UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

¨
oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year ended December 31, 2013
For the fiscal year ended December 31, 2010

OR

¨
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the transition period from                  to                 
For the transition period from _________ to _________

OR

¨
oSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 – Date of event requiring this shell company report                     
Date of event requiring this shell company report __________

Commission file number 1-03006

Philippine Long Distance Telephone Company

(Exact name of Registrant as specified in its charter)

Republic of the Philippines

(Jurisdiction of incorporation or organization)

Ramon Cojuangco Building

Makati Avenue

Makati City, Philippines

(Address of principal executive offices)

Atty. Ma. Lourdes C. Rausa-Chan, telephone: +(632) 816-8556;lrchan@pldt.com.ph;lrchan@pldt.com.ph
;

Ramon Cojuangco Bldg., Makati Avenue, Makati City, Philippines

(Name, telephone, e-mail and/or facsimile number and address of Company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

    

Name of each exchange

Title of each classon which registered

Common Capital Stock, Par Value Five Philippine Pesos Per Share New York Stock Exchange*
American Depositary Shares, evidenced by American Depositary Receipts, each representing one share of Common Capital Stock New York Stock Exchange

*
Registered on the New York Stock Exchange not for trading but only in connection with the registration of American Depositary Shares, or ADSs, pursuant to the requirements of such stock exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

11.375% Notes due 2012
8.350% Notes due 2017

8.350% Notes due March 2017

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as at the close of the period covered by the annual report.

As at December 31, 2010:
186,756,438 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share
441,887,387 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share

As at December 31, 2013:
216,055,775 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share
36,000,570 shares of Non-voting Preferred Stock, Par Value Ten Philippine Pesos Per Share
150,000,000 shares of Voting Preferred Stock, Par Value One Philippine Peso Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yesþx  Noo¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:  Yeso¨  Noþx

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yesþx  Noo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files).  Yeso¨  Noo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filerþAccelerated fileroNon-accelerated filero
(Do not check if a smaller reporting company)
Smaller reporting companyo

Large Accelerated Filer  x                 Accelerated Filer  ¨                 Non-Accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP¨International Financial Reporting Standards as issued by the
International Accounting Standards Board  x
Other  ¨

o

     International Financial Reporting Standards as issued by the International Accounting Standards Boardþ
     Othero
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
  Item 17o¨  Item 18o¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yeso¨  Noþx

 


TABLE OF CONTENTS

   3  

   6  

PRESENTATION OF FINANCIAL INFORMATION

   6  

PRESENTATION OF FINANCIAL INFORMATIONPART I

  7

        Item 1.

 

   76  

Offer Statistics and Expected Timetable

   76  

Key Information

   76  

Performance Indicators

   76  

Selected Financial Data

   8  

Capital Stock

8

Dividends Declared

9

Dividends Paid

9

Exchange Rates

   10  

Dividends DeclaredCapitalization and Indebtedness

   10  
 11
11
12

   1210  

Risk Factors

   1210  

Information on the Company

21

Overview

21

Historical Background and Development

   22  

OverviewRecent Developments

   22  

Historical Background and DevelopmentBusiness Overview

   23  
 23

   24  

Organization

24

Development Activities (2011-2013)

   25  

Development Activities (2008-2010)Strengths

   2528  

StrengthsStrategy

   29  

StrategyBusiness

   30  

BusinessInfrastructure

   3138  

InfrastructureInterconnection Agreements

   4241  

Interconnection AgreementsLicenses and Regulations

41

Material Effects of Regulation on our Business

   44  

Licenses and RegulationCompetition

   45  

Material Effects of Regulation on our BusinessEnvironmental Matters

   47  

CompetitionIntellectual Property Rights

47

Properties

47

        Item 4A.

Unresolved Staff Comments

48

        Item 5.

Operating and Financial Review and Prospects

48

Overview

48

Management’s Financial Review

   49  

Environmental MattersCritical Accounting Policies

   5250  
 52
52
53
53
53
54
55

   6155  

Results of Operations

   6156  

Plans

88

Liquidity and ProspectsCapital Resources

89

Impact of Inflation and Changing Prices

94

        Item 6.

Directors, Senior Management and Employees

95

Directors, Key Officers and Advisors

95

Terms of Office

101

Family Relationships

101

Compensation of Key Management Personnel

101

Long-term Incentive Plan

102

Share Ownership

   103  

Liquidity and Capital ResourcesBoard Practices

   103  
 109
110
110
117
117
117
118
119
120

   120103  

Directors’ and Officers’ Involvement in Certain Legal Proceedings

   122106  

Employees and Labor Relations

   124107  

Pension and Retirement Benefits

   125108  

Major Shareholders and Related Party Transactions

   126109  

Related Party Transactions

   127110  

Financial Information

   128110  

Consolidated Financial Statements and Other Financial Information

   128110  

Legal Proceedings

   128110  

Dividend Distribution Policy

   129112  

The Offer and Listing

   130112  

Common Capital Stock and AmercianAmerican Depositary Shares

   130112  

i


Item 10.

Additional Information

   130

i


113  

Articles of Incorporation and By-Laws

   130113  

Material Contracts

   135113  

Exchange Controls and Other Limitations Affecting Securities Holders

   135114  

Taxation

   136114  

Documents on Display

   139117  

Quantitative and Qualitative Disclosures About Market Risks

   139117  

Liquidity Risk

   140117  

Foreign Currency Exchange Risk

   140120  

Interest Rate Risk

   142121  

Credit Risk

   144123  

Impairment Assessments

   147126  

Capital Management Risk

   148126  

Description of Securities Other than Equity Securities

   149127  

PART II

  

        Item 13.

 
150

   150127  

Material Modifications to the Rights of Security Holders and Use of Proceeds

   150127  

Controls and Procedures

   150128  

Audit Committee Financial Expert

   150128  

Code of Business Conduct and Ethics

   151128  

Principal Accountant Fees and Services

   157135  

Exemption from the Listing Standards for Audit Committees

   157136  

Purchases of Equity Securities by the Issuer and Affiliated Purchaser

   158136  

Change in Registrant’s Certifying Accountant

   158136  

Corporate Governance

   158136  

        Item 16H.

Mine Safety Disclosure

   136  

PART III

        Item 17.

Financial Statements

   159137  

Financial Statements

   159137  

Exhibits

   160271  
Item 19. Exhibits

EXHIBIT INDEX

   283273  

CERTIFICATION

   326  
EXHIBIT INDEX285
CERTIFICATION302
Ex-1.B Amended By-Laws (as amended on August 3, 2010)
Ex-99.6 Computation of Earnings Per Share
Ex-99.7 Calculation of Ratio of Earnings to Fixed Charges
Ex-99.8 Subsidiaries
Ex-12.1 Section 302 Certification of the Chief Executive Officer
Ex-12.2 Section 302 Certification of the Chief Financial Officer
Ex-12.1 Section 906 Certification of the Chief Executive Officer
Ex-12.2 Section 906 Certification of the Chief Financial Officer

ii


CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

Unless the context indicates or otherwise requires, references to “we,” “us,” “our” or “PLDT Group” mean Philippine Long Distance Telephone Company and its consolidated subsidiaries, and references to “PLDT” mean Philippine Long Distance Telephone Company, not including its consolidated subsidiaries (seeNote 2 Summary of Significant Accounting Policiesto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for a list of these subsidiaries, including a description of their respective principal business activities).

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All references to the “Philippines” contained in this report mean the Republic of the Philippines and all references to the “U.S.” or the “United States” are to the United States of America.

In this report, unless otherwise specified or the context otherwise requires, all references to “pesos,” “Philippine pesos” or “Php” are to the lawful currency of the Philippines, all references to “dollars,” “U.S. dollars” or “US$” are to the lawful currency of the United States and all references to “Japanese yen,” “JP¥” or “¥” are to the lawful currency of Japan, and all references to “Euro” or “€” are to the lawful currency of the European Union.Japan. Unless otherwise indicated, translationsconversion of peso amounts into U.S. dollars in this report were made based on the volume weighted average exchange rate quoted through the Philippine Dealing System, which was Php43.81Php44.40 to US$1.00 on December 31, 2010.2013. On March 29, 2011,28, 2014, the volume weighted average exchange rate quoted was Php43.53Php45.00 to US$1.00.

In this annual report, each reference to:

ACeS Philippines means ACeS Philippines Cellular Satellite Corporation, an 88.5%-owned subsidiary of PLDT;

ADRs means American Depositary Receipts;

ADSs means American Depositary Shares;

AGS means ABM Global Solutions, Inc., a 99.2%-owned subsidiary of ePLDT;

AGS Group means AGS and its subsidiaries;

ARPU means average revenue per user;

Bayan means Bayan Telecommunications, Inc.;

BCC means Bonifacio Communications Corporation, a 75.0%-owned subsidiary of PLDT;

Beacon means Beacon Electric Asset Holdings, Inc., 50.0%-owned by PCEV;

Beta means Asia Outsourcing Beta Limited;

BIR means Bureau of Internal Revenue;

BPO means business process outsourcing;

BSP means Bangko Sentral ng Pilipinas;

BTFHI means BTF Holdings, Inc., a wholly-owned company of the PLDT Beneficial Trust Fund;

BTS means base transceiver station;

CBA means collective bargaining agreement;

CEO means chief executive officer;

CG means Corporate Governance;

CG Manual means PLDT Manual on Corporate Governance;

CGO means Corporate Governance Office;

Chikka means Chikka Holdings Limited, a wholly-owned subsidiary of Smart;

Chikka Group means Chikka and its subsidiaries;

Cignal TV means Cignal TV, Inc., a wholly-owned subsidiary of Satventures, Inc.;

ClarkTel means PLDT Clark Telecom, Inc., a wholly-owned subsidiary of PLDT;

CMTS means cellular mobile telephone system;

Code of Ethics means PLDT’s Code of Business Conduct and Ethics;

CPCN means Certificate of Public Convenience and Necessity;

CURE means Connectivity Unlimited Resource Enterprise, Inc., a majority-owned subsidiary of PHC;

DFON means domestic fiber optic network;

Digitel means Digital Telecommunications Philippines, Inc., a 99.6%-owned subsidiary of PLDT;

Digitel Group means Digitel and its subsidiaries;

  3rd Brand

DMPI means 3rd Brand Pte. Ltd.Digitel Mobile Philippines, Inc., an 85.0%-owned subsidiary of SCH;

ACeS Philippines means ACeS Philippinesowns the brand nameSun Cellular Satellite Corporation,and a wholly-owned subsidiary of PLDT;
ADRs mean American Depositary Receipts;
AIL means ACeS International Limited, a 36.99%-owned associate of ACeS Philippines;
Airborne Access means Airborne Access Corporation, a 99.4%-owned subsidiary of SBI;
ARPU means average revenue per user;
BayanTel means Bayan Telecommunication, Inc.;
BayanTrade means BayanTrade, Inc. (formerly BayanTrade Dotcom, Inc.), a 93.5%-owned subsidiary of ePLDT;
BCC means Bonifacio Communications Corporation, a 75.0%-owned subsidiary of PLDT;
Beacon means Beacon Electric Asset Holdings, Inc., 50.0%-owned by PCEV;
BIR means Bureau of Internal Revenue;
BOW means Blue Ocean Wireless, a 51.0%-owned subsidiary of SCH;
BPO means business process outsourcing;
BSP means Bangko Sentral ng Pilipinas;
BTS means base transceiver station;
CBA means collective bargaining agreement;
CG Manual means PLDT Manual on Corporate Governance;
CGO means Corporate Governance Office;
ClarkTel means PLDT Clark Telecom, Inc., a wholly-owned subsidiary of PLDT;
CMTS means cellular mobile telephone system;Digitel;

DSL means digital subscriber line;

3

ECC means Executive Compensation Committee;

ePLDT means ePLDT, Inc., a wholly-owned subsidiary of PLDT;

EPS means earnings per share;

FECL means Far East Capital Limited, a wholly-owned subsidiary of Smart;

First Pacific means First Pacific Company Limited;

First Pacific Group means First Pacific and its Philippine affiliates;

FTTH means Fiber-to-the-Home;

GAAP means generally accepted accounting principles;

Globe means Globe Telecom, Inc.;

GNC means Governance and Nomination Committee;

GSM means global system for mobile communications;

HB means House Bill;

IAS means International Accounting Standards;

I-Contacts means I-Contacts Corporation, a wholly-owned subsidiary of Smart;

ICT means information and communications technology;

IFRS means International Financial Reporting Standards as issued by the International Accounting Standards Board;

IGF means international gateway facility;

IP means internet protocol;

IPCDSI means IP Converge Data Services, Inc., a wholly-owned subsidiary of ePLDT;

ISP means internet service providers;

JG Summit Group means JG Summit Holdings, Inc. and its subsidiaries;

JGSHI means JG Summit Holdings, Inc.;

LEC means local exchange carrier;

LTIP means long-term incentive plan;

MIC means Mabuhay Investments Corporation (formerly Mabuhay Satellite Corporation), a 67.0%-owned subsidiary of PLDT;

Maratel means PLDT-Maratel, Inc., a 98.0%-owned subsidiary of PLDT;

MediaQuest means MediaQuest Holdings, Inc., a wholly-owned entity of the PLDT Beneficial Trust Fund;

Meralco means Manila Electric Company;

MPIC means Metro Pacific Investments Corporation, a subsidiary of First Pacific;

MPRI means Metro Pacific Resources, Inc.;

MVNO means mobile virtual network operations;

NGN means Next Generation Network;

NTC means the National Telecommunications Commission of the Philippines;

NTT means Nippon Telegraph and Telephone Corporation;


NTT Communications means NTT Communications Corporation, a wholly-owned subsidiary of NTT;

NTT DOCOMO means NTT DOCOMO, Inc., a majority-owned and publicly traded subsidiary of NTT;

NTTC-UK means NTT Communications Capital (UK) Ltd., a wholly-owned subsidiary of NTT Communications;

Code of Ethics means PLDT’s Code of Business Conduct and Ethics;
CPCN means Certificate of Public Convenience and Necessity;
CSRs mean customer service representatives;
CURE means Connectivity Unlimited Resource Enterprise, Inc., a wholly-owned subsidiary of FHI;
CyMed means CyMed, Inc., a wholly-owned subsidiary of SPi;
DFON means domestic fiber optic network;
Digital Paradise means Digital Paradise, Inc., a 75.0%-owned subsidiary of ePLDT;
Digitel means Digital Telecommunications Philippines, Inc.;
DSL means digital subscriber line;
ECC means the Executive Compensation Committee;
ePLDT means ePLDT, Inc., a wholly-owned subsidiary of PLDT;
First Pacific means First Pacific Company Limited;
First Pacific Group means First Pacific and its affiliates;
FHI means Francom

NYSE means New York Stock Exchange;

PAPTELCO means Philippine Association of Private Telephone Companies, Inc.;

PCD means PCD Nominee Corporation;

PCEV means PLDT Communications and Energy Ventures, Inc., a 99.8%-owned subsidiary of Smart;

PDRs means Philippine Depositary Receipts;

PDSI means Primeworld Digital Systems, Inc., a wholly-owned subsidiary of Smart;

PFRS means Philippine Financial Reporting Standards;

PGIC means Philippine Global Investments Corporation, a wholly-owned subsidiary of PLDT Global;

PGIH means Philippine Global Investments Holdings, Inc. (formerly SPi Global Holdings, Inc.), a wholly-owned subsidiary of PLDT;

PGNL means Pilipinas Global Network Limited, a 60%-owned subsidiary of PLDT;

PHC means PH Communications Holdings Corporation, a wholly-owned subsidiary of Smart;

Philcom means PLDT-Philcom, Inc., a wholly-owned subsidiary of PLDT;

Philcom Group means Philcom and its subsidiaries;

Philippine SEC means the Philippine Securities and Exchange Commission;

Philweb means Philweb Corporation;

PLDT Beneficial Trust Fund means the beneficial trust fund created by PLDT to pay the benefits under the PLDT Employees’ Benefit Plan;

PLDT Global means PLDT Global Corporation, a wholly-owned subsidiary of PLDT;

PLP means PLDT Landline Plus;

PSE means the Philippine Stock Exchange, Inc.;

PTIC means Philippine Telecommunications Investment Corporation;

Satventures means Satventures, Inc., a wholly-owned subsidiary of Mediaquest;

SBI means SmartBroadband, Inc., a wholly-owned subsidiary of Smart;

SHPL means Smarthub Pte. Ltd., a wholly-owned subsidiary of Smart;

SIM means Subscriber Identification Module;

Smart means Smart Communications, Inc., a wholly-owned subsidiary of PLDT;

SME means small and medium enterprises;

SMHC means Smart Money Holdings Corporation, a wholly-owned subsidiary of Smart;

SMS means Short Messaging Service;

SRC means the Securities Regulation Code of the Philippines;

SRF means Supervision and Regulation Fees;

SubicTel means PLDT Subic Telecom, Inc., a wholly-owned subsidiary of PLDT;

TSC means the Technology Strategy Committee;

U.S. SEC means the United States Securities and Exchange Commission;

VAS means Value-Added Service;

VAT means Value-Added Tax;

VoIP means Voice over Internet Protocol;

Voyager means Voyager Innovations, Inc., a wholly-owned subsidiary of Smart;

FPHC means First Philippine Holdings Corporation;
FPUC means First Philippine Utilities Corporation;
GAAP means generally accepted accounting principles;
Globe means Globe Telecom, Inc.;
GNC means the Governance and Nomination Committee;
GSM means global system for mobile communications;
HB means House Bill;
I-Contacts means I-Contacts Corporation, a wholly-owned subsidiary of Smart;
ICT means information and communications technology;
IFRS means International Financial Reporting Standards as issued by the International Accounting Standards Board;
Infocom means Infocom Technologies, Inc., a 99.6%-owned subsidiary of ePLDT;
IP means internet protocol;
ISP means internet service providers;
Laguna Medical means Laguna Medical Systems, Inc., a wholly-owned subsidiary of SPi;
LEC means local exchange carrier;
Level Up! means Level Up!, Inc., a 57.5%-owned subsidiary of ePLDT;
LTIP means long-term incentive plan;
Mabuhay Satellite means Mabuhay Satellite Corporation, a 67.0%-owned subsidiary of PLDT;
Maratel means PLDT-Maratel, Inc., a 97.8%-owned subsidiary of PLDT;
Meralco means Manila Electric Company;

4


W-CDMA means Wideband-Code Division Multiple Access;

MPIC means Metro Pacific Investments Corporation, a subsidiary of First Pacific;
MPRI means Metro Pacific Resources, Inc.;
netGames means netGames, Inc., a 57.5%-owned subsidiary of ePLDT;
NGN means Next Generation Network;
NTC means the National Telecommunications Commission of the Philippines;
NTT means Nippon Telegraph and Telephone Corporation;
NTT Communications means NTT Communications Corporation, a wholly-owned subsidiary of NTT;
NTT DoCoMo means NTT DoCoMo, Inc., a majority-owned and publicly traded subsidiary of NTT;
NTTC-UK means NTT Communications Capital (UK) Ltd., a wholly-owned subsidiary of NTT Communications;
NYSE means New York Stock Exchange;
PAPTELCO means Philippine Association of Private Telephone Companies, Inc.;
Parlance means Parlance Systems, Inc., merged with SPi CRM and Vocativ on April 8, 2010, wherein SPi CRM is the surviving entity;
PCD means PCD Nominee Corporation;
PCEV means PLDT Communications and Energy Ventures, Inc., (formerly known as Pilipino Telephone Corporation, or Piltel), a 99.5%-owned subsidiary of Smart;
PDSI means Primeworld Digital Systems, Inc., a wholly-owned subsidiary of Smart;
PFRS means Philippine Financial Reporting Standards;
PGCI means Philippine Global Communications, Inc.;
PHC means PH Communications Holdings Corporation, a wholly-owned subsidiary of Smart;
Philcom means PLDT-Philcom, Inc., a wholly-owned subsidiary of PLDT;
Philippine SEC means the Philippine Securities and Exchange Commission;
PLDT Beneficial Trust Fund means the beneficial trust fund created by PLDT to pay the benefits under the PLDT Employees’ Benefit Plan;
PLDT Global means PLDT Global Corporation, a wholly-owned subsidiary of PLDT;
PLP means PLDT Landline Plus;
PSE means the Philippine Stock Exchange, Inc.;
PTIC means Philippine Telecommunications Investment Corporation;
SBI means Smart Broadband, Inc., a wholly-owned subsidiary of Smart;
SCH means SmartConnect Holdings Pte. Ltd., a wholly-owned subsidiary of Smart;
SGP means SmartConnect Global Pte. Ltd., a wholly-owned subsidiary of SCH;
SHI means Smarthub, Inc., a wholly-owned subsidiary of Smart;
SIM means subscriber identification module;
Smart means Smart Communications, Inc., a wholly-owned subsidiary of PLDT;
SMHC means Smart Money Holdings Corporation, a wholly-owned subsidiary of Smart;
SMI means Smart Money, Inc., a wholly-owned subsidiary of SMHC;

5

WiMAX means Worldwide Interoperability for Microwave Access; and


Wolfpac means Wolfpac Mobile, Inc., a wholly-owned subsidiary of Smart.

SMS means short messaging service;
SNMI means Smart-NTT Multimedia, Inc., a wholly-owned subsidiary of PLDT;
SPi CRM means SPi CRM Inc., (formerly known as ePLDT Ventus, Inc., or Ventus), the surviving entity of a merger with Vocativ and Parlance on April 8, 2010, a wholly-owned subsidiary of ePLDT;
SPi means SPi Technologies, Inc., a wholly-owned subsidiary of ePLDT;
SPi Group means SPi and its subsidiaries;
Springfield means Springfield Service Corporation, a wholly-owned subsidiary of SPi;
SRC means the Securities Regulation Code of the Philippines;
SRF means supervision and regulation fees;
SubicTel means PLDT Subic Telecom, Inc., a wholly-owned subsidiary of PLDT;
TSC means the Technology Strategy Committee;
TSI means Telecoms Solutions, Inc., a wholly-owned subsidiary of SMHC;
U.S. SEC means the United States Securities and Exchange Commission;
VAS means value-added service;
VAT means value-added tax;
Vocativ means Vocativ Systems, Inc., merged with SPi CRM and Parlance on April 8, 2010, wherein SPi CRM became the surviving entity;
VoIP means voice over internet protocol;
WAP means wireless application protocol;
WCI means Wireless Card, Inc., a wholly-owned subsidiary of Smart;
W-CDMA means wideband-code division multiple access; and
Wolfpac means Wolfpac Mobile, Inc., a wholly-owned subsidiary of Smart.
FORWARD-LOOKING STATEMENTS

Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements are generally identified by forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similar words.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in Item 3. “Key Information Risk Factors.” When considering forward-looking statements, you should keep in mind the description of risks and other cautionary statements in this report.

You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as at the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the statements in this report after the date hereof. In light of these risks and uncertainties, you should keep in mind that actual results may differ materially from any forward-looking statement made in this report or elsewhere.

6


PRESENTATION OF FINANCIAL INFORMATION

Our consolidated financial statements as at December 31, 20102013 and 20092012 and January 1, 2012 and for the three years in the period ended December 31, 2010, 2009 and 2008,2013, included in Item 18. “Financial Statements” of this annual report on Form 20-F have been prepared in conformity with IFRS. We adopted IFRS effective as at and for the fiscal year ended December 31, 2007 by applyingIFRS 1: First-Time Adoption of International Financial Reporting Standards. Our consolidated financial statements as at and for the year ended December 31, 2006 were originally prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and were restated in accordance with IFRS for comparative purposes only.

In accordance with rule amendments adopted by the U.S. SEC, which became effective on March 4, 2008, we do not provide a reconciliation to U.S. GAAP.

As at December 31, 2013, our chief operating decision maker, or our Management Committee, views our business activities in three business units: Wireless, Fixed Line and Others. On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which was completed in April 2013. Consequently, as at December 31, 2012, the BPO segment was classified as discontinued operations and a disposal group held-for-sale. The BPO segment met the criteria of an asset to be classified as held-for-sale as at December 31, 2012. The results of operations of our BPO business for the four months ended April 30, 2013 and for the years ended December 31, 2012 and 2011 were presented as discontinued operations. See Item 4. “Information on the Company – Development Activities (2011-2013) – Sale of BPO Segment”,Note 2 – Summary of Significant Accounting Policies – Discontinued OperationsandNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Held-for-Sale and Discontinued Operationsto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion of the classification of the BPO segment as an asset held-for-sale.

PART I
Item 1. Identity of Directors, Senior Management and Advisors

Item 1.Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Item 2.Offer Statistics and Expected Timetable

Not applicable.

Item 3.Key Information

Item 3. Key Information
Performance Indicators

We use a number of non-GAAP performance indicators to monitor financial performance. These are summarized below and discussed later in this report.

Adjusted EBITDA

Adjusted EBITDA is measured as net income excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity share in net earnings (losses) of associates and joint ventures, foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net, provision for (benefit from) income tax and other income.income (expenses). Adjusted EBITDA is monitored by the management for each business unit separately for purposes of making decisions about resource allocation and performance assessment. Adjusted EBITDA is presented also a supplemental disclosure because our management believes that it is widely used by investors in their analysis of the performance of PLDT and tocan assist them in their comparison of PLDT’s performance with thatthose of other companies in the technology, media and telecommunications sector. We also present adjustedAdjusted EBITDA because it is used by some investors as a

way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Companies in the technology, media and telecommunications sector have historically reported Adjusted EBITDA as a supplement to financial measures in accordance with IFRS or GAAP in the United States.IFRS. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of our performance, nor should Adjusted EBITDA be considered as an alternative to cash flows from operating activities as a measure of liquidity or as an alternative to any other measure determined in accordance with IFRS. Unlike net income, adjustedAdjusted EBITDA does not include depreciation and amortization or financing costs and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using adjustedAdjusted EBITDA as only one of several comparative tools, together with IFRS-based measurements, to assist in the evaluation of operating performance. Such IFRS-based measurements include income before income tax, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in adjustedAdjusted EBITDA. Our calculation of adjustedAdjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

A reconciliation of our consolidated adjustedAdjusted EBITDA to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 20082011 is presented in Item 5. “Operating and Financial Review and Prospects Management’s Financial Review” andNote 4 Operating Segment Informationto the accompanying audited consolidated financial statements in Item 18.

7

“Financial Statements”.


Core Income

Core income is measured as net income attributable to equity holders of PLDT (net income less net income attributable to non-controlling interests), excluding foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net (excluding hedge costs), asset impairment on noncurrent assets, other nonrecurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures. The coreCore income results are monitored by the management for each business unit separately for purposes of making decisions about resource allocation and performance assessment. Also, core income is used by the management as a basis offor determining the level of dividend payouts to shareholders and a basis offor granting incentives to employees. Core income should not be considered as an alternative to income before income tax or net income determined in accordance with IFRS as an indicator of our performance. Unlike income before income tax, core income does not include foreign exchange gains and losses, gains and losses on derivative financial instruments, asset impairments and other non-recurringnonrecurring gains and losses. We compensate for these limitations by using core income as only one of several comparative tools, together with IFRS-based measurements, to assist in the evaluation of operating performance. Such IFRS-based measurements include income before income tax and net income. Our calculation of core income may be different from the calculation methods used by other companies and, therefore, comparability may be limited. A reconciliation of our consolidated core income to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 20082011 is presented in Item 5. “Operating and Financial Review and Prospects Management’s Financial Review” andNote 4 Operating Segment Informationto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Selected Financial Data

The selected consolidated financial information below as at December 31, 2013, 2012, 2011, 2010 and 2009 and for the threefinancial years ended December 31, 2013, 2012, 2011, 2010 2009 and 2008,2009, should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements, includingand the accompanying notes, included elsewhere in Item 18 in18. “Financial Statements” of this annual report.report on Form 20-F. As disclosed above under “Presentation of Financial Information”,Information,” our consolidated financial statements as at and for the years ended December 31, 2013, 2012, 2011, 2010 2009, 2008 and 20072009 have been prepared and presented in conformity with IFRS and our consolidated financial statements for the year ended December 31, 2006, which were originally prepared in accordance with U.S. GAAP, have been restated in accordance with IFRS for comparative purposes only.

8

IFRS.


   2013(1)   2013   2012(2)   2011(2, 3)   2010(2)  2009(2) 
   (in millions, except earnings per common share amounts, weighted average number of common shares,
ratio of earnings to fixed charges and dividends declared per common share amounts)
 

Statements of Operations Data:

           

Revenues

  US$3,791     Php168,331     Php163,033     Php148,479     Php150,814    Php154,132  

Service revenues

   3,695     164,052     159,738     145,834     148,597    151,706  

Non-service revenues

   96     4,279     3,295     2,645     2,217    2,426  

Expenses(3)

   2,827     125,515     122,529     106,424     95,287    96,016  

Net income (loss) for the year

   798     35,453     36,099     31,218     39,825    40,198  

Continuing operations

   752     33,384     35,556     30,351     40,314    40,784  

Discontinued operations

   47     2,069     543     867     (489  (586

Earnings per common share for the year attributable to equity holders of PLDT

           

Basic

   3.69     163.67     167.07     161.05     210.53    210.94  

Diluted

   3.69     163.67     167.07     160.91     210.53    210.91  

Earnings per common share from continuing operations for the year attributable to equity holders of PLDT

           

Basic

   3.47     154.09     164.55     156.52     213.15    214.08  

Diluted

   3.47     154.09     164.55     156.39     213.15    214.05  

Balance Sheets Data

           

Cash and cash equivalents

   719     31,905     37,161     46,057     36,678    38,319  

Total assets

   9,001     399,638     405,815     401,792     278,083    278,377  

Total long-term debt – net of current portion

   2,003     88,924     102,811     91,273     75,879    86,066  

Total debt(4)

   2,344     104,090     115,792     117,275     89,646    98,729  

Total liabilities

   5,908     262,312     260,081     247,546     180,351    181,006  

Total equity attributable to equity holders of PLDT

   3,089     137,147     145,550     153,860     97,416    96,821  

Weighted average number of common shares for the year (in thousands)

   4,866     216,055     216,055     191,369     186,790    186,916  

Other Data:

           

Depreciation and amortization

   686     30,304     32,354     27,539     25,881    25,159  

Ratio of earnings to fixed charges(5)

   5.7x     5.7x     5.4x     5.9x     7.0x    7.4x  

Net cash provided by operating activities

   1,661     73,763     80,370     79,209     77,260    74,386  

Net cash used in investing activities

   474     21,045     39,058     29,712     23,283    49,132  

Net cash used in financing activities

   1,347     59,813     48,628     40,204     55,322    20,293  

Dividends declared to common shareholders

   852     37,809     36,946     41,460     40,909    38,758  

Dividends declared per common share

   4.03     179.00     171.00     222.00     219.00    207.00  

Amounts in conformity with IFRS:
                         
  2010(1) 2010 2009 2008 2007 2006
  (in millions, except earnings per common share amounts, weighted average number of common shares, ratio of earnings to
  fixed charges and dividends declared per common share amounts)
Statements of Operating Data:
                        
Revenues US$3,297  Php144,459  Php147,993  Php145,837  Php138,704  Php127,508 
Service revenues  3,247   142,242   145,567   142,873   135,478   124,988 
Non-service revenues  51   2,217   2,426   2,964   3,226   2,520 
Expenses  2,029   88,903   90,111   85,786   83,587   82,003 
Net income for the year  919   40,259   40,095   34,976   39,274   32,581 
Earnings per common share for the year attributable to equity holders of PLDT                        
Basic  4.86   212.85   210.38   179.96   205.84   173.10 
Diluted  4.86   212.85   210.36   179.95   204.88   173.01 
Balance Sheets Data:
                        
Cash and cash equivalents  837   36,678   38,319   33,684   17,447   16,870 
Total assets  6,341   277,815   280,148   252,558   240,158   241,904 
Total long-term debt — net of current portion  1,732   75,879   86,066   58,899   53,372   63,769 
Total debt(2)
  2,046   89,646   98,729   73,911   60,640   80,154 
Total liabilities  4,118   180,430   181,023   145,589   127,813   139,052 
Total equity  2,223   97,385   99,125   106,969   112,345   102,853 
Weighted average number of common shares for the year (in thousands)     186,790   186,916   188,163   188,656   184,456 
Other Data:
                        
Depreciation and amortization  600   26,277   25,607   24,709   28,613   31,869 
Ratio of earnings to fixed charges(3)
  7.4x  7.4x  7.7x  8.0x  8.3x  4.6x
Net cash provided by operating activities  1,764   77,260   74,386   78,302   77,418   69,211 
Net cash used in investing activities  531   23,283   49,132  ��17,014   31,319   35,790 
Net cash used in financing activities  1,263   55,322   20,293   45,464   44,819   45,900 
Dividends declared to common shareholders  934   40,909   38,758   36,578   28,299   14,459 
Dividends declared per common share  5.00   219.00   207.00   194.00   150.00   78.00 
(1)
(1)

We maintain our accounts in Philippine pesos, the functional and presentation currency under IFRS. For convenience, the Philippine peso financial information as at and for the year ended December 31, 2010,2013, has been translatedconverted into U.S. dollars at the exchange rate of Php43.81Php44.40 to US$1.00, the rate quoted through the Philippine Dealing System as at December 31, 2010.2013. This translationconversion should not be construed as a representation that the Philippine peso amounts represent, or have been or could be converted into, U.S. dollars at that rate or any other rate.

(2)

The 2009 to 2012 results have been adjusted to reflect the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18.“Financial Statements” for further discussion.

(2)(3)

Includes the Digitel Group’s results of operations for the period from October 26, 2011 to December 31, 2011 and consolidated financial position as at December 31, 2011.

(4)

Total debt represents the sum of (i) current portion of long-term debt,debt; (ii) long-term debt net of current portionportion; and (iii) notes payable.

(3)(5)

For purposes of this ratio, “Earnings” consist of: (a) pre-tax income from continuing operations before adjustment for non-controllingnoncontrolling interests in consolidated subsidiaries or income or loss from equity investees; (b) fixed charges; (c) amortization of capitalized interest;(d) distributed income of equity investees; and (e) share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges; less the sum of the following: (1) capitalized interest; (2) preference security dividend requirements of consolidated subsidiaries; and (3) the non-controllingnoncontrolling interests in pre-tax income of subsidiaries that have not incurred fixed charges.

“Fixed charges” consist of interest expense and capitalized interest, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense, and preference security dividend requirements of consolidated subsidiaries.

9

“Fixed charges” consist of interest expense and capitalized interest, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense, and preference security dividend requirements of consolidated subsidiaries.


Capital Stock

The following table summarizes PLDT’s capital stock issued and outstanding as at December 31, 20102013 and 2009:

         
  December 31, 
  2010  2009 
  (in millions) 
Serial Preferred Stock        
10% Cumulative Convertible Preferred Stock        
A to HH Php4,059  Php4,056 
Cumulative Non-convertible Redeemable Preferred Stock        
Series IV  360   360 
       
  Php4,419  Php4,416 
       
Common Stock Php947  Php947 
       
2012:

   December 31, 
   2013   2012 
   (in millions) 

Serial Preferred Stock

    

10% Cumulative Convertible Preferred Stock

    

HH to II

  Php—      Php—    

Series IV Cumulative Non-convertible Redeemable Preferred Stock

   360     360  

Voting Preferred Stock

   150     150  
  

 

 

   

 

 

 
  Php510    Php510  

Common Stock

  Php1,080    Php1,080  
  

 

 

   

 

 

 

Dividends Declared

The following table shows the dividends declared to common shareholders from the earnings for the years ended December 31, 2008, 20092011, 2012 and 2010:

               
    Date   Amount
Earnings Approved Record Payable Per share Total Declared
        (in pesos) (in million pesos)
2008 August 5, 2008 August 22, 2008 September 22, 2008  70   13,140 
2008 March 3, 2009 March 18, 2009 April 21, 2009  70   13,124 
2008 March 3, 2009 March 18, 2009 April 21, 2009  60   11,250 
               
         200   37,514 
               
               
2009 August 4, 2009 August 20, 2009 September 22, 2009  77   14,384 
2009 March 2, 2010 March 17, 2010 April 20, 2010  76   14,197 
2009 March 2, 2010 March 17, 2010 April 20, 2010  65   12,142 
               
         218   40,723 
               
               
2010 August 3, 2010 August 19, 2010 September 21, 2010  78   14,570 
2010 March 1, 2011 March 16, 2011 April 19, 2011  78   14,567 
2010 March 1, 2011 March 16, 2011 April 19, 2011  66   12,326 
               
         222   41,463 
               
2013:

   Date  Amount 

Earnings

  Approved  Record  Payable  Per share   Total Declared 
            (in pesos)   (in millions) 

2011

  August 2, 2011  August 31, 2011  September 27, 2011   78    Php14,567  

2011

  March 6, 2012  March 20, 2012  April 20, 2012   63     13,611  

2011

  March 6, 2012  March 20, 2012  April 20, 2012   48     10,371  
        

 

 

   

 

 

 
         189     38,549  
        

 

 

   

 

 

 

2012

  August 7, 2012  August 31, 2012  September 28, 2012   60     12,964  

2012

  March 5, 2013  March 19, 2013  April 18, 2013   60     12,963  

2012

  March 5, 2013  March 19, 2013  April 18, 2013   52     11,235  
        

 

 

   

 

 

 
         172     37,162  
        

 

 

   

 

 

 

2013

  August 7, 2013  August 30, 2013  September 27, 2013   63     13,611  

2013

  March 4, 2014  March 18, 2014  April 16, 2014   62     13,395  

2013

  March 4, 2014  March 18, 2014  April 16, 2014   54     11,667  
        

 

 

   

 

 

 
         179    Php38,673  
        

 

 

   

 

 

 

Our current dividend policy is to declare and pay dividendsout 70% of our core earnings per share taking into consideration the interestsinterest of our shareholders as well as our working capital, capital expenditures and debt servicing requirements. Also taken into consideration are our ability to meet loan covenant requirements in the declaration and payment of dividends as discussed in Note 19 — Equity and Note 20 — Interest-bearing Financial Liabilities to the accompanying consolidated financial statements in Item 18. The retention of earnings ismay be necessary to meet the funding requirements of our business expansion and development programs. Unappropriated retainedHowever, in the event no investment opportunities arise, we may consider the option of returning additional cash to our shareholders in the form of special dividends up to the 30% balance of our core earnings or share buybacks. We were able to declare dividend payouts of PLDT include undistributedapproximately 100% of our core earnings representingfor the seven consecutive years from 2007 to 2013. The accumulated equity in the net earnings of our subsidiaries, which areform part of our retained earnings, is not available for distribution as dividends until receivedunless realized in the form of dividends from such subsidiaries. See Note 19 — Equity to the accompanying consolidated financial statements in Item 18. Dividends are generally paid in Philippine pesos. In the case of shareholders residing outside the Philippines, PLDT’s transfer agent in Manila, Philippines, which acts as the dividend-disbursing agent, converts the Philippine peso dividends into U.S. dollars at the prevailing exchange rates and remits the dollar proceedsdividends abroad, net of any applicable withholding tax.

10


Our subsidiaries pay dividends subject to the requirements of applicable laws and regulations and availability of unrestricted retained earnings, without any restriction imposed by the terms of contractual agreements. Notwithstanding the foregoing, the declaration and payment of such dividends depends upon the respective subsidiary’s results of operations and future projects, earnings, cash flow, financial condition, capital investment requirements and other factors.

Dividends Paid
     A

The following table shows a summary of dividends paid per share of PLDT’s common stock stated in both Philippine peso and U.S. dollars follows:

         
  In Philippine Peso In U.S. Dollars
2006  78.00   1.54 
2007  150.00   3.26 
2008  194.00   4.47 
Regular Dividend — April 21, 2008  68.00   1.62 
Regular Dividend — September 22, 2008  70.00   1.51 
Special Dividend — April 21, 2008  56.00   1.34 
2009  207.00   4.30 
Regular Dividend — April 21, 2009  70.00   1.45 
Regular Dividend — September 22, 2009  77.00   1.62 
Special Dividend — April 21, 2009  60.00   1.24 
2010  219.00   4.95 
Regular Dividend — April 20, 2010  76.00   1.71 
Regular Dividend — September 21, 2010  78.00   1.78 
Special Dividend — April 20, 2010  65.00   1.46 
dollars:

   In Philippine Peso   In U.S. Dollars 

2009

   207.00     4.30  

Regular Dividend – April 21, 2009

   70.00     1.45  

Regular Dividend – September 22, 2009

   77.00     1.62  

Special Dividend – April 21, 2009

   60.00     1.24  

2010

   219.00     4.95  

Regular Dividend – April 20, 2010

   76.00     1.71  

Regular Dividend – September 21, 2010

   78.00     1.78  

Special Dividend – April 20, 2010

   65.00     1.46  

2011

   222.00     5.10  

Regular Dividend – April 19, 2011

   78.00     1.80  

Regular Dividend – September 27, 2011

   78.00     1.78  

Special Dividend – April 19,2011

   66.00     1.52  

2012

   171.00     4.04  

Regular Dividend – April 20, 2012

   63.00     1.48  

Regular Dividend – September 28, 2012

   60.00     1.44  

Special Dividend – April 20,2012

   48.00     1.12  

2013

   175.00     4.18  

Regular Dividend – April 18, 2013

   60.00     1.39  

Regular Dividend – September 27, 2013

   63.00     1.53  

Special Dividend – April 18, 2013

   52.00     1.26  

Dividends on PLDT’s common stock were declared and paid in Philippine pesos. For the convenience of the reader, the Philippine peso dividends are translatedconverted into U.S. dollars based on the Philippine Dealing System Reference Rate on the respective dates of dividend payments.

Exchange Rates

The Philippine government does not administratively fix the exchange rate between the Philippine peso and the U.S. dollar. Since August 1, 1992, a market average rate has been determined daily in inter-bank trading using the Philippine Dealing System, known as the Philippine Dealing System Reference Rate. The Philippine Dealing System is a specialized off-floor direct dealing service for the trading of Philippine pesos-U.S. dollars by member banks of the Bankers Association of the Philippines, or BAP, and BSP, the central bank of the Philippines. All members of the BAP are required to make their Philippine peso-U.S. dollar trades through this system, which was established by Telerate Financial Information Network of Hong Kong.

The following table shows the exchange rates between the Philippine peso and the U.S. dollar, expressed in Philippine pesos per U.S. dollar, for the periods indicated, based on the volume-weighted average exchange rate for each business day in each of the periods presented:

                 
  Year Ended December 31,
  Period End Average(1) High(2) Low(3)
2006 Php49.05  Php51.17  Php49.05  Php53.59 
2007  41.41   45.88   41.14   49.16 
2008  47.65   44.71   40.36   49.98 
2009  46.43   47.82   45.95   49.06 
2010  43.81   45.10   42.52   46.98 
2011 (through March 29, 2011)  43.53   43.80   43.30   44.59 

   Year Ended December 31, 
   Period End   Average(1)   High(2)   Low(3) 

2009

  Php46.43    Php47.82    Php45.95    Php49.06  

2010

   43.81     45.10     42.52     46.98  

2011

   43.92     43.28     41.96     44.59  

2012

   41.08     42.14     40.86     44.25  

2013

   44.40     42.66     40.57     44.66  

2014 (through March 28, 2014)

   45.00     45.00     44.34     45.41  

Source: Philippine Dealing System Reference Rate

(1)
(1)

Calculated by using the average of the exchange rates on the last day of each month during the period.

(2)

Highest exchange rate for the period.

(3)

Lowest exchange rate for the period.

                 
  Month
  Period End Average(1) High(2) Low(3)
2010                
October Php43.06  Php43.40  Php43.06  Php43.89 
November  44.15   43.55   42.52   44.26 
December  43.81   43.94   43.65   44.38 
2011                
January  44.31   44.20   43.71   44.59 
February  43.68   43.67   43.36   44.21 
March (through March 29, 2011)  43.53   43.51   43.30   43.95 

   Month 
   Period End   Average(1)   High(2)   Low(3) 

2013

        

September

   Php43.54     Php43.78     Php43.07     Php44.56  

October

   43.25     43.17     43.07     43.41  

November

   43.76     43.58     43.23     43.88  

December

   44.40     44.14     43.69     44.49  

2014

        

January

   45.34     44.97     44.34     45.40  

February

   44.66     44.86     44.52     45.41  

March (through March 28, 2014)

   45.00     44.80     44.44     45.24  

Source: Philippine Dealing System Reference Rate

(1)
(1)

Calculated by using the average of the exchange rates during the month.

(2)

Highest exchange rate for the month.

(3)

Lowest exchange rate for the month.

11


This report contains conversions of Philippine peso amounts into U.S. dollars for your convenience. Unless otherwise specified, these conversions were made at the Philippine Dealing System Reference Rate as at December 31, 20102013 of Php43.81Php44.40 to US$1.00. You should not assume that such Philippine peso amounts represent such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rate indicated, or at any particular rate. As at March 29, 2011,28, 2014, the exchange rate quoted through the Philippine Dealing System was Php43.53Php45.00 to US$1.00. TheUnless otherwise specified, the weighted average exchange rate of the Philippine peso to the U.S. dollar for a given year used in the succeedingfollowing discussions in this report was calculated using the average of the daily exchange rates quoted through the Philippine Dealing System during the year.

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

You should carefully consider carefully all of the information in this annual report, including the risks and uncertainties described below. If any of the following risks actually occurs, it could have a material adverse effect on our business, financial condition or results of operations and the trading price of our ADSs could decline and you could lose all or part of your investment.

Risks Relating to Us

We face competition from well-established telecommunications operators and may face competition from new entrants, thatwhich may adversely affecthave a material adverse effect on our business, results of operations, financial condition and prospects.

In 1993, the Philippine government liberalized the Philippine telecommunications industry and opened the Philippine telecommunications market to new entrants. IncludingAt present, following the acquisition of the Digitel Group by PLDT, Group, there are fourthe number of major players in the industry has been reduced to three major LECs, 11 international gateway facilityeight major IGF providers and threetwo major cellular service providersoperators in the country. Many entrants into the Philippine telecommunications market have entered into strategic alliances with foreign telecommunications companies, which provide them access to technologicaltechnology and funding support, as well as service innovations and marketing strategies. We cannot assure you that the number of providers of telecommunicationtelecommunications services will not further increase in the future or that competition for telecommunications customers will not cause our cellular and fixed line subscribers to switch to other operators, or otherwise cause us to increase our marketing expenditures or reduce our rates, resulting in a reduction in our profitability.

Competition in the cellular telecommunications industry in the Philippines is based primarily on factors such asparticularly intense, with network coverage, quality of service, product offerings, and price.price dictating subscriber preference. Recently, competition has increased as operators sought to develophave grown more aggressive in maintaining and maintain revenuegrowing market share, and to attract new subscribers.especially in light of a maturing market. Our principal cellular competitors,competitor, Globe, and Digitel, with itsSun Cellularbrand, havehas introduced aggressive marketing campaigns and promotions, such as unlimited voice and SMS offers. In addition, the government may allocate additional frequenciessame way, Smart and award additional cellular telecommunications licenses in the future, which could lead to increased competition.

   �� As a result of the competitive environment, Smart has not increased its cellular rates since November 1998. Moreover, the level of competition requires Smart toDMPI are also continuously innovate its productsinnovating their product and to conductservice offerings and conducting promotions, which may affect itstheir cellular revenues and revenue growth. For example,Specifically, in response to fixed rate or “bucket plans” forthe unlimited voice and text services launchedoffers by its competitors,Globe, Smart launchedintroduced promotions pursuant to whichallowing Smart BuddyandTalk ‘N Textprepaid subscribers had the option to avail themselves of unlimited on-network (Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) text messages at a fixed rate.
     We DMPI, on the other hand, strengthened its unlimited plans through improved handset bundle offerings. Due to competition from other well-established telecommunications operators, we cannot assure you that the additional marketing expenses incurred by us for these promotions, nor can we assure you that, in response to rate pressures from our competitors, the potential loss of customers, decrease in rates or the increase in capital expenditures required for our continued capacity expansion necessary to accommodate the continued

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increases expected in call and text volumes as a result of unlimited voice/voice and text offers, will not, in each case, have a material adverse effect on our business, results of operations, financial performance.
condition or prospects.

The cellular telecommunications industry may not continue to grow.

The majority of our total revenues isare currently derived from the provision of cellular services.services to customers in the Philippines. As a result, we depend on the continued development and growth of this industry in the cellular telecommunications industry.Philippines. The cellular penetration rate in the Philippines iscountry, however, has already reached an estimated to have reached about 94%,108% as at December 31, 2013, counting for multiple SIM card ownership. Theownership, thus the industry may well be considered mature. Further growth of the cellular communications market depends on many factors beyond our control, including the continued introduction of new and enhanced cellular devices, the price levels of cellular handsets, consumer tastes and preferences and amount of disposable income of existing and potential subscribers. Any economic, technological or other developments resulting in a reduction in demand for cellular services or otherwise causing the Philippine cellular telecommunications industry to stop growing or reducing the rate of its growth, could materially harm our business, results of operations, financial condition and prospects.

Our results of operations have been, and may continue to be, adversely affected by competition in, and the introduction of new services, which could put additional pressures on the traditional international and national long distance services.

The international long distance business has historically been one of our major sources of revenue. However, due to competition, the steep decline in international settlement rates that are paid to us by foreign telecommunications carriers for termination of international calls on our network, and the growing popularity of the so-called “over-the-top” service providers that offer social networking, instant messaging and VoIP services, revenues generated from our international long distance business have declined in recent years.

Revenues from international long distance services could continue to decline in the future for a variety of reasons, such as:

increases in competition from other domestic and international telecommunications providers;

advances in technology;

the growing popularity of alternative providers offering “over-the-top” services like social networking, instant messaging, internet telephony, also known as VoIP services; or

alternative providers of broadband capacity.

The continued high cellular penetration in the Philippines and the prevalence of SMS have negatively impacted our national long distance business in recent years. Moreover, net settlement payments between PLDT and other foreign telecommunications carriers for origination and termination of international call traffic between the Philippines and other countries, which have been our predominant source of foreign currency revenues, have been declining in recent years. A continued decline in our foreign currency revenues could increase our exposure to risks from any possible future declines in the value of the Philippine peso against the U.S. dollar. As a result, we cannot assure you that we will be able to adequately increase our other revenues to make up for any adverse impact of a further decline in our net settlement payments. We cannot assure you that we can generate new revenue streams to fully offset the declines in our traditional fixed line long distance businesses, thus, our revenues and profitability could be materially reduced and our growth and prospects could suffer.

Our business is significantly affected by governmental laws and regulations, including regulations in respect of our franchises, rates and taxes, and laws relating to anti-competitive practices and monopoly.

We operate our business under franchises, each of which is subject to amendment, termination or repeal by the Philippine Congress. Additionally, PLDT operates pursuant to various provisional authorities and CPCNs, which have been granted by the NTC and will expire between now and 2028. Some of PLDT’s CPCNs and provisional authorities have already expired. However, PLDT filed applications for extension of these CPCNs and provisional authorities prior to their respective expiration dates and is therefore entitled to continue to conduct its business under its existing CPCNs and provisional authorities pending the NTC’s decisions on these applications. Because PLDT filed the applications for extension on a timely basis, we expect that these applications will be granted. However, we cannot assure you that the NTC will grant these applications. Smart also operates its cellular, international long distance, national long distance and global mobile personal communications via satellite services as well as international private leased circuits pursuant to CPCNs, which will expire upon the expiration of its franchise. Smart’s franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise was granted. DMPI’s CPCN to operate and maintain a nationwide CMTS is for a period coterminous with the life of its existing franchise which is valid until December 11, 2027, 25 years after the date of its issuance.

The NTC also regulates the rates we are permitted to charge for services that have not yet been deregulated, such as local exchange services. We cannot assure you that the NTC will not impose additional obligations on us that could lead to the revocation of our licenses if not adhered to and/or to the reduction in our total revenues or profitability. In addition, the NTC could adopt changes to the regulations or implement additional guidelines governing our interconnection with other telecommunications companies or the rates and terms upon which we provide services to our customers. The occurrence of any of these charges could materially reduce our revenues and profitability.

The PLDT Group is also subject to a number of national and local taxes. We cannot assure you that the PLDT Group will not be subject to new, increased and/or additional taxes and that the PLDT Group would be able to impose or pass on additional charges or fees on its customers to compensate for the imposition of such taxes. HB No. 701 proposes to require all telecommunication companies to secure business permits and licenses from the Local Government Unit where their respective cell sites are located. If this bill, or any similar bills, are enacted into law, such legislation could materially reduce our profitability and have a material adverse effect on our results of operations and financial condition. We cannot assure you that the PLDT Group will be able to impose additional charges or fees on its customers to compensate for the imposition of such taxes or charges, or for the loss of fees and/or charges.

Moreover, as one of the leading telecommunications service providers in the Philippines for fixed line, cellular and broadband services, we are subject to laws and regulations relating to anti-competitive practices and anti-monopoly. For example, Section 700 of NTC Memorandum Circular No. 8-9-95 requires us to seek the approval of the NTC with respect to rates of non-deregulated services in order to ensure that a healthy competitive environment is fostered within the industry. Also, Article II, Section 4 (g) of Republic Act, or R.A., No. 7925 makes it the policy of the government to pursue a fair and reasonable interconnection of authorized public network operators and other providers of telecommunications services in order to achieve a viable, efficient, reliable and universal telecommunications services. The executive branch of the government has also exhibited strong interest in enforcing anti-competitive and anti-monopolistic measures with the signing by the President of the Philippines of Executive Order, or E.O., No. 45 on June 9, 2011. E.O. No. 45 designated the Department of Justice, or the DOJ, as the Competition Authority and established the Office for Competition under it, to among others, investigate violations of competition laws and prosecute violators thereof. The DOJ’s Department Circular No. 11 implementing E.O. No. 45 took effect on March 1, 2013. While our business practices have not in the past been found to have violated any laws and regulations related to anti-competition and anti-monopoly, we cannot assure you that the relevant governmental regulators will not, in the future, find our business practices to have an anti-competitive effect on the Philippines telecommunications industry, nor can we assure you that we will not be found to have violated the relevant laws and regulations relating to anti-competition and anti-monopoly in the future. For example, prior to the acquisition of the Digitel Group, there were four major LECs (PLDT, Digitel, Innove Communications, Inc. and Bayan) and three cellular service providers (Smart, DMPI and Globe) in the Philippines. On October 26, 2011, we completed the acquisition of the Digitel Group, the operator ofSun Cellular, one of the two other major cellular service providers in the Philippines. As a result of the acquisition, the number of LECs and cellular service providers in the Philippines was reduced to three and two, respectively, leaving Globe as our sole major competitor in the cellular service market. In order to mitigate the apparent anti-competitive effect of the acquisition, we agreed, as part of the NTC’s decision to grant its consent for the acquisition, to divest ourselves of the frequency spectrum and associated licenses held by CURE, one of Smart’s subsidiaries. Any future expansion in our services, particularly in our cellular services, could subject us to additional conditions in the granting of our provisional authorities by the NTC and to increased regulatory scrutiny, which could harm our business.

reputation and business, and which could have a material adverse effect on our growth and prospects. In addition, the occurrence of any such event could impose substantial costs or cause interruptions or considerable delays in the provision, development or expansion of our services. Delay or failure to receive any required franchises, licenses or regulatory approvals could result in the suspension of our services or abandonment of any planned expansions, thereby affecting our business, results of operations, financial condition and prospects.

The NTC may implement proposed changes in existing regulations and introduce new regulations, which may result in increased competition and/or changes in rates, each of which could have a material adverse effect on our revenues and profitability.

The NTC may regulate the rates and manner in which we operate and charge our customers.

On July 23, 2009 the NTC issued Memorandum Circular No. 05-07-2009 mandating cellular operators, including Smart and DMPI, to bill subscribers on a maximum six-second per pulse basis instead of the previous per minute basis. The NTC granted Smart and DMPI the provisional authority to charge new rates for the CMTS service and also directed Smart and DMPI to implement a six-second per pulse billing scheme on December 5, 2009. The implementation of this billing scheme is now pending with the Philippine Supreme Court after Smart and DMPI filed their petitions for review of the decision of the Court of Appeals on March 15, 2012 and March 12, 2012, respectively.

On October 24, 2011, the NTC issued Memorandum Circular No. 02-10-2011 directing the reduction of interconnection charges for SMS between two separate networks from Php0.35 to Php0.15 per SMS. The NTC has interpreted this circular to require a reduction in SMS charges charged to end users. Therefore, it initiated administrative cases against the mobile operators for the latter’s failure to implement reduced SMS charges.

The NTC may call on carriers, other industry players and the public in general to public hearings with respect to certain proposed regulations affecting the industry in general or solicit comments from said parties with respect to consultative documents issued by the NTC on major industry issues, like the August 2006 significant market power, or SMP, obligations, which were revived again during the pendency of PLDT’s acquisition of the Digitel Group in 2011. Under the said consultative documents, for example, certain obligations are proposed to be imposed on carriers with SMP by using a roadmap which consists of the following critical processes: (1) defining markets to be used as basis for regulatory intervention; (2) determining if one or several operators in the defined markets have the degree of market power that merit regulatory intervention; (3) identifying appropriate SMP obligations to achieve policy objectives; and (4) determining conditions that justify withdrawal of regulation.

On July 15, 2011, the NTC issued Memorandum Circular No. 7-7-2011 which required broadband service providers to specify the minimum broadband/internet connection speed and service reliability and the service rates in advertisements, flyers, brochures and service agreements. The said Memorandum Circular also set the minimum service reliability of broadband service to 80%.

On December 19, 2011, the NTC issued a Decision in NTC ADM Case 2009-048 which lowered the interconnection charge to/from LEC and to/from CMTS to Php2.50 per minute, from Php4.00 per minute for LEC to CMTS and Php3.00 per minute from CMTS to LEC, making it in parity with each other. PLDT and Smart individually filed on February 1, 2012 and January 20, 2012, respectively, their separate Motions for Reconsideration, which the NTC denied. The parties appealed to the Court of Appeals, reiterating among others, that the NTC erred in ruling that all LECs are automatically entitled to a cross-subsidy; that the NTC decision violates PLDT and Smart’s right to due process; and that the NTC decision violates the Constitutional proscription against non-impairment of contracts. PLDT and Smart’s petitions remain pending with the Court of Appeals. In the meantime, the PAPTELCO has filed a motion for the execution of the NTC decision before the NTC, which remains pending.

A summary of the existing material regulations on our business is set forth in Item 4. “Information on the Company – Material Effects of Regulation on our Business”. Due to the regulatory power of the NTC, as described above, we cannot assure you that the NTC will not impose changes to the current regulatory framework in the future, which could lead to increased competition or negatively affect the rates we can charge for our services. Any of these events could have a material adverse effect on our business, results of operations and prospects.

The franchise of Smart and DMPI may be revoked due to their failure to conduct a public offering of their shares.

In order to diversify the ownership base of public utilities, the Public Telecommunications Policy Act of the Philippines, or R.A. 7925, requires a telecommunications entity with regulated types of services to make a public offering through the stock exchanges, representing at least 30% of its aggregate common shares within a period of five years from: (a) the date the law first became effective; or (b) the entity’s first start of commercial operations, whichever date is later. As of the latest practicable date, Smart and DMPI have yet to conduct a public offering of their shares. Consequently, the Philippine Congress may revoke the franchise of Smart and DMPI for their failure to comply with the requirement under R.A. 7925 to conduct a public offering of their shares. Aquo warrantocase may also be filed against Smart and DMPI by the Office of the Solicitor General of the Philippines for the revocation of the respective franchises of Smart and DMPI on the ground of violation of R.A. 7925.

Although the position taken by Smart and DMPI is that such provision is merely directory and that the policy underlying the requirement for telecommunication entities to conduct a public offering should be deemed to have been achieved when PLDT acquired a 100% equity interest in Smart in 2000 and Digitel in 2011, which is now majority-owned by PLDT, and which in turn owns a 100% equity interest in DMPI, since PLDT was then and continues to be a publicly listed company, there can be no assurance that the Philippine Congress will agree with such position. In September 2004, Senate Bill No. 1675 was filed seeking to declare that a telecommunications entity shall be deemed to have complied with the requirement of making a public offering of its shares if two-thirds of its outstanding voting stock are owned and controlled directly or indirectly, by a listed company. However, we cannot assure you that such bill will be enacted or that the Philippine Congress will not revoke the franchise of Smart and DMPI or the Office of Solicitor General of the Philippines will not initiate aquo warranto proceeding against Smart and DMPI for the revocation of their respective franchises for failure to comply with the provision under R.A. 7925 to conduct a public offering of shares, the occurrence of any of which could have a material adverse effect on our business, results of operations, financial condition and prospects.

If we fail to effect the divestment of CURE in accordance with the terms of, or in a manner contemplated under the NTC’s approval of our acquisition of the Digitel Group, the NTC may revoke its approval of any relevant franchises, licenses or permits held by Smart, any of which could significantly disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects.

As part of the NTC’s decision to grant its consent to our acquisition of the Digitel Group, we agreed to divest ourselves of the frequency spectrum and associated franchises, licenses and permits held by CURE. Under the terms of the order issued by the NTC on October 26, 2011, (i) CURE must sell itsRed Mobile business to Smart; and (ii) Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, certain frequency spectrum and related permits.

In compliance with the commitments in the divestment plan, CURE completed the sale and transfer of itsRed Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, CURE’s only remaining assets as at June 30, 2012 were its congressional franchise, the 10 MHz of 3G frequency in the 2100 band and related permits.

In a letter dated September 10, 2012, Smart informed the NTC that the minimum Cost Recovery Amount, or CRA, to enable the PLDT Group to recover its investment in CURE, includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through an auction sale of CURE’s shares of stock to the winning bidder and submitted CURE’s audited financial statements as at June 30, 2012 to the NTC. In a letter dated January 21, 2013, the NTC referred the computation of the CRA to the commissioners of the NTC. Smart sent a reply agreeing to the proposal and is awaiting advice from the NTC on the bidding and auction of the 3G license of CURE.

As at December 31, 2013, CURE is still waiting for NTC’s advice on how to proceed with the planned divestment.

SeeNote 2 – Summary of Significant Accounting Policies – Divestment of CURE to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

We cannot assure you that we will be able to effect the divestment of CURE within the time or in a manner contemplated under the order issued by the NTC. If we fail to effect the divestment of CURE in accordance with the terms of, or in a manner contemplated under the NTC’s approval of our acquisition of the Digitel Group, the NTC may revoke its approval or any relevant franchises, licenses or permits held by Smart, any of which could significantly disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects.

Rapid changes and advancements in telecommunications technology may adversely affect the economics of our existing businesses and the value of our assets, increase our required capital expenditures and create new competition.

The global telecommunications sectorindustry has been characterized by rapid technological changes.changes and advancements, and the Philippine market is not an exception. We cannot assure you that these developments will not result in competition from providers of new telecommunications services or the need to make substantial capital expenditures to upgradetransform our facilities.existing network infrastructure. Furthermore, the NTC has issued to Smart and our competitors licenses covering 3G cellular services, andin respect of which we have made significant investments in the roll out of these services.investments. We are also continuing to upgrade our fixed linefixed-line network to a next generation, all-IP network, and rolling out aexpand our wireless broadband network in order to expandenhance our capability to provide broadband services. We have begun upgradingservices, as well as upgrade and modernizingmodernize our wireless cellular network in order to achieve greater operating and cost-efficiencies. However, these projects require and will continue to require significant capital expenditures over the next few years.

In addition, the rapid development of new technologies, new services and products, and new business models has begun to eliminate the distinctions between traditional, local, long distance, wireless, cable and internet communication services and bring new competitors into the telecommunications market. As a result, we now face growingare subject to increasing competition not just from other telcos but also from the so-called “over-the-top”providers offering telecommunications services using alternative technologies. These new competitors, which include internet service providers, that offer social networking, instantmobile device manufacturers and mobile software and application developers, compete against us in both voice and data businesses by offering mobile internet access, alternative voice and messaging services, Over The Top, or OTT, products, and VoIP services.

other mobile services and are gaining an increasing share of the telecommunications industry value chain.

Our future success will depend in part, on our ability to anticipate orand adapt to suchthese changes and to offer services that meet customer demands of our customers on a competitive and timely basis. WeHowever, we may be unable to obtain new technologies on a timely basis or on satisfactory terms or implement them in an appropriate or effective manner. Future development of new technologies, services or standards could require significant changes to our business model, could negatively impact our existing businesses and couldor necessitate new acquisitions or investments. In addition, new products and services may be expensive to develop and may result in increased competition. Such strategic initiatives and technological developments could require us to incur significant additional capital expenditures. WeAs a result, we cannot assure you that we would be able to adopt or successfully implement new technologies. In addition, theretechnologies, nor can be no assurance on how emerging andwe assure you that future technological changes will not adversely affect our operations or the competitiveness of our services.

We may not be successful in our acquisitions of, and investments in, other companies and businesses, and may therefore be unable to fully implement our business strategy.

As growth slows or reverses in our traditional fixed line and cellular businesses, and as part of our strategy to grow other business segments, we make acquisitions and investments in companies or businesses to enter new businesses or defend our existing markets. Since 2010, we have made a number of significant acquisitions, investments in businesses within and ancillary to the telecommunications sector, including an investment in shares of Meralco through PCEV in 2010, the acquisition of the Digitel Group in 2011 and an investment in PDRs of MediaQuest, the ultimate parent company of Cignal TV, a direct-to-home pay-TV business, in 2012 and other smaller investments in various businesses. The success of our acquisitions and investments depends on a number of factors, such as:

our ability to identify suitable opportunities for investment or acquisition;

our ability to reach an acquisition or investment agreement on terms that are satisfactory to us or at all;

the extent to which we are able to exercise control over the acquired company;

the economic, business or other strategic objectives and goals of the acquired company compared to those of the PLDT Group, as well as the ability to execute the identified strategies in order to generate fair returns on the investment; and

our ability to successfully integrate the acquired company or business with our existing businesses.

Any of our contemplated acquisitions and investments may not be consummated due to reasons or factors beyond our control. Even if any contemplated acquisitions and investments are consummated, we may not be able to realize any or all of the anticipated benefits of such acquisitions and investments and we cannot assure you that the consummation of such acquisitions and investments will not result in losses for us for a prolonged period of time. Moreover, if we are unsuccessful in our contemplated acquisitions and investments, we may not be able to fully implement our business strategy to maintain or grow certain of our businesses and our results of operations and financial position could be materially and adversely affected.

If we are unable to install and maintain telecommunications facilities and equipment in a timely manner, we may not be able to maintain our current market share and the quality of our services, which could have a material adverse effect on our results of operations and financial condition.

Our business requires the regular installation of new, and the maintenance of existing, telecommunications transmission and other facilities and equipment, which are being undertaken. The installation and maintenance of these facilities and equipment are subject to a number of risks and uncertainties, such as:

shortages of equipment, materials and labor;

work stoppages and labor disputes;

interruptions resulting from inclement weather and other natural disasters;

unforeseen engineering, environmental and geological problems; and

unanticipated cost increases.

Any of these factors could give rise to delays or cost overruns in the installation of new facilities or equipment or could prevent us from properly maintaining the equipment used in our networks, and hence could affect our ability to maintain existing services and roll-out new services, for example, which could have a material adverse effect on our results of operations and financial condition.

