Next Generation Following 10 years of Transformation (2016)

N E X T G E N E R A T I O N

2016MAYNILADANNUALREPORT

F O L L O W I N G 1 0 Y E A R S O F T R A N S F O R M A T I O N

MAYNILAD ANNUAL REPORT 2016 MAYNILAD ANNUAL REPORT 20162 3

ON THE COVERWe close a chapter in our history with the celebration of our first decade into re-privatization. As we take the lessons that we learned into the Next Generation, we look forward to the road ahead. Together, we will go from strength to strength, towards resilience and sustainable success forMaynilad, our stakeholders, and our people.


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CONTENTS

COMPANY PROFILE

OUR 2016 MILESTONES

AWARDS RECEIVED IN 2016

BOARD OF DIRECTORS

TOP MANAGEMENT TEAM

OPERATIONAL HIGHLIGHTS

FINANCIAL REVIEW AND ANALYSIS

LOOKING AHEAD

CORPORATE SOCIAL RESPONSIBILITY

CHAIRMAN’S MESSAGE

PRESIDENT’S REPORT

KEY FIGURES

CONSOLIDATED FINANCIAL STATEMENTSOUR STRATEGIES

FOR GROWTH

YEAR IN BRIEF

2016 PERFORMANCE AT A GLANCE

TABLE OF


WHO WE AREIn 1997, Maynilad Water Services, Inc. (Maynilad)—then under its original sponsors Benpres Holdings Corporation and Suez Lyonnaise de Eaux—was granted a 25-year exclusive concession by the Philippine Government to operate, maintain and in-vest in the water and sewerage systems in the West Zone concession. The consortium ceded management of Maynilad to MWSS in 2005, and Maynilad was re-privatized via a competitive bidding the following year, with the consortium of Metro Pacific Investments Corporation and DMCI Holdings, Inc. winning over the other bidders. Year 2007 thus marks the start of Maynilad’s journey as a re-privatized company. In 2010, the concession term was extended by 15 years, and Marubeni Corporation joined Maynilad in 2013 as one of its major shareholders.

PROFILECOMPANY


WHAT WE DO

OUR VISION

OUR MISSION

Maynilad provides customers with piped-in water supply that meets the Philippine National Standards for Drinking Water of the Department of Health. This means our water is safe and fit for drinking, bathing, cooking and other household activities.

Aside from delivering potable water, Maynilad also provides sewerage services currently to custom-ers from Tondo, Sampaloc, South Manila, Malabon, Navotas, Caloocan, Projects 7 and 8 in Quezon City, Magallanes Village in Makati, and parts of Muntinlupa.

Customers outside Maynilad’s sewerage network are regularly offered Maynilad’s septic tank clean-ing (desludging) services.

Maynilad also has a pool of technical experts that deliver services in the areas of hydraulic model-ling, water loss reduction, supply and pressure management, Geographic Information System development, wastewater management, project management, and water and wastewater sampling and laboratory analysis, among other technical services.

We are the leading water solutions company in the Philippines with a strong presence across Asia.

We provide safe, affordable and sustainable water solutions that enable those we serve to lead healthier, more comfortable lives.


OUR VALUES

HONESTY AND INTEGRITY

We deal with our stakeholders with honesty and integrity. We will always do what is right and fair for the sake of our customers, shareholders and the environment.

COMMITMENT TO EXCELLENCE

We view excellence as a means and not an end. To maintain our operational efficiency and industry leadership, we push our people to excel by being diligent and innovative in their work

CUSTOMER SERVICE

We consider our customers as our growth partners. Only by providing them with affordable, high-quality water solutions can we continue generating value for our company and shareholders.

TEAMWORK

We value our people and consider their success as our own. This is why we provide them with the support, responsibilities and opportunities that will allow them to develop individually and with the company.

ENTREPRENEURSHIP

We encourage creative thinking and deliberate execution. We expect our people to manage our company’s resources with a strong sense of initiative, ownership and accountability in order to balance the needs of our customers with those of our other stakeholders.

LOVE FOR COUNTRY

We actively partner with the public sector so that we can provide even more Filipinos with water solutions that will spur national development and secure the environment.


BRIEFYEAR IN

Mr. Ramoncito S. Fernandez officially takes over as President and CEO of Maynilad

Treatment capacity was enhanced following the

unprecedented rise in turbidity levels in the company’s

raw water sources

Maynilad subsidiary, PhilHydro, won a contract to supply bulk

water to Bocaue Water District

The “Maynilad Next Generation” business strategy for 2016 to 2018 was adopted, giving way to major organizational movements designed to future-proof the company

Billed volume increased by 3.5% despite water supply challenges, bringing total water service connections to more than 1.3 million

A Joint Venture agreement was signed by Maynilad and PT Moya

Indonesia for the establishment of a joint venture company that will provide water and

wastewater services in Indonesia.


AT A GLANCE 2016 PERFORMANCE

2016 2016

2016

2016

20152016

2016 2016

498.60 1,312,223

20.22

1,265,625

19.10

31.0

99.81

9.55 9.68

481.53 29.9

100.00 100.00

98.23

6.75 7.17

Billed Volume (MCM) Billed Services

Consolidated Revenue (PHP Billion)

Non-Revenue Water (Average %)

7 PSI Pressure (Average %)24-Hour Water Supply (%)

Net Income (PHP Billion) Core Net Income (PHP Billion)

2015 2015

2015

2015

20162015

2015 2015


MILESTONESOUR 2016

JANUARY

FEBRUARY APRIL JUNE AUGUST OCTOBER DECEMBER

MARCH

2016 2016

JULY

SEPTEMBER

NOVEMBER

MAY

• New President and CEO. Mr. Ramoncito S. Fernandez was appointed to head Maynilad. The formerPresident and CEO of Metro Pacific Tollways Corp. replaced Mr. Victorico P. Vargas, who moved to the PLDT Group.

•Online billing. “My Water Bill” program was launched, enabling Maynilad customers to receive their Statement of Account (SOA) via multiple electronic means such as SMS, email, or web portal.

• Cavite expansion. Maynilad took over the water systems of 14 subdivisions in Bacoor, Kawit and Imus, yielding 3,891 additional household connections to its water distribution network.

• New pumping station.Construction of a supplementary pumping station inside La Mesa Compound in Quezon City kicked off. The ₱428-million North A Pumping Station Annex is expected to improve water pressure and expand coverage in Quezon City and Caloocan to serve over 84,000 households.

• Regional award on sustainability reporting. Maynilad was recognized at the 2015 Asia Sustainability Reporting Awards in the “Best Stakeholder Reporting” and “Best Environmental Reporting” categories for “Our Valued Connections – The Maynilad 2013-2014 Sustainability Report”.

• From CFO to COO. Mr. Randolph Estrellado, former Chief Finance Officer (CFO) of Maynilad, was appointed as its Chief Operating Officer.

• Five Anvils. Maynilad brought home five Gold Awards at the 51st Anvil Awards for different programs and projects led by Corporate Communications, Human Resources and Corporate Quality, Environment, Safety and Health.

• Sewer project. Maynilad began pipe-laying works for its sewer network project in Parañaque City, which involves 77 kilometers of sewer lines. The project is funded by the Development Bank of the Philippines and Japan International Cooperation Agency.

• Contract award for PWTP 2. Maynilad awarded the design-and-build contract for the Putatan Water Treatment Plant 2, which will provide 150 MLD to augment water supply needs in the south.

• New reservoir. The construction of a new 50-ML reservoir begins. The facility is meant to improve water pressure in North Caloocan.

• Security Summit 2016. Chief Information Officer Dr. Francisco Castillo discussed the convergence of Information Technology and Operations Technology before an audience of information security practitioners, security specialists and business leaders at the Computerworld Philippines: Security Summit 2016.

• Birthday outreach. President and CEO Ramoncito S. Fernandez celebrated his 60th birthday by inaugurating the Samahang Tubig Maynilad (STM) at Riverview, Barangay Batasan Hills, Quezon City. Maynilad’s 13th STM, Riverview is home to some 60 families who previously did not have access to potable water.

• Big win at Global CSR Awards. At the 8th Annual Global CSR Summit and Awards, Maynilad brought home a Platinum Award under the Best Environmental Excellence Category for its “Sanitation Safety Plan,” “Greenhouse Gas and Air Pollutants Inventory,” and “Energy Management System”; and a Gold Award under the Best Community Program Category for its Twinning Partnership with Nepal for Non-Revenue Water Management.

• Brigada Eskwela. Employee-volunteers were deployed to more than 50 public schools throughout the West Zone to refurbish classrooms, as well as upgrade water and sanitation facilities, in support of the Department of Education’s Brigada Eskwela program.

• Safety and health champions in NCR. The Department of Labor and Employment’s (DOLE) 10th Gawad Kaligtasan at Kalusugan (GKK) awarded Maynilad as the “National Capital Region (NCR) Champion” for safety and health in the “Institutional Category,” and Maynilad’s Safety Head, Engr. Conrado Soriano in the “Individual Category.”

• Disaster relief. Maynilad sent aid in the form of potable water to the fire victims in Barangay 201, Zone 20, Kalayaan, Pasay City, as well as to the victims of Typhoon Habagat in Quezon City, Marikina City, Manila, Pampanga and Bataan.

• Singapore International Water Week. Experts from Maynilad, led by President and CEO Ramoncito S. Fernandez, presented before an audience of ASEAN leaders and global water professionals at the 7th Singapore International Water Week (SIWW). They talked about Maynilad’s strategies in addressing water and wastewater challenges.

• Manila Bay cleanup. Maynilad was formally inducted as a member of LANDBANK’s Manila Bay SUNSET Partnership Program Inc. (MBSPPI), a coalition of government and private institutions committed to protecting and cleaning up the coastal area of Manila Bay.

• Water Conference 2016. Maynilad Water Academy, in partnership with the Philippine Association of Water Districts (PAWD), held the Watershed Conference 2016, a venue for local water service providers to share best practices in watershed management. The output of the Watershed Conference 2016 will serve as guide for water districts in instituting programs for effective watershed management.

• Global Handwashing Day 2016. Around 2,000 schoolchildren learned proper handwashing during Maynilad’s week-long campaign to mark the Global Handwashing Day (GHD) 2016. GHD is an international advocacy to promote the value of proper handwashing with clean water and soap.

• National safety award. Maynilad was one of the winners in the 10th National Gawad Kaligtasan at Kalusugan (GKK) Awards of DOLE—a biennial award that recognizes outstanding individuals and organizations in the area of occupational safety and health.

• Bacoor expansion. Queens Row Subdivision in Bacoor City, Cavite province, was connected to Maynilad’s water distribution network, resulting in some 1,024 households getting access to safe and reliable surface water. Residents from this subdivision used to extract water from shallow wells or buy expensive water from delivery trucks.

• Climate change conference. Over 170 local and international water experts gathered for the Maynilad Water Supply Operations Conference 2016 to push for collaboration in addressing problems due to climate change. The annual event serves as a venue for leaders in the industry to engage in discussions about emerging issues in the water sector.

• Maynilad and DILG partnership. Maynilad and the Department of Interior and Local Government (DILG) organized the 2016 Run for Water fun run, in celebration of World Water Day 2016. With the theme “Water and Jobs,” the activity highlighted how clean water can help uplift the lives of workers and transform societies.

• Asia Young Leaders Summit. Maynilad executive Engr. Apollo C. Tiglao represented Maynilad at the Asia Young Leaders Summit, where he shared before prominent new-generation leaders how he rose from cadet engineer to President and CEO of Maynilad subsidiary, Subic Water and Sewerage Co., Inc.

• Water champions. Maynilad and the National Water Resources Board (NWRB) honored 18 waterchampions who made a difference in the areas of water access and envi-ronmental sustainability duringthe World Water Day (WWD) Awards 2016 held at Hotel Novotel Manila, Quezon City.

• Three ISO Certifications for CNRW. The Central Non-Revenue Water (CNRW) Division was conferred three ISO certifications after passing the strict audit for ISO 9001 (Quality Management Systems), ISO 14001 (Environmental Management Systems) and BS OHSAS 18001 (Occupational Health and Safety Management Systems).

• DENR accreditation. The Central Laboratory secured its accreditation as an environmental testing laboratory of the Department of Environment and Natural Resources (DENR). This accreditation validated the Central Laboratory’s high standards and authorized it to generate environmental data.

• ASEAN CIO of the Year. Maynilad Chief Information Officer Dr. Francisco Castillo was declared ASEAN CIO of the Year at the ASEAN Strategy Forum Executive IT event held in Singapore.

• Nairobi at Maynilad. Representatives of the Nairobi City Water and Sewerage Company Ltd. (NCWSC) visited Maynilad for a study tour training program to enhance their capabilities in water loss man-agement, treatment technologies and warehouse administration.

• 20 million safe man-hours. The Safety Organization of the Philippines, Inc. (SOPI) recognized Maynilad for attaining an all-time-high record of 20 Million Man Hour No Loss Time Accident (MHNLTA) in all of its facilities and offices.

• FAITH Garden in Parañaque. Barangay Moonwalk in Parañaque City received an overhead water tank and drip irrigation system from Maynilad as part of its support for the city government’s home food security program, Food Always in the Home (FAITH) Gardens. The project aims to augment food supply by providing a steady source of free, fresh vegetables for Parañaque residents.

• Drink-wash stations for schools. Maynilad’s Lingkod Eskwela Program provided a total of 52 drink-wash stations installed in 46 public schools as of 2016, benefiting some 143,000 elementary, high school and college students.

• Maynilad Safety Center. Maynilad constructs this new facility inside the La Mesa Dam compound. It is meant to be utilized for disaster risk management, serving as command center for disaster preparedness and emergency response at the North Quadrant of the NCR Region.

• Joint venture. Maynilad and PT Moya Indonesia signed a Joint Venture Agreement for the establishment of a joint venture company in Indonesia, which will provide water and wastewater services in Indonesia such as pipe network design and installation, non-revenue water and wastewater management.

• Septage treatment plant inauguration. The Alabang-Zapote Septage Treatment Plant (ALAZAP SpTP) in Las Piñas City was inaugurated. The new SpTP can treat up to 500 cubic meters of septage per day and was commissioned to treat wastewater collected from the septic tanks of Maynilad customers in the south.

• Pumping station in Kawit. The construction of the new Toclong Pumping Station and Reservoir in Kawit, Cavite, was completed. The ₱466-million facility can store up to 35 million liters of water and is equipped with high-efficiency pumps to increase water pressure for some 19,000 households in Noveleta, Rosario, Cavite City and Kawit City.

• ISO certification. Maynilad’s Energy Management Systems was awarded the ISO 50001:2011 by international auditing and certification body TUV Rheinland Philippines. The certification recognized Maynilad’s compliance in energy efficiency, use and consumption in its vital facilities.

• Global Water Summit. In his keynote speech at the Global Water Safety Conference & Exhibition, President and CEO Ramoncito S. Fernandez talked about the Maynilad Water Safety Plan (WSP), which was lauded as one of the most comprehensive in the world and used as a model by other water districts in the Philippines and the Western Pacific Region.


MESSAGECHAIRMAN’S

Manuel V. PangilinanChairman


To our Dear Stakeholders,

When we took over the operations of Maynilad in 2007, we had a vision of Maynilad as a regional leader in the water service industry. With the commitment of our stakeholders, we knew we could turn the Company around.

We have come so far in the past ten years, thanks to our collective effort. In 2013, the International Water Association referred to our success story as “the most dramatic turnaround in the world.”

Celebrating 10 Years

As we close 2016, we are also seeing off the first decade of our Maynilad, the company that we built from the ground up. It gives me great pride to report that despite the setbacks, we have now become our vision defined 10 years ago. In many aspects, we have even surpassed the goals that we set out to achieve when we started.

We capped our first decade with total investment made in the business of ₱127 billion. In 2006, Maynilad was servicing less than 678,000 water service connections, of which only 32% had access to water 24 hours a day and only 45% with an average water pressure of 7 psi (pounds per square inch). By the end of 2016, water connections have risen to more than 1.312 million. Of this number, 98.23% is served 24 hours a day and 75.79% have a minimum water pressure of 16 psi.

Aside from the direct positive impact of our improved service levels, our investmentsand services have also contributed to a vibrant economy. Over 29,000 jobs have beengenerated through our operations. Likewise, our Corporate Social Responsibility initiatives have brought positive change to our adopted communities, schools and students, the environment, and our lifeline customers.

The year 2016 was an opportune time to recalibrate and retrain our focus on the road ahead, using as guideposts what we have learned over the past 10 years and the challenges that we expect to meet. And with our newly appointed President and CEO Mon Fernandez, we launched our transformation strategy called “Maynilad Next Generation.”

With operational efficiency, business growth, and organization and people development as pillars, our three-year strategy is expected to bring in new successes and value to our stakeholders in the medium term. The changes that we are putting in place now are meant to prepare us to meet the challenges of tomorrow better.

Rethinking Our Processes

We took a step back to revisit our inter-departmental processes to find and address gaps that could further improve operational efficiencies. As a result of this internal assessment, we have streamlined the organization to encourage cooperation and cross-functional teamwork. More than ever, our teams are now better positioned to closely coordinate with each other on shared processes, and work towards common goals.

As an example, we have integrated Non-Revenue Water (NRW) operations into our Business Areas to reduce work duplications and allow our field personnel to respond more quickly to issues on the ground.

We also revisited the complex task of project management. Every year, we spend billions of pesos for our capital expenditure projects. Every project goes through multiple phases that are handled, and sometimes shared, by different departments. Now, we have taken a comprehensive approach to project management to make sure that departments work seamlessly and in synergy, so that projects are timely and efficiently completed.

To operationalize this approach, we have hired end-to-end project managers with the skills and foresight to oversee projects from conceptualization up to final commissioning.

We also delineated contract and project management responsibilities. A separate team now handles planning, engineering, construction and contracts management, allowing our project management team to focus on project execution. As a result, both processes have been streamlined and made more efficient.

New Organizational Units

For the past ten years, we have diligently planned for both the unpredictable and the inevitable. In 2016, we took risk management to the next level by creating new organizational units to focus on crucial areas of our business operations.

We now have an Integrated Asset Management (IAM) division, whose task is to manage the company’s assets to ensure optimal performance over the maximum life cycle. Our IAM division has started developing its framework and processes based on an internal evaluation of asset management gaps. We intend to roll out our asset management plans in 2017.

We have also created a new Government Relations Department, which will be exclusively responsible for liaising with our regulators and other Government partners. In addition to communicating with Government agencies as part of our day-to-day operations, we foresee the unit playing an important role in the coming years as we accelerate the implementation of our capital expenditure projects.

Significant Results

Maynilad closed 2016 with significant gains. Our willingness to embrace change, coupled with our people’s unwavering commitment to public service, has given us a banner year in many key result areas.

Revenues went up to ₱20.03 billion from ₱18.92 billion in 2015, and from a baseline of only ₱6.67 billion in 2006.

Despite water supply challenges, we managed to increase our billed volume to 498.60 million cubic meters (MCM) from 481.53 MCM last year. By end of 2016, we were serving 1,312,223 accounts.

The uncertainty of water supply in 2016 underscored the importance of our NRW management efforts. A further reduction of average NRW from 31.0% in 2015 to 29.9% in 2016 helped mitigate the effect of the supply risk. While there is still a lot of room for improvement where NRW is concerned, the current NRW average of 29.9% is still a big leap from the 68% water losses in the West Zone when we took over operations ten years ago.

Significant results were likewise posted in the area of wastewater management. Our sewer-served population increased to 1.42 million in 2016 from 1.29

million in the previous year. For the five-year period starting 2012, we were able to offer our sanitation services to more people—up from only 4.05 million in 2015 to 5.50 million in 2016. The recent commissioning of a third septage treatment plant enabled us to reach more households in the south with our desludging services.

Challenges

Transitioning into the Next Generation Maynilad requires building readiness to external and internal challenges.

In 2016, we came to terms with the fact that climate change is going to be our biggest threat yet. We’ve had to deal with sudden drops in water supply and quality due to aberrant weather conditions. Despite preparations, the effects of climate change compromised our operations, even forcing us to decrease service levels in worst cases.

We are now more focused on building resiliency both in terms of supply and operations. First, we realized that our dependence on the Angat Dam as our only source of raw water makes us highly vulnerable. As such, we are closely coordinating with our regulators to explore alternative water sources. We are also looking at other viable, more advanced water treatment technologies, even as we squeeze out more efficiency from our operations to optimize supply in the distribution system.

Internally, the challenge to sustainability is having the right people to carry on our legacy. We have started intensively training our next-in-line leaders as part of our succession planning. This will ensure that we have competent leaders who can build on today’s gains and bring Maynilad to the future.

Conclusion

The Greek philosopher Socrates once said, “The secret of change is to focus all of your energy, not on fighting the old, but on building the new.”

As we close 2016, we want to thank everyone for the valuable support that they have so generously given. More importantly, as we welcome the second of many more decades, we invite you, our stakeholders, to build with us a resilient and future-ready Maynilad.

Manuel V. PangilinanChairman of the Board

Aside from the direct positive impact of our

improved service levels, our investments and services have also contributed to a vibrant economy.

Over 29,000 jobs have beengenerated through our

operations.

MESSAGESCHAIRMAN’S


REPORTPRESIDENT’S

Ramoncito S. FernandezPresident and Chief Executive Officer


REPORTPRESIDENT’S

Ramoncito S. FernandezPresident and Chief Executive Officer

To Our Stakeholders,

Welcome to Maynilad’s next decade.

If there is one lesson from the past ten years that we can take to the future, it is the value of preparing not just for the inevitable, but also for the unpredictable. While we worked hard to reach our targets, we also spent the most part of 2016 priming Maynilad for future challenges and opportunities.

Expansion Efforts

In 2016, we went full steam with our expansion efforts by creating a BusinessDevelopment team, exclusively tasked to generate business opportunities in terms ofnew concessions and bulk water contracts. Their efforts led to the signing of a bulkwater supply contract between our subsidiary, PhilHydro, and the water district of Bocaue, Bulacan.

As we approach 100% water service coverage in our concession area, this first foray will help define an expansion strategy beyond the West Zone, where we foresee future growth to come from. We intend to intensify efforts to establish our presence in the provinces of Bulacan and Cavite where we have started making headway, and also pursue bulk water and concession contracts overseas.

In November 2016, Maynilad signed a Joint Venture agreement with PT Moya Indonesia for the establishment of a joint venture company that will provide water and wastewater services in Indonesia. This joint venture company has given Maynilad a foothold in Indonesia, allowing us to explore more business prospects in the region.

Several years ago, we also started marketing our homegrown talents as a potential revenue stream. This year, our technical expertise helped bring in additional revenues from third-party consulting contracts, as well as engagements with Maynilad’s sister-companies. As we continue to build our in-house expertise, we foresee the demand for Maynilad’s technical services rising in the future.

CAPEX Targets

This year marked a record high for our CAPEX program. We brought the total number of pipes laid since 2007 to 3,061 kilometers, in addition to the 4,576 kilometers of pipes that we inherited with the re-privatization.

We spent ₱9.5 billion on our CAPEX program for 2016 after having awarded projects with a total worth of ₱17.1 billion. Big-ticket projects include the new pumping station and reservoir in Toclong, Kawit, Cavite, which is meant to support our expansion efforts in the south. This ₱466-million facility has

a capacity of 35 million liters, and currently serves some 19,000 households in the municipalities of Noveleta and Rosario, and the cities of Cavite and Kawit. The Toclong facility brings our total pumping stations to 27, and our reservoirs to 26, from only seven each in 2006.

The remaining sewage treatment plants (STPs) in the San Juan River Basin—Talayan, Kapiligan, Samson and Bahay Toro—finally passed the process-proving stage. We have also begun operating the Alabang-Zapote Septage Treatment Plant in Las Piñas. These new facilities will boost our capability to serve a growing customer base as we increase our sewer service connections exponentially.

In 2016, we prioritized finding new raw water sources to address our water supply vulnerability. In partnership with the MWSS, we are studying the feasibility of Kaliwa River watershed as potential alternative water source. If the results are positive and the MWSS pursues this project, the new water source will help considerably in reducing supply risks especially during disasters.

Improved Efficiencies

Technology plays a central role in our drive to improve operational efficiencies. A few years ago, we invested in geographic information system (GIS) technology to develop a map of our network. This enabled us to remotely monitor and operate facilities from a Central Control Room for faster response to supply concerns. In 2016, the Maynilad Webmap has been completed, and is now accessible from desktop and mobile devices.

As a testament to our commitment to process efficiency, Maynilad continues to hold the record for the most number of ISO certifications for multiple sites of any Philippine company. In 2015, we were conferred a company-wide ISO certification, bringing our total number of ISO certificates to 150. In 2016, we were conferred an ISO 50001:2011, which certifies that our energy management systems meet global standards.

Our energy management system monitors energy consumption in our priority facilities and helps us identify where we can potentially reduce consumption. In the future, we envision energy management being integrated into our overall efforts to improve service quality and environmental management. We are proud to be a showcase of how process efficiency not only increases productivity but also creates positive environmental impact.

Climate Change and Sustainability

Climate change caused us to rethink the way we did business in 2016. We were met with unprecedented challenges such as critically low water supply and rising turbidity levels in our raw water sources. While we were not sufficiently prepared for these, we were able to manage its impact on our operations the best way we could, given the circumstances.

There are no quick solutions to the problem of climate change, but we do understand its urgency. As such, we have put in place intermediate measures to mitigate its immediate impact on our operations while we work towards longer-term solutions.

Specifically, we have begun improving the treatment capacities of our La Mesa and Putatan water treatment facilities to address rising turbidity levels. Our La Mesa Treatment Plants 1 and 2 will soon be able to treat raw water turbidity levels of up to 2,000 Nephelometric Turbidity Units (NTU). Our Putatan Water Treatment Plant, on the other hand, is being upgraded from microfiltration to ultrafiltration, and fitted with a Biological Activated Filter, among other functionalities. We are also in the process of building more reservoirs to increase our water-holding capacity to further mitigate the impact of critical water supply during disasters.

