UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Philippine Long Distance Telephone Company |
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(Translation of registrants name into English) | ||||
Ramon Cojuangco Building Makati Avenue, Makati City Philippines |
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(Address of principal executive office) |
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Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: [x] Form 20-F [ ] Form 40-F | ||||
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ] | ||||
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ] | ||||
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: [ ] Yes [x] No | ||||
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a |
PLDT 2Q2012 Financial Results
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
Philippine Long Distance Telephone Company | ||
Date: 08/07/2012 | By: |
Ma. Lourdes C. Rausa-Chan |
Name: | Ma. Lourdes C. Rausa-Chan | |
Title: | Corporate Secretary | |
Exhibit No. | Description | |
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99 | PLDT 2Q2012 Financial Results | |
SEC Number | PW-55 | |
File Number
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________________________________________________
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY
(Companys Full Name)
Ramon Cojuangco Building
Makati Avenue, Makati City
(Companys Address)
(632) 816-8556
(Telephone Number)
Not Applicable
(Fiscal Year Ending)
(month & day)
SEC Form 17-Q
Form Type
Not Applicable
Amendment Designation (if applicable)
June 30, 2012
Period Ended Date
Not Applicable
(Secondary License Type and File Number)
August 7, 2012
Securities & Exchange Commission
SEC Building, EDSA
Mandaluyong City
Attention: Director Justina Callangan
Corporation Finance Department
Gentlemen:
In accordance with Section 17.1(b) of the Securities Regulation Code and SRC Rule 17.1, we submit herewith two (2) copies of SEC Form 17-Q with Managements Discussion and Analysis and accompanying unaudited consolidated financial statements for the six (6) months ended June 30, 2012.
Very truly yours, /s/ Ma. Lourdes C. Rausa-Chan MA. LOURDES C. RAUSA-CHAN Corporate Secretary |
COVER SHEET
P W - 5 5 S.E.C. Registration No.
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A | K | A | T | I | A | V | E | . | M | A | K | A | T | I | C | I | T | Y | |||||||||||||||||||||
(Business Address: No. Street City/Town/Province)
MS. JUNE CHERYL A. CABAL-REVILLA | 816-8534 | |
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Remarks: Please use black ink for scanning purposes.
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE (SRC) AND
SRC 17 (2) (b) THEREUNDER
1. For the quarterly period ended June 30, 2012
2. SEC Identification Number PW-55 3. BIR Tax Identification No. 000-488-793
4. Philippine Long Distance Telephone Company
Exact name of registrant as specified in its charter
5. Republic of the Philippines
Province, country or other jurisdiction of incorporation or organization
6. | Industry Classification Code:(SEC Use Only)
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7. | Ramon Cojuangco Building, Makati Avenue, Makati City
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0721 | ||||||
Address of registrants principal office
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Postal Code |
8. (632) 816-8556
Registrants telephone number, including area code
9. Not Applicable
Former name, former address, and former fiscal year, if changed since last report
10. Securities registered pursuant to Sections 8 of the SRC
Title of Each Class Number of Shares of Common Stock Outstanding
Common Capital Stock, Php5 par value 216,055,775 shares as at June 30, 2012
11. Are any or all of these securities listed on the Philippine Stock Exchange?
Yes [ X ] No [ ]
12. Check whether the registrant
(a) | has filed all reports required to be filed by Section 17 of the SRC during the preceding ten months (or for such shorter period that the registrant was required to file such reports): |
Yes [ X ] No [ ]
(b) has been subject to such filing requirements for the past 90 days.
Yes [ X ]No [ ]
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TABLE OF CONTENTS
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Page | ||||
PART I - FINANCIAL INFORMATION
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1 |
Item 1. | Consolidated Financial Statements 1 |
Item 2. | Managements Discussion and Analysis of Financial |
Condition and Results of Operations |
1 | |||
Financial Highlights and Key Performance Indicators |
2 | |||
Overview |
3 | |||
Performance Indicators |
5 | |||
Managements Financial Review |
6 | |||
Results of Operations |
7 | |||
Wireless |
11 | |||
Revenues |
11 | |||
Expenses |
22 | |||
Other Income (Expenses) |
24 | |||
Provision for Income Tax |
25 | |||
Net Income |
25 | |||
EBITDA |
25 | |||
Core Income |
25 | |||
Fixed Line |
26 | |||
Revenues |
26 | |||
Expenses |
32 | |||
Other Expenses |
34 | |||
Provision for Income Tax |
34 | |||
Net Income |
35 | |||
EBITDA |
35 | |||
Core Income |
35 | |||
Business Process Outsourcing |
35 | |||
Revenues |
35 | |||
Expenses |
36 | |||
Other Income (Expenses) |
38 | |||
Provision for Income Tax |
38 | |||
Net Income |
38 | |||
EBITDA |
38 | |||
Core Income |
39 | |||
Others |
39 | |||
Expenses |
39 | |||
Other Income |
40 | |||
Net Income |
40 | |||
EBITDA |
40 | |||
Core Income |
40 | |||
Liquidity and Capital Resources |
40 | |||
Operating Activities |
41 | |||
Investing Activities |
41 | |||
Financing Activities |
42 | |||
Off-Balance Sheet Arrangements |
46 | |||
Equity Financing |
46 | |||
Contractual Obligations and Commercial Commitments |
46 | |||
Quantitative and Qualitative Disclosures about Market Risks |
46 | |||
Impact of Inflation and Changing Prices |
48 | |||
PART II OTHER INFORMATION |
48 | |||
Related Party Transactions |
54 | |||
ANNEX Aging of Accounts Receivable |
A-1 | |||
SIGNATURES |
S-1 |
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Our consolidated financial statements as at June 30, 2012 (unaudited) and December 31, 2011 (audited) and for the six months ended June 30, 2012 and 2011 and related notes (pages F-1 to F-130) are filed as part of this report on Form 17-Q.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion and analysis of our financial condition and results of operations, unless the context indicates or otherwise requires, references to we, us, our or PLDT Group mean the Philippine Long Distance Telephone Company and its consolidated subsidiaries, and references to PLDT mean the Philippine Long Distance Telephone Company, not including its consolidated subsidiaries (see Note 2 Summary of Significant Accounting Policies to the accompanying unaudited consolidated financial statements for the list of these subsidiaries, including a description of their respective principal business activities and PLDTs direct and/or indirect equity interest).
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes. Our unaudited consolidated financial statements, and the financial information discussed below, have been prepared in accordance with Philippine Financial Reporting Standards, or PFRS, which is virtually converged with International Financial Reporting Standards as issued by the International Accounting Standards Board, except for some transitional differences. PFRS differs in certain significant respects from generally accepted accounting principles, or GAAP, in the U.S.
The financial information appearing in this report and in the accompanying unaudited consolidated financial statements is stated in Philippine pesos. All references to Philippine pesos, Php or pesos are to the lawful currency of the Philippines; all references to U.S. dollars, US$ or dollars are to the lawful currency of the United States; all references to Japanese yen, JP¥ or yen are to the lawful currency of Japan and all references to Euro or are to the lawful currency of the European Union. Unless otherwise indicated, translations of Philippine peso amounts into U.S. dollars in this report and in the accompanying unaudited consolidated financial statements were made based on the exchange rate of Php42.28 to US$1.00, the volume weighted average exchange rate as at June 30, 2012 quoted through the Philippine Dealing System.
Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as believe, plan, anticipate, continue, estimate, expect, may, will or other similar words.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith, and we believe that they are reasonable in all material respects. However, we caution you that forward-looking statements and assumed facts or bases almost always vary from actual results, and the differences between the results implied by the forward-looking statements and assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the description of risks and cautionary statements in this report. You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as at the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date hereof. In light of these risks and uncertainties, actual results may differ materially from any forward-looking statement made elsewhere in this report.
Financial Highlights and Key Performance Indicators
June 30, | December 31, | Decrease | ||||||||||||||
2012(1) | 2011(1) | Amount | % | |||||||||||||
(in millions, except for net debt to equity ratio,
EBITDA margin, earnings per common share, operational
data and exchange rates) |
(Unaudited) | (Audited) | ||||||||||||||
Consolidated Statements of Financial Position |
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Total assets |
385,274 | 395,646 | (10,372 | ) | (3 | ) | ||||||||||
Property, plant and equipment net |
191,790 | 197,731 | (5,941 | ) | (3 | ) | ||||||||||
Cash and cash equivalents and short-term investments |
32,223 | 46,615 | (14,392 | ) | (31 | ) | ||||||||||
Total equity attributable to equity holders of PLDT |
146,116 | 151,833 | (5,717 | ) | (4 | ) | ||||||||||
Notes payable and long-term debt, including current
portion |
114,223 | 117,275 | (3,052 | ) | (3 | ) | ||||||||||
Net debt(2) to equity ratio |
0.56x | 0.47x | | | ||||||||||||
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
2012(1) | 2011 | Amount | % | |||||||||||||
Consolidated Income Statements |
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Revenues(3) |
86,232 | 76,759 | 9,473 | 12 | ||||||||||||
Expenses(3) |
63,241 | 48,512 | 14,729 | 30 | ||||||||||||
Other income (expenses) |
2,964 | (153 | ) | 3,117 | 2,037 | |||||||||||
Income before income tax |
25,955 | 28,094 | (2,139 | ) | (8 | ) | ||||||||||
Net income |
19,471 | 21,296 | (1,825 | ) | (9 | ) | ||||||||||
Net income attributable to equity holders of PLDT: |
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Reported net income |
19,502 | 21,299 | (1,797 | ) | (8 | ) | ||||||||||
Core income |
18,661 | 21,023 | (2,362 | ) | (11 | ) | ||||||||||
EBITDA |
39,300 | 41,512 | (2,212 | ) | (5 | ) | ||||||||||
EBITDA margin(3) and (4) |
46 | % | 55 | % | (9 | %) | (16 | ) | ||||||||
Reported earnings per common share: |
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Basic |
90.15 | 112.83 | (22.68 | ) | (20 | ) | ||||||||||
Diluted |
90.15 | 112.76 | (22.61 | ) | (20 | ) | ||||||||||
Core earnings per common share(5): |
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Basic |
86.26 | 111.35 | (25.09 | ) | (23 | ) | ||||||||||
Diluted |
86.26 | 111.30 | (25.04 | ) | (22 | ) | ||||||||||
Consolidated Statements of Cash Flows |
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Net cash provided by operating activities |
35,920 | 34,629 | 1,291 | 4 | ||||||||||||
Net cash used in investing activities |
12,485 | 6,298 | 6,187 | 98 | ||||||||||||
Capital expenditures |
9,298 | 6,335 | 2,963 | 47 | ||||||||||||
Net cash used in financing activities |
37,632 | 26,285 | 11,347 | 43 | ||||||||||||
Operational Data |
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Number of cellular subscribers |
67,429,102 | 47,834,533 | 19,594,569 | 41 | ||||||||||||
Number of fixed line subscribers |
2,133,478 | 1,856,890 | 276,588 | 15 | ||||||||||||
Number of broadband subscribers: |
3,061,686 | 2,212,219 | 849,467 | 38 | ||||||||||||
Fixed Line |
892,959 | 720,519 | 172,440 | 24 | ||||||||||||
Wireless |
2,168,727 | 1,491,700 | 677,027 | 45 | ||||||||||||
Number of employees: |
35,190 | 29,327 | 5,863 | 20 | ||||||||||||
Fixed Line |
10,746 | 9,770 | 976 | 10 | ||||||||||||
LEC |
7,972 | 7,410 | 562 | 8 | ||||||||||||
Others |
2,774 | 2,360 | 414 | 18 | ||||||||||||
Wireless |
8,131 | 5,069 | 3,062 | 60 | ||||||||||||
Business Process Outsourcing |
16,313 | 14,488 | 1,825 | 13 |
Weighted average rates | ||||||||||||
Exchange Rates per US$ | Month-end rates | during the period | ||||||||||
June 30, 2012
|
Php42.28 | Php42.90 | ||||||||||
December 31, 2011
|
43.92 | 43.31 | ||||||||||
June 30, 2011
|
43.36 | 43.52 | ||||||||||
December 31, 2010
|
43.81 | 45.12 |
(1) Includes the Digitel Groups (Digitel and DMPI) financial information and operational data as at June 30, 2012 and December 31, 2011, and for the first half of 2012. |
(2) Net debt is derived by deducting cash and cash equivalents and short-term investments from total debt (long-term debt, including current portion and notes payable). |
(3) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues, as discussed below, and the implementation of the reorganization of our business segments, as discussed in the Overview section. |
(4) EBITDA margin is measured as EBITDA divided by service revenues for the period. |
(5) Core earnings per common share, or core EPS, is measured as core income attributable to common equity holders of PLDT divided by the weighted average number of common shares for the period. |
As discussed in Other Information and Note 13 Business Combinations and Acquisition of Noncontrolling Interests PLDTs Acquisition of Digitel to the accompanying unaudited consolidated financial statements, the acquisition of Digitel was completed on October 26, 2011. Incremental impact of the Digitel Group on our consolidated financial highlights and results of operations as at and for the six months ended June 30, 2012, as set forth in the table below:
Incremental Impact | ||||||||||||
Intercompany | of the Digitel | |||||||||||
(in millions, except for EBITDA margin and operational data) | Digitel Group | Transactions | Group on PLDT Group | |||||||||
Income Statements | ||||||||||||
Revenues |
11,974 | (634 | ) | 11,340 | ||||||||
Expenses |
11,746 | (846 | ) | 10,900 | ||||||||
Other income |
2,440 | (1,976 | ) | 464 | ||||||||
Income before income tax |
2,668 | (1,764 | ) | 904 | ||||||||
Net income for the period |
2,519 | (1,764 | ) | 755 | ||||||||
Net income attributable to equity holders: |
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Reported net loss |
2,519 | (1,762 | ) | 757 | ||||||||
Core income |
(11 | ) | 378 | 367 | ||||||||
EBITDA |
3,233 | 212 | 3,445 | |||||||||
EBITDA margin(1) |
28 | % | | 31 | % | |||||||
Statements of Cash Flows |
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Net cash provided by operating activities |
3,663 | | 3,663 | |||||||||
Net cash used in investing activities |
535 | | 535 | |||||||||
Capital expenditures |
548 | | 548 | |||||||||
Net cash used in financing activities |
2,367 | | 2,367 | |||||||||
Operational Data |
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Number of cellular subscribers |
15,944,027 | | 15,944,027 | |||||||||
Number of fixed line subscribers |
282,879 | | 282,879 | |||||||||
Number of broadband subscribers |
635,400 | | 635,400 | |||||||||
Fixed Line |
101,532 | | 101,532 | |||||||||
Wireless |
533,868 | | 533,868 |
(1) EBITDA margin is measured as EBITDA divided by service revenues for the period. |
Change in the Presentation of our Outbound Revenues
In December 2011, we changed the presentation of our outbound revenues to gross amounts before charges billed to us, where applicable, by other carriers. In doing so, interconnection costs are then presented as a separate line item in the expense section of our consolidated income statements. Prior to December 2011, we presented outbound revenues net of the share of other carriers. We made this change to present outbound revenue on a gross basis to more correctly present and align our consolidated income statement presentation with the predominant global practice in the telecommunications industry.
Overview
We are the largest and most diversified telecommunications company in the Philippines. Based on the recent reorganization, as discussed below, we have organized our business into business units based on our products and services and have four reportable operating segments which serve as bases for managements decision to allocate resources and evaluate operating performance:
| Wireless ¾ wireless telecommunications services provided by Smart Communications, Inc., or Smart, Connectivity Unlimited Resource Enterprise, or CURE (the Red Mobile business of CURE was transferred to Smart on June 30, 2012), and Digital Mobile Philippines, Inc., or DMPI, which owns the Sun Cellular business and is a wholly-owned subsidiary of Digital Telecommunications Inc., or Digitel (PLDT acquired a controlling interest in Digitel on October 26, 2011 and through a series of transactions holds approximately 99.5% of the outstanding common stock of Digitel as at June 30, 2012), our cellular service providers; Smart Broadband, Inc., or SBI, and Primeworld Digital Systems, Inc., or PDSI, our wireless broadband service providers; Wolfpac Mobile, Inc., or Wolfpac, and Chikka Holdings Limited, or Chikka, and its subsidiaries, or Chikka Group, our wireless content operators; and ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines, our satellite operator; |
| Fixed Line ¾ fixed line telecommunications services primarily provided by PLDT. We also provide fixed line services through PLDTs subsidiaries, namely, PLDT Clark Telecom, Inc., PLDT Subic Telecom, Inc., PLDT-Philcom, Inc. or Philcom, and its subsidiaries, or Philcom Group, PLDT-Maratel, Inc., SBI, PDSI, Bonifacio Communications Corporation, PLDT Global Corporation, or PLDT Global, and Digitel, all of which together account for approximately 16% of our consolidated fixed line subscribers; and information and communications infrastructure and services for internet applications, internet protocol, or IP-based solutions and multimedia content delivery provided by ePLDT, Inc., or ePLDT, and ABM Global Solutions, Inc. (formerly known as BayanTrade, Inc.), or AGS, and its subsidiaries, or AGS Group; netGames, Inc.; and bills printing and other value-added services, or VAS, -related services provided by ePDS, Inc., or ePDS (ePLDT increased its equity interest in ePDS from 50% to 67% on August 24, 2011). ePLDT disposed of its 75% interest in Digital Paradise, a provider of internet access services, on April 1, 2011,disposed of its 57.51% interest in Level Up!, a publisher of online games, on July 11, 2011, and transferred its 99.64% interest in Infocom to SPi Global on December 6, 2011; |
| Business Process Outsourcing, or BPO knowledge processing solutions provided by SPi Technologies, Inc., or SPi, and its subsidiaries, or SPi Group; and customer relationship management provided by SPi CRM Inc., or SPi CRM, and Infocom (ePLDT transferred the internet business of Infocom to PLDT on July 1, 2011); and |
| Others PCEV, an investment company. |
See Note 2 Summary of Significant Accounting Policies and Note 13 Business Combinations and Acquisition of Noncontrolling Interests to the accompanying unaudited consolidated financial statements.
The primary effects of the acquisition of the Digitel Group on our operating segments is the addition of DMPI to our wireless business and the addition of Digitel to our fixed line business. We have agreed with the NTC that we will continue to operate Sun Cellular as a separate brand.
On July 7, 2010, our Board of Directors approved the reorganization of the ePLDT Group into two business groups: (i) the information and communications technology, or ICT, business group, which provides data center services, internet and online gaming services and business solutions and applications, and which was subsequently incorporated into our fixed line business; and (ii) the BPO business group, which covers customer relationship management or call center operations under SPi CRM; and content solutions, medical billing and coding and medical transcription services under SPi.
With our objective to grow the BPO business segment, and for ePLDT to focus on its core business of IT infrastructure and services, our Board of Directors approved on July 5, 2011 to spin off SPi and SPi CRM from ePLDT and transfer the ownership of SPi Global to PLDT, and to place both SPi and SPi CRM under SPi Global. Subsequently, the Board of Directors decided to include Infocom in the spin-off. The reorganization was completed on December 6, 2011.
PCEV transferred its cellular business to Smart in August 2009 and acquired 223 million common shares, or about 20% equity interest, in Manila Electric Company, or Meralco, in March 2010. PCEV acquired 50% equity interest in Beacon Electric Asset Holdings, Inc., or Beacon, effective March 31, 2010, 154.2 million and 68.8 million Meralco common shares to Beacon on May 12, 2010 and October 25, 2011, respectively. As a result, PCEV became an investment company and was reclassified PCEV from Wireless to Others business segment.
As at June 30, 2012, our chief operating decision maker views our business activities in four business units: Wireless, Fixed Line, BPO and Others, compared to three business units in 2010: Wireless, Fixed Line and ICT. The remaining ICT businesses, which do not form part of our BPO, were reclassified into our fixed line segment. We have retroactively implemented the above changes in our segment reporting and restated our comparative operating segment information accordingly.
Performance Indicators
We use a number of non-GAAP performance indicators to monitor financial performance. These are summarized below and discussed later in this report.
EBITDA
EBITDA is measured as net income excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity share in net earnings (losses) of associates and joint ventures, foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net, provision for (benefit from) income tax and other income. EBITDA is monitored by the management for each business unit separately for purposes of making decisions about resource allocation and performance assessment. EBITDA is presented also as a supplemental disclosure because our management believes that it is widely used by investors in their analysis of the performance of PLDT and to assist them in their comparison of PLDTs performance with that of other companies in the technology, media and telecommunications sector. We also present EBITDA because it is used by some investors as a way to measure a companys ability to incur and service debt, make capital expenditures and meet working capital requirements. Companies in the technology, media and telecommunications sector have historically reported EBITDA as a supplement to financial measures in accordance with PFRS. EBITDA should not be considered as an alternative to net income as an indicator of our performance, as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to any other measure determined in accordance with PFRS. Unlike net income, EBITDA does not include depreciation and amortization or financing costs and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using EBITDA as only one of several comparative tools, together with PFRS-based measurements, to assist in the evaluation of operating performance. Such PFRS-based measurements include income before income tax, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in EBITDA. Our calculation of EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
Core Income
Core income is measured as net income attributable to equity holders of PLDT (net income less net income attributable to noncontrolling interests), excluding foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net (excluding hedge costs), asset impairment on noncurrent assets, other non-recurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures. The core income results are monitored by the management for each business unit separately for purposes of making decisions about resource allocation and performance assessment. Also, core income is used by the management as a basis of determining the level of dividend payouts to shareholders and basis of granting incentives to employees. Core income should not be considered as an alternative to income before income tax or net income determined in accordance with PFRS as an indicator of our performance. Unlike income before income tax, core income does not include foreign exchange gains and losses, gains and losses on derivative financial instruments, asset impairments and other non-recurring gains and losses. We compensate for these limitations by using core income as only one of several comparative tools, together with PFRS-based measurements, to assist in the evaluation of operating performance. Such PFRS-based measurements include income before income tax and net income. Our calculation of core income may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
Managements Financial Review
We use EBITDA and core income to assess our operating performance. The reconciliation of our consolidated EBITDA and our consolidated core income to our consolidated net income for the six months ended June 30, 2012 and 2011 are set forth below.
The following table shows the reconciliation of our consolidated EBITDA to our consolidated net income for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(in millions) | ||||||||
Consolidated EBITDA |
39,300 | 41,512 | ||||||
Foreign exchange gains net |
1,565 | 426 | ||||||
Equity share in net earnings of associates and joint ventures |
1,311 | 839 | ||||||
Interest income |
626 | 645 | ||||||
Asset impairment |
| (3 | ) | |||||
Gains (losses) on derivative financial instruments net |
(403 | ) | 484 | |||||
Amortization of intangible assets |
(785 | ) | (144 | ) | ||||
Financing costs net |
(3,377 | ) | (3,178 | ) | ||||
Depreciation and amortization |
(15,524 | ) | (13,118 | ) | ||||
Other income |
3,242 | 631 | ||||||
Consolidated income before income tax |
25,955 | 28,094 | ||||||
Provision for income tax |
(6,484 | ) | (6,798 | ) | ||||
Consolidated net income |
19,471 | 21,296 | ||||||
The following table shows the reconciliation of our consolidated core income to our consolidated net income for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(in millions) | ||||||||
Consolidated core income |
18,661 | 21,023 | ||||||
Foreign exchange gains net |
1,565 | 423 | ||||||
Core income adjustment on equity share in net earnings of associates and joint ventures |
(93 | ) | (458 | ) | ||||
Gains (losses) on derivative financial instruments net, excluding hedge cost |
(230 | ) | 663 | |||||
Others |
| (74 | ) | |||||
Net tax effect of aforementioned adjustments |
(401 | ) | (278 | ) | ||||
Net income attributable to equity holders of PLDT |
19,502 | 21,299 | ||||||
Net loss attributable to noncontrolling interests |
(31 | ) | (3 | ) | ||||
Consolidated net income |
19,471 | 21,296 | ||||||
Results of Operations
The table below shows the contribution by each of our business segments to our consolidated revenues, expenses, other income (expenses), income before income tax, provision for income tax, net income, EBITDA, EBITDA margin and core income for the six months ended June 30, 2012 and 2011. In each of the six months ended June 30, 2012 and 2011, we generated a majority of our revenues from our operations within the Philippines.
Wireless | Fixed Line | BPO | Others | Inter-segment Transactions | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the six months ended
June 30, 2012 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
59,635 | 30,742 | 4,836 | | (8,981 | ) | 86,232 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses |
40,895 | 27,347 | 4,153 | 11 | (9,165 | ) | 63,241 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expenses) |
382 | (685 | ) | (10 | ) | 3,461 | (184 | ) | 2,964 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income before income tax |
19,122 | 2,710 | 673 | 3,450 | | 25,955 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income tax |
5,670 | 629 | 181 | 4 | | 6,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income/Segment profit |
13,452 | 2,081 | 492 | 3,446 | | 19,471 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA |
28,208 | 9,928 | 991 | (11 | ) | 184 | 39,300 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA margin(1) |
48 | % | 33 | % | 20 | % | | | 46 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Core income |
12,703 | 1,922 | 497 | 3,539 | | 18,661 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the six months ended
June 30, 2011 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
50,875 | 29,615 | 4,126 | | (7,857 | ) | 76,759 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses |
28,641 | 24,149 | 3,701 | 7 | (7,986 | ) | 48,512 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expenses) |
(592 | ) | (296 | ) | 1 | 863 | (129 | ) | (153 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income before income tax |
21,642 | 5,170 | 426 | 856 | | 28,094 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income tax |
5,380 | 1,395 | 20 | 3 | | 6,798 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income/Segment profit |
16,262 | 3,775 | 406 | 853 | | 21,296 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA |
29,046 | 11,639 | 705 | (7 | ) | 129 | 41,512 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA margin(1) |
58 | % | 40 | % | 17 | % | | | 55 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Core income |
16,117 | 3,182 | 413 | 1,311 | | 21,023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) |
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
8,760 | 17 | 1,127 | 4 | 710 | 17 | | | (1,124 | ) | 14 | 9,473 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expenses |
12,254 | 43 | 3,198 | 13 | 452 | 12 | 4 | 57 | (1,179 | ) | 15 | 14,729 | 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expenses) | 974 | 165 | (389 | ) | 131 | (11 | ) | (1,100) | 2,598 | 301 | (55 | ) | 43 | 3,117 | 2,037 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Income before income tax | (2,520 | ) | (12 | ) | (2,460 | ) | (48 | ) | 247 | 58 | 2,594 | 303 | | | (2,139) | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income tax |
290 | 5 | (766 | ) | (55 | ) | 161 | 805 | 1 | 33 | | | (314 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income /Segment profit (loss) | (2,810 | ) | (17 | ) | (1,694 | ) | (45 | ) | 86 | 21 | 2,593 | 304 | | | (1,825) | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA | (838 | ) | (3 | ) | (1,711 | ) | (15 | ) | 286 | 41 | (4 | ) | 57 | 55 | 43 | (2,212) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Core income | (3,414 | ) | (21 | ) | (1,260 | ) | (40 | ) | 84 | 20 | 2,228 | 170 | | | (2,362) | (11 | ) |
(1) EBITDA margin is measured as EBITDA divided by service revenues for the period.
The table below shows the contribution by business segment of the results of the Digitel Group to our consolidated revenues, expenses, other income (expenses), income before income tax, provision for income tax, net income, EBITDA, EBITDA margin and core income for the six months ended June 30, 2012.
Intercompany | Incremental Effect | |||||||||||||||||||
Wireless | Fixed Line | Consolidated | Transactions | on PLDT Group | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Revenues |
10,273 | 1,701 | 11,974 | (634 | ) | 11,340 | ||||||||||||||
Expenses |
9,950 | 1,796 | 11,746 | (846 | ) | 10,900 | ||||||||||||||
Other income |
118 | 2,322 | 2,440 | (1,976 | ) | 464 | ||||||||||||||
Income before income tax |
441 | 2,227 | 2,668 | (1,764 | ) | 904 | ||||||||||||||
Provision for income tax |
68 | 81 | 149 | | 149 | |||||||||||||||
Net income /Segment profit |
373 | 2,146 | 2,519 | (1,764 | ) | 755 | ||||||||||||||
EBITDA |
3,061 | 172 | 3,233 | 212 | 3,445 | |||||||||||||||
EBITDA margin(1) |
31 | % | 10 | % | 28 | % | | 31 | % | |||||||||||
Core income (loss) |
53 | (64 | ) | (11 | ) | 378 | 367 |
(1) EBITDA margin is measured as EBITDA divided by service revenues for the period. |
On a Consolidated Basis
We reported consolidated revenues of Php86,232 million, which includes a revenue contribution from the Digitel Group of Php11,340 million, in the first half of 2012, an increase of Php9,473 million, or 12%, as compared with Php76,759 million in the same period in 2011, primarily due to an increase in our service revenues by Php9,107 million as a result of higher cellular and broadband revenues from our wireless business, higher revenues from data and other network, local exchange and international long distance services of our fixed line business, as well as higher service revenues from our BPO business, partially offset by lower revenues from national long distance and miscellaneous services of our fixed line business, and satellite and other services of our wireless business.
The following table shows the breakdown of our consolidated revenues by business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Wireless |
59,635 | 69 | 50,875 | 66 | 8,760 | 17 | ||||||||||||||||||||||
Fixed line |
30,742 | 36 | 29,615 | 39 | 1,127 | 4 | ||||||||||||||||||||||
BPO |
4,836 | 5 | 4,126 | 5 | 710 | 17 | ||||||||||||||||||||||
Inter-segment transactions | (8,981 | ) | (10) | (7,857 | ) | (10 | ) | (1,124 | ) | 14 | ||||||||||||||||||
Consolidated |
86,232 | 100 | 76,759 | 100 | 9,473 | 12 | ||||||||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the implementation of the reorganization of our business segments. |
Consolidated expenses increased by Php14,729 million, or 30%, to Php63,241 million in the first half of 2012, which includes expenses from the Digitel Group of Php10,900 million, from Php48,512 million in the same period in 2011, largely as a result of higher compensation and employee benefits, depreciation and amortization, cost of sales, repairs and maintenance, selling and promotions, rent, taxes and licenses, amortization of intangible assets, and professional and other contracted services, partly offset by a decrease in other operating expenses.
The following table shows the breakdown of our consolidated expenses by business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Wireless |
40,895 | 65 | 28,641 | 59 | 12,254 | 43 | ||||||||||||||||||||||
Fixed line |
27,347 | 43 | 24,149 | 50 | 3,198 | 13 | ||||||||||||||||||||||
BPO |
4,153 | 6 | 3,701 | 8 | 452 | 12 | ||||||||||||||||||||||
Others |
11 | | 7 | | 4 | 57 | ||||||||||||||||||||||
Inter-segment transactions | (9,165 | ) | (14) | (7,986 | ) | (17 | ) | (1,179 | ) | 15 | ||||||||||||||||||
Consolidated |
63,241 | 100 | 48,512 | 100 | 14,729 | 30 | ||||||||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the implementation of the reorganization of our business segments. |
Consolidated other income in the first half of 2012, which includes other income from the Digitel Group of Php464 million, amounted to Php2,964 million, a change of Php3,117 million as against other expenses of Php153 million in the same period in 2011, primarily due to the combined effects of the following: (i) an increase in other income by Php2,611 million mainly due to the realized portion of deferred gain on the transfer of Meralco shares to Beacon, the effect of the inclusion of Digitels other income, higher net gain on fixed assets disposal and the reversal of prior years provisions, partially offset by lower pension benefit income recognized by PLDT; (ii) higher net foreign exchange gains by Php1,139 million mainly due to the revaluation of foreign-currency denominated assets and liabilities as a result of the effect of a higher level of appreciation of the Philippine peso to the U.S. dollar and the inclusion of Digitels gain on revaluation of dollar-denominated net liabilities in the first half of 2012; (iii) net increase in equity share in net earnings of associates and joint ventures by Php472 million; (iv) lower interest income by Php19 million due to a lower average interest rates, effect of appreciation of the Philippine peso relative to the U.S. dollar and shorter average tenor of placements, partly offset by the higher average level of investments; (v) an increase in net financing costs by Php199 million mainly due to higher interest on loans and other related items on account of higher outstanding long-term debts, partially offset by our wireless business higher capitalized interest in the first half of 2012; and (vi) net losses on derivative financial instruments of Php403 million in the first half of 2012 as against net gains on derivative financial instruments of Php484 million in the same period in 2011 mainly due to the effect of narrower U.S. dollar and Philippine peso interest rate differentials on principal-only swap transactions of PLDT and lower interest rate swap contracts of DMPI in the first half of 2012, partially offset by lower hedge costs.
The following table shows the breakdown of our consolidated other income (expenses) by business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Wireless |
382 | 13 | (592 | ) | 387 | 974 | 165 | |||||||||||||||||
Fixed line |
(685 | ) | (24 | ) | (296 | ) | 194 | (389 | ) | 131 | ||||||||||||||
BPO |
(10 | ) | | 1 | (1 | ) | (11 | ) | 1,100 | |||||||||||||||
Others |
3,461 | 117 | 863 | (564 | ) | 2,598 | 301 | |||||||||||||||||
Inter-segment transactions |
(184 | ) | (6 | ) | (129 | ) | 84 | (55 | ) | 43 | ||||||||||||||
Consolidated |
2,964 | 100 | (153 | ) | 100 | 3,117 | (2,037 | ) | ||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the implementation of the reorganization of our business segments. |
Consolidated net income decreased by Php1,825 million, or 9%, to Php19,471 million, which includes net income contribution from the Digitel Group of Php755 million, in the first half of 2012, from Php21,296 million in the same period in 2011. The decrease was mainly due to the combined effects of the following: (i) an increase in consolidated expenses by Php14,729 million; (ii) an increase in consolidated revenues by Php9,473 million; (iii) an increase in consolidated other income net by Php3,117 million; and (iv) a decrease in consolidated provision for income tax by Php314 million, which was mainly due to lower taxable income from our fixed line business, partially offset by higher taxable income of our wireless, BPO and other businesses. Our consolidated basic and diluted EPS decreased to Php90.15 in the first half of 2012 from consolidated basic and diluted EPS of Php112.83 and Php112.76, respectively, in the same period in 2011. Our weighted average number of outstanding common shares was approximately 216.1 million and 186.8 million in the six months ended June 30, 2012 and 2011, respectively.
The following table shows the breakdown of our consolidated net income by business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Wireless |
13,452 | 69 | 16,262 | 76 | (2,810 | ) | (17 | ) | ||||||||||||||||||||
Fixed line |
2,081 | 11 | 3,775 | 18 | (1,694 | ) | (45 | ) | ||||||||||||||||||||
BPO |
492 | 2 | 406 | 2 | 86 | 21 | ||||||||||||||||||||||
Others |
3,446 | 18 | 853 | 4 | 2,593 | 304 | ||||||||||||||||||||||
Consolidated |
19,471 | 100 | 21,296 | 100 | (1,825 | ) | (9 | ) | ||||||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the implementation of the reorganization of our business segments. |
EBITDA
Our consolidated EBITDA in the first half of 2012, which includes an EBITDA contribution from the Digitel Group of Php3,445 million, amounted to Php39,300 million, a decrease of Php2,212 million, or 5%, as compared with Php41,512 million in the same period in 2011, primarily due to higher operating expenses driven by higher compensation and employee benefits, cost of sales, repairs and maintenance, selling and promotions, rent, and taxes and licenses, partially offset by an increase in consolidated revenues.
The following table shows the breakdown of our consolidated EBITDA by business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Wireless |
28,208 | 72 | 29,046 | 70 | (838 | ) | (3 | ) | ||||||||||||||||||||
Fixed line |
9,928 | 25 | 11,639 | 28 | (1,711 | ) | (15 | ) | ||||||||||||||||||||
BPO |
991 | 3 | 705 | 2 | 286 | 41 | ||||||||||||||||||||||
Others |
(11 | ) | | (7 | ) | | (4 | ) | 57 | |||||||||||||||||||
Inter-segment transactions |
184 | | 129 | | 55 | 43 | ||||||||||||||||||||||
Consolidated |
39,300 | 100 | 41,512 | 100 | (2,212 | ) | (5 | ) | ||||||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the implementation of the reorganization of our business segments. |
Core Income
Our consolidated core income in the first half of 2012, which includes core income from the Digitel Group of Php367 million, amounted to Php18,661 million, a decrease of Php2,362 million, or 11%, as compared with Php21,023 million in the same period in 2011, primarily due to an increase in consolidated expenses, partially offset by increases in consolidated revenues and other income, as well as lower provision for income tax. Our consolidated basic and diluted core EPS also decreased to Php86.26 in the first half of 2012 from Php111.35 and Php111.30, respectively, in the same period in 2011.
The following table shows the breakdown of our consolidated core income by business segment for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Wireless |
12,703 | 68 | 16,117 | 77 | (3,414 | ) | (21 | ) | ||||||||||||||||||||
Fixed line |
1,922 | 10 | 3,182 | 15 | (1,260 | ) | (40 | ) | ||||||||||||||||||||
BPO |
497 | 3 | 413 | 2 | 84 | 20 | ||||||||||||||||||||||
Others |
3,539 | 19 | 1,311 | 6 | 2,228 | 170 | ||||||||||||||||||||||
Consolidated |
18,661 | 100 | 21,023 | 100 | (2,362 | ) | (11 | ) | ||||||||||||||||||||
(1) Includes the Digitel Groups results of operations for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the implementation of the reorganization of our business segments. |
On a Business Segment Basis
Wireless
Revenues
We generated revenues from our wireless business of Php59,635 million, including a contribution from DMPI of Php10,273 million, in the first half of 2012, an increase of Php8,760 million, or 17%, from Php50,875 million in the same period in 2011.
The following table summarizes our total revenues from our wireless business for the six months ended June 30, 2012 and 2011 by service segment:
Increase (Decrease) | ||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Service Revenues: |
||||||||||||||||||||||||
Cellular |
53,405 | 90 | 46,251 | 91 | 7,154 | 15 | ||||||||||||||||||
Wireless broadband, satellite and others |
||||||||||||||||||||||||
Wireless broadband |
4,249 | 7 | 3,188 | 6 | 1,061 | 33 | ||||||||||||||||||
Satellite and others |
800 | 1 | 840 | 2 | (40 | ) | (5 | ) | ||||||||||||||||
58,454 | 98 | 50,279 | 99 | 8,175 | 16 | |||||||||||||||||||
Non-Service Revenues: |
||||||||||||||||||||||||
Sale of cellular handsets, cellular
subscriber identification module, or
SIM,-packs and broadband data modems |
1,181 | 2 | 596 | 1 | 585 | 98 | ||||||||||||||||||
Total Wireless Revenues |
59,635 | 100 | 50,875 | 100 | 8,760 | 17 | ||||||||||||||||||
(1) Includes DMPIs revenues for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
The following table summarizes the revenue contribution of DMPI for the six months ended
June 30, 2012 by service segment:
Amount | % | |||||||
(in millions) | ||||||||
Service Revenues: |
||||||||
Cellular |
9,078 | 88 | ||||||
Wireless broadband |
932 | 9 | ||||||
10,010 | 97 | |||||||
Non-Service Revenues: |
||||||||
Sale of cellular handsets, cellular SIM-packs and broadband data modems |
263 | 3 | ||||||
Total Wireless Revenues |
10,273 | 100 | ||||||
Service Revenues
Our wireless service revenues in the first half of 2012, which includes service revenues from DMPI of Php10,010 million, increased by Php8,175 million, or 16%, to Php58,454 million as compared with Php50,279 million in the same period in 2011, mainly as a result of higher revenues from our cellular and wireless broadband services. The increase in our cellular revenues was mainly due to the inclusion of DMPIs revenues for the first half of 2012, partially offset by the decline in Smarts revenues from domestic and international calls, as well as domestic outbound and inbound text messaging services as a result of increased utilization of unlimited offers, increasing patronage of social networking sites, and the NTC-mandated decrease in SMS interconnection charges. Our dollar-linked revenues were negatively affected by the appreciation of the Philippine peso relative to the U.S. dollar, which decreased to a weighted average exchange rate of Php42.90 for the six months ended June 30, 2012 from Php43.52 for the six months ended June 30, 2011. With subscriber growth being driven more by multiple SIM card ownership, especially in the lower income segment of the Philippine wireless market, monthly cellular average revenue per unit/s, or ARPUs, for the first half of 2012 were lower as compared with the same period in 2011. As a percentage of our total wireless revenues, service revenues amounted to 98% and 99% in the first half of 2012 and 2011, respectively.
Cellular Service
Our cellular service revenues in the first half of 2012, which includes revenues from DMPI of Php9,078 million, amounted to Php53,405 million, an increase of Php7,154 million, or 15%, from Php46,251 million in the same period in 2011. Cellular service revenues accounted for 91% and 92% of our wireless service revenues in the first half of 2012 and 2011, respectively.
We have focused on segmenting the market by offering sector-specific, value-driven packages for our subscribers. These include load buckets which provide a fixed number of messages with prescribed validity periods and call packages which allow a fixed number of calls of preset duration. Starting out as purely on-net packages, buckets now also offer voice, text and hybrid bundles available to all networks. Smart and Sun Cellular also provide packages with unlimited voice, text, data, and combinations thereof, whose denominations depend on the duration and nature of the unlimited packages.
The following table shows the breakdown of our cellular service revenues for the six months ended June 30, 2012 and 2011:
Increase | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
(in millions) | ||||||||||||||||
Cellular service revenues |
53,405 | 46,251 | 7,154 | 15 | ||||||||||||
By service type |
52,034 | 45,070 | 6,964 | 15 | ||||||||||||
Prepaid |
43,876 | 41,053 | 2,823 | 7 | ||||||||||||
Postpaid |
8,158 | 4,017 | 4,141 | 103 | ||||||||||||
By component |
52,034 | 45,070 | 6,964 | 15 | ||||||||||||
Voice |
25,066 | 21,808 | 3,258 | 15 | ||||||||||||
Data |
26,968 | 23,262 | 3,706 | 16 | ||||||||||||
Others(3) |
1,371 | 1,181 | 190 | 16 |
(1) | Includes DMPIs revenues for the first half of 2012. |
(2) | The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
(3) | Refers to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, share in revenues from PLDTs WeRoam and PLDT Landline Plus, or PLP, services, a small number of leased line contracts, and revenues from Chikka and other Smart subsidiaries. |
The following table shows the breakdown of DMPIs cellular service revenues for the six months ended June 30, 2012:
Cellular service revenues (in millions) |
9,078 | |||
By service type |
8,919 | |||
Prepaid |
5,376 | |||
Postpaid |
3,543 | |||
By component |
8,919 | |||
Voice |
5,006 | |||
Data |
3,913 | |||
Others |
159 |
The following table shows our other key measures of our cellular business as at and for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||
2012 | 2011 | Amount | % | |||||||||||||
Cellular subscriber base |
67,429,102 | 47,834,533 | 19,594,569 | 41 | ||||||||||||
Prepaid |
65,313,661 | 47,404,197 | 17,909,464 | 38 | ||||||||||||
Smart Prepaid |
26,287,817 | 26,079,785 | 208,032 | 1 | ||||||||||||
Talk N Text |
23,992,900 | 19,777,498 | 4,215,402 | 21 | ||||||||||||
Sun Cellular(1) |
14,470,645 | | 14,470,645 | 100 | ||||||||||||
Red Mobile |
562,299 | 1,546,914 | (984,615 | ) | (64 | ) | ||||||||||
Postpaid |
2,115,441 | 430,336 | 1,685,105 | 392 | ||||||||||||
Sun Cellular(1) |
1,473,382 | | 1,473,382 | 100 | ||||||||||||
Smart |
641,920 | 429,752 | 212,168 | 49 | ||||||||||||
Red Mobile(2) |
139 | 584 | (445 | ) | (76 | ) | ||||||||||
Systemwide traffic volumes (in millions) |
||||||||||||||||
Calls (in minutes)(3) |
25,559 | 17,742 | 7,817 | 44 | ||||||||||||
Domestic |
23,887 | 16,200 | 7,687 | 47 | ||||||||||||
Inbound |
822 | 700 | 122 | 17 | ||||||||||||
Outbound |
23,065 | 15,500 | 7,565 | 49 | ||||||||||||
International |
1,672 | 1,542 | 130 | 8 | ||||||||||||
Inbound |
1,474 | 1,445 | 29 | 2 | ||||||||||||
Outbound |
198 | 97 | 101 | 104 | ||||||||||||
SMS/Data count (in hits)(4) |
260,484 | 161,477 | 99,007 | 61 | ||||||||||||
Text messages |
256,307 | 160,610 | 95,697 | 60 | ||||||||||||
Domestic |
255,893 | 160,314 | 95,579 | 60 | ||||||||||||
Bucket-Priced/Unlimited |
234,993 | 146,961 | 88,032 | 60 | ||||||||||||
Standard |
20,900 | 13,353 | 7,547 | 57 | ||||||||||||
International |
414 | 296 | 118 | 40 | ||||||||||||
Value-Added Services |
4,152 | 851 | 3,301 | 388 | ||||||||||||
Financial Services |
25 | 16 | 9 | 56 |
(1) Sun Cellular brand and its subscribers were acquired by PLDT when PLDT acquired a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of the Digitel Group. |
(2) Red Mobile postpaid was launched on March 17, 2011.
(3) Includes DMPIs minutes for the first half of 2012.
(4) Includes DMPIs SMS counts (except financial services) for the first half of
2012.
Revenues generated from our prepaid cellular services amounted to Php43,876 million in the first half of 2012, an increase of Php2,823 million, or 7%, as compared with Php41,053 million in the same period in 2011. Prepaid cellular service revenues accounted for 84% and 91% of cellular voice and data revenues in the first half of 2012 and 2011, respectively. Revenues generated from postpaid cellular service amounted to Php8,158 million in the first half of 2012, an increase of Php4,141 million, or 103%, as compared with Php4,017 million earned in the same period in 2011, and which accounted for 16% and 9% of cellular voice and data revenues in the first half of 2012 and 2011, respectively. The increase in revenues from our prepaid cellular services was primarily due to the inclusion of DMPIs revenues for the first half of 2012 and Smarts higher revenues from domestic bucket-priced/unlimited SMS and internet-based VAS, partially offset by a decline in Smarts revenues from domestic and international calls, and domestic standard SMS.
Revenues attributable to DMPIs prepaid and postpaid cellular services for the first half of 2012 amounted to Php5,376 million and Php3,543 million, and accounted for 60% and 40% of DMPIs cellular voice and data revenues, respectively.
Voice Services
Cellular revenues from our voice services, which include all voice traffic and voice VAS, such as voice mail and outbound international roaming, increased by Php3,258 million, or 15%, to Php25,066 million in the first half of 2012 from Php21,808 million in the same period in 2011, primarily due to the inclusion of DMPIs revenues of Php5,006 million for the first half of 2012, partially offset by a decrease in Smarts domestic and international call revenues. Cellular voice services accounted for 47% of our cellular service revenues in each of the first half of 2012 and 2011.
The following table shows the breakdown of our cellular voice revenues for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
(in millions) | ||||||||||||||||
Voice services: |
||||||||||||||||
Domestic |
||||||||||||||||
Inbound |
3,127 | 2,575 | 552 | 21 | ||||||||||||
Outbound |
13,694 | 10,872 | 2,822 | 26 | ||||||||||||
16,821 | 13,447 | 3,374 | 25 | |||||||||||||
International |
||||||||||||||||
Inbound |
6,905 | 7,072 | (167 | ) | (2 | ) | ||||||||||
Outbound |
1,340 | 1,289 | 51 | 4 | ||||||||||||
8,245 | 8,361 | (116 | ) | (1 | ) | |||||||||||
Total |
25,066 | 21,808 | 3,258 | 15 | ||||||||||||
(1) Includes DMPIs revenues for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
The following table shows the breakdown of DMPIs cellular voice revenues for the six months ended June 30, 2012:
(in millions) | ||||
Voice services: |
||||
Domestic |
4,218 | |||
Inbound |
697 | |||
Outbound |
3,521 | |||
International |
788 | |||
Inbound |
539 | |||
Outbound |
249 | |||
Total |
5,006 | |||
Domestic voice service revenues increased by Php3,374 million, or 25%, to Php16,821 million in the first half of 2012 from Php13,447 million in the same period in 2011, primarily due to an increase in domestic outbound and inbound voice service revenues of Php2,822 million and Php552 million, respectively.
Revenues from domestic outbound voice service increased by Php2,822 million, or 26%, to Php13,694 million in the first half of 2012 from Php10,872 million in the same period in 2011 mainly due to the inclusion of DMPIs domestic outbound voice service revenues of Php3,521 million for the first half of 2012, partially offset by Smarts lower yield on standard and bucket calls. Domestic outbound call volume of 23,065 million minutes, which includes DMPIs domestic outbound call volume of 6,317 million minutes, in the first half of 2012, increased by 7,565 million minutes, or 49%, from 15,500 million minutes in the same period in 2011.
Revenues from our domestic inbound voice service increased by Php552 million, or 21%, to Php3,127 million in the first half of 2012 from Php2,575 million in the same period in 2011 primarily due to the effect of the inclusion of DMPIs domestic inbound voice service revenues of Php697 million for the first half of 2012, partially offset by the decrease in Smarts domestic inbound voice revenues due to lower traffic from domestic fixed line and other mobile carriers. Domestic inbound call volumes of 822 million minutes, which includes DMPIs domestic inbound call volumes of 175 million minutes, in the first half of 2012, increased by 122 million minutes, or 17%, from 700 million minutes in the same period in 2011.
International voice service revenues decreased by Php116 million, or 1%, to Php8,245 million in the first half of 2012 from Php8,361 million in the same period in 2011 primarily due to lower international inbound voice service revenues by Php167 million, or 2%, to Php6,905 million in the first half of 2012 from Php7,072 million in the first half of 2011, partially offset by an increase in international outbound voice service revenues by Php51 million, or 4%, to Php1,340 million in the first half of 2012 from Php1,289 million in the same period in 2011. The decrease in international voice service revenues was primarily due to the unfavorable effect on Smarts dollar-linked revenues of the appreciation of the Philippine peso relative to the U.S. dollar to a weighted average exchange rate of Php42.90 for the six months ended June 30, 2012 from Php43.52 for the six months ended June 30, 2011, and Smarts lower international inbound and outbound voice traffic and inbound termination rates, partially offset by the inclusion of DMPIs revenues of Php788 million for the first half of 2012. International inbound and outbound calls totaled 1,672 million minutes, which includes DMPIs international inbound and outbound call volume aggregating 252 million minutes, in the first half of 2012, an increase of 130 million minutes, or 8%, from 1,542 million minutes in the same period in 2011.
Data Services
Cellular revenues from our data services, which include all text messaging-related services, as well as VAS, increased by Php3,706 million, or 16% to Php26,968 million in the first half of 2012 from Php23,262 million in the same period in 2011, primarily due to the inclusion of Digitels revenues of Php3,913 million for the first half of 2012, partially offset by a decrease in Smarts text messaging revenues. Cellular data services accounted for 50% of our cellular service revenues in each of the first half of 2012 and 2011.
The following table shows the breakdown of our cellular data service revenues for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
(in millions) | ||||||||||||||||
Text messaging |
||||||||||||||||
Domestic |
22,669 | 19,860 | 2,809 | 14 | ||||||||||||
Bucket-Priced/Unlimited |
14,648 | 11,319 | 3,329 | 29 | ||||||||||||
Standard |
8,021 | 8,541 | (520 | ) | (6 | ) | ||||||||||
International |
1,930 | 1,811 | 119 | 7 | ||||||||||||
24,599 | 21,671 | 2,928 | 14 | |||||||||||||
Value-added services |
||||||||||||||||
Internet-based(3) |
1,413 | 717 | 696 | 97 | ||||||||||||
SMS-based(5) |
362 | 294 | 68 | 23 | ||||||||||||
Pasa Load/Give-a-load(4) |
344 | 331 | 13 | 4 | ||||||||||||
MMS-based(6) |
221 | 228 | (7 | ) | (3 | ) | ||||||||||
2,340 | 1,570 | 770 | 49 | |||||||||||||
Financial services |
29 | 21 | 8 | 38 | ||||||||||||
Total |
26,968 | 23,262 | 3,706 | 16 | ||||||||||||
(1) Includes DMPIs revenues for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
(3) Includes revenues from web-based services such as mobile internet browsing, video streaming and Uzzap, net of allocated discounts and content provider costs. |
(4) Includes revenues from Pasa Load and Dial*SOS, net of allocated discounts. Pasa Load/Give-a-load is a service which allows prepaid and postpaid subscribers to transfer small denominations of air time credits to other prepaid subscribers. Dial*SOS allows Smart prepaid subscribers to borrow Php4 of load (Php3 on-net SMS plus Php1 air time) from Smart which will be deducted upon their next top-up. |
(5) Includes revenues from info-on-demand and voice text services, net of allocated discounts and content provider costs. |
(6) Includes revenues from point-to-point multimedia messaging system, or MMS, and content download services, such as ringtone, logo or music downloads, net of allocated discounts and content provider costs. |
The following table shows the breakdown of DMPIs cellular data service revenues for the six months ended June 30, 2012:
(in millions) | ||||
Text messaging |
||||
Domestic |
3,392 | |||
Bucket-Priced/Unlimited |
2,403 | |||
Standard |
989 | |||
International |
155 | |||
3,547 | ||||
Value-added services |
||||
Internet-based |
246 | |||
SMS-based |
114 | |||
Give-a-load |
4 | |||
MMS-based |
2 | |||
366 | ||||
Total |
3,913 | |||
Text messaging-related services contributed revenues of Php24,599 million in the first half of 2012, an increase of Php2,928 million, or 14%, as compared with Php21,671 million in the same period in 2011, and accounted for 91% and 93% of our total cellular data service revenues in the first half of 2012 and 2011, respectively. The increase in revenues from text messaging-related services resulted mainly from the inclusion of DMPIs revenues of Php3,547 million in the first half of 2012, partially offset by lower text messaging revenues from Smart due to declining SMS yields and the NTC-mandated decrease in SMS interconnection charges. Text messaging revenues from the various bucket-priced/unlimited SMS offers totaled Php14,648 million in the first half of 2012, an increase of Php3,329 million, or 29%, as compared with Php11,319 million in the same period in 2011, primarily due to the inclusion of revenues from DMPIs bucket-priced/unlimited plans of Php2,403 million and an increase in Smarts revenues from bucket-priced/unlimited SMS offers. Bucket-priced/unlimited text messages of 234,993 million, which includes DMPIs bucket-priced/unlimited text messages of 21,703 million, in the first half of 2012, increased by 88,032 million, or 60%, from 146,961 million in the same period in 2011.
Standard text messaging revenues, which includes outbound standard SMS and domestic inbound SMS revenues, decreased by Php520 million, or 6%, to Php8,021 million in the first half of 2012 from Php8,541 million in the same period in 2011, primarily due to Smarts lower standard text messaging revenues on the back of increased usage of unlimited SMS, as well as the lower domestic inbound SMS revenues due to the NTC-mandated reduction in SMS interconnect charge, partially offset by the inclusion of DMPIs standard text messaging revenues of Php989 million in the first half of 2012. Standard text messages of 20,900 million, which includes DMPIs standard text messages of 5,232 million, in the first six months of 2012, increased by 7,547 million, or 57%, from 13,353 million in the same period in 2011.
International text messaging revenues amounted to Php1,930 million in the first half of 2012, an increase of Php119 million, or 7%, from Php1,811 million in the same period in 2011 mainly due to the inclusion of DMPIs revenues and the growth in Smarts international inbound SMS traffic, partially offset by the unfavorable effect of the appreciation of the peso relative to the U.S. dollar on international inbound text messaging revenues and a lower international outbound SMS traffic.
VAS contributed revenues of Php2,340 million in the first half of 2012, an increase of Php770 million, or 49%, as compared with Php1,570 million in the same period in 2011, primarily due to an increase in revenues from Smarts internet-based VAS, particularly from mobile internet browsing, and the inclusion of DMPIs VAS revenues of Php366 million.
Subscriber Base, ARPU and Churn Rates
As at June 30, 2012, our cellular subscribers, totaled 67,429,102, an increase of 19,594,569, or 41%, over the cellular subscriber base of 47,834,533 as at June 30, 2011. Our cellular prepaid subscriber base grew by 17,909,464, or 38%, to 65,313,661 as at June 30, 2012 from 47,404,197 as at June 30, 2011, and our cellular postpaid subscriber base increased by 1,685,105, or 392%, to 2,115,441 as at June 30, 2012 from 430,336 as at June 30, 2011. The significant increase in subscriber base was primarily due to the inclusion of DMPIs prepaid and postpaid subscribers of 14,470,645 and 1,473,382, respectively, as at June 30, 2012, and the increase in Smart and Talk N Text subscribers. Prepaid subscribers accounted for 97% and 99% of our total subscriber base as at June 30, 2012 and 2011, respectively.
Our net subscriber activations for the six months ended June 30, 2012 and 2011 were as follows:
Increase (Decrease) | ||||||||||||||||
2012 | 2011 | Amount | % | |||||||||||||
Prepaid |
3,520,869 | 2,189,764 | 1,331,105 | 61 | ||||||||||||
Smart Prepaid |
(285,320 | ) | 786,342 | (1,071,662 | ) | (136 | ) | |||||||||
Talk N Text |
3,525,725 | 810,117 | 2,715,608 | 335 | ||||||||||||
Red Mobile |
(876,085 | ) | 593,305 | (1,469,390 | ) | (248 | ) | |||||||||
Sun Cellular(1) |
1,156,549 | | 1,156,549 | 100 | ||||||||||||
Postpaid |
211,604 | 8,761 | 202,843 | 2,315 | ||||||||||||
Smart |
91,435 | 8,177 | 83,258 | 1,018 | ||||||||||||
Red Mobile(2) |
(124 | ) | 584 | (708 | ) | (121 | ) | |||||||||
Sun Cellular(1) |
120,293 | | 120,293 | 100 | ||||||||||||
Total |
3,732,473 | 2,198,525 | 1,533,948 | 70 | ||||||||||||
(1) Sun Cellular brand and its subscribers were acquired by PLDT when PLDT acquired a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of the Digitel Group. |
(2) Red Mobile postpaid was launched on March 17, 2011. |
Prepaid and postpaid subscribers reflected net activations of 3,520,869 and 211,604 subscribers, respectively, in the first half of 2012 as compared with net activations of 2,189,764 and 8,761 in the same period in 2011, respectively.
The following table summarizes our average monthly churn rates for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(in %) | ||||||||
Prepaid |
||||||||
Smart Prepaid |
5.9 | 4.8 | ||||||
Talk N Text |
4.9 | 5.4 | ||||||
Red Mobile |
19.2 | 11.3 | ||||||
Sun Cellular(1) |
10.5 | | ||||||
Postpaid |
||||||||
Smart |
2.8 | 2.3 | ||||||
Red Mobile(2) |
10.3 | | ||||||
Sun Cellular(1) |
0.9 | |
(1) Sun Cellular brand and its subscribers were acquired by PLDT when PLDT acquired a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of the Digitel Group. |
(2) Red Mobile postpaid was launched on March 17, 2011. |
For Smart Prepaid subscribers, the average monthly churn rate in the first half of 2012 and 2011 were 5.9% and 4.8%, respectively, while the average monthly churn rate for Talk N Text subscribers were 4.9% and 5.4% in the first half of 2012 and 2011, respectively. The average monthly churn rate for Red Mobile prepaid subscribers were 19.2% and 11.3% in the first half of 2012 and 2011, respectively. The average monthly churn rate for Sun Cellular prepaid subscribers was 10.5% in the first half of 2012.
The average monthly churn rate for Smarts postpaid subscribers were 2.8% and 2.3% for the first half of 2012 and 2011, respectively. The average monthly churn rate for Red Mobiles and Sun Cellulars postpaid subscribers were 10.3% and 0.9%, respectively, for the first half of 2012.
The following table summarizes our average monthly cellular ARPUs for the six months ended June 30, 2012 and 2011:
Gross(1) | Increase (Decrease) | Net(2) | Increase (Decrease) | |||||||||||||||||||||||||||||
2012 | 2011 | Amount | % | 2012 | 2011 | Amount | % | |||||||||||||||||||||||||
Prepaid |
||||||||||||||||||||||||||||||||
Smart Prepaid |
175 | 204 | (29 | ) | (14 | ) | 153 | 179 | (26 | ) | (15 | ) | ||||||||||||||||||||
Talk N Text |
117 | 127 | (10 | ) | (8 | ) | 103 | 112 | (9 | ) | (8 | ) | ||||||||||||||||||||
Red Mobile |
56 | 37 | 19 | 51 | 49 | 33 | 16 | 48 | ||||||||||||||||||||||||
Sun Cellular(3) |
75 | | 75 | 100 | 65 | | 65 | 100 | ||||||||||||||||||||||||
Postpaid |
||||||||||||||||||||||||||||||||
Smart Postpaid |
1,290 | 1,624 | (334 | ) | (21 | ) | 1,265 | 1,567 | (302 | ) | (19 | ) | ||||||||||||||||||||
Red Mobile(4) |
354 | 343 | 11 | 3 | 354 | 343 | 11 | 3 | ||||||||||||||||||||||||
Sun Cellular(3) |
413 | | 413 | 100 | 411 | | 411 | 100 |
(1) Gross monthly ARPU is calculated by dividing gross cellular service revenues for the month, gross of discounts, allocated content provider costs and interconnection income but excluding inbound roaming revenues, by the average number of subscribers in the month. |
(2) Net monthly ARPU is calculated by dividing gross cellular service revenues for the month, including interconnection income, but excluding inbound roaming revenues, net of discounts and content provider costs, by the average number of subscribers in the month. Net monthly ARPUs in 2011 have been restated to reflect the change in the presentation of our outbound revenues. |
(3) Sun Cellular brand and its subscribers were acquired by PLDT when PLDT acquired a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of the Digitel Group. |
(4) Red Mobile postpaid was launched on March 17, 2011. |
Our average monthly prepaid and postpaid ARPUs per quarter for the first two quarters of 2012 and for each of the four quarters of 2011were as follows:
Prepaid | Postpaid | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Smart Prepaid | Talk N Text | Red Mobile | Sun Cellular(1) | Smart | Red Mobile(2) | Sun Cellular | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross(3) | Net(4) | Gross(3) | Net(4) | Gross(3) | Net(4) | Gross(3) | Net(4) | Gross(3) | Net(4) | Gross(3) | Net(4) | Gross(3) | Net(4) | |||||||||||||||||||||||||||||||||||||||||||||||||||
2012 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
First Quarter |
178 | 155 | 118 | 104 | 46 | 40 | 75 | 64 | 1,302 | 1,279 | 339 | 339 | 414 | 411 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Second Quarter |
172 | 150 | 116 | 103 | 66 | 57 | 76 | 66 | 1,277 | 1,251 | 368 | 368 | 413 | 411 | ||||||||||||||||||||||||||||||||||||||||||||||||||
2011 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
First Quarter |
205 | 180 | 129 | 113 | 32 | 28 | | | 1,610 | 1,557 | 133 | 133 | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Second Quarter |
203 | 179 | 126 | 111 | 43 | 38 | | | 1,638 | 1,576 | 413 | 413 | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter |
188 | 166 | 117 | 103 | 39 | 33 | | | 1,494 | 1,430 | 431 | 431 | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Fourth Quarter |
194 | 166 | 124 | 109 | 39 | 34 | | | 1,452 | 1,480 | 355 | 355 | | |
(1) Sun Cellular brand and its subscribers were acquired by PLDT when PLDT acquired a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of the Digitel Group. |
(2) Red Mobile postpaid was launched on March 17, 2011. |
(3) Gross monthly ARPU is calculated based on the average of the gross monthly ARPUs for the quarter.
(4) Net monthly ARPU is calculated based on the average of the net monthly ARPUs for the quarter. Net monthly ARPUs in 2011 have been restated to reflect the change in the presentation of our outbound revenues. |
Wireless Broadband, Satellite and Other Services
Our revenues from wireless broadband, satellite and other services consist mainly of wireless broadband service revenues from SBI and DMPI, charges for ACeS Philippines satellite information and messaging services and service revenues generated by the mobile virtual network operations of PLDT Globals subsidiary.
Wireless Broadband
Revenues from our wireless broadband services increased by Php1,061 million, or 33%, to Php4,249 million in the first half of 2012 from Php3,188 million in the same period in 2011, primarily due to the inclusion of DMPIs revenues for the first half of 2012 of Php932 million and a 10% growth in SBIs broadband subscriber base, partially offset by a decline in SBIs ARPU.
SBI and Sun Broadband Wireless, DMPIs broadband service, offer a number of wireless broadband services and had a total of 2,168,727 subscribers as at June 30, 2012, an increase of 677,027 subscribers, or 45%, as compared with 1,491,700 subscribers as at June 30, 2011, primarily due to the inclusion of DMPIs prepaid and postpaid broadband subscribers of 258,044 and 275,824, respectively, as at June 30, 2012, and 143,159, or 10%, increase in SmartBro subscribers. Our prepaid wireless broadband subscriber base increased by 395,133 subscribers, or 38%, to 1,442,623 subscribers as at June 30, 2012 from 1,047,490 subscribers as at June 30, 2011, while our postpaid wireless broadband subscriber base increased by 281,894 subscribers, or 63%, to 726,104 subscribers as at June 30, 2012 from 444,210 subscribers as at June 30, 2011.
SmartBro, SBIs wireless broadband service linked to Smarts wireless broadband-enabled base stations, allows subscribers to connect to the internet using an outdoor aerial antenna installed in a subscribers home.
SBI also offers mobile internet access through SmartBro Plug-It, a wireless modem and SmartBro Pocket Wifi, a portable wireless router which can be shared by up to five users at a time. Both provide instant connectivity in places where there is Smart network coverage. SmartBro Plug-It and SmartBro Pocket Wifi are available in both postpaid and prepaid variants, with prepaid offering 30-minute internet access for every Php10 worth of load. SBI also offers unlimited internet surfing with Unli Surf200, Unli Surf100 and Unli Surf50 for SmartBro Plug-It and Pocket Wifi Prepaid subscribers with specific internet usage needs. We also have an additional array of load packages that offer per minute-based charging and longer validity periods, as well as Always On packages, which offers volume over time-based buckets catering to subscribers with varying data surfing requirements.
SmartBro WiMAX service is available in Metro Manila and selected key cities in Visayas and Mindanao. WiMAX, which stands for Worldwide Interoperability for Microwave Access, is a wide area network technology that allows for a more efficient radio-band usage, improved interference avoidance and higher data rates over a longer distance. WiMAX unlimited broadband usage is available under Plan 799 and Plan 999 with burst speeds of 512 kbps up to 1 Mbps, respectively.
DMPIs Sun Broadband Wireless service offers internet users an affordable high-speed broadband wireless service utilizing advanced 3.5G HSPA technology on an all-IP network. Sun Broadband Wireless has plans and offerings ranging from Php350 to Php1,495 with speeds of up to 2 Mbps.
Satellite and Other Services
Revenues from our satellite and other services decreased by Php40 million, or 5%, to Php800 million in the first half of 2012 from Php840 million in the same period in 2011, primarily due to the termination of wired and wireless leased line clients, a decrease in the number of ACeS subscribers and the effect of the appreciation of the Philippine peso relative to the U.S. dollar to a weighted average exchange rate of Php42.90 for the six months ended June 30, 2012 from Php43.52 for the six months ended June 30, 2011 on our U.S. dollar and U.S. dollar-linked satellite and other service revenues.
Non-Service Revenues
Our wireless non-service revenues consist of proceeds from sales of cellular handsets, cellular SIM-packs and broadband data modems. Our wireless non-service revenues increased by Php585 million, or 98%, to Php1,181 million in the first half of 2012 as compared with Php596 million in the same period in 2011, primarily due to the increase in the average retail price and quantity of Smarts cellular handsets/SIM-packs issued for activation, as well as the effect of the inclusion of DMPIs non-service revenues of Php263 million for the first half of 2012.
Expenses
Expenses associated with our wireless business amounted to Php40,895 million, which includes DMPIs expenses of Php9,950 million, in the first half of 2012, an increase of Php12,254 million, or 43%, from Php28,641 million in the same period in 2011. A significant portion of this increase was attributable to higher expenses related to cost of sales, depreciation and amortization, selling and promotions, interconnection costs, repairs and maintenance, compensation and employee benefits, rent, and amortization of intangible assets. As a percentage of our total wireless revenues, expenses associated with our wireless business accounted for 69% and 56% in the first half of 2012 and 2011, respectively.
