Meralco Financial Analysis
INTRODUCTION MERALCO is the Philippines’ largest electric power distribution company, with a franchise service area covering 9,337 square kilometers. It provides power to 4. 8 million customers in 31 cities and 80 municipalities, which include the whole of Metro Manila, the provinces of Rizal, Cavite, and Bulacan, and parts of Pampanga, Batangas, Laguna, and Quezon. Business establishments in the franchise area account for almost 46% of the country’s Gross Domestic Product or GDP.
Through Clark Electric Distribution Corporation or CEDC, a 65%-subsidiary, it holds the power distribution franchise for Clark Special Economic Zone in Clark, Pampanga. CEDC franchise area covers 32 square kilometers and 1,611 customers. The Company is organized into three major operating segments, namely, power distribution, real state and contracts, services, and others. In 2010, MERALCO PowerGen Corporation or MPG (formerly Asian Center for Energy Management), a wholly-owned subsidiary, was reorganized as the Company’s vehicle for potential entry into power generation. COMPANY PROFILE
MERALCO marches on to its 108th year of service in 2011. Consistently in the list of the Philippines’ top five corporations and cited among Asia’s finest, MERALCO today serves over 4. 8 million residential, commercial and industrial customers. It is strategically located to serve the country’s center of commerce and industry and its hub of government services and infrastructures. It services about 30 manufacturing economic zones, which also compete in the global market. Likewise, the Company caters to providers of outsourced business processes, both domestic and international. MERALCO’s 9,337 sq. km. franchise area overs 31 cities and 80 municipalities including Metro Manila, the entire provinces of Bulacan, Rizal, and Cavite; parts of the provinces of Laguna, Quezon, Batangas, and Pampanga. The electrification level in the franchise area is 99%. MISSION To provide our customers with the best value in energy, products, and services. VISSION To be a world-class company and the service provider of choice. OBJECTIVES: To protect and enhance the interest of its stakeholders by committing itself to the following principles. 1. Customers are its reason for being, and therefore, they should always be treated with dignity.
The Company must be fully responsive to their needs. The Company has the responsibility to provide the customers with the highest quality products and services, consistent with their requirements and with international standards; * Treat the customers fairly, courteously, and with integrity in all of its business transactions; * Act promptly on their immediate concerns and be receptive to their long-term needs and interest; and * Make every effort to ensure that the health, safety and general well-being of its customers are enhanced by its products and services. 2.
Employees are their most valued asset, and therefore, they should always be treated with dignity and with full consideration of their interests. The Company has the responsibility to * Provide its employees with incentives and opportunities for professional growth and advancement; * Provide its employees with just and competitive compensation and benefits that improve their living conditions and incentives * Guarantee fairness, equal treatment, and opportunity and avoid discriminatory practices; and * Provide suitable and safe working conditions to protect employees from avoidable injury and illness in the workplace. Its Investors are its principals, and therefore, the trust they have placed in the company must be honored. The company has the responsibility to * Apply professional and diligent management to ensure the financial viability of the company and maintain a fair and competitive return for its investors, and * Conserve and enhance its investors’ assets, and fulfill and safeguard their interest. 4. The Suppliers and Creditors are their business partners and, therefore, the relationship with them must be based on mutual respect and benefit.
The company has the responsibility to * Foster long-term stability, direct relation and continuous development with suppliers to attain quality, competitiveness, process efficiency, and performance reliability; Seek fairness, truthfulness, integrity, and transparency in all of its business dealings with them; and Seek to encourage and prefer suppliers whose business practices respect human dignity and the environment. The Competitors are its catalyst toward continuing service excellence and, therefore, the competition with them should be fair and honest, a basic requirement for national development in the distribution of products and services to the community. The Company has the responsibility to Promote behavior that demonstrates mutual respect among competitors; and * Maintain the highest level of business ethics and integrity. The Community is its business environment and the society it serves. The Company has the responsibility to uphold and maintain at all times the highest standards of business ethics; Fulfil with dedication and commitment its social responsibilities; * Undertake activities that support and contribute to the economic and social development of the country; 7.
