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Edited Transcript of MWC.PS earnings conference call or presentation 13-Aug-19 1:00am GMT

Half Year 2019 Manila Water Company Inc Earnings Call

Quezon City Sep 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Manila Water Company Inc earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Abelardo P. Basilio

Manila Water Company, Inc. - Acting COO of Manila Water Operations

* Jose Rene D. Almendras

Manila Water Company, Inc. - President, CEO & Chief Sustainability Officer

* Maria Cecilia T. Cruzabra

Manila Water Company, Inc. - CFO, Treasurer, Group Director of Corporate Finance & Strategy and Compliance Officer

* Mark S. Orbos

Manila Water Company, Inc. - Department Head of Corporate Strategy & IR

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Presentation

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [1]

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our Group Director for our Corporate Project Management; and Mr. Rodell Garcia, Senior Adviser to the SLT; and Ms. May Quinto (sic) [Maidy Quinto], Subsidiary Operations Group Director.

This morning's presentation will cover our consolidated financial and operating results for the first half of the year. We will further discuss the key operating and financial results of the Manila Concession, our operating subsidiaries in the Philippines under Manila Water Philippine Ventures, our subsidiaries in the region under Manila Water Asia Pacific and Manila Water Total Solutions.

I shall begin with the key messages summarizing our results for the first half of 2019.

Consolidated net income stood at PHP 2.9 billion for the first half of the year, 18% lower than the same period last year. Manila Concession net income declined 25% to PHP 2.5 billion. Nevertheless, the company continues to improve on its operations recovery with water availability to 99% of the Manila Concession customers restored to regulatory standards. Domestic operations posted good performance led by Estate Water but partially offset by Clark Water and Boracay Water. Foreign subsidiaries' contribution remained steady, mainly driven by East Water. The group's -- the group continued to maintain a healthy balance sheet with total assets at PHP 124 billion. And lastly, new business development efforts find significant headway. The recent wins in Calbayog, Lambunao and the granting of original proponent status for the construction and operation of an integrated waste management facility for Marikina City.

We now move on to our consolidated financial performance. Consolidated revenues grew 7% to PHP 10.5 billion in the first half of 2019 from PHP 9.8 billion the previous year. On account of higher billed volume and average effective tariff in several key businesses -- key business units, despite the downward impact of the voluntary onetime bill waiver program to help alleviate the inconvenience of customers to those affected during the water crisis in the first quarter of the year.

Consolidated operating cost and expenses increased by 22% to PHP 4.6 billion in the first half of the year, led by growth in overhead costs of PHP 1.2 billion. This increase was primarily due to the provision of a penalty imposed by MWSS in relation to the recent water supply shortage in the Manila Concession. Without this penalty, the increase in overhead costs would be at 14%. Meanwhile, other income grew by 5% to PHP 418 million in the first half of the year from PHP 400 million in previous year, driven by higher equity share in net income of associates coming from the full impact this year of the East Water acquisition, which was done last March 2018. These were slightly offset by lower foreign exchange gain recognized on cash, cash equivalents during the period. These developments resulted in a consolidated earnings before interest, taxes, depreciation and amortization of PHP 6.4 billion in the first half of 2019. This level is 1% lower than the same period last year. EBITDA margin was recorded at 61%. Depreciation and amortization rose by 11% to PHP 1.4 billion, mainly attributable to the significant CapEx made by the subsidiaries.

Meanwhile, net interest expense was higher by 28%, PHP 790 million due to incremental interest expense from the launch of the Manila Concession and subsidiaries combined with the completion of the [tier] capitalization period for borrowing costs. Provision for income tax increased by 26% to PHP 1.2 billion, mainly due to higher provision for deferred income. Also contributory to the increases, the higher provision for income tax. These developments resulted in reported net income of PHP 2.9 billion for the first half of the year, a decline of 18% from the same period last year. Net income margin was recorded at 28%. Excluding one-offs, Manila Water Company's consolidated core net income stood at PHP 3.8 billion, growing 8% from PHP 3.6 billion the same period last year.

Here is a breakdown of the group earnings for the period. Net income declined in the Manila Concession for the first half of the year, due to the bill waiver program given by the Manila Concession to its customers and the provision -- and the MWSS penalty. For Manila Water Philippine Ventures, Estate Water largely drove the net income increase of 31%, coming mostly from its supervision fees. Portions of the increase was also due to higher effective tariff for Boracay and Laguna.

For Manila Water Asia Pacific, net income increase was due to the full recognition this year to share net income from Thailand's East Water. For Total Solutions, streamlining efforts and management initiatives continues as it yielded results towards efficiency. These will be discussed in detail in the subsequent slides.