It may take a couple of years before these projects become fully operational. In the meantime, we have also updated our operating protocols to worst-case scenarios. Our Central Control Room makes it possible for us to manage water supply more efficiently—and remotely—so we are better able to cope with supply crises.

We also realize the need to set up a comprehensive preventive management program that will allow for better maintenance of all our assets in the face of the growing demands of operations. Towards this end, we created a new division called the Integrated Asset Management, whose task is to establish processes for preventive and predictive maintenance of all facilities. Having an asset management program in place will help us avoid service downtimes for routine maintenance, ensuring that we optimize the life of our assets while meeting customer service requirements.

Finally, we also know how much our customers rely on us for information during disasters. We have revised our communication plans to pro-actively inform them and provide assistance when our mitigation plans fail to address service level issues.Our experience with battling the effects of climate change these past few years has also taught us that the challenge is bigger than Maynilad. In December, we spearheaded a conference that brought local and international water experts together to push for a collaborative and innovative approach to addressing the effects of climate change on the water sector. We hope to see the ideas raised in the conference materialize to bring tangible results.

Elevated customer experience

In line with our “Maynilad Next Generation” corporate transformation strategy, we sought to lay the groundwork for a Maynilad that is more responsive to customers.

This led us to create an ad hoc Customer Experience Project Organization that will define strategies and programs for building customer engagement and

intimacy, forging strategic customer relationships, developing customer service excellence competencies, and crafting a five-year customer service process roadmap.

Our desire is to put customers first, and the key to this is to know them better and establish a closer relationship that will enable us to anticipate their needs and meet their expectations. Through this initiative, we hope to truly put the customer at the heart of Maynilad, setting new processes that will go beyond mere regulatory compliance towards lasting customer delight.

Awards and Recognition

It is always a pleasure and a source of pride to be recognized for the work that we do. In 2016, we received over 30 citations and awards from local and international organizations, making it one of our most fruitful years yet in this regard.

Maynilad was once again a big winner at the Anvil and Philippine Quill Awards in 2016, with five and eight awards, respectively. Another source of pride is our “Top Green Companies in Asia” award, which we won along with only four other companies from the Philippines, Thailand and Indonesia. The award is conferred to companies that operate with minimal negative impact on the environment, community and society while remaining financially viable. It is part of the Asia Corporate Excellence & Sustainability (ACES) Awards, organized by Malaysia-based MORS Group, The prestigious awards program recognizes Asia’s finest corporate leaders and companies in the areas of leadership and corporate social responsibility.

For many of us, having the opportunity to touch lives through the work that we do is fulfilling in itself. But being recognized for how well we do our work undoubtedly provides us with the motivation to always strive for excellence.

Next Generation

As we close Maynilad’s first decade, allow me to congratulate everyone for a job well done. Our successes are a product of everyone’s commitment to results, resiliency in the face of difficulties, and the passion and pride for what we do.

From what we witnessed in 2016, the years to come will be filled with new and familiar challenges. But our experiences these past years have made us bolder, wiser, and better prepared to build the next-generation Maynilad: one with loftier visions, and people who believe that these can be achieved.

Join us in the next chapter of Maynilad’s history.


FIGURESKEY

2012 2013 2014 2015 2016

Revenue 15.83 16.78 18.23 18.92 20.03

Reported Net Income 6.38 6.85 8.27 9.52 6.78

Core Net Income* 6.81 7.53 8.79 9.65 7.18

Core EBITDA* 10.45 11.05 12.82 13.83 14.34

Billed Volume (MCM) 428.42 443.85 463.24 481.53 498.60

No. of Billed Water Services 1,073,508 1,129,497 1,190,062 1,265,625 1,312,223

Water Service Coverage (%)* 87.6 89.5 91.6 93.6 94.3

Pipes Laid to Date (km) 7,085 7,306 7,458 7,575 7,637

NRW Average (%) 43.4 38.7 33.9 31.0 29.9

NRW Volume Recovered (MLD) 120 138 117 58 10

Septic Tanks Cleaned 24,804 32,535 41,873 63,134 96,594

New Sewer Service Connections (Domestic) 1,506 4,423 4,229 4,113 4,019

Sewerage Coverage (%)** 7.6 9.6 12.1 14.1 15.2

Sanitation Coverage (%)** 8.6 18.0 28.7 44.2 58.9

Jobs Generated 22,204 17,824 14,066 25,046 29,183

CAPEX Spent (in Million Pesos) 6,698 5,506 4,345 8,007 9,539

24-Hour Water Service (%) 96.0 97.8 99.9 99.8 98.2

Average Water Pressure of 7 psi (%) 99.8 99.9 100 100 100

Min. Water Pressure of 16 psi (%) 40.0 58.0 67.0 70.7 75.8

Financial Performance (in Billion Pesos)

Operating Highlights

Customer Service Improvements

*Excludes Extraordinary**Computation based on constrained water-served population

This year marked a record high for Maynilad’s CAPEX program.

The total number ofpipes laid since 2007 has reached 3,061 kilometers,

adding to the 4,576 kilometers of

pipes Maynilad inherited after re-privatization.


FOR GROWTHOUR STRATEGIES

Our organization seeks to further improve internal

capabilities to meet service obligations while also increasing enterprise

value. The changes that we are putting in place now

are meant to prepare us to meet the challenges of

tomorrow better.


OPERATIONAL EFFICIENCY

BUSINESS GROWTH

ORGANIZATION AND PEOPLE DEVELOPMENT

After Maynilad was re-privatized, we focused on increasing billed volume and reducing NRW as operational efficiency targets. We have since experienced sustained growth in these areas. As such, for the next three years, we are looking at raising operational efficiency to improve our comprehensive service obligation targets for water, sewerage and sanitation, and customer service.

We will do this by investing in infrastructure and people. Under our catch-up plan, our average annual CAPEX spending will be doubled to ₱14 billion. This will ensure that we meet targets that were missed due to external factors by 2018. We are also beefing up our human resources by upgrading capabilities, hiring, realigning, and developing talent to prepare them for critical roles and positions.

On the back-end, we are streamlining internal business processes and performing risk assessments to ensure that investments achieve their desired impact.

We have managed to transition from a water util-ity into a water solutions company by expanding our portfolio of products, services and expertise. From 2016 to 2018, we will continue strengthening these offerings through innovation. At the same time, we will also aggressively pursue expansion of coverage outside the West Zone, particularly in Bulacan, Cavite, Laguna and Bicol, which our subsidiary has started tapping. We are partnering with our sister company, Metro Pacific Water In-vestments Corporation, to explore other local and international markets.

At the heart of the “Maynilad Next Generation” strategy is our people. As we fast-track our growth, we will also accelerate organization and people development initiatives to ensure that our goals are supported by capable employees.

We have started implementing organization transformation through several movements in Maynilad offices, functions and synergies. We have put in place a competency-based human resource management system that we will use as basis to develop responsive and relevant learning and growth programs for employees. We want to see more people transform into effective business managers and technical experts who can drive the company’s future growth.

In 2016, we rolled out a three-year growth strategy called “Maynilad Next Generation.” This strategy is meant to sustain our transformation by setting new targets, following our phenomenal success over the past decade.

“Next Generation Maynilad” is built on three pillars: Operational Efficiency, Business Growth, and Organization and People Development. These pillars are expected to lead the company towards the goal of improving our capability to meet our service obligations while increasing our enterprise value.


Billed services increased by 3.7% from the previous year as Maynilad spent

₱9.5 billion in CAPEX projects, which include the laying of 62 kilometers of new pipes connecting new customers

to the network.

HIGHLIGHTSOPERATIONAL


NETWORK IMPROVEMENTS FOR WATER RECOVERY

TEMPORARY REDUCTION IN SERVICE LEVELS

After re-privatization, we set up a Central Non-Revenue Water Division to better pursue one of our immediate priorities at that time —that is, to reduce Non-Revenue Water (NRW) so we can recover water for expansion and service level enhancements. This centralized setup allowed us to not only attain landmark improvements in our NRW levels, it also built our internal capacity by having key technical people focused on achieving our NRW targets.

A decade later, we have seen a steady increase in our service levels owing to our NRW reduction efforts and infrastructure upgrades. More recently, as we set our targets higher, we saw the need to re-integrate NRW activities into our Business Area operations to make sure that our NRW teams are closer to the field and the customers that we serve. The reorganization has resulted in better synergy between service delivery and leak resolution.

Part of our NRW management program is the replacement of old pipelines and meters,pro-active leak repairs, and network diagnostics. In 2016, we replaced a total of 196 kilometers of pipes; repaired around 28,000 leaks on our primary, secondary and tertiary lines; and replaced 127,392 old water meters in different areas within the West Zone. We also established an additional 40 District Metered Areas (DMA), bringing totalDMAs in our concession area to 1,589.

Our operations are now enabled by our investments in GIS and telemetry technology. Monitoring of Maynilad’s assets is now possible via the Maynilad WebMap, which is currently already accessible to operating units via desktop and mobile devices. Our newly operational Central Control Room, on the other hand, has made it possible for our people to remotely monitor and control some pumping stations and inline boosters in our network for enhanced supply management and quicker response to issues.

As a result of all these activities, we were able to bring down average NRW from 31% in 2015 to 30% in 2016. This is equivalent to a reduction of 36 liters of lost water per connection per day. We intend to work towards further reduction of NRW to 20% by 2022.

Maynilad was off to a good start in 2016, with water elevation in Angat Dam reaching the ideal level of 214 meters above sea level (MASL) and the strong El Niño beginning to dissipate by the first quarter. In August, however, new raw water quality issues emerged that temporarily affected service levels to majority of our customers.

Following non-stop rains brought on by the monsoon, turbidity of the raw water in Ipo Dam increased to unprecedented levels. It reached as high as 1,600 NTU (nephelometric turbidity units) in a span of four hours, up from the normal 300 NTU. This level breached the treatment capacity of our facilities.

Hence, to maintain the quality of our water supply output and protect the integrity of our La Mesa Treatment Plants, we were constrained to reduce production. Mitigating measures were employed to help ease the impact of the reduced production on our customers, including conducting regular system adjustments to manage distribution in the network and deploying water tankers to deliver potable water to severely affected areas.

Water production stabilized a week later, only to be affected again the next month as the issue recurred. Meanwhile, prolonged periods of high

total dissolved solids and random spikes in organics in the raw water of Laguna Lake also affected the production of our Putatan Water Treatment Plant.

It was clear that additional investments were needed to increase the treatment capacity of our facilities, given this new norm where raw water quality is concerned.

We have since made internal adjustments by updating our operating protocols as an intermediate response, with the end in mind of improving our ability to proactively inform customers of supply issues and provide assistance when our mitigation plans are insufficient to address service level shortfalls.

Meanwhile, we have started working towards more sustainable solutions such as improving the treatment capacity and updating the technology in our La Mesa Water Treatment Plants (WTP) 1 and 2 and our Putatan WTP. We are also in the process of adding another 100 million liters per day (MLD) to the Putatan WTP’s production capacity. This expansion project is happening alongside the building of more reservoirs to increase water storage, and our ability to operate optimally in times of crises.


EXPANSION

ENHANCED EFFICIENCIES

We raised our billed services to 1,312,223 in 2016 from only 1,265,625 in 2015 after investing in further infrastructure improvements that brought potable water to previously unreached areas, particularly communities in Las Piñas, Bacoor City, Imus City, and Kawit in Cavite Province. Supporting this expansion was the ₱9.5 billion we spent for Capital Expenditure (CAPEX) projects in 2016.

These CAPEX projects include the laying of 62 kilometers of new pipes in 2016 to connect more customers to Maynilad’s network, bringing the total length of the distribution system in the West Zone to 7,637 kilometers. We also made considerable investments in building and improving pumping stations and reservoirs to further increase our service levels and enhance our capability to deliver uninterrupted water supply, especially during calamities.

We brought our total to 27 pumping stations after completion of our Toclong Pumping Station and Reservoir in Kawit, Cavite. The ₱466-million facility can store up to 35 million liters of water and is equipped with high-efficiency pumps to increase water pressure for some 19,000 households in Cavite Province, particularly the municipalities of Noveleta and Rosario and the cities of Cavite and Kawit. It was completed in May 2016.

We likewise kicked off construction of new pumping stations and reservoirs, including the ₱428-million North A Annex Pumping Station Annex inside the La Mesa Compound in Quezon City. Other reservoirs being constructed are in Victoria Homes, Muntinlupa City; Sacred Heart, North Caloocan; and Magdiwang, Bacoor, Cavite.

In 2016, technology continued to play a major part of our strategy to enhance operational efficiencies. A few years ago, we launched an initiative to geo-tag Maynilad’s assets to facilitate the survey, monitoring and management of our network. Using a new basemap that we recently acquired, our data engineers were able to complete a more accurate and updated Maynilad Webmap in 2016.

The Maynilad Webmap is now accessible to our operating units using both the desktopand mobile applications. We have also equipped our zone specialists with network-enabledtablets so they can access crucial real-time information needed to manage operations or resolve issues. Our Technical Services team will work on integrating the Maynilad Webmap with our other IT systems for interoperability. Plans are alsounderway to invest in hardware and software to ensure that our GIS system is up todate.

In 2006, before we took over Maynilad, only 45% of the West Zone was being served at an average water pressure of 7 psi (pounds per square inch). We officially reached average 7 psi coverage of 100% as early as 2012, and are now working to attain 16 psi pressure coverage. By the end of the year, 76% of our customers were already enjoying access to an average of 16 psi water pressure, up from 71% in 2015.

While we work to sustain improvements in our service levels, we have also continued pursuing business opportunities outside the West Zone. Our efforts have resulted in our first few conversions, including a bulk water supply contract with the Bocaue Water District. Our support for PhilHydro, a subsidiary that we acquired in 2012, also led to increased billed volume in its operations in Bulacan.

On the international front, our recent joint venture with PT Moya Indonesia has opened another lucrative market for Maynilad. PT Moya Indonesia currently owns 95% of the concessionaire companies that supply bulk water to a number of cities in the country. Under the agreement, which gives Maynilad a 49% share, the joint venture will provide water and wastewater services in Indonesia, such as pipe network design and installation, NRW management and water management.

We look forward to further growth from these income streams in the future.

Our investments in IT and automation early on have resulted in increased efficiencies in terms of monitoring and issue resolution. In 2016, we commissioned our Central Control Room at our Balara Head Office, as well as its satellite Control Center and Monitoring Office at the Arroceros Compound in Manila. This has made it possible for us to remotely perform mission-critical processes such as network supply and pressure monitoring, data logging and communication, and field facilities maintenance and support. From the control room, we are now able to remotely operate our pumping stations and inline boosters, which drastically reduced our response time to issues.

Beyond 2017, we will continue to upgrade our IT systems to sustain high data availability and accuracy.


WASTEWATER MANAGEMENT

HUMAN RESOURCES

We closed 2016 with 15% sewerage coverage and 59% sanitation coverage. Completion of ongoing sewerage system projects in Pasay, Parañaque, Muntinlupa (Tunasan and Cupang), Valenzuela and Cavite City would have enabled us to achieve our sewerage coverage targets, but these projects were mired by issues such as difficulties in acquiring suitable lots for the STPs, permitting delays and right-of-way conflicts.

At any rate, four new Sewage Treatment Plants (STPs) in the San Juan River Basin passed the process-proving stage in 2016 and were turned over to Maynilad. In addition, the new Alabang-Zapote SpTP was commissioned, and this helped to reinforce our sanitation efforts in the southern part of our concession.

Maynilad’s wastewater infrastructure now includes 17 STPs, one SpTP and two sewage and septage treatment plants, fueling our expansion from 1.29 million “population served” in 2015 to 1.42 million in 2016. We also managed to offer our sanitation services to 5.50 million people from 2012 to 2016.

Meanwhile, efforts to ensure maximum capacity utilization of our STPs and conveyance systems made possible the treatment of 57.98 million cubic meters (MCM) of wastewater this year, which represents a capture rate of 91.80% of the 63.16 MCM expected flow.

The year 2016 was marked by major reorganization, as the company laid the foundation for the three-year Maynilad Next Generation Program. Ten divisions went through adjustments intended to improve productivity, streamline processes, avoid duplications, and promote collaboration on cross-functional activities.

We also created a new division called Integrated Asset Management to exclusively handle asset planning, optimization and sustainability. In our Project Management Division, new roles have been created to improve project turnaround times. Under our Commercial and Marketing Division, we started putting together a Government Relations team to liaise with relevant government agencies.

Within our Water Supply Operations Division, we now have a new Process Engineering Section, tasked to enhance our capability to analyze treatment plant process operation and maintenance, and a Water Source Development team to focus on exploring new water sources and analyzing the viability of existing options.

A new Business Development team directly reporting to our Chief Operating Officer has likewise been set up. They will be in charge of implementing our growth plans in Bulacan and Cavite, as well as strengthening our ties with our subsidiaries.

On top of these initiatives, Maynilad also seeks to improve public understanding of wastewater, its effects on health and the environment, and practices that harm our treatment facilities. In 2016—aside from the regular roadshows being conducted by our Wastewater Management Division and Program Management Division prior to, and during, project implementation—we started conducting educational campaigns in select public and private schools in Quezon City so we can enhance wastewater awareness among the youth. We managed to conduct these educational roadshows in 10 schools by yearend, and we intend to sustain this activity so we can reach more schools in other cities within our concession.

In the next three years, we expect to complete all our ongoing sewerage system projects, which will increase our sewage treatment capacity by 269 MLD and improve sewerage coverage to 26%. Between 2017 and 2022, we are also targeting to increase our sanitation coverage to 81% through our scheduled desludging program.

The wastewater management part of our business has had a relatively slow growth since our focus for the past decade has been to improve our water services. We aim to sustain our recent momentum to make sure that we meet all our subsequent targets for wastewater management and sanitation.

As the organization settled into the revitalized setup, we also took the opportunity to adopt a Balanced Scorecard Management System. Working with all divisions, the Top Management Team and the Next-In-Line employees, we updated the company 2016 scorecard to cover the Financial, Customer, Internal Business Processes, and Learning and Growth perspectives. Our updated scorecard will guide our employees towards our Next Generation targets.

We made more investments in training for 2016, increasing total training hours by 39.4% to 72,715 hours from only 52,162 hours in 2015. In terms of reach as a percentage of the total number of employees, our training programs were also availed of by 87% of employees, compared to only 69% in 2015. These programs were widely appreciated, as shown by the highly positive results of our employee survey.

This year, we sustained our flagship project on innovation, the Think Maynilad Innofest. A total of 114 employees participated, submitting 71 entries in all. Of these entries, two emerged as grand winners, adding to the growing list of innovations that the company can use to improve operational efficiencies. Meanwhile, the two teams that we fielded in the national IdeaSpace Start-up Competition were among the top 10 winners. The Think Maynilad Innofest has institutionalized a culture of innovation in Maynilad, encouraging the conceptualization of workable solutions for operational problems and boosting employee morale in the process.


CUSTOMER SERVICE

SUSTAINABILITY

We strengthened existing platforms and opened up more meaningful and convenient ways to connect with our customers in 2016. Our social media accounts and our hotline 1626 remained as the top platforms for receiving and responding to customer complaints, while our Text Hotline served as an alternative mode for sending inquiries, requests and complaints. In addition to these platforms, we launched the “My Water Bill” program in January, which allows us to provide billing information to customers via SMS, email, or through our web portal.

Aggressive promotion of our TxtTubig Program in 2016 led to an increase in customers who registered for the service. We now have almost 460,000 customers representing 35% of our coverage enrolled in the program and receiving vital and timely information from Maynilad straight to their mobile phones

One of the priorities for Maynilad’s management team in 2016 was to think about how we can sustain our gains over the past 10 years, and ensure a healthy growth trajectory in the years to come. Given the new challenges that we are faced with year after year, we resolved to build our resilience in multiple ways.

We set up a new division called Integrated Asset Management (IAM), in charge of making sure we get the most value out of our investments by managing and maximizing the life cycle of Maynilad’s assets. The IAM team hit the ground running in 2016 with the creation of our Asset Management Project Execution Plan, based on research conducted to surface the gaps. Several other asset management processes have been laid down based on best practices, and are ready to be implemented.

The effects of climate change underscore the importance of healthy watersheds to the sustainability of the water services industry. In response, we continue to strengthen our commitment to environmental conservation through our holistic watershed management program. Our flagship watershed rehabilitation program, “Plant for Life”, set an accumulated target of 40,000 mangrove propagules planted for four years from 2013 to 2016. By 2015, our accumulated total was already at 67,000 mangrove propagules. We added another

In 2016, we also endeavored to get to know our customers better by launching customer profiling activities. Qualitative and quantitative studies were conducted for our commercial and industrial accounts, which gave us fresh insights into the segments that we serve, as well as the potential opportunities for service expansion.

Similarly, a focus group discussion conducted with our residential customers allowed us to validate the effectiveness of our marketing strategies, as well as gather feedback on motivators and barriers, and the level of receptiveness to new service offerings. The data that we gathered will be used to make sure future strategies are aligned with market needs and sentiments.

25,000 mangrove propagules in 2016 with the help of 348 volunteers from eight partner organizations, bringing accumulated total to 92,000. This is on top of the tree-planting activities we also conduct at the Ipo watershed, where 250,600 tree saplings have been planted to date.

Aside from direct interventions, we also continued to empower watershed communities with livelihood programs. These activities aim to decrease their reliance on the environment for sustenance and build their capacity to become stewards of the watersheds.

Finally, the other important part of our sustainability strategy is putting processes and protocols in place. In 2015, Maynilad was conferred a company-wide ISO certification, making it the company with the most number of ISO certificates for multiple sites in the Philippines. Maynilad currently holds a total of 209 ISO certificates. These include ISO 50001:2011 for its Energy Management Systems, and ISO 14064:2006 for greenhouse gases verification and carbon footprint reporting—the first and only such certificate to be conferred to a Philippine water company.

We have started working on upgrading our ISO certifications to the latest 2015 version, which further emphasizes risk planning and mitigation.


REVENUESConsolidated revenues from water and sewer services for the year 2016 grew 6.0% to ₱19.82 billion from ₱18.7 billion last year. The increase in revenues was primarily driven by the 3.5% increase in billed volume, coupled with 2.3% increase in average effective tariff.

Although the inflationary or consumer price index (CPI) adjustment for 2016 applied in January only amounted to 0.8%, the effect on the average effective tariff was compounded by the late implementation in June of 2015 of a 4.3% adjustment representing a delayed two-year CPI net of the discontinuation of the ₱1.00 Currency Exchange Rate Adjustment (CERA). The new rebased rates won by Maynilad in arbitration remain unimplemented.

Other fees and services which primarily consist of installation charges and reconnection fees reflected an increase of 2.2% to ₱404 million. Total revenues from operations amounted to ₱20.22 billion, a 5.9% increase from ₱19.1 billion last year.

The increase in revenues was primarily

driven by the 3.5% increase in billed

volume, coupled with 2.3% increase in

average effective tariff.

AND ANALYSISFINANCIAL REVIEW


CASH OPERATING EXPENSESConsolidated cash operating expenses increased by 12.3% to ₱5.81 billion versus ₱5.18 billion last year primarily due to higher personnel cost, water treatment chemicals, outside services, and repairs and maintenance costs.

Personnel costs, the company’s single largest cost element, increased 8.5% to ₱2.0 billion from ₱1.85 billion last year primarily due to 3.8% growth in headcount, which brought total employees as of December 2016 to 2,229 compared to 2,147 at the end of the same period last year, and an average salary increase of around 4.4%. Employee productivity ratio remained constant at 1.70 employees per 1,000 connections.

Light and power increased 5.2% to ₱820 million as the company continued to benefit from lower average power rates obtained from retail electricity contracts which brought down average costs per kilowatt-hour by around 6.6%, partly offsetting a 10.7% growth in kilowatt-hour consumption due to higher production in the Putatan Water Treatment Plant (WTP), pumping activities in the south, and more sewage treatment plants in operation.

Outside services grew 19.9% to ₱683 million as the company increased sanitation services in the south using a specialized service contractor, expanded customer service to include managing of social network sites, and added water tankering services due to water quality issues that affected supply in the third and fourth quarters. Repairs and maintenance (R&M) increased 32.5% to ₱515 million, a timing issue resulting from the late confirmation by contractors of materials withdrawn and used for repairs the previous year. Excluding late accruals, R&M should have grown by only 17.1%. These four items are the company’s largest cost elements, accounting for 69% of total cash expenses, and as a group increased 12.2%.

All other expense items accounting for 31% of the total grew 12.4% to ₱1.79 billion, driven primarily by water treatment chemicals which grew 28.4% to ₱251 million due to higher consumption resulting from the increased production in Putatan WTP and the additional treatment needed to address the poor raw water quality experienced in La Mesa and Putatan WTPs during the period.

NON-CASH OPERATING EXPENSESUnder IFRIC 12, all property plant and equipment (PP&E) defined as parts of the network are considered intangible assets. These are no longer depreciated but are instead amortized over the life of the concession similar to concession fees. Concession assets (composed of concession fees and network PP&E) are considered intangible assets and are amortized over the life of the concession. Beginning 2013, the company decided that given the large initial expenditures and the economic benefit of the concession asset being more closely aligned with the growth in billed volume, it would apply the unit-of-production (UOP) method, instead of the straight-line method, of amortizing its concession asset.