Another increase in current assets may be due to higher sales for the year 2010.
CURRENT LIABILITIES Current liabilities had increased by 5. 42% or Php2,282 million by the year ended December 31, 2010, with trade payables and accrued expenses having the highest increase worth Php2,877 million, achieving 20. 52% of its total liabilities. Decreases in the current liabilities were due to payments of some payables and some customer’s refunds. NONCURRENT ASSETS Most of the noncurrent assets had decreased by the year 2010, this is due completion of major electric projects and due to the consumption of fuel gas.
NONCURRENT LIABILITIES
A total of Php4,789 million increase in noncurrent liabilities of the company may due to the issuance of long term obligations that could result in an increase in working capital. This increase was due to the pre-termination of some loan deposits received from units sold on installment contracts. EQUITY The employee share-based payment plan had increased by 31% as of December 31, 2010. This is due to the recognition of the provisions of PFRS2, “Shared-based Payments” related to the Employee Stock Purchase Plan. And a decrease of 98. 5% of the share in cumulative translation adjustment of a subsidiary and an associate resulted from the return of capital related to the Company’s investment in FPPC. RATIO ANALYSIS CURRENT RATIO A total of Php55,757 million worth of current assets definitely means the capability of the Company to pay its current liabilities worth Php44,045. This means a 1. 26 current ratio is an indicator of a slightly strong financial position. ACID-TEST RATIO A 1. 13:1 acid-test ratio of the company simply portrays that its most liquid assets can settle its current liabilities. RECEIVABLE TURNOVER
The Company can collect its receivables 6. 74 times in a year with an average of 54. 15 days or less than two months collection period. This situation is favorable to the company’s present position. INVENTORY TURNOVER As inventory is being a concern, the company is efficient in managing its inventories. A 74. 46 times inventory turnover is proof of the latter statement. It is not too high nor too low indicating better liquidity. DEBT TOTAL ASSET RATIO More than half of the company’s assets is financed through the company’s debts. This is proven by a 0. 65 ratio of debt to the total assets.
TIMES INTEREST EARNED Since the earnings of the company, Php14,437, is higher than its total interest expense, Php493, the company has the capability to settle its debts. Getting a 30. 28 ratio means that the company is able to meet its interest obligations because its earnings are significantly greater than its annual interest obligations. PROFIT MARGIN Compare to the 2009 profit margin of 3%, the company got a 4% profit margin which indicates that the revenue earned, Php245, 461million by the company was effectively converted into actual profit, Php10,117 million, despite Php231, 024 total expenses.
ASSET TURNOVER The 1. 4 asset turnover ratio of 2010 is relatively higher than 2009 meaning despite Php178,968 million total assets the company still gained a total revenue of Php245,461 million with a total net profit of Php10,117 million meaning the company is efficiently utilizing its assets to produce a favorable profit. RETURN ON ASSETS The company has a total of 6% return on assets of 2010 which is 2% higher than the 4% return on assets of 2009 indicates that the company can make an intelligent choice on how to spend its money on new assets. RETURN ON COMMON STOCKHOLDER’S EQUITY
A 6% increase in return on common stockholder’s equity simply indicates that the company is generating profits on its common stock investment meaning it is generating an income for the benefit of common stockholders. EARNINGS PER SHARE With an 8. 62 earnings per share which is higher than the 2009 EPS, 5. 74, the company is getting higher earnings, meaning a strong financial position. PRICE-EARNINGS RATIO The 1. 16 price-earnings mean that investors are ready to pay 10 times earnings. The company has a chance in getting numerous investors. PAY-OUT RATIO A 77. 3% of the total Php7834 can be paid back to shareholders. Investors will increase their confidence to the company. CONCLUSION MERALCO is the Philippines’ largest electric power distribution company, with a franchise service area covering 9,337 square kilometers. It provides power to 4. 8 million customers in 31 cities and 80 municipalities, which include the whole of Metro Manila, the provinces of Rizal, Cavite, and Bulacan, and parts of Pampanga, Batangas, Laguna, and Quezon. Business establishments in the franchise area account for almost 46% of the country’s Gross Domestic Product or GDP.