Our businesses depend on the reliability of our network infrastructure which is subject to physical, technological and other risks.

We depend, to a significant degree, on an uninterrupted operation of our network to provide our services. We also depend on robust information technology systems to enable us to conduct our operations. The development and operation of telecommunications networks are subject to physical, technological and other risks, which may cause interruptions in service or reduced capacity for customers. These risks include but are not limited to:

physical damage;

power loss;

capacity limitation;

cable theft;

software defects; and

breaches of security by computer viruses, break-ins or otherwise.

The occurrence of any of the above events could have a material adverse effect on our ability to provide services to customers. While we are undertaking initiatives to prevent and/or mitigate the occurrence of these events, including the preparation of a disaster recovery plan that aims to allow restoration of service at the earliest possible time from occurrence of an incident, there can be no assurance that these events will not occur or that our initiatives will be effective should such events occur.

We are exposed to cyber security risks, which may include the gaining of unauthorized access, data corruption, possible theft of intellectual property, stakeholder information or other sensitive data, the occurrence of any of which could significantly disrupt our business and have a material adverse effect on our results of operations and stakeholder confidence.

Over the years, our continued dependence on the latest digital technologies in conducting our operations exposes our business to risks associated with cyber incidents. These cyber incidents may range from unintentional events to deliberate attacks. These may be carried out by parties with the intention to bring about something as simple as plain disruption of our operations to something as destructive as breaching our network security. To date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, have had a material impact on our operations or financial condition. However, some network attacks can cause our telecommunications services or internal systems to be unavailable. Others, such as SPAM, can disrupt our business communication. Some network attacks, such as brute force attack, may even cause the disclosure of confidential information.

In order to minimize our exposure to cyber security risks, we have deployed a multi-layered defense mechanism from the network to the host and up to the application level, so that if one defensive measure fails, there are other defensive measures which will continue to provide protection. However, we cannot assure you that any of such defenses will be effective against or neutralize the effects of any cyber incidents resulting from unintentional cyber security breaches or deliberate attacks on our network infrastructure or computer systems, nor can we assure you that our business will not be significantly disrupted in the event of such security breach or attack. If we fail to timely and effectively prevent the occurrence of any such cyber security incidents, or fail to promptly rectify any such incidents, our business could be significantly disrupted, our results of operations could be materially and adversely affected, and the confidence of our stakeholders could be lost.

Our businesses require substantial capital investment, which we may not be able to finance.

Our projects under development and the continued maintenance and improvement of our networks and services, including Smart’s projects, networks, platforms and

services, require substantial ongoing capital investment. Our consolidated capital expenditures totaled Php28,838 million, Php36,396 million and Php31,207 million for the years ended December 31, 2013, 2012 and 2011, respectively. We currently estimate that our consolidated capital expenditures in 2014 will be approximately Php32 billion, of which approximately Php17 billion is estimated to be spent by Smart, approximately Php12 billion is estimated to be spent by PLDT; approximately Php1 billion is estimated to be spent by DMPI; and the balance represents the estimated capital spending of our other subsidiaries. Smart’s capital spending is currently anticipated to focus on building out its coverage, leveraging the capabilities of its newly modernized network, expanding its transmission network, increasing international bandwidth capacity and expanding its 3G and wireless broadband networks in order to enhance its data transmission capabilities. Smart also contemplates enhancing its network and platforms infrastructure and systems to support solutions deployment, campaign analytics and service delivery to enable customized and targeted services. PLDT’s capital spending is currently intended principally to continue the build-out and upgrade of its broadband data and IP infrastructures, its fixed line data services and to maintain its network. DMPI’s capital spending is currently anticipated to further expand its mainstream services and integration with the PLDT Group network of its core and transmission network to increase penetration, mainly in provincial areas to achieve greater business benefits from a closely synergized environment.

Future strategic initiatives could require us to incur significant additional capital expenditures. We may be required to finance a portion of our future capital expenditures from external financing sources, which have not yet been fully arranged. There can be no assurance that financing for new projects will be available on terms acceptable to us, or at all. If we cannot complete our development programs or other capital projects on time due to our failure to obtain the required financing, our growth, results of operations, financial condition and prospects could be materially and adversely affected.

Our debt instruments contain restrictive covenants which require us to maintain certain financial tests and our indebtedness could impair our ability to fulfill our financial obligations and service our other debt.

As at December 31, 2013 and 2012, our consolidated long-term debt amounted to Php104,090 million, or US$2,344 million, and Php115,792 million, or US$2,819 million, respectively, and accounted for a 0.8 times debt to equity ratio, calculated as long-term debt on a consolidated basis, divided by total equity attributable to equity holders of PLDT. Our existing debt instruments contain covenants which, among other things, require PLDT to maintain certain financial ratios and other financial tests, calculated on the basis of PFRS at relevant measurement dates, principally at the end of each quarter period. For a description of some of these covenants, seeNote 20 – Interest-bearing Financial Liabilities to the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Our indebtedness and the requirements and limitations imposed by our debt covenants could have important consequences. For example, we may be required to dedicate a substantial portion of our cash flow to payments on our indebtedness, which could reduce the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements.

The principal factors that can negatively affect our ability to comply with the financial ratios and other financial tests under our debt instruments are depreciation of the Philippine peso relative to the U.S. dollar, poor operating performance of PLDT and our consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries, and increases in our interest expenses. Of our total consolidated debts, 57% and 45% were denominated in foreign currencies as at December 31, 2013 and 2012, respectively, principally in U.S. dollars, many of these financial ratios and other tests are expected to be negatively affected by any weakening of the Philippine peso.

We have maintained compliance with all of our financial ratios and covenants, as measured under PFRS, under our loan agreements and other debt instruments. However, if negative factors adversely affect our financial ratios, we may be unable to maintain compliance with these ratios and covenants. Inability to comply with the financial ratios and covenants could result in a declaration of default and acceleration of maturities of some or all of our indebtedness.

If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. An inability to effect these measures successfully could result in a declaration of default and an acceleration of maturities of some or all of our indebtedness, which could have a material adverse effect on our business, results of operations and financial condition.

Our results of operations and our financial position could be materially and adversely affected if the Philippine peso significantly fluctuates against the U.S. dollar.

A substantial portion of our indebtedness, related interest expenses, our capital expenditures and a portion of our expenses are denominated in U.S. dollars and other foreign currencies, while a significant portionwhereas most of our revenues isare denominated in Philippine pesos. Approximately 43%As at December 31, 2013, 57% of our total consolidated indebtedness was foreign currency-denominated, of which approximately 30%48% of our total consolidated indebtedness was unhedged asunhedged. As at December 31, 2010.

2012, approximately 45% of our total consolidated indebtedness was foreign currency-denominated, of which approximately 38% of our total consolidated indebtedness was unhedged.

A depreciation of the Philippine peso against the U.S. dollar increaseswould increase the amount of our U.S. dollar-denominated debt obligations and operating and interest expenses in Philippine peso terms. In the event that the Philippine peso depreciates against the U.S. dollar, we may be unable to generate enough funds through operations and other means to offset the resulting increase in our obligations in Philippine peso terms. Moreover, a depreciation of the Philippine peso against the U.S. dollar may result in our recognition of significant foreign exchange losses, which could materially and adversely affect our results of operations. A depreciation of the Philippine peso could also cause us not to be in compliance with the financial covenants imposed on us by our lenders under certain loan agreements and other indebtedness. Further, fluctuations in the Philippine peso value and of interest rates impact the mark-to-market gains/losses of certain of our financial debt instruments, which were designated as non-hedged items.

     On the other hand, approximately 26%

Approximately, 21% of PLDT Group’sour consolidated service revenues are eitherwere denominated in U.S. dollars and/or arewere linked to the U.S. dollar.dollar for the year ended December 31, 2013 as compared with approximately 21% and 30% for the years ended December 31, 2012 and 2011, respectively. Approximately 11% of our consolidated expense were denominated in U.S. dollars and/or linked to the U.S. dollar for the year ended December 31, 2013 as compared with approximately 12% and 17% for the years ended December 31, 2012 and 2011, respectively. In this respect, anthe appreciation of the weighted

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average exchange rate of the Philippine peso against the U.S. dollar decreasesdecreased our revenues and expenses, and consequently, affects our cash flow from operations in Philippine peso terms.

The Philippine peso has been subject to significant fluctuations in recent years. From 20032009 to 2004, the Philippine peso depreciated from a high of Php52.02 on May 8, 2003 to a low of Php56.44 on October 14, 2004. While2012, the Philippine peso appreciated in 2005, 2006 and 2007, it depreciated in 2008from Php47.26 as at January 5, 2009 to a low of Php49.98 and closed at Php47.65Php41.08 as at December 31, 2008. In 2009, the Philippine peso again appreciated to2012 and a high of Php45.95 and closed at Php46.43Php40.86 on December 5, 2012, only to depreciate by approximately 8% to Php44.40 as at December 31, 2009 and continued to appreciate to a high of Php42.52 and closed at Php43.81 as at December 31, 2010.2013. We cannot assure you that the Philippine peso will not depreciate further and be subjectedsubject to significant fluctuations going forward, due to a range of factors, including:

political and economic developments affecting the Philippines, including the level of remittances from overseas Filipino workers;

global economic and financial trends;
the volatility of regional currencies, particularly the Japanese yen;
any interest rate increases by the Federal Reserve Bank of the United States; and
changes in the value of the U.S. dollar relative to the Philippine peso resulting from either higher demand for U.S. dollars by both banks and domestic businesses to service their maturing U.S. dollar obligations; and foreign exchange traders including banks covering their short U.S. dollar positions, among others.
Our results of operations have been, and may continue to be, adversely affected by competition in, and the emergence of new services, which may put additional pressures on, our traditional international and national long distance services.
     The international long distance business has historically been one of our major sources of revenue. However, due to competition and the steep decline in international settlement rates that are paid to us by foreign telecommunications carriers for termination of international calls on our network, revenues generated from our international long distance business have declined in recent years.
     We anticipate that revenues from international long distance services will continue to decline in the future, primarily due to:
increases in competition from other domestic and international telecommunications providers;
advances in technology;
alternative providers offering internet telephony, also known as VoIP, and broadband capacity; and
unauthorized traffic termination and bypass routings by international simple resale operators.
     The continued increase in cellular penetration in the Philippines, including the level of remittances from overseas Filipino workers;

global economic and financial trends;

the prevalencevolatility of SMS have negatively impacted our national long distance business in recent years. Although revenues from dataregional currencies, particularly the Japanese yen;

any interest rate increases by the Federal Reserve Bank of the United States; and other services have grown significantly in recent years compensating for declines in our traditional fixed line businesses, there can be no assurance that we will be able to generate new revenue streams that may fully offset the declines in our traditional fixed line long distance businesses or that these declines will not materially and adversely affect our financial performance.

     Net settlement payments between PLDT and other foreign telecommunications carriers for origination and termination of international call traffic between the Philippines and other countries have been our predominant source of foreign currency revenues. However, in U.S. dollar terms, these payments have been declining in recent years. A continued decline in our foreign currency revenues could increase our exposure to risks from possible future declines

changes in the value of the U.S. dollar relative to Philippine peso, against theresulting from events such as higher demand for U.S. dollar. We cannot assure you that we will be abledollars by both banks and domestic businesses to adequately increase our other revenues to make up for any adverse impact of a further decline in our net settlement payments.

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We may not be successful in our acquisitions of and investments in other companies and businesses, and may therefore be unable to fully implement our business strategy.
     As part of our growth strategy, we may, from time to time, make acquisitions and investments in companies or businesses. The success of our acquisitions and investments depends on a number of factors, including:
our ability to identify suitable opportunities for investment or acquisition;
our ability to reach an acquisition or investment agreement on terms that are satisfactory to us or at all;
the extent to which we are able to exercise control over the acquired company;
the economic, business or other strategic objectives and goals of the acquired company compared to those of the PLDT Group, as well as the ability to execute the identified strategies in order to generate fair returns on the investment; and
our ability to successfully integrate the acquired company or business with our existing businesses.
     Any of our contemplated acquisitions and investments may not be consummated due to reasons or factors beyond our control. Even if any contemplated acquisitions and investments are consummated, we may not be able to realize any or all of the anticipated benefits of such acquisitions and investments and we cannot assure you that the consummation of such acquisitions and investments will not result in losses for us for a prolonged period of time. Moreover, if we are unsuccessful in our contemplated acquisitions and investments, we may not be able to fully implement our business strategy to maintain or grow certain of our businesses and our results of operations and financial position could be materially and adversely affected.
Our debt instruments contain restrictive covenants which require us to maintain certain financial tests and our indebtedness could impair our ability to fulfill our financial obligations, service our other debt and carry out new financings.
     As at December 31, 2010, we had consolidated total indebtedness of Php89,646 million (US$2,046 million), and a consolidated ratio of debt to equity (total debt on a consolidated basis divided by total equity attributable to equity holders of PLDT) of 0.9x. Our existing debt instruments contain covenants which, among other things, require PLDT to maintain certain financial ratios, and other financial tests, calculated on the basis of PFRS on a consolidated and non-consolidated basis, and limit our ability to incur indebtedness. For a description of some of these covenants, see Item 5. ���Operating and Financial Review and Prospects — Liquidity and Capital Resources — Financing Activities — Debt Covenants.”
     Our indebtedness and the requirements and limitations imposed by our debt covenants could have important consequences. For example, they could require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements.
     The principal factors that can negatively affect our ability to comply with the financial ratios and other financial tests under our debt instruments are depreciation of the Philippine peso relative to thetheir maturing U.S. dollar poor operating performance of PLDT and our consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries, and increases in our interest expenses. Approximately 43% of our total consolidated debts were denominated in foreign currencies as at December 31, 2010, principally in U.S. dollars, many of these financial ratios and other tests are expected to be negatively affected by any weakening of the Philippine peso.
     We have maintained compliance with all of our financial ratios and covenants, as measured under PFRS, under our loan agreements and other debt instruments. However, if negative factors adversely affect our financial ratios, we may be unable to maintain compliance with these ratios and covenants or be unable to incur new debt. Inability to comply with the financial ratios and covenants or raise new financing could result in a declaration of default and acceleration of maturities of some or all of our indebtedness. The terms of some of our debt instruments have no minimum amount for cross-default.
     If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. An inability to effect theseforeign exchange traders including banks covering their short U.S. dollar positions, among others.

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measures successfully could result in a declaration of default and an acceleration of maturities of some or all of our indebtedness.
Our subsidiaries could be limited in their ability to pay dividends to us due to internal cash requirements and their creditors having superior claims over their assets and cash flows, which could materially and adversely affect our financial condition.

A majority of our total revenues and cash flow from operations is derived from our subsidiaries, particularly Smart. Smart has significant internal cash requirements for debt service, capital expenditures and operating expenses and as a result, may be financially unable to pay any dividends to PLDT. Although Smart has been making dividend payments to PLDT regularly since December 2002, there can be no assurance that PLDT will continue to receive these dividends or other distributions, or otherwise be able to derive liquidity from Smart or any other subsidiary or investee in the future.

Creditors of our subsidiaries willgenerally have priority claims over our subsidiaries’ assets and cash flows. We and our creditors will effectively be subordinated to the existing and future indebtedness and other liabilities, including trade payables, of our subsidiaries, except that we may be recognized as a creditor with respect to loans we have made to subsidiaries. If we are recognized as a creditor of a subsidiary, our claim will still be subordinated to any indebtedness secured by assets of the subsidiary and any indebtedness of the subsidiary otherwise deemed seniorsuperior to the indebtedness we hold.

We may have difficulty meeting our debt payment obligations if we do not continue to receive cash dividends from our subsidiaries and our financial condition could be materially and adversely affected as a result.

Our businesses require substantial capital investment, which we may not be able to finance.
     Our projects under development and the continued maintenance and improvement of our networks and services, including Smart’s projects, networks, platforms and services, require substantial ongoing capital investment. Our consolidated capital expenditures totaled Php28,766 million and Php28,069 million in 2010 and 2009, respectively. Our 2011 budget for consolidated capital expenditures is approximately Php34.4 billion, of which approximately Php13.5 billion is budgeted to be spent by PLDT and approximately Php19.5 billion is budgeted to be spent by Smart; the balance represents the budgeted capital spending of our other subsidiaries. PLDT’s capital spending is intended principally to finance the continued build-out and upgrade of its broadband data and IP infrastructures and for its fixed line data services and the maintenance of its network. Smart’s capital spending is focused on expanding and upgrading its transmission network from the backbone up to last mile facilities to meet anticipated increased demand for cellular and broadband services in a highly-competitive playing field, including improvement of quality and subscriber experience, expansion of capacity and its accelerated network modernization program in order to achieve a greater operational and cost efficiencies.
     Future strategic initiatives could require us to incur significant additional capital expenditures. We may be required to finance a portion of our future capital expenditures from external financing sources, which have not yet been fully arranged. There can be no assurance that financing for new projects will be available on terms acceptable to us. If we cannot complete our development programs and other capital projects, our growth, results of operations and financial condition could be materially and adversely affected.
Our businesses depend on the reliability of our network infrastructure which is subject to physical, technological and other risks.
     We depend, to a significant degree, on an uninterrupted operation of our network to provide our services. We also depend on robust information technology systems to enable us to conduct our operations. The development and operation of telecommunications networks are subject to physical, technological and other risks, which may cause interruptions in service or reduced capacity for customers. These risks include:
physical damage;
power loss;
capacity limitation;

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cable theft;
software defects; and
breaches of security by computer viruses, break-ins or otherwise.
     The occurrence of any of these risks could have a material adverse effect on our ability to provide services to customers. While we are undertaking initiatives to prevent and/or mitigate the occurrence of said risks, including the preparation of a disaster recovery plan that aims to allow restoration of service at the earliest possible time from occurrence of an incident, there can be no assurance that these risks will not occur or that our initiatives will be effective should such risks occur.
A significant number of shares of PLDT’s sharesvoting stocks (common and voting preferred stocks) are held by threefour shareholders, which may not act in the interests of other shareholders or stakeholders in PLDT.

The First Pacific Group hasand its Philippine affiliates had beneficial ownership of approximately 26% in PLDT’s outstanding common stock as at February 28, 2011.December 31, 2013, taking into account shares purchased from JGSHI pursuant to an option agreement in connection with the Digitel acquisition. This is the largest block of PLDT’s common stock that is directly or indirectly under common ownership.

Pursuant to publicly available filings made with the PSE, as at February 28, 2011,December 31, 2013, NTT Communications and NTT DoCoMoDOCOMO together beneficially owned approximately 21%20% of PLDT’s outstanding common stock. stock, taking into account shares purchased from JGSHI pursuant to an option agreement in connection with the Digitel acquisition.

On October 26, 2011, PLDT completed the acquisition of a controlling interest in Digitel from JGSHI, and certain other seller-parties. As payment for the assets acquired from JGSHI, PLDT issued approximately 27.7 million common shares. In November 2011, JGSHI sold 5.81 million and 4.56 million PLDT shares to a Philippine affiliate of First Pacific and NTT DOCOMO, respectively, pursuant to separate option agreements that JGSHI had entered into with a Philippine affiliate of First Pacific and NTT DOCOMO, respectively. As at December 31, 2013, the JG Summit Group owned approximately 8% of PLDT’s outstanding common shares.

First Pacific and certain of its affiliates, or the FP Parties, NTT Communications, NTT DoCoMoDOCOMO and PLDT entered into a Cooperation Agreement, dated January 31, 2006, pursuant to which, among other things, certain rights of NTT Communications under the Stock Purchase and Strategic Investment Agreement dated September 28, 1999, or the Strategic Agreement, and the Shareholders Agreement dated March 24, 2000, or the Shareholders Agreement, were extended to NTT DoCoMo.DOCOMO. See Item 7. “Major Shareholders and Related Party Transactions” for further details regarding the shareholdings of NTT Communications and NTT DoCoMoDOCOMO in PLDT. As a result of the Cooperation Agreement, NTT Communications and NTT DoCoMo,DOCOMO, in coordination with each other, have contractual veto rights over a number of major decisions and transactions that PLDT could make or enter into, including:

capital expenditures in excess of US$50 million;

capital expenditures in excess of US$50 million;

any investments, if the aggregate amount of all investments for the previous 12 months is greater than US$25 million in the case of all investments to any existing investees and US$100 million in the case of all investments to any new or existing investees, determined on a rolling monthly basis;

any investments in a specific investee, if the cumulative value of all investments made by us in that investee is greater than US$10 million in the case of an existing investee and US$50 million in the case of a new investee;
issuance of common stock or stock that is convertible into common stock;
new business activities other than those we currently engage in; and
merger or consolidation.
     Moreover, as a resultrolling monthly basis;

any investments in a specific investee, if the cumulative value of all investments made by us in that investee is greater than US$10 million in the Shareholders Agreement,case of an existing investee and US$50 million in the Cooperation Agreementcase of a new investee;

issuance of common stock or stock that is convertible into common stock;

new business activities other than those we currently engage in; and their respective stockholdings, the FP Parties and/

merger or NTT Communications and/or NTT DoCoMo are able to influence our actions and corporate governance, including:consolidation.

elections of PLDT’s directors; and
approval of major corporate actions, which require the vote of common stockholders.
     Additionally, pursuant

Pursuant to amendments effected by the Cooperation Agreement to the Stock Purchase and Strategic Investment Agreement and the Shareholders Agreement, upon NTT Communications and NTT DoCoMoDOCOMO and their respective subsidiaries owning in the aggregate 20% or more of PLDT’s shares of common stock and for as long as they continue to own in the aggregate at least 17.5% of PLDT’s shares of common stock then outstanding, NTT DoCoMoDOCOMO has additional rights under the Stock Purchase and Strategic Investment Agreement and Shareholders Agreement, including that:

NTT DoCoMoDOCOMO is entitled to nominate one additional NTT DoCoMoDOCOMO nominee to the board of directors of each of PLDT and Smart;

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PLDT must consult NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees of any proposal of investment in an entity that would primarily engage in a business that would be in direct competition or substantially the same business opportunities, customer base, products or services with business carried on by NTT DOCOMO, or which NTT DOCOMO has announced publicly an intention to carry on;

PLDT must procure that Smart does not cease to carry on its business, dispose of all of its assets, issue common shares, merge or consolidate, or effect winding up or liquidation without PLDT first consulting with NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or Smart, or certain of its committees; and

PLDT must first consult with NTT DOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees for the approval of any transfer of Smart’s common capital stock by any member of the PLDT Group to any person who is not a member of the PLDT Group.

Additionally, PLDT’s shares of voting preferred stock which represents approximately 41% of total outstanding shares of voting stocks are owned by a single stockholder, BTFHI.


As a result of their respective stockholdings, the FP Parties and/or NTT Communications and/or NTT DOCOMO and/or BTFHI are able to influence our actions and corporate governance, including:

elections of PLDT’s directors; and

PLDT must consult NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or certain of its committees of any proposal of investment in an entity that would primarily engage in a business that would be in direct competition or substantially the same business opportunities, customer base, products or services with business carried on by NTT DoCoMo, or which NTT DoCoMo has announced publicly an intention to carry on;
PLDT must procure that Smart does not cease to carry on its business, dispose of all of its assets, issue common shares, merge or consolidate, or effect winding up or liquidation without PLDT first consulting with NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or Smart, or certain of its committees; and
PLDT must first consult with NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or certain of its committees for the approval of any transfer by any member of the PLDT Group of Smart common capital stock to any person who is not a member of the PLDT Group.

approval of major corporate actions, which require the vote of holders of common and voting preferred stocks.

The FP Parties and/or NTT Communications and/or NTT DoCoMoDOCOMO and/or BTFHI may exercise their respective influencevoting rights over these decisions and transactions in a manner that could be contrary to the interests of other shareholders or stakeholders in PLDT.

If a major shareholder sells its interest in PLDT, the transaction may result in an event of default under certain circumstances.
     If First Pacific Group or NTT Communications sells all or a portion of their equity interest in PLDT, under certain circumstances, such sale may give rise to an obligation for PLDT to make an offer to purchase its outstanding debt under its US$250 million 11.375% notes due 2012. As at December 31, 2010, Php6,387 million in principal amount of PLDT’s indebtedness is directly subject to a redemption upon any change in the major shareholding of PLDT or to an offer to purchase requirement. In such event, if PLDT fails to complete an offer to purchase the affected debts, all of its debt could become immediately due and payable as a result of various cross-default and acceleration provisions.
The franchise of Smart may be revoked due to its failure to conduct a public offering of its shares.
     In order to diversify the ownership base of public utilities, the Public Telecommunications Policy Act of the Philippines, Republic Act, or R.A., 7925, requires a telecommunications entity with regulated types of services to make a public offering through the stock exchanges representing at least 30% of its aggregate common shares within a period of five years from: (a) the date the law became effective; or (b) the entity’s first start of commercial operations, whichever date is later. As the timeframe has lapsed without Smart having conducted a public offering of its shares, the Philippine Congress may revoke the franchise of Smart for its failure to comply with the requirement under R.A. 7925 on the public offering of its shares. Aquo warrantocase may also be filed against Smart by the Office of the Solicitor General of the Philippines for the revocation of the franchise of Smart on the ground of violation of R.A. 7925.
     Smart maintains the position that it has not violated the provision in its franchise to make a public offering of its shares within a certain period, since it believes such provision is merely directory. Further, Smart believes that the policy underlying the requirement for telecommunications entities to conduct a public offering should be deemed to have been achieved when PLDT acquired a 100% equity interest in Smart in 2000, since PLDT was then and continues to be a publicly listed company. In September 2004, Senate Bill No. 1675 was filed seeking to declare that a telecommunications entity shall be deemed to have complied with the requirement of making a public offering of its shares if two-thirds of its outstanding voting stock are owned and controlled directly or indirectly, by a listed company. However, there can be no assurance that such bill will be enacted or that Philippine Congress will not revoke the franchise of Smart or the Office of Solicitor General of the Philippines will not initiate aquo warrantoproceeding against Smart for the revocation of its franchise for failure to comply with the provision under R.A. 7925 on the public offering of shares.
Our business is significantly affected by governmental laws and regulations, including regulations in respect of our franchises, rates and taxes.
     We operate our business under franchises, each of which is subject to amendment, termination or repeal by the Philippine Congress. Additionally, PLDT operates pursuant to various provisional authorities and CPCNs, which were granted by the NTC and will expire between now and 2028. For a description of our licenses, see Item 4.

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“Information on the Company — Licenses and Regulation.” Some of PLDT’s CPCNs and provisional authorities have already expired. However, PLDT filed applications for extension of these CPCNs and provisional authorities prior to their respective expiration dates and is therefore entitled to continue to conduct its business under its existing CPCNs and provisional authorities pending the NTC’s decisions on these extensions. Because PLDT filed the applications for extension on a timely basis, we expect that these extensions will be granted. However, we cannot assure you that the NTC will grant these extensions. Smart also operates its cellular, international long distance, national long distance and global mobile personal communications via satellite services as well as international private leased circuits pursuant to CPCNs, which will expire upon the expiration of its franchise. Smart’s franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise was granted.
     The NTC also regulates the rates we are permitted to charge for services that have not yet been deregulated, such as local exchange services. We cannot assure you that the NTC will not impose additional obligations on us that could lead to the revocation of our licenses if not adhered to and/or reduction in our total revenues or profitability. In addition, the NTC could adopt changes to the regulations governing our interconnection with other telecommunications companies or the rates and terms upon which we provide services to our customers that could have a material adverse effect on our results of operations.
     The PLDT Group is also subject to a number of national and local taxes. We cannot assure you that PLDT Group will not be subject to new and/or additional taxes and that PLDT Group would be able to impose additional charges or fees to compensate for the imposition of such taxes.
     There are bills in the 14th Philippine Congress which propose to tax telecommunications services. HB No. 1469 proposes to re-impose a 5% franchise tax on gross receipts of telephone and telegraph services in lieu of the VAT. HB No. 1560, which proposes to impose a franchise tax of 3.5% in the first year and 7% thereafter on gross receipts of telecommunications and broadcast companies, in lieu of the VAT. Other bills filed proposed to tax or regulate fees for telecommunications services. Among them, a proposed tax on mobile phone companies on all text entries to text games; a Php0.50 specific tax on each SMS to be borne by the cellular phone companies; and a 10% ad valorem tax on all cellular phone calls using 3G, a proposal to prohibit telecommunications companies from imposing fees and/or charges on text messaging between subscribers of the same telecommunications company and providing for free text messages until the prepaid load has been fully consumed.
     The Committee on Oversight of Congress also held discussions on the possibility of linking up the BIR and NTC with the telecommunications companies through an electronic “metering device,” which discussions led to a proposal to impose an additional Php0.10 tax on text messaging.
     In the Upper House, Senate Bill No. 2402 proposes to establish a Health and Education Acceleration Program Fund for special projects on educational development from the proceeds of income tax imposed on telecommunications companies at the rate of 20% of their gross receipts from short messaging service or text sent from and through their networks which would be remitted to the fund for a period of five years. This tax may not be passed on to consumers. Under the proposed bill, telecommunications companies shall no longer pay for the regular income tax on their income from these transactions during the five-year period that the special gross receipts tax on text messaging is imposed. The income tax scheme for text messaging shall revert to the regular income tax for corporations after the five-year period. Moreover, the bill proposes to allow telecommunications companies to deduct 10% of the tax remitted to the fund from their other income as ordinary business expense over a period of ten years. See Item 4. “Information on the Company — Licenses and Regulations — Material Effects of Regulation on our Business”. If any of these bills are enacted into law, such legislation could have a material adverse effect on our results of operations and financial condition. We cannot assure you that we would be able to impose additional charges or fees to compensate for the imposition of such taxes or charges, or for the loss of fees and/or charges. The 15th Philippine Congress from June 2010 to June 2013, requested Smart to attend a hearing concerning HB No. 1224 or the Corporate Social Responsibility Act Bill filed by Rep. Gloria Macapagal-Arroyo and Rep. Diosdado Macapagal-Arroyo. However, both the Upper House and Lower House have pending bills concerning Anti-Trust, Competition and the setting up of a Fair Trade Commission. The PLDT Group has submitted its position papers on both matters.

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The NTC may implement proposed changes in existing regulations and introduce new regulations, which may result in increased competition and/or changes in rates, each of which could have material adverse effects on our revenues and profitability.
     The NTC may regulate the rates and manner in which we charge the customers of our business.
     For example, on July 3, 2009, NTC issued Memorandum Circular No. 03-07-2009 promulgating an extension of expiration of prepaid loads from two months to various expiration periods ranging from three days to 120 days. Smart has been implementing the new validity period of prepaid loads since July 19, 2009.
     In addition, on July 7, 2009, the NTC issued another Memorandum Circular No. 04-07-2009, further amending the Memorandum Circular No. 03-03-2005A (Rules and Regulation on Broadcast Messaging), which prohibits content and/or information providers from initiating push messages. The Memorandum Circular No. 04-07-2009, further provides that subscribers must be the party to take the initiative with the public telecommunications entities and/or content providers to initiate any service and requires that a notification be sent to subscribers to give subscribers an option whether to continue with the availed service.
     In addition, on July 23, 2009 the NTC issued Memorandum Circular No. 05-07-2009 mandating cellular operators, including Smart, to bill subscribers on a maximum six-second pulse basis instead of the previous per minute basis. The NTC granted Smart the provisional authority to charge new rates for the CMTS service and also directed Smart to implement a six seconds per pulse billing scheme on December 5, 2009. Smart subsequently implemented the six seconds per pulse directive by billing on a six second per pulse basis, if subscribers entered additional dialing numbers as a prefix before the actual number. The NTC opposed Smart’s implementation of the six seconds per pulse directive. As at the date of this annual report, the matter is pending before the Court of Appeals and is the subject of a temporary restraining order preventing the NTC from implementing its six second per pulse billing directive.
     Furthermore, from time to time, the NTC issues consultative documents on the development of a competition policy framework for the information communications sector and related matters.
     For example, on August 24, 2006, the NTC issued a consultative document specifically focusing on its proposal to impose asymmetric regulations on carriers with significant market power, or SMP, including a discussion on its proposed roadmap for implementing such SMP obligations. On October 23, 2006, we submitted our response to such consultative paper to the NTC.
     In formulating our responses, we took into account both industry interests and the broader context of our nation’s economic development, drawing on the experience in other countries. We believe that the basis for the need for regulatory reform is unclear and the envisioned SMP regime is inappropriate for the Philippines, as the market is highly competitive and well-functioning. In addition, the imposition of asymmetric regulations on SMP would discourage capital investments in a sector on which the Philippine economy is highly dependent. We have therefore proposed that the NTC explore its full range of options available on a cost-benefit basis, taking into consideration the specific local context of the Philippine marketplace.
     Furthermore, in 2008, in connection with the NTC’s efforts to enhance competition within the telecommunications industry in the Philippines, the NTC issued Memorandum Circulars on the following:
(a)guidelines on the mandatory interconnection of backhaul networks to the cable landing station, which were issued on October 7, 2008 and became effective on October 23, 2008; and
(b)guidelines on the interconnection of LECs in local calling areas that eliminate interconnection access charges between LECs within a local calling area, which were issued on May 30, 2008 and became effective on June 17, 2008.
     In addition, on April 14, 2009, the NTC released implementing guidelines on developing reference access offers, which are statements of the prices, terms and conditions under which a telecommunications carrier proposes to provide access to its network or facilities to another such carrier or value-added service provider.

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     During the last quarter of 2010, the NTC has begun holding public hearings on a proposed Memorandum Order concerning the minimum speed of broadband internet.
     We cannot assure you that the NTC will not impose changes to the current regulatory framework, which could lead to increased competition or affect the rates we charge for our services. Any such changes could have a material adverse effect on our business, results of operations and prospects.
If we are unable to install and maintain telecommunications facilities and equipment in a timely manner, we may not be able to maintain our current market share and the quality of our services, which could have a material adverse effect on our results of operations and financial condition.
     Our business requires the regular installation of new, and the maintenance of existing, telecommunications transmission and other facilities and equipment, which are being undertaken. The installation and maintenance of these facilities and equipment are subject to risks and uncertainties relating to:
shortages of equipment, materials and labor;
work stoppages and labor disputes;
interruptions resulting from inclement weather and other natural disasters;
unforeseen engineering, environmental and geological problems; and
unanticipated cost increases.
     Any of these factors could give rise to delays or cost overruns in the installation of new facilities or equipment or could prevent us from properly maintaining the equipment used in our networks, and hence could affect our ability to maintain existing services and roll out new services, etc., which could have a material adverse effect on our results of operations and financial condition.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could adversely impact investor confidence and the market price of our common shares and ADSs.ADSs, and have a material adverse effect on our business, our reputation, financial condition and results of operations.

Effective internal controlscontrol over financial reporting areis necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we are unable to provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and results of operations could be harmed.

We are required to comply with various Philippine and U.S. laws and regulations on internal controls.control. For example, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with the Annual Report on Form 20-F for the fiscalcalendar year ended December 31, 2006, we have been required to include a report by our management on our internal control over financial reporting in our Annual Reports on Form 20-F that contains an assessment by our management ofon the effectiveness of our internal control over financial reporting. In addition, an independent registered public accounting firm must express an opinion on our internal control over financial reporting based on theirits audits.

     Internal

However, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal control over financial reporting, including our failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on our business, our reputation, financial condition and results of operations, and the market prices of our common shares and ADSs.

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ADSs could decline significantly.


We are unionized and are vulnerable to work stoppages, slowdowns or increased labour costs.

As at December 31, 2013, PLDT has three employee unions, representing in the aggregate 5,494, or 31%, of the employees of the PLDT Group. This unionized workforce could result in demands that may increase our operating expenses and adversely affect our profitability. Each of our different employee groups may require separate collective bargaining agreements. If any group of our employees and PLDT are unable to reach agreement on the terms of their collective bargaining agreement or we were to experience widespread employee dissatisfaction, we could be subject to work slowdowns or stoppages. Any of these events would be disruptive to our operations and could harm our business.

Adverse results of any pending or future litigation and/or disputes may impact PLDT’s cash flows, results of operations and financial condition.

PLDT is currently involved in several legal proceedings in the Philippines. Since 1990, PLDT and Eastern Telecommunications Philippines, Inc. (ETPI) have been engaged in legal proceedings involving a number of issues in connection with their business relationship. Accordingly, to avoid further protracted litigation and improve their business relationship, both PLDT and ETPI have agreed in April 2008 to submit their differences and issues to voluntary arbitration. Pursuant to an agreement between PLDT and ETPI, the arbitration proceedings have been suspended.

PLDT is also involved in legal proceedings with various parties regarding Philipine SEC Memorandum Circular No. 8, which was issued in response to the Gamboa Case Decision. On June 10, 2013, Jose M. Roy III as petitioner filed a petition with the Supreme Court against the Chairperson of the Philippine SEC, Teresita Herbosa, the Philippine SEC and PLDT as respondents. The petition primarily questions the constitutionality of the Philippine SEC Guidelines in determining the nationality of a Philippine company pursuant to the Gamboa Case Decision and Section 11, Article XII of the Constitution. PLDT, through counsels, filed its Comment on the Petition on September 5, 2013, challenging the petition. The resolution of the Jose M. Roy III Petition remains pending with the Supreme Court.

In January 2012, Smart and DMPI filed answers to a December 2011 show cause order by the NTC which required an explanation of why SMS retail rates were not lowered after the NTC issued Memorandum Circular No. 02-10-2011, which mandates that interconnection charge for SMS between two separate networks shall not be higher than Php0.15 per SMS. The outcome of the proceedings remain pending.

We are currently involved in various legal proceedings and tax assessments. Our estimate of the probable costs for the resolution of these claims have been developed in consultation with our counsel handling the defense in these matters and is based upon our analysis of potential results. Our future financial performance could be materially affected by changes in our estimates or effectiveness of our strategies relating to these proceedings and assessments.

For more information on PLDT’s legal proceedings, see Item 8. “Financial Information – Legal Proceedings.” While PLDT believes the positions it has taken in these cases are legally valid but the final results of these cases may prove to be different from its expectations. In addition, there is no assurance that PLDT will not be involved in future litigation or other disputes, the results of which may materially and adversely impact its business and financial conditions.

Risks Relating to the Philippines

PLDT’s business may be adversely affected by political or social or economic instability in the Philippines.

The Philippines is subject to political, social and economic volatility that, directly or indirectly, could have a material adverse impact on our ability to sustain our business and growth.

     For example, the

The Philippines has from time to time experienced severe political and social instability, including acts of political violence. On December 12, 2011, the Philippine House of Representatives initiated impeachment proceedings against Renato Corona, then Chief Justice of the Supreme Court of the Philippines. The impeachment complaint accused Corona of improperly issuing decisions that favored former President Arroyo, as well as failure to disclose certain properties, in violation of rules applicable to all public employees and officials. The trial of Chief Justice Corona began in January 2012. On May 29, 2012, the impeachment court found Corona guilty of failing to disclose to the public his statement of assets, liabilities and net worth and removed Corona from his position as Chief Justice of the Supreme Court of the Philippines.

In 2013, a major Philippine newspaper exposed a scam relating to the diversion and misuse of the Priority Development Assistance Fund, or PDAF, by some members of Congress through a pseudo-development organization headed by Janet Lim Napoles. As a result of this exposé, a number of street protests and violent civil unrest,investigations, including coup d’etat attempts againstone in the former President Arroyo’s administration.

     Furthermore, the Philippine economy has experienced periods of slow growth and significant depreciationSenate of the Philippine peso. The Philippine government is also facing a fiscal deficit thatPhilippines, have been launched to determine the extent of the diversion of the PDAF and the government is aiming to eliminate inofficials and the near future by implementingprivate individuals responsible for the misappropriation of public funds. Cases of plunder and malversation of public funds are now pending against Janet Lim Napoles, three senators, a number of economic reforms.
     The fiscal deficit positionfew members of the Philippine governmentHouse of Representatives, and the ongoing political uncertainty have resulted in increased concerns about the political and economic stability of the country. other private individuals.

We cannot assure you that the political environment in the Philippines will be stable or that the current or any future government will adopt economic policies that are conducive to sustained economic growth or which do not impact adversely on the current regulatory environment for the telecommunications and other companies.

If foreign exchange controls were to be imposed, our ability to meet our foreign currency payment obligations could be adversely affected.

The Philippine government has, in the past, instituted restrictions on the conversion of the Philippine peso into foreign currencies and the use of foreign exchange received by Philippine companies to pay foreign currency-denominated obligations. The Monetary Board of the BSP has statutory authority, with the approval of the President of the Philippines, during a foreign exchange crisis or in times of national emergency, to:

suspend temporarily or restrict sales of foreign exchange;

suspend temporarily or restrict sales of foreign exchange;
require licensing of foreign exchange transactions; or
require the delivery of foreign exchange to the BSP or its designee banks.

require licensing of foreign exchange transactions; or

require the delivery of foreign exchange to the BSP or its designee banks.

We cannot assure you that foreign exchange controls will not be imposed in the future. If imposed, these restrictions could materially and adversely affect our ability to obtain foreign currency to service our foreign currency obligations.

The occurrence of natural catastrophes could materially disrupt our operations.

The Philippines has experienced a number of major natural catastrophes over the years, including typhoons, floods, volcanic eruptions, earthquakes and earthquakestyphoons, a recent example of which was Typhoon Yolanda (international name “Haiyan”) in November 2013, the world’s strongest typhoon to date, which caused massive destruction in the Visayan provinces, that may materially disrupt and adversely affect our business operations. The frequency and severity of the occurrence of natural catastrophes and challenges may be further exacerbated through effects of the ongoing global climate change. We cannot assure you that we are fully capable to deal withof addressing the impact of these situations andoccurrences or that the insurance coverage we maintain will fully compensate us for all the damages and economic losses resulting from these catastrophes.

Item 4. InformationContinued terrorist activities in the Philippines could destabilize the country, adversely affecting our business environment.

Certain islands in the Philippines have been subject to a number of terrorist attacks and violent crimes in recent years. An increase in the number of terrorist attacks or violent crimes, or the occurrence of a large-scale terrorist attack, in the Philippines could negatively affect the Philippine economy and, therefore, our business, financial position and financial performance. The Philippine army has been in conflict with the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network and has been identified as being responsible for kidnapping and terrorist activities in the Philippines. There has been a series of bombings in the Philippines, mainly in southern cities. Although no one has claimed responsibility for these attacks, Philippine military officials have stated that the attacks appeared to be the work of the Abu Sayyaf organization. There have also been a number of violent crimes in the Philippines, including an isolated incident in August 2010 involving the hijacking of a tour bus carrying 25 Hong Kong tourists in Manila, which resulted in the deaths of eight tourists and prompted the Hong Kong government to declare a travel warning on the CompanyPhilippines. On January 25, 2011, five people were killed and 13 were injured when an improvised mortar bomb triggered by a mobile phone exploded on a bus in Makati City. In August 2013, a series of bombings occurred in the cities of Cagayan de Oro and Cotabato City, and in other areas in Maguindanao and North Cotabato provinces, all located in Mindanao. Early in September 2013, an alleged splinter group of the Moro National Liberation Front took hostages in Zamboanga and initiated an armed aggression versus the Armed Forces of the Philippines. While the Zamboanga standoff situation is improving, the conflict is not yet fully resolved.

There can be no assurance that the Philippines will not be subject to further, or an increased number of, acts of terrorism or violent crimes in the future. Terrorist attacks and violent crimes have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Philippine economy and, in turn, our business, financial position and financial performance. Furthermore, there can be no assurance that the Philippines will not suffer a large-scale terrorist attack which could impact the Philippine economy for a significant period of time.

Territorial disputes with China and a number of Southeast Asian countries may disrupt the Philippine economy and business environment.

The Philippines, China and several Southeast Asian nations have been engaged in a series of long-standing territorial disputes over certain islands in the West Philippine Sea, also known as the South China Sea. The Philippines maintains that its claim over the disputed territories is supported by recognized principles of international law consistent with the United Nations Convention on the Law of the Sea (“UNCLOS”). The Philippines made several efforts during the course of 2011 and 2012 to establish a framework for resolving these disputes, calling for multilateral talks to delineate territorial rights and establish a framework for resolving disputes.

Despite efforts to reach a compromise, a dispute arose between the Philippines and China over a group of small islands and reefs known as the Scarborough Shoal. In April and May 2012, the Philippines and China accused each other of deploying vessels to the shoal in an attempt to take control of the area, and both sides unilaterally imposed fishing bans at the shoal during later that year. These actions threatened to disrupt trade and other ties between the two countries, including a temporary ban by China on Philippine banana imports, as well as a temporary suspension of tours to the Philippines by Chinese travel agencies. Since July 2012, Chinese vessels have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the Philippines has continued to protest China’s presence there. In January 2013, the Philippines instituted arbitration proceedings under UNCLOS and sent notice to the Chinese embassy in Manila. China has rejected and returned the notice sent by the Philippines to initiate arbitral proceedings. In May 2013, the Philippine Coast Guard shot and killed a Taiwanese fisherman in an area of the South China Sea claimed as an exclusive economic zone by both countries.

In September 2013, the Permanent Court of Arbitration in The Hague, Netherlands issued rules of procedure and initial timetable for the arbitration in which it will act as a registry of the proceedings. Should these territorial disputes continue or escalate further, the Philippines and its economy may be disrupted and our operations could be adversely affected as a result. In particular, further disputes between the Philippines and China may lead both countries to impose trade restrictions on the other’s imports. Any such impact from these disputes could adversely affect the Philippine economy, and materially and adversely affect our business, financial position and financial performance.

As a foreign private issuer, we follow certain home country corporate governance practices which may afford less protection to holders of our ADSs.

As a foreign private issuer incorporated in the Philippines and listed on the PSE, we are permitted under applicable NYSE rules to follow certain home country corporate governance practices. The corporate governance practice and requirements in the Philippines do not require us to have a majority of our board of directors to be independent, and do not require us to hold regular executive sessions where only independent directors shall be present. Further, the criteria for independence of directors and audit committee members applicable in the Philippines differ from those applicable under the NYSE rules. Such Philippine home country corporate governance practices may afford less protection to holders of our ADSs.

The credit ratings of the Philippines may restrict the access to capital of Philippine companies, including PLDT.

Historically, the Philippines’ sovereign debt has been rated non-investment grade by international credit rating agencies. Although the Philippines’ long-term foreign currency-denominated debt was recently upgraded by Fitch and Standard & Poor’s to the investment-grade rating of BBB-, and by Moody’s to the investment-grade rating of Baa3, the continued relatively low sovereign ratings of the Government will directly and adversely affect companies domiciled in the Philippines as international credit rating agencies issue credit ratings by reference to that of the sovereign. No assurance can be given that Fitch, Moody’s, Standard & Poor’s or any other international credit rating agency will not downgrade the credit ratings of the Government in the future and, therefore, Philippine companies, including PLDT. Any such downgrade could have an adverse impact on the liquidity in the Philippine financial markets, the ability of the Government and Philippine companies, including PLDT, to raise additional financing, and the interest rates and other commercial terms at which such additional financing is available.

Risks Relating to Our Securities

PLDT is required to comply with foreign ownership restriction under the Philippine Constitution. At present, PLDT believes it has complied with such restriction through the issuance of 150 million shares of its Voting Preferred Stock to BTFHI. There can be no assurance that further interpretations of such law will not require further actions to procure compliance with foreign ownership restriction under the Philippine Constitution.

Section 11, Article XII of the 1987 Philippine Constitution provides that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least 60% of whose capital is owned by such citizens. On June 28, 2011, the Philippine Supreme Court promulgated a decision in the case ofWilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et. al. (G.R. No. 176579) (the “Gamboa Case”), where it has ruled that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors and thus, in the case of PLDT, only to voting common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).

On October 16, 2012, BTFHI subscribed for 150 million newly issued shares of Voting Preferred Stock of PLDT. As a result of the issuance of the shares of Voting Preferred Stock, PLDT’s foreign ownership decreased from 58.4% of outstanding common stock as at October 15, 2012 to 34.5% of outstanding voting stocks (common stock and Voting Preferred Stock) as at October 16, 2012.

On May 30, 2013, the Philippine SEC issued SEC Memorandum Circular No. 8, or the Philippine SEC Guidelines, which provides under Section 2 thereof: “All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of compliance therewith, the required percentage of Filipino ownership shall be applied to both: (a) the total number of outstanding shares of stock entitled to vote in the election of directors; and (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.” PLDT believes it was, and continues to be, compliant with the Philippine SEC Guidelines. As at end of December 31, 2013, PLDT’s foreign ownership was 31.53% of its outstanding shares entitled to vote (Common and Voting Preferred Shares), and 17.33% of its total outstanding capital stock. Thus, we believe that as of the date of this report, PLDT is in compliance with the requirement of Section 11, Article XII of the 1987 Constitution. SeeNote 26 – Provisions and Contingencies – Matters Relating to the Gamboa Case and the recent Jose M. Roy III Petitionto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

However, we cannot assure you that the Philippine SEC or the relevant authorities in the Philippines will view shares of Voting Preferred Stock issued to BTFHI as shares of stock owned by Filipinos entitled to vote in the election of directors for the purpose of determining whether PLDT is in compliance with the 60% to 40% Filipino-alien equity requirement as provided under the Philippine Constitution. As a result, PLDT may be subject to certain sanctions imposed by the Philippine SEC, which may have a material and adverse impact on our reputation, business, financial position and prospects.

Item 4.Information on the Company

Overview

We are the leading telecommunications service provider in the Philippines. Through our three principal business segments, wireless, fixed line and information and communications technology,others, we offer the largest and most diversified range of telecommunications services across the Philippines’ most extensive fiber optic backbone and wireless, fixed line and satellite networks.

     PLDT is

We are the leading fixed line service provider in the Philippines with over 60%accounting for approximately 69% of the total reported fixed line subscribers nationwide as at December 31, 2010.2013. Smart is the leading cellular service provider in the country, and together with the other PLDT Group cellular service provider, DMPI, account for approximately 52%66% of total reported cellular subscribers nationwide as at December 31, 2010.2013. We have interests in the information and communications technology sectors,BPO sector, including the operation of ourVitroTM data center, customer relationship management and knowledge processing solutions business. In December 2012, our Board of Directors authorized the sale of our BPO business and internetour BPO segment was classified as a discontinued operation. The sale was completed in April 2013 and online gaming services.

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US$40 million was reinvested in the BPO business. See Item 4. “Information on the Company – Sale of BPO Segment” for further discussion.


Our common shares are listed and traded on the PSE and our ADSs, evidenced by ADRs, are listed and traded on the NYSE in the United States.

We had a market capitalization of approximately Php476,976Php576,005 million, or US$10,88712,973 million, as at December 31, 2010,2013, representing one of the largest market capitalizations among Philippine-listed companies. For the year ended December 31, 2010, weWe had total revenues, including revenues from discontinued operations, of Php144,459Php168,331 million, or US$3,2973,791 million, and net income attributable to equity holders of PLDT of Php40,217Php35,420 million, or US$918 million.

798 million for the year ended December 31, 2013.

We operate under the jurisdiction of the NTC, which jurisdiction extends, among other things, to approving major services that we offer and rates that we can charge.

Historical Background and Development

PLDT was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928 as Philippine Long Distance Telephone Company, following the merger of four telephone companies under common U.S. ownership. Under its Amended Articles of Incorporation, PLDT’s corporate term is currently limited through 2028. In 1967, effective control of PLDT was sold by the General Telephone and Electronics Corporation, then a major shareholder since PLDT’s incorporation, to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company, which at that time was the second largest telephone company in the Philippines. In 1998, the First Pacific Group acquired a significant interest in PLDT. On March 24, 2000, NTT Communications, through its wholly-owned subsidiary NTTC-UK, became PLDT’s strategic partner with approximately 15% economic and voting interest in the issued and outstanding common stock of PLDT at that time. Simultaneous with NTT Communications’ investment in PLDT, the latter acquired 100% of Smart. On March 14, 2006, NTT DoCoMoDOCOMO acquired from NTT Communications approximately 7% of PLDT’s then outstanding common shares held by NTT Communications with NTT Communications retaining ownership of approximately 7% of PLDT’s common shares. Since March 14, 2006, NTT DoCoMoDOCOMO has made additional purchases of shares of PLDT, and together with NTT Communications beneficially owned approximately 21%20% of PLDT’s outstanding common stock as at February 28, 2011.December 31, 2013. NTT Communications and NTT DoCoMoDOCOMO are subsidiaries of NTT Holding Company. On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliate of First Pacific, completed the acquisition of an approximately 46% interest in PTIC, a shareholder of PLDT. This investment in PTIC represented an attributable interest of approximately 6% of the then outstanding common shares of PLDT and thereby raised the First Pacific Group’sGroup and its Philippine affiliates’ beneficial ownership to approximately 28% of PLDT’s shares ofoutstanding common stock as at that date. Since then, First Pacific’s beneficial ownership interest in PLDT decreased by approximately 2%, mainly due to the holders of Exchangeable Notes, which were issued in 2005 by a subsidiary of First Pacific and exchangeable into PLDT shares owned by First Pacific Group, who fully exchanged their notes. First Pacific Group and its Philippine affiliates had beneficial ownership of approximately 26% inof PLDT’s outstanding common stock as at February 28, 2011.December 31, 2013. See Item 7. “Major Shareholders and Related Party Transactions” for further discussion.

PLDT’s original franchise was granted in 1928 and was last amended in 1991, extending its effectiveness until 2028 and broadening PLDT’s franchise permitting PLDT to provide virtually every type of telecommunications service. PLDT’s franchise covers the business of providing basic and enhanced telecommunications services in and between the provinces, cities and municipalities in the Philippines and between the Philippines and other countries and territories including mobile, cellular, wired or wireless telecommunications system, fiber optics, multi-channel transmission distribution systems and their VAS such as but not limited to transmission of voice, data, facsimile, control signals, audio and video, information services bureau and all other telecommunications systems technologies, as are at present available or can be made available through technical advances or innovations in the future. Our subsidiaries, including Smart and DMPI, also maintain their own franchises with a different range of services and periods of legal effectiveness for their licenses.

On October 26, 2011, PLDT completed the acquisition of a controlling interest in Digitel from JGSHI and certain other seller-parties. As payment for the assets acquired from JGSHI, PLDT issued approximately 27.7 million common shares. In November 2011, JGSHI sold 5.81 million and 4.56 million PLDT shares to a Philippine affiliate of First Pacific and NTT DOCOMO, respectively, pursuant to separate option agreements that JGSHI had entered into with a Philippine affiliate of First Pacific and NTT DOCOMO, respectively. According to public filings, as at February 28, 2014, the JG Summit Group, First Pacific Group and its Philippine affiliates and NTT Group (NTT DOCOMO, together with NTT Communications) owned approximately 8%, 26% and 20% of PLDT’s outstanding common shares, respectively. See Item 4. “Information on the Company – Development Activities (2011-2013) – PLDT’s Acquisition of a Controlling Interest in Digitel from JGSHI”.

On October 16, 2012, BTF Holdings, Inc., or BTFHI, a wholly-owned company of the Board of Trustees for the Account of the Beneficial Trust Fund, or BTF, created pursuant to PLDT’s benefit plan, subscribed for 150 million newly issued shares of Voting Preferred Stock of PLDT, or Voting Preferred Shares, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement dated October 15, 2012 between BTFHI and PLDT. As a result of the issuance of Voting Preferred Shares, the voting power of the NTT Group (NTT DOCOMO and NTT Communications), First Pacific Group and its Philippine affiliates, and JG Summit Group was reduced to 12%, 15% and 5%, respectively, as at December 31, 2013.

Our principal executive offices are located at the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines and our telephone number is +(632) 816-8534. Our website address iswww.pldt.com.phwww.pldt.com. The contents of our website are not a part of this annual report.

Recent Developments

PLDT’sIPCDSI’s Acquisition of Digitel

     On March 29, 2011, the boards of PLDT and JG Summit Holdings,Rack I.T. Data Center, Inc., or JGS,Rack IT

On January 28, 2014, IPCDSI entered into a Sale and Purchase Agreement to acquire 100% ownership in Rack IT for an indicative purchase price of Php170 million subject to certain pre-closing price adjustments. Rack IT was incorporated to engage in the business of providing data center services, encompassing all the information technology and facility-related components or activities that support the operations of a data center. As at the date of this report, Rack IT is still at the pre-operating phase and construction of its data center facility, which is located in Sucat, Parañaque, is still ongoing.

PLDT issued Php15 billion Fixed Rate Retail Bonds

On January 23, 2014, the Philippine SEC approved the acquisitionregistration and approved the offering of our peso fixed-rate retail bonds with a base offer size of Php10 billion, with an option for oversubscription of up to Php5 billion.

The bonds were offered to the public on January 24 to 30, 2014. PLDT exercised its oversubscription option and increased the total issue size from Php10 billion to Php15 billion. Of the total issue size, Php12.4 billion was allocated to the seven-year tranche due 2021, or the Fixed Rate Bonds due 2021, with a coupon rate of 5.2250% per annum, and the remaining Php2.6 billion to the ten-year tranche due 2024, or the Fixed Rate Bonds due 2024, with a coupon rate of 5.2813% per annum.

On February 6, 2014, the Fixed Rate Bonds Due 2021 and Fixed Rate Bonds Due 2024 were issued and listed for trading on the Philippine Dealing Exchange. These bonds may be sold and traded only in the Philippines.

Proceeds from the issuance of these bonds will be used to finance capital expenditure and/or refinance existing obligations, the proceeds of which were utilized for service improvements and expansion.

PLDT’s inaugural bonds were rated by PLDT of JGS’sCredit Rating and certain other seller-parties’ ownership interest in Digitel, comprising of: (i) 3,277,135,882 common shares in Digitel, representing approximately 51.55% equity stake; (ii) zero-coupon convertible bonds issued by Digitel and its subsidiaries to JGS and its subsidiaries, which PLDT expects to be convertible into

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approximately 18.6 billion shares of Digitel by June 30, 2011; and (iii) intercompany advances of Php34.1 billion made by JGS and its subsidiaries and certain of such seller-parties to Digitel and its subsidiaries (the “Assets”). Digitel is the 100% owner of Digitel MobileInvestors Service Philippines, Inc., or DMPI, which is engaged inCRISP, as “AAA” with a stable outlook, the mobile telecommunications businesshighest on the scale.

Automated Fare Collection System Project Awarded to Ayala-First Pacific Consortium, or AF Consortium

In 2013, Smart, along with other companies of conglomerates Metro Pacific Investments Corporation, or MPIC, and owns the brandSun Cellular.

     PLDT agreed to pay JGS and certain other seller-parties Php69.2 billion, which will be settled by the issuance of one new PLDT share for every Php2,500 consideration payableAyala Corporation, or Ayala, bid for the Assets. In order to aid the board of PLDT in discharging their fiduciary duties, PLDT will engage an independent financial advisor to review the transaction and render a fairness opinion on the transaction and the consideration payable by PLDT.
     PLDT further expects to announce its intention to conduct a tender offer for all the remaining Digitel shares, approximately 48.45%Automated Fare Collection System, or AFCS, project of the issued common stockDepartment of Digitel, heldTransportation and Communication, or DOTC, and Light Rail Transit Authority. The project aims to upgrade the Light Rail Transit 1 and 2, and Metro Rail Transit ticketing systems by thesubstantially speeding up payments, reducing queuing time and facilitating efficient passenger transfer to other remaining shareholdersrail lines. The AF Consortium led by MPIC and Ayala, composed of Digitel. Under the contemplated tender offer, it is anticipated that PLDT will offer to purchase the remaining Digitel shares at the price of Php1.60 per Digitel share, which will be paid in the form of either PLDT shares issued at Php2,500 per share or cash, at the option of the Digitel shareholder. The contemplated tender offer price will be equivalent to the fully diluted price per share of Digitel, assuming full conversion of the convertible bonds. Should all remaining shareholders of Digitel accept the tender offer by PLDT, PLDT will issue a total of 29.65 million new PLDT sharesAC Infrastructure Holdings Corporation, BPI Card Finance Corporation, and Globe Telecom, Inc., for the acquisitionAyala Group, and MPIC, Meralco Financial Services Corporation, and Smart for the MPIC Group bidded for the AFCS Project and on January 30, 2014, received a Notice of the Assets and of the remaining Digitel shares held by the other remaining shareholders of Digitel. The 29.65 million new PLDT shares will potentially represent approximately 13.7% of the enlarged issued share capital of PLDT on a fully diluted basis.
     Assuming full acceptance by the minorities of Digitel, the total transaction consideration would be Php74.1 billion.
     The completion of the acquisition will be subject to the procurement of regulatory approvals, including: (i) the approval by the NTC of the sale or transfer of JGS and the other seller-parties’ Digitel shares representing more than 40% of Digitel’s issued and outstanding common stocks; (ii) the approval by the Philippine SEC of the valuation of the Assets; (iii) the approval by the PSE of the block sale of the Digitel shares; (iv) the confirmation by the Philippine SEC that the issuance of the PLDT common shares to JGS and the other seller-parties is exemptAward from the registration requirement ofDOTC declaring it as the SRC; and (v) all other necessary approvals under applicable laws and regulations; and the approval by the stockholders of PLDT for the issuance of the PLDT common shares as payment for the purchase price of the Assets. In addition, the sale of the Digitel shares is subject to the consent of certain creditors of Digitel and DMPI.
     This transaction is intended to be completed by the end of the second quarter of 2011.
Reorganization of ePLDT
     On July 7, 2010, our Board of Directors approved the reorganization of the ePLDT Group into two business groups: (i) the ICT business group, which provides data center services, internet and online gaming services and business solutions and applications; and (ii) the BPO business group which covers customer relationship management or call center operations under SPi CRM; and content solutions, medical billing and coding and medical transcription services under SPi.winning bidder. The BPO business groupAF Consortium will be eventually transferred to PLDT, subject to the finalization of the terms and conditions thereof and the execution of relevant agreements.
     Although our Board of Directors already approved the reorganization of ePLDT into two business groups, ICT business group and BPO business group, the actual reorganization has not yet been consummated as at March 29, 2011 and therefore, asform a corporation with Smart taking 20% ownership.

Business Overview

As at December 31, 2010, the2013, our chief operating decision maker, continues to viewor our Management Committee, views our business activities using thein three business units: Wireless, Fixed Line and ICT.

Capital ExpendituresOthers. On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which was completed in April 2013. Consequently, as at December 31, 2012, the BPO segment was classified as discontinued operations and Divestitures
     See Item 5. “Operatinga disposal group held-for-sale. The BPO segment met the criteria of an asset to be classified as held-for-sale as at December 31, 2012. The results of operations of our BPO business for the four months ended April 30, 2013 and Financial Review and Prospects — Liquidity and Capital Resources” for information concerning our principal capital expenditures for the years ended December 31, 2008, 20092012 and 20102011 were presented as discontinued operations. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations and those planned for 2011. We have not undertaken any significant divestituresNote 3 – Management’s Use of Accounting Judgments, Estimates and currently do not have any significant divestitures in progress.

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Organization
     PLDT Group includes the following significant subsidiaries as at March 29, 2011:
             
  Place of   Percentage of Ownership
Name of Subsidiary Incorporation Principal Business Activity Direct Indirect
 
Wireless
            
Smart: Philippines Cellular mobile services  100.0    
Smart Broadband, Inc., or SBI, and Subsidiaries, or SBI Group Philippines Internet broadband distribution     100.0 
Primeworld Digital Systems, Inc., or PDSI Philippines Internet broadband distribution services     100.0 
I-Contacts Corporation, or I-Contacts Philippines Call center services     100.0 
Wolfpac Mobile, Inc., or Wolfpac Philippines Mobile applications development and services     100.0 
Wireless Card, Inc., or WCI Philippines Promotion of the sale and/or patronage of debit and/or charge cards     100.0 
Smarthub, Inc., or SHI Philippines Software development and sale of maintenance and support services     100.0 
Smart Money Holdings Corporation, or SMHC: Cayman Islands Investment company     100.0 
Smart Money, Inc., or SMI Cayman Islands Mobile commerce solutions marketing     100.0 
Telecoms Solutions, Inc., or TSI Mauritius Mobile commerce platforms     100.0 
Far East Capital Limited and Subsidiary Cayman Islands Cost effective offshore financing and risk management activities for Smart     100.0 
PH Communications Holdings Corporation, or PHC Philippines Investment company     100.0 
Francom Holdings, Inc., or FHI: Philippines Investment company     100.0 
Connectivity Unlimited Resource Enterprise, Inc., or CURE Philippines Cellular mobile services     100.0 
Chikka Holdings Limited, or Chikka, and Subsidiaries, or Chikka Group British Virgin Islands Mobile applications development and services; Content provider     100.0 
PLDT Communications and Energy Ventures, Inc., or PCEV, (formerly known as Pilipino Telephone Corporation, or Piltel) and Subsidiaries, or PCEV Group Philippines Investment company     99.5 
SmartConnect Holdings Pte. Ltd., or SCH: Singapore Investment company     100.0 
SmartConnect Global Pte. Ltd., or SGP Singapore International trade of satellites and Global System for Mobile Communication, or GSM, enabled global telecommunications     100.0 
3rd Brand Pte. Ltd., or 3rd Brand Singapore Solutions and systems integration services     85.0 
Blue Ocean Wireless, or BOW Isle of Man Delivery of GSM communication capability for the maritime sector     51.0 
Telesat, Inc., or Telesat* Philippines Satellite communications services  100.0    
ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines Philippines Satellite information and messaging services  88.5   11.5 
Mabuhay Satellite Corporation, or Mabuhay Satellite* Philippines Satellite communications services  67.0    
             
Fixed Line
            
PLDT Clark Telecom, Inc., or ClarkTel Philippines Telecommunications services  100.0    
PLDT Subic Telecom, Inc., or SubicTel Philippines Telecommunications services  100.0    
PLDT Global Corporation, or PLDT Global, and Subsidiaries, or PLDT Global Group British Virgin Islands Telecommunications services  100.0    
Smart-NTT Multimedia, Inc., or SNMI* Philippines Data and network services  100.0    
PLDT-Philcom, Inc. (formerly known as Philcom Corporation), or Philcom, and Subsidiaries, or Philcom Group Philippines Telecommunications services  100.0    
PLDT-Maratel, Inc., or Maratel Philippines Telecommunications services  97.8    
Bonifacio Communications Corporation, or BCC Philippines Telecommunications, infrastructure and related value-added services, or VAS  75.0    
             
Information and Communications Technology, or ICT
            
ePLDT, Inc., or ePLDT: Philippines Information and communications infrastructure for Internet-based services, e-commerce, customer relationship management and IT-related services  100.0    
SPi Technologies, Inc., or SPi, and Subsidiaries, or SPi Group Philippines Knowledge processing solutions     100.0 
SPi CRM Inc., or SPi CRM (formerly ePLDT Ventus, Inc.)** Philippines Customer relationship management     100.0 
Parlance Systems, Inc., or Parlance** Philippines Customer relationship management      
Vocativ Systems, Inc., or Vocativ** Philippines Customer relationship management      
Infocom Technologies, Inc., or Infocom Philippines Internet services     99.6 
BayanTrade, Inc. (formerly BayanTrade Dotcom, Inc.), or BayanTrade, and Subsidiaries, or BayanTrade Group Philippines Internet-based purchasing, IT consulting and professional services     93.5 
Digital Paradise, Inc., or Digital Paradise Philippines Internet services     75.0 
Level Up!, Inc., or Level Up! Philippines Publisher of online games     57.5 
netGames, Inc., or netGames Philippines Customer relationship management     57.5 
*Assumptions – Discontinued OperationsCeased commercial operations
**On April 8, 2010, SPi CRM, Parlance and Vocativ were merged, with SPi CRM as the surviving entity.
Development Activities (2008-2010)
     On April 25, 2008, Smart acquired the entire issued and outstanding capital stock of PHC and FHI, which collectively own 100% equity interest of CURE for a total consideration of Php420 million. PHC and FHI own 97% and 3%, respectively, of CURE.
     On January 3, 2009, PLDT, PremierGlobal Resources and PGCI executed a Share Assignment Agreement wherein PGCI sold to PLDT the rights, title and interest in all of the outstanding common shares of Philcom’s common stock for a cash consideration of Php75 million.