The following table summarizes the breakdown of our total wireless-related expenses for the six months ended June 30, 2012 and 2011 and the percentage of each expense item in relation to the total:
Increase (Decrease) | ||||||||||||||||||||||||
2012(1) | % 2011(2) | % Amount | % | |||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Depreciation and amortization |
8,756 | 21 | 6,758 | 24 | 1,998 | 30 | ||||||||||||||||||
Interconnection costs |
5,979 | 15 | 4,541 | 16 | 1,438 | 32 | ||||||||||||||||||
Rent |
4,796 | 12 | 4,070 | 14 | 726 | 18 | ||||||||||||||||||
Repairs and maintenance |
3,995 | 10 | 2,592 | 9 | 1,403 | 54 | ||||||||||||||||||
Cost of sales |
3,959 | 10 | 1,764 | 6 | 2,195 | 124 | ||||||||||||||||||
Compensation and employee benefits |
3,837 | 9 | 2,943 | 10 | 894 | 30 | ||||||||||||||||||
Selling and promotions |
3,643 | 9 | 1,993 | 7 | 1,650 | 83 | ||||||||||||||||||
Professional and other contracted services |
1,771 | 4 | 1,445 | 5 | 326 | 23 | ||||||||||||||||||
Taxes and licenses |
1,273 | 3 | 795 | 3 | 478 | 60 | ||||||||||||||||||
Amortization of intangible assets |
712 | 2 | 54 | | 658 | 1,219 | ||||||||||||||||||
Communication, training and travel |
675 | 2 | 482 | 2 | 193 | 40 | ||||||||||||||||||
Asset impairment |
658 | 1 | 321 | 1 | 337 | 105 | ||||||||||||||||||
Insurance and security services |
460 | 1 | 414 | 1 | 46 | 11 | ||||||||||||||||||
Other expenses |
381 | 1 | 469 | 2 | (88 | ) | (19 | ) | ||||||||||||||||
Total |
40,895 | 100 | 28,641 | 100 | 12,254 | 43 | ||||||||||||||||||
(1) | Includes DMPIs expenses for the first half of 2012. |
(2) | The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the transfer of PCEV from Wireless to Others business segment. |
The following table summarizes the breakdown of DMPIs wireless-related expenses for the six months ended June 30, 2012 and the percentage of each expense item in relation to the total:
Amount | % | |||||||
(in millions) | ||||||||
Depreciation and amortization |
2,739 | 27 | ||||||
Interconnection costs |
1,524 | 15 | ||||||
Repairs and maintenance |
1,382 | 14 | ||||||
Cost of sales |
1,160 | 12 | ||||||
Rent |
805 | 8 | ||||||
Selling and promotions |
774 | 8 | ||||||
Compensation and employee benefits |
719 | 7 | ||||||
Taxes and licenses |
291 | 3 | ||||||
Communication, training and travel |
179 | 2 | ||||||
Professional and other contracted services |
171 | 2 | ||||||
Asset impairment |
82 | 1 | ||||||
Insurance and security services |
46 | | ||||||
Other expenses |
78 | 1 | ||||||
Total |
9,950 | 100 | ||||||
Depreciation and amortization charges increased by Php1,998 million, or 30%, to Php8,756 million primarily due to the inclusion of DMPIs depreciation and amortization expenses of Php2,739 million for the first half of 2012, partially offset by lower depreciation charges on cellular and broadband network facilities of Smart.
Interconnection costs increased by Php1,438 million, or 32%, to Php5,979 million primarily due to the inclusion of DMPIs interconnection costs of Php1,524 million for the first half of 2012, partially offset by a decrease in interconnection charges on Smarts domestic calls and SMS, and international roaming SMS.
Rent expenses increased by Php726 million, or 18%, to Php4,796 million primarily due to the inclusion of DMPIs rent expenses of Php805 million for the first half of 2012, increase in domestic fiber optic network, or DFON, and office building rental charges, partially offset by a decrease in site, satellite, leased circuit and pole rental charges. In the six months ended June 30, 2012, we had 10,509 cell sites, 13,149 cellular/mobile broadband base stations and 2,806 fixed wireless broadband-enabled base stations, which includes DMPIs 4,421 cell sites and 2,241 cellular/mobile broadband base stations, as compared with 6,055 cell sites, 10,442 cellular/mobile broadband base stations and 2,684 fixed wireless broadband-enabled base stations in the same period in 2011.
Repairs and maintenance expenses increased by Php1,403 million, or 54%, to Php3,995 million mainly due to the inclusion of DMPIs repairs and maintenance expense of Php1,382 million for the first half of 2012, higher site and office electricity charges and fuel costs for power generation, partly offset by lower maintenance costs on cellular and broadband network facilities.
Cost of sales increased by Php2,195 million, or 124%, to Php3,959 million primarily due to the inclusion of DMPIs cost of sales of Php1,160 million for the first half of 2012 and higher average cost and quantity of handsets and SIM-packs issued for activation purposes, partly offset by lower quantity and average cost of broadband modems sold, as well as lower broadband and cellular retention costs.
Compensation and employee benefits expenses increased by Php894 million, or 30%, to Php3,837 million primarily due to the inclusion of DMPIs compensation and employee benefit expenses of Php719 million for the first half of 2012, as well as higher salaries and employee benefits, and LTIP costs, partially offset by lower MRP costs and provision for pension benefits of Smart. Employee headcount increased to 8,131 as at June 30, 2012 as compared with 5,069 as at June 30, 2011, primarily due to the inclusion of DMPIs headcount of 2,875 as at June 30, 2012.
Selling and promotion expenses increased by Php1,650 million, or 83%, to Php3,643 million primarily due to the inclusion of DMPIs selling and promotions expense of Php774 million for the first half of 2012 and higher spending on commissions, advertising and promotional campaigns.
Professional and other contracted service fees increased by Php326 million, or 23%, to Php1,771 million primarily due to the inclusion of DMPIs professional and other contracted service fees of Php171 million for the first half of 2012, the increase in consultancy, contracted service, customer relationship management service, market research, legal fees and outsourced service costs, partly offset by lower technical service, bill printing and other professional fees.
Taxes and licenses increased by Php478 million, or 60%, to Php1,273 million primarily due to the inclusion of DMPIs taxes and licenses of Php291 million and higher business-related taxes, and registration and license fees for the first half of 2012.
Amortization of intangible assets increased by Php658 million to Php712 million primarily due to the amortization of intangible assets related to customer list and franchise of DMPI in the first half of 2012.
Communication, training and travel expenses increased by Php193 million, or 40%, to Php675 million primarily due to the inclusion of DMPIs communication, training and travel expenses of Php179 million for the first half of 2012 and higher expenses related to training, hauling, fuel consumption for vehicles and communication, partially offset by lower courier charges and local travel expenses.
Asset impairment increased by Php337 million, or 105%, to Php658 million primarily due to higher provision for inventory obsolescence covering slow-moving cellular handsets and broadband modems, as well as higher provision for doubtful accounts, and the inclusion of DMPIs provision for uncollectible receivables of Php82 million for the first half of 2012.
Insurance and security services increased by Php46 million, or 11%, to Php460 million primarily due to the inclusion of DMPIs insurance and security expenses of Php46 million for the first half of 2012, and higher insurance and bond premiums, partially offset by Smarts lower expenses on security services.
Other expenses decreased by Php88 million, or 19%, to Php381 million primarily due to lower various business and operational-related expenses, partly offset by the inclusion of DMPIs other operational expenses of Php78 million for the first half of 2012.
Other Income (Expenses)
The following table summarizes the breakdown of our total wireless-related other income (expenses) for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||
2012 | 2011(1) | Amount | % | |||||||||||||
Other Income (Expenses): |
(in millions) | |||||||||||||||
Foreign exchange gains net |
1,099 | 284 | 815 | 287 | ||||||||||||
Interest income |
296 | 341 | (45 | ) | (13 | ) | ||||||||||
Equity share in net losses of associates |
(25 | ) | (20 | ) | (5 | ) | 25 | |||||||||
Loss on derivative financial instruments net |
(38 | ) | | (38 | ) | (100 | ) | |||||||||
Financing costs net |
(1,370 | ) | (1,367 | ) | (3 | ) | | |||||||||
Others |
420 | 170 | 250 | 147 | ||||||||||||
Total |
382 | (592 | ) | 974 | 165 | |||||||||||
(1) The 2011 other income and expenses have been restated to reflect the transfer of PCEV from Wireless to Others business segment. |
Our wireless business other income amounted to Php382 million, which includes other income from DMPI amounting to Php118 million, in the first half of 2012, a change of Php974 million, or 165%, as against other expenses of Php592 million in the same period in 2011, primarily due to the combined effects of the following: (i) higher net foreign exchange gains by Php815 million on account of revaluation of foreign currency-denominated assets and liabilities due to the appreciation of the Philippine peso to the U.S. dollar, and the inclusion of gains on revaluation of dollar-denominated net liabilities of DMPI of Php495 million for the first half of 2012; (ii) an increase in other income by Php250 million mainly due to the inclusion of DMPIs other income of Php14 million, higher outsourcing income and recovery of prior years provision, partially offset by lower rental income;
(iii) higher net financing costs by Php3 million primarily due to the inclusion of DMPIs financing costs of Php361 million for the first half of 2012, higher accretion on financial liabilities and financing charges, partly offset by the increase in capitalized interest, and lower interest on loans and other related items of Smart; (iv) an increase in equity share in net losses of associates by Php5 million; (v) net loss on DMPIs derivative financial instruments of Php38 million in the first half of 2012; and (vi) a decrease in interest income by Php45 million mainly due to lower average interest rates, lower level and shorter average tenor of U.S. dollar and peso placements in the first half of 2012 and the appreciation of the Philippine peso to the U.S. dollar.
Provision for Income Tax
Provision for income tax increased by Php290 million, or 5%, to Php5,670 million in the first half of 2012 from Php5,380 million in the same period in 2011 primarily due to higher taxable income. The effective tax rate for our wireless business was 30% and 25% in the first half of 2012 and 2011, respectively.
Net Income
As a result of the foregoing, our wireless business net income decreased by Php2,810 million, or 17%, to Php13,452 million, including a net income from DMPI of Php373 million, in the first half of 2012, from Php16,262 million recorded in the same period in 2011.
EBITDA
As a result of the foregoing, our wireless business EBITDA decreased by Php838 million, or 3%, to Php28,208 million in the first half of 2012, which includes EBITDA from DMPI of Php3,061 million, from Php29,046 million in the same period in 2011.
Core Income
Our wireless business core income decreased by Php3,414 million, or 21%, to Php12,703 million in the first half of 2012, which includes core income from DMPI amounting to Php53 million for the first half of 2012, from Php16,117 million in the same period in 2011 on account of an increase in wireless-related expenses and higher provision for income tax, partially offset by higher wireless revenues and a decrease in other expenses.
Fixed Line
Revenues
Revenues generated from our fixed line business amounted to Php31,108 million, including revenues from Digitel of Php2,067 million, in the first half of 2012, an increase of Php1,493 million, or 5%, from Php29,615 million in the same period in 2011.
The following table summarizes our total revenues from our fixed line business for the six months ended June 30, 2012 and 2011 by service segment:
Increase (Decrease) | ||||||||||||||||||||||||||||
2012(1) | % 2011(2) | % | Amount | % | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Fixed Line Services: |
||||||||||||||||||||||||||||
Service Revenues: |
||||||||||||||||||||||||||||
Local exchange |
7,932 | 26 | 7,457 | 25 | 475 | 6 | ||||||||||||||||||||||
International long distance |
5,286 | 17 | 5,568 | 19 | (282 | ) | (5 | ) | ||||||||||||||||||||
National long distance |
2,677 | 9 | 2,862 | 10 | (185 | ) | (6 | ) | ||||||||||||||||||||
Data and other network |
13,199 | 43 | 11,669 | 39 | 1,530 | 13 | ||||||||||||||||||||||
Miscellaneous |
1,315 | 4 | 1,494 | 5 | (179 | ) | (12 | ) | ||||||||||||||||||||
30,409 | 99 | 29,050 | 98 | 1,359 | 5 | |||||||||||||||||||||||
Non-Service Revenues: |
||||||||||||||||||||||||||||
Sale of computers, phone units and SIM cards |
333 | 1 | 565 | 2 | (232 | ) | (41 | ) | ||||||||||||||||||||
Total Fixed Line Revenues |
30,742 | 100 | 29,615 | 100 | 1,127 | 4 | ||||||||||||||||||||||
(1) Includes Digitels revenues for the first half of 2012.
(2) The 2011 revenues have been restated to reflect the change in the presentation of our outbound revenues and the inclusion of the ICT business group in our fixed line business. |
The following table summarizes the revenue contribution of Digitel to our fixed line business for the six months ended June 30, 2012 by service segment:
Amount | % | |||||||
(in millions) | ||||||||
Fixed Line Services: |
||||||||
Service Revenues: |
||||||||
Local exchange |
515 | 30 | ||||||
International long distance |
337 | 20 | ||||||
National long distance |
190 | 11 | ||||||
Data and other network |
659 | 39 | ||||||
Total Fixed Line Revenues |
1,701 | 100 | ||||||
Service Revenues
Our fixed line business provides local exchange service, national and international long distance services, data and other network services, and miscellaneous services. Our fixed line service revenues increased by Php1,359 million, or 5%, to Php30,409 million in the first half of 2012, which includes service revenues from Digitel amounting to Php1,701 million for the first half of 2012, from Php29,050 million in the same period in 2011 due to an increase in the revenue of our data and other network, and local exchange services, partially offset by a decrease in international long distance, national long distance and miscellaneous services.
Local Exchange Service
The following table summarizes the key measures of our local exchange service business as at and for the six months ended June 30, 2012 and 2011:
Increase | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
Total local exchange service revenues (in millions) |
7,932 | 7,457 | 475 | 6 | ||||||||||||
Number of fixed line subscribers |
2,133,478 | 1,856,890 | 276,588 | 15 | ||||||||||||
Postpaid |
2,011,565 | 1,754,165 | 257,400 | 15 | ||||||||||||
Prepaid |
121,913 | 102,725 | 19,188 | 19 | ||||||||||||
Number of fixed line employees |
7,972 | 7,410 | 562 | 8 | ||||||||||||
Number of fixed line subscribers per employee |
268 | 251 | 17 | 7 |
(1) Includes Digitels revenues, subscriber base and employee headcount as at and for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
The following table summarizes the key measures of Digitels local exchange service business as at June 30, 2012 and for the first half of 2012:
Total local exchange service revenues (in millions) |
515 | |||
Number of fixed line subscribers |
282,879 | |||
Postpaid |
235,394 | |||
Prepaid |
47,485 | |||
Number of fixed line employees |
787 | |||
Number of fixed line subscribers per employee |
359 |
Revenues from our local exchange service increased by Php475 million, or 6%, to Php7,932 million in the first half of 2012 from Php7,457 million in the same period in 2011, primarily due to the inclusion of Digitels revenues of Php515 million for the first half of 2012 and the increase in postpaid wired and PLP lines, partially offset by a decrease in ARPU on account of lower fixed charges due to the increase in demand for bundled voice and data services and a decrease in installation charges. The percentage contribution of local exchange revenues to our total fixed line service revenues accounted for 26% in each of the first half of 2012 and 2011.
PLP wireless service allows subscribers to bring the telephone set anywhere within the home zone area and is available in postpaid and prepaid variants. Similar to our PLP wireless service, Digitels SunTel wireless landline offers unlimited landline to landline calls with the convenience of limited mobility.
International Long Distance Service
The following table shows our international long distance service revenues and call volumes for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
Total international long distance service revenues (in millions) |
5,286 | 5,568 | (282 | ) | (5 | ) | ||||||||||
Inbound |
4,632 | 5,023 | (391 | ) | (8 | ) | ||||||||||
Outbound |
654 | 545 | 109 | 20 | ||||||||||||
International call volumes (in million minutes, except call ratio) |
1,022 | 951 | 71 | 7 | ||||||||||||
Inbound |
805 | 865 | (60 | ) | (7 | ) | ||||||||||
Outbound |
217 | 86 | 131 | 152 | ||||||||||||
Inbound-outbound call ratio |
3.7:1 | 10.1:1 | | |
(1) Includes Digitels revenues and call volumes for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
The following table summarizes the key measures of Digitels international long distance service business as at June 30, 2012 and for the first half of 2012:
Total international long distance service revenues (in millions) |
337 | |||
Inbound |
171 | |||
Outbound |
166 | |||
International call volumes (in million minutes, except call ratio) |
172 | |||
Inbound |
34 | |||
Outbound |
138 | |||
Inbound-outbound call ratio |
0.2:1 |
Our total international long distance service revenues decreased by Php282 million, or 5%, to Php5,286 million in the first half of 2012, which includes revenues from Digitel amounting to Php337 million, from Php5,568 million in the same period in 2011, primarily due to the decrease in PLDTs average settlement and collection rates, and call volumes, as well as the unfavorable effect of the appreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar to Php42.90 for the six months ended June 30, 2012 from Php43.52 for the six months ended June 30, 2011, partially offset by the inclusion of Digitels international long distance service revenues and call volumes in the first half of 2012. The percentage contribution of international long distance service revenues to our total fixed line service revenues accounted for 17% and 19% in the first half of 2012 and 2011, respectively.
Our revenues from inbound international long distance service decreased by Php391 million, or 8%, to Php4,632 million in the first half of 2012 from Php5,023 million in the same period in 2011 primarily due to the decrease in average settlement rate, as well as the unfavorable effect on our inbound revenues of the appreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar, partially offset by the inclusion of Digitels inbound international long distance service revenues of Php171 million and inbound call volumes of 34 million minutes for the first half of 2012.
Our revenues from outbound international long distance service increased by Php109 million, or 20%, to Php654 million in the first half of 2012 from Php545 million in the same period in 2011, primarily due to the inclusion of Digitels revenues from outbound international long distance service of Php166 million, partially offset by the decline in average collection rate in dollar terms and the unfavorable effect of the appreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar to Php42.90 for the six months ended June 30, 2012 from Php43.52 for the six months ended June 30, 2011, resulting in a decrease in the average billing rates to Php43.06 in the first half of 2012 from Php43.62 in the same period in 2011.
National Long Distance Service
The following table shows our national long distance service revenues and call volumes for the six months ended June 30, 2012 and 2011:
Decrease | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
Total national long distance service revenues (in millions) |
2,677 | 2,862 | (Php185) | (6 | ) | |||||||||||
National long distance call volumes (in million minutes) |
488 | 558 | (70 | ) | (13 | ) |
(1) Includes Digitels revenues of Php190 million and call volumes of 24 million minutes for the first half of 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues. |
Our national long distance service revenues decreased by Php185 million, or 6%, to Php2,677 million in the first half of 2012 from Php2,862 million in the same period in 2011, primarily due to a decrease in call volumes, partially offset by the inclusion of Digitels national long distance service revenues for the first half of 2012 and an increase in the average revenue per minute of our national long distance services due to the cessation of certain promotions on our national long distance calling rates. The percentage contribution of national long distance revenues to our fixed line service revenues accounted for 9% and 10% in the first half of 2012 and 2011, respectively.
Data and Other Network Services
The following table shows information of our data and other network service revenues for the six months ended June 30, 2012 and 2011:
Increase (Decrease) | ||||||||||||||||
2012(1) | 2011(2) | Amount % | ||||||||||||||
Data and other network service revenues (in millions) |
13,199 | 11,669 | 1,530 | 13 | ||||||||||||
Domestic |
9,361 | 8,088 | 1,273 | 16 | ||||||||||||
Broadband |
5,762 | 4,755 | 1,007 | 21 | ||||||||||||
DSL |
5,638 | 4,616 | 1,022 | 22 | ||||||||||||
WeRoam |
124 | 139 | (15 | ) | (11 | ) | ||||||||||
Leased Lines and Others |
3,599 | 3,333 | 266 | 8 | ||||||||||||
International |
||||||||||||||||
Leased Lines and Others |
3,251 | 3,033 | 218 | 7 | ||||||||||||
VitroTM Data Center |
587 | 548 | 39 | 7 | ||||||||||||
Subscriber base |
||||||||||||||||
Broadband |
892,959 | 720,519 | 172,440 | 24 | ||||||||||||
DSL |
876,073 | 698,921 | 177,152 | 25 | ||||||||||||
WeRoam |
16,886 | 21,598 | (4,712 | ) | (22 | ) | ||||||||||
SWUP |
20,959 | 18,983 | 1,976 | 10 |
(1) Includes Digitels revenues and subscriber base as at and for the six months ended June 30, 2012. |
(2) The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the inclusion of the ICT business group in our fixed line business. |
The following table shows Digitels contribution to our data and other network service revenues and subscriber base as at and for the six months ended June 30, 2012:
Data and other network service revenues (in millions) |
659 | |||
Domestic |
645 | |||
Broadband Digitels DSL |
405 | |||
Leased Lines and Others |
240 | |||
International |
||||
Leased Lines and Others |
14 | |||
DSL Subscriber base |
101,532 |
Our data and other network services posted revenues of Php13,199 million, which includes revenues from Digitel of Php659 million, in the first half of 2012, an increase of Php1,530 million, or 13%, from Php11,669 million in the same period in 2011, primarily due to higher revenues from PLDT DSL, the inclusion of Digitels data and other network service revenues of Php659 million for the first half of 2012, an increase in international data revenues primarily due to higher revenues from i-Gate and Fibernet, and an increase in domestic leased line revenues resulting from the higher revenue contribution of internet protocol-virtual private network, or IP-VPN, and Metro Ethernet. The percentage contribution of this service segment to our fixed line service revenues accounted for 44% and 40% in the first half of 2012 and 2011, respectively.
Domestic
Domestic data services contributed Php9,361 million in the first half of 2012, an increase of Php1,273 million, or 16%, as compared with Php8,088 million in the same period in 2011 mainly due to higher DSL revenues and the inclusion of Digitels revenues of Php645 million for the first half of 2012, higher IP-VPN, Metro Ethernet and Shops.Work subscribers as customer locations and bandwidth requirements continued to expand and demand for offshoring, outsourcing services increased, partially offset by lower traditional leased line revenues on Diginet. The percentage contribution of domestic data service revenues to total data and other network services accounted for 71% and 69% in the first half of 2012 and 2011.
Broadband
Broadband data services include PLDT DSL broadband internet service, which is intended for individual internet users, small and medium enterprises, and large corporations with multiple branches, and PLDT WeRoam, our mobile broadband service, running on the PLDT Groups nationwide wireless network (using GPRS, EDGE, 3G/HSDPA/HSPA/HSPA+ and WiFi technologies).
Broadband data revenues amounted to Php5,762 million, including Digitels broadband data revenues of Php405 million, in the first half of 2012, an increase of Php1,007 million, or 21%, from Php4,755 million in the same period in 2011, primarily due to the higher revenue contribution of DSL which contributed revenues of Php5,638 million in the first half of 2012 from Php4,616 million in the same period in 2011 as a result of the increase in the number of subscribers by 25% to 876,073 subscribers, including Digitels DSL subscriber base of 101,532, as at June 30, 2012, from 698,921 subscribers in the same period in 2011. DSL revenues accounted for 43% and 40% of total data and other network service revenues in the first half of 2012 and 2011, respectively.
WeRoam revenues amounted to Php124 million in the first half of 2012, a decrease of Php15 million, or 11%, from Php139 million in the same period in 2011 as a result of a decrease in subscriber base by 22% to 16,886 subscribers in the first half of 2012 from 21,598 subscribers in the same period in 2011.
Leased Lines and Others
Leased lines and other data services include: (1) Diginet, our domestic private leased line service providing Smarts fiber optic and leased line data requirements; (2) IP-VPN, a managed corporate IP network that offers a secure means to access corporate network resources; (3) Metro Ethernet, our high-speed wide area networking services that enable mission-critical data transfers; (4) Shops.Work, our connectivity solution for retailers and franchisers that links company branches to their head office; and (5) SWUP, our wireless VPN service that powers mobile point-of-sale terminals and off-site bank ATMs, as well as other retail outlets located in remote areas. As at June 30, 2012, SWUP has a total subscriber base of 20,959 up by 10% from 18,983 subscribers in the same period in 2011. Leased lines and other data revenues amounted to Php3,599 million in the first half of 2012, an increase of Php266 million, or 8%, from Php3,333 million in the same period in 2011, primarily due to the inclusion of Digitels leased line data revenues of Php240 million for the first half of 2012, and higher revenues from IP-VPN, Metro Ethernet and Shops.Work, partially offset by lower Diginet revenues. The percentage contribution of leased lines and other data service revenues to the total data and other network services accounted for 27% and 28% in the first half of 2012 and 2011, respectively.
International
Leased Lines and Others
International leased lines and other data services consist mainly of: (1) i-Gate, our premium dedicated internet access service that provides high speed, reliable and managed connectivity to the global internet, and is intended for enterprises and VAS providers; (2) Fibernet, which provides cost-effective and reliable bilateral point-to-point private networking connectivity, through the use of our extensive international alliances to offshore and outsourcing, banking and finance, and semiconductor industries; and (3) other international managed data services in partnership with other global service providers, such as AT&T, BT-Infonet, NTT Arcstar, Orange Business, SingTel, Tata, Telstra, Verizon Business, among others, which provide data networking services to multinational companies. International data service revenues increased by Php218 million, or 7%, to Php3,251 million in the first half of 2012 from Php3,033 million in the same period in 2011, primarily due to higher i-Gate, inland-cable lease and Fibernet revenues, and the effect of the inclusion of Digitels international leased line data revenues of Php14 million for the first half of 2012, as well as an increase in revenues from various global service providers, partially offset by the unfavorable effect of the appreciation of the Philippine peso relative to the U.S. dollar. The percentage contribution of international data service revenues to total data and other network service revenues accounted for 25% and 26% in the first half of 2012 and 2011, respectively.
VitroTM Data Center
VitroTM data center provides co-location or rental services, server hosting, disaster recovery and business continuity services, intrusion detection, security services, such as firewalls and managed firewalls. Revenues from this service increased by Php39 million, or 7%, to Php587 million in the first half of 2012 from Php548 million in the same period in 2011 mainly due to higher co-location and managed services.
Miscellaneous Services
Miscellaneous service revenues are derived mostly from rental and facilities management fees, internet and online gaming, and directory advertising. These service revenues decreased by Php179 million, or 12%, to Php1,315 million in the first half of 2012 from Php1,494 million in the same period in 2011 mainly due to a decrease in internet and online gaming revenues as a result of the disposal of ePLDTs 75% interest in Digital Paradise on April 1, 2011 and 57.51% interest in Level Up! on July 11, 2011, as well as lower rental fees, partially offset by the effect of the inclusion in the consolidation of the financial results of ePDS (ePLDT increased its equity interest in ePDS from 50% to 67% effective August 24, 2011), the revenue contribution of PGNL, the exclusive distributor and licensee of the programs, shows, films and channels of TV5 abroad, and distributes these media content via syndication and via its international linear channels, and higher facilities management fees. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues was 4% and 5% in the first half of 2012 and 2011, respectively.
Non-service Revenues
Non-service revenues decreased by Php232 million, or 41%, to Php333 million in the first half of 2012 from Php565 million in the same period in 2011, primarily due to the lower sale of several managed PABX and OnCall solution, hardware and software licenses, and PLP units, as well as lower computer-bundled sales, partially offset by the sale of Telpad units.
Expenses
Expenses related to our fixed line business totaled Php27,347 million, which includes expenses from Digitel amounting to Php1,796 million, in the first half of 2012, an increase of Php3,198 million, or 13%, as compared with Php24,149 million in the same period in 2011. The increase was primarily due to higher expenses related to compensation and employee benefits, repairs and maintenance, depreciation and amortization, professional and other contracted services, taxes and licenses, and communication, training and travel, partly offset by lower expenses related to interconnection costs, costs of sales, amortization of intangible assets, selling and promotions, and other operating expenses. As a percentage of our total fixed line revenues, expenses associated with our fixed line business accounted for 88% and 82% in the first half of 2012 and 2011, respectively.
The following table shows the breakdown of our total fixed line-related expenses for the six months ended June 30, 2012 and 2011 and the percentage of each expense item to the total:
Increase (Decrease) | ||||||||||||||||||||||||||||
2012(1) | % | 2011(2) | % Amount | % | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Compensation and employee benefits |
7,395 | 27 | 5,223 | 22 | 2,172 | 42 | ||||||||||||||||||||||
Depreciation and amortization |
6,533 | 24 | 6,157 | 25 | 376 | 6 | ||||||||||||||||||||||
Interconnection costs |
3,904 | 14 | 4,278 | 18 | (374 | ) | (9 | ) | ||||||||||||||||||||
Repairs and maintenance |
2,701 | 10 | 2,243 | 9 | 458 | 20 | ||||||||||||||||||||||
Professional and other contracted services |
2,112 | 8 | 1,801 | 7 | 311 | 17 | ||||||||||||||||||||||
Rent |
1,399 | 5 | 1,393 | 6 | 6 | | ||||||||||||||||||||||
Selling and promotions |
671 | 2 | 680 | 3 | (9 | ) | (1 | ) | ||||||||||||||||||||
Taxes and licenses |
594 | 2 | 363 | 2 | 231 | 64 | ||||||||||||||||||||||
Asset impairment |
526 | 2 | 488 | 2 | 38 | 8 | ||||||||||||||||||||||
Cost of sales |
524 | 2 | 643 | 3 | (119 | ) | (19 | ) | ||||||||||||||||||||
Communication, training and travel |
424 | 2 | 317 | 1 | 107 | 34 | ||||||||||||||||||||||
Insurance and security services |
297 | 1 | 241 | 1 | 56 | 23 | ||||||||||||||||||||||
Amortization of intangible assets |
| | 16 | | (16 | ) | (100 | ) | ||||||||||||||||||||
Other expenses |
267 | 1 | 306 | 1 | (39 | ) | (13 | ) | ||||||||||||||||||||
Total |
27,347 | 100 | 24,149 | 100 | 3,198 | 13 | ||||||||||||||||||||||
(1) | Includes Digitels expenses for the first half of 2012. |
(2) | The 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the inclusion of the ICT business group in our fixed line business. |
The following table summarizes the breakdown of Digitels fixed line-related expenses for the six months ended June 30, 2012 and the percentage of each expense item to the total:
Amount | % | |||||||
(in millions) | ||||||||
Compensation and employee benefits |
563 | 31 | ||||||
Repairs and maintenance |
300 | 17 | ||||||
Depreciation and amortization |
267 | 15 | ||||||
Interconnection costs |
206 | 11 | ||||||
Rent |
117 | 7 | ||||||
Professional and other contracted services |
95 | 5 | ||||||
Taxes and licenses |
56 | 3 | ||||||
Cost of Sales |
47 | 3 | ||||||
Communication, training and travel |
44 | 2 | ||||||
Selling and promotions |
31 | 2 | ||||||
Insurance and security services |
27 | 2 | ||||||
Asset impairment |
27 | 1 | ||||||
Other expenses |
16 | 1 | ||||||
Total |
1,796 | 100 | ||||||
Compensation and employee benefits expenses increased by Php2,172 million, or 42%, to Php7,395 million primarily due to higher MRP costs, salaries and employee benefits, LTIP costs, as well as the effect of the inclusion of Digitels compensation and employee benefits expenses of Php563 million for the first half of 2012, partially offset by lower provision for pension costs. Employee headcount increased to 10,746 in the first half of 2012 as compared with 9,770 in the same period in 2011 mainly due to inclusion of Digitels headcount of 787 and increase in the number of employee headcount by iPlus, partially offset by the decrease in PLDTs headcount as a result of the MRP.
Depreciation and amortization charges increased by Php376 million, or 6%, to Php6,533 million due to the inclusion of Digitels depreciation and amortization expenses of Php267 million for the first half of 2012, as well as a higher depreciable asset base.
Interconnection costs decreased by Php374 million, or 9%, to Php3,904 million primarily due to lower international and national long distance interconnection/settlement costs as a result of lower international received paid and domestic sent paid calls that terminated to other domestic carriers, and lower settlement costs for data and other network services particularly Fibernet and Infonet, partially offset by the inclusion of Digitels interconnection costs of Php206 million.
Repairs and maintenance expenses increased by Php458 million, or 20%, to Php2,701 million primarily due to the inclusion of Digitels repairs and maintenance expenses of Php300 million for the first half of 2012, higher repairs and maintenance costs for buildings, central office/telecoms equipment and IT software and hardware, partially offset by lower office electricity charges, and repairs and maintenance costs of cable and wire facilities.
Professional and other contracted service expenses increased by Php311 million, or 17%, to Php2,112 million primarily due to higher consultancy and contracted services, technical service, payment facility and management fees, as well as the effect of the inclusion of Digitels professional and other contracted fees of Php95 million for the first half of 2012, partially offset by lower bill printing fees, outsourced costs, and transfer agents fees.
Rent expenses increased by Php6 million to Php1,399 million primarily due to the effect of the inclusion of Digitels rent expenses of Php117 million for the first half of 2012, as well as higher international leased circuits, and satellite rental charges, partially offset by lower domestic leased circuits, office building, telecom equipment, and site rental charges.
Selling and promotion expenses decreased by Php9 million, or 1%, to Php671 million primarily due to lower advertising and commission expenses, partially offset by the effect of the inclusion of Digitels selling and promotions expenses of Php31 million for the first half of 2012, as well as higher public relations expense.
Asset impairment increased by Php38 million, or 8%, to Php526 million mainly due to higher provision for uncollectible receivables and the effect of the inclusion of Digitels provision for uncollectible receivables of Php27 million for the first half of 2012.
Cost of sales decreased by Php119 million, or 19%, to Php524 million in primarily due to lower sales of several managed PABX and OnCall solutions, hardware and software licenses, and PLP units, partially offset by the inclusion of Digitels cost of sales of Php47 million, and the sale of Telpad units.
Communication, training and travel expenses increased by Php107 million, or 34%, to Php424 million mainly due to higher mailing and courier charges, fuel consumption and foreign and local travel, and the effect of the inclusion of Digitels communication, training and travel expenses of Php44 million for the first half of 2012, partially offset by the decrease in communication charges.
Insurance and security services increased by Php56 million, or 23%, to Php297 million primarily due to higher security services, and insurance and bond premiums, and the effect of the inclusion of Digitels insurance and security expenses of Php27 million for the first half of 2012.
Amortization of intangible assets amounted to Php16 million in the first half of 2011 relating to the amortization of intangible assets related to PLDTs acquisition of the customer list of PDSI in 2011.
Other expenses decreased by Php39 million, or 13%, to Php267 million primarily due to lower various business and operational-related expenses, partially offset by the inclusion of Digitels other expenses of Php16 million.
Other Expenses
The following table summarizes the breakdown of our total fixed line-related other expenses for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||
2012 | 2011 | Amount | % | |||||||||||||
Other Income (Expenses): | (in millions) | |||||||||||||||
Foreign exchange gains net |
507 | 147 | 360 | 245 | ||||||||||||
Interest income |
482 | 253 | 229 | 91 | ||||||||||||
Equity share in net earnings of associates |
113 | 102 | 11 | 11 | ||||||||||||
Gains (losses) on derivative financial instruments net |
(399 | ) | 484 | (883 | ) | (182 | ) | |||||||||
Financing costs net |
(2,162 | ) | (1,783 | ) | (379 | ) | 21 | |||||||||
Others |
774 | 501 | 273 | 54 | ||||||||||||
Total |
(685 | ) | (296 | ) | (389 | ) | 131 | |||||||||
Our fixed line business other expenses amounted to Php685 million in the first half of 2012, an increase of Php389 million, or 131%, from Php296 million in the same period in 2011. The increase was due to the combined effects of the following: (i) net losses on derivative financial instruments of Php399 million in the first half of 2012 as against net gains on derivative financial instruments of Php484 million in the same period in 2011 due to the effect of narrower dollar and peso interest rate differentials and higher level of appreciation of the Philippine peso to the U.S. dollar; (ii) an increase in net financing costs by Php379 million due to higher interest expense on loans and related items, higher financing charges, and the effect of the inclusion of Digitels financing costs of Php171 million in the first half of 2012; (iii) an increase in other income by Php273 million mainly due to the gain on disposal of fixed assets and income from consultancy, partially offset by lower pension benefit income recognized by PLDT; (iv) increase in equity share in net earnings of associates and joint ventures by Php11 million mainly due to the increase in share in net earnings of Philweb Corporation, or Philweb; (v) an increase in interest income by Php229 million due to a higher average level of investments, partially offset by lower interest rates, shorter average tenor of placements and the impact of the appreciation of the Philippine peso on dollar placements; and (vi) increase in net foreign exchange gains by Php360 million due to the inclusion of Digitels foreign exchange gains of Php100 million in the first half of 2012 and on account of foreign exchange revaluation of foreign currency-denominated assets and liabilities due to the effect of the higher level of appreciation of the Philippine peso to the U.S. dollar.
Provision for Income Tax
Provision for income tax, including Digitels provision for income tax of Php81 million, amounted to Php629 million in the first half of 2012, a decrease of Php766 million, or 55%, as compared with Php1,395 million in the same period in 2011, primarily due to lower taxable income. The effective tax rates of our fixed line business were 23% and 27% in the first half of 2012 and 2011, respectively.
Net Income
As a result of the foregoing, our fixed line business contributed a net income of Php2,081 million in the first half of 2012, decreased by Php1,694 million, or 45%, as compared with Php3,775 million in the same period in 2011.
EBITDA
As a result of the foregoing, our fixed line business EBITDA decreased by Php1,711 million, or 15%, to Php9,928 million in the first half of 2012, which includes EBITDA from Digitel of Php172 million, from Php11,639 million in the same period in 2011.
Core Income
Our fixed line business core income decreased by Php1,260 million, or 40%, to Php1,922 million in the first half of 2012, which includes core income from Digitel of negative Php64 million, from Php3,182 million in the same period in 2011, primarily as a result of increases in fixed lines operating and other expenses, partially offset by higher fixed line revenues and lower provision for income tax.
Business Process Outsourcing
Revenues
Our BPO business provides knowledge processing solutions and customer relationship management.
Our BPO business generated revenues of Php4,836 million in the first half of 2012, an increase of Php710 million, or 17%, as compared with Php4,126 million in the same period in 2011. This increase was primarily due to higher revenue contributions from our knowledge processing solutions and customer relationship management businesses.
The following table summarizes our total revenues from our BPO business for the six months ended June 30, 2012 and 2011 by service segment:
Increase | ||||||||||||||||||||||||||||||||||||||||||||
2012 | % | 2011(1) | % | Amount | % | |||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Service Revenues: |
||||||||||||||||||||||||||||||||||||||||||||
Knowledge processing solutions |
3,247 | 67 | 2,744 | 67 | 503 | 18 | ||||||||||||||||||||||||||||||||||||||
Customer relationship management |
1,589 | 33 | 1,382 | 33 | 207 | 15 | ||||||||||||||||||||||||||||||||||||||
Total BPO Revenues |
4,836 | 100 | 4,126 | 100 | 710 | 17 | ||||||||||||||||||||||||||||||||||||||
(1) The 2011 results have been restated to reflect the implementation of the reorganization of ePLDT Group in our business segments. |
Service Revenues
Service revenues generated by our BPO business amounted to Php4,836 million in the first half of 2012, an increase of Php710 million, or 17%, as compared with Php4,126 million in the same period in 2011, primarily as a result of the continued growth in our knowledge processing solutions and customer relationship management businesses.
Knowledge Processing Solutions
We provide our knowledge processing solutions business primarily through the SPi Group. Our knowledge processing solutions business contributed revenues of Php3,247 million in the first half of 2012, an increase of Php503 million, or 18%, from Php2,744 million in the same period in 2011. Dollar-denominated revenues increased by 20% mainly due to higher content services and additional revenues as a result of the inclusion of Laserwords Private Ltd., or Laserwords, in the consolidation effective November 1, 2011, partially offset by the sale of our medical transcription business on September 26, 2011 and the appreciation of the Philippine peso to the U.S. dollar by approximately 2%. Knowledge processing solutions business revenues accounted for 67% of total revenues of our BPO business in each of the first half of 2012 and 2011.
Customer Relationship Management
We provide our customer relationship management business primarily through SPi CRM. In the first half of 2012, SPi CRM changed its functional currency from Philippine peso to U.S. dollar. Revenues relating to our customer relationship management business increased by Php207 million, or 15%, to Php1,589 million in the first half of 2012 from Php1,382 million in the same period in 2011, primarily due to higher domestic sales by 12%, partially offset by the effect of the appreciation of the Philippine peso to the U.S. dollar and lower revenues from Infocom due to transfer of part of its services to PLDT. In total, we own and operate 6,118 seats with an average of 3,510 customer service representatives, or CSRs, in the first half of 2012, as compared with 5,986 seats with an average of 3,610 CSRs in the same period in 2011. SPi CRM has six customer relationship management sites as at June 30, 2012 and 2011. Customer relationship management business revenues accounted for 33% of total revenues of our BPO business in each of the first half of 2012 and 2011.
Expenses
Expenses associated with our BPO business totaled Php4,153 million in the first half of 2012, an increase of Php452 million, or 12%, as compared with Php3,701 million in the same period in 2011, primarily due to higher expenses related to compensation and employee benefits, professional and other contracted services, depreciation and amortization, repairs and maintenance, communication, training and travel, selling and promotions, taxes and licenses, and rent, partially offset by lower expenses related to asset impairment and amortization of intangible assets. As a percentage of our total BPO revenues, expenses related to our BPO business accounted for 86% and 90% in the first half of 2012 and 2011, respectively.
The following table shows the breakdown of our total BPO-related expenses for the six months ended June 30, 2012 and 2011 and the percentage of each expense item to the total:
Increase (Decrease) | ||||||||||||||||||||||||||||||||
2012 | % | 2011(1) | % Amount | % | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Compensation and employee benefits |
2,742 | 66 | 2,491 | 67 | 251 | 10 | ||||||||||||||||||||||||||
Professional and other contracted services |
284 | 7 | 227 | 6 | 57 | 25 | ||||||||||||||||||||||||||
Rent |
236 | 6 | 222 | 6 | 14 | 6 | ||||||||||||||||||||||||||
Depreciation and amortization |
235 | 5 | 203 | 6 | 32 | 16 | ||||||||||||||||||||||||||
Repairs and maintenance |
212 | 5 | 182 | 5 | 30 | 16 | ||||||||||||||||||||||||||
Communication, training and travel |
191 | 4 | 165 | 4 | 26 | 16 | ||||||||||||||||||||||||||
Amortization of intangible assets |
73 | 2 | 74 | 2 | (1 | ) | (1 | ) | ||||||||||||||||||||||||
Selling and promotions |
40 | 1 | 17 | | 23 | 135 | ||||||||||||||||||||||||||
Taxes and licenses |
39 | 1 | 20 | 1 | 19 | 95 | ||||||||||||||||||||||||||
Insurance and security services |
30 | 1 | 29 | 1 | 1 | 3 | ||||||||||||||||||||||||||
Asset impairment |
1 | | 3 | | (2 | ) | (67 | ) | ||||||||||||||||||||||||
Other expenses |
70 | 2 | 68 | 2 | 2 | 3 | ||||||||||||||||||||||||||
Total |
4,153 | 100 | 3,701 | 100 | 452 | 12 | ||||||||||||||||||||||||||
(1) | The 2011 results have been restated to reflect the implementation of the reorganization of our business segments. |
Compensation and employee benefits increased by Php251 million, or 10%, to Php2,742 million mainly due to higher salaries and benefits, LTIP and provision for pension costs, partially offset by a decline in MRP costs. BPO employee headcount increased by 1,825, or 13%, to 16,313 in the first half of 2012 as compared with 14,488 in the same period in 2011.
Professional and other contracted services increased by Php57 million, or 25%, to Php284 million primarily due to higher contracted service fees, as well as professional fees for services rendered on the purchase of Laserwords in November 2011.
Rent expenses increased by Php14 million, or 6%, to Php236 million primarily due to higher office building rental charges, partially offset by lower site rental charges.
Depreciation and amortization increased by Php32 million, or 16%, to Php235 million primarily due to higher depreciable asset base.
Repairs and maintenance expenses increased by Php30 million, or 16%, to Php212 million primarily due to higher office and site electricity charges, and repairs and maintenance costs for vehicles, furniture and other work equipment, partially offset by lower repairs and maintenance cost of IT software and site facilities.
Communication, training and travel expenses increased by Php26 million, or 16%, to Php191 million primarily due to higher travel and training expenses, and mailing and courier charges, partially offset by lower communication expenses.
Amortization of intangible assets decreased by Php1 million, or 1%, to Php73 million primarily due to lower amortization of intangible assets in the first half of 2012.
Selling and promotions expenses increased by Php23 million, or 135%, to Php40 million primarily due to higher spending on advertising and promotions, as well as higher commissions expenses.
Taxes and licenses increased by Php19 million, or 95% to Php39 million due to higher business-related taxes in the first half of 2012.
Insurance and security services increased by Php1 million, or 3%, to Php30 million primarily due to higher expenses on insurance and bond premiums, partially offset by lower expenses on security services.
Asset impairment decreased by Php2 million, or 67%, to Php1 million primarily due to lower provision for uncollectible receivables.
Other expenses increased by Php2 million, or 3%, to Php70 million mainly due to higher various business operational-related costs.
Other Income (Expenses)
The following table summarizes the breakdown of our total BPO-related other income (expenses) for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||
2012 | 2011(1) | Amount | % | |||||||||||||
Other Income (Expenses): | (in millions) | |||||||||||||||
Gains on derivative financial instruments net |
34 | | 34 | 100 | ||||||||||||
Interest income |
7 | 9 | (2 | ) | (22 | ) | ||||||||||
Financing costs |
(13 | ) | (28 | ) | 15 | (54 | ) | |||||||||
Foreign exchange losses net |
(41 | ) | (5 | ) | (36 | ) | 720 | |||||||||
Others |
3 | 25 | (22 | ) | (88 | ) | ||||||||||
Total |
(10 | ) | 1 | (11 | ) | (1,100 | ) | |||||||||
(1) The 2011 results have been restated to reflect the implementation of the reorganization of our business segments. |
Our BPO business other expenses amounted to Php10 million in the first half of 2012, a change of Php11 million as against other income of Php1 million in the same period in 2011, primarily due to the combined effects of the following: (i) increase in net foreign exchange losses by Php36 million due to the revaluation of net foreign currency-denominated assets as a result of the effect of the higher level of appreciation of the Philippine peso to the U.S. dollar in the first half of 2012; (ii) a decrease in other income by Php22 million mainly due to the effect of adjustments on derecognition of liabilities in 2011; (iii) a decrease in interest income by Php2 million due to collection of notes receivable in 2011; (iv) a decrease in financing costs by Php15 million due to lower accretion on contingent liabilities from our knowledge processing solutions business; and (v) net gains on derivative financial instruments of Php34 million in the first half of 2012 due to mark-to-market gain from forward foreign exchange contracts.
Provision for Income Tax
Provision for income tax amounted to Php181 million, an increase of Php161 million, in the first half of 2012 from Php20 million in the same period in 2011, primarily due to higher taxable income in the first half of 2012, expiration of income tax holiday of a subsidiary of SPi and the inclusion of provision for income tax of Laserwords for the first half of 2012.
Net Income
As a result of the foregoing, our BPO business registered a net income of Php492 million, an increase of Php86 million, or 21%, in the first half of 2012 from Php406 million in the same period in 2011.
EBITDA
As a result of the foregoing, our BPO business EBITDA increased by Php286 million, or 41%, to Php991 million in the first half of 2012 from Php705 million in the same period in 2011.
Core Income
Our BPO business core income amounted to Php497 million in the first half of 2012, an increase of Php84 million, or 20%, as compared with Php413 million in the same period in 2011 mainly as a result of an increase in BPO revenues, partially offset by an increase in BPO-related expenses, and higher provision for income tax and other expenses.
Others
Expenses
Expenses associated with our other business segment totaled Php11 million in the first half of 2012, an increase of Php4 million, or 57%, as compared with Php7 million in the same period in 2011, primarily due to PCEVs higher professional fees and other operating expenses.
Other Income
The following table summarizes the breakdown of other income for other business segment for the six months ended June 30, 2012 and 2011:
Change | ||||||||||||||||
2012 | 2011(1) | Amount | % | |||||||||||||
Other Income (Expenses): |
(in millions) | |||||||||||||||
Equity share in net earnings of associates |
1,223 | 757 | 466 | 62 | ||||||||||||
Interest income |
9 | 42 | (33 | ) | (79 | ) | ||||||||||
Others |
2,229 | 64 | 2,165 | 3,383 | ||||||||||||
Total |
3,461 | 863 | 2,598 | 301 | ||||||||||||
(1) The 2011 results have been restated to reflect the implementation of the reorganization of our business segments. |
Other income increased by Php2,598 million, or 301%, to Php3,461 million in the first half of 2012 from Php863 million in the same period in 2011 primarily due to the combined effects of the following: (i) an increase in other income by Php2,165 million mainly due to the realized portion of deferred gain on the transfer of Meralco shares to Beacon of Php2,012 million and preferred dividends from Beacon of Php191 million; (ii) an increase in equity share in net earnings of associates by Php466 million mainly due to the increase in PCEVs indirect share in the net earnings of Meralco, partly offset by PCEVs share in expenses of Beacon and fair value adjustment related to the acquisition of Meralco; and (iii) a decrease in interest income by Php33 million as a result of lower average level of temporary cash investments by our PCEV business.
For the six months ended June 30, 2012, Meralcos reported and core income amounted to Php9,752 million and Php9,023 million, respectively, as compared with Php6,091 million and Php7,822 million, respectively, in the same period in 2011. These results were due primarily to increases in billed customers and electricity sales volume, as well as higher generation charges, partially offset by lower distribution rates in the first half of 2012 as compared with the same period in 2011. PCEVs share in the reported and core income of Meralco, including its share in Beacons results of operations and amortization of fair value adjustment related to the acquisition of Meralco, amounted to Php1,224 million and Php1,317 million, respectively, in the first half of 2012, and Php757 million and Php1,215 million, respectively, in the same period in 2011. PCEV acquired 223 million Meralco shares on July 14, 2009, of which 154.2 million shares and 68.8 million shares were transferred on May 12, 2010 and October 25, 2011, respectively, to Beacon, where PCEV acquired a 50% equity interest effective March 31, 2010.
Net Income
As a result of the foregoing, our other business segment registered a net income of Php3,446 million, an increase of Php2,593 million, or 304%, in the first half of 2012 from Php853 million in the same period in 2011.
EBITDA
As a result of the foregoing, negative EBITDA from our other business segment increased by negative Php4 million, or 57%, to negative Php11 million in the first half of 2012 from negative Php7 million in the same period in 2011.
Core Income
Our other business segments core income amounted to Php3,539 million in the first half of 2012, an increase of Php2,228 million, or 170%, as compared with Php1,311 million in the same period in 2011 mainly as a result of an increase in other income, partially offset by higher expenses and provision for income tax.
Liquidity and Capital Resources
The following table shows our consolidated cash flows for the six months ended June 30, 2012 and 2011, as well as our consolidated capitalization and other consolidated selected financial data as at June 30, 2012 and December 31, 2011:
Six Months ended June 30, | ||||||||
2012 | 2011 | |||||||
(in millions) | ||||||||
Cash Flows |
||||||||
Net cash provided by operating activities |
35,920 | 34,629 | ||||||
Net cash used in investing activities |
12,485 | 6,298 | ||||||
Capital expenditures |
9,298 | 6,335 | ||||||
Net cash used in financing activities |
37,632 | 26,285 | ||||||
Net increase (decrease) in cash and cash equivalents |
(14,445 | ) | 1,980 | |||||
June 30, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in millions) | ||||||||
Capitalization |
||||||||
Long-term portion of interest-bearing financial liabilities
net of current portion: |
||||||||
Long-term debt |
100,294 | 91,273 | ||||||
Obligations under finance lease |
6 | 7 | ||||||
100,300 | 91,280 | |||||||
Current portion of interest-bearing financial liabilities: |
||||||||
Long-term debt maturing within one year |
12,480 | 22,893 | ||||||
Notes payable |
1,449 | 3,109 | ||||||
Obligations under finance lease maturing within one year |
6 | 7 | ||||||
13,935 | 26,009 | |||||||
Total interest-bearing financial liabilities |
114,235 | 117,289 | ||||||
Total equity attributable to equity holders of PLDT |
146,116 | 151,833 | ||||||
260,351 | 269,122 | |||||||
Other Selected Financial Data |
||||||||
Total assets |
385,274 | 395,646 | ||||||
Property, plant and equipment |
191,790 | 197,731 | ||||||
Cash and cash equivalents |
31,612 | 46,057 | ||||||
Short-term investments |
611 | 558 |
Our consolidated cash and cash equivalents and short-term investments totaled Php32,223 million as at June 30, 2012. Principal sources of consolidated cash and cash equivalents in the first half of 2012 were cash flows from operating activities amounting to Php35,920 million, proceeds from availment of long-term debt and notes payable of Php27,647 million, proceeds from disposal of investment available for sale of Php3,563 million, interest received of Php646 million, dividends received of Php225 million. These funds were used principally for: (1) debt principal and interest payments of Php29,055 million and Php2,764 million, respectively; (2) dividend payments of Php23,935 million; (3) capital outlays of Php9,298 million; (4) payment for purchase of investment in an associate and purchase of shares of noncontrolling shareholders of Php7,626 million; (5) Trust Fund and settlement for redemption of shares of Php5,849 million (6) payment of capital expenditures under long-term financing of Php2,920 million; and (7) settlements of derivative financial instruments of Php693 million.
As at June 30, 2011, our consolidated cash and cash equivalents and short-term investments totaled Php39,258 million. Principal sources of consolidated cash and cash equivalents in the first half of 2011 were cash flows from operating activities amounting to Php34,629 million, net proceeds from availment of long-term debt and notes payable of Php11,949 million, interest received of Php653 million and dividends received of Php216 million. These funds were used principally for: (1) dividend payments of Php26,833 million; (2) total debt principal and interest payments of Php7,362 million and Php2,552 million, respectively; (3) capital outlays of Php6,335 million; and (4) settlements of derivative financial instruments of Php319 million.
Operating Activities
Our consolidated net cash flows from operating activities increased by Php1,291 million, or 4%, to Php35,920 million in the first half of 2012, including Digitel Groups cash flows from operating activities for the first half of 2012 of Php3,663 million, from Php34,629 million in the same period in 2011, primarily due to lower corporate taxes paid and lower settlement of other payables, partially offset by lower operating income and lower collection of receivables.
Cash flows provided by operating activities of our fixed line business increased by Php2,624 million, or 22%, to Php14,306 million in the first half of 2012 from Php11,682 million in the same period in 2011, primarily due to lower level of settlement of accounts payable and other liabilities, partially offset by lower operating income and lower collection of receivables. Likewise, cash flows provided by operating activities of our BPO business in the first half of 2012 amounted to Php1,135 million, an increase of Php421 million, or 59%, from Php714 million in the same period in 2011, primarily due to higher operating income and a lower level of settlement of accounts payable and other liabilities, partially offset by a lower level of collection of outstanding receivables. On the other hand, cash flows from operating activities of our wireless business decreased by Php1,561 million, or 7%, to Php20,664 million in the first half of 2012 from Php22,225 million in the same period in 2011, primarily due to lower level of collection of outstanding receivables, higher level of settlement of accounts payable and other current liabilities, and lower operating income, partially offset by lower corporate taxes paid.
Investing Activities
Consolidated net cash used in investing activities amounted to Php12,485 million in the first half of 2012, including the Digitel Groups cash flows used in investing activities of Php535 million, an increase of Php6,187 million, or 98%, from Php6,298 million in the same period in 2011, primarily due to the combined effects of the following: (1) the payment for purchase of investments in associates and purchase of shares of noncontrolling shareholders by Php7,626 million; (2) the increase in capital expenditures by Php2,963 million; (3) the payment for purchase of short-term investments by Php80 million; (4) the higher proceeds from disposal of property, plant and equipment of Php81 million;
(5) payment for contingent consideration arising from business acquisition of Php817 million in the first half of 2011; and (6) net proceeds from disposal of investment available for sale of Php3,563 million in the first half of 2012.
Our consolidated capital expenditures in first half of 2012 totaled Php9,298 million, an increase of Php2,963 million, or 47%, as compared with Php6,335 million in the same period in 2011, primarily due to an increase in Smart and its subsidiaries capital spending and the inclusion of the Digitel Groups capital spending of Php548 million for the first half of 2012, partially offset by the decrease in PLDTs capital spending. Smart and its subsidiaries capital spending of Php4,921 million in the first half of 2012 was used primarily to modernize and expand its 2G/3G cellular and mobile broadband networks, as well as to purchase additional customer premises equipment for the fixed wireless broadband business. PLDTs capital spending of Php3,406 million in the first half of 2012 was principally used to finance the expansion and upgrade of its submarine cable facilities, DFON facilities, NGN roll-out, fixed line data and IP-based network services and outside plant rehabilitation. Digitels capital spending of Php548 million for the first half of 2012 was intended principally to finance the expansion of fixed mobile convergence and continued upgrade of its core and transmission network to increase penetration, particularly in provincial areas. SPi and its subsidiaries capital spending of Php176 million in the first half of 2012 was primarily used to fund the continued expansion of its customer relationship management and knowledge processing solutions facilities. The balance of Php247 million represented other subsidiaries capital spending.
As part of our growth strategy, we may from time to time, continue to make acquisitions and investments in companies or businesses.
Dividends received in the first half of 2012 amounted to Php225 million, an increase of Php9 million, or 4%, as compared with Php216 million in the same period in 2011. The dividends received in the first half of 2012 were mostly from Beacon and Philweb while dividends received in the same period in 2011 were mostly from Meralco and Philweb.
Financing Activities
On a consolidated basis, net cash used in financing activities amounted to Php37,632 million, including the Digitel Groups net cash used in financing activities for the first half of 2012 of Php2,367 million, an increase of Php11,347 million, or 43% as compared with Php26,285 million in the same period in 2011, resulting largely from the combined effects of the following: (1) net increase in repayments of long-term debt and notes payable by Php21,693 million; (2) Trust Fund and settlement for the redemption of shares of Php5,849 million; (3) higher net settlement of capital expenditures under long-term financing by Php1,792 million; (4) higher settlements of derivative financial instruments by Php374 million; (5) higher interest payments by Php212 million; (6) lower cash dividend payments by Php2,898 million; and (7) higher proceeds from the issuance of long-term debt and notes payable by Php15,698 million.
Debt Financing
Proceeds from availment of long-term debt and notes payable for the six months ended June 30, 2012 were Php27,090 million and Php557 million, respectively, mainly from Smarts, PLDTs, SPis and Digitel Groups drawings related to the financing of our capital expenditure requirements maturing loan obligations. Payments of principal and interest on our total debt amounted to Php29,055 million and Php2,764 million, respectively, in the first half of 2012, including the Digitel Groups payments of principal and interest of Php1,632 million and Php273 million, respectively.
Our consolidated long-term debt decreased by Php1,392 million, or 1%, to Php112,774 million as at June 30, 2012 from Php114,166 million as at December 31, 2011, largely due to debt amortizations and prepayments and the appreciation of the Philippine peso relative to the U.S. dollar to Php42.28 as at June 30, 2012 from Php43.92 as at December 31, 2011, partially offset by drawings from our term loan facilities. The long-term debt levels of Smart decreased by 2% to Php36,144 million and Digitel Groups decreased by 9% to Php19,430 million, while PLDTs increased by 1% to Php56,057 million as at June 30, 2012 as compared with December 31, 2011. The long-term debt of SPi stood at Php634 million as at June 30, 2012.
On March 7, 2012, PLDT signed a US$150 million term loan facility agreement with a syndicate of banks with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the facility agent. Proceeds from the facility will be used to finance capital expenditures and/or to refinance PLDTs existing obligations which were also used to finance capital expenditures for network expansion and improvement programs. The facility is payable over five years in nine equal semi-annual installments commencing on the date which falls 12 months after the date of the facility agreement with final repayment on March 7, 2017. The initial drawdown of US$100 million, or Php4,228 million, was made on May 10, 2012 and remained outstanding as at June 30, 2012.
On March 16, 2012, PLDT signed a US$25 million term loan facility agreement with Citibank, N.A. Manila to refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. This loan is payable over five years in 17 equal quarterly installments commencing 12 months from initial drawdown date with final repayment on May 30, 2017. The amount of US$25 million, or Php1,057 million, was fully drawn on May 29, 2012 and remained outstanding as at June 30, 2012.
On March 19, 2012, Smart issued Php5,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated March 15, 2012, comprised of Series A five-year notes amounting to Php1,910 million and Series B ten-year notes amounting to Php3,590 million. The Series A note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 96% payable on March 20, 2017. The Series B note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 91% payabale on March 21, 2022. Proceeds from the issuance of these notes have been used primarily for Smarts debt refinancing and capital expenditures. The aggregate amount of Php5,462 million, net of debt discount, remained outstanding as at June 30, 2012
On March 20, 2012, PLDT signed a Php2,000 million term loan facility agreement with RCBC to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over ten years with an annual amortization rate of 1% on the fifth year up to the ninth year from initial drawdown date and the balance payable upon maturity on April 12, 2022. The amount of Php2,000 million was fully drawn on April 12, 2012 and remained outstanding as at June 30, 2012.
On March 26, 2012, SPi signed a loan agreement amounting to US$15 million with Security Banking Corporation. Proceeds of the loan were used for working capital requirements The loan will mature on March 26, 2017 and is payable in 19 quarterly installments commencing on September 24, 2012. The amount of US$15 million, or Php634 million, remained outstanding as at June 30, 2012.
On April 27, 2012, PLDT signed a Php3,000 million term loan facility agreement with Land Bank of the Philippines to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from drawdown date and the balance payable upon maturity. There are no amounts outstanding under this facility as at June 30, 2012. The amount of Php3,000 million was fully drawn in July 18, 2012.
On May 29, 2012, PLDT signed a Php2,000 million term loan facility agreement with LBP to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from initial drawdown date and the balance payable upon maturity. The amount of Php2,000 million was fully drawn on June 27, 2012 and remained outstanding as at June 30, 2012.
On May 29, 2012, Smart signed a US$50 million five-year term loan facility to finance the equipment and service contracts for the modernization and expansion project with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the lender. The loan is payable over five years in nine equal semi-annual installments with the first installment due on the 12th month from signing date. No availment has been made on this facility as at June 30, 2012.
On June 7, 2012, Smart signed a Philippine Peso term loan facility with LBP to finance capital expenditures for its network upgrade and expansion program for an amount of Php1,000 million. The facility is a five-year loan with annual amortizations equivalent to 1% of the principal amount commencing on the first anniversary of the initial drawdown with the balance of 96% payable upon maturity. No availment has been made on this facility as at June 30, 2012.
On June 27, 2012, DMPI signed a Philippine Peso seven-year fixed rate term loan facility with BPI Asset Management and Trust Group and ALFM Peso Bond Fund, Inc., in the total amount of Php1,500 million to finance capital expenditures for network expansion and improvements. The facility has annual amortization payments equivalent to 1% of the outstanding principal amount with the balance payable on June 2019. First availment was made on June 29, 2012 amounting to Php700 million and remained outstanding as at June 30, 2012.
On July 27, 2012, PLDT issued Php1,500 million seven-year fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement dated July 25, 2012. Proceeds from the facility were used to finance capital expenditures for network expansion and improvement.
As a result of the acquisition of Digitel, as discussed in Other Information, PLDT assumed the obligations of JG Summit Holdings, Inc., or JGSHI, as guarantor under the Digitel and DMPI loan agreements covered by guarantees from JGSHI. These loans and guarantees contained certain representations and covenants applicable to JGSHI including that on the ownership of JGSHI in Digitel. Digitel and DMPI obtained the required consents of the lenders and export credit agencies for the replacement of JGSHI by PLDT as guarantor under these loans. As at June 30, 2012, the outstanding balance of DMPI loans covered by PLDT guarantees is Php16,990 million. There are no outstanding Digitel loans covered by PLDT guarantees as at June 30, 2012.
Approximately Php58,494 million principal amount of our consolidated outstanding long-term debt as at June 30, 2012 is scheduled to mature over the period from 2012 to 2015. Of this amount, Php24,733 million is attributable to Smart, Php22,713 million to PLDT, Php10,581 million to Digitel Group and Php467 million is attributable to SPi.
For a complete discussion of our long-term debt, see Note 20 Interest-bearing Financial Liabilities Long-term Debt to the accompanying unaudited consolidated financial statements.
Debt Covenants
Our consolidated debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS, at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments. Furthermore, certain of DMPIs debt instruments contain provisions wherein DMPI may be declared in default in case of a change in control in DMPI.
As at June 30, 2012, we were in compliance with all of our debt covenants.
See Note 20 Interest-bearing Financial Liabilities Debt Covenants to the accompanying unaudited consolidated financial statements for a detailed discussion of our debt covenants.
Financing Requirements
We believe that our available cash, including cash flow from operations, will provide sufficient liquidity to fund our projected operating, investment, capital expenditures and debt service requirements for the next 12 months.
Consolidated cash dividend payments in the first half of 2012 amounted to Php23,935 million as compared with Php26,833 million paid to shareholders in the same period in 2011.
The following table shows the dividends declared to common and preferred shareholders from the earnings for the six months ended June 30, 2012 and 2011:
Date | Amount | |||||||||||||||||||||||||||||||
Earnings | Approved | Record | Payable | Per share | Total Declared | |||||||||||||||||||||||||||
(in millions, except per share | ||||||||||||||||||||||||||||||||
amount) | ||||||||||||||||||||||||||||||||
2011 |
||||||||||||||||||||||||||||||||
Common |
||||||||||||||||||||||||||||||||
Regular Dividend |
August 2, 2011 | August 31, 2011 | September 27, 2011 | 78.00 | 14,567 | |||||||||||||||||||||||||||
Preferred |
||||||||||||||||||||||||||||||||
Series IV Cumulative
Non-convertible
Redeemable Preferred
Stock(1) |
||||||||||||||||||||||||||||||||
Various | Various | Various | | 25 | ||||||||||||||||||||||||||||
10% Cumulative
Convertible Preferred
Stock |
Various | Various | Various | 1.00 | 260 | |||||||||||||||||||||||||||
Charged to Retained Earnings |
14,852 | |||||||||||||||||||||||||||||||
2012 |
||||||||||||||||||||||||||||||||
Common |
||||||||||||||||||||||||||||||||
Regular Dividend |
August 7, 2012 | August 31, 2012 | September 28, 2012 | 60.00 | 12,963 | |||||||||||||||||||||||||||
Preferred |
||||||||||||||||||||||||||||||||
Series IV Cumulative
Non-convertible
Redeemable Preferred
Stock(1) |
August 7, 2012 | August 22, 2012 | September 15, 2012 | | 12 | |||||||||||||||||||||||||||
Charged to Retained Earnings |
12,975 | |||||||||||||||||||||||||||||||
(1) Dividends were declared based on total amount paid up. |
See Note 19 Equity to the accompanying unaudited consolidated financial statements for further details.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have any current or future effect on our financial position, results of operations, cash flows, changes in stockholders equity, liquidity, capital expenditures or capital resources that are material to investors.
Equity Financing
As part of our goal to maximize returns to our shareholders, in 2008, we obtained Board of Directors approval for a share buyback program of up to five million shares of PLDTs common stock, representing approximately 3% of PLDTs then total outstanding shares of common stock. Under the share buyback program, we acquired a total of approximately 2.72 million shares of PLDTs common stock for a total consideration of Php6,505 million representing approximately 1% of PLDTs outstanding shares of common stock, at a weighted average price of Php2,388 per share as at June 30, 2012. The effect of the acquisition of shares of PLDTs common stock pursuant to the share buyback program was considered in the computation of our basic and diluted earnings per common share for the first half of 2012 and 2011. See to Note 8 Earnings Per Common Share, Note 19 Equity and Note 27 Financial Assets and Liabilities to the accompanying unaudited consolidated financial statements for further details.
Contractual Obligations and Commercial Commitments
Contractual Obligations
For a discussion of our consolidated contractual undiscounted obligations as at June 30, 2012 and 2011, see Note 27 Financial Assets and Liabilities to the accompanying unaudited consolidated financial statements.
Commercial Commitments
Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php95 million and Php913 million as at June 30, 2012 and December 31, 2011, respectively. These commitments will expire within one year.