Amortization of intangible assets increased 15.03% to ₱2.34 billion from ₱2.04 billion in the prior year, in line with the company’s continuing capital expenditure program. Total non-cash expenses, however, grew at a much faster rate of 23.9% to ₱2.56 billion, as the prior year’s level was depressed by a higher reversal of provisions for doubtful accounts. The company’s average days sales outstanding (DSO) at the end of the 2016 was retained at 45.7 days, same as at the end of 2015.

NET INCOME

EBITDA

BALANCE SHEETWith total operating expenses increasing faster than revenues, income from operations remained flat at ₱11.85 billion. Reported net income, on the other hand, declined by 29.3% to ₱6.75 billion due to the expiry of the company’s income tax holiday (ITH) in 2015.

In connection with the expiry of the ITH, the company reviewed its tax position and determined that it was more beneficial to elect the optional standard deduction (OSD) in computing its income taxes for the year as opposed to the more traditional itemized deduction. Likewise, a review of the company’s projected gross margin and net income showed that the applicable tax rate for the expected manner of recovery and settlement of the deferred taxes is at the effective tax rate of 18% using OSD. This resulted in a re-measurement of the deferred tax assets (DTA) recorded in the balance sheet for most of the remaining life of the concession, resulting in either a write-down of DTA for cost of services measured at the 30% tax rate to the effective tax rate of 18%, or totally writing off DTA on expense items no longer deductible in an OSD regime. The one-time impact of this re-measurement is ₱324.4 million.

Core net income for the period, which excludes one-time charges such as foreign exchange gains or losses, and the write-off of deferred tax assets related to the adoption of OSD, amounted to ₱7.17 billion, a decline of 25.9% from last year’s core net income of ₱9.68 billion.

Core Earnings before Interest, Taxes, and Depreciation (EBITDA) grew 3.7% to ₱14.4 billion versus ₱13.9 billion last year, a deterioration in margin to 71.2% from 72.8% in the previous year, due primarily to the delay in the implementation of the rate rebasing tariff that is needed to cover the growth in cash operating expenses.

In 2016, Maynilad’s total assets increased 7.2% to ₱87.2 billion compared to ₱81.4 billion at the end of 2015, primarily driven by the continuing addition to concession assets that offset the impact of the payment of dividends, and the write-off of deferred tax assets. Concession assets continued to form bulk of total assets, growing 10.9% net of amortization to ₱69.3 billion or 79.5% of total assets of the company.

Debt-to equity ratio further strengthened to 54:46, despite the payment of ₱2 billion in cash dividends in March, as the company increased retained earnings by ₱4.75 billion.

INVESTMENTSAcquired in August 2012 and owned 100% by Maynilad, PhilHydro owns and operates three plants that supply treated bulk water to the Legazpi City Water District in Albay, Norzagaray Water District and Santa Maria Water District in Bulacan, and municipal waterworks of Bambang, Nueva Vizcaya. The company also owns and operates the treated water supply and distribution system of Rizal, Nueva Ecija. The company has a total plant capacity of 53 MLD and is currently operating at around 34 MLD.

In 2016, Philhydro’s billed volumes increased 5.5% to 34.3 MLD versus 32.7 MLD in the same period in the previous year primarily due to an 11.6% increase in Bulacan as new pipe capacity allowed for expansion in the water districts of Norzagaray and Santa Maria. The company generated revenues of ₱195 million and income from operations of ₱26 million, which was partially depressed by a one-time payment of taxes and licenses as a result of a long-delayed business permit dispute in Legazpi. Contribution to Maynilad after amortization of goodwill from acquisition was a loss of ₱28 million but added a positive ₱59 million contribution to core EBITDA.

On 28 January 2013, Maynilad won the bid to acquire 10% of Subic Water and Sewerage Company Inc. (Subic Water) from the city of Olongapo for ₱211 million. After the expiry of the right of first refusal of Subic Water’s existing shareholders to acquire the shares, Maynilad signed the deed of sale for the acquisition on 15 March 2013.

Subic Water operates the water supply and sewerage system in the Subic Bay Freeport and the water system in Olongapo City, under a franchise agreement expiring in 2027. Billed connections at the end of December 2016 reached 41,754 accounts while average NRW stood at 23.48%. Unaudited gross revenues amounted to ₱641.67 million while netincome was at ₱187.75 million. Maynilad’s 10% investment in Subic Water is carried at cost less any accumulated impairment losses.


RATE REBASING UPDATEMaynilad is a concessionaire of the Metropolitan Waterworks and Sewerage System (MWSS) given the exclusive right to manage water and wastewater operations in the West Zone of the Greater Manila Area as defined in the Concession Agreement (CA) entered into by both parties on 21 February 1997.

On 30 March 2012, Maynilad submitted a business plan for the determination of the tariff adjustment for the period 2013 to 2017. After almost one and half years of review and discussion, in a resolution dated 12 September 2013, MWSS denied Maynilad’s petition for an upward adjustment of 28.35% of its average basic charge (or ₱8.58 per cubic meter), and instead approved a negative adjustment of 4.82% (or ₱1.46 per cubic meter), which Maynilad subsequently contested.

Under the CA, any disagreement or dispute which cannot be resolved through consultation or negotiation between the parties must be resolved through an arbitration process. In this regard, on 4 October 2013, Maynilad filed a notice of dispute with the Secretariat of the International Chamber of Commerce (ICC) International Court of Arbitration to resolve its rebasing dispute with MWSS. Maynilad reviewed and took into consideration the MWSS determination as outlined in its September resolution and submitted an alternative proposal with a positive adjustment of 13.41% (or ₱4.06 per cubic meter). The most significant element driving this alternative proposal is Maynilad’s position that corporate income tax should be a recoverable expenditure in tariff determination.

On 5 January 2015, Maynilad officially received the Appeals Panel’s award dated 29 December 2014 (the Award) upholding Maynilad’s alternative rebasing adjustment. Due to the integration of the ₱1.00 CERA into the basic water charge, the net impact of the increase was effectively only ₱3.06. The Award, being final and binding on the parties, Maynilad asked the MWSS to cause its Board of Trustees to approve the 2015 Tariffs Table so that the same can be published and implemented 15 days after its publication. However in their letter dated 9 Febru-ary 2015, the MWSS and Regulatory Office informed Maynilad that they have decided to await the final outcome of their arbitration with the other concessionaire, Manila Water.

On 20 February 2015, Maynilad wrote the government, through the Department of Finance (DOF), to call on the undertaking which the Republic of the Philippines (the Republic) issued in favor of the Maynilad on 31 July 1997 and 17 March 2010 (the undertaking). The undertaking provides that the Republic shall indemnify Maynilad in respect of any loss that is occasioned by a delay caused by the

Republic or any government-owned agency inimplementing any increase in the Standard Rates beyond the date for its implementation in accordance with the CA.

On 21 April 2015, Maynilad finally received from the MWSS Regulatory Office (RO) copies of resolutions from the RO and the MWSS Board of Trustees (collectively, the “Resolutions”) directing Maynilad to implement a tariff adjustment of ₱0.64/cu.m., which net of the ₱1.00 CERA, actually translates to a tariff adjustment of negative ₱0.36/cu.m. According to the Resolutions, the MWSS and RO will now “have the issue on the recoverability of corporate income tax, along with its underlying issue pertaining to public utilities, finally resolved in a court of law.” This, despite the express provision in the CA that any decision or Award of the Appeals Panel is final and binding on the parties, and the express waiver in the CA of the parties’ right to appeal any such decision or award.

For being contrary to the Final Award as well as the provisions of the CA, Maynilad did not implement the Resolutions. Instead, Maynilad continues to pursue its claim against the Undertaking of the Philippine Republic, including bringing the Philippine Republic to international arbitration in Singapore.

On 27 March 2015, Maynilad served a Notice of Arbitration and Statement of Claim upon the Republic, through the DOF. Maynilad gave notice and demanded that the Republic’s failure or refusal to pay it the amounts required under the Demand Letters be, pursuant to the terms of the undertaking, referred to arbitration before a three-member panel appointed and conducting proceedings in Singapore in accordance with the 1976 United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules. The arbitration panel was constituted in 2015.

On 17 February 2016, Maynilad wrote again a letter to the Republic, through the DOF, to reiterate its demand against the undertaking and to update its claim in the amount of ₱5.6 billion. On 31 March 2016, Maynilad filed its Amended Statement of Claim. On 28 April 2016, the Republic, through the DOF, filed its Statement of Defense. Hearings on the arbitration were completed in December 2016 with expected resolution by the second quarter of 2017.

On 25 July 2015, Maynilad filed a Petition for Confirmation and Execution of the Final Award with the Regional Trial Court of Quezon City. As of the end of 2016, the parties have completed the presentation of their respective evidence.


Aside from ending Maynilad’s first decade since its re-privatization, 2016 also marked the start of our Maynilad Next Generation Program—a three-year strategic plan collaboratively developed by Maynilad’s top management team and next-in-line leaders. The plan embodies our response to new issues, and how we intend to achieve optimal performance despite the challenging business environment.

Part of this “NextGen” plans is to continuously monitor and evaluate the impact of our reorganization to our business operations and bottom line. For example, we need to see further improvements in the resolution times, streamlined processes, and better collaboration between our integrated functions. We are also looking forward to our new IAM team becoming fully functional.

We see the growing importance of closer coordination among our divisions. The groundwork for cross-functional teamwork has been laid through our reorganization. Together

with our culture of innovation, this collaborative environment is expected to encourage employees to share information for better decision-making and more creative solutions.

We are focusing on the development of sewerage systems across our concession area. This massive undertaking is being done in phases, and the ultimate goal is to meet full sewerage coverage by the end of the concession period in 2037.

As we approach 100% water service coverage in the West Zone, the pressure to explore and pursue other growth areas has also become a priority. Our new business development team is expected to focus on our growth prospects in the coming years. We work to ensure that the skills of our people are continuously upgraded so they are ready to meet future challenges.

The Maynilad Next Generation Program

embodies our response to new issues, and how we

intend to achieve optimal performance despite the

challenging businessenvironment.

AHEADLOOKING


In 2016, Maynilad strengthened its CSR initiatives by

implementing a comprehensiveprogram consisting of various

strategic interventions that aim to create a positive impact

on our different stakeholders.

SOCIAL RESPONSIBILITYCORPORATE


WELFARE AND LIVELIHOOD

ACCESS TO WATER

We continued to create livelihood opportunities for our watershed communities with interventions that promote skills and sustainability, such as our Sining Ipo and our Habing Buhay projects. From the sculptors of the Ipo Watershed to the weavers of Laguna Lake, the beneficiaries of these programs have been empowered to be productive without need for destructive extraction from the environment.

We also brought our water services to more indigent communities this year. We inaugurated the newest Samahang Tubig Maynilad community in Riverview, Quezon City. The cooperative-based organization is composed of 60 families in the informal settler community. Aside from providing water access, the cooperative model also allows the beneficiaries to effectively manage their shared water system.

Maynilad partnered with Tubig Pag-asa—a social business in Sucat, Parañaque—to set up a system for providing water to around 150 families who previously relied on water syndicates selling over-priced water. To complement the access to our wa-ter service, we also built a communal “GinhaWASH area,” a communal toilet-and-bath facility that pro-vides residents with access to a sanitation facility and allows us to collect their septage properly.

Our CSR initiatives have brought positive change to our adopted communities, schools

and students, the environment, and our

lifeline customers.

EDUCATION AND TRAININGThe key to sustaining the impact of these interventions is through education and capacity building. In 2016, we held our first-ever Cooperative Management Training for our social enterprise groups, including some of our community-based water associations. The training series taught participants the fundamentals of a cooperative, as well as more advanced management skills such as policy formulation and auditing.

We held a number of other capacity-building workshops, including our Ginhawa Gardening Workshops for beneficiaries of our “Food Always in the Home (FAITH) Gardens” in Parañaque City. Our award-winning education program, “Daloy Dunong,” engaged over 14,000 students, who were taught about the importance of water, good hygiene, and environmental responsibility.

Meanwhile, our Lingkod Eskwela program continues to give more students access topotable water through the installation of drink-wash facilities in the most populous andresource-deficient public schools in the West Zone. In 2016, we built drink-wash stations in 44 public schools, including one for the Polytechnic University of the Philippines.

Maynilad continued to respond to calls for assistance during disasters. We sent safe drinking water to the survivors of at least 12 fire incidents in the West Zone. In partnership with the MVP CSR Council, we participated in relief efforts in El Niño-stricken areas in Mindanao. We also sent our Mission Ginhawa team to Kalinga, Apayao, Tuguegarao and Penablanca in Cagayan to bring water and water filter donations to communities hit by Typhoon Lawin.

DISASTER RELIEF


RECEIVED IN 2016AWARDS


Yet again, Maynilad flew high in 2016 with a slew of recognitions from local and international award-giving bodies. These awards, detailed below, are a testament to the excellent work that results from collective effort.

LOCAL AWARDS INTERNATIONAL AWARDS• Anvil Awards of the Public Relations Society of the Philippines: “Maynilad Simpleng Ginhawa”

program; “Think Maynilad Innofest”; “Grabe and Maynilad” audio-visual presentation (AVP); “Our Valued Connections: The Maynilad 2013-2014 Sustainability Report”; “Our Backstory: 2013 Annual Report”

• Philippine Quill Awards of the International Association of Business Communicators: “Maynilad Simpleng Ginhawa” program; Maynilad Pipe Realignment Information Campaign; “Our Valued Connections: The Maynilad 2013-2014 Sustainability Report”; “Our Backstory: 2013 Annual Report”; “Grabe ang Maynilad AVP; “Think Maynilad Innofest”; “Sining Ipo” project; “Top Achievement for Partners”

• Gawad Kalikasan at Kalusugan Awards of the Department of Labor and Employment: Champion, Regional Level, Institutional Category for Maynilad Central Depot, La Mesa Treatment Plant 2 and Fairview-Commonwealth Business Area; Champion, Regional Level, Individual Category, and Gold Award, National Level, Individual Category for Engr. Conrad Soriano; Silver Award, National Level, Institutional Category for Maynilad Central Depot and Commonwealth Business Area; and Gold Award, National Level, Institutional Category for La Mesa Treatment Plant 2

• Gawad Maestro Awards of the Philippine Society for Training and Development: “Maynilad 8 Steps for Service Excellence

• Safety Awards of the Safety Organization of the Philippines: Award of Excellence for achieving 20 million man-hours without lost-time accident

• Don Emilio Abello Energy Efficiency Award of the Department of Energy:

- Outstanding Awards for Pagcor Pumping Station and La Mesa Treatment Plant 2- Outstanding Energy Manager Awards to Michael Buligan of Water Network and John Jerald de Jesus of Water Production- Recognition for Maynilad’s ISO 50001 Certification

• Asia Sustainability Reporting Awards of CSR Works: Best Stakeholder Reporting and Best Environmental Reporting for “Our Valued Connections: The Maynilad 2013-2014 Sustainability Report”

• Global CSR Awards of the Pinnacle Group International: Platinum Award, Best Environmental Excellence Category for “Sanitation Safety Plan,” “Greenhouse Gas and Air Pollutants Inventory,” and “Energy Management System”; Gold Award, Best Community Program Category for the Twinning Partnership with Nepal for Non-Revenue Water Management

• ADFIAP Development Awards of the Association of Development Funding Institutions in Asia and the Pacific (ADFIAP): Outstanding Development Project Award for the Maynilad Talayan Sewage Treatment Plant

• ASEAN Corporate Sustainability Summit and Awards of the Asia Society for Social Improvement and Sustainable Transformation (ASSIST): Resource Efficiency Category for Maynilad’s Energy Management System

• ASEAN Red Ribbon for Outstanding Workplace (ARROW) Award of the Association of Southeast Asian Nations – Business Coalition: Outstanding Workplace for Central Materials Depot, La Mesa Treatment Plant 2, and Fairview-Commonwealth Business Area

• Asia Corporate Excellence & Sustainability Awards of the MORS Group: Top Green Companies in Asia


DIRECTORSBOARD OF


MANUEL V. PANGILINANChairman2007 to present

Mr. Pangilinan assumed chairmanship of Maynilad in January 2007 and remain as such up to the present. He is also the President and CEO of Philippine Long Distance Telephone Company (PLDT) and Smart Communications, after serving as their Chairman until Dec. 2015. He also serves as Chairman, Vice Chairman, or Board of Director of Manila Electric Company (MERALCO), Metro Pacific Investments Corp., Mediaquest Inc., Associated Broadcasting Corp. (TV5), Philex Mining Corp., Philex Petroleum Corp., NLEX Corp. (formerly Manila North Tollways Corp.), Landco Pacific Corp., Medical Doctors, Inc. (owner and operator of Makati Medical Center), Colinas Verdes Hospital Managers Corp. (operator of Cardinal Santos Medical Center), East Manila Hospital Managers Corp. (operator of Our Lady of Lourdes Hospital), and Asian Hospital, Inc. In 2012, he was appointed as Vice Chairman of Roxas Holdings Inc., which owns and operates the largest sugar milling operations in the Philippines.

Mr. Pangilinan founded First Pacific in 1981 and serves as its Managing Director and CEO. Within the First Pacific Group, he holds the positions of President and Commissioner of P.T. Indofood Sukses Makmur, the largest food company in Indonesia.

He is currently Chairman of the Board of Trustees of San Beda College. On Feb. 5, 2007, Mr. Pangilinan was named President of the Samahang Basketbol ng Pilipinas. Effective Jan. 2009, MVP assumed chairmanship of the Amateur Boxing Association of the Philippines. In Oct. 2009, he was appointed Chairman of the Philippine Disaster Recovery Foundation, Inc. He is also chairman of the Philippine Business for Social Progress. In June 2012, he was appointed as Co-Chairman of the US-Philippine Business Society.

ISIDRO A. CONSUNJIVice Chairman2007 to present

Mr. Consunji has been Vice Chairman of Maynilad since January 2007. He is a Member of the Board of Directors of DMCI Holdings, Inc. (DMCI), Semirara Mining and Power Corp., Atlas Consolidated Mining and Development Corp., D.M. Consunji, Inc., DMCI Project Developers Inc., DMCI Mining Corp., DMCI Power Corp., DMCI Masbate Corp., Maynilad Water Holding Co. Inc. (formerly DMCI-MPIC Water Company), Sem-Calaca Power Corp., Southwest Luzon Power Generation Corp., Sem-Calaca Res Corp., Semirara Claystone, Inc., Dacon Corp., DFC Holdings, Inc., and Wire Rope Corp. of the Philippines.

Mr. Consunji graduated from the University of the Philippines where he earned a degree in Bachelor of Science in Civil Engineering. He also took up Master of Business Economics from the Center for Research & Communication (now University of Asia and the Pacific) and Master of Business Management from the Asian Institute of Management. He took up an Advanced Management Program at IESE School in Barcelona, Spain. Among Mr. Consunji’s civic affiliations are Philippine Overseas Construction Board (Chairman); Construction Industry Authority of the Philippines (Board Member); Philippine Constructors Association and Philippines Chamber of Coal Mines (Past President); and Asian Institute of Management Alumni Association, UP Alumni Engineers, and UP Aces Alumni Association (Member).

DIRECTORSBOARD OF


JOSE MA. K. LIMDirector2007 to present

Mr. Lim has been a Director of Maynilad since January 2007. He is President & CEO of Metro Pacific Investments Corp., and is also currently a Director in the following MPIC subsidiary and/or affiliate companies: Beacon Electric Asset Holdings Inc., Manila Electric Company, Metro Pacific Tollways Corp., NLEX Corp.; Tollways Management Corp., Light Rail Manila Corp., AF Payments Inc., MetroPac Water Investments Corp. Indra Philippines, Global Business Power Corp., Medical Doctors, Inc., Colinas Verdes Hospital Managers Corp., Asian Hospital Inc., East Manila Hospital Managers Corp., and Manila Medical Services Inc. (owner and operator of Manila Doctors Hospital). He is also a Director of the Ateneo Graduate School of Business and a Trustee of the Asian Institue of Management. He is a founding member of the Shareholders Association of the Philippines and an active member in various business organizations.

JORGE A. CONSUNJIDirector2007 to present

Mr. Consunji has been a Director of Maynilad since January 2007. He also serves as a member of the Board of Directors of DMCI Holdings Inc., Semirara Mining and Power Corp., D.M. Consunji, Inc., DMCI Project Developers, Inc., DMCI Mining Corp., DMCI Power Corp., DMCI Masbate Corp., Sem-Calaca Power Corp., Southwest Luzon Power Generation Corp., Maynilad Water Holding Co. Inc. (formerly DMCI-MPIC Water Company), Dacon Corp., DFC Holdings, Inc., and Wire Rope Corp. of the Philippines.

RAMONCITO S. FERNANDEZDirectorJanuary 2016 to present

Mr. Fernandez is concurrently the President and CEO of Maynilad. He formally took over the position last January 2016. He is also a Director for Metro Pacific Investments Corp., Metro Pacific Water Investments Corp., Pacific Global One Aviation Company, Inc., Tahanan Mutual Building and Loan Association, Inc.; and Trustee for the Institute of Corporate Directors and the Shareholders’ Association of the Philippines (SharePHIL). Prior to joining Maynilad, Mr. Fernandez was President and CEO of Metro Pacific Tollways Corp., Tollways Management Corp. and MP CALA Holdings, Inc.; Head of the International and Carrier Business and Global Access Group of PLDT/Smart; Head of Administration and Materials Management of PLDT/Smart; EVP of Marketing, Sales and Logistics of Starpack Philippines, Inc.; and VP Officer-in-Charge of Steniel Carton Systems Corp.

RANDOLPH T. ESTRELLADODirector2007 to present

Mr. Estrellado has been a Director of Maynilad since January 2007 and is concurrently the Company’s Chief Operating Officer and Chief Finance Officer. He previously served as Director and Chief Finance Officer of Metro Pacific Investments Corp. Prior to joining Metro Pacific, Mr. Estrellado was Vice President and Chief Finance Officer for ABS-CBN Broadcasting Corporation from 2000 to 2006. Mr. Estrellado had also served in various positions of senior responsibility with the Lopez Group and Phinma Group of Companies.

DIRECTORSBOARD OF


DIRECTORSBOARD OF

ATTY. MARILYN A. VICTORIO-AQUINODirectorDecember 21, 2012 to present

Atty. Aquino joined the Maynilad Board on December 21, 2012. She is also a Director of Philex Mining Corporation, Lepanto Consolidated Mining Company, PXP Energy, Silangan Mindanao Mining Co. Inc., Silangan Mindanao Exploration Company Inc., MetroPac Movers, Inc.; MetroPac Logistics Co. Inc., and PremierLogistics, Inc.; and Assistant Director of First Pacific Company Limited (FPC). She joined FPC on July 1, 2012 following her 31-year practice at SyCipLaw. She graduated cum laude (class salutatorian) from the University of the Philippines, College of Law in 1980 and placed second in the Philippine Bar Examination in the same year.

KENSUKE TATSUKAWADirectorApril 22, 2013 to March 2016

Mr. Tatsukawa joined the Maynilad Board of Directors in April 2013, and was the Senior Operating Officer for the Energy & Environment Infrastructure Division of the Marubeni Corporation. He was also assigned by Marubeni to help facilitate international projects in Doha, Qatar as Project Director for the Doha Sewage Project Office (2008-2010), and in Jakarta, Indonesia as Project Coordinator (1994-2001). Presently he is the President & CEO of Marubeni Korea Corporation.

MANABU SUGAWARA DirectorAugust 1, 2014 to present

Mr. Sugawara joined the Maynilad Board of Directors last August 2014. He has been engaged in the development of various international infrastructure projects in Marubeni Corporation for over 20 years, including the overseas assignments in Manila, Philippines (2000-2002), and in Lima, Peru (2009-2011). Mr. Sugawara held a director position in Marubeni’s water business subsidiary and/or affiliate companies, such as Consorcio Agua Azul S.A. (Lima, Peru), Chengdu Generale Des Eaux-Marubeni Waterworks Company Limited (Sichuan Province, P.R.China). He is also presently Vice President of Marubeni Philippines Corp.

TAKESHI KURIOKADirectorMarch 2016 to present

Mr. Kurioka joined the Maynilad Board of Directors last March 2016, and is the Unit Director for the Environment Infrastructure Department of the Marubeni Corporation. He has been engaged in the development of various international infrastructure projects in Marubeni Corporation for over 25 years, including the overseas assignments in Abu Dhabi, UAE (2002-2007) and in Adelaide, Australia (2011-2015, Executive Director position in Osmoflo Pty Ltd).


RAMONCITO S. FERNANDEZPresident and Chief Executive Officer

RANDOLPH T. ESTRELLADOChief Operating Officer and Chief Finance Officer

CHRISTOPHER J. LICHAUCOHead, Business Area Operations

JOHN PATRICK C. GREGORIOHead, Commercial & Marketing

FRANCISCO C. CASTILLOHead, Information Technology Services

LOURDES MARIVIC P. ESPIRITUHead, Legal & Regulatory Affairs

IRINEO L. DIMAANOHead, Central Non-Revenue Water

MANAGEMENT TEAMTOP


RONALDO C. PADUAHead, Water Supply Operations

ANTONIO F. GARCIAHead, Wastewater Management

ARTURO CELSO D. BARANDAHead, Corporate Logistics

YOLANDA C. LUCASHead, Program Management

FRANCISCO A. ARELLANOHead, Corporate Quality, Environment, Safety & Health

MITCHIE M. ARCAINAOIC/Head, Human Resources

ERIC J. MONTESHead, Integrated Asset Management

MARCOS D. DE JESUSHead, Technical Services

MANAGEMENT TEAMTOP


INDEPENDENT AUDITORS’ REPORTMaynilad Water Services, Inc. and Subsidiaries(A Subsidiary of Maynilad Water Holding Company, Inc.)

