COVER SHEET for AUDITED FINANCIAL STATEMENTS SEC ReIstralon Number A 1990-11593 COMPANY NAME [1111IIJI1iI1F III ICjjMjjAjLjIF_LFJ LI ]aI IZI I] IJ-I II II I I II 1 LLI I -L t.- I I III I I.. [ I I.L ~IJIII1IMILANILIIAIITERICMPANY,INC.T LL PRINCIPAL OFFICE (t /SW1Bt/BrMngay/Q/TomI/Pmwce) [MWSSiJIIDMiI ITRA I ONI F B UIL D'ING,L IM_WISSI AIIMIINIISTIRAIT11114 j8IJ IRDlIfl=G_ E4111I IIJIL L UNII R[1[A111, JI I III IIILLA RIA-1,11 ] Form Type Department requi eort Secondary Lcense Type, If ApplIcable COMPANY INFORMATION Companys Email Addren Company's Telewhone Number Mobile Number corporatesecrtaymanilawater.com (632) 917-5900 NIA No.of Stocholdem Annual Meeg iMonthIaI FacalYear MonthIEi 949 0/04122 12/31 CONTACT PERSON INFORMATION The deelgnated contect paeon U be an Offier of the Corporallon Name of Contact Person Email Address Tle. one Numbeds MobIle Number Ma. Cecilia T. Cruzabra acne.cruabragmanilawater.com I(632) 981-81586 N/A CONTACT PERSON's ADDRESS 2nd Floor, MWSS Administration Building, 489 Katlpunan Road, Balara, Quezon City NOTE f1: In ase of dealh, lesin ln or'cussSOn ot5e ofture officer destnated as contact pesn, such kicident sherb e reported foafro Comissi w v ifft (30) cabndardays hom Me ocwunce hneeat obrmaln and cwnbe conract detls of e - conoect person dosuted 2: AlB*smustbepmpendcrrcwtelfed-p Feare to do so shWcauseie delyi &atflf*corporewrrecords whl te Commblon andrnon1race0vatWNois ofD*ftIcs FurAer, non-rce@ offtof alDeIldendes aseW not excuses corporalbo om AbIf fork deftencies 1IllillIlliIilliI COVER SHEET for AUDITED FINANCIAL STATEMENTS SEC Registration Number AI19 9161-11 593 COMPANY NAME MAN I LA WATER COMPANY, INC. IMAIIILI I IIII IC0MPANjjj1I C1. II PRINCIPAL OFFICE (No/Street/8arangey/CQV/lTown/Prome) IM[WISS JAIDMI ±NI I±SITIRIAITIOI 101I B ILDI INGI,l 111 JP ITIIIIIN 11 110JI1 JBIAILJAJR A[,1 48J9f ] KA ITI I U A1N RIAD, BAILL A RA 1 1- LL II IILILI [ IIIIII - III II IlIZ T Fonn Type Department requiring lhe report Secondary License Type. If Applicable COMPANY INFORMATION ComL. n, s Email Address Companys Telephone Number Mobile Number corporatesacretry@mnHawater.com (632) 917-5900 ] NIA No. of Stockholders Annual Meeting (Month ID.: Flscal Year - .,onth ID 949 9 0422 12131 CONTACT PERSON INFORMATION The designated contact person 3I be an Officer of the Corporation Name of Contact Person Email Address Telephone Number/s Moble Number Mu. Cecilia T. Cruzabra cacle..cruzabr.@manltewater.com (632) 981-8156 NIA CONTACT PERSON's ADDRESS 2nd Floor, MWSS Administration Building, 489 Katipunan Road, Balara, Quezon City NOTE 1: In case of death, resignsatn or cesastfn of ofice of the officer desgnated as confect parson, such icVWit sha be repoed to the Commbaun Won thky (30) calendar days hIm the occurrence thereof Inbrmatbn and cmlet contact deftls of the new contect person deslated. 2: AN Boxes must be propery and compb ed-p Febe to do so shell cause the delay In updating ie corporeuns records wit Mhe Conrnmilon and4ornon-rece(ptof Noe of Dellences. Further non-qee(pt of Note of Definces she not excuse the corporathn flom #aty forls deficlences ||1IIIIII111 l u IIIIIIlll SyCip Garras Veayo & Co. Tel: (632) 891 0307 BOAIPRC Reg. No. 0001, S G V 6700 Ayala Avenue Fax: (632) 819 0872 October 4, 2018, valid until August 24, 2021 1226 Makati City ey.coi*ph SEC Accredltation No. 0012-FR-6 (Group A), Bulding a better Philippines November 8, 2018, valid until November 5, 2021 working world INDEPENDENT AUDITOR'S REPORT The Board of Directors and Stockholders Manila Water Company, Inc. MWSS Administration Building, Katipunan Road Balars, Quezon City Report on the Audit of the Parent Company Financial Statements Opinion We have audited the parent company financial statements of Manila Water Company, Inc. (the Company), which comprise the parent company statements of financial position as at December 31, 2018 and 2017, and the parent company statements of comprehensive Income, parent company statements of changes in equity and parent company statements of cash flows for the years then ended, and notes to the parent company financial statements, including a summary of significant accounting policies. In our opinion, the accompanying parent company financial statements present fairly, in all material respects, the financial position of the Company 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 (PFRSs). Basis for Opinion We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described In the Auditor's Responsibilifes for the Audit of the Parent Company Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics for Professional Accountants In the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the parent company financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Parent Company Financial Statements Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with PFRSs, and for such Internal control as management determines Is necessary to enable the preparation of parent company financial statements that are free from material misstatement, whether due to fraud or error. In preparing the parent company financial statements, management Is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless management either Intends to liquidate the Company or to cease operations, or has no realistic altemative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. A member Om of finst & Young Globael UMi � а � � Г э °___ - _ t__.а..__ ._ _вхL_ . ._: ________ r __я_® х._а._____д._ i в k • i , iг � 1 _ _ - - � 1J 1 , 1 "'_г _____ "- I__"т_"г� '_ _____ '_ S__"""__ . . __"'' * � ° _ _' ° . . _ _° I' _ _ ,. . . . _ , _ _ _ _ _ ° _ __ . . � + _. ' + - . � _ . � � А � , 1 м - _. ' - 1 , , ®®. �-. ® _ � � i ..... -. ; ' .?'� � ( � • А _ ........ � , А петbпllпп ог Ems1 i Ywny G1оЬв1 lJmlhtl r-.c :) , c-V Building a better working world -3- Report an the Supplementary Information Required Under Revenue Regulations 15-2010 Our audits were conducted for the purpose of forming an opinion on the parent company financial statements taken as a whole. The supplementary Information required under Revenue Regulations 15-2010 In Note 28 to the parent company financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic parent company financial statements, Such information Is the responsibility of the management of Manila Water Company, Inc. The information has been subjected to the auditing procedures applied in our audit of the basic parent company financial statements. In our opinion, the information is fairly stated, in all material respects. In relation to the basic parent company financial statements taken as a whole. The engagement partner an the audit resulting in this independent auditors report is Michael C. Sabado. GORRES VELAYO & CO 5 SYCIP Michael C. Sabado Partner CPA Certificate No. 89336 SEC Accreditation No. 0864-AR-3 (Group A), March 16, 2017, valid until March 15, 2020 Tax Identification No. 160-302-865 BIR Accreditation No. 08-001998-73-2018, February 26, 2018, valid until February 25, 2021 PTR No. 7332eO7, January 3, 2019, Makati City February 26, 2019 . ...... . ...... . .. . ...... ... A m=bw ffrrn of Ermt & Young 131abol Udted MANILA WATER COMPANY. INC. PARENT COMPANY STATEMENTS OF FINANCIAL POSITION December 31 2018 2017 ASSETS Current Assets Cash and cash equivalents (Notes 4, 19 and 24) 16,749,935,407 P6,188,372,172 Receivables (Notes 5, 19 and 24) 1,473,757,789 1,308,576,213 Inventories (Note 6) 76,369,995 35,230,305 Other current assets Note 389,474,256 13 828 549 Total Current Assets 8_689 537449 8 146 007 239 Noncurrent Assets Property and equipment (Note 8) 930,297,348 953,730,791 Service concession assets - net (Notes 9 and 20) 72,431,154,346 65,530,854,341 Investments in subsidlaries (Note 10) 8,202,525,537 7,912,056,023 Deferred tax assets - not (Note 17) 1,193,984,623 1,091,803,718 Pension assets - not (Note 14) - 16,111,500 Other noncurrent assets iNotes 11 3 600.212227 3 901 155,988 Total Noncurrent Assets 86 318174081 79 405 712 361 1P91 047 711 130 P87 551 719 600 LIABILITIES AND EQUITY Current Liabilities Accounts and other payables (Notes 12 and 24) P4,797,823,590 P4,282,484,759 Current portion of: Long-term debt (Notes 13, 23 and 24) 4,971,163,962 4,126,033,722 Service concession obligations (Notes 9, 20, 23 and 24) 694,399,151 719,234,617 Income tax vayable 450.744,152 332 754 847 Total Current Liabilities 10,913,930.855 9460 507 945 Noncurrent Liabilities Noncurrent portion of: Long-term debt (Notes 13, 23 and 24) 28,734,678,777 27,206,412,046 Service concession obligations (Notes 9, 20, 23 and 24) 6,252,455,678 8,110,228,860 Pension liabilities - not (Note 14) 57,993,800 - Provisions (Note 26) 569,893,356 501,099,013 Other noncurrent liabilities (Notes 15. 23 and 24 676,035,105 636 481 861 Total Noncurrent Liabilities 36.291,056,714 34.454 219 780 Total Liabilities 47 204,987,569 43.914 727 725 Equity Capital stock (Note 18): Common stock 2,064,839,617 2,053,666,578 Preferred stock 400 000 000 400 000 000 a p i c a 2,464,839,617 2,453,666,576 Additional paid-in capital 4,518,048,369 4,230,508,417 Subscri tions receivable - 458,453326) 235 693 873. Total paid-up capital 6,524,434,660 8,448,481,120 Common stock options outstanding (Nok 18 _ - 51,742,998 28,700,622 Retained earnings (Note 18): Appropriated 32,444,000,000 28,688,000,000 Unappropriated 8,896,197,503 8,460,483,333 Remeasurement .sin loss, on defined benefit plans Note 14 (73,651,200) 1 328 800 Total E,.,ul' ----47 s4 72?9t- A333 991 875 __ __7PRO471 30 i 551 719 600 See accompanying Notes to Parent Company Financial Statements. ____ - ill' HtMiIIIIIIIIII MANILA WATER COMPANY, INC. PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME Yearn Ended December 31 2018 2017 REVENUE FROM CONTRACTS WITH CUSTOMERS Water (Notes 19 and 22) P12,966,830,787 P12,123,443,382 Environmental charges (Notes 19 and 22) 2,691,307,953 2,450,178,848 Sewer (Notes 19 and 22) 246,597,711 226,593,869 Other operatinp Income fNotes 18 and 22 447.584,581 414461 239 16,352.121,332 15 244.677 338 COST OF SERVICES Depreciation and amortization (Notes 8 and 9) 1,918,127,621 2,007,178,321 Salaries, wages and employee benefits (Notes 14, 18 and 19) 932,821,656 923,162,490 Power, iight and water (Note 19) 776,719,325 711,349,773 Repairs and maintenance 281,454,834 290,949,852 Management, technical and professional fees (Note 19) 211,334,144 280,404,174 Water treatment chemicals (Note 6) 195,707,506 70,258,983 Contractual services 173,656,798 172,89,715 Wastewater costs 144,641,734 131,522,987 Regulatory costs (Note 1) 126,457,196 109,775,997 Amortization of water service connections 118,883,739 127,545,565 Collection fees 117,423,317 110,573,321 Printing and communication (Note 19) 31,673,656 27,771,491 Occupancy costa (Notes 21 and 25) 27,514,720 23,638,731 Transportation and travel 16,593,043 12,538,245 Other expenses 19, B89,38 23,587544 5092,898,656 5,023,150 189 GROSS PROFIT 11,259,222,676 10,221,527,169 OPERATING EXPENSES Note 16. 2186,054,568 1,858,568 387 INCOME BEFORE OTHER INCOME EXPENSES) 973 168.108 8.382 958 782 OTHER INCOME (EXPENSES) Revenue from rehabilitation works (Notes 1, 2 and 9) 8,198,599,481 9,878,153,855 Cost of rehabilitation works (Notes 1, 2 and 9) (8,198,599,481) (9,878,153,855) Foreign currency differentials (Note 1) 1,766,783,135 140,084,234 Foreign exchange losses (1,731,919,818) (138,631,016) Interest expense (Notes 9, 13 and 18) (1,257,030,404) (1,147,544,582) Interest Income (Note 16) 228,650,572 158,411,509 Gain on disposal of property and equipment - net 16,314,551 1,721,579 Amortization of deferred credits (Note 15) 12,535,602 11,142,247 Other Income losses - net kNote 16 171131 189 '21 082 750 (793.535,173) i995 898 779' INCOME BEFORE INCOME TAX 8,179,632,935 7,367,060,003 PROVISION FOR INCOME TAX iNote 17' 1-846540.437 1 636 601 721 NET INCOME 6,333,092,498 5,730,458,282 OTHER COMPREHENSIVE LOSS Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent pedods: Actuarial loss on Lension liabilities :Note 14' (74 978 000) 50 004 400: TOTAL COMPREHENSIVE INCOME P6 258.114.498 P5680 453882 See accompanying Notes to Parent Company Financial Statements. 11|5|15 llu li II MANILA WATER COMPANY, INC. PARENT COMPANY STATEMENTS OF CHANGES IN EQUITY Years Ended December 31 ...... . ........... . .....2018 20 17 CAPITAL STOCK (Note 18) Common stock - P1 par value Authorized - 3,100,000,000 shares Issued and outstanding - 2,030,732,360 shares in 2018 and 2 028 087 122 shares In 2017 2,030 732380 2 026 067 122 Subscribed common stock - 34,107,257 shares in 2018 and 27,599,454 shares in 2017 Balance at beginning of year 27,599,454 28,732,488 Additions 10,893,733 - Issuance of shares ;1.4.18_,_301 :1 1103 Balance at-enof 3ar 34 107257 27599,454 2.064,839,617 2 053 888,576 Preferred stock - P0.10 par value, 10% cumulative, voting participating, nonredeemable and nonconvertible Authorized, Issued and outstanding - 4 000 000.000 shares 400. 000 000 400 000 000 2,464 839 617 2 453 66 576 ADDITIONAL PAID-IN CAPITAL (Note 18) Balance at beginning of year 4,230,508,417 4,221,712,962 Additions 287,539,952 8 795,455 Balance at and of Year 4.518,048369 4-230 508 417 SUBSCRIPTIONS RECEIVABLE (Note 18) Balance at beginning of year (235,693,873) (319,227,328) Subscriptions (297,787,156) - Collections 75,027103 83533455 Balance at end of year (458.453.326) 235 693 873 COMMON STOCK OPTIONS OUTSTANDING (Note 18) Balance at beginning of year 28,700,622 25,325,260 Cost of share-based payment 23,968,213 12,170,817 Exercised (925837) 75 795 455, Balance at end of year 51.742; 998 28 700 622 RETAINED EARNINGS (Note 18) Appropriated: Balance at beginning of year 28,698,000,000 21,100,000,000 AD.-riations 3 745.000 000 7598 000 000 Balance at and of year 32.444.000 000 28 689 000 000 Unappropriated: Balance at beginning of year 8,400,483,333 12,450,934,317 Net income 6,333,092,498 5,730,458,282 Appropriations (3,746,000,000) (7,598,000,000) Dividends declared _ (2151.378,328) .2 122,909 266 Balance at end of ,ear 8 896,197.503 8 460,483 333 .__ . .. ... ..............41340,197503 37 158483.333 REMEASUREMENT GAIN (LOSS) ON DEFINED BENEFIT PLANS (Note 14) Balance at beginning of year 1,326,800 51,331,200 Actuarial loss on pension liabilities 1,_74.978,000) .50 004 400, Balance at end of vear __73.851 200 1 326 800 See accompanying Notes to Paent Company Financial Statements. -- MANILA WATER COMPANY. INC. PARENT COMPANY STATEMENTS OF CASH FLOWS Years Ended December 31 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P8,179,832,935 P7,367,060,003 Adjustments for: Depreciation and amortization (Notes 8 and 9) 2,176,660,562 2,236,975,329 Interest expense (Notes 13 and 16) 1,257,030,404 1,147,544,582 Pension expense and contribution - net (Note 14) 18,882,900 57,748,800 Share-based payments (Note 18) 23,968,213 12,170,617 Interest Income (Notes 4 and 16) (228,680,572) (158,411,509) Gain on disposal of investment In subsidiaries, property and equipment (26,706,065) (2,334,281) Amortization of deferred credIts Note 15 1(12,5351602) 1 14142 247 Operating income before changes in operating assets and liabilities 11,388,282,775 10,649,611,494 Changes In operating assets and lIabilities: Decrease (Increase) in: Receivables (145,961,470) (243,043,281) Inventories (41,139,690) 36,264,965 Other current assets 99,277,077 (244,922,965) Service concession assets (6,167,244,675) (9,339,019,440) Increase in accounts and other aw. ables 546.946 312 788 084 734 Net cash provided by operations 5,680,160,329 1,646,975,507 Income tax Dald 1 705 654 823 1 642 897254 Net cash provided by o-erating activities 3 974 505 506 4 078 253 CASH FLOWS FROM INVESTING ACTIVITIES Interest received 189,874,866 145,301,079 Acquisitions of: Investments In subsidiaries (Note 10) (280,078,000) (671,342,296) Property and equipment (Note 8) (370,089,907) (521,848,690) Proceeds from sale of property and equipment 20,841,461 3,185,797 Decrease increase in other noncurrent assets :Note 11 716 642 956 1,021_129 848 Net cash provided by 'used In) Investing activities 276 991,376 (2065 831 958 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from avallments of long-term debt (Note 13): 5,423,698,492 12,861,374,686 Payments of: Long-term debt (4,740,342,410) (3,340,724,713) Service concession obligations (Note 9) (875,350,761) (834,801,817) Dividends (Note 18) (2,151,378,328) (2,122,909,285) Interest (1,473,677,188) (965,146,346) Collection of subscription receivable (Note 18) 75,027,703 83,533,455 Increase In rrovlslons and other noncurrent Ilabillties 52,088,845 8,030 311 Net cash :rovided by used In financin activities 3,689,933 647) 5 689 356 310 NET INCREASE IN CASH AND CASH EQUIVALENTS 561,563,235 3,627,602,605 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6188,372172 2560769567 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4 6P749,935 407 P6 188 372 172 See accompanying Notes to Parent Company Financial Statements. i Il I MANILA WATER COMPANY, INC. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS 1. Corporate Information Manila Water Company, Inc. (the Company) was Incorporated on January 6, 1997 with remaining corporate life of twenty-nine (29) years. The Company started commercial operations on January 1, 2000. It became a publicly listed company via an Initial public offering on March 18, 2005. As of December 31, 2018, the Parent Company is 41.99% owned by Ayala Corporation (Ayala). Ayala is a publicly listed company which is 47.04% owned by Mermac, inc. and the rest by the public. The Company is incorporated to provide water, sewerage and sanitation, distribution services, pipeworks and management services. Amendment of Articles of Incorooration On March 1, 2018, the Board of Directors (BOD) approved the following: a. amendment of the Company's Articles of Incorporation to exclude the 300.00 million common shares from the pre-emptive rights of existing stockholders, and endorsed the said amendment for approval by the stockholders; and b. allotment and subsequent Issuance of up to 300.00 million common shares for the purpose of exchanging such shares for assets and/or raising funds to acquire assets needed for the business of the Company. On April 16, 2018, the stockholders of the Company approved the amendment of the Seventh Article of the Articles of incorporation to exempt from pre-emptive rights 300.00 million unissued common shares ("carved-out shares") which are reserved or allocated for issuance in one or more transactions or offerings, (I) for properties or assets needed for the business of the Company, or (il) for cash to acquire properties or assets needed for the business of the Company. The Issuance of all or any of the carved-out shares does not require the approval of stockholders. The Company's principal place of business is at the MWSS Administration Building, 489 Katlpunan Road, Balara, Quezon City. Concession Aareement with MetroDolitan Waterworks and Seweraue System (MWSS) On February 21, 1997, the Company entered into a Concession Agreement (the Concession Agreement) with MWSS, a government corporation organized and existing pursuant to Republic Act (RA) No. 6234, as amended, with respect to the MWSS East Zone (East Zone). The Concession Agreement sets forth the rights and obligations of the Company throughout a twenty-five (25) year concession period. The MWSS Regulatory Office (MWSS-RO) monitors and reviews the performance of each of the Concessionaires - the Company and Maynliad Water Services, Inc. (Maynilad), the West Zone Concessionaire. Under the Concession Agreement, MWSS grants the Company (as contractor to perform certain functions and as agent for the exercise of certain rights and powers under RA No. 6234) the sale right to manage, operate, repair, decommission, and refurbish all fixed and movable assets (except certain retained assets) required to provide water delivery and sewerage services In the East Zone for a period of twenty five (25) years commencing on August 1, 1997 (the Commencement Date) up to May 6, 2022 (the Expiration Date) or the early termInation date as the case may be. While the Company has the right to manage, operate, repair, and refurbish specified MWSS facilities In the East Zone, legal tile to these assets remains with MWSS. The legal title to all fixed assets contributed to the existing MWSS system by the Company during the Concession remains with the Company until the Expiration Date (or until the early termination date) at which time all rights, titles and interest in such assets will automatically vest In MWSS. On Commencement Date, the Company officially took over the operations of the East Zone and rehabilitation works for the service area commenced Immediately thereafter. As provided in the Company's project plans, operational commercial capacity has been obtained upon substantial completion of the rehabilitation work. Under the Concession Agreement, the Company is entitled to the following rate adjustments: a. annual standard rate adjustment to compensate for increases in the consumer price Index (CPI); b. extraordinary price adjustment (EPA) to account for the financial consequences of the occurrence of certain unforeseen events stipulated In the Concession Agreement; c. foreign currency differential adjustment (FCDA) to recoverforeln exchange losses Including accruals and carrying costs thereof arising from MWSS loans and any Conc-s-inai re oars 13 r al a[ ilms and concession fee payments, In accordance with the provision .-t forth In 'endment %o. 1 he Concession Agreement dated October 12, 2001 (see Notes 2, 3 and 11): and oIIIanIl I lf iIIIIIbIi -2- d. Rebasing Convergence Adjustment for the purposes of calculating the Rates Adjustment Umit for each of the five Charging Years of the Rebaming Period determined based on the following: 1. where the Rebasing Adjustment Is found to be positive, the Rebasing Convergence Adjustment for the first Charging Year of the Rate Rebasing Period shall be equal to the Rebasing Adjustment, and the Rebasing Convergence Adjustment for each of the following four Charging Years shall be zero; and ii. where the Rebasing Adjustment is found to be negative, the Rebasing Adjustment for each of the five (5) Charging Years of the Rebasing Period shall be equal to the Rebasing Adjustment divided by five (5). These rate adjustments are subject to a rate adjustment limit which is equivalent to the sum of CPI published in the Philippines, EPA and Rebasing Convergence Adjustment as defined In the Concession Agreement. The Concession Agreement also provides a general rate setting policy for rates chargeable by the Company for water and sewerage services as follows: a. For the period through the second Rate Rebasing date (January 1, 2008), the maximum rates chargeable by the Company (subject to interim adjustments) are set out in the Concession Agreement; and b. From and after the second Rate Rebasing date, the rates for water and sewerage services shall be set at a level that will permit the Company to recover, over the twenty-five (25) year term of the concession, its investment including operating, capital maintenance and investment Incurred, Philippine business taxes and payments corresponding to debt service on MWSS loans and the Company's loans incurred to finance such expenditures, and to earn a rate of retum equal to the appropriate discount rate (ADR) on these expenditures for the remaining term of the concession. The maximum rates chargeable for such water and sewerage services shall be subject to general adjustment at five-year Intervals commencing on the second Rate Rebasing date, provided that the MWSS-RO may exercise its discretion to make a general adjustment of such rates. On April 18, 2009, the MWSS Board of Trustees (80T) passed Resolution No. 2009-072 approving the fifteen (15) year extension of the Concession Agreement (the Extension) from May 7, 2022 to May 6, 2037. This resolution was confirmed by the Department of Finance (DOF), by authority from the Office of the President of the Republic of the Philippines, on October 19, 2009. The significant commitments under the Extension follow: a. To mitigate tariff increases such that there will be reduction of the balance of the approved 2008 rebased tariff by 68%, zero Increase of the rebased tariff in 2009 and a P1.00 Increase for years 2010 to 2016, subject to CPI and FCDA adjustments. b. To increase the share in the current operating budget support to MWSS by 100% as part of the concession fees starting 2009. c. To increase the total investments from the approved P187.00 billion for the periods 2008 to 2022 to P450.00 billion for 2008 to 2037. With the approval of the Extension, the recovery period for the Company's Investment was extended by another fifteen (15) years from 2022 to 2037. In March 2012, the Company submitted to MWSS a business plan embodying its rate rebasing proposals for charging year 2013. The rate rebasing activity is done every five (5) years. The MWSS conducted a review of the proposal including the Company's last five (5) years' financial performance. The financial review process extended up to the third quarter of 2013. On September 10, 2013, the MWSS-RO issued Resolution No. 13-09- CA providing for a negative rate rebasing adjustment of 29.47% on the Company's 2012 average basic water rate of P24.57 per cubic meter shall be implemented in five (5) equal tranches of negative 5.894% per charging year. The Company objected to the MWSS' Rate Rebasing determination and formally filed its Dispute Notice on September 24, 2013, before a duly-constituted Appeals Panel, commencing the arbitration process, as provided under Section 12 (in relation to Section 9.4 of the Concession Agreement). On December 10, 2013, the MWSS BOT through MWSS-RO Resolution No. 13-012 CA, approved the implementation of a status quo for the Company's Standard Rates including FCDA. until such time that the Appeals Panel has rendered a final award on the 2013 Rate Rebasing determination. On April 21, 2015, the Company received the final award of the Appeals Panel in the arbitration which final award Included the following tariff component determination: a. P28.1 billion Opening Cash Position (OCP) which restored P11.0 billion from the September 2013 OCP determination of MWSS of P17.1 billion; b. P199.8 billion capital expenditures and concession fees which restored P29.5 billion from the September 2013 future capital and concession fee expenditure of P1 70.1 billion; -3- c. 7.81% ADR which was an improvement of 79 bps from the post-tax ADR of 6.82% In September 2013; and d. exclusion of corporate Income tax from cash flows beginning January 1, 2013. Consequently, the final award resulted in a rate rebasing adjustment for the period 2013 to 2017 of negative 11.05% on the 2012 basic average water charge of P25.07 per cubic meter. This adjustment translates to a decrease of P2.77 per cubic meter from the tariff during the intervening years before the 2018 rate rebasing. Annual CPI adjustments and the quarterly FCDA will continue to be made consistent with the Company's Concession Agreement with MWSS. On September 27, 2018, the MWSS BOT (MWSS Resolution No. 2018-145-RO) approved the Company's Rebasing Adjustment for the Fifth Rate Rebasing Period (2018 to 2022) as recommended by the MWSS-RO (MWSS-RO Resolution No. 2018-1 0-CA). To mitigate the impact on the tariff of Its customers, the Company shall stagger its implementation over a five-year period. The first tranche took effpct on October 18, 2018. On December 13, 2018, the MWSS BOT (MWSS Resolution No. 2018-190-RO) approved the Company's Implementation of the 5.70% CPI Adjustment to be applied to the 2018 average basic charge of P26.98 per cubic meter and the 2.62% FCDA to be applied to the 2019 average basic charge. These adjustments are recommended by the MWSS-RO (MWSS-RO Resolution No. 2018-12-CA) and shall take effect on January 1, 2019. Arbitraton under the United Nations Commission on Internalonal Trade Law (UNCITRAL) Rules (1976) On April 23, 2015, the Company served to the Republic of the Philippines (the *Republic"), through the DOF, its Notice of Claim demanding that the Republic indemnify the Company in accordance with the indemnity clauses in the Republic's Letter Undertaking dated July 31, 1997 and Letter Undertaking dated October 19, 2009. At present, the arbitration case remains pending. FCDA The MWSS BOT approves the FCDA quarterly. The FCDA has no impact on the net income of the Company, as the same is a recovery or refund mechanism of foreign exchange losses or gains. The following FCDA adjustments and their related foreign exchange basis took effect in 2017 to 2018: A:oroval Date Effective Date FCDA Foreihn Exchan-e Rate Basis April 5, 2017 April22, 2017 P0.69 per cubic meter USD1: P49.74 1 JPYI: P0,37 July 27, 2017 August 13,2017 P0.97 per cubic meter USD1: P49.86 / JPY1: 10.45 September 14, 2017 October 1, 2017 P1.21 per cubic meter USD1: P50.64 / JPY1: PO.45 December 13, 2017 January 1, 2018 P0.83 per cubic meter USD1: P51.34 / JPYI: P0.45 March 13, 2018 April 1, 2018 P0.59 per cubic meter USD1: P50.51 / JPYI: P0.48 June 14, 2018 July 1, 2018 P1.58 per cubic meter USD1: P52.10 / JPY1: PD.48 September 14, 2018 October 1, 2018 P1.56 per cubic meter USD1: P53.43 / JPY1: P0.48 December 14, 2018 January 1, 2019 P0.75 per cubic meter USD1: P53.94 / JPY1: P0.48 There was no FCDA adjustment for the first quarter of 2017 due to the vacancies In the MWSS BOT, resulting in a lack of quorum necessary for the approval of any MWSS-RO resolution, Including FCDA. AoDroval for the issuance of the Parent Company Financial Statements The BOD approved and authorized the issuance of the parent company financial statements on February 28, 2019. 