25


     ePLDT’s equity interest in BayanTrade increased from 10.8% as at December 31, 2008 to 93.5% as at December 31, 2009 as a result of 34.3% equity interest acquired by ePLDT under the rights offering that was completed on January 20, 2009 for a cash consideration of Php28 million and acquisition of an additional 48.4% equity interest on April 15, 2009 for cash consideration of Php39 million.
     On March 12, 2009, FPHC, FPUC, and Lopez, Inc., (collectively, the Lopez Group) and PLDT entered into an investment and cooperation agreement under which: (a) PLDT acquired, through PCEV as its designated affiliate, 223 million shares in Meralco representing approximately 20% of Meralco’s outstanding shares of common stock, for a cash consideration of Php20,070 million, or Php90 per share; and (b) PLDT and the Lopez Group agreed on certain governance matters, including the right of PLDT or its assignee to nominate certain senior management officers and members of the board of directors and board committees of Meralco. On March 1, 2010, PCEV, MPIC and Beacon entered into an Omnibus Agreement, or OA. Beacon was organized with the sole purpose of holding the respective shareholdings of PCEV and MPIC in Meralco. PCEV and MPIC are Philippine affiliates of First Pacific and both held equity shares in Meralco.
     Under the OA, each of PCEV and MPIC agreed to subscribe to 1,156.5 million common shares of Beacon, for a subscription price of Php20 per share or a total of Php23,130 million. PCEV and MPIC also agreed that their resulting equity after such subscriptions and PCEV’s purchase from MPIC of 12,500 Beacon common shares will be 50% each of the outstanding common shares of Beacon. On March 30, 2010, the investment in Meralco by PCEV was reduced by Php15,083 million, the proportionate carrying amount of 154.2 million Meralco shares sold and transferred to Beacon.
     MPIC additionally agreed to subscribe to 801 million shares of Beacon’s preferred stock entitled to liquidation preference and yearly cumulative dividends at the rate of 7% for a subscription price of Php10 per share or a total of Php8,010 million. The subscriptions of MPIC and PCEV were completed on March 30, 2010 and May 12, 2010, respectively, by the offset in full (in the case of PCEV) and in part (in the case of MPIC) of the subscription price by the transfer of Meralco shares held by PCEV and MPIC consisting of 154.2 million and 163.6 million Meralco shares, or the Transferred Shares, from PCEV and MPIC, respectively. The transfer of legal title to the Meralco shares was implemented through a special block sale/cross sale in the PSE.
     Beacon also exercised a Call Option on March 30, 2010 to acquire 74.7 million Meralco shares from FPHC in consideration of the payment by Beacon of Php22,410 million in cash on March 30, 2010.
     On March 30, 2010, Beacon entered into an Php18,000 million ten-year corporate notes facility with First Metro Investment Corporation and PNB Capital and Investment Corporation as joint lead arrangers and various local financial institutions as noteholders. The proceeds of the notes facility partially financed the acquisition of Meralco shares by Beacon pursuant to its exercise of the Call Option. The amount drawn under this facility amounted to Php16,200 million (Php16,027 million, net of debt issuance cost of Php173 million), the remaining undrawn balance amounted to Php1,800 million as at December 31, 2010. This facility is not guaranteed by PLDT and is not included in our consolidated debt.
     As at December 31, 2010, the carrying value of Beacon’s investment in Meralco of Php73,322 million includes: (a) consideration for the Transferred Shares from PCEV of Php23,130 million and from MPIC of Php24,540 million; (b) consideration for the Option Shares from FPHC of Php22,410 million; (c) liability for contingent consideration of Php2,373 million; (d) capitalized costs of Php942 million pursuant to an agreement between PCEV and MPIC; and (e) equity share in net earnings of Meralco of Php2,655 million less (f) dividends received of Php2,728 million from Meralco.
     As at December 31, 2010, Beacon held 393 million Meralco common shares representing approximately 35% equity interest in Meralco with market value of Php89,490 million based on a quoted price of Php228 per share. See Note 10 — Investments in Associates and Joint Ventures to the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for further information on the acquisition of Meralco shares and the transfer of PCEV’s equity interest in Meralco.
     Smart’s Board of Directors approved on June 19, 2009 a tender offer to acquire at Php8.50 per share, fully payable in cash on August 12, 2009, from PCEV’s non-controlling shareholders up to approximately 840 million shares which is approximately 7.2% of the outstanding common stock of PCEV at that time. Smart filed the Tender Offer Report with the Philippine SEC and the PSE on June 23, 2009 pursuant to Section 19 of the SRC. The tender

26

discussion.


offer commenced on July 1, 2009 and ended on July 29, 2009, with approximately 93.0% of PCEV’s non-controlling shares tendered, thereby increasing Smart’s ownership to approximately 99.5% of the outstanding common stock of PCEV. The aggregate cost for the tender offer paid by Smart to non-controlling shareholders on August 12, 2009 amounted to Php6,618 million, from which Smart recognized an excess of acquisition cost over the carrying value of non-controlling interests acquired of Php5,479 million presented as part of capital in excess of par value account under “Equity” in our consolidated statement of financial position. See Note 13 — Business Combinations and Acquisition of Non-Controlling Interests to the accompanying consolidated financial statements in Item 18 for further discussion.
     On June 30, 2009, PCEV’s stockholders approved the sale and transfer of PCEV’s cellular mobile telephone business/assets to Smart through a series of transactions, which included: (a) the assignment of PCEV’sTalk ‘N Texttrademark to Smart for a consideration of Php8,004 million; (b) the transfer of PCEV’s existingTalk ‘N Textsubscriber base to Smart in consideration of the rate of Php73 per subscriber, which is equivalent to Smart’s average acquisition cost per subscriber in 2008 for itsSmart Buddysubscribers representing Php1,213 million in the aggregate; and (c) the sale of PCEV’s GSM fixed assets to Smart at net book value. As a result, the cellular mobile telephone business has been consolidated under Smart in order to maximize revenue streams and eliminate any potential regulatory issues relating to the traffic between PCEV and Smart. The NTC approved the request for the sale and transfer of PCEV’s subscribers to Smart submitted on July 8, 2009 and the transfer of PCEV’s cellular mobile telephone business and assets to Smart completed on August 17, 2009.
     In July 2009, Smart (through its subsidiary, SCH) increased its shareholdings in BOW to approximately 1.2 million shares representing 51.0% of the total issued and outstanding shares of BOW from 381 thousand shares, or 28.3%. The cost of the additional investment in BOW amounted to US$6 million, or Php301 million, for 782 thousand shares, or US$8 per share, of which US$4 million, or Php182 million, was paid in cash and US$2 million, or Php119 million, was offset against net payables by BOW to Smart.
     PCEV’s Board of Directors approved three share buyback programs during its meetings on November 3, 2008, March 2, 2009 and August 3, 2009. For all three programs, the buyback was done through the trading facilities of the PSE via open market purchases, block trades or other modes, subject to compliance with applicable laws, rules and regulations. Number of shares approved for repurchase under the buyback programs were 58 million, 25 million and 61.5 million for the programs approved on November 3, 2008, March 2, 2009 and August 3, 2009, respectively. The program approved on November 3, 2008 was completed in January 2009 at a total cost of Php403 million, while the program approved on March 2, 2009 was completed in March 2009 at a total cost of Php188 million. The program approved on August 3, 2009 is still ongoing and will continue until the number of shares earmarked for the program has been fully repurchased or until such time as PCEV’s Board of Directors determines otherwise. The most recent share buyback program was undertaken to accommodate minority shareholders who may not have had the opportunity to participate in the tender offer of Smart due to various constraints. The maximum price under this program is Php8.50 per share. As at December 31, 2010, approximately 3.6 million shares at a cost of Php29.8 million have been repurchased under the third buyback program. Cumulative shares repurchased under the share buyback programs totaled approximately 86.6 million and 85.8 million at an aggregate cost of Php621 million and Php614 million as at December 31, 2010 and 2009, respectively, which reduced the amount of non-controlling interests by the same amount.
     On August 31, 2009, SPi (through SPi-America, a wholly-owned U.S. subsidiary of SPi) signed a Stock Purchase Agreement with Laguna Medical, a California Corporation, and its various sellers, to purchase 80% of the issued and outstanding common shares of Laguna Medical for a cash consideration of US$6.6 million, or Php313 million. Simultaneous with the agreement to acquire the 80% equity interest of Laguna Medical, SPi signed a Put-Call Agreement with Laguna Medical LLC, a Delaware Corporation, in respect of the remaining 20% of the outstanding common stock of Laguna Medical held by Laguna Medical LLC. Under said Put-Call Agreement, commencing on July 1, 2011, Laguna Medical LLC granted SPi the exclusive right to purchase the remaining Laguna Medical shares (call right) while SPi granted Laguna Medical LLC the exclusive right to sell the remaining Laguna Medical shares (put right) to SPi. Based on our evaluation of the mandatory Put-Call option, SPi has present access to the economic benefits associated with the ownership interest in Laguna Medical, hence, control over the 20% interest has already been in the possession of SPi since August 31, 2009. As a result, the effective ownership interest of Laguna Medical acquired by SPi on August 31, 2009 was 100%. The acquisition cost for the remaining 20% of the outstanding common stock of Laguna Medical is equivalent to the base price of US$2 million plus the change in Laguna Medical EBITDA from the date of acquisition to April 30, 2011 multiplied by applicable performance factors specified in the agreement.

27


     In May and October 2009, Smart acquired an aggregate of approximately 84 million shares, representing the total issued and outstanding capital stock of PDSI, for a total consideration of Php1,569 million. The acquisition was completed on two dates: (a) the first closing took place on May 14, 2009 and involved the acquisition of approximately 34 million shares representing 40% of the issued and outstanding shares of PDSI for a consideration of Php632 million; and (b) the second closing took place on October 2, 2009 and involved the acquisition of the remaining approximately 50 million shares representing 60% of the issued and outstanding shares of PDSI for a consideration of Php937 million.
     On December 18, 2009, Smart acquired 120 thousand common shares, representing 100% of the outstanding share capital of Chikka, a mobile applications development and services company, for a total consideration of US$13.5 million, or Php629 million, of which US$12.1 million, or Php564 million, was paid in cash on December 18, 2009 and the balance of US$1.4 million, or Php65 million, was paid on September 27, 2010 upon completion of the post closing provisions. See Note 23 — Accrued Expenses and Other Current Liabilities to the accompanying consolidated financial statements in Item 18 for further discussion.
     See Note 2 — Summary of Significant Accounting Policies, Note 13 — Business Combinations and Acquisition of Non-Controlling Interests and Note 14 — Goodwill and Intangible Assets to the accompanying consolidated financial statements in Item 18 for further discussion regarding these and other acquisitions.
Wireless

We provide (1) cellular and (2) wireless broadband, satellite and other services through our wireless business, which contributed about 92%91% and 8%9% of our wireless service revenues, respectively, in 2010.2013. In previous years, rapid growth in the cellular market has resulted in a change in our revenue composition, with cellular service asbecoming our largest revenue source, surpassing our fixed line revenues in 2003.revenues. Cellular data services, which include all text messaging and text-related services ranging from ordinary textSMS to VAS, contributed significantly to our revenue increase. Our total wireless revenues accounted for 61%was 65% of our total revenues in 2013 and 66% and 61% for each of the years ended December 31, 2010, 20092012 and 2008. For each of the years ended December 31, 2010, 2009 and 2008, our2011, respectively. Our cellular service revenues accounted for 91%were 89% of our total wireless revenues.

revenues, which include service and non-service revenues in each of 2013 and 2012, and 90% in 2011.

Our cellular service, which accounted for about 92%91% of our wireless service revenues for the year ended December 31, 2010,2013, is provided through Smart and CURE. As measured by subscriber base, Smart is the leading cellular service provider in the Philippines,DMPI with 45,636,00870,045,627 total subscribers as at December 31, 2010 including 953,609 subscribers ofRed Mobile,2013 representing a combined market share of approximately 52%64%. In 2010,2013, the combined number of subscribers of Smart andRed MobileSun Cellularsubscribers increased by 4,307,367, or 10%,179,169, to 45,636,008.70,045,627. The growth was mainly due to a combination of organic subscriber growth and multiple SIM card ownership especially in the lower income segment of the Philippine wireless market. The continued popularity of multiple SIM card ownership, together with unlimited voice offers, resulted in a decrease in our average revenue per user, or ARPU, and partly due to the continuous introduction of innovative services.ownership. Cellular penetration in the Philippines reached approximately 94%108% as at December 31, 2010,2013, or approximately 2436 times the country’s fixed line penetration, although the existence of subscribers owning multiple SIM cards overstates this penetration rate to a certain extent.

     Nearly 99%

Approximately 97% and 90% of Smart’sSmart and all of Red Mobile’s cellular Sun Cellularsubscribers, respectively, as at December 31, 20102013 were prepaid service subscribers and subscriber gains in 20102013 were predominantly attributable to their respective prepaid services. The predominance of prepaid service reflects one of the distinguishing characteristics of the Philippine cellular market, allowing us to increase and broaden our subscriber base rapidly while controlling credit riskwithout handset subsidies and reducing billing and administrative costs on a per-subscriber basis.

     Our cellular subscriber growth has also been driven by text messaging. basis, as well as to control credit risk.

Text messaging continues to be extremely popular in the Philippines, particularly on the prepaid platform, as it provides a convenient and inexpensive alternative to voice and e-mail based communications. While still a significant contributor to Smart’s andRed Mobile’scellular data service volume growth in 2010, cellularCellular data service revenues decreasedincreased by Php5,543Php843 million, or 12%2%, to Php41,529Php52,258 million in 20102013 from Php47,072Php51,415 million in 2009.

2012.

Smart’s cellular network is the most extensive in the Philippines, covering substantially all of MetroMetropolitan Manila and most of the other major population centers in the Philippines. Its dual-band GSM network allows it to efficiently deploy high capacity 1800 MHz BTS in dense urban areas while its 900 MHz BTS can be much more economically deployed in potentially high growth, but less densely populated provincial areas. We have rolled out a 3G network based on a W-CDMA technology and are currently upgrading our wireless broadband facilities. With 10,316

28


20,770 cellular/mobile broadband base stations as at the end of December 2010, Smart’s31, 2013, our cellular network covers approximately 99% of all towns and municipalities in the Philippines, accountingPhilippines.

DMPI transformed its transmission backbone network from a linear architecture to a ring topology, which allows for approximately 99%greater redundancy to ensure service reliability and quality. Additionally, DMPI developed an advanced 3G network that is currently operational in various provinces nationwide. We believe DMPI has developed an

advanced network infrastructure that is highly efficient and can be easily scaled to accommodate increased subscriber base for its 2G and 3G business and increased network traffic from “unlimited” plans offered to subscribers ofSun Cellular. Smart and DMPI have defined a synergy plan whereby certain cell sites will be co-located. When the population.

plan is fully implemented, it is expected that this will generate savings in terms of capex optimization, cost efficiencies and reductions in cost duplications.

Fixed Line

We are the leading provider of fixed line telecommunications services throughout the country.country, servicing retail, corporate and small medium enterprise, or SME, clients. Our fixed line business group offers local exchange, international long distance, national long distance, data and other network and miscellaneous services. We had 1,822,1052,069,419 fixed line subscribers as at December 31, 2010,2013, an increase of 5,5645,625 from the 1,816,5412,063,794 fixed line subscribers as at December 31, 2009.2012 mainly due to higher net additions in 2013 compared with 2012. Total revenues from our fixed line accounted for 32%was 35% of our total revenues for the year ended December 31, 2013, and 34% in each of the years ended December 31, 2010, 20092012 and 2008. International long distance revenues and national2011. National long distance revenues have been declining largely due to a drop in call volumes as a result of continued popularity of alternative means of communications such as texting, e-mailing and internet telephony. Partly mitigating these declines has been the growth ofAn increase in our data and other network servicesservice revenues in recent years.years have mitigated such decline to a certain extent. Recognizing the growth potential of data and other network services, we have put considerable emphasis on the development of new packet-switched, data-capable and IP-based networks.

Our 10,050-kilometer11,200-kilometer long DFON is complemented by an extensive digital microwave backbone network operated by Smart. TheseThis microwave networks complementcomplements the higher capacity fiber optic networks and are vital in delivering reliable services to remote areas.areas not covered by fixed terrestrial transport network. Our fixed line network reaches all of the major cities and municipalities in the Philippines, with a concentration in the Metropolitan Manila area. Our network offers the country’s most extensive connections to international networks through two international gateway switching exchanges satellite systems and various regional submarine cable systems in which we have economic interests.

See “—Item 4. “Information on the Company – Infrastructure Fixed Line Network Infrastructure” for further information on our fixed line infrastructure.

InformationOthers

Other business consists primarily of PCEV, an investment holding company which has a 24.98%-interest in Meralco shares through its 50% equity interest in Beacon’s outstanding common stock and Communications Technologypreferred stock, and PGIH, which owns an 18.24% economic interest in Beta, an investment holding company of SPi Technologies and its subsidiaries, where we reinvested approximately US$40 million of the proceeds from the sale of BPO in 2013.

Other business also includes PLDT’s investments in multi-media content, including in Cignal TV, Satventures and Hastings, through its ePLDT’s investments in PDRs issued by MediaQuest. See Item 4. “Information on the Company – Development Activities (2011-2013) – Investment in PDRs of MediaQuest” for further discussion.

Capital Expenditures and Divestitures

     Through

See Item 5. “Operating and Financial Review and Prospects – Liquidity and Capital Resources” for information concerning our wholly-owned subsidiary, ePLDT, we provide broad-based integrated information and communications technology, or ICT, services focusing on infrastructure and solutionsprincipal capital expenditures for internet applications, IP-based solutions and multimedia content delivery. ePLDT’s principal activities are the operation of an internet data center under the brand nameVitro™, customer relationship management, knowledge processing solutions, and internet and online gaming business. Total revenues from our ICT services accounted for 7% of our total revenues for each of the years ended December 31, 2010, 20092011, 2012 and 2008.

2013 and those planned for 2014. See Item 4. “ – Development Activities (2011-2013) – Divestment of CURE” for the discussion of our recent divestitures.

Organization

Our consolidated financial statements include the financial statements of PLDT and the following subsidiaries (collectively, the “PLDT Group”) as at December 31, 2013 and 2012:

         Percentage of Ownership 
         December 31, 
   Place of     2013   2012 

Name of Subsidiary

  Incorporation  

Principal Business Activity

  Direct   Indirect   Direct   Indirect 

Wireless

            

Smart:

  Philippines  

Cellular mobile services

   100.0     —       100.0     —    

Smart Broadband, Inc., or SBI, and Subsidiary

  Philippines  

Internet broadband distribution services

   —       100.0     —       100.0  

Primeworld Digital Systems, Inc., or PDSI

  Philippines  

Internet broadband distribution services

   —       100.0     —       100.0  

I-Contacts Corporation

  Philippines  

Call center services

   —       100.0     —       100.0  

Wolfpac Mobile, Inc.

  Philippines  

Mobile applications development and services

   —       100.0     —       100.0  

Wireless Card, Inc.

  Philippines  

Promotion of the sale and/or patronage of debit and/or charge cards

   —       100.0     —       100.0  

Smart e-Money, Inc., or SeMI, (formerly Smarthub, Inc.)(a)

  Philippines  

Software development and sale of maintenance and support services

   —       100.0     —       100.0  

Smart Money Holdings Corporation, or SMHC:

  Cayman Islands  

Investment company

   —       100.0     —       100.0  

Smart Money, Inc., or SMI

  Cayman Islands  

Mobile commerce solutions marketing

   —       100.0     —       100.0  

Far East Capital Limited, or FECL, and Subsidiary, or FECL Group

  Cayman Islands  

Cost effective offshore financing and risk management activities for Smart

   —       100.0     —       100.0  

PH Communications Holdings Corporation

  Philippines  

Investment company

   —       100.0     —       100.0  

Francom Holdings, Inc.:

  Philippines  

Investment company

   —       100.0     —       100.0  

Connectivity Unlimited Resource Enterprise, or CURE

  Philippines  

Cellular mobile services

   —       100.0     —       100.0  

Chikka Holdings Limited, or Chikka, and Subsidiaries, or Chikka Group

  British Virgin Islands  

Content provider, mobile applications development and services

   —       100.0     —       100.0  

Chikka Communications Consulting (Beijing) Co. Ltd., or CCCBL

  China  

Mobile applications development and services

   —       100.0     —       100.0  

Chikka Pte. Ltd., or CPL

  Singapore  

Managing patent and trademark portfolio

   —       100.0     —       100.0  

Smarthub Pte. Ltd., or SHPL:

  Singapore  

Investment company

   —       100.0     —       100.0  

Takatack Pte. Ltd., or TPL, (formerly SmartConnect Global Pte. Ltd.)(b)

  Singapore  

International trade of satellites and Global System for Mobile Communication, or GSM, enabled global telecommunications

   —       100.0     —       100.0  

3rd Brand Pte. Ltd., or 3rd Brand

  Singapore  

Solutions and systems integration services

   —       85.0     —       85.0  

Voyager Innovations, Inc., or Voyager(c)

  Philippines  

Mobile applications development and services

   —       100.0     —       —    

Telesat, Inc.(d)

  Philippines  

Satellite communications services

   100.0     —       100.0     —    

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

  Philippines  

Satellite information and messaging services

   88.5     11.5     88.5     11.5  

Mabuhay Investments Corporation, or MIC, (formerly Mabuhay Satellite Corporation)(e)

  Philippines  

Investment company

   67.0     —       67.0     —    

Digitel Mobile Philippines, Inc., or DMPI, (a wholly-owned subsidiary of Digitel)

  Philippines  

Cellular mobile services

   —       99.6     —       99.5  

Fixed Line

            

PLDT Clark Telecom, Inc., or ClarkTel

  Philippines  

Telecommunications services

   100.0     —       100.0     —    

PLDT Subic Telecom, Inc., or SubicTel

  Philippines  

Telecommunications services

   100.0     —       100.0     —    

PLDT Global Corporation, or PLDT Global, and Subsidiaries

  British Virgin Islands  

Telecommunications services

   100.0     —       100.0     —    

Smart-NTT Multimedia, Inc.(d)

  Philippines  

Data and network services

   100.0     —       100.0     —    

PLDT-Philcom, Inc., or Philcom, and Subsidiaries, or Philcom Group

  Philippines  

Telecommunications services

   100.0     —       100.0     —    

ePLDT, Inc., or ePLDT(f):

  Philippines  

Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and information technology, or IT, related services

   100.0     —       100.0     —    

IP Converge Data Services, Inc., or IPCDSI(g)

  Philippines  

Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and IT related services

   —       100.0     —       100.0  

iPlus Intelligent Network, Inc., or iPlus(h)

  Philippines  

Managed IT outsourcing

   —       100.0     —       100.0  

Curo Teknika, Inc., or Curo(h)

  Philippines  

Managed IT outsourcing

   —       100.0     —       —    

ABM Global Solutions, Inc., or AGS, and Subsidiaries, or AGS Group(i)

  Philippines  

Internet-based purchasing, IT consulting and professional services

   —       99.2     —       97.1  

ePDS, Inc., or ePDS

  Philippines  

Bills printing and other related value-added services, or VAS

   —       67.0     —       67.0  

netGames, Inc., or netGames(j)

  Philippines  

Gaming support services

   —       57.5     —       57.5  

Digitel

  Philippines  

Telecommunications services

   99.6     —       99.5     —    

Digitel Capital Philippines Ltd., or DCPL(k)

  British Virgin Islands  

Telecommunications services

   —       99.6     —       99.5  

Digitel Information Technology Services, Inc.(l)

  Philippines  

Internet services

   —       99.6     —       99.5  

PLDT-Maratel, Inc., or Maratel

  Philippines  

Telecommunications services

   98.0     —       97.8     —    

Bonifacio Communications Corporation, or BCC

  Philippines  

Telecommunications, infrastructure and related VAS

   75.0     —       75.0     —    

Pilipinas Global Network Limited, or PGNL, and Subsidiaries

  British Virgin Islands  

International distributor of Filipino channels and content

   60.0     —       60.0     —    

Others

            

PLDT Global Investments Holdings, Inc., or PGIH, (formerly SPi Global Holdings, Inc.)(m)(n):

  Philippines  

Investment company

   100.0     —       100.0     —    

PLDT Global Investments Corporation, or PGIC

  British Virgin Islands  

Investment company

   —       100.0     —       —    

PLDT Communications and Energy Ventures, Inc., or PCEV

  Philippines  

Investment company

   —       99.8     —       99.8  

(a)

On July 12, 2013, the Philippine SEC approved the change in the business name of Smarthub, Inc. to Smart e-Money, Inc.

(b)

On September 29, 2013, by a special resolution of the Board of Directors of SmartConnect Global Pte. Ltd., resolved to change its registered business name to Takatack Pte. Ltd.

(c)

On January 7, 2013, Voyager was registered with the Philippine SEC to provide mobile applications development and services.

(d)

Ceased commercial operations.

(e)

Ceased commercial operations; however, on January 13, 2012, the Philippine SEC approved the amendment of MIC’s Articles of Incorporation changing its name from Mabuhay Satellite Corporation to Mabuhay Investments Corporation and its primary purpose from satellite communication to holding company.

(f)

On June 11, 2012, MySecureSign, Inc., or MSSI, and ePLDT were merged, wherein ePLDT became the surviving company.

(g)

On October 12, 2012, ePLDT acquired 100% equity interest in IPCDSI.

(h)

On October 30, 2013, Curo was incorporated to take-on the Outsourced IT Services as a result of the spin-off of iPlus.

(i)

In December 2012 and January 2013, ePLDT acquired an additional 5.7% equity interest in AGS from its minority shareholders, thereby increasing ePLDT’s ownership in AGS from 93.5% to 99.2%.

(j)

Ceased commercial operations in January 2013.

(k)

Liquidated in January 2013.

(l)

Corporate life shortened until June 2013.

(m)

On December 4, 2012, our Board of Directors authorized the sale of our Business Process Outsourcing, or BPO, segment, which was wholly-owned by PGIH. The sale was completed in April 2013. Consequently, as at December 31, 2013, the BPO segment was classified as discontinued operations and a disposal group held-for-sale. See Note 2 Summary of Significant Accounting Policies – Discontinued Operations and Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as Held-for-Sale and Discontinued Operations.

(n)

On June 3, 2013, the Philippine SEC approved the change in the business name of SPi Global Holdings, Inc. to PLDT Global Investments Holdings, Inc.

Development Activities (2011-2013)

Investment in PDRs of MediaQuest

In 2012, ePLDT made deposits totaling Php6 billion to MediaQuest, an entity wholly-owned by the PLDT Beneficial Trust Fund, for the issuance of PDRs by MediaQuest in relation to its indirect interest in Cignal TV, Inc., or Cignal TV. Cignal TV is a wholly-owned subsidiary of Satventures, which is a wholly-owned subsidiary of MediaQuest. The Cignal TV PDRs confer an economic interest in common shares of Cignal TV indirectly owned by MediaQuest, and when issued, will provide ePLDT with a 40% economic interest in Cignal TV. Cignal TV operates a direct-to-home, or DTH, Pay-TV business under the brand name “Cignal TV”, which is the largest DTH Pay-TV operator in the Philippines with 602 thousand net subscribers as at December 31, 2013.

On March 5, 2013, PLDT’s Board of Directors approved two further investments in additional PDRs of MediaQuest:

a Php3.6 billion investment by ePLDT in PDRs to be issued by MediaQuest in relation to its interest in Satventures. The Satventures PDRs confer an economic interest in common shares of Satventures owned by MediaQuest, and when issued, will provide ePLDT with a 40% economic interest in Satventures; and

a Php1.95 billion investment by ePLDT in PDRs to be issued by MediaQuest in relation to its interest in Hastings Holdings, Inc., or Hastings. The Hastings PDRs confer an economic interest in common shares of Hastings owned by MediaQuest, and when issued, will provide ePLDT with a 100% economic interest in Hastings. Hastings is a wholly-owned subsidiary of MediaQuest and holds all the print-related investments of MediaQuest, including equity positions in three leading newspapers: The Philippine Star, the Philippine Daily Inquirer, and Business World. SeeNote 25 – Employee Benefits – Unlisted Equity Investments – Investment in MediaQuestto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further details.

The Php6 billion Cignal TV PDRs and Php3.6 billion Satventures PDRs were issued on September 27, 2013. These PDRs provided ePLDT an aggregate of 64% economic interest in Cignal TV.

ePLDT’s deposit for future PDRs subscription amounted to Php1.95 billion for Hastings PDRs as at December 31, 2013 and Php6 billion for Cignal TV PDRs as at December 31, 2012.

On March 4, 2014, PLDT’s Board of Directors approved an additional investment of up to Php500 million in Hastings PDRs to be issued by MediaQuest, which will increase ePLDT’s investment in Hastings PDRs from Php1.95 billion up to Php2.45 billion representing a 60% economic interest in Hastings. A new investor is expected to subscribe for a 40% economic interest in Hastings either directly through Hastings or PDRs to be issued by MediaQuest in relation to its interest in Hastings.

As at the date of issuance of this report, the Hastings PDRs have not yet been issued.

The PLDT Group’s financial investment in PDRs of MediaQuest is part of the PLDT Group’s overall strategy of broadening its distribution platforms and increasing the Group’s ability to deliver multi-media content to its customers across the Group’s broadband and mobile networks.

SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in MediaQuest to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Sale of BPO Segment

On February 5, 2013, PLDT entered into an agreement to sell the BPO business owned by its wholly-owned subsidiary, PGIH to Asia Outsourcing Gamma Limited, or AOGL, a company controlled by CVC Capital Partners, or CVC. The sale of the BPO business was completed on April 30, 2013. PLDT reinvested approximately US$40 million of the proceeds from the sale in our acquisition of shares of Beta, resulting in an approximately 18.24% economic interest, and will continue to participate in the growth of the business as a partner of CVC. Pursuant to the sale, PLDT is subject to certain obligations, including: (1) an obligation, for a period of five years, not to carry on or be engaged or concerned or interested in or assist any business which competes with the business process outsourcing business as carried on at the relevant time or at any time in the 12 months prior to such time in any territory in which business is carried on (excluding activities in the ordinary course of PLDT’s business); and (2) an obligation, for a period of five years, to provide certain transitional services on a most-favored-nation basis (i.e., no less favorable material terms (including pricing) than those offered by PLDT or any of its controlled affiliates to any other customer in relation to services substantially similar to those provided or to be provided to AOGL and/or its designated companies). In addition, PLDT may be liable for certain damages actually suffered by AOGL until the time of sale arising out of, among others, breach of representation, tax matters and noncompliance with Indian employment laws by SPi Technologies India Pvt. Ltd., a joint subsidiary of SPi and SPi India Holdings (Mauritius), Inc. for the transactions that transpired up to the time of sale. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operationsand Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as Held-for-Sale and Discontinued Operationsto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion of the classification of the BPO segment as an asset held-for-sale.

PCEV’s Transfer of Meralco Shares to Beacon

On October 25, 2011, PCEV transferred to Beacon its remaining investment in 68.8 million of Meralco’s common shares for a total cash consideration of Php15,136 million. PCEV also subscribed to 1,199 million Beacon preferred shares of the same value. The transfer of the Meralco shares was implemented by a cross sale through the PSE.

Since the transactions involve entities with common shareholders, PCEV recognized a deferred gain on transfer of the Meralco shares amounting to Php8,145 million, equivalent to the difference between the Php15,136 million transfer price of the Meralco shares and the Php6,991 million carrying amount in PCEV’s books of the Meralco shares transferred. The deferred gain was presented as an adjustment to the investment cost of the Beacon preferred shares in 2011. Similar to the deferred gain on the transfer of the 154.2 million Meralco shares, the deferred gain will only be realized upon the disposal of the Meralco shares to a third party.

The carrying value of PCEV’s investment in Beacon, representing 50% of Beacon’s common shares outstanding, was Php29,625 million and Php20,801 million as at December 31, 2013 and 2012, respectively.

PCEV’s Additional Investment in Beacon

On January 20, 2012, PCEV subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million. On the same date, MPIC also subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million.

Sale of Beacon Preferred Shares to MPIC

On June 6, 2012, PCEV sold 282.2 million of its investment in Beacon preferred shares to MPIC for a total cash consideration of Php3,563 million which took effect on June 29, 2012. Because the Beacon preferred shares were sold to an entity not included in the PLDT Group, PCEV realized a portion of the deferred gain amounting to Php2,012 million. This amount was recorded when the underlying Meralco shares were transferred to Beacon. The carrying value of PCEV’s investment in Beacon’s preferred shares, amounting to Php5,440 million and Php6,991 million was presented as part of available-for-sale financial investments in our consolidated statements of financial position as at December 31, 2012 and January 1, 2012, respectively.

Change in View and Purpose of Investment in Beacon Preferred Shares

On October 30, 2013, PCEV’s Board of Directors approved the change in view and purpose of investment in Beacon preferred shares, from investment available-for-sale to strategic investment intended to generate safe and steady returns which PCEV intends to hold on to for the long-term, similar to its investment in common shares. As a result, the investment in Beacon preferred shares was reclassified from available-for-sale investments to investment in joint venture (both are noncurrent assets). The carrying value of PCEV’s investment in Beacon preferred shares amounted to Php6,250 million as at December 31, 2013.

PLDT’s Acquisition of Digitel

On October 26, 2011, we completed the acquisition of certain interests in Digitel, including (i) 3.28 billion common shares representing 51.6% of the issued common stock of Digitel, (ii) zero-coupon bonds convertible into approximately 18.6 billion common shares of Digitel, and (iii) intercompany advances made by JGSHI to Digitel in the total principal amount plus accrued interest of Php34.1 billion as at December 31, 2010. Upon completion of the acquisition, we began consolidating the results of operation of Digitel in our financial statements.

Digitel operates a fixed line business in certain parts of the country and is the 100% owner of DMPI, which is engaged in the mobile telecommunications business and owns the brandSun Cellular. We have agreed with the NTC that we will continue to operateSun Cellularas a separate brand. The primary effect of the acquisition of Digitel on our operating segments was the addition of DMPI to our wireless business and the addition of Digitel to our fixed line business.

As a consequence of completion of a mandatory tender offer and related share exchanges, open market acquisitions, and conversions of certain of our zero coupon bonds, we held 99.6% of the outstanding capital of Digitel as of December 31, 2013.

Divestment of CURE

On October 26, 2011, PLDT received the order issued by the NTC approving the application jointly filed by PLDT and Digitel for the sale and transfer of approximately 51.6% of the outstanding common stock of Digitel to PLDT. The approval of the application was subject to conditions which included the divestment by PLDT of CURE, in accordance with the divestment plan, as follows:

CURE must sell itsRed Mobilebusiness to Smart consisting primarily of its subscriber base, brand and fixed assets; and

Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, 10 MHz of 3G frequency in the 2100 band and related permits.

In compliance with the commitments in the divestment plan, CURE completed the sale and transfer of itsRed Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, which included: (a) the sale of CURE’sRed Mobiletrademark to Smart; (b) the transfer of CURE’s existingRed Mobilesubscriber base to Smart; and (c) the sale of CURE’s fixed assets to Smart at net book value.

In a letter dated July 26, 2012, Smart informed the NTC that it has complied with the terms and conditions of the divestment plan as CURE had rearranged its assets, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, CURE’s only remaining assets as at June 30, 2012 were its congressional franchise, the 10 MHz of 3G frequency in the 2100 band and related permits.

In a letter dated September 10, 2012, Smart informed the NTC that the minimum CRA to enable the PLDT Group to recover its investment in CURE, includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through an auction sale of CURE’s shares of stock to the winning bidder and submitted CURE’s audited financial statements as at June 30, 2012 to the NTC. In a letter dated January 21, 2013, the NTC referred the computation of the CRA to the commissioners of the NTC. Smart sent a reply agreeing to the proposal and is awaiting advice from the NTC on the bidding and auction of the 3G license of CURE.

As at December 31, 2013, CURE is still waiting for NTC’s advice on how to proceed with the planned divestment.

SeeNote 2 – Summary of Significant Accounting Policies – Divestment of CURE to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

PCEV’s Common Stock

On November 2, 2011, the Board of Directors of PCEV authorized PCEV’s management to take such steps necessary for the voluntary delisting of PCEV from the PSE in accordance with the PSE Rules on Voluntary Delisting. On December 2, 2011, PCEV’s Board of Directors also created a special committee to review and evaluate any

tender offer to be made by Smart (as the owner of 99.51% of the outstanding common shares of PCEV) to purchase the shares owned by the remaining noncontrolling shareholders representing 0.49% of the outstanding common stock of PCEV. Smart’s tender offer commenced on March 19, 2012 and ended on April 18, 2012, with approximately 25.1 million shares, or 43.4% of PCEV’s noncontrolling shares tendered, thereby increasing Smart’s ownership to 99.7% of the outstanding common stock of PCEV at that time. The aggregate cost of the tender offer paid by Smart to noncontrolling shareholders on April 30, 2012 amounted to Php115 million. PCEV filed its petition with the PSE for voluntary delisting on March 19, 2012. On April 25, 2012, the PSE approved the petition for voluntary delisting and PCEV’s shares were delisted and ceased to be tradable on the PSE effective May 18, 2012.

Following the voluntary delisting of the common stock of PCEV from the PSE on May 18, 2012, PCEV’s Board of Directors and stockholders approved on June 6, 2012 and July 31, 2012, respectively, the following resolutions and amendments to the articles of incorporation of PCEV to decrease the authorized capital stock of PCEV, increase the par value of PCEV’s common stock (and thereby decrease the number of shares of such common stock) and decrease the number of shares of preferred stock of PCEV as follows:

   Prior to Amendments   After Amendments 
   Authorized Capital   Number of
Shares
   Par Value   Authorized Capital   Number of
Shares
   Par Value 

Common Stock

  Php12,060,000,000     12,060,000,000    Php1    Php12,060,006,000     574,286    Php21,000  

Class I Preferred Stock

   240,000,000     120,000,000     2     66,661,000     33,330,500     2  

Class II Preferred Stock

   500,000,000     500,000,000     1     50,000,000     50,000,000     1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Authorized Capital Stock

  Php12,800,000,000        Php12,176,667,000      
  

 

 

       

 

 

     

The decrease in authorized capital and amendments to the articles of incorporation were approved by the Philippine SEC on October 8, 2012. As a result of the increase in the par value of PCEV common stock, each multiple of 21,000 shares of PCEV common stock, par value Php1, was reduced to one PCEV share of common stock, with a par value of Php21,000. Shareholdings of less than 21,000 shares or in excess of an integral multiple of 21,000 shares of PCEV which could not be replaced with fractional shares were paid the fair value of such residual shares equivalent to Php4.50 per share of pre-amendments PCEV common stock, the same amount as the tender offer price paid by Smart during the last tender offer conducted from March 19 to April 18, 2012.

As a consequence of the foregoing, the number of outstanding shares of PCEV common stock decreased to approximately 555,716 from 11,683,156,455 (exclusive of treasury shares). The number of holders of PCEV common stock decreased to 121 as at December 31, 2013 and because the number of shareholders still exceeds 100 shareholders under the rules of the Philippine SEC, PCEV is still required to make filings of updates with the Philippine SEC. Smart’s percentage of ownership in PCEV stood at 99.8% as at December 31, 2013.

PLDT’s Acquisition of Subscription Assets of Digitel

On July 1, 2013, PLDT entered into an agreement to acquire the subscription assets of Digitel for a total cost of approximately Php5.3 billion. The agreement covers the transfer, assignment and conveyance of Digitel’s subscription agreements and subscriber list, and includes a transition mechanism to ensure uninterrupted availability of services to the Digitel subscribers until migration to the PLDT network is completed.

ePLDT’s Acquisition of Shares of AGS’ Minority Stockholders

In December 2012 and January 2013, ePLDT acquired an additional 5.67% equity interest in AGS from its minority shareholders for a total consideration of Php5 million, thereby increasing ePLDT’s ownership in AGS from 93.5% to 99.2%.

SeeNote 2 – Summary of Significant Accounting Policies andNote 13 – Business Combinations to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion regarding these and other acquisitions.

Strengths

We believe our business is characterized by the following competitive strengths:

  

Recognized Brands. PLDT, Smart,Talk ‘N Textand Smart Sun Cellularare strong and widely recognized brand names in the Philippines. We have built the PLDT brand name for over 8085 years as the leading telecommunications provider in the Philippines. Smart is recognized in the Philippines as an innovative provider of high-quality cellular services. TheTalk ‘N Textbrand, which is provided using Smart’s network, has also gained significant recognition as a reliable value for moneyprice-competitive brand. Our brand range was further strengthened with the acquisition of DMPI and its cellular brand,Sun Cellular. Since its launch in 2003,Sun Cellular has built considerable brand equity as a provider of “unlimited” services. Having a range of strong and recognizable brands allows us to offer to various market segments differentiated products and services that suit customers’ budgets and usage preferences.

  

Leading Market Shares. With over 4975 million fixed line,lines, cellular and broadband subscribers as at December 31, 2010,2013, we have the leading market positions in each of the fixed line, cellular and broadband markets in the Philippines.Philippines in terms of both subscribers and revenues.

  

Diversified Revenue Sources. We derive our revenues from our three business segments, namely, wireless, fixed line and ICTother businesses, with wireless contributing 61%,and fixed line 32%contributing 65% and ICT 7%35%, respectively, to our total revenues in 2010.2013, and 66% and 34% from our wireless and fixed line, respectively, in 2012. Revenue sources of our wireless business include cellular services, which include voice services and text message-related and VAS, and wireless broadband services. Revenues from cellular voice and text services have been declining but are somewhat mitigated by the increase in revenues from wireless broadband and mobile internet browsing. Our fixed line business derives service revenues from local

exchange, international long distance, national long distance and data and other network services. In our ICT business, sources of revenue include knowledge processing solutions, customer relationship management and internet and online gaming business, and data center and other services. Revenues from our fixed line services, such as local exchange, national and international long distance, have been declining over the past years due to

29


pressures on traditional fixed line voice revenues and reductions in international interconnection rates, offset by the significant revenue contribution of our datafrom corporate, SME and other network service. Fixed line revenues represent 32% of our total revenues in 2010, 2009, and 2008. We will continue to identify and develop new revenue sources to further broaden our diversified revenue base for our wireless, fixed line and ICT businesses.consumer data.

  

AdvancedSuperior Integrated Network. With the most advanced and extensive telecommunications networks in the Philippines, we are able to offer a wide array of communications services. We are enhancinghave completed a two-year network transformation program that further enhanced the capabilities of our fixed line and wireless networks, to allowallowing us to better exploitleverage this competitive strength and achieveto maintain market leadership while achieving higher levels of network efficiency in providing voice and data services. This includesPart of our network transformation program included the build out of a second network that has been designed to contain the increase in voice traffic resulting from lower cost voice offers under our Red Mobile brand. This network and brand strategy will allow the quality of service on our main network serving our Buddy and Talk and Text brands to be maintained. In addition, we continue ourcontinued upgrade of our fixed line network to an all IP-based NGN, the build out of our transmission network to 54,000 kilometers of fiber, the investment in increased international bandwidth capacity, and continue to roll outthe expansion of our 3G and wireless broadband networks in order to increase broadband subscribers and expandenhance our data/broadband capabilities. We are also investing inOur network investments include the upgrade of our wireless networkIT capabilities, including our Operating Support Systems, Business Support Systems and Intelligent Networks, all of which are essential in enabling us to achieve, among others, greater operational and cost efficiencies.offer more relevant services to our customers.

  

Innovative Products and Services. We have successfully introduced a number of innovative and award-winning cellular products and services, includingSmart Money, Smart LoadandPasa Load. Smart Loadis an “over-the-air” electronic loading facility designed to make reloading of air time credits more convenient for, and accessible to consumers.Pasa Load(the term “pasa” means “transfer”) is a derivative service ofSmart Loadthat allows load transfers to otherSmart BuddyPrepaidandTalk ‘N Textsubscribers.

  

Strong Strategic Relationships. We have important strategic relationships with First Pacific, NTT DoCoMoDOCOMO and NTT Communications. TheWe believe the technological support, international experience and management expertise made available to us through these strategic relationships will enable us to enhance our market leadership and ability to provide and cross-sell a more complete range of products and services.

Strategy

The key elements of our business strategy are:

  

Build on our leading positions in the fixed line and wireless businesses. We plan to buildcontinue building on our position as the leading fixed line and wireless service providersprovider in the Philippines by continuing to launch new products and services to increase subscriber value and utilization of our existing facilities and equipment at reduced cost, and to increase our subscribers’ use of our network for both voice and data, as well as their reliance on our services. We are currently upgrading our fixed line facilities to NGN, and have rolled out a 3G network based on a W-CDMA technology as well as expanding our DSL and wireless broadband facilities. We plan to upgrade of our wireless network to achieve operating and cost efficiencies. Our operating target is to continue growth in profitability by increasing our revenues while controlling our costs.

  

Capitalize on our strength as an integrated provider of telecommunications services. We offer the broadest range of telecommunications services among all operators in the Philippines. We plan to capitalize on this position to maximize revenue opportunities by bundling and cross-selling our products and services, and by developing convergent products that feature the combined benefits of voice and data, fixed line, wireless, and ICTother products and services, including media content, utilizing our network and business platforms. We are also lowering our costs by integrating the operations of our different businesses.

  

Strengthen our leading position in the data and broadband market. Leveraging on the inherent strengthstrengths of our fixed line and wireless businesses, we are committed to further develop our fastest growing business —business– broadband, data and other network services. Consistent with our strategy of introducing innovative products and services using advanced technology, we have launchedcontinue to launch various products and services in the data and broadband market that addressdeliver quality of experience according to different market needs.needs, including data centers and cloud-related services.

  

Maintain a strong financial position and improve shareholder returns.In recent years, we have significantly improvedFollowing significant improvements in our financial position, by utilizing our cash flows principally for debt reduction.

30


As the cash flows generated by our businesses have increased and our leverage ratios have improved, we have been able to restorerestored the payment of cash dividends to our common shareholders beginning in 2005 and were able to declare dividend payouts of approximately 100% in each of 2008, 2009 and 2010 of our core earnings.earnings for the seven consecutive years from 2007 to 2013. We expect thatplan to continue utilizing our free cash flows will continue to be utilized for the payment of cash dividends to common shareholders and investments in new growth areas while continuing to maintain a healthy balance sheet position.areas. As part of our growth strategy, we have made and may continue to make acquisitions and investments in companies or businesses. We will continue to consider value-accretive investments in telecommunications as well as telco-related businesses such as those in the global outsourcingmedia and off-shoring industry.content.

Business

Wireless

We provide cellular, wireless broadband, satellite and other services through our wireless business.

Cellular Service

Overview

Our cellular business, which we provide through Smart and CUREDMPI to over 4570 million subscribers as at December 31, 2013, approximately 99%97% of whom are prepaid subscribers, is focusedfocuses on providing wireless voice communications and wireless data communications (primarily through text messaging) andmessaging, but also through a variety of other VAS which include: (a)Smart Money; (b) specialized content such as ringtones, logos, caller ringback tunes; (c)Mobile Banking(banking services delivered overand mobile broadband). As a condition of our acquisition of a controlling interest in Digitel, we have agreed with the cellular network); (d) international roaming;NTC that we will divest the congressional franchise, spectrum and (e) gamesrelated permits held by CURE following the migration of CURE’sRed Mobile subscriber base to Smart. See “Item 4. Information on the Company – Development Activities (2011-2013) – Divestment of CURE” and other VAS developed on Smart’s platform.

Note 2 – Summary of Significant Accounting Policies – Divestment of CUREto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

The following table summarizes key measures of Smart’s and CURE’sour cellular business as at and for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010 2009 2008
Systemwide cellular subscriber base  45,636,008   41,328,641   35,224,604 
Prepaid  45,214,433   40,893,098   34,826,468 
Smart Buddy
  25,293,443   23,762,814   20,501,617 
Talk ‘N Text
  18,967,381   17,050,713   14,308,493 
Red Mobile(1)
  953,609   79,571   16,358 
Postpaid  421,575   435,543   398,136 
Growth rate of cellular subscribers  10%  17%  17%
Smart Buddy
  6%  16%  3%
Talk ‘N Text
  11%  19%  47%
Red Mobile(1)
  1,098%  386%  100%
Cellular revenues (in millions) Php86,399  Php88,410  Php87,518 
Voice  42,250   38,850   37,275 
Data  41,529   47,072   47,804 
Others(2)
  2,620   2,488   2,439 
Percentage of cellular revenues to total wireless service revenues  92%  92%  94%
Percentage of cellular revenues to total service revenues  56%  56%  57%
2011:

   December 31, 
   2013  2012  2011(1) 

Systemwide cellular subscriber base

   70,045,627    69,866,458    63,696,629  

Prepaid

   67,667,750    67,611,537    61,792,792  

Smart Prepaid

   24,608,687    25,061,453    28,011,521  

Talk ‘N Text

   29,485,017    28,445,053    20,467,175  

Sun Cellular

   13,574,046    14,105,031    13,314,096  

Postpaid

   2,377,877    2,254,921    1,903,837  

Smart

   889,696    683,480    550,748  

Sun Cellular

   1,488,181    1,571,441    1,353,089  

Growth rate of cellular subscribers

    

Prepaid

    

Smart Prepaid

   (2%)   (11%)   7

Talk ‘N Text

   4  39  8

Sun Cellular

   (4%)   6  100

Postpaid

    

Smart

   30  18  31

Sun Cellular

   (5%)   16  100

Cellular revenues (in millions)

  Php105,875   Php103,604   Php93,645  

Voice

   51,384    49,627    43,884  

Data

   52,258    51,415    47,235  

Others

   2,233    2,562    2,526  

Percentage of cellular revenues to total wireless service revenues

   91  91  92

Percentage of cellular revenues to total service revenues

   59  60  55

(1)

(1)

The Red Mobile brand was launched in November 2008 by CURE.
(2)RefersIncludes DMPI’s cellular service revenues of Php2,808 million for the period from October 26, 2011 to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, share in revenues from PLDT’s WeRoam and PLP services, a small number of leased line contracts, and revenues from Chikka, Wolfpac and other Smart subsidiaries.December 31, 2011.

Service Plans.

Smart markets nationwide cellular communications services under the brand namesSmart Buddy,Prepaid, Talk ‘N Text, Smart GoldPostpaidandSmart Infinity,while CURE offersRed Mobile.Infinity. Smart Buddy,Prepaidand Talk ‘N TextandRed Mobileare prepaid services whileSmart GoldPostpaidandSmart Infinity are postpaid services, which are all provided through Smart’s digital network.

With the acquisition of a majority interest in the Digitel Group on October 26, 2011, we offer prepaid and postpaid services under the brand nameSun Cellular.

Smart, hastogether withTalk ‘N Text andSun Cellular, have focused on segmenting the market by offering sector-specific, value-driven packages for its prepaid subscribers. These include new varieties of our top-up servicesload buckets which provide a fixed number of messages with prescribed validity periods and call packages which allow a fixed number of minutes or calls of preset duration. Starting out as purely on-networkwithin network packages, Smart’s top-up servicesbuckets now includealso offer voice, text messageand hybrid bundles available to all networks.

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Smart also has a roster of 3G services which it commercially launched in May 2006. These services include video calling, video streaming, high-speed internet browsing and downloading of special 3G content, offered at rates similar to those of 2G services.
Smartalk, Smart’sprovides packages with unlimited voice, offering,text, data, and combinations thereof, denominations of which depend on the duration and nature of the unlimited packages.

Among the many popular bucket variants of Smart prepaid is available totheSmart BuddyUnli Call andSmart Gold Text 25 where subscribers nationwide. The service does not require any change in SIM or cellular phone number and enablesSmart BuddyandSmart Goldsubscribers to makecan enjoy unlimited calls to any subscriber on the Smart’s network. Smart subscribers could avail of the service, via registration or via retailer loading, by purchasing loads for unlimited calls which come in two denominations:

Smartalk 100” which offers five days of unlimited calls for Php100; and
Smartalk 500” which offers 30 days of unlimited calls for Php500 to any subscriber on the Smart network.
     Buoyed by the widespread acceptance of the service, Smart offersSmartalk Plus, which includes unlimited calling and on-net texting during off-peak hours and reduced rates during peak hours.Smartalk Plus’Php100 load denomination is valid for five days and provides on-net unlimited calls and SMS from 10:00 p.m. to 5:00 p.m., and call and SMS rates of Php2.50 per minute and Php0.20 per SMS, respectively, from 5:01 p.m. to 9:59 p.m. As a result, Smart’s 2010 outbound voice traffic almost doubled from 2009 levels. In 2010, Smart expanded its roster of unlimited offerings on the back of the planned capacity expansion of its networks. Smart expects to continue to successfully maintain its market leadership through innovative voice and text packages that drive activations, boost usage and strengthen brand equity.
     Through theTalk ‘N Text UnliTalk Plus 100package,existingTalk ‘N Textsubscribers can avail of unlimited off-peak calls from 10:00 p.m. to 5:00 p.m. and special peak hour rates of Php2.50 per minute from 5:01 p.m. to 9:59 p.m. to anySmart Buddy, Smart Postpaid andTalk ‘N Text, subscribers. The packageunlimited texts to Smart,Talk ‘N Text and Sun Cellular, plus free 50 all network texts with 15MB of mobile internet data valid for one day. In addition, for as low as Php10, Smart prepaid subscribers can get 75 all network texts, plus 5MB of mobile internet data which is valid for one day.

Sun Cellularoffers itsCall and Text Unlimited products, which allow subscribers to enjoy 24 hours ofSun-to-Sun voice calls and all network texts for as low as Php25 per day.Sun Cellular’s Text Unlimited products offer unlimitedSun-to-Sun SMS with free voice calls plus mobile internet for as low as Php10 per day.Sun Cellular also includes all day unlimited textingoffersCall and Textcombo which allows subscribers to anysend 50Smart BuddySun-to-Sun SMS and 50 SMS to other networks along with 10 minutesSun-to-Sun voice calls and 10 minutes mobile internet for only Php10, valid for one day.

Sun Cellular also offersSun Trio Loads, which comes with 200 SMS toSun,Smart Postpaid andTalk ‘N Textsubscribers. Each registration, 10 minutes Sun-to-Sun calls, 3 minutes of calls to this promo isSun Cellular,Smart and Talk ‘N Text bundled with 30 minutes of mobile internet for only Php20, valid for five days.one day. Moreover,Sun Cellular launchedSun BlackBerry All-Dayunlimited services which comes with unlimited mobile internet, unlimited social networking, unlimited instant messaging, unlimited BlackBerry browsing and unlimited BlackBerry Messenger for only Php50 per day.

Postpaid subscribers have similar options depending on their monthly subscription plans. Smart offersSmart All-in Plans, which enable subscribers to choose from Smart’s different services, such as unlimited call, text, or mobile browsing, all charged within the subscriber’s monthly service fee.

Smart also offers theSmart Unli Postpaid Plan 599 which offers unlimited calls to Smart subscribers and unlimited texts to Smart,Talk ‘N Text andSun Cellular subscribers.

Smart’sUnli Data Plans offer unlimited internet browsing on postpaid basis, best suited for subscribers with high data usage. Bundled with the latest handsets, and with free texts and calls, subscribers may choose among the following packages:Plan1500, Plan2000 andPlan3000.

Sun Cellular postpaid plans offer a variety of services to cater to the emerging needs of the subscribers at affordable prices.Sun Cellular offersSundroid Rush Plansstarting from Php450 per month that comes with a free Android handset and tablet where subscribers can enjoy unlimitedSun Calls and Texts, 250 free texts to other networks and 20 hours for mobile internet.Sun Cellularalso hasUnliTalk 100offers IDD plans which offers five daysallows subscribers to make international calls and send SMS to selected countries for as low as Php2 per minute of unlimitedvoice call or per SMS. The IDD Plans also come with a free Android handset along with free calls toTalk ‘N Textand Smart subscribers.

Red Mobile Unlimitedoffers unlimitedRed-to-Redcall and text, and unlimitedRed-to-Redtext packages, as well as unlimited calling and texting to all Smart subscribers using a secondary network powered by Smart.
SMS, depending on the plan.

Voice Services.Services

Cellular voice services comprise all voice traffic and voice VAS such as voice mail and international roaming. Voice services remain a significant contributor to wireless revenues, generating a total of Php42,250Php51,384 million, Php38,850Php49,627 million and Php37,275Php43,884 million, or 49%, 44%48% and 43%47% of cellular service revenues in 2010, 20092013, 2012 and 2008,2011, respectively. Local calls continue to dominate outbound traffic constituting 83%91% of all our cellular minutes. Domestic inbound and outbound calls totaled 23,11051,504 million minutes in 2010,2013, an increase of 9,7391,907 million minutes, or 73%4%, as compared with 13,37149,597 million minutes in 2009,2012, due to increased usage resulting fromtraffic on bucket and unlimited voice offerings.calls. International inbound and outbound calls totaled 3,0263,590 million minutes in 2010,2013, an increase of 92162 million minutes, or 3%5%, as compared with 2,9343,428 million minutes in 2009, mainly due to an increase in cellular subscriber base.2012. The ratio of inbound-to-outbound international long distance minutes was 13.5:8.6:1 for 2010.

2013.

Data Services.

Cellular revenues from data services include all text messaging-related services and mobile internet, as well as, VAS.

The PhilippinesPhilippine cellular market is one of the most text messaging-intensive markets in the world, totalingwith more than a billion text messages sent per day. Text messaging is extremely popular in the Philippines, particularly on the prepaid platform, as it provides a convenient and inexpensive alternative to voice and e-mail based communications. Text messaging also utilizes less network capacity than voice, thereby increasing network efficiency.

     Text messaging has been one of the key drivers for our cellular subscriber growth. Despite the strong volume growth in text messaging, Smart’s cellular

Cellular revenues from this service declinedincreased by 13%Php843 million, or 2%, to Php38,901Php52,258 million in 20102013 from Php44,573Php51,415 million in 2009, resulting mainly from the continued decline in SMS yield as a result of aggressive SMS pricing offers, the prescribed extension of load validity periods2012 primarily due to higher mobile internet and alternative means of communicationVAS revenues, partially offset by lower text messaging revenues. In 2013, Smart’s and increases in the number of subscribers who also hold SIM cards from other cellular operators and who selectively use such SIM cards in their calls and SMS. In 2010, Smart’sDMPI’s text messaging system handled 18,31931,878 million outbound messages on standard SMS services with 312,634and 471,298 million messages generated by bucket-priced text services.

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Revenues from mobile internet includes web-based services such as mobile internet browsing and video streaming, net of allocated discounts and content provider costs.

     In 2010, approximately 48% of Smart’s cellular revenues were derived from data usage, compared to 53% in 2009.
Smart also offersand DMPI offer the following value-added cellular services:
VAS:

  

Smart Money,Pasa Load/Give-a-loadwhichincludes revenues fromPasa Load and Dial*SOS, net of allocated discounts.Pasa Load/Give-a-load is a reloadable payment card powered by MasterCard, enablesservice which allows prepaid and postpaid subscribers to pay fortransfer small denominations of air time credits to other prepaid subscribers. Dial*SOS allows Smart prepaid subscribers to borrow Php4 of load (three Smart-to-Smart texts plus Php1 air time) from Smart which will be deducted upon their purchases by transferring money from their bank accounts to their Smart Money cards and reload theirSmart Buddy,Talk ‘N TextandSmart Bro accounts electronically; andnext top-up;

  

Mobile BankingSMS-based, launched in collaboration with various banks, allows subscribers to execute banking transactionsincludes revenues from info-on-demand and voice text services, net of allocated discounts and content provider costs; and

MMS-basedincludes revenues from point-to-point multimedia messaging system, or MMS, and content download services, such as balance inquiriesringtone, logo or music downloads, net of allocated discounts and transfers over their mobile telephones.content provider costs.

     Consistent with Smart’s objective to develop new businesses, Smart introduced a “fixed wireless” broadband service under the brandSmart Broto complement PLDT’s DSL in areas that are currently not covered by the fixed line network.Smart Brois rapidly increasing network coverage in order to retain “first-mover” advantage in areas with limited or no fixed line or broadband coverage.Smart Brois also pioneering a shared access model in order to propagate broadband and address affordability barriers.

Due to the high level of text messaging service usage, we believe that the Philippine market is well suited for text-based informational and e-commerce services. There is a potential growth in mobile internet browsing as a result of the popularity of social networking and the affordability of smartphones. Our current approach is to continue maximizing our GSM, or 2G,3G network services while continuously upgrading our network to Enhanced Data for GSMLong-Term Evolution, or EDGE. EDGE is a technology that would further increaseLTE 4G, in anticipation of the speedgrowth in mobile internet browsing.

Chikka

Through Chikka, we provide an internet and data capability of our GSM network. In addition, on December 29, 2005, Smart was awarded a 3G license by the NTC after being ranked the highest among competing operators with a perfect score on a 30-point grading system designedGSM-based instant messaging facility for mobile users or subscribers. Services include instant text messaging from personal computer to gauge the capability of telecommunication operators to effectively provide extensive 3G services. As a result of being ranked highest, Smart received the largest radio frequency allocation of 15 MHz as well as first choice of frequency spectrum. Smart chose the 1920-1935 MHzmobile phones and 2110-2125 MHz spectrum, the range that would best enable it to deploy its 3G network nationwidevice versa, text newsletter, text-based promotions, multi-media messaging, subscription-based services, and at the same time offer the highest quality of 3G service.

other mobile VAS.

Rates and Discounts

Our current policy is to recognize a prepaid subscriber as “active” only when the subscriber activates and uses the SIM card and reloads it at least once during the month of initial activation or in the immediately succeeding month. A prepaid cellular subscriber is disconnected if the subscriber does not reload within four months after the full usage or expiry of the last reload.

Smart BuddyPrepaidandTalk ‘N TextCall and Text prepaid cards are sold in denominations of Php100, Php300 and Php500. The Php300 and Php500 whichcards include zero, 33 and 83 free text messages, respectively. The stored value of a prepaid card remains valid for a period ranging from 30 days to 120 days depending on the denomination of the card, with larger denominations having longer validity periods from the time a subscriber activates the card. We launch from time to time promotions with shorter validity periods. The introduction of our “over-the-air” electronic loading facility,Smart Load,made reloading of air time credits more convenient and accessible for consumers.Smart Load’s over-the-air reloads have evolved to respond to market needs and now come in various denominations of Php15, Php30, Php60, Php115, Php200, Php300, Php500 andranging from Php10 to Php1,000 with corresponding expiration periods, as well as Php10 available viaTalk ‘N Text’sticket load only and Php20 available only as a bucket load package.periods. The introduction of our “over-the-air”Smart Loadwas followed byPasa Load, a derivative service, allowing prepaid and postpaid subscribers to transfer even smaller denominations to other prepaid subscribers. Since 2005, Smart has offered fixed rate or “bucket” planspackages as a means of driving subscriber activations and stimulating usage. These bucket plans,packages, which offer a fixed number of text messages or call minutes for a limited validity period, have proven to be extremely popular with subscribers and now account for 25% of our wireless service revenues. In the past years,subscribers. Smart also began to offeroffers unlimited voice and text planspackages under its various brands in order to be competitive and maintain industry leadership.

Both bucket packages, and unlimited voice and text packages account for 32% of our cellular service revenues in 2013.

Smart BuddyPrepaidsubscribers are charged Php6.50 per minute for calls toSmart BuddyPrepaidandTalk ‘N Textsubscribers and Php7.50 per minute terminating to other cellular or fixed line networks.Talk ‘N Textcalls toTalk ‘N Textsubscribers are charged Php5.50 per minute while calls toSmart BuddyPrepaid and other cellular fixed line subscribers are charged Php6.50 per minute.

Red MobileSun Cellularsubscriber has continued to offer its range of existing unlimited products and further introduced special product promotions.Sun Cellular introduced an enhanced version of its flagshipCall and Text Unlimited product by launching theSun Call and Text Unlimitedproduct, offering unlimited calls to otherSun and texts to all networks. For example, the Php100 denomination is valid for five days with unlimited one-network calls and all-network texts. There are also variants with longer validity periods and more free inclusions: Php150 providesRed MobileSun Call & Text Unlimited for 7 days with Php25 regular load, while Php450 is valid for 30 days and includes Php50 regular load. Recently,Sun Cellular launchedSun Power Text Unlimited 200 which gives subscribers are charged at Php0.50 per minute. Calls to30 days of unlimited Sun texts, four hours ofSmart BuddySun-to-Sun calls andTalk ‘N Textsubscribers are charged Php2.00 per minute while calls 1,000 texts to other networks’ subscribers are charged Php6.50 per minute.

33

networks.


     We offer both flat rate, or regular,Smart offersAll In,Unli Voice and consumableText, andUnli Data postpaid plans with monthly service fees ranging from Php300Php349 to Php3,500Php3,000 forSmart GoldPostpaidand from Php5,000Php3,500 to Php8,000 forSmart Infinity.plans. These plans are availableallocated with varying amounts of free air timecalls, texts and text messagesdata, and different rates beyond the free minutes and text messages,in excess of allocation, depending on the monthly service fee.plan. Monthly service fees for flat rate, or regular,fee plans are applicable only to local calls, text messages and data browsing, as well as for consumable plansincluding VAS.

Sun Cellular offers postpaid services that enable subscribers to all voice calls, text messages (bothplace local and international)international calls and VAS.

     Smart is permittedSMS, use mobile internet and utilize a wireless landline through postpaid plans with varying monthly service fees ranging from Php250 to adjust its cellular air timePhp3,500. Sun Cellular subscribers not availing of anyCall and national direct dial rates accordingText Unlimited service are charged Php5.50 per minute for calls to changes in the Philippine peso-to-U.S. dollar exchange rate. Under the authorization granted to Smart by the NTC, Smart is permitted to increaseotherSun Cellular subscribers and is required to decrease its air time and national direct dial rates by 1% for every Php0.25 change in the exchange rate relative to a base rate of Php24.73 to US$1.00. However, Smart has not implemented any foreign currency adjustments to its rates since November 4, 1998 because of the concern that increased rates may result in decreased usage or switchingPhp6.50 to other cellular providers by its subscribers.
networks. Local NDD calls are likewise charged at Php6.50 per minute.

