EXECUTIVE SUMMARY INTRODUCTION The Metro Manila Wastewater Management Project (MWMP) was established on May 31, 2012 through a loan agreement between the International Bank for Reconstruction and Development (IBRD) of World Bank and Land Bank of the Philippines (LBP). This Project aims to improve wastewater services in selected sub-catchments of Metro Manila and surrounding areas. To finance the Project, IBRD granted LBP a loan in the principal amount of US$275 million (or around PHP1 1.968 billion) for a term of 25 years inclusive of seven years grace period, with a guarantee from the Government of the Republic of the Philippines. The loan would be re-lent to Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI) as the implementing entities of the Project. The commitment period of the loan is five (5) years from date of loan signing. The project closing date was extended to June 30, 2019 from the original June 30, 2017 as conveyed in a letter dated June 15, 2017 of the World Bank Country Director, Philippines, East Asia and Pacific Region. SCOPE AND OBJECTIVE OF AUDIT The audit covered the examination, on a test basis, of the accounts and financial transactions of the MWMP for the period from January 1 to December 31, 2018 in accordance with the International Standards of Supreme Audit Institutions to enable us to express an opinion on the fairness of presentation of the financial statements for the years ended December 31, 2018 and 2017. FINANCIAL HIGHLIGHTS 1. Financial Position 2018 2017 USD PHP USD PHP Assets 194,341,327 10,218,466,974 157,575,512 7,867,745,320 Liabilities 188,930,562 9,933,968,933 154,332,944 7,705,843,929 Equity 5,410,765 284,498,041 3,242,568 161,901,391 II. Results of Operations 2018 2017 USD PHP USD PHP Interest Income 7,260,144 381,738,379 4,255,759 212,490,024 Interest Expense 5,091,946 267,734,533 2,638,382 131,734,410 Net Income 2,168,198 114,003,846 1,617,377 80,755,614 AUDITOR'S OPINION The Auditor rendered an unmodified opinion on the fairness of presentation of the financial statements of the MWMP for the years ended December 31, 2018 and 2017 in accordance with Philippine Financial Reporting Standards. ii TABLE OF CONTENTS Page AUDITED FINANCIAL STATEMENTS Independent Auditor's Report 1 Statements of Financial Position 3 Statemenis of Financial Performance 4 Statements of Cash Flows 5 Notes to Financial Statements 6 AUDITED FINANCIAL STATEMENTS Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City CORPORATE GOVERNMENT SECTOR CLUSTER I- BANKING AND CREDIT INDEPENDENT AUDITOR'S REPORT The Board of Directors Land Bank of the Philippines Malate, Manila Report on the Audit of the Financial Statements Opinion We have audited the accompanying financial statements of Metro Manila Wastewater Management Project, a Project implemented by Land Bank of the Philippines and funded by International Bank for Reconstruction and Development of World Bank under Loan No. 8162-Ph, which comprise the statements of financial position as at December 31, 2018 and 2017, statements of financial performance and statements of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Metro Manila Wastewater Management Project as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. Basis for Opinion We conducted our audit in accordance with International Standards of Supreme Audit Institutions (ISSAI). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAI will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of financial statements. As part of an audit in accordance with ISSAI, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for bur opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. COMMISSION ON AUDIT .ELI ES pervi Auditor July 12, 2019 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A project of Land Bank of the Philippines Funded by IBRD Loan 8162-Ph) STATEMENTS OF FINANCIAL POSITION December 31. 