2. Summary of Significant Accounting Policies Basis of Preparation The parent company financial statements have been prepared using the historical cost basis. The Company's presentation and functional currency is the Philippine Peso (P, Peso or PHP). Amounts are rounded off to the nearest Peso, except otherwise stated. The parent company financial statements provide comparative Information In respect of the previous periods. Statement of Comoliance The parent company financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). These are the Company's separate financial statements. The Company also prepares and issues consolidated financial statements for the same period as the separate set of financial statements prepared in compliance with PFRS. The consolidated financial statements are available at the Company's principal place of business and in the Company's websIte. 1l11 l lllllll lIlllllIIII -4- Chanaea in Accountina Policies and Disclosures The accounting policies adopted in the preparation of the parent company financial statements are consistent with those of the previous financial years, except for the PFRS, amended PFRS and Improvements to PFRS which were adopted as of January 1, 2018. Unless otherwise stated, the new standards and amendments did not have any material impact to the Company. a. Amendments to PFRS 2, Sham-based Payment, Classification and Measurement of Share-based Payment Transactions The amendments to PFRS 2 address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations, and the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. The Company's accounting policy for cash-settled share-based payments Is consistent with the approach clarified in the amendments. In addition, the Company has no share-based payment transaction with net settlement features for withholding tax obligations and had not made any modification to the terms and conditions of its share-based payment transaction. Therefore, these amendments do not have any impact on the parent company financial statements. b. PFRS 9, Financial Instruments PFRS 9, Financial instruments, replaces Philippine Accounting Standards (PAS) 39 Financial instruments: Recognition and Measurement, for annual periods beginning on or after January 1, 2018, bringing together all three aspects of the accounting for financial instruments: clasalfication and measurement; Impairment and hedge accounting. The Company adopted PFRS 9 prospectively, with an initial application date as of January 1, 2018. The Company has not restated comparative information for the year ended December 31, 2017, which continues to be reported under PAS 39. The adoption of PFRS 9 did not result to differences requiring adjustment to the Company's opening retained eamings. I. Classlficatlon and measurement Under PFRS 9, debt instruments are subsequently measured at fair value through profit or loss (FVPL), amortized cost, or fair value through OCI (FVOC). The classIfication Is based on two criteria: the Company's business model for managing the assets; and whether the Instruments' contractual cash flows represent 'solely payments of principal and interest' on the principal amount outstanding. The assessment of the Company's business model was made as of the date of initial application, January 1, 2018. The assessment of whether contractual cash flows on debt instruments are solely comprised of principal and interest was made based on the facts and circumstances as at the initial recognition of the assets. The classification and measurement requirements of PFRS 9 did not have a significant impact to the Company. All financial assets held at amortized costs under PAS 39 continues to be measured at amortized costs and are classified and measured as debt instruments at amortized cost beginning January 1, 2018. Also, the adoption of PFRS 9 did not have a material impact on other comprehensive income or on the Company's operating, Investing, and financing cash flows. In summary, upon the adoption of PFRS 9, the Company had the following required or elected reclassificatlons for financial assets: At Janua-. 1 2018 PAS39 - PFRS 9 PAS539 measurement category: CarD1nO_alue AtAmortized-Cost Loans and receivables: Cash and cash equivalents P6,188,372,172 P6,188,372,172 Receivables 1,308,576,213 1.308,576,213 The Company has not designated any financial assets or liabilities as at FVPL. The adoption has no impact on the classification and measurement of the Company's financial liabilities. liiiiilllllllllliliillillHfilllllI -5- !i. Impairment The adoption of PFRS 9 has changed the Company's accounting for impairment losses for financial assets by replacing PAS 39's incurred loss approach with a forward-looking expected credit loss (ECL) approach. PFRS 9 requires the Company to recognize an allowance for ECLs for all debt Instruments not held at FVPL and contract assets. The Company applied the simplified approach and recorded lifetime ECLa on all trade receivables. Adoption of ECL approach under PFRS 9 did not result to recognition of additional Impairment lose to the Company's financial assets as of January 1, 2018. III. Hedge accounting Under PAS 39, all gains and losses arising from the Company's cash flow hedging relationships were eligible to be subsequently reclassified to profit or loss. However, under PFRS 9, gains and losses arising on cash flow hedges of forecast purchases of non-financial assets need to be Incorporated into the initial carrying amounts of the non-financial assets. This change Is not applicable to the Company because it does not have cash flow hedging arrangements. c. Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with PFRS 4 The amendments address concerns arising from implementing PFRS 9, the new financial instruments standard before implementing the new Insurance contracts standard. The amendments introduce two (2) options for entities Issuing insurance contracts: a temporary exemption from applying PFRS 9 and an overlay approach. The temporary exemption Is first applied for reporting periods beginning on or after January 1, 2018. An entity may elect the overlay approach when it first applies PFRS 9 and apply that approach retrospectively to financial assets designated on transition to PFRS 9. The entity restates comparative information reflecting the overlay approach If, and only if, the entity restates comparative information when applying PFRS 9. The amendments are not applicable to the Company since the Company does not have activities that are predominantly connected with insurance nor does the Company Issue Insurance contracts. d. PFRS 15, Revenue from Contracts with Customers PFRS 15 supersedes PAS 11, Constructon Contracts, PAS 18. Revenue, and related Interpretations and It applies, with limited exceptions, to all revenue arising from contracts with its customers. PFRS 15 establishes a five-step model to account for revenue arising from contracts with customers and requires that revenue be recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. PFRS IS requires entities to exercise judgment, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. In addition, the standard requires extensive disclosures. The Company adopted PFRS 15 using the modified retrospective method of adoption with January 1, 2018 as the date of Initial application. Under this method, the standard can be applied either to all contracts at the date of initial application or only to contracts that are not completed at this date. The Company elected to apply the standard to all contracts as at January 1, 2018. Before the adoption of PFRS 15, the Company has been recognizing revenue from connection fees when the customer Is connected to the Company's water or sewer network. Under PFRS 15, the connection fee and the related water and sewer services are accounted for as arising from a single performance obligation that will be satisfied over the period when the related services are expected to be provided. Accordingly, connection fees previously recognized for all active water service connections will have to be recognized over time. Management invoked the impracticability of retrospective restatement under PAS 8, Accounting Policies, Changes in Accounting Estmates and Errors, and has accounted for the change In accounting for connection fees prospectively starting on the date of initial application as allowed under PAS 8 (see Note 3). The adoption of PFRS 15 did not result to differences requiring adjustment to the Company's opening retained earnings as at January 1, 2018. The comparative information was not restated and continues to be reported under PAS 11, PAS 18, and related Interpretations. The adoption of PFRS 15 did not have a material impact on total assets, total liabilities, total comprehensive Income or on the Company's operating, investing, and financing cash flows. -6- s. Amendments to PAS 28, Investments In Associates and Joint Ventures, Measudng an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) The amendments clarify that an entity that Is a venture capital organization, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure Its Investments in associates and joint ventures at fair value through profit or loss. They also clarify that If an entity that is not itself an investment entity has an interest In an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate's or joint venture's Interests In subsidiaries. This election Is made separately for each investment entity associate or Joint venture, at the later of the date on which (1) the investment entity associate or joint venture Is initially recognized; (1l) the associate or joint venture becomes an investment entity; and (11) the Investment entity associate or joint venture first becomes a parent. Retrospective application Is required. The amendments are not applicable to the Company as the Company does not have any investment In an entity that is considered as a venture capital organization or other qualifying entity under the amendments. f. Amendments to PAS 40, Investment Property, Transfers of Investment Property The amendments clarify when an entity should transfer property, including property under construction or development into or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of Investment property and there is evidence of the change in use. A mere change in management's intentions for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. Retrospective application of the amendments is not required and is only permitted if this is possible without the use of hindsight. The amendments are not applicable to the Company as the Company does not have assets classified as investment property. g. Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration The interpretation clarifies that, in determining the spot exchange rate to use on Initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non- monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. Entitles may apply the amendments on a fully retrospective basis. Retrospective application of this Interpretation Is not required. The interpretation did not have any significant Impact on the parent company financial statements. h. Philippine Interpretation Committee (PIC) Question and Answer (Q&A) 2018-15, PAS I - Classificeon of Advances to Contractors in the Nature of Prepayments: Current vs. Noncurrent Upon the adoption of PIC Q&A 2018-15, advances to contractors and suppliers that have previously presented under current assets were reclassified to noncurrent assets. Before the adoption of PlC Q&A 2018-15. the classification of the Company Is based the timing of application of these advances against billings and timing of delivery of goods and services. This interpretation aims to classify the prepayment based on the actual realization of such advances based on the determined usage or realization of the asset to which It Is Intended for (e.g. inventory, investment property, property and equipment). The Company adopted PIC Q&A 2018-15 starting January 1, 2018. The Impact of adoption is applied retrospectively which resulted to the decrease in other current assets and increase in other noncurrent assets by P787.56 million as of December 31, 2017. The adoption of the PIC Q&A also resulted to an increase In cash flows from operating activities and corresponding decrease In cash flows from investing activities amounting to P120.39 million for the year ended December 31, 2017. 11 IllIIIIIlllllfill11111111II -7- Future Chanaes in Accountina Policies Pronouncements issued but not yet effective are listed below. Unless otherwise Indicated, the Company does not expect that the future adoption of the sld pronouncements will have a significant impact on its financial statements. The Company Intends to adopt the following pronouncements when they become effective, Effectve beginning on or after January 1, 2019 a. Amendments to PFRS 9, Prepayment Features Wth Negative Compensation Under PFRS 9, a debt instrument can be measured at amortized cost or FVOCI, provided that the contractual cash flows are 'solely payments of principal and interest on the principal amount outstanding' (the SPPI criterion) and the Instrument is held within the appropriate business model for that classification. The amendments to PFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and Irrespective of which party pays or receives reasonable compensation for the early termination of the contract. The amendments should be applied retrospectively and are effective from January 1, 2019, with earlier application permitted. The amendments are not expected to have any significant impact on the parent company financial statements. b. PFRS 16, Leases PFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under PAS 17, Leases. The standard Includes two recognition exemptions for lessees - leases of 'low-value' assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a leasee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the Interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will also be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change In an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under PFRS 16 Is substantially unchanged from today's accounting under PAS 17. Lessors will continue to classify all leases using the same classification principle as in PAS 17 and distinguish between two types of leases: operating and finance leases. PFRS 16 also requires lessees and lessors to make more extensive disclosures than under PAS 17. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard's transition provisions permit certain reliefs. The Company Is currently assessing the impact of adopting PFRS 16. c. Amendments to PAS 19 Employee Benefits, Plan Amendment, Curtailment or Settlement The amendments to PAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to: * Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event, and * Determine net Interest for the remainder of the period after the plan amendment, curtailment or settlement using: the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure that net defined benefit liability (asset). -8- The amendments also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount Is recognized in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change In that effect, excluding amounts included in the net interest, is recognized in other comprehensive Income. The amendments apply to plan amendments, curtailments, or settlements occurring on or after the beginning of the first annual reporting period that begins on or after January 1, 2019, with early application permitted. These amendments will apply only to any future plan amendments, curtallments, or settlements of the Company. d. Amendments to PAS 28, Long-term Interests in Associates and Joint Ventures The amendments clarify that an entity applies PFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment In the associate or Joint venture (long-term Interests). This clarification is relevant because it Implies that the expected credit loss model in PFRS 9 applies to such long-term Interests. The amendments also clarified that, In applying PFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the not Investment, recognized as adjustments to the net investment in the associate or joint venture that arise from applying PAS 28. The amendments should be applied retrospectively and are effective from January 1, 2019, with early application permitted. Since the Company does not have such long-term interests in its associates, the amendments will not have an impact on the parent company financial statements. e. Philippine Interpretation iFRIC 23, Uncertainty over Income Tax Treatments The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of PAS 12, Income Taxes, and does not apply to taxes or levies outside the scope of PAS 12, nor does it specifically include requirements relating to Interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following: . Whether an entity considers uncertain tax treatments separately; " The assumptions an entity makes about the examination of tax treatments by taxation authorities; a How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and, * How an entity considers changes In facts and circumstances. An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. This interpretation is not relevant to the Company because there is no uncertainty Involved in the tax treatments made by management in connection with the calculation of current and deferred taxes as of December 31, 2018 and 2017. f. Annual Improvements to PFRSs 2015- 2017 Cycle * Amendments to PFRS 3, Business Combinations, and PFRS 11, Joint Arrangements, Previously Heid Interest in a Joint Operation The amendments clarify that, when an entity obtains control of a business that Is a joint operation, It applies the requirements for a business combination achieved in stages, including remeasurIng previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held Interest in the joint operation. A party that participates In, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in PFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. An entity applies those amendments to business combinations for which the acquisition date Is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019 and to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early application permitted. These amendments are currently not applicable to the Company but may apply to future transactions. * Amendments to PAS 12, Income Tax Consequences of Payments on Financial Instruments Classifled as Equity The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, other comprehensive Income or equity according to where the entity originally recognized those past transactions or events. An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application is permitted. These amendments are not relevant to the Company because dividends declared by the Company do not give rise to tax obligations under the current tax laws. * Amendments to PAS 23, Borrowing Costs, Bonowing Costs Eligible for Capitalization The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application permitted. Since the Company's current practice is In line with these amendments, the Company does not expect any effect on Its parent company financial statements upon adoption. Effective beginning on or after January 1, 2020 a. Amendments to PFRS 3, Definition of a Business The amendments to PFRS 3 clarify the minimum requirements to be a business, remove the assessment of a market participant's ability to replace missing elements, and narrow the definition of outputs. The amendments also add guidance to assess whether an acquired process Is substantive and add illustrative examples. An optional fair value concentration test Is introduced which permits a simplified assessment of whether an acquired set of activities and assets Is not a business. An entity applies those amendments prospectively for annual reporting periods beginning on or after January 1, 2020, with earlier application permitted. These amendments will apply on future business combinations of the Company. b. Amendments to PAS 1, Presentation of Financial Statements, and PAS 8, Accounting Policies, Changes In Accounting Estimates and Errors, Definition of Material The amendments refine the definition of material In PAS 1 and align the definitions used across PFRSs and other pronouncements. They are Intended to Improve the understanding of the existing requirements rather than to significantly impact an entity's materiality judgements. An entity applies those amendments prospectively for annual reporting periods beginning on or after January 1, 2020, with earlier application permitted. These amendments will apply to future financial statements of the Company. IIIIIII1IllI III111 IIIIIIIIIIIIIIIII1l 10- Elfectie beginning on or after January 1, 2021 a. PFRS 17, Insurance Contracts PFRS 17 Is a comprehensive new accounting standard for Insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, PFRS 17 will replace PFRS 4, Insurance Contracts. This new standard on Insurance contracts applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-Insurance), regardless of the type of entities that Issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of PFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for Insurers. In contrast to the requirements In PFRS 4, which is largely based on grandfathering previous local accounting policies, PFRS 17 provides a comprehensive model for Insurance contracts, covering all relevant accounting aspects. The core of PFRS 17 is the general model, supplemented by: a. A specific adaptation for contracts with direct participation features (the variable fee approach) b. A simplified approach (the premium allocation approach) mainly for short-duration contracts PFRS 17 is effective for reporting periods beginning on or after January 1, 2021, with comparative figures required. Early application is permitted. The standard Is not applicable to the Company since it does not have activities that are predominantly connected with Insurance nor does it issue insurance contracts. Interpretation with Deferred Effective Date a. Amendments to PFRS 10 and PAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss of control of a subsidiary that Is sold or contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognized when a transfer to an associate or Joint venture involves a business as defined In PFRS 3, Business Combinations. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, Is recognized only to the extent of unrelated Investors' interests In the associate or joint venture. On January 13, 2018, the Financial Reporting Standards Council postponed the original effective date of January 1, 2016 of the said amendments until the International Accounting Standards Board has completed Its broader review of the research project on equity accounting that may result in the simplification of accounting for such transactions and of other aspects of accounting for associates and joint ventures. Sianficant Accountina Policies Current versus Noncurrent Classification The Company presents assets and liabilities in its statement of financial position based on a current and noncurrent classification. An asset Is current when it Is: a. Expected to be realized or intended to be sold or consumed in normal operating cycle; b. Held primarily for the purpose of trading; c. Expected to be realized within twelve (12) months after the reporting period; or d. Cash or cash equivalent, unless restricted from being exchanged or used to settle a liability for at least twelve (12) months after the reporting period. All other assets are classified as noncurrent. A liability Is current when: a. It is expected to be settled In normal operating cycle; b. It Is held primarily for the purpose of trading; c. It is due to be settled withIn twelve (12) months after the reporting period; or d. There Is no unconditional right to defer the settlement of the liability for at least twelve (12) months after the reporting period. - 11 - The Company classifies all other liabilities as noncurrent. Deferred tax assets and liabilities are classified as noncurrent assets and liabilities. Fair Value Measurement Fair value is the estimated price that would be received for selling an asset or paid to transfer a Ilability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: a. in the principal market for the asset or liability; or b. In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best Interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset In Its highest and best use or by selling it to another market participant that would use the asset In its highest and best use. The Company uses valuation techniques that are appropriate In the circumstances and for which value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: a. Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. b. Level 2: valuation techniques for which the lowest level Input that is significant to the fair value measurement Is directly or Indirectly observable. c. Level 3: valuation techniques for which the lowest level Input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognized in the parent company financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Company's management determines the policies and procedures for both recurring and non-recurring fair value measurement. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Cash and Cash Eauivalents 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 (3) months or less from the date of acquisition and that are subject to an Insignificant risk of change in value. Reconnition and Measurement of Financial Instruments (Effective January 1. 2018) Financial assets a. Initial recognition Financial assets are classified, at Initial recognition, as either subsequently measured at amortized cost, at FVOCI, or at FVPL. The classification of financial assets at Initial recognition depends on the financial asset's contractual cash flow characteristics and the Company's business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at FVPL, transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction price determined under PFRS 15. 12- In order for a financial asset to be classIfied and measured at amortized cost or at FVOCI, It needs to give rise to cash flows that are 'solely payments of principal and interest' on the principal amount outstanding. This assessment is referred to as the 'solely payments of principal and interest test' and is performed at an instrument level. The Company's business model for managing financial assets refers to how It manages Its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, sellIng the financial assets, or both. 