Quantitative and Qualitative Disclosures about Market Risks
Our operations are exposed to various risks, including liquidity risk, foreign currency exchange risk, interest rate risk, credit risk and capital management risk. The importance of managing these risks has significantly increased in light of considerable change and continuing volatility in both the Philippine and international financial markets. With a view to managing these risks, we have incorporated financial risk management functions in our organization, particularly in our treasury operations, equity issues and sales of certain assets.
For further discussions of these risks, see Note 27 Financial Assets and Liabilities to the accompanying unaudited consolidated financial statements.
The following table sets forth the estimated consolidated fair values of our financial assets and liabilities recognized as at June 30, 2012 and March 31, 2012:
Fair Values | ||||||||
June 30, | March 31, | |||||||
2012 | 2012 | |||||||
(Unaudited) | ||||||||
(in millions) | ||||||||
Noncurrent Financial Assets |
||||||||
Available-for-sale financial assets |
||||||||
Listed equity securities |
78 | 76 | ||||||
Unlisted equity securities |
5,553 | 7,101 | ||||||
Investments in debt securities |
154 | 155 | ||||||
Advances and refundable deposits net of current portion |
885 | 852 | ||||||
Total noncurrent financial assets |
6,670 | 8,184 | ||||||
Current Financial Assets |
||||||||
Cash and cash equivalents |
31,612 | 46,792 | ||||||
Short-term investments |
611 | 607 | ||||||
Trade and other receivables net |
16,223 | 16,014 | ||||||
Derivative financial assets |
62 | 438 | ||||||
Current portion of investment in debt securities |
370 | 363 | ||||||
Current portion of advances and refundable deposits |
7,979 | 8,050 | ||||||
Total current financial assets |
56,857 | 72,264 | ||||||
Total Financial Assets |
63,527 | 80,448 | ||||||
Noncurrent Financial Liabilities |
||||||||
Interest-bearing financial liabilities |
107,836 | 98,538 | ||||||
Derivative financial liabilities |
2,425 | 2,236 | ||||||
Customers deposits |
1,809 | 1,722 | ||||||
Deferred credits and other noncurrent liabilities |
16,188 | 16,640 | ||||||
Total noncurrent financial liabilities |
128,258 | 119,136 | ||||||
Current Financial Liabilities |
||||||||
Accounts payable |
23,623 | 23,815 | ||||||
Accrued expenses and other current liabilities |
47,291 | 44,971 | ||||||
Interest-bearing financial liabilities |
13,935 | 21,340 | ||||||
Derivative financial liabilities |
90 | 985 | ||||||
Dividends payable |
834 | 24,723 | ||||||
Total current financial liabilities |
85,773 | 115,834 | ||||||
Total Financial Liabilities |
214,031 | 234,970 | ||||||
The following table sets forth the amount of consolidated losses recognized for the financial assets and liabilities for the six months ended June 30, 2012 and for the three months ended March 31, 2012:
June 30, | March 31, | |||||||
2012 | 2012 | |||||||
(in millions) | ||||||||
Profit and Loss |
||||||||
Interest income |
626 | 357 | ||||||
Losses on derivative financial instruments net |
(403 | ) | (95 | ) | ||||
Accretion on financial liabilities |
(546 | ) | (288 | ) | ||||
Interest on loans and other related items |
(3,150 | ) | (1,591 | ) | ||||
Other Comprehensive Income |
||||||||
Net fair value gains on cash flow hedges |
38 | 32 | ||||||
Net gains on available-for-sale financial assets net of tax |
3 | 1 | ||||||
(3,432 | ) | (1,584 | ) | |||||
Impact of Inflation and Changing Prices
Inflation can be a significant factor in the Philippine economy, and we are continually seeking ways to minimize its impact. The average inflation rate in the Philippines in the first half of 2012 and 2011 was 3.0% and 4.3%, respectively. Moving forward, we currently expect inflation to increase, which may have an impact on our operations.
PART II OTHER INFORMATION
Divestment of CURE
On October 26, 2011, PLDT received the Order issued by the NTC approving the application jointly filed by PLDT and Digitel for the sale and transfer of initially approximately 51.6% of the outstanding capital stock of Digitel to PLDT. The approval of the application is subject to conditions which included the divestment by PLDT of CURE, in accordance with the Divestment Plan, as follows:
| CURE will sell its Red Mobile business to Smart consisting primarily of its subscriber base, brand and fixed assets. There will be a nine-month transition period to effect this first requirement; and |
| Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, 10 MHz of 3G frequency in the 2100 band, or the Affected Frequency, and related permits, or the Divestment Sale. |
In compliance with the commitments in the divestment plan, CURE completed the sale and transfer of its Red Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, which included: (a) the sale of CUREs Red Mobile trademark to Smart;
(b) the transfer of CUREs existing Red Mobile subscriber base to Smart; and (c) the sale of CUREs fixed assets to Smart at net book value.
In a letter dated July 26, 2012, Smart informed the NTC that it has complied with the terms and conditions of the divestment plan as CURE had rearranged its assets, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, its only remaining assets as at June 30, 2012 are its congressional franchise, the 10 MHz 3G frequency and related permits.
Smart also informed the NTC that the minimum Cost Recovery Amount to which the PLDT Group is entitled to enable the PLDT Group to recover its investment in CURE, includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through a sale of shares of stock to the winning bidder.
Mandatory Tender Offer in connection with the Digitel Acquisition
Under the SRC, PLDT is required to conduct a mandatory tender offer for all the remaining Digitel shares held by the noncontrolling shareholders, in connection with PLDTs acquisition of 51.6% interest in Digitel from the seller-parties. On December 5, 2011, PLDT filed its tender offer report on Philippine SEC Form 19.1 setting forth the terms of the mandatory tender offer to purchase the remaining Digitel shares at the price of Php1.6033 per Digitel share, payable in the form of either PLDT shares issued at Php2,500 per share, or one PLDT common share for every 1,559.28 Digitel shares, or cash, at the option of noncontrolling Digitel shareholders, except for tendering shareholders residing outside the Philippines who will only be paid in cash. The tender offer period commenced on December 7, 2011 and ended on January 16, 2012. A total of 2,888 million shares were tendered by Digitel noncontrolling shareholders, representing approximately 94% of the shares held by the public. Of the shares tendered, 13% or 374 million Digitel shares were paid in cash for an aggregate amount of Php600 million, and 87% or 2,514 million Digitel shares were paid in PLDT common shares for a total of approximately 1.61 million PLDT common shares, which were issued on January 27, 2012.
Conversion of Exchangeable Bonds
On February 7, 2012, PLDTs Board of Directors authorized the exchange of 78.4% of the 2014 Exchangeable Bonds issued by DCPL with redemption value of US$340 million, or Php14,641 million, in exchange for 14,641 million Digitel common shares. On May 8, 2012, PLDTs Board of Directors authorized the exchange of the remaining 2014 Exchangeable Bonds with redemption value of US$27 million, or Php1,143 million, in exchange for 1,143 million Digitel common shares. The exchange is subject to the approval of the Philippine SEC of the increase in the Authorized Capital Stock of Digitel.
As a result of the tender offer, the exchanges described above and PLDTs purchase of Digitel common shares from the open market, PLDT holds 99.5% of the outstanding capital of Digitel as at June 30, 2012.
Digitels Voluntary Delisting
On January 25, 2012, Digitel filed a petition for voluntary delisting of its shares with the Philippine Stock Exchange, or PSE, since its public ownership level has fallen below the minimum 10% required by the PSE. On February 22, 2012, the PSE granted the petition for voluntary delisting and the Digitel shares were delisted and ceased to be tradable on the PSE effective March 26, 2012.
PCEVs Voluntary Delisting
On November 2, 2011, the Board of Directors of PCEV authorized PCEVs management to take such steps as necessary for the voluntary delisting of PCEV from the PSE in accordance with the PSE Rules on Voluntary Delisting. On December 2, 2011, PCEVs Board of Directors also created a special committee to review and evaluate any tender offer to purchase the shares owned by the remaining noncontrolling shareholders representing 0.49% of the outstanding common stock of PCEV. Smart filed a Tender Offer Report with the Philippine SEC on March 15, 2012. The Tender Offer commenced on March 19, 2012 and ended on April 18, 2012, with approximately 25.1 million shares or 43.4% of PCEVs noncontrolling shares tendered, thereby increasing Smarts ownership to 99.7% of the outstanding common stock of PCEV. The aggregate cost of the Tender Offer paid by Smart to noncontrolling shareholders on April 30, 2012 amounted to Php115 million. PCEV, on the other hand, filed with the PSE its petition for voluntary delisting on March 19, 2012. On April 25, 2012, the PSE approved the petition for voluntary delisting and PCEVs shares were delisted and ceased to be tradable on the PSE effective May 18, 2012.
Decrease in PCEVs Authorized Capital Stock/Increase in Par Value of PCEVs Common Stock
On July 31, 2012, PCEVs stockholders authorized the decrease in authorized capital stock of PCEV from Php12,800 million divided into three classes: 12,060 million shares of common stock with a par value of Php1.00 each; 120 million shares of Class I preferred stock with a par value of Php2.00 each; and 500 million shares of Class II preferred stock with a par value of Php1.00 each to Php12,177 million divided into three classes: 574 thousand shares of common stock with a par value of Php21,000 each; 33 million shares of Class I preferred stock with a par value of Php2.00 each; and 50 million shares of Class II preferred stock with a par value of Php1.00 each.
PCEVs stockholders also authorized the increase in the par value of the shares of common stock of PCEV from Php1.00 per share to Php21,000 per share. This is for purposes of rationalizing the stockholders profile of PCEV following its delisting from the PSE effective May 18, 2012 and reverting to its status as a private company. Presently, Smart owns 11,651 million shares representing 99.7% of the outstanding common stock of PCEV and the balance of 33 million shares representing 0.3% are owned by 19,607 stockholders. Around 75% of these stockholders own 300 or less shares each and many of them have been inactive as borne out by their non-participation in PCEVs stockholders meetings either in person or by proxy. Communications or reports from PCEV have also been unsuccessfully delivered to the respective addresses on record of many of these stockholders despite diligent efforts and reasonable means employed by PCEV to effect such delivery.
The increase in par value of the common stock will have the following effects: (1) the number of shares of common stock into which a portion of the authorized capital stock is divided will decrease from 12,060 million shares to 574 thousand shares; (2) the number of issued and outstanding shares of common stock will decrease from 11,772 million shares to 560 thousand shares; and (3) the number of holders or common stock will decrease from 19,608 to 98, of which only 3 holders will hold 100 or more shares.
Each multiple of 21,000 shares of common stock, with a par value of Php1.00 per share, will be reduced to one share, with a par value of Php 21,000. Stockholdings of less than 21,000 shares, or the Residual Shares, will be paid the fair value thereof equivalent to Php4.50 per share, or the Cash Value. This Cash Value is the same price that Smart paid to the holders of PCEV shares who participated and tendered their shares in the Tender Offer conducted by Smart during the period from March 19, 2012 to April 18, 2012 as discussed in the preceding section on Voluntary Delisting. The payment for the Cash Value will be made available to the holders of the Residual Shares beginning on the 30th day following the approval by the Philippine SEC of the decrease in authorized capital stock and amendments to the Articles of Incorporation of PCEV.
On July 31, 2012, PCEVs stockholders authorized the amendments to the Seventh Article of the Articles of Incorporation to reflect the decrease in authorized capital stock, decrease in number of shares of preferred stock, increase in par value of common stock and decrease in the number of shares of common stock.
Additional Investment of PCEV in Beacon/PCEVs Sale of Beacons Preferred Shares
On January 20, 2012, PCEV and Beacon entered into a Subscription Agreement for the subscription by PCEV to 135 million Beacon common shares for a total cash consideration of Php2,700 million. On the same date, Metro Pacific Investments Corporation, or MPIC, also subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million.
On June 6, 2012, PCEV sold 282.2 million of its Beacon preferred shares to MPIC for a total consideration of Php3,563 million. PCEV realized a proportionate deferred gain amounting to Php2,012 million upon sale of the preferred shares to MPIC.
PLDTs Creation of Voting Preferred Stock |
On July 5, 2011, the Board of Directors of PLDT approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized Preferred Capital Stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendments, or the Amendments. The shares of Voting Preferred Stock may be issued, owned, or transferred only to or by: (a) a citizen of the Philippines or a domestic partnership or association wholly-owned by citizens of the Philippines; (b) a corporation organized under the laws of the Philippines of which at least 60% of the capital stock entitled to vote is owned and held by citizens of the Philippines and at least 60% of the board of directors of such corporation are citizens of the Philippines; and (c) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee qualifies under paragraphs (a) and (b) above and at least 60% of the funds accrue to the benefit of citizens of the Philippines, or Qualified Owners. The holders of Voting Preferred Stock will have voting rights at any meeting of the stockholders of PLDT for the election of directors and for all other purposes, with one vote in respect of each share of Voting Preferred Stock.
The Special Meeting of Stockholders scheduled on September 20, 2011 for purposes of presenting and obtaining stockholders approval of the Amendments was cancelled by the Board of Directors due to an anticipated lack of quorum.
On March 22, 2012, PLDTs stockholders approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized preferred capital stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendment. Thereafter, the Amended Articles of Incorporation were submitted to the Philippine SEC for approval, which the latter approved on June 5, 2012.
Upon the approval of the Amendments by the Philippine SEC, the Board of Directors, pursuant to the authority granted to it in the Seventh Article of PLDTs Articles of Incorporation, may determine the specific terms, features and limitations of the Voting Preferred Stock and, as it deems necessary to protect the interest of PLDT and its stakeholders, authorize the issuance of shares of Voting Preferred Stock to Qualified Owners. It is contemplated that the shares of Voting Preferred Stock will have the following other features: (a) entitled to dividends at such rate to be determined by the Board of Directors, payable before any dividends are paid to the holders of Common Stock; (b) not convertible to Common Stock or to any shares of stock of PLDT of any class; (c) redeemable at the option of PLDT; (d) holders will have no pre-emptive right to subscribe or purchase any shares of stock of any class, or convertible debt, securities or warrants issued, sold or disposed by PLDT; and (e) in the event of dissolution or liquidation or winding up of PLDT, holders will be entitled to be paid in full, or pro-rata insofar as the assets of PLDT will permit, the par value of such shares of Voting Preferred Stock and any accrued or unpaid dividends thereon before any distribution shall be made to holders of shares of Common Stock.
As at the date of issuance of this report, none of the Voting Preferred Stock has been issued.
Redemption of Preferred Shares
On September 23, 2011, the Board of Directors approved the redemption, or the Redemption, of all outstanding shares of PLDTs 10% Cumulative Convertible Preferred Stock Series A to FF, or the SIP Preferred Shares, and all such shares were redeemed and retired effective January 19, 2012, or the Redemption Date.
The record date for the determination of the holders of outstanding SIP Preferred Shares subject to Redemption, or the Holders of SIP Preferred Shares, was fixed on October 10, 2011, or the Record Date. In accordance with the terms and conditions of the SIP Preferred Shares, the Holders of SIP Preferred Shares as of the Record Date are entitled to payment of the redemption price in an amount equal to the par value of such shares, plus accrued and unpaid dividends thereon up to the Redemption Date, or the Redemption Price.
PLDT has set aside Php5.9 billion (the amount required to fund the redemption price for the SIP Preferred Shares in a trust account) in addition to the Php2.3 billion funds from unclaimed dividends on SIP Preferred Shares, or the total amount of Php8.2 billion, to fund the redemption price for the SIP Preferred Shares, or the Redemption Trust Fund, in a trust account, or the Trust Account, in the name of Rizal Commercial Banking Corporation, as Trustee. Pursuant to the terms of the Trust Account, the Trustee will continue to hold in trust, for the benefit of those Holders of SIP Preferred Shares who failed to claim their Redemption Price for their SIP Preferred Shares for a period of ten years from the Redemption Date, or until January 19, 2022. After the said date, any and all remaining balance in the Trust Account shall be returned to PLDT and revert to its general funds. Any interests on the Redemption Trust Fund shall accrue for the benefit of, and be paid from time to time to, PLDT.
As at January 19, 2012, notwithstanding that any stock certificate representing the SIP Preferred Shares was not surrendered for cancellation, the SIP Preferred Shares were no longer deemed outstanding and the right of the holders of such shares to receive dividends thereon ceased to accrue and all rights with respect to such SIP Preferred Shares ceased and terminated, except only the right to receive the Redemption Price of such SIP Preferred Shares, but without interest thereon.
All SIP Preferred Shares of PLDTs Series A to FF 10% Cumulative Convertible Preferred Stock were redeemed and retired effective January 19, 2012. A total amount of Php192 million was withdrawn from the Trust Account, representing total payments on redemption as at June 30, 2012. The balance of the Trust Account of Php7,970 million was presented as part of the current portion of advances and other noncurrent assets and the related redemption liability of the same amount was presented as part of accrued expenses and other current liabilities in our statement of financial position as at June 30, 2012.
On May 8, 2012, the Board of Directors approved the redemption of all outstanding shares of PLDTs Series GG 10% Cumulative Convertible Preferred Stock effective August 30, 2012.
PLDT expects to similarly redeem the outstanding shares of Series HH and II 10% Cumulative Convertible Preferred Stock as and when they become eligible for redemption.
See Note 19 Equity to the accompanying unaudited consolidated financial statements for further details.
DMPIs Equity Restructuring
On April 12, 2012, the Board of Directors of Digitel and DMPI approved the following: (1) the conversion of Digitels deposit for future stock subscription to DMPI of Php17,665 million and a portion of Digitels advances to DMPI in the amount of Php13,767 million into additional shares of stock at a premium which resulted in an additional paid-in capital, or APIC, of Php30,909 million; and (2) the application of the adjusted APIC, which is comprised of the APIC from the conversion of advances into equity, as discussed in item (1), and the outstanding APIC of Php34 million, against the deficit of Php30,943 million as at December 31, 2011.
On June 19, 2012, the Philippine SEC approved DMPIs equity restructuring, which involved the application of DMPIs APIC in item (2) above against the deficit as at December 31, 2011.
Digitels Equity Restructuring
On April 12, 2012, the Board of Directors of Digitel approved the following: (a) the amendment of Digitels Articles of Incorporation to increase its authorized capital stock from 25 billion shares to 29.5 billion shares with a par value of Php1.00 per share in preparation for the exchange of the remaining 2014 Zero Coupon Exchangeable Bonds issued by DCPL into Digitel shares; (b) the subsequent amendment of Digitels Articles of Incorporation to decrease its authorized and subscribed capital stock through the reduction in par value to create APIC; and (c) the application of Digitels adjusted APIC against the deficit of Php34.5 billion as at April 30, 2012. Subsequently, on June 28, 2012, the Digitel shareholders ratified these changes in the authorized capital stock. As at the date of issuance of this report, the approval of the above transactions is pending with the Philippine SEC.
Corporate Merger of MSSI and ePLDT
In April 2012, the Board of Directors of MSSI and ePLDT approved the plan of merger of MSSI and ePLDT, with ePLDT as the surviving company, in order to realize economies in operation and achieve greater efficiency in the management of their business. The merger was approved by two-thirds vote of MSSI and ePLDTs stockholders on April 13, 2012 and April 27, 2012, respectively. On June 11, 2012, the Philippine SEC approved the plan and articles of merger. The merger has no impact on the unaudited consolidated financial statements of the PLDT Group.
Investment in PDRs of MediaQuest
On May 8, 2012, the PLDT Board of Directors approved a Php6 billion investment by ePLDT, in Philippine Depositary Receipts, or PDRs, to be issued by MediaQuest Holdings, Inc., or MediaQuest, a wholly-owned entity of the PLDT Beneficial Trust Fund. MediaQuest will invest the proceeds of the PDRs in its wholly-owned subsidiaries, Associated Broadcasting Company Development Corporation, or TV5, and Mediascape, Inc., or Cignal TV. TV5 operates free-to-air TV and radio stations while Cignal TV operates a DTH satellite TV business.
Since 2007, TV5 has grown its market share from 2.3% to 18% at the end of 2011 for Metro Manila and from 2.7% to 15.6% nationwide. Cignal TV is now the largest DTH Pay-TV operator in the Philippines, with over 250,000 subscribers. This investment will provide MediaQuest with the additional funding it requires in order to sustain the growth momentum of TV5 and Cignal TV.
The PLDT Groups financial investment in media is consistent with its overall strategy of evolving from a traditional telecommunications business into a multi-media service company. It mirrors as well similar investments in media assets by other leading telecommunications companies worldwide. MediaQuest will serve as the anchor for the PLDT Groups media offerings in terms of creation of content for delivery across the PLDT Groups various platforms.
ePLDT made a deposit for future stock subscription of Php4 billion in MediaQuest as at June 30, 2012. An additional deposit of Php1 billion was made on July 6, 2012. Mediaquest will file for an increase in authorized capital stock with the Philippine SEC once the necessary documentation has been completed.
See Note 10 Investments in Associates and Joint Ventures to the accompanying unaudited consolidated financial statements for further discussion.
ePLDTs Sale of Investment in Philweb
On July 10, 2012, ePLDT entered into a share purchase agreement with Philweb for the sale of ePLDTs 27% interest in Philweb, an Internet-based online gaming company. The sale of the 398 million shares will be executed in four tranches, which will be completed by the end of 2013. The first tranche, which was transacted on July 13, 2012, and the second tranche, which will be paid on December 12, 2012, are both for 93.5 million shares, and both for a total purchase price of Php1 billion. The first tranche payment is net of subscriptions payable of Php75 million. The third tranche will be paid on June 13, 2013 for 93.5 million shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from the actual date of payment of the second tranche to the actual date of payment of the third tranche. The fourth tranche will be paid on December 13, 2013 for 118 million shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from the actual date of payment of the second tranche to the actual date of payment of the fourth tranche.
See Note 10 Investments in Associates and Joint Ventures to the accompanying unaudited consolidated financial statements for further discussion.
Related Party Transactions
For a detailed discussion of the related party transactions, see Note 24 Related Party Transactions to the accompanying unaudited consolidated financial statements.
ANNEX AGING OF ACCOUNTS RECEIVABLE
The following table shows the aging of our consolidated receivables as at June 30, 2012:
31-60 | 61-90 | Over 91 | ||||||||||||||||||
Type of Accounts Receivable | Total | Current | Days | Days | Days | |||||||||||||||
(in millions) | ||||||||||||||||||||
Retail subscribers |
12,176 | 2,671 | 1,017 | 304 | 8,184 | |||||||||||||||
Corporate subscribers |
9,979 | 1,940 | 992 | 654 | 6,393 | |||||||||||||||
Foreign administrations |
5,143 | 1,413 | 1,485 | 788 | 1,457 | |||||||||||||||
Domestic carriers |
853 | 205 | 94 | 84 | 470 | |||||||||||||||
Dealers, agents and others |
3,790 | 2,714 | 147 | 204 | 725 | |||||||||||||||
Total |
31,941 | 8,943 | 3,735 | 2,034 | 17,229 | |||||||||||||||
Less: Allowance for doubtful accounts. |
15,718 | |||||||||||||||||||
Total Receivables net |
16,223 | |||||||||||||||||||
SIGNATURES
Pursuant to the requirements of the Securities Regulation Code, the registrant has duly caused this report for the first half of 2012 to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant: PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
Signature and Title: /s/ Napoleon L. Nazareno
Napoleon L. Nazareno President and Chief Executive Officer Signature and Title: /s/ Anabelle Lim-Chua |
Anabelle Lim-Chua
Senior Vice President and Treasurer
(Principal Financial Officer)
Signature and Title: /s/ June Cheryl A. Cabal-Revilla
June Cheryl A. Cabal-Revilla
First Vice President and Controller
(Principal Accounting Officer)
Date: August 7, 2012
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS AT JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011 (AUDITED)
AND FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (UNAUDITED)
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at June 30, 2012 and December 31, 2011
(in million pesos, except par value per share amounts and number of shares)
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
|
||||||||
Noncurrent Assets |
||||||||
Property, plant and equipment (Notes 3, 5, 9, 12, 20 and 27) |
191,790 | 197,731 | ||||||
Investments in associates and joint ventures (Notes 3, 4, 5, 10, 24 and 27) |
24,793 | 17,865 | ||||||
Available-for-sale financial assets (Notes 6, 10 and 27) |
5,631 | 7,181 | ||||||
Investment in debt securities net of current portion (Notes 11 and 27) |
150 | 150 | ||||||
Investment properties (Notes 3, 6, 9, 12 and 27) |
1,115 | 1,115 | ||||||
Goodwill and intangible assets (Notes 3, 4, 5, 14, 21 and 27) |
78,560 | 80,656 | ||||||
Deferred income tax assets net (Notes 3, 4, 7 and 27) |
5,116 | 5,975 | ||||||
Prepayments net of current portion (Notes 3, 5, 18, 24, 25 and 27) |
8,947 | 8,869 | ||||||
Noncurrent asset held-for-sale (Notes 10 and 27) |
1,128 | | ||||||
Advances and other noncurrent assets net of current portion (Note 27) |
1,383 | 1,340 | ||||||
Total Noncurrent Assets |
318,613 | 320,882 | ||||||
Current Assets |
||||||||
Cash and cash equivalents (Notes 15 and 27) |
31,612 | 46,057 | ||||||
Short-term investments (Note 27) |
611 | 558 | ||||||
Trade and other receivables (Notes 3, 5, 16, 18, 24 and 27) |
16,223 | 16,245 | ||||||
Inventories and supplies (Notes 3, 4, 5, 17 and 27) |
2,893 | 3,827 | ||||||
Derivative financial assets (Note 27) |
62 | 366 | ||||||
Current portion of investment in debt securities (Notes 11 and 27) |
370 | 358 | ||||||
Current portion of prepayments (Notes 18 and 27) |
6,771 | 7,227 | ||||||
Current portion of advances and other noncurrent assets (Notes 19, 27 and 28) |
8,119 | 126 | ||||||
Total Current Assets |
66,661 | 74,764 | ||||||
TOTAL ASSETS |
385,274 | 395,646 | ||||||
EQUITY AND LIABILITIES |
||||||||
|
||||||||
Equity |
||||||||
Preferred stock, Php10 par value per share, authorized - 822,500,000 shares;
issued and outstanding - 36,026,550 shares as at June 30, 2012 and
441,912,370 shares as at December 31, 2011 (Notes 8, 19, 27 and 28) |
360 | 4,419 | ||||||
Common stock, Php5 par value per share, authorized - 234,000,000 shares;
issued - 218,779,886 shares and outstanding - 216,055,775 shares as at June 30, 2012;
and issued - 217,160,444 shares and outstanding - 214,436,333 shares
as at December 31, 2011 (Notes 8, 19, 27 and 28) |
1,093 | 1,085 | ||||||
Treasury stock - 2,724,111 shares as at June 30, 2012 and December 31, 2011 (Notes
8, 19 and 27) |
(6,505 | ) | (6,505 | ) | ||||
Capital in excess of par value |
130,596 | 127,246 | ||||||
Retained earnings (Note 19) |
21,727 | 26,232 | ||||||
Other comprehensive income (Note 6) |
(1,155 | ) | (644 | ) | ||||
Total Equity Attributable to Equity Holders of PLDT |
146,116 | 151,833 | ||||||
Noncontrolling interests (Note 6) |
207 | 386 | ||||||
TOTAL EQUITY |
146,323 | 152,219 | ||||||
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
As at June 30, 2012 and December 31, 2011
(in million pesos)
2012 | 2011 | |||||||||||
(Unaudited) | (Audited) | |||||||||||
Noncurrent Liabilities |
||||||||||||
Interest-bearing financial liabilities net of current portion (Notes 3, 4, 5, 9, 20, 23 and 27) | 100,300 | 91,280 | ||||||||||
Deferred income tax liabilities net (Notes 3, 4, 7 and 27) |
3,395 | 2,902 | ||||||||||
Derivative financial liabilities (Note 27) |
2,425 | 2,235 | ||||||||||
Pension and other employee benefits (Notes 3, 5, 23, 25 and 27) |
1,417 | 609 | ||||||||||
Customers deposits (Note 27) |
2,268 | 2,272 | ||||||||||
Deferred credits and other noncurrent liabilities (Notes 3, 5, 9, 21, 23, 27 and 28) |
19,749 | 22,642 | ||||||||||
Total Noncurrent Liabilities | 129,554 | 121,940 | ||||||||||
Current Liabilities |
||||||||||||
Accounts payable (Notes 22, 24, 26 and 27) |
25,088 | 29,554 | ||||||||||
Accrued expenses and other current liabilities (Notes 3, 10, 14, 19, 20, 21, 23, 24, 25, 26, 27 and 28) |
65,459 | 58,271 | ||||||||||
Derivative financial liabilities (Note 27) |
90 | 924 | ||||||||||
Provision for claims and assessments (Notes 3, 26 and 27) |
1,555 | 1,555 | ||||||||||
Current portion of interest-bearing financial liabilities (Notes 3, 4, 5, 9, 20, 23 and 27) |
13,935 | 26,009 | ||||||||||
Dividends payable (Notes 19 and 27) |
834 | 2,583 | ||||||||||
Income tax payable (Notes 7 and 27) |
2,436 | 2,591 | ||||||||||
Total Current Liabilities | 109,397 | 121,487 | ||||||||||
TOTAL LIABILITIES | 238,951 | 243,427 | ||||||||||
TOTAL EQUITY AND LIABILITIES | 385,274 | 395,646 | ||||||||||
See accompanying Notes to Consolidated Financial Statements. |
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the Periods Ended June 30, 2012 and 2011
(in million pesos, except earnings per common share amounts)
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated Note | (As Restated Note | |||||||||||||||
2012 | 2) | 2012 | 2) | |||||||||||||
(Unaudited) | ||||||||||||||||
REVENUES |
||||||||||||||||
Service revenues (Notes 2, 3 and 4) |
84,725 | 75,618 | 41,945 | 37,911 | ||||||||||||
Non-service revenues (Notes 3, 4 and 5) |
1,507 | 1,141 | 711 | 568 | ||||||||||||
86,232 | 76,759 | 42,656 | 38,479 | |||||||||||||
EXPENSES |
||||||||||||||||
Depreciation and amortization (Notes 3, 4 and 9) |
15,524 | 13,118 | 8,054 | 6,515 | ||||||||||||
Compensation and employee benefits (Notes 3, 5 and 25) |
13,967 | 10,649 | 7,877 | 5,308 | ||||||||||||
Repairs and maintenance (Notes 12, 17 and 24) |
6,598 | 4,676 | 3,318 | 2,369 | ||||||||||||
Interconnection costs (Note 2) |
6,051 | 5,977 | 2,656 | 2,841 | ||||||||||||
Cost of sales (Notes 5, 17 and 24) |
4,483 | 2,406 | 1,875 | 1,177 | ||||||||||||
Selling and promotions |
4,353 | 2,690 | 2,674 | 1,535 | ||||||||||||
Professional and other contracted services (Note 24) |
2,886 | 2,510 | 1,312 | 1,320 | ||||||||||||
Rent (Notes 3 and 27) |
2,861 | 2,023 | 1,368 | 1,009 | ||||||||||||
Taxes and licenses (Note 26) |
1,905 | 1,180 | 904 | 551 | ||||||||||||
Communication, training and travel |
1,196 | 857 | 614 | 444 | ||||||||||||
Asset impairment (Notes 3, 4, 5, 9, 10, 16, 17 and 27) |
1,185 | 812 | 564 | 631 | ||||||||||||
Amortization of intangible assets (Notes 3, 4 and 14) |
785 | 144 | 721 | 69 | ||||||||||||
Insurance and security services (Note 24) |
737 | 636 | 352 | 327 | ||||||||||||
Other expenses (Note 24) |
710 | 834 | 309 | 412 | ||||||||||||
63,241 | 48,512 | 32,598 | 24,508 | |||||||||||||
22,991 | 28,247 | 10,058 | 13,971 | |||||||||||||
OTHER INCOME (EXPENSES) |
||||||||||||||||
Foreign exchange gains net (Notes 4, 9 and 27) |
1,565 | 426 | 329 | 106 | ||||||||||||
Equity share in net earnings of associates and joint ventures (Notes 4 and 10) |
1,311 | 839 | 1,037 | 647 | ||||||||||||
Interest income (Notes 4, 5, 11 and 15) |
626 | 645 | 269 | 324 | ||||||||||||
Gains (losses) on derivative financial instruments net (Notes 4 and 27) |
(403 | ) | 484 | (308 | ) | 62 | ||||||||||
Financing costs net (Notes 4, 5, 9, 20 and 27) |
(3,377 | ) | (3,178 | ) | (1,696 | ) | (1,648 | ) | ||||||||
Other income (Notes 4 and 18) |
3,242 | 631 | 2,400 | 274 | ||||||||||||
2,964 | (153 | ) | 2,031 | (235 | ) | |||||||||||
INCOME BEFORE INCOME TAX (Note 4) |
25,955 | 28,094 | 12,089 | 13,736 | ||||||||||||
PROVISION FOR INCOME TAX (Notes 3, 4 and 7) |
6,484 | 6,798 | 2,688 | 3,166 | ||||||||||||
NET INCOME (Note 4) |
19,471 | 21,296 | 9,401 | 10,570 | ||||||||||||
ATTRIBUTABLE TO: |
||||||||||||||||
Equity holders of PLDT (Notes 4 and 8) |
19,502 | 21,299 | 9,423 | 10,565 | ||||||||||||
Noncontrolling interests (Notes 4 and 8) |
(31 | ) | (3 | ) | (22 | ) | 5 | |||||||||
19,471 | 21,296 | 9,401 | 10,570 | |||||||||||||
Earnings Per Share Attributable to Common Equity Holders of PLDT
(Note 8) |
||||||||||||||||
Basic |
90.15 | 112.83 | 43.56 | 55.96 | ||||||||||||
Diluted |
90.15 | 112.76 | 43.56 | 55.96 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements. |
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Periods Ended June 30, 2012 and 2011
(in million pesos)
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | ||||||||||||||||
NET INCOME (Note 4) |
19,471 | 21,296 | 9,401 | 10,570 | ||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) (Note 6) |
||||||||||||||||
Net fair value gains on cash flow hedges (Note 27) |
38 | | 6 | | ||||||||||||
Gains (losses) from changes in fair value of available-for-sale
financial assets recognized during the period (Note 10) |
3 | | 2 | (2 | ) | |||||||||||
Depreciation of revaluation increment on investment properties
transferred to property, plant and equipment during the period |
(1 | ) | | | | |||||||||||
Foreign currency translation differences of subsidiaries |
(551 | ) | (141 | ) | 1 | (96 | ) | |||||||||
Total Other Comprehensive Income (Loss) |
(511 | ) | (141 | ) | 9 | (98 | ) | |||||||||
TOTAL COMPREHENSIVE INCOME |
18,960 | 21,155 | 9,410 | 10,472 | ||||||||||||
ATTRIBUTABLE TO: |
||||||||||||||||
Equity holders of PLDT |
18,991 | 21,159 | 9,432 | 10,466 | ||||||||||||
Noncontrolling interests |
(31 | ) | (4 | ) | (22 | ) | 6 | |||||||||
18,960 | 21,155 | 9,410 | 10,472 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Six Months Ended June 30, 2012 and 2011
(in million pesos)
Total Equity | ||||||||||||||||||||||||||||||||||||||
Attributable to | ||||||||||||||||||||||||||||||||||||||
Common | Capital in Excess of | Other Comprehensive | Equity Holders | Noncontrolling | Total | |||||||||||||||||||||||||||||||||
(Unaudited) | Preferred Stock | Stock | Treasury Stock | Par Value | Retained Earnings | Income | of PLDT | Interests | Equity | |||||||||||||||||||||||||||||
Balances as at January 1, 2011 | 4,419 | 947 | (6,505 | ) | 62,890 | 36,594 | (1,276 | ) | 97,069 | 316 | 97,385 | |||||||||||||||||||||||||||
Total comprehensive income: | | | | | 21,299 | (140 | ) | 21,159 | (4 | ) | 21,155 | |||||||||||||||||||||||||||
Net income (Notes 4 and 8) | | | | | 21,299 | | 21,299 | (3 | ) | 21,296 | ||||||||||||||||||||||||||||
Other comprehensive loss (Note 6) | | | | | | (140 | ) | (140 | ) | (1 | ) | (141 | ) | |||||||||||||||||||||||||
Cash dividends (Note 19) | | | | | (26,937 | ) | | (26,937 | ) | | (26,937 | ) | ||||||||||||||||||||||||||
Issuance of capital stock net of conversion (Note 19) |
1 | | | | | | 1 | | 1 | |||||||||||||||||||||||||||||
Others (Notes 2 and 13) |
| | | | | | | 125 | 125 | |||||||||||||||||||||||||||||
Balances as at June 30, 2011 | 4,420 | 947 | (6,505 | ) | 62,890 | 30,956 | (1,416 | ) | 91,292 | 437 | 91,729 | |||||||||||||||||||||||||||
Balances as at January 1, 2012 | 4,419 | 1,085 | (6,505 | ) | 127,246 | 26,232 | (644 | ) | 151,833 | 386 | 152,219 | |||||||||||||||||||||||||||
Total comprehensive income: | | | | | 19,502 | (511 | ) | 18,991 | (31 | ) | 18,960 | |||||||||||||||||||||||||||
Net income (Notes 4 and 8) | | | | | 19,502 | | 19,502 | (31 | ) | 19,471 | ||||||||||||||||||||||||||||
Other comprehensive loss (Note 6) | | | | | | (511 | ) | (511 | ) | | (511 | ) | ||||||||||||||||||||||||||
Cash dividends (Note 19) | | | | | (24,007 | ) | | (24,007 | ) | | (24,007 | ) | ||||||||||||||||||||||||||
Issuance of capital stock net of conversion (Note 19) |
(30 | ) | 8 | | 4,423 | | | 4,401 | | 4,401 | ||||||||||||||||||||||||||||
Redemption of preferred shares (Note 19) | (4,029) | | | | | | (4,029 | ) | | (4,029 | ) | |||||||||||||||||||||||||||
Others (Notes 2 and 13) | | | | (1,073 | ) | | | (1,073 | ) | (148 | ) | (1,221 | ) | |||||||||||||||||||||||||
Balances as at June 30, 2012 | 360 | 1,093 | (6,505 | ) | 130,596 | 21,727 | (1,155 | ) | 146,116 | 207 | 146,323 | |||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
(in million pesos)
2012 | 2011 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Income before income tax (Note 4) |
25,955 | 28,094 | ||||||
Adjustments for: |
||||||||
Depreciation and amortization (Notes 3, 4 and 9) |
15,524 | 13,118 | ||||||
Interest on loans and other related items net (Notes 4, 5, 9, 20 and 27) |
2,674 | 2,552 | ||||||
Asset impairment (Notes 3, 4, 5, 9, 10, 16, 17 and 27) |
1,185 | 812 | ||||||
Incentive plans (Notes 3, 5 and 25) |
802 | 702 | ||||||
Amortization of intangible assets (Notes 3 and 14) |
785 | 144 | ||||||
Accretion on financial liabilities net (Notes 5, 20 and 27) |
546 | 555 | ||||||
Losses (gains) on derivative financial instruments net (Notes 4 and 27) |
403 | (484 | ) | |||||
Pension benefit costs (income) (Notes 3, 5 and 25) |
72 | (30 | ) | |||||
Losses (gains) on disposal of property, plant and equipment (Note 9) |
(65 | ) | 27 | |||||
Interest income (Notes 4, 5 and 15) |
(626 | ) | (645 | ) | ||||
Equity share in net earnings of associates and joint ventures (Notes 4 and 10) |
(1,311 | ) | (839 | ) | ||||
Foreign exchange gains net (Notes 4, 9 and 27) |
(1,565 | ) | (426 | ) | ||||
Others |
(2,458 | ) | (17 | ) | ||||
Operating income before changes in assets and liabilities |
41,921 | 43,563 | ||||||
Decrease (increase) in: |
||||||||
Trade and other receivables |
(1,671 | ) | 661 | |||||
Inventories and supplies |
837 | (371 | ) | |||||
Prepayments |
81 | (39 | ) | |||||
Advances and other noncurrent assets |
(25 | ) | 95 | |||||
Increase (decrease) in: |
||||||||
Accounts payable |
(3,943 | ) | (4,673 | ) | ||||
Accrued expenses and other current liabilities |
4,272 | 1,790 | ||||||
Pension and other employee benefits |
(245 | ) | (102 | ) | ||||
Customers deposits |
(3 | ) | 24 | |||||
Other noncurrent liabilities |
(222 | ) | 31 | |||||
Net cash generated from operations |
41,002 | 40,979 | ||||||
Income taxes paid |
(5,082 | ) | (6,350 | ) | ||||
Net cash provided by operating activities |
35,920 | 34,629 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Interest received |
646 | 653 | ||||||
Dividends received (Note 10) |
225 | 216 | ||||||
Proceeds from: |
||||||||
Disposal of investments available-for-sale |
3,567 | | ||||||
Disposal of property, plant and equipment (Note 9) |
116 | 35 | ||||||
Maturity of short-term investments |
| 187 | ||||||
Payments for: |
||||||||
Purchase of investments available-for-sale |
(4 | ) | | |||||
Purchase of short-term investments |
(64 | ) | (171 | ) | ||||
Purchase of investments in joint ventures (Note 10) |
(2,813 | ) | | |||||
Purchase of shares of noncontrolling shareholders (Note 13) |
(4,813 | ) | | |||||
Purchase of intangible assets |
| (9 | ) | |||||
Contingent consideration arising from business combinations |
| (817 | ) | |||||
Interest paid capitalized to property, plant and equipment (Notes 4, 5, 9, 20 and 27) |
(476 | ) | (314 | ) | ||||
Additions to property, plant and equipment (Notes 4 and 9) |
(8,822 | ) | (6,021 | ) | ||||
Decrease in advances and other noncurrent assets |
(47 | ) | (57 | ) | ||||
Net cash used in investing activities |
(12,485 | ) | (6,298 | ) | ||||
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Six Months Ended June 30, 2012 and 2011
(in million pesos)
2012 | 2011 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Availments of long-term debt (Note 20) |
27,090 | 11,300 | ||||||
Availments of long-term financing for capital expenditures |
2,133 | 2,544 | ||||||
Proceeds from notes payable (Note 20) |
557 | 649 | ||||||
Payments of obligations under finance leases |
(5 | ) | (30 | ) | ||||
Payments of debt issuance costs (Note 20) |
(58 | ) | (11 | ) | ||||
Payments of redemption of liabilities |
(202 | ) | | |||||
Settlements of derivative financial instruments (Note 27) |
(693 | ) | (319 | ) | ||||
Payments of notes payable (Note 20) |
(2,173 | ) | | |||||
Payments of interest net of capitalized portion (Notes 5, 20 and 27) |
(2,764 | ) | (2,552 | ) | ||||
Settlements of long-term financing for capital expenditures |
(5,053 | ) | (3,672 | ) | ||||
Trust fund for redemption of shares (Note 19) |
(5,647 | ) | | |||||
Payments of cash dividends (Note 19) |
(23,935 | ) | (26,833 | ) | ||||
Payments of long-term debt (Note 20) |
(26,882 | ) | (7,362 | ) | ||||
Proceeds from issuance of capital stock |
| 1 | ||||||
Net cash used in financing activities |
(37,632 | ) | (26,285 | ) | ||||
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS |
(248 | ) | (66 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(14,445 | ) | 1,980 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD |
46,057 | 36,678 | ||||||
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD |
31,612 | 38,658 | ||||||
See accompanying Notes to Consolidated Financial Statements.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Corporate Information |
The Philippine Long Distance Telephone Company, or PLDT, or the Parent Company, was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common U.S. ownership. Under its amended Articles of Incorporation, PLDTs corporate term is currently limited through 2028. In 1967, effective control of PLDT was sold by the General Telephone and Electronics Corporation, then a major shareholder since PLDTs incorporation, to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company, which at that time was the second largest telephone company in the Philippines. In 1998, certain subsidiaries of First Pacific Company Limited, or First Pacific, and its Philippine affiliates (collectively the First Pacific Group and its Philippine affiliates), acquired a significant interest in PLDT. On March 24, 2000, NTT Communications Corporation, or NTT Communications, through its wholly-owned subsidiary NTT Communications Capital (UK) Ltd., or NTTC-UK, became PLDTs strategic partner with approximately 15% economic and voting interest in the issued and outstanding common stock of PLDT at that time. Simultaneous with NTT Communications investment in PLDT, the latter acquired 100% of Smart Communications, Inc., or Smart. On March 14, 2006, NTT DOCOMO, Inc., or NTT DOCOMO, acquired from NTT Communications approximately 7% of PLDTs then outstanding common shares held by NTT Communications with NTT Communications retaining ownership of approximately 7% of PLDTs common shares. Since March 14, 2006, NTT DOCOMO has made additional purchases of shares of PLDT, and together with NTT Communications beneficially owned approximately 20% of PLDTs outstanding common stock as at June 30, 2012. NTT Communications and NTT DOCOMO are subsidiaries of NTT Holding Company. On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliate of First Pacific, completed the acquisition of an approximately 46% interest in Philippine Telecommunications Investment Corporation, or PTIC, a shareholder of PLDT. This investment in PTIC represents an attributable interest of approximately 6% of the then outstanding common shares of PLDT and thereby raised First Pacific Groups and its Philippine affiliates beneficial ownership to approximately 28% of PLDTs outstanding common stock as at that date. Since then, First Pacific Groups beneficial ownership interest in PLDT decreased by approximately 2%, mainly due to the holders of Exchangeable Notes, which were issued in 2005 by a subsidiary of First Pacific and exchangeable into PLDT shares owned by First Pacific Group, who fully exchanged their notes. First Pacific Group and its Philippine affiliates had beneficial ownership of approximately 26% in PLDTs outstanding common stock as at June 30, 2012. On October 26, 2011, PLDT completed the acquisition of a controlling interest in Digital Telecommunications Phils., Inc., or Digitel, from JG Summit Holdings, Inc., or JGSHI, and certain other seller-parties. As payment for the assets acquired from JGSHI, PLDT issued approximately 27.7 million common shares. In November 2011, JGSHI sold 5.81 million and 4.56 million PLDT shares to a Philippine affiliate of First Pacific and NTT DOCOMO, respectively, pursuant to separate option agreements that JGSHI had entered into with a Philippine affiliate of First Pacific and NTT DOCOMO, respectively. As at June 30, 2012, the JG Summit Group owned approximately 8% of PLDTs outstanding common shares. See Note 13 Business Combinations and Acquisition of Noncontrolling Interests PLDTs Acquisition of Digitel.
The common shares of PLDT are listed and traded on the Philippine Stock Exchange, Inc., or PSE.
On
October 19, 1994, an American Depositary Receipt, or ADR, facility was established, pursuant to
which Citibank N.A., as the depositary, issued ADRs evidencing American Depositary Shares, or
ADSs, with each ADS representing one PLDT common share with a par value of Php5 per share.
Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary for
PLDTs ADR facility. The ADSs are listed on the New York Stock Exchange, or NYSE, in the United
States and are traded on the NYSE under the symbol PHI. There are approximately 52 million
ADSs outstanding as at June 30, 2012.
PLDT and our Philippine-based fixed line and wireless subsidiaries operate under the jurisdiction of the Philippine National Telecommunications Commission, or NTC, which jurisdiction extends, among other things, to approving major services offered and certain rates charged to customers.
We are the leading telecommunications service provider in the Philippines. Through our three principal business segments, wireless, fixed line and business process outsourcing, or BPO, we offer the largest and most diversified range of telecommunications services across the Philippines most extensive fiber optic backbone and wireless, fixed line and satellite networks. Our principal activities are discussed in Note 4 Operating Segment Information.
Our registered office address is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.
2. | Summary of Significant Accounting Policies |
Basis of Preparation
Our consolidated financial statements have been prepared under the historical cost basis, except for derivative financial instruments, available-for-sale financial assets and investment properties that have been measured at fair value.
Our consolidated financial statements include adjustments consisting only of normal recurring adjustments, necessary to present fairly the results of operations for the interim periods. The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results of operations that may be expected for the full year.
Our consolidated financial statements are presented in Philippine peso, PLDTs functional and presentation currency, and all values are rounded to the nearest million, except when otherwise indicated.
Basis of Consolidation
Our unaudited consolidated financial statements include the financial statements of PLDT and the following subsidiaries (collectively, the PLDT Group) as at June 30, 2012:
Place of | Percentage of Ownership | |||||||||||||||
Name of Subsidiary | Incorporation | Principal Business Activity | Direct | Indirect | ||||||||||||
Wireless |
||||||||||||||||
Smart: |
Philippines | Cellular mobile services | 100.0 | | ||||||||||||
Smart Broadband, Inc., or SBI, and Subsidiaries,
or SBI Group |
Philippines | Internet broadband distribution services | | 100.0 | ||||||||||||
Primeworld Digital Systems, Inc., or PDSI |
Philippines | Internet broadband distribution services | | 100.0 | ||||||||||||
I-Contacts Corporation, or I-Contacts |
Philippines | Call center services | | 100.0 | ||||||||||||
Wolfpac Mobile, Inc., or Wolfpac |
Philippines | Mobile applications development and services | | 100.0 | ||||||||||||
Wireless Card, Inc., or WCI |
Philippines | Promotion of the sale and/or patronage of | | 100.0 | ||||||||||||
debit and/or charge cards | ||||||||||||||||
Smarthub, Inc., or SHI |
Philippines | Software development and sale of | | 100.0 | ||||||||||||
maintenance and support services | ||||||||||||||||
Smart Money Holdings Corporation, or SMHC: |
Cayman Islands | Investment company | | 100.0 | ||||||||||||
Smart Money, Inc., or SMI |
Cayman Islands | Mobile commerce solutions marketing | | 100.0 | ||||||||||||
Far East Capital Limited, or FECL, and Subsidiary, |
Cayman Islands | Cost effective offshore financing and risk | | 100.0 | ||||||||||||
or FECL Group |
management activities for Smart | |||||||||||||||
PH Communications Holdings Corporation, or PHC |
Philippines | Investment company | | 100.0 | ||||||||||||
Francom Holdings, Inc., or FHI: |
Philippines | Investment company | | 100.0 | ||||||||||||
Connectivity Unlimited Resource Enterprise, |
Philippines | Cellular mobile services | | 100.0 | ||||||||||||
or CURE |
||||||||||||||||
Chikka Holdings Limited, or Chikka, and Subsidiaries, or |
British Virgin | Mobile applications development and | | 100.0 | ||||||||||||
Chikka Group |
Islands | services; Content provider | ||||||||||||||
Smarthub Pte. Ltd. |
Singapore | Investment company | | 100.0 | ||||||||||||
(formerly SmartConnect Holdings Pte. Ltd.),
or SHPL: |
||||||||||||||||
SmartConnect Global Pte. Ltd., or SGP |
Singapore | International trade of satellites and | | 100.0 | ||||||||||||
Global System for Mobile Communication, or | ||||||||||||||||
GSM, enabled global telecommunications | ||||||||||||||||
3rd Brand Pte. Ltd., or 3rd Brand |
Singapore | Solutions and systems integration services | | 85.0 | ||||||||||||
Telesat, Inc., or Telesat(a) |
Philippines | Satellite communications services | 100.0 | | ||||||||||||
ACeS Philippines Cellular Satellite Corporation, or |
Philippines | Satellite information and messaging services | 88.5 | 11.5 | ||||||||||||
ACeS Philippines |
||||||||||||||||
Mabuhay Investment Corporation (formerly Mabuhay Satellite |
Philippines | Investment company | 67.0 | | ||||||||||||
Corporation), or MIC(a)(b) |
||||||||||||||||
Digitel Mobile Philippines, Inc., or DMPI,
a wholly-owned subsidiary of Digitel |
Philippines | Cellular mobile services | | 99.5 | ||||||||||||
Fixed Line |
||||||||||||||||
PLDT Clark Telecom, Inc., or ClarkTel |
Philippines | Telecommunications services | 100.0 | | ||||||||||||
PLDT Subic Telecom, Inc., or SubicTel |
Philippines | Telecommunications services | 100.0 | | ||||||||||||
PLDT Global Corporation, or PLDT Global, and Subsidiaries, or |
British Virgin | |||||||||||||||
PLDT Global Group |
Islands | Telecommunications services | 100.0 | | ||||||||||||
Smart-NTT Multimedia, Inc., or SNMI(a) |
Philippines | Data and network services | 100.0 | | ||||||||||||
PLDT-Philcom, Inc., or Philcom, and Subsidiaries, |
Philippines | Telecommunications services | 100.0 | | ||||||||||||
or Philcom Group |
||||||||||||||||
PLDT-Maratel, Inc., or Maratel |
Philippines | Telecommunications services | 97.8 | | ||||||||||||
Bonifacio Communications Corporation, or BCC |
Philippines | Telecommunications, infrastructure and | 75.0 | | ||||||||||||
related VAS | ||||||||||||||||
Digitel: |
Philippines | Telecommunications services | 99.5 | | ||||||||||||
British Virgin | ||||||||||||||||
Digitel Capital Philippines Ltd., or DCPL |
Islands | Telecommunications services | | 99.5 | ||||||||||||
Digitel Information Technology Services, Inc. or DITSI |
Philippines | Internet services | | 99.5 | ||||||||||||
ePLDT, Inc., or ePLDT(c)(d)(e): |
Philippines | Information and communications | 100.0 | | ||||||||||||
infrastructure for internet-based services, | ||||||||||||||||
e-commerce, customer relationship | ||||||||||||||||
management and information technology, or | ||||||||||||||||
IT, related services | ||||||||||||||||
ABM Global Solutions, Inc. |
Philippines | Internet-based purchasing, IT consulting | | 93.5 | ||||||||||||
(formerly BayanTrade, Inc.), or AGS, and Subsidiaries, or AGS |
and professional services | |||||||||||||||
Group |
||||||||||||||||
Bills printing and other related | ||||||||||||||||
ePDS, Inc., or ePDS |
Philippines | value-added services, or VAS | | 67.0 | ||||||||||||
netGames, Inc., or netGames |
Philippines | Gaming support services | | 57.5 | ||||||||||||
Pilipinas Global Network Limited, or PGNL |
British Virgin | International distributor of Filipino | 60.0 | | ||||||||||||
Islands | channels and content | |||||||||||||||
BPO |
||||||||||||||||
SPi Global Holdings, Inc., or SPi Global(d): |
Philippines | Investment company | 100.0 | | ||||||||||||
SPi Technologies, Inc., or SPi, and Subsidiaries, |
Philippines | Knowledge processing solutions | | 100.0 | ||||||||||||
or SPi Group(c) |
||||||||||||||||
SPi CRM, Inc., or SPi CRM,
(formerly ePLDT Ventus, Inc.)(c) |
Philippines | Customer relationship management | | 100.0 | ||||||||||||
Infocom Technologies, Inc., or Infocom(c) |
Philippines | Customer relationship management | | 99.6 | ||||||||||||
Others |
||||||||||||||||
PLDT Communications and Energy Ventures, Inc.,
or PCEV |
Philippines | Investment company | | 99.7 | ||||||||||||
(a) | Ceased commercial operations. |
(b) | Ceased commercial operations, however, on January 13, 2012, the Philippine Securities and Exchange Commission, or Philippine SEC, approved the amendment of MICs Articles of Incorporation changing its name from Mabuhay Satellite Corporation to Mabuhay Investments Corporation and its primary purpose from satellite communication to holding company. |
(c) | On December 6, 2011, SPi, SPi CRM and Infocom were transferred by ePLDT to SPi Global to support PLDTs objective to grow the BPO segment. |
(d) | On July 25, 2011, SPi Global was sold by ePLDT to PLDT and reclassified as a holding company for BPO segment. ePLDT and its remaining subsidiaries were folded to the fixed line business of PLDT. See discussion in Note 4 Operating Segment Information. |
(e) | On June 11, 2012, MySecureSign, or MSSI, and ePLDT were merged wherein ePLDT became the surviving company. |
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the PLDT Group obtains control, and continue to be consolidated until the date that such control ceases.
The financial statements of our subsidiaries are prepared for the same reporting period as PLDT. We prepare our consolidated financial statements using uniform accounting policies for like transactions and other events with similar circumstances. All intra-group balances, income and expenses, unrealized gains and losses and dividends resulting from intra-group transactions are eliminated in full.
Noncontrolling interest shares in losses even if the losses exceed the non-controlling equity interest in the subsidiary.
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction.
If the PLDT Group loses control over a subsidiary, it: (a) derecognizes the assets (including goodwill) and liabilities of the subsidiary; (b) derecognizes the carrying amount of any noncontrolling interest; (c) derecognizes the cumulative translation differences recorded in equity; (d) recognizes the fair value of the consideration received; (e) recognizes the fair value of any investment retained; (f) recognizes any surplus or deficit in profit or loss; and (g) reclassifies the parents share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate.
PCEVs Common Stock
PCEVs Board of Directors approved three share buyback programs during its meetings on November
3, 2008, March 2, 2009 and August 3, 2009. For all three programs, the buyback was done through
the trading facilities of the PSE through open market purchases, block trades or other modes,
subject to compliance with applicable laws, rules and regulations. The number of shares
approved for repurchase under the buyback programs were 58 million,
25 million and 61.5 million for the programs approved on November 3, 2008, March 2, 2009 and
August 3, 2009, respectively. The program approved on November 3, 2008 was completed in January
2009 at a total cost of Php403 million, while the program approved on March 2, 2009 was
completed in March 2009 at a total cost of Php188 million. PCEV repurchased 2.8 million shares
at a total cost of Php23 million in 2009 and 0.8 million shares at a total cost of Php6 million
in 2010 under the program approved on August 3, 2009. As at June 30, 2012 and December 31,
2011, cumulative shares repurchased under the share buyback programs totaled 86.6 million at an
aggregate cost of Php620 million.
The share buyback was accounted for as acquisition of noncontrolling interest and therefore an equity transaction wherein the difference between the consideration paid and proportionate carrying value is recognized as an adjustment to capital in excess of par.
The program approved on August 3, 2009 was terminated by PCEVs Board of Directors on March 5, 2012 in anticipation of the tender offer by Smart to PCEVs remaining noncontrolling shareholders.
On November 2, 2011, the Board of Directors of PCEV authorized PCEVs management to take such steps as necessary for the voluntary delisting of PCEV from the PSE in accordance with the PSE Rules on Voluntary Delisting. On December 2, 2011, PCEVs Board of Directors also created a special committee to review and evaluate any tender offer to purchase the shares owned by the remaining noncontrolling shareholders representing 0.49% of the outstanding common stock of PCEV. Smart filed a Tender Offer Report with the Philippine SEC on March 15, 2012. The Tender Offer commenced on March 19, 2012 and ended on April 18, 2012, with approximately 25.1 million shares or 43.4% of PCEVs noncontrolling shares tendered, thereby increasing Smarts ownership to 99.7% of the outstanding common stock of PCEV. The aggregate cost of the Tender Offer paid by Smart to noncontrolling shareholders on April 30, 2012 amounted to Php115 million. PCEV, on the other hand, filed with the PSE its petition for voluntary delisting on March 19, 2012. On April 25, 2012, the PSE approved the petition for voluntary delisting and PCEVs shares were delisted and ceased to be tradable on the PSE effective May 18, 2012.
On July 31, 2012, PCEVs stockholders authorized the decrease in authorized capital stock of PCEV from 12,800 million divided into three classes: 12,060 million shares of common stock with a par value of Php1.00 each; 120 million shares of Class I preferred stock with a par value of Php2.00 each; and 500 million shares of Class II preferred stock with a par value of Php1.00 each to 12,177 million divided into three classes: 574 thousand shares of common stock with a par value of Php21,000 each; 33 million shares of Class I preferred stock with a par value of Php2.00 each; and 50 million shares of Class II preferred stock with a par value of Php1.00 each.
PCEVs stockholders also authorized the increase in the par value of the shares of common stock of PCEV from Php1.00 per share to Php21,000 per share. This is for purposes of rationalizing the stockholders profile of PCEV following its delisting from the PSE effective May 18, 2012 and reverting to its status as a private company. Presently, Smart owns 11,651 million shares representing 99.7% of the outstanding common stock of PCEV and the balance of 33 million shares representing 0.3% are owned by 19,607 stockholders. Around 75% of these stockholders own 300 or less shares each and many of them have been inactive as borne out by their non-participation in PCEVs stockholders meetings either in person or by proxy. Communications or reports from PCEV have also been unsuccessfully delivered to the respective addresses on record of many of these stockholders despite diligent efforts and reasonable means employed by PCEV to effect such delivery.
The increase in par value of the common stock will have the following effects: (1) the number of shares of common stock into which a portion of the authorized capital stock is divided will decrease from 12,060 million shares to 574 thousand shares; (2) the number of issued and outstanding shares of common stock will decrease from 11,772 million shares to 560 thousand shares; and (3) the number of holders of common stock will decrease from 19,608 to 98, of which only 3 holders will hold 100 or more shares.
Each multiple of 21,000 shares of common stock, with a par value of Php1.00 per share, will be reduced to one share, with a par value of Php21,000. Stockholdings of less than 21,000 shares, or the Residual Shares, will be paid the fair value thereof equivalent to Php4.50 per share, or the Cash Value. This Cash Value is the same price that Smart paid to the holders of PCEV shares who participated and tendered their shares in the Tender Offer conducted by Smart during the period from March 19, 2012 to April 18, 2012 as discussed in the preceding section on Voluntary Delisting. The payment for the Cash Value will be made available to the holders of the Residual Shares beginning on the 30th day following the approval by the Philippine SEC of the decrease in authorized capital stock and amendments to the Articles of Incorporation of PCEV.
On July 31, 2012, PCEVs stockholders authorized the amendments to the Seventh Article of the Articles of Incorporation to reflect the decrease in authorized capital stock, decrease in number of shares of preferred stock, increase in par value of common stock and decrease in the number of shares of common stock.
Divestment of CURE
On October 26, 2011 PLDT received the Order issued by NTC approving the application jointly filed by PLDT and Digitel for the sale and transfer of initially approximately 51.6% of the outstanding capital stock of Digitel to PLDT. The approval of the application is subject to conditions which included the divestment by PLDT of CURE, in accordance with the Divestment Plan, as follows:
| CURE will sell its Red Mobile business to Smart consisting primarily of its subscriber base, brand and fixed assets. There will be a nine-month transition period to effect this first requirement; and |
| Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, 10 MHz of 3G frequency in the 2100 band, or the Affected Frequency, and related permits, or the Divestment Sale. |
In compliance with the commitments in the divestment plan, CURE completed the sale and transfer of its Red Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, which included: (a) the sale of CUREs Red Mobile trademark to Smart; (b) the transfer of CUREs existing Red Mobile subscriber base to Smart; and (c) the sale of CUREs fixed assets to Smart at net book value.
In a letter dated July 26, 2012, Smart informed the NTC that it has complied with the terms and conditions of the divestment plan as CURE had rearranged its assets, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, its only remaining assets as at June 30, 2012 are its congressional franchise, the 10 MHz 3G frequency and related permits.
Smart also informed the NTC that the minimum Cost Recovery Amount, or CRA, to which the PLDT Group is entitled to enable the PLDT Group to recover its investment in CURE, includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through a sale of shares of stock to the winning bidder.
The divestment of CURE related franchise and licenses qualifies as noncurrent assets held-for-sale but was no longer presented separately in our consolidated statement of financial position as the carrying amounts are not material.
Reorganization of SPi Global
On July 25, 2011, ePLDT sold its 100% equity interest in SPi Global to PLDT to serve as the new holding company for BPO business segment of the PLDT Group. Subsequently, on December 6, 2011, ePLDT also sold its 100% equity interest in SPi, SPi CRM and Infocom to SPi Global. The transaction was made at carrying values and has no impact in our consolidated financial statements. See discussion in Note 4 Operating Segment Information.
Corporate Merger of MSSI and ePLDT
In April 2012, the Board of Directors of MSSI and ePLDT approved the plan of merger of MSSI and ePLDT, with ePLDT as the surviving company, in order to realize economies in operation and achieve greater efficiency in the management of their business. The merger was approved by two-thirds vote of MSSI and ePLDTs stockholders on April 13, 2012 and April 27, 2012, respectively. On June 11, 2012, the Philippine SEC approved the plan and articles of merger. The merger has no impact on the unaudited consolidated financial statements of the PLDT Group.
DMPIs Equity Restructuring
On April 12, 2012, the Board of Directors of Digitel and DMPI approved the following: (1) the conversion of Digitels deposit for future stock subscription in DMPI of Php17,665 million and a portion of Digitels advances to DMPI in the amount of Php13,767 million into additional shares of stock at a premium which resulted in an additional paid-in capital, or APIC, of Php30,909 million; and (2) the application of the adjusted APIC, which is comprised of the APIC from the conversion of advances into equity, as discussed in item (1), and the outstanding APIC of Php34 million, against the deficit of Php30,943 million as at December 31, 2011.
On June 19, 2012, the Philippine SEC approved DMPIs equity restructuring, which involved the application of DMPIs APIC in item (2) above against the deficit as at December 31, 2011.
Digitels Equity Restructuring
On April 12, 2012, the Board of Directors of Digitel approved the following: (a) the amendment of Digitels Articles of Incorporation to increase its authorized capital stock from 25 billion shares to 29.5 billion shares with a par value of Php1.00 per share in preparation for the exchange of the remaining 2014 Zero Coupon Exchangeable Bonds issued by DCPL into Digitel shares; (b) the subsequent amendment of Digitels Articles of Incorporation to decrease its authorized and subscribed capital stock through the reduction in par value to create APIC; and (c) the application of Digitels adjusted APIC against the deficit of Php34.5 billion as at April 30, 2012. Subsequently, on June 28, 2012, the Digitel shareholders ratified these changes in the authorized capital stock. As at the date of issuance of this report, the approval of the above transactions is pending with the Philippine SEC.
Statement of Compliance
Our consolidated financial statements have been prepared in conformity with Philippine Financial Reporting Standards, or PFRS.
Change in the Presentation of our Outbound Revenues
In December 2011, we changed the presentation of our outbound revenues to gross amounts before charges billed to us, where applicable, by other carriers. In doing so, interconnection costs are then presented as a separate line item in the expense section of our consolidated income statements. Prior to December 2011, we presented outbound revenues net of the share of other carriers. We made this change to present outbound revenues on a gross basis to more correctly present and align our consolidated income statement presentation with the predominant global practice in the telecommunications industry.
We accounted for the change retroactively and accordingly restated our comparative consolidated income statements. The change is for presentation only, and has no impact on our consolidated net income, earnings per share, cash flows and statements of financial position. The table below shows the affected line items in our financial information for the six months ended June 30, 2011.
As restated | As previously presented | Change | ||||||||||
(in million pesos) | ||||||||||||
Revenues (Note 4) |
76,759 | 70,782 | 5,977 | |||||||||
Expenses |
48,512 | 42,535 | 5,977 | |||||||||
EBITDA margin(1) (Note 4) |
55 | % | 60 | % | (5 | %) | ||||||
(1) | See discussion in Note 4 Operating Segment Information. |
Changes in Accounting Policies and Disclosures
Our accounting policies are consistent with those of the previous financial year except for the adoption of the following amendments to existing PFRSs effective beginning January 1, 2012:
| Amendment to PFRS 7, Financial Instruments: Disclosures Transfer of Financial Assets; and |
| Amendment to PAS 12, Income Taxes Deferred Income Tax: Recovery of Underlying Assets. |
The changes introduced by such amendments are as follows:
Amendment to PFRS 7, Financial Instruments: Disclosures Transfer of Financial Assets. The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of our financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entitys continuing involvement in those derecognized assets. The adoption of this amendment did not have any impact on our financial position or performance.
Amendment to PAS 12, Income Taxes Deferred Income Tax: Recovery of Underlying Assets. The amendment clarified the determination of deferred income tax on investment property measured at fair value. The amendment introduced a rebuttable presumption that deferred income tax on investment property measured using the fair value model in PAS 40, Investment Property, should be determined on the basis that its carrying amount will be recovered through sale. The adoption of this amendment did not have any impact on our financial position or performance.
Significant Accounting Policies
The following are the significant accounting policies applied by us in preparing our consolidated financial statements:
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method. 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 noncontrolling interest in the acquiree. For each business combination, the acquirer has the option to measure the components of the noncontrolling interest in the acquiree that are present ownership interest and entitle their holders to a proportionate share of the net assets in the event of liquidation either at fair value or at the proportionate share of the acquirees identifiable net assets. All other components of noncontrolling interest are measured at acquisition date fair values unless other measurement basis is required. Acquisition-related costs are expensed as incurred.
When we acquire a business, we assess 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.
If the business combination is achieved in stages, the acquirers previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss.