Consolidated Financial StatementsDecember 31, 2016 and 2015And Years Ended December 31, 2016,2015 and 2014

FINANCIAL STATEMENTSCONSOLIDATED

OPINION

We have audited the consolidated financial statements of Maynilad Water Services, Inc. and Subsidiaries (the Group), a subsidiary of Maynilad Water Holding Company, Inc., which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance withPhilippine Financial Reporting Standards (PFRSs).

BASIS FOR OPINION

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

OTHER INFORMATION

Management is responsible for the other information. The other information comprises the information included in the Annual Report for the year ended December 31, 2016, but does not include the consolidated financial statements and our auditor’s report thereon. The Annual Report for the year ended December 31, 2016 is expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits, or otherwise appears to be materially misstated.


RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with PFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s reportthat includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in theaggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and,based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

SYCIP GORRES VELAYO & CO.

Johnny F. AngPartner

CPA Certificate No. 0108257SEC Accreditation No. 1284-AR-1 (Group A),June 9, 2016, valid until June 9, 2019Tax Identification No. 221-717-423BIR Accreditation No. 08-001998-101-2015,November 25, 2015, valid until November 24, 2018PTR No. 5908662, January 3, 2017, Makati CityFebruary 27, 2017


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Amounts in Thousands)

See accompanying Notes to Consolidated Financial Statements.

ASSETS 2016 2015

Current Assets

Cash and cash equivalents (Notes 4, 24 and 25) ₱5,024,754 ₱3,093,012

Short-term investments (Notes 4, 24 and 25) 3,041,000 6,088,541

Trade and other receivables (Notes 5, 24 and 25) 2,492,645 2,428,812

Other current assets (Notes 6, 10, 24 and 25) 3,470,767 3,216,752

Total Current Assets 14,029,166 14,827,117

Noncurrent Assets

Service concession assets (Notes 7, 10, 12, 14 and 22) 69,297,460 62,488,321

Deferred tax assets - net (Notes 15 and 20) 1,032,194 2,139,574

Property and equipment (Note 8) 1,254,339 833,821

Goodwill (Note 2) 288,082 288,082

Available-for-sale financial assets (Notes 9, 24 and 25) 132,387 132,387

Other noncurrent assets (Notes 2, 5, 24 and 25) 1,145,282 643,548

Total Noncurrent Assets 73,149,744 66,525,733

₱87,178,910 ₱81,352,850

LIABILITIES AND EQUITY 2016 2015

Current Liabilities

Trade and other payables (Notes 11, 14, 16, 23, 24 and 25) ₱10,892,909 11,327,222

Current portion of interest-bearing loans (Notes 7, 10, 24 and 25) 1,808,101 1,742,164

Current portion of service concession obligation payable to MWSS (Notes 7, 12, 24 and 25) 1,328,978 1,357,705

Total Current Liabilities 14,029,988 14,427,091

Noncurrent Liabilities

Interest-bearing loans - net of current portion(Notes 7, 10, 24 and 25) 24,879,755 23,337,175

Service concession obligation payable to MWSS- net of current portion (Notes 7, 12, 24 and 25) 6,500,131 6,737,157

Deferred credits (Notes 2, 7, 24 and 25) 631,975 583,643

Customers’ deposits (Notes 2, 24 and 25) 279,363 244,434

Pension liability (Note 16) 317,329 416,234

Deferred tax liabilities - net (Notes 15 and 20) 28,885 -

Other noncurrent liabilities (Note 16) 249,830 68,461

Total Noncurrent Liabilities 32,887,268 31,387,104

Total Liabilities 46,917,256 45,814,195

Equity

Capital stock (Notes 1 and 13) 4,546,982 4,546,982

Additional paid-in capital (Note 13) 10,021,200 9,979,786

Treasury shares (Note 13) (32,672) (104,654)

Other comprehensive income (Notes 9 and 16) 34,718 27,219

Other equity adjustments (Note 13) (309,220) (163,152)

Retained earnings (Note 13)

Unappropriated 14,500,646 13,752,474

Appropriated 11,500,000 7,500,000

Total Equity 40,261,654 35,538,655

₱87,178,910 ₱81,352,850

December 31

December 31


CONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands, Except Earnings per Share Value)


CONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands, Except Earnings per Share Value)

2016 2015 2014

Operating revenueWater services:

West zone ₱16,116,765 ₱15,161,712 ₱14,509,367

Outside west zone 194,622 173,937 134,930

Sewer services

West zone 3,508,118 3,367,186 3,294,000

Others 404,241 395,402 424,378

20,223,746 19,098,237 18,362,675

Costs and Expenses

Amortization of service concession assets (Note 7) 2,343,969 2,037,684 1,804,448

Salaries, wages and benefits (Notes 13, 14 and 16) 2,004,436 1,847,947 2,029,042

Contracted services 946,240 913,880 819,463

Utilities 877,986 831,853 846,894

Repairs and maintenance 515,011 388,703 495,833

Depreciation and amortization (Note 8) 291,491 260,174 256,745

Materials and supplies 283,014 223,597 183,370

Taxes and licenses 214,383 189,184 168,791

Rental (Notes 22 and 23) 143,736 150,624 167,654

Collection charges 136,201 137,113 122,050

Business meetings and representations 125,835 95,834 82,147

Regulatory costs 101,200 94,344 71,431

Transportation and travel 98,434 122,587 185,013

Provision (reversal of provision) for doubtful accounts(Note 5) (76,852) (231,978) 358

Advertising and promotion 58,699 52,450 40,867

Insurance 51,603 43,541 42,990

Others 257,711 87,947 97,413

8,373,097 7,245,484 7,414,509

Income before other Income ( Expenses ) 11,850,649 11,852,753 10,948,166

Years Ended December 31

2016 2015 2014

Other Income ( Expenses )

Revenue from rehabilitation works (Note 7) 8,951,700 7,728,506 4,162,174

Cost of rehabilitation works (8,951,700) (7,728,506) (3,993,120)

Interest expense and other financing charges (Note 17) (1,810,575) (1,983,288) (2,163,476)

Interest income (Note 4) 119,919 134,894 81,283

Net foreign exchange losses (Note 2) (510,811) (152,683) (112,619)

Foreign currency differential adjustments (FCDA) (Note 2) 510,644 200,344 110,012

Others - net (Notes 9, 10 and 11) (161,289) (434,096) (807,802)

(1,852,112) (2,234,829) (2,723,548)

Income before Income Tax 9,998,537 9,617,924 8,224,618

Provision for ( Benefit from ) Income Tax(Notes 15 and 20)

Current 2,117,314 46,142 62,737

Deferred 1,133,051 21,155 (93,407)

3,250,365 67,297 (30,670)

Net Income ₱6,748,172 ₱9,550,627 ₱8,255,288

Basic Earnings Per Share (Note 18) ₱1,522.22 ₱2,152.51 ₱1,850.78

Diluted Earnings Per Share (Note 18) ₱1,522.22 ₱2,151.55 ₱1,850.78




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)

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Net Income ₱6,748,172 ₱9,550,627 ₱8,255,288

Other Comprehensive Incom ( Loss )

Other comprehensive income (loss) not to be reclassifiedto profit or loss in subsequent period (Note 16):

Remeasurement gain (loss) on retirement plans 10,713 (40,953) 18,917

Income tax effect (3,214) _ (5,675)

Other comprehensive income to be reclassified to profit or loss in subsequent period (Note 9) -Reversal of impairment loss on available-for-salefinancial assets

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7,499 (18,943) 13,242

Total Comprehensive Income ₱6,755,671 ₱9,531,684 ₱8,268,530


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CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)

2016 2015 2014

Cash Flow from Operating Activities

Income before income tax ₱9,998,537 ₱9,617,924 ₱8,224,618

Adjustment for:

Amortization of service concession assets (Note 7) 2,343,969 2,037,684 1,804,448

Interest expense and other financing charges (Note 17) 1,810,575 1,983,288 2,163,476

Depreciation and amortization (Note 8) 291,491 260,174 256,745

Interest income (Note 4) (119,919) (134,894) (81,283)

Pension cost (income) (Note 16) 104,049 93,448 (155,111)

Gain on sale of property and equipment (13,252) (232) (3,053)

Dividend income (Note 9) (10,000) (14,473) -

Unrealized foreign exchange gains - net (7,628) (6,863) (158)

Cost of share-based payments (Note 13) - 146,068 -

Impairment loss on available-for-sale financial assets (Note 9) - - 100,207

Operating income before working capital changes 14,397,822 13,982,124 12,309,889

Decrease (increase) in:

Short-term investments 3,047,541 (3,173,541) 712,000

Trade and other receivables 8,495 (295,136) (247,488)

Other current assets (254,015) (572,121) (281,749)

Additions to service concession assets (Note 7) (9,060,721) (7,732,006) (4,170,046)

Increase (decrease) in trade and other payables (569,848) 472,690 (1,696,858)

Cash generated from operations 7,569,274 2,682,010 6,625,748

Interest received 130,726 118,805 76,938

Income taxes paid (1,654,232) (46,467) (65,245)

Net cash provided by operating activities 6,045,768 2,754,348 6,637,441


2016 2015 2014

Cash Flow from Investing Activities

Acquisitions of property and equipment (Note 8) (714,958) (286,317) (526,192)

Increase in other noncurrent assets (99,964) (13,815) (50,837)

Proceeds from sale of property and equipment 16,201 2,272 11,054

Dividends received (Note 9) 10,000 14,473 -

Cash paid on acquisition of a subsidiary (Note 11) - (29,592) (65,972)

Net cash used in investing activities (788,721) (312,979) (631,947)

Cash Flow from Financing Activities

Payments of:

Dividends (Note 13) (1,999,620) (1,999,991) (1,000,135)

Interest-bearing loans (Note 10) (1,742,164) (1,692,164) (1,721,331)

Service concession obligation payable to MWSS (Note 12) (1,208,713) (1,026,693) (1,184,393)

Proceeds from the availment/drawdown of interest-bearing loans (Note 10) 3,173,095 2,539,775 567,487

Interest paid (1,406,783) (1,426,075) (1,442,576)

Contributions to pension fund (Note 16) (192,000) - -

Increase (decrease) in:

Customers’ deposits 83,261 75,551 23,021

Other noncurrent liabilities 291 (1,170) 170,982

Acquisition of treasury shares (Note 13) (32,672) (6,128) (94,416)

Net cash used in financing activities (3,325,305) (3,536,895) (4,681,361)

Net Increase (Decrease) in cash and cash equivalents 1,931,742 (1,095,526) 1,324,133

Cash and cash equivalents at beginning of year 3,093,012 4,188,538 2,864,405

Cash and cash equivalents at end of year (Note 4) ₱5,024,754 ₱3,093,012 ₱4,188,538




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Number of Shares, Earnings per Share Value and Unless Otherwise Specified)

1. CORPORATE INFORMATION AND STATUS OF OPERATIONS

GENERAL

Maynilad Water Services, Inc. (Maynilad or Parent Company) was incorporated on January 22, 1997 in the Philippines primarily to bid for the operation of the privatized system of waterworks and sewerage services of the Metropolitan Waterworks and Sewerage System (MWSS) for Metropolitan Manila.

On October 26, 2011, the Securities and Exchange Commission (SEC) approved the amendment of the Articles of Incorporation to amend its primary purpose to include the provision of allied and ancillary services and undertaking such other activities incidental to its secondary purposes.

EFFECTIVE INTEREST IN MAYNILAD

MWHCI and Maynilad Subscription Agreements. Pursuant to the Subscription Agreements executed between Maynilad and Maynilad Water Holding Company, Inc. (MWHCI), a company incorporated in the Philippines and a 51.27% owned subsidiary of Metro Pacific Investments Corporation (MPIC), MWHCI subscribed to 134,022 common shares of Maynilad at par value on December 28, 2012. Such shares, however, were issued only on February 13, 2013 and together with the additional subscription to 402,067 common shares increased MWHCI ownership interest in Maynilad to 92.85% as at December 31, 2013.

MCNK JV Corporation and MWHCI Subscription Agreements. On December 28, 2012, a Subscription Agreement between MCNK JV Corporation (MCNK, a subsidiary of a Japan-listed entity Marubeni Corp.) and MWHCI was executed, wherein MCNK subscribed to 169,617,682 common shares of MWHCI. On February 13, 2013, MCNK and MWHCI entered into another Subscription Agreement for the subscription by MCNK to an additional 508,853,045 common shares resulting to 21.54% interest in MWHCI. On the same date, MPIC purchased 154,992,852 common shares of stock of MWHCI from DMCI Holdings, Inc. (DMCI, a listed Philippine entity) resulting in 51.27% and 27.19% ownership interest as at December 31, 2013 by MPIC and DMCI, respectively.

As at December 31, 2016 and 2015, Maynilad is a 92.85% owned subsidiary of MWHCI. In addition, MPIC directly owns 5.19% of Maynilad thereby having effective ownership interest of 52.80%.

Metro Pacific Holdings, Inc. (MPHI) owns 41.9% of the total issued common shares (or 42.0% of the total outstanding common shares) and 52.1% of the total issued and outstanding common shares of MPIC as at December 31, 2016 and 2015, respectively. The reduction in the ownership interest resulted from GT Capital Holdings, Inc.’s (GTCHI) acquisition of 1.3 billion MPICcommon shares from MPHI on May 27, 2016. On the same date, MPIC entered into a Share Subscription Agreement with GTCHI for the subscription

by GTCHI of 3.6 billion common shares in MPIC. As sole holder of the voting Class A Preferred Shares, MPHI’s combined voting interest as a result of all of its shareholdings is estimated at 55.0% as at December 31, 2016.

MPHI is a Philippine corporation whose stockholders are Enterprise Investment Holdings, Inc. (EIH; 60.0% interest), Intalink B.V. (26.7% interest) and First Pacific International Limited (FPIL; 13.3% interest). First Pacific Company Limited (FPC), a company incorporated in Bermuda andlisted in Hong Kong, through its subsidiaries, Intalink B.V. and FPIL, holds 40.0% equity interest in EIH and an investment financing which under Hong Kong Generally Accepted Accounting Principles require FPC to account for the results and assets and liabilities of EIH and its subsidiaries as part of FPC group companies in Hong Kong.

The registered office address of the Parent Company is MWSS Compound, Katipunan Road, Balara, Quezon City.

The accompanying consolidated financial statements were approved by the Audit Committee on February 27, 2017 as authorized by the Board of Directors (BOD) in accordance with its resolution.

CONCESSION AGREEMENT

On February 21, 1997, the Parent Company entered into a Concession Agreement with the MWSS, a government-owned and controlled corporation organized and existing pursuant to Republic Act (RA) No. 6234 (the Charter), as clarified and amended, with respect to the MWSS West Service Area. The Concession Agreement sets forth the rights and obligations of the ParentCompany throughout the concession period. The MWSS Regulatory Office (RO) acts as the regulatory body of the Concessionaires [the Parent Company and the East Concessionaire - Manila Water Company, Inc. (Manila Water)].

Under the Concession Agreement, MWSS grants the Parent Company (as contractor to perform certain functions and as agent for the exercise of certain rights and powers under the Charter), the sole right to manage, operate, repair, decommission and refurbish all fixed and movable assets required (except certain retained assets of MWSS) to provide water and sewerage services in the West Service Area for an extended period of 40 years commencing on August 1, 1997 (the Commencement Date) to May 6, 2037 or the early termination date as the case may be. The 15-year extension of the expiry of the Concession Agreement was approved by the MWSS in 2009 (see Notes 7, 12 and 22).

The Parent Company is also tasked to manage, operate, repair, decommission and refurbish certain specified MWSS facilities in the West Service Area. The legal title to these assets remains with MWSS. The legal title to all property, plant and equipment contributed to the existing MWSS system by the Parent Company during the concession period remains with the Parent Companyuntil the Expiration Date (or on early termination date) at which time, all rights, titles and interestin such assets will automatically vest in MWSS.


FOURTH RATE REBASING

MWSS released Board of Trustees Resolution No. 2013-100-RO dated September 12, 2013 and RO Resolution No. 13-010-CA dated September 10, 2013 on the rate rebasing adjustment for the rate rebasing period 2013 to 2017 reducing Maynilad’s 2012 average all-in basic water charge by 4.82% or ₱1.46 per cubic meter (cu.m.) or ₱0.29 per cu.m. over the next five years. Maynilad has formally notified its objection and initiated arbitration proceedings. On October 4, 2013, Maynilad filed its Dispute Notice before the Appeals Panel.

On December 17, 2013, the Regulatory Office released Resolution No. 13-011-CA regarding the implementation of a status quo for Maynilad’s Standard Rates and FCDA for any and all its scheduled adjustments until such time that the Appeals Panel has issued the Final Award.

On January 5, 2015, Maynilad officially received the Appeals Panel’s award dated December 29, 2014 (the “Arbitral Award”) upholding Maynilad’s alternative Rebasing Adjustment for the Fourth Rate Rebasing Period of 13.41% or its equivalent of ₱4.06 per cu.m. This increase has effectively been reduced to ₱3.06 per cu.m., following the integration of the ₱1.00 Currency Exchange Rate Adjustment (CERA) into the basic water charge. To mitigate the impact of the tariff increase on its customers, Maynilad offered to stagger its implementation over a three-year period. With the Arbitral Award being final and binding on the parties, Maynilad asked the MWSS to cause its Board of Trustees to approve the 2015 Tariffs Table so that the same can be published and implemented 15 days after its publication.

However, the MWSS and the RO have chosen, over Maynilad’s repeated objections, to defer the implementation of the Arbitral Award despite it being final and binding on the parties. In its letter dated February 9, 2015, the MWSS and RO, who received their copy of the Arbitral Award on January 7, 2015, informed Maynilad that they have decided to await the final outcome of their arbitration with the other concessionaire, Manila Water, before making any official pronouncements on the applicable resulting water rates for the two concessionaires.

On February 20, 2015, Maynilad wrote the Philippine Government, through the Department of Finance (DOF), to call on the undertaking which the Republic of the Philippines (the “Republic”) issued in favor of Maynilad onJuly 31, 1997 and March 17, 2010 (the “Undertaking”). The Undertaking provides, among other things, that the Republic shall indemnify Maynilad inrespect of any loss that is occasioned by a delay caused by the Republic or any government-owned agency in implementing any increase in the Standard Rates beyond the date for its implementation in accordance with the Concession Agreement.

On March 9, 2015, Maynilad again wrote the Republic, through the DOF, to reiterate its demand against the Undertaking. The letters dated February 20 and March 9, 2015 are collectively referred to as the “Demand Letters”. Maynilad demanded that it be paid, immediately and without further delay, the ₱3.4 billion in revenue losses that it had sustained as a direct result of the MWSS’ and the RO’s refusal to implement its correct Rebasing Adjustment from January 1, 2013 (the commencement of the Fourth Rate Rebasing Period) to February 28, 2015.

On March 27, 2015, Maynilad served a Notice of Arbitration and Statement of Claim upon the Republic, through the DOF. Maynilad gave notice and demanded that the Republic’s failure or refusal to pay the amounts required under the Demand Letters be, pursuant to the terms of theUndertaking, referred to arbitration before a three-member panel appointed and conduct proceedings in Singapore in accordance with the 1976 United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

On April 21, 2015, the MWSS Board of Trustees in its Resolution No. 2015-004-CA dated March 25, 2015 approved to partially implement the Arbitral Awardof a tariff adjustment of ₱0.64 per cu.m. which, net of the ₱1.00 CERA, actually translates to a tariff adjustment of negative ₱0.36 per cu.m. as opposed to the Arbitral Award of ₱3.06 per cu.m. tariff adjustment, net of CERA. For being contrary to the Final Award as well as the provisions of the Concession Agreement, Maynilad did not implement this tariff adjustment.

On May 14, 2015, the MWSS Board of Trustees in its Resolution No. 2015-060-RO approved a 7.52% increase in the prevailing average basic charge of ₱ 31.25 per cu.m. or an upward adjustment of ₱2.35 per cu.m. as partial implementation of the Arbitral Award. With the discontinuance of CERA, the net adjustment in average water charge is 4.32% or ₱1.35 per cu.m.

In the fourth quarter of 2015, the Arbitration Tribunal was constituted. On February 17, 2016, Maynilad again wrote the Republic, through the DOF, to reiterate its demand against the Undertaking and to update its claim. Evidentiary hearings were completed in December 2016. As at February 27, 2017, the decision from the Arbitration Tribunal is still pending.

As at December 31, 2016 and 2015, Maynilad’s revenue losses due to the delayed implementation of the Arbitral Award were estimated at ₱8.2 billion and ₱6.1 billion, respectively.


2. SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES

BASIS OF PREPARATION

The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency, and all amounts are rounded to the nearest thousand (₱000), except when otherwise indicated.

STATEMENT OF COMPLIANCE

The accompanying consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS include statements named PFRS and Philippine Accounting Standards (PAS), including Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC) and Philippine Interpretations Committee (PIC).

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements comprise the financial statements of the Parent Company and all of its subsidiaries (collectively referred to as the “Company”).

Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee, if and only if, the Company has:

• power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);

• exposure, or rights, to variable returns from its involvement with the investee; and

• the ability to use its power over the investee to affect its returns.

The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Company gains control until the date the Company ceases to control the subsidiary.

A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it:

• derecognizes the assets (including goodwill) and liabilities of the subsidiary;

• derecognizes the carrying amount of any non-controlling interest;• derecognizes the cumulative translation differences recorded in equity;• recognizes the fair value of the consideration received;• recognizes the fair value of any investment retained;• recognizes any surplus or deficit in profit or loss; and• reclassifies the Company’s share of components previously recognized

in other comprehensive income to profit or loss or retained earnings, as appropriate.

The financial statements of Maynilad and the following subsidiaries that it controls comprise the consolidated financial statements.

All subsidiaries are wholly-owned and incorporated in the Philippines.

Phil Hydro. On August 3, 2012, the Parent Company through a Share Purchase Agreement with a third party acquired 100% ownership interest in Phil Hydro for a net consideration of ₱526.9 million. Goodwill arising from the acquisition amounted to ₱288.1 million.

Phil Hydro is engaged in waterworks construction, engineering and engineering consulting services. Phil Hydro is currently undertaking water supply projects outside Metro Manila in line with the thrusts of the government under Presidential Decree No. 198, also known as the Provincial Water Utilities Act of 1973, which mandates the local government units to create and operate local water utilities and provide potable water to the public.

Subsidiaries Nature of Business

Philippine Hydro, Inc. (Phil Hydro)

Bulk water supply and

water distribution

(outside the West Service Area)

Amayi Water Solutions Inc. (Amayi) Water distribution (outside the West Service Area)


Phil Hydro has existing 25-year Bulk Water Supply Agreements with various provincial municipalities outside the West Service Area and a Memorandum of Agreement with certain provincial municipality for the construction and operation of water treatment facilities for water distribution services.

Amayi. Amayi is incorporated for the purpose of operating, managing, maintaining and rehabilitating waterworks, sewerage and sanitation system and services outside the Concession Area.

The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company using consistent accounting policies. All significant intercompany balances, transactions, income and expense and profits and losses from intercompany transactions are eliminated in full upon consolidation.

CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous financial year, except for the adoption of the following new accounting pronouncements starting January 1, 2016. Adoption of these pronouncements did not have any significant impact on the Company’s financial position or performance except as otherwise indicated.

• PFRS 10, Consolidated Financial Statements, PFRS 12, Disclosure of Interests in Other Entities, and PAS 28, Investments in Asso-ciates and Joint Ventures – Investment Entities: Applying the Consolida-tion Exception (Amendments)

• PFRS 11, Joint Arrangements – Accounting for Acquisitions of Interests in Joint Operations(Amendments)

• PFRS 14, Regulatory Deferral Accounts• PAS 1, Presentation of Financial Statements – Disclosure Initiative

(Amendments)• PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets –

Clarification of Acceptable Methods of Depreciation and Amortization (Amendments)

• PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture – Bearer Plants (Amendments)

• PAS 27, Separate Financial Statements – Equity Method in Separate Fi-nancial Statements (Amendments)

Annual Improvements to PFRSs 2012 - 2014 Cycle

• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations – Changes inMethods of Disposal (Amendments)

• PFRS 7, Financial Instruments: Disclosures – Servicing Contracts (Amend-ments)

• PFRS 7, Financial Instruments: Disclosures – Applicability of the Amendments to PFRS 7 toCondensed Interim Financial Statements

• PAS 19, Employee Benefits – Discount Rate: Regional Market Issue (Amendments)

• PAS 34, Interim Financial Reporting – Disclosure of Information ‘Elsewhere in the Interim Financial Report’ (Amendment)

STANDARDS, AMENDMENTS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE

The Company did not early adopt the following pronouncements issued but not yet effective. Except as otherwise indicated, the Company does not expect the adoption of these pronouncements to have a significant impact on its consolidated financial statements. The Company intends to adopt the following pronouncements when they become effective.

Effective 2017

• PFRS 12, Disclosure of Interests in Other Entities – Clarification of the Scope of the Standard (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) (Amendments)

• PAS 7, Statement of Cash Flows – Disclosure Initiative (Amendments)

The amendments to PAS 7 require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendments, entities are not required to provide comparative information for preceding periods. Early application of the amendments is permitted.

Application of amendments will result in additional disclosures in the 2017 consolidated financial statements of the Company.

• PAS 12, Income Taxes – Recognition of Deferred Tax Assets for Unrealized Losses (Amendments)


Effective 2018

• PFRS 2, Share-based Payment – Classification and Measurement of Share-based Payment Transactions (Amendments)

• PFRS 4, Insurance Contracts – Applying PFRS 9, Financial Instruments, with PFRS 4 (Amendments)

• PFRS 9, Financial Instruments

PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial Instruments – Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. PFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.

The adoption of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets and impairment methodology for financial assets, but will have no impact on the classification and measurement of the Company’s financial liabilities. The Company is currently assessing the impact of adopting this standard.