For consolidated costs and expenses. Our cost of services and OpEx increased by 22% to PHP 4.6 billion in the first half of the year, driven by higher overhead and direct costs. Direct costs rose 14% to PHP 1.8 billion as a result of increased repairs and maintenance expense of the Manila Concession due to additional network improvement during the water supply shortage, increased power costs due to higher consumption and higher power rates and increased cost of water treatment chemicals usage and increased contractual services. Personnel costs decreased to PHP 1.1 billion due to lower annual salary adjustments. Overhead costs grew significantly to PHP 1.2 billion, primarily due to the provision on the penalty amounting to PHP 534 million imposed by MWSS. Without this one-off, overhead costs would have increased by 11%.

Other expenses declined by 6% to PHP 220 million, mainly due to the reclassification of payments related to the purchase of bulk water, previously booked as regulatory costs starting December '18. Meanwhile premises costs increased by 5% to PHP 195 million, mainly driven by higher security and [extenuating] expenses for the Manila Concession. New business development cost decreased by 28% to PHP 93 million, as growth and expansion initiatives are to be taken up in the coming months.

Total CapEx reached PHP 3.7 billion in the first half of the year as the Manila Concession and Laguna Water projects dealt with delays in the construction start. We anticipate significant catch-up for these programs in place at the second half of the year.

For our consolidated balance sheet highlights. Total assets stood at PHP 124 billion as of the first half of the year, mainly due to additional capital expenditures during the period. We ended the period with a cash balance of PHP 6.3 billion, 33% lower than last year. On the other hand, liabilities were posted at PHP 69 billion, slightly higher than the previous year, primarily due to loan principal amortizations.

Stockholders' equity grew to PHP 55 billion, mainly from the net income recognized during the quarter, net of dividends declared. Bank debt-to-equity was registered at 0.93x, situating the group well within its tolerances set in line with its covenants.

We now move on to the Manila Concession for a more detailed discussion of its financial and operating results.

The Manila Concession was adversely affected by the water supply shortage, which saw average dam levels decline significantly during the first half of the year. The Manila Concession exerted much effort to restore water service to customers and manage the crisis, noting a significant 4.6 percentage points efficiency improvement in the company's nonrevenue water, reaching an all-time low of 7.5%. Still the water supply shortage affected operations resulting to a 5.1 MCM decline to the

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MCM as average consumption decreased by 4%. Meanwhile, collection efficiency in the first half of 2019 rose to 103%, reflecting the impact of the application of the MWSS penalty.

In response to the water supply shortage, Manila Concession voluntarily implemented a onetime bill waiver program in early of this year to help alleviate the inconvenience of all customers and assist severely affected areas. In line with the said waiver, company recognized a PHP 353 million reduction in total revenues in the first quarter of the year. In spite of these challenges, revenues managed to improve by 3% to PHP 8.1 billion. Meanwhile, costs and expenses rose to PHP 3 billion, primarily driven by the PHP 534 million penalty imposed by MWSS, in relation to the water shortage. Said penalty was recognized in the first quarter of this year. Other relevant contributing factors were higher water treatment chemicals to address the increased turbidity of raw water, additional repairs and maintenance costs as well as higher power, light and water costs. In all, additional costs incurred to address the water supply shortage totaled approximately PHP 126 million. These resulted in a 10% decrease in EBITDA to PHP 5.2 billion, translating on EBITDA margin of 64%.

Net income reached PHP 2.5 billion, a decline of 25% for the same period last year. Net income margin stood at 25%. Excluding one-offs, Manila Concession's core income stands at PHP 3.2 billion, down by 5% from PHP 3.3 billion the same period last year.

Manila Concession spent a total of close to PHP 3 billion for CapEx in the first half of 2019. Projects experienced delay mainly due to challenges in regulatory approval as well as securing rights of way permits. Of the total amount, majority was spent on wastewater expansion, network reliability and water supply projects.

To give you an update on service recovery coming from the water supply crisis in the first half of the year. It can be seen here that Manila Water has been able to significantly improve our water availability and service to its customers, even in the light of a significantly reduced water supply scenario still being implemented by MWSS. Manila Water continues to improve its operations and will continue to do so to ensure that service to customers are upheld and maintained.

Moving forward, Manila Water continues to work closely with MWSS to implement its water supply master plan. On March 21, 2019, Manila Water signed a raw water supply offtake agreement with MWSS and the Wawa JV Company, Incorporated. Wawa JV Company, Incorporated is a joint venture company formed by Prime Metroline Infrastructure Holdings Corporation and San Lorenzo Ruiz Builders and Developers Corporation.

Other medium-term sources are also being explored under the instruction of MWSS. As can be seen here, these agreements are under memorandum of understanding with the different entities to explore several water supply augmentation measures that can be realized in the medium term.

To provide details on the recent Department of the Environment and Natural Resources' PAB decision, according to news articles, the Supreme Court ordered MWSS and Manila Water in August 7, 2019, to jointly and severally pay PHP 921.46 million in fines for its reported noncompliance with the Clean Water Act. To date, Manila Water has not received a copy of the Supreme Court decision, and this is for us to make an informed assessment of the court order. Manila Water has invested more than PHP 33 billion for the past 21 years, and we'll continue to invest PHP 38.4 billion more until 2022, as part of the government approved business plan to further improve sewage and sanitation services in the Manila Concession. To date, wastewater coverage in the Manila Concession is more than 15% of the customer base and 22% in terms of facility acceptance and capacity. This is a 700% improvement in coverage from only 3% when Manila Water took over the concession in 1997.