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 trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset. As of December 31, 2018, the Company's financial assets comprise of financial assets at amortized cost. b. Subsequent measurement - Financial assets at amotied cost Financial assets are measured at amortized cost If both of the following conditions are met: a the asset is held within the Company's business model whose objective is to hold assets In order to collect contractual cash flows; and, * the contractual terms of the Instrument give rise on specified dates to cash flows that are solely payments of principal and Interest on the principal amount outstanding. Financial assets at amortized cost are subsequently measured using the effective Interest method and are subject to impaIrment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or Impaired. The Company classified cash In banks and cash equivalents and receivables as financial assets at amortized cost (see Notes 4, 5 and 19). c. Derecogntion A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized when: * the right to receive cash flows from the asset has expIred; or * the Company has transferred its right to receive cash flows from the asset or has 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 (1) the Company has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Company has transferred Its rights to receive cash flows from an asset or has entered Into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing Involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. 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 consideration that the Company could be required to repay. d. Impairment The Company recognizes an allowance for ECLa for all debt instruments not held at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate (EIR). The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are Integral to the contractual terms. For those credit exposures for which there has been a significant increase in credit risk since initial recognItIon, a loss allowance Is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). 1111111111111l0110liiilll111 -13- For receivables, the Company applies a simplified approach in calculating ECLa. Therefore, the Company does not track changes In credit risk, but Instead recognizes a lose allowance based on lifetime ECLB at each reporting date. The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Company considers a financial asset In default when contractual payments are ninety (90) up to one hundred eighty (180) days past their due dates. However, in certain cases, the Company may also consider a financial asset to be in default when internal or external Information Indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking Into account any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Financial liabilites a. Inital recogniton Financial liabilities are classified, at initial recognition, either as financial liabilities at FVPL, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial lIabIlities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. As of December 31, 2018, the Company's financial liabilities comprise of financial liabilities at amortized cost (loans and borrowings). b. Subsequent measurement After initial recognition, long-term debts are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized under the 8Other income (expense)' account in the parent company statements of comprehensive income when the liabilities are derecognized or impaired, and through the "Interest expense' account when the gains and losses are amortized. This accounting policy applies to the Company's accounts and other payables, long-term debt, service concession obligations, and other obligations that meet the above definition (other than liabilities covered by other accounting standards, such as pension liabilities, Income tax payable, and other statutory liabilities). c, Derecogndon A financial Ilability Is derecognized when the obligation under the liability Is discharged or canceled or has expired. When an existing financial liability I 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 respective carrying amounts is recognized In the parent company statements of comprehensive income. Offeettina Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the parent company statements 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, to realize the asset and settle the liability simultaneously. The Company assesses that it has a currently enforceable right of offset if the right is not contingent on a future event and is legally enforceable in the normal course of business, event of default, and event of insolvency or bankruptcy of the Company and all of the counterparties. Recoanition and Measurement of Financial Instruments (Prior to Adoption of PFRS 91) Date of recogniffon The Company recognizes a financial asset or a financial liability in the parent company statements of financial position when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date. 14- Iniial recognition All financial assets are initially recognized at fair value. Except for financial assets and liabilities at FVPL, the initial measurement of financial assets and liabilities includes transaction costs. The Company classifies its financial assets in the following categories: financial assets at FVPL, held-to-maturity (HTM) Investments, available-for-sale (AFS) financial assets, and loans and receivables. The Company classifles its financial liabilities as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the investments were acquired and whether these are quoted in an active market. Management determines the classification of Its investments at Initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Financial Instruments are classified as liability or equity In accordance with the substance of the contractual arrangement. Interest, dividends, gains, and losses relating to a financial instrument, or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classlfied as equity are charged directly to equity, net of any related income tax benefits. As of December 31, 2017, the Company's financial instruments primarily consist of loans and receivables, and other financial liabilities. Day I proflt For transactions other than those related to customers' guaranty deposits and other deposits, where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instruments or based on a valuation technique whose variables Include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a 'Day 1' profit) in profit or loss under "Other income" unless it qualifies for recognition as some other type of asset or liability. In cases where use is made of data which is not observable, the difference between the transaction price and model value Is only recognized in profit or loss when the Inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the 'Day 1' profit amount. Embedded dedvatives 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 derivative 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 FVPL. Embedded derivatives are measured at fair value with fair value changes being reported through profit or lose and are carried as assets when the fair value Is positive and as liabilities when the fair value Is negative. Subsequent reassessment is prohibited unless there Is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment Is required. The Company determines whether a modification In the cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract, or both have changed and whether the change is significant relative to the previously expected cash flows from the contract. The Company has certain closely and clearly related derivatives that are embedded in the host contract (such as long-term debt) which do not require bifurcation. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments and fixed maturities that are not quoted In an active market. These are not entered into with the Intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. These are included in current assets If maturity Is within twelve months from the reporting date. Otherwise, these are classified as noncurrent assets. After Initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking Into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in "Interest Incomeg In profit or loss. The losses arising from Impairment of such loans and receivables are recognized as "Provision for probable losses and doubtful accounts in profit or loss. This accounting policy applies primarily to the Company's cash In banks and cash equivalents, receivables, and deposits under other current assets and other noncurrent assets. IIIII IIll IIII1111111 ll1111111 I IIIII - 15 - Other financial liabilities Issued financial instruments or their components, which are not designated as at FVPL are classified as other financial liabilities where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount, after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of Issuance. After initial measurement, other financial liabilities are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an Integral part of the effective Interest rate. Any effect of restatement of foreign currency-denominated liabilities are recognized in profit or loss. This accounting policy applies primarily to the Company's long-term debt, service concession obligations, accounts and other payables except statutory liabilities, customers' guaranty deposits and other deposits under other noncurrent liabilities, payable to related parties and stockholders, and other payables that meet the above definition (other than liabilities covered by other accounting standards, such as pension liabilities and income tax payable). Derecognition of Financial Assets and Financia Liabilities (Prior to Adoaption of PFRS gM Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized when: a. the right to receive cash flows from the asset has expired; b. the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a "pass-through' arrangement; or c. the Company has transferred its right to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risks and rewards of the asset but has transferred the control of the asset. Where the Company has transferred its right to receive cash flows from an asset or has entered into a "pass- through" arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company's 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 consideration that the Company could be required to repay. Financial liabliltles A financial liability Is derecognized when the obligation under the liability is discharged, cancelled, or has expired. Where an existing financial liability Is replaced by another financial liability 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 respective carrying amounts Is recognized in profit or loss. The Company gives financiai guarantees to its subsidiary. Financial guarantees are Initially recognized at fair value. Subsequent to initial recognition, the Company's liability under each financial guarantee is measured at the higher of the amount initially recognized less cumulative amortization recognized in the income statement and the amount of related ECL. Offsettina Financial instruments (Prior to Adootlon of PFRS 91 Financial assets and financial liabilities are offset and the net amount reported In the 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 not basis, or to realize the asset and settle the liability simultaneously. Imoirment of Financial Assets (Prior to Adoption of PFRS 91 The Company assesses at each reporting date whether there Is objective evidence that a financial asset or 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 has occurred after the Initial recognition of the asset (an incurred 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may Include indications that the borrower or a group of borrowers is ||illlllllllllliiillillllllillI experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they 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 condition that correlate with default. For the Company's receivables from customers, evidence of Impairment may also include non-collection of the Company's trade receivables, which remain unpaid after thirty (30) days from bill generation. Loans and receivables For loans and receivables carded at amortized cost, the Company first assesses 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 the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, It Includes the asset In a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an Impairment lose Is, or continues to be recognized, are not included In a collective assessment for 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 asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been Incurred). The carrying amount of the asset Is reduced through use of an allowance account and the amount of loss Is charged to profit or loss. Interest income continues to be recognized based on the original effective interest rate of the asset. Receivables, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery. If, In a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized Impairment loss is reversed. Any subsequent reversal of an Impairment loss Is recognized In profit or lose, to the extent that the carrying value-of the asset does not exceed Its amortized cost at the reversal date. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as Industry, customer type, customer location, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience Is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Company to reduce any differences between loss estimates and actual loss experience. Inventories Inventories are valued at the lower of cost or net realizable value (NRV). NRV is the estimated selling price less estimated costs to complete and to sell. The cost Is determined using the moving average method for all inventories, except for raw materials and finished goods. The cost of raw materials and finished goods are determined based on the periodic weighted average method. The cost of raw materials includes all costs directly attributable to their acquisition. Prepaid Exoenses Prepaid expenses are carried at cost less the amortized portion. These typically Include prepayments for business taxes, insurance and employee health care expenses and other benefits. Propery and Eauipment Property and equipment, except land, are stated at cost less accumulated depreciation and amortization, and any Impairment In value. Land is stated at cost less any impairment In value. The initial cost of property and equipment comprises its purchase price, including import duties, taxes and any directly attributable costs of bringing the property and equipment to its working condition and location for its intended use, including capitalized borrowing costs incurred during the construction period. Expenditures Incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged to operations In the period In which the costs are incurred. In situations where It can be clearly 17- 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 and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the related property and equipment. Depreciation and amortization of property and equipment commences once the property and equipment are available for use and are calculated on a straight-line basis over the estimated useful lives (EUL) of the property and equipment as follows: Leasehold Improvements 5 years or lease term, whichever Is shorter Plant and technical equipment 5 years or the term of the related management contract, whichever is shorter Office fumlture and equipment 3 to 6 years Transportation equipment 5 years The EUL and depreciation and amortlzatlon method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. Construction in progress represents property, plant and equipment under construction and is stated at cost Including costs of construction and other direct costs. Construction In progress is not depreciated until such time that the relevant assets are in the location and condition necessary for It to be capable of operating in the manner Intended by management. When property and equipment is retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and accumulated impairment, If any, are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. Service Concession Assets and ObIlaitions The Company accounts for its concession arrangements with MWSS under the Intangible Asset model as it receives the right (license) to charge users of public service. Under the Concession Agreement, the Company Is granted the sole and exclusive right and discretion during the concession period to manage, occupy, operate, repair, maintain, decommission and refurbish the Identified facilities required to provide water services. The legal title to these assets shall remain with MWSS at the end of the concession period. Beginning January 1, 2018, the Company accounts for the accumulating right to be paid for rehabilitation works as 'Contract assets' during the construction phase of the arrangements. Contract assets are derecognized when construction Is completed, and the consideration to be received is recognized as service concession assets (SCA). Prior to January 1, 2018, the Company accounts for the cost of rehabilitation works directly as part of SCA. The SCA also include the fair value of the service concession obligations at drawdown date and other local component costs and cost overruns paid by the Company. Amortization of SCA commences once the SCA are available for use and are calculated on a straight-line basis over the remaining concession period. Beginning May 1, 2017, the Company's SCA are amortized using the units of production (UOP) method over the estimated total billable volume for the remaining period of the - concession agreement to better reflect the usage of the SCA, which is directly related to its estimated total billable volume and is aligned with industry practice. This change in method resulted to a P419.53 million reduction of amortization expense from May 1 to December 31, 2017. Investments in Subsidiaries The Company determined that it has control over its subsidiaries by considering, among others, its power over the investee, exposure or rights to variable returns from its involvement with the Investee, and the ability to use its power over the investee to affect its returns. The following were also considered: * The contractual arrangement with the other vote holders of the investee; * Rights arising from other contractual agreements; and a The Company's voting rights and potential voting rights. The Company's investments in subsidiaries are accounted for under the cost method less any accumulated impairment losses in the parent company financial statements. iiiillliiiiiillillllilllllillil - 18 - Imoirment of Nonfinancial Assets This accounting policy applies primarily to the Company's property and equipment, service concession assets, investments In subsidiaries and other current and noncurrent assets. The Company assesses at each reporting date whether there Is an Indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset's recoverable amount. An asset's recoverable amount is calculated as the higher of the asset's or cash generating unit's fair value less cost of disposal and Its value In use and Is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds Its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken Into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other fair value Indicators. Impairment losses of continuing operations are recognized in profit or lose In those expense categories consistent with the function of the Impaired asset. 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, the recoverable amount Is estimated. A previously recognized impairment loss is reversed only If there has been a change in the estimates used to determine the asset's recoverable amount since the lest impairment loss was recognized. If that Is the case, the carrying amount of the asset is increased to its recoverable amount. That 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 years. Such reversal is recognized In profit or loss unless the asset is carried at revalued amount, in which case the reversal Is treated as revaluation increase. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. 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 of or extension of the arrangement; 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 fulfillment is dependent on a specified asset; or d. there Is a substantial change to the asset. Where reassessment Is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b). A lease where the lessor retains substantially all the risks and benefits of ownership of the asset Is classified as an operating lease. Revenue Reconnition (Unon the Adoption of PFRS 15) Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled In exchange for those goods or services. The Company has generally concluded that it is the principal in its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized. |illilliiiiiilillilillillilII - 19 - Revenue recognized over time using the output method Water and sewer revenue Water and sewer revenue Is recognized over time as the customer receives and consumes the benefit from the performance of the related water and sewerage services. Water and sewerage are billed every month according to the bill cycles of the customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at end of the month are estimated and accrued. These estimates are based on historical consumption of the customers. Also, twenty percent (20%) of water revenue is recognized by the Company as environmental charge. The Company has determined that the output method is the appropriate method In measuring the progress of the water and sewerage services since this depicts the Company's performance in managing and providing water and sewerage services. The Company recognizes revenue from water and sewerage services and environmental charge over time using the output method. As a practical expedient under PFRS 15, the Company recognizes revenue In the amount to which the Company has a right to Invoice since the Company bills a fixed amount for every cubic meter of water delivered. Connection fees Connection fees are amounts paid by customers In exchange for the set-up of a connection from the customers establishment to the Company's water or sewer network. Revenue from connection fees Is recognized over time using the output method based on time elapsed over the period when the related water and sewerage services are expected to be provided. The Company has determined that the output method is the appropriate method in measuring the progress of the connection services since this depicts the Company's performance In managing and providing a service connection from the water and used water facilities to the customers. Revenue recognized over Ume using the input method Revenue from rehabilitation works and Cost of rehabilitation works Revenue from rehabilitation works is equivalent to the related cost for the rehabilitation works covered by the service concession arrangements which is recognized as part of contract assets included under SCA pertain to revenue from construction or upgrade services. Revenue from rehabilitation works is recognized over time, using the Input method. Under this method, progress Is measured by reference to the actual costs incurred to date. The Company determined that the Input method is the appropriate method in measuring progress of the rehabilitation works because there Is a direct relationship between the Company's effort (i.e., actual cost incurred) and the transfer of service to the customer. Revenue recognized at a point in Ume Other operating Income Other customer-related fees such as reconnection and disconnection fees, income from customer late payments, income from septic sludge disposal, and income from bacteriological water analysis are recognized at a point in time when the control over these good or services have been transferred to the customer. Interest income Interest Income is recognized as it accrues, taking into account the effective yield of the assets. For all financial Instruments measured at amortized cost, interest income Is recorded using EIR. EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income Is included in finance income In the parent company statements of comprehensive income. Cotract Blagnces Receivables A receivable represents the Company's right to an amount of consideration that Is unconditional O.e., only the passage of time Is required before payment of the consideration Is due). Contract assets A contract asset is the right to consideration In exchange for goods or services transferred to the customer. If the Company performs by transferring goods or services to a customer before the payment is due, a contract asset is recognized for the earned consideration that is conditional. 1111111li IIIIIIIII li |i llll I lI1III -20- Contract liabiliies A contract liability Is the obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Company transfers goods or services to a customer, a contract liability is recognIzed when the payment Is made or the payment Is due (whichever is earlier). Contract liabilities are recognized as revenue when the Company performs under the contract. Revenue Recoonition (Prior to Adootion of PFRS 15) Revenue Is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment Ia made. Revenue Is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The following specific recognition criteria must also be met before revenue is recognized. Water and sewer revenue Water and sewer revenue are recognized when the related water and sewerage services are rendered. Water and sewerage are billed every month according to the bill cycles of the customers. As a result of bill cycle cut- off, monthly service revenue eamed but not yet billed at end of the month are estimated and accrued. These estimates are based on historical consumption of the customers. Also, twenty percent (20%) of water revenue is recognized by the Company as environmental charge. Connection fees Revenue from connection fee is recognized outright upon when the customer's establishment is connected to the Company's water or sewer network. Revenue from rehabilitation works and Cost of rehabilitation works Revenue from rehabilitation works is recognized and measured by the Company In accordance with PAS 11 for the construction and PAS 18 for the service. This Includes revenue from rehabilitation works which Is equivalent to the related cost for the rehabilitation works covered by the service concession arrangements which is recognized as part of SCA. Other operating income Other customer related fees such as reconnection and disconnection fees, income from customers late payments, Income from septic sludge disposal, and income from bacteriological water analysis are recognized when these services have been rendered. Interest Income Interest income is recognized as it accrues, taking into account the effective yield of the assets. For all financial instruments measured at amortized cost, Interest Income is recorded using the effective interest rate. Effective Interest rate Is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance Income in the parent company statements of comprehensive income. Cost of Services and Operating Expenses Costs and expenses are recognized in profit or loss when a decrease In future economic beneflts related to a decrease in an asset or an Increase In a liability has arisen that can be measured reliably. These are recognized: * on the basis of a direct association between the costs Incurred and the earning of specific items of income; * on the basis of systematic and rational allocation procedures when economic benefits are expected to arise over several accounting periods and the association can only be broadly or indirectly determined; or, * immediately when expenditure produces no future economic benefits or when, and to the extent that, future economic benefits do not qualify or cease to qualify, for recognition in the statement of financial position as an asset. Cost of services and operating expenses are measured at the amount paid or payable. Iiililliill1ll1llillllill 21 - Forelan Currency-Denominated Transactions Foreign exchange differentials arising from foreign currency transactions are credited to or charged against operations. As approved by the MWSS BOT under Amendment No. 1 of the Concession Agreement, the following will be recovered through billings to customers: a. restatement of foreign currency-denominated loans; b. excess of actual concession fee payment over the amounts of concession fees translated using the base exchange rate assumed in the business plan approved every rate rebasing exercise. The current base exchange rate Is P53.18: US$1.00 based on the latest rate rebasing exercise effective January 1, 2018; c. excess of actual interest payment translated at exchange spot rate on settlement date over the amount of Interest translated at drawdown rate; and d. excess of actual payment of other financing charges relating to foreign currency-denominated loans translated at exchange spot rate on settlement date over the amount of other financing charges translated at drawdown rate. The functional and presentation currency of the Company is the Philippine Peso. Transactions In foreign currencies are Initially recorded by the Company at the respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. All differences are taken to profit or loss, with the exception of differences on foreign currency borrowings that provide a hedge against a net Investment in a foreign entity. These are recognized in OCI until the disposal of the net investment, at which time they are recognized in profit or loss. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity. Nonmonetary items that are measured In terms of historical cost in a foreign currency are translated using the exchange rate as at the date of Initial transaction. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. In view of the automatic reimbursement mechanism, the Company recognizes deferred FCDA (Included as part of "Other noncurrent assets' in the parent company statements of financial position) for both the realized and unrealized foreign exchange gains and losses. Other water revenue-FCDA is credited (debited) upon recovery (refund) of realized foreign exchange losses (gains). The write-off or reversal of the deferred FCDA pertaining to concession fees will be made upon determination of the rebased foreign exchange rate, which Is assumed In the business plan approved by the MWSS-RO during the latest Rate Rebasing exercise, unless Indication of impairment of the deferred FCDA would be evident at an earlier date. BorrowIrda costs Borrowing costs that are directly attributable to the acquisition, development, Improvement and construction of fixed assets (including costs incurred in connection with rehabilitation works) that necessarily takes a substantial period of time to get ready for its intended use are recorded as property, plant and equipment or SCA, as applicable. All other borrowIng costs are expensed in the period they occur. Borrowing costs consist of Interest and other costs that an entity Incurs In connection with the borrowing of funds. The interest capitalized is calculated using the Company's weighted average cost of borrowings after adjusting for borrowing associated with specific developments. Where borrowings are associated with specific developments, the amounts capitalized is the gross interest incurred on those borrowings less any investment Income arising on their temporary Investment. The capitalization of those borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs ceases when substantially all activities necessary in preparing the related assets for their intended use are complete. Borrowing costs Include interest charges and other related financing charges Incurred in connection with the borrowing of funds. Premiums and/or discounts on long-term debt are included In the tLong-term debt account In the parent company statements of financial position and are amortized using the EIR method. Provislons A provision is recognized when the Company has: (a) a present obligation (legal or constructive) as a result of a past event; (b) it Is probable (i.e. more ilkely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, 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 an interest expense. Where the Company expects a provision to be reimbursed, the reimbursement Is not recognized as a separate asset and only when the reimbursement Is virtually certain. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. 1lilllli I IIllIlli111111IIIIIll -22- Continaencles Contingent liabilities are not recognized in the parent company financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits Is remote. Contingent assets are not recognized in the parent company flnancial statements but disclosed when an inflow of economic benefits is probable. Defined Benefit Plan The net defined beneflt ilability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any). The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. Defined benefit costs comprise the following: a. service cost, b. net Interest on the net defined benefit liability or asset, and c. remeasurements of net defined benefit liability or asset. Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by Independent qualified actuaries. Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on govemment bonds to the not defined benefit liability or asset. Net Interest on the net defined benefit liability or asset Is recognized as expense or income in the parent company statements of comprehensive Income. Remeasurements comprising actuarial gains and losses and return on plan assets (excluding net Interest on defined benefit liability or asset) are recognized Immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassIfied to profit or loss in subsequent periods. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Company, nor can they be paid directly to the Company. The fair value of plan assets is based an market price information. When no market price Is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The Company's right to be reimbursed of some or all of the expenditure required to settle a defined benefit obligation is recognized as a separate asset at fair value when and only when reimbursement Is virtually certain. Termination Benefit Termination benefits are employee benefits provided in exchange for the termination of an employee's employment as a result of either an entity's decision to terminate an employee's employment before the normal retirement date or an employee's decision to accept an offer of benefits in exchange for the termination of employment. A liability and expense for a termination benefit is recognized at the earlier of when the entity can no longer withdraw the offer of those benefits and when the entity recognizes related restructuring costs. Initial recognition and subsequent changes to termination benefits are measured in accordance with the nature of the employee benefit, as either post-employment benefits, short-term employee benefits, or other long-term employee benefits. Short-term Employee Benefits Short-term employee benefits include items such as salaries and wages, social security contributions and nonmonetary benefits, if expected to be settled wholly within twelve (12) months after the end of the reporting period In which the employees rendered the related services. Short-term employee benefits are recognized as expense as incurred. When an employee has rendered service to the Company during the reporting period, the II111lllllllll I1llllll1lllllil - 23 - Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service as a liability (accrued expense), after deducting any amount already paid. Emoloyee Leave Entitlement Employee leave entitlements to annual leave are recognized as a liability when they are accrued to the employees. The undiscounted liability for employee leaves expected to be settled wholly before twelve (12) months after the end of the annual reporting period is recognized for services rendered by employees up to the end of the reporting period. Share-Based Payment Employee share purchase plans The Company has an employee stock ownership plan (ESOWN) which allows the grantees to purchase the Company's shares at a discounted price. The Company recognizes stock compensation expense over the holding period. The Company treats Its ESOWN plan as option exercisable within a given period. These are accounted for similar to the PFRS 2, Share-based Payment, options. Dividends paid on the awards that have vested are deducted from equity and those paid on awards that are unvested are charged to profit or loss. For the unsubscribed shares where the employees still have the option to subscribe In the future, these are accounted for as *Common stock options outstanding" in the parent company statements of financial position. Capital stock Is measured at par value for all shares subscribed, Issued and outstanding. When the Company issues more than one class of stock, a separate account is maintained for each class of stock and number of shares issued. When the shares are sold at premium, the difference between the proceeds at the per value is credited to "Additional paid-in capitaln account. Direct costs incurred related to equity issuance are chargeable to "Additional paid-In capital" account. If additional paid-In capital Is not sufficient, the excess is charged against retained eamings. When the Company issues more than one class of stock, a separate account Is maintained for each class of stock and the number of shares issued. Subscriptions receivable pertains to the uncollected portion of the subscribed shares. Retained earnings represent accumulated earnings of the Company. Appropriated retained earnings are set aside for future business expansions. The Company's BOD declares dividends from the unappropriated portion of its retained earnings. Taxes Value Added Tax (VAT) Input VAT pertains to the 12% indirect tax paid by the Company in the course of the Company's trade or business on local purchase of goods or services. Deferred input VAT pertains to Input VAT on accumulated purchases of property, plant and equipment and service concession assets for each month amounting to R1.0 million or more. This is amortized over five (5) years or the life of the property, plant and equipment or service concession assets, whichever is shorter, in accordance with the Bureau of Internal Revenue (BIR) regulation. Output VAT pertains to the 12% tax due on the local sale of goods and services by the Company. If at the end of any taxable month, the output VAT exceeds the input VAT, the outstanding balance is included under aTrade payables" in the HAccounts and other payabless account. If the input VAT exceeds the output VAT, the excess shall be carried over to the succeeding months and included under the 'Other current assets" account. Current Income tax Current income tax assets and liabilities 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 have been enacted or substantively enacted as at the reporting date. Deferred Income tax Deferred income tax is provided, using the liability method, for all temporary differences, with certain exceptions, between the tax bases of assets and liabilities and their carrying amounts for flnancial reporting purposes at the reporting date. -24- Deferred income tax liabilities are recognized for all taxable temporary differences, except: * When the deferred Income tax liability arises from the Initial recognition of goodwill or 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. * In respect of taxable temporary difference associated with investments In subsidiaries and associates, when the timing of the reversal of the temporary difference can be controlled and it Is probable that the temporary difference will not reverse in the foreseeable future. Deferred Income tax assets are recognized for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. 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 the carryforward of unused tax credits and unused tax losses can be utilized, except: * 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 lose. In respect of deductible temporary differences associated with investments in subsidiaries and associates, 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 each reporting date and reduced to the extent that it is no longer probable that sufficient taxable income 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 each reporting date and are recognized to the extent that it has become probable that future taxable Income will allow all or part of the deferred Income tax assets to be recovered. Deferred Income tax assets and liabilities are measured at the tax rate that is expected to apply in the year 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 of the reporting date. Deferred income tax relating to items recognized outside profit or loss is recognized outside profit or lose. Deferred Income tax Items are recognized in correlation to the underlying transaction either in other comprehensive Income or directly in equity. The Company offsets deferred income tax assets and deferred Income tax liabilities if and only If it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which Intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities almultaneously, In each future period In which significant amounts of deferred income tax liabilities or assets are expected to be settled or recovered. Asets Held in Trust Assets which are owned by MWSS but are operated by the Company under the Concession Agreement are not reflected in the parent company statements of financial position but are considered as Assets Held in Trust (see Note 21). Seament Reportina The Company's operating businesses are organized based on source and types of revenue. Information on business segments is presented in Note 22 to the parent company financial statements. Events after the Reporting Date Any event after the reporting date up to the date of the auditors' report that provide additional Information about the Company's financial position at the reporting date (adjusting events) is reflected in the parent company financial statements. Any event after the reporting date that is not an adjusting event Is disclosed in the parent company financial statements when material. - 25 - 3. Significant Accounting Judgments, Estimates and Assumptions The preparation of the parent company financial statements In conformity with PFRS requires management to make estimates and assumptions that affect the amounts reported In the parent company financial statements and the accompanying notes. The estimates and assumptions used In the parent company financial statements are based upon management's evaluation of relevant facts and circumstances as of the date of the parent company financial statements. Actual results could differ from such estimates. Management believes the following represent a summary of these significant estimates and judgments: Judaments In the process of applying the Company's accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the parent company financial statements. Service concession arrangements in applying Philippine Interpretation IFRIC 12, Service Concession Arrangements, the Company made a judgment that its concession arrangement with MWSS qualifies under the Intangible Asset Model as It receives the right (license) to charge users of public service (see Notes 2 and 9). Operating lease commitments - Company as lessee The Company entered into lease agreements for its stockyard and office areas. The Company has determined, based on the evaluation of the terms and conditions of the arrangements that the significant risks and rewards for properties leased from third parties are retained by the lessors and accordingly, accounts for these contracts as operating leases (see Note 21). Provisions and contingencies The Company is currently involved in various legal proceedings and exposures in the ordinary conduct of business. The estimate of the probable costs for the resolution of these claims has been developed in consultation with internal and outside counsels handling the defense in these matters and Is based upon an analysis of potential results. The Company currently does not believe that these proceedings will have a material adverse effect on the Company's financial position and results of operations (see Note 26). Use of Estimates Key assumptions concerning the future and other sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Company. Such changes are reflected in the assumptions when they occur. Revenue and cost recognition - rehabilitation works The Company measures revenue from rehabilitation works at the fair value of the consideration received or receivable. The Company's revenue from rehabilitation works are recognized over time, using the Input method. Under this method, progress is measured by reference to the actual costs incurred to date. Revenue from rehabilitation works recognized by the Company Is equivalent to the costs of rehabilitation works Incurred as these costs are recovered by the Company through its right to charge the customers. The Company's revenue from and cost of rehabilitation works amounted to 18,198.60 million and P9,878.15 million in 2018 and 2017, respectively (see Note 9). Provision for expected credit losses of receivables The Company uses a provision matrix to calculate ECLs for receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns. The provision matrix is initially based on the Company's historical observed default rates. The Company calibrates the matrix to adjust the historical credit loss experience with forward-looking information. For Instance, if forecast economic conditions (i.e., inflation) are expected to deteriorate over the next year which can lead to an increase in prices of basic goods and services, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. - 26- The assessment of the correlation between historical observed default rates, forecast economic conditions, and ECLs is a significant estimate. The amount of ECLs Is sensitive to changes in circumstances and of forecast . economic conditions. The Company's historical credit loss experience and forecast of economic conditions may also not be representative of customer's actual default in the future. As of December 31, 2018 and 2017, the outstanding balance of allowance for ECLs amounted to P611.97 million and P568.44 million, respectively (see Note 5). Accounting for connection fees Under PFRS 16, the connection fee and the related water and sewer services are accounted for as arising from a single performance obligation that will be satisfied over the period when the related services are expected to be provided. The adoption of PFRS 15 requires that the connection fee collected for all active water service connections as at January 1, 2018 to be recognized as revenue over time. Management has made a Judgment that it Is impracticable to restate revenue from connection fee retrospectively given the Impracticality in obtaining all the relevant Information to properly and accurately estimate the cumulative impact of the change in accounting for connection fees, including among others, sources and number of active service connections, amount of connection fee paid per connection, and the related cost. Considering impracticability of retrospective restatement, the Company adopted the change in accounting for connection fees prospectively starting on January 1, 2018, as allowed under PAS 8. Estimating billable water volume Starting May 1, 2017, the SCAs related to the Company's concession agreements are amortized using the UOP method based on actual billed volume and total estimated billable volume for the remaining period of the concession agreements. The Company considers factors such as population growth rate, supply and consumption, and service coverage, including ongoing and future expansions in estimating the total billable water volume over the remainIng periods of the concession agreements. For the years ended December 31, 2018 and 2017, SCA amortization expense based on the UOP method amounted to P1,787.66 million and P795.03 million, respectively (see Note 9). Deferred FCDA Under the concession agreements entered Into by the Company with MWSS, the Company Is entitled to recover (refund) foreign exchange losses (gains) arising from concession loans and any concessionaire loans. The Company recognized deferred FCDA (Included as part of "Other noncurrent assets" in the parent company statements of financial position) for both realized and unrealized foreign exchange gains and losses. Deferred FCDA Is set up as an asset for the realized and unrealized exchange losses since this Is a resource controlled by the Company as a result of past events and from which future economic benefits are expected to flow to the Company. Realized and unrealized foreign exchange gains, on the other hand, which will be refunded to the customers, are presented as liability. As of December 31, 2018 and 2017, the Company's deferred FCDA amounted to P2,420.09 million and P1,200.24 million, respectively (see Note 11). The Company's deferred FCDA arises from rate adjustment mechanism for the recovery or compensation an a current basis, subject to quarterly review and adjustment by MWSS, when necessary, of accrued foreign exchange gains and losses, arising from MWSS loans and concession loans used for capital expenditures and concession fee payments. Pension assets and liabilities The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making various assumptions. These Include the determination of the discount rates, future salary Increases, mortality rates, incapacity rates, retirement rate, and termination rates. The amounts of defined benefit obligations are highly sensitive to changes due to the complexity of the valuation and its long-term nature. Defened tax assets The Company reviews the carrying amounts of deferred taxes at each reporting date and reduces deferred tax assets to the extent that it Is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Significant management judgement is required to determine the amounts that could be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning. Also, the Company does not recognize certain deferred taxes on deductible temporary differences where doubt exists as to the tax benefits they will bring in the future (see Note 17). II IIIII IIIIIIIIlllI ll I lBI lhII 27- Impairment of nonfinancial assets The Company assesses the impairment of nonfinancial assets (property and equipment, SCA, investments in subsidiaries, other current assets, and other noncurrent assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Company considers Important which could trigger an impairment review Include the following: * significant underperformance relative to expected historical or projected future operating results; * significant changes in the manner of usage of the acquired assets or the strategy for the Company's overall business; * significant negative industry or economic trends; * significant decline in net worth or market capitalization; and * significant decline In distributed profits or Increase In losses. As described In the accounting policy, the Company estimates the recoverable amount as the higher of the not selling price and value In use. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Company is required to make estimates and assumptions regarding the expected future cash generation of the assets, discount rates to be applied and the expected period of benefits. As of December 31, 2018 and 2017, there were no Impairment Indicators on the Company's nonfinancial assets, and as such, the Company did not recognize any impairment loss during the year (see Notes 7, 8, 9, 10 and 11). Discount rate, salary increase rate, retirement rate, and termination rate assumptions are reviewed at each reporting date. The net pension liability and asset amounted to P57.99 million and P16.11 million as of December 31, 2018 and 2017, respectively (see Note 14). In determining the appropriate discount rate, management considers the Interest rates of government bonds that are denominated In the currency In which the benefits will be paid, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. Future salary Increases are based on expected future inflation rates for the specific country. Retirement and termination rates are based on expected rates at which employees are assumed to retire or leave the employment of the Company. Further details about the assumptions used are provided In Note 14. 4. Cash and Cash Equivalents This account consists of: 2018 2017 Cash on hand and in banks (Note 19) P341,691,719 P375,531,122 Cash ec!uivalents :Note 19 8.408.243 688 5 812 841.050 P6.749.935.407 P6 188 372 172 Cash In banks earn Interest at the respective bank deposit rates ranging from 0.10% to 3.30% and 0.10% to 2.80% in 2018 and 2017, respectively. Cash equivalents are highly liquid investments with varying periods of up to three (3) months and earn Interest at the respective short-term rates. Interest income earned from cash in banks and cash equivalents amounted to P195.14 million and P99.54 million in 2018 and 2017, respectively (see Note 16). I||1IIIIIIIIIIIlilllIIi~lllllli -28 - 5. Receivables This account consists of receivables from: 2018 2017 Customers: Residential P1,131,302,339 P1,002,869,874 Commercial 154,694,000 148,949,702 Semi-business 74,281,019 61,227,443 Industrial 19,860,211 7,337,456 Bonifaclo Water Corporation (BWC) (Note 11) 388,410,670 501,014,249 Related parties (Notes 10 and 19) 483,855,609 453,860,880 Employees - 24,113,763 28.070,246 Interest from banks 23,119,503 15,426,725 Others 'Note 13: 107,101,233 109582867 2,406,738,347 2,328,339,442 Less allowance for ECL 611.961.309 568.440 685 1,794,772,038 1,759,898,777 Less noncurrent Lortion of receivable from BWC iNote 11' 321 014 249 451 322 564 P1.473-757-789 P1 308 576.213 The classes of the Company's receivables arising from water and sewer services rendered to customers, collectible within thirty (30) days from billing date, follow: a. Residential - pertains to receivables from residential households. b. Commercial - pertains to receivables from commercial customers. c. Semi-business - pertains to receivables from small businesses. d. Industrial - pertains to receivables from customers for Industrial and manufacturing purposes. Receivable from BWC pertains to the assigned receivable between the Company and Veolia Water Philippines, Inc. (VWPI) covered by the Share Purchase Agreement (SPA) related to the acquisition of VWPI's Interest in Clark Water Corporation (Clark Water), a subsidiary of Manila Water Philippine Ventures, Inc. (MWPV), in 2011. The assigned receivable will be paid by BWC at an amount equal to 30% of the product consumed by all of BWC's customers and the tariff Imposed by the Company on its customers falling under the corresponding classification pursuant to the Concession Agreement and all amounts received by BWC as connection fees from customers and any fee BWC may charge in relation to the Interconnection with the wastewater treatment plant of areas of developments outside the BWC service area. The assigned receivable from BWC is interest bearing and the Company classifies as current the portion of its gross receivable from BWC that is due within the next twelve (12) months in accordance with the agreed terms. Receivable from employees arise from car, salary and other loans which are due and demandable based on an agreed payment schedule and are collected through salary deductions. Interest from banks are accrued interest arising from the Company's cash In banks and cash equivalents. Other receivables represent receivables from the Land Bank of the Philippines in relation to the MWMP Loan (see Note 13), and receivables from shared facilities and collection facilities. Movements in the Company's allowance for ECLs follows: 2018 Receivable from Customers Other Residential CommerchlSemi-Business Industrial Recevables Total lalance at beginning of year P407,214,661 P74,8150N P25,278,233 P3,142,962 P67,989,780 P568,440,666 ProvisIon Note 1. 