Press Release
May 19, 2008

Loren proposes stocks conversion of refund due Meralco customers

Senator Loren Legarda proposed today the conversion into shares of stocks of the billions of pesos in refunds of the about four million customers of the Manila Electric Company (Meralco).

Legarda said that her proposal can put an end to the worsening riff among Meralco shareholders, refund customers what Meralco owes them, and empower end-users of electricity as Meralco co-owners.

"This is a win-win option as it will ease the pressure on Meralco's cashflow and at the same time formalize the stake of the consumers in the distribution company where they can earn dividends and be represented in the Meralco board," Loren explained.

The chair of the Senate Economic Affairs Committee, Legarda said the conversion into stocks of Meralco's payables to its customers is an alternative to an outright refund deductible from the bills of end-users.

"But it's still a refund, only in a better form," said Legarda. "Meralco customers will be better represented in the board of directors of Meralco, thus will have a bigger say in the operation of the utility."

"Likewise, Meralco customers will be entitled to dividend earnings from their shares of stocks, which will serve as their investment or savings."

She said the billions of pesos Meralco owes its customers in refunds should translate to a substantial number of seats to be created in the Meralco board.

At present, the Lopez holds five seats and the Government Service Insurance System (GSIS) four in the 11-member Meralco board. The two remaining board seats are held by independent directors.

Among the refunds due are the some P20 billion in meter deposits that had been collected by Meralco through the years, but whose collection had been disallowed in 2004.

Meralco has also yet to complete a P30-billion refund ordered by the Supreme Court a few years back arising from its inclusion of its income tax into the computation of electricity rates from 1994 to 2002.

There is also a growing clamor among Meralco customers for the company to refund electricity used by Meralco but whose cost had been passed on to consumers under systems loss.

Republic Act 7832 enacted in 1994 allows utilities like Meralco to pass 9.5 percent of their systems loss from pilferage and distribution inefficiency to consumers.

Legarda is set to file a bill that will disallow the passing on to consumers of utilities' systems losses, saying they are a part of the risks of doing business and thus should be shouldered by companies.

If Meralco and its customers will adopt her proposal, Legarda said Meralco customers will be able to directly express their concerns to Meralco management and suggest ways electric rates can be lowered.

Legarda said the exchange of charges and countercharges of Meralco shoulders in the media is part of the democratic process of being heard.

"Issues on power rates are at least ventilated. It's important to identify problem areas so solutions can be worked out. The discussions have exposed the limitations of the 2004 EPIRA law which will have to be amended," she said.

"For years, the consumers have been financing Meralco's operations in the form of meter and bill deposits and through the repeated cases of overcharging," Senator Loren legarda said. "When caught and mandated to refund, Meralco carries out this out at snail's pace," Legarda said.

Meanwhile, Meralco is using the consumers' money to finance their operations without any returns.

Based on Meralco's audited 2007 financial statement, it has P76 billion in non-current liabilities, of which P21.4 billion are customers' deposits. It still has a balance of P14.4 billion, inclusive of present value effect, of the P30-billion refund mandated by the Supreme Court.

The two items alone represents 47% - almost one-half - of Meralco's long-term indebtedness as of December 2007. In contrast, its long-term interest bearing loans and borrowings from banks is merely P14.2 billion.

Converting advances and debts into equity is a standard strategy used by Meralco and other Lopez-owned companies. A case in point is Meralco's subsidiary, Meralco Industrial Engineering Services Corporation (MIESCOR) from which Meralco has a P136 million.

To settle the account, MIESCOR paid the receivables last January 2008 in the form of shares of stock equivalent to its 65% ownership in Clark Electric Distribution Corporation.

The Corporate Information Solutions Inc., which handles Meralco's e-transactions, is now a 100%-owned subsidiary after it acquired the 49%, valued at P328 million, previously held by the Lopez-controlled Benpres Holdings Corporation, as settlement for its payables to Meralco.

Benpres owns 55.4% of First Philippine Holdings Corporation, which in turn, owns 33.4% of Meralco.

FPHC's share increased from 17.7% to 33.4% after two major transactions, making FPHC the largest shareholder with veto power. FPHC bought in January 2008, the 40% share of Union Fenosa International in First Philippine Union Fenosa for about $250million. FPUF has a 22.8% stake in Meralco.

This transaction is equivalent to an additional 9.1% stake in Meralco. FPHC also bought the 6.6% stake in Meralco from Meralco Pension Fund for about P8.3 billion. Thus, if we use the same valuation used in buying out shares held by Union Fenosa and the Meralco Pension Fund, the P35.8 billion refundable to customers would - if converted to equity - represent at least 28% of Meralco's outstanding shares.

But this could even be a lot higher considering that the shares held by Union Fenosa and Meralco Pension Fund were purchased at a premium. At last Fridays' closing price of P69.50 per share, the P35.8 billion is equivalent to 515.1 million shares or 46% of the company 1.1 billion outstanding shares.

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