Business Review

Water & Wastewater Services

Message from the Company President

The year 2010 was remarkable for Manila Water when new records were achieved, corporate objectives were met and significant shareholder value was built.

24/7 WATER DESPITE EL NIÑO

The onset of the 2010 El Niño reduced the company’s water source allocation by 30%. Despite this, Manila Water continued to provide 24/7 water availability to 99.9% of its piped network. This was achieved through a reduction in non-revenue water (NRW) to an all-time low of 11% versus 15.8% the previous year. As a result, the East Zone concession did not have a single waterless barangay during the El Niño.

Despite water reductions at the source, Manila Water achieved sustained growth, resulting in the addition of 93,889 new households to its customer base, and a billed volume growth of 3.5% to 409.8 million cubic meters (mcm) from 396.0 mcm the previous year.

STRONG FINANCIAL PERFORMANCE

Our success in operations also translated to strong financial performance, with revenues increasing by 16% to P11 billion and net income growing by 23% to P3.9 billion, its highest level since we commenced operations in 1997. Consequently, we achieved a return on equity of 20% in 2010. Collection efficiency remained at 100% while accounts receivable days improved to 16 days in 2010, from 18 days in 2009.

DELIVERING ON COMMITMENTS

In line with our commitment to development, growth and sustainability, we invested P9.6 billion in total capital programs in the East Zone for 2010. This total capex investment resulted in the expansion and rehabilitation of 329 kilometers of pipelines all over the East Zone; increased wastewater treatment capacity by 114 million liters per day (mld) or a 7% increase year-on-year; and increased water supply capacity via reservoirs and pumping stations by 130 mld or 13% year-on-year.

Moving forward, we are looking to invest at least P10 billion per year to further improve the reliability of our overall operations, expand our water and wastewater networks, and develop new water sources to minimize the risks posed by relying on a single raw water supply source. These investments will also allow us to sustain our ability to meet, if not exceed, our regulatory targets set by the Metropolitan Waterworks and Sewerage System.

PURSUING WASTEWATER MANAGEMENT

As we continue to improve our water service levels, we are mindful of the need to contribute to the rehabilitation of water bodies in the metropolis. In line with the Three River Masterplan, which aims to revive Metro Manila’s major water bodies—the Pasig, Marikina and San Juan Rivers, Manila Water operates 36 sewerage and septage treatment plants with a total treatment capacity of 135 mld.

Moving forward, other initiatives will include the commissioning of two new sewage treatment plants (STP), contributing an additional 15 mld in 2011. Manila Water expects to increase treatment capacity by 200 mld by commissioning three more STPs within the next three years.

NEW BUSINESSES BEYOND THE EAST ZONE

Building on our accomplishments, we are currently developing our growth platform beyond the East Zone concession. After the first full year in operation, Boracay and Laguna reported revenue growth of 12% and 17% respectively. Overall, the collective revenues of P223.9 million for Laguna Water and Boracay Island Water accounted for 2% of the 16 percentage-point increase in total revenues in 2010.

In Vietnam, our Leakage Reduction operations in Saigon Water Co.(SAWACO) Zone 1 have exceeded contract targets by 7,000 cu.m/day. In fact, our recovered 17,000 cu.m./day by the end of 2010 is impressively 3,000 cu.m./day within reach of our August 2011 target. Due to this performance, we have gained increased trust and confidence from our partner, SAWACO, paving the way for more business opportunities in Vietnam. We are also currently working with REE Corporation and Mitsubishi Corporation for the development of other projects in Vietnam.

Manila Water has secured a partnership with Jindal Water Infrastructure Limited, one of India’s largest conglomerates, which will work with us for future projects in the states of Maharashtra, Rajasthan, and Gudjarat in India. Apart from this partnership, we have disclosed our participation in a bid to handle NRW reduction services for the city of Bangalore.

TALENT DEVELOPMENT

We have identified talent development as key to further accelerating our current and new business initiatives. Hence, we have been investing on our manpower base by upgrading the skills of our workforce. This in turn, will be complemented by partnerships with reputable organizations and external hiring of key personnel. This approach to talent development allows us to strengthen our capability to deliver our current commitments and at the same time prepare the organization and our people for the challenges ahead.

PURSUING GROWTH HERE AND BEYOND

Looking forward, we remain committed to deliver results as a key player in the region’s water industry. As we capitalize on our success in the East Zone, we shall continue finding opportunities to replicate our business model in other areas outside the concession. Key to this strategy is our ability to develop partnerships in key cities in the Philippines as well as in select emerging markets in the region.

On a final note, all these efforts are constantly guided by our unwavering commitment towards the principle of the triple bottom line—perfectly aligning economic viability, social responsibility and environmental sustainability. Through our consistent focus, skills and core competencies, Manila Water is well positioned to meet the challenges of today and tomorrow.

GERARDO C. ABLAZA, JR.

President and CEO

OPERATIONS REVIEW

Despite challenges brought about by El Niño, Manila Water met its targets in 2010. The prolonged dry season reduced the company's raw water allocation by more than 300 million liters per day (mld). Nonetheless, the company maintained normal operations and provided 24/7 potable water service to its customers.

Continued improvements in network efficiency as evidenced by the drop in non-revenue water (NRW) to an all-time low of 11% allowed the company to maintain its service levels. Together with Manila Water’s expansion initiatives, water sales grew by 3% on the back of an incremental 94,000 new households connected, most of which came from the expansion areas in Rizal, Taguig, Marikina, and Pasig. Billed volume reached a total of 409.8 million cubic meters (mcm) by year-end.

Net income in 2010 reached P3.9 billion and grew by 23% versus last year. This was supported by steady sales volume, which increased total revenues by 16% to P11.0 billion. A decline in depreciation costs further strengthened net income growth.

The company spent P9.6 billion in new capex investments in 2010, bringing cumulative investments in the East Zone to P42 billion since 1997. The company also closed a US$150 million loan agreement with four international banks which was guaranteed by Nippon Export and Investment Insurance (NEXI), a Japanese export credit agency under the supervision of Japan’s Ministry of Economy, Trade 11% all-time low for non-revenue water Manila Water provided uninterrupted water service to 99.9% its customers despite El Nino Tubig Para sa Barangay now serves 1.6 million people in low-income communities and Investment. The guarantee, which is the first of its kind in the world to be issued for a water project, affirms NEXI’s belief in Manila Water’s sustainability efforts and in its financial capacity. The loan will be used to finance the company’s capital expenditure plans for the expansion and further improvement of the water supply facilities and distribution network in the East Zone.

Manila Water continued to grow the business beyond the East Zone. Building on the acquisition of a concession in Laguna, Manila Water formed Boracay Island Water Company. Combined, these concessions currently account for around 2% of revenues but with a potential to expand moving forward. Overseas, in addition to operations in Vietnam, the company envisions to build a dominant position in the Asian region through partnerships with key regional players.

The company’s achievements were recognized by prestigious international award-giving organizations. The International Water Association awarded the company the grand prize for operations/management in their Project Innovation Awards for implementing creative approaches in reducing system losses, resulting in huge benefits to its customers. The “Water Efficiency Project of the Year” was bestowed by the subscribers of Global Water Intelligence and Water Desalination Report. Top finance publication FinanceAsia honored the company as the Best-Managed Mid-Cap Company for the Philippines for the second time, while Coporate Governance Asia recognized the company as the Best in Corporate Governance in the country.