2018 and 2017 (Comparative in US Dollars translated in Philippine Peso based on PDS closing rate at year end) 2018 2017 Note USD PHP USD PHP ASSETS Cash and cash equivalents - FCDU 3 5,111,495 268,762,399 2,993,034 149,442,197 Loans and receivables - FCDU 4 189,229,832 9,949,704,575 154,582,478 7,718,303,123 TOTAL ASSETS 194,341,327 10,218,466,974 157,575,512 7,867,745,320 LIABILITIES AND EQUITY Liabilities Bills payable others - FCDU 5 188,080,634 9.889,279,710 153,889,096 7,683,682,598 Accrued interestexpense-BP - FCDU 6 849,928 44,689,223 443,848 22,161,331 TOTAL LIABIITIES 188,930,562 9,933,968,933 154,332,944 7,705,843,929 Equity Retained Earnings 3,242,567 170,494,195 1,625,191 81,145,777 Net income 2.168,198 114,003,846 1,617,377 80,755,614 TOTAL EQUITY 5,410,765 284,498,041 3,242,568 161,901,391 TOTAL LIABILITIES AND EQUITY 194,341,327 10,218,466,974 157,575,512 7,867,745,320 The Notes on pages 6 to 8 form part of these financial statements. 3 METRO MANILA WASTEWATER PROJECT (A project of Land Bank of the PhIPnres FxOed by IRD Loa 8162-Ph) STATEMENTS OF F1NANCIAL PERFR2MANCE For the years ened December 31, 2i8 and 2017 (Comparative in US Dollars translated in PhAppie Peso based on POS losing rate at year end) 2018 2017 Note USD PHP USD PHP Income interest income - FCDU 7 7,260,144 381,738,379 4,255,759 212,490,024 Expense Interest expense - FCDU 8 5,091,946 267.734,533 2,638,382 131,734,410 NET INCOME 2,168,198 114,003,846 1,617,377 80,755,614 The Notes on pages 6 to 8 form part of these financial statements. 4 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A project of Land Bank of the Philippines Funded by IBRD Loan 8162-Ph) STATEMENTS OF CASH FLOWS For the years ended December 31, 2018 and 2017 (Comparative in US Dollars translated in Philippine Peso based on PDS closing rate at year end) 2018 2017 USD PHP USD PHP CASH FLOW FROM OPERATING ACTIVITIES: Interest received 6,804,327 357,771,500 3,976,413 198,542,311 Interest paid (4,685.866) (246,382,839) (2,442,690) (121,963,530) Additional Loans to MWC and MWSI (3 .191,537) (1,797,791,007) (46.296,695) (2,311,593,972) Net cash used in operating activities (32,073,07 ) (1,686,402,346) (44,782,972) (2,235,015,191) CASH FLOW FROM FINANCING ACTIVITIES: Additional Drawdowns from World Bank 34,191,537 1,797,791,007 46,296,695 2,311,593,972 Net cash provided by financing activities 34,191,537 1,797,791,007 46,296,695 2,311,593,972 Net Increase in Cash and cash equivalents 2,118,461 111,388,661 1,533,723 76,578,807 Cash and cash equivalents, beginning of year 2,993034 157,373,738 1,459,311 72,863,390 CASH AND CASH EQUIVALENTS, END ,111,495 268,762,399 2,993,034 149,442,197 The Notes on pages 6 to 8 form part of these financial statements. 5 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A Project implemented by LBP Funded by IBRD Loan No. 8162-Ph) NOTES TO FINANCIAL STATEMENTS 1. Nature of the Project The term loan was established on May 31, 2012 to partially finance the Metro Manila Wastewater Management Project (MWMP). This Project aims to improve wastewater services in selected sub-catchments of Metro Manila and surrounding areas. The investment cost includes price and physical contingencies and taxes. The US$275 million or around PHPi1.968 billion loan borrowed by Land Bank of the Philippines (LBP) from the World Bank would be re-lent to Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI) at US$137.5 million for each concessionaire as the implementing entities of the project. It is a 25-year term loan inclusive of seven years grace period, with a guarantee from the Government of the Philippines. The commitment period for the disbursement of the term loan shall be within a period of about five years from date of loan signing. The project closing date was extended to June 30, 2019 from the original June 30, 2017 as conveyed in a letter dated June 15, 2017 of the World Bank Country Director, Philippines, East Asia and Pacific Region. 