Smart subscribers pay an international direct dialing rate of US$0.40 per minute. This rate applies to most destinations, including the United States, Hong Kong, Japan, Singapore, the United Kingdom and the United Arab Emirates. Smart charges US$0.98 per minute for 27 other destinations and US$2.18 per minute for another ten destinations. SubscribersSmart subscribers also have the option of calling at more affordable rates, even for as low as Php2.50 per minute, throughHELLOwreloadable IDD card, Smart’s budget IDD service.

Sun Cellularoffers an IDD rate of US$0.30 per minute to Japan, Saudi Arabia, United Arab Emirates, Australia, United Kingdom, Italy, Germany, Spain and over 100 other countries. Subscribers can also opt to avail of any ofSun Cellular’s various promos, where international calling rates can reach as low as Php1.50 per minute.

Distribution and Discounts

We sell our cellular services primarily through a network of independent dealers and distributors that generally have their own retail networks, direct sales forces and sub-dealers. We currently have 2028 exclusive regional and 125 exclusive provincial distributors, all exclusive and 4985 key account dealers, 2315 of which are exclusive. These dealers include major distributors of cellular handsets and broadband modems whose main focus is telecommunications outlets. Account managers from our sales force manage the distribution network and regularly update these business partners on upcoming marketing strategies, promotional campaigns and new products introductions.products. With the introduction ofSmart Load, Smart moved into a new realm of distribution. These over-the-air reloads, which were based on the “sachet” marketing concept of consumer goods, such as shampoo and ketchup, required a distribution network that approximates those of fast-moving consumer goods companies. Starting with just 50,000 outlets when it was launched,Smart Load’s distribution network now encompasses approximately 2.21.0 million retail agents,retailers, 80% of which are micro businesses (e.g., neighborhood stores, individual entrepreneurs and individual roving agents)., and 20% are macro business (e.g., mall branches, supermarkets, drugstores, pawnshops and micro-financial institution outlets) established nationwide and internationally. These micro-retailers must be affiliated with anyone of Smart’s authorized dealers, distributors, sub-dealers or agents. With the prepaid reloading distribution network now extended to corner store and individual retailer levels and minimum reloading denominations as low as Php10, Smart’s prepaid service became more affordable and accessible to subscribers.

Sun Cellular also offers over-the-air reloads through Sun’sXpress Load.

For prepaid services, we grant discounts to dealers for prepaid phone kits, modems, air timecall and text cards and over-the-air reloads sold. Smart compensates dealers with Php100 to Php800 in cash discountdiscounts per unit depending on the price of the prepaid phone kit sold whereasSun Cellular’s cash discount of Php37 to Php450 varies based on the prepaid phone kit sold. Air timeCall and text cards and over-the-air reloads are sold to distributors at an average discount of approximately 8% and 5%13%, respectively. Air timerespectively for Smart, and 8% and 12%, respectively forSun Cellular. Call and text cards cannot be returned or refunded and normally expire within six to 1214 months after release from the Smart warehouse.

The same policy is being applied bySun Cellular.

Wireless Broadband, Satellite and Other Services

Overview

We currently provide wireless broadband, and satellite and other services through SBI, BOW, our wireless GSM communications service provider for the maritime sector, Airborne AccessDMPI and PDSI, our wireless broadband service providers; Wolfpac and Chikka Group, our wireless content operators; andoperator; ACeS Philippines, our satellite operator.

operator; and MVNO services from PLDT Global.

The following table shows information of our wireless broadband revenues and subscriber base as at and for the years ended December 31, 2013, 2012 and 2011:

   December 31, 
   2013  2012  2011 

Wireless Broadband Revenues

  Php9,432   Php8,606   Php6,804  

Prepaid

   2,823    2,467    1,911  

Postpaid

   6,609    6,139    4,893  

Wireless Broadband Subscribers

   2,453,826    2,359,024    2,068,409  

Prepaid

   1,669,618    1,587,160    1,362,992  

Smart

   1,359,862    1,231,092    1,162,020  

Sun

   309,756    356,068    200,972  

Postpaid

   784,208    771,864    705,417  

Smart

   549,347    495,802    454,333  

Sun

   234,861    276,062    251,084  

Percentage of wireless broadband revenues to total wireless service revenues

   8  8  7

Percentage of wireless broadband revenues to total service revenues

   5  5  4

Smart Broadband

SBI offersSmartBro

, a wireless broadband and data service being offered to residential consumers as well as small and medium-scale enterprises in the Philippines through the following technologies: 3G high-speed packet access, or HSPA, 4G HSPA+, LTE, broadband-enabled base stations and WiMAX. SBI’s wireless broadband revenue contribution increased by Php809 million, or 12%, to Php7,558 million in 2013 from Php6,749 million in 2012. As at December 31, 2013, we had 1,909,209 subscribers, an increase of 182,315 subscribers, or 11%, as compared with 1,726,894 subscribers as at December 31, 2012.SmartBro aims to strengthen our position in the wireless data service and complements PLDT’smyDSL service in areas where the latter is not available.

SBI also offersmyBro, a fixed wireless broadband service being offered under PLDT’sHome megabrand.myBro fixed wireless broadband service is powered either via a link to Smart’s wireless broadband-enabled base stations which allows subscribers to connect to the internet using an outdoor aerial antenna installed in the subscriber’s home or via Smart’s WiMAX (Worldwide Interoperability for Microwave Access) network.myBro revenues increased by Php332 million, or 8%, to Php4,314 million in 2013 from Php3,982 million in 2012 primarily due to an increase in subscriber base by 8,858, or 2%, to 436,094 as at December 31, 2013 from 427,236 as at December 31, 2012.

DMPI

Through SBI,DMPI, with itsSun Broadband Wireless service, we are engaged in providing wireless broadband and data services under the brand nameSmart Broto residential consumers as well as small and medium-scale enterprises in the Philippines. As at December 31, 2010, SBI had 1,355,977DMPI’sSun Broadband Wireless service offers internet users broadband wireless broadband subscribers,service with 3.5G HSPA technology on an increase of 318,257 subscribers, or 31% as compared with 1,037,720 subscribers as at December 31, 2009.all-IP network.Smart BroSun Broadband Wirelessaims to strengthen Smart’sour position in the wireless data service and complements PLDT’smyDSLservice in areas where the latter is not available.

34

Sun Cellularalso offers theSBW Gadget Bundle available underPlans 600and999, which comes with a free tablet and pocket wifi. DMPI’s wireless broadband revenue contribution increased by Php17 million, or 1%, to Php1,874 million in 2013 from Php1,857 million in 2012. As at December 31, 2013, DMPI had 309,756 and 234,861 prepaid and postpaid broadband subscribers, respectively, as compared with 356,068 and 276,062 prepaid and postpaid broadband subscribers, respectively, in 2012.


PDSI

PDSI provides a suite of high-value IP-based products servicing corporate clients, such as wired and wireless leased line access with security and high availability option, managed services, VoIP and other value-added services such as server co-location and data center services.

Airborne Access
     Through Airborne Access, we provide wireless internet access in hotspots nationwide equipped with Airborne Access WiFi access points.
Wolfpac
     Through Wolfpac, we are engaged in the business of consumer mobile applications software development and consumer mobile content development and other allied services.
Chikka
     Through Chikka, we provide an internet and GSM-based instant messaging facility for mobile users or subscribers. Services include personal computer to mobile instant text messaging and vice versa, text newsletter, text-based promotions, multi-media messaging, subscription-based services, and other mobile VAS.

ACeS Philippines

ACeS Philippines currently owns approximately 36.99% of ACeS International Limited, or AIL. AIL provides satellite-based communications to users in the Asia-Pacific region through the ACeS System and ACeS Service. AIL has entered into interconnection agreements and roaming service agreements with PLDT and other major telecommunications operators that allow ACeS service subscribers to access GSM terrestrial cellular systems in addition to the ACeS System. Further, AIL has an amended Air Time Purchase Agreement, or ATPA, with National Service Providers in Asia, including PLDT. SeeNote 24 Related Party Transactions andNote 26 — Contractual Obligations27 – Financial Assets and Commercial Commitments Liabilitiesto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for further discussion regarding the ATPA.

As part of the integration process of the PLDT Group’s wireless business, ACeS Philippines’ operations have been integrated into Smart. This operational integration effectively gives Smart the widest service coverage in the Philippines through the combination of the coverage of ACeS Philippines with Smart’s cellular service.

Revenues

Our revenues from wireless broadband, and satellite and other services consist of wireless broadband service revenues forof SBI, BOWDMPI and PDSI, charges forrevenues from ACeS Philippines’ satellite information and messaging services, revenues from content and mobile applications services from Chikka Group; and service revenues generated from MVNO services of PLDT Global’s subsidiaries and revenues generated from Wolfpac and Chikka Group for wireless data content.

subsidiaries.

Rates

Smart BromyBro, SBI’s fixed wireless broadband service linked to Smart’s wireless broadband-enabled base stations, allows subscribers to connect to the internet using an outdoor aerial antenna installed in a subscriber’s home.

SBI offers mobile internet access throughSmart BroSmartBro Plug-It,a wireless modem, andSmartBro Pocket Wifi, a portable wireless router which providescan be shared by up to five users at a time. Both provide instant connectivity in places where there is Smart network coverage.Smart BroSmartBro Plug-Itisand SmartBro Pocket Wifiare available in both postpaid and prepaid variants, with prepaid offering 30-minute internet access for every Php10variants. Standard browsing charge is Php5 worth of load.load for Bro prepaid and Php2.50 for Bro postpaid (excluding Unli and LTE plans) for 15-minute internet access. SBI also offers unlimited internet surfing withUnli Surf200, Unli Surf100Surf85andUnli Surf50forSmart BroSmartBro Plug-It Prepaidand SmartBro Pocket Wifisubscribers with specific internet usage needs. We also have an additional array of load packages that offer per minute-based and volume-based charging and longer validity periods.

Smart BroSmartBro WiMAXservice is available in MetroMetropolitan Manila and selected key cities in Visayas and Mindanao.WiMAX, which stands for Worldwide Interoperability for Microwave Access, is a wide area network technology that allows for a more efficient radio-band usage, an improved interference avoidance and higher data rates over a longer distance.WiMAXwas initially offered at Plan 999 for unlimited broadband usage with a burst speed of up to 1 Mbps.

35


Additional unlimited broadband packages are alsois available under PlanPlans 799 and Plan 1995999 with burst speeds of up to 512 kbps and 1 Mbps, respectively.

DMPI’sSun Broadband Wireless service offers internet users affordable broadband wireless service with the most advanced 3.5G HSPA technology on an all-IP network.Sun Broadband Wireless has plans and offerings ranging from Php250 to Php1,399 with speeds of up to 23.6 Mbps, respectively.

     Wolfpac generates revenues from SMS subscriptions, institutional services and downloadable contents. The subscription priceexcept for the SMS subscription and institutional services is pegged at Php2.50 per SMS, while for downloadable content, the subscription price ranges from Php10.00Plan 1399 which has a speed of up to Php30.00.
7.2 Mbps.

ACeS fixed/mobile service subscribers are charged Php13.84Php15.00 per minute for local and cell-to-cellmobile calls and for national direct dial services,on-net transactions, while residential subscribersoff-net transactions are charged peak-hour rates of Php13.00 per minute and off-peak hour rates of Php8.00 per minute for domestic calls regardless of destination. For ACeS System public calling offices, callers are charged Php4.50 and Php7.00 per minute for calls terminating to fixed line and cellular networks, respectively.Php18.00. Rates for international long distance calls depend on the country of termination and range from US$0.35 per minute for frequently called countries to US$0.85 per minute for less frequently called countries.

Fixed Line

We provide local exchange, international long distance, national long distance, data and other network and miscellaneous services under our fixed line business.

We offer postpaid and prepaid fixed line services. Initially intended as an affordable alternative telephone service for consumers under difficult economic conditions, our prepaid fixed line services now form an important part of our overall churn and credit risk exposure management strategy.

Local Exchange Service

Our local exchange service, which consists of our basic voice telephony business, is provided primarily through PLDT. We also provide local exchange services through our subsidiaries Philcom and its subsidiaries, BCC, PLDT Global Group, ClarkTel, SubicTel, SBI, PDSI, Maratel and Maratel.Digitel. Together, these subsidiaries account for approximately 4%8% of our consolidated fixed line subscribers.

The following table summarizes key measures of our local exchange serviceservices as at and for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010 2009 2008
Number of local exchange line subscribers  1,822,105   1,816,541   1,782,356 
Number of fixed line employees  7,395   7,947   7,813 
Number of local exchange line subscribers per employee  246   229   228 
Total local exchange service revenues (in millions) Php15,321  Php15,681  Php15,923 
Local exchange service revenues as a percentage of total fixed line service revenues  31%  31%  32%
Local exchange service revenues as a percentage of total service revenues  10%  10%  10%
2011:

   2013  2012  2011(1) 

Number of local exchange line subscribers

   2,069,419    2,063,794    2,166,295  

Number of fixed line employees

   7,415    7,546    9,072  

Number of local exchange line subscribers per employee

   279    273    239  

Total local exchange service revenues (in millions)

  Php16,274   Php16,470   Php15,719  

Local exchange service revenues as a percentage of total fixed line service revenues

   26  28  28

Local exchange service revenues as a percentage of total service revenues

   9  9  10

(1)

Includes Digitel’s local exchange revenue contribution of Php178 million, subscriber base of 296,395 and employee count of 1,586 for the period from October 26, 2011 to December 31, 2011.

Revenues from our local exchange service decreased by Php360 million, or 2%,amounted to Php15,321Php16,274 million in 2010 from Php15,6812013, Php16,470 million in 20092012 and Php15,719 million in 2011. The decrease in revenues in 2013 from 2012 was primarily due to lower weighted average billed lines and a decrease in ARPU on account of lower fixed charges due to the increase in demand for bundled voice and data services, and the decrease in installation and service connection charges, partially offset by an increase in the average number of postpaid billed lines as a result of the launching ofPLDT Call Allservice promotions related toPLP.higher installation and activation charges. The percentage contribution of local exchange revenues to our total fixed line service revenues accounted for 31%26% in 2013, and 28% in each of 20102012 and 2009.

2011.

Rates

Basic monthly charges for our local exchange service in the Metropolitan Manila area were Php592.63 for a single-party residential line and Php1,234.02 for a single business line as at December 31, 2010. Monthly charges vary according to the type of customer (business or residential) and location, with charges for urban customers generally being higher than those for rural/provincial customers. Regular installation charges amount to Php1,200Php1,100 for residential customers and Php1,500 for business customers. New products launched on promotion or products bundled onwith existing services usually waive the installation fee or allow for a minimal installation fee of Php500. Aside from the basic monthly charges, we charge our postpaid subscribers separately for NDD, IDD and calls to mobile phones. Calls toGenerally, calls between PLDT and other landlines within a local area code are free. Our prepaid fixed line customers generally do not pay a basic monthly charge andbut they can load a minimum amount of Php200, which will expire in a month, to have unlimited incoming calls. To make outbound calls, customers must top-up, as local calls are charged basedPhp2.00 per call and tolls are charged separately depending on usage.

36

the type of call. Recently, the Php300 load plan was introduced to the market with 600 free local outgoing minutes and unlimited incoming calls for one month. To make outbound calls, in excess of the free minutes, prepaid fixed line customers must top-up their load, with all local calls charged at Php2.00 per call while tolls are charged separately depending on the type of call.


PLDT offers both prepaid and postpaidPLP, where subscribers to the services benefit from a text-capable home phone which allows subscribers to bring the telephone set anywhere within the home zone area. These services are primarily intended for subscribers in areas where PLDT has no fixed cable facilities and is expected to increase our fixed line subscriber base.
     For

Currently, for thePLPpostpaid regular service, there are two plans being offered: (a)(i) Plan 600 and (ii) Plan 1,000, both with 600 freeunlimited local outgoing minutes; and (b) Plan 1,000 with 1,000 free local outgoing minutes; and a charge of Php1 per minute in excess of free minutes for both plans.calls. Another postpaid service currently offered is theCall Allplan whereinPLPis bundled with PLDT fixed line service for a monthly service fee of Php850. PLDT also offers thewireless broadband services bundled with voice namely: Home Bundle 1299 and Internet@Home service, which is a voice and data bundleplans are offered in two plans with monthly service fees of Php990 and Php1,299.

For thePLPprepaid service, there are two load plans being offered: (a)(i) Php300 load denomination with free 150 local outgoing minutes; and (b) Php600 load denomination with free 600 local outgoing minutes. Both prepaid plans includeminutes and unlimited incoming calls for one month,month; and (ii) Php150 load denomination with free 250 local outgoing minutes and unlimited incoming calls valid for 15 days. Both prepaid plans charges Php2 per minute and Php1 per minutecall in excess of free local outgoing minutes for Php300 and Php600 denominations, respectively.

     For a detailed description of these rates, see “— International Long Distance Service — Rates” and “— National Long Distance Service — Rates.”
minutes.

Pursuant to a currency exchange rate adjustment, or CERA, a mechanism authorized by the NTC, we are allowed to adjust our postpaid monthly local service rates upward or downward by 1% for every Php0.10 change in the Philippine peso-to-dollarpeso-to-U.S. dollar exchange rate relative to a base rate of Php11.00 to US$1.00. In 2010, we have not made any adjustment in our monthly local service rates. In a letter dated July 11, 2008, the NTC had approved our request to implement a rate rationalization program for our local service rates. In effect, there has been no change in the average Philippine peso to U.S. dollar rate of Php49.76 to US$1.00 factored2013, we have not made any adjustment in our monthly local service rates until the end of 2010.

rates.

For a detailed description of these rates, see “—“– International Long Distance Service Rates” and “—“– National Long Distance Service Rates.”

In the first quarter of 2005, HB No. 926 was filed and is pending in the House of Representatives of the Philippines. The proposed bill provides for the cancellation of the currency exchange rate mechanism currently in place. If this bill is passed into law or if the NTC issues guidelines to change the basis of the currency exchange rate mechanism, our ability to generate U.S. dollar linked revenues from our local exchange business could be adversely affected.

International Long Distance Service

Our international long distance service consists of switched voice and packet-based voice and data services that go through our international gateway facilities.IGFs. We also generate international long distance revenues through access charges paid to us by other Philippine telecommunications carriers for incoming international voice calls that terminate toon our local exchange network. Our packet-based voice and data services are transmitted over traditional TDM and IP networks. Revenues from our existing traditional circuits, VoIP systemsinternational long distance service amounted to Php11,422 million in 2013, Php10,789 million in 2012 and the network of a consortium of dominant carriersPhp11,342 million in Asia in which PLDT is a member.

2011.

The following table shows certain information about our international long distance services for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010 2009 2008
Total call volumes (in million minutes)  1,714   1,863   2,024 
Inbound call volumes (in million minutes)  1,515   1,653   1,786 
Outbound call volumes (in million minutes)  199   210   238 
Inbound-outbound call ratio  7.6:1   7.9:1   7.5:1 
Total international long distance service revenues (in millions) Php5,224  Php6,255  Php7,063 
International long distance service revenues as a percentage of total fixed line service revenues  11%  12%  14%
International long distance service revenues as a percentage of total service revenues  4%  4%  5%
2011:

   2013  2012  2011(1) 

Total call volumes (in million minutes)

   2,185    2,150    2,029  

Inbound call volumes (in million minutes)

   1,806    1,691    1,767  

Outbound call volumes (in million minutes)

   379    459    262  

Inbound-outbound call ratio (in minutes)

   4.8:1    3.7:1    6.7:1  

Total international long distance service revenues (in millions)

  Php11,422   Php10,789   Php11,342  

International long distance service revenues as a percentage of total fixed line service revenues

   18  18  20

International long distance service revenues as a percentage of total service revenues

   6  6  7

(1)

Includes Digitel’s international long distance service revenue contribution of Php234 million and call volumes of 58 million minutes for the period from October 26, 2011 to December 31, 2011.

International long distance service historically has been a major source of our revenue. However, primarilyAlthough we experienced a decline in international long distance service revenues in 2012 due to the steep decline inlower inbound termination and collection rates, andas well as intense competition, revenues derived from our international long distance service have been declining significantly.

revenues posted a 6% increase in 2013 mainly due to the favorable effect of higher weighted average exchange rate of the Philippine peso to the U.S. dollar.

We have been pursuing a number of initiatives to strengthen our international long distance service business, including: (a)(i) lowering our inbound termination rates; (b)(ii) identifying and containing unauthorized traffic termination

37


on our network; (c)(iii) being more selective in accepting incoming traffic from second- and third-tier international carriers; and (d)(iv) introducing a number of marketing initiatives, including substantial cuts in international direct dialing rates, innovative pricing packages for large accounts and loyalty programs for customers. In addition,

through PLDT Global, we aggregate inbound call traffic to the Philippines at our points of presence and, using our capacity in submarine cable systems connected to each point of presence, transmit calls to our network. PLDT Global is also enhancing the presence of PLDT in other international markets by offering new products and services such as international prepaid calling cards, virtual mobile services, SMS transit and other global bandwidth services. We believe these strategies will help us maximize the use of our existing international facilities and develop alternative sources of revenue.

The table below sets forth the net settlement amounts for international calls handled by PLDT, by country, for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  Net Settlement 
  2010  2009  2008 
  (in millions) 
Saudi Arabia US$32  US$33  US$30 
United States  31   25   46 
United Arab Emirates  14   20   20 
Japan  11   17   14 
Qatar  11   5   4 
Hongkong  10   8   4 
Taiwan  6   6   6 
Singapore  4   5   5 
Canada  3   9   9 
Others  19   29   36 
          
Total US$141  US$157  US$174 
          
2011:

   Net Settlement 
   2013   2012   2011 
   (in millions) 

Saudi Arabia

  US$71    US$49    US$71  

United Arab Emirates

   31     27     18  

United States

   22     19     22  

Canada

   11     7     3  

Malaysia

   9     7     2  

Hong Kong

   7     8     9  

Taiwan

   7     10     12  

UK

   5     4     4  

Japan

   5     11     11  

Others

   14     19     25  
  

 

 

   

 

 

   

 

 

 

Total

  US$182    US$161    US$177  
  

 

 

   

 

 

   

 

 

 

Rates

The average termination rate for PLDT was approximately US$0.1050.095 per minute in 20092011, and approximately US$0.10 per minute0.09 in 2010.

2012 and 2013.

Rates for outbound international long distance calls are based on type of service, whether operator-assisted or direct-dialed. Our rates are quoted in U.S. dollars and are billed in Philippine pesos. The Philippine peso amounts are determined at the time of billing. We charge a flat rate of US$0.40 per minute to retail customers for direct-dialed calls, applicable to all call destinations at any time on any day of the week.

We also offer international long distance service through PLDTBudget Card, a prepaid call card, which offers low-priced international calling services at IDD callto 98 calling destinations (including 16 Middle East destinations) with rates ranging from Php1.50 per minute to Php15.00 per minute depending on the destination to more than 100 calling destinations (excluding the Middle East). In April 2007, we introduced theBudget Card Middle East Editionwhich offers reduced IDD call rates of Php10 per minute and Php15 per minute to 14 different destinations in the Middle East.minute. PLDTBudget CardandBudget Card Middle East Editionare sold comes in denominations of Php200,two denominations: Php100, and Php30 and mustwhich can be consumed within 30 days from first use, and Php200, which can be consumed within 60 days from first use.

The standard IDD rate of US$0.40 per minute is being offered in all Digitel regular retail plans. To cater to the growing overseas foreign workers market, Digitel launchedChoice Elite offering outbound IDD rates to top destination countries for as low as US$0.14 per minute and product bundles for Digitel DSL andSunTel offering a US$0.10 per minute calling to select country destinations.

We also offer lower international rates such as ID-DSL which has a monthly service fee of Php99 with 30 minutes of free calls to selected countries and a rate of as low as Php1 per minute in excess of free minutes.

National Long Distance Service

Our national long distance services are provided primarily through PLDT. This service consists of voice services for calls made by our fixed line customers outside of their local service areas within the Philippines and access charges paid to us by other telecommunications carriers for wireless and fixed line calls carried through our backbone network and/or terminating to our fixed line customers.

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The following table shows certain information about our national long distance services for the years ended December 31, 2010, 20092013, 2012 and 2008:
             
  2010 2009 2008
Total call volumes (in million minutes)  1,290   1,822   1,944 
Total national long distance service revenues (in million pesos)  4,690   5,969   6,207 
National long distance service revenue as a percentage of total fixed line service revenues  10%  12%  13%
National long distance service revenue as a percentage of total service revenues  3%  4%  4%
2011:

   2013  2012  2011(1) 

Total call volumes (in million minutes)

   852    971    1,126  

Total national long distance service revenues (in millions)

  Php4,583   Php5,046   Php5,537  

National long distance service revenue as a percentage of total fixed line service revenues

   7  9  10

National long distance service revenue as a percentage of total service revenues

   3  3  3

(1)

Includes Digitel’s national long distance service revenue contribution of Php50 million and call volume of 10 million minutes for the period from October 26, 2011 to December 31, 2011.

Cellular substitution and the widespread availability and growing popularity of alternative, more economical non-voice means of communications, particularly e-mailing, and cellular text messaging and social networking sites, have negatively affected our national long distance call volumes partially offset byand higher ARPU primarily as a result of ceasingARPU. Furthermore, certain promotions on our national long distance calling rates.rates ended in 2013. The integration of some of our local exchanges into a single local calling area, as approved by the NTC, as well as the interconnection among local telcos, has also negatively affected our national long distance call volumes, and consequently, our revenues. Because of this integration, calls between two exchanges located within the same province are no longer considered national long distance calls but are treated as local calls.

Rates

Rates for national long distance calls traditionally were based on type of service, such as whether the call is operator-assisted or direct-dialed. However, in line with its move towards rate simplification, PLDT simplified these rates in recent years to a flat rate of Php5.00 per minute for calls originating from and terminating to the PLDT fixed line network and for calls terminating to fixed line networks of other LECs. Additionally, in recent years, PLDT also simplified its rates for calls terminating to cellular subscribers to a uniform rate of Php14.00 per minute.

subscribers.

In addition, PLDT launchesbundles the free PLDT-to-PLDT calls in some promotions from time to timeand product/service launchings in order to stimulate fixed line usage.

We continue to evaluate the rate structure of our national long distance services from per minute toll charges to flat rates per call for calls of unlimited duration. This is envisioned to make fixed line rates more competitive with VoIP rates and to revitalize interest in fixed line usage. We continue to study various pricing models in respect of the above new rate plans.

PLDT currently has interconnection arrangements with the majority of other LECs, pursuant to which the originating carrier pays: (1) a hauling charge of Php0.50 per minute for short-haul traffic or Php1.25 per minute for long-haul traffic to the carrier owning the backbone network; and (2) an access charge ofranging from Php1.00 per minute to Php3.00 per minute to the terminating carrier. PLDT still maintains revenue-sharing arrangements with a few other LECs, whereby charges are generally apportioned 30% for the originating entity, 40% for the backbone owner and the remaining 30% for the terminating entity. See “— Interconnection Agreements” for more information on these interconnection arrangements.

Data and Other Network Services

Our data and other network service revenues include charges for broadband, leased lines IP-based, packet-based and switched-basedIP-based services. These services are used for broadband internet, and domestic and international communications such as private data networking broadband and narrowband internet-based data communications, and packet-based communication.

39

communications.


The following table summarizes key measures of our data and other network services as at and for the years ended December 31, 2010, 20092013, 2012 and 2008:
             
  2010 2009 2008
Subscriber base:            
Broadband
  665,027   576,687   448,826 
DSL  643,048   559,664   432,583 
WeRoam  21,979   17,023   16,243 
SWUP
  15,641   12,383   6,516 
             
Total data and other network service revenues (in million pesos)  21,646   21,567   18,607 
Domestic  15,637   16,391   14,155 
Broadband
  8,511   7,232   5,563 
DSL  8,263   7,024   5,360 
WeRoam  248   208   203 
Leased Lines and Others
  7,126   9,159   8,592 
             
International            
Leased Lines and Others
  6,009   5,176   4,452 
             
Data and other network service revenues as a percentage of total fixed line service revenues  44%  42%  38%
Data and other network service revenues as a percentage of total service revenues  14%  14%  12%
2011:

   2013  2012  2011(1) 

Subscriber base:

    

Broadband

   961,967    887,399    842,273  

SWUP

   30,302    22,720    20,153  

Total data and other network service revenues (in millions)

  Php27,472   Php25,059   Php22,544  

Domestic

   19,917    18,436    16,404  

Broadband

   12,307    11,246    9,517  

Leased Lines and Others

   7,610    7,190    6,887  

International

    

Leased Lines and Others

   5,787    5,524    5,229  

Data Center

   1,768    1,099    911  

Data and other network service revenues as a percentage of total fixed line service revenues

   45  42  39

Data and other network service revenues as a percentage of total service revenues

   15  14  14

(1)

Includes Digitel’s data and other network service revenue contribution of Php221 million for the period from October 26, 2011 to December 31, 2011 and DSL subscribers of 99,367 as at December 31, 2011.

Recognizing the growth potential of data and other networking services, including IP-based services, and in light of their importance to our business strategy, we have been putting considerable emphasis on these service segments. These segments registered the highest percentage growth in revenues among our fixed line services in 2010 and continuedfrom 2011 to grow in the first quarter of 2011.

2013.

The continuous upgrading of our network using next-generation facilities and the completion of our domestic fiber optic backbone has enabled us to offer a growing range of value-addedbroadband and broadbandvalue-added services. With this and other technological upgrades, our infrastructure has developed from a traditional voice facility to a nationwide data network.

Domestic data services consist of broadband data services and leased lines and other data services.

In 2010,2013, we continued to broaden our service offerings with the launch of new services and expansion or enhancement of some of the existing offerings.

Broadband data services includePLDT DSLbroadband internet service, which is intended for individual internet users, small and medium enterprises, and large corporate subscriberscorporations with multiple branches, andPLDT WeRoamFibr, our most advanced broadband service, running oninternet connection.

At the start of 2013, PLDT Group’s nationwide wireless network (using GPRS, EDGE, 3G/HSDPA/HSPAintroduced new bandwidth variants of DSL offerings for businesses with speeds as fast as 15 Mbps, and WiFi technologies).

WeRoammobile broadband offers enterprise-grade postpaid packages that include unlimitedhardware bundle options where large enterprise customers are able to get top-of-the-line, branded IT devices of their choice together with their DSL. PLDT iGate, the direct internet or VPN access with maximum speeds of 3.6 Mbps via HSPA technology. VAS such as cloud-based web securityoffering for corporate requirements, continued its strong performance due to an increase in sales and premium static IP addressing are also available to enterprise customers.WeRoamis offered at monthly recurring fees of Php1,300, Php1,500, Php1,750 or Php2,000 depending on the type of plan selected.
     TheWeRoam Notebook ShopbundlesWeRoamwith the latest Lenovo business laptops to provide companies with powerful mobile productivity solutions. TheWeRoam Notebook Shopis available in three packages,Portable, ProductiveandPerformance, depending on the computing power needed, offered at monthly recurring fees ranging from Php2,520 to Php8,926.
subscriber base.

Leased lines and other data services include: (1)(i) Diginet, oura domestic private leased line service, providingspecifically supporting Smart’s fiber optic and leased line datanetwork requirements; (2)(ii) IP-VPN,a an end-to-end managed corporate IP networkIP-based or Layer 3 data networking service that offers a secure means to access corporate network resources; (3)(iii) Metro Ethernet, oura high-speed, Layer 2, wide area networking servicesservice that enableenables mission-critical data transfers; (4)(iv)Shops.Work, oura connectivity solution designed for retailers and franchisers, that linkslinking company branches to theirthe head office; and (5)(v)SWUP, oura wireless VPN service that powers mobile point-of-sale terminals and off-site bank ATMs, as well as other retail outlets located in remote areas.

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International leased lines and other data services consist mainly of: (1)(i) i-Gate, our premium, dedicateddirect internet access service, that provides high speed, reliable and managedwhich continues to be the choice among enterprise users for dedicated internet connectivity, to the globalas bandwidth capability goes beyond 200 Mbps, where heavy users can be provided with as much as 1,000 Mbps of direct i-Gate internet and is intended for enterprises and VAS providers; (2)bandwidth, complemented by industry-leading Service Level Agreements; (ii) Fibernet, which provides cost-effective and reliable bilateral point-to-point private data networking connectivity, through the use of our extensive international alliances, to offshore and outsourcing, banking and finance, and semiconductor industries; and (3)(iii) other international managed data services in partnership with other Global Service Providers, such as AT&T, BT-Infonet, NTT Arcstar, Orange Business, SingTel, Tata, Telstra, Verizon Business, among others,global service providers, which provide data networking services to multinational companies.
Information

In 2013, PLDT launched a fully meshed and Communications Technology

     We conduct ourmanaged international platform to the U.S. and Hong Kong designed for automatic switching and rerouting in milliseconds that enables various international submarine cables to act as multiple protections while promoting single connectivity. This platform provides subscribers a combination of low latency and high capacity services and allows uninterrupted and dedicated communication for their business data, voice, video and other telecommunications service, as well as provides improved network performance and global service level experience.

VitroTM data center, the Philippines’ pioneer and only purpose-built network of data centers, provides co-location or rental services, server hosting, disaster recovery, business continuity services, and a host of managed ICT businessessolutions to meet the growing ICT outsourcing needs of enterprise customers. The co-location business was the main growth driver in 2013 and was further boosted by revenues from cloud management, IT professional and VAS services, as well as increased licenses subscription.

PLDT completed and commercially launched the Philippine’s first carrier-grade cloud infrastructure in 2012. Following the launch, PLDT undertook a marketing campaign directed at both large enterprises and SMEs, which involved initiatives including customer events and free trial offers. PLDT’s cloud portfolio has grown to comprise infrastructure, platform and software solutions. PLDT has introduced customizable software solutions using the cloud infrastructure, in the areas of customer relationship management, supply chain management, human resources and payroll accounting, franchise management and others.

PLDT has initiated efforts to modernize its network, including through the deployment of fiber-to-the-home, or FTTH, technology which allows for high-speed internet connections at speeds of up to 100 Mbps. In addition to internet access, this technology is expected to support the offering of multimedia services, such as interactive video services, and to serve as a platform for the provision of cable television by facilitating the streaming of high-definition video.

For three consecutive years, PLDT has been the sole Philippine telecommunications company that has consistently been a finalist and awardee for Metro Ethernet Forum Carrier Ethernet Awards. PLDT was awarded the Best Marketing for the Asia-Pacific Region recognizing PLDT’s global competitiveness and leadership for international and domestic enterprise data services.

Miscellaneous

Miscellaneous services provide directory advertising, facilities management, rental fees and other services which are conducted through our wholly-owned subsidiary, ePLDT. ePLDT, isand its subsidiaries, a broad-based integrated information and communications technology company, focusing on infrastructure and solutions for internet applications, IP-based solutions and multimedia content delivery. ePLDT’s principal businesses are the operation of: (1) knowledge processing solutions, through the SPi Group; (2) customer relationship management through SPi CRM; (3) an internet data center under the brand nameVitro™; and (4) internet and online gaming through Infocom, netGames, Digital Paradise and Level Up!. Our ICT business registered revenues of Php11,358 million, Php11,549 million and Php10,983 million for the years ended December 31, 2010, 2009 and 2008, respectively, accounting for 7% of our total revenues in each year. The growth in the revenue contribution from our ICT business was primarily due to the continued growth of our data center and knowledge processing solutions businesses’ service revenues.

Knowledge Processing Solutions
     ePLDT provides knowledge processing solutions through the SPi Group. Our knowledge processing solutions business provides services such as: (a) editorial and content production services to the scholarly scientific, technical and medical journal publishing industry; (b) digital content conversion services to information organizations; (c) pre-press project management services to book publishers; (d) conversion services of medical records/data from handwritten or speech format to electronic format and patient scheduling, coding and compliance assistance, consulting and specialized reporting services; and (e) revenue cycle management, transcription and coding compliance services for U.S. medical facilities.
Customer Relationship Management
     We provide our customer relationship management business primarily through SPi CRM. SPi CRM provides offshore, cost-effective contact center outsourcing solutions specializing in inbound customer care; customer and technical support to its clients in the Philippines, U.S. and U.K.; and exclusive customer support and billing requirements to one of the largest direct-to-home satellite television providers in the U.S. In 2010, we owned and operated 5,565 seats with an average of 4,592 CSRs compared to 7,140 seats with an average of 5,190 CSRs in 2009. As at December 31, 2010 and 2009, SPi CRM had six and seven customer relationship management sites, respectively.
Internet and Online Gaming
     ePLDT owns a 99.6% equity interest in Infocom, one of the country’s leading internet service providers, or ISPs. Infocom offers consumer prepaid internet access under the nameWarpSpeedandSpeed Tipid, and postpaid internet access; dedicated dial-up and multi-user dial-up corporate leased lines; broadband internet access through DSL and cable; and website consulting, development and hosting. ePLDT also owns a 75% equity interest in Digital Paradise, an internet café business with 104 branches which assumed the assets of Netopia Computer Technologies, Inc. and the brandNetopia.ePLDT further holds a 57.5% equity interest both in netGames, a publisher of Massively Multi-player Online Games in the Philippines and in Level Up!, a leading publisher of online games in the Philippines.
Data Center and Others
     ePLDT operatesVitro™, one of the Philippines’ first internet data centers that provides co-location, web and server hosting, hardware and software maintenance services, website development and maintenance services, webcasting and web hosting, shared applications, data disaster recovery and business continuity services, intrusion detection and IP security services, as well as firewall and managed firewall, and other data services.

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company.


Infrastructure

Infrastructure
Wireless Network Infrastructure

Cellular

Through Smart and DMPI, we operate a digital GSM network. To meet the growing demand for cellular services, Smart hasand DMPI have implemented an extensive deployment program for its GSM network covering substantially all of Metropolitan Manila and most of the other population centers in the Philippines. As at December 31, 2010,2013, Smart had 48and DMPI have 64 mobile switching centers, 9481 text messaging service centers and 10,31620,770 cellular/mobile broadband base stations in operation after having added 589 cellular/mobile broadbandconsolidating Smart’s 14,074 base stations to its nationwide cellular network in 2010.

network.

Smart has an operating spectrum of 7.5 MHz in the 900 band supportingand 20 MHz in the 1800 band for its GSM networknetwork; and 15 MHz in the 2100 band and 10 MHz in the 850 band assigned for 3G and W-CDMA. Smart’s dual-band GSM network allowsSmart was awarded a 3G license by the NTC in 2005 and received the largest radio frequency allocation of 15 MHz. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum, the range that would best enable it to efficientlyrapidly deploy high capacity 1800 MHz BTS in dense urban areas while its 900 MHz BTS can be much more economically deployed in potentially high growth, but less densely populated provincial areas. The 3G network revolutionizes mobile technologynationwide and at the same time offer a high quality of 3G service. CURE was assigned 10 MHz of 3G frequency bandwidth in the 1955-1965 to 1955-2155 MHz spectrum, which is the subject of the divestment plan as presented by providing more capacity, faster data ratesPLDT to the NTC in relation to PLDT’s acquisition of Digitel. DMPI has a total operating spectrum of 17.5 MHz in the 1800 band and richer data10 MHz band in the 2100 band, with the latter under the 1935-1945 MHz and video applications. 2125-2135 MHz spectrum, contiguous to Smart’s 15 MHz spectrum. See “– Development Activities (2011-2013) – Divestment of CURE” andNote 2 – Summary of Significant Accounting Policies – Divestment of CUREto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Smart has been deployingco-locating its 3G networkcell sites where its base stations are installed. In addition, 30 of Smart’s mobile switching centers were housed in urban areas where there is a demand for mobile broadband applications and where 3G mobile units are more likelyPLDT’s fixed line complexes as at December 31, 2013. These operational synergies have allowed Smart to be available. We do not expect spectrum constraintsreduce switch installation time from three months to affect Smart’s expansion plans for GSM in the foreseeable future.

five weeks. Due to its access to PLDT’s network assets,facilities, Smart has been able to achieve significant capital expenditure savings, which capital expenditures are understood to be significantly less, on a per net addition basis, than its current competitors. This translates into an improved ability to price competitively and target the mass market subscriber base in the Philippines, while retaining profitability. Based on existing equipment purchase contracts, Smart expects incremental capital expenditure per net additional subscriber to amount to less than US$50.
     Smart was awarded a 3G license by the NTC in 2005 and received the largest radio frequency allocation of 15 MHz. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum, the range that would best enable it to rapidly deploy its 3G network nationwide and at the same time offer the highest quality of 3G service.

Smart has been continuously extending its 3G footprint and since it commenced, it now covers 410 cities and municipalities which includes the whole Metro Manila and major urban centers nationwide. Smart also upgraded itsfootprint. The 3G network to HSDPA to provide users with high downloadrevolutionizes mobile technology by providing more capacity, faster data rates and an improved broadband experience.

richer data and video applications from a 2G network. Smart has also been co-locatingdeploying its cell sitesHSPA+ network in urban areas where there is a demand for mobile broadband applications and where HSPA+ mobile units are more likely to be available.

Smart launched its fourth generation (4G) LTE network in August 2012. To date, Smart has established its LTE network coverage with 1,172 LTE base stations in strategic locations in the Philippines. Forthcoming are installed. As at December 31, 2010, 27deployments in select high traffic areas in the nation’s capital and strategic locations to benefit more members of Smart’s mobile switching centers were housed in PLDT’sthe Philippine population.

In 2012, the PLDT Group completed its two-year network transformation program covering fixed line, complexes. These operational synergies have allowed Smartcellular and broadband networks, not only to reduce switch installation time from three monthsachieve operating and cost efficiencies and lay the foundation for future technological advances, but primarily to five weeks.

provide superior quality of experience to subscribers. The program, with a total cost of Php67 billion, also included convergent IT transformation that enhanced business analytics, customer relations management and operations support systems.

Wireless Broadband, Satellite and Other Services

     SBI

Smart Broadband operates a nationwide broadband wireless internet data services. It is operating in the 2.4, 2.5, 3.5 and 5.7 GHz spectrum, supporting its WiFi, Canopy and eventually WiMaxWiMAX services, respectively. It offers fixed wireless broadband internet connectivity to both residential and corporate clients. It also maintains and operates WiFi hotspots installations that serve mobile internet users. Smart also upgraded its 3G network to High-Speed Downlik Packet Access to provide users with high download data rates and an improved broadband experience. More than 2,5002,900 of Smart’s base stations are now wireless broadband-capable, covering most of the key cities and the other populated centers in the country. These are strategically co-located in Smart’s cellular base stations that allow it to efficiently reach many subscribers. For its backbone, it uses the nationwide PLDT and Smart fiber optic and IP backbone that provide substantial bandwidth capacity to utilize and to grow on demand.

ACeS Philippines manages, controls and operates its own satellite gateway and other ground infrastructure, including a 13-meter feeder-link C-band earth station, beam congruency antenna and equipment that serve as the primary interface between the ACeS System and other telecommunications networks. It uses the Garuda I satellite to transmit digital voice services to ACeS System, mobile and fixed terminal users within the Asian service area.

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Fixed Line Network Infrastructure

Domestic

Our domestic telephone network includes installed telephones and other equipment, such as modems on customers’ premises, localcopper and fiber access lines connecting customers to exchanges, referred to as “outside plant connecting customers to our exchanges,inter-office linesinter-exchange fiber optics connecting exchanges, and long distance transmission equipment.equipment with unmatched capacity and reach. We have a total of 203271 central office exchanges nationwide as at December 31, 20102013 and are continuously expanding the wireline infrastructure in unserved and underserved areas using new technology.

enabling our customers to access to the Philippine’s largest network and to the rest of the world.

We are currently upgradingcontinuing the upgrade of our fixed line facilities to the NGN, anfully IP-based platformplatforms that can deliver voice and data services using a single copper or fiber line to the same network. NGNcustomer with better quality of service. This migration initiative enables us to fully replace the ageingaging Public Switched Telephone Network, switches andor PSTN, transfer existing customers to this new platformthese newer platforms, and acquireensure the best service for new customers forof voice and data services.services for their present and future needs. We expect to complete the upgrading of our fixed line facilities to NGN in early 2015, providing subscribers with a diversified range of telecommunication services using IP technology.

One of these platforms, FTTH, is an advanced access technology that employs fiber optics all the way up to customer premises. To realize this, we are building a fiber distribution network that will connect homes and other premises to further ensure their internet quality kilometers away from the serving exchange. This new optical fiber distribution network will eventually replace conventional copper cable. At present, FTTH is potentially capable of delivering up to 2.5 Gigabits per second, or Gbps, of bandwidth to customers. Its huge bandwidth, when tapped, could enable the Company to additionally deliver high-bandwidth content and services to our subscribers. These include high definition broadcast television, video-on-demand, and other new services now being offered by leading telcos abroad. We have been testing FTTH since 2006 and in 2012 began deploying FTTH in high-end and selected upper middle villages in Metropolitan Manila.

For many years up until today, PLDT has been using the poles of Meralco in Metropolitan Manila and in the rest of Meralco’s service areas for PLDT’s outside plant aerial cable pursuant to lease agreements with Meralco.

We are also started thecontinuously upgrading of our legacy data and transport networks to our fully IP-based platform.platforms. This enables us also to also replace theretire our old data network and providesprovide new capabilities tofor our corporate data customers.customers such as enhanced visibility into their network and better quality of service. We also expect to complete this initiativeproject in 2015.

     We also have2015 and intend to continually evolve our infrastructure ready to cater to future technology.

The network includes an Internet Gatewayinternet gateway that provides premium service with high-speed, reliable and managed connectivity to the internet. The gateway is composed of high capacity and high performance routers that serve as our IP network gateway that connects the Philippines to the rest of the world. It provides premium and differentiated internet service to all types of customers ranging from ordinary broadband customers to high bandwidth internet requirements of corporate customers, knowledge processing solution providers, internet service providers and even other service providers.

Furthermore, we have several networks that provide domestic and international connectivity for corporate customers and other carriers. These include the Multi-Service Access Platform, or MSAP, based on synchronous digital hierarchy,Synchronous Digital Hierarchy, or SDH, technology and legacy data networks that providesprovide wide range of bandwidth from low speed to high speed capacity in Gigabits per seconds.Gbps. These MSAP networks are deployed in strategic areas nationwide. In 2013, we completed Phase 4 deployment of our carrier ethernet network to serve the growing demand for ethernet services from the corporate segment and prepare the network for full migration highlighting delivery of

multimedia services. Carrier ethernet service is a global standard for secure, scalable, resilient, cost effective, and high bandwidth point to point or multi-point connectivity using the simple and ubiquitous Ethernet technology delivered through PLDT’s carrier ethernet certified network. It supports enterprise requirement such as data storage, headquarter to branch connectivity, headquarter to disaster recovery site connectivity, cloud services and backhaul for mobile/LTE services.

The PLDT DFON is a nationwide comprisingbackbone network. The DFON is comprised of more than a thousand nodes11,200 kilometers of fiber optic cable installed across the country connecting its major islands. It is the first fiber optic backbone network in the country and these networks will eventually be evolved to a converged multi-service Carrier Ethernet Network starting this year.

     We have our own 10,050-kilometer DFON, the country’s first telecommunications network using fiber opticsis used in delivering voice, video, data, and other broadband and multimedia services nationwide. Our fiber optic network employs MSAP and Reconfigurable Optical Add-Drop Multiplexer technologies to improve network performance and reduce operating costs. Our networkIt is composedcomprised of in-landnodes connected by terrestrial and submarine cable installationslinks and is configured in seven major loops and four subtended loops. The DFON’s loops provide self-healing ringsprotection and alternative routes for added resiliency and protection against single and multiple fiber breaks along the different segments. The DFON uses the ROADM and 10/40/100G technology which give it greater flexibility for capacity and expansion. The network also includes interconnectivity among the three self-healing subtending rings, or small rings withininternational cable landing stations of PLDT with its own backhaul capacity and resiliency under the mainsame DFON loop, allowing route delivery even in the event of single link failure per ring. Further, one main and one subtending rings are also provided with a third fiber optic cable routes to further improve network resiliency in case of double/multiple link failures within the ring.platform. To date, the PLDT DFONnetwork has an aggregateaggregated capacity of 1.7nearly 6 Terabits per second andsecond. The DFON is connected directly to four international submarine cable systems. PLDT’s fiber optic transport network is augmentedcomplemented by the nationwidea terrestrial microwave backbone operated by Smart. These microwave networks complement the higher capacity fiber optic networks and are vital in delivering reliablenetwork to deliver services to remote areas.
areas not covered by fixed terrestrial transport network.

We likewise have an IP backbone network, or IPBB, composed of high-capacity, high-performance core and edge routers which providesprovide connectivity to all IP-based network elements of PLDT, Smart, othersubsidiaries and affiliates and subsidiaries, and corporate customers. It serves as the singlecommon and highly resilient IP transport platform for all IP-based services of PLDT.

     For many years,the PLDT Group. Both the DFON and IPBB serve as the common high bandwidth Fiber Optic Cable-based backbone for the PLDT Group.

Aside from the DFON and IPBB, the PLDT Group has been usingembarked on further synergy initiatives to rationalize and integrate its networks which include, among others, the power poleoutside plant, the DSL network, the IP backbone, the transmission systems, the internet gateway, international voice gateway, the PSTN, and NGN. These initiatives are expected to complement and enhance coverage and capacity for all networks in the PLDT Group.

We are continuously integrating Digitel’s fixed line to PLDT’s infrastructure. Digitel has a legacy PSTN network in all of Meralcoits service areas in Luzon and Metropolitan Manila and also has a DSL network deployed in a majority of its service areas. Digitel has a Luzon-wide transmission system consisting of microwave radio and fiber optics systems used to connect transit exchanges and other operators. The majority of Digitel’s transmission network runs on microwave radio systems. Digitel has its own IP backbone, internet gateway and international voice gateway.

Considering the similarity of technology used, service coverage and products being offered, we believe there are significant potential gains for PLDT’s fixed line aerial cables in this area pursuantcost efficiency through a converged network. Customer care systems and operation support systems are also be rationalized and integrated to lease agreements with Meralco. PLDT, through PCEV, has approximately 6% direct ownership interest in Meralco and approximately 17.5% indirect interest in Meralco through PCEV’s investment in Beacon, and has in this regard entered into an investment and cooperation agreementalign with the Lopez Group providing it with certain corporate governance rights in respect of Meralco. See “— Information on the Company — Infrastructure — Fixed Line Network Infrastructure”, Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Investing Activities” and Note 10 — Investments in Associates and Joint Ventures to the accompanying consolidated financial statements in Item 18 for further information on the Meralco shares acquisition and the transfer of PCEV’s equity share in Meralco.

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converged network.


International
     We provide

PLDT provides international network services using ourvia two international gateway switching exchanges.gateways. PLDT’s two international gateways are located in the cities of Manila and Makati. At the moment we have two new IP softswitches that are expected to replace PLDT two legacy switches which we use to provide international voice services. As at December 31, 2010, our2013, PLDT’s international long distance facilities allow direct correspondence with 4039 countries (representing 7981 correspondents) and can reach 668979 foreign destinations (via direct and transited routes including fixfixed and mobile network destination breakouts) worldwide.

As at December 31, 2013, Digitel’s international long distance facilities also allows direct interconnection with 32 correspondents in 16 countries and can reach more than 200 foreign networks/destinations (including fixed and mobile network breakouts) worldwide. In addition, Digitel has two IGF switches, located in Mandaluyong City and Quezon City which complements PLDT’s reach.

We also own interests in submarine cable systems, through which we route all of our international traffic.

voice and data traffic as well as private data lines.

The table below shows the submarine cable systems in which we havePLDT has interests and the countries or territories they link:

Cable System

  
Cable System

Countries Being Linked

G-PGuam and the Philippines
Asia-Pacific Cable Network 2, or APCN2  Philippines, Hong Kong, Japan, Korea, Malaysia, Singapore, China and Taiwan
SEA-ME-WE-3  Japan, Korea, China, Taiwan, Hong Kong, Macau, Philippines, Vietnam, Brunei, Malaysia, Singapore, Indonesia, Australia, Thailand, Myanmar, Sri Lanka, India, Pakistan, United Arab Emirates, Oman, Djibouti, Saudi Arabia, Egypt, Cyprus, Turkey, Greece, Italy, Morocco, Portugal, France, UK, Belgium and Germany
China-U.S.China-United States Cable Network, or CUCN  Japan, China, Taiwan, Korea, Guam and the U.S. Mainland
FLAG Cable  Japan, Korea, China, Hong Kong, Malaysia, Thailand, India, United Arab Emirates, Saudi Arabia, Egypt, Italy, Spain and UK
Southern Cross Cable  U.S. Mainland, Hawaii, Fiji, Australia and New Zealand
East Asia Crossing, or EAC Cable  Japan, Hong Kong, Korea, Taiwan, Singapore and the Philippines
PC-1,Pacific Crossing-1, or PC1, Japan-U.S. Cable and TGN, TGN-P, Unity  Japan and the U.S.
Asia-America GatewayAAG Cable Network, or AAG  Malaysia, Singapore, Thailand, Vietnam, Brunei, Hong Kong, Philippines, Guam, Hawaii and the U.S. Mainland
Asia Submarine-cable Express, or ASEPhilippines, Japan, Singapore, Malaysia and Hong Kong
     In November 2009,

PLDT, alongin partnership with leading telecom firms in Asia, completed the construction of the ASE optical fiber cable expansion to Hong Kong in February 2013. The 7,800-kilometer undersea cable network uses 40 Gbps technology that is upgradeable to 100 Gbps, with a consortium of major carriers in Asia and North America, put into service a new international cable system first started in 2007, the Asia-America Gateway, connecting the Asia-Pacific Region and North America with aminimum design capacity of 100 Gigabit per second and using the latest Dense Wavelength Division Multiplexing, or DWDM, technology to provide upgradeable, future proof transmission facilities. This new cable system not only provides PLDT additional capacity to support rapid growth of broadband and resiliency to existing international cable systems, but also puts PLDT in a strategic position to be the gateway between Asia-Pacific and North America which provides opportunities for new business as regional internet hub.

     In July 2010, PLDT signed a Memorandum of Understanding to plan the Asia Submarine-cable Express (ASE) project. On January 27, 2011, PLDT signed the ASE Construction and Maintenance Agreement with leading telecommunication companies of Japan, Singapore and Malaysia. As the Philippine Landing Party, PLDT will build a new cable15 Terabits. With its landing station inat Daet, Camarines Norte, to accommodate the ASE. The system will initially connectASE provides the first and only direct cable connection from the Philippines to Japan Hong Kong, Singaporethat avoids the earthquake-prone sea south of Taiwan, through which the other cable systems pass.

In April 2013, the AAG upgrade project was completed, providing PLDT with additional capacity. PLDT has also acquired additional transpacific capacities in Unity and Malaysia. It is expectedTGN-P to be operational byinterconnect with ASE.

In addition, Digitel maintains submarine cable capacities in EAC, PC1 and CUCN.

The extent of PLDT’s international cable infrastructure provides not only significant capacity in support of the third quarterbusiness, it also ensures resiliency and redundancy in order to minimize service disruptions and guarantee continuity of 2012.

service. PLDT’s international cable network improves reliability and enables it to offer services with automatic switching.

Interconnection Agreements

Since the issuance of Executive OrderE.O. No. 59 in 1993, which requires non-discriminatory interconnection of Philippine carriers’ networks, we have entered into bilateral interconnection arrangements with other Philippine fixed line and cellular carriers.

     Effective

In January 1, 2003, local2009, the access charge for cellular operators, including Smart, that terminatedomestic calls to PLDT’sfrom one fixed line to a fixed line in another network increased from Php2.00was updated in the range of Php1.00 per minute to Php2.50 per minute, which further increased to Php3.00 per minute effective January 1, 2004.

     Since January 1, 2004, domesticwhile the access charge for calls terminating to cellular subscribers originating from fixed line subscribers were charged a termination rate ofto CMTS was updated to Php4.00 per minute.
     Under a separate agreement between PLDT and PAPTELCO, The change for CMTS calls to fixed line network remained at Php3.00 per minute.

PLDT is thean Inter-Exchange Carrier providing transit facility provider between Smart, Globe, other LECs,service among CMTS, LEC operators andincluding the PAPTELCO. Transit traffic is a service being provided by PLDT to Smart, Globe,connect calls from one carrier to other LEC operators and PAPTELCO members where PAPTELCO memberscarriers most of which have no direct interconnection with either

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Smart, Globe and other LEC operators. PLDT also has similar arrangement with other non-members of PAPTELCO.
     Effectiveinterconnection. Since January 1, 2002, Smart charged a termination rate of Php4.002009, PLDT’s transit fee remains at Php0.50 per minute for domestic calls originating from or terminating to another cellular operator’s network. For SMS originating from Smart and terminating on other operators’ cellular network and for SMS originating from other operators and terminating on Smart’s cellular network, the charge is Php0.35 per message.
     Effective February 1, 2003, international calls terminating to PLDT’s fixed line network have been charged a termination rate of approximately US$0.12short haul (intra-island), Php1.25 per minute an increase from the previous rate of approximately US$0.08 per minute. Also, international calls terminating to Smart’s cellular network have been charged a termination rate of approximately US$0.16for long-haul (inter-island) and Php1.14 per minute an increase from the previous termination rate of approximately US$0.12 per minute. In 2010, the average termination rates for PLDT and Smart were approximately US$0.10 per minute and US$0.13 per minute, respectively.
CMTS calls.

PLDT has continuously and actively negotiated with other legitimate Philippine Fixedfixed and CMTS carriers for interconnection based on the guidelines being issued by the NTC or any authorized government agency. These carriers include the major fixed and mobile players in the industry with nationwide operations, PAPTELCO and other non-PAPTELCO players, both of which usually operate in selected towns in the countryside.

     Direct interconnection, termination/access charges or the charges a carrier bills the other in directly accessing its network are bilaterally negotiated and agreed upon by the carriers, pursuant to NTC rules and regulations.
     As an authorized Inter-Exchange Carrier, PLDT provides transit services or calls originating from one carrier and terminating to the other via PLDT’s network. PLDT provides extensive transit services to PAPTELCO and non-PAPTELCO carriers, these entities virtually having no telecommunications backbone of their own. As at December 31, 2010,2013, PAPTELCO has 4741 member companies, of which 33 are active, operating 12290 main telephone exchanges in the countryside.
     In 2010, wholesale

As at December 31, 2013, the PLDT Group is interconnected with 94 foreign carriers from 41 countries reaching more than 600 international destinations.

The average international termination rate for calls to PLDT fixed line network remainedwas retained at approximately US$0.100.09 per minute while traffic to Smart via PLDT international gateway facility was rated wholesale at approximately US$0.13 per minute.in 2013. Despite the global trend to reducetowards reductions in wholesale international termination rates, PLDT has kept its ratesonly implemented modest rate reductions since 2009. Also, PLDT carries international calls terminating at approximately above US$0.10 level consideringSmart andSun Cellular network where it has no direct interconnections.

In 2013, the cost to haul and terminate theseaverage international termination rate for calls to its subscribers.

Smart was approximately US$0.125 per minute and the rate for Sun Cellular was approximately US$0.108 per minute.

Access charge for SMS from Smart to other CMTS operators and vice versa had been reduced from Php0.35 per SMS to Php0.15 per SMS effective November 30, 2011, as mandated by the NTC through Memorandum Circular No. 02-10-2011.

Licenses and Regulations

Licenses

PLDT, Subictel, Clarktel,SubicTel, ClarkTel, Philcom, Digitel, Smart, PCEV, SBI, DMPI and CURE provide telecommunications services pursuant to legislative franchises which will expire, in the case of PLDT, on November 28, 2028; in the case of Subictel, in 2019;SubicTel, on January 22, 2020; in the case of Clarktel,ClarkTel, on June 30, 2024; in the case of Philcom, in November 2019; in the case of Digitel, in February 2019; in the case of Smart, on March 27, 2017; in the case of2017 and with respect to spectrum transferred from PCEV, on May 14, 2019; in the case of SBI, on July 14, 2022; in the case of DMPI, on December 11, 2027; and in the case of CURE, on April 24, 2026.2026, although PLDT has agreed to divest the CURE spectrum as a part of the NTC decision with respect to PLDT’s acquisition of a controlling interest in Digitel. A franchise holder is required to obtain operating authority from the NTC to provide specific telecommunications services.services authorized under its franchise. These approvals may take the form of a CPCN, or, while an application for a CPCN is pending, a provisional authority to operate. Provisional authorities are typically granted for a period of 18 months. The Philippine Revised Administrative Code of 1987 provides that if the grantee of a license or permit, such as a CPCN or provisional authority, has made timely and sufficient application for the extension thereof, the existing CPCN or provisional authority will not expire until the application is finally decided upon by the administrative agency concerned.

PLDT

PLDT operates its business pursuant to a number of provisional authorities and CPCNs, the terms of which will expire at various timesdates between now and 2028. The CPCNs pursuant to which PLDT may provide services to most of the Metropolitan Manila area, Davao and other Philippine cities expired in 2003. Although some of PLDT’s CPCNs and provisional authorities have already expired, PLDT filed applications for extension of these CPCNs and provisional authorities prior to their respective expiration dates and is therefore entitled to continue to conduct its business under its existing CPCNs and provisional authorities pending the NTC’s decision on these extensions. PLDT expects that the NTC will grant these extensions; however, there can be no assurance that this will occur. The periodperiods of validity of some of PLDT’s CPCNs has been extended further by the NTC to November 28, 2028, coterminous with PLDT’s current franchise under R.A. 7082. Motions to extend the period of validity of the other CPCNs to November 28, 2028 are currently pending withhave been granted by the NTC. See Item 3. “Key Information Risk Factors

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Risk Factors Relating to Us —The Company and Its Business – Our business is significantly affected by governmental laws and regulations, including regulations in respect of our franchises, rates and taxes”taxes, and laws relating to anti-competitive practices and monopoly” for further discussion.

On August 22, 2008, PLDT was granted authority under NTC Case No. 2007-095 to operate in key cities and municipalities nationwide not yet covered by its existing CPCNs and/or authorizations. This approval extended the coverage of PLDT to all areas nationwide except for seven areas in Albay province. On July 17, 2009, the NTC granted PLDT a Provisional Authorityprovisional authority under NTC Case No. 2006-078 to operate in the seven areas in Albay, thereby, authorizing it to operate nationwide.

On August 31, 2011, the NTC rendered its decision in NTC Case No. 2011-030 granting provisional authority for PLDT to participate in the ownership, construction and maintenance of the ASE submarine cable network and further authorizing PLDT to construct the Philippine terminal station thereof in Daet, Province of Camarines Norte. The said provisional authority was valid for 18 months from receipt thereof by PLDT or up to February 28, 2013. PLDT filed an application for extension of its provisional authority on February 12, 2013. On July 05, 2013, the NTC granted PLDT a CPCN for a period of ten years based on its franchise under R.A. 7082.

Digitel

Digitel operates its business pursuant to a number of provisional authorities and CPCNs. Under these CPCNs, Digitel may provide services to: (a) install, operate, maintain and develop telecommunications facilities in Regions I to V; (b) install, operate and maintain telephone systems/networks/services in Quezon City, Valenzuela City and Malabon, Metropolitan Manila and Tarlac; (c) install, operate and maintain an IGF in Binalonan, Pangasinan; (d) install, operate and maintain an IGF in Metropolitan Manila; (e) operate and maintain a National Digital Transmission Network; (f) install, operate, and maintain a nationwide CMTS using GSM and/or CDMA technology; and (g) install, operate and maintain a cable landing station. Digitel was also granted provisional authority to: (a) install, operate and maintain LECs in the National Capital Region; and (b) install, operate and maintain LEC services in Visayas and Mindanao.

Smart

Smart operates its cellular, international long distance and national long distance services pursuant to CPCNs, the terms of which will expire upon the expiration of its franchise. On July 22, 2002, Smart was granted separate CPCNs to operate a CMTS and an international gateway facility.IGF. On August 26, 2002, Smart was granted a CPCN to install, operate and maintain nationwide global mobile personal communications via satellite which will also expire upon expiration of its franchise.franchise on March 27, 2017. On February 19, 2008, Smart was granted a CPCN to establish, install, maintain, lease and operate an international private leased circuit for a term that is coterminous with the expiration of its franchise. Prior to that, Smart was permitted to engage in these activities pursuant to a provisional authority and timely filed an application for the grant of such CPCN. On September 29, 2009, Smart was granted a provisional authority to install, operate and maintain a nationwide data communications network which iswas valid for 18 months or up to March 29, 2011. Smart filed a motion for issuance of CPCN or extension of provisional authority on March 03, 2011, which is still pending resolution by3, 2011. Acting on the motion, the NTC issued an Order on June 24, 2011, extending the provisional authority from March 28, 2011 up to but not beyond March 28, 2014. On February 11, 2014, Smart filed a motion for extension with the NTC, which motion remains pending as at March 29, 2011.of April 1, 2014. On May 28, 2010, the NTC issued an order granting the extension of Smart’s provisional authority to construct, install, operate and maintain a nationwide public calling office and payphone service from January 5, 2010 up to January 4, 2013.

On January 2, 2013, Smart filed a Motion for Issuance of CPCN and/or extension of provisional authority. Acting on the said motion, the NTC issued an Order dated September 25, 2013, extending the provisional authority from January 4, 2013 up to January 4, 2017.

On December 29, 2005, Smart was awarded a 3G license by the NTC after being ranked the highest among the competing operators with a perfect score on a 30-point grading system designed to gauge the capability of telecommunication operators to effectively provide extensive 3G services. As a result, Smart received the largest radio frequency allocation of 15 MHz as well as first choice of frequency spectrum. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrums. Smart is required to pay annual license fees of Php115 million based on the two 15 MHz spectrumsof paired spectrum awarded to Smart.

     PCEV CMTS

Smart was awarded by the NTC additional frequency band 825-835/870-880 MHz was reassigned to Smart for additional 3G use on March 6, 2008. Smart is nowwas required to pay to NTC the spectrum user fee, or SUF, of Php150 million based on the additional 10 MHz of 3G frequencies.

     Under

DMPI

On August 28, 2003, the termsNTC approved the assignment by Digitel of its authority to construct, install, operate and maintain a nationwide CMTS using GSM and/or CDMA technology to its wholly-owned subsidiary, DMPI. DMPI operates under the 3G license, Smart was required to:

begin installation and rollout of its 3G network no later than 18 months from the date of the award;
start commercial operations no later than 30 months from the date of the award; and
cover at least 80% of provincial capitals and 80% of chartered cities within five years.
     PCEV was authorized to provide virtually every typetrade nameSun Cellularand is also a grantee of telecommunications service, including the transmission of voice, data facsimile, audio and video and information services, in and between provinces, cities and municipalities throughout the Philippines. Thea 25-year legislative franchise under R.A. 9180, which was last amended on May 14, 1992, will expire on May 14, 2019 and may be extendedDecember 11, 2027. DMPI was also awarded a 3G license by a legislative act of the Philippine Congress. NTC with 10MHz radio frequency allocation.

SBI

On January 8, 2010, the NTC approved the transfer to SBI of PCEV’s CPCN to establish, construct, operate and maintain a nationwide CMTS.

CMTS and PCEV is now an investment holding company. The CPCN for CMTS transferred to SBI had a validity of 15 years from the date of issuance or until August 18, 2012, which was extended for a period coterminous with the life of SBI’s franchise, or July 2022, by order of the NTC on November 8, 2012.