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, Financial Instruments: Recognition and Measurement, either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured. Subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of PAS 39, it is measured in accordance with the appropriate PFRS.
Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred, the amount recognized for noncontrolling interest and the acquisition-date fair value of previously held equity interest in the acquiree over the fair values of 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 profit or loss.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we report in our consolidated financial statements provisional amounts for the items for which the accounting is incomplete. At measurement period which is no longer than one year from the acquisition date, the provisional amounts recognized at acquisition date are retrospectively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date. During the measurement period, we also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.
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 our cash-generating units, or CGUs, 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 acquired in a business combination has yet to be allocated to identifiable CGUs because the initial accounting is incomplete, such provisional goodwill is not tested for impairment unless indicators of impairment exist and we can reliably allocate the carrying amount of goodwill to a CGU or group of CGUs that are expected to benefit from the synergies of the business combination.
Where goodwill forms part of a CGU 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 CGU retained.
Investments in Associates
Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. An associate is an entity in which we have significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, an investment in an associate is carried in our consolidated statement of financial position at cost plus post acquisition changes in our share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized nor individually tested for impairment. Our consolidated income statement reflects our share in the financial performance of our associates. Where there has been a change recognized directly in the equity of the associate, we recognize our share in such change and disclose this, when applicable, in our consolidated statement of comprehensive income and changes in equity. Unrealized gains and losses resulting from our transactions with and among our associates are eliminated to the extent of our interest in those associates.
Our share in the profits or losses of our associates is shown on the face of our consolidated income statement. This is the profit or loss attributable to equity holders of the associate and therefore is profit or loss after tax and net of noncontrolling interest in the subsidiaries of the associate.
Our reporting dates and that of our associates are identical and our associates accounting policies conform to those used by us for like transactions and events in similar circumstances. When necessary, adjustments are made to bring such accounting policies in line with those of PLDT Group.
After application of the equity method, we determine whether it is necessary to recognize an additional impairment loss on our investments in associates. We determine at the end of each reporting period whether there is any objective evidence that our investment in associate is impaired. If this is the case, we calculate the amount of impairment as the difference between the recoverable amount of our investment in the associate and its carrying value and recognize the amount in our consolidated income statement.
Upon loss of significant influence over the associate, we measure and recognize any retained investment at its fair value. Any difference between the carrying amounts of our investment in the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss.
Investments in Joint Ventures
Investments in a joint venture that is a jointly controlled entity is accounted for using the equity method of accounting. The financial statements of the joint venture are prepared for the same reporting period as our consolidated financial statements. Where necessary, adjustments are made to bring the accounting policies of the joint venture in line with those of PLDT Group.
Adjustments are made in our consolidated financial statements to eliminate our share of unrealized gains and losses on transactions between PLDT and our jointly controlled entity. The joint venture is carried at equity method until the date on which we cease to have joint control over the jointly controlled entity.
Upon loss of joint control and provided that the former jointly controlled entity does not become a subsidiary or associate, we measure and recognize our remaining investment at fair value. Any difference between the carrying amount of the former jointly controlled entity upon loss of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted for as investment in an associate.
Foreign Currency Transactions and Translations
Our consolidated financial statements are presented in Philippine peso, which is also the Parent Companys functional currency. The Philippine peso is the currency of the primary economic environment in which we operate. This is also the currency that mainly influences the revenue from and cost of rendering products and services. Each entity in the PLDT Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.
The functional and presentation currency of the entities under PLDT Group (except for SHPL, SGP, 3rd Brand, SMHC, SMI, TSI, FECL Group, PLDT Global and Subsidiaries, PGNL, DCPL, SPi Global and certain of its subsidiaries, and certain subsidiaries of Chikka and AGS) is the Philippine peso.
Transactions in foreign currencies are initially recorded by entities under PLDT Group at the respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange prevailing at the end of the reporting period. All differences arising on settlement or translation of monetary items are recognized in our consolidated income statement except for foreign exchange differences that qualify as capitalizable borrowing costs for qualifying assets. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
The functional currency of SMHC, SMI, TSI, FECL Group, PLDT Global and certain of its subsidiaries, PGNL, DCPL, SPi Global and certain of its subsidiaries, and certain subsidiaries of Chikka is the U.S. dollar; and the functional currency of SHPL, SGP, 3rd Brand, and certain subsidiaries of AGS is the Singapore dollar. As at the reporting date, the assets and liabilities of these subsidiaries are translated into Philippine peso at the rate of exchange prevailing at the end of the reporting period, and income and expenses of these subsidiaries are translated monthly using the weighted average exchange rate for the month. The exchange differences arising on translation are recognized as a separate component of other comprehensive income as cumulative translation adjustments. On disposal of these subsidiaries, the amount of deferred cumulative translation adjustments recognized in other comprehensive income relating to subsidiaries are recognized in our consolidated income statement.
When there is a change in an entitys functional currency, the entity applies the translation procedures applicable to the new functional currency prospectively from the date of the change. The entity translates all assets and liabilities into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as the new historical cost. Exchange differences arising from the translation of a foreign operation previously recognized in other comprehensive income are not reclassified from equity to profit or loss until the disposal of the operation.
Foreign exchange gains or losses of PLDT and our Philippine-based subsidiaries are treated as taxable income or deductible expenses in the period such exchange gains or losses are realized.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
Noncurrent assets held-for-sale and discontinued operations
Noncurrent assets and disposal groups classified as held-for-sale are measured at the lower of their carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held-for-sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
In the consolidated income statement, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when we retain a noncontrolling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated income statement.
Property, plant and equipment and intangible assets once classified as held-for-sale are not depreciated nor amortized.
Financial Instruments Initial recognition and subsequent measurement
Financial Assets
Initial recognition and measurement
Financial assets are classified as financial assets at fair value through profit or loss, or FVPL, loans and receivables, held-to-maturity, or HTM, investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. We determine the classification of financial assets at initial recognition and, where allowed and appropriate, re-evaluate the designation of such assets at each financial year-end.
Financial assets are recognized initially at fair value plus transaction costs, except in the case of financial assets recorded at FVPL.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way purchases or sales) are recognized on the trade date, i.e., the date that we commit to purchase or sell the asset.
Subsequent measurement
The subsequent measurement of financial assets depends on the classification as described below:
Financial assets at FVPL
Financial assets at FVPL include financial assets held-for-trading and financial assets designated upon initial recognition at FVPL. Financial assets are classified as at FVPL if they are acquired for the purpose of selling in the near term. Derivative assets, including separated embedded derivatives are also classified as at FVPL unless they are designated as effective hedging instruments. Financial assets at FVPL are carried in our consolidated statement of financial position at fair value with net changes in gains or losses recognized in our consolidated income statement under Gains (losses) on derivative financial instruments net for derivative instruments and Other income for non-derivative financial assets. Interest earned and dividends received from financial assets at FVPL are recognized in our consolidated income statement under Interest income and Other income, respectively.
Financial assets may be designated at initial recognition as at FVPL if any of the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on them on a different bases; (ii) the assets are part of a group of financial assets which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the company is provided internally on that basis to the entitys key management personnel; or (iii) the financial assets contain an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.
Derivatives embedded in host contracts are accounted for as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. These embedded derivatives are measured at fair value with gains or losses arising from changes in fair value recognized in our consolidated income statement. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.
An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: (a) the economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the hybrid or combined instrument is not recognized at fair value through profit or loss.
Our financial assets at FVPL include portions of short-term investments as at June 30, 2012 and short-term investments and overlay principal only currency swap as at December 31, 2011.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments and are not quoted in an active market. Such financial assets are carried at amortized cost using the effective interest rate, or EIR, method. This method uses an EIR that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Gains and losses are recognized in our consolidated income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process. Interest earned or incurred is recorded in Interest income in our consolidated income statement. Assets in this category are included in the current assets except for those with maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets.
Our loans and receivables include cash and cash equivalents, trade and other receivables, portions of short-term investments, and portions of advances and other noncurrent assets as at June 30, 2012 and December 31, 2011.
HTM investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as HTM when we have the positive intention and ability to hold it to maturity. After initial measurement, HTM investments are measured at amortized cost using the EIR method. Gains or losses are recognized in our consolidated income statement when the investments are derecognized or impaired, as well as through the amortization process. Interest earned or incurred is recorded in Interest income in our consolidated income statement. Assets in this category are included in the current assets except for those with maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets.
Our HTM investments include investment in debt securities as at June 30, 2012 and December 31, 2011.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. They are purchased and held indefinitely and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, available-for-sale financial assets are measured at fair value with unrealized gains or losses recognized in other comprehensive income account until the investment is derecognized, at which time the cumulative gain or loss recorded in other comprehensive income reserve account is recognized in our consolidated income statement; or determined to be impaired, at which time the cumulative loss recorded in other comprehensive income reserve account is recognized in our consolidated income statement. Interest earned on holding available-for-sale debt securities are included under Interest income using the EIR method in our consolidated income statement. Dividends earned on holding available-for-sale equity investments are recognized in our consolidated income statement under Other income when the right of the payment has been established. These financial assets are included under noncurrent assets unless we intend to dispose of the investment within 12 months of the end of the reporting period.
Our available-for-sale financial assets include quoted and unquoted equity securities as at June 30, 2012 and December 31, 2011.
Financial Liabilities
Initial recognition and measurement
Financial liabilities are classified as financial liabilities at FVPL, other financial liabilities, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. We determine the classification of our financial liabilities at initial recognition.
Financial liabilities are recognized initially at fair value plus, in the case of loans and borrowings directly attributable transaction costs.
Subsequent measurement
The subsequent measurement of financial liabilities depends on their classification as follows:
Financial liabilities at FVPL
Financial liabilities at FVPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition at FVPL. Financial liabilities are classified as at held-for-trading if they are acquired for the purpose of selling in the near term. Derivative liabilities, including separated embedded derivatives are also classified as at FVPL unless they are designated as effective hedging instruments. Financial liabilities at FVPL are carried in our consolidated statement of financial position at fair value with gains or losses recognized in our consolidated income statement under Gains (losses) on derivative financial instruments net for derivative instruments and Other income for non-derivative financial liabilities.
Financial liabilities may be designated at initial recognition as FVPL if any of the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognizing gains or losses on them on different bases; (ii) the liabilities are part of a group of financial liabilities which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the company is provided internally on that basis to the entitys key management personnel; or (iii) the financial liabilities contain an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.
Our financial liabilities at FVPL include long-term principal only currency swaps and interest rate swaps as at June 30, 2012 and long-term principal only currency swaps, interest rate swaps and forward foreign exchange contracts as at December 31, 2011.
Other financial liabilities
After initial recognition, other financial liabilities are subsequently measured at amortized cost using the EIR method.
Gains and losses are recognized in our consolidated income statement when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are integral part of the EIR. The EIR amortization is included under Financing costs net in our consolidated income statement.
Our other financial liabilities include accounts payable, and accrued expenses and other current liabilities, with the exemption of statutory payables, interest-bearing financial liabilities, customers deposits, dividends payable, and accrual for long-term capital expenditures included under Deferred credits and other noncurrent liabilities account as at June 30, 2012 and December 31, 2011.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in our 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 assets and settle the liabilities simultaneously.
Fair value of financial instruments
The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market prices or dealer price quotations at the close of business at the end of the reporting period without any deduction for transaction costs. For financial instruments where there is no active market, fair value is determined using appropriate valuation techniques. Such techniques may include using recent arms length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 27 Financial Assets and Liabilities.
Amortized cost of financial instruments
Amortized cost is computed using the EIR method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are integral part of EIR.
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 which variables include only data from observable market, we recognize the difference between the transaction price and fair value (a Day 1 difference) in our consolidated income statement unless it qualifies for recognition as some other type of asset or liability. In cases where data used are not observable, the difference between the transaction price and model value is only recognized in our consolidated income statement when the inputs become observable or when the instrument is derecognized. For each transaction, we determine the appropriate method of recognizing the Day 1 difference amount.
Impairment of Financial Assets
We assess at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a 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 have occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that the debtor will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable 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
For financial assets carried at amortized cost, we first assess whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If we determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, we include the asset in a group of financial assets with similar credit risk characteristics and collectively assess them 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 there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original EIR. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized under Asset impairment in our consolidated income statement. Interest income continues to be accrued on the reduced carrying amount based on the original EIR of the asset. The financial asset together with the associated allowance are written-off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to us. If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in our consolidated income statement, to the extent that the carrying value of the asset does not exceed its original amortized cost at the reversal date. If a future write-off is later recovered, the recovery is recognized in profit or loss.
Available-for-sale financial assets
In the case of equity investments classified as available-for-sale financial assets, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. The determination of what is significant or prolonged requires judgment. We treat significant generally as 20.0% or more of the original cost of investment, and prolonged as greater than 12 months. When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income reserve account and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income reserve account is reclassified from other comprehensive income reserve account to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. The amount of the cumulative loss that is reclassified from other comprehensive income account to profit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss. Impairment losses recognized in profit or loss for an investment in an equity instrument are not reversed in profit or loss. Subsequent increases in the fair value after impairment are recognized directly in other comprehensive income.
In the case of debt instruments classified as available-for-sale financial assets, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income in our consolidated income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in our consolidated income statement, the impairment loss is reversed in profit or loss.
Derecognition of Financial Assets and 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: (1) the rights to receive cash flows from the asset have expired; or (2) we have transferred its rights to receive cash flows from the asset or have assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: (a) we have transferred substantially all the risks and rewards of the asset; or (b) we have neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset.
When we have transferred the rights to receive cash flows from an asset or have entered into a pass-through arrangement, and have neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognized to the extent of our continuing involvement in the asset.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of the consideration that we could be required to repay.
When continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of our continuing involvement is the amount of the transferred asset that we may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of our continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.
Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or 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 carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.
The financial liability is also derecognized when equity instruments are issued to extinguish all or part of the financial liability. The equity instruments issued are recognized at fair value if it can be reliably measured, otherwise, it is recognized at the fair value of the financial liability extinguished. Any difference between the fair value of the equity instruments issued and the carrying value of the financial liability extinguished is recognized in the profit or loss.
Derivative Financial Instruments and Hedge Accounting
Initial recognition and subsequent measurement
We use derivative financial instruments, such as long-term currency swaps, foreign currency options, forward currency contracts and interest rate swaps to hedge our risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value on derivatives during the period that do not qualify for hedge accounting are taken directly to the Gains (losses) on derivative financial instruments net in our consolidated income statement.
The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of long-term currency swaps, foreign currency options and interest rate swap contracts is determined using applicable valuation techniques. See Note 27 Financial Assets and Liabilities.
For the purpose of hedge accounting, hedges are classified as: (1) fair value hedges when hedging the exposure to changes in the fair value of a recognized financial asset or liability or an unrecognized firm commitment (except for foreign-currency risk); or (2) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized financial asset or liability or a highly probable forecast transaction or the foreign-currency risk in an unrecognized firm commitment; or (3) hedges of a net investment in a foreign operation.
At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how we will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated. In a situation when that hedged item is a forecast transaction, we assess whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect our consolidated income statement.
Hedges which meet the strict criteria for hedge accounting are accounted for as follows:
Fair value hedges
The change in the fair value of a hedging derivative is recognized in our consolidated income statement. The change in the fair value of the hedged item attributable to the risk being hedged is recorded as part of the carrying value of the hedged item and is also recognized in our consolidated income statement.
The fair value for financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models.
When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as financial asset or liability with a corresponding gain or loss recognized in our consolidated income statement. The changes in the fair value of the hedging instrument are also recognized in our consolidated income statement.
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is recognized in our consolidated statement of comprehensive income, while any ineffective portion is recognized immediately in our consolidated income statement.
Amounts taken to comprehensive income are transferred to our consolidated income statement when the hedged transaction affects our consolidated income statement, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability.
If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognized in other comprehensive income are transferred to our consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in other comprehensive income remain in other comprehensive income until the forecast transaction or firm commitment occurs.
Hedges of a net investment in a foreign operation
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized in other comprehensive income while any gains or losses relating to the ineffective portion are recognized in our consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized in other comprehensive income is transferred to our consolidated income statement.
Current versus noncurrent classification
Derivative instruments that are not designated as effective hedging instruments are classified as current or noncurrent or separated into a current and noncurrent portion based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows).
Where the group will hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond 12 months after the reporting date, the derivative is classified as noncurrent (or separated into current and noncurrent portions) consistent with the classification of the underlying item.
Embedded derivatives that are not closely related to the host contract are classified consistent with the cash flows of the host contract.
Derivative instruments that are designated as effective hedging instruments are classified consistently with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and a noncurrent portion only if a reliable allocation can be made.
Property, Plant and Equipment
Property, plant and equipment, except for land, is stated at cost less accumulated depreciation and amortization and any accumulated impairment losses. The initial cost of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the property, plant and equipment to its working condition and location for its intended use. Such cost includes the cost of replacing component parts of the property, plant and equipment when the cost is incurred, if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, we recognize such parts as individual assets with specific useful lives and depreciate them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. The present value of the expected cost for the decommissioning of the asset after use is included in the cost of the respective assets if the recognition criteria for a provision are met. Land is stated at cost less any impairment in value.
Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally recognized as expense 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, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the property, plant and equipment.
Depreciation and amortization commence once the property, plant and equipment are available for use and are calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used in depreciating our property, plant and equipment are disclosed in Note 9 Property, Plant and Equipment.
The assets residual value, estimated useful life, and depreciation and amortization method are reviewed at least at each financial year-end to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment and adjusted prospectively, if appropriate.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. 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 profit or loss in the period the asset is derecognized.
Property under construction is stated at cost less any impairment in value. This includes cost of construction, plant and equipment, capitalizable borrowing costs, and other direct costs. Property under construction is not depreciated until such time that the relevant assets are completed and available for its intended use.
Construction-in-progress is transferred to the related property, plant and equipment when the construction or installation and related activities necessary to prepare the property and equipment for their intended use have been completed, and the property and equipment are ready for commercial service.
Borrowing Costs
Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Qualifying assets are assets that necessarily take a substantial period of time to get ready for its intended use or sale. 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 capitalizable rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to our borrowings 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 necessary to prepare the asset for intended use are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the asset is available for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as exchange differences arising from foreign currency borrowings used to finance these projects, to the extent that they are regarded as an adjustment to interest costs.
All other borrowing costs are expensed as incurred.
Asset Retirement Obligations
We are legally required under various lease agreements to dismantle the installation in leased sites and restore such sites to their original condition at the end of the lease contract term. We recognize the liability measured at the present value of the estimated costs of these obligations and capitalize such costs as part of the balance of the related item of property, plant and equipment. The amount of asset retirement obligations are accreted and such accretion is recognized as interest expense.
Investment Properties
Investment properties are initially measured at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met and excludes the cost of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair values, which have been determined annually based on the latest appraisal performed by an independent firm of appraisers, an industry specialist in valuing these types of investment properties. Gains or losses arising from changes in the fair values of investment properties are included in our consolidated income statement in the period in which they arise. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time that fair value can be determined or construction is completed.
Investment properties are derecognized when they have been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in our consolidated income statement in the period of retirement or disposal.
Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If an owner occupied property becomes an investment property, we account for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use. The difference between the carrying amount of the owner occupied property and its fair value at the date of change is accounted for as revaluation increment recognized in other comprehensive income.
No assets held under operating lease have been classified as investment properties.
Intangible Assets
Intangible assets acquired separately are measured at cost on initial recognition. The cost of intangible assets acquired from business combinations is initially recognized at fair value on the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment loss. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or indefinite useful life.
Intangible assets with finite lives are amortized over the useful economic life using the straight-line method of accounting and assessed for impairment whenever there is an indication that the intangible assets may be impaired. At a minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statement.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the CGU level. Such intangible assets are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in our consolidated income statement when the asset is derecognized.
Intangible assets created within the business are not capitalized and expenditures are charged against operations in the period in which the expenditures are incurred.
Inventories and Supplies
Inventories and supplies, which include cellular phone units, materials, spare parts, terminal units and accessories, are valued at the lower of cost and net realizable value.
Cost incurred in bringing each items of inventories and supplies to its present location are accounted using the weighted average method. Net realizable value is determined by either estimating the selling price in the ordinary course of the business, less the estimated cost to sell or determining the prevailing replacement costs.
Impairment of Non-Financial Assets
We assess at each reporting period whether there is an indication that an asset may be impaired. If any such indication exists, or when the annual impairment testing for an asset is required, we make an estimate of the assets recoverable amount. An assets recoverable amount is the higher of an assets or CGUs fair value less costs to sell or its value in use, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from those of other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing the 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 the fair value less costs to sell, an appropriate valuation model is used. Impairment losses are recognized in our consolidated income statement.
For assets, excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, we make an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior periods. Such reversal is recognized in our consolidated income statement. After such reversal, the depreciation and amortization charges are adjusted in future years to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining economic useful life.
The following assets have specific characteristics for impairment testing:
Property, plant and equipment
For property, plant and equipment, we also assess for impairment on the basis of impairment indicators such as evidence of internal obsolescence or physical damage.
Goodwill
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 for goodwill by assessing the recoverable amount of each CGUs, or group of CGU, to which the goodwill relates. When the recoverable amount of the CGU, or group of CGUs, is less than the carrying amount of the CGU, or group of CGUs, to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.
If there is incomplete allocation of goodwill acquired in a business combination to CGUs, or group of CGUs, an impairment testing of goodwill is only carried out when impairment indicators exist. Where impairment indicators exist, impairment testing of goodwill is performed at a level at which the acquirer can reliably test for impairment.
Intangible assets
Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually either individually or at the CGU level, as appropriate. We calculate the amount of impairment as being the difference between the recoverable amount of the intangible asset and its carrying amount and recognize the amount of impairment in our consolidated income statement. Impairment losses relating to intangible assets can be reversed in future periods.
Investments in associates and joint ventures
We determine at the end of each reporting period whether there is any objective evidence that our investments in associates and joint ventures are impaired. If this is the case, the amount of impairment is calculated as the difference between the recoverable amount of the investments in associates and joint ventures, and its carrying amount. The amount of impairment loss is recognized in our consolidated income statement.
Investment in Debt Securities
Investment in debt securities are government securities which are carried at amortized cost using the EIR method. Interest earned from these securities is recognized as Interest income in our consolidated income statement.
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 the date of acquisition, and for which there is an insignificant risk of change in value.
Short-term Investments
Short-term investments are money market placements, which are highly liquid with maturities of more than three months but less than one year from the date of acquisition.
Trade and Other Receivables
Trade and other receivables, categorized as loans and receivables, are recognized initially at fair value and subsequently measured at amortized cost using the EIR method, less provision for impairment.
A provision for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the original EIR. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in our consolidated income statement.
When a trade and other receivable is uncollectible, it is written-off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written-off are recognized as income in our consolidated income statement.
Impairment of Trade and Other Receivables
Individual Impairment
Retail Subscribers
We recognize impairment losses for the whole amount of receivables from permanently disconnected wireless and fixed line subscribers. Permanent disconnections are made after a series of collection steps following nonpayment by postpaid subscribers. Such permanent disconnection usually occurs within a predetermined period from statement date.
We also recognize impairment losses for accounts with extended credit arrangements or promissory notes.
Regardless of the age of the account, additional impairment losses are also made for accounts specifically identified to be doubtful of collection when there is information on financial incapacity after considering the other contractual obligations between us and the subscriber.
Corporate Subscribers
Receivables from corporate subscribers are provided with impairment losses when they are specifically identified as impaired. Full allowance is generally provided after for the whole amount of receivables from corporate accounts based on aging of individual account balances. In making this assessment, we take into account normal payment cycle, counterpartys payment history and industry-observed settlement periods.
Foreign Administrations and Domestic Carriers
For receivables from foreign administration and domestic carriers, impairment losses are recognized when they are specifically identified as impaired regardless of the age of balances. Full allowance is generally provided after review of the status of settlement with the carriers. In making this assessment, we take into account normal payment cycle, counterparty carriers payment history and industry-observed settlement periods.
Dealers, Agents and Others
Similar to carrier accounts, we recognize impairment losses for the full amount of receivables from dealers, agents and other parties based on our specific assessment of individual balances regardless of the age of balances.
Collective Impairment
Postpaid Wireless and Fixed Line Subscribers
We estimate impairment losses for temporarily disconnected accounts for both wireless and fixed line subscribers based on the historical trend of temporarily disconnected accounts which eventually become permanently disconnected. Temporary disconnection is initiated after a series of collection activities is implemented, including the sending of a collection letter, call-out reminders and collection messages via text messaging. Temporary disconnection generally happens 90 days after the due date of the unpaid balance. If the account is not settled within 60 days from temporary disconnection, the account is permanently disconnected.
We recognize impairment losses on our postpaid wireless and fixed line subscribers through net flow-rate methodology which is derived from account-level monitoring of subscriber accounts between different age brackets, from current to one day past due to 120 days past due. The criterion adopted for making the allowance for doubtful accounts takes into consideration the calculation of the actual percentage of losses incurred on each range of accounts receivable.
Others Subscribers
Receivables that have been assessed individually and found not to be impaired are then assessed collectively based on similar credit risk characteristics to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident in the individual impairment assessment. Retail subscribers are provided with collective impairment based on a certain percentage derived from historical data/statistics.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to us and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding value-added tax, or VAT, or overseas communication tax, where applicable. When deciding the most appropriate basis for presenting revenue or cost of revenue, we assess our revenue arrangements against specific criteria to determine if we are acting as principal or agent. We consider both the legal form and the substance of our agreement, to determine each partys respective roles in the agreement. When our role in a transaction is that of principal, revenue is recognized on a gross basis, otherwise, revenue is recognized on a net basis.
Service Revenues
Our revenues are principally derived from providing the following telecommunications services: cellular voice and data services in the wireless business; local exchange, international and national long distance, data and other network, and information and communications services in the fixed line business; and knowledge processing solutions and customer relationship management services in the business process outsourcing business. When determining the amount of revenue to be recognized in any period, the overriding principle followed is to match the revenue with the provision of service. Services may be sold separately or bundled with goods or other services. The specific recognition criteria are as follows:
Subscribers
We provide telephone and data communication services under prepaid and postpaid payment arrangements as follows:
Postpaid service arrangements include fixed monthly charges generated from postpaid cellular voice and data services through the postpaid plans of Smart, Red Mobile and Sun Cellular, from local exchange services primarily through landline and related services, and from data and other network services primarily through broadband and leased line services, which we recognized on a straight-line basis over the customers subscription period. Services provided to postpaid subscribers are billed throughout the month according to the billing cycles of subscribers. Services availed by subscribers in addition to these fixed fee arrangements are charged separately and recognized as the additional service is provided or as availed by the subscribers.
Our prepaid services include over-the-air reloading channels and prepaid cards provided by Smart Prepaid, Talk N Text, Red Mobile and Sun Cellular. Proceeds from over-the-air reloading channels and prepaid cards are initially recognized as unearned revenue and realized upon actual usage of the airtime value (i.e., the pre-loaded airtime value of subscriber identification module, or SIM, cards and subsequent top-ups) for voice, short messaging services, or SMS, multimedia messaging services, or MMS, content downloading, infotext services and prepaid unlimited and bucket-priced SMS and call subscriptions, net of free SMS allocation, bonus credits or upon expiration of the usage period, whichever comes earlier. Interconnection fees and charges arising from the actual usage of prepaid cards are recorded as incurred.
Revenue from international and national long distance calls carried via our network is generally based on rates which vary with distance and type of service (direct dial or operator-assisted, paid or collect, etc.). Revenue from both wireless and fixed line long distance calls is recognized as the service is provided.
Nonrecurring upfront fees such as activation fees charged to subscribers for connection to our network are deferred and are recognized as revenue throughout the estimated average customer relationship. The related incremental costs are similarly deferred and recognized over the same period in our consolidated income statement.
Connecting carriers
Interconnection revenue for call termination, call transit, and network usages are recognized in the period the traffic occurs. Revenue related to local, long distance, network-to-network, roaming and international call connection services are recognized when the call is placed or connection is provided and the equivalent amounts charged to us by other carriers are recorded under interconnection costs in our consolidated income statement. Inbound revenue and outbound charges are based on agreed transit and termination rates with other foreign and local carriers and content providers.
VAS
Revenues from VAS include SMS in excess of consumable fixed monthly service fees (for postpaid) and free SMS allocations (for prepaid), MMS, content downloading and infotext services. The amount of revenue recognized is the net of amount settled with carriers owning the network where the outgoing voice call or SMS terminates and payout to content providers.
Knowledge processing solutions and customer relationship management and other services
Revenue from outsourcing contracts under our knowledge processing solutions and customer relationship management businesses are recognized when evidence of an arrangement exists, the service has been provided, the fee is fixed or determinable, and collectability is reasonably assured. If the fee is not fixed or determinable, or collectability is not reasonably assured, revenue is not recognized until payment is received. For arrangements requiring specific customer acceptance, revenue recognition is deferred until the earlier of the end of the deemed acceptable period or until a written notice of acceptance is received from the customer. Revenue on services rendered to customers whose ability to pay is in doubt at the time of performance of services is also not recorded. Rather, revenue is recognized from these customers as payment is received. Revenue contingent on meeting specific performance conditions are recognized to the extent of costs incurred to provide the service. Outsourcing contracts may also include incentive payments dependent on achieving performance targets. Revenue relating to such incentive payments is recognized when the performance target is achieved.
Revenue from server hosting, collocation services and customer support services under our information and communications business are recognized as the service is performed.
Incentives
We operate customer loyalty programmes in our wireless business which allows customers to accumulate points when they purchase services or prepaid credits from us. The points can then be redeemed for free services and discounts, subject to a minimum number of points being obtained. Consideration received is allocated between the services and prepaid credits sold and the points issued, with the consideration allocated to the points equal to their value. The fair value of the points issued is deferred and recognized as revenue when the points are redeemed.
Product-based incentives provided to dealers and customers as part of a transaction are accounted for as multiple element arrangements and recognized when earned.
Multiple-deliverable arrangements
In revenue arrangements including more than one deliverable, the deliverables are assigned to one or more separate units of accounting and the arrangement consideration is allocated to each unit of accounting based on residual method. Under the residual method, arrangement consideration is first allocated to the undelivered element and the residual amount allocated to the delivered element.
Non-service Revenues
Revenues from handset and equipment sales are recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods. The related cost or net realizable value of handsets or equipment, sold to customers is presented as Cost of sales account in the consolidated income statements.
Interest income
Interest income is recognized as it accrues on a time proportion basis taking into account the principal amount outstanding and the EIR.
Dividends
Revenue is recognized when our right to receive the payment is established.
Expenses
Expenses are recognized as incurred.
Provisions
We recognize provision when we have present obligation, legal or constructive, as a result of a past event, and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When we expect some or all of a provision to be reimbursed, 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 our consolidated income statement, net of any reimbursements. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, 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 interest expense.
Retirement Benefits
Defined benefit pension plans
We have separate and distinct retirement plans for PLDT and majority of our Philippine-based operating subsidiaries, administered by the respective Funds Trustees, covering permanent employees. Retirement costs are separately 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. Retirement costs include current service cost plus amortization of past service cost, experience adjustments, changes in actuarial assumptions and the effect of any curtailments or settlements. Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits vest immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan.
The defined benefit asset or liability comprises the present value of the defined benefit obligation (using a discount rate based on government bonds), net of past service cost and actuarial gains and losses not yet recognized, and less the fair value of plan assets out of which the obligations are to be settled directly. Plan assets are assets held by long-term employee benefit fund and are not available to our creditors nor can they be paid directly to us. Fair value is based on market price information and in the case of quoted securities, the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service cost and actuarial gains and losses not yet recognized, and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
Defined contribution plans
Smart and certain of its subsidiaries record expenses for their contribution to the defined contribution plans when the employee renders service to Smart and certain of its subsidiaries, essentially coinciding with their cash contributions to the plans.
Other Long-term Employee Benefits
Our liability arising from 2010 to 2012 Long-term Incentive Plan, or 2010 to 2012 LTIP, is determined using the projected unit credit method. Employee benefit costs include current service cost, 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 comprises the present value of the defined benefit obligation (using a discount rate based on government bonds) at the end of the reporting period.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of 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 even if that right is not explicitly specified in an arrangement. 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 or extension of the agreement; (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 the fulfillment is dependent on a specified asset; or (d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and the date of renewal or extension period for scenario (b).
As a Lessor. Leases where we retain substantially all the risks and benefits of ownership of the asset are classified as operating leases. Any initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rental income. Rental income is recognized in our consolidated income statement on a straight-line basis over the lease term.
All other leases are classified as finance leases. At the inception of the finance lease, the asset subject to lease agreement is derecognized and lease receivable is recognized. Interest income is accrued over the lease term and lease amortization is accounted for as reduction of lease receivable.
As a Lessee. Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. Operating lease payments are recognized as expense in our consolidated income statement on a straight-line basis over the lease term.
All other leases are classified as finance leases. A finance lease gives rise to the recognition of a leased asset and finance lease liability. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, if there is no reasonable certainty that we will obtain ownership of the leased asset at the end of the lease term. Interest expense is recognized over the lease term.
Income Taxes
Current income tax
Current income 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 authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the end of the reporting period where we operate and generate taxable income.
Deferred income tax
Deferred income tax is provided using the balance sheet liability method on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the end of the reporting period.
Deferred income tax liabilities are recognized for all taxable temporary differences except: (1) when the deferred income 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 profit nor taxable profit or loss; and (2) with respect to taxable temporary differences associated with investments in subsidiaries, associates and interest 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 income tax assets are recognized for all deductible temporary differences, the carryforward benefits of unused tax credits from excess minimum corporate income tax, or MCIT, over regular corporate income tax, or RCIT, and unused net operating loss carry over, or NOLCO. Deferred income tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward benefits of unused tax credits and unused tax losses can be utilized, except: (1) when the deferred income 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 profit nor taxable profit or loss; and (2) with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred income tax assets is reviewed at the end of each reporting period 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 income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax assets to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as at the end of the reporting period.
Deferred income tax relating to items recognized in other comprehensive income account is included in the statement of comprehensive income and not in our consolidated income statement.
Deferred income tax assets and liabilities are set off, if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it is incurred during the measurement period or in profit or loss.
Contingencies
Contingent liabilities are not recognized in our consolidated financial statements. They are disclosed in the notes to our 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 the consolidated financial statements when an inflow of economic benefits is probable.
Events After the End of the Reporting Period
Post quarter-end events up to the date of approval of the Board of Directors that provide additional information about our financial position at the end of the reporting period (adjusting events) are reflected in the unaudited consolidated financial statements. Post quarter-end events that are not adjusting events are disclosed in the notes to the unaudited consolidated financial statements when material.
Equity
Preferred and common stocks are 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/or fair value of considerations received in excess of par value are recognized as capital in excess of par value.
Treasury stocks are our own equity instruments which are reacquired and recognized at cost and presented as reduction in equity. No gain or loss is recognized in our consolidated income statement on the purchase, sale, reissuance or cancellation of our own equity instruments. Any difference between the carrying amount and the consideration upon reissuance or cancellation of shares is recognized as capital in excess of par value.
Change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction and any impact is presented as part of capital in excess of par value.
Retained earnings represent our net accumulated earnings less cumulative dividends declared.
Other comprehensive income comprise items of income and expense, including reclassification adjustments, that are not recognized in profit or loss as required or permitted by other PFRSs.
New Accounting Standards and Amendments and Interpretations to Existing Standards Effective Subsequent to June 30, 2012
We will adopt the following revised standards and interpretations enumerated below which are relevant to us when these become effective. Except as otherwise indicated, we do not expect the adoption of these revised standards and amendments to PFRS to have a significant impact on our consolidated financial statements.
Effective 2013
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. The amendment clarifies that an entity that has stopped applying PFRS may choose to either: (a) re-apply PFRS 1, even if the entity applied PFRS 1 in a previous reporting period; or (b) apply PFRS retrospectively in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, in order to resume reporting under PFRS. It also clarifies that upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles may carryforward, without adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Such borrowing costs are then recognized in accordance with PAS 23, Borrowing Costs.
The amendments to PFRS 1 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment has no impact on our financial position or performance.
PAS 1, Presentation of Financial Statements. The amendment requires an entity to present a: (a) comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period; and (b) opening statement of financial position when an entity changes its accounting policies, makes retrospective restatements or makes reclassifications, and that change has a material effect on the statement of financial position. The opening statement will be at the beginning of the preceding period.
The amendments to PAS 1 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment has no impact on our financial position or performance.
PAS 16, Property, Plant and Equipment. The amendment clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory.
We are currently assessing the potential impact of adoption of amendment of PAS 16 when these become effective for annual periods beginning on or after January 1, 2013.
PAS 32, Financial Instruments: Presentation. The amendment removes existing income tax requirements from PAS 32 and requires entities to apply requirements in PAS 12, Income Taxes, to any income tax arising from distributions to equity holders.
The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment has no impact on our financial position or performance.
PAS 34, Interim Financial Reporting. The amendment clarifies the requirements in PAS 34 relating to segment information for total assets and liabilities for each reportable segment to enhance consistency with the requirement in PFRS 8, Operating Segments.
We are currently assessing the potential impact of adoption of amendment of PAS 34 when these become effective for annual periods beginning on or after January 1, 2013.
Amendments to PFRS 7, Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities. These amendments require an entity to disclose information about rights of setoff and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are setoff in accordance with PAS 32, Financial Instruments. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar arrangement, irrespective of whether they are setoff in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information, presented separately for financial assets and financial liabilities recognized at the end of the reporting period: (a) the gross amounts of those recognized financial assets and recognized financial liabilities; (b) the amounts that are setoff in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; (c) the net amounts presented in the statement of financial position; (d) the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: (i) amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and (ii) amounts related to financial collateral (including cash collateral); and (e) the net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments to PFRS 7 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment affects disclosures only and has no impact on our financial position or performance.
PFRS 10, Consolidated Financial Statements. PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standards Interpretation Committee, or SIC, 12, Consolidation Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27.
PFRS 11, Joint Arrangements. PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities Non-Monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities, or JCEs, using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.
We are currently assessing the potential impact of adoption of PFRS 10 and PFRS 11 when these become effective for annual periods beginning on or after January 1, 2013.
PFRS 12, Disclosure of Interests in Other Entities. PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard becomes effective for annual periods beginning on or after January 1, 2013.
We expect a more comprehensive disclosure about our interest in subsidiaries, joint arrangements, and associates upon adoption.
PFRS 13, Fair Value Measurement. PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. We are currently assessing the impact that this standard will have on our financial position and performance. This standard becomes effective for annual periods beginning on or after January 1, 2013.
Revised PAS 19, Employee Benefits. Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. We are currently assessing the impact of the amendment to PAS 19. The amendment becomes effective for annual periods beginning on or after January 1, 2013.
Revised PAS 27, Separate Financial Statements. As a consequence of the new PFRS 10 and PFRS 12, what remains of PAS 27 is limited to accounting for subsidiaries, JCEs, and associates in separate financial statements. The amendment becomes effective for annual periods beginning on or after January 1, 2013.
Revised PAS 28, Investments in Associates and Joint Ventures. As a consequence of the new PFRS 11 and PFRS 12, PAS 28, Investments in Associates, has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013.
Amendments to PAS 1, Financial Statement Presentation Presentation of Items of Other Comprehensive Income. The amendments to PAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on our financial position or performance. The amendment becomes effective for annual periods beginning July 1, 2012.
Effective 2014
Amendments to PAS 32, Financial Instruments: Presentation Offsetting Financial Assets and Financial Liabilities. These amendments to PAS 32 clarify the meaning of currently has a legally enforceable right to set- off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on our net assets, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. We are currently assessing impact of the amendments to PAS 32.
Effective 2015
PFRS 9, Financial Instruments: Classification and Measurement. PFRS 9 as issued reflects the first phase on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. The standard is effective for annual periods beginning on or after January 1, 2015. In subsequent phases, hedge accounting and impairment of financial assets will be addressed with the completion of this project is expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of our financial assets, but will potentially have no impact on classification and measurement of financial liabilities. We will quantify the effect on our consolidated financial statements in conjunction with the other phases, when issued, to present a comprehensive picture.
3. | Managements Use of Accounting Judgments, Estimates and Assumptions |
The preparation of our consolidated financial statements in conformity with PFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities and disclosure of contingent liabilities at the end of each reporting period. The uncertainties inherent in these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the assets or liabilities affected in the future periods.
Judgments
In the process of applying the PLDT Groups accounting policies, management has made the following judgments, apart from those including estimations and assumptions, which have the most significant effect on the amounts recognized in our consolidated financial statements.
Determination of functional currency
The functional currencies of the entities under the PLDT Group are the currency of the primary economic environment in which each entity operates. It is the currency that mainly influences the revenue from and cost of rendering products and services.
The presentation currency of the PLDT Group is the Philippine peso. Based on the economic substance of the underlying circumstances relevant to the PLDT Group, the functional currency of all entities under PLDT Group is the Philippine peso, except for, SMHC, SMI, TSI, FECL Group, PLDT Global and certain of its subsidiaries, PGNL, DCPL, SPi Global and certain of its subsidiaries, and certain subsidiaries of Chikka, which use the U.S. dollar. SHPL, SGP, 3rd Brand, and certain subsidiaries of AGS use the Singapore dollar as functional currency.
As a result of the internal reorganization within PLDT wherein BPO is now classified as an independent operating segment under SPi Global, management undertook a review of the functional currency exposures of SPi Global and certain of its subsidiaries in December 2011. Based on managements assessment, SPi Global and SPi CRMs new currency exposures are now largely U.S. dollars. Based on the aforementioned consideration, which is set forth in PAS 21, The Effects of Changes in Foreign Exchange Rates, SPi Global and SPi CRM commenced adopting U.S. dollars as its functional currency starting on December 6, 2011. See discussions in Note 2 Summary of Significant Accounting Policies and Note 4 Operating Segment Information.
Leases
As a lessee, we have various lease agreements in respect of our certain equipment and properties. We evaluate whether significant risks and rewards of ownership of the leased properties are transferred to us (finance lease) or retained by the lessor (operating lease) based on PAS 17, Leases. Total lease expense arising from operating leases amounted to Php2,861 million and Php2,023 million for the six months ended June 30, 2012 and 2011, respectively. Total finance lease obligations amounted to Php12 million and Php14 million as at June 30, 2012 and December 31, 2011, respectively. See Note 20 Interest-bearing Financial Liabilities and Note 27 Financial Assets and Liabilities.
PLDTs Acquisition of Digitel
Our acquisition of 51.6% equity interest in Digitel and the mandatory tender offer for the Digitel shares held by the public or noncontrolling shareholders were accounted for as linked transactions and as a single business combination due to the following: (a) the price per share offered to remaining noncontrolling interest is fixed and the same price as what we offered to acquire the controlling interest of JGSHI; (b) the remaining non-controlling shareholders of Digitel did not negotiate to receive the offer; (c) although the offer was initiated by PLDT, it stemmed from a regulatory requirement triggered by the acquisition of controlling interest in Digitel; and (d) the offer period is relatively short period of time.
As the acquisition of 51.6% equity interest and the mandatory tender offer were accounted for as linked transactions, we accounted for the business combination as if we have acquired 100% equity interest at the closing date of the transaction on October 26, 2011, or the Closing Date of the sale transaction, or the Closing Date, up to the end of tender offer period on January 16, 2012. A mandatory tender offer option liability is recognized and treated as part of consideration transferred in addition to the fair value of PLDT common shares issued to JGSHI. At the end of the tender offer period, the mandatory tender offer option liability is derecognized and corresponding settlement either in shares or in cash is recorded for those who opted for the mandatory tender offer. For the portion of mandatory tender offer option liability that expires unexercised, the mandatory tender offer option liability is derecognized and noncontrolling interest is set-up measured as of the date of acquisition. See Note 13 Business Combinations and Acquisition of Noncontrolling Interests PLDTs Acquisition of Digitel.
Estimates and Assumptions
The key estimates and assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognized in the consolidated financial statements within the next financial year are discussed below. We based our estimates and assumptions on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of PLDT. Such changes are reflected in the assumptions when they occur.
Asset impairment
PFRS requires that an impairment review be performed when certain impairment indicators are present. In the case of goodwill, at a minimum, such asset is subject to an annual impairment test and more frequently whenever there is an indication that such asset may be impaired. This requires an estimation of the value in use of the CGUs to which the goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the CGU and to choose a suitable discount rate in order to calculate the present value of those cash flows.
Determining the recoverable amount of property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets, requires us to make estimates and assumptions in the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets. Future events could cause us to conclude that property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets associated with an acquired business are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and financial performance.
The preparation of estimated future cash flows involves significant estimations and assumptions. While we believe that our assumptions are appropriate and reasonable, significant changes in our assumptions may materially affect our assessment of recoverable values and may lead to future additional impairment charges under PFRS.
In December 2011, we recognized an impairment loss of Php8,457 million for certain network equipment and facilities which no longer efficiently support our network modernization program and have been identified for replacement. The impairment loss recognized represents the net book value of these network equipment and facilities. See Note 9 Property, Plant and Equipment.
The provisional goodwill from the acquisition of Laserwords Private Ltd., or Laserwords, ePDS and Digitel of Php849 million, Php26 million and Php68,340 million, respectively, were not tested for impairment since there were no indicators of impairment identified. See Note 13 Business Combinations and Acquisition of Noncontrolling Interests.
The carrying values of our property, plant and equipment, investments in associates and joint ventures, goodwill and intangible assets, and prepayments are separately disclosed in Notes 9, 10, 14 and 18, respectively.
Estimating useful lives of property, plant and equipment
We estimate the useful lives of our property, plant and equipment based on the periods over which our assets are expected to be available for use. Our estimate of the useful lives of our property, plant and equipment is based on our collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful lives of our property, plant and equipment are reviewed every year-end and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of our assets. It is possible, however, that future results of operations could be materially affected by changes in our estimates brought about by changes in the factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of our property, plant and equipment would increase our recorded depreciation and amortization and decrease our property, plant and equipment.
The total depreciation and amortization of property, plant and equipment amounted to Php15,524 million and Php13,118 million for the six months ended June 30, 2012 and 2011, respectively. Total carrying values of property, plant and equipment, net of accumulated depreciation and amortization, amounted to Php191,790 million and Php197,731 million as at June 30, 2012 and December 31, 2011, respectively. See Note 4 Operating Segment Information and Note 9 Property, Plant and Equipment.
Determining the fair value of investment properties
We have adopted the fair value approach in determining the carrying value of our investment properties. We opted to rely on independent appraisers in determining the fair values of our investment properties, and such fair values were determined based on recent prices of similar properties, with adjustments to reflect any changes in economic conditions since the date of those transactions. The amounts and timing of recorded changes in fair value for any period would differ if we made different judgments and estimates or utilized a different basis for determining fair value. Appraisal of investment properties is performed every December 31.
There were no gains from fair value adjustments charged to profit or loss in each of the six months ended June 30, 2012 and 2011. Total carrying values of our investment properties amounted to Php1,115 million each as at June 30, 2012 and December 31, 2011. See Note 12 Investment Properties.
Goodwill and intangible assets
Our consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the acquisition method, which require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquirees identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquirees assets and liabilities can materially affect our financial performance.
Intangible assets acquired from business combination with finite lives are amortized over the expected useful life using the straight-line method of accounting. At a minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statement.
The total amortization of intangible assets amounted to Php785 million and Php144 million for the six months ended June 30, 2012 and 2011, respectively. Total carrying values of goodwill and intangible assets amounted to Php78,560 million and Php80,656 million as at June 30, 2012 and December 31, 2011, respectively. See Note 14 Goodwill and Intangible Assets.
Recognition of deferred income tax assets and liabilities
We review the carrying amounts of deferred income tax assets at the end of each reporting period and reduce these to the extent that these are no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Our assessment on the recognition of deferred income tax assets on deductible temporary differences is based on the level and timing of forecasted taxable income of the subsequent reporting periods. This forecast is based on our past results and future expectations on revenues and expenses as well as future tax planning strategies. However, there is no assurance that we will generate sufficient taxable income to allow all or part of our deferred income tax assets to be utilized. We also review the level of projected gross margin for the use of Optional Standard Deduction, or OSD method, and assess the future tax consequences for the recognition of deferred income tax assets and deferred income tax liabilities. Based on Smarts projected gross margin, they expect to continue using the OSD method in the foreseeable future.
Based on the above assessment, our consolidated unrecognized deferred income tax assets amounted
to
Php14,790 million and Php16,098 million as at June 30, 2012 and December 31, 2011, respectively.
In addition, our unrecognized net deferred income tax assets for items which would not result
in future tax benefits when using the OSD method amounted to Php2,046 million and Php4,240
million as at June 30, 2012 and December 31, 2011, respectively. Total consolidated provision
for deferred income tax amounted to Php1,050 million and Php109 million for the six months ended
June 30, 2012 and 2011, respectively. Total consolidated net deferred income tax assets
amounted to Php5,116 million and Php5,975 million as at June 30, 2012 and December 31, 2011,
respectively, while total consolidated net deferred income tax liabilities amounted to Php3,395
million and Php2,902 million as at June 30, 2012 and December 31, 2011, respectively. See Note
4 Operating Segment Information and Note 7 Income Taxes.
Estimating allowance for doubtful accounts
If we assessed that there is an objective evidence that an impairment loss has been incurred in our trade and other receivables, we estimate the allowance for doubtful accounts related to our trade and other receivables that are specifically identified as doubtful of collection. The amount of allowance is evaluated by management on the basis of factors that affect the collectability of the accounts. In these cases, we use judgment based on the best available facts and circumstances, including, but not limited to, the length of our relationship with the customer and the customers credit status based on third party credit reports and known market factors, to record specific reserves for customers against amounts due in order to reduce our receivables to amounts that we expect to collect. These specific reserves are re-evaluated and adjusted as additional information received affect the amounts estimated.
In addition to specific allowance against individually significant receivables, we also assess a collective impairment allowance against credit exposures of our customer which were grouped based on common credit characteristic, which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when the receivables were originally granted to customers. This collective allowance is based on historical loss experience using various factors, such as historical performance of the customers within the collective group, deterioration in the markets in which the customers operate, and identified structural weaknesses or deterioration in the cash flows of customers.
Total provision for doubtful accounts for trade and other receivables recognized in our consolidated income statements amounted to Php960 million and Php774 million for the six months ended June 30, 2012 and 2011, respectively. Trade and other receivables, net of allowance for doubtful accounts, amounted to Php16,223 million and Php16,245 million as at June 30, 2012 and December 31, 2011, respectively. See Note 4 Operating Segment Information, Note 5 Income and Expenses, Note 16 Trade and Other Receivables and Note 27 Financial Assets and Liabilities.
Estimating net realizable value of inventories and supplies
We write-down the cost of inventories whenever the net realizable value of inventories becomes lower than cost due to damage, physical deterioration, obsolescence, change in price levels or other causes. The lower of cost and net realizable value of inventories is reviewed on a periodic basis. Inventory items identified to be obsolete or unusable are written-off and charged as expense in our consolidated income statement.
Total write-down of inventories and supplies amounted to Php225 million and Php35 million for the six months ended June 30, 2012 and 2011, respectively. The carrying values of inventories and supplies amounted to Php2,893 million and Php3,827 million as at June 30, 2012 and December 31, 2011, respectively. See Note 4 Operating Segment Information, Note 5 Income and Expenses and Note 17 Inventories and Supplies.
Estimation of pension benefit costs and other employee benefits
The cost of defined benefit plans and present value of the pension obligation are determined using projected unit credit method. Actuarial valuation includes making various assumptions which consists, among other things, discount rates, expected rates of return on plan assets, rates of compensation increases and mortality rates. See Note 25 Employee Benefits. Actual results that differ from our assumptions are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These excess actuarial gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan. Due to complexity of valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in assumptions. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for pension and other retirement obligations. All assumptions are reviewed every year-end.
Net consolidated pension benefit costs amounted to Php72 million for the six months ended June 30, 2012 and total consolidated pension benefit income amounted to Php30 million for the six months ended June 30, 2011. Unrecognized net actuarial gains amounted to Php2,889 million and Php2,886 million as at June 30, 2012 and December 31, 2011, respectively. The prepaid benefit costs amounted to Php5,855 million and Php5,654 million as at June 30, 2012 and December 31, 2011, respectively. The accrued benefit costs amounted to Php534 million and Php496 million as at June 30, 2012 and December 31, 2011, respectively. See Note 5 Income and Expenses, Note 18 Prepayments and Note 25 Employee Benefits.
The 2010 to 2012 LTIP, has been presented to and approved by the Executive Compensation Committee, or ECC, and the Board of Directors, and is based on profit targets for the covered Performance Cycle. The cost of 2010 to 2012 LTIP is determined using the projected unit credit method based on prevailing discount rates and profit targets. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for other employee benefits. All assumptions are reviewed on a monthly basis. Total outstanding liability and fair value of 2010 to 2012 LTIP cost amounted to Php1,392 million as at December 31, 2010. Based on our latest projection, the profit targets for the covered Performance Cycle is no longer achievable, thus, accrued LTIP cost as at December 31, 2010 was reversed and presented as part of other income in our consolidated income statement for the year ended December 31, 2011. See Note 5 Income and Expenses and Note 25 Employee Benefits.
To ensure the proper execution of our strategic and operational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, our LTIP has been revised and, with the endorsement of the ECC, approved by the Board of Directors on March 22, 2012. The award in the revised LTIP is contingent upon the successful achievement of certain profit targets, aligns the execution of the business strategies of the expanded Group, including Digitel, over the three year period 2012 to 2014. In addition, the revised LTIP allows for the participation of a number of senior executives and important newly hired executives, ensures the continuity of management and assists in succession planning of the PLDT Group. LTIP costs and liability recognized as at and for the six months ended June 30, 2012 amounted to Php802 million.
Provision for asset retirement obligations
Provision for asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. This requires an estimation of the cost to restore/dismantle on a per square meter basis, depending on the location, and is based on the best estimate of the expenditure required to settle the obligation at the future restoration/dismantlement date, discounted using a pre-tax rate that reflects the current market assessment of the time value of money and, where appropriate, the risk specific to the liability. Total provision for asset retirement obligations amounted to Php2,204 million and Php2,107 million as at June 30, 2012 and December 31, 2011, respectively. See Note 21 Deferred Credits and Other Noncurrent Liabilities.
Provision for legal contingencies and tax assessments
We are currently involved in various legal proceedings and tax assessments. Our estimate of the probable costs for the resolution of these claims have been developed in consultation with our counsel handling the defense in these matters and is based upon our analysis of potential results. We currently do not believe these proceedings could materially reduce our revenues and profitability. It is possible, however, that future financial performance could be materially affected by changes in our estimates or effectiveness of our strategies relating to these proceedings and assessments. See Note 26 Provisions and Contingencies.
Revenue recognition
Our revenue recognition policies require us to make use of estimates and assumptions that may affect the reported amounts of our revenues and receivables.
Our agreements with domestic and foreign carriers for inbound and outbound traffic subject to settlements require traffic reconciliations before actual settlement is done, which may not be the actual volume of traffic as measured by us. Initial recognition of revenues is based on our observed traffic adjusted by our normal experience adjustments, which historically are not material to our consolidated financial statements. Differences between the amounts initially recognized and the actual settlements are taken up in the accounts upon reconciliation. However, we cannot assure you that the use of such estimates will not result in material adjustments in future periods.
Revenues under a multiple element arrangement specifically applicable to our fixed line and wireless businesses are split into separately identifiable components based on their relative fair value to reflect the substance of the transaction. Where fair value is not directly observable, the total consideration is allocated using an appropriate allocation method.
Under certain arrangements with our knowledge processing solutions services, if there is uncertainty regarding the outcome of the transaction for which service was rendered, revenue is recognized only to the extent of expenses incurred for rendering the service and only to such amount is determined to be recoverable.
We recognize our revenues from installation and activation related fees and the corresponding costs over the expected average periods of customer relationship for fixed line and cellular services. We estimate the expected average period of customer relationship based on our most recent churn rate analysis.
Determination of fair values of financial assets and liabilities
Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Total fair values of financial assets and liabilities amounted to Php63,527 million and Php214,031 million, respectively, as at June 30, 2012, while the total fair values of financial assets and liabilities amounted to Php72,002 million and Php216,443 million, respectively, as at December 31, 2011. See Note 27 Financial Assets and Liabilities.
4. | Operating Segment Information |
Operating segments are components of the PLDT Group that engage in business activities from which they may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of PLDT Group), which operating results are regularly reviewed by the chief operating decision maker to make decisions about how resources are to be allocated to each of the segments and to assess their performances, and for which discrete financial information is available.
For management purposes, we are organized into business units based on our products and services and based on the reorganization as discussed below. We have four reportable operating segments, as follows:
| Wireless wireless telecommunications services provided by Smart, CURE (the Red Mobile business of CURE was transferred to Smart on June 30, 2012), and DMPI, which owns the Sun Cellular business and is a wholly-owned subsidiary of Digitel (PLDT acquired a controlling interest in Digitel on October 26, 2011 and through a series of transactions holds approximately 99.5% of the outstanding common stock of Digitel as at June 30, 2012), our cellular service providers; SBI and PDSI, our wireless broadband service providers; Wolfpac and Chikka Group, our wireless content operators; and ACeS Philippines, our satellite operator; |
| Fixed Line fixed line telecommunications services primarily provided by PLDT. We also provide fixed line services through PLDTs subsidiaries, namely, ClarkTel, SubicTel, Philcom Group, Maratel, SBI, PDSI, BCC, PLDT Global and Digitel, all of which together account for approximately 16% of our consolidated fixed line subscribers; and information and communications infrastructure and services for internet applications, internet protocol-based solutions and multimedia content delivery provided by ePLDT and AGS Group; netGames; and bills printing and other VAS-related services provided by ePDS (ePLDT increased its equity interest in ePDS from 50% to 67% on August 24, 2011). ePLDT disposed of its 75% interest in Digital Paradise, a provider of internet access services on April 1, 2011, disposed of its 57.51% interest in Level Up!, a publisher of online games on July 11, 2011, and transferred its 99.64% interest in Infocom to SPi Global on December 6, 2011; |
| BPO knowledge processing solutions provided by the SPi Group; and customer relationship management provided by SPi CRM and Infocom (ePLDT transferred the internet business of Infocom to PLDT on July 1, 2011); and |
| Others PCEV, an investment company. |
See Note 2 Summary of Accounting Policies and Note 13 Business Combinations and Acquisition of Noncontrolling Interests for further discussion.
The primary effects of the acquisition of the Digitel Group on our operating segments is the addition of DMPI to our wireless business and the addition of Digitel to our fixed line business. We have agreed with the NTC that we will continue to operate Sun Cellular as a separate brand.
On July 7, 2010, our Board of Directors approved the reorganization of the ePLDT Group into two business groups: (i) the information and communications technology, or ICT business group, which provides data center services, internet and online gaming services and business solutions and applications, and which was subsequently incorporated into our fixed line business; and (ii) the BPO business group, which covers customer relationship management or call center operations under SPi CRM; and content solutions, medical billing and coding and medical transcription services under SPi.
With our objective to grow the BPO business segment, and for ePLDT to focus on its core business of IT infrastructure and services, our Board of Directors approved on July 5, 2011 to spin off SPi and SPi CRM from ePLDT and transfer the ownership of SPi Global to PLDT, and to place both SPi and SPi CRM under SPi Global. Subsequently, the Board of Directors decided to include Infocom in the spin-off. The reorganization was completed on December 6, 2011.
PCEV transferred its cellular business to Smart in August 2009 and acquired 223 million common shares, or about 20% equity interest, in Manila Electric Company, or Meralco, in March 2010. PCEV acquired 50% equity interest in Beacon Electric Asset Holdings, Inc., or Beacon, on March 30, 2010 and subsequently transferred 154.2 million and 68.8 million Meralco common shares to Beacon on May 12, 2010 and October 25, 2011, respectively. As a result, PCEV became an investment/holding company and was reclassified from Wireless to Others business segment.
As at June 30, 2012, our chief operating decision maker views our business activities in four business units: Wireless, Fixed Line, BPO and Others, compared to three business units in 2010: Wireless, Fixed Line and ICT. The remaining ICT businesses, which did not form part of our BPO, were reclassified into our fixed line segment. We have retroactively implemented the above changes in our segment reporting and restated our comparative operating segment information accordingly.
The chief operating decision maker and management monitor the operating results of each business unit separately for purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on net income (loss) for the period; earnings before interest, taxes and depreciation and amortization, or EBITDA; EBITDA margin; and core income. Net income (loss) for the period is measured consistent with net income (loss) in the consolidated financial statements.
EBITDA is measured as net income excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity share in net earnings (losses) of associates and joint ventures, foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net, provision for (benefit from) income tax and other income (expenses).
EBITDA margin is measured as EBITDA divided by service revenues for the period.
Core income for the period is measured as net income attributable to equity holders of PLDT (net income less net income attributable to noncontrolling interests), excluding foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net (excluding hedge costs), asset impairment on noncurrent assets, other nonrecurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures.
Transfer prices between operating segments are on an arms length basis similar to transactions with third parties. Segment revenues, segment expenses and segment results include transfers between business segments. These transfers are eliminated in full upon consolidation.
Core earnings per common share, or core EPS, is measured as core income divided by the weighted average number of common shares for the period. See Note 8 Earnings Per Common Share for the weighted average number of common shares for the period.
EBITDA, EBITDA margin, core income and core EPS are non-PFRS measures.
The amount of segment assets and liabilities are based on measurement principles that are similar to those used in measuring the assets and liabilities in the consolidated statement of financial position, which is in accordance with PFRS.
The segment revenues, net income for the period, assets, liabilities, and other segment information of our reportable operating segments for the six months ended June 30, 2012 and 2011 and as at June 30, 2012 and December 31, 2011 are as follows:
Inter-segment | ||||||||||||||||||||||||
Wireless | Fixed Line | BPO | Others | Transactions | Consolidated | |||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
External customers: |
55,850 | 25,878 | 4,504 | | | 86,232 | ||||||||||||||||||
Service revenues (Note 3) |
54,669 | 25,552 | 4,504 | | | 84,725 | ||||||||||||||||||
Non-service revenues (Notes 3 and 5) |
1,181 | 326 | | | | 1,507 | ||||||||||||||||||
Inter-segment transactions: |
3,785 | 4,864 | 332 | | (8,981 | ) | | |||||||||||||||||
Service revenues (Note 3) |
3,785 | 4,857 | 332 | | (8,974 | ) | | |||||||||||||||||
Non-service revenues (Notes 3 and 5) |
| 7 | | | (7 | ) | | |||||||||||||||||
Total revenues |
59,635 | 30,742 | 4,836 | | (8,981 | ) | 86,232 | |||||||||||||||||
Results |
||||||||||||||||||||||||
Depreciation and amortization (Notes 3 and 9) |
8,756 | 6,533 | 235 | | | 15,524 | ||||||||||||||||||
Asset impairment (Notes 3, 5, 9, 10, 16, 17 and 27) |
658 | 526 | 1 | | | 1,185 | ||||||||||||||||||
Equity share in net earnings (losses) of associates and joint ventures (Note 10) |
(25 | ) | 113 | | 1,223 | | 1,311 | |||||||||||||||||
Interest income (Note 5) |
296 | 482 | 7 | 9 | (168 | ) | 626 | |||||||||||||||||
Financing costs net (Notes 5, 9, 20 and 27) |
1,370 | 2,162 | 13 | | (168 | ) | 3,377 | |||||||||||||||||
Provision for income tax (Notes 3 and 7) |
5,670 | 629 | 181 | 4 | | 6,484 | ||||||||||||||||||
Net income / Segment profit |
13,452 | 2,081 | 492 | 3,446 | | 19,471 | ||||||||||||||||||
EBITDA |
28,208 | 9,928 | 991 | (11 | ) | 184 | 39,300 | |||||||||||||||||
EBITDA margin |
48 | % | 33 | % | 20 | % | (100 | %) | | 46 | % | |||||||||||||
Core income |
12,703 | 1,922 | 497 | 3,539 | | 18,661 | ||||||||||||||||||
Assets and liabilities |
||||||||||||||||||||||||
Operating assets |
162,226 | 248,318 | 12,988 | 9,460 | (77,627 | ) | 355,365 | |||||||||||||||||
Investments in associates and joint ventures (Notes 3, 5, 10 and 27) |
49 | 4,227 | | 20,517 | | 24,793 | ||||||||||||||||||
Deferred income tax assets net (Notes 3, 7 and 27) |
39 | 4,845 | 232 | | | 5,116 | ||||||||||||||||||
Consolidated total assets |
162,314 | 257,390 | 13,220 | 29,977 | (77,627 | ) | 385,274 | |||||||||||||||||
Operating liabilities |
122,874 | 166,893 | 3,042 | 709 | (57,962 | ) | 235,556 | |||||||||||||||||
Deferred income tax liabilities net (Notes 3, 7 and 27) |
1,644 | 1,393 | 94 | | 264 | 3,395 | ||||||||||||||||||
Consolidated total liabilities |
124,518 | 168,286 | 3,136 | 709 | (57,698 | ) | 238,951 | |||||||||||||||||
Other segment information |
||||||||||||||||||||||||
Capital expenditures, including capitalized interest (Notes 5, 9, 20 and 21) |
5,202 | 3,920 | 176 | | | 9,298 | ||||||||||||||||||
June 30, 2011 (Unaudited) |
||||||||||||||||||||||||
Revenues (1) |
||||||||||||||||||||||||
External customers: |
48,039 | 24,809 | 3,911 | | | 76,759 | ||||||||||||||||||
Service revenues (Note 3) |
47,443 | 24,264 | 3,911 | | | 75,618 | ||||||||||||||||||
Non-service revenues (Notes 3 and 5) |
596 | 545 | | | | 1,141 | ||||||||||||||||||
Inter-segment transactions: |
2,836 | 4,806 | 215 | | (7,857 | ) | | |||||||||||||||||
Service revenues (Note 3) |
2,836 | 4,786 | 215 | | (7,837 | ) | | |||||||||||||||||
Non-service revenues (Notes 3 and 5) |
| 20 | | | (20 | ) | | |||||||||||||||||
Total revenues |
50,875 | 29,615 | 4,126 | | (7,857 | ) | 76,759 | |||||||||||||||||
Results(1) |
||||||||||||||||||||||||
Depreciation and amortization (Notes 3 and 9) |
6,758 | 6,157 | 203 | | | 13,118 | ||||||||||||||||||
Asset impairment (Notes 3, 5, 9, 10, 16, 17 and 27) |
321 | 488 | 3 | | | 812 | ||||||||||||||||||
Equity share in net earnings (losses) of associates and joint ventures (Note 10) |
(20 | ) | 102 | | 757 | | 839 | |||||||||||||||||
Interest income (Note 5) |
341 | 253 | 9 | 42 | | 645 | ||||||||||||||||||
Financing costs net (Notes 5, 9, 20 and 27) |
1,367 | 1,783 | 28 | | | 3,178 | ||||||||||||||||||
Provision for income tax (Notes 3 and 7) |
5,380 | 1,395 | 20 | 3 | | 6,798 | ||||||||||||||||||
Net income / Segment profit |
16,262 | 3,775 | 406 | 853 | | 21,296 | ||||||||||||||||||
EBITDA |
29,046 | 11,639 | 705 | (7 | ) | 129 | 41,512 | |||||||||||||||||
EBITDA margin(1) |
58 | % | 40 | % | 17 | % | (100 | %) | | 55 | % | |||||||||||||
Core income |
16,117 | 3,182 | 413 | 1,311 | | 21,023 | ||||||||||||||||||
Other segment information |
||||||||||||||||||||||||
Capital expenditures, including capitalized interest (Notes 5, 9, 20 and 21)(1) |
1,836 | 4,268 | 229 | 2 | | 6,335 | ||||||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||||||
Assets and liabilities |
||||||||||||||||||||||||
Operating assets |
136,821 | 281,770 | 13,211 | 9,982 | (69,978 | ) | 371,806 | |||||||||||||||||
Investments in associates and joint ventures (Notes 3, 5, 10 and 27) |
| 1,272 | | 16,593 | | 17,865 | ||||||||||||||||||
Deferred income tax assets net (Notes 3, 7 and 27) |
1,071 | 4,672 | 232 | | | 5,975 | ||||||||||||||||||
Consolidated total assets |
137,892 | 287,714 | 13,443 | 26,575 | (69,978 | ) | 395,646 | |||||||||||||||||
Operating liabilities |
133,344 | 190,569 | 3,277 | 754 | (87,419 | ) | 240,525 | |||||||||||||||||
Deferred income tax liabilities net (Notes 3, 7 and 27) |
1,158 | 1,363 | 107 | | 274 | 2,902 | ||||||||||||||||||
Consolidated total liabilities |
134,502 | 191,932 | 3,384 | 754 | (87,145 | ) | 243,427 | |||||||||||||||||
(1) | The June 30, 2011 results have been restated to reflect the change in the presentation of our outbound revenues and the implementation of the reorganization of our business segments. See Note 2 Summary of Significant Accounting Policies. |
The following table shows the reconciliation of our consolidated EBITDA to our consolidated net income for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Consolidated EBITDA |
39,300 | 41,512 | ||||||
Foreign exchange gains net (Notes 9 and 27) |
1,565 | 426 | ||||||
Equity share in net earnings of associates and joint ventures (Note 10) |
1,311 | 839 | ||||||
Interest income (Notes 5 and 15) |
626 | 645 | ||||||
Gains (losses) on derivative financial instruments net (Note 27) |
(403 | ) | 484 | |||||
Amortization of intangible assets (Notes 3 and 14) |
(785 | ) | (144 | ) | ||||
Financing costs net (Notes 5, 9, 20 and 27) |
(3,377 | ) | (3,178 | ) | ||||
Depreciation and amortization (Notes 3 and 9) |
(15,524 | ) | (13,118 | ) | ||||
Asset impairment on noncurrent assets (Notes 3 and 5) |
| (3 | ) | |||||
Other income (Note 18) |
3,242 | 631 | ||||||
Consolidated income before income tax |
25,955 | 28,094 | ||||||
Provision for income tax (Notes 3 and 7) |
(6,484 | ) | (6,798 | ) | ||||
Consolidated net income |
19,471 | 21,296 | ||||||
The following table shows the reconciliation of our consolidated core income to our consolidated net income for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Consolidated core income |
18,661 | 21,023 | ||||||
Foreign exchange gains net (Notes 9 and 27) |
1,565 | 423 | ||||||
Core income adjustment on equity share in net earnings of associates and
joint ventures |
(93 | ) | (458 | ) | ||||
Gains (losses) on derivative financial instruments net, excluding
hedge cost (Note 27) |
(230 | ) | 663 | |||||
Others |
| (74 | ) | |||||
Net tax effect of aforementioned adjustments |
(401 | ) | (278 | ) | ||||
Net income attributable to equity holders of PLDT (Notes 6 and 8) |
19,502 | 21,299 | ||||||
Net loss attributable to noncontrolling interests |
(31 | ) | (3 | ) | ||||
Consolidated net income |
19,471 | 21,296 | ||||||
The following table shows the reconciliation of our consolidated basic and diluted core EPS to our consolidated basic and diluted EPS attributable to common equity holder of PLDT for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
(Unaudited) | ||||||||||||||||
Consolidated core EPS |
86.26 | 86.26 | 111.35 | 111.30 | ||||||||||||
Adjustments: |
||||||||||||||||
Foreign exchange gains net (Notes 9 and 27) |
5.07 | 5.07 | 1.84 | 1.82 | ||||||||||||
Core income adjustment on equity share in net earnings of associates and
joint ventures (Note 10) |
(0.43 | ) | (0.43 | ) | (2.45 | ) | (2.43 | ) | ||||||||
Gains (losses) on derivative financial instruments net, excluding
hedge cost (Note 27) |
(0.75 | ) | (0.75 | ) | 2.48 | 2.46 | ||||||||||
Gains on settlement of Digital Paradise |
| | 0.08 | 0.08 | ||||||||||||
Others |
| | (0.47 | ) | (0.47 | ) | ||||||||||
3.89 | 3.89 | 1.48 | 1.46 | |||||||||||||
EPS attributable to common equity holder of PLDT (Note 8) |
90.15 | 90.15 | 112.83 | 112.76 | ||||||||||||
The following table presents our revenues from external customers by category of products and services for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Wireless services |
||||||||
Service revenues: |
||||||||
Cellular |
49,620 | 43,415 | ||||||
Broadband, satellite and others |
5,049 | 4,028 | ||||||
54,669 | 47,443 | |||||||
Non-service revenues: |
||||||||
Sale of cellular handsets, cellular SIM-packs and broadband data modems |
1,181 | 596 | ||||||
Total wireless revenues |
55,850 | 48,039 | ||||||
Fixed line services |
||||||||
Services revenues: |
||||||||
Local exchange |
7,875 | 7,261 | ||||||
International long distance |
5,130 | 5,470 | ||||||
National long distance |
2,392 | 2,771 | ||||||
Data and other network |
9,824 | 8,189 | ||||||
Miscellaneous |
331 | 573 | ||||||
25,552 | 24,264 | |||||||
Non-service revenues: |
||||||||
Sale of computers |
182 | 303 | ||||||
Point-product-sales |
144 | 242 | ||||||
Total fixed line revenues |
25,878 | 24,809 | ||||||
BPO services |
||||||||
Service revenues: |
||||||||
Knowledge processing solutions |
3,247 | 2,744 | ||||||
Customer relationship management |
1,257 | 1,167 | ||||||
Total BPO revenues |
4,504 | 3,911 | ||||||
Total products and services from external customers |
86,232 | 76,759 | ||||||
Disclosure of the geographical distribution of our revenues from external customers and the geographical location of our total assets are not provided since the majority of our consolidated revenues are derived from our operations within the Philippines.