We now move on to Manila Water Philippine Ventures, which is composed of our domestic operations distribution in Clark, Laguna, Boracay and Estate Water, which is the division under Manila Water Philippine Ventures. On a consolidated Manila Water Philippine Ventures level, revenues grew by 30% to PHP 2.2 billion in the first half of 2019. Significant contributor to this increase was higher revenues of Estate Water, coming mostly from the supervision fees arising from the provision of the design and project management services. In addition, portions of the increase in revenues are due to higher effective tariff in Boracay and Laguna Water as well as income from the new subsidiaries.

Costs and expenses rose by 17% year-on-year to PHP 1.3 billion, due to increase in direct costs, particularly higher power and light expenses. The increase in direct cost is attributable to the combined effects of additional facilities, which Estate Water took over in the second half of 2018. Increase in power rates for some subsidiaries and additional contribution for new operating subsidiaries also contributed to this.

New business development costs for the period stood at PHP 61 million, 28% lower than the previous year. As a result, EBITDA for the first half of 2019 stood at PHP 980 million. Manila Water Philippine Venture's net income ended at PHP 303 million for the first half of the year, increasing by 31% from the previous year due to higher net income of Estate Water and Laguna Water. Meanwhile, CapEx of Manila Water Philippine Ventures was at PHP 728 million. This is composed mainly of the expansion projects for water and used water networks as well as efficiency initiatives to manage nonrevenue water.

Here is a snapshot of the operating and financial highlights for our subsidiaries under Manila Water Philippine Ventures. Save for Estate Water, domestic subsidiaries' billed volume registered lower compared to the last year. In regulatory challenges several subsidiaries under PV slowed down its operations and expansion initiatives. However, the push towards efficiency continues and alignment of CapEx rollout is underway.

Looking on to Laguna Water. Laguna Water's billed volume dropped by 2% to 21.8 million cubic meters in the first half, brought about by lower consumption of several of its LTI locators. Meanwhile, billed connections increased by 12% due to new residential takeovers. Nonrevenue water declined by 1 percentage point as it reached 20.9% at the end of the second quarter of the year. Laguna Water spent PHP 216 million in CapEx during the period, mostly for expansion of water use water networks.

Revenues grew by 13% year-on-year to PHP 810 million on the back of a 23% improvement in average tariff. Cost and expenses, meanwhile, increased by 7% to PHP 410 million due to higher personnel costs and direct costs related to meter reading services. These movements resulted in a 32% growth in EBITDA to PHP 439 million and a 20% increase in net income to PHP 200 million in the first half of the year.

For Estate Water, Estate Water posted billed volume growth of 18% to PHP 5.2 million in the first half of 2019 on the back of a 7% increase in billed connections. CapEx spent mostly for the development of water use to other networks rose by 26% to PHP 255 million. Total revenue is almost double compared to the same period last year, mainly due to a significant increase in supervision fees from PHP 113 million to PHP 397 million. On the other hand, costs and expenses rose by 61% to PHP 326 million, mainly due to an increase in direct costs. The significant increase in revenues outgrew the increase in costs, which resulted to a significant increase in EBITDA to PHP 324 million. Estate Water posted net income of PHP 186 million in the first half of the year, increasing 166% from the previous year.

For Boracay, Boracay Water's billed volume declined by 10% to 2.3 million cubic meters in the first half of the year due to the impact of the island closure and transfer of some accounts to competitor Boracay 2B. Boracay Water's market share is at 66% in the first half of the year. After reopening the last quarter of the -- last year, tourist arrivals increased significantly to around 1.1 million tourists during the period. Nonrevenue water improved by 35 points to 7.4% during the said period as leaks and water lines caused by road improvements were repaired. During this period, Boracay Water spent CapEx of PHP 151 million, mostly for pipe laying and the expansion of used water services. Average tariff increased by 13%, in line with the approval of its new rates by TIEZA in 2017. This caused revenues to increase by 2% to PHP 328 million despite the decline in billed volume. Meanwhile, cost and expenses decreased by 5% versus last year, mainly due to lower bad debts expense. This resulted in 8% better than last year EBITDA for Boracay Water. Despite the EBITDA growth, net income was at PHP 57 million, 16% lower than last year due to a 41% increase in interest expense.