2. Summary of Significant Accounting Policies The accompanying financial statements have been prepared on a historical cost basis and in compliance with the Philippine Financial Reporting Standards (PFRS). In compliance with BSP requirement, MWMP loan transactions are recorded in LBP- Foreign Currency Deposit Unit (FCDU) books. For financial reporting purposes, the monetary assets and liabilities of the foreign currency denominated monetary assets and liabilities are translated in Philippine peso based on the Philippine Dealing System closing rate prevailing at the Statement of Financial Position date. Income is recorded on accrual basis except for interest on past due loans as provided under BSP Circular No. 342 dated April 14, 1983, Expenses are recognized on accrual basis. The effect of transactions and other financial events on the assets and liabilities are recognized at the time they have their primary impact, not necessarily when cash is disbursed. Cost is charged as an expense in the period in which it provides expected services in an effort to generate revenue. 6 3. Cash and Cash Equivalents - FCDU This account consists of: 2018 2017 USD PHP USD PHP Collections of interest 13,635,279 716,942,940 6,830,952 341,069,418 Less: Payment to World Bank 8,523,784 448,180,541 3,837,918 191,627,221 5,111,495 268,762,399 2,993,034 149,442,197 4. Loans and Receivables - FCDU This account consists of: 2018 2017 USD PHP USD PHP Loans to private non- financial corporation 188,080,633 9,889,279,710 153,889,097 7,683,682,598 Accrued interest receivable - FCDU 1.149.199 60,424,865 693,381 34,620,525 189,229,832 9,949,704,575 154,582,478 7,718,303,123 The obligations of MWCI and MWSI to LBP are recognized on the same date the World Bank releases the loan to LBP and transferred to the non-interest bearing US$ Designated Accounts (DAs) of MWCI and MWSI maintained at LBP. MWCI and MWSI acknowledge their obligations to LBP by executing Promissory Notes commencing on the date the World Bank releases the LBPs funds to the US$ DAs. The loans released to MWCI's and MWSI's are converted to peso. The term of the loan is twenty five (25) years inclusive of the maximum seven years grace period on payment of the principal. The interest rate is the same interest rate payable by LBP under the World Bank Loan Agreement plus the LBP's fixed spread of 1.25 per cent per annum. S. Bills Payable Others - FCDU This consists of the loan drawdowns by LBP from World Bank recorded in LBP's FCDU books on the date the World Bank releases the funds to the LBPs US$ DAs amounting to US$188,080,634 with equivalent PhP9,889,279,710, and US$153,889,096 with equivalent PhP7,683,682,598, as at December 31, 2018 and 2017, respectively. 6. Accrued Interest Expense Bills Payable Others - FCDU This account pertains to the accruals of interest on Bills Payable Others-FCDU under the World Bank Loan Agreement amounting to US$849,928 with equivalent PhP44,689,223, and US$443,848 with equivalent PhP22,161,331, as at December 31, 2018 and 2017, respectively. 7 7. Interest Income - Performing Loans to Private - FCDU This account pertains to the interest income on the outstanding loans computed starting from loan availment using the rate of interest payable by LBP under the World Bank Loan Agreement plus LBP's fixed spread of 1.25 per cent per annum. 8. Interest Expense Bills Payable others - FCDU This account pertains to the interest expense on the outstanding loan drawdown computed at World Bank's interest rate of US$ LIBOR plus World Bank spread. 9. Final Tax This pertains to the ten per cent final tax on the interest for the MWMP term loan for the accounts of MWCI and MWSI. 10. Foreign Exchange (FX) Profit/(Loss) Since the MWMP term loan was passed on to MWCI and MWSI, being the implementing entities of the Project with LBP's assistance as stated In the Loan Agreement, any foreign exchange revaluation profit/loss shall be for the account of MWCI and MWSI. 11. Guarantee Fee The guarantee fee is directly payable to the Bureau of the Treasury by MWCI and MWSI, and shall not be accounted for in the Project. It is computed at one per cent per annum based on the amount of each availment to be paid immediately upon receipt and booking of the loan release and thereafter on the anniversary date of each availment until the loan is fully paid. 12. Front End Fee The front end fee is computed at 0.25 per cent of the amount of the term loan subject to any waiver of a portion of such fee as maybe determined by World Bank from time to time, payable by MWCI and MWSI not later than 60 days after the effective date of the loan. 8