SBI is a grantee of a 25-year legislative franchise under R.A. 8337, which expireswill expire on July 14, 2022, to construct, install, establish, maintain, lease and operate wire and/or wireless telecommunications system throughout the Philippines.

On August 26, 2009, the NTC granted SBI a CPCN for the installation, operation and maintenance of the data leased channel circuit network service for a period coterminous with the life of its existing franchise. SBI is a grantee of a provisional authority for the expansion of its data leased channel circuit network service in several areas in Zamboanga Sibuguey,Sibugay, Sultan Kudarat, Southern Leyte, Biliran, Compostela Valley, Davao Oriental, Dinagat Island and Shariff Kabunsuan. The provisional authority is valid for 18 months from September 29, 2009 until March 29, 2011. SBI filed a motion for issuance of CPCN or extension of provisional authority on March 02,2, 2011. The said motion is still pending resolution by the NTC. SBI is also a grantee of a provisional authority for the installation, operation and maintenance of international leased line service that was valid up to February 2005 and the motion for extension of which remains pending with the NTC as at the date of this annual report.

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CURE

CURE is a grantee of a 25-year congressional franchise under R.A. 9130, which expireswill expire on April 24, 2026, to construct, install, establish, maintain, lease and operate wire and/or wireless telecommunications system throughout the Philippines. The NTC granted CURE a provisional authority to install, operate and maintain a nationwide 3G network on January 3, 2006 valid for 18 months, which was subsequently extended for three years from January 4, 2007 until January 3, 2010. On December 3, 2009, CURE filed a motion for the issuance of CPCN or extension on theof its provisional authority. CURE had also submitted its roll-out plan to the NTC on January 4, 2010. As at the date of this annual report, this motion is still pending with the NTC.
The congressional franchise, spectrum and associated permits of CURE are expected to be divested as part of the NTC decision with respect to the Digitel acquisition. See Item 4. “Information on the Company – Development Activities (2011-2013) – Divestment of CURE” for further information.

PDSI

PDSI is a grantee of a 25-year congressional franchise under R.A. 8992 which expireswill expire on January 26, 2026. The scope of its franchise is2026 to construct, install, establish, operate and maintain for commercial purposes and in the public interest, the business of providing basic and enhanced telecommunicationtelecommunications services in and between provinces and municipalities in the Philippines and between the Philippines and other countries and territories.

PDSI is a holder of a provisional authority issued by the NTC to construct, install, operate and maintain an information and data communication network in key cities and municipalities in the Philippines on December 22, 2005 with validity of 18 months or until June 22, 2007, which has been successively extended by the NTC.NTC thereafter. Most recently, on April 7, 2010, the NTC issued an order dated June 29, 2010 extending the provisional authority of PDSI to another three years or up to June 22, 2013. PDSI filed a Motion for Issuance of CPCN and/or extension of provisional authority on May 6, 2013 which remains pending as at this date. Likewise, PDSI is a registered VAS provider for internet access services and VoIP.

The following table sets forth the spectrum system, licensed frequency and bandwidth used by Smart, Digitel, SBI, CURE and PDSI:

Carrier

  

Spectrum System

  

Frequency Assignment

  

Bandwidth

CarrierSpectrum SystemFrequency AssignmentBandwidth
Smart  ETACS/GSM 900  897.5-905/942.5-950 MHz  7.5 MHz
  GSM 1800  1725-1730/1820-1825 MHz  5.0 MHz
    1730-1732.5/1825-1827.5 MHz  2.5 MHz
    1735-1740/1830-1835 MHz  5.0 MHz
    1745-1750/1840-1845 MHz  5.0 MHz
    1780-1782.5/1875-1877.5 MHz  2.5 MHz
  3G (W-CDMA)  1920-1935/2110-2125 MHz  15.0 MHz
    825-835/870-880 MHz  10.0 MHz
Digitel  GSM 1800  1760-1775/1855-1870 MHz  15.0 MHz
1782.5-1785/1877.5-1880 MHz2.5 MHz
1935-1945/2125-2135 MHz10.0 MHz
2520-2535 MHz15.0 MHz
SBI  AMPS/CDMA(1)  824-825/869-870 MHz  1.0 MHz
    845-846.5/890-891.5 MHz  1.5 MHz
  Wireless broadband  2670-2690 MHz(2)(1)  20.0 MHz
    2400-2483.5 MHz(2)(1)  73.0 MHz
    3400-3590 MHz(2)(1)  94.0MHz
    5470-5850 MHz(2)(1)  123.0MHz
CURE  3G  1955-1965/2145-2155 MHz(2)  10.0 MHz
PDSI  BWA (WiMAX)  2332.5-2362.5 MHz(3)2332.5-2362.5MHz  30.0 MHz

(1)
(1)On January 8, 2010, the NTC approved the transfer of PCEV’s CPCN to SBI
(2)

SBI frequency assignments on these bands are non-contiguous and are on a per station and location basisbasis.

(3)(2)

On May 27, 2010,The congressional franchise, spectrum and associated permits of CURE are expected to be divested as part of the NTC adjusted PDSI’s frequency assignments from 2340-2370 MHzdecision with respect to 2332.5-2362.5 MHz, due to various technical considerationsthe Digitel acquisition. See “— Development Activities (2011-2013) — Divestment of CURE” for further information.

Material Effects of Regulation on our Business

Operators of international gateway facilitiesIGFs and cellular telephone operators, pursuant to Executive OrderE.O. No. 109, are required to install a minimum number of local exchange lines. Of these new lines, operators are required to install one rural exchange line for every ten urban exchange lines installed. Smart and PCEV were required to install 700,000 and 400,000 rural lines, respectively, and each has received a certificate of compliance from the NTC.

PLDT, Subictel, Clarktel,SubicTel, ClarkTel, Philcom, Smart, Digitel, PCEV, SBI and CURE are required to pay various permit,permits, regulation and supervision fees to the NTC. PLDT was previously engaged in disputes with the NTC over some of the assessed fees. For more information on the disputes involving PLDT, see Item 8. “Financial Information — Legal Proceedings — NTC SRF.”

     The 14th Philippine Congress considered two bills that relate to the imposition of a franchise tax on telecommunications companies. HB No. 1469 proposes to re-impose a 5% franchise tax on gross receipts of telephone and telegraph services in lieu of the VAT. HB No. 1560 proposed a franchise tax at the rate of 3.5% on the

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first year and 7% thereafter on gross receipts of telecommunications and broadcast companies, in lieu of the VAT. Other bills filed proposed to tax telecommunications services. Among them, the imposition of a tax on mobile phone companies on all text entries to text games; the imposition of a Php0.50 specific tax on each SMS to be borne by the cellular phone companies; and the imposition of a 10% ad valorem tax on all cellular phone calls using 3G, a bill that seeks to prohibit telecommunications companies from imposing fees and/or charges on text messaging between subscribers of the same telecommunications company and providing for free text messages until the prepaid load has been fully consumed.
     The Committee on Oversight of Congress also held discussions on the possibility of linking up the BIR and NTC with the telecommunications companies through an electronic “metering device,” which discussions led to a proposal to impose an additional Php0.10 tax on text messaging.
     In the Upper House, Senate Bill No. 2402 proposes to establish a Health and Education Acceleration Program Fund for special projects on educational development from the proceeds of income tax imposed on telecommunications companies at the rate of 20% of their gross receipts from short messaging service or text sent from and through their networks which would be remitted to the fund for a period of five years. This tax may not be passed on to consumers. Under the proposed bill, telecommunications companies shall no longer pay for the regular income tax on their income from these transactions during the five-year period that the special gross receipts tax on text messaging is imposed. The income tax scheme for text messaging shall revert to the regular income tax for corporations after the five-year period. Moreover, the bill proposes to allow telecommunications companies to deduct 10% of the tax remitted to the fund from their other income as ordinary business expense over a period of ten years.
During the 15th Philippine Congress in 2010, Smart was requested to attend a hearing regarding HB No. 1224 or the Corporate Social Responsibility Act Bill filed by Rep. Gloria Macapagal-Arroyo and Rep. Diosdado Macapagal-Arroyo.Macapagal Arroyo. Aside from this proposed legislation, both the UpperCongress and Lower Housethe Senate of the Philippines have pending bills filed by various legislators concerning Anti-Trust, Competition and the setting up of a Fair Trade Commission. Senate Bill No. 1 introduced by Sen. Juan Ponce Enrile seeks to penalize unfair trade and anti-competitive practices in restraint of trade, unfair competition, abuse of dominant power and aims to strengthen the powers of regulatory authorities. The bill penalizes cartelization, monopolization, abuse of monopoly power or dominant position, and other unfair competition practices. The PLDT Group has submitted its position paperspaper on both matters.
     In 2009, the bill on November 11, 2010. Other Senate bills which have been introduced during the 15th Congress on the subject matter are Senate Bill nos. 123, 175 and 1838. The various committee hearings on these Senate bills have already been concluded and the Senate of the Philippines is expected to come out with one final version in substitution of these various Senate Bills any time soon. HB No. 4835, a consolidated bill in substitution of HB Nos. 549, 913, 1007, 1583, 1733, and others, is a similar bill proposed in the House of Representatives, which penalizes anti-competitive agreements, abuse of dominant position, and anti-competitive mergers and establishes a Philippine Fair Competition Commission, or the Commission. Under this proposed bill, the Commission has the power, among others, to commence investigations on transactions, agreements, or acts, that prevent, distort or restrict competition. It is relevant that the bill considers aprima facie case of anti-competitive agreement when two or more firms that are ostensibly competing for the same relevant market and actually perform or complementary acts among themselves which tend to bring about artificial and unreasonable increase, decrease or fixing in the price of any goods or when they simultaneously and unreasonably increase, decrease or fix the prices of their seemingly competing goods thereby lessening competition in the relevant market among themselves. This bill has undergone third reading but to date, no final version has yet been released.

There are also bills introduced in the 15thCongress of the Philippines which seek to regulate interconnection charges by either prescribing lower rates or potentially prohibiting interconnection charges. Some of them are HB No. 4939 of Representative Winston Castelo, HB No. 4598 of Representative Joseph Violago and HB No. 2858 of Representatives Rufus B. Rodriguez and Maximo B. Rodriguez. Committee hearings on these bills are ongoing.

The NTC has issued a number of directives that regulate the manner in which we conduct our business:

On July 3, 2009, the NTC issued Memorandum Circular No. 03-07-2009, imposing an extension of the expiration of the prepaid loads from two months to various expiration periods ranging from three days to 120 days. Smart has been implementing the new validity period of prepaid loads since July 19, 2009.
On July 7, 2009, the NTC amended its rules on broadcast messaging in Memorandum Circular No. 04-07-2009, which prohibits content and/or information providers from initiating push messages. It further requires that subscribers be the party to initiate any services with public telecommunication entities and/or content providers, be sent a notification when they subscribe for any service and be given an option whether to continue with the availed service.
On July 23, 2009, the NTC issued Memorandum Circular No. 05-07-2009 mandating cellular operators, including Smart, to charge calls on a maximum six-second pulse basis instead of the previous per minute basis whether the subscriber is prepaid or postpaid. The NTC granted Smart the provisional authority to charge new rates and implement six second pulse scheme on December 5, 2009. Smart subsequently implemented the six seconds per pulse directive by billing on a six second per pulse basis, if subscribers entered additional dialing numbers as a prefix before the actual number. The NTC opposed Smart’s implementation of the six seconds per pulse directive. As of March 31, 2010, the matter is pending before the Court of Appeals and is the subject of a temporary restraining order preventing the NTC from implementing its six second per pulse billing directive. In December 2009, Smart and other CMTS providers challenged the implementation of the NTC memorandum circular before the Court of Appeals, which issued a writ of preliminary injunction preventing the NTC from implementing its six second per pulse billing directive.
On December 28, 2010, the Court of Appeals promulgated a decision finding that the NTC had no basis to impose the rates it fixed for the six second pulse and that the CMTS operators have the option to file their rate applications anew. However, the Court ruled also that under the NTC memorandum circular, the six second pulse is the default mode and that the NTC has the power to regulate the rates of CMTS providers under Section 17 of R. A. 7925, even in the absence of ruinous competition, monopoly, cartel

On July 3, 2009, the NTC issued Memorandum Circular No. 03-07-2009, imposing an extension of the expiration of the prepaid loads from two months to various expiration periods ranging from three days to 120 days. Smart and DMPI have been implementing the new validity period of prepaid loads since July 19, 2009.

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On July 7, 2009, the NTC amended its rules on broadcast messaging in Memorandum Circular No. 04-07-2009, which prohibits content and/or information providers from initiating push messages. It further requires that requests for services must be initiated by the subscribers and not forced upon them by the public telecommunications entities and/or content providers. It further mandates that subscribers be sent a notification when they subscribe for any service and be given an option whether to continue with the availed service.


or combination thereof in restraint of free competition. The NTC, through the Office of the Solicitor General filed a motion for reconsideration of the decision. Smart was required by the Court of Appeals to file its comment.
On July 23, 2009, the NTC issued Memorandum Circular No. 05-07-2009 mandating cellular operators, including Smart, to charge calls on a maximum six-second per pulse basis instead of the previous per minute basis whether the subscriber is prepaid or postpaid. The six secondNTC granted Smart the provisional authority to charge new rates and implement six-second per pulse scheme on December 5, 2009. Smart subsequently implemented the six-second per pulse directive by billing on a six-second per pulse basis, if subscribers entered additional dialing numbers as a prefix before the actual number. The NTC opposed Smart’s implementation of the six-second per pulse directive. In December 2009, Smart and other CMTS providers challenged the implementation of the NTC memorandum circular before the Court of Appeals, which issued a writ of preliminary injunction preventing the NTC from implementing its six-second per pulse billing directive. On December 28, 2010, the Court of Appeals promulgated a decision finding that the NTC had no basis to impose the rates it fixed for the six-second per pulse and that the CMTS operators have the option to file their rate applications anew. However, the Court ruled also that under the NTC memorandum circular, the six-second per pulse is the default mode and that the NTC has the power to regulate the rates of CMTS providers under Section 17 of R.A. 7925, even in the absence of ruinous competition, monopoly, cartel or combination thereof in restraint of free competition. The NTC, through the Office of the Solicitor General filed a motion for partial reconsideration of the decision which Smart opposed. Smart and the other petitioners, except DMPI, likewise filed separate motions for partial reconsideration. The Court of Appeals denied all motions for reconsideration on January 19, 2012. Smart and CURE filed their petitions for review with the Supreme Court on March 15, 2012 and March 12, 2012, respectively. The six-second per pulse billing scheme is expected to have a negative impact on Smart’s revenue, profit and ARPU as this is expected to decrease the amount of time billed per call as a result of moving to shorter billing intervals of six seconds from the previous one minute.

On February 18, 2011, the NTC issued Memorandum Circular No. 01-02-2011 which among others required mobile phone providers like Smart and DMPI to make internet access through mobile phones optional; inform their subscribers of charges for internet access through mobile phones; and remind subscribers through SMS if at least 50% of credit limit has already been consumed.

On October 24, 2011, the NTC issued Memorandum Circular No. 02-10-2011 which mandates that interconnection charge for SMS between two separate networks shall not be higher than Php0.15 per SMS. Accordingly, Smart amended its interconnection amendments with other SMS providers in compliance with the circular. However, the NTC issued a show cause order dated December 12, 2011 requiring it to explain in writing within 15 days from receipt of the order why it has not lowered SMS retail rates despite the issuance of Memorandum Circular No. 02-10-2011. Smart and DMPI filed their answers on January 12, 2012, arguing, among others, that the circular does not mandate the reduction of SMS retail rates and that the NTC has no power to impose rates on mobile operators.

On July 15, 2011, the NTC issued Memorandum Circular No. 7-7-2011 which required broadband service providers to specify the minimum broadband/internet connection speed and service reliability and the service rates in advertisements, flyers, brochures and service agreements. The said Memorandum Circular also set the minimum service reliability of broadband service to 80%.

On December 19, 2011, the NTC issued a decision lowering the interconnection charge to/from LEC and to/from CMTS to Php2.50 per minute, from Php4.00 per minute for LEC to CMTS and Php3.00 per minute from CMTS to LEC, making it in parity with each other. PLDT and Smart separately filed their respective motions for reconsideration alleging among others that interconnection, including the rates thereof, should be by law a product of bilateral negotiations between the parties and the decision was unconstitutional as an invalid exercise by the NTC of its quasi-legislative powers and violates the constitutional guarantee against non-impairment of contracts. PLDT and Smart’s petitions remain pending with the Court of Appeals. Meantime, the PAPTELCO has filed a motion for the execution of the NTC decision before the NTC, which motion, likewise, remains pending.

See Item 3. “Key Information Risk Factors – Risks Relating to Us – Our business is significantly affected by governmental laws and regulations, including regulations in respect of our franchises, rates and taxes”taxes, and laws relating to anti-competitive practices and monopoly” for further discussion.

In order to diversify the ownership base of public utilities, the Public Telecommunications Policy Act R.A. 7925, requires a telecommunications entity with regulated types of services to make a public offering through the stock exchanges representing at least 30% of its aggregate common shares within a period of five years from: (a) the date the law became effective; or (b) the entity’s first start of commercial operations, whichever date is later. PLDT and PCEV have complied with this requirement. However, Smart hasand DMPI have not conducted a public offering of its shares. If Smart isand DMPI are found to be in violation of R.A. 7925, this could result in athe revocation of the franchisefranchises of Smart and DMPI and in the filing of aquo warrantocase against Smart and DMPI by the Office of the Solicitor General of the Philippines. See Item 3. “Key Information Risk Factors – Risks Relating to Us – The franchise of Smart and DMPI may be revoked due to itstheir failure to conduct a public offering of itstheir shares” for further discussion.

     In 2008, in connection with the NTC’s efforts to enhance competition within the telecommunications industry in the Philippines, the NTC issued Memorandum Circulars on the following:
(a)guidelines on the mandatory interconnection of backhaul networks to the cable landing station, which were issued on October 7, 2008 and became effective on October 23, 2008; and
(b)guidelines on the interconnection of LECs in local calling areas that eliminate interconnection access charges between LECs within a local calling area, which were issued on May 30, 2008 and became effective on June 17, 2008.
     In addition, on

On April 14, 2009, the NTC released the implementing guidelines on developing reference access offers, which are statements of the prices, terms and conditions under which a telecommunications carrier proposes to provide access to its network or facilities to another such carrier or value-added service provider.

     During the last quarter of 2010, the NTC started holding public hearings on a proposed Memorandum Order concerning minimum speed of broadband internet.

Competition

Including us, there are fourthree major LECs, 11 international gateway facilityeight major IGF providers and threetwo major cellular service providersoperators in the country. ManyPhilippines. Some new entrants into the Philippine telecommunications market have entered into strategic alliances with foreign telecommunications companies, which provide them access to technological and funding support as well as service innovations and marketing strategies. Consequently, we face increasing competitionHowever, barriers to entry are quite high given the amount of investment needed to be made by new entrants in major servicesorder to match the infrastructure of the telecommunications industry, particularly data and other network services.

existing operators.

Cellular Service

There are presently threeonly two major operating service providers,cellular operators, namely Smart,us and Globe, and Digitel. Globe acquired Innove to form one operating group while Smart and Red Mobile, all being partfollowing our acquisition of the PLDTDigitel Group form another operating group. These two operating groups have an approximately 82% share of the Philippine cellular market. There are therefore effectively two large competitorsin October 2011. Cellular market penetration in the Philippine cellular market. The third active operator, Digitel, commenced its cellular service,Sun Cellular,Philippines is in excess of 100% based on March 29, 2003 and is estimated to have an approximately 18% share of the cellular market as at December 31, 2010. In December 2005, the NTC awarded four out of five 3G licenses to existing cellular operators Smart, Globe, Digitel and to a new entrant, CURE. The NTC has yet to award a fifth license to another operator.

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SIM ownership.


Competition in the cellular telecommunications industry has intensified starting the middle of 2010 with the increasedgreater availability of affordably priced handsets offeringunlimited offers from the telecommunications operators resulting in increased volumes of calls and texts but declining yields. Even after PLDT’s acquisition of the Digitel Group in the last quarter of 2011, Globe continued to compete aggressively to gain revenue market share, albeit on a range of new functions andmore regional/localized basis. Competition also increased in the introduction by competitors of new and improved plans for postpaid subscribers, reduced rates per minute andspace with more aggressive marketing and promotional strategies.promotions involving greater handset subsidies. The principal bases of competition are price, including handset cost,prices in the case of postpaid plans, quality of service, network reliability, geographic coverage and attractiveness of packaged services. Smart was able to defend and stabilize its revenue market share in 2013 by matching Globe’s offers and by highlighting the quality of Smart’s network.

As at December 31, 2013, our network leads the industry in terms of coverage with 10,31620,770 cellular/mobile broadband base stations, as at December 31, 2010.

and 2,915 fixed wireless broadband base stations, of which 10,000 are 4G-capable.

Today, competition remains intense but appears to have stabilized.

As a result of competitive pressures, service providers, including Smart, have introduced “bucket” plans providing unlimited voice and text services, and other promotions. While most of the “bucket” priced plans currently available in the market are being offered on promotional bases, Smart, Globe andSun Cellular continue to launch other services that are designed to encourage incremental usage from existing subscribers and also to attract new subscribers.

Cellular operators also compete actively in launching innovative products and VAS. The growing range of cellular products and services include not only text messaging but also multi-media messaging, voice mail, text mail, international roaming, information-on-demand, mobile banking, e-commerce, mobile data, cellular internet access and internet messaging.

On February 14, 2006, Smart opened its 3G network in selected key cities nationwide, making video calling, video streaming, high speed internet browsing and special 3G content downloads on its 3G network available to subscribers with 3G handsets. In May 2008, DMPI started to operate its 3G network. Likewise, Globe has been rolling out its 3G network.

At the end of December 31, 2013, the PLDT Group’s 3G network had achieved about 71% population coverage.

Consistent with industry practice and Smart’s churn management efforts, Smart “locks” the handsets it sells to its subscribers, rendering them incompatible with SIM cards issued by competitors and thereby hindering them from swapping the existing SIM for a SIM of a competing operator. However, subscribers can have their handsets “unlocked” by unauthorized parties for a nominal fee and purchase new SIM cards from competing operators. “Unlocking” does not involve significant cost to the subscribers. Switching to another cellular operator would, however, result in a change of the subscriber’s cellular telephone number.

In order to avail themselves of promotions and cost efficient network-to-network calling rates, cellular subscribers in the Philippines have increasingly been subscribing to the services of multiple wireless operators. As a result, the increases in 20092013, 2012 and 20102011 in our cellular subscriber base and the penetration rate of the wireless market in the Philippines were primarily attributable to such “multiple SIM card ownership”.

ownership.”

Local Exchange Service

The concerted nationwide local exchange line build-out by various providers, as mandated by the Philippine government, significantly increased the number of fixed line subscribers in the country and resulted in wider access to basic telephone service. The growth of the fixed line market, however, remained weak due to the surge in demand for cellular services and, in the past, the general sluggishness of the Philippine economy. Nevertheless, we have sustained our leading position in the fixed line market on account of PLDT’s extensive network in key cities nationwide. In most areas, we face one or two competitors. Our principal competitors in the local exchange market are Digitel, BayanTelBayan and Globe,Globe-Innove, which provide local exchange service through both fixed and “fixedfixed wireless landline services.

There are currently fourthree major fixed wireless landline services in the market that resemble a cellular phone service but provide the same tariff structure as a fixed line service such as the charging of monthly service fees. The earliest of such service was provided by Digitel, now part of PLDT, in the fourth quarter of 2005 at a fixed monthly rate of Php672. This service is provided mostly in selected areas of Southern and Northern Luzon where Digitel was lackingdid not have fixed cable facilities. Globe quickly followed suit with a similar service at a monthly rate of Php995 which bundled a wireless landline and broadband internet connection of up to 384 kbps. This service is offered in limited areas of Metropolitan Manila such as Makati, Las Piñas, the Visayas region and selected areas of Southern Luzon such as Cavite and Batangas.

     BayanTel

Bayan launched a similar service at lower rates in the second half of 2006, which service maintains two major price points open to both residential and business subscribers. This service is available under two plans, a plan at a monthly rate of Php699 for customers in MetroMetropolitan Manila and a plan at a monthly rate of Php599 for customers in selected regional areas of the Philippines.

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In March 2007, we introduced thePLP, a postpaid fixed wireless service which was initially available only in regional areas where there were no available PLDT fixed cable facilities. There are two plans being offered for thePLPpostpaid regular service: (a) Plan 600 with 600 free local outgoing minutes; and (b) Plan 1,000 with 1,000 free local outgoing minutes, and a charge of Php1 per minute in excess of free minutes for both plans. In March 2008, we introduced the prepaid variant of thePLP. There are two load plans being offered for thePLPprepaid service: (a) Php300 load denomination with free 150 local outgoing minutes; and (b) Php600 load denomination with free 600 local outgoing minutes. Both prepaid plans include unlimited incoming calls for one month, and charges Php2 per minute and Php1 per minute in excess of free local outgoing minutes for Php300 and Php600 load denominations, respectively.

Currently, the twoPLP postpaid regular services (Plan 600 and Plan 1,000) are both offered with unlimited local outgoing calls. Both plans can be structured with either (i) Php300 load denomination with free 600 local outgoing minutes and unlimited incoming calls for one month; or (ii) Php150 load denomination with free 250 local outgoing minutes and unlimited incoming calls valid only for 15 days. Both prepaid plans charge Php2 per call in excess of free local outgoing minutes.

International Long Distance Service

There are 11 licensed international gateway facilityIGF operators, of which eight are major operators, in the country, including us. While we still maintain a leadership position in this highly competitive service segment of the industry, our market share in recent years has declined as a result of: (1) competition from other international gateway facility operators and illegal international simple resaleIGF operators; (2) anmigration from fixed to mobile calling, coupled with continued increase in inbound and outbound international long distance calls terminating to and originating from the growing number of cellular subscribers; and (3) the popularity of alternative and cheaper modes of communication such as social-networking, text messaging, e-mail, internet telephony and the establishment of virtual private networks for several corporate entities, further heightening the competition.

With respect to outbound calls from the Philippines, we compete for market share through our local exchange and cellular businesses, which are the origination points of outbound international calls. We also have introduced a number of marketing initiatives to stimulate growth of outbound call volumes, including tariff reductions and volume discounts for large corporate subscribers. Digitel and Globe have also launched new pricing schemes to grow their outbound call volumes.

With respect to inbound calls into the Philippines, we have been pursuing a number of initiatives to mitigate the decline in our inbound telecommunications traffic, including loweringmodest reduction of our termination rates and identifying and limiting unauthorized traffic termination. In addition, we have also established presence, through our wholly-owned subsidiary PLDT Global, in key cities overseas to identify and capture Philippine terminating traffic at its source, maximize the use of our international facilities and develop alternative sources of revenue.

National Long Distance Service

Our national long distance service business has been negatively affected by the growing number of cellular subscribers in the Philippines and the widespread availability and growing popularity of alternative economical non-voice methods of communication, particularly text messaging and e-mail. In addition, various ISPsInternet Service Providers have launched voice services via the internet to their subscribers nationwide.

While national long distance call volumes have been declining, we have remained athe leading provider of national long distance service in the Philippines due to our significant subscriber base and ownership of the Philippines’ most extensive transmission network.

PLDT launches from time to time promotions bundled with our other products to attract new subscribers including free PLDT-to-PLDT NDD service.

Data and Other Network Services

The market for data and other network services is a growing segment in the Philippine telecommunications industry. The growth isThis development has been spurred by the significant growth in consumer and retail broadband internet access, enterprise resource planning applications, customer relationship management, knowledge processing solutions, online gaming and other e-services that drive the need for broadband and internet-protocol based solutions both herein the Philippines and abroad. Our major competitors in this area are Globe, BayanTelGlobe-Innove and Digitel.Bayan. The principal bases of competition in the data services market are coverage, price, content, value for money, bundles or free gifts, customer service and quality of service.

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PLDT’s intends to compete in this segment, consistent with its overall strategy to broaden its distribution platform and increase its ability to deliver multimedia content.


Environmental Matters

We have not been subject to any material fines or legal or regulatory action involving non-compliancenoncompliance with environmental regulations of the Philippines. We are not aware of any non-compliancenoncompliance in any material respect with relevant environmental protection regulations.

Intellectual Property Rights

We do not own any material intellectual property rights apart from our brand names and logos. We are not dependent on patents, licenses or other intellectual property which are material to our business or results of operations, other than licenses to use the software that accompany most of our equipment purchases.

purchases and licenses for certain contents used in VAS of our wireless business. SeeNote 14 – Intangible Assets to the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Properties

We own four office buildings located in Makati City and own and operate 203481 exchanges nationwide, of which 4658 are located in the Metropolitan Manila area.area, including DMPI’s 10 exchanges. The remaining 157423 exchanges, including DMPI’s 198 exchanges, are located in cities and small municipalities outside Metropolitan Manila area. We also own radio transmitting and receiving equipment used for international and domestic communications. As at December 31, 2010,2013, we had 6,037 cellular10,455 cell sites, 10,31620,770 cellular/mobile broadband base stations and 2,5192,915 fixed wireless broadband-enabledbroadband base stations.

stations, of which 10,000 are 4G-capable.

As at December 31, 2010,2013, our principal properties, excluding property under construction, consisted of the following, based on net book values:

71% consisted of cable, wire and cellular facilities, including our DFON, subscriber cable facilities, inter-office trunking and toll cable facilities and cellular facilities;

69% consisted of cable, wire and cellular facilities, including our DFON, subscriber cable facilities, inter-office trunking and toll cable facilities and cellular facilities;
15% consisted of central office equipment, including international gateway facilities, pure national toll exchanges and combined local and toll exchanges;
10% consisted of land and improvements and buildings, which we acquired to house our telecommunications equipment, personnel, inventory and/or fleet;
5% consisted of information origination and termination equipment, including pay telephones and radio equipment installed for customers use, and cables and wires installed within customers’ premises; and
1% consisted of other work equipment.

14% consisted of central office equipment, including IGFs, pure national toll exchanges and combined local and toll exchanges;

9% consisted of land and improvements and buildings, which we acquired to house our telecommunications equipment, personnel, inventory and/or fleet;

1% consisted of information origination and termination equipment, including pay telephones and radio equipment installed for customers use, and cables and wires installed within customers’ premises; and

5% consisted of other work equipment.

For more information on these properties, seeNote 9 Property, Plant and Equipmentto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

These properties are located in areas where our subscribers are being served. In our opinion, these properties are in good condition, except for ordinary wear and tear, and are adequately insured.

The majority of our connecting lines are above or under public streets and properties owned by others. For example, for many years, the PLDT Group has been using the power pole network of Meralco in Metropolitan Manila for PLDT’s fixed line aerial cables in this area pursuant to short-term lease agreements with Meralco with typically five-year and more recently one-year terms.

PLDT’s, Smart’s, PCEV’s and PCEV’sDigitel’s properties are free from any mortgage, charge, pledge, lien or encumbrance; however, a portion of ePLDT’s property is subject to liens.

The PLDT Group has various lease contracts for periods ranging from one to ten years covering certain offices, warehouses, cell sites, telecommunications equipment locations and various office equipment.equipments. For more information on the obligations relating to these properties and long-term obligations, seeNote 26 — Contractual Obligations27 – Financial Assets and Commercial Commitments Liabilitiesto the accompanying audited consolidated financial statements in Item 18.

     For 2011, “Financial Statements”.

In 2014, we expect that cash from operations should enable us to increase the level of our capital expenditures for the continued expansion and upgrading of our network infrastructure. We expect to make additional investments in our core facilities to maximizeleverage existing technologies and increase capacity to accommodate expected continued increases in call and text volumes as a result of unlimited voice and text offerings and other promotions. Our 2011 budget for2014 estimated consolidated capital expenditures is approximately Php34.4Php32 billion, of which approximately Php19.5Php17 billion is budgetedestimated to be spent by Smart,Smart; approximately Php13.5Php12 billion is budgetedestimated to be spent by PLDT

52


PLDT; approximately Php1 billion is estimated to be spent by DMPI; and the balance represents the budgetedestimated capital spending of our other subsidiaries. Smart’s capital spending is focused on building out its coverage, leveraging the capabilities of its newly modernized network, expanding its transmission network, increasing international bandwidth capacity and expanding its 3G and wireless broadband networks in order to enhance its data /broadband capabilities. Smart is also enhancing its network and platforms infrastructure and systems to support service delivery to enable customized and targeted services. PLDT’s capital spending is intended principally to finance the continued build-out and upgrade of its broadband data and IP infrastructures, and for its fixed line data services and the maintenance of its network. Smart’sDMPI’s capital spending is focused on expandingintended principally to finance its mainstream services and upgradingintegration with the PLDT Group network of its core and transmission network to increase penetration, mainly in provincial areas to achieve greater business benefits from the backbone up to last mile facilities to meet increased demand for cellular and broadband services in a highly-competitive playing field. Smart’s 2011 capital investments are driven by rapidly-evolving technologies in both voice- and data-centric environments, improvement of quality and subscriber experience, expansion of capacity and achieving operational and cost efficiencies with its accelerated network modernization program. The aggressive rollout, expansion and modernization programs will likewise prepare Smart for the projected massive growth and demand in broadband business.
Item 4A. Unresolved Staff Comments
closely synergized environment.

Item 4A.Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

Item 5.Operating and Financial Review and Prospects

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements (and the related notes) as at December 31, 20102013 and 20092012 and for the three years in the period ended December 31, 2010, 2009 and 20082013 included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect to future events and our future financial performance. These statements involve risks and uncertainties, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of particular factors such as those set forth under “Forward-Looking Statements” and Item 3. “Key Information Risk Factors” and elsewhere in this report. Our consolidated financial statements, and the financial information discussed below, have been prepared in accordance with IFRS. For convenience, certain Philippine peso financial information in the following discussions has been translatedconverted to U.S. dollars at the exchange rate at December 31, 20102013 of Php43.81Php44.40 to US$1.00, as quoted through the Philippine Dealing System.

Overview

We are the largest and most diversified telecommunications company in the Philippines. We have organized our business into business units based on our products and services and have three reportable operating segments which serve as the basisbases for management’s decision to allocate resources and evaluate operating performance:

  

Wireless —wireless telecommunications services provided throughby Smart and DMPI, which owns theSun Cellular business and is a wholly-owned subsidiary of Digitel, our cellular service providers namely, Smart, PCEV (on August 17, 2009, Smart acquired the cellular business of PCEV, which is formerly known as Pilipino Telephone Corporation) and CURE;providers; SBI BOW, Airborne Access Corporation and PDSI, our wireless broadband service providers; Wolfpac and Chikka Group, our wireless content operators; and ACeS Philippines, our satellite operator;

  

Fixed Line —fixed line telecommunications services primarily provided by PLDT. We also provide fixed line services through PLDT’s subsidiaries, namely, ClarkTel, SubicTel, Philcom and subsidiaries,Group, Maratel, SBI, PDSI, BCC, and PLDT Global and Digitel, all of which together account for approximately 4%8% of our consolidated fixed line subscribers; and

ICT —information and communications infrastructure and services for internet applications, internet protocol-basedprotocol, or IP-based solutions and multimedia content delivery provided by ePLDT, IPCDSI, AGS, and BayanTrade Group; knowledge processing solutions provided by the SPi Group; customer relationship management provided by SPi CRM, (on April 8, 2010, SPi CRM, Parlanceits subsidiaries, or AGS Group, and Vocativ were merged wherein SPi CRM became the surviving entity)Curo Teknika, Inc.; internet access and online gamingbills printing and other VAS-related services provided by Infocom, Digital Paradise, netGamesePDS, Inc., or ePDS; and Level Up!; and e-commerce, and IT-related services provided by other investees of ePLDT, as discussed in Note 10 — Investments in Associates and Joint Ventures to the accompanying consolidated financial statements in Item 18.

     For a more detailed overview of our three main business segments, please see Item 4. “Information on the Company — Organization — Wireless”, Item 4. “Information on the Company — Organization — Fixed Line” and Item 4. “Information on the Company — Organization — Information and Communications Technology”, respectively.

53

Others — PGIH, PGIC and PCEV, our investment companies.


Key performance indicators and drivers that our management uses for the management of our business include, among others, the general economic conditions in the Philippines, our subscriber base, traffic volumes, and interconnection arrangements.

In addition, our results of operations and financial position are with increasing significanceincreasingly affected by fluctuations of the Philippine peso against the U.S. dollar. Since a substantial portion of our indebtedness is denominated in U.S. dollars, a depreciation or appreciation of the Philippine peso against the U.S. dollar as at the end of the most recent fiscal year compared to the end of the previous fiscal year may result in our recognition of significant foreign exchange losses or gains, respectively. For example, the Philippine peso appreciateddepreciated against the U.S. dollar from Php46.43Php41.08 as at December 31, 20092012 to Php43.81Php44.40 as at December 31, 2010,2013, as a result of which we recognized in 20102013 foreign exchange losses in the amount of Php2,893 million, representing a decrease of Php6,175 million as against foreign exchange gains in the amount of Php1,807

Php3,282 million representing an increase of Php898 million from Php909 million foreign exchange gains recognized in 2009.2012. Moreover, since approximately 26%21% of our revenues are either denominated in U.S. dollars or linked to the U.S. dollar, a depreciation or appreciation of the weighted average exchange rate of the Philippine peso against the U.S. dollar increases or decreases our revenues in Philippine peso terms and increases or decreases our cash flow from operations, respectively. For example, in 2010, the appreciationdepreciation of the Philippine peso relative to the U.S. dollar to a weighted average exchange rate of Php45.12Php44.24 in 20102013 from Php47.64Php42.24 in 2009 decreased2012 increased our U.S. dollar and U.S. dollar-linked revenues in Philippine peso terms. Furthermore, fluctuations of the Philippine peso against the U.S. dollar resulted in gains or losses on our derivative financial instruments, which with increasing significance affectincreasingly affected our results of operations and financial position. For example, we recognized net gains on derivative financial instruments of Php511 million in 2013 from net losses on derivative financial instruments of Php1,741Php2,009 million in 20102012.

On October 26, 2011, we completed the acquisition of the Digitel Group. Our financial statements for the year ended December 31, 2011 include the financial results of the Digitel Group for the period from Php1,006 million in 2009. Please see Item 3. “Key Information — Risk Factors —October 26, 2011 to December 31, 2011. Our financial statements for the years ended December 31, 2013 and 2012 include the full year financial results of the Digitel Group for the years ended December 31, 2013 and 2012. As a result, this may make it difficult to compare our past results of operations and financial position could be materiallyor to estimate our consolidated performance in the future.

On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which was completed in April 2013. Consequently, the BPO segment as at December 31, 2012 and adversely affected if2011 has been classified as discontinued operations and a disposal group held-for-sale. See Item 4. “Information on the Philippine peso significantly fluctuates againstCompany – Development Activities (2011-2013) – Sale of BPO Segment”,Note 2 – Summary of Significant Accounting Policies – Discontinued OperationsandNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Held-for-Sale and Discontinued Operations to the U.S. dollar”.

accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion of the classification of the BPO segment as an asset classified as held-for-sale.

Management’s Financial Review

As discussed in Item 3. “Key Information Performance Indicators”, we use our adjustedAdjusted EBITDA and core income to assess our operating performance; a reconciliation of our consolidated adjustedAdjusted EBITDA and our consolidated core income to our consolidated net income for the years ended December 31, 2008, 20092013, 2012 and 20102011 is set forth below.

The following table shows the reconciliation of our consolidated adjustedAdjusted EBITDA to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010  2009  2008 
  (in million pesos) 
Consolidated adjusted EBITDA  83,717   86,194   87,996 
Amortization of intangible assets  (388)  (368)  (377)
Depreciation and amortization  (26,277)  (25,607)  (24,709)
Asset impairment:            
Investments in associates and joint ventures  (78)     (282)
Property, plant and equipment  (120)  (634)  (104)
Goodwill and intangible assets  (1,243)  (379)  (2,450)
Prepayments and others  (55)  (1,324)  (23)
       
Consolidated operating profit for the year  55,556   57,882   60,051 
Foreign exchange gains (losses) — net  1,807   909   (6,170)
Equity share in net earnings (losses) of associates and joint ventures  1,408   2   (176)
Interest income  1,200   1,539   1,668 
Gains (losses) on derivative financial instruments — net  (1,741)  (1,006)  3,115 
Financing costs — net  (6,698)  (6,556)  (6,104)
Other income  2,153   2,069   1,665 
Consolidated income before income tax  53,685   54,839   54,049 
Provision for income tax  13,426   14,744   19,073 
       
Consolidated net income for the year  40,259   40,095   34,976 
       

54

2011:


   December 31, 
   2013  2012(1)  2011(1, 2) 
   (in millions) 

Adjusted EBITDA from continuing operations

   77,552    75,388    78,225  
  

 

 

  

 

 

  

 

 

 

Add (deduct) adjustments to continuing operations:

    

Other income

   4,113    5,813    2,626  

Equity share in net earnings of associates and joint ventures

   2,742    1,538    2,035  

Interest income

   932    1,354    1,357  

Gains (losses) on derivative financial instruments – net

   511    (2,009  201  

Amortization of intangible assets

   (1,020  (921  (117

Retroactive effect of adoption of Revised IAS 19(2)

   (1,269  1,287    —    

Asset impairment

   (2,143  (2,896  (8,514

Foreign exchange gains (losses) – net

   (2,893  3,282    (735

Financing costs – net

   (6,589  (6,876  (6,454

Provision for income tax

   (8,248  (8,050  (10,734

Depreciation and amortization

   (30,304  (32,354  (27,539
  

 

 

  

 

 

  

 

 

 

Total adjustments

   (44,168  (39,832  (47,874
  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

   33,384    35,556    30,351  

Net income from discontinued operations

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

Consolidated net income

   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(2)

Includes the Digitel Group’s Adjusted EBITDA for the period from October 26, 2011 to December 31, 2011.

The following table shows the reconciliation of our consolidated core income to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 2008:
             
  2010  2009  2008 
  (in million pesos) 
Consolidated core income for the year  42,028   41,138   38,214 
Foreign exchange gains (losses) — net  1,819   908   (6,170)
Core income adjustment on equity share in net earnings of associates and joint ventures  (699)  (517)   
Gains (losses) on derivative financial instruments — net, excluding hedge cost  (1,307)  (407)  3,934 
Asset impairment on noncurrent assets  (1,492)  (1,948)  (2,486)
Net tax effect of aforementioned adjustments  (132)  607   825 
       
Net income for the year attributable to equity holders of PLDT  40,217   39,781   34,317 
Net income for the year attributable to non-controlling interests  42   314   659 
       
Consolidated net income for the year  40,259   40,095   34,976 
       
2011:

   December 31, 
   2013  2012(1)  2011(1, 2) 
      (in millions) 

Core income from continuing operations

   38,816    36,356    37,827  

Core income from discontinued operations

   (99  551    789  
  

 

 

  

 

 

  

 

 

 

Consolidated core income

   38,717    36,907    38,616  
  

 

 

  

 

 

  

 

 

 

Add (deduct) adjustments to continuing operations:

    

Gains (losses) on derivative financial instruments – net, excluding hedge cost

   816    (1,689  564  

Core income adjustment on equity share in net earnings (losses) of associates and joint ventures

   59    (91  (476

Net income (loss) attributable to noncontrolling interests

   33    (49  (60

Casualty losses due to Typhoon Yolanda

   (878  —      —    

Retroactive effect of adoption of Revised IAS 19(2)

   (1,269  1,287    —    

Asset impairment on noncurrent assets

   (2,143  (2,896  (8,514

Foreign exchange gains (losses) – net

   (2,893  3,282    (741

Net tax effect of aforementioned adjustments

   843    (644  1,608  

Others

   —      —      143  
  

 

 

  

 

 

  

 

 

 

Total adjustments

   (5,432  (800  (7,476
  

 

 

  

 

 

  

 

 

 

Adjustment to discontinued operations

   2,168    (8  78  
  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

   33,384    35,556    30,351  

Net income from discontinued operations

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

Consolidated net income

   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(2)

Includes the Digitel Group’s core income for the period from October 26, 2011 to December 31, 2011.

The following table shows the reconciliation of our consolidated basic and diluted core EPS to our consolidated basic and diluted EPS attributable to common equity holders of PLDT for the years ended December 31, 2013, 2012 and 2011:

   2013  2012(1)  2011(1, 2) 
   Basic  Diluted  Basic  Diluted  Basic  Diluted 

Core EPS from continuing operations

   179.38    179.38    168.03    168.03    195.27    195.10  

Core EPS from discontinued operations

   (0.45  (0.45  2.55    2.55    4.12    4.12  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated core EPS

   178.93    178.93    170.58    170.58    199.39    199.22  

Add (deduct) adjustments to continuing operations:

       

Gains (losses) on derivative financial instruments – net,

   2.65    2.65    (5.47  (5.47  2.06    2.06  

Core income adjustment on equity share in net earnings (losses) of associates and joint

   0.27    0.27    (0.42  (0.42  (2.48  (2.48

Casualty losses due to typhoon “Yolanda”

   (3.58  (3.58  —      —      —      —    

Retroactive effect of adoption of RevisedIAS 19 (Note 2)

   (5.10  (5.10  5.18    5.18    —      —    

Foreign exchange gains (losses) – net (Notes 2, 9 and 27)

   (9.61  (9.61  10.63    10.63    (2.68  (2.67

Asset impairment (Notes 3, 5 and 9)

   (9.92  (9.92  (13.40  (13.40  (36.47  (36.44

Gain on disposal of investment and others

   —      —      —      —      0.82    0.82  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total adjustments

   (25.29  (25.29  (3.48  (3.48  (38.75  (38.71
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjustments to discontinued operations

   10.03    10.03    (0.03  (0.03  0.41    0.40  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

EPS from continuing operations attributable to common equity holders of PLDT (Note 8)

   154.09    154.09    164.55    164.55    156.52    156.39  

EPS from discontinued operations attributable to common equity holders of PLDT

   9.58    9.58    2.52    2.52    4.53    4.52  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated EPS attributable to common equity holders of PLDT

   163.67    163.67    167.07    167.07    161.05    160.91  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures for further discussion.

(2)

Includes the Digitel Group’s core income for the period from October 26, 2011 to December 31, 2011.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with IFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities and disclosure of contingent liabilities at the end of each reporting date.period. The uncertainties inherent in these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the assets or liabilities affected in the future years.

Judgments

In the process of applying the PLDT Group’s accounting policies, management has made the following judgments, apart from those including estimations and assumptions, which have the most significant effect on the amounts recognized in our consolidated financial statements.

Assets classified as held-for-sale and discontinued operations

On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which sale was completed in April 2013. Consequently, the BPO segment as at December 31, 2012 has been classified as discontinued operations and a disposal group held-for-sale. The BPO segment met the criteria of an asset to be classified as held-for-sale as at December 31, 2012 for the following reasons: (1) the BPO segment was then available for immediate sale and could be sold to a potential buyer in its current condition; (2) the Board of Directors had approved the plan to sell the BPO segment and we had entered into preliminary negotiations with a potential buyer, and a number of other potential buyers had been identified; and (3) the Board of Directors expected negotiations to be finalized and the sale to be completed in April 2013. The results of operations of our BPO business for the four months ended April 30, 2013 and for the years ended December 31, 2012 and 2011 were presented as discontinued operations. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operationsto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

On July 10, 2012, ePLDT entered into a Share Purchase Agreement with Philweb for the sale of 398 million common shares of Philweb, representing ePLDT’s 27% equity interest in Philweb. The sale of the 398 million common shares was executed in four tranches, and was completed by December 2013. Thus, the investment in Philweb was classified as assets held-for-sale as at December 31, 2012. SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in PhilwebandNote 27 – Financial Assets and Liabilities – ePLDT Groupto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Determination of functional currency

The functional currencies of the entities under the PLDT Group are the currency of the primary economic environment in which each entity operates. It is the currency that mainly influences the revenue from and cost of rendering products and services.

The presentation currency of the PLDT Group is the Philippine peso. Based on the economic substance of the underlying circumstances relevant to the PLDT Group, the functional currency of all entities under PLDT Group is the Philippine peso, except forfor: (a) SMHC, SMI, TSI, BOW, Mabuhay Satellite,FECL Group, Piltel International Holdings Corporation, PLDT Global SPi and certain of its subsidiaries, PGNL, DCPL, and certain subsidiaries of Chikka, which isuse the U.S. dollar; (b) SHPL, TPL, 3rd Brand, CPL, CITP Singapore Pte. Ltd., and BayanTrade Singapore dollar for SCH, SGP, 3rd Brand,Pte. Ltd., which use the Singapore dollar; (c) CCCBL, which use the Chinese renminbi; (d) BayanTrade (Malaysia) Sdn Bhd., which use Malaysian ringgit; and certain subsidiaries of BayanTrade.

(e) PT Columbus IT Indonesia, which use the Indonesian rupiah.

Leases

As a lessee, we have various lease agreements in respect of our certain equipment and properties. We evaluate whether significant risks and rewards of ownership of the leased properties are transferred to us (finance lease) or retained by the lessor (operating lease) based onIAS 17, Leaseswhich requires us to make judgments and estimates of transfer of risk and rewards of ownership of the leased properties.. Total lease expense arising from operating leases from continuing operations amounted to Php3,970Php6,041 million, Php4,055Php5,860 million and Php3,656Php3,938 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php86 million, Php263 million and Php224 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total finance lease obligations from continuing operations amounted to Php43Php11 million, Php18 million and Php64Php14 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php7 million as at December 31, 2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 20 Interest-bearing Financial Liabilities – Obligations under Finance LeasesandNote 26 — Contractual Obligations and Commercial Commitments and Note 28 —27 – Financial Assets and Liabilities – Liquidity Riskto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Significant influenceAccounting for investments in Manila Electric Company,MediaQuest Holdings, Inc., or Meralco, on which PCEV has less than 20% ownershipMediaQuest, through Philippine Depositary Receipts, or PDRs

     UnderIAS 28, Investments

ePLDT made various investments in Associates, significant influence must be present and currently exercisable over an investeePDRs issued by MediaQuest in relation to account for anyits direct interest in that investee as investmentSatventures, Inc., or Satventures, and indirect interest in an associate and carried at equity method of accounting. If an investor holds, directly or indirectly, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.

55


     On March 30, 2010, following the transfer of PCEV’s Meralco shares to Beacon, PCEV’s direct ownership in Meralco was reduced to approximately 6% from approximately 20%. BeaconCignal TV. Satventures is a jointly controlled entitywholly-owned subsidiary of PCEVMediaQuest and MPIC forCignal TV is a wholly-owned subsidiary of Satventures. ePLDT’s investments in PDRs are part of our overall strategy to broaden our distribution platform and increase our ability to deliver multi-media content. On September 27, 2013, the purposeSatventures and Cignal TV PDRs were issued and provided ePLDT a 40% economic interest each in the common shares of consolidating the ownership interestSatventures and Cignal TV, or an aggregate of PCEV and MPIC in Meralco. The decrease in PCEV’s direct ownership in Meralco, however, did not result to a change in PCEV’s representation to the Meralco Board of Directors. Prior to the transfer of approximately 14%64% economic interest in Meralco to Beacon, PCEV had three out of the 11 Board of Directors seats in Meralco. Cignal TV.

Based on the Omnibus Agreement, or OA, among PCEV, MPIC and Beacon, both PCEV and MPIC agreed that an equal number of Meralco nominee directors shall be chosen from each list of nominees provided by PCEV and MPIC. If the number of Meralco Nominee Directors for Beacon is an odd number, the remaining one Meralco Nominee Director shall be chosen alternatively first from the list of nominees provided by MPIC and then from the list provided by PCEV. The total Beacon ownershipour judgment, ePLDT’s investments in Meralco entitles it to nominate three Board of Directors seats, two of which are the Chairman of the Board and the President of PCEV. For Meralco Board of Directors, committees and officers, these are jointly nominated fromPDRs give ePLDT a list of nominees mutually agreed by MPIC and PCEV and vote affirmatively for the appointment of individuals to different Board of Directors committees and officers that Beacon is entitled to under the current MPIC-PCEV shareholders agreement. The Board of Directors members, committees and Meralco officers, which are the operating decision makers of Meralco, are represented by MPIC and PCEV through nominations. On this basis, PCEV has retained significant influence over Meralco, despite having less than 20% ownership interest,Satventures and Cignal TV as evidenced by virtueinter-change of PCEV’s 6% direct ownership interest together with its indirect interestmanagerial personnel, provision of about 17.5% through PCEV’s investmentessential technical information and material transactions among PLDT, Smart, Satventures and Cignal TV, thus accounted for as investments in Beacon.associates using the equity method.

The carrying value of our investments in PDRs issued by MediaQuest amounted to Php9,522 million as at December 31, 2013. See related discussion onNote 10 — Investments– Investment in Associates, and Joint Ventures and Deposits – Investment in MediaQuestto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Estimates and Assumptions

The key estimates and assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognized in the consolidated financial statements within the next financial year are discussed as follows:

below. We based our estimates and assumptions on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of PLDT. Such changes are reflected in the assumptions when they occur.

Asset impairment

IFRS requires that an impairment review be performed when certain impairment indicators are present. In the case of goodwill, at a minimum, such asset is subject to an annual impairment test and more frequently whenever there is an indication that such asset may be impaired. This requires an estimation of the value in use of the cash-generating unitsCGUs to which the goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the cash-generating unitCGU and to choose a suitable discount rate in order to calculate the present value of those cash flows.

Determining the recoverable amount of property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets, requires us to make estimates and assumptions in the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets. Future events could cause us to conclude that property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets associated with an acquired business are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and financial performance.

The preparation of estimated future cash flows involves significant estimations and assumptions. While we believe that our assumptions are appropriate and reasonable, significant changes in our assumptions may materially affect our assessment of recoverable values and may lead to future additional impairment charges under IFRS. Total

In December 2011, Smart recognized full impairment charges (including provision of Php8,457 million for doubtful account receivablescertain network equipment and write-downfacilities which no longer efficiently support our network modernization program, which was discussed and approved by Smart’s Board of inventoriesDirectors on February 28, 2011 and supplies) amountedhave been identified for replacement. The full impairment provision recognized represents the net book value of these network equipment and facilities.

In December 2012, DMPI recognized an impairment loss of Php2,881 million pertaining to Php2,438 million, Php5,061the net book values of certain identified network equipment and facilities that are affected by the unified wireless strategy as the overall business of DMPI became anchored on PLDT’s wireless business unit, Smart. The network modernization program resulted in network impairment of DMPI due to advancement in technologies.

In 2013, Smart and DMPI launched a network convergence program designed to consolidate the networks of Smart and DMPI into a single network enabling subscribers of both companies to take advantage of the combined network. The convergence is expected to result in savings from synergies in terms of optimized capital expenditures and cost efficiencies from co-location of base stations, consolidation of core systems, and operating expenses. The program, however, rendered certain network equipment and site facilities obsolete. In view of this, Smart and DMPI recognized full impairment provision on the net book value of the affected network equipment and site facilities amounting to Php378 million and Php4,180Php1,764 million, respectively.

SeeNote 5 – Income and Expenses – Asset Impairmentand Note 9 – Property, Plant and Equipment – Impairment of Certain Wireless Network Equipment and Facilitiesto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Total asset impairment on noncurrent assets from continuing operations amounted Php2,143 million, Php2,896 million and Php8,514 million for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively.2011, respectively, while that from discontinued operations amounted to nil for the years ended December 31, 2013 and 2012 and Php3 million for the year ended December 31, 2011. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment Information, Note 5 Income and Expenses – Asset Impairment andNote 9 – Property, Plant and Note 10 — Investments in Associates and Joint Ventures Equipmentto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

The carrying values of our property, plant and equipment, investments in associates, and joint ventures and deposits, goodwill and intangible assets, trade and other receivables, inventories and supplies and prepayments are separately disclosed in Notes9, 10, 14 16, 17 and18, respectively, to the accompanying audited consolidated financial statements in Item 18, respectively.

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18. “Financial Statements”.


Estimating useful lives of property, plant and equipment and intangible assets with finite life

We estimate the useful lives of each item of our property, plant and equipment and intangible assets with finite life based on the periods over which our assets are expected to be available for use. Our estimate of the useful lives of our property, plant and equipment and intangible assets with finite life is based on our collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful lives of our property, plant and equipment and intangible assets with finite life are reviewed at least at each financialevery year-end and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of our assets. It is possible, however, that future results of operations could be materially affected by changes in our estimates brought about by changes in the factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of our property, plant and equipment and intangible assets with finite life would increase our recorded expensesdepreciation and amortization and decrease our noncurrentproperty, plant and equipment and intangible assets.

The total depreciation and amortization of property, plant and equipment from continuing operations amounted to Php26,277Php30,304 million, Php25,607Php32,354 million and Php24,709Php27,539 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php153 million, Php466 million and Php418 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total carrying values of property, plant and equipment, net of accumulated depreciation and amortization from continuing operations, amounted to Php163,184Php192,665 million, Php200,078 million and Php161,256Php200,142 million as at December 31, 20102013 and 2009, respectively. See Note 4 — Operating Segment Information2012, and Note 9 — Property, Plant and Equipment to the accompanying consolidated financial statements in Item 18.

Determining the fair value of investment properties
     We have adopted the fair value approach in determining the carrying value of our investment properties. We opted to rely on independent appraisers in determining the fair values of our investment properties, and such fair values were determined based on recent prices of similar properties, with adjustments to reflect any changes in economic conditions since the date of those transactions. The amounts and timing of recorded changes in fair value for any period would differ if we made different judgments and estimates or utilized a different basis for determining fair value. Appraisal of investment properties is annually performed every December 31.
     Net gainsJanuary 1, 2012, respectively, while that from fair value adjustments charged to profit or lossdiscontinued operations amounted to Php6 million, Php352 million and Php59 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total carrying values of our investment properties amounted to Php1,560 million and Php1,210Php1,529 million as at December 31, 2010 and 2009, respectively. See Note 12 — Investment Properties to the accompanying consolidated financial statements in Item 18.
Goodwill and intangible assets
     Our consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the acquisition method starting January 1, 2009 and purchase method for prior year acquisitions, which both require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect our financial performance.
2012.

Intangible assets acquired from business combination with finite lives are amortized over the expected useful economic life using the straight-line method of accounting. At a minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statement.

The total amortization of intangible assets from continuing operations with finite life amounted to Php388Php1,020 million, Php368Php921 million and Php377Php117 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php55 million, Php180 million and Php147 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total carrying values of intangible assets with finite life from continuing operations amounted to Php7,286 million, Php7,505 million and Php8,698 million as at December 31, 2013 and 2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php354 million as at December 31, 2012.

SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 – Operating Segment Information, Note 9 – Property, Plant and EquipmentandNote 14 – Goodwill and Intangible Assetsto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Goodwill and intangible assets with indefinite useful life

Our consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the acquisition method, which require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Any excess in the purchase price over the estimated fair market values of the net assets acquired is recorded as goodwill in our consolidated statement of financial position. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect our financial performance.

Total carrying values of goodwill and intangible assets with indefinite useful life from continuing operations amounted to Php11,485Php66,632 million, Php66,745 million and Php13,024Php74,605 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php6,679 million as at December 31, 2012. SeeNote 13 — Business Combinations and Acquisition2 – Summary of Non-Controlling Interests Significant Accounting Policies – Discontinued Operationsand Note 14 Goodwill and Intangible Assetsto the accompanying audited consolidated financial statements in Item 18.

57

“Financial Statements”.


Recognition of deferred income tax assets and liabilities

We review the carrying amounts of deferred income tax assets at the end of each reporting period and reduce these to the extent that these are no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Our assessment on the recognition of deferred income tax assets on deductible temporary differences is based on the level and timing of forecasted taxable income of the subsequent reporting periods. This forecast is based on our past results and future expectations on revenues and expenses as well as future tax planning strategies. However, there is no assurance that we will generate sufficient taxable income to allow all or part of our deferred income tax assets to be utilized. We also review the level of projected gross margin for the use of Optional Standard Deduction, or OSD method, and assess the future tax consequences for the recognition of deferred income tax assets and deferred income tax liabilities.assets. Based on Smart’sSmart and Wolfpac’sSBI’s projected gross margin, they expect to continue using the OSD method in the foreseeable future.

Based on the above assessment, our consolidated unrecognized deferred income tax assets amounted to Php1,477Php12,426 million, Php15,351 million and Php1,236Php16,098 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. In addition, our unrecognized net deferred income tax assets for items which would not result in future tax benefits when using the OSD method amounted to Php2,805Php4,496 million, Php3,655 million and Php3,296Php4,240 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. Total consolidated provision forbenefit from deferred income tax from continuing operations amounted to Php1,198Php4,401 million, Php656Php919 million and Php2,715Php1,174 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php30 million, Php28 million and Php275 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total consolidated net deferred income tax assets from continuing operations amounted to Php6,110Php14,181 million, Php7,225 million and Php7,721Php5,117 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively, while total consolidated net deferred income tax liabilitiesthat from discontinued operations amounted to Php1,099 million and Php1,321Php212 million as at December 31, 2010 and 2009, respectively.2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment Informationand Note 7 Income Taxesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Estimating allowance for doubtful accounts

If we assessed that there iswas an objective evidence that an impairment loss has been incurred in our trade and other receivables, we estimate the allowance for doubtful accounts related to our trade and other receivables that are specifically identified as doubtful of collection. The amount of allowance is evaluated by management on the basis of factors that affect the collectibilitycollectability of the accounts. In these cases, we use judgment based on the best available facts and circumstances, including, but not limited to, the length of our relationship with the customer and the customer’s credit status based on third party credit reports and known market factors, to record specific reserves for customers against amounts due in order to reduce our receivables to amounts that we expect to collect. These specific reserves are re-evaluated and adjusted as additional information received affect the amounts estimated.

In addition to specific allowance against individually significant receivables, we also assess a collective impairment allowance against credit exposures of our customer which were grouped based on common credit characteristic, which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when the receivables were originally granted to customers. This collective allowance is based on historical loss experience using various factors, such as historical performance of the customers within the collective group, deterioration in the markets in which the customers operate, and identified structural weaknesses or deterioration in the cash flows of customers.

Total asset impairment provision for doubtful accounts for trade and other receivables from continuing operations recognized in our consolidated income statements amounted to Php834Php3,171 million, Php2,335Php2,175 million and Php1,079Php1,543 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php2 million, Php3 million and Php6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Trade and other receivables, net of asset impairment,allowance for doubtful accounts, from continuing operations amounted to Php16,428Php17,564 million, Php16,379 million and Php14,729Php16,245 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php2,704 million as at December 31, 2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment Information, Note 5 Income and Expenses – Asset Impairment, Note 16 Trade and Other ReceivablesandNote 28 —27 – Financial Assets and Liabilitiesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Estimating net realizable value of inventories and supplies

     We write down the cost of inventories whenever the net realizable value of inventories becomes lower than cost due to damage, physical deterioration, obsolescence, change in price levels or other causes. The lower of cost and net realizable value of inventories is reviewed on a periodic basis. Inventory items identified to be obsolete or unusable are written-off and charged as expense in our consolidated income statement.
     Total write-down of inventories and supplies amounted to Php108 million, Php389 million and Php242 million for the years ended December 31, 2010, 2009 and 2008, respectively. The carrying values of inventories and

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supplies amounted to Php2,219 million and Php2,165 million as at December 31, 2010 and 2009, respectively. See Note 4 — Operating Segment Information, Note 5 — Income and Expenses and Note 17 — Inventories and Supplies to the accompanying consolidated financial statements in Item 18.
Share-based payment transactions
     Our 2007 to 2009 LTIP grants SARs to our eligible key executives and advisors. Under the 2007 to 2009 LTIP, we recognize the services we receive from the eligible key executives and advisors, and our liability to pay for those services, as the eligible key executives and advisors render services during the vesting period. We measure our liability, initially and at each reporting date until settled, at the fair value of the SARs, by applying an option valuation model, taking into account the terms and conditions on which the SARs were granted, and the extent to which the eligible key executives and advisors have rendered service to date. We recognize any changes in fair value at each reporting date until settled in our consolidated income statement. The estimates and assumptions are described in Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18 and include, among other things, annual stock volatility, risk-free interest rate, dividends yield, the remaining life of options, and the fair value of common stock. While management believes that the estimates and assumptions used are reasonable and appropriate, significant differences in our actual experience or significant changes in the estimates and assumptions may materially affect the stock compensation costs charged to operations. The fair value of the 2007 to 2009 LTIP recognized as expense amounted to Php1,833 million and Php1,281 million for the years ended December 31, 2009 and 2008, respectively. The outstanding 2007 to 2009 LTIP liability of Php4,582 million as at December 31, 2009 was paid in full in April 2010. See Note 5 — Income and Expenses, Note 23 — Accrued Expenses and Other Current Liabilities and Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18 for further discussion.
Estimation of pension benefit costs and other employee benefits

The cost of defined benefit and contribution plans and present value of the pension obligation are determined using projected unit credit method. Actuarial valuation includes making various assumptions which consists, among other things, discount rates, expected rates of return on plan assets, rates of compensation increases and mortality rates. SeeNote 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18. Actual results that differ from our assumptions are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These excess actuarial gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan.. Due to complexity of valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in assumptions. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for pension and other retirement obligations. All assumptions are reviewed atevery year-end.

     Total

Net consolidated pension benefit costs from continuing operations amounted to Php236Php856 million, Php1,306Php584 million and Php725Php570 million for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively. Unrecognized2011, respectively, while net actuarial gainsconsolidated pension benefit costs from discontinued operations amounted to Php479Php9 million, Php170 million and Php8 million for the years ended December 31, 2013, 2012 and 2011, respectively. The prepaid benefit costs from continuing operations amounted to Php199 million, Php1,625 million and Php8,626 million as at December 31, 20102013 and unrecognized net actuarial losses2012, and January 1, 2012, respectively. The accrued benefit costs from continuing operations amounted to Php2,474Php10,310 million, Php492 million and Php438 million as at December 31, 2009. The prepaid benefit costs2013 and 2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php5,333 million and Php5,414Php206 million as at December 31, 2010 and 2009, respectively. The accrued benefit costs amounted to Php415 million and Php359 million as at December 31, 2010 and 2009, respectively.2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 5 Income and Expenses Note 18 — Prepayments and Note 25 — Share-based Payments– Compensation and Employee Benefits, Note 18 – PrepaymentsandNote 25 – Employee Benefits – Defined Benefit Pension Plansto the accompanying audited consolidated financial statements in Item 18.

     The new “Financial Statements”.