For Clark Water, Clark Water registered lower billed volume in the first half of 2019, down 1% to 7.1 million cubic meters due to lower consumption of several key locators, affected by trade tensions and lower production levels. Meanwhile, its billed connection slightly increased by 1% due to connections of new commercial accounts. Clark Water's nonrevenue water improved by 3 percentage points to 5.7% from 8.7% the previous year. Clark Water spent PHP 34 million in CapEx, mostly going to network expansion projects. Other CapEx programs are currently on hold while it undergoes its Rate Rebasing exercise. Due to lower billed volume, Clark Water's revenues dropped by 2% to PHP 229 million in the first half of the year. Despite the drop in its top line, Clark Water is able to keep its costs and expenses in check. These developments resulted in 3% decline in EBITDA to PHP 96 million. Clark Water net income decline result in 30 -- by 38% to PHP 26 million in the first half of 2019.

We'd want to show you the closing of the following projects in Manila Water Philippine Ventures. First, Lambunao in Iloilo. Manila Water signed and executed a joint venture agreement with the Lambunao Water District for the design, construction, rehabilitation, maintenance and operation financing of the water system in Lambunao Water District in the Municipality of Lambunao, Iloilo. Upon completion of conditions precedent, we shall execute the project for 35 years that has an estimated CapEx program of about PHP 79 million. It is estimated to deliver a potential billed volume of close to 3 million liters per day.

The second will be in Calbayog, Samar. Manila Water signed and executed a JVA with the Calbayog Water District for the design, construction, rehabilitation, maintenance, operation, financing and management of the water and wastewater system of Calbayog City Water District. Upon the completion of conditions precedent, the company through its wholly -- designated the wholly owned subsidiary, Calbayog Water, shall execute the project for 25 years with an estimated CapEx of about PHP 1 billion.

We now move on to Manila Water Asia Pacific, which houses our subsidiaries in Vietnam. On a consolidated level, equity share in net income of associates increased by 11%, PHP 376 million, primarily due to the full recognition this year of the share in net income from Thailand's East Water. Cost and expenses decreased by 41% to PHP 62 million due to lower personnel management and professional costs during the period. As a result, net income during the first half of the year ended at PHP 196 million, 2% higher than the previous year.

Showing you a snapshot of our associates under MWAP, which was all reported using Vietnamese accounting standards or VAS for all our Vietnam subsidiaries.

East Water sold a total of 192 million cubic meters for the first half of 2019, an increase of 23% in the billed volume level of 156.5 MCM the previous year. Total revenues increased by 18% to THB 1.74 billion. East Water's costs and expenses are up by 25% to THB 637 million, leading to an increase in EBITDA by 12% to THB 927 million. Further, net income increased by 4%, equivalent to THB 605 million. In peso terms, the income reflected in the consolidated financial statements as equity share in net income of associates amounted to PHP 187 million in the first half of the year, equivalent to Manila Water's 18.72% stake in East Water.

Moving on to our Vietnam subsidiaries. Thu Duc Water sold a total of 54 million cubic meters in the first half of 2019, at par with its billed volume level the previous year. Using Vietnamese accounting standards, revenue slightly increased to VND 164 billion. Meanwhile, Thu Duc Water's costs and expenses increased by 6% to VND 55 billion. This led to a 3% decrease in EBITDA to VND 109 billion. Further, net income decreased by 6%, equivalent to VND 50 billion. In peso terms, the PFRS translated income reflected in consolidated financial statements as equity share net income of associates amounted to PHP 122 million in the first half of the year, equivalent to MWAP's 49% stake in Thu Duc Water. New business development costs stood at PHP 32 million, 30% lower in the same period last year.

Moving on to Kenh Dong Water. Kenh Dong Water billed volumes slightly increased in the first half of the year to 29.6 million cubic meters. Using VAS, Kenh Dong Water posted revenues of VND 116 billion and an EBITDA of VND 61 billion. With higher direct costs, Kenh Dong's net income declined to VND 25 billion, down 32% from the same period last year. Similar to Thu Duc Water, income from Kenh Dong is translated to PFRS and is supported as equity share and net income of associates consolidated financial statements. In peso terms, translated net income is PHP 62 million for the first half of the year.

For Saigon -- for MWAP's investment in Saigon Water, this is the holding company in Vietnam with 7 subsidiaries, sold a consolidated total volume of 56 million cubic meters in the first half of 2019, 35% increase in billed volume from the previous year. Saigon Water posted total revenues of VND 95 billion, down 33% from the same period last year, despite significant increase in billed volume. Cost and expenses also decreased by 22% to VND 101 billion. As a result, EBITDA also decreased by -- to a loss of VND 5 billion.

Saigon Water also recorded other income from the warrantization of government grant of Cu Chi and investment associate Tan Hiep. Net of depreciation, interest expense amounting to VND 14 billion. Net income registered at VND 5 billion, a 91% decrease from VND 58 billion the previous year. In peso terms, the PFRS translated income of Manila Water is 37.99% stake in Saigon Water, amounted to PHP 4 million in the first half of 2019.

Lastly, we have Manila Water Total Solutions, which focuses on our vertical expansion. Current offerings arise after the meter services, which include provision of network, technical environmental services under the Corporate Accounts Management business in the sale of packaged purified water in Healthy Family brand.