In each of the six months ended June 30, 2012 and 2011, no revenue transactions with a single external customer had accounted for 10% or more of our consolidated revenues from external customers.
5. | Income and Expenses |
Non-service Revenues |
Non-service revenues for the six months ended June 30, 2012 and 2011 consists of the following: |
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Sale of computers, cellular handsets, cellular SIM-packs and broadband data modems |
1,363 | 899 | ||||||
Point-product-sales |
144 | 242 | ||||||
(Note 4) |
1,507 | 1,141 | ||||||
Compensation and Employee Benefits |
Compensation and employee benefits for the six months ended June 30, 2012 and 2011 consists of the following:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Salaries and other employee benefits |
11,233 | 9,716 | ||||||
Manpower rightsizing program, or MRP |
1,745 | 101 | ||||||
Incentive plans (Notes 3 and 25) |
802 | 702 | ||||||
Pension benefit costs (Notes 3 and 25) |
187 | 130 | ||||||
13,967 | 10,649 | |||||||
Over the past years, we have been implementing MRP in line with our continuing efforts to reduce the cost base of our businesses. The total MRP cost charged to operations amounted to Php1,745 million and Php101 million for the six months ended June 30, 2012 and 2011, respectively. The decision to implement the MRP was a result of challenges faced by our businesses as significant changes in technology, increasing competition, and shifting market preferences have reshaped the future of our businesses. The MRP is being implemented in compliance with the Labor Code of the Philippines and all other relevant labor laws and regulations in the Philippines.
Cost of Sales |
Cost of sales for the six months ended June 30, 2012 and 2011 consists of the following: |
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Cost of computers, cellular handsets, cellular
SIM-packs sold and broadband data modems |
4,319 | 2,121 | ||||||
Cost of point-product-sales |
120 | 226 | ||||||
Cost of satellite air time and terminal units (Note 24) |
44 | 59 | ||||||
4,483 | 2,406 | |||||||
Asset Impairment |
Asset impairment for the six months ended June 30, 2012 and 2011 consists of the following: |
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Trade and other receivables (Notes 3 and 16)
|
960 | 774 | ||||||
Inventories and supplies (Notes 3 and 17)
|
225 | 35 | ||||||
Prepayment and others
|
| 3 | ||||||
1,185 | 812 | |||||||
Interest Income |
Interest income for the six months ended June 30, 2012 and 2011 consists of the following: |
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Interest income on other loans and receivables |
597 | 630 | ||||||
Interest income on HTM investments (Note 11) |
16 | 15 | ||||||
Interest income on FVPL |
13 | | ||||||
(Note 4) |
626 | 645 | ||||||
Financing Costs net |
Financing costs net for the six months ended June 30, 2012 and 2011 consists of the following: |
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Interest on loans and other related items (Notes 20 and 27) |
3,150 | 2,866 | ||||||
Accretion on financial liabilities (Notes 20 and 27) |
546 | 555 | ||||||
Financing charges |
157 | 71 | ||||||
Capitalized interest (Note 9) |
(476 | ) | (314 | ) | ||||
(Note 4) |
3,377 | 3,178 | ||||||
6. | Components of Other Comprehensive Income |
Changes in other comprehensive income under equity of our consolidated statements of financial position for the six months ended June 30, 2012 and 2011 are as follows:
Revaluation | Total other | |||||||||||||||||||||||||||
Foreign currency | Net gains on | increment on | comprehensive loss | |||||||||||||||||||||||||
translation | available-for-sale | Net transactions | investment | attributable to | Share of | Total other | ||||||||||||||||||||||
differences of | financial assets | on cash flow hedges | properties | equity holders of | noncontrolling | comprehensive | ||||||||||||||||||||||
(Unaudited) | subsidiaries | net of tax | net of tax | net of tax | PLDT | interests | loss net of tax | |||||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||||||
Balances as at January 1, 2011
|
(1,639 | ) | 49 | | 314 | (1,276 | ) | (1 | ) | (1,277 | ) | |||||||||||||||||
Other comprehensive income (loss)
|
(140 | ) | | | | (140 | ) | (1 | ) | (141 | ) | |||||||||||||||||
Balances as at June 30, 2011
|
(1,779 | ) | 49 | | 314 | (1,416 | ) | (2 | ) | (1,418 | ) | |||||||||||||||||
Balances as at January 1, 2012
|
(1,024 | ) | 52 | 14 | 314 | (644 | ) | 8 | (636 | ) | ||||||||||||||||||
Other comprehensive income (loss)
|
(551 | ) | 3 | 38 | (1 | ) | (511 | ) | | (511 | ) | |||||||||||||||||
Balances as at June 30, 2012
|
(1,575 | ) | 55 | 52 | 313 | (1,155 | ) | 8 | (1,147 | ) | ||||||||||||||||||
Revaluation increment on investment properties pertains to the difference between the carrying value and fair value of property, plant and equipment reclassified to investment property at the time of change in classification.
7. | Income Taxes |
Corporate Income Tax
The components of consolidated net deferred income tax assets (liabilities) recognized in our consolidated statements of financial position as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Net deferred income tax assets (Notes 3 and 4)
|
5,116 | 5,975 | ||||||
Net deferred income tax liabilities (Notes 3 and 4)
|
(3,395 | ) | (2,902 | ) | ||||
The components of our consolidated net deferred income tax assets and liabilities as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Net deferred income tax assets: |
||||||||
Accumulated provision for doubtful accounts |
2,615 | 2,466 | ||||||
Unearned revenues |
1,839 | 2,726 | ||||||
Unamortized past service pension costs |
1,913 | 2,124 | ||||||
Fixed asset impairment |
29 | 1,469 | ||||||
Derivative financial instruments |
683 | 768 | ||||||
Provision for other assets |
388 | 441 | ||||||
NOLCO |
315 | 326 | ||||||
Accumulated write-down of inventories to net realizable values |
159 | 198 | ||||||
Unrealized foreign exchange losses |
1,097 | 111 | ||||||
MCIT |
21 | 9 | ||||||
Capitalized taxes and duties net of amortization |
(95 | ) | (125 | ) | ||||
Capitalized foreign exchange differential net of depreciation |
(165 | ) | (231 | ) | ||||
Pension and other employee benefits |
(1,572 | ) | (1,653 | ) | ||||
Undepreciated capitalized interest charges |
(2,243 | ) | (2,624 | ) | ||||
Others |
132 | (30 | ) | |||||
5,116 | 5,975 | |||||||
Net deferred income tax liabilities: |
||||||||
Unrealized foreign exchange gains |
2,699 | 1,756 | ||||||
Undepreciated capitalized interest charges |
843 | 582 | ||||||
Intangible assets and fair value adjustments on assets acquired
net of amortization |
281 | 90 | ||||||
Fair value adjustment on fixed assets from business combinations |
263 | 274 | ||||||
Debt issuance costs |
150 | 182 | ||||||
Pension and other benefits |
(22 | ) | | |||||
Fixed asset impairment |
(738 | ) | | |||||
Others |
(81 | ) | 18 | |||||
3,395 | 2,902 | |||||||
Changes in our consolidated net deferred income tax assets (liabilities) as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Net deferred income tax assets balance at beginning of the period (Notes 3, 4 and 27) |
5,975 | 6,110 | ||||||
Net deferred income tax liabilities balance at beginning of the period (Notes 3, 4
and 27) |
(2,902 | ) | (1,099 | ) | ||||
Net balance at beginning of the period |
3,073 | 5,011 | ||||||
Provision for deferred income tax (Note 3) |
(1,050 | ) | 1,261 | |||||
Excess MCIT deducted against RCIT due |
| (446 | ) | |||||
Business combinations |
| (2,780 | ) | |||||
Others |
(302 | ) | 27 | |||||
Net balance at end of the period |
1,721 | 3,073 | ||||||
Net deferred income tax assets balance at end of the period (Notes 3, 4 and 27) |
5,116 | 5,975 | ||||||
Net deferred income tax liabilities balance at end of the period (Notes 3, 4 and 27) |
(3,395 | ) | (2,902 | ) | ||||
The analysis of our consolidated net deferred income tax assets as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Deferred income tax assets: |
||||||||
Deferred income tax assets to be recovered after 12 months |
7,541 | 8,505 | ||||||
Deferred income tax assets to be recovered within 12 months |
1,921 | 2,541 | ||||||
9,462 | 11,046 | |||||||
Deferred income tax liabilities: |
||||||||
Deferred income tax liabilities to be settled after 12 months |
(3,751 | ) | (4,301 | ) | ||||
Deferred income tax liabilities to be settled within 12 months |
(595 | ) | (770 | ) | ||||
(4,346 | ) | (5,071 | ) | |||||
Net deferred income tax assets (Notes 3, 4 and 27) |
5,116 | 5,975 | ||||||
The analysis of our consolidated net deferred income tax liabilities as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Deferred income tax assets: |
||||||||
Deferred income tax assets to be recovered after 12 months |
801 | | ||||||
Deferred income tax assets to be recovered within 12 months |
306 | 274 | ||||||
1,107 | 274 | |||||||
Deferred income tax liabilities: |
||||||||
Deferred income tax liabilities to be settled after 12 months |
(2,987 | ) | (3,176 | ) | ||||
Deferred income tax liabilities to be settled within 12 months |
(1,515 | ) | | |||||
(4,502 | ) | (3,176 | ) | |||||
Net deferred income tax liabilities (Notes 3, 4 and 27) |
(3,395 | ) | (2,902 | ) | ||||
Provision for corporate income tax for the six months ended June 30, 2012 and 2011 consists of:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Current |
5,434 | 6,689 | ||||||
Deferred (Note 3) |
1,050 | 109 | ||||||
6,484 | 6,798 | |||||||
The reconciliation between the provision for income tax at the applicable statutory tax rate and the actual provision for corporate income tax for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Provision for income tax at the applicable statutory tax rate |
7,786 | 8,428 | ||||||
Tax effects of: |
||||||||
Nondeductible expenses |
1,285 | 120 | ||||||
Income subject to final tax |
(214 | ) | (199 | ) | ||||
Income not subject to income tax |
(363 | ) | (200 | ) | ||||
Equity share in net earnings of associates and joint ventures |
(393 | ) | (252 | ) | ||||
Income subject to lower tax rate |
(614 | ) | (315 | ) | ||||
Difference between OSD and itemized deductions |
| (1,182 | ) | |||||
Net movement in unrecognized deferred income tax assets and other adjustments |
(1,003 | ) | 398 | |||||
Actual provision for corporate income tax |
6,484 | 6,798 | ||||||
On December 18, 2008, the Bureau of Internal Revenue, or BIR, issued Revenue Regulations No. 16-2008, which implemented the provisions of Republic Act 9504, or R.A. 9504 on OSD. Under the OSD method of computing taxable income, corporations may elect a standard deduction in an amount equivalent to 40% of gross income, as provided by law, in lieu of the itemized allowed deductions.
Smart expects to continue to use the OSD method for computing the taxable income in the foreseeable future. The availment of the OSD method has affected their recognition of deferred income tax assets and liabilities. Deferred income tax assets and liabilities of Smart, for which the related income and expenses are not considered in determining gross income for income tax purposes, are not recognized as deferred income tax assets and liabilities in the consolidated statements of financial position. This is because the manner by which they expect to recover or settle the underlying assets and liabilities would not result in any future tax consequence. Deferred income tax assets and liabilities, for which the related income and expenses are considered in determining gross income for income tax purposes, are recognized only to the extent of their future tax consequence assuming OSD method was applied, which results in such deferred income tax assets and liabilities being reduced by the 40% allowable deduction that are provided for under the OSD method. Accordingly, the deferred income tax assets and liabilities that were not recognized due to the OSD method amounted to Php2,046 million and Php4,240 million as at June 30, 2012 and December 31, 2011, respectively. See Note 3 Managements Use of Accounting Judgments, Estimates and Assumptions.
The breakdown of our consolidated deductible temporary differences, carry forward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO (excluding those not recognized due to the adoption of the OSD method) for which no deferred income tax assets were recognized and the equivalent amount of unrecognized deferred income tax assets as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Fixed asset impairment |
26,598 | 29,029 | ||||||
NOLCO |
8,772 | 11,372 | ||||||
Provisions for other assets |
6,556 | 6,532 | ||||||
Accumulated provision for doubtful accounts |
4,417 | 4,113 | ||||||
Unearned revenues |
990 | 893 | ||||||
Asset retirement obligation |
651 | 627 | ||||||
Accumulated write-down of inventories to net realizable values |
315 | 270 | ||||||
Pension and other employee benefits |
192 | 127 | ||||||
MCIT |
174 | 133 | ||||||
Derivative financial instruments |
157 | 155 | ||||||
Unrealized foreign exchange losses |
24 | 22 | ||||||
Operating lease and others |
47 | 76 | ||||||
48,893 | 53,349 | |||||||
Unrecognized deferred income tax assets (Note 3) |
14,790 | 16,098 | ||||||
As at December 31, 2011, Digitel Groups deferred income tax assets were not recognized because management believes that there is no sufficient income that will be available upon which these can be utilized. Digitel Groups unrecognized deferred income tax assets amounted to Php14,020 million and Php14,766 million as at June 30, 2012 and December 31, 2011, respectively.
Our consolidated deferred income tax assets have been recorded to the extent that such consolidated deferred income tax assets are expected to be utilized against sufficient future taxable profit. Deferred income tax assets related to the preceding table were not recognized as we believe that future taxable profit will not be sufficient to realize these deductible temporary differences and carry forward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO in the future.
The breakdown of our consolidated excess MCIT and NOLCO as at June 30, 2012 are as follows:
Date Incurred | Expiry Date | MCIT | NOLCO | |||||||||
(in million pesos) | ||||||||||||
December 31, 2009 |
December 31, 2012 | 8 | 238 | |||||||||
December 31, 2010 |
December 31, 2013 | 24 | 1,139 | |||||||||
December 31, 2011 |
December 31, 2014 | 75 | 7,461 | |||||||||
June 30, 2012 |
December 31, 2015 | 88 | 987 | |||||||||
195 | 9,825 | |||||||||||
Consolidated tax benefits |
195 | 2,947 | ||||||||||
Consolidated unrecognized deferred income tax assets |
(174 | ) | (2,632 | ) | ||||||||
Consolidated recognized deferred income tax assets |
21 | 315 | ||||||||||
The excess MCIT totaling Php195 million as at June 30, 2012 can be deducted against future RCIT due. The excess MCIT that was deducted against RCIT due amounted to Php4 million and Php438 million for the six months ended June 30, 2012 and 2011, respectively. There were no expired portion of excess MCIT for the six months ended June 30, 2012 and 2011.
NOLCO totaling Php9,825 million as at June 30, 2012 can be claimed as deduction against future taxable income. The NOLCO claimed as deduction against taxable income amounted to Php1,706 million and Php154 million for the six months ended June 30, 2012 and 2011, respectively. There were no expired portion of NOLCO for the six months ended June 30, 2012 and 2011.
Registration with Subic Bay Freeport and Clark Special Economic Zone
SubicTel is registered as Subic Bay Freeport Enterprises, while ClarkTel is registered as a Clark Special Economic Zone Enterprise under Republic Act No. 7227, or R.A. 7227, otherwise known as the Bases Conversion and Development Act of 1992. As registrants, SubicTel and ClarkTel are entitled to all the rights, privileges and benefits established thereunder including tax and duty-free importation of capital equipment and a special income tax rate of 5% of gross income, as defined in R.A. 7227.
Registration with Philippine Economic Zone Authority, or PEZA
SPi is registered as an Ecozone IT enterprise to provide IT enabled services with emphasis on the presentation of content in electronic information formats, data analysis, capture, abstracting and data processing, design, development and the implementation of healthcare documentation solutions.
SPi CRM is registered as an Ecozone export enterprise that develop and provide customer relationship management services to local and overseas clients.
As registered PEZA enterprises, SPi and SPi CRM are entitled to certain tax and non-tax incentives which include, among other things, tax and duty-free importations, exemption from local tax and is liable for a final tax, in lieu of all taxes, of 5% gross income less allowable deductions as defined under R.A. 7916. The 5% final tax must be paid and remitted in accordance with the amendments contained in R.A. 8748, as follows: (a) 3% to the National Government; and (b) 2% which will be directly remitted by the business establishments to the Treasurers Office of the Municipality or City where the enterprise is located.
Three of SPi CRM facilities (SPi CRM Iloilo, SPi CRM Pasig and SPi CRM Mandaluyong) enjoy income tax holiday, or ITH, incentive as a Board of Investments, or BOI, registered entity in PEZA registered locations. ITH incentive commenced in March 2005 up to February 2011 for SPi CRM Iloilo. Upon expiration of the ITH, SPi CRM Iloilo is now subject to a special income tax rate of 5% of gross income as a PEZA registered location. ITH incentive for SPi CRM Pasig and SPi CRM Mandaluyong commenced in August 2006 and November 2006, respectively, and will continue until July 2012 and October 2012, respectively. In relation to this, they are required to comply with specific terms and conditions stated in their PEZA Supplemental Agreement.
The registration with PEZA for the operations of SPi CRM Dumaguete is still in progress and therefore it is subject to the regular corporate income tax. However, the Local Investment Board of Dumaguete City issued a Certificate of Registration and Eligibility which granted SPi CRM Dumaguete the exemption to pay local business taxes and basic real property taxes on improvements for the period from November 2010 to October 2013.
SHI was registered with the PEZA as an Ecozone IT enterprise on a non-pioneer status last July 31, 2009. Under the terms of registration, SHI is entitled to certain tax and non-tax incentives which include, among other things, an ITH for four years starting June 2009.
Registration with BOI
On January 3, 2007, the BOI approved ePLDTs application for pioneer status as a new IT service firm in the field of services related to Internet Data Center for its new data center facility. ePLDT was granted a six-year ITH for its new data center facility starting January 2007.
Consolidated income derived from non-registered activities with Economic Zone and BOI is subject to the RCIT rate enacted as at the end of the reporting period.
Consolidated tax incentives that were availed from registration with Economic Zone and BOI
amounted to
Php118 million and Php927 million for the six months ended June 30, 2012 and 2011, respectively.
8. | Earnings Per Common Share |
The following table presents information necessary to calculate the EPS for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
(Unaudited) | ||||||||||||||||
(in million pesos) | ||||||||||||||||
Consolidated net income attributable to equity holders of PLDT (Note 4)
|
19,502 | 19,502 | 21,299 | 21,299 | ||||||||||||
Dividends on preferred shares (Note 19)
|
(25 | ) | (25 | ) | (228 | ) | (24 | ) | ||||||||
Consolidated net income attributable to common equity holders of PLDT
|
19,477 | 19,477 | 21,071 | 21,275 | ||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Outstanding common shares at beginning of the period
|
214,436 | 214,436 | 186,756 | 186,756 | ||||||||||||
Effect of issuance of common shares during the period (Note 19)
|
1,619 | 1,619 | 1 | 1 | ||||||||||||
Common shares equivalent to convertible preferred shares deemed dilutive:
|
||||||||||||||||
Preferred Stock Series A to HH
|
| | | 1,914 | ||||||||||||
Weighted average number of common shares
|
216,055 | 216,055 | 186,757 | 188,671 | ||||||||||||
Earnings per share attributable to common equity holders of PLDT (Note 4)
|
Php90.15 | Php90.15 | Php112.83 | Php112.76 | ||||||||||||
Basic EPS amounts are calculated by dividing our consolidated net income for the period attributable to common equity holders of PLDT (consolidated net income adjusted for dividends on all series of preferred shares, except for dividends on preferred stock subject to mandatory redemption) by the weighted average number of common shares issued and outstanding during the period.
Diluted EPS amounts are calculated in the same manner assuming that, at the beginning of the year or at the time of issuance during the period, all outstanding options are exercised and convertible preferred shares are converted to common shares, and appropriate adjustments to consolidated net income are effected for the related income and expenses on preferred shares. Outstanding stock options will have a dilutive effect only when the average market price of the underlying common share during the period exceeds the exercise price of the stock option.
Convertible preferred shares are deemed dilutive when required dividends declared on each series of convertible preferred shares divided by the number of equivalent common shares, assuming such convertible preferred shares are converted to common shares, decreases the basic EPS. As such, the diluted EPS is calculated by dividing our consolidated net income attributable to common shareholders (consolidated net income, adding back any dividends and/or other charges recognized for the period related to the dilutive convertible preferred shares classified as liability, less dividends on non-dilutive preferred shares except for dividends on preferred stock subject to mandatory redemption) by the weighted average number of common shares excluding the weighted average number of common shares held as treasury shares, and including the common shares equivalent arising from the conversion of the dilutive convertible preferred shares and from the mandatory tender offer for all remaining Digitel shares.
Series A to EE in 2011 were deemed dilutive based on a calculation of the required dividends on these preferred shares divided by the number of equivalent common shares assuming such preferred shares are convertible into common shares, including the effect of the treasury shares, and compared against the basic EPS. Since the amount of dividends on Series GG and HH in 2012 over its equivalent number of common shares increased the basic EPS, the Convertible Preferred Stock were deemed anti-dilutive.
Where the effect of the assumed conversion of the preferred shares and the exercise of all outstanding options have an anti-dilutive effect, basic and diluted EPS are stated at the same amount.
The Board of Directors approved a share buyback program of up to five million shares of PLDTs common stock, representing approximately 3% of PLDTs then total outstanding shares of common stock in 2008. We have acquired approximately 2.72 million shares of PLDTs common stock, representing approximately 1% of PLDTs outstanding shares of common stock, at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million as at June 30, 2012 and December 31, 2011 in accordance with the share buyback program. The effect of the share buyback program was considered in computing our basic and diluted earnings per common share for the six months ended June 30, 2012 and 2011. See Note 19 Equity and Note 27 Financial Assets and Liabilities for further discussion.
9. | Property, Plant and Equipment |
Changes in property, plant and equipment account for the six months ended June 30, 2012 and 2011 are as follows:
Information | ||||||||||||||||||||||||||||||||||||||||
Vehicles, furniture | origination | |||||||||||||||||||||||||||||||||||||||
Cable and wire | Central office | Buildings | and other network | Communications | and termination | Land and | Property under | |||||||||||||||||||||||||||||||||
facilities | equipment | Cellular facilities | and improvements | equipment | satellite | equipment | land improvements | construction | Total | |||||||||||||||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||||||||||||||||||
As at December 31, 2010 (Audited) |
||||||||||||||||||||||||||||||||||||||||
Cost |
132,356 | 89,992 | 90,574 | 21,873 | 38,078 | 966 | 9,136 | 2,405 | 31,010 | 416,390 | ||||||||||||||||||||||||||||||
Accumulated depreciation,
impairment and amortization |
(75,711 | ) | (70,064 | ) | (56,619 | ) | (10,656 | ) | (30,922 | ) | (966 | ) | (7,990 | ) | (278 | ) | | (253,206 | ) | |||||||||||||||||||||
Net book value |
56,645 | 19,928 | 33,955 | 11,217 | 7,156 | | 1,146 | 2,127 | 31,010 | 163,184 | ||||||||||||||||||||||||||||||
Year Ended December 31, 2011 (Audited) |
||||||||||||||||||||||||||||||||||||||||
Net book value at beginning of the
year |
56,645 | 19,928 | 33,955 | 11,217 | 7,156 | | 1,146 | 2,127 | 31,010 | 163,184 | ||||||||||||||||||||||||||||||
Additions |
1,585 | 414 | 3,209 | 332 | 1,902 | | 315 | 10 | 23,469 | 31,236 | ||||||||||||||||||||||||||||||
Disposals/Retirements |
(32 | ) | (77 | ) | (11 | ) | (20 | ) | (183 | ) | | | (145 | ) | (2 | ) | (470 | ) | ||||||||||||||||||||||
Translation differences charged
directly to cumulative translation
adjustments |
1 | | | | 4 | | | | | 5 | ||||||||||||||||||||||||||||||
Acquisition through business
combinations |
6,772 | 963 | 26,792 | 1,881 | 927 | | 116 | 476 | 1,806 | 39,733 | ||||||||||||||||||||||||||||||
Impairment losses recognized
during the year |
(5 | ) | (4 | ) | (8,457 | ) | (2 | ) | | | (2 | ) | | | (8,470 | ) | ||||||||||||||||||||||||
Reclassifications (Note 12) |
54 | (39 | ) | | 168 | 35 | | | 269 | (17 | ) | 470 | ||||||||||||||||||||||||||||
Transfers |
3,774 | 2,861 | 3,422 | 386 | 1,303 | | 159 | | (11,905 | ) | | |||||||||||||||||||||||||||||
Depreciation and amortization |
(9,311 | ) | (3,602 | ) | (9,862 | ) | (1,379 | ) | (3,294 | ) | | (508 | ) | (1 | ) | | (27,957 | ) | ||||||||||||||||||||||
Net book value at end of the year
(Note 3) |
59,483 | 20,444 | 49,048 | 12,583 | 7,850 | | 1,226 | 2,736 | 44,361 | 197,731 | ||||||||||||||||||||||||||||||
As at December 31, 2011 (Audited) |
||||||||||||||||||||||||||||||||||||||||
Cost |
146,430 | 92,812 | 117,521 | 24,299 | 40,731 | 966 | 9,102 | 3,014 | 44,361 | 479,236 | ||||||||||||||||||||||||||||||
Accumulated depreciation,
impairment and amortization |
(86,947 | ) | (72,368 | ) | (68,473 | ) | (11,716 | ) | (32,881 | ) | (966 | ) | (7,876 | ) | (278 | ) | | (281,505 | ) | |||||||||||||||||||||
Net book value (Note 3) |
59,483 | 20,444 | 49,048 | 12,583 | 7,850 | | 1,226 | 2,736 | 44,361 | 197,731 | ||||||||||||||||||||||||||||||
Period Ended June 30, 2012 (Unaudited) |
||||||||||||||||||||||||||||||||||||||||
Net book value at beginning of the
period (Note 3) |
59,483 | 20,444 | 49,048 | 12,583 | 7,850 | | 1,226 | 2,736 | 44,361 | 197,731 | ||||||||||||||||||||||||||||||
Additions |
1,203 | 174 | 2,974 | 217 | 1,099 | | 116 | 2 | 3,540 | 9,325 | ||||||||||||||||||||||||||||||
Disposals/Retirements |
(1 | ) | (2 | ) | (18 | ) | (1 | ) | (30 | ) | | | (8 | ) | | (60 | ) | |||||||||||||||||||||||
Translation differences charged
directly to cumulative translation
adjustments |
| (15 | ) | | (6 | ) | (23 | ) | | | | (4 | ) | (48 | ) | |||||||||||||||||||||||||
Transfers and others |
3,287 | 1,996 | 945 | 120 | 496 | | 16 | | (6,493 | ) | 367 | |||||||||||||||||||||||||||||
Depreciation of revaluation
increment
on investment properties
transferred to property, plant and
equipment charged to other
comprehensive income |
| | | (1 | ) | | | | | | (1 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization
(Notes 3 and 4) |
(4,768 | ) | (2,114 | ) | (5,880 | ) | (685 | ) | (1,796 | ) | | (281 | ) | | | (15,524 | ) | |||||||||||||||||||||||
Net book value at end of the period
(Note 3) |
59,204 | 20,483 | 47,069 | 12,227 | 7,596 | | 1,077 | 2,730 | 41,404 | 191,790 | ||||||||||||||||||||||||||||||
As at June 30, 2012 (Unaudited) |
||||||||||||||||||||||||||||||||||||||||
Cost |
162,411 | 113,956 | 129,542 | 26,327 | 44,461 | 966 | 11,005 | 2,988 | 41,404 | 533,060 | ||||||||||||||||||||||||||||||
Accumulated depreciation,
impairment and amortization |
(103,207 | ) | (93,473 | ) | (82,473 | ) | (14,100 | ) | (36,865 | ) | (966 | ) | (9,928 | ) | (258 | ) | | (341,270 | ) | |||||||||||||||||||||
Net book value (Note 3) |
59,204 | 20,483 | 47,069 | 12,227 | 7,596 | | 1,077 | 2,730 | 41,404 | 191,790 | ||||||||||||||||||||||||||||||
Substantially all of our telecommunications equipment are purchased outside the Philippines. Our significant sources of financing for such purchases are foreign loans requiring repayment in currencies other than Philippine pesos, which are principally in U.S. dollars. See Note 20 Interest-bearing Financial Liabilities.
Interest capitalized to property, plant and equipment that qualified as borrowing costs amounted to Php476 million and Php314 million for the six months ended June 30, 2012 and 2011, respectively. Our undepreciated interest capitalized to property, plant and equipment that qualified as borrowing costs amounted to Php9,885 million and Php10,357 million as at June 30, 2012 and December 31, 2011, respectively. The average interest capitalization rates used were approximately 6% in each of the six months ended June 30, 2012 and 2011, respectively.
Our undepreciated capitalized net foreign exchange losses, which qualified as borrowing costs amounted to Php592 million and Php837 million as at June 30, 2012 and December 31, 2011, respectively. There were no additional capitalized foreign exchange differences, which qualified as borrowing costs for the six months ended June 30, 2012 and 2011.
The useful lives of our assets are estimated as follows:
Cable and wire facilities
|
10 15 years | |
Central office equipment
|
5 15 years | |
Cellular facilities
|
3 10 years | |
Buildings
|
25 years | |
Vehicles, furniture and other network equipment
|
3 5 years | |
Information origination and termination equipment
|
3 5 years | |
Leasehold improvements
|
3 5 years | |
Land improvements
|
10 years |
Property, plant and equipment include the net carrying value of capitalized vehicles, furniture and other network equipment under financing leases amounting to Php5 million and Php6 million as at June 30, 2012 and December 31, 2011, respectively. See Note 20 Interest-bearing Financial Liabilities.
Impairment of Certain Network Equipment and Facilities of Smart
In December 2011, Smart recognized an impairment loss of Php8,457 million for certain network equipment and facilities which no longer efficiently support our network modernization program and have been identified for replacement. The modernization program is designed to enable the delivery and fulfillment of advanced capabilities to support multimedia services and upcoming technologies in our technology roadmap by substantially expanding capacity, enhancing capabilities and improving quality of experience to meet the increasing demand for cellular, and advanced broadband services in a highly competitive playing field. This program is expected to result in savings in operating expenses, as well as alignment of Smart and Digitel networks. The impairment loss recognized represents the net book value of these network equipment and facilities. See Note 3 Managements Use of Accounting Judgments, Estimates and Assumptions.
10. | Investments in Associates and Joint Ventures |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Carrying value of investments in associates: |
||||||||
Pacific Global One Aviation Co., Inc., or PG1 |
137 | 155 | ||||||
Digitel Crossing, Inc., or DCI |
90 | 92 | ||||||
Philweb Corporation, or Philweb |
| 1,025 | ||||||
ACeS International Limited, or AIL |
| | ||||||
Asia Netcom Philippines Corp., or ANPC |
| | ||||||
227 | 1,272 | |||||||
Carrying value of investments in joint ventures: |
||||||||
Beacon |
20,517 | 16,593 | ||||||
Mobile Payment Solutions Pte. Ltd., or MPS |
49 | | ||||||
PLDT Italy S.r.l., or PLDT Italy |
| | ||||||
20,566 | 16,593 | |||||||
Deposit for future stock subscription: |
||||||||
MediaQuest Holdings, Inc., or MediaQuest |
4,000 | | ||||||
Total carrying value of investments in associates and joint ventures (Note 27) |
24,793 | 17,865 | ||||||
Changes in the cost of investments for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Balance at beginning of the period |
18,196 | 24,636 | ||||||
Deposit for future stock subscription |
4,000 | | ||||||
Additions during the period |
2,786 | 155 | ||||||
Business combinations (Note 13) |
| (6 | ) | |||||
Disposal during the period (including transfer of interests in Meralco to Beacon) |
| (6,589 | ) | |||||
Noncurrent asset held-for-sale |
(712 | ) | | |||||
Translation and other adjustments |
(9 | ) | | |||||
Balance at end of the period |
24,261 | 18,196 | ||||||
Changes in the accumulated impairment losses for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Balance at beginning of the period |
1,882 | 1,974 | ||||||
Impairment |
| 44 | ||||||
Impairment recovery |
| (92 | ) | |||||
Translation and other adjustments |
(3 | ) | (44 | ) | ||||
Balance at end of the period |
1,879 | 1,882 | ||||||
Changes in the accumulated equity share in net earnings of associates and joint ventures for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Balance at beginning of the period |
1,551 | 541 | ||||||
Equity share in net earnings (losses) of associates and joint ventures (Note 4): |
1,311 | 2,035 | ||||||
Beacon |
1,223 | 1,267 | ||||||
Philweb |
136 | 215 | ||||||
DCI |
(2 | ) | 92 | |||||
BayanTrade |
(3 | ) | | |||||
PG1 |
(18 | ) | | |||||
MPS |
(25 | ) | (115 | ) | ||||
Meralco |
| 576 | ||||||
Impairment recovery |
(12 | ) | (92 | ) | ||||
Dividends |
(33 | ) | (519 | ) | ||||
Business combinations (Note 13) |
| (11 | ) | |||||
Disposals |
| (402 | ) | |||||
Noncurrent asset held-for-sale |
(416 | ) | ||||||
Translation and other adjustments |
10 | (1 | ) | |||||
Balance at end of the period |
2,411 | 1,551 | ||||||
Investments in Associates
Investment in PG1
On June 14, 2011, PLDT, Meralco Powergen Corporation, or MPG, Philex Mining Corporation, or Philex, Metro Pacific Tollways Corporation, or MPTC, Metro Pacific Investments Corporation, or MPIC, and Jubilee Sky Limited, or JSL, entered into a shareholders agreement to establish PG1, with the purpose of carrying on, by means of aircraft of every kind or description, the general business of common and/or private carrier. PLDT subscribed for 125 million common shares with an aggregate value of Php125 million, representing 50% equity interest in PG1 and 30 million preferred shares with an aggregate value of Php30 million, which were all paid by assigning to PG1 certain aircraft and other related assets of PLDT. The difference between the Php244 million fair value of the assets and the Php155 million total subscription price amounting to Php89 million shall be paid by PG1 to PLDT in cash as soon as reasonably practicable after incorporation.
MPG, Philex, MPTC, MPIC and JSL owns 5%, 15%, 5%, 10% and 15% of PG1, respectively. PLDT has significant influence in PG1, and was accounted for as investment in associate.
PLDT has agreed to transfer 10% of its common shares to MPG, within a reasonable time after incorporation of PG1, to increase MPGs ownership to 15% and reduce PLDTs ownership to 40% of the outstanding common shares of PG1.
Investment of Digitel in DCI and ANPC
Digitel has 60% and 40% interest in Asia Netcom Philippines Corporation, or ANPC, and Digitel Crossing, Inc., or DCI, respectively. DCI is involved in the business of cable system linking Philippines, United States and other neighboring countries in Asia. ANPC is an investment holding company owning 20% of DCI.
In December 2000, Digitel, Pacnet Network (Philippines), Inc., or PNPI, (formerly Asia Global Crossing Ltd.) and BT Group O/B Broadband Infrastructure Group Ltd., or BIG, entered into a Joint Venture Agreement, or JVA, under which the parties agreed to form DCI with each party owning 40%, 40% and 20%, respectively. DCI was incorporated to develop, provide and market backhaul network services, among others.
On April 19, 2001, after BIG withdrew from the proposed joint venture, or JV, Digitel and PNPI formed ANPC to replace BIG. Digitel contributed US$2 million, or Php69 million, for a 60% equity interest in ANPC while PNPI owned the remaining 40% equity interest.
Digitel provided full impairment loss on its investment in DCI and ANPC in prior years on the basis that DCI and ANPC have incurred significant recurring losses in the past. In 2011, Digitel recorded a reversal of impairment loss amounting to Php92 million following recent improvement in an associates operations.
The Group has no control over ANPC despite owning more than half of voting interest because of certain governance matters, and management has assessed that the Group only has significant influence.
Digitels investment in DCI does not qualify as investment in JV as there is no provision for joint control in the JV agreement between Digitel, PNPI and ANPC.
Following PLDTs acquisition of a controlling stake in Digitel, PNPI, on November 4, 2011, sent a notice to exercise its Call Right under Section 6.3 of the JVA, which provides for a Call Right exerciseable by PNPI following the occurrence of a Digitel change in control. As at the date of issuance of this report, Digitel management is currently evaluating and reviewing the proper disposition of this investment.
Investment of ePLDT in Philweb
In May 2006, ePLDT subscribed to newly issued common shares of Philweb for an aggregate amount of Php503 million, representing 20% of the total outstanding capital stock of Philweb at a price of Php0.020 per share. Of the total subscription price, Php428 million was paid by ePLDT on the closing date. A portion of the unpaid subscription price amounting to Php25 million will be paid by ePLDT at the same time as the Philweb majority stockholders pay the remaining unpaid portion of the subscription pursuant to a general call on subscription to be made by Philwebs Board of Directors. The unpaid balance of Php50 million which remains outstanding as at June 30, 2012 and December 31, 2011, will be paid upon the lapse of certain post-closing price adjustment periods.
In October 2006, ePLDT acquired an additional 8,038 million shares of Philweb at a price of Php0.026 per share for an aggregate amount of Php209 million.
On September 22, 2009, PSE approved the change in par value of Philweb shares from Php0.01 to Php1.00. Thus, the total number of shares subscribed by ePLDT reduced to 332 million shares from 33,157 million shares.
On April 19, 2012, Philweb approved the 20% stock dividend declaration payable on May 30, 2012 to stockholders of record as at May 4, 2012; thereby increasing ePLDTs shares to 398 million shares. ePLDTs equity interest in Philweb is 27% as at June 30, 2012.
Philweb is primarily engaged in internet-based online gaming, through its appointment as Principal Technology Service Provider under the Marketing Consultancy Agreement for Internet Sports Betting and Internet Casino with the Philippine Amusement and Gaming Corporation, or PAGCOR. Philweb offers Internet Sports Betting in over 180 PAGCOR Internet Sports Betting Stations and over 180 Internet Casino Stations nationwide. The market value of ePLDTs investment in Philweb amounted to Php5,053 million and Php5,093 million, based on quoted share price of Php12.70 and Php15.36 as at June 30, 2012 and December 31, 2011, respectively.
As at June 30, 2012, as a result of the committed plan of ePLDT to sell its interest over Philweb following a strategic review of the PLDT Groups business, the investment in Philweb was reclassified as noncurrent asset held-for-sale in accordance with PFRS 5, Noncurrent Assets Held-for-Sale and Discontinued Operations. Consequently, the noncurrent asset held-for-sale was carried at the carrying value of the investment in Philweb, which is lower than the fair value less costs to sell of the Philweb shares, as at June 30, 2012.
On July 10, 2012, ePLDT entered into a share purchase agreement with Philweb for the sale of 398 million common shares of Philweb, representing ePLDTs 27% interest in Philweb. The sale of the 398 million shares will be executed in four tranches, which will be completed by the end of 2013. The first tranche, which was transacted on July 13, 2012, and the second tranche which will be paid on December 12, 2012, are both for 93.5 million shares, and both for a total purchase price of Php1 billion. The first tranche payment is net of subscriptions payable of Php75 million. The third tranche will be paid on June 13, 2013 for 93.5 million shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from the actual date of payment of the second tranche to the actual date of payment of the third tranche. The fourth tranche will be paid on December 13, 2013 for 118 million shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from the actual date of payment of the second tranche to the actual date of payment of the fourth tranche. Philweb shall have the unilateral option to accelerate the acquisition of the portion of the subject shares corresponding to the second to fourth tranches upon prior written notice of five days to ePLDT. The rights (including the rights to receive dividend) to the first to fourth tranches of the subject shares shall belong to Philweb after the closing of the sale of each tranche.
Investment of ACeS Philippines in AIL
As at June 30, 2012, ACeS Philippines held 36.99% equity interest in AIL, a company incorporated under the laws of Bermuda. AIL owns the Garuda I Satellite and the related system control equipment in Batam, Indonesia.
AIL has incurred recurring significant operating losses, negative operating cash flows, and significant levels of debt. The financial condition of AIL was partly due to the National Service Providers, or NSPs, inability to generate the amount of revenues originally expected as the growth in subscriber numbers has been significantly lower than budgeted. These factors raised substantial doubt about AILs ability to continue as a going concern. On this basis, we recognized a full impairment provision of Php1,896 million in respect of our investment in AIL in 2003.
Unrecognized share in net income of AIL amounted to Php3 million and Php28 million for the six months ended June 30, 2012 and 2011, respectively. Share in net cumulative losses amounting to Php2,064 million and Php2,035 million as at June 30, 2012 and December 31, 2011, respectively, were not recognized as we do not have any legal or constructive obligation to pay for such losses and have not made any payments on behalf of AIL.
See Note 24 Related Party Transactions and Note 27 Financial Assets and Liabilities for further details as to the contractual relationships with respect to AIL.
Summarized Financial Information of Associates
The following tables present our share in the summarized financial information of our investments in associates in conformity with PFRS for equity investees in which we have significant influence as at June 30, 2012 and December 31, 2011 and for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Statements of Financial Position: |
||||||||
Noncurrent assets |
778 | 893 | ||||||
Current assets |
957 | 912 | ||||||
Capital deficiency |
(902 | ) | (858 | ) | ||||
Noncurrent liabilities |
914 | 1,489 | ||||||
Current liabilities |
1,723 | 1,174 | ||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Income Statements: |
||||||||
Revenues |
165 | 7,821 | ||||||
Expenses |
106 | 6,818 | ||||||
Other expenses |
2 | 292 | ||||||
Net income |
56 | 494 | ||||||
We have no outstanding contingent liabilities or capital commitments with our associates as at June 30, 2012 and December 31, 2011.
Investments in Joint Ventures
Investment in Beacon
On March 1, 2010, PCEV, MPIC, and Beacon, entered into an Omnibus Agreement, or OA. Beacon, formerly known as Rightlight Holdings, Inc., was organized with the sole purpose of holding the respective shareholdings of PCEV and MPIC in Meralco. PCEV and MPIC are Philippine affiliates of First Pacific and both held equity interest in Meralco. Under the OA, PCEV and MPIC have agreed to set out their mutual agreement in respect of, among other matters, the capitalization, organization, conduct of business and the extent of their participation in the management of the affairs of Beacon.
Prior to the transactions contemplated under the OA, MPIC beneficially owned the entire outstanding capital stock of Beacon, consisting of 25,000 common shares of Beacon, with a total par value of Php25,000.
On April 29, 2010, the Philippine SEC approved Beacons application to increase its authorized capital stock to Php5,000 million consisting of 3 billion common shares with a par value of Php1 per share and 2 billion preferred shares with a par value of Php1 per share. The preferred shares of Beacon are non-voting, not convertible to common shares or any shares of any class of Beacon, have no pre-emptive rights to subscribe to any share or convertible debt securities or warrants issued or sold by Beacon. The preferred shareholder is entitled to liquidation preference and yearly cumulative dividends at the rate of 7% of the issue value subject to: (a) availability of unrestricted retained earnings; and (b) dividend payment restrictions imposed by Beacons bank creditors.
Under the OA, each of PCEV and MPIC agreed to subscribe to 1,156.5 million common shares of Beacon, for a subscription price of Php20 per share or a total of Php23,130 million. PCEV and MPIC also agreed that their resulting equity after such subscriptions and PCEVs purchase from MPIC of 12,500 Beacon common shares will be 50% each of the outstanding common shares of Beacon.
MPIC additionally agreed to subscribe to 801 million shares of Beacons preferred stock for a subscription price of Php10 per share or a total of Php8,010 million.
On March 30, 2010, MPIC completed its subscription to 1,156.5 million common shares of Beacon
and approximately 801 million preferred shares of Beacon in consideration of: (1) the transfer
of 163.6 million Meralco shares at a price of Php150 per share, or Php24,540 million in the
aggregate; and
(2) Php6,600 million in cash, as further described below in Transfer of Meralco Shares to
Beacon.
PCEV likewise completed its subscription to 1,156.5 million common shares of Beacon on March 30, 2010 in consideration of the transfer of 154.2 million Meralco common shares at a price of Php150 per share, or Php23,130 million in the aggregate.
On May 12, 2010, PCEV also completed the purchase from MPIC of 12,500 shares or 50% of the 25,000 Beacon common shares originally owned by MPIC.
PCEVs Investment in Beacon and Sale of Beacons Preferred Shares
On January 20, 2012, PCEV and Beacon entered into a Subscription Agreement for the subscription by PCEV to 135 million Beacon common shares for a total cash consideration of Php2,700 million. On the same date, MPIC also subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million.
Transfer of Meralco Shares to Beacon
Alongside with the subscription to the Beacon shares pursuant to the OA, Beacon agreed to purchase 154.2 million and 163.6 million Meralco common shares, or the Transferred Shares, from PCEV and MPIC, respectively, for a consideration of Php150 per share or a total of Php23,130 million for the PCEV Meralco shares and Php24,540 million for the MPIC Meralco shares. PCEV transferred 154.2 million Meralco common shares to Beacon at a price of Php150 per share for a total consideration of Php23,130 million on May 12, 2010. The transfer of legal title to the Meralco shares was implemented through a special block sale/cross sale in the PSE.
PCEV recognized a deferred gain of Php8,047 million for the difference between the Php23,130 million transfer price of the Meralco shares to Beacon and the Php15,083 million carrying amount in PCEVs books of the Meralco shares transferred since the transfer was between entities with common shareholders. The deferred gain, presented as a reduction in PCEVs investment in Beacon, will only be realized upon the disposal of the Meralco shares to a third party.
On October 19, 2011, PCEVs Board of Directors approved the transfer to Beacon of PCEVs remaining investment in 68.8 million of Meralcos common shares for a total cash consideration of Php15,136 million and the subscription to 1,199 million Beacon preferred shares of the same amount.
The transfer of the Meralco shares was implemented through a cross sale in the PSE on October 25, 2011. PCEV and Beacon entered into a Subscription Agreement on October 20, 2011 for said preferred shares.
Since the transactions involve entities with common shareholders, PCEV recognized a deferred gain on transfer of the Meralco shares amounting to Php8,145 million, equivalent to the difference between the Php15,136 million transfer price of the Meralco shares and the Php6,991 million carrying amount in PCEVs books of the Meralco shares transferred. The deferred gain is presented as an adjustment to the investment cost of the Beacon preferred shares. Similar to the deferred gain on the transfer of the 154.2 million Meralco shares, the deferred gain will only be realized upon the disposal of the Meralco shares to a third party.
On June 6, 2012, the PCEV Board of Directors approved the sale of 282.2 million Beacon preferred shares to MPIC for a total consideration of Php3,563 million. In this instance, the sale of Beacon preferred shares is deemed between non-related entities. Consequently, PCEV realized a portion of the deferred gain amounting to Php2,012 million, which was recorded when the underlying Meralco shares were transferred to Beacon. The carrying value of investment in Beacons preferred shares of Php5,440 million and Php6,991 million as at June 30, 2012 and December 31, 2011, respectively, was presented as part of available-for-sale financial assets in our consolidated statements of financial position.
Call Option
Under the OA, MPIC assigned its right to acquire the call option, or the Call Option, over 74.7 million common shares of Meralco held by First Philippine Pacific Holdings Corporation, or FPHC, or the Option Shares, to Beacon. As a result of this assignment, Beacon and FPHC executed an Option Agreement dated March 1, 2010 pursuant to which FPHC granted the Call Option over the Option Shares to Beacon.
On March 30, 2010, Beacon exercised the Call Option and FPHC transferred the 74.7 million shares of Meralco common stock to Beacon in consideration of the payment by Beacon of Php22,410 million.
Property Dividends
With respect to the approximately 317.8 million Transferred Shares, the 74.7 million Option Shares transferred by FPHC to Beacon pursuant to the Call Option and the 68.8 million shares transferred by PCEV to Beacon in October 2011, FPHC has the benefit of being assigned, or retaining in the case of the Option Shares, Rockwell Land Corporation, or Rockwell, common shares that may be declared by Meralco as property dividends. Beacon recognized in March 2010, a liability for contingent consideration amounting to Php2,703 million for said Rockwell common shares. The liability for contingent consideration was remeasured based on the fair value of said Rockwell common shares as at December 31, 2011 and 2010 and the resulting remasurement loss of Php317 million and Php331 million were charged to profit or loss for the years ended December 31, 2011 and 2010, respectively.
On February 27, 2012, Meralcos Board of Directors declared its common shareholdings in Rockwell as property dividend, to shareholders of record as at March 23, 2012, payable five days after the approval by the Philippine SEC of such property dividend, which approval was issued on April 27, 2012. Thereafter, Beacon remeasured its liability for contingent consideration based on the fair value of said Rockwell common shares when these were declared as dividends. Beacon also reclassified the fair value of the Rockwell common shares from the Investment in Meralco account to the Investment in associate Rockwell account. On June 28, 2012, Beacon transferred all its investment in Rockwell common shares to FPHC via a crossed sale at the PSE. With the transfer, Beacon closed its investment in Rockwell against its liability for contingent consideration and recognized a gain on disposal of investment of Php77 million for the difference.
Governance Arrangements
Beacon, PCEV and MPIC have also agreed on certain corporate governance matters, including Board composition, election of officers, shareholders action, representation to the Meralco Board, nomination of the Meralco Board Committees, and nomination of Meralco officers. The corporate governance agreements and Beacon equity structure resulted in a jointly controlled entity.
Beacons Acquisition of Additional Meralco Shares
On various dates in 2011, Beacon acquired from the market additional 49.9 million Meralco common shares or an equivalent of approximately 4.5% beneficial ownership in Meralco at an aggregate cost of Php14,310 million.
In January 2012, Beacon acquired 30 million Meralco common shares from First Philippine Utilities Corporation, or FPUC, representing approximately 2.7% beneficial ownership in Meralco at nominal value of Php295 per share, or a total of Php8,850 million.
As at June 30, 2012, Beacon beneficially owned 541 million Meralco common shares representing approximately 48% beneficial ownership in Meralco with a carrying value of Php111,857 million and market value of Php136,934 million based on quoted price of Php253 per share. As at December 31, 2011, Beacon beneficially owned 511.2 million Meralco common shares representing approximately 45.4% beneficial ownership in Meralco with a carrying value of Php104,092 million and market value of Php126,379 million based on quoted price of Php247 per share.
Beacon Financing
On March 22, 2010, Beacon entered into an Php18,000 million ten-year corporate notes facility with First Metro Investment Corporation, or FMIC, and PNB Capital and Investment Corporation, or PNB Capital, as joint lead arrangers and various local financial institutions as noteholders. The initial drawdown of Php16,200 million (Php16,031 million, net of debt issuance cost) under this notes facility partially financed the acquisition of Meralco shares by Beacon pursuant to its exercise of the Call Option in March 2010. In May 2011, the remaining Php1,800 million was drawn to partially finance the acquisition of the additional 49.9 million Meralco common shares including shares purchased under a deferred payment scheme. The outstanding balance of the facility amounted to Php17,576 million and Php17,835 million as at June 30, 2012 and December 31, 2011, respectively.
In May 2011, Beacon entered into an Php11,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The amount drawn under this facility of Php4,000 million (at an interest rate based on a spread of 1.5% over the 10-year PDST-F rate) was also used to partially finance the acquisition of the additional 49.9 million Meralco common shares. The outstanding balance of the facility amounted to Php3,902 million and Php3,897 million as at June 30, 2012 and December 31, 2011, respectively. The remaining Php7,000 million was subsequently drawn on July 9, 2012 (at an interest rate based on a spread of 1.5% over the interpolated PDST-F rate based on the remaining life of the facility) and used for the payment of the final tranche of the deferred purchase made in May 2011.
On November 9, 2011, Beacon entered into a Php5,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The full amount was drawn on February 1, 2012 and was used to finance the acquisition of the additional 30 million Meralco common stock from FPUC. The outstanding balance of the facility amounted to Php4,935 million as at June 30, 2012.
The above facilities were secured by a pledge over the Meralco shares and were not guaranteed by PLDT. Also, the above facilities were not included in our consolidated long-term debt.
Investment of SHI in MPS
In June 2010, SHI and MasterCard Asia/Pacific Pte. Ltd., or MasterCard Asia, entered into a JVA under which the parties agreed to form MPS. The joint venture will develop, provide and market certain mobile payment services among other activities as stipulated in the agreement. MPS was incorporated in Singapore on June 4, 2010 and is 40% and 60% owned by SHI and MasterCard Asia, respectively. On November 9, 2010, SHI contributed US$2.4 million representing 40% ownership in MPS.
On November 21, 2011, the Board of Directors of MPS approved the allotment and issuance of additional 5 million shares for US$5 million and 3 million shares for US$3 million to MasterCard Asia and SHI, respectively. On April 25, 2012, SHI remitted the amount of US$2 million representing the 60% payment for the additional shares allotted by SHI.
Investment of PLDT Global in PLDT Italy
PLDT Global holds 100% nominal interest in PLDT Italy, a company incorporated under the laws of Italy, which is intended to carry the joint venture business between PLDT Global and Hutchison Global Communications Limited, or HGC, a company based in Hong Kong. On March 12, 2008, PLDT Global and HGC entered into a Co-operation Agreement wherein the parties agreed to launch their first commercial venture in Italy by offering mobile telecommunications services through PLDT Italy. Under the terms of the agreement, PLDT Global and HGC agreed to share equally the profit or loss from the operations of PLDT Italy. As a condition precedent to the effectiveness of the Co-Operation Agreement, PLDT Global pledged 50% of its shareholdings in PLDT Italy to HGC.
The amount of funding contributed by each partner to the joint venture is Euro 3.9 million, or a total of Euro 7.8 million each as at June 30, 2012 and December 31, 2011. PLDT Global has made a full impairment provision on its investment to PLDT Italy as at June 30, 2012.
Summarized Financial Information of Joint Ventures
The following table presents our share in the summarized financial information of our investments in joint ventures as at June 30, 2012 and December 31, 2011 and for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Statements of Financial Position: |
||||||||
Noncurrent assets |
55,942 | 51,985 | ||||||
Current assets |
1,996 | 822 | ||||||
Equity |
40,177 | 36,210 | ||||||
Noncurrent liabilities |
12,912 | 10,866 | ||||||
Current liabilities |
4,849 | 5,731 | ||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Income Statements: |
||||||||
Revenues |
2,077 | 1,076 | ||||||
Expenses |
38 | 66 | ||||||
Other expenses |
625 | 413 | ||||||
Net income |
1,414 | 597 | ||||||
We have no outstanding contingent liabilities or capital commitments with our joint ventures as at June 30, 2012 and December 31, 2011.
Deposit for Future Stock Subscription
On May 8, 2012, the PLDT Board of Directors approved a Php6 billion investment by ePLDT, in Philippine Depositary Receipts, or PDRs, to be issued by MediaQuest, a wholly-owned entity of the PLDT Beneficial Trust Fund, or BTF. MediaQuest will invest the proceeds of the PDRs in its wholly-owned subsidiaries, Associated Broadcasting Company Development Corporation, or TV5, and Mediascape, Inc., or Cignal TV. TV5 operates free-to-air TV and radio stations while Cignal TV operates a DTH satellite TV business.
Since 2007, TV5 has grown its market share from 2.3% to 18% at the end of 2011 for Metro Manila and from 2.7% to 15.6% nationwide. Cignal TV is now the largest DTH Pay-TV operator in the Philippines, with over 250,000 subscribers. This investment will provide MediaQuest with the additional funding it requires in order to sustain the growth momentum of TV5 and Cignal TV.
The PLDT Groups financial investment in media is consistent with its overall strategy of evolving from a traditional telecommunications business into a multi-media service company. It mirrors as well similar investments in media assets by other leading telecommunications companies worldwide. MediaQuest will serve as the anchor for the PLDT Groups media offerings in terms of creation of content for delivery across the PLDT Groups various platforms.
ePLDT made a deposit for future stock subscription of Php4 billion in MediaQuest as at June 30, 2012. An additional deposit of Php1 billion was made on July 6, 2012. MediaQuest will file for an increase in authorized capital stock with the Philippine SEC once the necessary documentation has been completed.
11. | Investment in Debt Securities |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
National Power Corporation, or NAPOCOR, Zero Coupon Bond |
370 | 358 | ||||||
Rizal Commercial Banking Corporation, or RCBC, Note |
150 | 150 | ||||||
520 | 508 | |||||||
Less current portion (Note 27) |
370 | 358 | ||||||
Noncurrent portion (Note 27) |
150 | 150 | ||||||
NAPOCOR Zero Coupon Bond
In 2007, Smart purchased, at a discount, a NAPOCOR Zero Coupon Bond, or NAPOCOR Bond, with a face value of Php380 million, maturing on November 29, 2012 at a net yield to maturity of 6.88%. The NAPOCOR Bond, which is classified as a financial asset HTM, is carried at amortized cost using the effective interest rate method. Interest income recognized on the NAPOCOR Bond amounted to Php12 million and Php11 million for the six months ended June 30, 2012 and 2011, respectively.
RCBC Note
In 2008, Smart purchased at par a ten-year RCBC Tier 2 Note, or RCBC Note, with a face value of Php150 million bearing a fixed rate of 7.00% for the first five years and the step-up interest rate from the fifth year up to maturity date. The RCBC Note may be redeemed at the option of the Issuer at par plus accrued and unpaid interest on February 22, 2013. Smart designated the RCBC Note as HTM financial asset. Interest income recognized on the RCBC Note amounted to Php4 million in each of the six months ended June 30, 2012 and 2011.
12. | Investment Properties |
Changes in investment properties account for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Balance at beginning of the period |
1,115 | 1,560 | ||||||
Net gains from fair value adjustments charged to profit or loss(1) |
| 26 | ||||||
Transfers to property, plant and equipment (Note 9) |
| (470 | ) | |||||
Disposals |
| (1 | ) | |||||
Balance at end of the period (Notes 3 and 27) |
1,115 | 1,115 | ||||||
(1) | Presented as part of other income in our consolidated income statement. |
Investment properties, which consist of land and building, are stated at fair values, which have been determined annually based on the year-end appraisal performed by an independent firm of appraisers, an industry specialist in valuing these types of investment properties. The valuation was based on an open market value, supported by a market evidence in which such assets could be exchanged between a knowledgeable and willing buyer and seller in an arms length transaction at the date of valuation. None of our investment properties are being leased to third parties that earn rental income.
Repairs and maintenance expenses related to investment properties amounted to Php28 million and Php42 million for the six months ended June 30, 2012 and 2011, respectively.
13. | Business Combinations and Acquisition of Noncontrolling Interests |
SPis Acquisition of Laserwords
On November 1, 2011, SPi acquired, through SPi Technologies India Private Ltd., a wholly-owned subsidiary of SPi, a 100% equity interest in Laserwords for a total cash consideration of US$23 million or Php1,030 million.
The purchase price consideration has been allocated to the assets and liabilities on the basis of provisional values at the date of acquisition as follows:
Provisional Values | ||||||||||||||||
Previous Carrying Value | Recognized on Acquisition | |||||||||||||||
In U.S. Dollar | In Php(1) | In U.S. Dollar | In Php(1) | |||||||||||||
(in millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Property, plant and equipment (Note 9) |
| 20 | | 20 | ||||||||||||
Goodwill (Note 14) |
11 | 460 | | | ||||||||||||
Cash and cash equivalents |
1 | 53 | 1 | 53 | ||||||||||||
Trade and other receivables |
4 | 152 | 4 | 152 | ||||||||||||
Other current assets |
3 | 125 | 3 | 125 | ||||||||||||
19 | 810 | 8 | 350 | |||||||||||||
Liabilities: |
||||||||||||||||
Accounts payable |
2 | 91 | 2 | 91 | ||||||||||||
Accrued expenses and other current liabilities |
1 | 44 | 1 | 44 | ||||||||||||
Other current liabilities |
1 | 34 | 1 | 34 | ||||||||||||
4 | 169 | 4 | 169 | |||||||||||||
Total net assets acquired |
15 | 641 | 4 | 181 | ||||||||||||
Provisional goodwill from the acquisition |
19 | 849 | ||||||||||||||
Purchase consideration transferred |
23 | 1,030 | ||||||||||||||
Cash flows from investing activity: |
||||||||||||||||
Net cash acquired with subsidiary |
1 | 53 | ||||||||||||||
Cash paid |
(23 | ) | (1,030 | ) | ||||||||||||
Purchase of subsidiary net of cash acquired |
(22 | ) | (977 | ) | ||||||||||||
Cash flow from operating activity: |
||||||||||||||||
Transaction cost paid |
34 | |||||||||||||||
(1) | Converted to Philippine Peso using the exchange rate at the time of purchase of Php42.98 to US$1.00. |
The net assets recognized at the date of acquisition were based on provisional fair values of the assets owned by Laserwords, which will be determined through an independent valuation. The result of this valuation had not been finalized as at the date of issuance of our consolidated financial statements.
The provisional goodwill of Php849 million pertains to the assembled workforce and existing contracts with the customers for publishing services. The provisional goodwill was not tested for impairment since there were no identified indicators of impairment.
Our consolidated revenues would have increased by Php804 million and our net income would have decreased by Php8 million for the year ended December 31, 2011 had the acquisition of Laserwords actually taken place on January 1, 2011. Total revenues and net income of Laserwords included in our consolidated income statement from November 1, 2011 to December 31, 2011 amounted to Php129 million and Php26 million, respectively.
ePLDTs Acquisition of ePDS
On August 24, 2011, Quantium and ePLDT entered into a Deed of Sale of Shares whereby Quantium sold an aggregate 6 million of its common shares equivalent to 17% of the issued and outstanding capital stock of ePDS, to ePLDT for a cash consideration of Php32 million. This additional acquisition of ePDS shares increased ePLDTs shareholding in ePDS from 50% equity interest with a carrying value of Php16.5 million to 67% equity interest with a total carrying value at the time of acquisition of Php49 million. Previously, ePLDT accounted for its investment in ePDS as investment in joint venture.
The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values as follows at date of acquisition:
Previous | Fair Value at | |||||||
Carrying Value | Acquisition | |||||||
(in million pesos) | ||||||||
Assets: |
||||||||
Property, plant and equipment (Note 9) |
12 | 12 | ||||||
Deferred income tax assets net (Note 7) |
3 | 3 | ||||||
Other noncurrent assets |
4 | 4 | ||||||
Cash and cash equivalents |
104 | 104 | ||||||
Trade and other receivables |
40 | 40 | ||||||
Prepayments and other current assets |
6 | 6 | ||||||
169 | 169 | |||||||
Liabilities: |
||||||||
Other noncurrent liabilities |
9 | 9 | ||||||
Accounts payable |
89 | 89 | ||||||
Accrued expenses and other current liabilities |
37 | 37 | ||||||
135 | 135 | |||||||
34 | 34 | |||||||
Noncontrolling interests |
| (11 | ) | |||||
Total net assets acquired |
34 | 23 | ||||||
Goodwill from the acquisition |
26 | |||||||
Purchase consideration transferred: |
49 | |||||||
Cash paid |
32 | |||||||
Fair value of previous interest |
17 | |||||||
49 | ||||||||
Cash flows from investing activity: |
||||||||
Net cash acquired with subsidiary |
104 | |||||||
Cash paid |
(32 | ) | ||||||
Cash acquired net of purchase of subsidiary |
72 | |||||||
Noncontrolling interests represent interest not owned by ePLDT, which is measured at proportionate share in fair values of identifiable assets and liabilities acquired at the date of acquisition.
