PHI

Business Context and Reporting Period

Company: Philippine Long Distance Telephone Company (PLDT Inc.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2002
Accounting Standard: U.S. GAAP (First year of adoption for this filing; prior years restated)
Business Overview: PLDT is the leading telecommunications provider in the Philippines, operating through three main segments: Fixed Line (local exchange, long distance, data), Wireless (cellular via Smart and Piltel, satellite), and Information and Communications Technology (ePLDT). The company holds a dominant market share in fixed lines (~66%) and cellular services (~45% via Smart).

Key Financial Metrics (Year Ended Dec 31, 2002)

Note: USD figures are translated at the year-end rate of Php53.254 = US$1.00.

Material Changes vs. Prior Period (2001)

• Revenue Growth: Consolidated operating revenues increased 21% to Php95.5 billion, driven primarily by a 43% surge in wireless/cellular revenues (Php45.4 billion). Fixed line revenues grew modestly by 5%.
• Profitability Improvement: The company reported a Net Operating Income of Php15.0 billion in 2002, a significant turnaround from a Net Operating Loss of Php9.6 billion in 2001. This was largely due to reduced impairment charges and lower goodwill amortization (which ceased under new U.S. GAAP rules).
• Net Loss Reduction: Consolidated net loss improved by 84% to Php4.5 billion from Php27.8 billion in 2001. The 2001 loss was heavily impacted by asset impairments related to analog cellular networks.
• Debt Reduction: Total consolidated debt decreased by 2% to Php191.7 billion, reflecting active liability management and debt payments.
• Cash Flow: Net cash provided by operating activities increased 70% to Php36.7 billion, reflecting strong earnings growth and working capital management.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

• Strategy: Focus on strengthening financial position through cost containment, reduced capital expenditures (budgeted at Php16 billion for 2003), and maximizing cash flow from subsidiaries, particularly Smart.
• Dividends: PLDT does not expect to declare cash dividends on common stock in 2003 due to debt service requirements and covenants. Preferred shareholders continue to receive dividends.
• Capital Expenditures: 2003 budget is Php16 billion (Php7 billion for PLDT fixed line/data, Php9 billion for Smart GSM expansion).

Material Risks and Contingencies

• U.S. FCC Termination Rates Dispute: A significant legal and financial risk involves a dispute with U.S. carriers (AT&T, MCI) over international termination rates. The U.S. FCC ordered a suspension of payments to Philippine carriers in March 2003. Receivables from U.S. carriers totaled approximately US$19 million as of March 31, 2003. PLDT has filed for review of the FCC order.
• Debt Covenants and Leverage: PLDT carries substantial indebtedness (Debt-to-Equity ratio of 12.99x). The company is restricted from incurring additional debt under certain indentures because its leverage ratio exceeds 5.5:1. Compliance with financial covenants (interest coverage, debt-to-EBITDA) is critical; failure could trigger defaults.
• Foreign Exchange Risk: Approximately 95% of long-term debt is denominated in foreign currencies (mostly USD). Depreciation of the Philippine peso increases debt service costs in peso terms and negatively impacts financial ratios.
• Piltel Financial Distress: Subsidiary Piltel has significant financial difficulties and unrestructured debt. PLDT has provided a US$150 million Letter of Support (US$50 million undrawn as of year-end) to cover funding shortfalls.
• Local Tax Litigation: PLDT faces lawsuits from local government units regarding franchise and business taxes. The Supreme Court ruled against PLDT in a Davao City case, setting a precedent that could increase liability in other pending cases (aggregate claims approx. Php4.5 billion).
• Political and Economic Stability: Risks related to Philippine political instability, potential changes in government policy, and regional economic conditions.

Key Facts for Investor Verification

• Debt Covenant Compliance: Verify current status of interest coverage and debt-to-EBITDA ratios under Philippine GAAP to ensure no covenant breaches have occurred post-filing.
• U.S. FCC Proceeding Outcome: Monitor the resolution of the U.S. FCC order suspending termination payments, as this directly impacts international revenue and receivables collectability.
• Smart Dividend Flow: Confirm PLDT's ability to receive dividends from Smart (its primary cash generator), as Smart's loan covenants restrict dividend distributions without lender consent.
• Peso Exchange Rate Volatility: Assess the impact of recent peso depreciation on the peso-equivalent value of USD-denominated debt and interest expenses.
• Piltel Restructuring Progress: Track the status of Piltel's debt restructuring and the potential drawdown of the remaining US$50 million Letter of Support.
• Local Tax Liability: Review developments in pending local franchise tax lawsuits, particularly following the Supreme Court's decision in the Davao City case.