To ensure the proper execution of our strategic and operational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, the 2012 to 2014 LTIP, or 2010covering the period from January 1, 2012 to 2012 LTIP, has been presented to andDecember 31, 2014, was approved by the ECC and the Board of Directors andwith the endorsement of the ECC on March 22, 2012. The award in the 2012 to 2014 LTIP is based oncontingent upon the successful achievement of certain profit targets, intended to align the execution of the business strategies of the expanded Group, including Digitel, over the three year period from 2012 to 2014. In addition, the 2012 to 2014 LTIP allows for the covered Performance Cycle. The costparticipation of 2010a number of senior executives and certain newly hired executives and ensures the continuity of management in line with the succession planning of the PLDT Group. LTIP costs recognized for the years ended December 31, 2013 and 2012 amounted to 2012 LTIP is determined using the projected unit credit method based on prevailing discount ratesPhp1,638 million and profit targets. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for other employee benefits. All assumptions are reviewed on a monthly basis.Php1,491 million, respectively. Total outstanding liability and fair value of 20102012 to 20122014 LTIP cost amounted to Php1,392Php3,129 million and Php1,491 million as at and for the year ended December 31, 2010.2013 and 2012, respectively. SeeNote 5 Income and Expenses and Note 25 — Shared-based Payments– Compensation and Employee BenefitsandNote 25 – Employee Benefits – Other Long-term Employee Benefitsto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Provision for asset retirement obligations

Provision for asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. This requires an estimation of the cost to restore/dismantle on a per

59


square meter basis, depending on the location, and is based on the best estimate of the expenditure required to settle the obligation at the future restoration/dismantlement date, discounted using a pre-tax rate that reflects the current market assessment of the time value of money and, where appropriate, the risk specific to the liability. Total provision for asset retirement obligations amounted to Php1,344Php2,144 million, Php2,543 million and Php1,204Php2,107 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. SeeNote 21 Deferred Credits and Other Noncurrent Liabilitiesto the accompanying audited consolidated financial statements in Item 18.
“Financial Statements”.

Provision for legal contingencies and tax assessments

We are currently involved in various legal proceedings and tax assessments. Our estimate of the probable costs for the resolution of these claims hashave been developed in consultation with our counsel handling the defense in these matters and is based upon our analysis of potential results. We currently do not believe these proceedings will have a material adverse effect oncould materially reduce our consolidated financial statements.revenues and profitability. It is possible, however, that future financial performance could be materially affected by changes in our estimates or effectiveness of our strategies relating to these proceedings and assessments. SeeNote 27 —26 – Provisions and Contingenciesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Based on management’s assessment, appropriate provisions were made; however, management has decided not to disclose further details of these provisions as they may prejudice our position in certain legal proceedings.

Revenue recognition

Our revenue recognition policies require us to make use of estimates and assumptions that may affect the reported amounts of our revenues and receivables.

Our agreements with domestic and foreign carriers for inbound and outbound traffic subject to settlements require traffic reconciliations before actual settlement is done, which may not be the actual volume of traffic as measured by us. Initial recognition of revenues is based on our observed traffic adjusted by our normal experience adjustments, which historically are not material to our consolidated financial statements. Differences between the amounts initially recognized and the actual settlements are taken up in the accounts upon reconciliation. However, we cannot assure you that the use of such estimates will not result in material adjustments in future periods.

Revenues under a multiple element arrangement specifically applicable to our fixed line and wireless businesses are split into separately identifiable components based on their relative fair value in order to reflect the substance of the transaction. Where fair value is not directly observable, the total consideration is allocated using an appropriate allocation method.

We account for mobile contracts in accordance withIAS 18, Revenue Recognition, and have concluded that the handset and the mobile services may be accounted for as separate identifiable components. The handset (with activation) is delivered first, followed by the mobile service (which is provided over the contract period, generally one or two years). Because some amount of the arrangement consideration that may be allocated to the handset generally is contingent on providing the mobile service, the amount that is allocated to the handset is limited to the cash received (i.e., the amount paid for the handset) at the time of the handset delivery.

Under certain arrangements with our knowledge processing solutions services, if there is uncertainty regarding the outcome of the transaction for which service was rendered, revenue is recognized only to the extent of expenses incurred for rendering the service and only to such amount isas determined to be recoverable.

We recognize our revenues from installation and activation related fees and the corresponding costs over the expected average periods of customer relationship for fixed line and cellular services. We estimate the expected average period of customer relationship based on our most recent churn-ratechurn rate analysis.

Determination of fair values of financial assets and liabilities

Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

     Total

Other than those whose carrying amounts are reasonable approximations of fair values, total fair values of financial assets and liabilities amounted to Php55,538 million and Php167,396 million as at December 31, 2010,2013 amounted to Php4,965 million and Php115,885 million, respectively, while the total fair values of financial assets and liabilities amounted to Php58,225 million and Php165,063 million as at December 31, 2009,2012 amounted to Php6,782 million and Php134,036 million, respectively. Total fair values of financial assets and liabilities as at January 1, 2012 amounted to Php8,766 million and Php119,410 million, respectively. SeeNote 28 —27 – Financial Assets and Liabilitiesto the accompanying audited consolidated financial statements in Item 18.

60

“Financial Statements”.


New Accounting Standards and Interpretations to Existing Standards Effective Subsequent to December 31, 20102013
     Please see

SeeNote 2 Summary of Significant Accounting Policiesto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for athe discussion of new accounting standards that will become effective subsequent to December 31, 20102013 and their anticipated impact on our consolidated financial statements for the current and future periods.

Results of Operations

The table below shows the contribution by each of our business segments to our consolidated revenues, expenses, other income (expense), income (loss) before income tax, net income (loss), adjustedAdjusted EBITDA, adjustedAdjusted EBITDA margin and core income for the years ended December 31, 2010, 20092013, 2012 and 2008. Most2011. In each of the years ended December 31, 2013 and 2012, a majority of our revenues are derived from our operations within the Philippines. Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.

                     
              Inter-segment  
  Wireless Fixed Line ICT Transactions Consolidated
          (in millions)        
For the year ended December 31, 2010
                    
Revenues Php95,187  Php48,951  Php11,358   Php(11,037) Php144,459 
Expenses  49,632   38,745   11,944   (11,418)  88,903 
Other income (expenses)  1,235   (2,946)  221   (381)  (1,871)
Income (loss) before income tax  46,790   7,260   (365)     53,685 
Provision for (benefit from) income tax  11,414   2,050   (38)     13,426 
Net income (loss) for the year/ Segment profit (loss) for the year  35,376   5,210   (327)     40,259 
Adjusted EBITDA for the year  58,945   22,668   1,723   381   83,717 
Adjusted EBITDA margin for the year(1)
  63%  47%  16%     59%
Core income for the year  35,418   5,580   1,030      42,028 
For the year ended December 31, 2009
                    
Revenues  97,524   51,373   11,549   (12,453)  147,993 
Expenses  52,432   39,081   11,289   (12,691)  90,111 
Other income (expenses)  1,149   (4,170)  216   (238)  (3,043)
Income before income tax  46,241   8,122   476      54,839 
Provision for (benefit from) income tax  12,514   2,258   (28)     14,744 
Net income for the year/ Segment profit for the year  33,727   5,864   504      40,095 
Adjusted EBITDA for the year
  59,411   25,215   1,330   238   86,194 
Adjusted EBITDA margin for the year (1)
  62%  49%  12%     59%
Core income for the year  33,026   7,502   613   (3)  41,138 
For the year ended December 31, 2008
                    
Revenues  95,852   49,686   10,983   (10,684)  145,837 
Expenses  47,589   35,733   13,267   (10,803)  85,786 
Other expenses  (2,640)  (3,173)  (1)  (188)  (6,002)
Income (loss) before income tax  45,623   10,780   (2,285)  (69)  54,049 
Provision for (benefit from) income tax  16,124   3,048   (99)     19,073 
Net income for the year/ Segment profit (loss) for the year  29,499   7,732   (2,186)  (69)  34,976 
Adjusted EBITDA for the year
  60,967   25,854   1,056   119   87,996 
Adjusted EBITDA margin for the year (1)
  65%  52%  10%     62%
Core income for the year
  30,250   7,890   138   (64)  38,214 

   Wireless  Fixed Line  Others  Inter-segment
Transactions
  Consolidated 
   (in millions) 

For the year ended December 31, 2013

      

Revenues

  Php119,323   Php63,567   Php—      (Php14,559 Php168,331  

Expenses

   84,674    55,975    5    (15,139  125,515  

Other income (expenses)

   (3,866  (481  3,597    (434  (1,184

Income before income tax

   30,783    7,111    3,592    146    41,632  

Provision for (Benefit from) income tax

   8,862    (698  84    —      8,248  

Net income/Segment profit

   21,921    7,809    3,508    146    35,453  

Continuing operations

   21,921    7,809    3,508    146    33,384  

Discontinued operations

   —      —      —      —      2,069  

Adjusted EBITDA from continuing operations

   54,703    22,274    (5  580    77,552  

Adjusted EBITDA margin(1)

   47  36  —      (4%)   47

Core income

   26,499    9,061    3,110    146    38,717  

Continuing operations

   26,499    9,061    3,110    146    38,816  

Discontinued operations

   —      —      —      —      (99

For the year ended December 31, 2012(2)

      

Revenues

   115,932    60,246    —      (13,145  163,033�� 

Expenses

   83,717    52,776    18    (13,982  122,529  

Other income (expenses)

   893    (1,781  4,358    (368  3,102  

Income before income tax

   33,108    5,689    4,340    469    43,606  

Provision for (Benefit from) income tax

   8,094    (51  7    —      8,050  

Net income/Segment profit

   25,014    5,740    4,333    469    36,099  

Continuing operations

   25,014    5,740    4,333    469    35,556  

Discontinued operations

   —      —      —      —      543  

Adjusted EBITDA from continuing operations

   54,480    20,089    (18  837    75,388  

Adjusted EBITDA margin(1)

   48  34  —      (6%)   47

Core income

   25,694    5,769    4,424    469    36,907  

Continuing operations

   25,694    5,769    4,424    469    36,356  

Discontinued operations

   —      —      —      —      551  

For the year ended December 31, 2011(2, 3)

      

Revenues

   103,538    58,290    —      (13,349  148,479  

Expenses

   71,009    49,174    11    (13,770  106,424  

Other income (expenses)

   (1,734  (966  1,998    (268  (970

Income before income tax

   30,795    8,150    1,987    153    41,085  

Provision for income tax

   8,429    2,303    2    —      10,734  

Net income/Segment profit

   22,366    5,847    1,985    153    31,218  

Continuing operations

   22,366    5,847    1,985    153    30,351  

Discontinued operations

   —      —      —      —      867  

Adjusted EBITDA from continuing operations

   55,433    22,382    (11  421    78,225  

Adjusted EBITDA margin(1)

   54  39  —      3  54

Core income

   29,903    5,310    2,461    153    38,616  

Continuing operations

   29,903    5,310    2,461    153    37,827  

Discontinued operations

   —      —      —      —      789  

(1)
(1)

Adjusted EBITDA margin for the period is derivedmeasured as a percentage ofAdjusted EBITDA from continuing operations divided by service revenues.

(2)

As adjusted to reflect the adjustments on the application of the Revised IAS 19 — Employee Benefits and certain presentation adjustments to conform with the current presentation of our business segments. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s results of operations for the period from October 26, 2011 to December 31, 2011 and consolidated financial position as at December 31, 2011.

61In the following discussion and analysis of our financial condition and results of operations for financial year 2013, 2012 and 2011, our results of operations for 2013 and 2012 consolidate the results of operations of the Digitel Group (including DMPI) for the full year in 2013 and 2012 while the results of operations for 2011 consolidate the results of Digitel’s operations only from October 26, 2011 to December 31, 2011. Therefore, in the following section, references to increases in contribution from Digitel or DMPI in 2012 for a particular line item, such as revenues or expenses, should be read to describe the result of the inclusion of Digitel’s or DMPI’s results of operations in our consolidated results of operations for the full year in 2012 as compared to the more limited period in 2011 and does not necessarily reflect an actual increase in the historical amount of such line item by Digitel or DMPI in 2012 from 2011.


Years Ended December 31, 2013 and 2012

2010 Compared to 2009
On a Consolidated Basis

Revenues

     Our

We reported consolidated revenues for 2010 decreased by Php3,534of Php168,331 million in 2013, an increase of Php5,298 million, or 2%3%, to Php144,459 million from Php147,993as compared with Php163,033 million in 2009. This decrease was2012, primarily due to a decline in our service revenues by Php3,325 million as a result of decreases inhigher cellular and satellitebroadband revenues from our wireless business, as well as lowerand higher revenues from data and other network, and miscellaneous services from our fixed line business’business, partially offset by lower revenues from national long distance, local exchange and international long distance services.

services from our fixed line business, and lower satellite and other services from our wireless business.

The following table shows the breakdown of our consolidated revenues by business segment for the years ended December 31, 20102013 and 2009 by business segment:

                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php95,187   66  Php97,524   66  Php(2,337)  (2)
Fixed line  48,951   34   51,373   34   (2,422)  (5)
Information and communications technology  11,358   8   11,549   8   (191)  (2)
Inter-segment transactions  (11,037)  (8)  (12,453)  (8)  1,416   (11)
                   
Consolidated Php144,459   100  Php147,993   100  Php(3,534)  (2)
                   
2012:

   2013  %  2012(1)  %  Change 
       Amount  % 
   (in millions) 

Wireless

  Php119,323    71   Php115,932    71   Php3,391    3  

Fixed line

   63,567    38    60,246    37    3,321    6  

Others(2)

   —      —      —      —      —      —    

Inter-segment transactions

   (14,559  (9  (13,145  (8  (1,414  11  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated

  Php168,331    100   Php163,033    100   Php5,298    3  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18.“Financial Statements” for further discussion.

(2)

See Item 5. “Operating and Financial Review and Prospects — Results of Operations — Years Ended December 31, 2013 and 2012 — Other Income (Expenses)” for a discussion of income and expenses relating to the Others business.

Expenses

     Our

Consolidated expenses in 2010 decreasedincreased by Php1,208Php2,986 million, or 1%2%, to Php88,903 million from Php90,111Php125,515 million in 2009 largely2013 from Php122,529 million in 2012, as a result of decreases in asset impairment,higher expenses related to cost of sales, sellingprofessional and promotions,other contracted services, repairs and maintenance, taxes and licenses, asset impairment, insurance and security, rent, and communication, training and travel, expenses, which were partlypartially offset by higherlower expenses related to depreciation and amortization, compensation and employee benefits, repairsincluding the retroactive effect of the application of the Revised IAS 19 on our manpower rightsizing program, or MRP, costs of Php1,269 million in 2013, and maintenance, depreciation and amortization, and professional and other contracted services.

interconnection costs.

The following table shows the breakdown of our consolidated expenses by business segment for the years ended December 31, 20102013 and 2009 by business segment:

                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php49,632   56  Php52,432   58  Php(2,800)  (5)
Fixed line  38,745   44   39,081   43   (336)  (1)
Information and communications technology  11,944   13   11,289   13   655   6 
Inter-segment transactions  (11,418)  (13)  (12,691)  (14)  1,273   10 
                   
Consolidated Php88,903   100  Php90,111   100  Php(1,208)  (1)
                   
2012:

   2013  %  2012(1)  %  Change 
       Amount  % 
   (in millions) 

Wireless

  Php84,674    67   Php83,717    68   Php957    1  

Fixed line

   55,975    45    52,776    43    3,199    6  

Others

   5    —      18    —      (13  (72

Inter-segment transactions

   (15,139  (12  (13,982  (11  (1,157  8  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated

  Php125,515    100   Php122,529    100   Php2,986    2  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 — Employee Benefits. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Other ExpensesIncome (Expenses)

Consolidated other expenses — net in 2010 amounted to Php 1,871 million, a decrease of Php1,172 million, or 39%, from Php3,043Php1,184 million in 20092013, a change of Php4,286 million as against other income of Php3,102 million in 2012, primarily due to the combined effects of the following: (i) foreign exchange losses of Php2,893 million in 2013 as against foreign exchange gains of Php3,282 million in 2012 mainly due to the revaluation of net foreign-currency denominated liabilities as a result of the effect of the depreciation of the Philippine peso relative to the U.S. dollar to Php44.40 as at December 31, 2013 from Php41.08 as at December 31, 2012 as against an appreciation of the Philippine peso relative to the U.S. dollar to Php41.08 as at December 31, 2012 from Php43.92 as at December 31, 2011; (ii) a decrease in other income by Php1,700 million mainly due to the realized portion of deferred gain on the transfer of Manila Electric Company, or Meralco, shares to Beacon Electric Asset Holdings, Inc., or Beacon, of Php2,012 million in 2012, lower dividend income by Php718 million and reversal of prior years’ inventory provision, partially offset by the reversal of provision for NTC fees assessment as a result of a favorable Supreme Court decision, higher gain on the sale of Philweb shares by Php297 million, pension savings in 2013, higher income from consultancy and gain on insurance claims; (iii) lower interest income by Php422 million due to lower weighted average peso and dollar interest rates, lower amount of Philippine peso placements and shorter average tenor of dollar placements, partly offset by higher amount of dollar placements, longer average tenors of Philippine peso placements and the depreciation of the Philippine peso to the U.S. dollar; (iv) a decrease in net financing costs by Php287 million mainly due to lower average interest rates on loans, lower outstanding debt balance in 2013 and lower financing charges, partly offset by higher amortization of debt discount and lower capitalized interest; (v) an increase in equity share in net earnings of associates and joint ventures by Php1,204 million; and (vi) net gains on derivative financial instruments of Php1,406 million, which was mainly due to PCEV’s equity share in net earnings of Manila Electric Company, or Meralco, of which 68.8 million Meralco shares are held directly by PCEV and an additional 317.8 million Meralco shares are held through Beacon, in which PCEV acquired a 50% equity interest effective March 31, 2010 in exchange for transferring 154.2 million Meralco shares to Beacon; (ii) higher net foreign exchange gains by Php898Php511 million in 20102013 as compared with 2009 due to the revaluation of foreign-currency denominated liabilities as a result of the effect of the appreciation of the Philippine peso to the U.S. dollar; (iii) higheragainst net losses on derivative financial instruments by Php735of Php2,009 million in 2012 due to a gain in 2009 in the mark-to-market valuation relating to the derivative optionmaturity of the exchangeable note purchased as part2012 hedges, depreciation of the Meralco share acquisition by PCEV partially offset by lower mark-to-market lossPhilippine peso and hedge costs of PLDT resulting from the partial unwinding of principal-only currency swap contractswider dollar and peso interest rate differentials in 2010; (iv) lower interest income by Php339 million due to lower average level of money market placements and special deposits; (v) an increase in net financing costs by Php142 million mainly due to higher interest on loans and other related items — net, on account of PLDT’s and Smart’s higher average loan balances, and higher accretion on amortization of debt issuance cost and debt discount, and ICT business’ higher accretion on contingent consideration for business acquisitions; and (vi) an increase in other income by Php84 million, which was mainly due to gain on disposal of fixed assets of our wireless business and

622013.


reversal of prior year’s provision by our fixed line business, partially offset by lower gain on fixed assets disposal by our fixed line business.
The following table shows the breakdown of our consolidated other income (expenses) — netby business segment for the years ended December 31, 20102013 and 2009 by business segment:
                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php1,235   (66) Php1,149   (38) Php86   7 
Fixed line  (2,946)  158   (4,170)  137   1,224   (29)
Information and communications technology  221   (12)  216   (7)  5   2 
Inter-segment transactions  (381)  20   (238)  8   (143)  60 
                   
Consolidated Php(1,871)  100  Php(3,043)  100  Php1,172   (39)
                   
2012:

   2013  %  2012(1)  %  Change 
       Amount  % 
   (in millions) 

Wireless

  (Php3,866  326   Php893    29   (Php4,759  (533

Fixed line

   (481  41    (1,781  (57  1,300    (73

Others

   3,597    (304  4,358    140    (761  (17

Inter-segment transactions

   (434  37    (368  (12  (66  18  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated

  (Php1,184  100   Php3,102    100   (Php4,286  (138
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 — Employee Benefits. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Provision forNet Income Tax

     Provision for

Consolidated net income tax decreased by Php1,318Php646 million, or 9%2%, to Php13,426Php35,453 million in 20102013, from Php14,744Php36,099 million in 20092012. The decrease was mainly due to lower taxable income from our fixed line and ICT businesses.

Net Income (Loss)
     As a result, our consolidated net income was Php40,259 million in 2010,the combined effects of the following: (i) an increase of Php164 million as compared with Php40,095 million in 2009 primarily on account of decreasesconsolidated other expense – net by Php4,286 million; (ii) an increase in consolidated expenses by Php2,986 million; (iii) an increase in consolidated provision for income tax consolidated expensesby Php198 million, which was mainly due to higher taxable income of our wireless and consolidated other expenses — netbusinesses, partially offset by a decreaselower taxable income of our fixed line business; (iv) an increase in consolidated revenues.
revenues by Php5,298 million; and (v) higher income from discontinued operations of Php1,526 million mainly due to the gain on disposal of our BPO business. Our consolidated basic and diluted EPS, including EPS from discontinued operations, decreased to Php163.67 in 2013 from consolidated basic and diluted EPS of Php167.07 in 2012. Our weighted average number of outstanding common shares was approximately 216.06 million in each of the years ended December 31, 2013 and 2012.

The following table shows the breakdown of our consolidated net income (loss)by business segment for the years ended December 31, 20102013 and 2009 by business segment:

                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php35,376   88  Php33,727   84  Php1,649   5 
Fixed line  5,210   13   5,864   15   (654)  (11)
Information and communications technology  (327)  (1)  504   1   (831)  (165)
                   
Consolidated Php40,259   100  Php40,095   100  Php164    
                   
2012:

   2013   %   2012(1)   %   Change 
           Amount  % 
   (in millions) 

Wireless

  Php21,921     62    Php25,014     69    (Php3,093  (12

Fixed line

   7,809     22     5,740     16     2,069    36  

Others

   3,508     10     4,333     12     (825  (19

Inter-segment transactions

   146     —       469     1     (323  (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Continuing operations

   33,384     94     35,556     98     (2,172  (6

Discontinued operations

   2,069     6     543     2     1,526    281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Consolidated

  Php35,453     100    Php36,099     100    (Php646  (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 — Employee Benefits. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Adjusted EBITDA

Our consolidated adjustedAdjusted EBITDA was Php83,717from continuing operations amounted to Php77,552 million in 2010, a decrease2013, an increase of Php2,477Php2,164 million, or 3%, as compared with Php86,194Php75,388 million in 20092012, primarily due to a decline in our service revenue across our businesseshigher consolidated revenues, and higherlower operating expenses related to compensation and employee benefits, repairsexcluding the retroactive effect of the application of the Revised IAS 19 on our MRP costs of Php1,269 million in 2013, and maintenance,interconnection costs, partially offset by higher cost of sales, provision for doubtful accounts, and operating expenses related to professional and other contracted services, partly offset by lower expenses particularly provision for doubtful accounts, cost of sales, sellingrepairs and promotions, andmaintenance costs, taxes and licenses.

licenses, and insurance and security services.

The following table shows the breakdown of our consolidated adjustedAdjusted EBITDA from continuing operations by business segment for the years ended December 31, 20102013 and 2009 by business segment:

                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php58,945   70  Php59,411   69  Php(466)  (1)
Fixed line  22,668   27   25,215   29   (2,547)  (10)
Information and communications technology  1,723   2   1,330   2   393   30 
Inter-segment transactions  381   1   238      143   60 
                   
Consolidated Php83,717   100  Php86,194   100  Php(2,477)  (3)
                   
2012:

   2013  %   2012(1)  %   Change 
         Amount  % 
   (in millions) 

Wireless

  Php54,703    70    Php54,480    72    Php223    —    

Fixed line

   22,274    29     20,089    27     2,185    11  

Others

   (5  —       (18  —       13    (72

Inter-segment transactions

   580    1     837    1     (257  (31
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Continuing operations

  Php77,552    100    Php75,388    100    Php2,164    3  
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 — Employee Benefits. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Core Income

Our consolidated core income, including core income from discontinued operations, amounted to Php38,717 million in 2010 was Php42,028 million,2013, an increase of Php890Php1,810 million, or 2%5%, as compared with Php41,138Php36,907 million in 20092012, primarily due to decreasesan increase in consolidated revenues, partially offset by an increase in consolidated expenses, excluding the retroactive effect of the application of the Revised IAS 19 on our MRP costs of Php1,269 million in 2013, higher other expenses and lower core income contribution from discontinued operations and higher provision for income taxtax. Our consolidated basic and consolidated expenses partially offset by a decreasediluted core EPS, including basic and diluted core EPS from discontinued operations, increased to Php178.93 in consolidated revenues.

63

2013 from Php170.58 in 2012.


The following table shows the breakdown of our consolidated core income by business segment for the years ended December 31, 20102013 and 2009 by business segment:
                         
                  Change 
  2010  %  2009  %  Amount  % 
  (in millions) 
Wireless Php35,418   84  Php33,026   80  Php2,392   7 
Fixed line  5,580   13   7,502   18   (1,922)  (26)
Information and communications technology  1,030   3   613   2   417   68 
Inter-segment transactions        (3)     3   100 
                   
Consolidated Php42,028   100  Php41,138   100  Php890   2 
                   
     A reconciliation of our consolidated adjusted EBITDA and our consolidated core income to our consolidated net income is presented in Note 4 — Operating Segment Information to the accompanying consolidated financial statements in Item 18.
2012:

   2013  %   2012(1)   %   Change 
          Amount  % 
   (in millions) 

Wireless

  Php26,499    69    Php25,694     70    Php805    3  

Fixed line

   9,061    23     5,769     16     3,292    57  

Others

   3,110    8     4,424     12     (1,314  (30

Inter-segment transactions

   146    —       469     1     (323  (69
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Continuing operations

   38,816    100     36,356     99     2,460    7  

Discontinued operations

   (99  —       551     1     (650  (118
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Consolidated

  Php38,717    100    Php36,907     100    Php1,810    5  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 — Employee Benefits. See Note 2 — Summary of Significant Accounting Policies — Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

On a Business Segment Basis

Wireless

Wireless

Revenues

     Revenues

We generated revenues from our wireless business amounted to Php95,187of Php119,323 million in 2010, a decrease2013, an increase of Php2,337Php3,391 million, or 2%3%, from Php97,524Php115,932 million in 2009. 2012, which was primarily due to higher revenues from our cellular and wireless broadband services.

The following table summarizes our total revenues from our wireless business for the years ended December 31, 20102013 and 20092012 by service segment:

                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Service Revenues:                        
Cellular Php86,399   91  Php88,410   91  Php(2,011)  (2)
Wireless broadband, satellite and others                        
Wireless broadband  6,286   7   5,383   5   903   17 
Satellite and others  1,145   1   2,036   2   (891)  (44)
                   
   93,830   99   95,829   98   (1,999)  (2)
Non-Service Revenues:                        
Sale of cellular handsets, cellular subsriber identification module, or SIM,-packs and broadband data modems  1,357   1   1,695   2   (338)  (20)
                   
Total Wireless Revenues Php95,187   100  Php97,524   100  Php(2,337)  (2)
                   

                   Increase (Decrease) 
   2013   %   2012(1)   %   Amount  % 
   (in millions) 

Service Revenues:

           

Cellular

  Php105,875     89    Php103,604     89    Php2,271    2  

Wireless broadband, satellite and others

           

Wireless broadband

   9,432     8     8,606     8     826    10  

Satellite and others

   1,372     1     1,569     1     (197  (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
   116,679     98     113,779     98     2,900    3  

Non-Service Revenues:

           

Sale of cellular handsets, cellular subscriber identification module, or SIM,-packs and broadband data modems

   2,644     2     2,153     2     491    23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Wireless Revenues

  Php119,323     100    Php115,932     100    Php3,391    3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Service Revenues

Our wireless service revenues decreasedin 2013, increased by Php1,999Php2,900 million, or 2%3%, to Php93,830Php116,679 million in 2010 as compared with Php95,829Php113,779 million in 2009,2012, mainly as a result of higher revenues from our cellular and wireless broadband services, partially offset by lower revenues from our cellular services, and satellite and other revenues, partially offset by theservices. The increase in our wireless broadband revenues. The decrease in our cellular revenues was mainly due to higher domestic voice, and mobile internet revenues, partially offset by the declinedecrease in revenues from domestic and international text messaging services because of the continuedrevenues, lower international voice and other cellular service revenues. The increase in multiple SIM card ownership, intense competition, the continued decline in yields from short messaging service, or SMS, as a result of aggressive pricing offers, and the prescribed extension of load validity periods. The declineour wireless broadband revenues was partially offset, however, by an increase in domestic voice revenuesmainly due to the continued patronage of unlimited voice offers, which were introduced startinga 4% growth in the second half of 2009.our broadband subscriber base. Our dollar-linked revenues were negatively affected by the appreciationdepreciation of the Philippine peso relative to the U.S. dollar, which decreasedincreased to a weighted average exchange rate of Php45.12Php42.44 for the year ended December 31, 20102013 from Php47.64Php42.24 for the year ended December 31, 2009 and the sale of transponders by Mabuhay Satellite. With subscriber growth being driven more by multiple SIM card ownership, especially in the lower income segment of the Philippine wireless market, average monthly cellular ARPUs for 2010 were lower as compared with 2009. We expect the decreasing trend in our cellular revenues, particularly our revenues from domestic and international text messaging services, to continue due to the popularity of unlimited offers, multiple SIM card ownership, continued decline in yields from SMS and competitive pressure.2012. As a percentage of our total wireless revenues, service revenues increased to 99% in 2010 fromaccounted for 98% in 2009.

64

each of 2013 and 2012.


Cellular Service

Our cellular service revenues in 20102013 amounted to Php86,399Php105,875 million, a decreasean increase of Php2,011Php2,271 million, or 2%, from Php88,410Php103,604 million in 2009.2012. Cellular service revenues accounted for 92%91% of our wireless service revenues in each of 20102013 and 2009.

2012.

We have focused on segmenting the market by offering sector-specific, value-driven packages for our subscribers. These include load buckets which provide a fixed number of messages with prescribed validity periods and call packages which allow a fixed number of calls of preset duration. Starting out as purely on-net packages, buckets now also offer voice, text and hybrid bundles available to all networks. Smart andSun Cellular also provide packages with unlimited voice, text, data, and combinations thereof, whose denominations depend on the duration and nature of the unlimited packages.

The following tables showtable shows the breakdown of our cellular service revenues and other key measures of our cellular business as at and for the years ended December 31, 20102013 and 2009:

                 
          Increase (Decrease)
  2010 2009 Amount%
  (in millions)
Cellular service revenues Php86,399  Php88,410  Php(2,011)  (2)
                 
By service type
  83,779   85,922   (2,143)  (2)
Prepaid  77,231   79,284   (2,053)  (3)
Postpaid  6,548   6,638   (90)  (1)
                 
By component
  83,779   85,922   (2,143)  (2)
Voice  42,250   38,850   3,400   9 
Data  41,529   47,072   (5,543)  (12)
 
Others(1)
  2,620   2,488   132   5 
2012:

           Increase (Decrease) 
   2013   2012(1)   Amount  % 
   (in millions) 

Cellular service revenues

  Php105,875    Php103,604    Php2,271    2  

By service type

   103,642     101,042     2,600    3  

Prepaid

   84,600     84,525     75    —    

Postpaid

   19,042     16,517     2,525    15  

By component

   103,642     101,042     2,600    3  

Voice

   51,384     49,627     1,757    4  

Data

   52,258     51,415     843    2  

Others(2)

   2,233     2,562     (329  (13

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(2)
(1)

Refers to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, share in revenues from PLDT’s WeRoam and PLDT Landline Plus, or PLP, services, a small number of leased line contracts, and revenues from Chikka Wolfpac and other Smart subsidiaries.

                 
          Increase (Decrease)
  2010 2009 Amount %
Cellular subscriber base  45,636,008   41,328,641   4,307,367   10 
Prepaid  45,214,433   40,893,098   4,321,335   11 
Smart Buddy
  25,293,443   23,762,814   1,530,629   6 
Talk ’N Text
  18,967,381   17,050,713   1,916,668   11 
Red Mobile
  953,609   79,571   874,038   1,098 
Postpaid  421,575   435,543   (13,968)  (3)
                 
Systemwide traffic volumes (in millions)                
Calls (in minutes)  26,136   16,305   9,831   60 
Domestic  23,110   13,371   9,739   73 
Inbound
  1,438   1,495   (57)  (4)
Outbound
  21,672   11,876   9,796   82 
International  3,026   2,934   92   3 
Inbound
  2,817   2,738   79   3 
Outbound
  209   196   13   7 
                 
SMS/Data count (in hits)  341,113   287,921   53,192   18 
Text messages  339,530   286,294   53,236   19 
Domestic  339,011   285,847   53,164   19 
Inbound
  8,058   8,289   (231)  (3)
Outbound
  330,953   277,558   53,395   19 
Bucket-Priced  312,634   258,190   54,444   21 
Standard  18,319   19,368   (1,049)  (5)
International  519   447   72   16 
Inbound
  211   136   75   55 
Outbound
  308   311   (3)  (1)
Value-Added Services  1,557   1,608   (51)  (3)
Financial Services  26   19   7   37 

The following table shows other key measures of our cellular business as at and for the years ended December 31, 2013 and 2012:

           Increase (Decrease) 
   2013   2012   Amount  % 

Cellular subscriber base

   70,045,627     69,866,458     179,169    —    

Prepaid

   67,667,750     67,611,537     56,213    —    

Smart

   24,608,687     25,061,453     (452,766  (2

Talk ’N Text

   29,485,017     28,445,053     1,039,964    4  

Sun Cellular

   13,574,046     14,105,031     (530,985  (4

Postpaid

   2,377,877     2,254,921     122,956    5  

Sun Cellular

   1,488,181     1,571,441     (83,260  (5

Smart

   889,696     683,480     206,216    30  

Systemwide traffic volumes (in million minutes)(1)

       

Calls

   55,094     53,025     2,069    4  

Domestic

   51,504     49,597     1,907    4  

Inbound

   1,228     1,242     (14  (1

Outbound

   50,276     48,355     1,921    4  

International

   3,590     3,428     162    5  

Inbound

   3,216     3,025     191    6  

Outbound

   374     403     (29  (7

SMS/Data count (in million hits)(1)

   506,702     501,964     4,738    1  

Text messages

   504,050     500,039     4,011    1  

Domestic

   503,176     499,191     3,985    1  

Bucket-Priced/Unlimited

   471,298     468,898     2,400    —    

Standard

   31,878     30,293     1,585    5  

International

   874     848     26    3  

Value-Added Services

   2,577     1,872     705    38  

Financial Services

   75     53     22    42  

Mobile internet (in TB)

   18,092     4,954     13,138    265  

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Revenues attributable togenerated from our prepaid cellular services amounted to Php77,231Php84,600 million in 2010, a decrease2013, an increase of Php2,053Php75 million or 3%, as compared with Php79,284Php84,525 million earned in 2009.2012. Prepaid cellular service revenues accounted for 92%82% and 84% of cellular voice and data revenues in each of 20102013 and 2009.2012, respectively. Revenues attributable to Smart’sgenerated from postpaid cellular service amounted to Php6,548Php19,042 million in 2010, a decrease2013, an increase of Php90Php2,525 million, or 1%15%, as compared with Php6,638Php16,517 million earned in 2009,2012, and which accounted for 8%18% and 16% of cellular voice and data revenues in each2013 and 2012, respectively. The increase in revenues from our prepaid cellular services was primarily due to an increase in domestic outbound voice revenues and mobile internet, partially offset by a decline in international outbound revenues. The increase in our postpaid cellular service revenues was primarily due to an increase in postpaid subscribers of 2010 and 2009.

65Smart from 889,696 in 2013 from 683,480 in 2012 due to higher activations.


Voice Services

Cellular revenues from our voice services, which include all voice traffic and voice value-added services, or VAS, such as voice mail and outbound international roaming, increased by Php3,400Php1,757 million, or 9%4%, to Php42,250Php51,384 million in 20102013 from Php38,850Php49,627 million in 20092012, primarily due to an increase inhigher cellular domestic callvoice revenues, partially offset by a decrease inlower cellular international callvoice revenues. Cellular voice services accounted for 49% and 48% of our cellular service revenues in 2010 as compared with 44% in 2009.

2013 and 2012, respectively.

The following table shows the breakdown of our cellular voice revenues for the years ended December 31, 20102013 and 2009:

                 
          Increase (Decrease) 
  2010  2009  Amount  % 
      (in millions)     
Voice services:                
Domestic
                
Inbound Php5,203  Php5,095�� Php108   2 
Outbound  20,632   16,534   4,098   25 
             
   25,835   21,629   4,206   19 
             
                 
International
                
Inbound  14,698   15,287   (589)  (4)
Outbound  1,717   1,934   (217)  (11)
             
   16,415   17,221   (806)  (5)
             
                 
Total Php42,250  Php38,850  Php3,400   9 
             
2012:

           Increase (Decrease) 
   2013   2012(1)   Amount  % 
   (in millions) 

Voice services:

       

Domestic

       

Inbound

  Php4,655    Php4,737    (Php82  (2

Outbound

   30,619     28,440     2,179    8  
  

 

 

   

 

 

   

 

 

  

 

 

 
   35,274     33,177     2,097    6  
  

 

 

   

 

 

   

 

 

  

 

 

 

International

       

Inbound

   13,922     13,838     84    1  

Outbound

   2,188     2,612     (424  (16
  

 

 

   

 

 

   

 

 

  

 

 

 
   16,110     16,450     (340  (2
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php51,384    Php49,627    Php1,757    4  
  

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Domestic voice service revenues increased by Php4,206Php2,097 million, or 19%6%, to Php25,835Php35,274 million in 20102013 from Php21,629Php33,177 million in 20092012, primarily due to an increase in domestic outbound callvoice service revenues by Php4,098Php2,179 million, partially offset by lower domestic inbound voice service revenues by Php82 million.

Revenues from domestic outbound voice service increased by Php2,179 million, or 25%8%, to Php20,632Php30,619 million in 20102013 from Php16,534Php28,440 million in 20092012 mainly due to increased patronagetraffic on unlimited calls and improved yield on bucket offers. Domestic outbound call volume of unlimited voice offerings, complemented50,276 million minutes increased by an increase1,921 million minutes, or 4%, from 48,355 million minutes in the revenue contribution of2012.

Revenues from our domestic inbound domestic voice service decreased by Php108Php82 million, or 2%, to Php5,203Php4,655 million in 20102013 from Php5,095Php4,737 million in 2009 as a result of an increase in revenues from other domestic carriers. Outbound domestic2012. Domestic inbound call volumes increasedof 1,228 million minutes in 2013, decreased by 9,79614 million minutes, or 82%1%, to 21,672from 1,242 million minutes in 2010 from 11,876 million minutes in 2009. The increase in inbound domestic call volumes from other domestic carriers was offset by the decrease in call volumes from PLDT’s regular and fixed rate call packages, which resulted in the overall decrease in our inbound domestic call volumes by 57 million minutes, or 4%, to 1,438 million minutes in 2010 from 1,495 million minutes in 2009. The aggregate increase in volumes was mainly2012 primarily due to the higher call volumeslower traffic from unlimited voice offerings.

fixed line calls.

International voice service revenues decreased by Php806Php340 million, or 5%2%, to Php16,415Php16,110 million in 20102013 from Php17,221Php16,450 million in 20092012 primarily due to athe decline in inbound international outbound voice service revenues by Php589Php424 million, or 4%16%, to Php14,698Php2,188 million in 20102013 from Php15,287Php2,612 million in 2009 and due to a decline in outbound2012, partially offset by higher international inbound voice service revenues by Php217Php84 million, or 11%1%, to Php1,717Php13,922 million in 20102013 from Php1,934Php13,838 million in 2009.2012. The declinenet decrease in international voice service revenues was due to lower outbound traffic and a decrease in inbound termination rates, partially offset by the increase in inbound traffic and the favorable effect on our dollar-linked revenues of the appreciation of the Philippine peso relative to the U.S. dollar to ahigher weighted average exchange rate of Php45.12 for the year ended December 31, 2010 from Php47.64 forPhilippine peso to the year ended December 31, 2009. On the other hand, internationalU.S. dollar. International inbound and outbound calls totaled 3,0263,590 million minutes, an increase of 162 million minutes, or 5%, from 3,428 million minutes in 2010, an increase of 92 million minutes, or 3%, as compared with 2,934 million minutes in 2009, mainly due to an increase in our cellular subscriber base.

Smartalk, Smart’s unlimited voice offering, is available toSmart BuddyandSmart Gold subscribers nationwide. The service does not require any change in SIM or cellular phone number and enablesSmart BuddyandSmart Goldsubscribers to make unlimited calls to any subscriber on the Smart network. Smart subscribers could avail of the service, via registration or via retailer loading, by purchasing loads for unlimited calls which come in two denominations:
Smartalk 100” which offers five days of unlimited calls for Php100; and
Smartalk 500” which offers 30 days of unlimited calls for Php500 to any subscriber on the Smart network.
     In addition, Smart also offersSmartalk Plus, which includes unlimited calling and on-net texting during off-peak hours and reduced rates during peak hours.Smartalk Plus’Php100 load denomination is valid for five days and provides on-net unlimited calls and SMS from 10:00 p.m. to 5:00 p.m., and call and SMS rates of Php2.50 per minute

66

2012.


and Php0.20 per SMS, respectively, from 5:01 p.m. to 9:59 p.m.
     Through theTalk ‘N Text UnliTalk Plus 100package,existingTalk ‘N Textsubscribers can avail of unlimited off-peak calls from 10:00 p.m. to 5:00 p.m. and special peak hour rates of Php2.50 per minute from 5:01 p.m. to 9:59 p.m. to anySmart Buddy, Smart Postpaid andTalk ‘N Text subscriber. The package also includes all day unlimited texting to anySmart Buddy, Smart Postpaid andTalk ‘N Textsubscriber. Each registration to this promo is valid for five days.Talk ‘N Text also hasUnliTalk 100which offers five days of unlimited calls toTalk ‘N Textand Smart subscribers.
Red Mobile Unlimitedoffers unlimitedRed-to-Redcall and text, and unlimitedRed-to-Redtext packages, as well as unlimited calling and texting to all Smart subscribers using a secondary network powered by Smart.
Data Services

Cellular revenues from our data services, which include all text messaging-related services, as well as VAS, decreasedincreased by Php5,543Php843 million, or 12%2%, to Php41,529Php52,258 million in 20102013 from Php47,072Php51,415 million in 2009.2012 primarily due to higher mobile internet and VAS revenues, partially offset by lower text messaging revenues. Cellular data services accounted for 48%49% and 53%50% of our cellular service revenues in 20102013 and 2009,2012, respectively.

The following table shows the breakdown of our cellular data service revenues for the years ended December 31, 20102013 and 2009:

                 
          Increase (Decrease) 
  2010  2009  Amount  % 
  (in millions) 
Text messaging                
Domestic Php37,478  Php42,905  Php(5,427)  (13)
Bucket-Priced
  23,138   26,797   (3,659)  (14)
Standard
  14,340   16,108   (1,768)  (11)
International  1,423   1,668   (245)  (15)
             
   38,901   44,573   (5,672)  (13)
             
Value-added services                
Standard(1)
  1,012   1,057   (45)  (4)
Rich Media(2)
  1,083   998   85   9 
Pasa Load(3)
  493   413   80   19 
             
   2,588   2,468   120   5 
             
Financial services                
Smart Money
  34   27   7   26 
Mobile Banking  6   4   2   50 
             
   40   31   9   29 
             
                 
Total Php41,529  Php47,072  Php(5,543)  (12)
             
2012:

           Increase (Decrease) 
   2013   2012(1)   Amount  % 
   (in millions) 

Text messaging

       

Domestic

  Php41,822    Php42,719    (Php897  (2

Bucket-Priced/Unlimited

   29,411     28,752     659    2  

Standard

   12,411     13,967     (1,556  (11

International

   3,519     3,782     (263  (7
  

 

 

   

 

 

   

 

 

  

 

 

 
   45,341     46,501     (1,160  (2
  

 

 

   

 

 

   

 

 

  

 

 

 

Mobile internet(2)

   4,968     3,121     1,847    59  

Value-added services(3)

   1,786     1,719     67    4  

Financial services

   163     74     89    120  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php52,258    Php51,415    Php843    2  
  

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(2)
(1)

Includes standardrevenues from web-based services, net of allocated discounts and content provider costs.

(3)

Includes revenues from SMS-based VAS (info-on-demand and voice text services, net of allocated discounts and content provider costs); multi-media messaging system, or MMS-based VAS (point-to-point MMS and content download services, such as info-on-demand, ringtone, logo or music downloads, net of allocated discounts and logo downloads, etc.

(2)Includes Multimedia Messaging System, or MMS, internet browsing, General Packet Radio Service, or GPRS, etc.
(3)A service whichcontent provider costs); and Pasa Load (which allows prepaid and postpaid subscribers to transfer small denominations of air time credits to other prepaid subscribers.subscribers and Dial *SOS which allows Smart prepaid subscribers to borrow Php4 of load (Php3 on-net SMS plus Php1 air time) from Smart which will be deducted upon their next top-up).

Text messaging-related services contributed revenues of Php38,901Php45,341 million in 2010,2013, a decrease of Php5,672Php1,160 million, or 13%2%, as compared with Php44,573Php46,501 million in 2009,2012, and accounted for 94%87% and 95%90% of our total cellular data service revenues in 20102013 and 2009,2012, respectively. The decrease in revenues from text messaging-related services resulted mainly from lower domestic standard and international messaging revenues, partially offset by higher text messaging revenues from the continued decline invarious bucket-priced/unlimited SMS yield as a result of aggressive SMS pricing offers and the increased number of subscribers who also hold SIM cards from other cellular operators and who selectively use such SIM cards. Other factors that contributed to this decline in revenues were the prescribed extension of load validity periods and cheaper alternative means of communication.offers. Text messaging revenues from the various bucket-priced plansbucket-priced/unlimited SMS offers totaled Php23,138Php29,411 million in 2010, a decrease2013, an increase of Php3,659Php659 million, or 14%2%, as compared with Php26,797Php28,752 million in 2009. Likewise, standard2012. Bucket-priced/unlimited text messages increased by 2,400 million to 471,298 million in 2013 from 468,898 million in 2012.

Standard text messaging revenues, which includes inbound and outbound standard SMS revenues, decreased by Php1,768Php1,556 million, or 11%, to Php14,340Php12,411 million in 20102013 from Php16,108Php13,967 million in 2009. The decrease in international text messaging revenues was2012, mainly due to the declinea decrease in outbound standard SMS yieldrevenues primarily as a result of increased preference for bucket and unlimited SMS offers, partly offset by higher inbound revenues due to higher text messages from other carriers. PLDT expects the trend of bucket and unlimited SMS offers as well as the increaseto continue in the average roaming SMS settlement cost.

     Bucket-pricedfuture. Standard text messages increased by 1,585 million, or 5% to 31,878 million in 2010 totaled 312,6342013 from 30,293 million in 2012, as a result of increased domestic inbound SMS volume, partially offset by the decline in domestic outbound standard SMS volume.

International text messaging revenues amounted to Php3,519 million in 2013, a decrease of Php263 million, or 7%, from Php3,782 million in 2012 mainly due to lower outbound international SMS revenues driven by the decline in outbound traffic, partially offset by higher inbound traffic, higher effective dollar yield of international inbound SMS and the favorable effect of higher weighted average exchange rate of the Philippine peso to the U.S. dollar.

Mobile internet service revenues increased by Php1,847 million, or 59%, to Php4,968 million in 2013 from Php3,121 million in 2012 as a result of higher traffic for mobile internet browsing. Mobile internet service registered 18,092 TB in 2013, an increase of 54,44413,138 TB, or 265%, from 4,954 TB in 2012.

VAS contributed revenues of Php1,786 million in 2013, an increase of Php67 million, or 21%4%, as compared with 258,190Php1,719 million in 2009, primarily due to the continued patronage of bucket and unlimited text messaging offers. Standard text messages totaled 18,319 million in 2010, a decrease of 1,049 million, or 5%, as compared with 19,368 million in 2009, as a result of subscribers moving to bucket-priced text services.

67


     VAS contributed revenues of Php2,588 million in 2010, an increase of Php120 million, or 5%, as compared with Php2,468 million in 2009,2012, primarily due to an increase in the rich mediarevenues from SMS-based VAS particularly mobile internet browsing, which increased by Php195 million, or 37%, to Php725 million in 2010 from Php530 million in 2009, andPasa Load,revenues, partially offset by lower usage of standard VAS.
Pasa Load/Give-a-Load and MMS-based VAS revenues.

Subscriber Base, ARPU and Churn Rates

As at December 31, 2010, Smart, includingTalk ‘N TextandRed Mobile2013, our cellular subscribers totaled 45,636,008,70,045,627, an increase of 4,307,367, or 10%,179,169 over their combinedthe cellular subscriber base of 41,328,64169,866,458 as at December 31, 2009.2012. Our cellular prepaid subscriber base grewincreased by 11%56,213 to 45,214,43367,667,750 as at December 31, 20102013 from 40,893,09867,611,537 as at December 31, 2009,2012, while our cellular postpaid subscriber base decreasedalso increased by 13,968,122,956, or 3%5%, to 421,5752,377,877 as at December 31, 20102013 from 435,5432,254,921 as at December 31, 2009.2012. The increase in subscriber base was primarily due to the growth inTalk ‘N Text prepaid subscribers by 1,039,964, partially offset by a net decrease in Smart andSun Cellular subscribers by 246,550 and 614,245, respectively, resulting from lower average activations in 2013. Prepaid subscribers exclude those subscribers whose minimum balance is derived via accumulation from its rewards program. Prepaid subscribers accounted for 99%97% of our total subscriber base as at December 31, 20102013 and 2009.

2012.

Our net subscriber activations (reductions) for the years ended December 31, 20102013 and 20092012 were as follows:

                 
          Increase (Decrease) 
  2010  2009  Amount  % 
Prepaid  4,321,335   6,066,630   (1,745,295)  (29)
Smart Buddy
  1,530,629   3,261,197   (1,730,568)  (53)
Talk ’N Text
  1,916,668   2,742,220   (825,552)  (30)
Red Mobile
  874,038   63,213   810,825   1,283 
                 
Postpaid  (13,968)  37,407   (51,375)  (137)
             
                 
Total  4,307,367   6,104,037   (1,796,670)  (29)
             
     Our quarterly net subscriber activations (reductions) over the eight quarters in 2010 and 2009 were as follows:
                                 
  2010  2009 
  1Q  2Q  3Q  4Q  1Q  2Q  3Q  4Q 
Prepaid  1,868,812   2,144,244   (1,212,389)  1,520,668   1,692,767   1,575,585   621,154   2,177,124 
Smart Buddy
  1,271,132   730,346   (588,862)  118,013   419,821   523,496   644,932   1,672,948 
Talk ‘N Text
  394,984   562,375   128,786   830,523   1,256,907   1,019,162   (32,419)  498,570 
Red Mobile
  202,696   851,523   (752,313)  572,132   16,039   32,927   8,641   5,606 
                                 
Postpaid  9,870   (5,569)  (21,266)  2,997   9,328   17,746   6,806   3,527 
                         
                                 
Total  1,878,682   2,138,675   (1,233,655)  1,523,665   1,702,095   1,593,331   627,960   2,180,651 
                         

         Increase (Decrease) 
   2013  2012  Amount  % 

Prepaid

   56,213    5,818,745    (5,762,532  (99

Smart

   (452,766  (2,950,068  2,497,302    (85

Talk ’N Text

   1,039,964    7,977,878    (6,937,914  (87

Sun Cellular

   (530,985  790,935    (1,321,920  (167

Postpaid

   122,956    351,084    (228,128  (65

Smart

   206,216    132,732    73,484    55  

Sun Cellular

   (83,260  218,352    (301,612  (138
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   179,169    6,169,829    (5,990,660  (97
  

 

 

  

 

 

  

 

 

  

 

 

 

Prepaid and postpaid subscribers reflected net activations of 4,321,33556,213 and net reductions of 13,968,122,956 subscribers, respectively, in 20102013, as compared with net activations of 6,066,6305,818,745 and 37,407,351,084, respectively, in 2009.

2012.

The following table summarizes our average monthly churn rates for the years ended December 31, 2013 and 2012:

   2013   2012 
   (in %) 

Prepaid

    

Smart

   5.3     6.0  

Talk ’N Text

   5.0     4.1  

Sun Cellular

   10.6     11.0  

Postpaid

    

Smart

   2.7     2.6  

Sun Cellular

   3.2     1.0  

ForSmart BuddyPrepaid,subscribers, the average monthly churn rate in 20102013 and 2009 was 5.0%2012 were 5.3% and 4.2%6.0%, respectively, while the average monthly churn rate forTalk ’N Textsubscribers was 5.3%were 5.0% and 5.0%4.1% in 20102013 and 2009,2012, respectively. The average monthly churn rate forRed MobileSun Cellularprepaid subscribers was 26.9%were 10.6% and 12.3%11.0% in 20102013 and 2009,2012, respectively.

The average monthly churn rate for Smart’s Smart Postpaid subscribers were 2.7% and 2.6% in 2013 and 2012, respectively. The average monthly churn rate forSun Cellularpostpaid subscribers is 2.4%was 3.2% and 1.9% for 20101.0% in 2013 and 2009,2012, respectively. Smart’s policy is to redirect outgoing calls to an interactive voice response system if the postpaid subscriber’s account is either 45 days overdue or if the subscriber has exceeded the prescribed credit limit. If the subscriber does not make a payment within 44 days of redirection, the account is temporarily disconnected. If the account is not settled within 30 days from temporary disconnection, the account is then considered as churned. From the time that temporary disconnection is initiated, a series of collection activities is implemented, involving the sending of a collection letter, call-out reminders and collection messages via text messaging.

68


The following table summarizes our average monthly cellular ARPUs for the years ended December 31, 20102013 and 2009:
                                 
  Gross(1) Decrease Net(2) Decrease
  2010 2009 Amount % 2010 2009 Amount %
Prepaid                                
Smart Buddy
 Php220  Php261  Php(41)  (16) Php174  Php207  Php(33)  (16)
Talk ’N Text
  139   161   (22)  (14)  115   133   (18)  (14)
Red Mobile
  11   20   (9)  (45)  9   13   (4)  (31)
Prepaid — Blended(3)
  183   218   (35)  (16)  147   175   (28)  (16)
Postpaid — Smart  1,678   1,817   (139)  (8)  1,257   1,313   (56)  (4)
Prepaid and Postpaid Blended(4)
  198   235   (37)  (16)  158   188   (30)  (16)
2012:

   Gross(1)   Increase (Decrease)  Net(2)   Increase (Decrease) 
   2013   2012(3)   Amount  %  2013   2012(3)   Amount  % 

Prepaid

             

Smart

  Php164    Php167    (Php3  (2 Php144    Php145    (Php1  —    

Talk ’N Text

   96     111     (15  (14  85     97     (12  (12

Sun Cellular

   68     69     (1  (1  61     59     2    3  

Postpaid

             

Smart

   1,140     1,268     (128  (10  1,127     1,251     (124  (10

Sun Cellular

   483     394     89    23    480     391     89    23  

(1)
(1)

Gross monthly ARPU is calculated by dividing gross cellular service revenues for the month, gross of discounts, allocated content-providercontent provider costs and interconnection income but excluding inbound roaming revenues, by the average number of subscribers in the month.

(2)

Net monthly ARPU is calculated by dividing gross cellular service revenues for the month, including interconnection income, net of interconnection expense, but excluding inbound roaming revenues, net of discounts and content-providercontent provider costs, by the average number of subscribers in the month.

(3)

The average monthly ARPUDecember 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of Smart Buddy, Talk ’N Text and Red Mobile.our business segments.

(4)The average monthly ARPU of all prepaid and postpaid cellular subscribers.

     Prepaid service revenues consist mainly of charges for the subscribers’ actual usage of their loads. Prepaid blended gross average monthly ARPU in 2010 was Php183, a decrease of 16%, as compared with Php218 in 2009. The decrease was primarily due to a decline in the average outbound domestic text messaging revenue per subscriber, as well as a drop in the average inbound international and domestic voice revenue per subscriber in 2010 as compared with the same period in 2009. On a net basis, prepaid blended average monthly ARPU in 2010 was Php147, a decrease of 16%, as compared with Php175 in 2009.
     Gross average monthly ARPU for postpaid subscribers decreased by 8% to Php1,678 and net average monthly ARPU also decreased by 4% to Php1,257 in 2010 as compared with Php1,817 and Php1,313 in 2009, respectively. Prepaid and postpaid gross average monthly blended ARPU was Php198 in 2010, a decrease of 16%, as compared with Php235 in 2009. Likewise, the net average monthly prepaid and postpaid blended ARPU decreased by 16% to Php158 in 2010 from Php188 in 2009.

Our average monthly prepaid and postpaid ARPUs per quarter in 20102013 and 20092012 were as follows:

                                 
  Prepaid Postpaid
  Smart Buddy Talk ’N Text Red Mobile Smart
  Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
2010
                                
First Quarter Php232  Php184  Php140  Php115  Php11  Php8  Php1,686  Php1,286 
Second Quarter  224   179   141   116   4   3   1,665   1,257 
Third Quarter  207   163   135   112   6   5   1,661   1,229 
Fourth Quarter  215   171   140   116   22   19   1,702   1,256 
                                 
2009
                                
First Quarter  272   216   176   144   25   14   1,863   1,364 
Second Quarter  269   212   168   138   16   10   1,816   1,278 
Third Quarter  249   197   148   122   19   12   1,801   1,307 
Fourth Quarter  252   203   152   127   18   15   1,791   1,304 

   Prepaid   Postpaid 
   Smart   Talk ’N Text   Sun Cellular   Smart   Sun Cellular 
   Gross(1)   Net(2)   Gross(1)   Net(2)   Gross(1)   Net(2)   Gross(1)   Net(2)   Gross(1)   Net(2) 

2013

              

First Quarter

   160     141     98     87     66     57     1,168     1,154     458     455  

Second Quarter

   160     141     98     87     66     58     1,167     1,153     499     495  

Third Quarter

   161     142     92     82     66     60     1,111     1,099     479     476  

Fourth Quarter

   174     153     96     85     72     68     1,113     1,102     495     493  

2012(3)

                

First Quarter

   170     148     116     102     68     57     1,292     1,269     390     388  

Second Quarter

   164     143     113     100     66     57     1,264     1,237     400     397  

Third Quarter

   162     140     107     93     67     58     1,253     1,251     391     388  

Fourth Quarter

   170     149     106     93     74     64     1,265     1,248     393     391  

(1)
(1)

Gross monthly ARPU is calculated based on the average of the gross monthly ARPUs for the quarter.

(2)

Net monthly ARPU is calculated based on the average of the net monthly ARPUs for the quarter.

(3)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Wireless Broadband, Satellite and Other Services

Our revenues from wireless broadband, and satellite and other services consist mainly of wireless broadband service revenues from SBI and DMPI, charges for ACeS Philippines’ satellite information and messaging services and service revenues generated by the mobile virtual network operationsMVNO services of PLDT Global’s subsidiary.

Wireless Broadband

Revenues from our wireless broadband services increased by Php903Php826 million, or 17%10%, to Php6,286Php9,432 million in 20102013 from Php5,383Php8,606 million in 2009,2012, primarily due to the growthan increase in prepaid revenues by Php356 million, or 14%, to Php2,823 million in 2013 from Php2,467 million in 2012, and increase in postpaid revenues by Php470 million, or 8%, to Php6,609 million in 2013 from Php6,139 million in 2012.

The following table shows information of our wireless broadband subscribers.

69

revenues and subscriber base as at and for the years ended December 31, 2013 and 2012:


           Increase (Decrease) 
   2013   2012   Amount  % 

Wireless Broadband Revenues

  Php9,432    Php8,606    Php826    10  

Prepaid

   2,823     2,467     356    14  

Postpaid

   6,609     6,139     470    8  

Wireless Broadband Subscribers

   2,453,826     2,359,024     94,802    4  

Prepaid

   1,669,618     1,587,160     82,458    5  

Smart

   1,359,862     1,231,092     128,770    10  

Sun

   309,756     356,068     (46,312  (13

Postpaid

   784,208     771,864     12,344    2  

Smart

   549,347     495,802     53,545    11  

Sun

   234,861     276,062     (41,201  (15

     SBI offersSmart Broadband andSun Broadband Wireless, SBI’s and DMPI’s broadband services, respectively, offer a number of wireless broadband services and had a total of 1,355,9772,453,826 subscribers as at December 31, 2010, an2013, a net increase of 318,25794,802 subscribers, or 31%4%, as compared with 1,037,7202,359,024 subscribers as at December 31, 2009. Our postpaid wireless broadband subscriber base decreased2012, primarily due to an increase by 5,280182,315, or 11%, inSmart Broadband subscribers, partially offset by a decrease inSun Broadband subscribers by 87,513, or 1%14%, to 430,757 subscribers as at December 31, 2010 from 436,037 subscribers as at December 31, 2009, while our2013. Our prepaid wireless broadband subscriber base increased by 323,53782,458 subscribers, or 54%5%, to 925,2201,669,618 subscribers as at December 31, 20102013 from 601,6831,587,160 subscribers as at December 31, 2009.
2012, while our postpaid wireless broadband subscriber base increased by 12,344 subscribers, or 2%, to 784,208 subscribers as at December 31, 2013 from 771,864 subscribers as at December 31, 2012.

Smart BroBroadband offersmyBro,, SBI’s a fixed wireless broadband service linkedbeing offered under PLDT’sHome megabrand.myBro fixed wireless broadband service is powered either via a link to Smart’s wireless broadband-enabled base stations which allows subscribers to connect to the internet using an outdoor aerial antenna installed in athe subscriber’s home.

     SBIhome or via Smart’s WiMAX network.myBro revenues increased by Php332 million, or 8%, to Php4,314 million in 2013 from Php3,982 million in 2012 primarily due to an increase in subscriber base by 8,858, or 2%, to 436,094 as at December 31, 2013 from 427,236 as at December 31, 2012.

Smart Broadband also offers mobile internet access throughSmart BroSmartBro Plug-It,a wireless modem andSmartBro Pocket Wifi, a portable wireless router which providescan be shared by up to five users at a time. Both provide instant connectivity at varying speeds in places where there is Smart network coverage.coverage provided by either 3G high speed packet access (HSPA), 4G HSPA+ or Long Term Evolution, or LTE, technology.Smart BroSmartBro Plug-ItisandSmartBro Pocket Wifi are available in both postpaid and prepaid variants, with prepaid offering 30-minute internet access for every Php10 worth of load. SBIvariants. Smart Broadband also offers unlimited internet surfing withforUnli Surf200, Unli Surf100SmartBro Plug-ItandUnli Surf50forSmart Bro Plug-ItPocket Wifi Prepaidsubscribers subscribers.SmartBro LTEoffers the latest broadband technology with specific internet usage needs.speeds of up to 42 Mbps.SmartBro LTE Plug-It andSmartBro LTE Pocket Wifi are also available in both postpaid and prepaid variants. We also have an additional array of load packages that offer per minute-basedtime period-based charging and longer validity periods.

periods, as well asSmart Bro WiMAXAlways On packages, which offers volume over time-based buckets catering to subscribers with varying data surfing requirements.

DMPI’sSun Broadband Wireless is an affordable high-speed broadband wireless service is available in Metro Manilautilizing advanced 3.5G HSPA technology on an all-IP network offering various plans and selected key cities in Visayas and Mindanao.WiMAX, which stands for Worldwide Interoperability for Microwave Access, is a wide area network technology that allows for a more efficient radio-band usage, an improved interference avoidance and higher data rates over a longer distance.WiMAXwas initially offered at Plan 999 for unlimited broadband usage with a burst speed of uppackages to 1 Mbps. Additional unlimited broadband packages are also available under Plan 799 and Plan 1995 with speeds of up to 512 kbps and up to 2 Mbps, respectively.

internet users.

Satellite and Other Services

Revenues from our satellite and other services decreased by Php891Php197 million, or 44%13%, to Php1,145Php1,372 million in 20102013 from Php2,036Php1,569 million in 2009,2012, primarily due to a decrease in the number of ACeS Philippines’ subscribers and lower satellite transponder rental revenues as a resultrevenue contribution from MVNO services of the sale of transpondersPLDT Global, partially offset by Mabuhay Satellite in 2009 and the effect of the appreciation of thehigher weighted average exchange rate of the Philippine peso to the U.S. dollar to Php45.12Php42.44 for the year ended December 31, 20102013 from Php47.64Php42.24 for the year ended December 31, 20092012 on our U.S. dollar and U.S. dollar-linked satellite and other service revenues.

Non-Service Revenues

Our wireless non-service revenues consist of proceeds from sales of cellular handsets, cellular SIM-packs and broadband data modems. Our wireless non-service revenues decreasedincreased by Php338Php491 million, or 20%23%, to Php1,357Php2,644 million in 2010 as compared with Php1,6952013 from Php2,153 million in 20092012, primarily due to theincreased availments for broadbandPocket WiFi and cellular retention packages, partly offset by lower combined average retail pricequantity of broadbandPlug-It modem and cellular phonekits and handsets/SIM-packs as well as broadband data modems.

issued for activation.

Expenses

Expenses associated with our wireless business in 2010 amounted to Php49,632Php84,674 million a decreasein 2013, an increase of Php2,800Php957 million, or 5%1%, from Php52,432Php83,717 million in 2009.2012. A significant portion of this decreaseincrease was attributable to lower expenses related to rent, asset impairment, cost of sales, taxes and licenses, and selling and promotions, partially offset by the higher expenses related to repairs and maintenance, compensation and employee benefits,cost of sales, professional and other contracted services, rent, communication, training and travel, compensation and employee benefits, and insurance and security services.services, partially offset by lower depreciation and amortization, interconnection costs and asset impairment. As a percentage of our total wireless revenues, expenses associated with our wireless business accounted for 52%71% and 54%72% in 20102013 and 2009,2012, respectively.

     Cellular business expenses accounted for 83% of our wireless business expenses, while wireless broadband, satellite and other business expenses accounted for the remaining 17% of our wireless business expenses in 2010 as compared with 85% and 15%, respectively, in 2009.

70


The following table summarizes the breakdown of our total wireless-related expenses for the years ended December 31, 20102013 and 20092012 and the percentage of each expense item in relation to the total:
                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Depreciation and amortization Php13,243   27  Php13,237   25  Php6    
Rent  9,038   18   10,553   20   (1,515)  (14)
Compensation and employee benefits(1)
  6,385   13   6,059   12   326   5 
Repairs and maintenance  5,058   10   4,340   8   718   17 
Selling and promotions  3,809   8   4,051   8   (242)  (6)
Cost of sales  3,587   7   4,363   8   (776)  (18)
Professional and other contracted services  3,113   6   2,904   6   209   7 
Taxes and licenses  1,683   3   2,022   4   (339)  (17)
Communication, training and travel  948   2   972   2   (24)  (2)
Insurance and security services  831   2   781   1   50   6 
Asset impairment  824   2   2,026   4   (1,202)  (59)
Amortization of intangible assets  134      126      8   6 
Other expenses  979   2   998   2   (19)  (2)
                   
Total Php49,632   100  Php52,432   100  Php(2,800)  (5)
                   

                   Increase (Decrease) 
   2013   %   2012(1)   %   Amount  % 
   (in millions) 

Depreciation and amortization

  Php16,358     19    Php19,000     23    (Php2,642  (14

Cost of sales

   10,182     12     7,373     9     2,809    38  

Rent

   10,148     12     9,970     12     178    2  

Compensation and employee benefits

   8,727     11     8,586     10     141    2  

Interconnection costs

   8,141     10     8,458     10     (317  (4

Selling and promotions

   7,944     9     7,933     10     11    —    

Repairs and maintenance

   7,861     9     7,843     9     18    —    

Professional and other contracted services

   4,290     5     3,733     4     557    15  

Asset impairment

   3,918     5     4,218     5 ��   (300  (7

Taxes and licenses

   2,411     3     2,410     3     1    —    

Communication, training and travel

   1,580     2     1,430     2     150    10  

Insurance and security services

   1,157     1     1,033     1     124    12  

Amortization of intangible assets

   1,018     1     921     1     97    11  

Other expenses

   939     1     809     1     130    16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php84,674     100    Php83,717     100    Php957    1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

(1)

Includes salariesThe December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and employee benefits, long-term incentive plan, or LTIP, pensionthe adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and manpower rightsizing program, or MRP, costs.Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Depreciation and amortization charges decreased by Php2,642 million, or 14%, to Php16,358 million primarily due to a lower depreciable asset base.