• PFRS 15, Revenue from Contracts with Customers

PFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. Under PFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in PFRS 15 provide a more structured approach to measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under PFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2018. The Company is currently assessing the impact of adopting this standard.

• PAS 28, Investments in Associates and Joint Ventures – Measuring an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) (Amendments)

• PAS 40, Investment Property – Transfers of Investment Property (Amendments)

• Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration

The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the nonmonetary asset or nonmonetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. The interpretation may be applied on a fully retrospective basis. Entities may apply the interpretation prospectively to all assets, expenses and income in its scope that are initially recognized on or after the beginning of the reporting period in which the entity first applies the interpretation or the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation.

Effective 2019

• PFRS 16, Leases

Under the new standard, lessees will no longer classify their leases as either operating or finance leases in accordance with PAS 17, Leases. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements.

The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value.

Entities may early adopt PFRS 16 but only if they have also adopted PFRS 15. When adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective approach, with options to use certain transition reliefs. The Company is currently assessing the impact of adopting this standard.

Deferred Effectivity

• PFRS 10, Consolidated Financial Statements, and PAS 28, Investments in Associates and Joint Ventures – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments)


BUSINESS COMBINATIONS AND GOODWILL

Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in costs and expenses.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

FAIR VALUE MEASUREMENT

The Company measures financial instruments at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• in the principal market for the asset or liability; or• in the absence of a principal market, in the most advantageous market

for the asset or liability.

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The Company’s management determines the policies and procedures for both recurring and nonrecurring fair value measurements.

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above Fair value measurement disclosures are presented in Note 25.


CASH AND CASH EQUIVALENTS

Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from acquisition date and that are subject to an insignificant risk of change in value.

SHORT-TERM INVESTMENTS

Short-term investments are investments with maturities of more than three months to one year.

FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Date of Recognition. The Company recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using trade date accounting.

Initial Recognition. Financial assets and financial liabilities are recognized ini-tially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss (FVPL).

Categories of Financial Assets and Financial Liabilities. Financial assets are classified into the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, and available-for-sale (AFS) financial assets. Financial liabilities are classified as financial liabilities at FVPL or other financial liabilities. The Company determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this des-ignation at each reporting date.

The Company has no financial assets classified as financial asset at FVPL and HTM investments, and has no financial liabilities classified as financial liabilities at FVPL as at December 31, 2016 and 2015.

‘Day 1’ difference. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified or designated as AFS financial assets or financial assets at FVPL. After initial recognition, loans and receivables are carried at amortized cost in the consolidated statement of financial position using the effective interest method, less allowance for impairment. Amortization is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when loans and receivables are derecognized and impaired, as well as through the amortization process.Loans and receivables are included in current assets if maturity is within twelve months from the reporting date. Otherwise, these are classified as noncurrent assets.

This category includes the Company’s cash and cash equivalents, short-term investments, trade and other receivables, sinking fund, deposits, and miscellaneous deposits shown as part of “Other noncurrent assets” account in the consolidated statements of financial position (see Notes 4, 5 and 6).

AFS Financial Assets. Available-for-sale financial assets are non-derivative financial assets that are designated as AFS or are not classified in any of the three preceding categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS financial assets are measured at fair value with unrealized gains or losses being recognized in the consolidated statement of comprehensive income and presented as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income. Investments in equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at cost, net of impairment, if any. Assets under this category are classified as current assets if the Company intends to hold the assets within 12 months from financial reporting date and as noncurrent assets if it is more than a year from financial reporting date.

Other Financial Liabilities at Amortized Cost. Financial liabilities are classified in this category if these are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method.

Gains or losses are recognized in the consolidated statement of income when the liabilities are derecognized as well as through the amortization process.

Debt issuance costs are amortized using the effective interest method. The unamortized debt issuance costs are netted against the related carrying value of the debt instrument.


This category includes trade and other payables (excluding statutory liabilities), interest-bearing loans, service concession obligation payable to MWSS and customers’ deposits (see Notes 10, 11 and 12).

CLASSIFICATION OF FINANCIAL INSTRUMENTS BETWEEN DEBT AND EQUITY

A financial instrument is classified as a liability if it provides for a contractual obligation to:

• Deliver cash or another financial asset to another entity; or• Exchange financial assets or financial liabilities with another entity under

conditions that are potentially unfavorable to the Company; or• Satisfy the obligation other than by the exchange of a fixed amount of

cash or another financial asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

IMPAIRMENT OF FINANCIAL ASSETS

The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss’ event) and that loss event (or events) has an impact on the estimated future cash flows of the financial assets that can be reliably measured. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable date indicate that there is a measureable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in the consolidated statement of income.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.


Financial Assets Carried at Cost. If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS Financial Assets. The Company assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. The evidence of impairment for equity securities classified as AFS financial assets would include a significant or prolonged decline in fair value of investments below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the other comprehensive income – is removed from other comprehensive income and recognized in profit or loss in the consolidated statement of income. Impairment losses on equity investments are not reversed through the profit or loss in the consolidated statement of income. Increases in fair value after impairment are recognized directly in other comprehensive income in the consolidated statement of comprehensive income.

DERECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

• the Company’s right to receive cash flows from the asset has expired; or• the Company retains the right to receive cash flows from the asset, but

has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

• the Company has transferred its right to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the assets, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income.

OFFSETTING FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Company assesses that it has a currently enforceable right of offset if the right is not contingent on a future event, and is legally enforceable in the normal course of business, event of default, and event of insolvency or bankruptcy of the Company and all of the counterparties.

SERVICE CONCESSION ASSETS

Parent Company. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12, Service Concession Arrangement under the Intangible Asset model as it receives the right (license) to charge users of public service. Under the Concession Agreement, the Parent Company is granted the sole and exclusive right and discretion during the concession period to manage, occupy, operate, repair, maintain, decommission and refurbish the identified facilities required to provide water services. The legal title to these assets shall vest in MWSS at the end of the concession period.

Phil Hydro. Phil Hydro accounts for its Bulk Water Supply Agreements in ac-cordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service.

Service concession assets are recognized to the extent that the Company receives a license or right to charge the users of the public service. The service concession assets pertain to the fair value of the service concession obligations at drawdown date and construction costs related to the rehabilitation works performed by the Company. The Parent Company’s service concession assets is amortized using unit of production (UOP) method over the projected total billable water volume during the remaining term of the service concession arrangement. Phil Hydro amortizes its service concession assets using straight-line method over the terms of the Bulk Water Supply Agreements.

The Company recognizes and measures revenue from rehabilitation works using the percentage- of-completion method. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated physical completion of the contract work.


Cost of rehabilitation works, which includes all direct materials, labor costs, and those indirect costs related to contract performance, is recognized consistent with the revenue recognition method applied. Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceed total contract revenue. Changes in contract performance, contract conditions and estimated profitability including those arising from contract penalty provisions and final contract settlements which may result in revisions to estimated costs and gross margins are recognized in the year in which the revisions are determined.

Subsequent costs and expenditures related to the concession agreement are recognized as additions to service concession assets at fair value of obligations at drawdown date and cost of rehabilitation works.

PROPERTY AND EQUIPMENT

Property and equipment, except land, are stated at cost less accumulated depreciation and any impairment in value (see policy on “Impairment of Nonfinancial Assets”). Land is stated at cost. The initial cost of property and equipment comprises its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged to income in the period such costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment.

Depreciation is calculated on a straight-line basis over the following estimated useful lives:

The Company computes for depreciation charges based on the significant component of the asset.

The useful lives and depreciation method are reviewed periodically to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment.

Fully depreciated property and equipment are retained in the accounts until they are no longer in use and no further depreciation is charged to current operations.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of income in the year the item is derecognized.

IMPAIRMENT OF NONFINANCIAL ASSETS

An assessment is made at each reporting date to determine whether there is any indication of impairment of any nonfinancial assets (i.e., property and equipment and service concession assets), or whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to operations in the year in which it arises.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however, not to an amount higher than the carrying amount that would have been determined (net of any depreciation and amortization) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations.

Land improvements 5 to 25 years

Instrumentation, tools and other equipment 5 years

Office furniture, fixtures and equipment 5 years

Transportation equipment 5 years


GOODWILL

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units that are expected to benefit from synergies of the combination irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which the goodwill is so allocated:

• represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

• not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.

Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash- generating unit and part of the operation within that unit is disposed, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained. Impairment loss with respect to goodwill is not reversed.

Transfers of assets between commonly-controlled entities are accounted for under historical cost accounting.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation adjustments and goodwill is recognized in the consolidated statement of income.

FOREIGN CURRENCY-DENOMINATED TRANSACTIONS

Foreign exchange differentials arising from foreign currency transactions are credited or charged to operations. As approved by the MWSS Board of Trustees under Amendment No. 1 of the Concession Agreement, the following will be recovered through billings to customers:

• Restatement of foreign currency-denominated loans;• Excess of actual concession fee payments over the amounts of

concession fee translated using the base exchange rate assumed in the business plan approved every rate rebasing exercise;

• Excess of actual interest payments translated at exchange spot rates on settlement dates over the amounts of interest translated at drawdown date rates; and

• Excess of actual payments of other financing charges relating to foreign currency denominated loans translated at exchange spot rates on settlement dates over the amount of other financing charges translated at drawdown date rates.

In view of the automatic reimbursement mechanism, the Parent Company recognizes deferred FCDA (included as part of “Other noncurrent assets” or “Deferred credits” accounts in the consolidated statement of financial position) with a corresponding credit (debit) to FCDA revenues for the unrealized foreign exchange losses (gains) which have not been billed or which will be refunded to the customers. The write-off of the deferred FCDA or reversal of deferred credits pertaining to concession fees will be made upon determination of the new base foreign exchange rate, which is assumed in the business plan approved by the RO during the latest Rate Rebasing exercise, unless indication of impairment of deferred FCDA would be evident at an earlier date.

Deferred FCDA and deferred credits are calculated as the difference between the drawdown or rebased rate and the closing rate. These are presented as part of “Other noncurrent assets” and “Deferred credits” accounts in the consolidated statement of financial position, respectively.

As at December 31, 2016 and 2015, deferred FCDA amounted to ₱764.0 million and ₱279.1 million, respectively.

Customers’ Deposits. Customers’ deposits are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest method. Accretion of customers’ deposits is included under “Interest expense and other financing charges” account in the consolidated statement of income. The discount is recognized as deferred credits and amortized over the remaining concession period using the effective interest method. Amortization of deferred credits is included as part of “Other income” account in the consolidated statement of income.

As at December 31, 2016 and 2015, the discount, shown as part of “Deferred credits” account in the consolidated statements of financial position, amounted to ₱632.0 million and ₱583.6 million, respectively.


ASSETS HELD IN TRUST

Assets which are owned by MWSS but are used in the operations of the Parent Company under the Concession Agreement are not reflected in the consolidated statement of financial position but carried as Assets Held in Trust, except for certain assets transferred to the Parent Company as mentioned in Note 23. REVENUE RECOGNITION

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of consideration received or receivable, excluding discounts, rebates and value-added tax (VAT). Water and sewerage are billed every month according to the bill cycles of the customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at the end of the month are estimated and accrued. These estimates are based on historical consumption of the customers.

Revenue from water and sewerage services is recognized upon supply of water to the customers and when the related services are rendered. Billings to customers consist of the following:

a. Water charges

• Basic charges represent the basic tariff charged to consumers for the provision of water services.

• FCDA is the tariff mechanism that allows the Parent Company to recover foreign exchange losses or to compensate foreign exchange gains on a current basis beginning January 1, 2002 until the Expiration Date.

• Maintenance service charge represents a fixed monthly charge per connection. The charge varies depending on the meter size.

b. Environmental charge (included as part of revenue from sewer/sanitation services) represents 20% of the water charges, except for maintenance charge.

c. Sewerage charge represents 20% of the water charges, excluding maintenance service charge, for all consumers connected to the Company’s sewer lines. Effective January 1, 2012, pursuant to RO Resolution No. 11-007-CA, sewerage charge applies only to commercial and industrial customers connected to sewer lines.

Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

When the Company provides construction or upgrade services, the consideration received or receivable is recognized at its fair value. The Company accounts for revenue and costs relating to operation services based on the percentage of completion (shown as “Revenue from rehabilitation works” and “Cost of rehabilitation works” accounts in the consolidated statement of income).

COST AND EXPENSE RECOGNITION

Expenses are decreases in economic benefits during the accounting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to equity participants. Expenses are recognized in the consolidated statement of income as incurred.

LEASES

The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

A reassessment is made after the inception of the lease only if one of the following applies:

(a) There is a change in contractual terms, other than a renewal of or extension of the arrangement;

(b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

(c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or

(d) There is a substantial change to the asset.

Where reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

A lease where the lessor retains substantially all the risks and benefits of ownership of the asset is classified as an operating lease.

Operating lease payments are recognized as expense in the consolidated statement of income on a straight-line basis over the lease term.


BORROWING COSTS

Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization shall be determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period shall not exceed the amount of borrowing costs incurred during that period.

Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs ceases when all the activities necessary to prepare the asset for its intended use or sale are substantially complete. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized.

EQUITY

Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Proceeds and fair value of consideration received in excess of par value are recognized as additional paid-in capital.

Treasury shares, which represent own equity instruments that are reacquired, are recognized at cost and deducted from equity. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issuance or the cancellation of the Parent Company’s own equity instruments.

Retained earnings represent the Company’s accumulated earnings, net of dividends declared.

VALUE-ADDED TAX (VAT)

Revenues, expenses and assets are recognized net of the amount of VAT except:

• when the VAT incurred on a purchase of assets or services is not recoverable from the tax authority, in which case, the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

• receivables and payables that are stated with the amount of VAT included.

The net amount of current VAT recoverable from and payable to the tax authority is included as part of “Other current assets” and “Trade and other payables” accounts in the consolidated statement of financial position.

INCOME TAXES

Current Income Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the financial reporting date.

Deferred Income Tax. Deferred income tax is provided, using the liability method, on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

• when the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss; and

• with respect to taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.


Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused tax losses from net operating loss carryover (NOLCO) to the extent that it is probable that taxable income will be available against which the deductible temporary differences and the carryforward benefits of MCIT and NOLCO can be utilized, except:

• when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss; and

• with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable income will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow all or part of the deferred tax assets to be recovered.

Deferred tax assets and deferred tax liabilities are measured at the tax rate that is expected to apply to the period when the assets are realized or the liabilities are settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted as at the reporting date.

Deferred tax relating to items recognized directly in equity is recognized in equity and not in profit or loss.

Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

PROVISIONS

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation. When the Company expects a provision to be reimbursed, such as under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.

PENSION COST

The Parent Company has a funded, noncontributory defined benefit plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries.

The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Defined benefit costs comprise the following: (1) service cost; (2) net interest on the net defined benefit liability or asset; and (3) remeasurements of net defined benefit liability or asset.

Service costs, which include current service costs, past service costs and gains or losses on non- routine settlements, are recognized as part of “Salaries, wages and benefits” account in the consolidated statement of income. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time, which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset.


Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan as-sets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Parent Company, nor can they be paid directly to the Parent Company. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

LONG-TERM EMPLOYEE BENEFITS

The Long Term Incentive Plan (LTIP) of the Parent Company grants cash incentives to eligible employees of the Parent Company. Liability under the LTIP is determined using the projected unit credit method. Employee benefit costs include current service costs, interest cost, actuarial gains and losses, and past service costs. Past service costs and actuarial gains and losses are recognized immediately.

The long-term employee benefit liability is determined based on the present value of the defined benefit obligation (using discount rate based on government bonds) vested at the end of the reporting period.

SHARE-BASED PAYMENTS

Employees of the Parent Company receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions) under the Employee Stock Option Plan (ESOP).

The cost of equity-settled transactions is determined as the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognized, together with a corresponding increase in other equity adjustments, over the period in which the performance and/or service conditions are fulfilled, and is shown as part of “Salaries, wages and benefits” account in the consolidated statement of income.

The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Parent Company’s best estimate of the number of equity instruments that will ultimately vest.

No expense is recognized for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms not been modified if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

CONTINGENCIES

Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. Contingent assets are not recognized unless virtually certain.


EVENTS AFTER THE REPORTING PERIOD

Post year-end events that provide additional information about the Company’s position at the financial reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

EARNINGS PER SHARE (EPS)

Basic EPS is computed based on the weighted average number of outstanding shares and adjusted to give retroactive effect to any stock split during the year. The dilutive effect of outstanding ESOP shares is reflected as additional share dilution in the computation of diluted EPS (see Note 18).

3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the consolidated financial statements in accordance with PFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent liabilities at the reporting date. In preparing the Company’s consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as at the date of the consolidated financial statements. Future events may occur which will cause the assumptions used in arrivingat the estimates to change. The effects of any change in estimates are reflected in the consolidatedfinancial statements as they become reasonably determinable.

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

JUDGMENTS

In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements:

Fourth Rate Rebasing. In September 2013, the MWSS released its resolutions on the rate rebasing adjustment for the rebasing period 2013 to 2017 reducing Maynilad’s 2012 average all-in tariff. Maynilad has formally notified its objection and filed its Dispute Notice before the Appeals Panel. On January 5, 2015, Maynilad officially received the Appeals Panel’s award dated December 29, 2014. Maynilad already wrote the Philippine Government, through the DOF, to call on the Undertaking after the MWSS and RO’s delayed approval of the adjusted rates. Maynilad had subsequently served a Notice of Arbitration and Statement of Claim upon the Republic, through the DOF.

On May 14, 2015, the MWSS Board of Trustees in its Resolution No. 2015-060-RO approved a net adjustment of 4.32% to be applied to the prevailing average basic charge of ₱31.25 per cu.m. as partial implementation of the Arbitral Award. As at December 31, 2016 and 2015, Maynilad’s cumulative revenue losses due to the delayed implementation of the Arbitral Award are estimated at ₱8.2 billion and ₱6.1 billion, respectively (see Note 1). The consolidated financial statements do not include any adjustments that might result from the decision of the Arbitration Tribunal and approval by the MWSS and RO.

Amortization of Service Concession Assets. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service.

The Parent Company amortizes its service concession assets using UOP method, given that the economic benefit of these assets are more closely aligned with billed volume, which the Parent Company can already estimate reliably. Service concession assets, net of accumulated amortization of ₱21.1 billion and ₱18.7 billion, amounted to ₱69.3 billion and ₱62.5 billion as at December 31, 2016 and 2015, respectively (see Note 7).

Disputes with MWSS. Pending resolution of the dispute between the Parent Company and MWSS on certain claims of MWSS, the disputed amount of ₱5.1 billion as at December 31, 2016 and 2015, is considered as contingent liability (see Notes 7, 12 and 19).

Contingencies. The Company is currently involved in various legal and administrative proceedings. The Company’s estimate of the probable costs for the resolution of these claims has been developed in consultation with outside legal counsel handling defense in these matters and is based upon an analysis of potential results. The Company currently does not believe these proceedings will have a material adverse effect on the Company’s financial position. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings (see Notes 12 and 19).


ESTIMATES AND ASSUMPTIONS

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Fair Value of Service Concession Payable. The determination of the cost of service concession payable requires management to make estimates and assumptions to determine the extent to which the Company receives a right or license to charge users of the public service. In making those estimates, management is required to determine a suitable discount rate to calculate the present value of these cash flows. While the Company believes that the assumptions used are reasonable and appropriate, these estimates and assumptions can materially affect the consolidated financial statements.

Estimated Billable Water Volume. The Parent Company estimated the billable water volume, where the amortization of service concession assets is derived from, based on the period over which the Parent Company’s concession agreement with MWSS is in force. The Parent Company reviews annually the billable water volume based on factors that include market conditions such as population growth and consumption, and the status of the Parent Company’s projects and their impact on non-revenue water. It is possible that future results of operations could be materially affected by changes in the Parent Company’s estimates brought about by changes in the aforementioned factors. A reduction in the projected billable water volume would increase amortization and decrease noncurrent assets.

Service concession assets, net of accumulated amortization of ₱21.1 billion and ₱18.7 billion, amounted to ₱69.3 billion and ₱62.5 billion as at December 31, 2016 and 2015, respectively (see Note 7).

Allowance for Doubtful Accounts. The Company estimates the allowance for doubtful accounts related to the trade receivables based on two methods. The amounts calculated using each of these methods are combined to determine the total amount of allowance. First, the Company evaluates specific accounts that are considered individually significant for any objective evidence that certain customers are unable to meet their financial obligations. In these cases, the Company uses judgment, based on the best available facts and circumstances, including but not limited to, the length of its relationship with the customer and the customer’s current credit status based on third party credit reports and known market factors. The allowance provided is based on the difference between the present value of the receivables that the Company expects to collect, discounted at the receivables’ original effective interest rate and the carrying amount of the receivable. This specific allowance is re-evaluated and adjusted as additional information received affects the amounts estimated. Second, if it is determined that no objective evidence of impairment exists for an individually assessed receivable, the receivable is included in a group of receivables with similar credit risk characteristics and is collectively assessed for impairment. The provision under collective assessment is based on historical collection, write-off, experience and change in customer payment terms. Impairment assessment is performed throughout the year.

The amount and timing of recorded expenses for any period would therefore differ based on the judgments or estimates made. Reversal of provision for doubtful accounts amounted to ₱76.9 million, ₱232.0 million and nil in 2016, 2015 and 2014, respectively, while provision for doubtful accounts amounted to nil in 2016 and 2015 and ₱0.4 million in 2014. An increase in allowance for doubtful accounts would increase the Company’s recorded expenses and decrease trade and other receivables. Trade and other receivables, net of allowance for doubtful accounts, amounted to ₱2.5 billion and ₱2.4 billion as at December 31, 2016 and 2015, respectively (see Note 5).

Determination of Impairment of AFS Financial Assets. The Company determines that AFS financial assets are impaired when there has been a significant or pro-longed decline in the fair value below its cost or where other objective evidence of impairment exists. The Company determines that a decline in fair value of greater than 20% of cost is considered to be a significant decline and a decline for a period of more than 12 months is considered to be a prolonged decline. This determination of what is significant or prolonged requires judgment. In making this judgment, the Company evaluates, among other factors, the normal volatility in share price for quoted equities. AFS financial assets are considered impaired when the Company believes that future cash flows generated from the investment is expected to decline significantly. The Company’s management makes significant estimates and assumptions on the future cash flows expected and the appropriate discount rate to determine if impairment exists. Impairment mayalso be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as AFS are not reversed through profit or loss. Subsequent increases in the fair value after the impairment are recognized directly in other comprehensive income.

Impairment loss on AFS financial assets recognized in 2014 amounted to ₱100.2 million while reversal of impairment loss amounted to ₱22.0 million in 2015 due to the improvement in future cash flows. No additional impairment loss on AFS financial assets was recognized in 2016. The carrying value of AFS financial assets is disclosed in Note 9.

Estimated Useful Lives of Property and Equipment. The useful life of each item of the Company’s property and equipment is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of practices of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any item of property and equipment would increase the recorded depreciation expense and decrease property and equipment.


There was no change in estimated useful lives of property and equipment in 2016 and 2015. Property and equipment, net of accumulated depreciation and amortization of ₱1.9 billion and ₱1.7 billion, amounted to ₱1.3 billion and ₱0.8 billion as at December 31, 2016 and 2015, respectively (see Note 8).

Recognition of Deferred Tax Assets and Liabilities. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. However, there is no assurance that sufficient taxable profit will be generated to allow all or part of the deferred tax assets to be utilized.

Starting 2016, the Parent Company is no longer under income tax holiday (ITH) and elected to use Optional Standard Deduction (OSD) in computing its taxable income (see Notes 15 and 20). The Parent Company’s assessment is based on actual gross income in the current year that is at a level where it is favorable to use OSD method. The Parent Company expects to continue to use OSD method in computing its taxable income each year up to the end of the concession period except for certain years when the Parent Company expects that it would be more favorable to use itemized deduction method. Accordingly, deferred tax assets and liabilities which were previously valued in 2015 using the itemized deduction method are now valued based on the forecasted gross and taxable income and expected method of deduction more beneficial to the Parent Company.

The Company did not recognize deferred tax assets on deductible temporary differences where doubt exists as to the tax benefits they will bring in the future.

Net deferred tax assets recognized amounted to ₱1.0 billion and ₱2.1 billion as at December 31, 2016 and 2015, respectively (see Note 15). Unrecognized deferred tax assets amounted to nil and ₱47.8 million as at December 31, 2016 and 2015, respectively (see Note 15).

Deferred FCDA and Deferred Credits. Under Amendment No. 1 of the Concession Agreement, the Parent Company is entitled to recover (refund) foreign exchange losses (gains) arising from MWSS loans and any concessionaire loans. For the unrealized foreign exchange losses, the Parent Company recognized deferred FCDA as an asset since this is a resource controlled by the Company as a result of past events and from which future economic benefits are expected to flow to the Parent Company. Unrealized foreign exchange gains, however, are presented as deferred credits and will be refunded to the customers.

Pursuant to MWSS-RO Resolution No. 2014-099-RO, the new base foreign exchange rate was changed from ₱48.04 to ₱41.19 effective January 1, 2015 (see Note 7).

Deferred FCDA representing the net effect of unrealized foreign exchange losses on service concession obligation payable to MWSS, and restatement of foreign currency-denominated interest-bearing loans and related interest that are recoverable from the customers amounted to ₱764.0 million and ₱279.1 million as at December 31, 2016 and 2015, respectively.

Asset Impairment. The Company assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Company considers important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of use of the acquired assets or the strategy for overall business; and

• significant negative industry or economic trends.

The Company recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value in use (VIU) approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Determining the recoverable amount of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the results of operations.