Moving on to the results. Total Solutions' revenues decreased by 25% to PHP 165 million due to lower sales volume of Healthy Family. Delays in Corporate Accounts Management projects also contributed to the lower revenue. Total Solutions' cost and expenses saw a decrease of 30% to PHP 187 million. These movements resulted in an increase of EBITDA, 53% to PHP 22 million. In all, Manila Water Total Solutions posted a lower net loss this period of PHP 30 million, due to cost efficiencies realized in Healthy Family segment as a result of the closures of the 3 plants last year. The unit also supported by higher income contribution from the Corporate Accounts Management team from the various Ayala Land and Manila Water projects and PID division for its projects in Arca South and other various consultancy projects.

Just to show you the recent business development wins in Manila Water Total Solutions, Manila Water was granted an Original Proponent status by Marikina City, following submission of an unsolicited proposal to build and operate an integrated waste management facility to treat and process said city's solid waste. Manila Water's waste-to-value model focuses on tailor fitting sustainable solutions for one of the country's biggest environmental challenges, solid waste management.

In summary, allow me to reiterate our key messages. Consolidated net income stands at PHP 2.9 billion for the first half of the year, 18% lower than the same period last year. Manila Water Concession net income declined 25% to PHP 2.5 billion. Nevertheless, the company continues to improve on its operations recovery, with water availability to 99% of Manila Concession customers restored to regulatory standards. Domestic operations posted good performance led by Estate Water, but partially offset by Clark Water and Boracay Water. Foreign subsidiaries' contributions remain steady, mainly driven by East Water. The group continued to maintain a healthy balance sheet, with total assets at PHP 124 billion. New business development efforts find significant headway with recent wins in Calbayog, Lambunao and the granting of OPS for the construction of -- and operation of an integrated waste management facility for Marikina City.

That concludes our presentation for this morning. Now we open the floor for questions.

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Questions and Answers

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [1]

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Questions from the floor? Yes.

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Unidentified Analyst, [2]

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I'm Joshua from [Guild Tech] Securities. My first question is related to the core net income. As I've added, if we consider the penalties and the OpEx, that would be around PHP 660 million. So could you give the remaining balance? Because the difference of H1 2019 would be around PHP 931 million, so could you explain the differential? Then, could also the management discuss more on the approved water business plan up to 2022?

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Maria Cecilia T. Cruzabra, Manila Water Company, Inc. - CFO, Treasurer, Group Director of Corporate Finance & Strategy and Compliance Officer [3]

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I'll take on the first question related to your question on the one-off, right? You're correct in pointing out if -- that the one-off in operating expenses is PHP 660 million. The balance of the PHP 933 million is due to the waiver that we -- the waiver program that we implemented, which is a net or a contra to the revenue account. I hope that answers your question.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [4]

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Okay. As for the approved water business plan, are you referring to the water source?

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Unidentified Analyst, [5]

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The one -- or the one with up to 2022, the Calawis, Sumag, East Bay projects.

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Unidentified Company Representative, [6]

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Okay. Okay. For the approved business plan, recently, the MWSS actually approved, as part of business plan, the -- what we call, the East Bay. Due to the water crisis, I think one of the good benefits of this water crisis was MWSS recognized the need for pushing for the medium-term source. And there are several projects that will be pushed through, one is the Sumag. Sumag is an ongoing project right now that could actually produce around 186 MLD. It's coming -- it's going to Angat. And as you know, the Angat is a -- provides 97% of our source right now, but it will actually complement the Angat system. A second project, as I mentioned, is the East Bay project, which was recently approved. And a couple of projects, which is being under study right now, what we call the Wawa Calawis, the Sierra Madre and a proposal also from the Laguna Lake. So these 3 projects are being studied right now and being evaluated to make sure that it is able to provide the medium-term source for Manila Water. And of course, the Kaliwa Dam will still be a project that we are looking forward to, which I think -- we think, will come by 2023 or 2024. And of course, after this, there will be, what we call, the Laiban system.

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Unidentified Analyst, [7]

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Then, sir, a further question. Could you share how much is the projected CapEx for the Sumag and the East Bay project?

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Unidentified Company Representative, [8]

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For the East Bay project, I think it's part of the -- it's around more than PHP 8 billion project, which was -- will be part of the approved business plan. For Sumag, it's around more than PHP 2 billion project, including the [conveyors] going to Umiray.

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Unidentified Company Representative, [9]

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Just to add and clarify, a lot of the new water-source project proposals are outside the current business plan, no? If you recall, the CapEx approved for period 2018 to 2022 is about PHP 79 billion. The Sumag project and the 80 MLD of Calawis, which we named in the business plan as Tayabasan, is already part of that PHP 79 billion plus the con fees for Kaliwa, no? The new large water-source projects, the one that you're hearing, the WawaJV, that's an additional 438 million liters per day. The Laguna Lake project of AMA and then the Sierra Madre plus the expanded East Bay will be on top of the approved -- current approved business plan, no?