The fair value and gross amount of trade and other receivables amounted to Php39.9 million and Php40.3 million, respectively. The amount of allowance for impairment for uncollectible trade and other receivables amounted to Php0.4 million.
The goodwill of Php26 million pertains to the fair value of ePDS printing and enveloping business. The goodwill was not tested for impairment since there were no identified indicators of impairment.
No gain was recognized from revaluation of ePLDTs previously held interest of 50% in ePDS since the carrying value of investment approximates to the fair value at the time of acquisition of additional interest.
Our consolidated revenues and net income would have increased by Php97 million and Php10 million, respectively, for the year ended December 31, 2011 had the acquisition of ePDS actually taken place on January 1, 2011. Total revenues and net income of ePDS included in our consolidated income statement from August 24, 2011 to December 31, 2011 amounted to Php65 million and Php7 million, respectively.
PLDTs Acquisition of Digitel
On March 29, 2011, the Board of Directors of PLDT and JGSHI approved the acquisition by PLDT of JGSHIs and certain other seller-parties ownership interest in Digitel, comprising of: (i) 3.28 billion common shares representing approximately 51.6% of the issued common stock of Digitel; (ii) zero-coupon convertible bonds issued by Digitel and its subsidiary to JGSHI and its subsidiary, which are convertible into approximately 18.6 billion common shares of Digitel assuming a conversion date of June 30, 2011 and an exchange rate of Php43.405 per U.S. dollar; and (iii) intercompany advances made by JGSHI to Digitel in the total principal amount plus accrued interest of Php34.1 billion as at December 31, 2010, or the Enterprise Assets. Digitel operates a fixed line business in certain parts of the country and is the 100% owner of DMPI, which is engaged in the mobile telecommunications business and owns the brand Sun Cellular.
PLDT agreed to pay JGSHI and certain other seller-parties Php69.2 billion, which will be settled by the issuance of one new PLDT common share for every Php2,500 (equivalent to 27.7 million new PLDT common shares) consideration payable for the Enterprise Assets. In order to aid the board of PLDT in discharging their fiduciary duties, PLDT engaged an independent financial advisor to review the transaction and render a fairness opinion on the transaction and the consideration payable by PLDT. The independent financial advisor completed its review and concluded that the acquisition of the Enterprise Assets is fair and reasonable and in the interest of PLDT shareholders as a whole.
The completion of the acquisition was subject to the procurement of certain regulatory and other approvals, including: (i) the approval by the NTC of the sale or transfer of JGSHI and the other seller-parties Digitel shares representing more than 40% of Digitels issued and outstanding common stock; (ii) the confirmation by the Philippine SEC of the valuation of the Enterprise Assets; (iii) the approval by the PSE of the block sale of the Digitel shares; (iv) the confirmation by the Philippine SEC that the issuance of the PLDT common shares to JGSHI and the other seller-parties is exempt from the registration requirement of the SRC; and (v) all other necessary approvals under applicable laws and regulations; and the approval by the common stockholders of PLDT for the issuance of the PLDT common shares as payment for the purchase price of the Enterprise Assets and the Digitel shares which shall have been tendered pursuant to the mandatory tender offer.
In addition, the sale of the Digitel shares owned by the seller-parties was subject to the consent of certain creditors of Digitel and DMPI. Digitel and DMPI have outstanding long-term debts that had been guaranteed by JGSHI. The loans and guarantees contained representations and covenants applicable to JGSHI including that on the ownership of JGSHI in Digitel. Digitel and DMPI obtained the required consents of the lenders and export credit agencies both for the transfer of ownership of Digitel and the replacement of JGSHI by PLDT as guarantor for these loans.
The acquisition was completed on October 26, 2011 following the issuance by the Philippine SEC on July 29, 2011 of the confirmations referred to in clauses (ii) and (iv) above by the NTC on October 26, 2011 of the approval referred to in clause (i) above, or the Decision, and by the PSE on October 26, 2011 of the approval referred to in clause (iii) above. PLDTs common shareholders had earlier approved the issuance of PLDT common shares as payment for the Enterprise Assets during the PLDT stockholders meeting held on June 14, 2011.
As part of the NTC Decision, the NTC also approved the divestment plan presented by PLDT, which covers the following commitments:
| CURE will sell its Red Mobile business to Smart consisting of its subscriber base, brand and fixed assets; |
| Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, 10 MHz of 3G frequency in the 2100 band, or the Affected Frequency, and related permits, or the Divestment Sale; and |
| PLDT will have a period of nine months reckoned from the date of promulgation of the Decision, or the Transition Period, to effect an orderly migration of CUREs customers and an orderly transfer of CUREs assets to Smart with the least disruption and degradation of service to CUREs existing customers. |
The Divestment Sale will be made under the supervision and control of the NTC and will be effected through a competitive bidding among duly enfranchised and qualified public telecommunication entities. A minimum price will be prescribed to allow Smart to recover its investment in acquiring, developing and operating CURE, or the Cost Recovery Amount. In the event that the actual proceeds from the Divestment Sale exceed the Cost Recovery Amount, PLDT will pay the NTC, as fee for supervising the Divestment Sale, at least 50% of such excess less government fees and taxes payable as a consequence of the Divestment Sale.
The Divestment Sale will be conducted within six months after the Transition Period, provided the Decision shall have become final and executory. However, in the event that there will be a delay in the implementation of the Divestment Sale by reason of appeal or any legal challenge against the Decision, CURE will continue to pay spectrum users fee and other related fees which will form part of the Cost Recovery Amount. While the Divestment Sale is pending, the PLDT Group will not use the Affected Frequency.
In compliance with the commitments in the divestment plan, CURE completed the sale and transfer of its Red Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, which included: (a) the sale of CUREs Red Mobile trademark to Smart; (b) the transfer of CUREs existing Red Mobile subscriber base to Smart; and (c) the sale of CUREs fixed assets to Smart at net book value.
In a letter dated July 26, 2012, Smart informed the NTC that it has complied with the terms and conditions of the divestment plan as CURE had rearranged its assets, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, its only remaining assets as at June 30, 2012 are its congressional franchise, the 10 MHz 3G frequency and related permits.
Smart also informed the NTC that the minimum CRA to which the PLDT Group is entitled to enable the PLDT Group to recover its investment in CURE, includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through a sale of shares of stock to the winning bidder.
As payment for the Enterprise Assets, PLDT issued approximately 27.7 million common shares with a total issue value of around Php69 billion to the seller-parties. Said shares are subject to a lock-up period of one (1) year during which JGSHI and the other sellers may not transfer or encumber such PLDT shares without the consent of PLDT. PLDT granted consents to the sale by JGSHI of 5.81 million and 4.56 million PLDT shares under separate option agreements that JGSHI had entered into with a Philippine associate of First Pacific and NTT DOCOMO, respectively. Following the sale of those shares in November 2011, the JG Summit Group, First Pacific Group and its Philippine affiliates, and NTT Group (NTT DOCOMO and NTT Communications) owned approximately 8%, 26% and 20% of PLDTs outstanding common shares, respectively, as at June 30, 2012.
On December 8, 2011, PLDT exercised the conversion option for 4 billion Digitel common shares with stated value of Php4 billion comprising 25% of the total amount of increase in Digitels authorized capital stock, which was paid through the assignment by PLDT to Digitel of: (i) 2013 Convertible Bonds issued by Digitel, with redemption value of US$25 million or Php1,087 million as of the conversion date of December 8, 2011; and (ii) 15.6% of its 2014 Exchangeable Bonds issued by DCPL with redemption value of US$66 million, or Php2,913 million, as of the exchange date of December 8, 2011. As a result of this partial conversion and exchange by PLDT of bonds into 4 billion Digitel common shares, PLDTs equity interest increased from 51.6% to 70.2% of the outstanding common stock of Digitel as at January 12, 2012.
Under the SRC, PLDT is required to conduct a mandatory tender offer for all the remaining Digitel shares held by the noncontrolling shareholders, in connection with PLDTs acquisition of 51.6% interest in Digitel from the seller-parties. On December 5, 2011, PLDT filed its tender offer report on Philippine SEC Form 19.1 setting forth the terms of the mandatory tender offer to purchase the remaining Digitel shares at the price of Php1.6033 per Digitel share, payable in the form of either PLDT shares issued at Php2,500 per share, or one PLDT common share for every 1,559.28 Digitel shares, or cash, at the option of noncontrolling Digitel shareholders, except for tendering shareholders residing outside the Philippines, who will only be paid in cash. The tender offer period commenced on December 7, 2011 and ended on January 16, 2012. A total of 2,888 million shares were tendered by Digitel noncontrolling shareholders, representing approximately 94% of the shares held by the public. Of the shares tendered, 13% or 374 million Digitel shares were paid in cash for an aggregate amount of Php600 million, and 87% or 2,514 million Digitel shares were paid in PLDT common shares for a total of approximately 1.61 million PLDT common shares, which were issued on January 27, 2012.
On January 25, 2012, Digitel filed a petition for voluntary delisting of its shares with the PSE, since its public ownership level has fallen below the minimum 10% required by the PSE. On February 22, 2012, the PSE granted the petition for voluntary delisting and the Digitel shares were delisted and ceased to be tradable on the PSE effective March 26, 2012.
On February 7, 2012, PLDTs Board of Directors authorized the exchange of 78.4% of the 2014 Exchangeable Bonds issued by DCPL with redemption value of US$340 million, or Php14,641 million, in exchange for 14,641 million Digitel common shares. As at March 26, 2012, PLDT purchased a total of 72.3 million common shares of Digitel from the open market. On May 8, 2012, PLDTs Board of Directors authorized the exchange of the remaining 2014 Exchangeable Bonds with redemption value of US$27 million, or Php1,143 million, in exchange for 1,143 million Digitel common shares. The exchange is still subject to the approval of the Philippine SEC of the increase in Authorized Capital Stock of Digitel. As a result of the tender offer, open market acquisitions, and the exchanges described above, PLDT holds 99.5% of the outstanding capital of Digitel as at June 30, 2012.
PLDTs acquisition of equity interest, convertible exchangeable bonds and advances owned by JGSHI Group, and the mandatory tender offer are linked transactions and was accounted for as a single business combination transaction.
The consideration of Php69,429 million is the sum of the fair value of PLDTs newly issued 27.7 common shares with fair market value per share of Php2,330 and an aggregate value in the amount of Php64,492 in exchange for the equity interest, convertible exchangeable bonds and advances owned by JGSHI Group, and the fair value of financial instruments based on the statutory put option for the mandatory tender offer of Php4,937 million. The fair value of PLDTs newly issued shares is valued at Php2,330 per share, which is the quoted fair market value per share as at the market closing on October 26, 2011. Incidental cost related to acquisition amounting to Php599 million was recognized as expense.
As a result of the transaction, provisional goodwill amounting to Php68,340 million, representing the difference between the total consideration of Php69,429 million and the provisional value of net assets acquired of Php1,089 million, was recognized.
The purchase price consideration has been allocated to the assets and liabilities on the basis of provisional values at the date of acquisition as follows:
Provisional Values | ||||||||
Previous | Recognized on | |||||||
Carrying Value | Acquisition | |||||||
(in million pesos) | ||||||||
Assets: |
||||||||
Property, plant and equipment |
39,701 | 39,701 | ||||||
Advances and other noncurrent assets net of current portion |
153 | 153 | ||||||
Cash and cash equivalents |
1,856 | 1,856 | ||||||
Trade and other receivables |
1,593 | 1,593 | ||||||
Inventories and supplies |
281 | 281 | ||||||
Prepayments |
3,039 | 3,039 | ||||||
Current portion of advances and other noncurrent assets |
4 | 4 | ||||||
46,627 | 46,627 | |||||||
Liabilities: |
||||||||
Interest-bearing financial liabilities net of current portion |
17,401 | 17,401 | ||||||
Deferred income tax liabilities net |
2,783 | 2,783 | ||||||
Derivative financial liabilities |
329 | 329 | ||||||
Pension and other employee benefits |
64 | 64 | ||||||
Customers deposits |
4 | 4 | ||||||
Deferred credits and other noncurrent liabilities |
6,004 | 6,004 | ||||||
Accounts payable |
2,318 | 2,318 | ||||||
Accrued expenses and other current liabilities |
12,202 | 12,202 | ||||||
Derivative financial liabilities |
88 | 88 | ||||||
Current portion of interest-bearing financial liabilities |
4,345 | 4,345 | ||||||
45,538 | 45,538 | |||||||
Total net assets acquired |
1,089 | 1,089 | ||||||
Provisional goodwill from the acquisition |
68,340 | |||||||
Purchase consideration transferred |
69,429 | |||||||
Fair value of newly issued PLDT common shares |
64,492 | |||||||
Mandatory tender offer option liability |
4,937 | |||||||
69,429 | ||||||||
Cash flow investing activity: |
||||||||
Net cash acquired with subsidiary |
1,856 | |||||||
Incidental cost |
599 | |||||||
The net assets recognized at the date of acquisition were based on provisional fair values of the assets owned by Digitel, which will be determined through an independent valuation. The result of this valuation had not been received as at the date of issuance of our consolidated financial statements.
The fair value and gross amount of trade and other receivables amounted to Php1,470 million and Php3,948 million, respectively. The amount of allowance for impairment for uncollectible trade and other receivables amounted to Php2,478 million.
The provisional goodwill of Php68,340 million pertains to the expected synergies once the wireless and fixed line businesses of Digitel is integrated into the PLDT Group. The provisional goodwill was not tested for impairment since the acquisition occurred in the fourth quarter of 2011 and there was no material change in Digitels business since obtaining the fairness opinion from an independent financial advisor. Expected synergies arising from the acquisition includes cost efficiencies attainable from elimination of redundant infrastructure and facilities between PLDT, Smart and Digitel, and expected increase in revenue from current market share of PLDT, Smart and Digitel due to enhanced connectivity and integrated products and services.
Upon completion of the tender offer on January 16, 2012, we recognized a net reduction adjustment in the provisional goodwill of Php973 million. This adjustment consists of the value of noncontrolling interests of Php1,055 million, which determined based on its share on negative carrying value of Digitel at the end of the tender offer period, net of Php82 million difference between the fair value of the PLDTs common shares issued for settlement of the purchase price of Digitel shares tendered by the noncontrolling Digitel stockholders and the tender offer liability recognized as at December 31, 2011.
Our consolidated revenues would have increased by Php18,119 million, while our consolidated net income would have increased by Php711 million for the year ended December 31, 2011 had the acquisition of Digitel actually taken place on January 1, 2011. Total revenues and net loss of Digitel included in our consolidated income statement from October 26, 2011 to December 31, 2011 amounted to Php3,845 million and Php606 million, respectively.
14. | Goodwill and Intangible Assets |
Changes in goodwill and intangible assets for the six months ended June 30, 2012 and 2011 are as follows:
Intangible Assets | Total Goodwill | |||||||||||||||||||||||||||||||
Technology | Total | and Intangible | ||||||||||||||||||||||||||||||
Customer List | Spectrum | Licenses | Application | Trademark | Intangible Assets | Goodwill | Assets | |||||||||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||||||||||||||
Costs: |
||||||||||||||||||||||||||||||||
Balance at beginning of the period |
1,635 | 1,205 | 120 | 1,053 | 158 | 4,171 | 83,792 | 87,963 | ||||||||||||||||||||||||
Translation and other adjustments |
(56 | ) | | 14 | (7 | ) | (1 | ) | (50 | ) | (2,089 | ) | (2,139 | ) | ||||||||||||||||||
Balance at end of the period |
1,579 | 1,205 | 134 | 1,046 | 157 | 4,121 | 81,703 | 85,824 | ||||||||||||||||||||||||
Accumulated amortization and impairment: |
||||||||||||||||||||||||||||||||
Balance at beginning of the period |
1,360 | 589 | 41 | 1,042 | 53 | 3,085 | 4,222 | 7,307 | ||||||||||||||||||||||||
Amortization during the period (Note 3) |
192 | 525 | 57 | 4 | 7 | 785 | | 785 | ||||||||||||||||||||||||
Translation and other adjustments |
(163 | ) | (484 | ) | (40 | ) | (7 | ) | (1 | ) | (695 | ) | (133 | ) | (828 | ) | ||||||||||||||||
Balance at end of the period |
1,389 | 630 | 58 | 1,039 | 59 | 3,175 | 4,089 | 7,264 | ||||||||||||||||||||||||
Net balance at end of the period
(Notes 3 and 27) |
190 | 575 | 76 | 7 | 98 | 946 | 77,614 | 78,560 | ||||||||||||||||||||||||
Estimated useful lives (in years) |
1 8 | 15 | 18 | 3 5 | 1 10 | | | | ||||||||||||||||||||||||
Remaining useful lives (in years) |
1 5 | 7 | 10 | 1 3 | 8 | | | | ||||||||||||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||||||||||||||
Costs: |
||||||||||||||||||||||||||||||||
Balance at beginning of the year |
1,632 | 1,205 | 554 | 993 | 159 | 4,543 | 14,733 | 19,276 | ||||||||||||||||||||||||
Business combinations (Note 13) |
| | | | | | 69,215 | 69,215 | ||||||||||||||||||||||||
Additions |
| | 2 | | | 2 | | 2 | ||||||||||||||||||||||||
Disposal |
| | (436 | ) | | | (436 | ) | (464 | ) | (900 | ) | ||||||||||||||||||||
Translation and other adjustments |
3 | | | 60 | (1 | ) | 62 | 308 | 370 | |||||||||||||||||||||||
Balance at end of the year |
1,635 | 1,205 | 120 | 1,053 | 158 | 4,171 | 83,792 | 87,963 | ||||||||||||||||||||||||
Accumulated amortization and impairment: |
||||||||||||||||||||||||||||||||
Balance at beginning of the year |
1,212 | 509 | 426 | 977 | 41 | 3,165 | 4,626 | 7,791 | ||||||||||||||||||||||||
Amortization during the year |
146 | 80 | 17 | 8 | 13 | 264 | | 264 | ||||||||||||||||||||||||
Disposal |
| | (407 | ) | | | (407 | ) | (430 | ) | (837 | ) | ||||||||||||||||||||
Translation and other adjustments |
2 | | 5 | 57 | (1 | ) | 63 | 26 | 89 | |||||||||||||||||||||||
Balance at end of the year |
1,360 | 589 | 41 | 1,042 | 53 | 3,085 | 4,222 | 7,307 | ||||||||||||||||||||||||
Net balance at end of the year
(Notes 3 and 27) |
275 | 616 | 79 | 11 | 105 | 1,086 | 79,570 | 80,656 | ||||||||||||||||||||||||
Estimated useful lives (in years) |
1 8 | 15 | 18 | 3 5 | 1 10 | | | | ||||||||||||||||||||||||
Remaining useful lives (in years) |
2 6 | 8 | 11 | 1 4 | 8 | | | | ||||||||||||||||||||||||
Intangible Assets
Intangible Assets from Acquisition of SPi and CyMed, Inc., or CyMed
In 2010, ePLDT recognized an impairment of its remaining intangible assets from the acquisition of SPi and CyMed amounting to Php19 million and Php38 million, respectively, pertaining to the medical transcription business of SPi, since the carrying amount of the individual assets from SPi and CyMed were deemed unrecoverable.
There were no impairment indicators identified as at June 30, 2012. Annual impairment testing will be performed at year-end.
Intangible Assets from Acquisition of Chikka and PDSI
In 2010, Smart recognized intangible assets of Php132 million for technology and tradename and Php23 million for technology and customer base acquired in the purchase of Chikka Group and PDSI, respectively, based on the results of the valuation done by independent appraisers.
There were no impairment indicators identified as at June 30, 2012. Annual impairment testing will be performed at year-end.
The consolidated future amortization of intangible assets as at June 30, 2012 is as follows:
Year | (in million pesos) | |||
2012(1) |
123 | |||
2013 |
188 | |||
2014 |
122 | |||
2015 |
107 | |||
2016 and onwards |
406 | |||
Balance at end of the period |
946 | |||
(1) | July 1, 2012 through December 31, 2012 |
Impairment Testing of Goodwill |
Goodwill from Acquisition of SBI, CURE, Airborne Access, PDSI and Chikka
The organizational structure of Smart and its subsidiaries is designed to monitor financial operations based on fixed line and wireless segmentation. Management provides guidelines and decisions on resource allocation, such as continuing or disposing of asset and operations by evaluating the performance of each segment through review and analysis of available financial information on the fixed and wireless segments. As at December 31, 2011, Smarts goodwill comprised of goodwill resulting from Smarts acquisition of SBI in 2004, CURE in 2008, SBIs acquisition of a 99.4% equity interest in Airborne Access from ePLDT in 2008 and Smarts acquisition of PDSI and Chikka in 2009. The test for recoverability of Smarts goodwill was applied to the wireless asset group, which represents the lowest level for which identifiable cash flows are largely independent of the cash inflows from other groups of assets and liabilities.
Although revenue streams may be segregated among Smart, CURE, SBI and PDSI through subscribers availing themselves of their respective cellular (for Smart and CURE) and wireless broadband (for SBI and PDSI) services, the cost items and cash flows are difficult to carve out due largely to the significant portion of shared and common-used network/platform. In the case of CURE, it provides cellular services to its subscribers using Smarts 2G network. SBI, on the other hand, provides broadband wireless access to its subscribers using Smarts cellular base stations and fiber optic and IP backbone, as well as the Worldwide Interoperability for Microwave Access technology of PDSI. With the common use of wireless assets of Smart in providing 3G cellular and wireless broadband access, the lowest level of assets of CURE, SBI and PDSI for which cash flows are clearly identifiable from other groups of assets is Smarts wireless business segment. On the other hand, Chikkas mobile applications and content are developed mainly for the cellular subscribers of Smart and CURE.
The recoverable amount of this segment had been determined using the value in use approach calculated using cash flow projections based on the financial budgets approved by the Board of Directors, covering a five-year period from 2012 to 2016. The pre-tax discount rate applied to cash flow projections is 6.7% and cash flows beyond the five-year period are determined using a 2.5% growth rate that is the same as the long-term average growth rate for the telecommunications industry.
There were no impairment indicators identified as at June 30, 2012. Annual impairment testing will be performed at year-end.
Goodwill from Acquisition of SPi and its Subsidiaries, CyMed, Springfield Service Corporation, or Springfield, and Laguna Medical Systems, Inc., or Laguna Medical
The goodwill acquired through the SPi, CyMed, Springfield and Laguna Medical transactions was allocated for impairment testing to each of the CGUs of those businesses, namely medical transcription, content solutions, medical billing and medical coding, respectively. The recoverable amount of goodwill was determined using the value in use approach. Value in use was based on the cash flow projections of the most recent financial budgets and forecasts approved by the Board of Directors, which management believes are reasonable and are managements best estimate of the ranges of economic conditions that will exist over the remaining useful life of the asset. The pre-tax discount rate of 15% was applied based on the weighted average cost of capital adjusted for the difference in currency and specific risks associated with the assets or businesses of such CGUs.
The recoverable amount exceeded the carrying amount of the CGU, which as a result, no impairment was recognized by SPi for the year ended December 31, 2011.
There were no impairment indicators identified as at June 30, 2012. Annual impairment testing will be performed at year-end.
15. | Cash and Cash Equivalents |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Cash on hand and in banks (Note 27)
|
4,615 | 4,637 | ||||||
Temporary cash investments (Note 27)
|
26,997 | 41,420 | ||||||
31,612 | 46,057 | |||||||
Cash in banks earn interest at prevailing bank deposit rates. Temporary cash investments are made for varying periods of up to three months depending on our immediate cash requirements, and earn interest at the prevailing temporary cash investment rates. Due to the short-term nature of such transactions, the carrying value approximates the fair value of our temporary cash investments. See Note 27 Financial Assets and Liabilities.
Interest income earned from cash in banks and temporary cash investments amounted to Php583 million and Php626 million for the six months ended June 30, 2012 and 2011, respectively.
16. | Trade and Other Receivables |
As at June 30, 2012 and December 31, 2011, this account consists of receivables from:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Retail subscribers (Note 27)
|
12,176 | 11,302 | ||||||
Corporate subscribers (Notes 24 and 27)
|
9,979 | 9,200 | ||||||
Foreign administrations (Note 27)
|
5,143 | 4,961 | ||||||
Domestic carriers (Notes 24 and 27)
|
853 | 1,323 | ||||||
Dealers, agents and others (Notes 18, 24 and 27)
|
3,790 | 4,231 | ||||||
31,941 | 31,017 | |||||||
Less allowance for doubtful accounts (Notes 3, 5 and 27)
|
15,718 | 14,772 | ||||||
16,223 | 16,245 | |||||||
Changes in the allowance for doubtful accounts for the six months ended June 30, 2012 and 2011 are as follows:
Corporate | Foreign | Dealers, | ||||||||||||||||||||||
Total | Retail Subscribers | Subscribers | Administrations | Domestic Carriers | Agents and Others | |||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||||||
Balance at beginning of the period |
14,772 | 7,264 | 6,492 | 199 | 111 | 706 | ||||||||||||||||||
Provisions (Notes 3, 4 and 5) |
960 | 598 | 339 | 3 | 3 | 17 | ||||||||||||||||||
Translation and other adjustments |
(14 | ) | 268 | (277 | ) | (6 | ) | 41 | (40 | ) | ||||||||||||||
Balance at end of the period |
15,718 | 8,130 | 6,554 | 196 | 155 | 683 | ||||||||||||||||||
Individual impairment |
9,854 | 3,354 | 5,619 | 196 | 155 | 530 | ||||||||||||||||||
Collective impairment |
5,864 | 4,776 | 935 | | | 153 | ||||||||||||||||||
15,718 | 8,130 | 6,554 | 196 | 155 | 683 | |||||||||||||||||||
Gross amount of receivables individually
impaired, before deducting any impairment
allowance |
9,854 | 3,354 | 5,619 | 196 | 155 | 530 | ||||||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||||||
Balance at beginning of the year |
11,830 | 5,045 | 5,956 | 158 | 138 | 533 | ||||||||||||||||||
Business combinations and others (Note 13) |
2,463 | 1,870 | 305 | 42 | 56 | 190 | ||||||||||||||||||
Provisions |
1,549 | 812 | 673 | 12 | 6 | 46 | ||||||||||||||||||
Write-offs |
(1,037 | ) | (675 | ) | (344 | ) | | (11 | ) | (7 | ) | |||||||||||||
Translation and other adjustments |
(33 | ) | 212 | (98 | ) | (13 | ) | (78 | ) | (56 | ) | |||||||||||||
Balance at end of the year |
14,772 | 7,264 | 6,492 | 199 | 111 | 706 | ||||||||||||||||||
Individual impairment |
9,239 | 3,099 | 5,278 | 199 | 111 | 552 | ||||||||||||||||||
Collective impairment |
5,533 | 4,165 | 1,214 | | | 154 | ||||||||||||||||||
14,772 | 7,264 | 6,492 | 199 | 111 | 706 | |||||||||||||||||||
Gross amount of receivables individually
impaired, before deducting any impairment
allowance |
9,239 | 3,099 | 5,278 | 199 | 111 | 552 | ||||||||||||||||||
Receivables from foreign administrations and domestic carriers represent receivables based on interconnection agreements with other telecommunications carriers. The aforementioned amounts of receivables are shown net of related payable to the same telecommunications carriers where a legal right of offset exists and settlement is facilitated on a net basis.
See Note 24 Related Party Transactions for the summary of transactions with related parties and Note 27 Financial Assets and Liabilities on credit risk of trade receivables to understand how we manage and measure credit quality of trade receivables that are neither past due nor impaired.
17. | Inventories and Supplies |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Terminal and cellular phone units: |
||||||||
At net realizable value |
1,367 | 1,349 | ||||||
At cost |
1,783 | 1,728 | ||||||
Spare parts and supplies: |
||||||||
At net realizable value |
1,062 | 1,606 | ||||||
At cost |
1,732 | 2,256 | ||||||
Others: |
||||||||
At net realizable value |
464 | 872 | ||||||
At cost |
466 | 875 | ||||||
Total inventories and supplies at the lower of
cost or net realizable value (Notes 3, 4, 5 and
27) |
2,893 | 3,827 | ||||||
The cost of inventories and supplies recognized as expense for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Cost of sales |
4,088 | 2,148 | ||||||
Repairs and maintenance |
228 | 259 | ||||||
Write-down of inventories and supplies (Notes 3, 4 and 5) |
225 | 35 | ||||||
4,541 | 2,442 | |||||||
18. | Prepayments |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Prepaid taxes |
8,004 | 9,101 | ||||||
Prepaid benefit costs (Notes 3 and 25) |
5,855 | 5,654 | ||||||
Prepaid selling and promotions |
934 | 907 | ||||||
Prepaid rent net (Notes 3 and 5) |
379 | 137 | ||||||
Prepaid fees and licenses |
165 | 13 | ||||||
Prepaid insurance (Note 24) |
152 | 156 | ||||||
Other prepayments |
229 | 128 | ||||||
15,718 | 16,096 | |||||||
Less current portion of prepayments (Note 27) |
6,771 | 7,227 | ||||||
Noncurrent portion of prepayments (Note 27) |
8,947 | 8,869 | ||||||
Prepaid taxes include creditable withholding taxes, input VAT and real property taxes.
Prepaid benefit costs represent excess of fair value of plan assets over present value of
defined benefit obligations less unrecognized net actuarial gains or losses recognized in our
consolidated statements of financial position.
See Note 25 Employee Benefits.
Agreement between PLDT and Smart with TV5
In 2010, PLDT and Smart entered into advertising placement agreements with TV5, a subsidiary of MediaQuest Holdings, Inc., or MediaQuest, which is a wholly-owned investee company of PLDT Beneficial Trust Fund, or BTF, for the airing and telecast of advertisements and commercials of PLDT and Smart on TV5s television network for a period of five years. Total prepayment under the advertising placement agreements amounted to Php893 million and Php907 million as at June 30, 2012 and December 31, 2011, respectively.
19. | Equity |
Changes in PLDTs capital account for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:
Preferred Stock | ||||||||||||||||||||||||
Php10 par value per share | ||||||||||||||||||||||||
Series | Total | Common Stock | ||||||||||||||||||||||
A to II | IV | Preferred Stock | Php5 par value per share | |||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | |||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Authorized
|
823 | Php8,230 | 234 | Php1,170 | ||||||||||||||||||||
Issued
|
||||||||||||||||||||||||
Balances as at January 1, 2011
|
406 | 36 | 442 | Php4,419 | 189 | Php947 | ||||||||||||||||||
Issuance
|
| | | 2 | 28 | 138 | ||||||||||||||||||
Conversion
|
| | | (2 | ) | | | |||||||||||||||||
Balances as at December 31, 2011 (Audited) |
406 |
36 |
442 |
Php4,419 |
217 |
Php1,085 |
||||||||||||||||||
Balances as at January 1, 2012
|
406 | 36 | 442 | Php4,419 | 217 | Php1,085 | ||||||||||||||||||
Issuance
|
| | | | 2 | 8 | ||||||||||||||||||
Conversion
|
(3 | ) | | (3 | ) | (30 | ) | | | |||||||||||||||
Redemption
|
(403 | ) | | (403 | ) | (4,029 | ) | | | |||||||||||||||
Balances as at June 30, 2012 (Unaudited) |
|
36 |
36 |
Php360 |
219 |
Php1,093 |
||||||||||||||||||
Preferred Stock
On January 26, 2010, the Board of Directors designated 100,000 shares of preferred stock as Series II 10% Cumulative Convertible Preferred Stock to be issued from January 1, 2010 to December 31, 2012. There were 370 shares of Series II 10% Cumulative Convertible Preferred Stock issued as at June 30, 2012 and December 31, 2011.
The preferred stock is non-voting, except as specifically provided by law, and is preferred as to liquidation.
The Series GG to II 10% Cumulative Convertible Preferred Stock earns cumulative dividends at an annual rate of 10%. After the lapse of one year from the last day of the year of issuance of a particular Series of 10% Cumulative Convertible Preferred Stock, any holder of such series may convert all or any of the shares of 10% Cumulative Convertible Preferred Stock held by him into fully paid and non-assessable shares of Common Stock of PLDT, at a conversion price equivalent to 10% below the average of the high and low daily sales price of a share of Common Stock on the PSE, or if there have been no such sales on the PSE on any day, the average of the bid and the ask prices of a share of Common Stock of PLDT at the end of such day on such Exchange, in each such case averaged over a period of 30 consecutive trading days prior to the conversion date, but in no case shall the conversion price be less than the price set by the Board of Directors which, as at June 30, 2012 was Php5.00 each per share. The number of shares of Common Stock issuable at any time upon conversion of one share of the PLDT Subscriber Investment Plan, or SIP, or the 10% Cumulative Convertible Preferred Stock is determined by dividing Php10.00 by the then applicable conversion price.
In case the shares of Common Stock outstanding are at anytime subdivided into a greater or consolidated into a lesser number of shares, then the minimum conversion price per share of Common Stock will be proportionately decreased or increased, as the case may be, and in the case of a stock dividend, such price will be proportionately decreased, provided, however, that in every case the minimum conversion price shall not be less than the par value per share of Common Stock. In the event the relevant effective date for any such subdivision or consolidation of shares of stock dividend occurs during the period of 30 trading days preceding the presentation of any shares of 10% Cumulative Convertible Preferred Stock for conversion, a similar adjustment will be made in the sales prices applicable to the trading days prior to such effective date utilized in calculating the conversion price of the shares presented for conversion.
In case of any other reclassification or change of outstanding shares of Common Stock, or in case of any consolidation or merger of PLDT with or into another corporation, the Board of Directors shall make such provisions, if any, for adjustment of the minimum conversion price and the sale price utilized in calculating the conversion price as the Board of Directors, in its sole discretion, shall deem appropriate.
At PLDTs option, the Series GG to II 10% Cumulative Convertible Preferred Stock are redeemable at par value plus accrued dividends five years after the year of issuance.
On May 8, 2012, the Board of directors approved the redemption of all outstanding shares of PLDTs Series GG 10% Cumulative Convertible Preferred Stock effective on August 30, 2012.
PLDT expects to similarly redeem the outstanding shares of Series HH and II 10% Cumulative Convertible Preferred Stock as and when they become eligible for redemption.
The Series IV Cumulative Non-convertible Redeemable Preferred Stock earns cumulative dividends at an annual rate of 13.5% based on the paid-up subscription price. It is redeemable at the option of PLDT at any time one year after subscription and at the actual amount paid for such stock, plus accrued dividends.
On July 5, 2011, the Board of Directors of PLDT approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized Preferred Capital Stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendments (the Amendments). The shares of Voting Preferred Stock may be issued, owned, or transferred only to or by: (a) a citizen of the Philippines or a domestic partnership or association wholly-owned by citizens of the Philippines; (b) a corporation organized under the laws of the Philippines of which at least 60% of the capital stock entitled to vote is owned and held by citizens of the Philippines and at least 60% of the board of directors of such corporation are citizens of the Philippines; and (c) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee qualifies under paragraphs (a) and (b) above and at least 60% of the funds accrue to the benefit of citizens of the Philippines, or Qualified Owners. The holders of Voting Preferred Stock will have voting rights at any meeting of the stockholders of PLDT for the election of directors and for all other purposes, with one vote in respect of each share of Voting Preferred Stock.
The Special Meeting of Stockholders scheduled on September 20, 2011 for purposes of presenting and obtaining stockholders approval of the Amendments was cancelled by the Board of Directors due to an anticipated lack of quorum. Based on the validated and tabulated proxies reported by PLDTs Transfer Agents, the corporate secretary of PLDT determined that: (1) holders of shares equivalent to 73.27% of the total outstanding common stock had given valid proxies to be represented and vote their shares in the Special Meeting; and (2) the number of shares of preferred stock necessary to bring the total shares represented in person or by proxy and to vote at the Special Meeting to two-thirds of total outstanding capital stock, being the quorum required for the Special Meeting, would most likely not be secured. Under the Corporation Code, holders of preferred shares are also entitled to vote on significant corporate actions, such as the amendment of the Articles of Incorporation, which is the principal item in the agenda for the Special Meeting.
On March 22, 2012, PLDTs stockholders approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized Preferred Capital Stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendment. Thereafter, the Amended Articles of Incorporation were submitted to the Philippine SEC for approval which the latter approved on June 5, 2012.
Upon the approval of the Amendments by the Philippine SEC, the Board of Directors, pursuant to the authority granted to it in the Seventh Article of PLDTs Articles of Incorporation, may determine the specific terms, features and limitations of the Voting Preferred Stock and, as it deems necessary to protect the interest of PLDT and its stakeholders, authorize the issuance of shares of Voting Preferred Stock to Qualified Owners. It is contemplated that the shares of Voting Preferred Stock will have the following other features: (a) entitled to dividends at such rate to be determined by the Board of Directors, payable before any dividends are paid to the holders of Common Stock; (b) not convertible to Common Stock or to any shares of stock of PLDT of any class; (c) redeemable at the option of PLDT; (d) holders will have no pre-emptive right to subscribe or purchase any shares of stock of any class, or convertible debt, securities or warrants issued, sold or disposed by PLDT; and (e) in the event of dissolution or liquidation or winding up of PLDT, holders will be entitled to be paid in full, or pro-rata insofar as the assets of PLDT will permit, the par value of such shares of Voting Preferred Stock and any accrued or unpaid dividends thereon before any distribution shall be made to holders of shares of Common Stock.
As at the date of issuance of this report, none of the Voting Preferred Stock has been issued.
All preferred stocks limit the ability of PLDT to pay cash dividends unless all dividends on such preferred stock for all past dividend payment periods have been paid and or declared and set apart and provision has been made for the currently payable dividends.
On September 23, 2011, the Board of Directors approved the redemption, or the Redemption, of all outstanding shares of PLDTs 10% Cumulative Convertible Preferred Stock Series A to FF, or the SIP Preferred Shares, and all such shares were redeemed and retired effective on January 19, 2012, or the Redemption Date.
The record date for the determination of the holders of outstanding SIP Preferred Shares subject to Redemption, or Holders of SIP Preferred Shares, was fixed on October 10, 2011, or the Record Date. In accordance with the terms and conditions of the SIP Preferred Shares, the Holders of SIP Preferred Shares as of the Record Date are entitled to payment of the redemption price in an amount equal to the par value of such shares, plus accrued and unpaid dividends thereon up to the Redemption Date, or the Redemption Price.
PLDT has set aside Php5.9 billion (the amount required to fund the redemption price for the SIP Preferred Shares in a trust account) in addition to the Php2.3 billion funds from unclaimed dividends on SIP Preferred Shares, or the total amount of Php8.2 billion, to fund the redemption price for the SIP Preferred Shares, or the Redemption Trust Fund, in a trust account, or the Trust Account, in the name of RCBC, as Trustee. Pursuant to the terms of the Trust Account, the Trustee will continue to hold in trust, for the benefit of those Holders of SIP Preferred Shares who failed to claim their Redemption Price for a period of ten years from the Redemption Date, or until January 19, 2022. After the said date, any and all remaining balance in the Trust Account shall be returned to PLDT and revert to its general funds. Any interests on the Redemption Trust Fund shall accrue for the benefit of, and be paid from time to time, to PLDT.
As at January 19, 2012, notwithstanding that any stock certificate representing the SIP Preferred Shares was not surrendered for cancellation, the SIP Preferred Shares were no longer deemed outstanding and the right of the holders of such shares to receive dividends thereon ceased to accrue and all rights with respect to such SIP Preferred Shares ceased and terminated, except only the right to receive the Redemption Price of such SIP Preferred Shares, but without interest thereon.
All SIP Preferred Shares of PLDTs Series A to FF 10% Cumulative Convertible Preferred Stock were redeemed and retired effective January 19, 2012. A total amount of Php192 million was withdrawn from the Trust Account, representing total payments on redemption as at June 30, 2012. The balance of the Trust Account of Php7,970 million was presented as part of the current portion of advances and other noncurrent assets and the related redemption liability of the same amount was presented as part of accrued expenses and other current liabilities in our statement of financial position as at June 30, 2012.
Common Stock
The Board of Directors approved a share buyback program of up to five million shares of PLDTs common stock, representing approximately 3% of PLDTs then total outstanding shares of common stock in 2008. The share buyback program reflects PLDTs commitment to capital management as an important element in enhancing shareholders value. This also reinforces initiatives that PLDT has already undertaken, such as the declaration of special dividends on common stock in addition to the regular dividend payout equivalent to 70% of our core earnings per share, after having determined that PLDT has the capacity to pay additional returns to shareholders. Under the share buyback program, PLDT reacquired shares on an opportunistic basis, directly from the open market through the trading facilities of the PSE and NYSE.
We had acquired a total of approximately 2.72 million shares of PLDTs common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million in accordance with the share buyback program as at June 30, 2012 and December 31, 2011. See Note 8 Earnings Per Common Share and Note 27 Financial Assets and Liabilities.
On November 9, 2011, the PSE approved the listing of the additional 27.7 million common shares of PLDT, which were issued on October 26, 2011 at the issue price of Php2,500 per share, as consideration for the acquisition by PLDT of the Enterprise Assets of Digitel. See Note 13 Business Combinations and Acquisition of Noncontrolling Interests PLDTs Acquisition of Digitel.
On January 27, 2012, a total of 1.61 million PLDT common shares were issued for settlement of the purchase price of 2,518 million common shares of Digitel tendered by the noncontrolling Digitel stockholders under the mandatory tender offer conducted by PLDT, and which opted to receive payment of the purchase price in the form of PLDT common shares.
Dividends Declared
Our dividends declared for the six months ended June 30, 2012 and 2011 are detailed as follows:
June 30, 2012 (Unaudited)
Date | Amount | |||||||||||||||||||
Class | Approved | Record | Payable | Per Share | Total | |||||||||||||||
(in million pesos, except per share amounts) | ||||||||||||||||||||
10% Cumulative Convertible Preferred Stock |
||||||||||||||||||||
Series GG |
January 31, 2012 | February 29, 2012 | March 30, 2012 | 1.00 | | |||||||||||||||
Series HH |
March 22, 2012 | April 20, 2012 | May 31, 2012 | 1.00 | | |||||||||||||||
Series II |
March 22, 2012 | April 20, 2012 | May 31, 2012 | 1.00 | | |||||||||||||||
| ||||||||||||||||||||
Cumulative Non-convertible
Redeemable Preferred Stock |
||||||||||||||||||||
Series IV* |
January 31, 2012 | February 20, 2012 | March 15, 2012 | | 12 | |||||||||||||||
May 8, 2012 | May 28, 2012 | June 15, 2012 | | 13 | ||||||||||||||||
25 | ||||||||||||||||||||
Common Stock |
||||||||||||||||||||
Regular Dividend |
March 6, 2012 | March 20, 2012 | April 20, 2012 | 63.00 | 13,611 | |||||||||||||||
Special Dividend |
March 6, 2012 | March 20, 2012 | April 20, 2012 | 48.00 | 10,371 | |||||||||||||||
23,982 | ||||||||||||||||||||
Charged to retained earnings |
24,007 | |||||||||||||||||||
* | Dividends were declared based on total amount paid up. |
June 30, 2011 (Unaudited)
Date | Amount | |||||||||||||||||||
Class | Approved | Record | Payable | Per Share | Total | |||||||||||||||
(in million pesos, except per share amounts) | ||||||||||||||||||||
10% Cumulative Convertible Preferred Stock |
||||||||||||||||||||
Series CC |
January 25, 2011 | February 24, 2011 | March 31, 2011 | 1.00 | 17 | |||||||||||||||
Series DD |
January 25, 2011 | February 10, 2011 | February 28, 2011 | 1.00 | 3 | |||||||||||||||
Series FF |
January 25, 2011 | February 10, 2011 | February 28, 2011 | 1.00 | | |||||||||||||||
Series GG |
January 25, 2011 | February 24, 2011 | March 31, 2011 | 1.00 | | |||||||||||||||
Series EE |
March 29, 2011 | April 28, 2011 | May 31, 2011 | 1.00 | | |||||||||||||||
Series HH |
March 29, 2011 | April 28, 2011 | May 31, 2011 | 1.00 | | |||||||||||||||
20 | ||||||||||||||||||||
Cumulative Non-convertible
Redeemable Preferred Stock |
||||||||||||||||||||
Series IV* |
January 25, 2011 | February 18, 2011 | March 15, 2011 | | 12 | |||||||||||||||
May 10, 2011 | May 27, 2011 | June 15, 2011 | | 12 | ||||||||||||||||
24 | ||||||||||||||||||||
Common Stock |
||||||||||||||||||||
Regular Dividend |
March 1, 2011 | March 16, 2011 | April 19, 2011 | 78.00 | 14,567 | |||||||||||||||
Special Dividend |
March 1, 2011 | March 16, 2011 | April 19, 2011 | 66.00 | 12,326 | |||||||||||||||
26,893 | ||||||||||||||||||||
Charged to retained earnings |
26,937 | |||||||||||||||||||
* | Dividends were declared based on total amount paid up. |
Our dividends declared after June 30, 2012 are detailed as follows:
Date | Amount | |||||||||||||||||||
Class | Approved | Record | Payable | Per Share | Total | |||||||||||||||
(in million pesos, except | ||||||||||||||||||||
per share amounts) | ||||||||||||||||||||
Cumulative Non-convertible
Redeemable Preferred Stock |
||||||||||||||||||||
Series IV* |
August 7, 2012 | August 22, 2012 | September 15, 2012 | | 12 | |||||||||||||||
10% Cumulative Convertible Preferred Stock |
||||||||||||||||||||
Series GG Final Dividends |
July 3, 2012 | May 22, 2012 | August 30, 2012 | Php0.0027/day | | |||||||||||||||
Common Stock |
||||||||||||||||||||
Regular Dividend |
August 7, 2012 | August 31, 2012 | September 28, 2012 | Php60.00 | 12,963 | |||||||||||||||
Charged to retained earnings |
12,975 | |||||||||||||||||||
* | Dividends were declared based on total amount paid up. |
20. | Interest-bearing Financial Liabilities |
As at June 30, 2012 and December 31, 2011, this account consists of the following:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Long-term portion of interest-bearing financial liabilities:
|
||||||||
Long-term debt (Notes 4, 5, 9, 23 and 27)
|
100,294 | 91,273 | ||||||
Obligations under finance leases (Notes 3, 4, 5, 23 and 27)
|
6 | 7 | ||||||
100,300 | 91,280 | |||||||
Current portion of interest-bearing financial liabilities:
|
||||||||
Long-term debt maturing within one year (Notes 4, 5, 9, 23 and 27)
|
12,480 | 22,893 | ||||||
Notes payable (Notes 4, 5, 23 and 27)
|
1,449 | 3,109 | ||||||
Obligations under finance leases maturing within one year (Notes 3, 4, 5, 23 and 27) |
6 |
7 |
||||||
13,935 | 26,009 | |||||||
Unamortized debt discount, representing debt issuance costs and any difference between the fair value of consideration given or received at initial recognition, included in the financial liabilities as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Long-term debt (Note 27) |
1,688 | 2,136 | ||||||
Obligation under finance lease |
1 | 2 | ||||||
Unamortized debt discount at end of the period |
1,689 | 2,138 | ||||||
The following table describes all changes to unamortized debt discount for the six months ended June 30, 2012 and for the year ended December 31, 2011.
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Unamortized debt discount at beginning of the period |
2,138 | 2,945 | ||||||
Additions during the period |
58 | 43 | ||||||
Revaluations during the period |
39 | 187 | ||||||
Accretion during the period included as part of Financing costs net
Accretion on financial liabilities net (Note 5) |
(546 | ) | (1,037 | ) | ||||
Unamortized debt discount at end of the period |
1,689 | 2,138 | ||||||
Long-term Debt
As at June 30, 2012 and December 31, 2011, long-term debt consists of:
2012 | 2011 | |||||||||||||||||
Description | Interest Rates | (Unaudited | (Audited) | |||||||||||||||
(in millions) | ||||||||||||||||||
U.S. Dollar Debts: | ||||||||||||||||||
Export Credit Agencies-Supported Loans: | ||||||||||||||||||
China Export and Credit Insurance Corporation, or Sinosure |
US$ LIBOR + 0.55% to 1.80% in 2012 and 2011 |
US$ |
226 |
Php9,540 |
US$ |
248 |
Php10,879 |
|||||||||||
Exportkreditnamnden, or EKN | 1.99% to 3.79% and US$ LIBOR + 0.30% to 0.35% in 2012 and 3.79% and US$ LIBOR + 0.30% to 0.35% in 2011 |
112 |
4,737 |
102 |
4,483 |
|||||||||||||
EKN and AB Svensk Exportkredit, or SEK |
3.9550% in 2012 and 2011 |
73 |
3,098 |
79 |
3,475 |
|||||||||||||
Finnvera, Plc, or Finnvera | 2.99% and US$ LIBOR + 1.35% in 2012 and 2011 |
54 |
2,270 |
63 |
2,775 |
|||||||||||||
Others | US$ LIBOR + 0.35% to 0.40% in 2012 and 2011 |
4 |
175 |
6 |
256 |
|||||||||||||
469 | 19,820 | 498 | 21,868 | |||||||||||||||
Fixed Rate Notes | 8.35% to 11.375% in 2012 and 2011
|
232 | 9,815 | 377 | 16,567 | |||||||||||||
Term Loans: | ||||||||||||||||||
Debt Exchange Facility | 2.25% in 2012 and 2011
|
246 | 10,415 | 238 | 10,472 | |||||||||||||
GSM Network Expansion Facilities | US$ LIBOR + 0.42% to 1.85% in 2012 and 4.70% and US$ LIBOR + 0.42% to 1.85% in 2011 |
144 |
6,098 |
50 |
2,201 |
|||||||||||||
Others | US$ LIBOR + 0.42% to 2.00% in 2012 and 2.79% + swap rate and US$ LIBOR + 0.42% to 0.50% in 2011 |
175 |
7,386 |
51 |
2,222 |
|||||||||||||
US$ | 1,266 | Php53,534 | US$ | 1,214 | Php53,330 | |||||||||||||
Philippine Peso Debts: | ||||||||||||||||||
Corporate Notes | 5.3300% to 9.1038% in 2012 and 5.4692% to 9.1038% and PDST-F + 1.25% in 2011 |
Php35,262 |
Php38,510 |
|||||||||||||||
Term Loans: | ||||||||||||||||||
Unsecured Term Loans | 5.5808% to 8.6271%, PDST-F + 0.30% and BSP overnight rate + 30 bps to 50 bps in 2012 and 5.8308% to 8.6271%, PDST-F + 0.30% and BSP overnight rate + 30 bps to 50 bps in 2011 |
23,278 |
22,277 |
|||||||||||||||
Secured Term Loans | 5.659%, PDST-F + 1.375% in 2012 and PDST-F + 1.375% and AUBs prime rate in 2011 |
700 |
49 |
|||||||||||||||
59,240 | 60,836 | |||||||||||||||||
Total long-term debt | 112,774 | 114,166 | ||||||||||||||||
Less portion maturing within one year (Note 27) |
12,480 |
22,893 |
||||||||||||||||
Noncurrent portion of long-term (Note 27) | Php100,294 | Php91,273 | ||||||||||||||||
Note: Amounts presented are net of unamortized debt discount and debt issuance costs. |
The scheduled maturities of our consolidated outstanding long-term debt at nominal values as at June 30, 2012 are as follows:
U.S. Dollar Debt | Php Debt | Total | ||||||||||||||
Year | In U.S. Dollar | In Php | In Php | In Php | ||||||||||||
(in millions) | ||||||||||||||||
2012(1)
|
96 | 4,041 | 1,951 | 5,992 | ||||||||||||
2013
|
200 | 8,454 | 3,909 | 12,363 | ||||||||||||
2014
|
439 | 18,561 | 6,307 | 24,868 | ||||||||||||
2015
|
129 | 5,472 | 9,799 | 15,271 | ||||||||||||
2016 and onwards
|
441 | 18,643 | 37,325 | 55,968 | ||||||||||||
1,305 | 55,171 | 59,291 | 114,462 | |||||||||||||
(1) | July 1, 2012 through December 31, 2012 |
U.S. Dollar Debts:
Export Credit Agencies-Supported Loans
In order to acquire imported components for our network infrastructure in connection with our expansion and service improvement programs, we obtained loans extended and/or guaranteed by various export credit agencies.
Sinosure
On December 1, 2005, DMPI signed a US$23.6 million seven-year Export Credit Agreement to finance the supply of the equipment, software, and offshore services for the GSM 1800 in the National Capital Region, or NCR, with Societe Generale and Credit Agricole Corporate and Investment Bank (formerly Calyon) as the lenders. The facility is covered by a guarantee from China Export and Credit Insurance Corporation, or Sinosure, the export-credit agency of China. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on December 1, 2013. The agreement was drawn on various dates in 2005, 2006 and 2007 in the total amount of US$23.6 million. The amounts of US$5 million, or Php213 million, and US$7 million, or Php296 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On May 4, 2006, DMPI signed a US$12.7 million seven-year Export Credit Agreement to finance the supply of the equipment and software for the expansion of its GSM services in the NCR with the Societe Generale and Calyon as the lenders. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on October 6, 2014. The agreement was drawn on various dates in 2007 and 2008 in the total amount of US$12.2 million. The undrawn amount of US$0.5 million was cancelled. The amounts of US$4 million or Php184 million, and US$5 million, or Php229 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On June 1, 2006, DMPI signed a US$12 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the upgrading of GSM Phase 5 Core Intelligent Network Project with ING Bank N.V., or ING Bank, as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on June 1, 2014. The agreement was drawn on November 24, 2006 and October 31, 2007 in the amounts of US$8 million and US$2 million, respectively. The undrawn amount of US$2 million was cancelled. The amounts of US$3 million, or Php118 million, and US$4 million, or Php153 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On May 24, 2007, DMPI signed a US$21 million seven-year Buyers Credit Agreement to finance the equipment for the Phase 6 South Luzon Change Out and Expansion Project with ING Bank as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on May 24, 2015. The agreement was drawn on various dates in 2008 in the total amount of US$20.8 million. The undrawn amount of US$0.2 million was cancelled. The amounts of US$9 million, or Php377 million, and US$10 million, or Php457 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On May 24, 2007, DMPI signed a US$12.1 million seven-year Buyers Credit Agreement to finance the equipment for the Phase 6 NCR Expansion Project with ING Bank as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on May 24, 2015. The agreement was drawn on various dates in 2008 in the total amount of US$12.1 million. The amounts of US$5 million, or Php219 million, and US$6 million, or Php266 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On November 10, 2008, DMPI signed a US$5.5 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the supply of 3G network in the NCR with ING Bank as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on September 1, 2016. The agreement was drawn on December 19, 2008, December 24, 2008 and November 9, 2009 in the amounts of US$2.6 million, US$2.1 million and US$0.8 million, respectively. The amounts of US$4 million, or Php150 million, and US$4 million, or Php172 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On November 10, 2008, DMPI signed a US$4.9 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the Phase 7 Intelligent Network Expansion Project with ING Bank as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on September 1, 2016. The agreement was drawn on various dates in 2008 and 2009 in the total amount of US$4.9 million. The amounts of US$3 million, or Php134 million, and US$4 million, or Php155 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On November 10, 2008, DMPI signed a US$23.8 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the Phase 7 Core Expansion Project with ING Bank as the lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on September 1, 2016. The agreement was drawn on various dates in 2008 and 2009 in the total amount of US$23.8 million. The amounts of US$15 million, or Php646 million, and US$17 million, or Php746 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On August 14, 2009, DMPI signed a US$15.9 million seven-year facility agreement to finance the supply of telephone equipment for the Phase 7 South Luzon Base Station Expansion with The Hong Kong and Shanghai Banking Corporation Limited, or HSBC, as the lender. The facility is covered by a guarantee from Sinosure. The facility is payable over seven years in 14 equal semi-annual installments with final installment on August 14, 2017. The loan was drawn in 2009 and 2010 in the amounts of US$14.1 million and US$1.4 million, respectively. The undrawn amount of US$0.4 million was cancelled. The amounts of US$12 million, or Php513 million, and US$13 million, or Php581 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On August 14, 2009, DMPI signed a US$24.7 million seven-year facility agreement to finance the supply of telephone equipment for the Phase 5 NCR Base Station Expansion with Credit Suisse as the lead arranger. The facility is covered by a guarantee from Sinosure. The facility is payable over seven years in 14 equal semi-annual installments with final installment on August 14, 2017. The loan was drawn on various dates in 2009 and 2010 in the total amount of US$24.7 million. The amounts of US$20 million, or Php821 million, and US$21 million, or Php930 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On December 16, 2009, DMPI signed a US$50 million seven-year Buyers Credit Agreement to finance the equipment and related materials for the Phase 2 3G Expansion and Phase 8A NCR and South Luzon BSS Expansion Projects with China Citic Bank Corporation Ltd., or China CITIC Bank, as the original lender. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on December 17, 2017. The agreement was drawn on June 25, 2010 and December 14, 2010 in the amounts of US$37 million and US$11 million, respectively. The undrawn amount of US$2 million was cancelled. On December 9, 2011, China CITIC Bank and ING Bank signed a Transfer Certificate and Assignment of Guarantee whereby ING Bank took over the debt under the Buyers Credit Agreement. The assignment of debt was completed on December 16, 2011. The amounts of US$37 million, or Php1,576 million, and US$41 million, or Php1,786 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On September 15, 2010, DMPI signed a US$117.3 million seven-year Term Loan Facility Agreement to finance the purchase of equipment and related materials for the expansion of: (1) Phase 8A and 8B Core and IN; (2) Phase 3 3G; and (3) Phase 8B NCR and SLZ BSS with China Development Bank and HSBC as the lenders. The facility is covered by a guarantee from Sinosure. The agreement is payable over seven and half years in 15 equal semi-annual installments with final installment on April 10, 2019. The agreement was drawn on various dates in 2011 in the total amount of US$116.3 million. The undrawn amount of US$1 million was cancelled. The amounts of US$109 million, or Php4,589 million, and US$116 million, or Php5,108 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
EKN
On April 4, 2006, DMPI signed a US$18.7 million nine-year loan agreement to finance the supply of GSM mobile telephone equipment and related services with Nordea Bank AB (publ), or Nordea Bank, as the lender. The facility is covered by a guarantee from EKN, the export-credit agency of Sweden. The loan is payable over nine years in 18 equal semi-annual installments with final installment on April 30, 2015. The loan was fully drawn on various dates in 2006 and 2007. The amounts of US$6 million, or Php272 million, and US$7 million, or Php329 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On December 20, 2006, DMPI signed a US$43.2 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the GSM Expansion in Visayas and Mindanao with ING Bank as the lender. The facility is covered by a guarantee from EKN. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on May 30, 2014. The agreement was drawn on various dates in 2007 and 2008 in the total amount of US$42.9 million. The undrawn amount of US$0.3 million was cancelled. The amounts of US$13 million, or Php539 million, and US$16 million, or Php700 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On December 17, 2007, DMPI signed a US$51.2 million nine-year Buyers Credit Agreement to finance the equipment and service contracts for the Phase 7 Expansion Project in Visayas and Mindanao with ING Bank, Societe Generale and Calyon as the lenders. The facility is covered by a guarantee from EKN. The agreement is payable over nine years in 18 equal semi-annual installments with final installment on June 30, 2017. The agreement was drawn on various dates in 2008 and 2009 in the total amount of US$51.11 million. The undrawn amount of US$0.1 million was cancelled. The amounts of US$29 million, or Php1,239 million, and US$32 million, or Php1,416 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On December 17, 2007, DMPI signed a US$59.2 million nine-year Buyers Credit Agreement to finance the equipment and service contracts for the Phase 7 North Luzon Expansion and Change-out Project with ING Bank, Societe Generale and Calyon as the lenders. The facility is covered by a guarantee from EKN. The agreement is payable over nine years in 18 equal semi-annual installments with final installment on March 30, 2017. The agreement was drawn on various dates in 2008 and 2009 in the total amount of US$59 million. The undrawn amount of US$0.1 million was cancelled. The amounts of US$34 million, or Php1,427 million, and US$38 million, or Php1,631 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On November 25, 2008, Smart signed a US$22 million five-year term loan facility to finance the supply, installation, commissioning and testing of Wireless-Code Division Multiple Access, or W-CDMA/High Speed Packet Access project with Nordea Bank as the original lender, arranger and facility agent and subsequently assigned its rights and obligations to the AB Svensk Exportkredit (Swedish Export Credit Corporation), or SEK, supported by EKN on December 10, 2008. The amounts of US$8 million, US$13 million and US$1 million were drawn on December 15, 2008, August 5, 2009 and September 1, 2009, respectively. This facility is payable semi-annually in ten equal installments commencing six months from December 10, 2008. The outstanding balance under the facility amounted to US$7 million, or Php300 million, and US$9 million, or Php414 million, both net of unamortized debt discount, as at June 30, 2012 and December 31, 2011, respectively.
On June 10, 2011, Smart signed a US$49 million five-year term loan facility to finance the supply and services contracts for the modernization and expansion project with Nordea Bank as the original lender, arranger and facility agent. On July 5, 2011, Nordea Bank assigned its rights and obligations to the SEK guaranteed by EKN. This facility is payable semi-annually in ten equal installments commencing six months after the applicable mean commissioning date. The facility was partially drawn on March 13, 2012, May 2, 2012 and June 21, 2012 in the amounts of US$4.5 million, US$15.7 million and US$5.2 million, respectively. The amount of US$23 million, or Php960 million, net of unamortized debt discount, remained outstanding as at June 30, 2012.
EKN and SEK
On April 28, 2009, DMPI signed a US$96.6 million eight and a half-year loan agreement to finance the supply of GSM mobile telephone equipment and related services with Nordea Bank and ING Bank as the lenders. The facility is covered by a guarantee from EKN and SEK, the export-credit agency of Sweden. The agreement is comprised of Tranche 1 and Tranche 2 in the total amounts of US$43 million and US$53.6 million, respectively. Both tranches are payable over eight and a half years in 17 equal semi-annual installments with final installment on February 28, 2018 for Tranche 1 and November 30, 2018 for Tranche 2. Tranches 1 and 2 were fully drawn on various dates in 2009, 2010 and 2011. The aggregate amounts of US$73 million, or Php3,098 million, and US$79 million, or Php3,475 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Finnvera, Plc, or Finnvera
On May 14, 2009, Smart signed a US$50 million five-year term loan facility to finance the Phase 10 (Extension) GSM equipment and services contract with Finnish Export Credit, Plc, or FEC, guaranteed by Finnvera, the Finnish Export Credit Agency, and awarded to Calyon as the arranger. The facility was drawn on July 15, 2009. The loan is payable over five years in ten equal semi-annual payments. The amounts of US$25 million, or Php1,039 million, and US$29 million, or Php1,290 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On October 9, 2009, Smart signed a US$50 million five-year term loan facility to finance GSM equipment and services contracts with FEC guaranteed by Finnvera for 100% political and commercial risk cover. The facility was awarded to Citicorp as the arranger and was drawn on April 7, 2010 and was subsequently transferred to ANZ on January 4, 2011. The loan is payable over five years in ten equal semi-annual payments. The amounts of US$29 million, or Php1,231 million, and US$34 million, or Php1,485 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Others Export Credit Agencies
Compagnie Francaise d Assurance pour le Commerce Exterieur, or COFACE
On August 18, 2005, DMPI signed a US$19 million seven-year Export Credit Agreement to finance the supply of telecommunications materials, software, and services for the GSM Cellular Mobile Short Term Core Expansion Project with ING Bank, Societe Generale and Calyon as the lenders. The facility is covered by a guarantee from COFACE, the export-credit agency of France. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on February 8, 2013. The agreement was drawn on various dates in 2005 and 2006 in the total amount of US$18.2 million. The undrawn amount of US$0.8 million was cancelled. The amounts of US$3 million, or Php110 million, and US$4 million, or Php171 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Atradius N.V., or Atradius
On July 3, 2006, DMPI signed a US$6 million seven-year Buyers Credit Agreement to finance the equipment and service contracts for the Phase 5 Mobile Messaging Core Network with ING Bank as the lender. The facility is covered by a guarantee from Atradius, the export-credit agency of Amsterdam, the Netherlands. The agreement is payable over seven years in 14 equal semi-annual installments with final installment on June 27, 2014. The agreement was drawn on September 29, 2006 and August 28, 2007 in the amounts of US$3.5 million and US$1.9 million, respectively. The undrawn amount of US$0.6 million was cancelled. The amounts of US$1 million, or Php65 million, and US$2 million, or Php85 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Fixed Rate Notes
PLDT has the following non-amortizing fixed rate notes outstanding as at June 30, 2012 and December 31, 2011:
2012 | 2011 | |||||||||||||||||
Principal Amount | Interest Rate | Maturity Date | (Unaudited) | (Audited) | ||||||||||||||
(in millions) | ||||||||||||||||||
US$234,259,000
|
8.350 | % | March 6, 2017 | US$232 | Php9,815 | US$ | 232 | Php10,189 | ||||||||||
US$145,789,000
|
11.375 | % | May 15, 2012 | | | 145 | 6,378 | |||||||||||
US$232 | Php9,815 | US$ | 377 | Php16,567 | ||||||||||||||
Term Loans
US$283 Million Term Loan Facility, or Debt Exchange Facility
On July 2, 2004, Smart acquired from PCEVs creditors approximately US$289 million, or 69.4%, of
the aggregate of PCEVs outstanding restructured debt at that time, in exchange for Smart debt
and a cash payment by Smart. In particular, Smart paid a cash amount of US$1.5 million, or
Php84 million and issued new debt of
US$283.2 million, or Php15,854 million, at fair value of Php8,390 million, net of unamortized
debt discount amounting to Php7,464 million.
The outstanding balance of the Facility amounted to US$246 million, or Php10,415 million, and US$238 million, or Php10,472 million, both net of unamortized debt discount, as at June 30, 2012 and December 31, 2011, respectively. The Facility will be payable in full on June 30, 2014.
GSM Network Expansion Facilities
On October 16, 2006, Smart signed a U.S. Dollar term loan facility with Metropolitan Bank and Trust Company, or Metrobank, to finance the related Phase 9 GSM facility for an amount of US$50 million. The facility is a five-year loan payable in 18 equal quarterly installments commencing on the third quarter from initial drawdown date with final repayment on October 10, 2012. The facility was drawn on October 10, 2007 for the full amount of US$50 million. The amounts of US$5 million, or Php235 million, and US$11 million, or Php488 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On October 10, 2007, Smart signed a US$50 million five-year term loan facility to finance the
related Phase 10 GSM equipment and service contracts. The facility was awarded to Norddeutsche
Landesbank Girozentrale Singapore Branch, or Nord LB, as the lender with Standard Chartered Bank
(Hong Kong) Ltd. as the facility agent. The full amount of the facility was drawn on March 10,
2008. The loan is payable over five years in ten equal semi-annual payments with final
repayment on March 11, 2013. The amounts of US$10 million, or
Php422 million, and US$15 million, or Php657 million, both net of unamortized debt discount,
remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On November 27, 2008, Smart signed a US$50 million five-year term loan facility to finance the
Phase 10 GSM equipment and service contracts with FEC. The facility was awarded to ABN AMRO
Bank N.V., Australia and New Zealand Banking Group Limited, Standard Chartered Bank (Hong Kong)
Ltd., Mizuho Corporate Bank Ltd. as the lead arrangers. The loan is payable over five years in
ten equal semi-annual installments with final repayment on January 23, 2014. The facility was
drawn on January 23, 2009 and May 5, 2009 in the amounts of US$5 million and US$45 million,
respectively. The amounts of US$20 million, or Php841 million, and
US$25 million, or Php1,090 million, both net of unamortized debt discount, remained outstanding
as at
June 30, 2012 and December 31, 2011, respectively.
On June 6, 2011, Smart signed a US$60 million five-year term loan facility to finance the equipment and service contracts for the modernization and expansion project with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the lender. The loan is payable over five years in eight equal semi-annual installments with the first installment due on the 18th month from signing date. The facility was drawn on March 5, 2012, May 14, 2012 and June 18, 2012 in the amounts of US$41 million, US$15 million and US$4 million, respectively. The amount of US$60 million, or Php2,536 million, net of debt discount, remained outstanding as at June 30, 2012.
On August 19, 2011, Smart signed a US$50 million five-year term loan facility to finance the supply contracts for the modernization and expansion project with FEC as the lender. The facility was arranged by The Bank of Tokyo-Mitsubishi UFJ, Ltd., HSBC and Mizuho Corporate Bank, Ltd. This facility is payable semi-annually in ten equal installments commencing six months after August 19, 2012. The facility was partially drawn on March 14, 2012 in the amount of US$46 million and the remaining US$4 million was fully drawn on May 14, 2012. The amount of US$50 million, or Php2,096 million, net of debt discount, remained outstanding as at June 30, 2012.