Noncurrent nonfinancial assets carried at cost and subjected to impairment test when certain impairment indicators are present are as follows:

2016 2015

Service concession assets (see Note 7) ₱69,297,460 ₱62,488,321

Property and equipment (see Note 8) 1,254,339 833,821

Goodwill (see Note 2) 288,082 288,082

TOTAL ₱70,839,881 ₱63,610,224


The goodwill arising from the acquisition of Phil Hydro represents the fair value of expected incremental economic benefits that the Parent Company expects to obtain. The impairment test of goodwill is based on VIU calculations that used the discounted cash flow model. The VIU was based on the cash flow projections on the most recent financial budgets and forecast of Phil Hydro.The length of the projections is up to 2035 based on the existing Bulk Water Supply Agreements and Memorandum of Agreement. The discount rate applied was 10.3%, which was based on the weighted average cost of capital. Based on the impairment test, the Parent Company did not identify any impairment loss. As at December 31, 2016 and 2015, no impairment loss on goodwill was recognized.

The Company performs its annual impairment test close to year-end, after finalizing the annual financial budget and forecast. The impairment test of goodwill is based on VIU calculation that uses the discounted cash flow model. Cash flow projections are based on most recent financial budget and forecast. Discount rate applied is based on market weighted average cost of capital with estimated premium over cost of equity. The key assumptions used to determine the recoverable amount are discussed below.

Based on the impairment test performed, management did not identify impairment loss on goodwill. Management also believes that no reasonably possible change in any of the key assumptions would cause the carrying value to materially exceed the recoverable amount.

The forecasted period is greater than five (5) years as management can reliably estimate the cash flow for the entire duration of Phil Hydro’s concession period covered by the Bulk Water Supply Agreements and Memorandum of Agreement.

Computation of Pension Cost and Other Post-employment Benefits. The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. These include the determination of the discount rate, turnover rate, mortality rate and salary increase rate. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, defined benefit obligations are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

*Average growth represents average of year-over-year growth over the terms of the Bulk Water Supply Agreements and Memorandum of Agreement

In determining the appropriate discount rate, management considers the interest rates of government bonds that are denominated in the currency in which the benefits will be paid, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. Turnover rate is based on a 3-year historical information of voluntary separation and resignation by plan members.

The mortality rate is based on publicly available mortality tables for the specific country and is modified accordingly with estimates of mortality improvements. Future salary increases and pension increases are based on expected future inflation rates for the specific country.

Pension cost (income) presented as part of “Salaries, wages and benefits” account in the consolidated statements of income amounted to ₱104.0 million, ₱93.4 million and (₱155.1 million) in 2016, 2015 and 2014, respectively. Pension liability amounted to ₱317.3 million and ₱416.2 million as at December 31, 2016 and 2015, respectively (see Note 16).

Computation of Share-based Payment Transactions. The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility, discount rates and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payments are disclosed in Note 13.

Equity-based compensation expense presented as part of “Salaries, wages and benefits” account in consolidated statements of income amounted to nil in 2016 and 2014 and ₱146.1 million in 2015 (see Note 13).

Determination of Other Long-term Incentives Benefits. The LTIP for key executives of MPIC and certain subsidiaries, including the Parent Company, was approved by the Executive Compensation Committee and the BOD of MPIC which is based on profit targets for the covered Performance Cycle.

In 2013, the Parent Company has approved an LTIP for its managers and executives which is also based on profit targets for the covered Performance Cycle of 2013 to 2015. Payments were made on March 18, 2016 amounting to ₱369.0 million.

In 2016, a proposal for new LTIP covering Performance Cycle of 2016 to 2018 for its managers and executives which is also based on profit targets was prepared for approval by the Parent Company’s BOD. The final terms and conditions are still not approved by the BOD and is still pending as at February 27, 2017.

The cost of LTIP is determined using the projected unit credit method based on prevailing discount rates and profit targets. While management’s assumptions are believed to be reasonable and appropriate, significant differences in actual results or changes in assumptions may materially affect the Company’s other long-term incentive benefits.

Accrued LTIP amounted to ₱181.1 million and ₱429.0 million as at December 31, 2016 and 2015, respectively. The total cost of the LTIP recognized by the Company presented as part of “Salaries, wages and benefits” account in the consolidated statements of income amounted to ₱181.1 million, ₱149.8 million and ₱130.9 million in 2016, 2015 and 2014, respectively (see Notes 11 and 16).

2016 2015

Revenue growth rate* 3.0% 2.0%

Average forecast period 19 years 20 years

Discount rate 10.3% 8.7%


4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents account consists of:

Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for varying periods from one day to three months depending on the immediate cash requirements of the Company and earn interest at the respective short-term deposit rates.

Short-term investments amounting to ₱3.0 billion and ₱6.1 billion as at December 31, 2016 and 2015, respectively, with original maturities of more than three months to one year are separately shown in the consolidated statements of financial position.

Interest income earned from cash in banks, cash equivalents and short-term investments, net of applicable final tax, amounted to ₱119.9 million, ₱134.9 million and ₱81.3 million in 2016, 2015 and 2014, respectively.

5. TRADE AND OTHER RECEIVABLES

This account consists of receivables from:

The classes of the Company’s receivables from customers are as follows:

• Residential – pertains to receivables arising from water and sewer service use for domestic purposes only.

• Semi-business – pertains to receivables arising from water and sewer service use for small businesses.

• Commercial – pertains to receivables arising from water and sewer service use for commercial purposes.

• Industrial – pertains to receivables arising from water and sewer service use for industrial purposes, including services for manufacturing.

• Bulk water supply – pertains to receivables arising from water service to water districts outside the West Service Area.

Receivables from customers and bulk water supply are non-interest bearing and generally have 60-day term.

Other receivables consist mainly of receivables from collecting agents normally received within 30 days and advances for construction and installation of water reticulation systems for subdivisions in the West Service Area payable on installment basis over a period of 3-5 years. Portion of advances for water reticulation systems expected to be collected beyond one year amounting to ₱61.3 million and ₱144.6 million as at December 31, 2016 and 2015, respectively, is presented as part of “Other noncurrent assets” account in the consolidated statements of financial position.

2016 2015

Cash on hand and in banks ₱977,357 ₱982,791

Cash equivalents 4,047,397 2,110,221

₱5,024,754 ₱3,093,012

2016 2015

Customers

Residential ₱1,776,481 ₱1,908,889

Semi-business 271,113 241,700

Commercial 856,010 721,963

Industrial 226,938 155,901

Bulk water supply 56,777 42,362

3,187,319 3,070,815

Employees 45,897 39,899

Others 213,201 348,722

3,446,417 3,459,436

Less allowance for doubtful accounts 953,772 1,030,624

₱2,492,645 ₱2,428,812


The movements in the Company’s allowance for doubtful accounts follow: 6. OTHER CURRENT ASSETS

This account consists of:

Sinking fund represents the amount set aside to cover semi-annual principal and interest payment of loans, and unutilized proceeds from the US$137.5 million loan drawdowns for the Metro Manila Wastewater Management Project maintained in a designated bank account (see Note 10).

Advances to contractors are normally applied within a year against progress billings.

Input VAT is an indirect tax on the goods and services which the Company uses in its operations. The Company recovers its input VAT by offsetting it against the output VAT. Management believes that the amount of recorded input VAT is fully realizable in the future.

Deposits mainly consist of refundable rental deposits.

Prepayments mainly pertain to insurance, performance bond, and taxes (see Note 22).

2016 2015

Sinking fund (see Note 10) ₱1,777,626 ₱1,773,843

Advances to contractors 1,020,883 987,035

Input VAT 332,683 191,749

Deposits 150,549 140,250

Prepayments (see Note 22) 112,977 59,311

Others 76,049 64,564

₱3,470,767 ₱3,216,752

Residential Semi-business Commercial Industrial Receivables Total

At January 1Reversal during the year

₱450,773(36,292)

₱120,234(9,690)

₱276,971(22,321)

₱106,076(8,549) ₱76,570 ₱1,030,624

(76,852)

At December 31 ₱414,481 ₱110,544 ₱254,650 ₱97,527 ₱76,570 ₱953,772

Residential Semi-business Commercial Industrial Receivables Total

At January 1Reversal during the year

₱566,133(109,991)

₱149,377(29,143)

₱344,104(67,133)

₱131,787(25,711) ₱76,570 ₱1,267,971

(231,978)

Write-off (5,369) _ _ _ _ (5,369)

At December 31 ₱450,773 ₱120,234 ₱276,971 ₱106,076 ₱76,570 ₱1,030,624

Receivables from Customers

Receivables from Customers

2016

2015

Others

Others


7. SERVICE CONCESSION ASSETS

The movements in this account are as follows:

Service concession assets consist of the present value of total estimated concession fee payments pursuant to the Concession Agreement and the costs of rehabilitation works incurred.

The aggregate Concession Fees pursuant to the Concession Agreement is equal to the sum of the following:

a. 90% of the aggregate peso equivalent due under any MWSS loan which has been disbursed prior to the Commencement Date, including MWSS loans for existing projects and the raw water conveyance component of the

Umiray-Angat Transbasin Project (UATP), on the relevant payment date set forth on the pertinent schedule of the Concession Agreement;

b.90% of the aggregate peso equivalent due under any MWSS loan designated for the UATP which has not been disbursed prior to the Commencement Date on the relevant payment date set forth on the pertinent schedule of the

Concession Agreement;

c. 90% of the local component costs and cost overruns related to the UATP in accordance with the pertinent schedule of the Concession Agreement;

d.100% of the aggregate peso equivalent due under any MWSS loan designated for existing projects, which have not been disbursed prior to the

Commencement Date and have been either awarded to third party bidders or been elected by the Parent Company for continuation in accordance with the pertinent sections of the Concession Agreement;

e. 100% of the local component costs and cost overruns related to the existing projects in accordance with relevant schedule of the Concession Agreement; and

f. Maintenance and operating expenditure (MOE) representing one-half of the annual budget for MWSS for that year, provided that such annual budget shall not exceed ₱200.0 million (as at 1997), subject to annual CPI adjustment (see Note 22).

Service concession assets also include Tranche B Concession Fees, which pertain to additional concession fees charged by MWSS to the Parent Company representing the cost of borrowings by MWSS as at December 2004. In 2005, pursuant to the Debt and Capital Restructuring Agreement (DCRA), the Parent Company had recognized and fully paid Tranche B Concession Fees amounting to US$36.9 million and the related accrued interest thereon (see Note 12).

Pursuant to the recommendation of the Receiver under the DCRA, the disputed amount being claimed by MWSS of additional Tranche B Concession Fees of US$18.1 million is considered as contingent liability of the Parent Company, as discussed in Note 19.

The Parent Company recognized additional concession fees amounting to ₱188.4 million and ₱503.5 million in 2016 and 2015, respectively, mainly pertaining to various rehabilitation projects and UATP-related local component costs (see Note 12).

Specific borrowing costs capitalized as part of service concession assets amounted to ₱198.8 million and ₱99.4 million in 2016 and 2015, respectively (see Note 10).

On March 11, 2015, the MWSS Board of Trustees approved and confirmed the recommendation of the MWSS-RO to set aside the status quo of the FCDA and resume its normal operation starting first quarter of 2015. Under MWSS-RO Resolution No. 2014-002-CA, the MWSS-RO approved an FCDA equivalent to 1.12% of the 2015 basic charge of ₱33.97 per cu.m. or ₱0.38 per cu.m., effective January 1, 2015. The said FCDA adjustment was deter-mined using the new rebased rate of ₱41.19 approved by the MWSS-RO, applica-ble to concession fee payments starting January 1, 2013.

In 2015, the effect of change in rebased rate amounting to ₱632.3 million was accounted for as an adjustment to “Service concession assets” and “Deferred credits” accounts to adjust their carrying value based on the newly-determined and approved rebased rate (see Note 3).

2016 2015

Cost:

Balance at beginning of year ₱81,233,098 ₱73,633,419

Additions 9,153,108 8,232,006

Effect of change in rebased rate - (632,327)

Balance at end of year 90,386,206 81,233,098

Accumulated amortization:

Balance at beginning of year 18,744,777 16,707,093

Amortization 2,343,969 2,037,684

Balance at end of year 21,088,746 18,744,777

₱69,297,460 ₱62,488,321


8. PROPERTY AND EQUIPMENT

The rollforward analysis of this account are as follows:

Net gain on disposals of property and equipment amounting to ₱13.3 million, ₱0.2 million and ₱3.1 million in 2016, 2015 and 2014, respectively, is presented as part of “Others - net” account under “Other income (expenses)” in the consolidated statements of income. The company sold items of property and equipment for a total consideration of ₱16.2 million, ₱2.3 million and ₱11.1 million in 2016, 2015 and 2014, respectively.

No property and equipment as at December 31, 2016 and 2015 have been pledged as security or collateral.

2016

Land and Land Improvements

Instrumentation, Tools and Other

Equipment

Office Furniture, Fixture and Equipment

Transportation Equipment Total

Cost

At January 1 ₱41,275 ₱1,290,735 ₱887,574 ₱297,180 ₱2,516,764

Additions 5,180 253,075 189,936 266,767 714,958

Disposals − (10,804) (406) (58,304) (69,514)

At December 31 46,455 1,533,006 1,077,104 505,643 3,162,208

Accumulated Depreciationand Amortization

At January 1 3,623 793,353 701,707 184,260 1,682,943

Additions 705 120,668 112,558 57,560 291,491

Disposals − (10,804) (390) (55,371) (66,565)

At December 31 4,328 903,217 813,875 186,449 1,907,869

Net Book Value at December 31 ₱42,127 ₱629,789 ₱263,229 ₱319,194 ₱1,254,339

2015

Land and Land Improvements

Instrumentation, Tools and Other

Equipment

Office Furniture, Fixture and Equipment

Transportation Equipment Total

Cost

At January 1 ₱41,275 ₱1,177,403 ₱773,756 ₱259,111 ₱2,251,545

Additions - 114,659 124,858 46,800 286,317

Disposals - (1,327) (11,040) (8,731) (21,098)

At December 31 41,275 1,290,735 887,574 297,180 2,516,764

Accumulated Depreciationand Amortization

At January 1 2,876 677,662 606,032 155,257 1,441,827

Additions 747 117,018 106,677 35,732 260,174

Disposals − (1,327) (11,002) (6,729) (19,058)

At December 31 3,623 793,353 701,707 184,260 1,682,943

Net Book Value at December 31 ₱37,652 ₱497,382 ₱185,867 ₱112,920 ₱833,821


9. AFS FINANCIAL ASSETS

The Company’s AFS financial assets consists of its 10% ownership investment in the unquoted equity shares of Subic Water and Sewerage Co., Inc. The carrying amount of the AFS Financial asset, net of allowance for impairment loss of ₱88.7 million, amounted to ₱132.4 million as at December 31, 2016 and 2015.

In 2015, the Company recognized reversal of impairment loss amounting to ₱22.0 million in “Other comprehensive income” in the consolidated statement of comprehensive income.

Dividend income on AFS financial assets presented as part of “Others – net” account under “Other income (expenses)” in the consolidated statements of income amounted to ₱10.0 million, ₱14.5 million and nil in 2016, 2015 and 2014, respectively.

10. INTEREST-BEARING LOANS


₱21.2 billion Term Loan

On March 22, 2013, the Parent Company entered into several loan agreements for the refinancing of all of its existing loans under the 2008 and 2011 Omnibus Notes Facility and Security Agreements (ONFSA) (collectively referred to as “Corporate Notes”), whereby the Parent Company was granted a Term Loan Facility (the “Term Loan”) in the aggregate amount of ₱21.2 billion. Under the new terms, the loans shall be payable in semi-annual installments within ten years to commence at the end of the 6th month after the initial issue date and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate. The Term Loan is secured by a negative pledge. The change in the terms of the loan contracts was assessed as substantial modification of the Corporate Notes and thus, resulted to derecognition of the old loan and recognition of new financial liability.

₱5.0 billion Corporate Notes

On April 29, 2013, the Parent Company entered into a Loan Agreement (Corporate Notes) with a local bank. The loan shall be payable in semi-annual installments within ten years to commence at the end of the 42nd month, and bears a fixed rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate. The ₱5.0 billion Corporate Notes is secured by a negative pledge.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling ₱42.8 million were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to ₱4.0 million, ₱3.9 million and ₱3.6 million in 2016, 2015 and 2014, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 17). US$137.5 million Loan

The World Bank (WB), through the Metro Manila Wastewater Management Project (MWMP), provided a US$275.0 million loan to the Land Bank of the Philippines (LBP) for relending at an equal share to the two Concessionaires of the MWSS namely, Maynilad and Manila Water. The MWMP is expected to finance investments in wastewa-ter collection and treatment, and septage management in Metro Manila.

The loan will fund the following projects:

1. Rehabilitation of Ayala Alabang Sewage Treatment Plant (STP)2. Talayan STP (part of the San Juan River Basin Project)3. Valenzuela STP and associated wastewater conveyance system4. Pasay STP and associated wastewater conveyance system5. Muntinlupa STP and associated wastewater conveyance system6. South Septage Treatment Plant

The WB and the LBP signed the Loan Agreement on May 31, 2012 while the Subsidiary Loan Agreement between LBP and Maynilad was executed on October 25, 2012

2016 2015

₱21.2 billion Term Loan ₱15,229,475 ₱16,921,639

₱5.0 billion Corporate Notes 4,950,000 5,000,000

US$137.5 million Loan 3,357,711 2,016,649

₱5.2 billion Corporate Notes 3,000,000 1,000,000

Peso-denominated Bank Loan 255,000 255,000

26,792,186 25,193,288

Less unamortized debt issuance costs 104,330 113,949

26,687,856 25,079,339

Less current portion 1,808,101 1,742,164

₱24,879,755 ₱23,337,175


The loan shall be payable in semi-annual installments within 25 years, inclusive of seven years grace period. The interest shall be paid semi-annually based on the same rate of interest payable by LBP under the WB Loan Agreement, plus fixed spread of 1.25% per annum. The loan is secured by a negative pledge.

Summary of transactions during the year is as follows:

The US$4.6 million (₱226.7 million) and US$6.2 million (₱292.8 million) balance as at December 31, 2016 and 2015, respectively, represents the outstanding balance of LBP designated account No. 3404-031-936, under the account name MWMP - Category 2 - MWSI, and is presented as part of “Sinking fund” under “Other current assets” account in the consolidated statements of financial position (see Note 6).

The US$67.5 million (₱3.4 billion) and US$42.9 million (₱2.0 billion) cumulative drawn amount as at December 31, 2016 and 2015, respectively, is presented as part of the noncurrent portion of the interest-bearing loans. As at December 31, 2016, undrawn amount from this facility amounting to US$70.0 million out of Maynilad’s share of US$137.5 million from the facility is available until June 30, 2017. On November 29, 2016, Maynilad requested to extend the availability of the undrawn amount until June 30, 2019. As at February 27, 2017, the request is not yet granted.

The proceeds of the World Bank loan have been expended in accordance with the intended purposes as specified in the Loan Agreement.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling ₱42.8 million were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to ₱2.6 million, ₱2.5 million and ₱3.0 million in 2016, 2015 and 2014, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 17).

Specific borrowing costs capitalized as part of service concession assets amounted to ₱107.3 million and ₱54.8 in 2016 and 2015, respectively (see Note 7).

₱5.2 billion Corporate Notes

On February 24, 2014, the Parent Company entered into a Loan Agreement (Corporate Notes) with the Development Bank of the Philippines. The loan proceeds shall be used to finance the first stage of the Parañaque-Las Piñas STP and associated wastewater conveyance system. The loan shall be payable in semi-annual payments within fifteen years to commence at the end of the fifth year, which bears a fixed rate per annum equal to 6.0%. The first and second drawdowns amounting to ₱1.0 billion and ₱2.0 billion were made on March 2, 2015 and October 4, 2016, respectively. Undrawn amount from this facility amounting to ₱2.2 billion as at December 31, 2016 is available until February 2017. On January 17, 2017, Maynilad proposed to amend further the schedule of borrowing under the Loan Agreement as follows: (i) the third borrowing date be rescheduled (August 1, 2017), (ii) a fourth borrowing date be added in the schedule of borrowing (March 5, 2018), and (iii) the total borrowing be reduced to ₱4.8 billion. The ₱ 5.2 Billion Corporate Notes is secured by a negative pledge. Amendment is not yet approved as at February 27, 2017.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling ₱46.1 million were capitalized in 2015. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to ₱2.8 million and ₱2.2 million in 2016 and 2015, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 17).

Specific borrowing costs capitalized as part of service concession assets amounted to₱91.5 million and ₱44.6 million in 2016 and 2015, respectively (see Note 7).

Covenants. The loan agreements contain, among others, covenants regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt service coverage ratio, and maintenance of debt service reserve account (see Note 6). As at December 31, 2016 and 2015, the Parent Company has complied with these covenants.

Under the terms of the loan agreements, the Parent Company may, at its option and without premium and penalty, redeem the Corporate Notes in whole or in part, subject to the conditions stipulated in the agreements. The embedded early redemption and prepayment options are clearly and closely related to the host debt contract, and thus, do not require to be bifurcated and accounted for separately from the host contract.

2016 2015

Balance at beginning of year US$6,222 US$4,862

Amount received during the year 24,680 28,029

Net amount 30,902 32,891

Expenditures during the year (26,343) (26,669)

Balance at end of year US$4,559 US$6,222


Peso-denominated Loan of Phil Hydro

On May 4, 2015, Phil Hydro entered into a Loan Agreement with the Land Bank of the Philippines. The loan shall be payable in quarterly installments within eight years to commence after the end of the 8th quarter, and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 1.0% per annum, or (ii) 5.5% per annum. The benchmark rate shall be determined by reference to the PDST-R2 rate. The peso-denominated loan is secured by a negative pledge. Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling ₱1.3 million were capitalized in 2015. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to ₱0.2 million and ₱0.1 million in 2016 and 2015, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 17).

Covenants. The loan agreement contains, among others, covenants regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt service coverage ratio. As at December 31, 2016 and 2015, Phil Hydro has complied with these covenants.

The movements in the balance of unamortized debt issuance costs related to all interest-bearing loans are as follows:

The repayments of loans based on existing terms are scheduled as follows:

*Translated using the December 31, 2016 exchange rate of ₱49.72: US$1.

11. TRADE AND OTHER PAYABLES


Accrued expenses mainly consist of provisions, salaries, wages and benefits, contracted services and interest payable to the banks. Details of provisions required by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, are not disclosed as these may prejudice the Company’s positions in relation to the cases pending before the courts or quasi-judicial bodies.

Trade and other payables are non-interest bearing and are normally settled within one year.

Trade payables include liabilities relating to assets held in trust (see Note 23) used in the Company’s operations amounting to ₱97.3 million each as at December 31, 2016 and 2015.

Accrued construction costs represents unbilled construction costs from contractors and normally settled upon receipt of billings

2016 2015

Balance at beginning of year ₱113,949 ₱75,293

Additions during the year − 47,326

Amortization during the year (see Note 17) (9,619) (8,670)

₱104,330 ₱113,949

In Original Currency

Year US Dollar-denominated*

Peso LoansIn Millions

Total PesoEquivalent*

2017 $- ₱1,808.1 ₱1,808.1

2018 - 1,824.0 1,824.0

2019 1.9 1,824.0 1,917.4

2020 3.7 1,924.0 2,110.7

2021 onwards 61.9 16,054.4 19,132.0

$67.5 ₱23,434.5 ₱26,792.2

2016 2015

Accrued expenses (see Note 16) ₱5,586,916 ₱6,134,784

Trade payables 2,576,222 2,304,384

Accrued construction costs (see Note 14) 2,727,871 2,886,154

Due to a related party (see Note 14) 1,900 1,900

₱10,892,909 ₱11,327,222


12. SERVICE CONCESSION OBLIGATION PAYABLE TO MWSS


Disputes with MWSSThe Parent Company has been contesting certain charges billed by MWSS relating to: (a) the basisof the computation of interest; (b) MWSS cost of borrowings; and (c) additional penalties. Consequently, the Parent Company has not provided for these additional charges. These disputed charges were effectively reflected and recognized by the Parent Company as Tranche B Concession Fees amounting to US$30.1 million by virtue of the DCRA entered into in 2005. The Parent Company also paid US$6.8 million in 2005 as an additional amount of Tranche B Concession Fees determined by the Receiver (see Note 7).

The Parent Company reconciled its liability to MWSS with the confirmation and billings of MWSS. The difference between the amount confirmed by MWSS and the amount recognized by the Parent Company amounted to ₱5.1 billion as at December 31, 2016 and 2015. The difference mainly pertains to disputed claims of MWSS consisting of additional Tranche B Concession Fees (see Note 7), borrowing cost and interest penalty under the Concession Agreement (prior to the DCRA). The Parent Company’s position on these charges is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 7 and 19).

Following the issuance of the Rehabilitation Court’s Order on December 19, 2007 disallowing the MWSS’ disputed claims and the termination of the Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve the matter in accordance with the dispute resolution requirements of the transitional and clarificatory agreement (TCA).

Prior to the DCRA, the Parent Company has accrued interest on its payable to MWSS based on the terms of the Concession Agreement, which was disputed by the Parent Company before the Rehabilitation Court. These already amounted to ₱985.3 million as at December 31, 2011 and have been charged to interest expense in prior years. The Parent Company maintains that the accrued interest on its payable to MWSS has been adequately replaced by the Tranche B Concession Fees discussed above. The Parent Company’s position is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 7 and 19). With the prescription of the TCA and in light of the Parent Company’s current negotiation and outstanding offer of US$14.0 million to fully settle the claim of MWSS, the Parent Company reversed the amount of accrued interest in excess of the US$14.0 million settlement offer amounting to ₱378.1 million and charged to other income in 2012. The remaining balance of ₱607.2 million as at December 31, 2016 and 2015, which pertains to the disputed interest penalty under the Concession Agreement prior to DCRA, has remained in the books pending resolution of the remaining disputed claims of MWSS.