Right now, what we have done is to secure the clearance of the MWSS Board of Trustees for these 4 projects to go to the next phase. What is the next phase? This is for MWSS RO to study these 4 projects and determine, we are targeting end of this quarter, what is the sequence, what is the -- they will say -- they will bless whether these projects are prudent and efficient, no? So we expect that by the next briefing, we will have a firm review of the sequence and the specific projects that will go on top of the already approved business plan, no? So that's the update.

But we are quite pleased that we already have 4 that have -- that has gone through the approval of the BOT in principle. Now it's going to the financial and technical review of the RO, which we expect to end by -- end of this quarter, if not, first part of the fourth quarter.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [10]

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Any more questions? Yes.

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Unidentified Analyst, [11]

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My first question is on the MWSS, Manila Water and Maynilad Supreme Court decision. I'm just wondering how -- if you've already spoken with MWSS about this issue. And what are the legal remedies do you have? And apart from -- outside of that, I think -- do you -- do we know what the MWSS is hope -- or is thinking about how to resolve the issue? Do they plan to accelerate wastewater CapEx? Could this change the business plan in the interim? And could it result in an extraordinary price adjustment given these -- the complaints of the DENR and the Supreme Court? On the results, I just wanted to ask as well, in the operations of your Asia Pacific ventures, when should we see the turnaround for the -- for Thu Duc and Kenh Dong? And for Kenh Dong, you specifically cited that there are delayed tariff adjustments. When will the tariff adjustments be approved? And I guess on the Philippine Ventures, could you explain when should we expect Clark Water to turn around? Is there a rate review ongoing? Sorry, could you just remind us as well if there is like an ongoing Rate Rebasing in Clark?

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Unidentified Company Representative, [12]

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Thank you. First question would be on the Supreme Court decision. If I -- I'll just go through the questions of client first on the Supreme Court decision, if we have spoken to MWSS on its view of this decision. Any discussion on legal remedies? And what are MWSS' thoughts on being able to resolve and bridge the gap between the stated gap on coverage? Attorney Mon?

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Unidentified Company Representative, [13]

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On the question of remedies, I think the usual remedy from a Supreme Court decision is a motion for reconsideration. Now -- but at this time, we have not received a copy of the decision. So we can only make the final determination on what remedy to pursue after we receive a copy of the decision. I think the press reports say that Manila Water was made solidarily liable with MWSS for something like PHP 900 million. So we do not know the nature of that solidary liability at this point because we have not seen the decision. So are we only -- are we liable only to -- in terms of discharging the obligation because we are the contractor and the agent of MWSS? Meaning, is the obligation, primarily that of MWSS, but we are only made solidary liable in terms of paying it? So that we still have to determine, so we cannot say yet, definitively, what remedy we will take. I have not been involved in any discussion yet with MWSS on -- about their plans relating to the decision. I don't know, [for instance]...

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Unidentified Company Representative, [14]

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I think like us, MWSS is in the same boat because they have not received the decision, no? And if I understand it correctly, Mon, it has to be written first before a decision could be promulgated. We have not received a copy of that nor MWSS, so they also cannot fully comment on the case until they receive that. We will definitely discuss this as we have in the past with them and in Maynilad, no? So we're at that state and what we could do is once we have received the copy of the decision, then we could probably explain more to you, to the extent we can under the legal rules -- Attorney Mon, no -- on what we could say, no? But as Mon said, there's still a motion for a reconsideration remedy for this. So we will keep you posted, no? One thing I would like to cite based on the law referred to there on RA 9275, is that in that IRR, it clearly states that the concessionaire's compliance shall be in accordance with their respective CAs, no? So that's in the IR, but we don't want to comment further on the case until we have reviewed intently the decision, no, that was said. It was 14-0 and then there -- it became to 12-0. So I think clarity first is the first order of the day for this case. And we don't want to make any further comments at this time.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [15]

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Moving on to the questions on Thu Duc and Kenh Dong.

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Unidentified Company Representative, [16]

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We have 2 bulk -- 3 bulk water projects in Ho Chi Minh City. One would be Thu Duc, Kenh Dong and Tan Hiep 2. Let me focus on the Thu Duc and Kenh Dong.

Under the water supply agreement between Thu Duc and Saigon Water Company, or SAWACO, that's the counterpart of MWSS in Ho Chi Minh City, there is a repricing or rebasing of the tariff rate after you've reached the 15th year, which is this year. The team has already submitted its proposed adjustment that -- which is being evaluated by appropriate government agencies, and that will be submitted to the people's committee. That's how that tariff rates are adjusted in Ho Chi Minh City.

Second is Kenh Dong. This is -- obviously, we need to recover the 3 to nearly 4x increase in raw water price. That would account for the negative impact on the cost, which reduced our -- the profitability of Kenh Dong. That like -- we all -- the team also submitted an appropriate adjustment so that we will be kept whole in that like Thu Duc, that's also being evaluated by appropriate government agency, particularly Ministry of Construction and the Department of Planning and Investment of the city. That will soon be -- what do you call this -- reviewed. And in terms of time line, we certainly hope we get a favorable decision in quarter 3 this year, okay?