32.67,364 7.2z65( 2441.078 1 34.552 - 43.525.644 Balance at and of r a r P439.882.025 PB2.597.67S P27 719.311 PS 677.514 P57 989 760 P611 966.309 29 - 2017 Receivable from Customers Other Reaidential Comdel Semi-Buslness Industrial Receivables Total Balance at beginning of year P427,965,285 P71,709,81 P24,228,706 P3,103.809 P57,989,780 P584997.441 Provision (Note 16) 17,611,759 3105168 1,049,527 39,153 - 21,805,607 Reversal -Note 16. 38 362 353 - - - '38 362 383- Balance at and of oar P407 214 661 P74 -1t;% P25 278 233 P3 142 962 P57 989 780 P568 440 665 6. Inventories This account consists of water meters, connection supplies and water treatment chemicals that the Company uses in treating raw water into potable water. These materials are caried at cost. Carrying values as of December 31, 2018 and 2017 amounted to P76.37 miilion and P35.23 million, respectively. Cost of Inventories charged to current period amounted to P195.71 million and P70.26 million as of December 31, 2018 and 2017 respectively. 7. Other Current Assets This account consists of: 2018 2017 Prepaid expenses (Note 9) P384,962,848 P608,968,638 Guaran, dey osts 4.511.410 486911 P389.474.258 P613 828 549 Prepaid expenses include prepayments for transaction costs for undrawn credit facilities, loan guarantee fees, regulatory costs, business taxes, Insurance, employee health care expenses and other benefits. Guaranty deposits consist of rental deposits and other advance payments that can be refunded within one (1) year. 8. Property and Equipment The roliforward analysis of this account follows: 201! Plant and Leasehold Technical Office Furnitur Transportation Land improvements Equipmen* 3nd Enu!pment EAulDment Toul Cost Balance at beginning of year P203,331,818 P278,004,35l P973,223,294 P1,934,940,407 1787,079,212 P4,176,687,093 Additions 28,024 61,848,237 77,862,26 180,125,710 50,227,641 370,089,907 Dis, :als - - 1 M.523 '85.307:057 '1S.140.680 143154 260: Balance at and of. ear 203 359 839 330 860 602 1 060.971,026 2 029,767,100 779,118.173 4 403.122 740 Accumulated depreciation and amortization Balance at beginning of year - 250,616,202 119,046,288 1,687,049,915 386,244,87 3,222,866,302 Depreclatoln and amortization (Noto 16) - 21,918,578 34,864,769 223,608,884 109,604,209 388,996,440 Oiai.: ses - 1106 823 IS 00.9261 is1 29 9011 1139.027 310, Balance at and of ,ear - 272.1!3.780 053.804 534 1 80567873 441019 205 3 472.825.392 Nat book value _ P203.369 839 P67.416 822 P97 174.432 P224 109 227 P338 149 968 P930.207.348 - 30 - 2017 Plant and Leasehold Technlcal Office Furniture Transportation Land Imrrwements i= .ulnment and r;ulment e i-lmment Total Cost Balance at beginning of year P202,823,157 P267,77a,318 P958,081,877 P1,799,390,139 P438,177,511 P3,6686,255,000 Additions 500,66 10,228,049 15,141,417 136,168,983 359,790,583 521,846600 Dimr a- - - '616715 110897882 1151469.' Balance at and of 203 331 815 278 004 365 973 223 204 1 934 948 407 787 079 212 4 176 587 093 Accumulated depreciation and amortization Balance at beginning of year - 236,617,045 869,610,889 1,473,867,044 322,680,895 2,902,804,873 Depreciation and amortization (Note 16) - 13,898,157 49,386,399 193,752,843 73,677,111 330,714,510 Dis-osals - - 589 972! 10093100 -10663081. Balance at and of ear - 250 815 202 910046 288 1 667 049 915 386 244.897 3 222 816 302 Net book value P203331 815 P27 489 163 P54-177 006 P267 898 492 P400 834 315 P953 730 791 As of December 31, 2018 and 2017, fully depreciated property and equipment that are still in use by the Company amounted to P2,940.44 million and P2,803.74 millIon, respectively. No property and equipment was pledged as security as of December 31, 2018 and 2017 9. Service Concession Assets and Obligations A. Service concession assets The movements in this account follow: 2018 2017 Cost Balance at beginning of year P88,605,639,136 P78,711,730,551 Additions: Rehabilitation works 8,198,599,481 9,878,153,855 Concession fees 476,269,457 11,305,325 Local comp%onent cost 13.09.189 4449405 Balance at end of Y.ear 97.293.603,263 88.605 639 136 Accumulated amortization Balance at beginning of year 23,074,784,795 21,168,523,976 Amortization 1.787.664.122 1 906.260 819 Balance at end of vear 24 862 448.917 23 074 784 795 Net book value P72.431.154.346 P65 530 854 341 SCA consists of the present value of total estimated concession fee payments, Including regulatory costs and local component costs of the Company pursuant to the Concession Agreement and the revenue from rehabilitation works which is equivalent to the related cost for the rehabilitation works covered by the concession agreement. Contract assets (assets under construction) arlsIng from concession agreements consist of the cost of rehabilitation works covered by the concession agreements of the Company. As of December 31, 2018 and 2017, SCA includes assets under construction amounting to P21.575.54 millon and P18,995.09 million, respectively. Total Interest and other borrowing costs capitalized as part of the rehabilitation works amounted to P775.19 million and P464.70 million in 2018 and 2017, respectively. The capitalization rates used are 7.57% in 2018 and 7.62% in 2017. As of December 31, 2018 and 2017, non-cash acquisitions of SCA amounted to P72.07 million and 174.95 million, respectively. - 31 - B. Service concession obligations The breakdown of service concession obligations follows: 2018 2017 Current P694,399,151 P719,234,617 Noncurrent _ 6.252.455.676 6 110.228 880 P6.946.854.827 P6 529 401 477 MWSS Concession Fees The aggregate concession fees of the Company pursuant to the Agreement are equal to the sum of the following: I. 10% of the aggregate peso equivalent due under any MWSS loan which has been disbursed prior to the Commencement Date, includIng MWSS loans for existing projects and the Umiray Angst Transbasin Project (UATP), on the prescribed payment date; ii. 10% of the aggregate peso equivalent due under any MWSS loan designated for the UATP which has not been disbursed prior to the Commencement Date, on the prescribed payment date; ill. 10% of the local component costs and cost overruns related to the UATP; iv. 100% of the aggregate peso equivalent due under MWSS loans designated for existing projects, which have not been disbursed prior to the Commencement Date and have been either awarded to third party bidders or elected by the Company for continuation; v. 100% of the local component costs and cost overruns related to existing projects; vi. Company's share in the repayment of MWSS loan for the financing of new projects; and vii. One-half of MWSS annual corporate operating budget. In March 2010, MWSS entered into a loan agreement with The Export-Import Bank of China to finance the Angat Water Utilization and Aqueduct Improvement Project Phase II. Total loan facility amounted to $116.60 million with maturity of twenty (20) years including five (5) years grace period. Interest rate Is 3% per annum. MWSS subsequently entered Into a Memorandum of Agreement (MOA) with the Company and Maynilad for the Company and Maynilad to shoulder equally the repayment of the loan with such repayment to be part of the concession fees. On May 12, 2015, MWSS entered into a MOA with the Company and Maynilad for the Angst Water Transmission improvement Project (Angst Transmission Project). The Angst Transmission Project alms to improve the reliability and security of the raw water coming from the Angat Dam through the rehabilitation of the transmission system from Ipo to La Mesa and the application of water safety, risk and asset management plans. Subsequently, on May 27, 2018, MWSS entered In to a loan agreement with Asian Development Bank to finance the Angat Transmission Project. The loan amounts to US$123.30 million with a maturity of twenty-five (25) years including a seven (7)-year grace period. As stipulated in the MOA, the Company and Maynlad shall shoulder equally the repayment of the loan and all reasonable expenditures related to the Project with such payments to form part of the concession fees. In 2016, the Company paid MWSS P500.00 million as compensation for additional water allocation in the Angat reservoir. The schedule of undiscounted future concession fee payments follows: Foreign Currency Denominated Loans Peso Loansl (Translated to Project Local Total Peso Year USD: SuD)ort E:uivalent* 2019 $9,750,894 P395,714,907 P908,416913 2020 9,348,648 395,714,907 887,266,819 2021 6,711,781 395,714,907 748,619,300 2022 6.419,168 395,714,907 733,234,760 2023 8,587,831 395,714,907 741.040,945 2024 onwards 51 115013 5540008695 8227636079 $89 913 115 P7518583230 P12246214816 Puao squivalnt is franslated using the ainag rle is of December3l. 2018 amount to P52.58 to US$1. 11l1l 11ll li liilllIiII ll|IDI I - 32- 10. Investments In Subsidiaries The Company's percentage of ownership In the shares of stock of its subsidiaries in 2018 and 2017 follows: Country of incorporation Effective Percentages and Place of of Ownership Business 2018 2017 Manila Water Total Solutions Corp. (MWTS) Philippines 100.0 100.0 Calasilao Water Company, Inc. (Calaslao Water) -do- 90.0 90.0 Manila Water AsIa Pacific Pte. Ltd. (MWAP) Singapore 100.0 100.0 Manila Water South Asia Holdings Pte. Ltd. (MWSAH) -do- 100.0 100.0 Asia Water Network Solutions Joint Stock Company (Asia Water)1 Vietnam 67.9 67.9 Thu Duc Water Holdings Pte. Ltd. (TDWH) Singapore 100.0 100.0 Kenh Dong Water Holdings Pte. Ltd. (KDWH) -do- 100.0 100.0 Manila Water Thailand Holdings Pte. Ltd. (MWTH)2 -do- 100.0 100.0 Manila Water (Thalland) Co., Ltd. (MWTC)3 Thailand 100.0 - ManIla South East Asia Water Holdings Pte. Ltd. (MSEA)4 Singapore 100.0 100.0 PT Manila Water Indonesia (PTMWI)5 Indonesia 100.0 - MWPV Philippines 100.0 100.0 Laguna AAAWater Corporation (Laguna Water) -do- 70.0 70.0 Clark Water Corporatlon (Clark Water) -do- 100.0 100.0 Boracay Island Water Company, Inc. (Boracay Water) -do- 80.0 80.0 Filipinas Water Holdings Corp. (Filipinas Water)' -do- 100.0 100.0 Obando Water Company, Inc. (Obando Water) -do- 90.0 90.0 Bulakan Water Company, Inc. (Bulakan Water) -do- 90.0 - Manila Water Consortium, Inc. (MW Consortium) -do- 57.2 57.2 Cebu Manila Water Development, Inc. (Cebu Water)7 -do- 40.4 40.4 Davao del Norte Water Infrastructure Company, Inc. (Davao Water) -do- 51.0 51.0 Tagum Water Company, Inc. (Tagum Water)' -do- 45.9 45.9 Bulacan MWPV Development Corp. (BMDC) -do- 100.0 100.0 Aqua Centro MWPV Corp. (Aqua Centro) -do- 100.0 100.0 Manila Water Intematlonal Solutions, Inc. (MWIS) -do- 100.0 100.0 EcoWater MWPV Corp. (EcoWater) -do- 100.0 - Leyte Water Company, Inc. (Leyte Water) -do- 100.0 - Zamboanga Water Company, Inc. (Zamboanga Water. -do- 70.0 70.0 'Asia Waer is 51.00% owned by Sagon Water Infruture Corporation (Saigon Waler and 4850% owned by MWSAH MWSAfra efbothe ownerahip Iferest In Asia Water Is 67.87% as of December 31, 2018 and 2017 by virtue of lts 37.99% ownership interest In Saion Water. 'rvloualy named Mania Water Indonesia Holdings Pie. Ltd. PMWTC was incorporated on February 20, 2018 and i 100% owned by MWFH. 4Prevoualy named Noifh-West of Saigon Holdings Pie. Ltd. sPTMWI is incorporated on February 1, 2018 and 18 O5.00% owned by MSEA and & 00% owned by a director of PTMW1whose ownership has been pledged to MSEA. tPrevualy named Obando Water Consortium Holdings Corp., FIApines Watleris 49.00% owned by the Parent Company and 51.00% owned by MWPV 'Cebu Wateris 70.58% owned by MW Consoflum. MWPV's effece ownership Interest In Cebu Water la 40.39% by virtue oth 57.22% ownersh1 Interest in hMW Consorfum. 'Tagum Water Company fs 90.00% owned by the Davao Water. MWCIs effecifve Interest In Tagum Water Is 4&90% by vktue of Is 81.00% ownership interest In Davao Water. MWSAH Additional Subscription in Saigon Water On June 21, 2017, MWSAH subscribed to an additional 6.15 million primary shares of Saigon Water at a subscription price of VND16,900.00 per share for a total amount of P229.16 million (VND103.87 billion). As a result of this additional subscription, MWSAH now holds 37.99% of the outstanding capital stock of Saigon Water. - 33- MWPV Memorandum of Aareement (MOA) with Avala Land. Inc. (ALl) On January 15, 2016, MWPV entered into a MOA with ALI and its subsidiaries (the ALI Group), whereby MWPV shall exclusively provide water and used water services and facilities to all property development projects of the ALI Group. Aoua Centro's MOA with the SM Group On December 8, 2016, MWPV entered into MOAs with each of SM Prime Holdings Inc.'s and the latters affiliates and subsidiaries, SM Development Corporation and SM Residences Corp. (collectively, the SM Group). Pursuant to the MOA, MWPV will provide the water and/or used water services and facilities to the property development projects of the SM Group identified in each of the MOA. On October 5, 2017, Aqua Centro was Incorporated to handle property development projects, other than those within the ALI Group, by engaging in the development, improvement, maintenance, and expansion of water, sewerage, wastewater, and drainage facilitles, and provide services necessary or incidental thereto. On December 28, 2017, MWPV entered into a Novation Agreement with the SM Group and Aqua Centro to transfer Its rights, duties and obligations to provide water and/or used water services and facilities to the property development projects of the SM Group to Aqua Centro, effective from the inception of the MOA. As of December 31 2018 and 2017, Aqua Centro has sIx (6) and four (4) signed MOAs with the SM Group, respectively. MWPV has one (1) signed MOA with SM Group as of December 31, 2018 and 2017. Calasiao Water's Concession Aareement with Calaslao Water District (CWD) On December 9, 2018, the Company received a Notice of Award from the CWD for the Implementation of the joint venture project for the design, construction, rehabilitation, maintenance, operation, financing, expansion and management of the water supply system of the CWD In Calaslao, Pangasinan. On June 19, 2017, the Company signed a Joint Venture Agreement (JVA) with CWD which will govern the relationship of the two In undertaking the joint venture project, Under the JVA, the Company and CWD shall cause the incorporation of a joint venture company where the Company and CWD shall own 90.00% and 10.00%, respectively, of the outstanding capital stock. On August 2, 2017, the SEC approved the incorporation of Calasiao Water Company, Inc. On October 23, 2017, Calaesio Water and CWD signed and executed a concession agreement. Under the concession agreement, the CWD grants Calaslao Water, (as contractor to perform certain functions and as agent for the exercise of certain rights and powers under Presidential Decree No. 564) the sole right to develop, manage, operate, maintain, repair, decommission, and refurbish all fixed and movable assets (except certain retained assets) required to provide water delivery in the entire Municipality of Calasiao for a period of twenty- five (25) years commencing on December 29, 2017 (the Commencement Date) until December 29, 2042 (the Expiration Date) or the early termination date as the case may be. While Calaslao Water has the right to manage, operate, repair, and refurbish specified CWD facilities in the service area, legal title to these assets remains with the CWD, The legal title to all fixed assets contributed to the existing CWD system by Calasiso Water during the concession remains with Calaslao Water until the Expiration Date (or the early termination date) at which time all rights, titles and Interest in such assets will automatically vest In CWD. Under the concession agreement, in the event that one or more grounds for EPA has occurred or is expected to occur, an appropriate price adjustment to be applied to the tariff or an appropriate adjustment to the service obligations of the concessionaire will be determined by the CWD. The ground for EPA means any of the following circumstances: a. change in law or change In the Interpretation of the terms of the concession agreement; b. extraordinary cost incurred due to prolonged force majeure; c. a material change has been made to the basis of calculation or definition of the CPI or replacement Index agreed; or d. the concessionaire has Incurred signIficant additional costs as a result of an event of force majeure which are not covered by Insurance. MWPV Asset Purchase Aareement (APA) with Asian Land Strateales Cormoration (Asian Land) and Incomoration of BMDC On January 4, 2017, MWPV entered into an APA with Asian Land to acquire and operate the latter's assets used In the water business operations in Asian Land's developments In the province of Bulacan. The intention of MWPV was to assign the rights under the APA to its wholly owned subsidiary upon its incorporation. ||111iiiiii ll11111IIIIhIIIIIll lllllIl -34- On April 11, 2017, BMDC was incorporated to design, construct, rehabilitate, maintain, operate, finance, expand, and manage water supply system and sanitation facilities. BMDC is the ultimate entity that will own and operate the assets acquired from Asian Land. On July 31, 2017, MWPV assigned all Its rights and obligations on the APA to BMDC, a wholly-owned subsidiary of MWPV, under a Deed of Assignment. On the same day, the Deed of Absolute Sale was also executed between Asian Land and BMDC. Obando Water's Concession Aareement-with the Obando War District (OWD) On January 24, 2017, the consortium of the Company and MWPV received the Notice of Award from the OWD for the Implementation of the joint venture project for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply system and sanitation facilities of the OWD In Obando, Bulacan. On February 2, 2017, Obando Water Consortlum Holdings Corp. (now, Filipinas Water) was registered with the SEC. Filipinas Water Is the consortium between the Company and MWPV with an equity share of 49.00% and 51.00%, respectively. The primary purpose of Filipinas Water Is to engage in the business of a holding company without acting as stockbroker or dealer in securities. On July 26, 2017, Filipinas Water signed and executed a JVA with OWD. The JVA governs the relationship of Filipinas Water and OWD as joint venture partners in the Obando Water Concession Project (the 'Obando Concession Projecto). On October 10, 2017, Obendo Water was incorporated. Obando Water is 90% and 10% owned by Filipinas Water and OWD, respectively. On October 12, 2017, Obando Water and OWD signed and executed a concession agreement without the necessity for another bidding and subject to mutual agreement by Obando Water and the OWD. Under the concession agreement, OWD grants Obando Water, (as contractor to perform certain functions and as agent for the exerclse of certain rights and powers under Presidential Decree No. 584), the sole right to manage, operate, maintain, repair, refurbish, and expand the fixed and movable assets required to provide water and sanitation services In the entire Municipality of Obando for a period of twenty-five (25) years commencing on January 1, 2018 (the Commencement Date) until January 1, 2043 (the Expiration Date) or the early termination date, as the case may be. The initial water tariff, exclusive of value-added tax (VAT) and/or any applicable tax, to be charged to the customers for the first three (3) years of the concession agreement shall be based on the 2005 Local Water Utilities Administration (LWUA) approved tariff table of OWD. Under the concession agreement, in the event that one or more grounds for EPA has occurred or is expected to occur, an appropriate price adjustment to be applied to the tariff or an appropriate adjustment to the service obligations of the concessionaire will be determined by OWD. The grounds for EPA means any of the following circumstances: a. change in law or change In the Interpretation of the terms of the concession agreement; b. extraordinary cost Incurred due to prolonged force majeure; c. a material change has been made to the basis of calculation or definition of the CPI or replacement Index agreed; or d. change in assumptions at the time of the execution of the concession agreement; or a. the concessionaire has Incurred significant additional costs as a result of an event of force majeure which are not covered by Insurance. BMDC APA with Solar Resources. Inc. (Solar Resources) On July 26, 2017, BMDC entered into an APA with Solar Resources to acquire and operate the latter's assets used In the water business operations in Solar Resources developments in the province of Bulacan. On the same day, Solar Resources executed a Deed of Absolute Sale to sell and transfer its properties pertaining to water facilities and Its operations in the Las Palmas Subdivisions Phases 1 to 7 to BMDC. 8MDC APA with Borland Develooment Cormorstlon (Borland) On December 14, 2017, BMDC and Boriand executed the APA, Deed of Assignment, and Deed of Absolute Sale between the parties for the sale, assignment, transfer, and conveyance of Borland's assets pertaining to water facilities and its operation in San Vicente Homes subdivision in Bulacan. Ill11ll1llIllllllllIII -35- Notice of Award from the Levt Metrooolitan Water District (LMWD) On December 6, 2017, the Company received the Notice of Award from the LMWD for the implementation of the joint venture project (the "Leyte Project") for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply and sanitation facilities and services of LMWD In the Province of Leyte. The conditions precedent specified in the Notice of Award include the Incorporation of a special purpose vehicle (SPV) which will implement the Leyte Project under a contractual joint venture with LMWD. Upon completion of the conditions precedent specified in the Notice of Award, the SPV and LMWD shall enter Into a JVA that will grant the SPV, as contractor, to perform certain functions and as agent for the exercise of, the sole and exclusive right to manage, operate, maintain, repair, refurbish and improve, expand and as appropriate, decommission, the facilities of LMWD in its Service Area, including the right to bill and collect tariff for the provision of water supply and sanitation services In the Service Area of LMWD. LMWD's service area covers the City of Tacloban and seven other municipalities namely Palo, Tanauan, Dagaml, Tolosa, Pastrana, TabonTabon, and Santa Fe. MWPV Joint Venture Agreement with Tubla Pillolnas Group. Inc. (TPGI) On December 11, 2017, the Municipality of Malaslqui granted a franchise between MWPV and Tubig PilIpines, Inc. for the implementation of the joint venture project to establish, construct, operate, manage, repair, and maintain water supply and wastewater system and facilities in the municipality of Malasiqui, Pangaslnan. The franchise has a term of twenty-five (25) years from the commencement date. On February 20, 2018, the board of directors of MWPV approved the creation of an SPV for this project. On November 16, 2018, MWPV has signed and executed a JVA with TPGI. Under the agreement, MWPV and TPGI shall incorporate a joint venture company, with 50% and 50% ownership, respectively, which shall implement the project. MWPV Lease Aareement with the Phillmine Economic Zone Authority (PEZA) On December 18, 2017, MWPV signed a twenty-five (25) year lease agreement with PEZA. Pursuant to the agreement, MWPV will lease, operate, and manage the water and used water facilities of PEZA In the Cavite Special Economic Zone for the provision of water and used water services to the locators therein. MWPV shall apply Its expertise in the Industrial zones operations and shall provide capital expenditures for the duration of the agreement. The Cavite Special Economic Zone Is a 275-hectare industrial estate with 297 locators consuming approximately 350,000 cubic meters per month or 12.00 million liters per day. Notice of Award from Ilaaan City Water District (ICWD) and JVA with ICWD On January 26, 2018, the Company and MWPV (collectively the "Consortium") received the Notice of Award (Notice) from ICWD for the implementation of the joint venture project for the development, financing, operation and management of a raw water source, provision of bulk water supply with system expansion, and the development of septage management in the Ilagan City, Isabela (the "ilagan Projectu). On November 10, 2018, the Consortium signed and executed a JVA with the ICWD. Under the JVA, the Consortium and ICWD shall incorporate a joint venture company, with 90.00% and 10.00% ownership, respectively, which shall implement the Ilagan Project. Upon completion of conditions precedent set out in the JVA, the joint venture company will consequently enter Into a Bulk Water Sales and Purchase Agreement and Septage Management Agreement with ICWD for the implementation of the Ilagan Project for twenty-five (25) years from the commencement date. Notice of Award from Balaotas Water District (BWD On April 25, 2018, the Company and MWPV (collectively the "Consortium") received the Notice of Award from BWD for the implementation of a joint venture project for the design, construction, rehabilitation, maintenance, operation, financing, expansion and management of the water supply system and sanitation facilities of the BWD In the Municipality of Balagtas, Bulacan. Notice of Award from Bulacan Water District (BuWD1 and JVA with BuWD On April 30, 2018, the Company and MWPV (collectively the "Consortium") received the Notice of Award from the BuWD for the implementation of a joint venture project for the design, construction, rehabilitation, maintenance, operation, financing, expansion and management of the water supply system and sanitation facilities of the BuWD in the Municipality of Bulacan in Bulacan. III1 lllil lllll1li lllll 38- On Auguat 16, 2018, Filipinas Water signed and executed a JVA with the BuWD. Under the JVA, Filipinas Water and BuWD shall incorporate a joint venture company, with 90.00% and 10.00% ownership, respectively, which shall be granted a concession by BuWD for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply system and sanitation facilities of the BUWD in the municipality of Bulacan. On October 16, 2018, the joint venture company was incorporated and was registered with the SEC under the name of Bulakmn Water Company, Inc. Notice to Proceed from the Municipality of Sta. Barbara. Pangasinan On June 14, 2018, MWPV received a Notice to Proceed from the municipality of Sta. Barbara, Pangasinan following the enactment of the municipality's ordinance granting a franchise to MWPV for the provision of water supply and the Improvement, operation, maintenance, management, financing, and expansion of water supply facilities, and the provision of septage management in Sta. Barbara. The franchise shall be for a term of twenty-five (25) years and Is expected to be operational by 2019. Notice of Award from Paasanian Water District (PAGWAD) On July 12, 2018, Laguna Water received the Notice of Award from PAGWAD for the implementation of the contractual joint venture project for the design, improvement, upgrade, rehabilitation, and expansion of water supply and sanitation facilities including the financing and construction of such facilities and infrastructure In the service area of the PAGWAD, and the management, operation, and maintenance of such water supply and sanitation facilities and the provision of the services necessary or incidental thereto in the PAGWAD's service area. Incorporation of EcoWater On July 27, 2018, MWPV Incorporated EcoWater MWPV Corp. which will eventually handle the Lease Agreement for the Operations and Management of the Water and Used Water Facilities of PEZA in Cavite Economic Zone (CEZ). Out of 75.00 million subscribed shares, 25.00 million shares at P1.00 pervalue or R25.00 million was Initlelly paid by the Company for the 100% equity interest. Notice of Award frgm Tanauan Water District On October 12, 2018, MWPV received the Notice of Award from Tanauan Water District for the implementation of the joint venture project for the design, Improvement, upgrade, rehabilitation, and expansion of water supply and sanitation facilities including the financing and construction of such facilities and infrastructure in the service area of Tanauan Water District, and the