The schedule of undiscounted estimated future concession fee payments, based on the term of theConcession Agreement, is as follows:

Additional concession fee liability relating to the extension of the Concession Agreement (see Note 1) is only determinable upon loan drawdown of MWSS and the actual construction of the related concession projects.

2016 2015

Concession fees payable (see Note 7) ₱7,221,892 ₱7,487,645

Accrued interest 607,217 607,217

7,829,109 8,094,862

Less current portion 1,328,978 1,357,705

₱6,500,131 ₱6,737,157

*Translated using the December 31, 2016 exchange rate of ₱49.72: US$1.

In Original Currency

YearForeign

Currency Loans (Translated to US$)*

Peso Loans/Project Local

Support(In Millions)

Total PesoEquivalent*

2017 $14.3 ₱561.9 ₱1,270.7

2018 14.2 543.1 1,250.8

2019 14.2 543.1 1,251.5

2020 13.8 543.2 1,228.2

2021-2037 45.1 9,219.2 11,459.7

$101.6 ₱11,410.5 ₱16,460.9


Class A shares, comprising sixty percent (60%) of the authorized common shares, may only be subscribed by Filipino citizens or corporations or associations organized under the laws of the Philippines with at least sixty percent (60%) of the capital owned by Filipino citizens.

Class B shares, comprising forty percent (40%) of the authorized common shares, may be subscribed by, transferred to and owned by either Filipino citizens or by aliens.

b. ESOP

The employees of the Parent Company are allowed equity participation of up to six percent (6%) of the issued and outstanding capital stock of the Parent Company upon the effective date of the increase in authorized capital stock of the Parent Company pursuant to and in accordance with the provisions of Clause 2.6 of the DCRA. For this purpose, a series of 88,500,000 nonvoting convertible redeemable shares (ESOP Shares) was created from common Class A shares as reflected in the Parent Company’s amended Articles of Incorporation. In 2008, the ESOP shares were effectively reduced to 88,500 shares due to change in par value from ₱1 to ₱1,000. The ESOP shares have no voting rights, except for those provided under Section 6 of the Corporation Code and have no pre-emptive rights to purchase or subscribe to future or additional issuances or disposition of shares of the Parent Company.

Within thirty (30) days after the earlier of (i) the end of the fifth year from the creation of the ESOP Shares, and (ii) the listing date for common shares in a recognized Philippine Stock Exchange, the Parent Company may redeem the ESOP shares at a redemption ratio equal to one common share for every ESOP share held and such common shares so exchanged shall have the same rights and privileges as all other common shares.

Each ESOP Share will be convertible, at the option of the holder thereof, at any time during the period commencing the earlier of (i) the end of the fifth year from the creation of the ESOP Shares; or (ii) the listing date for common shares in a recognized Philippine Stock Exchange into one fully-paid and non-assessable

13. EQUITY

a. The Parent Company’s authorized and issued shares as at December 31, 2016 and 2015 are presented below:

common share. Such common share shall have the same rights and privileges as all other common shares. Conversion of the ESOP Share may be effected by surrendering the certificates representing such shares to be converted to the Parent Company common shares at the Parent Company’s principal office or at such other office or offices as the BOD may designate, and a duly signed and completed notice of conversion in such form as may from time to time be specified by the Parent Company (a “Conversion Notice”), together with such evidence as the Parent Company may reasonably require to prove the title of the person exercising such right. A Conversion Notice once given may not be withdrawn without the consent in writing of the Parent Company.

In 2012, the Board and shareholders of the Parent Company approved the amendment of its Articles of Incorporation to allow for the reissuance of ESOP shares that have been bought back by the Parent Company from separated employees. Upon approval by the SEC of the amendment on January 31, 2013, ESOP shares reacquired by the Parent Company from its resigned employees were subsequently reissued to all qualified employees.

In 2014, ESOP shares reacquired by the Company from employees who availed of the Special Opportunity Program (SOP) amounting to ₱94.4 million were presented as part of “Treasury shares” account shown under the equity section of the consolidated statements of financial position.

ESOP shares reacquired by the Parent Company from its resigned employees amounting to ₱32.7 million and ₱6.1 million in 2016 and 2015, respectively, were presented as treasury shares.

c. Dividends

On February 24, 2014, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of ₱220.01 per common share amounting to ₱1.0 billion to all shareholders of record as at February 24, 2014. Payments were made in tranches from April 2, 2014 to June 25, 2014.

On February 23, 2015, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of ₱442.09 per common share amounting to ₱2.0 billion to all shareholders of record as at March 1, 2015. Payments were made onMarch 17, 2015.

On January 25, 2016, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of ₱440.17 per common share amounting to ₱2.0 billion to all shareholders of record as at February 9, 2016. Payments were made on March 4, 2016.

d. Appropriation of Retained Earnings

On February 23, 2015, the Parent Company’s BOD approved the appropriation of its retained earnings amounting to ₱3.5 billion for various water and sewerage projects expected to be implemented in the next two years.

In 2016, the Parent Company reversed the appropriated retained earnings in 2013 amounting to ₱4.0 billion. On February 27, 2017, the Parent Company’s BOD approved the appropriation of its retained earnings amounting to ₱5.0 billion for various water and sewerage projects expected to be implemented in the next two years and ₱3.0 billion for cash dividends.

Number of Shares

2016 2015

Authorized and issued - ₱1,000 par value

Common shares

Class A 4,222,482 4,222,482

Class B 236,000 236,000

ESOP 88,500 88,500

4,546,982 4,546,982


e. Equity Adjustments

Redemption of Preferred Shares

The Parent Company issued and redeemed preferred shares in 2008. Foreign exchange fluctuation from date of issuance of the preferred shares to the date of issuance of notice of redemption, amounting to ₱351.0 million, is recognized as part of “Other equity adjustments” account shown under the equity section of the consolidated statements of financial position.

MPIC Share-based Payment

On June 24, 2007, the shareholders of MPIC approved a share option scheme (the Plan) under which MPIC’s directors may, at their discretion, invite executives of MPIC upon the regularization of employment of eligible executives, to take up share option of MPIC to obtain an ownership interest in MPIC and for the purpose of long-term employment motivation. The scheme became effective on June 14, 2007 and is valid for 10 years. An amended plan was approved by the stockholders on February 20, 2009.

As amended, the overall limit on the number of shares that may be issued upon exercise of all options to be granted and yet to be exercised under the Plan must not exceed 5.0% of the shares in issue from time to time.

The exercise price in relation to each option shall be determined by the Parent Company’s Compensation Committee, but shall not be lower than the highest of: (i) the closing price of the shares for one or more board lots of such shares on the PSE on the option offer date; (ii) the average closing price of the shares for one or more board lots of such shares on the PSE for the five business days on which dealings in the shares are made immediately preceding the option offer date; and (iii) the par value of the shares.

MPIC allocated and set aside stock options relating to an additional 145,000,000 common shares, of which, (a) 94,300,000 common shares were granted to its new directors and senior management officers, as well as members of the management committee of certain MPIC subsidiaries (includes 15,200,000 common shares grant-ed to officers of the Parent Company) at the exercise price of ₱2.73 per common share on July 2, 2010 and (b) another 10,000,000 common shares were granted at the exercise price of ₱3.50 on December 21, 2010 to officers of the Parent Company.

On March 8, 2011, 1,000,000 common shares were granted at the exercise price of ₱3.53 to senior management of the Parent Company.

The weighted average remaining term to expiry for the share options outstanding for the third grant is nil and 0.1 year as at December 31, 2016 and 2015, respectively.

The fair value of the options granted is estimated at the date of grant using Black-Scholes-Merton formula, taking into account the terms and conditions upon which the options were granted. The following tables list the inputs to the model used for the ESOP:

Starting in 2012, no additional stock option activity was received from MPIC.

Grant dated July 2, 2010

Grant dated December 21, 2010

Grant dated March 8, 2011

30.0% vesting on July 2, 2011



Spot price ₱2.65 ₱2.65 ₱2.65

Exercise price ₱2.65 ₱2.73 ₱2.73

Risk-free rate 4.61% 5.21% 5.67%

Expected volatility* 69.27% 67.52% 76.60%

Term to vesting (in days) 365 731 1,096

Call price ₱0.73 ₱1.03 ₱1.39

30.0% vesting on

August 1, 2011

35.0% vesting on

August 1, 2012

35.0% vesting on

August 1, 2013

Spot price ₱3.47 ₱3.47 ₱3.47


Risk-free rate 1.62% 2.83% 3.73%


Term to vesting (in days) 223 589 954

Call price ₱0.46 ₱1.20 ₱1.62

30.0% vesting on

March 8, 2012

35.0% vesting on

March 8, 2013

35.0% vesting on

March 8, 2014

Spot price ₱3.53 ₱3.53 ₱3.53


Risk-free rate 2.56% 4.83% 5.01%


Term to vesting (in days) 366 731 1,096

Call price ₱0.58 ₱1.28 ₱1.62

*The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome


Maynilad Share-based Payment

On November 23, 2015, the BOD approved the awarding of 23,777 ESOP shares to all qualified Maynilad employees to be paid through stock purchase bonus (equity-settled transaction). The ESOP covers employees who have met the following eligibility criteria:

a. The employee has completed a full year’s service, from November 2, 2014 to November 1, 2015 (the “Period”);b. The employee has obtained at least a satisfactory performance rating for the appraisal period immediately preceding November 1, 2015;c. The employee has not been suspended at any time during the Period;d. The employee has not exceeded 10 days of absences without official leave during the Period; ande. The employee has not exceeded 20 days of leave without pay during the Period.

Communication to eligible employees was made on December 1, 2015.

The fair value of ESOP shares amounting to ₱6,143.22 per share was determined based on the Parent Company’s equity value at the date of grant using the discounted cash flows (DCF) method.

The grant of shares under the ESOP does not require an exercise price to be paid by the employees nor are there cash alternatives. All ESOP shares will be held in treasury until issuance. On February 9, 2016, the ESOP shares were issued to qualified employees.

Equity-based compensation expense recognized by the Parent Company under “Salaries, wages and benefits” account in the consolidated statements of income amounted to nil in 2016 and 2014, and ₱146.1 million in 2015.

Carrying value of the ESOP recognized under “Other equity adjustments” in the equity section of the consolidated statements of financial position amounted to ₱41.8 million and ₱187.9 million as at December 31, 2016 and 2015, respectively.

14. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control, directly or indirectly, the other party or exercise influence over the other party in making financial and operating decisions. Parties are considered to be related if they are subject to common control or common significant influence.

Category Year Amount/ Volume of Transactions

OutstandingReceivable(Payable)

Terms Conditions

Revenue from water and sewer services

2016 ₱17.9 million ₱1.1 millionNon interest-bearing,

settlement in cash and payable on demand

Unsecured,not impaired

2015 15.2 million 1.6 million

Construction costs (see Note 11)

2016 2.9 billion (102.4 million)Non interest-bearing,


Unsecured



2016 4.7 million 1.0 millionNon interest-bearing,




Electricity costs 2016 ₱820.4 million (₱29.9 million)Noninterest-bearing,


Unsecured

2015 776.8 million (29.6 million)

Commercial outsourcing ofinformation technology and systemservices

2016 247.6 million (39.1 thousand)Non interest-bearing,


Unsecured

2015 170.8 million (26.0 thousand)


2016 36.6 million (2.6 million)Non interest-bearing,


Unsecured


Subsidiary of a significant influence investor DM Consunji, Inc.

Significant influence investees of FPC Manila Electric Company

Indra Philippines, Inc.

Meralco Industrial Engineering Services Corporation


Terms and Conditions of Transactions with Related PartiesOutstanding balances at year-end are unsecured, interest-free, settlement occurs in cash and payable on demand.

Total compensation and benefits of key management personnel of the Company consist of:

15. INCOME TAXES

Provision for current income tax represents the total of RCIT for both Parent Company and Phil Hydro in 2016 and 2014, and the combination of RCIT for the Parent Company and MCIT for Phil Hydro in 2015. Prior to 2016, RCIT for the Parent Company is computed only for miscellaneous income not covered by ITH (see Note 20).

The components of the net deferred tax assets of the Company as at December 31, 2016 and 2015 shown in the consolidated statements of financial position are as follows:

Category Year Amount/ Volume of Transactions

OutstandingReceivable(Payable)

Terms Conditions


2016 5.2 million 0.4 millionNon interest-bearing,




Communication expenses 2016 11.3 million (1.4 million)

Noninterest-bearing,settlement in cash and

payable on demandUnsecured


Outsourced services 2016 14.5 million (1.5 million)

Noninterest-bearing,settlement in cash and




2016 ₱8.5 million -Non interest-bearing,


Unsecured


2016 7.9 million 55.2 thousandNon interest-bearing,


Unsecured

2015 7.9 million 50.5 thousand

Communication expenses 2016 35.2 million (13.7 thousand)

Non interest-bearing,settlement in cash and



Insurance 2016 8.6 million (10.0 thousand)Non interest-bearing,




Sponsorship fees 2016 49.0 thousand (25.0 thousand)



2015 25.0 thousand (25.0 thousand)

Repairs and maintenance 2016 - -



2015 17.8 thousand -

Philippine Long Distance Telephone Company and Subsidiaries

Entity under common control Ecosystem Technologies International, Inc.

Others

2016 2015 2014

Compensation ₱264,218 ₱237,908 ₱198,607

Pension costs 11,743 11,628 9,597

Short-term benefits 7,424 7,285 7,823

₱283,385 ₱256,821 ₱216,027

2016 2015

Deferred tax assets:

Accrued expenses ₱453,214 ₱836,519

Service concession assets - net 499,633 1,031,947

Pension liability and unamortized past service cost 43,990 117,656

Unamortized debt issuance costs 31,318 119,280

Allowance for inventory obsolescence 6,885 19,049

Unearned revenue − 16,754

Allowance for doubtful accounts − 428

1,035,040 2,141,633

Deferred tax liabilities -Unrealized foreign exchange gain (2,846) (2,059)

Deferred tax assets - net ₱1,032,194 ₱2,139,574


The components of the net deferred tax liabilities of the Phil Hydro as at December 31, 2016 shown in the consolidated statement of financial position are as follows:

In 2015, the Parent Company has the following deductible temporary differences for which no deferred tax assets have been recognized since management believes that it is not probable that these will be realized in the near future:

Service concession assets consist of concession fees and property, plant and equipment. For income tax purposes, concession fees are amortized using UOP method while property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives or remaining concession period, whichever is shorter.

The reconciliation of provision for income tax computed at the statutory income tax rate to provision for (benefit from) income tax as shown in the consolidated statements of income is summarized as follows:

16. EMPLOYEE BENEFITS

LTIP

In 2013, the Parent Company approved an LTIP for its managers and executives which is based on profit targets for the covered Performance Cycle.

The total cost of the LTIP amounted to ₱181.1 million, ₱149.8 million and ₱130.9 million in 2016, 2015 and 2014, respectively, which are presented as part of “Salaries, wages and benefits” account in the consolidated statements of income. Accrued LTIP amounting to ₱181.1 million as at December 31, 2016 and ₱429.0 million as at December 31, 2015 were respectively presented aspart of “Other noncurrent liabilities” account and “Trade and other payables” account in the consolidated statements of financial position.

2016

Deferred tax assets:

Unearned revenue ₱16,129

Accrued expenses 2,331

Pension liability and unamortized past service cost 142

18,602

Deferred tax liabilities:

Service concession assets - net 47,189

Unamortized debt issuance costs 298

47,487

Deferred tax liabilities - net ₱28,885

2015

Impairment loss on AFS financial assets ₱78,197

Pension liability and unamortized past service cost 40,953

Share-based payment 40,199

₱159,349

2016 2015 2014

Income tax at statutory tax rate of 30% ₱2,999,561 ₱2,885,377 ₱2,467,385

Add (deduct) the tax effects of:

Deduction under OSD method Foregone benefit under itemized (1,407,531) − −

deduction method 1,216,392 − −

Derecognition of deferred tax assets relating to accrued expenses 214,169 414,913 −

Change in income tax rate for using OSD 244,460 − −

Change in unrecognized net deferred tax assets (47,805) (817,109) (380,601)

Interest income already subjected to final tax (35,976) (40,468) (24,385)

Net taxable income under ITH (see Note 20) − (2,405,872) (2,077,981)

Other nondeductible items and others 67,095 30,456 (15,088)

Provision for (benefit from) income tax ₱3,250,365 ₱67,297 (₱30,670)


Pension Plan

MayniladThe Parent Company has a funded, noncontributory and actuarially computed pension plan covering all regular and permanent employees. The benefits are based on years of service and compensation during the last year of employment.

In line with its strategic goal to improve operational efficiency, the Parent Company offered a Redundancy and Right-Sizing Program in 2014. The redundancy program offered a separation package based on the number of years, or fractions thereof, on a pro-rated basis, of service with the Company plus monetary equivalent of some benefits. This resulted to a curtailment gain of ₱257.3 million.

Changes in the funded pension liability in 2016 are as follows:

Changes in the funded pension liability in 2015 are as follows:

The components of pension cost (income) included under “Salaries, wages and benefits” account in the consolidated statements of income for 2016, 2015 and 2014 are as follows:

Present value of defined

benefitobligation

Fair value ofplan assets

Pensionliability

At December 31, 2015 ₱1,020,456 ₱604,880 ₱415,576

Pension cost in the consolidatedstatement of income:

Current service cost 88,530 − 88,530

Net interest cost 48,495 32,976 15,519

137,025 32,976 104,049

Benefits paid (17,735) (17,735) −

Actual contributions − 192,000 192,000

Remeasurements in other comprehensiveincome:

Interest income (excluding amount included in net interest) − (15,003) 15,003

Actuarial changes due to experience adjustment 25,517 − 25,517

Actuarial changes arising from changes in demographic assumptions (2,252) − (2,252)

Actuarial changes arising from changes in financial assumptions (48,981) − (48,981)

(25,716) (15,003) (10,713)

At December 31, 2016 ₱1,114,030 ₱797,118 ₱316,912

Present value of defined

benefitobligation

Fair value ofplan assets

Pensionliability

At January 1, 2015 ₱893,364 ₱612,327 ₱281,037

Pension cost in the consolidatedstatement of income:

Current service cost 81,136 − 81,136


120,712 27,126 93,586

Benefits paid (16,653) (16,653) −

Remeasurements in other comprehensiveincome:

Interest income (excluding amount included in net interest) - (17,920) 17,920

Actuarial changes due to experience adjustment 64,226 - 64,226

Actuarial changes arising from changes in financial assumptions (41,193) - (41,193)

(23,033) (17,920) (40,953)

At December 31, 2016 ₱1,020,456 ₱604,880 ₱415,576

2016 2015 2014

Current service cost ₱88,530 ₱81,136 ₱87,799


Curtailment gain - - 257,341

₱104,049 ₱93,586 ₱155,906


The fair value of plan assets by each class as at the end of the reporting period are as follows:

The plan asset’s carrying amount approximates its fair value since the plan assets are short-term in nature or marked-to-market. Investments held have quoted prices in active market.

The remaining plan assets which are short term in nature, do not have quoted market prices in an active market.

The plan assets have diverse investments and do not have any concentration risk. As at December 31, 2016, the plan assets consist of the following:

• Investments in government securities consist primarily of fixed-rate treasury notes and retail treasury bonds that bear interest ranging from 2.13% to 9.5% per annum and have maturities from 2017 to 2035.

• Investments in equity securities are composed of investment in shares of various listed entities. The carrying amounts of investments in equity securities also approximate their fair values since they are marked-to-market.

• Unit trust funds include mutual funds invested in quoted shares.• Loans and notes receivables include unsecured fixed-rate notes of a related party and

unsecured notes of an unaffiliated company which bear interest at 6.26%.• Cash and cash equivalents include regular savings and time deposits, which bear interest

ranging from 1.60% to 5.50% per annum.• Receivables and others include certificate of deposit with a term of 7 years and bear

interest at 5.25%.

The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. The principal assumptions used in determining pension cost and present value of defined benefit obligation are shown below:

Sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at the end of the reporting period, assuming all other assumptions were held constant:

2016 2015

Investments in:

Government securities ₱386,404 ₱273,937

Equity securities 323,408 226,292

Unit trust funds 36,629 17,195

Cash and cash equivalents 46,903 2,110

Loans/notes receivable 960 2,970

Receivables and others 2,815 82,376

₱797,119 ₱604,880

2016 2015

Discount rate 5.40% 4.86%

Salary increase rate 4.00% 4.00%

Turnover rate 2.76% 0.78%

Increase (decrease) in Basis Points

Increase (decrease) in

Amount

Discount rate 100 (₱80,812)

(100) 94,188

Salary increase rate 100 101,238

(100) (88,289)

Turnover rate 100 (3,465)

(100) 3,283

Increase (decrease) in Basis Points

Increase (decrease) in

Amount

Discount rate 100 (₱86,880)

(100) 102,676

Salary increase rate 100 97,507

(100) (84,141)

Turnover rate 100 (10,293)

(100) 8,376

2016

2015


Actual contributions to the defined benefit pension plan amounted to ₱192.0 million and nil in 2016 and 2015, respectively.

The Parent Company expects to contribute ₱170.8 million to the defined benefit pension plan in 2017.

Phil HydroPhil Hydro recognized pension liability amounting to ₱0.4 million and ₱0.7 million in 2016 and 2015, respectively, in the consolidated statements of financial position determined in accordance with Republic Act No. 7641. Pension cost (income) included under “Salaries, wages and benefits” account in the consolidated statements of income amounted to nil, (₱0.1 million) and ₱0.8 million in 2016, 2015 and 2014, respectively.

Shown below are the maturity analyses of the undiscounted benefit payments: 17. INTEREST EXPENSE AND OTHER FINANCING CHARGES

18. BASIC/DILUTED EARNINGS PER SHARE

NormalRetirement

Other thanNormal

RetirementTotal

Less than one year ₱43,086 ₱22,916 ₱66,002

More than one year to five years 458,152 112,280 570,432

More than 5 years to 10 years 641,177 124,361 765,538



More than 20 years 2,514,176 449,602 2,963,778

₱4,138,151 ₱978,530 ₱5,116,681

NormalRetirement

Other thanNormal

RetirementTotal

Less than one year ₱37,216 ₱22,916 ₱66,002

More than one year to five years 315,305 49,396 364,701




More than 20 years 3,137,143 258,263 3,395,406

₱4,807,931 ₱521,389 ₱5,329,320

2016

2015

2016 2015 2014

Bank loans (see Note 10) ₱1,257,103 ₱1,346,163 ₱1,453,080

Accretion on service concessionobligation payable to MWSS(see Note 12)

533,037 622,425 696,904

Accretion of customers’ deposits 10,816 6,030 6,897

Amortization of debt issuance costs (see Note 10) 9,619 8,670 6,595

₱1,810,575 ₱1,983,288 ₱2,163,476

2016 2015 2014

Net income (a) ₱6,748,172 ₱9,550,627 ₱8,255,288

Weighted average number of shares atbeginning of year 4,436,963 4,460,428 4,472,762

Less weighted average number oftreasury shares (see Note 13) 3,858 23,465 12,334

Weighted average number of shares atend of year for basic earnings pershare (b)

4,433,105 4,436,963 4,460,428

Add weighted average potential dilutiveshares from ESOP (see Note 13)

- 1,981 -

Weighted average number of shares atend of year for diluted earnings pershare (c)

4,433,105 4,438,944 4,460,428

Basic earnings per share (a/b) ₱1,522.22 ₱2,152.51 ₱1,850.78

Diluted earnings per share (a/c) ₱1,522.22 ₱2,151.55 ₱1,850.78


19. CONTINGENT LIABILITIES

Following are the significant contingent liabilities of the Company as at December 31, 2016 and 2015:

a. Additional Tranche B Concession Fees and interest penalty are being claimed by MWSS in excess of the amount recommended by the Receiver. Such additional

charges being claimed by MWSS (in addition to other miscellaneous claims) amounted to ₱5.1 billion as at December 31, 2016 and 2015. The Rehabilitation Court has resolved to deny and disallow the said disputed claims of MWSS in its December 19, 2007 Order, upholding the recommendations of the Receiver on the matter. Following the

termination of the Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve this matter in accordance with the dispute requirements of the TCA (see Note 12).

b. On October 13, 2005, the Parent Company and Manila Water (the “Concessionaires”) were jointly assessed by the Municipality of Norzagaray, Bulacan for real property taxes on certain common purpose facilities purportedly due from 1998 to 2005 amounting to ₱357.1 million. It is the position of the Concessionaires that it is the Republic of the

Philippines that owns these properties, and is therefore, exempt from real property taxes.

The supposed joint liability of the Concessionaires for real property tax, including interests, amounted to about ₱1.0 billion as at December 31, 2016 and 2015.

After the Local Board of Assessment Appeals (LBAA) ruled in favor of the Municipality of Norzagaray, Bulacan, the Concessionaires elevated the ruling of the LBAA to the Central Board of Assessment Appeals (CBAA) by filing separate appeals. As at February 27, 2017, the case is still pending resolution.

c. The Parent Company is a party to various civil and labor cases relating to breach of contracts with damages, illegal dismissal of employees, and nonpayment of backwages, benefits and performance bonus, among others.

20. REGISTRATION WITH THE BOARD OF INVESTMENTS (BOI)

The Parent Company is registered with the BOI under Executive Order No. 226, as amended, as a new operator of water supply and sewerage system for the West Service Area on a pioneer status.

The registration entitles the Parent Company to incentives which include, among others, an ITH for a period of six years beginning on Commencement Date or from actual start of commercial operations, whichever comes first.