Cost of sales increased by Php6Php2,809 million, or 38%, to Php13,243Php10,182 million in 2010 principallyprimarily due to increased issuances of handsets to existing postpaid subscribers for cellular retention and higher average cost of handsets/SIM-packs issued for activation purposes, complemented by higher average cost for broadbandPocket WiFi, partially offset by lower quantity of handsets/SIM-packs issued for activation and decreased issuances for broadbandPlug-It modems.

Rent expenses increased by Php178 million, or 2%, to Php10,148 million primarily due to an increase in depreciation on the growing asset base of 3Gleased circuit charges and 2G networks.

     Rent expenses decreased by Php1,515 million, or 14%, to Php9,038 million primarily due to decrease in domestic leased circuitsoffice building rental, partially offset by the increase in celllower site rental charges as a result of an increase in the number of cell sites. In 2010,charges. As at December 31, 2013, we had 6,03710,455 cell sites, 10,31620,770 cellular/mobile broadband base stations and 2,5192,915 fixed wireless broadband-enabledbroadband base stations, of which 10,000 are 4G-capable, as compared with 5,53911,132 cell sites, 9,72720,096 cellular/mobile broadband base stations and 2,0072,871 fixed wireless broadband-enabledbroadband base stations, in 2009.
of which 7,561 are 4G-capable broadband stations, as at December 31, 2012.

Compensation and employee benefits expenses increased by Php326Php141 million, or 5%2%, to Php6,385Php8,727 million primarily due to higher MRP costs and higher salaries and employee benefits as a result of merit-based increases,the retroactive adjustment of the application of the Revised IAS 19 of Php537 million in 2013, as well as LTIP costs, partially offset by the lower salaries employee benefits, and provision for LTIP and pension benefits. Employee headcount of Smart and its subsidiaries decreased to 5,165 in 20107,680 as at December 31, 2013 as compared with 5,4548,663 as at December 31, 2012, primarily due to the availment of the MRP by DMPI employees as at December 31, 2013.

Interconnection costs decreased by Php317 million, or 4%, to Php8,141 million primarily due to a decrease in 2009.

interconnection charges on international calls and roaming SMS.

Selling and promotion expenses increased by Php11 million to Php7,944 million primarily due to higher expenses on events, commissions and public relations, partially offset by lower advertising expenses.

Repairs and maintenance expenses increased by Php718Php18 million or 17%, to Php5,058Php7,861 million mainly due to an increase inhigher maintenance costs on IT software and hardware, and cellular and broadband network facilities, and software maintenance expenses, higher site electricity cost and higher fuel costs for power generation, partlypartially offset by lower site facilities maintenance charges for computer hardware and broadband network facilities.

     Selling and promotion expenses decreased by Php242 million, or 6%, to Php3,809 million primarily due to lower spending on advertising and promotional campaigns and commission expenses.
     Cost of sales decreased by Php776 million, or 18%, to Php3,587 million primarily due to the lower combined average cost of cellular phonekits and SIM-packs, the lower average cost of cellular retention packages and the lower average cost of broadband modems.
site electricity consumption costs.

Professional and other contracted service fees increased by Php209Php557 million, or 15%, to Php4,290 million primarily due to an increase in outsourced service costs and call center fees, partly offset by lower consultancy and technical service fees.

Asset impairment decreased by Php300 million, or 7%, to Php3,113 million primarily due to the increase in consultancy fees, management fees, corporate membership fees, outsourced service fees and other professional fees, partly offset by the lower contracted service fees, customer relationship management service fees and technical service fees.

     Taxes and licenses expenses decreased by Php339 million, or 17%, to Php1,683Php3,918 million primarily due to lower non-creditable input taxesimpairment on certain network equipment of DMPI, partially offset by higher provision for uncollectible receivables.

Taxes and licenses increased by Php1 million to Php2,411 million due to slightly higher business-related license fees.

taxes.

Communication, training and travel expenses decreasedincreased by Php24Php150 million, or 2%10%, to Php948 million primarily due to lower communication, training and travel expenses.

     Insurance and security services expenses increased by Php50 million, or 6%, to Php831Php1,580 million primarily due to higher site security expenseexpenses related to mailing and insurance premiums,courier, as well as freight and hauling, partially offset by lower officetravel expenses, fuel consumption costs for vehicles and communication charges.

Insurance and security expense.

71


     Asset impairment decreasedservices increased by Php1,202Php124 million, or 59%12%, to Php824Php1,157 million mainlyprimarily due to the impairment loss recognized on the investment in Blue Ocean Wireless in 2009,higher office and site security expenses, partly offset by lower provision for uncollectible receivables from subscribersinsurance and lower provision for obsolescence of slow-moving commercial and network inventory in 2010.
bond premiums.

Amortization of intangible assets increased by Php8Php97 million, or 6%11%, to Php134Php1,018 million primarily due to the amortizationlicense fees paid for exclusive partnership and use of intangible assets relating to the acquisition of Chikka and PDSI.

music catalogues.

Other expenses decreasedincreased by Php19Php130 million, or 2%16%, to Php979Php939 million primarily due to lowerhigher various business and operational-related expenses.

Other Income (Expenses)

The following table summarizes the breakdown of our total wireless-related other income — net(expenses) for the years ended December 31, 20102013 and 2009:

                 
          Change 
  2010  2009  Amount  % 
  (in millions) 
Other Income (Expenses):                
Equity share in net earnings (losses) of associates Php1,222  Php(68) Php1,290   1,897 
Foreign exchange gains — net  865   387   478   124 
Interest income  698   1,139   (441)  (39)
Gains on derivative financial instruments — net  3   1,166   (1,163)  (100)
Financing costs — net  (2,683)  (2,619)  (64)  2 
Others  1,130   1,144   (14)  (1)
             
Total Php1,235  Php1,149  Php86   7 
             
2012:

         Change 
   2013  2012(1)  Amount  % 
   (in millions) 

Other Income (Expenses):

     

Interest income

  Php324   Php565   (Php241  (43

Losses on derivative financial instruments – net

   (18  (51  33    (65

Equity share in net losses of associates

   (54  (78  24    (31

Foreign exchange gains (losses) – net

   (1,814  2,419    (4,233  (175

Financing costs – net

   (3,232  (2,683  (549  20  

Others

   928    721    207    29  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (Php3,866 Php893   (Php4,759  (533
  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Our wireless business’ other income — netexpenses amounted to Php1,235Php3,866 million in 2010, an increase2013, a change of Php86Php4,759 million or 7%, from Php1,149as against other income of Php893 million in 20092012, primarily due to the combined effects of the following: (i) equity share in net earningsforeign exchange losses of associates of Php1,222Php1,814 million in 20102013 as compared with equity share inagainst net losses of Php68 million in 2009 mainly due to PCEV’s share in net earnings of Meralco and Beacon; (ii) net increase in foreign exchange gains by Php478of Php2,419 million in 2012 on account of higher gains onthe revaluation of net foreign currency-denominated liabilities due to the effectdepreciation of the Philippine peso relative to the U.S. dollar to Php44.40 as at December 31, 2013 from Php41.08 as at December 31, 2012 as against an appreciation of the Philippine peso relative to the U.S. dollar to Php41.08 as at December 31, 2012 from Php43.92 as at December 31, 2011; (ii) higher net financing costs by Php549 million primarily due to higher amortization of debt discount, lower capitalized interest and an increase in financing charges, partly offset by lower outstanding debt balance and lower weighted average interest rates on loans; (iii) a decrease in interest income by Php241 million mainly due to lower weighted average interest rates and lower principal amounts of dollar and peso placements, partially offset by higher U.S. dollar interest rates, longer average tenor of Philippine peso placements in 2013 and the depreciation of the Philippine peso to the U.S. dollar; (iii)(iv) a decrease in other incomeequity share in net losses of associates by Php14 million mainly due to a gain on sale of investment in 2009, partially offset by a gain on sale of fixed assets in 2010; (iv) higher net financing costs by Php64 million primarily due to higher interest on loans and other related items on account of Smart’s higher average loan balances and increase in accretion of financial liabilities partly offset by the increase in capitalized interest;Php24 million; (v) decrease in interest income by Php441 million mainly due to Smart’s lower average level of short-term investments, as well as 2009 interest income recognized on the exchangeable note purchased by PCEV; and (vi) lower gainloss on derivative financial instruments by Php1,163Php33 million mainly on account of lower notional outstanding interest rate swaps not designated as hedges and higher interest rates in 2013; and (vi) an increase in other income by Php207 million mainly due to apension income recognized in 2013, reversal of prior year provision, higher gain in 2009 in the mark-to-market valuation relatingon disposal of fixed assets and higher income from consultancy, partly offset by casualty losses due to the derivative option of the exchangeable note purchased as part of the Meralco share acquisition by PCEV in 2009.

     Meralco’s reported and core income amounted to Php9,685 million and Php12,155 million for the year ended December 31, 2010, respectively, as compared with Php6,005 million and Php7,003 million for the year ended December 31, 2009, respectively. These results reflect the higher volume of energy sold resulting from unusually high temperatures, higher consumption brought about by election spending in the first half of 2010 and of the upturn in business expansions within the franchise area throughout the year. In addition, the results were boosted by the increase in billed customers, as well as the implementation of the distribution rate adjustments approved by the Energy Regulatory Commission. PCEV’s share in the reported and core income of Meralco (PCEV acquired 223 million Meralco shares on July 14, 2009, of which 154.2 million shares were transferred to Beacon, where PCEV acquired a 50% equity interest effective March 31, 2010), including share in Beacon’s December 31, 2010 results of operations, amounted to Php1,229 million and Php1,928 million, respectively, in 2010. PCEV’s share in Meralco’s reported and core income for the period from July 14, 2009 to December 31, 2009 amounted to Php398 million and Php534 million, respectively.
Typhoon Yolanda.

Provision for Income Tax

Provision for income tax decreasedincreased by Php1,100Php768 million, or 9%, to Php11,414Php8,862 million in 20102013 from Php12,514Php8,094 million in 20092012 primarily due to tax recognized on the transfer of theTalk ‘N Textbusiness to Smart in 2009. In 2010, thehigher taxable income. The effective tax raterates for our wireless business waswere 29% and 24% as compared with 27% in 2009. Smart2013 and certain of its subsidiaries opted to use the optional standard deduction, or OSD, method in computing their taxable income in 2010 and 2009.

72

2012, respectively.


Net Income
     Our

As a result of the foregoing, our wireless business recorded abusiness’ net income of Php35,376decreased by Php3,093 million, or 12%, to Php21,921 million in 2010, an increase of Php1,649 million, or 5%,2013 from Php33,727Php25,014 million recorded in 2009 on account of a decrease in the wireless-related expenses by Php2,800 million, the lower provision for income tax by Php1,100 million and an increase in other income — net by Php86 million, partially offset by a decrease in wireless revenues by Php2,337 million.

2012.

Adjusted EBITDA

     Our wireless business’ adjusted EBITDA decreased by Php466 million, or 1%, to Php58,945 million in 2010 from Php59,411 million in 2009 mainly due to a decline in our wireless revenues as

As a result of lower revenuesthe foregoing, our wireless business’ Adjusted EBITDA increased by Php223 million to Php54,703 million in 2013 from our cellular services, and satellite and other revenues, and higher expenses related to repairs and maintenance, and compensation and employee benefits, partly offset by lower expenses particularly rent, cost of sales, taxes and licenses, selling and promotions, and cost of inventory obsolescence.

Php54,480 million in 2012.

Core Income

Our wireless business’ core income increased by Php2,392Php805 million, or 7%3%, to Php35,418Php26,499 million in 20102013 from Php33,026Php25,694 million in 20092012 on account of a decreasean increase in the wireless-relatedwireless revenues, partially offset by an increase in other expenses and lowerhigher wireless-related operating expenses, excluding the retroactive effect of the application of the Revised IAS 19 in our MRP costs of Php537 million in 2013, and an increase in provision for income tax, partially offset by a decrease in wireless revenues.

tax.

Fixed Line

Revenues

Revenues generated from our fixed line business amounted to Php48,951Php63,567 million in 2010, a decrease2013, an increase of Php2,422Php3,321 million, or 5%6%, from Php51,373Php60,246 million in 2009. 2012.

The following table summarizes our total revenues from our fixed line business for the years ended December 31, 20102013 and 20092012 by service segment:

                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Fixed Line Services:                        
Service Revenues:                        
Local exchange Php15,321   31  Php15,681   31  Php(360)  (2)
International long distance  5,224   11   6,255   12   (1,031)  (16)
National long distance  4,690   10   5,969   12   (1,279)  (21)
Data and other network  21,646   44   21,567   42   79    
Miscellaneous  1,728   3   1,668   3   60   4 
                   
   48,609   99   51,140   100   (2,531)  (5)
Non-Service Revenues:                        
Sale of computers,PLPunits and SIM cards
  342   1   233      109   47 
                   
Total Fixed Line Revenues Php48,951   100  Php51,373   100  Php(2,422)  (5)
                   

                   Increase (Decrease) 
   2013   %   2012(1)   %   Amount  % 
   (in millions) 

Service Revenues:

           

Local exchange

  Php16,274     26    Php16,470     27    (Php196  (1

International long distance

   11,422     18     10,789     18     633    6  

National long distance

   4,583     7     5,046     8     (463  (9

Data and other network

   27,472     43     25,059     42     2,413    10  

Miscellaneous

   2,119     3     1,707     3     412    24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
   61,870     97     59,071     98     2,799    5  

Non-Service Revenues:

          

Sale of computers, phone units and SIM cards

   1,697     3     1,175     2     522    44  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Fixed Line Revenues

  Php63,567     100    Php60,246     100    Php3,321    6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Service Revenues

Our fixed line business provides local exchange service, national and international long distance services, data and other network services, and miscellaneous services. Our fixed line service revenues decreasedincreased by Php2,531Php2,799 million, or 5%, to Php48,609Php61,870 million in 20102013 from Php51,140Php59,071 million in 20092012 due to an increase in the revenue contribution of our data and other network, international long distance and miscellaneous services, partially offset by decreases in revenues from our national long distance, international long distance and local exchange services, partially offset by the increase in revenues from our data and other network services, as a result of higher revenues contributed by our DSL and i-Gate services, and miscellaneous services.

73


Local Exchange Service

The following table summarizes the key measures of our local exchange service business as at and for the years ended December 31, 20102013 and 2009:

                 
          Increase (Decrease)
  2010 2009 Amount %
Total local exchange service revenues (in millions) Php15,321  Php15,681  Php(360)  (2)
Number of fixed line subscribers  1,822,105   1,816,541   5,564    
Postpaid  1,703,998   1,637,981   66,017   4 
Prepaid  118,107   178,560   (60,453)  (34)
Number of fixed line employees  7,395   7,947   (552)  (7)
Number of fixed line subscribers per employee  246   229   17   7 
2012:

           Increase (Decrease) 
   2013   2012(1)   Amount  % 

Total local exchange service revenues (in millions)

  Php16,274    Php16,470    (Php196  (1

Number of fixed line subscribers

   2,069,419     2,063,794     5,625    —    

Postpaid

   2,009,593     1,997,671     11,922    1  

Prepaid

   59,826     66,123     (6,297  (10

Number of fixed line employees

   7,415     7,546     (131  (2

Number of fixed line subscribers per employee

   279     273     6    2  

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Revenues from our local exchange service decreased by Php360Php196 million, or 2%1%, to Php15,321Php16,274 million in 20102013 from Php15,681Php16,470 million in 20092012, primarily due to lower weighted average billed lines, a decrease in ARPU on account of lower fixed charges due to the increase in demand for bundled voice and data services, and a decrease in installation and service connection charges, partially offset by an increase in the average number of postpaid billed lines as a result of the launching ofPLDT Call Allservice promotions related toPLP.higher installation and activation charges. The percentage contribution of local exchange revenues to our total fixed line service revenues was 31%were 26% and 28% in each of 20102013 and 2009.

PLPoffers both postpaid and prepaid wireless services, which allows subscribers to bring the telephone set anywhere within the home zone area.
     There are two plans being offered for thePLPpostpaid regular service: (a) Plan 600 with 600 free local outgoing minutes; and (b) Plan 1,000 with 1,000 free local outgoing minutes, and a charge of Php1 per minute in excess of free minutes for both plans. Another postpaid service we offer is theCall Allplan in whichPLPis bundled with PLDT fixed line service for a monthly service fee of Php850. PLDT also offers theInternet@Homeservice, which is a voice and data bundle offered in two plans with monthly service fees of Php990 and Php1,299.
     There are two load plans being offered for thePLPprepaid service: (a) Php300 load denomination with free 150 local outgoing minutes; and (b) Php600 load denomination with free 600 local outgoing minutes. Both prepaid plans include unlimited incoming calls for one month and charges Php2 per minute and Php1 per minute in excess of free local outgoing minutes for Php300 and Php600 denominations,2012, respectively. There were a total of 304,624 activePLPsubscribers as at December 31, 2010, of which 271,432 and 33,192 were postpaid and prepaid subscribers, respectively, compared to a total of 224,165 activePLPsubscribers as at December 31, 2009, of which 171,605 and 52,560 were postpaid and prepaid subscribers, respectively.

International Long Distance Service

The following table shows our international long distance service revenues and call volumes for the years ended December 31, 20102013 and 2009:

                 
          Decrease
  2010 2009 Amount %
Total international long distance service revenues (in millions) Php5,224  Php6,255  Php(1,031)  (16)
Inbound  4,499   5,198   (699)  (13)
Outbound  725   1,057   (332)  (31)
                 
International call volumes (in million minutes, except call ratio)  1,714   1,863   (149)  (8)
Inbound  1,515   1,653   (138)  (8)
Outbound  199   210   (11)  (5)
Inbound-outbound call ratio  7.6:1   7.9:1       
2012:

           Increase (Decrease) 
   2013   2012(1)   Amount  % 

Total international long distance service revenues (in millions)

  Php11,422    Php10,789    Php633    6  

Inbound

   10,105     9,455     650    7  

Outbound

   1,317     1,334     (17  (1

International call volumes (in million minutes, except call ratio)

   2,185     2,150     35    2  

Inbound

   1,806     1,691     115    7  

Outbound

   379     459     (80  (17

Inbound-outbound call ratio

   4.8:1     3.7:1     —      —    

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Our total international long distance service revenues decreasedincreased by Php1,031Php633 million, or 16%6%, to Php5,224Php11,422 million in 20102013 from Php6,255Php10,789 million in 20092012, primarily due to the decreasenet increase in call volumes and the increase in average collection and settlement rates,billing rate in dollar terms, as well as the unfavorablefavorable effect of the appreciation of thehigher weighted average exchange rate of the Philippine peso to the U.S. dollar to Php45.12Php42.44 for the year ended December 31, 20102013 from Php47.64Php42.24 for the year ended December 31, 2009 and the decrease in call volumes.2012. The percentage contribution of international long distance service revenues to our total fixed line service revenues accounted for 11%19% and 12%18% in 20102013 and 2009,2012, respectively.

Our revenues from inbound international long distance service decreasedincreased by Php699Php650 million, or 13%7%, to Php4,499Php10,105 million in 20102013 from Php5,198Php9,455 million in 20092012 primarily due to the declineincrease in inbound call volumes and the favorable effect of

74


the appreciationon our inbound revenues of thea higher weighted average exchange rate of the Philippine peso to the U.S. dollar, sincepartially offset by the decrease in average settlement charges for inbound calls are primarily billedrate in U.S. dollars.
dollar terms.

Our revenues from outbound international long distance service decreased by Php332Php17 million, or 31%1%, to Php725Php1,317 million in 20102013 from Php1,057Php1,334 million in 20092012, primarily due to lower average collection ratethe decrease in dollar terms,call volumes and a decrease in the effect of the appreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar to Php45.12 forPhilippine peso, partially offset by the year ended December 31, 2010 from Php47.64 for the year ended December 31, 2009, resulting in a decreaseincrease in the average billing ratesrate in dollar terms.

Our total international long distance service revenues, net of interconnection costs, decreased by Php53 million, or 1%, to Php45.31Php4,554 million in 20102013 from Php47.78Php4,607 million in 2009, and the decline2012. The decrease was primarily due to higher interconnection costs as a result of higher call volumes terminating to domestic carriers, partly offset by an increase in outbound call volumes.

international long distance revenues, gross of interconnection costs.

National Long Distance Service

The following table shows our national long distance service revenues and call volumes for the years ended December 31, 20102013 and 2009:

                 
          Decrease
  2010 2009 Amount %
Total national long distance service revenues (in millions) Php4,690  Php5,969  Php(1,279)  (21)
National long distance call volumes (in million minutes)  1,290   1,822   (532)  (29)
2012:

           Decrease 
   2013   2012(1)   Amount  % 

Total national long distance service revenues (in millions)

  Php4,583    Php5,046    (Php463  (9

National long distance call volumes (in million minutes)

   852     971     (119  (12

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Our national long distance service revenues decreased by Php 1,279Php463 million, or 21%9%, to Php4,690Php4,583 million in 20102013 from Php5,969Php5,046 million in 20092012, primarily due to a decrease in call volumes, partially offset by an increase in the average revenue per minute forof our national long distance services due to cessation of certain promotions on our national long distance calling rates.services. The percentage contribution of national long distance revenues to our fixed line service revenues accounted for 10%were 7% and 9% in 20102013 and 2012, respectively.

Our national long distance service revenues, net of interconnection costs, decreased by Ph357 million, or 9%, to Php3,547 million in 2013 from 12%Php3,904 million in 2009.

2012, primarily due to a decrease in call volumes, partially offset by an increase in the average revenue per minute of our national long distance services.

Data and Other Network Services

The following table shows information of our data and other network service revenues for the years ended December 31, 20102013 and 2009:

                 
          Increase (Decrease)
  2010 2009 Amount %
Data and other network service revenues (in millions) Php21,646  Php21,567  Php79    
Domestic  15,637   16,391   (754)  (5)
Broadband
  8,511   7,232   1,279   18 
DSL  8,263   7,024   1,239   18 
WeRoam  248   208   40   19 
Leased Lines and Others
  7,126   9,159   (2,033)  (22)
                 
International                
Leased Lines and Others
  6,009   5,176   833   16 
                 
Subscriber base:                
Broadband
  665,027   576,687   88,340   15 
DSL  643,048   559,664   83,384   15 
WeRoam  21,979   17,023   4,956   29 
SWUP
  15,641   12,383   3,258   26 
2012:

           Increase 
   2013   2012(1)   Amount   % 

Data and other network service revenues (in millions)

  Php27,472    Php25,059    Php2,413     10  

Domestic

   19,917     18,436     1,481     8  

Broadband

   12,307     11,246     1,061     9  

Leased Lines and Others

   7,610     7,190     420     6  

International

        

Leased Lines and Others

   5,787     5,524     263     5  

Data Centers

   1,768     1,099     669     61  

Subscriber base

        

Broadband

   961,967     887,399     74,568     8  

SWUP

   30,302     22,720     7,582     33  

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Our data and other network services posted revenues of Php21,646Php27,472 million in 2010,2013, an increase of Php79Php2,413 million, or 10%, from Php21,567Php25,059 million in 20092012, primarily due to an increase in domestic broadband services, owing to higher revenues fromPLDT DSLas well as an increase in, data centers, higher international data revenues particularlyprimarily from i-Gate partially offset by a decrease inand domestic leased line revenues resulting from the lowerhigher revenue contribution of Diginet, our domestic leased private line service.Metro Ethernet. The percentage contribution of this service segment to our fixed line service revenues increased to 44% in 2010 fromwas 45% and 42% in 2009.

2013 and 2012, respectively.

Domestic

Domestic data services contributed Php15,637Php19,917 million in 2010, a decrease2013, an increase of Php754Php1,481 million, or 5%8%, as compared with Php16,391Php18,436 million in 20092012 mainly due to lowerhigher DSL, Metro Ethernet, Fibr and Diginet revenues, partially offset by the continued growth in DSL,andShops.Work Unplugged, orSWUP, internet protocol-virtual private network, or IP-VPN, and Metro Ethernet subscribers as customer locations and bandwidth requirements continued to expand and demand for

75


offshoring, and outsourcing services increased. The percentage contribution of domestic data service revenues to total data and other network services decreased to 72%were 73% and 74% in 2010 from 76% in 2009.
2013 and 2012, respectively.

Broadband

Broadband data services includePLDT DSLbroadband internet service, which is intended for individual internet users, small and medium enterprises, and large corporatecorporations with multiple branches, andPLDT WeRoamFibr, our mobilemost advanced broadband service, running on the PLDT Group’s nationwide wireless network (using GPRS, EDGE, 3G/HSDPA/HSPA and WiFi technologies). internet connection, which is intended for individual internet users.

Broadband data revenues amounted to Php8,511Php12,307 million in 2010,2013, an increase of Php1,279Php1,061 million, or 18%9%, from Php7,232Php11,246 million in 2009 primarily due to the higher revenue contribution of DSL which contributed revenues of Php8,263 million in 2010 from Php7,024 million in 20092012 as a result of the increase in the number of subscribers partially offset by the lower ARPU74,568, or 8%, to 961,967 subscribers as a result of the launching of lower-priced promotional plans. DSLat December 31, 2013 from 887,399 subscribers as at December 31, 2012. Broadband revenues accounted for 38% and 33%45% of total data and other network service revenues in 2010each of 2013 and 2009, respectively. DSL subscribers increased by 15% to 643,048 subscribers as at December 31, 2010 from 559,664 subscribers in 2009.WeRoamrevenues amounted to Php248 million in 2010 from Php208 million in 2009 as subscribers increased by 29% to 21,979 subscribers in 2010 from 17,023 subscribers in 2009.

2012.

Leased Lines and Others

Leased lines and other data services include: (1) Diginet, our domestic private leased line service providing Smart’s fiber optic and leased line data requirements; (2) IP-VPN,a managed corporate IP network that offers a secure means to access corporate network resources; (3) Metro Ethernet, our high-speed wide area networking services that enable mission-critical data transfers; (4)Shops.Work, our connectivity solution for retailers and franchisers that links company branches to their head office; and (5)SWUP, our wireless VPN service that powers mobile point-of-sale terminals and off-site bank ATMs, as well as other retail outlets located in remote areas. As at December 31, 2010,2013,SWUPhas had a total subscriber base of 15,64130,302, up by 7,582, or 33%, from 12,38322,720 subscribers in 2009.2012. Leased lines and other data revenues amounted to Php7,126Php7,610 million in 2010, a decrease2013, an increase of Php2,033Php420 million, or 22%6%, from Php9,159Php7,190 million in 20092012, primarily due to a decrease inhigher revenues from Metro Ethernet, Diginet revenuesandShops.Work, partially offset by the higher revenues from IP-VPN and Metro Ethernet.lower internet exchange revenues. The percentage contribution of leased lines and other data service revenues to the total data and other network services accounted for 33%were 28% and 42%29% in 20102013 and 2009,2012, respectively.

International

Leased Lines and Others

International leased lines and other data services consist mainly of: (1) i-Gate, our premium dedicated internet access service that provides high speed, reliable and managed connectivity to the global internet, and is intended for enterprises and VAS providers; (2) Fibernet, which provides cost-effective and reliable bilateral point-to-point private networking connectivity, through the use of our extensive international alliances to offshore and outsourcing, banking and finance, and semiconductor industries; and (3) other international managed data services in partnership with other Global Service Providers, such as AT&T, BT-Infonet, NTT Arcstar, Orange Business, SingTel, Tata, Telstra, Verizon Business, among others,global service providers, which provide data networking services to multinational companies. International data service revenues increased by Php833Php263 million, or 16%5%, to Php6,009Php5,787 million in 20102013 from Php5,176Php5,524 million in 20092012, primarily due to higher i-Gate revenues and an increase in i-Gaterevenues from various global service providers and IP-VPN local access services, as well as the favorable effect of higher weighted average exchange rate of the Philippine peso relative to the U.S. dollar, partially offset by lower inland-cable lease and Fibernet revenues. The percentage contribution of international data service revenues to total data and other network service revenues accounted for 28%were 21% and 24%22% in 20102013 and 2009,2012, respectively.

Miscellaneous Services
     Miscellaneous service revenues are derived mostly from directory advertising, facilities management and rental fees. These service revenues increased by Php60 million in 2010, or 4%, to Php1,728 million from Php1,668 million in 2009 mainly due to an increase in rental income owing to higher co-location charges and facilities management fees. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues was 4% in 2010 from 3% in 2009.
Non-service Revenues
     Non-service revenues increased by Php109 million, or 47%, to Php342 million in 2010 from Php233 million in 2009 primarily due to higher sales ofPLPunits and SIM cards.

76


Data Centers

Expenses
     Expenses related to our fixed line business totaled Php38,745 million in 2010, a decrease of Php336 million, or 1%, as compared with Php39,081 million in 2009. The decrease was primarily due to lower expenses related to asset impairment, rent, selling and promotions, and insurance and security services, partly offset by higher expenses related to compensation and employee benefits, professional and other contracted services, depreciation and amortization, repairs and maintenance, and cost of sales. Expenses associated with our fixed line business accounted for 79% and 76% in 2010 and 2009, respectively, of our total fixed line revenues.
     The following table shows the breakdown of our total fixed line-related expenses for the years ended December 31, 2010 and 2009 and the percentage of each expense item to the total:
                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Depreciation and amortization Php12,292   32  Php11,619   30  Php673   6 
Compensation and employee benefits(1)
  11,692   30   10,637   27   1,055   10 
Repairs and maintenance  4,527   12   4,345   11   182   4 
Professional and other contracted services  3,199   8   2,485   6   714   29 
Rent  2,469   6   2,749   7   (280)  (10)
Selling and promotions  1,376   3   1,590   4   (214)  (13)
Taxes and licenses  780   2   755   2   25   3 
Communication, training and travel  627   2   658   2   (31)  (5)
Insurance and security services  434   1   488   1   (54)  (11)
Cost of sales  433   1   310   1   123   40 
Asset impairment  291   1   2,901   8   (2,610)  (90)
Other expenses  625   2   544   1   81   15 
                   
Total Php38,745   100  Php39,081   100  Php(336)  (1)
                   
(1)Includes salaries and employee benefits, LTIP, pension and MRP costs.
     Depreciation and amortization charges increased by Php673 million, or 6%, to Php12,292 million due to a higher depreciable asset base in 2010 as compared with 2009.
     Compensation and employee benefits expenses increased by Php1,055 million, or 10%, to Php11,692 million primarily due to higher MRP costs, and salaries and employee benefits due to collective bargaining agreement-related increases, partially offset by lower provisions for pension costs and LTIP. See Note 3 — Management’s Use of Judgments, Estimates and Assumptions and Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements for further discussion.
     Repairs and maintenance expenses increased by Php182 million, or 4%, to Php4,527 million primarily due to higher electricity charges, domestic cable and wire facilities, and higher building repairs and maintenance costs.
     Professional and other contracted services increased by Php714 million, or 29%, to Php3,199 million primarily due to higher legal fees and contracted services and technical service fees for customer relationship management outsourcing project services, partially offset by lower management fees.
     Rent expenses decreased by Php280 million, or 10%, to Php2,469 million due to a decrease in international leased circuit rental charges, partially offset by an increase in site and domestic leased circuit rental charges.
     Selling and promotion expenses decreased by Php214 million, or 13%, to Php1,376 million primarily due to lower spending on advertising and promotions, and commission expenses, partially offset by higher public relations expenses.
     Taxes and licenses increased by Php25 million, or 3%, to Php780 million as a result of higher business-related taxes.
     Communication, training and travel expenses decreased by Php31 million, or 5%, to Php627 million mainly due to lower foreign travel expenses, and mailing and courier charges, partially offset by higher foreign training expenses, fuel consumption and local travel expenses.

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     Insurance and security services decreased by Php54 million, or 11%, to Php434 million primarily due to lower insurance and bond premiums, and lower security services.
     Cost of sales increased by Php123 million, or 40%, to Php433 million due to higher cost of SIM andPLPunits sold forPLPprepaid subscribers partially offset by lower computer-bundled sales in relation to our DSL promotion.
     Asset impairment decreased by Php2,610 million, or 90%, to Php291 million mainly due to impairment loss on priority deposit to ProtoStar in 2009, partially offset by higher impairment charges on payphone assets and investments in PLDT Italy in 2010.
     Other expenses increased by Php81 million, or 15%, to Php625 million due to increases in various business and fixed line operational-related expenses.
Other Expenses
     The following table summarizes the breakdown of our total fixed line-related other expenses — net for the years ended December 31, 2010 and 2009:
                 
          Change 
  2010  2009  Amount  % 
  (in millions) 
Other Income (Expenses):                
Foreign exchange gains — net Php1,008  Php532  Php476   89 
Interest income  484   402   82   20 
Losses on derivative financial instruments — net  (1,746)  (2,180)  434   (20)
Financing costs — net  (3,856)  (3,796)  (60)  2 
Equity share in net losses of joint ventures     (98)  98   100 
Others  1,164   970   194   20 
             
Total (Php 2,946) (Php 4,170) Php1,224   (29)
             
     Our fixed line business’ other expenses — net amounted to Php2,946 million in 2010, a decrease of Php1,224 million, or 29%, from Php4,170 million in 2009. The change was due to the combined effects of the following:
     (i) net increase in foreign exchange gains by Php476 million on account of higher gains on net foreign exchange revaluation of foreign-currency denominated liabilities due to the effect of the appreciation of the Philippine peso to the U.S. dollar; (ii) lower loss on derivative financial instruments by Php434 million in 2010 as compared with 2009 due to lower mark-to-market loss and hedge costs of PLDT resulting from the partial unwinding of principal-only currency swap contracts; (iii) increase in other income by Php194 million mainly due to the partial recovery of priority deposit from ProtoStar, higher miscellaneous income from consultancy, and subsidiaries and affiliates;
     (iv) share in net losses of joint ventures of Php98 million in 2009; (v) an increase in interest income by Php82 million due to higher average interest rate and higher level of cash balances; and (vi) an increase in net financing costs by Php60 million due to an increase in interest expense on loans and related items — net on account of a higher level of average loan balances as well as lower capitalized interest, partially offset by lower level of average interest rate.
Provision for Income Tax
     Provision for income tax amounted to Php2,050 million in 2010, a decrease of Php208 million, or 9%, as compared with Php2,258 million in 2009 primarily due to lower taxable income.
Net Income
     In 2010, our fixed line business contributed a net income of Php5,210 million, a decrease of Php654 million, or 11%, as compared with Php5,864 million in 2009 primarily as a result of the decrease in fixed line revenues by Php2,422 million, partially offset by decreases in other expenses — net by Php1,224 million, lower fixed line-related expenses by Php336 million and lower provision for income tax by Php208 million.
Adjusted EBITDA
     Our fixed line business’ adjusted EBITDA decreased by Php2,547 million, or 10%, to Php22,668 million in 2010 from Php25,215 million in 2009 primarily due to a decline in our fixed line service revenues as a result of lower revenues from our national long distance, international long distance and local exchange services, and higher expenses particularly compensation and employee benefits, and professional and other contracted services, partly offset by lower expenses related to doubtful accounts, rent, and selling and promotions.

78


Core Income
     Our fixed line business’ core income decreased by Php1,922 million in 2010, or 26%, to Php5,580 million from Php7,502 million in 2009 primarily as a result of the decrease in fixed line revenues and an increase in fixed line-related expenses, partially offset by lower provision for income tax.
Information and Communications Technology
Revenues
     Our ICT business provides knowledge processing solutions, customer relationship management, internet and online gaming, and data center services.
     In 2010, our ICT business generated revenues of Php11,358 million, a decrease of Php191 million, or 2%, as compared with Php11,549 million in 2009. This decrease was primarily due to the decline in the revenue contribution of our customer relationship management and internet and online gaming, as well as lower point-product sales, partially offset by the continued growth of our data center and knowledge processing solutions businesses’ service revenues.
     The following table summarizes our total revenues from our ICT business for the years ended December 31, 2010 and 2009 by service segment:
                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Service Revenues:                        
Knowledge processing solutions Php5,289   47  Php5,215   45  Php74   1 
Customer relationship management  2,823   25   3,319   29   (496)  (15)
Internet and online gaming  1,059   9   1,113   10   (54)  (5)
Data center and others  1,506   13   1,204   10   302   25 
                   
   10,677   94   10,851   94   (174)  (2)
Non-Service Revenues:                        
Point-product sales  681   6   698   6   (17)  (2)
                   
                         
Total ICT Revenues Php11,358   100  Php11,549   100  Php(191)  (2)
                   
Service Revenues
     Service revenues generated by our ICT business segment amounted to Php10,677 million in 2010, a decrease of Php174 million, or 2%, as compared with Php10,851 million in 2009 primarily as a result of the decline in revenues from our customer relationship management and internet and online gaming businesses, partially offset by the increase in co-location and disaster recovery revenues from our data center business, as well as the higher revenues from our knowledge processing solutions business. As a percentage of our total ICT business revenues, service revenues accounted for 94% in each of 2010 and 2009.
Knowledge Processing Solutions
     WeData centers provide our knowledge processing solutions business primarily through the SPi Group. The knowledge processing solutions business contributed revenues of Php5,289 million in 2010, an increase of Php74 million, or 1%, from Php5,215 million in 2009. Dollar revenues increased by 8% offset by the appreciation of the Philippine peso to the U.S. dollar by 6%. Additional revenues from Laguna Medical (acquired in September 2009), Medical Billing and Content Solutions were recognized in 2010. Knowledge processing solutions business revenues accounted for 50% and 48% of total service revenues of our ICT business in 2010 and 2009, respectively.
Customer Relationship Management
     We provide our customer relationship management business primarily through SPi CRM. Revenues relating to our customer relationship management business decreased by Php496 million, or 15%, to Php2,823 million in 2010 from Php3,319 million in 2009 primarily due to lower dollar-denominated revenues by 14%, lower domestic sales by 1%, and the effect of the appreciation of the Philippine peso to the U.S. dollar. In total, we own and operate 5,565 seats with an average of 4,592 customer service representatives, or CSRs, in 2010, as compared with 7,140 seats with an average of 5,190 CSRs in 2009. SPi CRM had six and seven customer relationship management sites as

79


at December 31, 2010 and 2009, respectively. Customer relationship management business revenues accounted for 26% and 31% of total service revenues of our ICT business in 2010 and 2009, respectively.
Internet and Online Gaming
     Revenues from our internet and online gaming business decreased by Php54 million, or 5%, to Php1,059 million in 2010 from Php1,113 million in 2009 primarily due to the absence of the introduction of major games in 2010, as well as the higher electricity cost, which forced internet cafés to shorten operating hours. Our internet and online gaming business revenues accounted for 10% of total service revenues of our ICT business in each of 2010 and 2009.
Data Center and Others
     ePLDT operates an internet data center under the brand nameVitroä, which provides co-location or rental services, server hosting, disaster recovery and business continuity services, intrusion detection, security services, such as firewalls and managed firewalls,firewalls. Data center revenues increased by Php669 million, or 61%, to Php1,768 million in 2013 from Php1,099 million in 2012 mainly due to higher co-location and managed services as a result of the consolidation of IPCDSI in October 2012. The percentage contribution of this service segment to our total data and other data services. Our data center contributednetwork service revenues of Php1,506were 6% and 4% in 2013 and 2012, respectively.

Miscellaneous Services

Miscellaneous service revenues are derived mostly from rental and facilities management fees, internet and online gaming, and directory advertising. These service revenues increased by Php412 million, or 24%, to Php2,119 million in 2010,2013 from Php1,707 million in 2012 mainly due to higher outsourcing fees and co-location charges, and the revenue contribution of PGNL, which is the exclusive distributor and licensee of the programs, shows, films and channels of TV5 abroad, the distribution of which is via syndication and international linear channels. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues was 3% in each of 2013 and 2012.

Non-service Revenues

Non-service revenues increased by Php522 million, or 44%, to Php1,697 million in 2013 from Php1,175 million in 2012, primarily due to higher revenues fromTelpadunits.

Expenses

Expenses related to our fixed line business totaled Php55,975 million in 2013, an increase of Php302 million, or 25%, from Php1,204 million in 2009 primarily due to an increase in co-location or rental and disaster recovery services revenues. Our data center revenues accounted for 14% and 11% of total service revenues of our ICT business in 2010 and 2009, respectively.

Non-Service Revenues
     Non-service revenues consist of sales generated from reselling certain software licenses, server solutions, networking products, storage products and data security products. Non-service revenues generated by our ICT business decreased by Php17 million, or 2%, to Php681 million in 2010 from Php698 million in 2009 primarily due to the lower revenues from sales of software licenses.
Expenses
     Expenses associated with our ICT business totaled Php11,944 million in 2010, an increase of Php655Php3,199 million, or 6%, as compared with Php11,289Php52,776 million in 2009,2012. The increase was primarily due to the higher expenses related to asset impairment, repairs and maintenance, depreciation and amortization, interconnection costs, asset impairment, rent, taxes and licenses, cost of intangible assets,sales, and insurance and security services, partially offset by the lower compensation and employee benefits, professional and other contracted services, cost of sales, communication, trainingpartly offset by lower expenses related to compensation and travel, and rent expenses.employee benefits. As a percentage of our total ICTfixed line revenues, expenses related toassociated with our ICTfixed line business accounted for 105%88% in each of 2013 and 98% in 2010 and 2009, respectively.
2012.

The following table shows the breakdown of our total ICT-relatedfixed line-related expenses for the years ended December 31, 20102013 and 20092012 and the percentage of each expense item to the total:

                         
                  Increase (Decrease) 
  2010  %  2009  %  Amount  % 
  (in millions) 
Compensation and employee benefits(1)
 Php6,000   50  Php6,418   57  Php(418)  (7)
Asset impairment  1,323   11   134   1   1,189   887 
Repairs and maintenance  752   6   669   6   83   12 
Cost of sales  751   6   799   7   (48)  (6)
Depreciation and amortization  742   6   751   7   (9)  (1)
Rent  687   6   716   6   (29)  (4)
Professional and other contracted services  500   4   592   5   (92)  (16)
Communication, training and travel  461   4   500   4   (39)  (8)
Amortization of intangible assets  254   2   242   2   12   5 
Taxes and licenses  108   1   104   1   4   4 
Selling and promotions  103   1   113   1   (10)  (9)
Insurance and security services  79   1   68   1   11   16 
Other expenses  184   2   183   2   1   1 
                   
Total Php11,944   100  Php11,289   100  Php655   6 
                   

                   Increase (Decrease) 
   2013   %   2012(1)   %   Amount  % 
   (in millions) 

Depreciation and amortization

  Php13,946     25    Php13,354     25    Php592    4  

Compensation and employee benefits

   12,671     23     13,439     26     (768  (6

Interconnection costs

   8,196     15     7,623     15     573    8  

Repairs and maintenance

   5,930     11     5,325     10     605    11  

Professional and other contracted services

   3,547     6     3,296     6     251    8  

Rent

   2,794     5     2,374     5     420    18  

Selling and promotions

   1,860     3     1,786     3     74    4  

Cost of sales

   1,665     3     1,374     3     291    21  

Asset impairment

   1,625     3     1,068     2     557    52  

Taxes and licenses

   1,514     3     1,097     2     417    38  

Communication, training and travel

   793     1     752     1     41    5  

Insurance and security services

   761     1     632     1     129    20  

Amortization of intangible assets

   2     —       —       —       2    100  

Other expenses

   671     1     656     1     15    2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php55,975     100    Php52,776     100    Php3,199    6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

(1)

Includes salariesThe December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and employee benefits, LTIP, pensionthe adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and MRP costs.Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Depreciation and amortization charges increased by Php592 million, or 4%, to Php13,946 million due to higher depreciable asset base.

Compensation and employee benefits expenses decreased by Php418Php768 million, or 7%6%, to Php6,000Php12,671 million primarily due to lower MRP costs, net of the retroactive adjustment of the application of the Revised IAS 19 of Php732 million in 2013, and lower provision for LTIP costs, partially offset by higher provision for pension costs an increase in salaries and employee benefits. Employee headcount decreased to 10,219 in 2013 as compared with 10,462 in 2012 mainly due to a declinedecrease in salaries and employee benefits, andDigitel’s headcount as a result of the lower provision for LTIP, partially offset by the increase in MRPMRP.

Interconnection costs and pension benefits. Although ePLDT and its subsidiaries’ employee headcount increased by 629 to

80


16,210 in 2010 as compared with 15,581 in 2009, related costs decreased due to lower labor cost per head, particularly from our knowledge processing solutions business.
     Asset impairment increased by Php1,189Php573 million, or 887%8%, to Php1,323Php8,196 million primarily due to impairmenthigher international long distance interconnection/settlement costs as a result of goodwillhigher volume of international received paid calls that terminated to other domestic carriers, partially offset by lower settlement costs for national long distance interconnection costs and data and other intangible assets in SPi related to its investment in CyMednetwork services particularly Fibernet and impairment of goodwill in ePLDT’s investment in BayanTrade and Level Up!.
Infonet.

Repairs and maintenance expenses increased by Php83Php605 million, or 12%11%, to Php752Php5,930 million primarily due to the higher office and site electricity charges, and higher IT software repairs and maintenance costs particularly from our data center businessfor IT software and hardware, buildings, and other various facilities, partially offset by a decrease in buildingssite electricity costs, lower repairs and maintenance costs on central office/telecoms equipment, as well as lower cost of janitorial servicesservices.

Professional and lower purchases of low-value softwares.

     Cost of sales decreasedother contracted service expenses increased by Php48Php251 million, or 6%8%, to Php751Php3,547 million primarily due to thehigher contracted service and bill printing fees, partially offset by lower volume of sales of software licensestechnical service and hardware products.
     Depreciation and amortization charges decreasedconsultancy fees.

Rent expenses increased by Php9Php420 million, or 1%18%, to Php742Php2,794 million primarily due to a decrease in the depreciable asset base of our knowledge processing solutions, customer relationship managementhigher domestic leased circuit charges, and internetsite, pole and online gaming businesses on account of fully depreciated assetsbuilding rentals.

Selling and lower capital expenditures, partially offsetpromotion expenses increased by higher depreciation in relation to Data Center expansion and disaster recovery project.

     Rent expenses decreased by Php29Php74 million, or 4%, to Php687Php1,860 million primarily due to the expiration of several leaseshigher commissions and closure of several offices of knowledge processing solutions business partlypublic relations expenses, partially offset by higher office building and site rental chargeslower advertising costs.

Cost of sales increased by the customer relationship management and data center businesses.

     Professional and other contracted services decreased by Php92Php291 million, or 16%21%, to Php500Php1,665 million primarily due to lower contracted service fees, management fees, legal feeshigher sale ofTelpad units.

Asset impairment increased by Php557 million, or 52%, to Php1,625 million mainly due to higher provision for uncollectible receivables.

Taxes and licenses increased by Php417 million, or 38%, to Php1,514 million as a result of higher municipal licenses and other professional fees incurred by our knowledge processing solutions business.

business-related taxes.

Communication, training and travel expenses decreasedincreased by Php39Php41 million, or 8%5%, to Php461Php793 million primarilymainly due to lowerhigher local and foreign training and travel, expenses, courier charges and communications charges incurred by our customer relationship management and knowledge processing solutions businesses, partially offset by higher trunk line charges by our data center business.

     Amortization of intangible assets increased by Php12 million, or 5%, to Php254 million due to intangible assets recognized in relation to the acquisition of Laguna Medical and additional game licenses acquired by our gaming business in late 2009 and 2010.
     Taxes and licenses increased by Php4 million, or 4%, to Php108 million primarily due to higher business-related taxes.
     Selling and promotion expenses decreased by Php10 million, or 9%, to Php103 million mainly due to our gaming business’ lower promotional expenses due to the timing of launching of its new major games anda decrease in commission expense of our knowledge processing solutions business, partially offset by higher advertisements by our customer relationship managementmailing and data center businesses.
courier, and fuel consumption charges.

Insurance and security services increased by Php11Php129 million, or 16%20%, to Php79Php761 million primarily due to higher expenses on office security services, partially offset by lower insurance and insurancebond premiums.

Amortization of intangible assets amounted to Php2 million in 2013 relating to the amortization of intangible assets related to customer list and licenses in relation to IPCDSI’s acquisition.

Other expenses increased by Php1Php15 million, or 1%2%, to Php184Php671 million mainlyprimarily due to higher various business and ICT operational-related costs.

expenses.

Other IncomeExpenses

The following table summarizes the breakdown of our total ICT-relatedfixed line-related other income — netexpenses for the years ended December 31, 20102013 and 2009:

                 
          Change 
  2010  2009  Amount  % 
  (in millions) 
Other Income (Expenses):                
Equity share in net earnings of associates Php186  Php168  Php18   11 
Interest income  35   28   7   25 
Gains on derivative financial instruments — net  2   8   (6)  (75)
Foreign exchange losses — net  (66)  (12)  (54)  450 
Financing costs — net  (176)  (171)  (5)  3 
Others  240   195   45   23 
             
Total Php221  Php216  Php5   2 
             

81

2012:


         Change 
   2013  2012(1)  Amount  % 
   (in millions) 

Other Income (Expenses):

     

Gains (losses) on derivative financial instruments – net

  Php523   (Php1,958 Php2,481    127  

Interest income

   392    713    (321  (45

Equity share (losses) in net earnings of associates

   (86  108    (194  (180

Foreign exchange gains (losses) – net

   (1,503  863    (2,366  (274

Financing costs – net

   (3,390  (4,193  803    (19

Others

   3,583    2,686    897    33  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (Php481 (Php1,781 Php1,300    (73
  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

The December 31, 2012 comparative information was adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Our ICTfixed line business’ other income — netexpenses amounted to Php221Php481 million in 2010, an increase2013, a decrease of Php5Php1,300 million, or 2%73%, from Php216Php1,781 million in 2009 primarily2012. The decrease was due to the combined effects of the following: (i) net gains on derivative financial instruments of Php523 million in 2013 as against net losses on derivative financial instruments of Php1,958 million in 2012 due to maturity of the 2012 hedges, the depreciation of the Philippine peso and a wider dollar and peso interest rate differentials; (ii) an increase in other income by Php45Php897 million mainly due to adjustmentthe reversal of provision for assessment as a result of a favorable Supreme Court decision, higher gain on sale of Philweb shares and an increase in fair value of contingent liability of SPi America Holdings from the acquisition of Laguna Medicalinsurance claims, partially offset by casualty losses on Typhoon Yolanda; (iii) lower financing costs by Php803 million mainly due to lower average interest rates on loans and insurance claim received in 2010lower financing charges, partly offset by lower capitalized interest; (iv) equity share in net losses of associates and joint ventures of Php86 million as against equity share in net earnings of associates of Php108 million in 2012 primarily due to the de-recognitionshare in net losses of Cignal TV for the period from October 1 to December 31, 2013 and disposal of Philweb shares in 2012; (v) a decrease in interest income by Php321 million due to lower principal amounts of dollar and peso placements, lower peso interest rates and shorter average tenor of U.S. dollar placements, partially offset by higher U.S. dollar interest rates, longer average tenor of Philippine peso placements in 2013 and the depreciation of the Philippine peso relative to the U.S. dollar; and (vi) foreign exchange losses of Php1,503 million in 2013 as against foreign exchange gains of Php863 million in 2012 on account of revaluation of net foreign currency-denominated liabilities due to the depreciation of the Philippine peso relative to the U.S. dollar to Php44.40 as at December 31, 2013 from Php41.08 as at December 31, 2012 as against an appreciation of the Philippine peso relative to the U.S. dollar to Php41.08 as at December 31, 2012 from Php43.92 as at December 31, 2011.

Provision for (Benefit from) Income Tax

Benefit from income tax amounted to Php698 million in 2009; (ii)2013, an increase of Php647 million from Php51 million in 2012, primarily due to recognition of deferred tax assets, partially offset by higher taxable income. The effective tax rate for our fixed line business was negative 10% and negative 1% in 2013 and 2012, respectively.

Net Income

As a result of the foregoing, our fixed line business contributed a net income of Php7,809 million in 2013, which represents an increase of Php2,069 million, or 36%, as compared with Php5,740 million in 2012.

Adjusted EBITDA

As a result of the foregoing, our fixed line business’ Adjusted EBITDA increased by Php2,185 million, or 11%, to Php22,274 million in 2013 from Php20,089 million in 2012.

Core Income

Our fixed line business’ core income increased by Php3,292 million, or 57%, to Php9,061 million in 2013 from Php5,769 million in 2012, primarily as a result of higher fixed line revenues, a decrease in other expenses and a higher benefit from income tax, partially offset by higher fixed line expenses, excluding the retroactive effect of the application of the Revised IAS 19 in our MRP costs of Php732 million in 2013.

Others

Expenses

Expenses associated with our other business segment totaled Php5 million in 2013, a decrease of Php13 million, or 72%, as compared with Php18 million in 2012, primarily due to PCEV’s lower other operating expenses.

Other Income

The following table summarizes the breakdown of other income for other business segment for the years ended December 31, 2013 and 2012:

           Change 
   2013   2012   Amount  % 
   (in millions) 

Other Income (Expenses):

       

Equity share in net earnings of associates

  Php2,882    Php1,508    Php1,374    91  

Foreign exchange gains – net

   424     —       424    100  

Interest income

   249     76     173    228  

Gains on derivative financial instruments – net

   6     —       6    100  

Others

   36     2,774     (2,738  (99
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php3,597    Php4,358    (Php761  (17
  

 

 

   

 

 

   

 

 

  

 

 

 

Other income decreased by Php761 million, or 17%, to Php3,597 million in 2013 from Php4,358 million in 2012 primarily due to lower other income by Php2,738 million mainly due to the realized portion of deferred gain on the transfer of Meralco shares to Beacon in 2012 and lower dividend income by Php720 million, partly offset by an increase in equity share in net earnings of associates by Php18 million; (iii) an increase in interest income of Php7 million due to increase in short-term placements and bank deposits; (iv) an increase in financing costs — net by Php5 million due to higher accretion on contingent liabilities from our knowledge processing solutions business; (v) the lower gain on derivative financial instruments by Php6Php1,374 million mainly due to the expirationincrease in PCEV’s share in the net earnings of derivative contractsBeacon and equity share in the net earnings of ParlanceAsia Outsourcing Beta Limited, or Beta, a holding company of SPi Technologies, Inc., or SPi, and SPiits subsidiaries, where we reinvested approximately US$40 million of the proceeds from the sale of our BPO business in December 2009; and (vi)2013.

Net Income

As a result of the foregoing, our other business segment registered a net income of Php3,508 million, a decrease of Php825 million, or 19%, in 2013 from Php4,333 million in 2012.

Adjusted EBITDA

As a result of the foregoing, negative Adjusted EBITDA from our other business segment improved by Php13 million, or 72%, to negative Php5 million in 2013 from negative Php18 million in 2012.

Core Income

Our other business segment’s core income amounted to Php3,110 million in 2013, a decrease of Php1,314 million, or 30%, as compared with Php4,424 million in 2012 mainly as a result of a lower other income, partially offset by an increase in the equity share in the net earnings of Beacon in 2013.

Years Ended December 31, 2012 and 2011

On a Consolidated Basis

Revenues

We reported consolidated revenues of Php163,033 million in 2012, an increase of Php14,554 million, or 10%, as compared with Php148,479 million in 2011, primarily due to higher cellular and broadband revenues from our wireless business, and higher revenues from data and other network, and local exchange services from our fixed line business, partially offset by lower revenues from international long distance and national long distance services from our fixed line business, and satellite and other services from our wireless business.

The following table shows the breakdown of our consolidated revenues by business segment for the years ended December 31, 2012 and 2011:

               Change 
   2012(1, 2)  %  2011(2, 3)  %  Amount   % 
   (in millions) 

Wireless

  Php115,932    71   Php103,538    70   Php12,394     12  

Fixed line

   60,246    37    58,290    39    1,956     3  

Others(4)

   —      —      —      —      —       —    

Inter-segment transactions

   (13,145  (8  (13,349  (9  204     (2
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Consolidated

  Php163,033    100   Php148,479    100   Php14,554     10  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

(1)

Includes the Digitel Group’s revenue contribution of Php22,587 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes the Digitel Group’s revenue contribution of Php3,845 million for the period from October 26, 2011 to December 31, 2011.

(4)

See Item 5. “Operating and Financial Review and Prospects – Results of Operations – Years Ended December 31, 2012 and 2011 – Other Income (Expenses)” for a discussion of income and expenses relating to the Others business.

Expenses

Consolidated expenses increased by Php16,105 million, or 15%, to Php122,529 million in 2012 from Php106,424 million in 2011, as a result of higher expenses related to compensation and employee benefits, including the retroactive effect of the application of the Revised IAS 19 in our manpower rightsizing program, or MRP, costs of Php1,287 million in 2012, depreciation and amortization, cost of sales, repairs and maintenance, rent, selling and promotions, communication, training and travel, insurance and security services, and professional and other contracted services, partially offset by lower expenses related to asset impairment, interconnection costs and other operating costs.

The following table shows the breakdown of our consolidated expenses by business segment for the years ended December 31, 2012 and 2011:

               Change 
   2012(1, 2)  %  2011(2, 3)  %  Amount  % 
   (in millions) 

Wireless

  Php83,717    68   Php71,009    67   Php12,708    18  

Fixed line

   52,776    43    49,174    46    3,602    7  

Others

   18    —      11    —      7    64  

Inter-segment transactions

   (13,982  (11  (13,770  (13  (212  2  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated

  Php122,529    100   Php106,424    100   Php16,105    15  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Includes the Digitel Group’s expenses of Php24,183 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s expenses of Php3,785 million for the period from October 26, 2011 to December 31, 2011.

Other Income (Expenses)

Consolidated other income amounted to Php3,102 million in 2012, a change of Php4,072 million as against other expenses of Php970 million in 2011, primarily due to the combined effects of the following: (i) foreign exchange gains of Php3,282 million in 2012 as against foreign exchange losses by Php54of Php735 million in 2011 mainly due to the revaluation of net foreign currency-denominated assetsforeign-currency denominated liabilities as a result of the effect of the appreciation of the Philippine peso relative to the U.S. dollar in 2010.

Benefitto Php41.08 as at December 31, 2012 from Income Tax
     Benefit from income tax of Php38 million in 2010 from Php28 million in 2009 primarily due to the corresponding deferred tax benefit from the amortization of intangible assets related to the acquisition of Laguna Medical in 2009.
Net Income (Loss)
     In 2010, our ICT business registered a net loss of Php327 millionPhp43.92 as compared with a net income of Php504 million in 2009 mainly as a result of an increase in ICT-related expenses by Php655 million due to asset impairment charges and a decrease in ICT revenues by Php191 million, partially offset by a net benefit from income tax by Php10 million andat December 31, 2011; (ii) an increase in other income by Php5 million.
Adjusted EBITDA
     Our ICT business’ adjusted EBITDA increased by Php393Php3,187 million or 30%, to Php1,723 million in 2010 from Php1,330 million in 2009 primarilymainly due to lower expenses particularly compensationthe realized portion of deferred gain on the transfer of Meralco shares to Beacon, preferred dividends from Beacon, gain on the first and employee benefits, professional and other contracted services, and costsecond tranches of sales, partially offset by a decline in revenues from our customer relationship management, and internet and online gaming businesses.
Core Income
     Our ICT business’ core income amounted to Php1,030 million in 2010, an increasedisposal of Php417 million, or 68%, as compared with Php613 million in 2009 mainly as a result of a decrease in cash expenses and a net benefit from income tax partially offset by a decrease in ICT revenues.
2009 Compared to 2008
On a Consolidated Basis
Revenues
     Our revenues increased by Php2,156 million, or 1%, to Php147,993 million in 2009 from Php145,837 million in 2008. This increase was primarily due to an increase in our service revenues by Php2,694 million resulting largely fromPhilweb shares, an increase in the service revenuesDigitel Group’s other income, higher net gain on fixed assets disposal and the reversal of our wireless and fixed line businesses, which was primarilyprior year’s provisions; (iii) lower interest income by Php3 million due to an increase in the numbera lower average interest rate and lower average level of our cellular and broadband subscribers, which was partially offset by a decrease in our non-service revenues.

82


     The following table shows the breakdownpeso investments, effect of our consolidated revenues for the years ended December 31, 2009 and 2008 by business segment:
                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php97,524   66  Php95,852   66  Php1,672   2 
Fixed line  51,373   34   49,686   34   1,687   3 
Information and communications technology  11,549   8   10,983   7   566   5 
Inter-segment transactions  (12,453)  (8)  (10,684)  (7)  (1,769)  17 
                   
Consolidated Php147,993   100  Php145,837   100  Php2,156   1 
                   
Expenses
     Our expenses increased by Php4,325 million, or 5%, to Php90,111 million in 2009 from Php85,786 million in 2008 largely resulting from increases in compensation and employee benefits, depreciation and amortization, asset impairment, rent and other operating expenses partly offset by lower provisions, professional and other contracted services, and communication, training and travel expenses. As a percentage of our consolidated revenues, consolidated expenses increased to 61% in 2009 from 59% in 2008.
     The following table shows the breakdown of our consolidated expenses for the years ended December 31, 2009 and 2008 by business segment:
                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php52,432   58  Php47,589   55  Php4,843   10 
Fixed line  39,081   43   35,733   42   3,348   9 
Information and communications technology  11,289   13   13,267   16   (1,978)  (15)
Inter-segment transactions  (12,691)  (14)  (10,803)  (13)  (1,888)  17 
                   
Consolidated Php90,111   100  Php85,786   100  Php4,325   5 
                   
Other Expenses
     Other expenses — net decreased by Php2,959 million, or 49%, to Php3,043 million in 2009 as compared with Php6,002 million in 2008. The decrease was primarily due to the combined effects of the following: (i) net foreign exchange gains of Php909 million in 2009 as compared with net foreign exchange losses of Php6,170 million in 2008 due to the appreciation of the Philippine peso relative to the U.S. dollar to Php46.43 as at December 31, 2009 from Php47.65 as at December 31, 2008; (ii)and shorter average tenor of placements, partly offset by the higher average level of dollar investments; (iv) an increase in other income of Php404net financing costs by Php422 million primarilymainly due to higher interest on loans and other related items on account of higher outstanding long-term debts, partially offset by our wireless business’ higher capitalized interest in 2012; (v) a gain on fair value adjustment of investment properties and a gain on the dissolution of Mabuhay Space Holdings Limited, a joint venture between Mabuhay Satellite and Space Systems/Loral, Inc.; (iii) an increasedecrease in equity share in net earnings of associates and joint ventures by Php178 million due to the share in net earnings of Meralco from July 15, 2009 (PCEV acquired a 20% equity interest of Meralco on July 14, 2009) to December 31, 2009; (iv) lower interest income by Php129 million due to lower average interest rate on money market placements and special deposits; (v) an increase in net financing costs by Php452 million mainly due to higher interest on loans and other related items — net, on account of PLDT’s and Smart’s higher average loan balances, depreciation of foreign exchange rate and lower capitalized interest;Php497 million; and (vi) net losses on derivative financial instruments of Php1,006Php2,009 million on account of loss on mark-to-market valuation on foreign currency swaps in 20092012 as against net gains on derivative financial instruments of Php3,115Php201 million in 20082011 mainly due to the effect of narrower U.S. dollar and Philippine peso interest rate differentials and higher level of appreciation of the de-designationPhilippine peso relative to the U.S. dollar in 2012 on principal-only swap transactions of foreign currency swapsPLDT and option contracts.
the increase in mark-to-market loss on interest rate swap contracts of DMPI in 2012, partially offset by lower hedge costs of PLDT.

The following table shows the breakdown of our consolidated other expenses — netincome (expenses) by business segment for the years ended December 31, 20092012 and 20082011:

               Change 
   2012(1, 2)  %  2011(2, 3)  %  Amount  % 
   (in millions) 

Wireless

  Php893    29   (Php1,734  179   Php2,627    (151

Fixed line

   (1,781  (57  (966  99    (815  84  

Others

   4,358    140    1,998    (206  2,360    118  

Inter-segment transactions

   (368  (12  (268  28    (100  37  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated

  Php3,102    100   (Php970  100   Php4,072    (420
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Includes the Digitel Group’s other income of Php1,007 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s other expenses of Php941 million for the period from October 26, 2011 to December 31, 2011.

Net Income

Consolidated net income increased by business segment:

                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php1,149   (38) Php(2,640)  44  Php3,789   144 
Fixed line  (4,170)  137   (3,173)  53   (997)  31 
Information and communications technology  216   (7)  (1)     217   21,700 
Inter-segment transactions  (238)  8   (188)  3   (50)  27 
                   
Consolidated Php(3,043)  100  Php(6,002)  100  Php2,959   (49)
                   
Provision for Income Tax

83


     Provision for income tax decreased by Php4,329Php4,881 million, or 23%16%, to Php14,744Php36,099 million in 2009, as compared with Php19,0732012 from Php31,218 million in 20082011. The increase was mainly due to a reduction in the regular corporate income tax rate from 35% to 30% beginning January 2009 and the availmentcombined effects of the optional standard deduction, or OSD, method in the computation of income tax by Smart and certain of our wireless and fixed line subsidiaries.
Net Income
     As a result, our consolidated net income was Php40,095 million in 2009,following: (i) an increase of Php5,119 million, or 15%, as compared with Php34,976 million in 2008 primarily due to lower consolidated other expenses — net, lowerrevenues by Php14,554 million; (ii) a decrease in consolidated provision for income tax by Php2,684 million, which was mainly due to lower taxable income of our fixed line and higher consolidated revenues partially offsetwireless businesses; (iii) lower income from discontinued operations by a slightPhp324 million; (iv) an increase in consolidated expenses.
expenses by Php16,105 million; and (v) an increase in consolidated other income – net by Php4,072 million. Our consolidated basic and diluted EPS, including EPS from discontinued operations, increased to Php167.07 in 2012 from consolidated basic and diluted EPS of Php161.05 and Php160.91, respectively, in 2011. Our weighted average number of outstanding common shares was approximately 216.06 million and 191.37 million in the years ended December 31, 2012 and 2011, respectively.

