In early 2003, Manila Electric Company (Meralco) was ordered by the Supreme Court to refund its consumers a huge sum of over P30 billion for overcharging electricity bills from 1994 to 2002. By the end of this year, Meralco will have shelled out P6.7 billion for 3.2 million or 82% of its total clientele under Phases 1 and 2 of the scheduled refund covering the small-scale electricity consumers. Under Phases 3 and 4, yet to be paid out to large-scale electricity consumers in the next few years, is a total of P23 billion.

A year ago, Meralco could not have foreseen such a cash flow predicament made worse by another P27 billion worth of loans falling due within the next three years.

Nonetheless, as Meralco enters its 100th year, its management is set to prove that the financial challenges – not to mention the difficulties of adopting to an industry in transformation - will not dampen its optimism for the future of the company. Especially that its franchise has just been extended by Congress for another 25 years.

In an interview with Philippine Business, Meralco Chairman and CEO Manuel M. Lopez and President and COO Jesus P. Francisco both articulated their dedication in helping Meralco rise above the current challenges – hoping that years from now, they can reminisce and regard 2003 as a chapter in Meralco’s history where a humbling experience made the company stronger.

It’s the Cashflow
Acknowledging the precarious situation the company is in and the consequent need to balance resources, Francisco, a 32-year Meralco veteran, assessed that the company’s problem is not profitability but cash flow. With about P22 billion long-term and P5 billion short-term debt falling due within the next three years and the company’s credit rating falling to triple C from a B rating two years ago, Francisco can only regret “not having borrowed more when creditors were more willing to lend.” Nevertheless, Francisco pointed out that the company’s obligations are, for a utility company, still at manageable levels. “However,” he points out, “payments have to be stretched.”

For his part, Lopez, whose family owns 17.5% of Meralco, disclosed that, for Phases 3 and 4 of the refund, Meralco is wont to request from the Energy Regulatory Commission that it be allowed to refund over an eight-year period – given that the collection of the subject bills took the same number of years (1994 to 2002) as well. Gearing up for the larger portion of the programmed refund also saw Meralco asking the Bureau of Internal Revenues to move fast on refunding taxes Meralco had paid based on its “refundable income”.

Lopez points out, however, that a minimum capital expenditure of P5 billion yearly to update its network is Meralco’s non-negotiable pledge – and, yes, this will also impinge on the company’s cashflow.

Rays of Hope
Given its 5.8% increase in kilowatt-hour sales for the first half of 2003 versus 2002 – and with the second-half electricity demand usually higher than first half, Meralco expects to exceed its targeted 5% sales increase for the whole year of 2003.

Bottomline-wise, cost cutting combined with improved sales will enable Meralco to achieve its target profit. From a net loss of P2.1 billion in 2002, Francisco projects a conservative target of P1.4 billion net income by end of 2003. Note, however, that these are considerably low income targets considering Meralco’s P75 billion asset base.

Meralco is also taking a conservative stand where business expansion is concerned. Lopez said, “We have to manage very prudently our subsidiaries and not venture into very risky businesses. We try to leverage much of our core competence into some small subsidiaries that will bring in profit.”

Meralco has stakes in different companies, the biggest of which is in Rockwell Land Corporation (51%). According to Lopez, “Others are much smaller, like Meralco Industrial Engineering Services Corporation and Corporate Information Solutions which have been around for 25 years. The new ones are Meralco Energy Inc., e-Meralco Ventures Inc., and Meralco Financial Services – small and low risk ventures.”

Cost-cutting measures included a freeze in salary increases for all employees – which had only been recently partially restored – and deferment of scheduled benefits including the postponement of a car plan for executives.

However, Lopez proudly reported that the company did not have to layoff employees. “We just didn’t hire even when employees resigned or retired. We try to manage our human resources.” From 8,900 employees six years ago, Meralco is down to 5,800 employees. Lopez appraised that this is “not bad for a company that is growing 200,000 new customers every year. By year-end, we will have four million customers, so that means productivity has improved tremendously. We are not a bloated company anymore.”
It is this kind of prudent management of financial and human resources that Meralco expects to move into the next century.

Even Meralco’s centennial celebrations are not spared from the company’s belt-tightening. In a culture used to making celebrations even for smaller milestones, Meralco’s centennial year couldn’t have come at the worst time. “We planned a lot of celebrations, but have postponed or canceled them,” Mr. Lopez reported. So far, only a centennial song was unveiled. Lopez hopes the financial problems will ease by year-end when they launch the Meralco commemorative book which will give the company reason to celebrate at least once this century.

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