The Company registered consolidated revenues for the year ended December 31, 2010, amounted to P=245,461 million, 33% higher compared with the P=184,550 million for the same period last year. Sales from all operating segments increased during the year with the highest registered by power distribution. The increase in electricity spending is attributable to (i) increased number of customers across all customer classes, (ii) growth in various industries as restocking activities resume after the global economic crisis, (iii) unusually warmer temperature during the first half of the year and, (iv) election spendings.
Sales from electricity amounted to P=239,077 million, an increase of P=60,391 million, or 34%, from P=178,686 million for the year ended December 31, 2009. Consolidated costs and expenses amounted to P=231,024 million for the year ended December 31, 2010, P=55,453 million higher than the P=175,571 million last year, primarily due to higher purchased power costs, increased provision for doubtful accounts, accrual for compensation and employee benefits. The 2010 consolidated full-year results reflect higher recurring net income compared with 2009 mainly as a result of increased volume of energy sold.
Revenues generated from power distribution amounted to P=239,164 million for the year ended December 31, 2010, higher by 34% compared with P=178,752 million in 2009. Pass-through charges increased by P=48,442 million, or 33% to P=195,435 million compared with P=146,993 million in 2009, as a result of higher average generation charge during the year, partially offset by the decrease in the average recoverable system loss charge to P=11,567 million from P=16,108 million. Costs and expenses of the power distribution segment increased by P=55,211 million, or 32%, to P=225,905 million in 2010 compared with P=170,694 million in 2009.
For the year ended December 31, 2010, purchased power costs amounted to P=200,916 million, an increase of 33% from P=150,928 million in 2009 brought about by the higher electricity consumption particularly from the industrial customers, and increased in average purchased power cost per kWh. Operations and maintenance expenses increased by P=2,100 million, or 15%, to P=15,711 million for the year ended December 31, 2010, compared with P=13,611 million for the year ended December 31, 2009, brought about by the increases in salaries and wages and provision for doubtful accounts.
MERALCO’s liquidity increased as the current and quick ratio rose in 2010. On the other hand, the company’s collection of receivables had dropped down from 72 days of 2009 to 54 days of 2010. This means the company is having a good turnover when it comes to it receivables. in this connection, the company achieved the 74. 46 times of inventory turnover that resulted to a higher sales. 0. 65 debt to total asset ratio and 30. 28 times interest earned proved that the company is solvent and able to meet its interest obligations.
Revenue earned was effectively converted into actual profit despite a higher total cost of expenses still the company gained a 59% increase in net income. As far as an asset is a concern, the company is efficiently utilizing its asset that resulted to a favorable profit. And because of the increase, we can say that the company is profitable and this could gain the trust of shareholders and may attract investors. RECOMMENDATION MERALCO’s total performance could be the basis of prospective investors to invest and it could be the reason why present stockholders will continue to do business with the company.
A favorable increase in sales as well as the increase in net income may not be an indicator of a total good performance of a company. The management should still preserve its good turnover on assets and inventories to preserve its stockholders and the legacy that MERALCO had started ever since. The company should sustain its good performance since it’s the number one electricity supplier here in the Philippines. The service should be enhanced and be improved as well. The customer’s refund should be minimized as well as the receivables.
The company should think of a better way of reducing refunds and receivables without sacrificing its service and the trust of the customers. Assets should continue to increase and be utilized in the right manner. Acquiring assets should be done at the right time so that the company will not suffer in paying its unwanted debts. Continuous improvement and innovation when it comes to service is highly recommended for the company to hold its present position in the market. MERALCO should continue to give light and power to the entire archipelago.