management, operation, and maintenance of such water supply and sanitation facilities and the provision of the services necessary or incidental thereto in Tenauan Water District's service area. Notice to Proceed from the Municipality of San Fabian. Pangasnan On October 15, 2018, MWPV received a Notice to Proceed from the municipality of San Fabian, PangasInan following the enactment of the municipality's ordinance granting a franchise to MWPV to establish, construct, operate, manage, repair, and maintain water supply system and facilities, and the provision of septage management in the municipality of San Fabian, PangasInan. The franchise shall be for a term of twenty-five (25) years and is expected to be operational by 2019. Notice of Award from the Lambunso Water District On November 27, 2018, MWPV received a Notice of Award from the Lambunao Water District (LWD) for a joint venture for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply system of the LWD in the Municipality of Lambunao in the Province of Ilollo. Upon completion of conditions precedent specified in the notice, the Company and the LWD shall enter into a JVA the implementation of the joint venture activity of which shall be undertaken by Aqua Centro. Notice of Award from the Calinoo Water District On November 27, 2018, the Company received a Notice of Award from the Calinog Water District (CWD) for a joint venture for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply system of the CWD in the Municipality of Calinog in the Province of Iloilo. Upon completion of conditions precedent specified In the notice, the Company and the CWD shall enter into a JVA the implementation of the joint venture activity of which shall be undertaken by Aqua Centra. I II llllll lill111 llllllllllll| - 37- Aoua Centro and Laauna Water APAs with Extraordinary Development Corporate Group (EDCGI On December 11, 2018, Aqua Centro entered Into seven (7) APAs with EDCG's subsidiaries to acquire the subsldiaries' assets related to the provision of water service in ten (10) subdivisions in Imus, General Trims, and Nale in the province of Cavite. These subsidiaries are Earth Aspire Corporation, First Advance Development Corporation, Ambition Land Inc., Prosperity Builders Resources Inc., Tahanang Yaman Homes Corporation, Extraordinary Development Corp., and Earth + Style Corporation. As of December 31, 2018, Aqua Centro has already started operations in six (8) out of the ten (10) subdlvisions. Aqua Centro shall operate in the remaining subdivisions once all the conditions precedent under the APAs have been fulfilled. On December 11, 2018, Laguna Water entered Into four (4) APAs with EDCG's subsidiaries to acquire the subsidiaries' assets related to or used in its water service provision operations in Biflen, Laguna. The APAs are with the following EDCG subsidiaries, namely, Earth Aspire Corporation, Earth Prosper Corporation, Earth and Style Corporation and Extraordinary Development Corp. Notice of Award from the Calbayog City Water Disrict On December 27, 2018, the Company received the Notice of Award from the Callbyog City Water District (CCWD) for the implementation of the joint venture project for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water and wastewater systems of CCWD in the City of Calbayog, as well as other areas which may eventually form part of the service coverage of CCWD in the Province of Samar. Upon completion of the conditions precedent specified in the notice, Company shall enter into a joint venture agreement with the CCWD for the implementation of the Project over a twenty-five (25)-year contract period. Notice of Award from the San Jose Dly Water District On December 25, 2018, the consortium of MWPV and TPGI received a Notice of Award from the San Jose City Water District (SJCWD) for the implementation of the joint venture project for the design, construction, improvement, upgrade, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply system and the provlsion of water and sanitation services of the SJCWD In the San Jose City, Nueva Ecija. Upon the completion of the conditions precedent specified In the notice of award, the consortium partners and the water district would enter into a joint venture agreement that will grant them as contractor to perform certain functions and as agent for the exercise of its right and powers, the sole right to develop, manage, operate, maintain, repair, refurbish and improve, expand and as appropriate, decommission, the facilities In the service area, Including the right to bill and collect tariff for water and sanitation services supplied In the service area of SJCWD. The carrying amounts of the Company's investments in subsidiaries follow: 2018 2017 MWAP P4,428,874,271 P4,272,514,271 MWPV 3,049,623,266 2,938,231,752 MWTS 617,050,000 552,050,000 Filipinas Water 43,218,000 24,500,000 Calasiao Water 23,760,000 23,780,000 Davao Water - 78,500,000 Zamboanga Water - 24500.000 P8.202 525.537 P7 912.058 023 On October 3, 2017, the BOD approved the sale of the Company's shareholdings In MWIS to MWPV, On December 28, 2017, the Company executed a Deed of Absolute Sale of Shares and Recelvables to MWPV for the transfer of 2,500,000 common shares of MWIS and receivables from MWIS. On January 24, 2018, the Company invested P18.72 million In Filipinas Water for working capital requirements. On February 19, 2018, the Company invested an additional USD3.00 million in MWAP as initial capitalization of MWTC for working capItal requirements. On May 23, 2018, the Company sold to MWPV Its 765,000 common shares of Davao Water comprising approximately 51% of Davao Water's outstanding capital stock In consideration for P75.58 million. illill11 11111II IINlllll1I1lll1llllllll 1 - 38 - On July 2, 2018, the Company sold to MWPV it. 245,000 common shares of Zamboanga Water comprising approximately 70% of Zamboanga Water's outstanding capital stock in consideration for P35.81 million. On November 11, 2018, the Company invested an additional P105.00 million In MWTS for working capital requirements. 11. Other Noncurrent Assets This account consists of: 2018 2017 Deferred FCDA (Note 1) P2,420,086,820 P1,200,237,917 Advances to contractors 695,749,924 787,558,741 Receivable from BWC - net of current portion (Note 5) 321,014,249 451,322,564 Deposits 75,977,718 1,373,934,709 Receivable from Ayala Multi-Purpose Cooperative (AMPC) 54,040,000 63,989,674 Miscellaneous 33.343.516 34112383 P3.800.212.227 P3 901 155 988 Deferred FCDA refers to the net unrecovered amounts from (amounts for refund to) customers for realized losses (gains) from payments of foreign loans based on the difference between the drawdown or rebased rate versus the closing rate at payment date. This account also covers the unrealized gains or losses from loan revaluations. Advances to contractors are being recouped against progress billings based on contract provisions and are advance payments for the construction of the Company's service concession assets. Deposits pertain to those made for land acquisition, for leased properties, and for guaranty deposits with Manila Electric Company for electric connections and Its related deferred charges. In 2018, deposit for land acquisition amounting to P1,299.85 million which was outstanding as of December 31, 2017 was reclassified to rehabilitation works under SCA (see Note 9), Receivable from AMPC pertains to the term loan and credit line facility agreement. Miscellaneous noncurrent assets Include various noncurrent receivables related to capital expenditure projects. 12, Accounts and Other Payables This account consists of: 2018 2017 Trade payables (Note 19) P3,039,289,855 P2,660,600,718 Accrued expenses: Salaries, wages and employee benefits 427,619,948 367,207,520 Management and professional fees 236,183,784 176,342,854 Repairs and maintenance 234,675,339 199,456,434 Utilities 135,239,745 95,760,078 Wastewater costs 89,920,515 101,875,043 Collection fees 35,427,918 59,319,488 Occupancy costs (Note 19 and 21) 34,586,835 28,805,359 Others 96,449,525 75,477,454 Interest payable (Notes 9 and 13) 364,438,950 305,116,662 Contractors payable 72,066,729 74,952,817 Others _ 31.724.437 137 570 332 P4.797.623 590 P4.282 484 759 Trade payables and accrued expenses are non-interest-bearing and are normally settled on fifteen (15) to sixty (60)-day terms. Other accrued expenses include accruals for advertising, supplies, representation, rental of vehicle and equipment and others. 11111 111lII I illilllll illl - 39 - Interest payable pertains to the unpaid portion of Interest arising from the service concession obligations and long-term debts of the Company. Contractors payable pertains to the accrual of expenses which requires the Company to pay the contractor based on progress billings. Contractors payable are normally settled within one (1) year. Other payables are non-interest bearing and are normally settled within one (1) year. 13. Long-term Debt This account consists of: 2018 2017 USD loans: NEXI Loan P1.943,410,415 P2.749,950,587 MWMP Loan 3,728,897,404 3,097,191,169 Japanese Yen (JPY) loans: JP40.00 billion Loan 12,931,751,997 14,999,076,082 MTSP Loan 562,501,053 872,747,524 First IFC Loan - 63,333.112 PHP loans: P5.00 Billion Metrobank Loan 4,886,865,987 4,887,248,393 P5.00 Billion Philippine National Bank (PNB) Loan 4,840,160,200 - Fixed Rate CorLuorate Notes 4.834.255.883 4 862 889 901 33,705,842,739 31,332,445,768 Less current oortion 4,971,163,962 4 126 033722 P28.734 678.777 P27 206 412 046 Unamortized debt discounts (premium) and issuance costs of the Company's long-term debt as of December 31, 2018 and 2017 follow: 2018 2017 USb loans P52,499,381 P80,039,544 JPY loans 179,542,477 259,654,871 PHP loans 33.718.13 .138.293: P265,759.989 P339,556.122 The rollforward analysis of unamortized debt discounts and Issuance costs of long-term debt follows: 2018 2017 Balance at beginning of year P339,556,122 P198,769,469 Additions 40,317,028 282,489,691 Amortization (Note 16) (137,804,019) (121,005,053) Foreln exchange aduatments 23.690.858 697 9851 Balance at end of sear P265 759.989 P339 556 122 NEXI Loan On October 21, 2010, the Company entered into a term loan agreement (NEXI Loan) amounting to US$150.00 million to partially finance capital expenditures within the East Zone. The loan has a tenor of ten (10) years and is financed by a syndicate of four (4) banks, namely - ING N.V Singapore, Mizuho Corporate Bank, Ltd., The Bank of Tokyo-Mitsublhi UFJ Ltd. and Sumitomo Mitsui Banking Corporation and is insured by Nippon Export and investment Insurance. The first, second and third drawdowns of the loan amounted to US$84.00 million, US$30.00 million and US$36.00 million, respectively. The carrying value of the loan as of December 31, 2018 and 2017 amounted to US$36.98 million and US$55.08 million, respectively. MWMP Loan On October 2, 2012, the Company entered into a SubsIdlery Loan Agreement with Land Bank of the Philippines under the Metro Manila Wastewater Management Project (MWMP) with the World Bank ("MWMP Loan"). The MWMP aims to Improve wastewater services in Metro Manila through increased wastewater collection and treatment. The loan has a term of twenty-five (25) years and was made available in U.S. Dollars in the 111l111i11llllilll11lllI liillIII -40- aggregated principal amount of US$137.5 million payable via semi-annual installments after the seven (7)-year grace period. The Company has made four (4) drawdowns In 2015 with an aggregate amount of US$22.60 million, three (3) drawdowns in 2016 with an aggregate amount of US$17.46 million, and three (3) drawdowns in 2017 with a total amount of US$22.40 million. In 2018, the Company made an additional drawdown amounting to US$8.88 million. The carrying value of the MWMP loan as of December 31, 2018 and 2017 is US$70.88 million and US$62.03 million, respectively. Summary of financial transactions related to MWMP Loan for the years ended December 31, 2018 and 2017 are shown below (in thousands): 2018 2017 Balance at beginning of year $28 $100 Amounts received during the year 8,880 22,400 Expenditures durin3 the year 18.7771 .22 472, Balance at end of year 5131 $28 The US$0.13 million and US$0.03 million as at December 31, 2018 and 2017, respectively, represents the outstanding balance of Land Bank of the Philippines (LBP) designated account no. 3404-032-835, under the account name MWMP - Category 1 - MWCI, and Is presented as part of 'Other receivables' under "Receivables" account (see Note 5). The proceeds of the MWMP loan will be expended in accordance with the intended purposes as specified In the loan agreement. JP440 billion Loan On September 30, 2015, the Company signed a seven (7)-year JP940.00 billion term loan facility, payable semi- annually, with three (3) International banks: MUFJ Bank, Ltd., Mizuho Bank, Ltd., and Sumitomo Mitsui Banking Corporation. The proceeds of the loan will be used to finance the Company's capital expenditures. The Company made its first drawdown an March 9, 2018 amounting to JPM13.40 billion, In 2017, the Company made two (2) additional drawdowns totaling JPV26.60 billion. The Company has not made any drawdown in 2018. The loan's carrying value as of December 31, 2018 and 2017 Is JPV27,21 9.01 million and JP*33,911.54 million, respectively. MTSP Loan On October 20, 2005, the Company entered into a Subsidiary Loan Agreement with Land Bank of the Philippines (MTSP Loan) to finance the Improvement of the sewerage and sanitation conditions in the East Zone. The loan has a term of seventeen (17) years, and was made available in Japanese Yen in the aggregate principal amount of JP8.59 billion payable via semi-annual Installments after the five (5) year grace period. The Company made its last drawdown on October 26, 2012. The total drawn amount from the loan is JP*3.99 billion. As of December 31, 2018 and 2017, the outstanding balance of the MTSP loan amounted to JP91,183.96 million and JP*1,521.02 million, respectively. First IFC Loan On March 28, 2003, the Company entered into a loan agreement with IFC ('First IFC Loan' to partially finance the Company's Investment program from 2002 to 2005 to expand water supply and sanitation services, improvement on the existing facilities of the Company, and for concession fee payments. The First IFC Loan was made available in Japanese Yen in the aggregate principal amount of JPV3,591.60 million equivalent to US$30.00 million and payable In twenty-five (25) semi-annual installments, within twelve (12) years starting on July 15, 2006. On June 15, 2018, the Company paid the outstanding balance of the loan as scheduled. Ae of December 31, 2018 and 2017, the carrylnq value of the loan amounted to nli and JPV143.19 million, respectively. O5.00 Billion Metrobank Loan On August 16, 2013, the Company entered Into a Credit Facility Agreement (R5,00 billion Metrobank Loan) with Metropolitan Bank and Trust Company (Metrobank) having a fixed nominal rate of 4.42% and with a term of seven (7) years from the Issue date and is payable annually. The Company may repay the whole and not a part only of the loan starting on the 3rd anniversary of the drawdown date of such loan or on any interest payment date thereafter. The carrying value of the loan as of December 31, 2018 and 2017 amounted to P4,866.87 million and P4,887.25 million, respectively. -41- R5.00 Billion PNB Loan On May 11, 2018, the Company signed a P5.00 billion, ten (10) year term loan facility with the PNB. The loan will be used to finance general corporate requirements and capital investment programs in the East Zone as well as to refinance existing concessionaire loans. On July 31, 2018, the Company made its first and only drawdown amounting to P5.00 billion. The carrying value of the P5.00 Billion PNB Loan as of December 31, 2018 amounted to P4,840.16 million. Fixed Rate Corporate Notes On April 8, 2011. the Company Issued P10.00 billion notes (Fixed Rate Corporate Notes) with P5.00 billion having a term of five (8) years (Five-Year FXCN Note) from the Issue date and the other P5.00 billion with a term of ten (10) years (Ten-Year FXCN Note) from the Issue date, both of which is payable quarterly. The Company may repay the whole and not a part only of the Ten-Year FXCN Note on the 7th anniversary of the drawdown date of such FXCN Note or on any FXCN interest payment date thereafter. On April 8, 2016, the Company repaid the outstanding balance of the FIve-Year FXCN in bullet as scheduled. The carrying value of the fixed rate corporate notes as of December 31, 2018 and 2017 amounted to P4,834,26 million and P4,862.89 million, respectively. Amendments to Omnibus Agreements, IntercreditorAgreement and Loan Agreements On July 17 2008, the Company, together with all of Its Lenders signed an Omnibus Amendment Agreement and Intercreditor Agreement and these agreements became effective on September 30, 2008. Prior to the execution of the Omnibus Amendment Agreement, the obligations of the Company to pay amounts due and owing or committed to be repaid to the lenders under the existing facility agreements were secured by Assignments of Interests by Way of Security executed by the Company in favor of a trustee acting on behalf of the lenders. The Assignments were also subject to the provisions of the Amended and Restated Intercreditor Agreement dated March 1, 2004 and Its Amendatory Agreement dated December 15, 2005 executed by the Company, the lenders and their appointed trustee. Under the Omnibus Amendment Agreement, the lenders effectively released the Company from the assignment of Its present and future fixed assets, receivables and present and future bank accounts, all the Project Documents (except for the Agreement, Technical Corrections Agreement and the Department of Finance Undertaking Letter), all Insurance policies where the Company is the beneficiary and performance bonds posted in its favor by contractors or suppliers. In consideration for the release of the assignment of the above-mentioned assets, the Company agreed not to create, assume, Incur, permit or suffer to exist, any mortgage, lien, pledge, security interest, charge, encumbrance or other preferential arrangement of any kind, upon or with respect to any of its properties or assets, whether now owned or hereafter acquired, or upon or with respect to any right to receive income, subject only to some legal exceptions. The lenders shall continue to enjoy their rights and privlleges as Concessionaire Lenders (as defined under the Agreement), which include the right to appoint a qualilfied replacement operator and the right to receive payments and/or other consideration pursuant to the Agreement in case of a default of either the Company or MWSS. Currently, all lenders of the Company are considered Concessionaire Lenders and are on pad passu status with one another. In November and December 2014, the Company signed Amendment Agreements to its loan agreements with its existing lenders. This effectively relaxed certain provisions in the loan agreements providing the Company more operational and financial flexibility. The loan amendments Include the shift to the use of the Company from consolidated financial statements to stand alone parent company financial statements for the purposes of calculating the financial covenant ratios, the increase In maximum debt to equity ratio to 3:1 from 2:1 and the standardization of the definition of debt-service-coverage ratio at a minimum of 1:2:1 across all loan agreements. Compliance With loan covenants All these loan agreements provide for certain covenants which must be compiled by the Company which include compliance with certain financial ratios such as the debt-to-equity and debt-service-coverage ratios. As of December 31, 2018 and 2017, the Company was In compliance with all the loan covenants required by the creditors and has not received any written notice of default from lenders or the trustees. Illlllll1lll 11II 11ll 1lllllll 11I11ll 1ll 1lll11III -42- 14. Retirement Plan The Company has a funded, noncontributory and tax-qualifled defined benefit pension plan covering substantially all of its regular employees. The benefits are based on current salaries, years of service and compensation as of the last year of employment. The latest actuarial valuations were made on December 31, 2018. RA No. 7641, the existing regulatory framework, requires a provision for retirement pay to qualified private sector employees In the absence of any retirement plan In the entity, provided however that the employee's retirement benefits under any collective bargaining and other agreements shall not be less than those provided under law. The law does not require minimum funding for the plan. The Company's funding policy states that equivalent target funding ratio must always be at least 80% and should the ratio reach 120%, the Retirement and Welfare Plan Committee (the Committee) may opt to declare a funding holiday. In the event there is an extraordinary Increase In defined benefit obligation, which may arise from benefit improvement, massive hiring and other extraordinary personnel movements, the Company has a maximum of three (3) years to comply with the required minimum funded ratlo of 80%. The retirement plan is covered by a retirement fund administered by trustee banks, which are under the supervision of the Committee. The Committee, which Is composed of six (8) members appointed by the Company, defines the investment strategy of the fund and regularly reviews the strategy based on market developments and changes in the plan structure. When defining the Investment strategy, the CommIttee considers the plan's objectives, benefit obligations and risk capacity. The Committee also reviews, on a quarterly basis, the performance of the funds managed by trustee banks. Changes in net pension (asset) liability of funded funds are as follows: 2018 Present value of defined benefit Fair value of plan Net pension obiluations assets liabilities (assetsl Balance at beginning of year 1868,740,600 P884,852,100 (P16,111,500) Net benefit costs In profit or loss: Current service cost 67,594,100 - 67,584,100 Net Interest -Note 1S 45.977.300 48.203.000 . 2.225.700 1137571.400 48.0.20300 65 308.400 Remeasurements in other comprehensive income: Return on plan assets (excluding amount included In Interest) - (74,129,100) 74,129,100 Actuarial changes arising from experience adjustments 32,429,200 - 32,429,200 Actuarial changes arising from changes in financial assumro ions 1 31 580 300- 131.580.300 848 900 (74,129.1001 74,978,000 Benefits paid (120,791,000) (120,791,000) - Transfers (17,529,900) - (17,529,900) Contributlans - 48.711.200 !48711.200M Balance at endof year P844,840, 000 P786.846.200 P57 993 800 43- 2017 Present value of defined benefit Fair value of plan* Net pension obiloations assets liabilities assets Balance at beginning of year 1748,013,100 P886,023,100 (P118,010,000) Net benefit costs In profit or loss: Current service cost 57,748,800 - 57,748,800 Net interest iNote 16' 32.527 200 38 381 900 :5 854 700' 90278000 38381900 51894100 Remeasurements in other comprehensive Income: Return on plan assets (excluding amount included in interest) - 21,272,300 (21,272,300) Actuarial changes arising from experience adjustments 6,185,800 - 6,185,600 Actuarial changes arising from changes in financial assumr-ions 65 091.100 - 65091 100 71276700 21272300 50004400 Benefits :ald :40.825 200' '40825 200: - Balance at end of %ear P868.740 600 P884 852 100 ;PI6 111 500 The fair value of net plan assets by each class is as follows: 2018 2017 Assets Cash and cash equivalents P7,771,247 P8,647,713 Debt Investments - Domestic 597,533,587 641,392,986 Equity investments - Domestic 176,300,135 230,417,486 Interest receivable 5.952,938 50018264 787 557.907 885 519.429 Liabilities Accrued trust fees 711.707 687,329 Fair value of i:lan assets P786.846 200 P884 852 100 All equity and debt investments held have quoted prices in active markets. The remaining plan assets do not have quoted market prices In active markets. The plan assets are invested in different financial instruments and do not have any concentration risk. The cost of defined benefit pension plans, as well as the present value of the pension obligation, are determined using actuarial valuations. The actuarial valuations involve making various assumptions. The principal assumptions used in determining pension for the defined benefit plans are shown below: 2018 2017 Discount rate 8.25% 5.50% Salary increase rate 7.00% 5.00% The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as of the end of the reporting period, assuming all other assumptions were held constant: Increase Effect on Defined Benefit ObiIg ation i Decrease 2018 2017 Discount rate 1.00% (P31,428,048) (P83,331,190) (1.00%) 44,623,068 75,059,188 Salary increase rate 1.00% 44,692,036 74,711,892 (1.00%) (31,934,952) (64,199,930) lillll llllI l1111111 l I IIIII I - 44- Shown below is the maturity analysis of the undiscounted benefit payments: 2018 2017 Less than 1 year P59,591,100 P65,579,700 More than 1 year and up to 5 years 516,044,000 404,058,400 More then 5 years and uw to 10 veers 403.807.300 418 320 100 P979 442 400 P947 958 200 The average duration of the defined benefit obligation at the end of the reporting period is 7.26 years and 8.72 years as of December 31, 2018 and 2017, respectively. The asset allocation of the plan is set and reviewed regularly by the Committee taking into consideration the membership proflie, iquidity requirements of the plan and expected benefit cash flows which are matched with asset durations. Contributions to the plan are recommended by the Committee and approved by the Company, in consideration of the contribution advice from the actuary. The Company expects to make a contribution amounting to P71.24 million In 2019 based on the recommendations to the Committee. 15. Other Noncurrent Liabilities Other noncurrent liabilities consist of: 2018 2017 Deferred credits P440,920,691 P423,883,685 Customers' :uarant, and other dep-osits 235,114.414 212 598 176 P676,035,105 P836 481 881 Deferred credits pertain to the unamortized discounts of the customers' guaranty deposits. The roliforward analysis of the deferred credits follows: 2018 2017 Balance at beginning of year P423,883,685 P408,814.408 Additions 29,572,608 26,211,525 Amortization Note 16. ;12.535.602 11 142247' Balance at end of ,ear D440.920.691k P423 883.685 Customers' guaranty and other deposits pertain to the deposits paid by the Company's customers for the set-up of new connections which will be refunded to the customers upon termination of customers' water service connections or at the end of the concession, whichever comes first. 18. Other Operating Income, Operating Expenses, Interest Income and Interest Expense Other operating income consist of: 2010 2017 Connection fees for water and service connections P201,596,734 P186,442,637 Technical services agreement 164,430,091 139,079,443 Reconnection fee 35,881,904 30,913,542 Septic sludge disposal and bacteriological water analysis 20,937,117 19,876,389 Rental of equipment 18,221,855 736,923 Sale of Inventories 5,625,100 24,109,727 Miscellaneous 592,080 13302598 447.584.881 P41441 239 Miscellaneous income includes income from other customer-related fees. Il1llllllllli li IIII001 li llI III -45- Operating expenses consist of. 2018 2017 Salaries, wages and employee benefits (Notes 14, 18 and 19) P850,953,833 P734,329,256 Management, technical and professional fees (Note 19) 286,416,971 242,195,428 Depreciation and amortization (Notes 8 and 9) 258,532,941 229,799,008 Taxes and licenses 257,4986,470 164,225,250 Occupancy costs (Note 21) 154,048,655 136,206,222 Repairs and maintenance (Note 19) 140,565,684 96,329,284 Insurance 78,332,794 74.789,753 Business meetings and representation 35,280,690 25,380,492 Printing and communication (Note 19) 30,656,800 31,117,437 Transportation and travel 21,017,054 20,460,872 Advertising 11,200,081 11,095,831 Premium on performance bond (Note 25) 3,827,990 4,721,199 Power, light and water (Note 19) 2,483,028 2,712,531 Other exc:enses .Note 5 155.251.677 85205824 P2 286.054.56 P1858 568 387 Other expenses include donations, rental of equipment, net reversal of provision for ECL (see Note 5), and laboratory supplies, among others. Interest income consists of: 2018 2017 Interest income on: Cash and cash equivalents (Note 4) P195,141,945 P99,539,671 Receivable from BWC (Note 5) 28,083,490 34,641,123 Receivable from related parties (Note 19) 2,881,742 10,748,769 Pension assets (Note 14) 2,225,700 5,854,700 Others 317.695 7827 248 P1228.650.572 P 158.411.509 Other interest income pertains to interest from employee loans and car plans. Interest expense consists of: 2018 2017 Interest expense on: Service concession obilgations (Note 9) P445,169,349 P457,728,95B Long-term debt: Coupon Interest 557,032,896 557,868,324 Amortization of debt discount, issuance costs and premium (Note 13) 137,804,019 121,005,053 Guaranty deposits (Note 15) 12,535,602 11,142,247 Others 104 488.538 - P1.257.030.404 P1 147544582 Other Income (losses) include gain on write-off of payables, miscellaneous receipts on penalties to service providers and others. 