On Philippine Ventures, Clark Water, yes, that's confirmed. We are still negotiating with the CDC, or Clark Development Corporation. We must admit, it has been delayed by nearly 20 months already. During -- last week, we got some positive news. We certainly hope we can conclude the negotiation within the month of August. So in the next investor briefing, we certainly hope we can update you on the RR exercise, or rebasing exercise, of Clark Water.

I'd like to take this opportunity to also brief the investors, the -- or the analysts that we successfully negotiated a bulk water project with the province of Pangasinan. Pangasinan is approximately 3 million population, but the population are -- would be concentrated around a cluster of municipalities, including Urdaneta, Malasiqui, San Carlos, Calasiao. You know this area.

So we successfully negotiated the bulk water project for -- essentially for these municipalities. And the initial estimate is that we will be delivering about 100 million, to be exact, 94 MLD, and that could potentially double over the contract period.

We have conditional water rights to Agno River, and we certainly hope we will secure additional water rights once we secure additional water rights with NWRB. We are excited about this project because it's approximately PHP 7 billion, PHP 8 billion. And if everything pans out, it will take, let's say, 2 years to construct. And we certainly hope we will implement the project on time. This is a significant development. As you know, we also submitted a similar bulk water proposal for Pampanga and Baguio, which are still being negotiated. Thank you.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [17]

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Thank you, sir. Any more questions from the floor? Yes, good morning.

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Unidentified Analyst, [18]

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Just to cover bases here. Just want to clear out the question over the current water situation. What is it now? And is it possible that you could assure us, investors, analysts, that if ever, next summer, there could be another supply situation, what are you expecting in terms of the penalties, if there is?

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [19]

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If you can put the slide on the -- yes, service recovery. Okay. You know very well that we actually -- this -- oil prices last March. And I think first told us the -- told the people that we will have to recover it by May. I think by May, we already recovered this 91%. We had 91%, 92% 24/7. However, we actually experienced high demand during the [high gas] at summer. And even right now, I think by June, we were actually recovering 94% already. But however, due to the crisis also at Angat, wherein the level has been going down, NWRB decided to reduce its allocation from 46 CMS to MWSS down to 42 and down to actually 36. You can see that by June to July, we have a dip in terms of our availability. However, we were able to recover by early -- late June going to July. Until right now, I think our customers are now experiencing 24/7.

What are the remedies or what did we do to bring it back 24/7? There are 3 things actually. One is by a supply of rotation. We actually put up -- installed around 40 wells that produce actually around more than 50 MLD of supply -- additional supply to our customers. Likewise, we were able to energize our Cardona treatment plant, which was, as of now, producing now 62 MLD. And in the matter of days within this month, it will now be able to produce around 100 MLD.

More with that, because of this high demand, we were actually doing some demand and pressure management to make sure that we are able to provide 24/7 to our customers. In view of this, we were able actually to reduce our NRW from a low 12% down to 7.5%. This actually paved the way for us to do this 24/7.

And in terms of assuring us, let's say, to provide this 24/7 even at summertime, the condition right now, it is raining right now. I think we are actually monitoring the levels at Angat. PAGASA NWRB forecast that the highest level that we can actually get is around 215, but there is a low level that they are also forecasting, just below 200. Ideally, we should be actually, for us, to end at a level around 200, at least 212, 214 meters.

The level will actually depend on how rain will come or some typhoon will come. It is actually trending -- the actuals trend of Angat level right now is trending to the El Niños of the past years 1998 and 2010. However, the good thing about this El Niño is it bring us good rains end of the year. So we are actually monitoring the levels of the Angat.

In preparation for this, we are actually in coordination with the MWSS. We are actually installing more wells to make sure that we are able to provide for the demand for next summer. And actually, as I've mentioned to you, we are actually energizing our Cardona from it's now 62 MLD to produce 100 MLD before the end of this month. And a lot of preparation also.

We are doing also some sort of a campaign and program in coordination with MWSS RO and some government agencies for what we call a demand management. It's really conserving more water and wise use of water, particularly during the summer months.

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Unidentified Analyst, [20]

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Just a quick follow-up there. So if I get it right, the ideal level to achieve by year-end is about 215 meters.

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [21]

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212 meters, at least.

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Unidentified Analyst, [22]

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212?

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [23]

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Yes.

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Unidentified Analyst, [24]

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And that is in...

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [25]

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We are now at 175 meters.

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Unidentified Analyst, [26]

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175?

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [27]

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It may end around 180 meters by end of this month, and hopefully, it will continue to increase.

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Unidentified Analyst, [28]

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And that's to provide a buffer for the next year summer months?

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [29]

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Yes, yes. We're monitoring it closely.

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Unidentified Analyst, [30]

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If we don't achieve the 215, let's say, we end up 200...