On May 29, 2012, Smart signed a US$50 million five-year term loan facility to finance the equipment and service contracts for the modernization and expansion project with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the lender. The loan is payable over five years in nine equal semi-annual installments with the first installment due on the 12th month from signing date. No availment has been made on this facility as at June 30, 2012.
Other Term Loans
On January 15, 2008, PLDT signed a US$100 million term loan facility agreement with Nord LB to be used for the capital expenditure requirements of PLDT. Two separate drawings of US$50 million each was drawn from the facility on March 27, 2008 and April 10, 2008 and is payable over five years in ten equal semi-annual installments with final repayment on March 27, 2013. The amounts of US$20 million, or Php845 million, and US$30 million, or Php1,318 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On July 15, 2008, PLDT signed a loan agreement amounting to US$50 million with the Bank of the Philippine Islands, or BPI, to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on July 21, 2008 in the amount of US$15 million and the balance of US$35 million was drawn on September 30, 2008. This loan is payable in 17 equal quarterly installments commencing on the fourth quarter from initial drawdown date with final repayment on July 22, 2013. The amounts of US$15 million, or Php622 million, and US$21 million, or Php904 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
On March 7, 2012, PLDT signed a US$150 million term loan facility agreement with a syndicate of banks with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the facility agent. Proceeds from the facility will be used to finance capital expenditures and/or to refinance PLDTs existing obligations which were also used to finance capital expenditures for network expansion and improvement programs. The facility is payable over five years in nine equal semi-annual installments commencing on the date which falls 12 months after the date of the facility agreement with final repayment on March 7, 2017. The initial drawdown of US$100 million, or Php4,228 million, was made on May 10, 2012 and remained outstanding as at June 30, 2012.
On March 16, 2012, PLDT signed a US$25 million term loan facility agreement with Citibank, N.A. Manila to refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. This loan is payable over five years in 17 equal quarterly installments commencing 12 months from initial drawdown date with final repayment on May 30, 2017. The amount of US$25 million, or Php1,057 million, was fully drawn on May 29, 2012 and remained outstanding as at June 30, 2012.
On March 26, 2012, SPi signed a loan agreement amounting to US$15 million with Security Banking Corporation, or Security Bank. Proceeds of the loan were used for working capital requirements. The loan will mature on March 27, 2017 and is payable in 19 quarterly installments commencing on September 24, 2012. The amount of US$15 million, or Php634 million, remained outstanding as at June 30, 2012.
Philippine Peso Debts:
Corporate Notes
Php5,000 Million Fixed Rate Corporate Notes
On February 15, 2007, Smart issued Php5,000 million fixed rate corporate notes, comprised of Series A five-year notes amounting to Php3,800 million and Series B ten-year notes amounting to Php1,200 million. Proceeds from the issuance of these notes have been used primarily for Smarts capital expenditures for network improvement and expansion program. The Series A note of Php3,800 million was paid in full on February 16, 2012. The amounts of Php1,152 million and Php4,963 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php5,000 Million Fixed Rate Corporate Notes
On December 12, 2008, Smart issued a five-year term unsecured fixed rate corporate notes
amounting to
Php5,000 million. The facility has annual amortizations equivalent to 1% of the principal
amount with the balance of 96% payable on December 13, 2013. Funds raised from the issuance of
these notes were used primarily to finance Smarts capital expenditures for network upgrade and
expansion program. The amount of Php4,827 million, net of unamortized debt discount, remained
outstanding as at December 31, 2011 and was paid in full on March 12, 2012.
Php5,000 Million Fixed Rate Corporate Notes
On February 20, 2009, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated February 18, 2009, comprised of Series A five-year notes amounting to Php2,390 million, Series B seven-year notes amounting to Php100 million, and Series C ten-year notes amounting to Php2,510 million. Proceeds from the facility were used to finance capital expenditures of PLDT. The aggregate amounts of Php4,928 million and Php4,952 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php7,000 Million Fixed Rate Corporate Notes
On December 10, 2009, PLDT issued Php7,000 million fixed rate corporate notes under a Notes Facility Agreement dated December 8, 2009, comprised of Series A 5.25-year notes amounting to Php5,050 million, Series B seven-year notes amounting to Php850 million, and Series C ten-year notes amounting to Php1,100 million. Proceeds from the facility were used to finance capital expenditures and/or to refinance its loan obligations which were also used to finance capital expenditures for network expansion and improvement. The aggregate amount of Php6,781 million remained outstanding as at June 30, 2012 and December 31, 2011.
Php2,500 Million Fixed Rate Corporate Notes
On July 13, 2010, PLDT issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. The notes are non-amortizing and will mature on July 13, 2015. Proceeds from the facility were used to finance capital expenditures and/or to refinance PLDTs loan obligations which were also used to finance capital expenditures for network expansion and improvement. The amount of Php2,500 million remained outstanding as at June 30, 2012 and December 31, 2011.
Php2,500 Million Fixed Rate Corporate Notes
On July 13, 2010, Smart issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. The notes are non-amortizing and will mature on July 13, 2015. Proceeds from the facility were used primarily to finance Smarts capital expenditures for network improvement and expansion program. The amounts of Php2,489 million and Php2,487 million, net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php2,000 Million Fixed Rate Corporate Notes
On March 9, 2011, Smart signed a Notes Facility Agreement with BDO Private Bank, Inc. amounting to Php2,000 million to finance capital expenditures for network improvement and expansion program. Tranche A amounting to Php1,000 million was issued on March 16, 2011. Tranche B amounting to Php1,000 million was issued in multiple drawdowns of Php250 million each, the first of which was on March 24, 2011. On various dates in April 2011, the remaining Php750 million of Tranche B was fully drawn. The aggregate amount of Php2,000 million remained outstanding as at June 30, 2012 and December 31, 2011. The facility is payable in full, five years from the respective issue dates.
Php5,000 Million Fixed Rate Corporate Notes
On March 24, 2011, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated March 22, 2011, comprised of Series A 5-year notes amounting to Php3,435 million, Series B 7-year notes amounting to Php700 million and Series C ten-year notes amounting to Php865 million. Proceeds from the facilities were used to finance capital expenditures for network expansion and improvement and/or to refinance existing debt obligations which were also used to finance service improvements and expansion programs. The amounts of Php4,950 million and Php5,000 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php5,000 Million Fixed Rate Corporate Notes
On November 8, 2011, PLDT issued Php5,000 million fixed rate notes under a Notes Facility Agreement dated November 4, 2011, comprised of Series A 5-year notes amounting to Php2,795 million, Series B 7-year notes amounting to Php230 million and Series C 10-year notes amounting to Php1,975 million. Proceeds from the facilities were used to finance capital expenditures for network expansion and improvement and/or to refinance existing debt obligations which were also used to finance service improvements and expansion programs. The amount of Php5,000 million remained outstanding as at June 30, 2012 and December 31, 2011.
Php5,500 Million Fixed Rate Corporate Notes
On March 19, 2012, Smart issued Php5,500 million fixed rate corporate notes under a Notes Facility Agreement dated March 15, 2012, comprised of Series A five-year notes amounting to Php1,910 million and Series B ten-year notes amounting to Php3,590 million. The Series A note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 96% payable on March 20, 2017. The Series B note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 91% payable on March 21, 2022. Proceeds from the issuance of these notes have been used primarily for Smarts debt refinancing and capital expenditures. The aggregate amount of Php5,462 million, net of debt discount, remained outstanding as at June 30, 2012.
Php1,500 Million Fixed Rate Corporate Notes
On July 27, 2012, PLDT issued Php1,500 million seven-year fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement dated July 25, 2012. Proceeds from the facility were used to finance capital expenditures for network expansion and improvement.
Term Loans
Unsecured Term Loans
Php2,500 Million Term Loan Facility
On October 21, 2008, Smart signed a Philippine Peso term loan facility with Metrobank to finance capital expenditures for network improvement and expansion program for an amount of Php2,500 million, which was drawn in full on November 13, 2008. The facility is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown with final repayment on November 13, 2013. The amounts of Php936 million and Php1,248 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php2,400 Million Term Loan Facility
On November 21, 2008, PLDT signed a loan agreement with Land Bank of the Philippines, or LBP,
amounting to
Php2,400 million to finance capital expenditures and/or to refinance its loan obligations which
were utilized for service improvements and expansion programs. The initial drawdown under this
loan was made on
December 12, 2008 in the amount of Php500 million and the balance of Php1,900 million was
subsequently drawn on May 20, 2009 and July 31, 2009 in two equal Php500 million tranches and on
September 15, 2009 in the amount of Php900 million. The loan is payable over five years in ten
equal semi-annual installments with final repayment on December 12, 2013. The amounts of Php767
million and Php1,022 million remained outstanding as at June 30, 2012 and December 31, 2011,
respectively.
Php3,000 Million Term Loan Facility
On November 26, 2008, PLDT signed a loan agreement with Union Bank of the Philippines amounting
to
Php3,000 million to finance capital expenditures and/or to refinance its loan obligations which
were utilized for service improvements and expansion programs. The initial drawdown under this
loan was made on
December 22, 2008 in the amount of Php500 million and the balance of Php2,500 million was
subsequently drawn on April 14, 2009. The loan is payable over five years in nine equal
semi-annual installments commencing on the second semester from initial drawdown date with final
repayment on December 23, 2013. The amounts of Php1,000 million and Php1,333 million remained
outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php2,000 Million Term Loan Facility
On November 28, 2008, PLDT signed a loan agreement with Philippine National Bank, or PNB,
amounting to
Php2,000 million to be used for its capital expenditure requirements in connection with PLDTs
service improvement and expansion programs. The initial drawdown under this loan was made on
December 19, 2008 in the amount of Php500 million and the balance of Php1,500 million was
subsequently drawn on January 30, 2009, February 27, 2009 and March 13, 2009 in three equal
Php500 million tranches. The loan is payable over five years in 17 equal quarterly installments
commencing on the fourth quarter from initial drawdown date with final repayment on December 19,
2013. The amounts of Php706 million and Php941 million remained outstanding as at June 30, 2012
and December 31, 2011, respectively.
Php2,500 Million Term Loan Facility
On March 6, 2009, PLDT signed a loan agreement with Banco de Oro Unibank, Inc., or BDO,
amounting to
Php2,500 million to finance capital expenditures and/or refinance its loan obligations which
were utilized for service improvements and expansion programs. The loan is payable in full upon
maturity on April 17, 2014. The amount of Php2,500 million remained outstanding as at June 30,
2012 and December 31, 2011.
Php1,500 Million Term Loan Facility
On May 12, 2009, Smart signed a Philippine Peso term loan facility with BDO amounting to Php1,500 million to finance capital expenditures for network improvement and expansion program, which was fully drawn on May 20, 2009. The facility is a three-year loan, payable in full upon maturity on May 20, 2012. The amount of Php1,498 million, net of unamortized debt discount, remained outstanding as at December 31, 2011 and was paid in full on May 20, 2012.
Php2,500 Million Term Loan Facility
On June 8, 2009, PLDT signed a loan agreement with RCBC amounting to Php2,500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over seven years with an annual amortization of 1% on the fifth and sixth year from initial drawdown date and the balance payable upon maturity on September 28, 2016. The amount of Php2,500 million remained outstanding as at June 30, 2012 and December 31, 2011.
Php1,500 Million Term Loan Facility
On June 16, 2009, PLDT signed a loan agreement with Allied Banking Corporation amounting to Php1,500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments commencing on September 15, 2010 with final repayment on September 15, 2014. The amount of Php1,500 million was fully drawn on September 15, 2009. The amounts of Php794 million and Php971 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php500 Million Term Loan Facility
On June 29, 2009, PLDT signed a loan agreement with Insular Life Assurance Company, Ltd. amounting to Php500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on July 1, 2016. The amount of Php500 million remained outstanding as at June 30, 2012 and December 31, 2011.
Php1,000 Million Term Loan Facility
On July 16, 2009, Smart signed a Philippine Peso term loan facility with Metrobank to finance capital expenditures for network improvement and expansion program for an amount of Php1,000 million, which was drawn in full on August 3, 2009. The facility is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown with final repayment on August 1, 2014. The amounts of Php563 million and Php688 million, both net of unamortized debt discount, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php2,000 Million Term Loan Facility
On September 18, 2009, PLDT signed a loan agreement with BPI amounting to Php2,000 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments with final repayment on October 27, 2014. The initial drawdown under this loan was made on October 26, 2009 in the amount of Php1,000 million and the balance of Php1,000 million was subsequently drawn on December 4, 2009. The amounts of Php1,176 million and Php1,412 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php1,000 Million Term Loan Facility
On November 23, 2009, PLDT signed a loan agreement with BPI amounting to Php1,000 million to finance capital expenditures and/or refinance its obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments with final repayment on December 18, 2014. The amount of Php1,000 million was fully drawn on December 18, 2009. The amounts of Php588 million and Php706 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php1,500 Million Term Loan Facility
On March 15, 2011, Smart signed a Philippine Peso term loan facility with Metrobank to finance capital expenditures for network improvement and expansion program for an amount of Php1,500 million, which was drawn in full on March 22, 2011 and remained outstanding as at June 30, 2012 and December 31, 2011. The facility is a five-year loan, payable in full upon maturity on March 22, 2016.
Php2,000 Million Term Loan Facility
On March 24, 2011, Smart signed a Philippine Peso term loan facility with PNB to finance capital expenditures for network improvement and expansion program for an amount of Php2,000 million, which was drawn in full on March 29, 2011 and remained outstanding as at June 30, 2012 and December 31, 2011. The facility is a five-year loan, payable in full upon maturity on March 29, 2016.
Php300 Million Term Loan Facility
On April 4, 2011, PLDT signed a loan agreement with the Manufacturers Life Insurance Co. (Phils.), Inc., or Manulife, amounting to Php300 million to finance capital expenditures and/or refinance its existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on April 29, 2016. The amount of Php300 million was fully drawn on April 28, 2011 and remained outstanding as at June 30, 2012 and December 31, 2011.
Php500 Million Term Loan Facility
On April 4, 2011, PLDT signed a loan agreement with Manulife amounting to Php500 million to finance capital expenditures and/or refinance its existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on June 17, 2016. The amount of Php500 million was fully drawn on June 16, 2011 and remained outstanding as at June 30, 2012 and December 31, 2011.
Php1,000 Million Term Loan Facility
On April 12, 2011, Digitel signed a Php1,000 million five-year term loan facility agreement to finance additional capital expenditure requirements with Metrobank as the lender. The principal is payable upon maturity or on June 23, 2016. The partial drawdowns were made on various dates in June 2011 in the aggregate amount of Php710 million and the balance of Php290 million was subsequently drawn on various dates in June 2012. The amounts of Php1,000 million and Php710 million remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Php2,000 Million Term Loan Facility
On April 14, 2011, Digitel signed a Php2,000 million five-year term loan facility agreement to finance the capital expenditures and/or refinance existing loan obligations with BDO as the lender. The principal is payable upon maturity or on May 26, 2016. The agreement was drawn on various dates in 2011 in the total amount of Php1,948 million and remained outstanding as at June 30, 2012 and December 31, 2011. The undrawn amount of Php52 million was cancelled.
Php2,000 Million Term Loan Facility
On March 20, 2012, PLDT signed a Php2,000 million term loan facility agreement with RCBC to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over ten years with an annual amortization rate of 1% on the fifth year up to the ninth year from initial drawdown date and the balance payable upon maturity on April 12, 2022. The amount of Php2,000 million was fully drawn on April 12, 2012 and remained outstanding as at June 30, 2012.
Php3,000 Million Term Loan Facility
On April 27, 2012, PLDT signed a Php3,000 million term loan facility agreement with LBP to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from drawdown date and the balance payable upon maturity. There are no amounts outstanding under this facility as at June 30, 2012. The amount of Php3,000 million was fully drawn on July 18, 2012.
Php2,000 Million Term Loan Facility
On May 29, 2012, PLDT signed a Php2,000 million term loan facility agreement with LBP to finance capital expenditures and/or refinance PLDTs loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from initial drawdown date and the balance payable upon maturity. The amount of Php2,000 million was fully drawn on June 27, 2012 and remained outstanding as at June 30, 2012.
Php1,000 Million Term Loan Facility
On June 7, 2012, Smart signed a Philippine Peso term loan facility with LBP to finance capital expenditures for its network upgrade and expansion program for an amount of Php1,000 million. The facility is a five-year loan with annual amortizations equivalent to 1% of the principal amount commencing on the first anniversary of the initial drawdown with the balance of 96% payable upon maturity. No availment has been made on this facility as at June 30, 2012.
Secured Term Loans
Php150 Million Term Loan Facility
On June 7, 2007, AGS obtained a medium term loan facility with BPI amounting to Php150 million, which was fully availed of in December 2007. Each interest period will cover a 90-day period commencing on the initial drawdown date and the interest rate will be determined at the first day of each interest period and payable at the end of the interest period. The loan facility was obtained to facilitate the purchase of a subsidiary and to support its working capital requirements. The aggregate loan amount is due as follows: (a) 20% within the third year from first drawdown date; (b) 20% within the fourth year from first drawdown date; and (c) 60% within the fifth year from first drawdown date. AGS is given a right to repay the principal and the interest accruing thereon on each interest payment date or interest rate setting date without any prepayment penalty. AGS and the bank has agreed to the following terms: (a) pledge of AGSs shares of stock of the subsidiary purchased at a collateral loan ratio of 2:1; (b) assignment of receivables at a collateral-to-loan of 2:1; and (c) negative pledge on other present and future assets of AGS. The outstanding principal balance of the loan amounting to Php49 million as at December 31, 2011 was paid in full on June 30, 2012.
Php1,500 Million Term Loan Facility
On June 27, 2012, DMPI signed a Philippine Peso seven-year fixed rate term loan facility with BPI Asset Management and Trust Group and ALFM Peso Bond Fund, Inc., in the total amount of Php1,500 million to finance capital expenditures for network expansion and improvements. The facility has annual amortization payments equivalent to 1% of the outstanding principal amount with the balance payable on June 2019. First availment was made on June 29, 2012 amounting to Php700 million and remained outstanding as at June 30, 2012.
Notes Payable
Vendor Financing
On January 5, 2006, a Promissory Note in the amount of US$1.3 million was issued by DMPI in relation to the Purchase Agreement between DMPI and Ceragon Networks Ltd., dated December 1, 2005, as payment for the financeable portion of the Contract Price. The Promissory Note is payable in ten consecutive semi-annual installments with final installment on February 22, 2012. The outstanding balance amounting to US$0.1 million, or Php5 million, as at December 31, 2011 was paid in full on February 22, 2012.
On January 5, 2006, a Promissory Note in the amount of US$1.2 million was issued by DMPI in relation to the Purchase Agreement between DMPI and Ceragon Networks Ltd. dated December 1, 2005 as payment for the financeable portion of the Contract Price. The Promissory Note is payable in ten consecutive semi-annual installments with final installment on June 28, 2012. The outstanding balance amounting to US$0.1 million, or Php5 million, as at December 31, 2011 was paid in full on June 28, 2012.
DMPI and DTPI had an outstanding balance of trust receipts of Php963 million and Php1,562 million as at June 30, 2012 and December 31, 2011, respectively, which will mature on various dates from January 4, 2012 to February 16, 2013.
On April 1, 2011, SPi availed of short-term loans from BPI and Security Bank amounting to US$9 million and US$16 million, respectively. Additional loan was availed last October 28, 2011 from Security Bank amounting to US$10 million. Proceeds of the loans were used for working capital requirements. Interest rate on each loan is repriced every month. The aggregate amounts of US$12 million, or Php486 million, and US$25 million, or Php1,537 million, remained outstanding as at June 30, 2012 and December 31, 2011, respectively.
Debt Covenants
Our debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments.
The principal factors that can negatively affect our ability to comply with these financial ratios and other financial tests are depreciation of the Philippine peso relative to the U.S. dollar, poor operating performance of PLDT and its consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries, and increases in our interest expense. Interest expense may increase as a result of various factors including issuance of new debt, the refinancing of lower cost indebtedness by higher cost indebtedness, depreciation of the Philippine peso, the lowering of PLDTs credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions. Since approximately 47% of PLDTs total consolidated debts each as at June 30, 2012 and December 31, 2011 were denominated in foreign currencies, principally in U.S. dollars, many of these financial ratios and other tests are negatively affected by any weakening of the Philippine peso.
PLDTs debt instruments contain a number of other negative covenants that, subject to certain exceptions and qualifications, restrict PLDTs ability to take certain actions without lenders approval, including: (a) incurring additional indebtedness; (b) disposing of all or substantially all of its assets or of assets in excess of specified thresholds of its tangible net worth; (c) creating any lien or security interest; (d) permitting set-off against amounts owed to PLDT; (e) merging or consolidating with any other company; (f) entering into transactions with stockholders and affiliates; and (g) entering into sale and leaseback transactions.
Furthermore, certain of DMPIs debt instruments contain provisions wherein DMPI may be declared in default in case of a change in control in DMPI.
PLDTs debt instruments and guarantees for DMPI loans, as discussed in Note 10 Investments in Associates and Joint Ventures, also contain customary and other default provisions that permit the lender to accelerate amounts due or terminate their commitments to extend additional funds under the debt instruments. These default provisions include: (a) cross-defaults that will be triggered only if the principal amount of the defaulted indebtedness exceeds a threshold amount specified in these debt instruments; (b) failure by PLDT to meet certain financial ratio covenants referred to above; (c) the occurrence of any material adverse change in circumstances that a lender reasonably believes materially impairs PLDTs ability to perform its obligations under its debt instrument with the lender; (d) the revocation, termination or amendment of any of the permits or franchises of PLDT in any manner unacceptable to the lender; (e) the nationalization or sustained discontinuance of all or a substantial portion of PLDTs business; and (f) other typical events of default, including the commencement of bankruptcy, insolvency, liquidation or winding up proceedings by PLDT.
Smarts debt instruments contain certain restrictive covenants that require Smart to comply with specified financial ratios and other financial tests at semi-annual measurement dates. Smarts loan agreements include compliance with financial tests such as consolidated debt to consolidated equity, consolidated debt to consolidated EBITDA and debt service coverage ratios. The agreements also contain customary and other default provisions that permit the lender to accelerate amounts due under the loans or terminate their commitments to extend additional funds under the loans. These default provisions include: (a) cross-defaults and cross-accelerations that permit a lender to declare a default if Smart is in default under another loan agreement. These cross-default provisions are triggered upon a payment or other default permitting the acceleration of Smart debt, whether or not the defaulted debt is accelerated; (b) failure by Smart to comply with certain financial ratio covenants; and (c) the occurrence of any material adverse change in circumstances that the lender reasonably believes materially impairs Smarts ability to perform its obligations or impair guarantors ability to perform their obligations under its loan agreements.
DMPIs debt instruments contain customary and other default provisions that permit the lender to accelerate amounts due under the loans, including: (a) cross-defaults and cross-accelerations that permit a lender to declare a default if DMPI or PLDT, as guarantor, is in default under another loan agreement; (b) failure by PLDT to comply with certain financial ratio covenants; (c) occurrence of any material adverse change in circumstances that the lender reasonably believes materially impairs DMPIs and PLDTs ability to perform its obligations under its loan agreements; (d) change of control; and (e) other typical events of default including the commencement of bankruptcy, insolvency, liquidation, or winding up proceedings by DMPI.
As at June 30, 2012, we were in compliance with all of our debt covenants.
Obligations Under Finance Leases
The consolidated future minimum payments for finance leases as at June 30, 2012 are as follows:
Year | (in million pesos) | |||
2012 |
4 | |||
2013 |
5 | |||
2014 |
2 | |||
2015 |
1 | |||
2016 and onwards |
1 | |||
Total minimum finance lease payments (Note 27) |
13 | |||
Less amount representing unamortized interest |
1 | |||
Present value of net minimum finance lease payments (Notes 3 and 27) |
12 | |||
Less obligations under finance leases maturing within one year (Notes 9 and 27) |
6 | |||
Long-term portion of obligations under finance leases (Notes 9 and 27) |
6 | |||
Long-term Finance Lease Obligations
The PLDT Group has various long-term lease contracts for a period of three years covering various office equipment. In particular, PLDT, Smart and SPi Group have finance lease obligations in the aggregate amounts of Php13 million and Php16 million as at June 30, 2012 and December 31, 2011, respectively. See Note 9 Property, Plant and Equipment.
Under the terms of certain loan agreements and other debt instruments, PLDT may not create, incur, assume, permit or suffer to exist any mortgage, pledge, lien or other encumbrance or security interest over the whole or any part of its assets or revenues or suffer to exist any obligation as lessee for the rental or hire of real or personal property in connection with any sale and leaseback transaction.
21. | Deferred Credits and Other Noncurrent Liabilities |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Accrual of capital expenditures under long-term financing |
17,359 | 20,128 | ||||||
Provision for asset retirement obligations (Notes 3 and 9) |
2,204 | 2,107 | ||||||
Unearned revenues (Note 23) |
178 | 172 | ||||||
Others |
8 | 235 | ||||||
19,749 | 22,642 | |||||||
Accrual of capital expenditures under long-term financing represent expenditures related to the expansion and upgrade of our network facilities which are not due to be settled within one year. Such accruals are settled through refinancing from long-term loans obtained from the banks.
The following table summarizes all changes to asset retirement obligations for the six months ended June 30, 2012 and for the year ended December 31, 2011:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Provision for asset retirement obligations at beginning of the period |
2,107 | 1,344 | ||||||
Accretion expenses (Note 5) |
70 | 122 | ||||||
Additional liability recognized during the period (Note 28) |
27 | 29 | ||||||
Business combinations (Note 13) |
| 614 | ||||||
Settlement of obligations and others |
| (2 | ) | |||||
Provision for asset retirement obligations at end of the period (Note 3) |
2,204 | 2,107 | ||||||
22. | Accounts Payable |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Suppliers and contractors (Note 27) |
20,807 | 25,476 | ||||||
Carriers (Note 27) |
1,901 | 1,642 | ||||||
Taxes (Notes 26 and 27) |
1,441 | 1,555 | ||||||
Related parties (Notes 24 and 27) |
703 | 626 | ||||||
Others |
236 | 255 | ||||||
25,088 | 29,554 | |||||||
23. | Accrued Expenses and Other Current Liabilities |
As at June 30, 2012 and December 31, 2011, this account consists of:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Accrued utilities and related expenses (Notes 24 and 27) |
30,459 | 28,429 | ||||||
Accrued taxes and related expenses (Notes 26 and 27) |
11,926 | 11,817 | ||||||
Liability from redemption of preferred shares (Notes 19 and 28) |
7,970 | | ||||||
Accrued employee benefits (Notes 3, 25 and 27) |
6,309 | 4,463 | ||||||
Unearned revenues (Note 21) |
5,918 | 5,664 | ||||||
Accrued interests and other related costs (Notes 20 and 27) |
1,023 | 1,122 | ||||||
Mandatory tender offer option liability (Note 28) |
| 4,940 | ||||||
Others |
1,854 | 1,836 | ||||||
65,459 | 58,271 | |||||||
Accrued utilities and related expenses pertain to cost incurred for repairs and maintenance (mostly pertaining to electricity and water consumption), selling and promotions, professional and other contracted services, rent, insurance and security services, and other operational-related expenses pending receipt of billings and statement of accounts from suppliers.
Accrued taxes and related expenses pertain to licenses, permits and other related business taxes.
Unearned revenues represent advance payments for leased lines, installation fees, monthly service fees and unused and/or unexpired portion of prepaid loads.
24. | Related Party Transactions |
a. | Air Time Purchase Agreement between PLDT and AIL and Related Agreements |
Under the Founder NSP Air Time Purchase Agreement, or ATPA, entered into with AIL in March 1997, which was amended in December 1998, or Original ATPA, PLDT was granted the exclusive right to sell AIL services, through ACeS Philippines, as national service provider, or NSP, in the Philippines. In exchange, the Original ATPA required PLDT to purchase from AIL a minimum of US$5 million worth of air time, or Minimum Air Time Purchase Obligation, annually over ten years commencing on January 1, 2002, or Minimum Purchase Period, the expected date of commercial operations of the Garuda I Satellite. In the event that AILs aggregate billed revenue was less than US$45 million in any given year, the Original ATPA also required PLDT to make supplemental air time purchase payments not to exceed US$15 million per year during the Minimum Purchase Period, or Supplemental Air Time Purchase Obligation.
On February 1, 2007, the parties to the Original ATPA entered into an amendment to the
Original ATPA on substantially the terms attached to the term sheet negotiated with the
relevant banks, or Amended ATPA. Under the Amended ATPA, the Minimum Air Time Purchase
Obligation was amended and replaced in its entirety with an obligation of PLDT to purchase
from AIL a minimum of US$500 thousand worth of air time annually over a period ending upon
the earlier of: (i) the expiration of the Minimum Purchase Period; and
(ii) the date on which all indebtedness incurred by AIL to finance the AIL System is repaid.
Furthermore, the Amended ATPA unconditionally released PLDT from any obligations arising
out of or in connection with the Original ATPA prior to the date of the Amended ATPA, except
for obligations to pay for billable units used prior to such date.
Total fees under the Amended ATPA, which was presented as part of cost of sales in our consolidated income statements, amounted to Php44 million and Php59 million for the six months ended June 30, 2012 and 2011, respectively. Under the Amended ATPA, the outstanding obligations of PLDT, which was presented as part of accounts payable in our consolidated statements of financial position, amounted to Php123 million and Php147 million as at June 30, 2012 and December 31, 2011, respectively. See Note 5 Income and Expenses.
b. | Agreements between PLDT and certain subsidiaries with Meralco |
In the ordinary course of business, Meralco provides electricity to PLDT and certain subsidiaries offices within its franchise area. The rates charged by Meralco are the same as those with unrelated parties. Total electricity costs, which was presented as part of repairs and maintenance in our consolidated income statements, amounted to Php1,605 million and Php1,248 million for the six months ended June 30, 2012 and 2011, respectively. Under these agreements, the outstanding utilities payable, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php383 million and Php271 million as at June 30, 2012 and December 31, 2011, respectively.
In 2009, PLDT and Smart renewed their respective Pole Attachment Contracts with Meralco, wherein Meralco leases its pole spaces to accommodate PLDTs and Smarts cable network facilities. Total fees under these contracts, which was presented as part of rent in our consolidated income statements, amounted to Php140 million and Php104 million for the six months ended June 30, 2012 and 2011, respectively. Under these agreements, the outstanding obligations, which was presented as part of accrued expenses and other current liabilities in our consolidated statement of financial position, amounted to Php7 million and Php6 million as at as at June 30, 2012 and December 31, 2011, respectively.
See also Note 10 Investments in Associates and Joint Ventures for additional transactions involving Meralco.
c. | Transactions with Major Stockholders, Directors and Officers |
Material transactions to which PLDT or any of its subsidiaries is a party, in which a director, key officer or owner of more than 10% of the outstanding common stock of PLDT, or any member of the immediate family of a director, key officer or owner of more than 10% of the outstanding common stock of PLDT had a direct or indirect material interest as at June 30, 2012 (unaudited) and December 31, 2011 (audited) and for the six months ended June 30, 2012 and 2011 (unaudited) are as follows:
1. | Cooperation Agreement with First Pacific and certain affiliates, or the FP Parties, NTT Communications and NTT DOCOMO |
In connection with the transfer by NTT Communications of approximately 12.6 million shares of PLDTs common stock to NTT DOCOMO pursuant to a Stock Sale and Purchase Agreement dated January 31, 2006 between NTT Communications and NTT DOCOMO, the FP Parties, NTT Communications and NTT DOCOMO entered into a Cooperation Agreement, dated January 31, 2006. Under the Cooperation Agreement, the relevant parties extended certain rights of NTT Communications under the Stock Purchase and Strategic Investment Agreement dated September 28, 1999, as amended, and the Shareholders Agreement dated March 24, 2000, to NTT DOCOMO, including:
| certain contractual veto rights over a number of major decisions or transactions; and |
| rights relating to the representation on the Board of Directors of PLDT and Smart, respectively, and any committees thereof. |
Moreover, key provisions of the Cooperation Agreement pertain to, among other things:
| Restriction on Ownership of Shares of PLDT by NTT Communications and NTT DOCOMO. Each of NTT Communications and NTT DOCOMO has agreed not to beneficially own, directly or indirectly, in the aggregate with their respective subsidiaries and affiliates, more than 21% of the issued and outstanding shares of PLDTs common stock. If such event does occur, the FP Parties, as long as they own in the aggregate not less than 21% of the issued and outstanding shares of PLDTs common stock, have the right to terminate their respective rights and obligations under the Cooperation Agreement, the Shareholders Agreement and the Stock Purchase and Strategic Investment Agreement. |
| Limitation on Competition. NTT Communications, NTT DOCOMO and their respective subsidiaries are prohibited from investing in excess of certain thresholds in businesses competing with PLDT in respect of customers principally located in the Philippines and from using their assets in the Philippines in such businesses. Moreover, if PLDT, Smart or any of Smarts subsidiaries intend to enter into any contractual arrangement relating to certain competing businesses, PLDT is required to provide, or to use reasonable efforts to procure that Smart or any of Smarts subsidiaries provide, NTT Communications and NTT DOCOMO with the same opportunity to enter into such agreement with PLDT or Smart or any of Smarts subsidiaries, as the case may be. |
| Business Cooperation. PLDT and NTT DOCOMO agreed in principle to collaborate with each other on the business development, roll-out and use of a wireless-code division multiple access mobile communication network. In addition, PLDT agreed, to the extent of the power conferred by its direct or indirect shareholding in Smart, to procure that Smart will: (i) become a member of a strategic alliance group for international roaming and corporate sales and services; and (ii) enter into a business relationship concerning preferred roaming and inter-operator tariff discounts with NTT DOCOMO. |
| Additional Rights of NTT DOCOMO. Pursuant to amendments effected by the Cooperation Agreement to the Stock Purchase and Strategic Investment Agreement and the Shareholders Agreement, upon NTT Communications and NTT DOCOMO and their respective subsidiaries owning in the aggregate 20% or more of PLDTs shares of common stock and for as long as they continue to own in the aggregate at least 17.5% of PLDTs shares of common stock then outstanding, NTT DOCOMO has additional rights under the Stock Purchase and Strategic Investment Agreement and Shareholders Agreement, including that: |
1. | NTT DOCOMO is entitled to nominate one additional NTT DOCOMO nominee to the Board of Directors of each PLDT and Smart; |
2. | PLDT must consult NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees of any proposal of investment in an entity that would primarily engage in a business that would be in direct competition or substantially the same business opportunities, customer base, products or services with business carried on by NTT DOCOMO, or which NTT DOCOMO has announced publicly an intention to carry on; |
3. | PLDT must procure that Smart does not cease to carry on its business, dispose of all of its assets, issue common shares, merge or consolidate, or effect winding up or liquidation without PLDT first consulting with NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or Smart, or certain of its committees; and |
4. | PLDT must first consult with NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees for the approval of any transfer by any member of the PLDT Group of Smart common capital stock to any person who is not a member of the PLDT Group. |
NTT Communications and NTT DOCOMO together beneficially owned approximately 20% of PLDTs outstanding common stock as at June 30, 2012.
| Change in Control. Each of NTT Communications, NTT DOCOMO and the FP Parties agreed that to the extent permissible under applicable laws and regulations of the Philippines and other jurisdictions, subject to certain conditions, to cast its vote as a shareholder in support of any resolution proposed by the Board of Directors of PLDT for the purpose of safeguarding PLDT from any Hostile Transferee. A Hostile Transferee is defined under the Cooperation Agreement to mean any person (other than NTT Communications, NTT DOCOMO, First Pacific or any of their respective affiliates) determined to be so by the PLDT Board of Directors and includes, without limitation, a person who announces an intention to acquire, seeking to acquire or acquires 30% or more of PLDT common shares then issued and outstanding from time to time or having (by itself or together with itself) acquired 30% or more of the PLDT common shares who announces an intention to acquire, seeking to acquire or acquires a further 2% of such PLDT common shares: (a) at a price per share which is less than the fair market value as determined by the Board of Directors of PLDT, as advised by a professional financial advisor; (b) which is subject to conditions which are subjective or which could not be reasonably satisfied; (c) without making an offer for all PLDT common shares not held by it and/or its affiliates and/or persons who, pursuant to an agreement or understanding (whether formal or informal), actively cooperate to obtain or consolidate control over PLDT; (d) whose offer for the PLDT common shares is unlikely to succeed; or (e) whose intention is otherwise not bona fide; provided that, no person will be deemed a Hostile Transferee unless prior to making such determination, the Board of Directors of PLDT has used reasonable efforts to discuss with NTT Communications and NTT DOCOMO in good faith whether such person should be considered a Hostile Transferee. |
| Termination. If NTT Communications, NTT DOCOMO or their respective subsidiaries cease to own, in the aggregate, full legal and beneficial title to at least 10% of the shares of PLDTs common stock then issued and outstanding, their respective rights and obligations under the Cooperation Agreement and the Shareholders Agreement will terminate and the Strategic Arrangements (as defined in the Stock Purchase and Strategic Investment Agreement) will terminate. If the FP Parties and their respective subsidiaries cease to have, directly or indirectly, effective voting power in respect of shares of PLDTs common stock representing at least 18.5% of the shares of PLDTs common stock then issued and outstanding, their respective rights and obligations under the Cooperation Agreement, the Stock Purchase and Strategic Investment Agreement, and the Shareholders Agreement will terminate. |
2. | Advisory Service Agreement between NTT DOCOMO and PLDT |
An Advisory Services Agreement was entered into by NTT DOCOMO and PLDT on June 5, 2006, in accordance with the Cooperation Agreement dated January 31, 2006. Pursuant to the Advisory Services Agreement, NTT DOCOMO will provide the services of certain key personnel in connection with certain aspects of the business of PLDT and Smart. Also, this agreement governs the terms and conditions of the appointments of such key personnel and the corresponding fees related thereto. Total fees under this agreement, which was presented as part of professional and other contracted services in our consolidated income statements, amounted to Php26 million and Php37 million for the six months ended June 30, 2012 and 2011, respectively. Under this agreement, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php13 million and Php8 million as at June 30, 2012 and December 31, 2011, respectively.
3. | Other Agreements with NTT Communications and/or its Affiliates |
PLDT is a party to the following agreements with NTT Communications and/or its affiliates:
| Advisory Services Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Communications, as amended on March 31, 2003, March 31, 2005 and June 16, 2006, under which NTT Communications provides PLDT with technical, marketing and other consulting services for various business areas of PLDT starting April 1, 2000; |
| Arcstar Licensing Agreement and Arcstar Service Provider Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Worldwide Telecommunications Corporation under which PLDT markets, and manages data and other services under NTT Communications Arcstar brand to its corporate customers in the Philippines. PLDT also entered into a Trade Name and Trademark Agreement with NTT Communications under which PLDT has been given the right to use the trade name Arcstar and its related trademark, logo and symbols, solely for the purpose of PLDTs marketing, promotional and sales activities for the Arcstar services within the Philippines; |
| Conventional International Telecommunications Services Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Communications under which PLDT and NTT Communications agreed to cooperative arrangements for conventional international telecommunications services to enhance their respective international businesses; and |
| Service Agreement. On February 1, 2008, PLDT entered into an agreement with NTT World Engineering Marine Corporation wherein the latter provides offshore submarine cable repair and other allied services for the maintenance of PLDTs domestic fiber optic network submerged plant. |
Total fees under these agreements, which was presented as part of professional and other contracted services, selling and promotions, rent, and repairs and maintenance in our consolidated income statements, amounted to Php56 million and Php57 million for the six months ended June 30, 2012 and 2011, respectively. Under these agreements, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php53 million and Php41 million as at June 30, 2012 and December 31, 2011, respectively.
4. | Agreement between Smart and Asia Link B.V., or ALBV |
Smart has an existing Technical Assistance Agreement with ALBV, a subsidiary of the First Pacific Group and its Philippine affiliates. ALBV provides technical support services and assistance in the operations and maintenance of Smarts cellular business. The agreement, which upon its expiration on February 23, 2012 was renewed until February 23, 2016 and is subject to further renewal upon mutual agreement of the parties, provides for payment of technical service fees equivalent to a rate of 0.5% of the consolidated net revenues of Smart. Total service fees under this agreement, which was presented as part of professional and other contracted services in our consolidated income statements, amounted to Php188 million and Php297 million for the six months ended June 30, 2012 and 2011, respectively. Under this agreement, the outstanding obligations, which was presented as part of accounts payable in our consolidated statement of financial position, amounted to Php1 million and Php234 million as at June 30, 2012 and December 31, 2011, respectively.
5. | Agreements Relating to Insurance Companies |
PLDT has insurance policies with Malayan Insurance Co., Inc., or Malayan, wherein premiums are directly paid to Malayan. Total insurance expenses under these agreements, which was presented as part of insurance and security services in our consolidated income statements, amounted to Php120 million and Php108 million for the six months ended June 30, 2012 and 2011, respectively. One director of PLDT has direct/indirect interests in or serves as a director/officer of Malayan as at June 30, 2012 and December 31, 2011.
d. Others
See Note 18 Prepayments for other related party transactions.
Compensation of Key Officers of the PLDT Group
The compensation of key officers of the PLDT Group by benefit type for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Short-term employee benefits |
390 | 272 | ||||||
Post-employment benefits (Note 25) |
23 | 18 | ||||||
Other long-term employee benefits (Note 25) |
172 | 132 | ||||||
Total compensation paid to key officers of the PLDT Group |
585 | 422 | ||||||
Each of the directors, including the members of the advisory board of PLDT, is entitled to a directors fee in the amount of Php200 thousand for each board meeting attended. Each of the members or advisors of the audit, executive compensation, governance and nomination and technology strategy committees is entitled to a fee in the amount of Php75 thousand for each committee meeting attended.
There are no agreements between PLDT Group and any of its key management personnel providing for benefits upon termination of employment, except for such benefits to which they may be entitled under PLDT Groups retirement and incentive plans.
The amounts disclosed in the table are the amounts recognized as an expenses during the reporting period related to key management personnel.
25. | Employee Benefits |
Pension
Defined Benefit Pension Plans
We have defined benefit pension plans, covering substantially all of our permanent and regular employees, excluding those employees of Smart and certain of its subsidiaries, which require contributions to be made to a separate administrative fund.
Our actuarial valuation is performed every year-end. Based on the latest actuarial valuation, the actual present value of accrued (prepaid) benefit costs, net periodic benefit costs and average assumptions used in developing the valuation as at June 30, 2012 and December 31, 2011 are as follows:
(in million pesos) | ||||
Present value of defined benefit obligations as at December 31, 2011 (Audited) |
15,662 | |||
Fair value of plan assets as at December 31, 2011 (Audited) |
23,706 | |||
Surplus status net |
(8,044 | ) | ||
Unrecognized net actuarial gains (Note 3) |
2,886 | |||
(5,158 | ) | |||
Translation adjustments |
(158 | ) | ||
Contributions |
(7 | ) | ||
Net actuarial pension benefit costs during the period (Note 3) |
2 | |||
(5,321 | ) | |||
Accrued benefit costs as at June 30, 2012 (Unaudited) (Note 3) |
534 | |||
Prepaid benefit costs as at June 30, 2012 (Unaudited) (Notes 3 and 18) |
(5,855 | ) | ||
Net pension benefit costs (income) for the six months ended June 30, 2012 and 2011 were computed as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Components of net pension benefit costs (income): |
||||||||
Interest costs |
501 | 582 | ||||||
Current service costs |
460 | 409 | ||||||
Amortizations of unrecognized net actuarial losses (gains) |
3 | (5 | ) | |||||
Recognition of net gains |
(12 | ) | | |||||
Expected return on plan assets |
(950 | ) | (1,096 | ) | ||||
Net periodic benefit costs (income) (Notes 3 and 5) |
2 | (110 | ) | |||||
Consolidated pension benefit income |
115 | 160 | ||||||
Consolidated pension benefit costs |
117 | 50 | ||||||
Actual gain on plan assets amounted to Php3,882 million for the year ended December 31, 2011.
The weighted average assumptions used to determine pension benefits as at June 30, 2012 (unaudited) are as follows:
Average remaining working years of covered employee |
19 | |||
Expected rate of return on plan assets |
8 | % | ||
Discount rate |
6 | % | ||
Rate of increase in compensation |
6 | % | ||
We have adopted mortality rates in accordance with the 1994 Group Annuity Mortality Table developed by the U.S. Society of Actuaries, which provides separate rates for males and females.
The assets of the Beneficial Trust Fund established for PLDTs pension plan include investments in shares of stocks of PLDT with fair values amounting to Php430 million and Php427 million as at June 30, 2012 and December 31, 2011, respectively, which represent about 2% and 4%, respectively, of such beneficial trust funds net assets available for plan benefits.
The Board of Trustees of the beneficial trust fund uses an investment approach with the objective of maximizing the long-term expected return of plan assets. The majority of investment portfolio consists of listed and unlisted equity securities while the remaining portion consists of passive investments like temporary cash investments and fixed income investments.
The allocation of the fair value of the beneficial trust funds assets for the PLDT pension plan as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
Investments in listed and unlisted equity securities |
96 | % | 96 | % | ||||
Temporary cash investments |
4 | % | 3 | % | ||||
Investments in debt and fixed income securities |
| 1 | % | |||||
100 | % | 100 | % | |||||
Defined Contribution Plan
Smart and certain of its subsidiaries contributions to the plan are made based on the employees years of tenure and range from 5% to 10% of the employees monthly salary. Additionally, an employee has an option to make a personal contribution to the fund, at an amount not exceeding 10% of his monthly salary. The employer then provides an additional contribution to the fund ranging from 10% to 50% of the employees contribution based on the employees years of tenure. Although the plan has a defined contribution format, Smart and certain of its subsidiaries regularly monitor compliance with R.A. 7641, otherwise known as The Retirement Pay Law. As at June 30, 2012 and December 31, 2011, Smart and certain of its subsidiaries were in compliance with the requirements of R.A. 7641.
The plans investment portfolio seeks to achieve regular income and long-term capital growth and consistent performance over its own portfolio benchmark. In order to attain this objective, the trustees mandate is to invest in a diversified portfolio of bonds and equities, both domestic and international. The portfolio mix is kept at 60% to 90% for debt and fixed income securities while 10% to 40% is allotted to equity securities.
The allocation of the fair value of the beneficial trust funds assets for Smart and certain of its subsidiaries pension plan as at June 30, 2012 and December 31, 2011 is as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
Investments in debt and fixed income securities |
52 | % | 57 | % | ||||
Investments in listed and unlisted equity securities |
31 | % | 29 | % | ||||
Others |
17 | % | 14 | % | ||||
100 | % | 100 | % | |||||
Smart and certain of its subsidiaries currently expect to make approximately Php199 million of cash contributions to their pension plans in 2012.
Pension Benefit Costs
Net consolidated pension benefit costs (income) for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Expense recognized for defined benefit plans |
117 | 50 | ||||||
Expense recognized for defined contribution plans |
70 | 80 | ||||||
Total expense recognized for consolidated pension benefit costs (Notes 3 and 5) |
187 | 130 | ||||||
Consolidated pension benefit income |
115 | 160 | ||||||
Net consolidated pension benefit costs (income) (Note 3) |
72 | (30 | ) | |||||
Other Long-term Employee Benefits
The new LTIP, or 2010 to 2012 LTIP, has been presented to and approved by the ECC and the Board of Directors, and is based on profit targets for the covered Performance Cycle. The cost of 2010 to 2012 LTIP is determined using the projected unit credit method based on assumed discount rates and profit targets. LTIP costs recognized for the six months ended June 30, 2011 amounted to Php702 million, while the total outstanding liability and fair value of 2010 to 2012 LTIP cost amounted to Php1,392 million as at December 31, 2010. Based on our latest projection, the profit targets for the covered Performance Cycle is no longer achievable, thus, accrued LTIP cost as at December 31, 2010 was reversed and presented as part of other income in our consolidated income statement for the year ended December 31, 2011. See Note 3 Managements Use of Accounting Judgments, Estimates and Assumptions and Note 5 Income and Expenses.
To ensure the proper execution of our strategic and operational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, our LTIP has been revised and, with the endorsement of the ECC, approved by the Board of Directors on March 22, 2012. The award in the revised LTIP is contingent upon the successful achievement of certain profit targets, aligns the execution of the business strategies of the expanded Group, including Digitel, over the three year period 2012 to 2014. In addition, the revised LTIP allows for the participation of a number of senior executives and important new hires executives, ensures the continuity of management and assists in succession planning of the PLDT Group. LTIP costs and liability recognized as at and for the six months ended June 30, 2012 amounted to Php802 million.
Net periodic benefit costs computed for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Components of net periodic benefit costs: |
||||||||
Current service costs |
793 | 671 | ||||||
Interest costs |
6 | 32 | ||||||
Net actuarial loss |
3 | (1 | ) | |||||
Net periodic benefit costs |
802 | 702 | ||||||
26. | Provisions and Contingencies |
NTC Supervision and Regulation Fees, or SRF
Since 1994, following the rejection of PLDTs formal protest against the assessments by the NTC
of SRF, PLDT and the NTC have been involved in legal proceedings before the Court of Appeals and
the Supreme Court. The principal issue in these proceedings was the basis for the computation
of the SRF. PLDTs opinion, which was upheld by the Court of Appeals, but, as set forth below,
rejected by the Supreme Court, was that the SRF should be computed based only on the par value
of the subscribed or paid up capital of PLDT, excluding stock dividends, premium or capital in
excess of par. The Supreme Court, in its decision dated July 28, 1999, ordered the NTC to make
a recomputation of the SRF based on PLDTs capital stock subscribed and paid. Subsequently, in
February 2000, the NTC issued an assessment letter for the balance of the SRF, but in
calculating said fees, the NTC used as a basis not only capital stock subscribed or paid but
also the stock dividends. PLDT questioned the inclusion of the stock dividends in the
calculation of the SRF and sought to restrain the NTC from enforcing/implementing its assessment
until the resolution of the said issue. Prior to the resolution of the issue mentioned above,
PLDT paid the SRF due in 2000 together with the balance due from the recalculation of the SRF
and had been paying the SRF due in September of each year thereafter, excluding the portion that
was based on stock dividends.
The Supreme Court, in a resolution promulgated on December 4, 2007, held that the computation of
the SRF should be based on the outstanding capital stock of PLDT, including stock dividends. In
a letter to PLDT on February 29, 2008, the NTC assessed PLDT the total amount of Php2,870
million as SRF, which included penalties and interest. On April 3, 2008, PLDT paid NTC the
outstanding principal amount relating to SRF on stock dividends in the amount of Php455 million,
but did not pay the penalties and interest assessed by the NTC. PLDT, through counsel, believes
that it is not liable for penalties and interest, and therefore protested and disputed NTCs
assessments of the same. In letters dated April 14, 2008 and June 18, 2008, the NTC demanded
payment of the balance of its assessment. On July 9, 2008, PLDT filed a Petition for Certiorari
and Prohibition with the Court of Appeals, or the Petition, praying that the NTC be restrained
from enforcing or implementing its assessment letter of
February 29, 2008, and demand letters dated April 14, 2008 and June 18, 2008, all demanding
payment of SRF including penalties and interests. The Petition further prayed that after notice
and hearing, the NTC be ordered to forever cease and desist from implementing and/or enforcing,
and annulling and reversing and setting aside, the said assessment letter and demand letters.
The Court of Appeals, in its Decision dated May 25, 2010, granted PLDTs Petition and set
aside/annulled the NTCs letters-assessments dated February 29, 2008, April 14, 2008 and June
18, 2008. The NTC did not file a Motion for Reconsideration of the decision of the Court of
Appeals. Instead, the NTC, through the Solicitor General, filed a petition for review directly
with the Supreme Court. PLDT received a copy of the petition on July 29, 2010, and after
receiving the order of the Supreme Court to file its comment, filed its Comment on the petition
on December 7, 2010. The NTC filed a Reply dated August 26, 2011, which was received by PLDT on
September 6, 2011. PLDT filed a Rejoinder on October 12, 2011. This case is still pending with
the Supreme Court.
PLDTs Local Business and Franchise Tax Assessments
Pursuant to a decision of the Supreme Court on March 25, 2003 in the case of PLDT vs. City of Davao declaring PLDT not exempt from the local franchise tax, PLDT started paying local franchise tax to various local government units. PLDT has paid a total amount of Php1,067 million as at June 30, 2012 for local franchise tax covering prior periods up to June 30, 2012.
As at June 30, 2012, PLDT has no contested LGU assessments for franchise taxes based on gross receipts received or collected for services within their respective territorial jurisdiction.
However, PLDT contested the imposition of local business taxes in addition to local franchise tax by the City of Tuguegarao in the amount of Php1.9 million for the years 1998 to 2003. The Regional Trial Court, or RTC, rendered a decision stating that the City of Tuguegarao cannot impose local business tax on PLDT, there being no ordinance enacted for that purpose. Its Motion for Reconsideration having been denied by the court in its Order dated March 2, 2009, the City of Tuguegarao has filed a Notice of Appeal before the Court of Appeals. PLDT filed a motion to dismiss the said appeal on the ground of lack of jurisdiction as the appeal should have been filed before the Court of Tax Appeals, or CTA. In a resolution dated February 9, 2012, the Court of Appeals dismissed the case for failure of the City of Tuguegarao and its Treasurer to file their Appellants Brief. PLDT also contested the imposition of local business tax in addition to local franchise tax also by the City of Tuguegarao in the amount of Php2.3 million for the years 2006 to 2011. PLDT filed a Petition with the RTC of the City of Makati on July 8, 2011. The City of Tuguegarao filed its Answer with Motion to Dismiss claiming the RTC of the City of Makati does not have jurisdiction over the case. Both parties have filed their respective Memorandum on the issue of Jurisdiction. A judicial dispute resolution, or JDR, conference was set by court after the parties failed to settle the case in the mediation proceedings. Due failure of the City Tuguegarao to appear on the JDR conference last May 15, 2012, the court transmitted the case to the Office of the Clerk of Court of the City of Makati for re-raffling in accordance with the JDR guidelines.
Moreover, PLDT also contested the imposition of franchise tax by the Province of Cagayan based
on gross receipts derived from outside its territorial jurisdiction specifically that of the
City of Tuguegarao, in the amount of
Php3 million for the years 1999 to 2006. The RTC, in its decision dated February 25, 2009,
ruled in favor of PLDT, stating that the Province of Cagayan can no longer tax PLDT for
transactions taking place in the City of Tuguegarao. The Province of Cagayan filed a Motion for
Reconsideration which was denied by the RTC in its Order dated October 7, 2009. The Province of
Cagayan filed a Petition for Review before the CTA. After filing its Comment and the submission
of the respective memoranda of both parties, PLDT received the Decision of the CTA on September
20, 2010 which affirmed with modifications the Decision of the RTC. Though said Decision
affirmed that the Province of Cagayan cannot impose franchise tax on gross receipts realized in
the City of Tuguegarao, the CTA ruled that PLDT is subject to surcharge and interest for the
years 1999 to 2004 thereby reducing the amount refundable to PLDT from Php2.8 million to Php1
million. Both parties filed a partial motion for reconsideration of the said decision as well
as comment on the other partys motion. In a resolution dated January 27, 2011, the CTA
partially granted the motion for reconsideration of PLDT by modifying its decision stating that
the Province of Cagayans right to assess surcharge and interest for local franchise tax for the
year 1998 has already prescribed thereby increasing the amount refundable to PLDT by Php0.059
million. PLDT has filed a Motion for the Issuance of Writ of Execution before RTC of the City
of Makati. In its order dated May 9, 2012, the Court ruled that the motion will be acted upon
only upon receipt of the complete records of the case from the CTA. PLDT has filed before the
CTA a motion to remand the said records to RTC of the City of Makati, which was favorably acted
upon by the court in an order dated June 20, 2012.
Smarts Local Business and Franchise Tax Assessments
In Smart Communications, Inc. vs. City of Makati (Civil Cases No. 02-249 and 02-725, August 3, 2004), the deficiency local franchise tax assessment issued against Smart by the City of Makati covering the years 1995 and 1998 to 2001 had been ordered cancelled by the RTC of City of Makati. This was upheld by the Court of Appeals in its Resolution dated June 9, 2005 (CA G.R. SP No. 88681, June 9, 2005). The Courts Decision declaring Smart as exempt from paying local franchise tax had become final and executory.
In August 2009, the City of Makati issued a Letter of Authority for the examination of Smarts local tax liabilities covering the years 2006, 2007 and 2008. The City of Makati issued deficiency local tax assessments, which Smart protested. On August 3, 2010, the City of Makati issued a Notice of Distraint and Levy. Smart filed on September 1, 2010 an Appeal before the RTC of the City of Makati. After several hearings, Smart and the City of Makati entered into a compromise agreement which was submitted to the court for judgment. On January 20, 2012, the RTC of the City of Makati issued its Judgment finding the compromise agreement meritorious and ordered both parties to comply with the terms and conditions of the agreement. With the compliance to the terms and conditions, the audit of Smarts local tax liabilities by the City of Makati was terminated.
In the cases of Smart Communications, Inc. vs. City of Davao (July 21, 2009) and City of Iloilo vs. Smart Communications (July 1, 2009), the Supreme Court held that Smart is liable to pay the local franchise tax to the City of Davao and City of Iloilo. Several cities and provinces have began discussions with Smart on the settlement of alleged local franchise tax with their respective jurisdictions. To limit the years covered by Smarts tax liability, Smart is invoking the prospective application of the decisions on the Cities of Iloilo and Davao and the recognition of its local tax exemption by virtue of its BOI registration issued on May 3, 2001.
Meanwhile, the Province of Cagayan also issued tax assessment for alleged local franchise tax. On January 24, 2011, Smart filed a Petition before the RTC of the City of Makati, appealing the assessment on the ground that Smart cannot be held liable for local franchise tax mainly because it has no sales office within the Province of Cagayan pursuant to Section 137 of the Local Government Code (R.A. No. 7160). The RTC of the City of Makati issued a temporary restraining order on October 21, 2011, and the writ of preliminary injunction on November 14, 2011. On April 30, 2012, the RTC rendered a decision giving the petition due course and the assailed tax assessment nullified and set aside. The Province of Cagayan was directed to cease and desist from imposing local franchise taxes on Smarts gross receipts. The Province of Cagayan then filed a Petition for Review before the Court of Tax Appeals in the City of Quezon on June 19, 2012, appealing the RTC Decision dated April 30, 2012.
Smarts Real Property Tax Assessment
In Smart Communications, Inc. vs. Central Board of Assessment Appeals, or CBAA, Local Board of Assessment Appeals of Surigao City, and City Assessor of Surigao City, Smart filed a Petition for Review with the Court of Appeals assailing the prior decision of the CBAA which declared Smart as being liable to pay real property taxes to the City of Surigao. The Court of Appeals on November 26, 2008 decided that Smart is exempt from the payment of real property taxes for its properties which are actually, directly and exclusively used in the operation of its franchise.
On August 16, 2010, the Court of Appeals issued an Entry of Judgment confirming that the November 26, 2008 Resolution had become final and executory on December 22, 2008, and it was recorded in the book of Entries of Judgments.
PCEVs Local Franchise Tax Assessment
In 2004, PCEV secured a favorable decision from a Trial Court involving the local franchise tax in the City of Makati. In the case entitled Pilipino Telephone Corporation vs. City of Makati and Andrea Pacita S. Guinto (PCEV vs. City of Makati) (Civil Case No. 01-1760), the RTC of the City of Makati rendered its Decision dated December 10, 2002 declaring PCEV exempt from the payment of local franchise and business taxes. The Trial Court ruled that the legislative franchise of PCEV, R.A. 7293, granting the corporation exemption from local franchise and business taxes took effect after R.A. 7160 or the local government code which removed all prior tax exemptions granted by law or other special law. The Trial Courts decision was affirmed by the Court of Appeals in its Decision dated July 12, 2004 and then subsequently, the Supreme Court denied the appeal of the City of Makati in its Entry of Judgment dated October 13, 2004. The Supreme Court ruled that the City of Makati, failed to sufficiently show that the Court of Appeals committed any reversible error in the questioned judgment to warrant the exercise of the Supreme Courts discretionary appellate jurisdiction.
On March 9, 2009, PCEV received a letter from the City of Makati on alleged outstanding franchise tax obligations covering the period from 1995 to 2009. In November 2009, PCEV received a Billing Statement from the City of Makati for alleged franchise tax liability covering the period from 1999 to 2003. On December 16, 2009, PCEV filed its reply and refuted the alleged franchise tax liability based on the PCEV vs. City of Makati case.
Digitels Franchise Tax Assessment and Real Property Tax Assessment
In the case of Digitel vs. Province of Pangasinan (G.R. No. 152534, February 23, 2007), the Supreme Court held that Digitel is liable to the Province of Pangasinan for franchise tax from November 13, 1992 and real property tax only on real properties not actually, directly and exclusively used in the franchise operations from February 17, 1994. However, in the case of Digitel vs. City Government of Batangas (G.R. No. 156040, December 11, 2008), the Supreme Court ruled that Digitels real properties used in its telecommunications business are subject to the real property tax. On June 16, 2009, the Supreme Court denied Digitels Motion for Reconsideration.
Digitel and various city governments and provinces are in discussions regarding its real property tax liability within their respective jurisdiction.
Arbitration with Eastern Telecommunications Philippines, Inc., or ETPI
Since 1990 (up to present), PLDT and ETPI have been engaged in legal proceedings involving a
number of issues in connection with their business relationship. While they have entered into
Compromise Agreements in the past (one in February 1990, and another one in March 1999), these
agreements have not put to rest their issues against each other. Accordingly, to avoid further
protracted litigation and improve their business relationship, both PLDT and ETPI have agreed in
April 2008 to submit their differences and issues to voluntary arbitration. For this
arbitration (after collating various claims of one party against the other) ETPI, on one hand,
initially submitted its claims of about Php2.9 billion against PLDT; while PLDT, on the other
hand, submitted its claims of about
Php2.8 billion against ETPI. Currently, PLDT and ETPI have agreed to suspend the arbitration
proceedings between them.
Matters Relating to a Third Party Aggregator
In late 2009, PLDT informally received a communication which provided a complaint, or the Draft, setting forth a securities class action lawsuit in the United States District Court for the Southern District of New York against PLDT and certain PLDT officers and indicated that such Draft may be filed against PLDT. The Draft alleges that some PLDT officers and employees caused PLDTs subsidiary, Smart, to enter into contracts with a third-party entity in order to divert long distance telephone traffic and profits to such third-party entity. The Draft further alleges that these officers and employees personally created and controlled the third-party entity and were personally enriched as a result. The Draft alleges that this alleged scheme was accomplished by causing Smart to offer a lower rate for long distance telephone traffic to that third-party entity so that long distance traffic which otherwise would have been handled by PLDT at a higher rate was redirected to equipment owned by the third-party entity. The Draft alleges that PLDT failed to disclose material facts regarding the alleged scheme and that, as a result, PLDT misstated its true financial condition in its annual reports from 2002 through 2008.
In light of the nature of the allegations and out of an abundance of caution, PLDTs Board of Directors referred the Draft for review by the Audit Committee. The Audit Committee appointed an independent Investigation Committee to oversee an investigation into the allegations contained in the Draft. The Audit Committee retained independent counsel to lead in the investigation. To preserve the confidential nature of the inquiry, the investigation was limited to internal sources at PLDT, including current PLDT and Smart employees, internal records and discrete inquiries and public records searches.
The independent counsel, under the oversight of the Investigation Committee, has concluded on the basis of the evidence within the control of PLDT or otherwise reasonably available, that: (i) while the investigation cannot definitively exclude the possibility, the investigation has found no evidence to establish that PLDTs officers and employees were personally involved in the creation of the third-party entity referred to in the Draft and has found no evidence of any improper personal financial benefit or gain by these officers and employees, directly or indirectly from such third party entity; and (ii) while Smart had substantial business relationships with various third-party aggregators of long-distance telephone traffic during the relevant period, including the third-party entity referred to in the Draft (with which Smart ceased doing business in 2008), there is no evidence that the relationship with such third-party entity in fact resulted in a material adverse impact on PLDTs revenues during the relevant period and may have in fact benefited PLDT overall through an increase in overall call volume.
On May 7, 2010, the Audit Committee of PLDT approved the recommendation and conclusion of the independent counsel, as endorsed by the Investigation Committee.
Matters Relating to Gamboa Case
On June 29, 2011, the Supreme Court of the Philippines promulgated a Decision in the case of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et. Al. (G.R. No. 176579) (the Gamboa Case), where the Court held that the term capital in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors and thus only to voting common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). The Decision of the Supreme Court reversed earlier opinions issued by the Philippine SEC that non-voting preferred shares are included in the computation of the 60% to 40% Filipino-alien equity requirement of certain economic activities, such as telecommunications which is a public utility under Section 11, Article XII of the 1987 Constitution. Several Motions for Reconsideration of the decision were filed by the parties and are pending resolution by the Supreme Court.
While PLDT is not a party to the Gamboa Case, the Supreme Court directed the Philippine SEC in the Gamboa Case to apply this definition of the term capital in determining the extent of allowable foreign ownership in Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
In connection with the Motions for Reconsideration, the Supreme Court has allowed oral arguments by the parties the latest of which was held on June 26, 2012. To the best of PLDTs knowledge, the Philippine SEC has not commenced any proceeding to determine if PLDT is in violation of Section 11, Article XII of the 1987 Constitution. A finding by the Philippine SEC that there is a violation of Section 11, Article XII of the 1987 Constitution by PLDT may subject the latter to sanctions under Philippine law, including possible revocation of its franchise.
Nonetheless, on July 5, 2011, the Board of Directors of PLDT approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized preferred capital into preferred shares with full voting rights, or Voting Preferred Stock, and serial preferred shares without voting rights, and other conforming amendments, or Amendments to the Articles. The Amendments to the Articles will require the approval by the stockholders of PLDT and the approval of the Philippine SEC. Upon approval of the Amendments to the Articles by the Philippine SEC, up to 150,000,000 Voting Preferred Stock could be initially issued by the Board to, among others, Philippine citizens and Philippine corporations at least 60% of the capital stock entitled to vote is owned and held by such citizens, as and when the Board determines such issuance to be necessary to avoid any disruptions in PLDTs operations and transactions and to protect the interests of PLDT and its stakeholders. Upon issuance of such Voting Preferred Stock to Filipinos and Filipino-owned entities, the total foreign equity in the total resulting voting shares of PLDT will be reduced from the current 58% to about 35%. A Special Meeting of Stockholders of PLDT was scheduled on September 20, 2011, at which meeting the Amendments to the Articles were supposed to be submitted to PLDTs stockholders for approval. However, the Special Meeting was cancelled due to an anticipated lack of quorum. On March 22, 2012, PLDTs stockholders approved the amendments to the Seventh Article of PLDTs Articles of Incorporation consisting of the sub-classification of its authorized Preferred Capital Stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendment. Thereafter, the Amended Articles of Incorporation were submitted to the Philippine SEC for approval which the latter approved on June 5, 2012.
Other disclosures required by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, were not provided as it may prejudice our position in on-going claims, litigations and assessments.
27. | Financial Assets and Liabilities |
We have various financial assets such as trade and non-trade receivables and cash and short-term deposits, which arise directly from our operations. Our principal financial liabilities, other than derivatives, comprise of bank loans and overdrafts, finance leases, trade and non-trade payables. The main purpose of these financial liabilities is to finance our operations. We also enter into derivative transactions, primarily principal only-currency swap agreements, currency options, interest rate swaps and forward foreign exchange contracts to manage the currency and interest rate risks arising from our operations and sources of financing. Our accounting policies in relation to derivatives are set out in Note 2 Summary of Significant Accounting Policies.