1111l1l11lllllllilDlii I IiII1III -46 - 17. Income Tax Provision for (benefit from) income tax consists of: 2018 2017 Current P1,948,721,342 P1,627,277,014 Deferred ,102.180 905 9324.707 P1,846.540 437 P1 636.601.721 The reconciliation of the statutory income tax rate to the effective income tax rate follows: 2018 2017 Statutory Income tax rate 30.00% 30.00% Tax effects of: Nondeductible expense 54.19 57.08 Income not subject to tax (37.67) (42.39) Excess of 40% Optional Standard Deduction (OSD) against allowable deductions (15.12) (17.81) Change In unrecognized deferred tax - (0.13) Others - net .8.83 ;4.54 Effective Income tax rate 22.57% 2 2 .2 1 % The components of the net deferred tax assets of the Company pertain to the deferred income tax effects of the following: 2018 2017 Deferred tax asset (liability) Service concession obligations - net 11,390,345,294 P1,167,318,943 Difference between amortization expense of SCA per stral=ht line and r,er UOP methods 1196360.671). 175 515 225 P1.193.984.623 P1091 803 718 Revenue Reaulation (RR) No. 16-2008 RR No. 16-2008 provided the implementing guidelines for Section 34 of RA No. 9504 on the use of the OSD for corporations. The OSD allowed shall be an amount not exceeding 40% of the gross income. Gross income earned refers to gross sales or gross revenue derived from any business activity, net of returns and allowances, less cost of sales or direct costs but before any deduction Is made for administrative expenses or incidental losses. This was applied by the Company for the years ended December 31, 2018 and 2017. The availment of OSD affected the recognition of several deferred tax assets and liabilities, In which the related income and expenses are not considered in determining gross income for Income tax purposes. The Company forecasts that it will continue to avail of the OSD, such that the manner by which it will recover or settle the underlying assets and lIabilities, for which the deferred tax assets and liabilities were initially recognized, would not result In any future tax consequence under OSD. The effective tax rate of 18% for the years in which OSD Is projected to be utilized was used in computing the deferred Income taxes on the net service concession obligation starting 2009. Deferred taxes on allowance for ECL and pension liability were not recognized by the Company. The net reduction in deferred tax assets from applying the 18% effective tax rate to the recognized deferred taxes on not service obligation and the derecognition of the deferred taxes relating to the accounts with temporary differences which are not considered in determining gross income for income tax purposes by the Company amounted to P288.21 million and P212.77 million as of December 31, 2018 and 2017, respectively. 111111|| IIli IIIIIllGIiI lIIIIiIIllllIIIl 47- 18. Equity The Company's capital stock consists of: 2018 2017 Sharea Amount Shares Amount Common stock - P1 per share Authorized 3,100,000,000 P3,100,000,000 3,100,000,000 13,100,000,000 Issued and subscribed 2,064,839,617 2,064,839,817 2,053,88,576 2,053,666,576 Outstanding 2,030,732,360 2,030,732,360 2,028,067,122 2,028,087,122 Preferred stock - P0.10 per value, 10% cumulative, voting, participating, nonredeemable and nonconvertible Authorized, Issued and outstanding - 4,000,000,000 shares 4,000,000,000 400,000,000 4,000,000,000 400,000,000 On March 18, 2005, the Company launched Its Initial Pubilc Offering where a total of 745.33 million common shares were offered at an offering price of P8.50 per share. The Company has 949 and 900 existing certificated shareholders as of December 31, 2018 and 2017, respectively. The Scripless shareholders are counted under PCD Nominee Corporation (Filipino) and PCD Nominee Corporation (Non-Filipino). On March 1, 2018, the BOD approved the following: a. amendment of the Company's Articles of Incorporation to exclude the 300.00 million common shares from the pre-emptive rights of existing stockholders, and endorsed the said amendment for approval by the stockholders; and b. allotment and subsequent Issuance of up to 300.00 million common shares for the purpose of exchanging such shares for assets and/or raising funds to acquire assets needed for the business of the Company. On April 16, 2018, the stockholders of the Company approved the amendment of the Seventh Article of the Articles of Incorporation to exempt from pre-emptive rights 300.00 million unissued common shares rcarved-out shares') which are reserved or allocated for issuance In one or more transactions or offerings, (i) for properties or assets needed for the business of the Company, or (ii) for cash to acquire properties or assets needed for the business of the Company. The issuance of all or any of the carved-out shares does not require the approval of stockholders. The movement of the Company's outstanding common stock follows: 2018 2017 Number of shares at beginning of year 2,026,067,122 2,024,934,000 Additions 4665238 1133032 Number of shares at end of vear 2.030 732.360 2028 067 122 Dividends The following table shows the cash dividends declared by the Company's BOD on the outstanding capital stock for the years ended December 31, 2018 and 2017: Amount Per Share - Participating Common Preferred Declaration Date Record Date Shares Shares Pa',ment Date March 1, 2017 March 15, 2017 P0.4244 PC.04244 March 31, 2017 October 3, 2017 October 17, 2017 0.4244 0.04244 November 2, 2017 November 23, 2017 December 8, 2017 - 0.01000 December 20, 2017 March 1, 2018 March 15, 2018 0.4302 0.04302 March 28, 2018 October 2, 2018 October 17, 2018 0.4283 0.04283 October 31, 2018 November 20, 2018 December 6, 2018 - 0.01000 December 20, 2018 There are no dividends in arrears for the Company's participating preferred shares as of December 31, 2018 and 2017. 11111111111111lIll i iIllIlII -48- Retained eamings The approved Business Plan includes planned capital expenditures on (i) service continuity, (II) service accessibility, (ill) water security, and (iv) environmental sustainability described as follows: a. Service continuity projects are endeavored to maintain the level of service provided to Its customers even In times of calamity; b. Service accessibility projects would enable the Company to expand its service coverage; c. Water security projects include two components: (1) new water source development and, (2) existing water source rehabilitation and Improvement; and d. Projects under the Environmental Sustainability Investment category are comprised of wastewater projects endeavored to achieve the Company's wastewater coverage targets. On November 20, 2018, November 23, 2017 and November 22, 2016, the Company's BOD approved the appropriation of P3.75 billion, P7.60 billion and P21.10 billion respectively, to ensure the completion of the Company's large system projects included in its approved Business Plan. The implementation of these projects is consistent with the timeline of the approved Business Plan which covers until the end of the concession period. In accordance with Securities Regulation Code (SRC) Rule 68, as Amended (2011), Annex 68-C, the Company's retained earnings available for dividend declaration as of December 31, 2018 and 2017 is computed at P7.22 billion and P7.02 billion, respectively. Executive Stock Option Plan (Executive SOP), Expanded Executive SOP and ESOWV The subscribed shares are effectively treated as options exercisable within a given period which is the same as the grantee's payment schedule. For the unsubscribed shares of the ESOWN grants in 2013 and 2012, the employee still has the option to subscribe within seven (7) years. The fair values of stock options granted are estimated on the date of grant using the Binomial Tree Model and Black-Scholes Merton Formula, taking into consideration the terms and conditions upon which the options were granted. The expected volatility was determined based on an Independent valuation. The fair value of stock options granted under ESOWN at grant date and the assumptions used to determine the fair value of the stock options follow: Grant Dates March 7, February 10, November 19, October 5, 2018 2015 2013 2012 Number of shares granted 16,054,873 7,281,647 6,627,100 4,772,414 Number of unsubscribed shares 5,161,140 884,873 351,680 460,000 Fair value of each option P5.74 111.58 P10.58 P11.76 Weighted average share price P26.55 P21.35 P23.00 P26.24 Exercise price P27.31 P26.00 P22.92 P24.07 Expected volatility 24.92% 26.53% 24.90% 30.66% Dividend yield 2.80% 2.55% 3.47% 2.56% Risk-free interest rate 3.43% 3.79% 2.99% 4.57% To enjoy the rights provided for in the ESOWN, the grantee should be with the Company at the time the holding period expires. The Holding Period of the ESOWN shares follows: Year Holdin3 Period After one year from subscription date 40% After two years from subscription date 30% After three years from subscription date 30% For the 2013 and previous years grants, the ESOWN grantees are allowed to subscribe fully or partially to whatever allocation may have been granted to them. In case of partial subscriptions, the employees are still allowed to subscribe to the remaining unsubscribed shares granted to them provided that this would be made at the start of year five (5) from grant date up to the end of year six (6). Any additional subscription made by the employee (after the initial subscription) will be subjected to another three (3) year holding period. For the 2018 and 2015 grants, unsubscribed shares were forfeited. ||lill IillillllllIl 1011IIIIIlliIlI -49- Movements in the number of stock options outstanding under ESOWN are as follows: Weighted Weighted average average 2018 exercise orlce 2017 exercise .Ace Balance at beginning of year 231,980 123.49 4923,730 P23.49 Cancelled 1100.380 - 4.691 750. Balance at end of ear 131.600 423.49 231 90 P23.49 Total expense arising from equity-settled share-based payment transactions amounted to P23.97 million and 112.17 million in 2018 and 2017, respectively. On March 6, 2018, the Remuneration Committee of the Company's Board of Directors approved the grants of ESOWN equivalent to 16,054,873 shares at the subscription price of P27.31 per share, The subscription price Is equivalent to the average closing price of Company's common shares at the PSE for twenty (20) consecutive trading days ending March 6, 2018. The expected life of the options is based on managements estimate and is not necessarily Indicative of exercise patterns that may occur. The Company's expected volatility was used as an Input in the valuation of the outstanding options. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily reflect the actual outcome. No other features of the options granted were Incorporated Into the measurement of fair value. 19. Related Party Transactions Parties are considered to be related to the Company If It has the ability, directly or Indirectly, to control the Company or exercise significant influence over the Company in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant Influence. Related parties may be individuals (being members of key management personnel and/or their close family members) or other entitles and Include entitles which are under the significant influence of related parties of the Company where those parties are Individuals, and post-employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company. In the normal course of business, the Company has transactions with related parties. The sales and Investments made to related parties are made at normal market prices. Service agreements are based on rates agreed upon by the parties. Outstanding balances at year-end are unsecured and interest-free. There have been no guarantees provided or received for any related party receivables or payables. As of December 31, 2018 and 2017. the Company has not recognized any provision for probable losses relating to amounts owed by related parties. This assessment Is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates. Significant transactions with related parties follow: a. The Company entered into an Administrative and Support Services Agreement (ASSA) with Ayala in 1997 with Ayala as its sponsor as required during the privatization process. The ASSA was initially effective for ten (10) years and automatically renewable every five (5) years. Under the agreement, Ayala shall provide technical and other knowledge, experience and skills as reasonably necessary for the development, administration and operation of the concession, for which the Company shall pay an annual base fee of US$1.00 million and adjusted for the effect of CPI. As a result, certain key management positions are occupied by employees of Ayala. On March 1, 2017, the BOD confirmed the automatic renewal of the ASSA between the Company and Ayala for another five (5) years until July 30, 2022 and approved the amendment reducing the base fee to P1.00 per year beginning August 1, 2017. Total management and professional fees charged to operations arising from these agreements amounted to P209.22 million and P276.20 million In 2018 and 2017, respectively. There were no outstanding payables as of December 31, 2018 and 2017. [lillilll11 l1l1lIlII lllI lIlI llllllll|I 111 - 50- b. The following tables provide the total amount of all other transactions that have been entered into with the Company's shareholders and affiliates for the relevant financial year: Cash In Banks and Cash Ecuivalents Trade Receivables Trade Payables 2018 2017 2018 221F 20IB 2717 Shareholder Aala P- P- Pi r. PT P- ____ -__ Affilate: Ayala Land (AL) and subaldlartes - - 241,218 131.170 5,125 2,34,24 AC Industrial Technology Holdings, Inc. (AITHI) and subsidlerles - - - 14e - - Globe Telecom (Globe) and subaldiaries - - 20885 - - Bank of the Philippine Islands (BPI) and subeldlaries 2 448 244 237 1 913 201 638 10114 -12 63 3.9 - 2448244237 1915291 636 187 1 '2 1119102 2 z,124 P2 448 244 237 P1 913 291 836 P571973 15 Pose 2.3t _ P2354124 Cash In banks and cash equivalents pertain to deposits and Investments with original maturities of three (3) months or less from the date of original acquisition. Trade receivables are primarily composed of receivables for water and sewerage services rendered by the Company. These are non-interest bearing and are collectible within thirty (30) days from bill generation. No allowance for ECL was provided for receivables from related parties as of December 31, 2018 and 2017. Trade payables pertain to retentions deducted from contractors' billings and are normally paid within a year after the project acceptance. Revenue Purchases 2018 2017 2018 2017 Shareholder: Avala 18,109,967 P 356 135 P209 220,988 P27e,204 416 Affiliates: ALI and subsidiaries 109,304,386 101,938,887 3,920,146 4,722,951 BPI and subsidiaries 10,703,159 11,173,282 1,587,843 - Globe and subsidiaries 2,764,468 3,242,537 30,924,898 21,054,995 AITHI and subsidiaries 592,314 545,243 5,375,175 577,078 AC Energy Holdings, Inc. (AC Energy) - - 377,271,684 160,805,173 HCX Technolqv Partners Inc. - - 5,679 690 5977427 123.364-307 116899949 424.759436 193.137622 P129.474.274 P123 256 084 P833.980.424 P469342038 Revenue is mainly attributable to water and used water services and shared facilities rendered by the C, mpany to its shareholder and affiliates. Purchases from Ayala Land and the subsidiaries pertain mainly to construction of fixed assets, while purchases from AITHI relates to the acquisition and repairs of transportation equipment. Purchases from Globe pertain to telecommunication services and purchases from BPi relate to banking transactions and financial services needs of the Company, while purchases from HCX Technology Partners, Inc. consist of human resource services. - In September 2017, the Company entered into an Open Access Contract with AC Energy which will cover a two-year supply of electricity to five (5) of the Company's facilities currently enrolled under Open Access. As of December 31, 2018 and 2017, the Company has guaranty deposits with AC Energy amounting to P9.23 million. 11III II IIIIOIIIO lllllllllll lilllll 51 - c. The Company made advances and loan to Its subsidiaries, which are included in uReceivables" in the parent company statements of financial position, as follows: 2018 2017 MWTS P291,373,263 P287,438,648 MWPV and subsidiaries 128,546,639 103,082,411 MWAP 57,810,845 63,339,821 Calasliao Water 6.074,862 - P483. 855 1009 453 860 880 In June 2017, the Company provided MWTS with a R150.00 million short-term loan to support the entity's capital working requirements (see Note 5). Interest Income earned from this loan amounted to P2.88 million and P10.75 million as of December 31, 2018 and 2017, respectively (see Note 16). d. One of the trustee banks who manage the Company's retirement fund is BPI, an affiliate. The Company's plan assets under BPI amounted to P471.19 million and P553.16 million as of December 31, 2018 and 2017, respectively (see Note 14). a. Compensation of key management personnel of the Company by benefit type, included as part of "Salaries, wages and employee benefite' are as follows: 2018 2017 Short-term employee benefits P549,791,280 P502,864,917 Post-employment benefits 19,899,576 16,402,047 Share-based payment 10.960 455 10349090 11P686.651,311 P529 616 054 20. Significant Contracts with the West Zone Concessionaire In relation to the Concession Agreement, the Company entered into the following contracts with Maynilad: a. Interconnection Agreement wherein the two Concessionaires formed an unincorporated joint venture that will manage, operate, and maintain the Interoonnection facilities. The terms of the agreement provide, among others, the cost and the volume of water to be transferred between zones. b. Joint Venture Arrangement that will operate, maintain, renew, and as appropriate, decommission common purpose facilities, and perform other functions pursuant to and in accordance with the provisions of the Agreement and perform such other functions relating to the concession (and the concessIon of the West Zone Concessionaire) as the Concessionaires may choose to delegate to the joint venture, subject to the approval of MWSS. c. In March 2010, MWSS entered into a loan agreement with The Export-import Bank of China to finance the Angst Water Utilization and Aqueduct Improvement Project Phase II (the Project). Total loan facility Is US$116.60 million with maturIty of twenty (20) years Including five (5) years of grace period. Interest rate is 3% per annum. MWSS then entered into a MOA with the Company and Mayniled for the Company and Maynilad to shoulder equally the repayment of the loan, with such repayment to be part of the concession fees (see Note 9). d. On May 12, 2015, MWSS entered Into a MOA with the Company and Maynilad for the Angst Water Transmission Improvement Project (Angst Transmission Project). The Angat Transmission Project alms to improve the reliability and security of the raw water coming from the Angst Dam through the rehabilitation of the transmission system from Ipo to La Mesa and the application of water safety, risk and asset management plans. Subsequently, on May 27, 2016, MWSS entered in to a loan agreement with Asian Development Bank to finance the Angat Transmission Project. The loan amounts to US$123.30 million with a maturity of twenty-five (25) years including a seven (7)-year grace period. As stipulated in the MOA, the Company and Maynilad shall shoulder equally the repayment of the loan and all reasonable expenditures related to the Project with such payments to form part of the concession fees. I11llllllllll IlllIllllllII i llllll|I - 52- 21. Assets Held In Trust The Company Is granted the right to operate, maintain in good working order, repair, decommission and refurbish the movable property required to provide the water and sewerage services under the Agreement. The legal title to all movable property in existence at the Commencement Date, however, shall be retained by MWSS and upon expiration of the useful life of any such movable property as may be determined by the Company, such movable property shall be returned to MWSS In its then-current condition at no charge to MWSS or the Company. The Concession Agreement also provides for the Concessionaires to have equal access to MWSS facilities involved in the provision of water supply and sewerage services in both the East and West Zones Including, but not limited to, the MWSS management Information system, billing system, telemetry system, central control room and central records. The net book value of the facilities transferred to the Company on Commencement Date based on MWSS' closing audit report amounted to P4.60 billion, with a sound value of P10.40 billion. In 2015, the Company engaged the services of Royal Asia Appraisal Corporation to conduct a re-appraisal of the assets managed by the Company as of 2014, based on the asset registry as of December 31, 2013. Total reproduction cost as of December 31, 2015 amounted to P123.47 billion, with a sound value of P69.10 bllion. MWSS' corporate headquarters is made available to the Concessionaires starting August 11 1997, subject to periodic renewal by mutual agreement of the parties. The lease was last renewed on October 27, 2006. On August 28, 2012, additional office space was leased by the Company. Rent expense amounted to P32.25 million and P27.75 million in 2018 and 2017, respectively. These are included under "Occupancy costs" in the parent company statements of comprehensive income. In March 2015, the Company and MWSS entered into an agreement for the lease of a portion of the Son Juan Reservoir and Aqueduct Complex being utilized by the Company as stockyard for its pipes and other materials. The lease agreement shall continue to be in effect until the termination of the Concession Agreement. Rent expense recognized in 2018 and 2017 both amounted to P16.20 million which is included under WOccupancy costs" In the parent company statements of comprehensive income. 22. Segment Information Business segment information is reported on the basis that Is used intemally for evaluating segment performance and deciding how to allocate resources among operating segments. Accordingly, the segment information Is reported based on the nature of service the Company Is providing and Its geographic location. The Company's BOD and Management Committee monitors the operating results of Its business segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on profit or loss and is measured consistently with profit or loss in the parent company financial statements. Transfer prices between operating segments are on an arms' length basis in a manner similar to transactions with third parties. The amount of segment assets and liabilities are based on measurement principles that are similar with those used In measuring assets and liabilities in the parent company statements of financial position which is in accordance with PFRS. The Company has one operating segment which is the Manila Concession and Head Office which represents the operations of the Company in the East Zone in accordance with Its Concession Agreement. The Company does not have a single customer contributing more than 10% of its total revenue. lilll1 IIIIIII1lll1ll IIIIIIII1l - 53 - Disaaregated revenue Information The following are the disaggregation of the Company's revenue from contracts with customers for the year ended December 31, 2018: Timing of revenue recognition: Revenue recognized over time P18,106,433,185 Revenue recognized at a roint in time 245 688 147 P16.352 121 332 23. Fair Value Measurement The carrying amounts approximate fair values of the Company's financial assets and liabilitles due to it. short- term maturities, except for the following financial assets and financial Ilabiliies as of December 31, 2018 and 2017: 2018 2017 Fair Value Fair Value SIgnIficant Significant Carrying unobservable Carrying unobservable Value Inputs iLevel 31 Value InDuts i:Level 3: (in Thousands) Other financial ilabilities Long-term debt P33,705,843 P32,446,710 P31,332,446 P31,164,152 Service concession obligations 6,946,855 7,680,868 8,829,481 7,949,147 Customers' guaranty and other deDoslts 235,114 177,722 212598 165901 P40.887.812 140.305,300 P38 374 505 P39.279 200 The methods and assumptions used by the Company In estimating the fair values of the other financial liabilities such as long-term debt, customers' guaranty deposits and other deposits, and service concession obligations are as follows: a. The fair values are estimated using the discounted cash flow methodology using the Company's current incremental borrowing rates for aImIlar borrowings with maturities consistent with those remaining for the liability being valued. b. The discount rates used for PHP-denominated loans were 5.22% to 7.41% in 2018 and 2.50% to 4.47% in 2017 while the discount rates used for foreign currency-denominated loans ranged from 5.31% to 7.51% In 2018 and 2.45% to 5.70% in 2017. Fair Value Hierarchy There were no financial assets carried at fair value as of December 31, 2018 and 2017. During the periods ended December 31, 2018 and 2017, there were no transfers between Level I and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurement. 24. Financial Risk Management Objectives and Policies The Company's principal financial instruments comprise of cash and cash equivalents, long-term debt and service concession obligation. The main purpose of the Company's financial instruments Is to fund Its operations and capital expenditures. The main risks arising from the use of financial instruments are Interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Company has other various financial assets such as trade receivables and payables which arise directly from the conduct of Its operations. The Company's BOD reviews and approves the policies for managing each of these risks. The Company monitors risks arising from all financial instruments and regularly report financial management activities and the results of these activities to the Company's BOD. The Company's risk management policies are summarized below: -54- Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes In market Interest rates. The Company's exposure to Interest rate risk relates primarily to its financial Instruments with floating and/or fixed rates. 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. The Company's policy is to manage the interest payments using a mix of fixed and variable rate debts to minimize the Company's exposure to changes. As of December 31. 2018 and 2017, the Company's mix of fixed interest and floating interest rate of long-term debt are 81.49% to 18.51% and 79.19% to 20.81%, respectively. Fixed Interest rates of the Company's foreign currency and Peso denominated long-term debt range from 1.39% to 7.40% and from 4.86% to 7.71%, respectively. Floating interest rates are based on six (6) month LIBOR plus margin as of December 31, 2018 and 2017 � � i � - �i :: i п � �I и I и uI 1 v_ �5 � 1 l� а � с о rt � Q �� . � , - с .�О�г у 1 1 1 ! й I сг - � � �. �i - � I . :.+ 1 Г i м г+; L+ I I�I� . С� �� � � �I �'л�� _ t•"1 .ri _� . ы�н' I � �� � .