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [31]

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We are actually preparing for the worse condition. We are able to by the summer almost -- as I mentioned, we are almost 92% 24/7 this summer. Many time, as mentioned by the report, almost 100%. We will continue to -- we are now adding more wells and energizing our Cardona up to 100 MLD this year. That is also in preparation for the summer.

It will be good if Angat will be -- because that will be the base flow of our concession. We have to get 1,600 at least -- 1,600 from our allocation.

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Jose Rene D. Almendras, Manila Water Company, Inc. - President, CEO & Chief Sustainability Officer [32]

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Yes. Maybe just to add to Abe, no, so what we will have next summer, which we did not have fully during this summer, is 100 MLD of Cardona, about 115 of deep well. So that's already 215. So if you add 74 of the NRW that will be sustained, so that's the extra supply to mitigate the potential risks on Angat, no? I think what we should all focus on is the Angat level, no, for the year-end.

I think the good development that we have seen is, as already announced, August will be the transition-out of the weak El Niño, and we're beginning to feel that. And so far, the projection is from September to January next year, it will be a -- ends on neutral or rains will be near normal, no? So we will get the rain.

So we are coordinating every week or every other week with NWRB in calibrating the releases from Angat. And at the moment, we are still at 36 for this month, no? And our focus, including MWSS and NWRB, is already preparing for next summer, no, both on the supply side and on the demand side, no? I think the demand side, even if it's raining, is something that needs to be started this early. And we're starting with the campaign late this month or early next month, no, together with MMDA and the mayors, to encourage everyone to have responsible use of water, no, and focus them on the next summer. So while there are risks on Angat, I think even the coping mechanism of the customers are better for next year, just in case.

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Maria Cecilia T. Cruzabra, Manila Water Company, Inc. - CFO, Treasurer, Group Director of Corporate Finance & Strategy and Compliance Officer [33]

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If I may add also, the penalty is meted by MWSS only if we get the full allocation in Angat. So, so far, today, we have not received our 46 CMS.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [34]

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Thank you. Any more questions? Yes.

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Unidentified Analyst, [35]

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I forgot to ask my usual question. On CapEx, you've only spent PHP 2 billion for the East Zone in the first half. How should we expect the ramp-up in the second half for CapEx?

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Abelardo P. Basilio, Manila Water Company, Inc. - Acting COO of Manila Water Operations [36]

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For CapEx, I think I just want to mention that for the first quarter, we have some problems in terms of right of way. We're actually doing a lot of sewer system projects right now, which require us to work on busy streets and actually to acquire more lands within Metro Manila.

A typical sewer system would actually require a plant -- an STP, which will require around at least 2 hectares of land. So we are acquiring such lands right now. We actually did acquire some lands right now, and that actually brought us some delays during the first quarter.

Another thing, due to the prices also, there are 2 main projects that were affected. One is the, what we call, the NBAQ, Novaliches-Balara Aqueduct, which strides from La Mesa going to Balara. Because of the low level at La Mesa, we -- it was actually delayed for quite a time. But right now it's rising, so we can proceed as scheduled as we actually projected. Also, it's affected the project at our treatment plant. Because -- again, because of the water shortage, we have to adjust the schedule.

And again, as I've mentioned, it would require us to do some road pipe laying, and we have some problems in the first quarter during -- with our LG in terms of permitting. But we have actually threshed out these problems right now with a new and incoming mayor, so we are actually proceeding as projected. But there will be some delays, which will actually spill over to the first quarter of next year. This is the reason why we are somewhat delayed in our CapEx.

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Unidentified Analyst, [37]

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So how much would be the CapEx for 2019? And how does it -- how does that number or guidance compare with what's in the business plan? And I guess as a follow-up to that, is there any risk that the regulator could use the underspending as a reason not to implement the tariff for 2020?

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Maria Cecilia T. Cruzabra, Manila Water Company, Inc. - CFO, Treasurer, Group Director of Corporate Finance & Strategy and Compliance Officer [38]

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Okay. On our capital expenditure target for the year, we're looking at PHP 8 billion to PHP 10 billion. If we will also consider the con fees that are in the business plan, then that is also delayed. So -- well, that -- we're not accountable for that as well. That is based on the implementation of MWSS, no?

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Jose Rene D. Almendras, Manila Water Company, Inc. - President, CEO & Chief Sustainability Officer [39]

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On the regulator, like enshrined in the CA, tariff adjustments are reviewed every rate rebasing based on performance, no? So that's -- I cannot speculate specifically what he will do. But based on the concession agreement, tariffs are recon in the R -- as part of the RR process. But we do have regular reports to the RO on our CapEx progress every quarter.

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Mark S. Orbos, Manila Water Company, Inc. - Department Head of Corporate Strategy & IR [40]

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Thank you. Additional questions?

Okay. If there are no more questions, we'd like to thank you for coming to our briefing this morning. On behalf of the senior leadership team, we'd like to give our thanks, and we'd like to offer you to partake in our refreshments that we have for you. Thank you, and good morning.