The following table sets forth our financial assets and financial liabilities as at June 30, 2012 and December 31, 2011:
Financial | Total financial | Non-financial | ||||||||||||||||||||||||||||||||||
Loans | Financial | Derivatives used | Available-for-sale | liabilities carried | assets and | assets and | ||||||||||||||||||||||||||||||
and receivables | HTM investments | instruments at FVPL | for hedging | financial assets | at amortized cost | liabilities | liabilities | Total | ||||||||||||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||||||||||||||
Assets as at June 30, 2012 (Unaudited) | ||||||||||||||||||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment | | | | | | | | 191,790 | 191,790 | |||||||||||||||||||||||||||
Investments in associates and joint ventures | | | | | | | | 24,793 | 24,793 | |||||||||||||||||||||||||||
Available-for-sale financial assets | | | | | 5,631 | | 5,631 | | 5,631 | |||||||||||||||||||||||||||
Investment in debt securities | | 150 | | | | | 150 | | 150 | |||||||||||||||||||||||||||
Investment properties | | | | | | | | 1,115 | 1,115 | |||||||||||||||||||||||||||
Goodwill and intangible assets | | | | | | | | 78,560 | 78,560 | |||||||||||||||||||||||||||
Deferred income tax assets net | | | | | | | | 5,116 | 5,116 | |||||||||||||||||||||||||||
Prepayments net of current portion | | | | | | | | 8,947 | 8,947 | |||||||||||||||||||||||||||
Noncurrent asset held-for-sale | | | | | | | | 1,128 | 1,128 | |||||||||||||||||||||||||||
Advances and other noncurrent assets net of current portion | 967 | | | | | | 967 | 416 | 1,383 | |||||||||||||||||||||||||||
Current: | | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 31,612 | | | | | | 31,612 | | 31,612 | |||||||||||||||||||||||||||
Short-term investments | 73 | | 538 | | | | 611 | | 611 | |||||||||||||||||||||||||||
Trade and other receivables | 16,223 | | | | | | 16,223 | | 16,223 | |||||||||||||||||||||||||||
Inventories and supplies | | | | | | | | 2,893 | 2,893 | |||||||||||||||||||||||||||
Derivative financial assets | | | | 62 | | | 62 | | 62 | |||||||||||||||||||||||||||
Current portion of investment in debt securities | | 370 | | | | | 370 | | 370 | |||||||||||||||||||||||||||
Current portion of prepayments | | | | | | | | 6,771 | 6,771 | |||||||||||||||||||||||||||
Current portion of advances and other noncurrent assets | 7,979 | | | | | | 7,979 | 140 | 8,119 | |||||||||||||||||||||||||||
Total assets | 56,854 | 520 | 538 | 62 | 5,631 | | 63,605 | 321,669 | 385,274 | |||||||||||||||||||||||||||
Liabilities as at June 30, 2012 (Unaudited) | ||||||||||||||||||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||||||||||||||
Interest-bearing financial liabilities net of current portion | | | | | | 100,300 | 100,300 | | 100,300 | |||||||||||||||||||||||||||
Deferred income tax liabilities net | | | | | | | | 3,395 | 3,395 | |||||||||||||||||||||||||||
Derivative financial liabilities | | | 2,425 | | | | 2,425 | | 2,425 | |||||||||||||||||||||||||||
Pension and other employee benefits | | | | | | | | 1,417 | 1,417 | |||||||||||||||||||||||||||
Customers deposits | | | | | | 2,268 | 2,268 | | 2,268 | |||||||||||||||||||||||||||
Deferred credits and other noncurrent liabilities | | | | | | 17,359 | 17,359 | 2,390 | 19,749 | |||||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||||||||||||||
Accounts payable | | | | | | 23,623 | 23,623 | 1,465 | 25,088 | |||||||||||||||||||||||||||
Accrued expenses and other current liabilities | | | | | | 47,291 | 47,291 | 18,168 | 65,459 | |||||||||||||||||||||||||||
Derivative financial liabilities | | | 75 | 15 | | | 90 | | 90 | |||||||||||||||||||||||||||
Provision for claims and assessments | | | | | | | | 1,555 | 1,555 | |||||||||||||||||||||||||||
Current portion of interest-bearing financial liabilities |
| | | | | 13,935 | 13,935 | | 13,935 | |||||||||||||||||||||||||||
Dividends payable | | | | | | 834 | 834 | | 834 | |||||||||||||||||||||||||||
Income tax payable | | | | | | | | 2,436 | 2,436 | |||||||||||||||||||||||||||
Total liabilities | | | 2,500 | 15 | | 205,610 | 208,125 | 30,826 | 238,951 | |||||||||||||||||||||||||||
Net assets (liabilities) | 56,854 | 520 | (1,962 | ) | 47 | 5,631 | (205,610 | ) | (144,520 | ) | 290,843 | 146,323 | ||||||||||||||||||||||||
Assets as at December 31, 2011 (Audited) | ||||||||||||||||||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment | | | | | | | | 197,731 | 197,731 | |||||||||||||||||||||||||||
Investments in associates and joint ventures | | | | | | | | 17,865 | 17,865 | |||||||||||||||||||||||||||
Available-for-sale financial assets | | | | | 7,181 | | 7,181 | | 7,181 | |||||||||||||||||||||||||||
Investment in debt securities | | 150 | | | | | 150 | | 150 | |||||||||||||||||||||||||||
Investment properties | | | | | | | | 1,115 | 1,115 | |||||||||||||||||||||||||||
Goodwill and intangible assets | | | | | | | | 80,656 | 80,656 | |||||||||||||||||||||||||||
Deferred income tax assets net | | | | | | | | 5,975 | 5,975 | |||||||||||||||||||||||||||
Prepayments net of current portion | | | | | | | | 8,869 | 8,869 | |||||||||||||||||||||||||||
Advances and other noncurrent assets net of current portion | 1,147 | | | | | | 1,147 | 193 | 1,340 | |||||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 46,057 | | | | | | 46,057 | | 46,057 | |||||||||||||||||||||||||||
Short-term investments | 24 | | 534 | | | | 558 | | 558 | |||||||||||||||||||||||||||
Trade and other receivables | 16,245 | | | | | | 16,245 | | 16,245 | |||||||||||||||||||||||||||
Inventories and supplies | | | | | | | | 3,827 | 3,827 | |||||||||||||||||||||||||||
Derivative financial assets | | | 366 | | | | 366 | | 366 | |||||||||||||||||||||||||||
Current portion of investment in debt securities | | 358 | | | | | 358 | | 358 | |||||||||||||||||||||||||||
Current portion of prepayments | | | | | | | | 7,227 | 7,227 | |||||||||||||||||||||||||||
Current portion of advances and other noncurrent assets | 18 | | | | | | 18 | 108 | 126 | |||||||||||||||||||||||||||
Total assets | 63,491 | 508 | 900 | | 7,181 | | 72,080 | 323,566 | 395,646 | |||||||||||||||||||||||||||
Liabilities as at December 31, 2011 (Audited) | ||||||||||||||||||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||||||||||||||
Interest-bearing financial liabilities net of current portion | | | | | | 91,280 | 91,280 | | 91,280 | |||||||||||||||||||||||||||
Deferred income tax liabilities net | | | | | | | | 2,902 | 2,902 | |||||||||||||||||||||||||||
Derivative financial liabilities | | | 2,235 | | | | 2,235 | | 2,235 | |||||||||||||||||||||||||||
Pension and other employee benefits | | | | | | | | 609 | 609 | |||||||||||||||||||||||||||
Customers deposits | | | | | | 2,272 | 2,272 | | 2,272 | |||||||||||||||||||||||||||
Deferred credits and other noncurrent liabilities | | | | | | 20,343 | 20,343 | 2,299 | 22,642 | |||||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||||||||||||||
Accounts payable | | | | | | 27,982 | 27,982 | 1,572 | 29,554 | |||||||||||||||||||||||||||
Accrued expenses and other current liabilities | | | | | | 40,459 | 40,459 | 17,812 | 58,271 | |||||||||||||||||||||||||||
Derivative financial liabilities | | | 922 | 2 | | | 924 | | 924 | |||||||||||||||||||||||||||
Provision for claims and assessments | | | | | | | | 1,555 | 1,555 | |||||||||||||||||||||||||||
Current portion of interest-bearing financial liabilities |
| | | | | 26,009 | 26,009 | | 26,009 | |||||||||||||||||||||||||||
Dividends payable | | | | | | 2,583 | 2,583 | | 2,583 | |||||||||||||||||||||||||||
Income tax payable | | | | | | | | 2,591 | 2,591 | |||||||||||||||||||||||||||
Total liabilities | | | 3,157 | 2 | | 210,928 | 214,087 | 29,340 | 243,427 | |||||||||||||||||||||||||||
Net assets (liabilities) | 63,491 | 508 | (2,257 | ) | (2 | ) | 7,181 | (210,928 | ) | (142,007 | ) | 294,226 | 152,219 | |||||||||||||||||||||||
The following table sets forth the consolidated carrying values and estimated fair values of our financial assets and liabilities recognized as at June 30, 2012 and December 31, 2011:
Carrying Value | Fair Value | |||||||||||||||
2012 | 2011 | 2012 2011 | ||||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Audited) | |||||||||||||
(in million pesos) | ||||||||||||||||
Noncurrent Financial Assets |
||||||||||||||||
Available-for-sale financial assets: |
||||||||||||||||
Listed equity securities |
78 | 81 | 78 | 81 | ||||||||||||
Unlisted equity securities |
5,553 | 7,100 | 5,553 | 7,100 | ||||||||||||
Investment in debt securities |
150 | 150 | 154 | 158 | ||||||||||||
Advances and other noncurrent assets net of current portion |
967 | 1,147 | 885 | 1,061 | ||||||||||||
Total noncurrent financial assets |
6,748 | 8,478 | 6,670 | 8,400 | ||||||||||||
Current Financial Assets |
||||||||||||||||
Cash and cash equivalents: |
||||||||||||||||
Cash on hand and in banks |
4,615 | 4,637 | 4,615 | 4,637 | ||||||||||||
Temporary cash investments |
26,997 | 41,420 | 26,997 | 41,420 | ||||||||||||
Short-term investments |
611 | 558 | 611 | 558 | ||||||||||||
Trade and other receivables net: |
||||||||||||||||
Foreign administrations |
4,947 | 4,762 | 4,947 | 4,762 | ||||||||||||
Retail subscribers |
4,046 | 4,038 | 4,046 | 4,038 | ||||||||||||
Corporate subscribers |
3,425 | 2,708 | 3,425 | 2,708 | ||||||||||||
Domestic carriers |
698 | 1,212 | 698 | 1,212 | ||||||||||||
Dealers, agents and others |
3,107 | 3,525 | 3,107 | 3,525 | ||||||||||||
Derivative financial assets: |
||||||||||||||||
Long-term currency swap |
| 356 | | 356 | ||||||||||||
Forward foreign exchange contracts |
62 | 10 | 62 | 10 | ||||||||||||
Current portion of investment in debt securities |
370 | 358 | 370 | 358 | ||||||||||||
Current portion of advances and other noncurrent assets |
7,979 | 18 | 7,979 | 18 | ||||||||||||
Total current financial assets |
56,857 | 63,602 | 56,857 | 63,602 | ||||||||||||
Total Financial Assets |
63,605 | 72,080 | 63,527 | 72,002 | ||||||||||||
Noncurrent Financial Liabilities |
||||||||||||||||
Interest-bearing financial liabilities: |
||||||||||||||||
Long-term debt net of current portion |
100,294 | 91,273 | 107,831 | 95,052 | ||||||||||||
Obligations under finance leases |
6 | 7 | 5 | 7 | ||||||||||||
Derivative financial liabilities: |
||||||||||||||||
Long-term currency swap net of current portion |
2,278 | 2,090 | 2,278 | 2,090 | ||||||||||||
Interest rate swap |
147 | 145 | 147 | 145 | ||||||||||||
Customers deposits |
2,268 | 2,272 | 1,809 | 1,772 | ||||||||||||
Deferred credits and other noncurrent liabilities |
17,359 | 20,343 | 16,188 | 19,420 | ||||||||||||
Total noncurrent financial liabilities |
122,352 | 116,130 | 128,258 | 118,486 | ||||||||||||
Current Financial Liabilities |
||||||||||||||||
Accounts payable: |
||||||||||||||||
Suppliers and contractors |
20,807 | 25,476 | 20,807 | 25,476 | ||||||||||||
Carriers |
1,901 | 1,642 | 1,901 | 1,642 | ||||||||||||
Related parties |
703 | 626 | 703 | 626 | ||||||||||||
Others |
212 | 238 | 212 | 238 | ||||||||||||
Accrued expenses and other current liabilities: |
||||||||||||||||
Utilities and related expenses |
30,163 | 28,123 | 30,163 | 28,123 | ||||||||||||
Liability from redemption of preferred shares |
7,970 | | 7,970 | | ||||||||||||
Employee benefits |
6,281 | 4,438 | 6,281 | 4,438 | ||||||||||||
Interests and other related costs |
1,023 | 1,122 | 1,023 | 1,122 | ||||||||||||
Mandatory tender offer option liability |
| 4,940 | | 4,940 | ||||||||||||
Others |
1,854 | 1,836 | 1,854 | 1,836 | ||||||||||||
Derivative financial liabilities: |
||||||||||||||||
Current portion of long-term currency swap |
| 834 | | 834 | ||||||||||||
Current portion of interest rate swap |
75 | 89 | 75 | 89 | ||||||||||||
Current portion of forward foreign exchange contracts |
15 | 1 | 15 | 1 | ||||||||||||
Interest-bearing financial liabilities: |
||||||||||||||||
Current portion of long-term debt |
12,480 | 22,893 | 12,480 | 22,893 | ||||||||||||
Notes payable |
1,449 | 3,109 | 1,449 | 3,109 | ||||||||||||
Obligations under finance leases |
6 | 7 | 6 | 7 | ||||||||||||
Dividends payable |
834 | 2,583 | 834 | 2,583 | ||||||||||||
Total current financial liabilities |
85,773 | 97,957 | 85,773 | 97,957 | ||||||||||||
Total Financial Liabilities |
208,125 | 214,087 | 214,031 | 216,443 | ||||||||||||
Below are the list of financial assets and liabilities carried at fair value that are classified using a fair value hierarchy as required for complete sets of financial statements as at June 30, 2012 and December 31, 2011. This classification provides a reasonable basis to illustrate the nature and extent of risks associated with those financial statements.
2012 | 2011 | |||||||||||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||||||
Level 1(1) | Level 2(2) | Total | Level 1(1) | Level 2(2) | Total | |||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||
Noncurrent Financial Assets
|
||||||||||||||||||||||||
Available-for-sale financial assets Listed equity securities |
78 |
|
78 |
81 |
|
81 |
||||||||||||||||||
Current Financial Assets
|
||||||||||||||||||||||||
Short-term investments
|
| 538 | 538 | | 534 | 534 | ||||||||||||||||||
Derivative financial assets
|
| 62 | 62 | | 366 | 366 | ||||||||||||||||||
Total
|
78 | 600 | 678 | 81 | 900 | 981 | ||||||||||||||||||
Noncurrent Financial Liabilities
|
||||||||||||||||||||||||
Derivative financial liabilities
|
| 2,425 | 2,425 | | 2,235 | 2,235 | ||||||||||||||||||
Current Financial Liabilities
|
||||||||||||||||||||||||
Derivative financial liabilities
|
| 90 | 90 | | 924 | 924 | ||||||||||||||||||
Total
|
| 2,515 | 2,515 | | 3,159 | 3,159 | ||||||||||||||||||
(1) | Fair values determined using observable market inputs that reflect quoted prices in active markets for identical assets or liabilities. |
(2) | Fair values determined using inputs other than quoted market prices that are either directly or indirectly observable for the assets or liabilities. |
As at June 30, 2012 and 2011, we have no financial instruments whose fair values are determined using inputs that are not based on observable market data (Level 3).
As at June 30, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value:
Long-term financial assets and liabilities:
Fair value is based on the following:
Type | Fair Value Assumptions | |
Noncurrent portion of advances and other noncurrent assets | Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus credit spread. |
|
Fixed Rate Loans: | ||
U.S. dollar notes Other loans in all other currencies |
Quoted market price. Estimated fair value is based on the discounted value of future cash flows using the applicable Commercial Interest Reference Rate and Philippine Dealing System Treasury Fixing rates for similar types of loans. |
|
Variable Rate Loans | The carrying value approximates fair value because of recent and regular repricing based on market conditions. |
|
Customers deposits and deferred credits and other noncurrent liabilities |
Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus credit spread. |
|
Derivative Financial Instruments:
Foreign currency options: The fair values were computed using an option pricing model using market volatility rates of the U.S. dollar and Philippine peso exchange rate as at valuation date.
Forward foreign exchange contracts, bifurcated foreign currency forwards and foreign currency swaps: The fair values were computed as the present value of estimated future cash flows using market U.S. dollar and Philippine peso interest rates as at valuation date.
Available-for-sale financial assets: Fair values of available-for-sale financial assets, which consist of proprietary listed shares, were determined using quoted prices. Investments in unlisted securities are carried at cost less any accumulated impairment losses.
Investment in debt securities: Fair values were determined using quoted prices. For non-quoted securities, fair values were determined using discounted cash flow based on market observable rates.
Due to the short-term nature of the transactions, the fair value of cash and cash equivalents, short-term investments, current investment in debt securities, trade and other receivables, current portion of advances and other noncurrent assets, accounts payable, accrued expenses and other current liabilities, current portion of interest-bearing financial liabilities, and dividends payable approximate their carrying values as at the end of the reporting period.
Derivative Financial Instruments
Our derivative financial instruments are accounted for as either cash flow hedges or transactions not designated as hedges. Cash flow hedges refer to those transactions that hedge our exposure to variability in cash flows attributable to a particular risk associated with a recognized financial asset or liability and exposures arising from forecast transactions. Changes in the fair value of these instruments representing effective hedges are recognized directly in other comprehensive income until the hedged item is recognized in our consolidated income statement. For transactions that are not designated as hedges, any gains or losses arising from the changes in fair value are recognized directly to income for the period. As at June 30, 2012 and December 31, 2011, SPi and SPi CRM designated forward foreign exchange contracts as cash flow hedges, while as at December 31, 2011, we have no outstanding financial instruments designated as hedges.
The table below sets out the information about our derivative financial instruments as at June 30, 2012 and December 31, 2011:
2012 | 2011 | |||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Mark-to- | Mark-to- | |||||||||||||||||||||||||||
market Gains | market Gains | |||||||||||||||||||||||||||
Maturity | Notional | (Losses) | Notional | (Losses) | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||
Transactions not designated as hedges: |
||||||||||||||||||||||||||||
PLDT |
||||||||||||||||||||||||||||
Currency swaps |
2017 | US$ | 222 | (Php2,278) | US$ | 222 | (Php2,090) | |||||||||||||||||||||
2012 | | | 100 | (834 | ) | |||||||||||||||||||||||
2012 | | | 60(1) | 356 | ||||||||||||||||||||||||
(2,278 | ) | (2,568 | ) | |||||||||||||||||||||||||
Digitel Group |
||||||||||||||||||||||||||||
Interest rate swaps |
2017 | 63 | (222 | ) | 69 | (234 | ) | |||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||||||
SPi Group |
||||||||||||||||||||||||||||
Forward foreign exchange contracts |
2012 | 28 | 27 | 57 | 10 | |||||||||||||||||||||||
2013 | 21 | 20 | (4 | ) | (1 | ) | ||||||||||||||||||||||
47 | 9 | |||||||||||||||||||||||||||
Net liabilities |
(Php2,453) | (Php2,793) | ||||||||||||||||||||||||||
(1) | Overlay principal only swap agreements to effectively unwind a portion of the outstanding long-term principal only swap agreement matured in 2011. |
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Presented as: |
||||||||
Current assets |
62 | 366 | ||||||
Noncurrent liabilities |
(2,425 | ) | (2,235 | ) | ||||
Current liabilities |
(90 | ) | (924 | ) | ||||
Net liabilities |
(2,453 | ) | (2,793 | ) | ||||
Analysis of gains (losses) on derivative financial instruments for the six months ended June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Net mark-to-market losses at end of the period |
(2,453 | ) | (2,605 | ) | ||||
Net mark-to-market losses at beginning of the period |
(2,793 | ) | (3,421 | ) | ||||
Net change |
340 | 816 | ||||||
Effective portion recognized in the profit or loss for the cash flow hedge |
(17 | ) | | |||||
Net gains on cash flow hedges charged to other comprehensive income |
(42 | ) | (11 | ) | ||||
Hedge cost |
(173 | ) | (179 | ) | ||||
Settlements, accretion and conversion |
(511 | ) | (142 | ) | ||||
Net gains (losses) on derivative financial instruments (Note 4) |
(403 | ) | 484 | |||||
PLDT
Due to the amounts of PLDTs foreign currency hedging requirements and the large interest differential between the Philippine peso and the U.S. dollar, the costs to book long-term hedges can be significant. In order to manage such hedging costs, PLDT utilizes structures that include currency option contracts, and fixed-to-floating coupon-only swaps that may not qualify for hedge accounting.
Currency Swaps
PLDT has entered into long-term principal only-currency swap agreements with various foreign counterparties to hedge the currency risk on its fixed rate notes maturing in 2012 and 2017. Under the swaps, PLDT effectively exchanges the principal of its U.S. dollar-denominated fixed rate notes into Philippine peso-denominated loan exposures at agreed swap exchange rates. The agreed swap exchange rates are reset to the lowest U.S. dollar/Philippine peso spot exchange rate during the term of the swaps, subject to a minimum exchange rate. The outstanding swap contracts have an agreed average swap exchange rates of Php49.80 as at June 30, 2012 and Php50.45 as at December 31, 2011. The semi-annual fixed or floating swap cost payments that PLDT is required to make to its counterparties averaged about 3.42% per annum as at June 30, 2012 and 3.04% per annum as at December 31, 2011. The long-term currency swaps that we entered to hedge the 2012 fixed rate notes with notional amount of US$100 million matured on May 15, 2012, with total cash settlement of Php941 million. The mark-to-market losses of the 2017 swaps with a notional amount of US$222 million amounted to Php2,278 million as at June 30, 2012, and the mark-to-market losses of the 2012 and 2017 swaps with notional amounts of US$100 million and US$222 million amounted to Php834 million and Php2,090 million as at December 31, 2011, respectively.
On various dates from October to November 2010, PLDT entered into several overlay principal only swap agreements with an aggregate notional amount of US$60 million to effectively unwind a portion of the outstanding long-term principal only-currency swap agreement maturing in 2012. The overlay swaps are offsetting swaps which carry the direct opposite terms and cash flows of our existing swap agreement. As consideration for the overlay swaps, PLDT will pay an average fixed rate of 10.84% on a semi-annual basis over the life of the offsetting swaps. These overlay swap agreements have an aggregate mark-to-market gains of Php356 million as at December 31, 2011. These overlay swaps matured on May 15, 2012, where PLDT received proceeds amounting to Php565 million.
Digitel Group
On October 7, 2008, DMPI entered in an eight-year interest rate swap agreement with a total notional amount of US$54.1 million to hedge its interest rate exposures on the US$59.2 million US$ Loan Facility maturing in March 2017 into fixed interest rate. Under this agreement, Digitel is entitled to receive a floating rate of equivalent to the US$ LIBOR rate as of the last Calculation Date and in exchange, will pay a fixed rate of 3.88%. The outstanding notional amount under this agreement amounted to US$34 million and US$37 million as at June 30, 2012 and December 31, 2011, respectively. The mark-to-market losses amounted to Php120 million and Php125 million as at June 30, 2012 and December 31, 2011, respectively.
On October 7, 2008, DMPI entered in an eight-year interest rate swap agreement with a total notional amount of US$46.5 million to hedge its interest rate exposures on the US$51.2 million US$ Loan Facility maturing in June 2017 into fixed interest rate. Under this agreement, Digitel is entitled to receive a floating rate of equivalent to the US$ LIBOR rate as of the last Calculation Date and in exchange, will pay a fixed rate of 3.97%. The outstanding notional amount under this agreement amounted to US$29 million and US$32 million as at June 30, 2012 and December 31, 2011, respectively. The mark-to-market losses amounted to Php102 million and Php109 million as at June 30, 2012 and December 31, 2011, respectively.
SPi Group
In February and March 2011, SPi and SPi CRM entered into several forward foreign exchange contracts with various financial institutions to hedge a portion of monthly dollar denominated revenues and peso denominated expenses maturing March 2011 up to October 2012. The gains and losses on such contracts are expected to be recognized in profit or loss upon occurrence of the monthly dollar revenues and monthly peso expenses hedged.
On December 6, 2011, SPi CRM changed its functional currency from Philippine peso to U.S. dollar resulting to all outstanding hedges to become ineffective starting from that date and marked-to-market gains and losses thereafter are recognized in profit or loss. The mark-to-market gains of SPi CRM and SPis outstanding forward exchange contracts that was designated as hedges with notional amount of US$23 million and US$26 million, respectively, amounted to Php47 million as at June 30, 2012. The mark-to-market gains of SPi CRM and SPis outstanding forward exchange contracts that were designated as hedges with notional amount of US$24 million and US$29 million, respectively, amounted to Php9 million as at December 31, 2011.
In January 2012, SPi CRM pre-terminated all outstanding ineffective hedges.
Financial Risk Management Objectives and Policies
The main risks arising from our financial instruments are liquidity risk, foreign currency exchange risk, interest rate risk and credit risk. The importance of managing those risks has significantly increased in light of the considerable change and volatility in both the Philippine and international financial markets. Our Board of Directors reviews and approves policies for managing each of these risks. Our policies for managing these risks are summarized below. We also monitor the market price risk arising from all financial instruments.
Liquidity Risk
We manage our liquidity profile to be able to finance our operations and capital expenditures, service our maturing debts and meet our other financial obligations. To cover our financing requirements, we use internally generated funds and proceeds from debt and equity issues and sales of certain assets.
As part of our liquidity risk management program, we regularly evaluate our projected and actual cash flows, including our loan maturity profiles, and continuously assess conditions in the financial markets for opportunities to pursue fund-raising initiatives. These activities may include bank loans, export credit agency-guaranteed facilities, debt capital and equity market issues.
Any excess funds are primarily invested in short-term and principal-protected bank products that provide flexibility of withdrawing the funds anytime. We also allocate a portion of our cash in longer tenor investments such as fixed income securities issued or guaranteed by the Republic of the Philippines, and Philippine banks and corporates, managed funds and other structured products linked to the Republic of the Philippines. We regularly evaluate available financial products and monitor market conditions for opportunities to enhance yields at acceptable risk levels. Our investments are also subject to certain restrictions contained in our debt covenants. Our funding arrangements are designed to keep an appropriate balance between equity and debt and to provide financing flexibility while enhancing our businesses.
We have letters of credit amounting to Php95 million as at June 30, 2012 and certain financial instruments that are allocated to meet our short-term liquidity needs. These financial instruments are cash and cash equivalents, and short-term investments amounting to Php31,612 million and Php611 million, respectively, as at June 30, 2012. See Note 15 Cash and Cash Equivalents.
The following table discloses a summary of maturity profile of our financial assets based on our consolidated undiscounted claims outstanding as at June 30, 2012 and December 31, 2011:
Less than | ||||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
(in million pesos) | ||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||
Loans and receivables: |
67,957 | 59,036 | 8,689 | 134 | 98 | |||||||||||||||
Advances and other noncurrent assets |
8,946 | 25 | 8,689 | 134 | 98 | |||||||||||||||
Cash equivalents |
26,997 | 26,997 | | | | |||||||||||||||
Short-term investments |
73 | 73 | | | | |||||||||||||||
Retail subscribers |
12,176 | 12,176 | | | | |||||||||||||||
Corporate subscribers |
9,979 | 9,979 | | | | |||||||||||||||
Foreign administrations |
5,143 | 5,143 | | | | |||||||||||||||
Domestic carriers |
853 | 853 | | | | |||||||||||||||
Dealers, agents and others |
3,790 | 3,790 | | | | |||||||||||||||
HTM investments: |
520 | 370 | 150 | | | |||||||||||||||
Investment in debt securities |
520 | 370 | 150 | | | |||||||||||||||
Financial instruments at FVPL: |
538 | 538 | | | | |||||||||||||||
Short-term investments |
538 | 538 | | | | |||||||||||||||
Available-for-sale financial assets |
5,631 | | | | 5,631 | |||||||||||||||
Total |
74,646 | 59,944 | 8,839 | 134 | 5,729 | |||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||
Loans and receivables: |
73,626 | 72,492 | 886 | 201 | 47 | |||||||||||||||
Advances and other noncurrent assets |
1,165 | 31 | 886 | 201 | 47 | |||||||||||||||
Cash equivalents |
41,420 | 41,420 | | | | |||||||||||||||
Short-term investments |
24 | 24 | | | | |||||||||||||||
Retail subscribers |
11,302 | 11,302 | | | | |||||||||||||||
Corporate subscribers |
9,200 | 9,200 | | | | |||||||||||||||
Foreign administrations |
4,961 | 4,961 | | | | |||||||||||||||
Domestic carriers |
1,323 | 1,323 | | | | |||||||||||||||
Dealers, agents and others |
4,231 | 4,231 | | | | |||||||||||||||
HTM investments: |
508 | 358 | 150 | | | |||||||||||||||
Investment in debt securities |
508 | 358 | 150 | | | |||||||||||||||
Financial instruments at FVPL: |
534 | 534 | | | | |||||||||||||||
Short-term investments |
534 | 534 | | | | |||||||||||||||
Available-for-sale financial assets |
7,181 | | | | 7,181 | |||||||||||||||
Total |
81,849 | 73,384 | 1,036 | 201 | 7,228 | |||||||||||||||
The following table discloses a summary of maturity profile of our financial liabilities based on our consolidated contractual undiscounted obligations outstanding as at June 30, 2012 and December 31, 2011:
Payments Due by Period | ||||||||||||||||||||
Less than | ||||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
(in million pesos) | ||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||
Debt(1): |
141,101 | 3,766 | 64,691 | 54,100 | 18,544 | |||||||||||||||
Principal |
115,911 | 3,062 | 49,240 | 48,271 | 15,338 | |||||||||||||||
Interest |
25,190 | 704 | 15,451 | 5,829 | 3,206 | |||||||||||||||
Lease obligations: |
18,012 | 7,105 | 5,309 | 2,726 | 2,872 | |||||||||||||||
Operating lease |
17,999 | 7,102 | 5,304 | 2,721 | 2,872 | |||||||||||||||
Finance lease |
13 | 3 | 5 | 5 | | |||||||||||||||
Unconditional purchase obligations(2) |
567 | 250 | 254 | 63 | | |||||||||||||||
Other obligations: |
91,906 | 67,077 | 12,970 | 8,742 | 3,117 | |||||||||||||||
Derivative financial liabilities(3): |
3,412 | 75 | 988 | 2,349 | | |||||||||||||||
Long-term currency swap |
3,190 | | 871 | 2,319 | | |||||||||||||||
Interest rate swap |
222 | 75 | 117 | 30 | | |||||||||||||||
Various trade and other obligations: |
88,494 | 67,002 | 11,982 | 6,393 | 3,117 | |||||||||||||||
Suppliers and contractors |
38,166 | 20,807 | 11,117 | 6,242 | | |||||||||||||||
Utilities and related expenses |
26,088 | 26,032 | 51 | 5 | | |||||||||||||||
Liability from redemption of preferred shares |
7,970 | 7,970 | | | | |||||||||||||||
Employee benefits |
6,292 | 6,292 | | | | |||||||||||||||
Customers deposits |
2,268 | | 160 | 3 | 2,105 | |||||||||||||||
Carriers |
1,901 | 1,901 | | | | |||||||||||||||
Dividends |
834 | 834 | | | | |||||||||||||||
Others |
4,975 | 3,166 | 654 | 143 | 1,012 | |||||||||||||||
Total contractual obligations |
251,586 | 78,198 | 83,224 | 65,631 | 24,533 | |||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||
Debt(1): |
142,271 | 16,378 | 62,213 | 39,476 | 24,204 | |||||||||||||||
Principal |
119,410 | 15,348 | 48,141 | 33,971 | 21,950 | |||||||||||||||
Interest |
22,861 | 1,030 | 14,072 | 5,505 | 2,254 | |||||||||||||||
Lease obligations: |
17,826 | 6,352 | 5,324 | 2,998 | 3,152 | |||||||||||||||
Operating lease |
17,810 | 6,349 | 5,317 | 2,992 | 3,152 | |||||||||||||||
Finance lease |
16 | 3 | 7 | 6 | | |||||||||||||||
Unconditional purchase obligations(2) |
674 | 279 | 263 | 132 | | |||||||||||||||
Other obligations: |
91,828 | 66,223 | 14,976 | 7,072 | 3,557 | |||||||||||||||
Derivative financial liabilities(3): |
3,789 | 589 | 1,026 | 701 | 1,473 | |||||||||||||||
Long-term currency swap |
3,552 | 500 | 907 | 673 | 1,472 | |||||||||||||||
Interest rate swap |
237 | 89 | 119 | 28 | 1 | |||||||||||||||
Various trade and other obligations: |
88,039 | 65,634 | 13,950 | 6,371 | 2,084 | |||||||||||||||
Suppliers and contractors |
45,604 | 25,476 | 13,761 | 6,367 | | |||||||||||||||
Utilities and related expenses |
23,839 | 23,834 | 5 | | | |||||||||||||||
Employee benefits |
4,452 | 4,452 | | | | |||||||||||||||
Dividends |
2,583 | 2,583 | | | | |||||||||||||||
Customers deposits |
2,272 | | 184 | 4 | 2,084 | |||||||||||||||
Carriers |
1,642 | 1,642 | | | | |||||||||||||||
Others |
7,647 | 7,647 | | | | |||||||||||||||
Total contractual obligations |
252,599 | 89,232 | 82,776 | 49,678 | 30,913 | |||||||||||||||
(1) | Consists of long-term debt, including current portion, and notes payable; gross of unamortized debt discount and debt issuance costs. |
(2) | Based on the Amended ATPA with AIL. See Note 24 Related Party Transactions. |
(3) | Gross liabilities before any offsetting application. |
Debt
See Note 20 Interest-bearing Financial Liabilities for a detailed discussion of our debt, including debt instruments of Digitel Group.
Operating Lease Obligations
The PLDT Group has various lease contracts for periods ranging from one to ten years covering certain offices, warehouses, cell sites telecommunications equipment locations and various office equipment.
The consolidated future minimum lease commitments payable with non-cancellable operating leases as at June 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Within one year |
7,160 | 6,423 | ||||||
After one year but not more than five years |
7,967 | 8,235 | ||||||
More than five years |
2,872 | 3,152 | ||||||
17,999 | 17,810 | |||||||
Finance Lease Obligations
See Note 20 Interest-bearing Financial Liabilities for the detailed discussion of our long-term finance lease obligations.
Unconditional Purchase Obligations
See Note 24 Related Party Transactions for a detailed discussion of PLDTs obligation under the Original and the Amended ATPA.
Under the Amended ATPA, PLDTs aggregate remaining minimum obligation is approximately Php567 million and Php674 million as at June 30, 2012 and December 31, 2011, respectively.
Other Obligations Various Trade and Other Obligations
PLDT Group has various obligations to suppliers for the acquisition of phone and network equipment, contractors for services rendered on various projects, foreign administrations and domestic carriers for the access charges, shareholders for unpaid dividends distributions, employees for benefits related obligations, and various business and operational related agreements. Total obligations under these various agreements amounted to approximately Php88,494 million and Php88,039 million as at June 30, 2012 and December 31, 2011, respectively. See Note 22 Accounts Payable and Note 23 Accrued Expenses and Other Current Liabilities.
Commercial Commitments
Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php95 million and Php913 million as at June 30, 2012 and December 31, 2011, respectively. These commitments will expire within one year.
Foreign Currency Exchange Risk
The revaluation of our foreign currency-denominated financial assets and liabilities as a result of the appreciation or depreciation of the Philippine peso is recognized as foreign exchange gains or losses as at the end of the reporting period. The extent of foreign exchange gains or losses is largely dependent on the amount of foreign currency debt. While a certain percentage of our revenues are either linked to or denominated in U.S. dollars, most of our indebtedness and related interest expense, a substantial portion of our capital expenditures and a portion of our operating expenses are denominated in foreign currencies, mostly in U.S. dollars. As such, a strengthening or weakening of the Philippine peso against the U.S. dollar will decrease or increase in Philippine peso terms both the principal amount of our foreign currency-denominated debts and the related interest expense, our foreign currency-denominated capital expenditures and operating expenses as well as our U.S. dollar-linked and U.S. dollar-denominated revenues. In addition, many of our financial ratios and other financial tests are affected by the movements in the Philippine peso to U.S. dollar exchange rate.
To manage our foreign exchange risks and to stabilize our cash flows in order to improve investment and cash flow planning, we enter into forward foreign exchange contracts, currency swap contracts, currency option contracts and other hedging products aimed at reducing and/or managing the adverse impact of changes in foreign exchange rates on our operating results and cash flows. We use forward foreign exchange purchase contracts, currency swap contracts and foreign currency option contracts to manage the foreign currency risks associated with our foreign currency-denominated loans. We also enter into forward foreign exchange sale contracts to manage foreign currency risks associated with our U.S. dollar-linked and U.S. dollar-denominated revenues. In order to manage the hedge costs of these contracts, we utilize structures that include credit-linkage with PLDT as the reference entity, a combination of foreign currency option contracts, and fixed to floating coupon only swap contracts. We accounted for these instruments as either cash flow hedges, wherein changes in the fair value are recognized as cumulative translation adjustments in other comprehensive income until the hedged transaction affects our consolidated income statement or when the hedging instrument expires, or transactions not designated as hedges, wherein changes in the fair value are recognized directly as income or expense for the year.
The following table shows our consolidated foreign currency-denominated monetary financial assets and liabilities and their Philippine peso equivalents as at June 30, 2012 and December 31, 2011:
2012 | 2011 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||
U.S. Dollar |
Php(1) | U.S. Dollar | Php(2) | |||||||||||||
(in millions) |
||||||||||||||||
Noncurrent Financial Assets |
||||||||||||||||
Advances and other noncurrent assets |
2 | 85 | 2 | 83 | ||||||||||||
Total noncurrent financial assets |
2 | 85 | 2 | 83 | ||||||||||||
Current Financial Assets |
||||||||||||||||
Cash and cash equivalents |
161 | 6,803 | 165 | 7,248 | ||||||||||||
Short-term investments |
13 | 544 | 12 | 540 | ||||||||||||
Trade and other receivables net |
209 | 8,830 | 215 | 9,445 | ||||||||||||
Derivative financial assets |
1 | 62 | 8 | 366 | ||||||||||||
Total current financial assets |
384 | 16,239 | 400 | 17,599 | ||||||||||||
Total Financial Assets |
386 | 16,324 | 402 | 17,682 | ||||||||||||
Noncurrent Financial Liabilities |
||||||||||||||||
Interest-bearing financial liabilities net of current portion |
1,068 | 45,127 | 906 | 39,806 | ||||||||||||
Derivative financial liabilities |
57 | 2,425 | 51 | 2,235 | ||||||||||||
Total noncurrent financial liabilities |
1,125 | 47,552 | 957 | 42,041 | ||||||||||||
Current Financial Liabilities |
||||||||||||||||
Accounts payable |
127 | 5,371 | 198 | 8,688 | ||||||||||||
Accrued expenses and other current liabilities |
140 | 5,904 | 129 | 5,677 | ||||||||||||
Derivative financial liabilities |
2 | 90 | 21 | 924 | ||||||||||||
Current portion of interest-bearing financial liabilities |
215 | 9,097 | 349 | 15,328 | ||||||||||||
Total current financial liabilities |
484 | 20,462 | 697 | 30,617 | ||||||||||||
Total Financial Liabilities |
1,609 | 68,014 | 1,654 | 72,658 | ||||||||||||
(1) | The exchange rate used to translate the U.S. dollar amounts into Philippine peso was Php42.28 to US$1.00, the Philippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at June 30, 2012. |
(2) | The exchange rate used to translate the U.S. dollar amounts into Philippine peso was Php43.92 to US$1.00, the Philippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at December 31, 2011. |
As at August 6, 2012, the Philippine peso-U.S. dollar exchange rate was Php41.79 to US$1.00. Using this exchange rate, our consolidated net foreign currency-denominated financial liabilities would have decreased in Philippine peso terms by Php599 million as at June 30, 2012.
Approximately 47% of our total consolidated debts (net of consolidated debt discount) were denominated in U.S. dollars each as at June 30, 2012 and December 31, 2011. Consolidated foreign currency-denominated debt decreased to Php54,020 million as at June 30, 2012 from Php54,877 million as at December 31, 2011. See Note 20 Interest-bearing Financial Liabilities. The aggregate notional amount of PLDTs outstanding long-term principal only-currency swap contracts were US$222 million and US$262 million as at June 30, 2012 and December 31, 2011, respectively. Consequently, the unhedged portion of our consolidated debt amounts was approximately 39% (or 33%, net of our consolidated U.S. dollar cash balances) and 37% (or 30%, net of our consolidated U.S. dollar cash balances) as at June 30, 2012 and December 31, 2011, respectively.
Approximately, 27% of our consolidated service revenues were denominated in U.S. dollars and/or were linked to U.S. dollars for the six months ended June 30, 2012 as compared with approximately 30% for the six months ended June 30, 2011. Our consolidated expenses were denominated in U.S. dollars and/or were linked to U.S. dollars was approximately 17% for the six months ended June 30, 2012 as compared with approximately 20% for the six months ended June 30, 2011. In this respect, the appreciation of the weighted average exchange rate of the Philippine peso against the U.S. dollar decreased our revenues and expenses, and consequently, our cash flow from operations in terms of Philippine peso.
The Philippine peso had appreciated by 3.74% against the U.S. dollar to Php42.28 to US$1.00 as at June 30, 2012 from Php43.92 to US$1.00 as at December 31, 2011. As at June 30, 2011, the Philippine peso had appreciated by 1.02% against the U.S. dollar to Php43.36 to US$1.00 from Php43.81 to US$1.00 as at December 31, 2010. As a result of our consolidated foreign exchange movements, as well as the amount of our consolidated outstanding net foreign currency financial assets and liabilities, we recognized net consolidated foreign exchange gains of Php1,565 million and Php426 million for the six months ended June 30, 2012 and 2011, respectively. See Note 4 Operating Segment Information.
Management conducted a survey among our banks to determine the outlook of the Philippine peso-U.S. dollar exchange rate until our next reporting date of September 30, 2012. Our outlook is that the Philippine peso-U.S. dollar exchange rate may weaken/strengthen by 0.53% as compared to the exchange rate of Php42.28 to US$1.00 as at June 30, 2012. If the Philippine peso-U.S. dollar exchange rate had weakened/strengthened by 0.53% as at June 30, 2012, with all other variables held constant, profit after tax for the six months ended June 30, 2012 would have been approximately Php162 million higher/lower and our consolidated stockholders equity as at June 30, 2012 would have been approximately Php156 million higher/lower, mainly as a result of consolidated foreign exchange gains and losses on translation of U.S. dollar-denominated net assets/liabilities and mark-to-market valuation of derivative financial instruments.
Interest Rate Risk
Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and short-term borrowings with floating interest rates.
Our policy is to manage interest cost through a mix of fixed and variable rate debts. We evaluate the fixed to floating ratio of our loans in line with movements of relevant interest rates in the financial markets. Based on our assessment, new financing will be priced either on a fixed or floating rate basis. On a limited basis, we enter into interest rate swap agreements in order to manage our exposure to interest rate fluctuations. We make use of hedging instruments and structures solely for reducing or managing financial risk associated with our liabilities and not for trading purposes.
The following tables set out the carrying amounts, by maturity, of our financial instruments that are expected to have exposure on interest rate risk as at June 30, 2012 and December 31, 2011. Financial instruments that are not subject to interest rate risk were not included in the table.
As at June 30, 2012 (Unaudited)
Discount/ | ||||||||||||||||||||||||||||||||||||||||||||
Debt Issuance Cost | Carrying Value | |||||||||||||||||||||||||||||||||||||||||||
In U.S. Dollars | In Php | In Php | Fair Value | |||||||||||||||||||||||||||||||||||||||||
In U.S. | ||||||||||||||||||||||||||||||||||||||||||||
Below 1 year | 1-2 years | 2-3 years | 3-5 years | Over 5 years | Total | In Php | Dollar | In Php | ||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||||||||||||||||||||||
Investment in Debt Securities
|
||||||||||||||||||||||||||||||||||||||||||||
Philippine Peso
|
9 | 3 | | | | 12 | 520 | | 520 | 12 | 524 | |||||||||||||||||||||||||||||||||
Interest rate
|
6.9200 | % | 7.0000 | % | | | | | | | | | | |||||||||||||||||||||||||||||||
Cash in Bank
|
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar
|
22 | | | | | 22 | 922 | | 922 | 22 | 922 | |||||||||||||||||||||||||||||||||
Interest rate
|
0.0100% to 0.7580% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Philippine Peso
|
64 | | | | | 64 | 2,716 | | 2,716 | 64 | 2,716 | |||||||||||||||||||||||||||||||||
Interest rate
|
0.1000% to 3.0000% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Other Currencies
|
3 | | | | | 3 | 111 | | 111 | 3 | 111 | |||||||||||||||||||||||||||||||||
Interest rate
|
0.0100% to 2.0000% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Temporary Cash Investments |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar
|
125 | | | | | 125 | 5,277 | | 5,277 | 125 | 5,277 | |||||||||||||||||||||||||||||||||
Interest rate
|
0.2500% to 1.6500% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Philippine Peso
|
514 | | | | | 514 | 21,720 | | 21,720 | 514 | 21,720 | |||||||||||||||||||||||||||||||||
Interest rate
|
1.0000% to 5.0000% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Short-term Investments
|
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar
|
13 | | | | | 13 | 544 | | 544 | 13 | 544 | |||||||||||||||||||||||||||||||||
Interest rate
|
4.0090 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
Philippine Peso
|
1 | | | | | 1 | 67 | | 67 | 1 | 67 | |||||||||||||||||||||||||||||||||
Interest rate
|
3.2980 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
751 | 3 | | | | 754 | 31,877 | | 31,877 | 754 | 31,881 | ||||||||||||||||||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||||||||||||||||||||||
Long-term Debt
|
||||||||||||||||||||||||||||||||||||||||||||
Fixed Rate
|
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar Notes
|
| | | 234 | | 234 | 9,904 | 89 | 9,815 | 279 | 11,806 | |||||||||||||||||||||||||||||||||
Interest rate
|
| | | 8.3500 | % | | | | | | | | ||||||||||||||||||||||||||||||||
U.S. Dollar Fixed Loans
|
| 341 | 27 | 31 | 15 | 414 | 17,479 | 1,475 | 16,004 | 412 | 17,394 | |||||||||||||||||||||||||||||||||
Interest rate
|
| 1.9000% to 3.9550% | 1.9000% to 3.9550% | 1.9000% to 3.9550% | 3.9550 | % | | | | | | | ||||||||||||||||||||||||||||||||
Philippine Peso
|
| 145 | 118 | 623 | 311 | 1,197 | 50,606 | 50 | 50,556 | 1,292 | 54,638 | |||||||||||||||||||||||||||||||||
Interest rate
|
| 5.3300% to 9.1038% | 5.3300% to 9.1038% | 5.3300% to 9.1038% | 5.4963% to 9.1038% | | | | | | | |||||||||||||||||||||||||||||||||
Variable Rate
|
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar
|
38 | 281 | 117 | 184 | 37 | 657 | 27,788 | 73 | 27,715 | 657 | 27,788 | |||||||||||||||||||||||||||||||||
Interest rate
|
US$ | LIBOR + 0.4000% to 0.7500 |
% |
US$ | LIBOR + 0.3000% to 2.0000 |
% |
US$ | LIBOR + 0.3000% to 2.0000 |
% |
US$ | LIBOR + 0.3000% to 2.0000 |
% |
US$ | LIBOR + 0.3000% to 1.8000 |
% |
|
|
|
|
|
|
|||||||||||||||||||||||
Philippine Peso
|
| 126 | 10 | 70 | | 206 | 8,685 | 1 | 8,684 | 206 | 8,685 | |||||||||||||||||||||||||||||||||
Interest rate
|
| PHP PDST-F + 0.3000% | PHP PDST-F + 0.3000% | BSP overnight rate + 30 bps to 50 bps |
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Short-term Debt
|
||||||||||||||||||||||||||||||||||||||||||||
Notes Payable
|
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar
|
11 | | | | | 11 | 486 | | 486 | 11 | 486 | |||||||||||||||||||||||||||||||||
Interest rate
|
Banks prime rate |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||
Philippine Peso
|
23 | | | | | 23 | 963 | | 963 | 23 | 963 | |||||||||||||||||||||||||||||||||
Interest rate
|
4.0000 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
72 | 893 | 272 | 1,142 | 363 | 2,742 | 115,911 | 1,688 | 114,223 | 2,880 | 121,760 | ||||||||||||||||||||||||||||||||||
As at December 31, 2011 (Audited)
Discount/ | ||||||||||||||||||||||||||||||||||||||||||||
Debt Issuance Cost | Carrying Value | |||||||||||||||||||||||||||||||||||||||||||
In U.S. Dollars | In Php | In Php | Fair Value | |||||||||||||||||||||||||||||||||||||||||
In U.S. | ||||||||||||||||||||||||||||||||||||||||||||
Below 1 year | 1-2 years | 2-3 years | 3-5 years | Over 5 years | Total | In Php | Dollar | In Php | ||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||||||||||
Investment in Debt Securities |
||||||||||||||||||||||||||||||||||||||||||||
Philippine Peso |
8 | 4 | | | | 12 | 508 | | 508 | 12 | 516 | |||||||||||||||||||||||||||||||||
Interest rate |
6.8750 | % | 7.0000 | % | | | | | | | | | | |||||||||||||||||||||||||||||||
Cash in Bank |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar |
14 | | | | | 14 | 626 | | 626 | 14 | 626 | |||||||||||||||||||||||||||||||||
Interest rate |
0.0100% to 0.7663% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Philippine Peso |
66 | | | | | 66 | 2,886 | | 2,886 | 66 | 2,886 | |||||||||||||||||||||||||||||||||
Interest rate |
0.0100% to 3.1500% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Other Currencies |
5 | | | | | 5 | 218 | | 218 | 5 | 218 | |||||||||||||||||||||||||||||||||
Interest rate |
0.0100% to 2.0000% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Temporary Cash Investments |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar |
133 | | | | | 133 | 5,824 | | 5,824 | 133 | 5,824 | |||||||||||||||||||||||||||||||||
Interest rate |
0.2500% to 1.7000% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Philippine Peso |
810 | | | | | 810 | 35,596 | | 35,596 | 810 | 35,596 | |||||||||||||||||||||||||||||||||
Interest rate |
1.0000% to 4.8750% | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Short-term Investments |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar |
12 | | | | | 12 | 540 | | 540 | 12 | 540 | |||||||||||||||||||||||||||||||||
Interest rate |
3.1020 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
Philippine Peso |
| | | | | | 18 | | 18 | | 18 | |||||||||||||||||||||||||||||||||
Interest rate |
3.5000 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
1,048 | 4 | | | | 1,052 | 46,216 | | 46,216 | 1,052 | 46,224 | ||||||||||||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Long-term Debt |
||||||||||||||||||||||||||||||||||||||||||||
Fixed Rate |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar Notes |
146 | | | | 234 | 380 | 16,691 | 124 | 16,567 | 427 | 18,740 | |||||||||||||||||||||||||||||||||
Interest rate |
11.3750 | % | | | | 8.3500 | % | | | | | | | |||||||||||||||||||||||||||||||
U.S. Dollar Fixed Loans |
| 53 | 302 | 28 | 21 | 404 | 17,738 | 1,900 | 15,838 | 359 | 15,770 | |||||||||||||||||||||||||||||||||
Interest rate |
| 2.9900% to 3.9550% | 2.2500% to 3.9550% | 2.9900% to 3.9550% | 3.9550 | % | | | | | | | ||||||||||||||||||||||||||||||||
Philippine Peso |
121 | 137 | 122 | 590 | 187 | 1,157 | 50,818 | 38 | 50,780 | 1,194 | 52,454 | |||||||||||||||||||||||||||||||||
Interest rate |
5.6250% to 6.5708% | 5.4692% to 8.4346% | 5.4692% to 9.1038% | 5.4963% to 9.1038% | 5.4963% to 9.1038% | | | | | | | |||||||||||||||||||||||||||||||||
Variable Rate |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar |
11 | 242 | 73 | 94 | 58 | 478 | 20,996 | 71 | 20,925 | 476 | 20,925 | |||||||||||||||||||||||||||||||||
Interest rate |
US$LIBOR + 0.7500% | US$LIBOR + 0.3000% | US$LIBOR + 0.3000% | US$LIBOR + 0.3000% | US$LIBOR + 0.3000% | | | | | | | |||||||||||||||||||||||||||||||||
to 1.8500% | to 1.8500% | to 1.8000% | to 1.8000% | |||||||||||||||||||||||||||||||||||||||||
Philippine Peso |
1 | 147 | 20 | 61 | | 229 | 10,059 | 3 | 10,056 | 229 | 10,056 | |||||||||||||||||||||||||||||||||
Interest rate |
PDST-F + 1.3750% | PDST-F + 0.3000% | PDST-F + 0.3000% | BSPovernight rate | | | | | | | | |||||||||||||||||||||||||||||||||
+ 30 bps to 50 bps | ||||||||||||||||||||||||||||||||||||||||||||
Short-term Debt |
||||||||||||||||||||||||||||||||||||||||||||
Notes Payable |
||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollar |
35 | | | | | 35 | 1,537 | | 1,537 | 35 | 1,537 | |||||||||||||||||||||||||||||||||
Banks | ||||||||||||||||||||||||||||||||||||||||||||
Interest rate |
prime rate | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Philippine Peso |
36 | | | | | 36 | 1,572 | | 1,572 | 36 | 1,572 | |||||||||||||||||||||||||||||||||
Interest rate |
4.0000 | % | | | | | | | | | | | ||||||||||||||||||||||||||||||||
350 | 579 | 517 | 773 | 500 | 2,719 | 119,411 | 2,136 | 117,275 | 2,756 | 121,054 | ||||||||||||||||||||||||||||||||||
Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk.
Repricing of floating rate financial instruments is mostly done on intervals of three months or six months. Interest on fixed rate financial instruments is fixed until maturity of the particular instrument.
Management conducted a survey among our banks to determine the outlook of the U.S. dollar and Philippine peso interest rates until our next reporting date of September 30, 2012. Our outlook is that the U.S. dollar and Philippine peso interest rates may move 5 basis points and 15 basis points higher/lower, respectively, as compared to levels as at June 30, 2012. If U.S. dollar interest rates had been 5 basis points higher/lower as compared to market levels as at June 30, 2012, with all other variables held constant, profit after tax for the six months ended June 30, 2012 and our consolidated stockholders equity as at June 30, 2012 would have been approximately Php13 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If Philippine peso interest rates had been 15 basis points higher/lower as compared to market levels as at June 30, 2012, with all other variables held constant, profit after tax for the six months ended June 30, 2012 and our consolidated stockholders equity as at June 30, 2012 would have been approximately Php47 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions.
Credit Risk
Credit risk is the risk that we will incur a loss arising from our customers, clients or counterparties that fail to discharge their contracted obligations. We manage and control credit risk by setting limits on the amount of risk we are willing to accept for individual counterparties and by monitoring exposures in relation to such limits.
We trade only with recognized and creditworthy third parties. It is our policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis to reduce our exposure to bad debts.
We established a credit quality review process to provide regular identification of changes in the creditworthiness of counterparties. Counterparty limits are established and reviewed periodically based on latest available financial data on our counterparties credit ratings, capitalization, asset quality and liquidity. Our credit quality review process allows us to assess the potential loss as a result of the risks to which we are exposed and allow us to take corrective actions.
The table below shows the maximum exposure to credit risk for the components of our consolidated statement of financial position, including derivative financial instruments as at June 30, 2012 and December 31, 2011:
Gross Maximum Exposure(1) | Net Maximum Exposure(2) | ||||||||||||||||||
2012 | 2011 | 2012 2011 | |||||||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Audited) | ||||||||||||||||
(in million pesos) | |||||||||||||||||||
Loans and receivables: |
|||||||||||||||||||
Advances and other noncurrent assets |
8,946 | 1,165 | 8,933 | 1,152 | |||||||||||||||
Cash and cash equivalents |
31,612 | 46,057 | 31,015 | 45,483 | |||||||||||||||
Short-term investments |
73 | 24 | 73 | 24 | |||||||||||||||
Foreign administrations |
4,947 | 4,762 | 4,848 | 4,693 | |||||||||||||||
Retail subscribers |
4,046 | 4,038 | 3,993 | 3,975 | |||||||||||||||
Corporate subscribers |
3,425 | 2,708 | 3,256 | 2,495 | |||||||||||||||
Domestic carriers |
698 | 1,212 | 698 | 1,212 | |||||||||||||||
Dealers, agents and others |
3,107 | 3,525 | 3,050 | 3,497 | |||||||||||||||
HTM investments: |
|||||||||||||||||||
Investment in debt securities |
520 | 508 | 520 | 508 | |||||||||||||||
Available-for-sale financial assets |
5,631 | 7,181 | 5,631 | 7,181 | |||||||||||||||
Financial instruments at FVPL: |
|||||||||||||||||||
Short-term investments |
538 | 534 | 538 | 534 | |||||||||||||||
Long-term currency swap |
| 356 | | 356 | |||||||||||||||
Derivatives used for hedging: |
|||||||||||||||||||
Forward foreign exchange contracts |
62 | 10 | 62 | 10 | |||||||||||||||
Total |
63,605 | 72,080 | 62,617 | 71,120 | |||||||||||||||
(1) | Gross financial assets before taking into account any collateral held or other credit enhancements or offsetting arrangements. |
(2) | Gross financial assets after taking into account any collateral held or other credit enhancements or offsetting arrangements or deposit insurance. |
The table below provides information regarding the credit quality by class of our financial assets according to our credit ratings of counterparties as at June 30, 2012 and December 31, 2011:
Neither past due | ||||||||||||||||||||
nor impaired | Past due but | |||||||||||||||||||
Total | Class A(1) | Class B(2) | not impaired | Impaired | ||||||||||||||||
(in million pesos) | ||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||
Loans and receivables: |
||||||||||||||||||||
Advances and other noncurrent assets |
8,946 | 8,909 | 37 | | | |||||||||||||||
Cash and cash equivalents |
31,612 | 29,823 | 1,789 | | | |||||||||||||||
Short-term investments |
73 | 73 | | | | |||||||||||||||
Retail subscribers |
12,176 | 1,164 | 982 | 1,900 | 8,130 | |||||||||||||||
Corporate subscribers |
9,979 | 1,641 | 371 | 1,413 | 6,554 | |||||||||||||||
Foreign administrations |
5,143 | 1,451 | 698 | 2,798 | 196 | |||||||||||||||
Domestic carriers |
853 | 169 | 22 | 507 | 155 | |||||||||||||||
Dealers, agents and others |
3,790 | 1,668 | 1,074 | 365 | 683 | |||||||||||||||
HTM investments: |
||||||||||||||||||||
Investment in debt securities |
520 | 520 | | | | |||||||||||||||
Available-for-sale financial assets |
5,631 | 148 | 5,483 | | | |||||||||||||||
Financial instruments at FVPL(3): |
||||||||||||||||||||
Short-term investments |
538 | 538 | | | | |||||||||||||||
Derivatives used for hedging: |
||||||||||||||||||||
Forward foreign exchange contracts |
62 | 62 | | | | |||||||||||||||
Total |
79,323 | 46,166 | 10,456 | 6,983 | 15,718 | |||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||
Loans and receivables: |
||||||||||||||||||||
Advances and other noncurrent assets |
1,165 | 1,128 | 37 | | | |||||||||||||||
Cash and cash equivalents |
46,057 | 44,885 | 1,172 | | | |||||||||||||||
Short-term investments |
24 | 24 | | | | |||||||||||||||
Retail subscribers |
11,302 | 1,449 | 1,050 | 1,539 | 7,264 | |||||||||||||||
Corporate subscribers |
9,200 | 974 | 375 | 1,359 | 6,492 | |||||||||||||||
Foreign administrations |
4,961 | 1,309 | 1,242 | 2,211 | 199 | |||||||||||||||
Domestic carriers |
1,323 | 215 | 24 | 973 | 111 | |||||||||||||||
Dealers, agents and others |
4,231 | 1,705 | 1,217 | 603 | 706 | |||||||||||||||
HTM investments: |
||||||||||||||||||||
Investment in debt securities |
508 | 508 | | | | |||||||||||||||
Available-for-sale financial assets |
7,181 | 150 | 7,031 | | | |||||||||||||||
Financial instruments at FVPL(3): |
||||||||||||||||||||
Short-term investments |
534 | 534 | | | | |||||||||||||||
Long-term currency swap |
356 | 356 | | | | |||||||||||||||
Derivatives used for hedging: |
||||||||||||||||||||
Forward foreign exchange contracts |
10 | 10 | | | | |||||||||||||||
Total |
86,852 | 53,247 | 12,148 | 6,685 | 14,772 | |||||||||||||||
(1) | This includes low risk and good paying customer accounts with no history of account treatment for a defined period and no overdue accounts as at report date; and deposits or placements to counterparties with good credit rating or bank standing financial review. |
(2) | This includes medium risk and average paying customer accounts with no overdue accounts as at report date, and new customer accounts for which sufficient credit history has not been established; and deposits or placements to counterparties not classified as Class A. |
(3) | Gross receivables from counterparties, before any offsetting arrangements. |
The aging analysis of past due but not impaired class of financial assets as at June 30, 2012 and December 31, 2011 are as follows:
Past due but not impaired | ||||||||||||||||||||||||
Neither past due | ||||||||||||||||||||||||
Total | nor impaired | 1-60 days | 61-90 days | Over 91 days | Impaired | |||||||||||||||||||
(in million pesos) | ||||||||||||||||||||||||
June 30, 2012 (Unaudited) |
||||||||||||||||||||||||
Loans and receivables: |
||||||||||||||||||||||||
Advances and other noncurrent assets |
8,946 | 8,946 | | | | | ||||||||||||||||||
Cash and cash equivalents |
31,612 | 31,612 | | | | | ||||||||||||||||||
Short-term investments |
73 | 73 | | | | | ||||||||||||||||||
Retail subscribers |
12,176 | 2,146 | 1,228 | 180 | 492 | 8,130 | ||||||||||||||||||
Corporate subscribers |
9,979 | 2,012 | 634 | 241 | 538 | 6,554 | ||||||||||||||||||
Foreign administrations |
5,143 | 2,149 | 1,116 | 529 | 1,153 | 196 | ||||||||||||||||||
Domestic carriers |
853 | 191 | 100 | 77 | 330 | 155 | ||||||||||||||||||
Dealers, agents and others |
3,790 | 2,742 | 148 | 110 | 107 | 683 | ||||||||||||||||||
HTM investments: |
||||||||||||||||||||||||
Investment in debt securities |
520 | 520 | | | | | ||||||||||||||||||
Available-for-sale financial assets |
5,631 | 5,631 | | | | | ||||||||||||||||||
Financial instruments at FVPL: |
||||||||||||||||||||||||
Short-term investments |
538 | 538 | | | | | ||||||||||||||||||
Derivatives used for hedging: |
||||||||||||||||||||||||
Forward foreign exchange contracts |
62 | 62 | | | | | ||||||||||||||||||
Total |
79,323 | 56,622 | 3,226 | 1,137 | 2,620 | 15,718 | ||||||||||||||||||
December 31, 2011 (Audited) |
||||||||||||||||||||||||
Loans and receivables: |
||||||||||||||||||||||||
Advances and other noncurrent assets |
1,165 | 1,165 | | | | | ||||||||||||||||||
Cash and cash equivalents |
46,057 | 46,057 | | | | | ||||||||||||||||||
Short-term investments |
24 | 24 | | | | | ||||||||||||||||||
Retail subscribers |
11,302 | 2,499 | 1,202 | 226 | 111 | 7,264 | ||||||||||||||||||
Corporate subscribers |
9,200 | 1,349 | 706 | 263 | 390 | 6,492 | ||||||||||||||||||
Foreign administrations |
4,961 | 2,551 | 897 | 282 | 1,032 | 199 | ||||||||||||||||||
Domestic carriers |
1,323 | 239 | 100 | 98 | 775 | 111 | ||||||||||||||||||
Dealers, agents and others |
4,231 | 2,922 | 182 | 199 | 222 | 706 | ||||||||||||||||||
HTM investments: |
||||||||||||||||||||||||
Investment in debt securities |
508 | 508 | | | | | ||||||||||||||||||
Available-for-sale financial assets |
7,181 | 7,181 | | | | | ||||||||||||||||||
Financial instruments at FVPL: |
||||||||||||||||||||||||
Short-term investments |
534 | 534 | | | | | ||||||||||||||||||
Long-term currency swap |
356 | 356 | | | | | ||||||||||||||||||
Derivatives used for hedging: |
||||||||||||||||||||||||
Forward foreign exchange contracts |
10 | 10 | | | | | ||||||||||||||||||
Total |
86,852 | 65,395 | 3,087 | 1,068 | 2,530 | 14,772 | ||||||||||||||||||
Impairment Assessments |
The main consideration for the impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. Our impairment assessments are classified into two areas: individually assessed allowance and collectively assessed allowances.
Individually assessed allowance
We determine the allowance appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterpartys business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral, if any, and the timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.
Collectively assessed allowances
Allowances are assessed collectively for losses on loans and advances that are not individually significant and for individually significant loans and advances where there is no objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.
The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it is identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. The impairment allowance is then reviewed by credit management to ensure alignment with our policy.
Capital Management Risk
We aim to achieve an optimal capital structure in pursuit of our business objectives which include maintaining healthy capital ratios and strong credit ratings, and maximizing shareholder value.
In recent years, our cash flow from operations has allowed us to substantially reduce debts and, in 2005, resume payment of dividends on common shares. Since 2005, our strong cash flow has enabled us to make investments in new areas and pay higher dividends.
Our approach to capital management focuses on balancing the allocation of cash and the incurrence of debt as we seek new investment opportunities for new businesses and growth areas. Our current dividend policy is to pay out 70% of our core earnings per share. Further, in the event no investment opportunities arise, we may consider the option of returning additional cash to our shareholders in the form of special dividends or share buybacks. Philippine corporate regulations prescribe, however, that we can only pay out dividends or make capital distribution up to the amount of our unrestricted retained earnings.
As part of our goal to maximize returns to our shareholders, we obtained in 2008 an approval from the Board of Directors to conduct a share buyback program for up to five million PLDT common shares. Under the share buyback program, we acquired a total of approximately 2.72 million shares of PLDTs common stock for a total consideration of Php6,505 million, representing approximately 1% of PLDTs outstanding shares of common stock, at a weighted average price of Php2,388 per share as at June 30, 2012 and December 31, 2011. See Note 8 Earnings Per Common Share and Note 19 Equity.
Some of our debt instruments contain covenants that impose maximum leverage ratios. In addition, our credit ratings from the international credit ratings agencies are based on our ability to remain within certain leverage ratios.
We monitor capital using several financial leverage measurements calculated in conformity with PFRS, such as net consolidated debt to equity ratio. Net consolidated debt is derived by deducting cash and cash equivalents and short-term investments from total debt (long-term debt, including current portion and notes payable). Our objective is to maintain our net consolidated debt to equity ratio below 100%.
The table below provides information regarding our consolidated debt to equity ratio as at June 30, 2012 and December 31, 2011:
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
(in million pesos) | ||||||||
Long-term debt, including current portion (Note 20) |
112,774 | 114,166 | ||||||
Notes payable (Note 20) |
1,449 | 3,109 | ||||||
Total consolidated debt |
114,223 | 117,275 | ||||||
Cash and cash equivalents (Note 15) |
(31,612 | ) | (46,057 | ) | ||||
Short-term investments |
(611 | ) | (558 | ) | ||||
Net consolidated debt |
82,000 | 70,660 | ||||||
Equity attributable to equity holders of PLDT |
146,116 | 151,833 | ||||||
Net consolidated debt to equity ratio |
56 | % | 47 | % | ||||
28. | Cash Flow Information |
The table below shows non-cash activities for the six months ended June 30, 2012 and 2011:
2012 | 2011 | |||||||
(Unaudited) | ||||||||
(in million pesos) | ||||||||
Liability from redemption of preferred shares which consists of the following:
|
||||||||
Preferred shares redeemed (Note 19)
|
4,029 | | ||||||
Unclaimed dividends from stock agent form part of trust account
|
2,323 | | ||||||
Unpaid dividends for preferred shares redeemed
|
1,821 | | ||||||
Shares issued for settlement of the purchase price of Digitel shares tendered by the noncontrolling Digitel stockholders |
4,401 |
|
||||||
Recognition of asset retirement obligations (Note 21)
|
27 | 12 | ||||||