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, 2003
Business Overview: PLDT is the leading telecommunications provider in the Philippines, operating through three primary segments: Wireless (led by subsidiary Smart), Fixed Line, and Information and Communications Technology (ICT). The company holds a dominant market share in both fixed-line and cellular services.

Key Financial Metrics (Year Ended Dec 31, 2003)

Note: US$ conversions based on year-end exchange rate of Php55.586 to US$1.00.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 21% to Php112.0 billion, driven primarily by a 39% surge in wireless revenues (Php64.3 billion) due to a 51% growth in the cellular subscriber base to 12.9 million.
• Profitability Turnaround: The company returned to profitability with a net income of Php11.0 billion, reversing a net loss of Php6.2 billion in 2002. This was largely due to improved wireless performance and a significant reduction in non-cash asset impairment charges (Php675 million in 2003 vs. Php13.3 billion in 2002).
• Fixed Line Stability: Fixed line revenues remained relatively flat (up 1%) at Php46.2 billion, though its contribution to total revenue declined to 41% as wireless grew.
• Debt Reduction: Total consolidated debt decreased by 3% to Php186.4 billion, aided by debt repayments of Php31.5 billion and cash flows from operations.

Guidance, Outlook, Risks, and Contingencies

Outlook and Guidance

• Capital Expenditures: The 2004 budget for consolidated capital expenditures is approximately Php22.0 billion (Php7.0 billion for PLDT fixed line/data and Php15.0 billion for Smart wireless expansion).
• Dividends: No cash dividends were declared for common shareholders in 2003. Dividend payments are restricted by debt covenants and the need to service debt. Preferred shareholders continue to receive dividends.
• Smart Dividends: PLDT relies heavily on dividends from Smart to service its own debt. Smart paid Php11.3 billion in dividends to PLDT in May 2004 (representing 70% of its 2003 net income).

Key Risks and Contingencies

• Substantial Indebtedness: With a debt-to-equity ratio of 7.53x and 94% of debt denominated in foreign currencies (mostly USD), PLDT is highly sensitive to peso depreciation. The peso depreciated 4% in 2003, increasing debt service costs in peso terms.
• Debt Covenants: The company is subject to restrictive covenants (e.g., debt-to-EBITDA ratios). While compliant as of year-end, future peso depreciation or operational setbacks could trigger defaults. The consolidated leverage ratio was 5.4:1 against a 5.5:1 threshold.
• Piltel Financial Distress: Subsidiary Piltel remains in financial difficulty with significant restructured debt. PLDT has provided a US$150 million Letter of Support (US$50 million undrawn as of year-end). Smart is pursuing a debt exchange offer with Piltel creditors to restructure obligations.
• Regulatory and Legal:
  • US DOJ Investigation: PLDT and Smart are under criminal investigation by the U.S. Department of Justice regarding alleged antitrust violations in international termination services.
  • FCC Ruling: The U.S. FCC previously suspended payments for termination services; interim agreements were reached in late 2003/early 2004 to restore payments.
  • Local Taxes: PLDT is contesting local franchise and business tax assessments totaling over Php5.1 billion from various local government units.
• Smart Public Offering: Smart is required to conduct a public offering of its shares by August 2004 to comply with its franchise; failure to do so could result in franchise revocation.

Important Facts for Investor Verification

• Debt Currency Exposure: Verify the current exchange rate impact on the ~Php172 billion of foreign currency-denominated debt, as peso depreciation directly increases interest expense and principal obligations.
• Smart Dividend Flow: Confirm the ability of Smart to continue paying dividends to PLDT, as PLDT's debt service capability is heavily dependent on these cash flows.
• Piltel Restructuring Status: Monitor the progress of Smart's proposed debt exchange offer with Piltel creditors and the potential for further drawdowns on PLDT's Letter of Support.
• Regulatory Outcomes: Track the outcome of the U.S. DOJ antitrust investigation and the status of local tax litigation, which could result in significant liabilities.
• Covenant Compliance: Review quarterly reports to ensure continued compliance with tightening debt covenants, particularly the debt-to-EBITDA ratio which becomes more restrictive in 2004.