ц 3 , F. д ь.5 ' I 1 � � О� � �}: � � iП � л� у � �I н � � о L м � � �' � � n � � �_r I ' ti I r. �. о ff� и. п i. . � i. I � I � I' м п: I I . ы, п . � � � i 3 � �� I _ � 4Г �� � M1 О 4 � I I I � � I -tij � I _1 � I� � I The following tables demonstrate the sensitivity of the Company's income before Income tax to a reasonably possible change In Interest rates on December 31, 2018 and 2017, with all variables held constant (through the Impact an floating rate borrowings). 2013 Effi9ct on Changesin Income before Basis Points Income Tax (in Thousands) Floating rate borrwMngs 100 (11362,878) (100) 62,878 2017 Effect on Changes in Income before Basis Points Income Tax (in Thousands) Floating rate borrowings 100 (11368,578) (100) 66,578 Foreign exchange risk The Company's foreign exchange risk results primarily from movements of the PHP against the USD and JPY. Substantially all revenues are generated in PHP while majority of capital expenditures are also in PHP Approximately 57% and 69% of long-term debt as of December 31. 2018 and 2017, respectively. are denominated in foreign currency. Information on the Company's foreign currency-denominated monetary assets and liabilities and their Philippine Peso equivalents are as follows: 2018 2017 Original Peso Original Peso Currency Equivalent Curren .--, E -, ulvalent (in Thousands) (in Thousands) Assets Cash and cash equivalents: USD $7,198 P378,361 $21,445 101,070,749 VND VND34,961 79 VND50,643 112 jPY V656 264 W556 246 11137V704 P1.071 107 Liabilities Long-term debt: jPY V28,402,974 111113,494,253 k'35,575.758 P15,736,157 USD $107,842 5,67D,308 $117,107 5,847,151 Service concession obligation: jPY V118,468 56,284 11198,292 87,704 USD $64,869 3,410,310 $62,839 3,137,537 French Franc , FR;'. FIRM 35 FRF308 2785 22-631.190 24810334 Not foreign currency- denominated liabilities i 11122.252.486 P23 739 227- The spot whango rafes used wom P52.58 to USSI, 90.4751 to JFV1, PD. 16 to FRF1, M00227 to VND1 In 2010 and P49,03 to USSI, ft4423 to JPV1, P9.09 to FRFI, Fa0022 to VND1 In 2017. Under the Concession Agreement, the Company has a natural hedge on foreign exchange risks on its loans and concession fee payments through a recovery mechanism In the tariff (sea Note 1). The Company does not expect any movement of the USD, JPY, VND and FRIF against the Philippine Peso to have a significant effect on the Company's Income before income tax. iiiiiiiiiiiiiiiii illillig illitillI -57 - Credit flak Credit risk is the risk that a counterparty will not meet its obligations under a financial Instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from Its financing activities, Including deposits with banks and financial institutions, foreign exchange transactions and other financial Instruments. Customer credit risk is managed by the Company's established policy, procedures and control relating to customer credit risk management. Credit risk for receivables from customers is managed primarily through credit reviews and an analysis of receivables on a continuous basis. The Company has no significant concentration of credit risk. Outstanding customer receivables and contract assets are regularly monitored and customer payments are facilitated through various collection modes Including the use of postdated checks and auto-debit arrangements. An Impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of customer segments with similar loss pattems (i.e., by customer type). The calculation reflects the probability-weighted outcome and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. The provision matrix is Initially based on the Company's historical observed default rates. The Company will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. Generally, trade receivables are written-off when deemed unrecoverable and are not subject to enforcement activity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets. The Information about the credit risk exposure on the Company's receivables and contract assets using a provision matrix Is as follows: Dcfmbor2¶ 2018 Current Daka Past D-. a Standard Leas then 30 to 10 51 to s0 Over 90 Expected Grade 30 Day Do Days Daay n Credit Loss Total (in thousands) Receivables Customers Residential P107,633 P251.693 P73,211 27,532 P231,347 P438,882 1,131,302 Commercial 17,139 40,874 10,514 3,249 220 82,598 184.94 Seml-buslness 9,423 27,883 6,548 2,680 128 27,719 74,281 Industrial 2,663 12,725 041 113 - 3,876 11,160 Related parties 483,86 - - - - - 483,866 BWC 318,411 - - - - - 388,411 Employees 2411,4 - - - - - 24,114 Interest from banks 23,119 - - - - - 23,119 Others 4 2 - - - 17669 107101 P1.105.470 P333 175 PO0 918 P33 514 P231 66 PG11 986 P2 406 731 Janus, 1 20- Current Do. Past Due Standard Less than 30 to 60 51 to 90 Over 90 Expected Grade 30 Da.; Dais D: a Da, Credit Loss Total (In thousands) Receivables Customers Restdentiel P105,761 P248,776 P84.507 P16,80 P159.012 P408,134 11,002,570 Commercial 12.512 20.194 9,222 3,128 10,970 76.926 145,950 Semi-business 8,849 13.547 4,314 1,561 10.228 25.526 61.227 Industrial 1,531 3,573 - 352 901 900 7,337 Related parties 453,01 - - - - - 453.161 BWC 801,014 - - - - - 501.014 Employees 28,070 - - - - - 28.070 Interest from banks 15,427 - - - - - 15.427 Others 51 e - - - - 57090 109 582 P1 175618 P. 93 100 P77 843 P23 019 1189.111 _P568 658 P2 328339 Credit risk from balances with banks and financial Institutions is managed in accordance with the Company's policy. Investments of surplus funds are made only with approved counterpartles and within credit limits assigned to each counterparty. Counterparty limits are reviewed and approved by the BOD, and are updated when necessary. III1lllllllIIIIIIII ll l 1l 11lllll - 58 - Cash and cash equivalents are placed in various banks. Material amounts are held by banks which belong to the top five (5) banks in the country. The rest are held by local banks that have good reputation and low probability of insolvency. These are considered to be low credit risk investments. Liquidity flak The Company's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans and debentures. The Company's policy Is to maintain a level of cash that is sufficlent to fund Its operating cash requirements for the next four (4) to six (8) months and any claim for refund of customers' guaranty deposits. Capital expenditures are funded through long-term debt, while operating expenses and working capital requirements are sufficiently funded through cash generation. The Company's financial assets used for liquidity management based on their maturities are as follows: 2018 More than Within 1 Year 1-5 yearn _ yearn Total - Gross Assets: Cash and cash equivalents P8,749,935,407 P- P- P6,749,935,407 Receivables from: Customers 1,380,137,569 - - 1,380,137,569 Related parties 483,855,609 - - 483,855,609 Employees 24,113,763 - - 24,113,763 Interest from banks 23,119,503 - - 23,119,503 Others 107 101.233 - - 107 101.233 P18768.263.084 P-P- P8.788.203.084 2017 More than Within 1 Year 1-5 -years _ 5 years Total - Gross Assets: Cash and cash equivalents P6,188,372,172 P- P- P6,188,372,172 Receivables from: Customers 1,220,384,475 - - 1,220,384,475 Related parties 453,880,880 - - 453,880,880 Employees 28,070,248 - - 28,070,246 interest from banks 15,426,725 - - 15,426,725 Others 109582867 - - 109582867 IRS 015 697 365 P- P- P8 015 697 385 The Company's financial liabilities based on contractual undiscounted payments: 2018 More than Within 1 Year 1-5 ?eara 5 years Total - Gross Liabilities. Accounts and other payables P4,797,623,590 P- P.- P4,797,623,590 Long-term debt* 6,403,531,687 26,568,187,965 6,818,209,808 39,789,929,460 Service concession obligations* 908,416,937 3,110,161,811 8,471,678,250 12,490,256,998 Customers' guaranty and other do.osits - - 676,035.105 676035105 P12.109,572.214 P29.676 349.776 P15.968.923.163 P57 753.845 153 tIneuds contatual walut cash flows I IIII III INlllllllIIIIIll l - 59 - 2017 More than Within 1 Year 1-5 years 5 years Total - Gross Liabilities: Accounts and other payables P4,282,484,759 P- P- P4,282,484,759 Long-term debt* 5,087,182,367 27,462,783,951 3,585,419,099 38,115,365,417 Service concession obllgatlons' 865,288,682 3,084,906,986 8,000,120,672 11,980,316,340 Customers' guaranty and other deposits - - 838 481 881 838481 861 P10 234 935 808 P30.547 890 937 P12 202.021 832 P52 984 648 377 'Incudes confrctual IntesW ceash tws Changes in liabilities arising from financing activities: 2018 Service Concession Long-term Debt Obligati ons Interest Payable _ Total Balance at beginning ofyear P31,332,446,768 P6,829,461,477 P308,116,662 P35,467,023,907 Cash flows 683,356,052 (875,350,761) (1,473,677,188) (1,065,671,867) Accretion 137,804,019 322,344,046 - 460,148,965 Interest - 140,533,042 1,532,999,476 1,673,532,518 Concession fees - 476,269,457 - 476,269,457 Foreign exchange losses 1 552 236.870 53.595 666 - 1.605.833.536 P33.705.842.739 _P6.94_854,827 P364,438,950 P41,017.136.516 2017 Service Concession Loni-term Debt Obilations Interest Paable Total Balance at beginning ofyear P21,558,327,078 P7,170.32,044 P254,660,247 P28,983,619,369 Cash flows 9,520,849,973 (834,801,817) (965,146,346) 7,720,701,810 Accretion 121,005,053 323,832,844 - 444,837,897 Interest - 140,881.034 1,015,602,761 1,156,283,795 Concession fees - 11,305,325 - 11,305,325 Foreign exchange losses 1324364 17832047 - 150295711 P31 332 445 768 PS 829 461 477 P305 118 662 P38 467 023 907 Capital management The primary objective of the Company's capital management strategy is to ensure that it maintains a healthy capital structure, In order to maintain a strong credit standing while it maximizes shareholder value. The Company closely manages its capital structure vim-A-vis a certain target gearing ratio, which Is total debt (less concession obligation) divided by the sum of the total stockholders' equity and total debt (less concession obligation). The Company's target gearing ratio is set at 60%. This target is to be achieved by managing the Company's level of borrowings and dividend payments to shareholders. 2018 2017 Total I1abitles P47,204,987,569 P43,914,727,725 Less service concession obliation 6.946.854 827 8 829 461 477 40,258,132,742 37,085,268,248 Total stockholders' e: uliv 47.842 723 961 43.838.991.875 Total P88.100 650 703 P80 722 258 123 Gearlng ratio 46% 46% 1i iiiiIllllilllll IIIIII llI ll -60 - For purposes of computing Its not debt, the Company includes the outstanding balance of Its long-term debt (including current portion), accounts and other payables, less cash and cash equivalents. To compute Its total capital, the Company uses the total stockholders' equity. 2018 2017 Total liabilities P47,204,987,569 P43,914,727,725 Less: Service concession obligations 6,946,854,827 8,829,481,477 Cash and cash euilvalents 6.749.935.407 6 188 372172 13.696.790.234 13 017 833 849 Net debt 33,108,197,335 30,896,894,076 Total stockholders' e:u,r 47.842 723.061 43 838 991 875 Total net debt and e ui 5 P81.30.921.296 P74 533 885 951 Total net debt and eluitl. ratio 41% 41% 25. Commitments The significant commitments of the Company under the Concession Agreement and Extension are as follows: a. To pay MWSS concession fees; b. To post a performance bond, bank guarantee or other security acceptable to MWSS In favor of MWSS as a bond for the full and prompt performance of the Company's obligations under the Agreement. The aggregate amounts drawable In one or more Installments under such performance bond during the Rate Rebasing Period to which it relates are set out below. Aggregate amount drawable under performance bond Rate Rebasing Period in USS millions. First (August 1, 1997 - December 31, 2002) US$70.00 Second (January 1, 2003 - December 31, 2007) 70.00 Third (January 1, 2008 - December 31, 2012) 60.00 Fourth (January 1, 2013 - December 31, 2017) 50.00 Fifth (January 1, 2018 - December 31, 2022) 50.00 Sixth (January 1, 2023 - December 31, 2027) 50.00 Seventh (January 1, 2028 - December 31, 2032) 50.00 Eighth (January 1, 2033 - May 6, 2037) 50.00 Within thirty (30) days from the commencement of each renewal date, the Company shall cause the performance bond to be reinstated in the full amount set forth above as applicable for that year. With a minimum of 10-day written notice period to the Company, MWSS may make one or more drawings under the performance bond relating to a Rate Rebasing Period to cover amounts due to MWSS during that period; provided, however, that no such drawing shall be made in respect of any claim that has been submitted to the Appeals Panel for adjudication until the Appeals Panel has handed down its decision on the matter. In the event that any amount payable to MWSS by the Company is not paid when due, such amount shall accrue interest at a rate equal to that of a 364-day Treasury Bill for each day It remains unpaid; c. With the Extension, the Company agreed to increase its annual share in MWSS operating budget by 100% from P100.00 million to P395.00 million, subject to annual CPl: d. To meet certain specific commitments in respect of the provision of water and sewerage services In the East Zone, unless deferred by MWSS-RO due to unforeseen circumstances or modified as a result of rate rebasing exercise; e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner consistent with the National Building Standards and best industrial practices so that, at all times, the water and sewerage system In the East Zone is capable of meeting the servIce obligations (as such obligations may be revised from time to time by the MWSS-RO following consultation with the Company); Illill1 illill1illllllilll11llillll11ll| -61- f. To repair and correct, on a priority basis, any defect In the facilities that could adversely affect public health or welfare, or cause damage to persons or third party property g. To ensure that at all times, the Company has sufficient financial, material and personnel resources available to meet Its obligations under the Agreement; and h. To ensure that no debt or liability that would mature after the life of the Agreement will be incurred unless with the approval of MWSS. The Company Is committed to perform Its obligations under the Concession Agreement and Extension to safeguard Its continued right to operate the Concession. Ooeratina Leases - as a Lessee The Company leases office space and storage and plant facilities wherein it is the lessee. The terms of the lease range from one year or until the end of the concession period. As of December 31, 2018 and 2017, the Company's future minimum lease payments are as follows: 2018 2017 Within one year P16,200,000 P18,200,000 After one year but not more than five years 64,800,000 54,800,000 More than five veers 217.350.000 233 550 000 --_ P298.350.000 P314 550 000 Rent expense recognized In 2018 and 2017 amounted to P16.20 million. 26. Provisions and Contingencies On October 13, 2005, the Municipality of Norzagaray, Bulacan assessed the Company and Maynilad Water Services, Inc. (jointly, the "Concesslonaires") real property taxes on certain common purpose facilities registered in the name of and owned by MWSS purportedly due from 1998 to 2005 amounting to P357.11 million. On November 15, 2010, the local government of Quezon City demanded the payment of P302.71 million for deficiency real property taxes from MWSS on MWSS properties within its territorial jurisdiction. The assessments from the municipality of Norzagaray and Quezon City have been questioned by the Concessionaires and MWSS, and are pending resolution before the Central Board of Assessment Appeals and Supreme Court, respectively. On January 26, 2011, the Supreme Court issued a Temporary Restraining Order enjoining the local government of Quezon City from levying the real properties, machineries and equipment of MWSS. Total provision for these assessments amounted to P416.23 million as of December 31, 2018 and 2017. As of December 31, 2018 and 2017, the remaining provision for estimated probable losses pertains to various regal proceedings and exposures arlse In the ordinary course of business. Management believes that any amount the Company may have to pay in connection with any of these matters will not have a material adverse effect on the Company's financial position or operating results. The Information normally required under PAS 37, Provisions, Contingent Liabilitles and Contingent Assets, is not disclosed as it may prejudice the outcome of the proceedings. 27. Events after the Reporting Period The Company and MWPV JoInt Venture Aareement with the Tanauan Water District On February 4, 2019, the Company and MWPV (collectively the 'Consortiumn) signed and executed a joint venture agreement with the Tanauan Water District for the design, construction, rehabilitation, maintenance, operation, financing, expansion, and management of the water supply and sanitation facilities and services of the Tanauan Water District in Tanauan City, Batangas (the Tansuan Project). Upon completion of the conditions precedent set out In the joint venture agreement, the Consortium, through a SPV, and the Tenauan Water District shall execute the Tanauan Project for a period of twenty-five (25) years from the commencement date. -62 - Declaration ofCasDividends On February 26, 2019, the Company's BOD approved the declaration of cash dividends of P0.4551 per share on outstanding common shares and 10.0455 per share on outstanding participating preferred shares with date of record on March 14, 2019 and payment date of March 28, 2019. 28. Supplementary Tax Information under Revenue Regulations No. 15-2010 The Company reported and/or paid the following types of taxes for the year: VAT The National Internal Revenue Code (NIRC) of 1997 also provides for the imposition of VAT on sales of goods and services. Accordingly, the Company's sales are subject to output VAT while its importations and purchases from other VAT-registered Individuals or corporations are subject to Input VAT. Details of the Company's not sales/receipts, output VAT and Input VAT accounts follow: a. Net salestrecelpts and output VAT declared In the Company's VAT returns filed for the period: Net Sales/ Receits Out'ut VAT Vatable sales/receipt to private entities P15,111,537,400 P1,813,384,488 Sale to government 1,825,007,000 195,000,840 Exempt sales/receipts 13,593,060 - Zero-rated sales 11,799 758 - P18 761 937,218 P2 008 385 328 VAT exempt sales Includes sales to embassies evidenced by VAT exemption certificates duly issued by the BIR. The embassies are established for diplomatic missions and are entitled to VAT exemption, on the basis of reciprocity, as confirmed by the Office of Protocol of the Department of Foreign Affairs. Zero-rated sales pertain to sale of services to PEZA-registered entities and registered in Special Economic Zone. This is in accordance with the provisions set forth in RA No. 7916 and RA No. 7227, as amended by RA9400. b. The amount of input VAT claimed are broken down as follows: Balance at January 1 P155,351,228 Input tax deferred on capital goods from previous period 234,619,810 Current year's domestic purchases/payments for: Purchase of capital goods 22,222,197 Domestic purchase of goods other than capital goods 111,447,941 Domestic purchase of services 885,092,551 Service rendered by non-residents 248.508 Total available Input VAT 1,408,982,235 Less claims for tax credit/refund and other adjustments: Output tax due 2,008,385,328 Input tax deferred for succeeding period 200,950,050 VAT withheld on sales to government (78,947,474) Input tax on sales to government closed to expense (14,828,044) Inzut tax allocable to exemAt sales 693 062 Net VAT payable (709,272,687) Less: VAT payments 888 093 997 Balance at December 31 1outFut VAT sayzble! P41 178 690. Other Taxes and Licenses This includes all other taxes, local and national, including real estate taxes, licenses and permit fees. 1 IIII liIIIIIIIIIIIIIIlIlllll 11111111 -63- Details consist of the following: Included in Operating Expenses: Mayors business permit P108,972,156 Real property tax 47,283,224 Documentary stamps 6,063.192 BIR and PSE registration 2,015,091 Discharge permit fee 1,444,510 Vehicle registration 1,228,5650 Excavation permit fee 528,319 Others B8 961 428 Total P257 496 470 Withholdina Taxes Details of withholding taxes for the year are as follows: Expanded withholding taxes P303,461,920 Withholding taxes on compensation and benefits 285,517,986 Final withholdinj taxes 244 600 830 P833 580 516 Outstanding withholding taxes payable as of December 31, 2018 amounted to P30.19 million. I111111111 I i ilIllI liN 11111111 ll SyCip Gorre Veleyo & Co. Tel: (632) 891 0307 BOAIPRC Reg. No. 0001, sOyV e760 Ayala Avenue Fax: (632) 81 0872 October 4. 2018, valid until August 24, 2021 1220 Makatl City ey.com/ph SEC Accreditation No. 0012-FR-5 (Group A), Bulding a bater Philippines November 6, 2018. valid until November 5, 2021 working world INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY SCHEDULES The Stockholders and the Board of Directors Manila Water Company, Inc. MWSS Administration Building, 489 Katipunan Road Balara, Quezon City We have audited in accordance with Philippine Standards on Auditing, the parent company financial statements of Manila Water Company, Inc. (the Company) as of and for the years ended December 31, 2018 and 2017 and have issued our report thereon dated February 26, 2019. Our audits were made for the purpose of forming an opinion on the basic parent company financial statements taken as a whole. The accompanying schedules of all the effective standards and interpretations under the Philippine Financial Reporting Standards and reconciliation of retained eamings available for dividend declaration as of December 31, 2018 are the responsibility of the Company's management. These schedules are presented for the purpose of complying with Securities Regulation Code Rule 68, As Amended (2011), and are not part of the basic parent company financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic parent company financial statements and, In our opinion, fairly state, in all material respects, the information required to be set forth therein In relation to the basic parent company financial statements taken as a whole. SYCIP GORRES VELAYD & CO. ( i Michael C. Sabado Partner CPA Certificate No. 89336 SEC Accreditation No. 0664-AR-3 (Group A), March 16, 2017, valid until March 15, 2020 Tax Identification No. 160-302-885 BIR Accreditation No. 08-001998-73-2018, February 26, 2018, valid until February 25, 2021 PTR No. 7332607, January 3, 2019, Makatl City February 26, 2019 A member firm of Ernst & Yoag lobalmi nltd MANILA WATER COMPANY, INC. SUPPLEMENTARY SCHEDULE OF ALL THE EFFECTIVE STANDARDS AND INTERPRETATIONS PNIUPP% FINANCIAL REPRTI1S STANDARDS AND INTERPfTATIObW Not EffethuaSofDeember,2118 .daAdopt [WoAdoted' ApplIcable Philippine Financial Reporting Standards PFRS I First-time Adoption of Philipplne Financial Reporting Standards PFRS 2 Share-based Payment I/ Amendments to PFRS 2, Classification and Measurement of Share-based Payment I Transactions PFRS 3 Business Combinations / PFRS 4 Insurance Contracts Amendments to PFRS 4, Applying PFRS 9 Financial Instruments with PFRS 4 Insurance Contracts PFRS 5 Non-current Assets Held for Sale and Discontinued Operations PFRS 6 Exploration for and Evaluation of Mineral Resources PFRS 7 Financial Instruments: Disclosures I PFRS 8 Operating Segments / PFRS 9 Financial Instruments I PFRS 10 Consolidated Financial Statements V PFRS 11 Joint Arrangements & PFRS 12 Disclosure of Interests in Other Entities I PFRS 13 Fair Value Measurement PFRS 14 Regulatory Deferral Accounts PFRS 15 Revenue from Contracts with Customers / Philippine Accounting Standards PAS 1 Presentation of Financial Statements / PAS 2 Inventories V PAS 7 Statement of Cash Flows PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 10 Events after the Reporting Period PAS 12 Income Taxes V PAS 18 Property, Plant and Equipment V PAS 17 Leases PAS 19 Employee Benefits PAS 20 Accounting for Government Grants and Disclosure of Government Assistance PAS 21 The Effects of Changes in Foreign Exchange Rates I -2- PHILPPINE PIMANCIAL REPORTING STANDARDS AND INTERPRETATIONSNo EMeW n of Des6nisw 31, 2818. Adopted Not Adopted Applicable PAS 23 Borrowing Costs V PAS 24 Related Party Disclosures V PAS 28 Accounting and Reporting by Retirement Benefit Plans PAS 27 Separate Financial Statements PAS 28 investments In Associates and Joint Ventures / Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) PAS 29 Financial Reporting in Hyperinflationary Economies I/ PAS 32 Financial Instruments: Presentation PAS 33 Earnings per Share PAS 34 Interim Financial Reporting PAS 38 Impairment of Assets / PAS 37 Provisions, Contingent Liabilities and Contingent Assets PAS 38 Intangible Assets / PAS 39 Financial Instruments: Recognition and Measurement PAS 40 investment Property Amendments to PAS 40, Transfers of Investment Property PAS 41 Agriculture Philippine Interpretations Philippine Changes in Existing Decommissioning, Restoration Interpretation and Similar Liabilities IFRIC-1 Philippine Members' Shares in Co-operative Entities and Interpretation Similar Instruments IFRIC-2 Philippine Determining whether an Arrangement contains a Interpretation Lease / IFRIC-4 Philippine Rights to Interests arising from Decommissioning, interpretation Restoration and Environmental Rehabilitation IFRIC-5 Funds Philippine Liabilities arising from Participating In a Specific Interpretation Market-Waste Electrical and Electronic Equipment IFRIC-6 Philippine Applying the Restatement Approach under PAS 29 Interpretation Financial Reporting in Hyperinflationary Economies / IFRIC-7 Philippine interim Financial Reporting and Impairment Interpretation I/ IFRIC-10 3- PHILIPPINE FInANCIAL REPORTING STANIARDS AND INTERPRETATION11. Not Effse as ot December 31. 2018 Adopted Not Adopted I'AppiO Philippine Service Concession Arrangements Interpretation IFRIC-12 Philippine PAS 19--The Limit on a Defined Benefit Asset, Interpretation Minimum Funding Requirements and their IFRIC-14 Interaction Philippine Hedges of a Net Investment In a Foreign Operation Interpretation IFRIC-18 Philippine Distributions of Non-cash Assets to Owners Interpretation V IFRIC-17 Philippine Extinguishing Financial Liabilities with Equity Interpretation Instruments / IFRIC-19 Philippine Stripping Costs in the Production Phase of a Interpretation Surface Mine IFRIC-20 Philippine Levies Interpretation IFRIC-21 Philippine Foreign Currency Transactions and Advance Interpretation Consideration iFRIC-22 Philippine Introduction of the Euro Interpretation SIC-7 Philippine Government Assistance-No Specific Relation to Interpretation Operating Activities SIC-10 Philippine Operating Leases-Incentives Interpretation SIC-15 Philippine Income Taxes-Changes in the Tax Status of an Interpretation Entity or its Shareholders SIC-25 Philippine Evaluating the Substance of Transactions Involving interpretation the Legal Form of a Lease SIC-27 Philippine Service Concession Arrangements: Disclosures Interpretation V SIC-29 Philippine Intangible Assets-Web Site Costs Interpretation SIC-32 MANILA WATER COMPANY. INC. SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION FOR THE YEAR ENDED DECEMBER 31, 2018 Unappropriated retained earnings, beginning 18,460,483,333 Adjustments: Deferred tax asset recognized (1,167,318,943) Accretion of receivable from Bonifaclo Water Corporation (BWC) (120,591,585) Mark-to-market gain on receivables from BWC (113,488,598) Accretion of deferred credits '42 797 7991 Unappropriated retained earnings, adjusted to available for dividend distribution, beginning 7,016,286,428 Add (Less): Net Income during the period closed to retained earnings 8,333,092,498 Deferred tax benefit during the period (223,026,351) Amortization of deferred credits .12 535 802: Total 13,113,816,973 Less: Dividend declarations during the period (2,151,378,328) Arororiations durinc the ueriod '3748000.000: Una!-roo.riated retained eaminis available for dividend distribution endin 7 216 438 645 *As disclosed in Note 18 to the parent company financial statements, excess retained earnings wl be uftired for captel expenditures under the approved Business P/an In compliance wih the Company's service obligatons under the ConcessAn Agreement