On April 16, 2008, the BOI granted the request of the Parent Company for the extension of the period for the ITH availment from August 2001 - July 2007 to January 2003 - December 2008.

On October 20, 2008, the Parent Company filed an application for an ITH bonus year. The application was for the extension of the availment of the ITH incentive by the Parent Company for one (1) year or for the period January 1, 2009 to December 31, 2009. The BOI approved the Parent Company’s application on December 22, 2008.

On December 3, 2009, the Parent Company was issued with BOI Certificate of RegistrationNo. 2009-171 as a new operator of the 200 million liters per day (MLD) Bulk Water Supply and Distribution Project (Putatan, Muntinlupa). On December 16, 2009, Certificates of Registration Nos. 2009-188 and 2009-189 as a new operator of the 1,500 MLD and 900 MLD Bulk Water Supply and Distribution Projects pertaining to the La Mesa Treatment Plants 1 and 2, respectively, were likewise issued by the BOI. The registrations entitle the Parent Company to incentives which include an ITH for six years commencing on January 2010 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. Commercial operations of the 1,500 MLD and 900 MLD Bulk Water Supply and Distribution Projects started on January 1, 2010 while the 200 MLD Project started on January 1, 2011. The ITH for all these projects has expired on December 31, 2015. The ITH incentives were limited to the sales/revenue generated from the operation of the three plants which substantially covered the total capacity of the Parent Company. ITH incentive enjoyed by the Company amounted to ₱2,405.9 million and ₱2,078.0 million in 2015 and 2014, respectively (see Note 15).


21. SIGNIFICANT CONTRACTS WITH MANILA WATER (EAST CONCESSIONAIRE)

22. COMMITMENTS

In relation to the Concession Agreement, the Parent Company entered into the following contracts with the East Concessionaire:

a. Interconnection Agreement wherein the two Concessionaires shall form an unincorporated joint venture that will manage, operate, and maintain interconnection facilities. The terms of the agreement provide, among others, the cost and the volume of water to be transferred between zones; and

b. Common Purpose Facilities Agreement that provides for the operation, maintenance, renewal, and, as appropriate, decommissioning of the Common Purpose Facilities, and performance of other functions pursuant to and in accordance with the provisions of the Concession Agreement and performance of such other functions relating to the Concession (and the Concession of the East Concessionaire) as the Parent Company and the East Concessionaire may choose to delegate to the Joint Venture, subject to the approval of MWSS.

Concession Agreement

Significant commitments under the Concession Agreement follow:

a. To pay Concession Fees (see Note 7)

b. To post Performance Bond (see Note 6)

Under Section 6.9 of the Concession Agreement, the Parent Company is required to post a performance bond to secure the performance of its obligations under certain provisions of the Concession Agreement. The aggregate amount drawable in one or more installments under such performance bond during the Rate Rebasing Period to which it relates is set out below.

Within 30 days from the commencement of each renewal date, the Parent Company shall cause the performance bond to be reinstated to the full amount applicable to the rate rebasing period as set forth above.

In connection with the extension of the term of the Concession Agreement (see Note 1), certain adjustments to the obligation of the Parent Company to post the performance bond under Section 6.9 of the Concession Agreement have been approved and summarized as follows:

• The aggregate amount drawable in one or more installments under each performance bond during the Rate Rebasing Period to which it relates has been adjusted to US$30.0 million until the Expiration Date.

• The amount of the Performance Bond for the period covering 2023 to 2037 shall be mutually agreed upon in writing by the MWSS and the Parent Company consistent with the provisions of the Concession Agreement.

• The Parent Company posted the Surety Bond for the amount of US$90.0 million issued by Prudential Guarantee and Assurance, Inc. (the Surety) in favor of MWSS, as security for the Parent Company’s proper and timely performance of its obligations under the Concession Agreement. On December 6, 2012, the Parent Company renewed the Surety Bond for the amount of US$80.0 million issued by the Surety in favor of MWSS.

• The liability of the Surety under this bond will expire on December 31, 2017 (see Note 6).

c. To pay half of MWSS and MWSS-RO’s budgeted expenditures for the subsequent years, provided the aggregate annual budgeted expenditures do not exceed ₱200.0 million, subject to CPI adjustments. As a result of the extension of the life of the Concession Agreement, the annual budgeted expenditures shall increase by 100%, subject to CPI adjustments, effective January 2010 (see Notes 1 and 7).

d. To meet certain specific commitments in respect to the provision of water and sewerage services in the West Service Area, unless modified by the MWSS-RO due to unforeseen circumstances.

e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner consistent with the National Building Standards and best industrial practices so that, at all times, the water and sewerage system in the West Service Area is capable of meeting the service obligations (as such obligations may be revised from time to time by the MWSS-RO following consultation with the Parent Company).

f. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect public health or welfare, or cause damage to persons or third-party property.

g. To ensure that at all times the Parent Company has sufficient financial, material and personnel resources available to meet its obligations under the Concession Agreement.

h. To prevent incurrence of debt or liability that would mature beyond the term of the Concession Agreement, without prior notice to MWSS.

Rate Rebasing Period

Aggregate AmountDrawable Under

Performance Bond(In Millions)

First (August 1, 1997 – December 31, 2002) US$120.0

Second (January 1, 2003 – December 31, 2007) 120.0

Third (January 1, 2008 – December 31, 2012) 90.0

Fourth (January 1, 2013 – December 31, 2017) 80.0

Fifth (January 1, 2018 – May 6, 2022) 60.0


Failure of the Parent Company to perform any of its obligations under the Concession Agreement of a kind or to a degree which, in a reasonable opinion of the MWSS-RO, amounts to an effective abandonment of the Concession Agreement and which failure continues for at least 30 days after written notice from the MWSS-RO, may cause the Concession Agreement to be terminated.

Operating Lease Commitments

The Company leases the office space and branches, where service outlets are located, severalequipment and service vehicles, renewable under certain terms and conditions to be agreed upon by the parties. Total rent expense for the above operating leases amounted to ₱143.7 million, ₱150.6 million and ₱167.7 million in 2016, 2015 and 2014, respectively (see Note 23).

Future minimum operating lease payments as at December 31 are as follows:

23. ASSETS HELD IN TRUST

Materials and Supplies

The Parent Company has the right to use any items of inventory owned by MWSS in carrying out its responsibility under the Concession Agreement, subject to the obligation to return the same at the end of the concession period, in kind or in value at its current rate, subject to CPI adjustments.

Facilities

The Parent Company has been granted the right to operate, maintain in good working order, repair, decommission and refurbish the movable property required to provide the water and sewerage services under the Concession Agreement. MWSS shall retain legal title to all movable property in existence at the Commencement Date. However, upon expiration of the useful life of any such movable property as may be determined by the Parent Company, such movable property shall be returned to MWSS in its then-current condition at no charge to MWSS or the Parent Company (see Note 7).

The Concession Agreement also provides the Parent Company and the East Concessionaire to have equal access to MWSS facilities involved in the provision of water supply and sewerage services in both West and East Service Areas including, but not limited to, the MWSS management information system, billing system, telemetry system, central control room and central records.

The net book value of the facilities transferred to the Parent Company on Commencement Date based on MWSS’ closing audit report amounted to ₱7.3 billion with a sound value of₱13.8 billion.

Beginning at the Commencement Date, MWSS’ corporate headquarters were made available for a one-year lease to the Parent Company and the East Concessionaire, subject to yearly renewal with the consent of the parties concerned. As at December 31, 2016, the lease has been renewed for another year. Rent expense amounted to ₱38.0 million in 2016, 2015 and 2014 (see Note 22)

Period Covered 2016 2015

Not later than one year ₱125.55 ₱94.83

More than one year and not later than five years 334.81 207.53

More than five years 154.85 169.48


24. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s principal financial instruments are its debts to the local banks and concession fees payable to MWSS per Concession Agreement. Other financial instruments of the Company are cash and cash equivalents, short-term investments, and trade and other receivables. The main purpose of those financial instruments is to finance the Company’s operations.

The main risks arising from the Company’s principal financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.

The BOD reviews and approves the policies for managing the Company’s financial risks.The Company monitors risks arising from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD.

Interest Rate RiskInterest rate risk is the risk that the future cash flows of financial instruments will fluctuatebecause of the changes in market interest rates. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s interest-bearing loans.

The Company maintains a mix of floating and fixed rate interest-bearing loans, at a ratio of 12% floating and 88% fixed, and 8% floating and 92% fixed in 2016 and 2015, respectively, per abovementioned loan agreements. The floating rate interest-bearing loans will increase to a higher portion over time because of future drawdowns in connection to the MWMP loan agreement.

The following table shows the Company’s significant financial liabilities that are exposed to cash flow interest rate risk:

Interest on financial liabilities classified as fixed rate is fixed until the maturity of the instrument.

The following tables show information about the Company’s financial assets nd financial liabilities that are exposed to cash flow and fair value interest rate risks.

*Excludes cash on hand amounting to ₱12,899.

₱21.2 billion Term Loan Fixed rate benchmark+0.75%(5.75%, March 25, 2013 to March 25, 2018)

₱5.0 billion Corporate Notes(1st drawdown)

Fixed rate benchmark+0.75%(5.75%, April 29, 2013 to April 29, 2018)

₱5.0 billion Corporate Notes(2nd drawdown)

Fixed rate benchmark+0.75%(5.75%, October 29, 2013 to October 29, 2018)

US$137.5 million Loan(US$67.5 million drawdown)

Floating rate benchmark+1.25%(3.12%, November 15, 2016 to May 15, 2017)

₱5.2 billion Corporate Notes(1st drawdown)

Fixed rate benchmark(6.00%, March 2, 2015 to March 2, 2035)

₱5.2 billion Corporate Notes(2nd drawdown)

Fixed rate benchmark(6.00%, October 4, 2016 to March 2, 2035)

Peso-denominated Bank Loan Fixed rate benchmark(5.50%, June 29, 2015 to June 29, 2025)

Short-term cash investments Within 1 Year Total

Cash and cash equivalents (1-90 days)* ₱5,011,855 ₱5,011,855

Short-term investments (91-364 days) 3,041,000 3,041,000

₱8,052,855 ₱8,052,855

2016

2016

Within 1 Year More than1 Year

Total(In US$)

Total(In ₱)

Liabilities:

Interest-bearing loans:

Interest rate 5.75%5.75%, 3.12%,

6.00% and5.50%

Current - local ₱1,808,101 - - ₱1,808,101

Noncurrent - foreign - $66,857 $66,857 3,324,117

Noncurrent - local - ₱21,555,638 - 21,555,638

26,687,856

Service concession obligationpayable to MWSS:

Interest rate 8.16%

Current - foreign $11,128 - $11,128 ₱553,289

Current - local ₱775,689 - - 775,689

Noncurrent - foreign - $73,626 73,626 3,660,698


7,829,109

₱34,516,965


*Excludes cash on hand amounting to ₱23,732.

The following table demonstrates the sensitivity of the Company’s profit before tax to a reasonably possible change in interest rates for the years ended December 31, 2016 and 2015, with all variables held constant (through the impact on floating rate borrowings). The estimates are based on the management’s annual financial forecast. There is no impact on the Company’s equity other than those already affecting income.

Foreign Currency RiskForeign currency risk is the risk that the fair value or future value of financial instruments will fluctuate because of changes in foreign exchange rates. The Company’s foreign currency risk arises primarily from movements of the Philippine Peso against the United States Dollar, Euro and Japanese Yen. The servicing of foreign currency denominated loans of MWSS is among the requirements of the Concession Agreement. Revenues are generated in Philippine Peso. However, there is a mechanism in place as part of the Concession Agreement wherein the Company (or the end consumers) can recover currency fluctuations through the FCDA that is approved by the Regulatory Office.

Short-term cash investments: Within 1 Year Total

Cash and cash equivalents (1-90 days)* ₱3,069,280 ₱3,069,280

Short-term investments (91-364 days) 6,088,541 6,088,541

₱9,157,821 ₱9,157,821

2015

2015

Within 1 Year More than1 Year

Total(In US$)

Total(In ₱)

Liabilities:

Interest-bearing loans:

Interest rate 5.75%5.75%, 2.40%,

6.00% and5.50%

Current - local ₱1,742,164 - - ₱1,742,164

Noncurrent - foreign - $42,084 $42,084 1,980,458


25,079,339

Service concession obligationpayable to MWSS:

Interest rate 8.21%

Current - foreign $9,244 - $9,244 ₱435,008

Current - local ₱922,697 - - 922,697

Noncurrent - foreign - $85,617 85,617 4,029,148


8,094,862

₱33,174,201

Increase/ Decrease

in Basis Points

Effect on Income Before

Tax

Floating rate borrowings +50 (₱16,621)

-50 16,621

Increase/ Decrease

in Basis Points

Effect on Income Before

Tax

Floating rate borrowings +50 (₱9,902)

-50 9,902

2016

2015


Information on the Company’s foreign currency-denominated monetary assets and liabilities and the Philippine Peso equivalent of each as at December 31, 2016 and 2015 is presented as follows:

The spot exchange rates used were ₱49.72:US$1, ₱51.84:EUR1, and ₱0.43:JPY1 as at December 31, 2016.

The spot exchange rates used were ₱47.06:US$1, ₱51.74:EUR1, and ₱0.39:JPY1 as at December 31, 2015

The following table demonstrates the sensitivity to a reasonably possible change in foreign exchange rates, with all variables held constant, of the Company’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and equity as at December 31, 2016 and 2015. The estimates in the movement of the foreign exchange rates were based on the management’s annual financial forecast.

The Company recognized net foreign exchange loss of ₱510.8 million and ₱152.7 million in 2016 and 2015, respectively, mainly arising from the translation of the Company’s cash and cash equivalents, short-term investments, deposits, interest-bearing loans and service concession obligation payable to MWSS. However, the net foreign exchange gain or loss on interest-bearing loans and service concession obligation payable to MWSS is subject to foreign exchange recovery mechanisms under the Concession Agreement (see Note 2).

2016

2015

US Dollar Euro JPY Total(In ₱)

Asset Cash and cash equivalents,short-term investments andsinking fund

$4,623 €– ¥– ₱229,847

Liabilities

Interest-bearing loans ($66,857) €– ¥– (₱3,324,117)

Service concession obligationpayable to MWSS (82,081) (19) (312,776) (4,213,987)

(148,938) (19) (312,776) (7,538,104)

Net foreign currency

denominated liabilities ($144,315) (€19) (¥312,776) (₱7,308,257)

US Dollar Euro JPY Total(In ₱)

Asset Cash and cash equivalents,short-term investments andsinking fund

$6,346 €– ¥– ₱298,664

Liabilities

Interest-bearing loans ($42,084) €– ¥– (₱1,980,458)

Service concession obligationpayable to MWSS (84,589) (33) (1,228,775) (4,464,156)

(126,673) (33) (1,228,775) (6,444,614)

Net foreign currency

denominated liabilities ($120,327) (€33) (¥1,228,775) (₱6,145,950)

2016

Increase/Decrease in Peso and U.S

Dollar, Euro and JPY Exchange Rates

ForeignExchange Rate

Effect on IncomeBefore Income Tax

U.S Dollar +1% 49.72 (₱71,753)

Euro +1% 51.84 (10)

JPY +1% 0.43 (1,345)

U.S Dollar -1% 49.72 71,753

Euro -1% 51.84 10

JPY -1% 0.43 1,345

2015

Increase/Decrease in Peso and U.S

Dollar, Euro and JPY Exchange Rates

ForeignExchange Rate

Effect on IncomeBefore Income Tax

U.S Dollar +1% 47.06 (₱56,626)

Euro +1% 51.74 (17)

JPY +1% 0.39 (4,792)

U.S Dollar -1% 47.06 56,626

Euro -1% 51.74 17

JPY -1% 0.39 4,792


Credit RiskCredit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.

The Company trades only with recognized, creditworthy third parties. It is the Company’s policy that except for connection fees and other highly meritorious cases, it does not offer credit terms to its customers. Because of the basic need service it provides, historical collections of the Company are relatively high. Credit exposure is widely dispersed. Receivable balances are monitored on an ongoing basis.

With respect to credit risk arising from the other financial assets of the Company, consisting of cash and cash equivalents, short-term cash investments, deposits and sinking fund and miscellaneous deposits, the Company’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Company transacts only with institutions or banks which have demonstrated financial soundness for the past five years.

The Company has no significant concentrations of credit risk.

The table below shows the maximum exposure to credit risk for the components of the consolidated statements of financial position as at December 31, 2016 and 2015:

*Excludes cash on hand amounting to ₱12,899 and ₱23,732 as at December 31, 2016 and 2015, respectively.**Included as part of “Other noncurrent assets” in the consolidated statements of financial position.

As at December 31, 2016 and 2015, the credit quality per class of financial assets that were neither past due nor impaired are as follows:

*Excludes cash on hand amounting to ₱12,899 and ₱23,732 as at December 31, 2016 and 2015, respectively.**Included as part of “Other noncurrent assets” in the consolidated statements of financial position.

2016 2015

Cash and cash equivalents* (see Note 4) ₱5,011,855 ₱3,069,280

Short-term investments (see Note 4) 3,041,000 6,088,541

Trade and other receivables - net (see Note 5) 2,492,645 2,428,812

Deposits and sinking fund (see Note 6) 1,928,175 1,914,093

Miscellaneous deposits** 319,980 220,016

Total credit risk exposure ₱12,793,655 ₱13,720,742

Neither Past Due nor

Impaired High Grade


Impaired Standard

Past Due butnot Impaired

Past Due butImpaired Total

Cash and cash equivalents* ₱5,011,855 – – – ₱5,011,855

Short-term investments 3,041,000 – – – 3,041,000

Trade and other receivables 2,338,887 31,188 122,570 953,772 3,446,417

Deposits and sinking fund 1,928,175 – – – 1,928,175

Miscellaneous deposits** – 319,980 – – 319,980

₱12,319,917 ₱351,168 ₱122,570 ₱953,772 ₱13,747,427


Impaired High Grade


Impaired Standard

Past Due butnot Impaired

Past Due butImpaired Total

Cash and cash equivalents* ₱3,069,280 ₱– ₱– ₱– ₱3,069,280

Short-term investments 6,088,541 – – – 6,088,541

Trade and other receivables 2,166,300 160,752 101,760 1,030,624 3,459,436

Deposits and sinking fund 1,914,093 – – – 1,914,093

Miscellaneous deposits** – 220,016 – – 220,016

₱13,238,214 ₱380,768 ₱101,760 ₱1,030,624 ₱14,751,366

2016

2015


Past due accounts amounting to ₱122.6 million and ₱101.8 million as at December 31, 2016 and 2015, respectively, are not impaired since based on the Company’s experience, these receivables are normally collected the following year.

The credit quality of the financial assets was determined as follows:

Cash and cash equivalents, short-term investments, and deposits and sinking fund are placed in various banks. These are held by large prime financial institutions that have good reputation and low probability of insolvency. Management assesses the quality of these financial assets as high grade.

For trade and other receivables, high grade relates to those which are consistently collected before the maturity date, normally seven days from bill delivery. Standard grade includes receivables from customers that are collectible beyond seven days from bill delivery even without an effort from the Company to follow them up, or those advances from officers and employees that are collected through salary deduction. For miscellaneous deposits, standard grade consists of meter and security deposits that are normally refundable upon termination of service.

Liquidity RiskLiquidity risk is the potential for not meeting the obligations as they become due because of an inability to liquidate assets or obtain adequate funding.

The Company monitors its risk to a shortage of funds using a recurring liquidity planning. Cash planning considers the maturity of both its financial investments and financial assets(e.g., trade and other receivables, other financial assets) and projected cash flows from operations.

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank drafts, bank loans and debentures.

The tables below summarize the maturity profile of the Company’s financial liabilities as atDecember 31, 2016 and 2015 based on contractual undiscounted payments.

**Principal plus interest payment**Excludes taxes payable and interest payable

**Principal plus interest payment**Excludes taxes payable and interest payable

On Demand Due Within3 Months

Due Between3 and 12 Months

Due after12 Months Total

Interest-bearing loans* – ₱1,129,031 ₱1,026,171 ₱24,879,755 ₱27,034,957

Trade and other payables** 601,454 2,660,299 1,941,696 4,566,70 9,770,154

Service concession obligation payableto MWSS

– – 1,328,978 6,500,131 7,829,109

Customers’ deposits – – – 911,338 911,338

₱601,454 ₱3,789,330 ₱4,296,845 ₱36,857,929 ₱45,545,558




Interest-bearing loans* – ₱1,100,226 ₱972,157 ₱23,337,175 ₱25,409,558

Trade and other payables** 1,045,691 2,804,270 2,222,174 4,649,417 10,721,552

Service concession obligation payableto MWSS

– – 1,357,705 6,737,157 8,094,862

Customers’ deposits – – – 828,077 828,077

₱1,045,691 ₱3,904,496 ₱4,552,036 ₱35,551,826 ₱45,054,049

2016

2015


The table below shows the maturity profile of the Company’s financial assets based on contractual undiscounted cash flows as at December 31, 2016 and 2015:

Capital ManagementThe primary objective of the Company’s capital management strategy is to ensure that it maintains a healthy capital structure in order to maintain a strong credit standing while it maximizes shareholder value.

The Company closely manages its capital structure vis-a-vis a certain target gearing ratio, which is net debt divided by total capital plus net debt. The Company’s target gearing ratio is 75%. This target is to be maintained over the next five years by managing the Company’s level of borrowings and dividend payments to shareholders.

For purposes of computing its net debt, the Company includes the outstanding balance of its long-term interest-bearing loans, service concession obligation payable to MWSS and trade and other payables, less the outstanding cash and cash equivalents, short-term investments, deposits and sinking fund. To compute its capital, the Company uses net equity.

For purposes of monitoring debt ratio covenants, the Company computes using both interest-bearing debt and total liabilities. The Company closely monitors its debt covenants and maintains a capital expenditure program and dividend declaration policy that keeps the compliance of these covenants into consideration.




Cash and cash equivalents ₱977,357 ₱4,047,397 ₱– ₱– ₱5,024,754

Short-term investments – – 3,041,000 – 3,041,000

Trade and other receivables 2,233,358 188 259,099 – 2,492,645

Deposits and sinking fund 1,777,626 – 150,549 – 1,928,175

AFS financial assets 132,387 – – – 132,387

Miscellaneous deposits – – – 319,980 319,980

₱5,120,728 ₱4,047,585 ₱3,450,648 ₱319,980 ₱12,938,941




Cash and cash equivalents ₱982,791 ₱2,110,221 ₱– ₱– ₱3,093,012

Short-term investments – – 6,088,541 – 6,088,541

Trade and other receivables 2,039,961 230 388,621 – 2,428,812

Deposits and sinking fund 1,773,843 – 140,250 – 1,914,093

AFS financial assets 132,387 – – – 132,387

Miscellaneous deposits – – – 220,016 220,016

₱4,928,981 ₱2,110,452 ₱6,617,412 ₱220,016 ₱13,876,861

2016Due Between

2015Due Between

2016 2015

Interest-bearing loans and service concession obligation payable to MWSS (see Notes 10 and 12)

₱34,516,965 ₱33,174,201

Trade and other payables (see Note 11) 10,892,909 11,327,222

Less cash and cash equivalents, short-term in-vestments, deposits and sinking fund(see Notes 4 and 6)

(9,993,929) (11,095,646)

Net debt (a) 35,415,945 33,405,777

Net equity 40,261,654 35,538,655

Net equity and debt (b) ₱75,677,599 ₱68,944,432

Gearing ratio (a/b) 47% 48%


The following table summarizes the carrying values and fair values of the Company’s financial assets and financial liabilities as at December 31, 2016 and 2015:

The following methods and assumptions were used to estimate the fair value of each class of financial assets and financial liabilities for which it is practicable to estimate such value:

Cash and Cash Equivalents Short-term Investments, Trade and Other Receivables, Deposits and Sinking Fund, and Trade and Other Payables. Due to the short-term nature of these transactions, the carrying values approximate the fair values as at the reporting date.

AFS Financial Assets. Fair value is equivalent to the carrying value because the Company’s AFS financial assets pertain to unquoted equity investments.

Interest-bearing Loans. For floating rate loans, the carrying value approximates the estimated fair value as at the reporting date due to quarterly repricing of interest rates. For fixed rate loans, the estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.

Miscellaneous Deposits, Service Concession Obligation Payable to MWSS and Customers’ Deposits. Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.

The fair values of fixed rate interest-bearing loans, miscellaneous deposits, service concession obligation payable to MWSS and customers’ deposits are determined using Fair Value Hierarchy Level 3.

25. FINANCIAL ASSETS AND FINANCIAL LIABILITIES

In 2015, the noncash operating activities pertain to unpaid concession fees amounting to₱500.0 million and effect of change in rebased rate amounting to ₱632.3 million (see Note 7).

In 2016, the noncash operating activity pertains to MWSS loan drawdown for Angat WaterTransmission Improvement Project (AWTIP) amounting to ₱92.4 million (see Note 7).

On February 27, 2017, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends amounting to ₱3.0 billion to all shareholders.

26. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

27. EVENTS AFTER THE REPORTING PERIOD

20152016

Carrying Value Fair Value Carrying Value Fair Value

Financial Assets Loans and receivables -Miscellaneous deposits (included under “Other noncurrent assets”account)

₱319,980 ₱270,064 ₱220,016 ₱171,339

Financial Liabilities

Other financial liabilities:

Interest-bearing loans Service concession obligation ₱26,687,856 ₱28,175,873 ₱25,079,339 ₱26,959,364

payable to MWSS 7,829,109 9,302,022 8,094,862 9,569,586

Customers’ deposits 279,363 312,192 244,434 271,883

₱34,796,328 ₱37,790,087 ₱33,418,635 ₱36,800,833

Documents

Next Generation Following 10 years of Transformation (2016)