The following table shows the breakdown of our consolidated net income by business segment for the years ended December 31, 20092012 and 2008 by business segment:

                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php33,727   84  Php29,499   84  Php4,228   14 
Fixed line  5,864   15   7,732   22   (1,868)  (24)
Information and communications technology  504   1   (2,186)  (6)  2,690   123 
Inter-segment transactions        (69)     69   100 
                   
Consolidated Php40,095   100  Php34,976   100  Php5,119   15 
                   
2011:

                   Change 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Wireless

  Php25,014     69    Php22,366     72    Php2,648    12  

Fixed line

   5,740     16     5,847     19     (107  (2

Others

   4,333     12     1,985     6     2,348    118  

Inter-segment transactions

   469     1     153     —       316    207  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Continuing operations

   35,556     98     30,351     97     5,205    17  

Discontinued operations

   543     2     867     3     (324  (37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Consolidated

  Php36,099     100    Php31,218     100    Php4,881    16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

Includes the Digitel Group’s net income of Php342 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s net loss of Php606 million for the period from October 26, 2011 to December 31, 2011.

Adjusted EBITDA

Our consolidated adjustedAdjusted EBITDA was Php86,194from continuing operations, amounted to Php75,388 million in 2009,2012, a decrease of Php1,802Php2,837 million, or 2%4%, as compared with Php87,996Php78,225 million in 20082011, primarily due to higher operating expenses particularlydriven by higher compensation and employee benefits, cost of sales, repairs and maintenance, rent, selling and promotions, and communication, training and travel, as well as lower provision for uncollectible receivables, rent expenses, and various operational and business-related expenses,income tax, partially offset by an increase in service revenues across our businesses.

consolidated revenues.

The following table shows the breakdown of our consolidated adjustedAdjusted EBITDA from continuing operations by business segment for the years ended December 31, 20092012 and 2008 by business segment:

                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php59,411   69  Php60,967   69  Php(1,556)  (3)
Fixed line  25,215   29   25,854   30   (639)  (2)
Information and communications technology  1,330   2   1,056   1   274   26 
Inter-segment transactions  238      119      119   100 
                   
Consolidated Php86,194   100  Php87,996   100  Php(1,802)  (2)
                   
2011:

                 Change 
   2012(1, 2)  %   2011(2, 3)  %   Amount  % 
   (in millions) 

Wireless

  Php54,480    72    Php55,433    71    (Php953  (2

Fixed line

   20,089    27     22,382    29     (2,293  (10

Others

   (18  —       (11  —       (7  64  

Inter-segment transactions

   837    1     421    —       416    99  
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Continuing operations

  Php75,388    100    Php78,225    100    (Php2,837  (4
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

(1)

Includes the Digitel Group’s EBITDA of Php6,040 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s EBITDA of Php1,056 million for the period from October 26, 2011 to December 31, 2011.

Core Income

Our consolidated core income, was Php41,138including core income from discontinued operations, amounted to Php36,907 million in 2009, an increase2012, a decrease of Php2,924Php1,709 million, or 8%4%, as compared with Php38,214Php38,616 million in 20082011, primarily due to an increase in consolidated expenses, excluding the retroactive effect of the application of the Revised IAS 19 in our MRP costs of Php1,287 million in 2012, partially offset by an increase in consolidated revenues and lower provision for income taxtax. Our consolidated basic and higher revenues, partially offset by higher expenses.

diluted core EPS, including basic and diluted core EPS from discontinued operations, also decreased to Php170.58 in 2012 from Php199.39 and Php199.22, respectively, in 2011.

The following table shows the breakdown of our consolidated core income by business segment for the years ended December 31, 20092012 and 2008 by business segment:

                         
                  Change 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Php33,026   80  Php30,250   79  Php2,776   9 
Fixed line  7,502   18   7,890   21   (388)  (5)
Information and communications technology  613   2   138      475   344 
Inter-segment transactions  (3)     (64)     61   95 
                   
Consolidated Php41,138   100  Php38,214   100  Php2,924   8 
                   

84

2011:


                   Change 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Wireless

  Php25,694     70    Php29,903     77    (Php4,209  (14

Fixed line

   5,769     16     5,310     14     459    9  

Others

   4,424     12     2,461     6     1,963    80  

Inter-segment transactions

   469     1     153     1     316    207  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Continuing operations

   36,356     99     37,827     98     (1,471  (4

Discontinued operations

   551     1     789     2     (238  (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Consolidated

  Php36,907     100    Php38,616     100    (Php1,709  (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

Includes the Digitel Group’s core income of Php1,784 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes the Digitel Group’s negative core income of Php9 million for the period from October 26, 2011 to December 31, 2011.

On a Business Segment Basis

Wireless

Wireless

Revenues

     Revenues

We generated revenues from our wireless business amounted to Php97,524of Php115,932 million in 2009,2012, an increase of Php1,672Php12,394 million, or 2%12%, from Php95,852Php103,538 million in 2008. 2011.

The following table summarizes our total revenues from our wireless business for the years ended December 31, 20092012 and 20082011 by service segment:

                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Services:                        
Service Revenues:                        
Cellular Php88,410   91  Php87,518   92  Php892   1 
Wireless broadband, satellite and others                        
Wireless broadband  5,383   5   4,327   4   1,056   24 
Satellite and others  2,036   2   1,748   2   288   16 
                   
   95,829   98   93,593   98   2,236   2 
                         
Non-Service Revenues:                        
Sale of cellular handsets, cellular SIM-packs and broadband data modems  1,695   2   2,259   2   (564)  (25)
                   
Total Wireless Revenues Php97,524   100  Php95,852   100  Php1,672   2 
                   

                   Increase (Decrease) 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Service Revenues:

       

Cellular

  Php103,604     89    Php93,645     90    Php9,959    11  

Wireless broadband, satellite and others

           

Wireless broadband

   8,606     8     6,804     7     1,802    26  

Satellite and others

   1,569     1     1,620     2     (51  (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
   113,779     98     102,069     99     11,710    11  

Non-Service Revenues:

       

Sale of cellular handsets, cellular SIM-packs and broadband data modems

   2,153     2     1,469     1     684    47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Wireless Revenues

  Php115,932     100    Php103,538     100    Php12,394    12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

Includes the Digitel Group’s revenue contribution of Php19,581 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes the Digitel Group’s revenue contribution of Php3,184 million for the period from October 26, 2011 to December 31, 2011.

Service Revenues

Our wireless service revenues in 2012, increased by Php2,236Php11,710 million, or 2%11%, to Php95,829Php113,779 million in 2009 as compared with Php93,593Php102,069 million in 2008,2011, mainly as a result of the growth in thehigher revenues from our cellular and wireless broadband subscriber base. In particular,services. The increase in our cellular revenues was mainly due to an increase in DMPI’s revenue contribution to our wireless service revenues in 2012, partially offset by the decline in Smart’s revenues from voiceinternational and domestic calls, as well as domestic outbound and inbound text messaging services as a result of increased dueutilization of unlimited offers, increasing patronage of social networking sites, and the NTC-mandated decrease in SMS interconnection charges. Our dollar-linked revenues were negatively affected by the appreciation of the Philippine peso relative to the introduction of new unlimited voice offers, the favorable effect of the depreciation of theU.S. dollar, which decreased to a weighted average exchange rate of Php42.24 for the Philippine peso toyear ended December 31, 2012 from Php43.31 for the U.S. dollar on our dollar-linked revenues to Php47.64 in 2009 from Php44.47 in 2008, as well as theyear ended December 31, 2011. With subscriber growth in international inbound call volumes in 2009 as compared with 2008. Revenues from SMS, on the other hand, decreased due to the increase in the number of multiple SIM card ownership, intense competition and the continued decline in SMS yield as a result of aggressive SMS offers. Since the growth in our cellular subscriber base was mainly due to the increase inbeing driven more by multiple SIM card ownership, especially in the lower income segment of the Philippine wireless market, and the increase in our call volumes was primarily due to the introduction of new unlimited voice offers, average monthly cellular ARPUs for 20092012 were lower as compared with 2008. Due to the popularity of unlimited voice offers and competitive pressures, we expect this trend to continue.2011. As a percentage of our total wireless revenues, service revenues contributedaccounted for 98% and 99% in both 20092012 and 2008.

2011, respectively.

Cellular Service

Our cellular service revenues in 2012 amounted to Php88,410Php103,604 million, in 2009, an increase of Php892Php9,959 million, or 1%11%, from Php87,518Php93,645 million in 2008.2011. Cellular service revenues accounted for 91% and 92% of our wireless service revenues in 20092012 and 2011, respectively.

We have focused on segmenting the market by offering sector-specific, value-driven packages for our subscribers. These include load buckets which provide a fixed number of messages with prescribed validity periods and call packages which allow a fixed number of calls of preset duration. Starting out as comparedpurely on-net packages, buckets now also offer voice, text and hybrid bundles available to all networks. Smart andSun Cellular also provide packages with 94% in 2008.

85

unlimited voice, text, data, and combinations thereof, whose denominations depend on the duration and nature of the unlimited packages.


The following table shows the breakdown of our cellular service revenues for the years ended December 31, 2012 and 2011:

           Increase 
   2012(1, 2)   2011(2, 3)   Amount   % 
   (in millions) 

Cellular service revenues

  Php103,604    Php93,645    Php9,959     11  

By service type

   101,042     91,119     9,923     11  

Prepaid

   84,525     81,649     2,876     4  

Postpaid

   16,517     9,470     7,047     74  

By component

   101,042     91,119     9,923     11  

Voice

   49,627     43,884     5,743     13  

Data

   51,415     47,235     4,180     9  

Others(4)

   2,562     2,526     36     1  

(1)

Includes DMPI’s cellular service revenues of Php17,241 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes DMPI’s cellular service revenues of Php2,808 million for the period from October 26, 2011 to December 31, 2011.

(4)

Refers to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, share in revenues from PLDT’s WeRoam and PLP services, a small number of leased line contracts, and revenues from Chikka and other Smart subsidiaries.

The following table shows other key measures of our cellular business as at and for the years ended December 31, 20092012 and 2008:

                 
          Increase (Decrease)
  2009 2008 Amount %
  (in millions)
Cellular service revenues Php88,410  Php87,518  Php892   1 
                 
By service type
  85,922   85,079   843   1 
Prepaid  79,284   78,743   541   1 
Postpaid  6,638   6,336   302   5 
                 
By component
  85,922   85,079   843   1 
Voice  38,850   37,275   1,575   4 
Data  47,072   47,804   (732)  (2)
                 
Others(1)
  2,488   2,439   49   2 
2011:

           Increase (Decrease) 
   2012   2011   Amount  % 

Cellular subscriber base

   69,866,458     63,696,629     6,169,829    10  

Prepaid

   67,611,537     61,792,792     5,818,745    9  

Smart

   25,061,453     28,011,521     (2,950,068  (11

Talk ’N Text

   28,445,053     20,467,175     7,977,878    39  

Sun Cellular

   14,105,031     13,314,096     790,935    6  

Postpaid

   2,254,921     1,903,837     351,084    18  

Sun Cellular

   1,571,441     1,353,089     218,352    16  

Smart

   683,480     550,748     132,732    24  

Systemwide traffic volumes (in millions)(1, 2)

       

Calls (in minutes)

   53,025     44,192     8,833    20  

Domestic

   49,597     41,107     8,490    21  

Inbound

   1,242     1,350     (108  (8

Outbound

   48,355     39,757     8,598    22  

International

   3,428     3,085     343    11  

Inbound

   3,025     2,862     163    6  

Outbound

   403     223     180    81  

SMS/Data count (in million hits) (2, 3)

   501,964     353,907     148,057    42  

Text messages

   500,039     351,502     148,537    42  

Domestic

   499,191     350,858     148,333    42  

Bucket-Priced/Unlimited

   468,898     322,588     146,310    45  

Standard

   30,293     28,270     2,023    7  

International

   848     644     204    32  

Value-Added Services

   1,872     2,368     (496  (21

Financial Services

   53     37     16    43  

Mobile internet (in TB)

   4,954     965     3,989    413  

(1)

(1)

RefersIncludes DMPI’s minutes of 15,574 million minutes for the full year 2012 and 2,681 million minutes for the period from October 26, 2011 to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, revenues from Smart’s public calling offices and share in PLDT’s WeRoam and PLP services, a small number of leased line contracts, revenues from Wolfpac and other Smart subsidiariesDecember 31, 2011.

                 
          Increase (Decrease)
  2009 2008 Amount %
Cellular subscriber base  41,328,641   35,224,604   6,104,037   17 
Prepaid  40,893,098   34,826,468   6,066,630   17 
Smart Buddy
  23,762,814   20,501,617   3,261,197   16 
Talk ’N Text(1)
  17,050,713   14,308,493   2,742,220   19 
Red Mobile(2)
  79,571   16,358   63,213   386 
Postpaid  435,543   398,136   37,407   9 
                 
Systemwide traffic volumes (in millions)                
Calls (in minutes)  16,305   9,192   7,113   77 
Domestic  13,371   6,287   7,084   113 
Inbound
  1,495   1,654   (159)  (10)
Outbound
  11,876   4,633   7,243   156 
International  2,934   2,905   29   1 
Inbound
  2,738   2,684   54   2 
Outbound
  196   221   (25)  (11)
                 
SMS/Data count (in hits)  287,921   258,246   29,675   11 
Text messages  286,294   256,606   29,688   12 
Domestic  285,847   256,181   29,666   12 
Inbound
  8,289   8,430   (141)  (2)
Outbound
  277,558   247,751   29,807   12 
Bucket-Priced  258,190   226,937   31,253   14 
Standard  19,368   20,814   (1,446)  (7)
International  447   425   22   5 
Inbound
  136   125   11   9 
Outbound
  311   300   11   4 
Value-Added Services  1,608   1,614   (6)   
Financial Services  19   26   (7)  (27)
(2)

(1)

The transferAs adjusted to reflect certain presentation adjustments to conform with the current presentation of PCEV’s cellularour business to Smart was completed on August 17, 2009segments.
(2)The Red Mobile brand was launched in November 2008 by CURE

(3)

Includes DMPI’s SMS count of 61,208 million for the full year 2012 and 9,526 million for the period from October 26, 2011 to December 31, 2011.

Revenues attributable togenerated from our prepaid cellular prepaid serviceservices amounted to Php79,284Php84,525 million in 2009,2012, an increase of Php541Php2,876 million, or 1%4%, over the Php78,743as compared with Php81,649 million earned in 2008.2011. Prepaid cellular service revenues accounted for 92%84% and 93%90% of cellular voice and data revenues in 20092012 and 2008,2011, respectively. Revenues attributable to Smart’sgenerated from postpaid cellular service amounted to Php6,638Php16,517 million in 2009,2012, an increase of Php302Php7,047 million, or 5%74%, over the Php6,336as compared with Php9,470 million earned in 2008,2011, and which accounted for 8%16% and 7%10% of cellular voice and data revenues in 20092012 and 2008,2011, respectively.

86

The increase in our postpaid cellular service revenues was primarily due to DMPI’s higher postpaid cellular service revenue contribution by Php5,804 million and Smart’s higher postpaid cellular service revenues by Php1,242 million due to an increase in subscriber base. The increase in revenues from our prepaid cellular services was primarily due to an increase in domestic outbound voice revenues and mobile internet, partially offset by a decline in domestic and international inbound revenues.


Voice Services

Cellular revenues from our voice services, which include all voice traffic and voice value-added services, or VAS, such as voice mail and outbound international roaming, increased by Php1,575Php5,743 million, or 4%13%, to Php38,850Php49,627 million in 20092012 from Php37,275Php43,884 million in 20082011, primarily due to the introduction of new unlimited voice offers, the favorable effect of the depreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar on our dollar-linkedhigher cellular domestic call revenues, to Php47.64 in 2009 from Php44.47 in 2008 and the growth in inboundpartially offset by lower cellular international call volumes.revenues. Cellular voice services accounted for 44%48% and 47% of our cellular service revenues in 2009 as compared with 43% in 2008.

2012 and 2011, respectively.

The following table shows the breakdown of our cellular voice revenues for the years ended December 31, 20092012 and 2008:

                 
          Increase (Decrease) 
  2009  2008  Amount  % 
  (in millions) 
Voice services:                
Domestic
                
Inbound Php5,095  Php5,405  (Php 310)  (6)
Outbound  16,534   15,959   575   4 
             
   21,629   21,364   265   1 
             
                 
International
                
Inbound  15,287   13,732   1,555   11 
Outbound  1,934   2,179   (245)  (11)
             
   17,221   15,911   1,310   8 
             
                 
Total Php38,850  Php37,275  Php1,575   4 
             
2011:

           Increase (Decrease) 
   2012(1, 2)   2011(2, 3)   Amount  % 
   (in millions) 

Voice services:

       

Domestic

       

Inbound

  Php4,737    Php4,963    (Php226  (5

Outbound

   28,440     22,441     5,999    27  
  

 

 

   

 

 

   

 

 

  

 

 

 
   33,177     27,404     5,773    21  
  

 

 

   

 

 

   

 

 

  

 

 

 

International

       

Inbound

   13,838     13,906     (68  —    

Outbound

   2,612     2,574     38    1  
  

 

 

   

 

 

   

 

 

  

 

 

 
   16,450     16,480     (30  —    
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php49,627    Php43,884    Php5,743    13  
  

 

 

   

 

 

   

 

 

  

 

 

 

(1)

Includes DMPI’s cellular voice revenues of Php10,676 million of operations for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes DMPI’s cellular voice revenues of Php1,537 million for the period from October 26, 2011 to December 31, 2011.

Domestic voice service revenues increased by Php265Php5,773 million, or 1%21%, to Php21,629Php33,177 million in 20092012 from Php21,364Php27,404 million in 20082011, primarily due to an increase in domestic outbound callvoice service revenues by Php575Php5,999 million, partially offset by lower domestic inbound voice revenues by Php226 million.

Revenues from domestic outbound voice service increased by Php5,999 million, or 4%27%, to Php16,534Php28,440 million in 20092012 from Php15,959Php22,441 million in 20082011 mainly due to increased traffic on unlimited voice offerings. This was partially offsetcalls and improved yield on bucket offers. Domestic outbound call volume of 48,355 million minutes increased by the lower revenue contribution of8,598 million minutes, or 22%, from 39,757 million minutes in 2011.

Revenues from our domestic inbound domestic voice service decreased by Php310Php226 million, or 6%5%, to Php5,095Php4,737 million in 20092012 from Php5,405Php4,963 million in 2008 as2011 primarily due to a result of lowerdecrease in traffic originating from other domestic mobile carriers. Domestic inbound call volumes of 1,242 million minutes in 2012, decreased by 108 million minutes, or 8%, from PLDT’s regular call service1,350 million minutes in 2011 primarily due to the introduction of a fixed rate calling package, partly offset by higherlower traffic from other domestic. Inbound and outbound domestic call volumes were 1,495 million minutes and 11,876 million minutes, respectively, in 2009 from 1,654 million minutes and 4,633 million minutes, respectively, in 2008. The aggregate increase was mainly due to higher call volumes from unlimited voice offerings.

fixed line calls.

International voice service revenues increaseddecreased by Php1,310Php30 million or 8%, to Php17,221Php16,450 million in 20092012 from Php15,911Php16,480 million in 20082011 primarily due to higherlower international inbound international voice service revenues by Php1,555Php68 million to Php13,838 million in 2012 from Php13,906 million in 2011, partially offset by higher international outbound voice service revenues by Php38 million, or 11%1%, to Php15,287Php2,612 million in 20092012 from Php13,732Php2,574 million in 2008.2011. The increasenet decrease in international voice service revenues was mainlydue to the unfavorable effect on accountdollar-linked revenues of the favorable effect of the depreciation of thelower weighted average exchange rate of the Philippine peso to the U.S. dollar to Php47.64Php42.24 for the year ended December 31, 20092012 from Php44.47Php43.31 for the year ended December 31, 2008 on our dollar-linked revenues complemented by the increase in international2011. International inbound call volumes by 54and outbound calls totaled 3,428 million minutes, or 2%, to 2,738 million minutes in 2009 from 2,684 million minutes in 2008. This was partially offset by lower international outbound voice service revenues by Php245 million, or 11%, to Php1,934 million in 2009 from Php2,179 million in 2008 as international outbound call volumes decline by 25an increase of 343 million minutes, or 11%, to 196from 3,085 million minutes in 2009 from 221 million minutes in 2008.

2011.

Data Services

Cellular revenues from our data services, which include all text messaging-related services, as well as VAS, decreasedincreased by Php732Php4,180 million, or 2%9%, to Php47,072Php51,415 million in 20092012 from Php47,804Php47,235 million in 2008.2011 primarily due to higher text messaging revenues and higher mobile internet revenues, partially offset by lower VAS revenues. Cellular data services accounted for 53% and 55%50% of our cellular service revenues in 2009each 2012 and 2008, respectively.

87

2011.


The following table shows the breakdown of our cellular data service revenues for the years ended December 31, 20092012 and 2008:
                 
          Increase (Decrease) 
  2009  2008  Amount  % 
  (in millions) 
Text messaging                
Domestic Php42,905  Php43,477  Php(572)  (1)
Bucket-Priced
  26,797   26,461   336   1 
Standard
  16,108   17,016   (908)  (5)
International  1,668   1,808   (140)  (8)
             
   44,573   45,285   (712)  (2)
             
Value-added services                
Standard(1)
  1,057   1,325   (268)  (20)
Rich Media(2)
  998   679   319   47 
Pasa Load
  413   470   (57)  (12)
             
   2,468   2,474   (6)   
             
Financial services                
Smart Money
  27   41   (14)  (34)
Mobile Banking  4   4       
             
   31   45   (14)  (31)
             
                 
Total Php47,072  Php47,804  Php(732)  (2)
             
2011:

           Increase (Decrease) 
   2012(1)   2011(1)   Amount  % 
   (in millions) 

Text messaging

       

Domestic

  Php42,719    Php40,096    Php2,623    7  

Bucket-Priced/Unlimited

   28,752     23,164     5,588    24  

Standard

   13,967     16,932     (2,965  (18

International

   3,782     3,612     170    5  
  

 

 

   

 

 

   

 

 

  

 

 

 
   46,501     43,708     2,793    6  
  

 

 

   

 

 

   

 

 

  

 

 

 

Mobile internet(2)

   3,121     1,707     1,414    83  

Value-added services(3)

   1,719     1,774     (55  (3

Financial services

   74     46     28    61  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php51,415    Php47,235    Php4,180    9  
  

 

 

   

 

 

   

 

 

  

 

 

 

(1)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(2)
(1)

Includes standardrevenues from web-based services, net of allocated discounts and content provider costs.

(3)

Includes revenues from SMS-based VAS (info-on-demand and voice text services, net of allocated discounts and content provider costs); multi-media messaging system, or MMS-based VAS (point-to-point MMS and content download services, such as info-on-demand, ringtone, logo or music downloads, net of allocated discounts and logo download, etc.content provider costs); and Pasa Load (which allows prepaid and postpaid subscribers to transfer small denominations of air time credits to other prepaid subscribers and Dial *SOS which allows Smart prepaid subscribers to borrow Php4 of load (Php3 on-net SMS plus Php1 air time) from Smart which will be deducted upon their next top-up).

(2)Includes Multimedia Messaging System, or MMS, internet browsing, General Packet Radio Service, or GPRS, etc.

Text messaging-related services contributed revenues of Php44,573Php46,501 million in 2009, a decrease2012, an increase of Php712Php2,793 million, or 2%6%, as compared with Php45,285Php43,708 million in 2008,2011, and accounted for 95%90% and 93% of our total cellular data service revenues in each of 20092012 and 2008.2011, respectively. The decreaseincrease in revenues from text messaging-related services resulted mainly from thean increase in DMPI’s text messaging revenue contribution by Php4,432 million, partially offset by lower text messaging revenues from Smart mainly due to the number of subscribers who also hold SIM cards from other cellular operators and who selectively use such SIM cards in their calls and SMS, intense competition, the continued declineNTC-mandated decrease in SMS yield as a result of unlimited SMS offers and alternative means of communication.interconnection charges. Text messaging revenues from the various bucket-priced plansbucket-priced/unlimited SMS offers totaled Php26,797Php28,752 million in 2009,2012, an increase of Php336Php5,588 million, or 1%24%, as compared with Php26,461Php23,164 million in 2008. On the other hand, standard2011. Bucket-priced/unlimited text messages increased by 146,310 million, or 45%, to 468,898 million in 2012 from 322,588 million in 2011.

Standard text messaging revenues, which includes inbound and outbound standard SMS revenues, decreased by Php908Php2,965 million, or 18%, to Php16,108Php13,967 million in 20092012 from Php17,016Php16,932 million in 2008. The decrease2011, primarily due to increased preference for unlimited SMS offers. Standard text messages increased by 2,023 million, or 7% to 30,293 million in 2012 from 28,270 million in 2011, as a result of increased domestic inbound SMS volume, partially offset by the decline in domestic outbound standard SMS volume.

International text messaging revenues amounted to Php3,782 million in 2012, an increase of Php170 million, or 5%, from Php3,612 million in 2011 mainly due to an increase in DMPI’s international text messaging revenues was mainly duerevenue contribution and the growth in Smart’s international inbound SMS traffic, partially offset by the unfavorable effect of the appreciation of the peso relative to the higher average/effective rate of roaming costs in 2009.

     Bucket-pricedU.S. dollar on international inbound text messages totaled 258,190messaging revenues and a lower international outbound SMS traffic.

Mobile internet service revenues increased by Php1,414 million, or 83%, to Php3,121 million in 2009,2012 from Php1,707 million in 2011 as a result of higher traffic for mobile internet browsing. Mobile internet service registered 4,954 TB in 2012, an increase of 31,2533,989 TB, or 413%, from 965 TB in 2011.

VAS contributed revenues of Php1,719 million in 2012, a decrease of Php55 million, or 14%3%, as compared with 226,937Php1,774 million in 2008. Standard text messages totaled 19,368 million in 2009, a decrease of 1,446 million, or 7%, as compared with 20,814 million in 2008 mainly due to a shift to bucket-priced text services.

     VAS, which contributed revenues of Php2,468 million in 2009, decreased by Php6 million from Php2,474 million in 20082011, primarily due to lower usage of standard services andPasa Load, which is a service allowing prepaid subscribers to transfer small denominations of air time credits to other prepaid subscribers, owing to the continued patronage of low-denomination top-ups partially offset by higher usage of rich media services.
MMS/SMS-based revenues.

Subscriber Base, ARPU and Churn Rates

     Smart (including PCEV’sTalk ‘N Textsubscribers which were transferred to Smart on August 17, 2009) andRed Mobile

As at December 31, 2012, our cellular subscribers totaled 41,328,641 at the end of 2009,69,866,458, an increase of 6,104,037,6,169,829, or 17%10%, over their combinedthe cellular subscriber base of 35,224,60463,696,629 as at the end of 2008. This increase in our cellular subscriber base was primarily attributable to multiple SIM card ownership which, together with unlimited voice offers, resulted in lower average monthly cellular ARPU for 2009 than in 2008.December 31, 2011. Our cellular prepaid subscriber base grew by 17%5,818,745, or 9%, to 40,893,098 in 200967,611,537 as at December 31, 2012 from 34,826,468 in 2008, while61,792,792 as at December 31, 2011, and our cellular postpaid subscriber base increased by 9%351,084, or 18%, to 435,5432,254,921 as at December 31, 2012 from 1,903,837 as at December 31, 2011. The increase in 2009 from 398,136subscriber base was primarily due to the growth in 2008.Smart’sTalk ‘N Text prepaid subscribers and an increase in DMPI’s prepaid and postpaid subscribers by 790,935 and 218,352, respectively, as at December 31, 2012. Prepaid subscribers accounted for 99%97% of our total subscriber base in each of 2009as at December 31, 2012 and 2008. 2011.

Our net subscriber activations (reductions) for the years ended December 31, 2012 and 2011 were as follows:

          Increase (Decrease) 
   2012  2011   Amount  % 

Prepaid

   5,818,745    3,603,022     2,215,723    61  

Smart

   (2,950,068  1,764,469     (4,714,537  (267

Talk ’N Text

   7,977,878    1,499,794     6,478,084    432  

Sun Cellular

   790,935    338,759     452,176    133  

Postpaid

   351,084    178,870     172,214    96  

Smart

   132,732    129,173     3,559    3  

Sun Cellular

   218,352    49,697     168,655    339  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total

   6,169,829    3,781,892     2,387,937    63  
  

 

 

  

 

 

   

 

 

  

 

 

 

Prepaid and postpaid subscribers reflected net activations of 6,066,6305,818,745 and 37,407,351,084 subscribers, respectively, in 20092012 as compared with net activations of 3,603,022 and 5,127,318 and 56,256,178,870, respectively, in 2008.

88

2011.


The following table summarizes our average monthly churn rates for the years ended December 31, 2012 and 2011:

   2012   2011 
   (in %) 

Prepaid

    

Smart

   6.0     5.1  

Talk ’N Text

   4.1     5.5  

Sun Cellular

   11.0     10.0  

Postpaid

    

Smart

   2.6     2.1  

Sun Cellular

   1.0     1.0  

Our net subscriber activations for the years ended December 31, 2009 and 2008 were as follows:
                 
          Increase (Decrease) 
  2009  2008  Amount  % 
Prepaid  6,066,630   5,127,318   939,312   18 
Smart Buddy
  3,261,197   504,293   2,756,904   547 
Talk ’N Text(1)
  2,742,220   4,606,667   (1,864,447)  (40)
Red Mobile(2)
  63,213   16,358   46,855   286 
                 
Postpaid  37,407   56,256   (18,849)  (34)
             
                 
Total  6,104,037   5,183,574   920,463   18 
             
(1)The transfer of PCEV’s cellular business to Smart was completed on August 17, 2009
(2)The Red Mobile brand was launched in November 2008 by CURE
     Our quarterly net subscriber activations over the eight quarters in 2009 and 2008 were as follows:
                                 
  2009  2008 
  1Q  2Q  3Q  4Q  1Q  2Q  3Q  4Q 
Prepaid  1,692,767   1,575,585   621,154   2,177,124   1,533,812   1,660,040   917,528   1,015,938 
Smart Buddy
  419,821   523,496   644,932   1,672,948   282,044   130,697   111,487   (19,935)
Talk ‘N Text
  1,256,907   1,019,162   (32,419)  498,570   1,251,768   1,529,343   806,041   1,019,515 
Red Mobile
  16,039   32,927   8,641   5,606            16,358 
                                 
Postpaid  9,328   17,746   6,806   3,527   1,117   5,027   17,816   32,296 
                         
                                 
Total  1,702,095   1,593,331   627,960   2,180,651   1,534,929   1,665,067   935,344   1,048,234 
                         
ForSmart BuddyPrepaid,subscribers, the average monthly churn rate for 2009in 2012 and 2008 was 4.2%2011 were 6% and 4.7%5.1%, respectively, while the average monthly churn rate forTalk ’N Textsubscribers was 5.0%were 4.1% and 4.8%5.5% in 20092012 and 2008,2011, respectively. The average monthly churn rate forRed MobileSun Cellularprepaid subscribers was 12.3%were 11.0% and 10.0% in 2009.
2012 and 2011, respectively.

The average monthly churn rate for Smart’s Smart Postpaid subscribers were 2.6% and 2.1% in 2012 and 2011, respectively. The average monthly churn rate forSun Cellularpostpaid subscribers were 1.9%was 1.0% in each of 2012 and 1.2% for 2009 and 2008, respectively. Smart’s policy is to redirect outgoing calls to an interactive voice response system if the postpaid subscriber’s account is either 45 days overdue or if the subscriber has exceeded the prescribed credit limit. If the subscriber does not make a payment within 44 days of redirection, the account is temporarily disconnected. If the account is not settled within 30 days from temporary disconnection, the account is then considered as churned. From the time that temporary disconnection is initiated, a series of collection activities are implemented, involving the sending of a collection letter, call-out reminders and collection messages via text messaging.

2011.

The following table summarizes our cellular average monthly cellular ARPUs for the years ended December 31, 20092012 and 2008:

                                 
  Gross(1) Decrease Net(2) Decrease
  2009 2008 Amount % 2009 2008 Amount %
Prepaid                                
Smart Buddy
 Php261  Php290  Php(29)  (10) Php207  Php230  Php(23)  (10)
Talk ’N Text
  161   194   (33)  (17)  133   158   (25)  (16)
Red Mobile
  20   48   (28)  (58)  13   39   (26)  (67)
Prepaid — Blended(3)
  218   254   (36)  (14)  175   203   (28)  (14)
Postpaid — Smart  1,817   2,065   (248)  (12)  1,313   1,483   (170)  (11)
Prepaid and Postpaid Blended(4)
  235   274   (39)  (14)  188   217   (29)  (13)
2011:

   Gross(1, 2)   Decrease  Net(2, 3)   Decrease 
   2012   2011   Amount  %  2012   2011   Amount  % 

Prepaid

             

Smart

  Php167    Php190    (Php23  (12 Php145    Php166    (Php21  (13

Talk ’N Text

   111     124     (13  (10  97     109     (12  (11

Sun Cellular

   69     75     (6  (8  59     65     (6  (9

Postpaid

             

Smart

   1,268     1,548     (280  (18  1,251     1,510     (259  (17

Sun Cellular

   394     450     (56  (12  391     447     (56  (13

(1)
(1)

Gross monthly ARPU is calculated by dividing gross cellular service revenues for the month, includinggross of discounts, allocated content-providercontent provider costs and interconnection income but excluding inbound roaming revenues, by the average number of subscribers in the month.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(2)(3)

Net monthly ARPU is calculated by dividing gross cellular service revenues for the month, including interconnection income, net of interconnection expense, but excluding inbound roaming revenues, net of discounts and content-providercontent provider costs, by the average number of subscribers in the month.

(3)The average monthly ARPU of Smart Buddy, Talk ’N Text and Red Mobile.
(4)The average monthly ARPU of all prepaid and postpaid cellular subscribers.

     Prepaid service revenues consist mainly of charges for subscribers’ actual usage of their loads. Prepaid blended gross average monthly ARPU was Php218 in 2009, a decrease of 14%, as compared with Php254 in 2008.

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The decrease was primarily due to a decline in the average outbound and inbound domestic voice and text messaging revenue per subscriber in 2009 as compared with 2008 resulting primarily from the fact that the increase in our cellular subscriber base in 2009 was primarily attributable to multiple SIM card ownership and that the increase in our call volumes resulted primarily from unlimited voice offerings. On a net basis, prepaid blended average monthly ARPU was Php175 in 2009, a decrease of 14%, as compared with Php203 in 2008.
     Gross average monthly ARPU for postpaid subscribers decreased by 12% to Php1,817 as net average monthly ARPU also decreased by 11% to Php1,313 in 2009 as compared with Php2,065 and Php1,483 in 2008, respectively. Prepaid and postpaid gross average monthly blended ARPU was Php235 in 2009, a decrease of 14%, as compared with Php274 in 2008. NetOur average monthly prepaid and postpaid blended ARPU decreased by 13% to Php188ARPUs per quarter in 2009 from Php217 in 2008.
     Our average quarterly prepaid2012 and postpaid ARPUs for 2009 and 20082011 were as follows:
                                 
  Prepaid Postpaid
  Smart Buddy Talk’N Text Red Mobile Smart
  Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
2009
                                
First Quarter Php272  Php216  Php176  Php144  Php25  Php14  Php1,863  Php1,364 
Second Quarter  269   212   168   138   16   10   1,816   1,278 
Third Quarter  249   197   148   122   19   12   1,801   1,307 
Fourth Quarter  252   203   152   127   18   15   1,791   1,304 
                                 
2008
                                
First Quarter  292   230   207   163        ��2,013   1,472 
Second Quarter  294   232   199   159         2,134   1,510 
Third Quarter  285   223   178   148         2,078   1,505 
Fourth Quarter  291   234   192   162   48   39   2,037   1,445 

   Prepaid   Postpaid 
   Smart Prepaid   Talk ’N Text   Sun Cellular(1)   Smart   Sun Cellular(1) 
   Gross(2)   Net(3)   Gross(2)   Net(3)   Gross(2)   Net(3)   Gross(2)   Net(3)   Gross(2)   Net(3) 

2012(4)

                    

First Quarter

   170     148     116     102     68     57     1,292     1,269     390     388  

Second Quarter

   164     143     113     100     66     57     1,264     1,237     400     397  

Third Quarter

   162     140     107     93     67     58     1,253     1,251     391     388  

Fourth Quarter

   170     149     106     93     74     64     1,265     1,248     393     391  

2011(4)

                    

First Quarter

   198     174     129     113     —       —       1,610     1,557     —       —    

Second Quarter

   196     172     126     111     —       —       1,637     1,575     —       —    

Third Quarter

   180     158     117     103     —       —       1,493     1,429     —       —    

Fourth Quarter

   185     159     124     109     —       —       1,451     1,480     —       —    

(1)

Sun Cellular brand and its subscribers were acquired by PLDT upon acquisition of a controlling interest in Digitel on October 26, 2011. Sun Cellular operates through DMPI, a wholly-owned subsidiary of Digitel.

(2)
(1)

Gross quarterlymonthly ARPU is calculated based on the average of the gross monthly ARPUs for the quarter.

(2)(3)

Net quarterlymonthly ARPU is calculated based on the average of the net monthly ARPUs for the quarter.

(4)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Wireless Broadband, Satellite and Other Services

Our revenues from wireless broadband, and satellite and other services consist mainly of wireless broadband service revenues from SBI and DMPI, charges for ACeS Philippines’ satellite information and messaging services and service revenues generated by the mobile virtual network operationsMVNO services of PLDT Global’s subsidiary.

Wireless Broadband

Revenues from our wireless broadband services increased by Php1,056Php1,802 million, or 24%26%, to Php5,383Php8,606 million in 20092012 from Php4,327Php6,804 million in 20082011, primarily due to thea 14% growth in broadband subscriber base.

The following table shows information of our wireless broadband subscribers.

     SBI offerssubscriber base as at December 31, 2012 and 2011:

           Increase 
   2012   2011   Amount   % 

Wireless Broadband Revenues (in millions)

  Php8,606    Php6,804     1,802     26  

Prepaid

   2,467     1,911     556     29  

Postpaid

   6,139     4,893     1,246     25  

Wireless Broadband Subscribers

   2,359,024     2,068,409     290,615     14  

Prepaid

   1,587,160     1,362,992     224,168     16  

Smart Broadband

   1,231,092     1,162,020     69,072     6  

Sun Broadband

   356,068     200,972     155,096     77  

Postpaid

   771,864     705,417     66,447     9  

Smart Broadband

   495,802     454,333     41,469     9  

Sun Broadband

   276,062     251,084     24,978     10  

Smart Broadband andSun Broadband Wireless, SBI’s and DMPI’s broadband services, respectively, offer a number of wireless broadband services and had a total of 1,037,7202,359,024 subscribers as at December 31, 2009,2012, an increase of 490,630290,615 subscribers, or 90%14%, as compared with 547,0902,068,409 subscribers as at December 31, 2008.2011, primarily due to an increase in DMPI’s prepaid and postpaid broadband subscribers by 155,096 and 24,978, respectively, and an increase by 110,541, or 7%, in SBI’s broadband subscribers as at December 31, 2012. Our prepaid wireless broadband subscriber base increased by 224,168 subscribers, or 16%, to 1,587,160 subscribers as at December 31, 2012 from 1,362,992 subscribers as at December 31, 2011, while our postpaid wireless broadband subscriber base increased by 13,09466,447 subscribers, or 9%, to 436,037771,864 subscribers as at December 31, 20092012 from 422,943705,417 subscribers as at December 31, 2008. Our prepaid2011.

Smart Broadband offersmyBro, a fixed wireless broadband subscriberservice being offered under PLDT’sHome megabrand.myBro fixed wireless broadband service is powered either via a link to Smart’s wireless broadband-enabled base stations which allows subscribers to connect to the internet using an outdoor aerial antenna installed in the subscriber’s home or via Smart’s WiMAX network.

Smart Broadband also increasedoffers mobile internet access throughSmartBro Plug-It,a wireless modem andSmartBro Pocket Wifi, a portable wireless router which can be shared by 477,536up to five users at a time. Both provide instant connectivity at varying speeds in places where there is Smart network coverage provided by either 3G HSPA, 4G HSPA+ or LTE technology.SmartBro Plug-ItandSmartBro Pocket Wifi are available in both postpaid and prepaid variants. Smart Broadband also offers unlimited internet surfing forSmartBro Plug-ItandPocket Wifi Prepaid subscribers.SmartBro LTEoffers the latest broadband technology with speeds of up to 42 Mbps.SmartBro LTE Plug-It andSmartBro LTE Pocket Wifi are also available in both postpaid and prepaid variants. We also have an additional array of load packages that offer time period-based charging and longer validity periods, as well asAlways On packages, which offers volume over time-based buckets catering to subscribers or 385%,with varying data surfing requirements.

DMPI’sSun Broadband Wireless is an affordable high-speed broadband wireless service utilizing advanced 3.5G HSPA technology on an all-IP network offering various plans and packages to 601,683 subscribers as at December 31, 2009 from 124,147 subscribers as at December 31, 2008.

internet users.

Satellite and Other Services

Revenues from our satellite and other services increaseddecreased by Php288Php51 million, or 16%3%, to Php2,036Php1,569 million in 20092012 from Php1,748Php1,620 million in 2008 principally2011, primarily due to the growthtermination of wired and wireless leased line clients, a decrease in the number of ACeS Philippines’ subscribers of our wireless broadband business complemented byand the favorable effect of the depreciationappreciation of the Philippine peso relative to the U.S. dollar to a weighted average exchange rate of the Philippine peso to the U.S. dollar to Php47.64Php42.24 for the year ended December 31, 20092012 from Php44.47Php43.31 for the year ended December 31, 20082011 on our U.S. dollar and U.S. dollar-linked satellite and other service revenues, partially offset by lower satellite transponder rental revenues owing to lower rental charges and a decrease in the number of transponders being leased out.

90

revenues.


Non-Service Revenues

Our wireless non-service revenues consist of proceeds from sales of cellular handsets, cellular SIM-packs and broadband data modems. Our wireless non-service revenues decreasedincreased by Php564Php684 million, or 25%47%, to Php1,695Php2,153 million in 2009 as compared with Php2,2592012 from Php1,469 million in 20082011, primarily due to the lowerincrease in the combined average retail price and quantity of Smart’s cellular phonekits and handsets/SIM-packs partly offset by increased sales of broadband data modems.

issued for activation, as well as the increase in DMPI’s non-service revenue contribution.

Expenses

Expenses associated with our wireless business amounted to Php52,432Php83,717 million in 2009,2012, an increase of Php4,843Php12,708 million, or 10%18%, from Php47,589Php71,009 million in 2008.2011. A significant portion of this increase was attributable to rent,higher expenses related to depreciation and amortization, asset impairment, compensation and employee benefits, cost of sales, repairs and maintenance, selling and promotions, rent, amortization of intangible assets, professional and other contracted services, and other expenses, partially offset by lower expenses related to provisions,asset impairment, interconnection costs and communication, training and travelother operating expenses. As a percentage of our total wireless revenues, expenses associated with our wireless business accounted for 54%72% and 50%69% in 20092012 and 2008,2011, respectively.

     Cellular business expenses accounted for 85% of our wireless business expenses, while wireless broadband, satellite and other business expenses accounted for the remaining 15% of our wireless business expenses in 2009 as compared with 90% and 10%, respectively, in 2008.

The following table summarizes the breakdown of our total wireless-related expenses for the years ended December 31, 2012 and 2011 and the percentage of each expense item in relation to the total for the years ended December 31, 2009 and 2008:

                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
Wireless Services:                        
Depreciation and amortization Php13,237   25  Php11,975   25  Php1,262   11 
Rent  10,553   20   9,267   20   1,286   14 
Compensation and employee benefits(1)
  6,059   12   5,433   11   626   12 
Cost of sales  4,363   8   4,236   9   127   3 
Repairs and maintenance  4,340   8   4,230   9   110   3 
Selling and promotions  4,051   8   3,781   8   270   7 
Professional and other contracted services  2,904   6   2,529   5   375   15 
Asset impairment  2,026   4   1,006   2   1,020   101 
Taxes and licenses  2,022   4   1,872   4   150   8 
Communication, training and travel  972   2   1,091   2   (119)  (11)
Insurance and security services  781   1   722   2   59   8 
Amortization of intangible assets  126      133      (7)  (5)
Provisions        897   2   (897)  (100)
Other expenses  998   2   417   1   581   139 
                   
Total Php52,432   100  Php47,589   100  Php4,843   10 
                   
total:

                   Increase (Decrease) 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Depreciation and amortization

  Php19,000     23    Php14,295     20    Php4,705    33  

Rent

   9,970     12     8,223     12     1,747    21  

Compensation and employee benefits

   8,586     10     5,248     7     3,338    64  

Interconnection costs

   8,458     10     9,604     14     (1,146  (12

Selling and promotions

   7,933     10     6,144     9     1,789    29  

Repairs and maintenance

   7,843     9     5,643     8     2,200    39  

Cost of sales

   7,373     9     4,267     6     3,106    73  

Asset impairment

   4,218     5     9,197     13     (4,979  (54

Professional and other contracted services

   3,733     4     3,164     5     569    18  

Taxes and licenses

   2,410     3     2,233     3     177    8  

Communication, training and travel

   1,430     2     1,022     1     408    40  

Insurance and security services

   1,033     1     847     1     186    22  

Amortization of intangible assets

   921     1     108     —       813    753  

Other expenses

   809     1     1,014     1     (205  (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php83,717     100    Php71,009     100    Php12,708    18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)
(1)

Includes salariesDMPI’s expenses of Php21,485 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and employee benefits, long-term incentive plan, or LTIP, pensionthe application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and MRP costs.Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes DMPI’s expenses of Php3,083 million for the period from October 26, 2011 to December 31, 2011.

Depreciation and amortization charges increased by Php1,262Php4,705 million, or 11%33%, to Php13,237Php19,000 million in 2009 principallyprimarily due to the increase in DMPI’s depreciation and amortization expense by Php4,319 million and Smart’s higher depreciable asset base.

Rent expenses increased depreciation onby Php1,747 million, or 21%, to Php9,970 million primarily due to the growing asset base of 3Gincrease in DMPI’s rent expense by Php1,715 million, increase in site and broadband networks,office building rental and broadband customer-deployed equipment, partlydomestic fiber optic network, or DFON, charges, partially offset by a decrease in leased circuit and satellite rental charges. In the depreciable asset base of our 2G network. Going forward, we expect our depreciation and amortization expenses to increase in line with our expected increase in our capital expenditures in 2010.

     Rent expenses increased by Php1,286 million, or 14%, to Php10,553 million on account of an increase in international and domestic circuits leased by Smart from PLDT, as well as higher site rental expenses. In 2009,year ended December 31, 2012, we had 5,53911,132 cell sites, 9,72720,096 cellular/mobile broadband base stations and 2,0072,871 fixed wireless broadband-enabled base stations, as compared with 5,28410,482 cell sites, 8,47714,879 cellular/mobile broadband base stations and 1,9862,786 fixed wireless broadband-enabled base stations in 2008.
2011.

Compensation and employee benefits expenses increased by Php626Php3,338 million, or 12%64%, to Php6,059 million primarily due to increased provision for LTIP, MRP cost, merit-based increases, and employee upgrades and promotions. The increase was partly offset by a decrease in employee headcount of Smart and subsidiaries by 94 to 5,454 in 2009 as compared with 5,548 in 2008. For further discussion of our LTIP, please see Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18.

91


     Cost of sales increased by Php127 million, or 3%, to Php4,363 million primarily due to higher sales volume of broadband data modems in 2009 and an increase in retention transactions, partly offset by the lower combined average cost of cellular phonekits and SIM-packs.
     Repairs and maintenance expenses increased by Php110 million, or 3%, to Php4,340 million mainly due to an increase in network maintenance costs and electricity consumption, partly offset by lower fuel costs for power generation and lower software maintenance expenses.
     Selling and promotion expenses increased by Php270 million, or 7%, to Php4,051 million primarily due to higher advertising, promotional campaigns and public relations expenses.
     Professional and other contracted services increased by Php375 million, or 15%, to Php2,904Php8,586 million primarily due to the increase in call center service fees, partly offsetDMPI’s compensation and employee benefit expense by lower contracted service fees, payment facility fees, consultancyPhp1,677 million, as well as higher MRP costs, LTIP costs, salaries employee benefits and technical service fees.
     Asset impairmentprovision for pension benefits. Employee headcount increased to 8,663 as at December 31, 2012 as compared with 8,043 as at December 31, 2011, primarily due to an increase in Smart’s and DMPI’s headcount by Php1,020an aggregate of 470 as at December 31, 2012.

Interconnection costs decreased by Php1,146 million, or 101%12%, to Php2,026 million mainly due to higher impairment on fixed assets and intangibles, higher provision for uncollectible receivables and higher provision for obsolescence of slow-moving handsets and broadband routers and modems.

     Taxes and licenses increased by Php150 million, or 8%, to Php2,022Php8,458 million primarily due to higher business-related taxesa decrease in interconnection charges on international calls and license fees.
     Communication, trainingroaming SMS.

Selling and travelpromotion expenses decreasedincreased by Php119Php1,789 million, or 11%29%, to Php972 million primarily due to lower travel, training, fuel, communication and hauling expenses incurred in 2009.

     Insurance and security services increased by Php59 million, or 8%, to Php781Php7,933 million primarily due to the increase in the number of sitesDMPI’s selling and promotions expense by Php1,296 million and higher salary ratespending on advertising and promotional campaigns, public relations and commissions.

Repairs and maintenance expenses increased by Php2,200 million, or 39%, to Php7,843 million mainly due to the increase in DMPI’s repairs and maintenance expense by Php2,265 million, higher office and cell site electricity charges, and IT hardware and software costs, partly offset by lower maintenance costs on cellular and broadband network facilities and other work equipment, as well as lower fuel costs.

Cost of security guards.

     Amortizationsales increased by Php3,106 million, or 73%, to Php7,373 million primarily to the increase in DMPI’s cost of intangiblessales by Php2,013 million and higher average cost and quantity of handsets and SIM-packs issued for activation purposes, partly offset by lower quantity and average cost of broadband modems sold, as well as lower broadband and cellular retention costs.

Asset impairment decreased by Php7Php4,979 million, or 5%54%, to Php126Php4,218 million primarily due to impairment charges in 2011 on certain network equipment and facilities as a result of Smart’s network modernization program, partially offset by the increase in DMPI’s asset impairment by Php3,051 million, higher provision for uncollectible receivables and provision for inventory obsolescence covering slow-moving cellular handsets and broadband modems.

Professional and other contracted service fees increased by Php569 million, or 18%, to Php3,733 million primarily due to the full amortization of technical application relating to SBI,increase in DMPI’s professional and other contracted service fees by Php319 million, and the increase in call center, market research, consultancy, contracted service, outsourced service costs and legal fees, partly offset by the amortization oflower technical service, corporate membership and bill printing fees.

Taxes and licenses relatingincreased by Php177 million, or 8%, to BOW.

     Provisions of Php897Php2,410 million in 2008 pertained to provisions for assessments. Please see Note 27 — Provisions and Contingenciesprimarily due to the accompanying consolidated financial statementsincrease in Item 18 for further discussion.
     OtherDMPI’s taxes and licenses by Php469 million.

Communication, training and travel expenses increased by Php581Php408 million, or 139%40%, to Php998Php1,430 million primarily due to the increase in DMPI’s communication, training and travel expense by Php314 million, partially offset by a decrease in foreign travel, mailing and courier, and fuel consumption charges, partially offset by higher local training and travel.

Insurance and security services increased by Php186 million, or 22%, to Php1,033 million primarily due to higher office security services, and the increase in DMPl’s insurance and security expense by Php177 million, partially offset by lower expenses insurance and bond premium.

Amortization of intangible assets increased by Php813 million, or 753%, to Php921 million primarily due to the amortization of intangible assets related to customer list and franchise of DMPI.

Other expenses decreased by Php205 million, or 20%, to Php809 million primarily due to lower various business and wireless operational-related expenses.

expenses, partially offset by the increase in DMPl’s other expense by Php70 million.

Other Income (Expenses)

The following table summarizes the breakdown of our total wireless-related other income (expenses) — net for the years ended December 31, 20092012 and 2008:

                 
          Change 
  2009  2008  Amount  % 
  (in millions) 
Other Income (Expenses):                
Gains (losses) on derivative financial instruments — net Php1,166  Php(241) Php1,407   584 
Interest income  1,139   1,197   (58)  (5)
Foreign exchange gains (losses) — net  387   (1,771)  2,158   122 
Equity share in net losses of associates  (68)  (119)  51   (43)
Financing costs — net  (2,619)  (2,029)  (590)  29 
Others  1,144   323   821   254 
             
Total Php1,149  Php(2,640) Php3,789   144 
             
2011:

         Change 
   2012(1, 2)  2011(2, 3)  Amount  % 
   (in millions) 

Other Income (Expenses):

     

Foreign exchange gains (losses) – net

  Php2,419   (Php720 Php3,139    436  

Interest income

   565    677    (112  (17

Gains (losses) on derivative financial instruments – net

   (51  (10  (41  410  

Equity share in net losses of associates

   (78  (115  37    (32

Financing costs – net

   (2,683  (2,744  61    (2

Others

   721    1,178    (457  (39
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  Php893   (Php1,734 Php2,627    151  
  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Includes DMPI’s other income of Php569 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes DMPI’s other expenses — net of Php763 million for the period from October 26, 2011 to December 31, 2011.

Our wireless business generatedbusiness’ other income — net of Php1,149amounted to Php893 million in 2009, an increase2012, a change of Php3,789Php2,627 million or 144%, as against other expenses — net of Php2,640Php1,734 million in 20082011, primarily due to the combined effects of the following: (1)(i) net foreign exchange gains of Php387Php2,419 million in 20092012 as against net losses on foreign exchange losses of Php720 million in 2011 on account of revaluation of Php1,771 million in 2008 mainlynet foreign currency-denominated liabilities due to the appreciation of the Philippine peso to the U.S. dollar to Php41.08 as at December 31, 2012 from Php43.92 as at December 31, 2011, and the increase in 2009; (2) netDMPI’s gains on derivative financial instrumentsrevaluation of Php1,166net dollar-denominated liabilities by Php2,057 million; (ii) lower net financing costs by Php61 million primarily due to increase in 2009 as against net losses on derivative transactions of Php241 millioncapitalized interest and Smart’s decrease in 2008interest expense mainly due to a gain inlower average loan balance and interest rate, partly offset by the mark-to-market valuation of Php1,170 million

92


relating to the derivative option of the exchangeable note purchased as part of the Meralco share acquisition by PCEV in 2009; (3) increase in other incomeDMPI’s financing costs by Php821Php633 million, mainly due to Smart’s equipment rental and gainhigher accretion on dissolution of Mabuhay Space Holdings Limited (please see to Note 10 — Investments in Associatesfinancial liabilities and Joint Ventures to the accompanying consolidated financial statements in Item 18 for further discussion); (4)financing charges; (iii) a decrease in equity share in net losses of associates by Php51Php37 million; (iv) higher net loss on derivative financial instruments by Php41 million in 2012 mainly due to the increase in DMPI’s net loss on derivative financial instruments; (v) a decrease in interest income by Php112 million mainly fromdue to lower average short-term investments and lower average interest rates, as well as shorter average tenor of U.S. dollar and peso placements in 2012 and the decline in equity share in net losses in BOW complementedappreciation of the Philippine peso to the U.S. dollar, partially offset by the shareincrease in net earnings of Meralco of Php398DMPI’s interest income by Php30 million; and (vi) a decrease in other income by Php457 million from July 15, 2009 (PCEV acquired 20% equity interest of Meralco)mainly due to December 31, 2009, net of amortization of sharelower rental and other miscellaneous income, the decrease in Meralco intangibles of Php41DMPI’s other income contribution by Php79 million, and depreciation of fair value adjustment of certain Meralco’s utility, plant and others of Php59 million, partlypartially offset by a Php381 million loss on the re-measurement of Smart’s investment in BOW; and (5) higher net financing costs by Php590 million primarily due to higher interestgain on loansfixed assets disposal and other related items — net on account of Smart’s higher average loan balances, foreign exchange rate, interest rate, and lower capitalized interest.
outsourcing income.

Provision for Income Tax

Provision for income tax decreased by Php3,610Php335 million, or 22%4%, to Php12,514Php8,094 million in 20092012 from Php16,124Php8,429 million in 2008.2011 primarily due to the realization of foreign exchange loss on dollar denominated debt and accounts receivable written off, partially offset by the expiration of SBI’s tax holiday in July 2011. The effective tax rate for our wireless business was 24% and 27% in 2009 as compared with 35% in 2008 mainly due to the reduction in the regular corporate income tax rate from 35% to 30% beginning January 20092012 and availment of OSD in the computation of regular corporate income tax.

2011, respectively.

Net Income

     Our

As a result of the foregoing, our wireless business recorded abusiness’ net income of Php33,727increased by Php2,648 million, or 12%, to Php25,014 million in 2009, an increase of Php4,228 million, or 14%,2012 from Php29,499Php22,366 million recorded in 2008 primarily due to an increase of Php3,789 million in other income — net, a decrease of Php3,610 million in provision for income tax and a Php2,236 million increase in wireless service revenues, partially offset by an increase in wireless-related expenses of Php4,843 million and a Php564 million decrease in non-service revenues.

2011.

Adjusted EBITDA

     Our

As a result of the foregoing, our wireless business’ adjustedAdjusted EBITDA was Php59,411decreased by Php953 million, or 2%, to Php54,480 million in 2009, a decrease of Php1,556 million, or 3%, as compared with Php60,9672012 from Php55,433 million in 2008 primarily due to higher cash operating expenses particularly rent, compensation and employee benefits, professional and other contracted services, selling and promotions, and other operating expenses, partially offset by higher service revenues.

2011.

Core Income

Our wireless business’ core income decreased by Php4,209 million, or 14%, to Php25,694 million in 2009 was Php33,0262012 from Php29,903 million in 2011 on account of an increase in wireless-related operating expenses, excluding the retroactive effect of Php2,776 million, or 9%, as compared with Php30,250the application of the Revised IAS 19 in our MRP costs of Php537 million in 2008 primarily due to2012, partially offset by higher wireless revenues, a decrease in other expenses and lower provision for income tax and higher revenues, partially offset by higher expenses.

tax.

Fixed Line

Revenues

Revenues generated from our fixed line business amounted to Php51,373Php60,246 million in 2009,2012, an increase of Php1,687Php1,956 million, or 3%, from Php49,686Php58,290 million in 2008.

93

2011.


The following table summarizes our total revenues from our fixed line business for the years ended December 31, 20092012 and 20082011 by service segment:
                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
Fixed Line Services:                        
Service Revenues:                        
Local exchange Php15,681   31  Php15,923   32  Php(242)  (2)
International long distance  6,255   12   7,063   14   (808)  (11)
National long distance  5,969   12   6,207   13   (238)  (4)
Data and other network  21,567   42   18,607   37   2,960   16 
Miscellaneous  1,668   3   1,466   3   202   14 
                   
   51,140   100   49,266   99   1,874   4 
Non-Service Revenues:                        
Sale of computers  233      420   1   (187)  (45)
                   
Total Fixed Line Revenues Php51,373   100  Php49,686   100  Php1,687   3 
                   

                   Increase (Decrease) 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Service Revenues:

          

Local exchange

  Php16,470     27    Php15,719     27    Php751    5  

International long distance

   10,789     18     11,342     19     (553  (5

National long distance

   5,046     8     5,537     10     (491  (9

Data and other network

   25,059     42     22,544     39     2,515    11  

Miscellaneous

   1,707     3     1,954     3     (247  (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 
   59,071     98     57,096     98     1,975    3  

Non-Service Revenues:

          

Sale of computers, phone units and SIM cards

   1,175     2     1,194     2     (19  (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Fixed Line Revenues

  Php60,246     100    Php58,290     100    Php1,956    3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)

Includes Digitel’s service revenues of Php3,190 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes Digitel’s service revenues of Php683 million for the period from October 26, 2011 to December 31, 2011.

Service Revenues

Our fixed line business provides local exchange service, internationalnational and nationalinternational long distance services, data and other network services, and miscellaneous services. Our fixed line service revenues increased by Php1,874Php1,975 million, or 4%3%, to Php51,140Php59,071 million in 20092012 from Php49,266Php57,096 million in 2008 primarily2011 due to an increase in revenues fromthe revenue contribution of our data and other network, services as a result of higher revenues contributed by our DSL and diginet services, and miscellaneouslocal exchange services, partially offset by a decreasedecreases in revenues from our international long distance, local exchange and national long distance services, as well as miscellaneous services.

     For a description of our service offerings, see Item 4. “Information on the Company — Business — Fixed Line.”

Local Exchange Service

The following table summarizes the key measures of our local exchange service business as at and for the years ended December 31, 20092012 and 2008:

                 
          Increase (Decrease)
  2009 2008 Amount %
Total local exchange service revenues (in millions) Php15,681  Php15,923  Php(242)  (2)
Number of fixed line subscribers  1,816,541   1,782,356   34,185   2 
Postpaid  1,637,981   1,533,687   104,294   7 
Prepaid  178,560   248,669   (70,109)  (28)
Number of fixed line employees(1)
  7,947   7,813   134   2 
Number of fixed line subscribers per employee  229   228   1    
2011:

           Increase (Decrease) 
   2012(1, 2)   2011(2, 3)   Amount  % 

Total local exchange service revenues (in millions)

  Php16,470    Php15,719    Php751    5  

Number of fixed line subscribers

   2,063,794     2,166,295     (102,501  (5

Postpaid

   1,997,671     2,029,359     (31,688  (2

Prepaid

   66,123     136,936     (70,813  (52

Number of fixed line employees

   7,546     9,072     (1,526  (17

Number of fixed line subscribers per employee

   273     239     34    14  

(1)

(1)

Increase in headcount was primarily due toIncludes Digitel’s local exchange revenue contribution of Php989 million, subscriber base of 206,631 and employee count of 516 as at and for the acquisition of Philcom.full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes Digitel’s local exchange revenue contribution of Php178 million, subscriber base of 296,395 and employee count of 1,586 for the period from October 26, 2011 to December 31, 2011.

Revenues from our local exchange service decreasedincreased by Php242Php751 million, or 2%5%, to Php15,681Php16,470 million in 20092012 from Php15,923Php15,719 million in 20082011, primarily owingdue to the increase in Digitel’s local exchange service revenue contribution by Php811 million and the increase in postpaid wired andPLP lines, partially offset by a decrease in ARPU on account of lower fixed charges due to the increase in demand for bundled voice and data services and higher service connection charges, partially offset by an increasea decrease in the average number of postpaid billed lines as a result of the launching ofPLP.installation charges. The percentage contribution of local exchange revenues to our total fixed line service revenues decreased to 31%was 28% in 2009 as compared with 32% in 2008.

     See Item 4. “Information on the Company — Business — Fixed Line — Local Exchange Service” for further information on our local exchange service.

94each of 2012 and 2011.


International Long Distance Service

The following table shows our international long distance service revenues and call volumes for the years ended December 31, 20092012 and 2008:

                 
          Decrease
  2009 2008 Amount %
Total international long distance service revenues (in millions) Php6,255  Php7,063  Php(808)  (11)
Inbound  5,198   5,667   (469)  (8)
Outbound  1,057   1,396   (339)  (24)
                 
International call volumes (in million minutes, except call ratio)  1,863   2,024   (161)  (8)
Inbound  1,653   1,786   (133)  (7)
Outbound  210   238   (28)  (12)
Inbound-outbound call ratio  7.9:1   7.5:1       
2011:

           Increase (Decrease) 
   2012(1, 2)   2011(2, 3)   Amount  % 

Total international long distance service revenues (in millions)

  Php10,789    Php11,342    (Php553  (5

Inbound

   9,455     10,195     (740  (7

Outbound

   1,334     1,147     187    16  

International call volumes (in million minutes, except call ratio)

   2,150     2,029     121    6  

Inbound

   1,691     1,767     (76  (4

Outbound

   459     262     197    75  

Inbound-outbound call ratio

   3.7:1     6.7:1     —      —    

(1)

Includes Digitel’s international long distance service revenue contribution of Php683 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes Digitel’s international long distance service revenue contribution of Php234 million for the period from October 26, 2011 to December 31, 2011.

Our total international long distance service revenues decreased by Php808Php553 million, or 11%5%, to Php6,255Php10,789 million in 20092012 from Php7,063Php11,342 million in 20082011 primarily due to athe decrease in inbound and outboundPLDT’s call volumes, on account of cellular substitutionthe decrease in average collection and settlement rates in dollar terms, and the availabilityunfavorable effect of alternative economical modes of communications, such as email, text messaging and/or VoIP calls with lower international calling rates, among others, partially offset by a favorable effect from the depreciationappreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar to Php42.24 for the year ended December 31, 2012 from Php43.31 for the year ended December 31, 2011, partially offset by increases in 2009.Digitel’s international long distance service revenue contribution by Php449 million and call volumes by 290 million minutes. The percentage contribution of international long distance service revenues to our total fixed line service revenues decreased to 12%accounted for 18% and 20% in 2009 from 14% in 2008.

2012 and 2011, respectively.

Our revenues from inbound international long distance service decreased by Php469Php740 million, or 8%7%, to Php5,198Php9,455 million in 20092012 from Php5,667Php10,195 million in 20082011 primarily due to a declinethe decrease in inbound traffic volume by 133 million minutes to 1,653 million minutes in 2009 with more traffic terminating to cellular operators wherecall volumes, as well as the net revenue retained by us is lower. The decreasingunfavorable effect was partially offset by a favorable effect fromon our inbound revenues of the depreciationappreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar which increased ourand the decrease in the average settlement rate in dollar terms, partially offset by an increase in Digitel’s inbound international long distance revenues, since settlement charges forservice revenue contribution by Php117 million and inbound calls are primarily billed in U.S. dollars.

call volumes by 13 million minutes.

Our revenues from outbound international long distance service decreasedincreased by Php339Php187 million, or 24%16%, to Php1,057Php1,334 million in 20092012 from Php1,396Php1,147 million in 20082011, primarily due to the declinean increase in Digitel’s revenue contribution from outbound international call volumeslong distance service by Php332 million, partially offset by the depreciationdecrease in PLDT’s outbound call volumes, the decrease in the average collection rate in dollar terms and the unfavorable effect of the appreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar to Php47.64 in 2009Php42.24 for the year ended December 31, 2012 from Php44.47 in 2008,Php43.31 for the year ended December 31, 2011, resulting in an increasea decrease in the average billing rate to Php42.45 in 2012 from Php43.34 in 2011.

Our total international long distance service revenues, net of interconnection costs, decreased by Php466 million, or 9%, to Php4,607 million in 2012 from Php5,073 million in 2011. The decrease was primarily due to the unfavorable effect of lower weighted average exchange rate of the Philippine peso to the U.S. dollar, lower net average settlement and collection rates to Php47.78 in 2009 from Php43.95dollar terms, and the decrease in 2008.

inbound call volumes, partly offset by an increase in outbound call volumes.

National Long Distance Service

The following table shows our national long distance service revenues and call volumes for the years ended December 31, 20092012 and 2008:

                 
          Decrease
  2009 2008 Amount %
Total national long distance service revenues (in millions) Php5,969  Php6,207  Php(238)  (4)
National long distance call volumes (in million minutes)  1,822   1,944   (122)  (6)
2011:

           Decrease 
   2012(1, 2)   2011(2, 3)   Amount  % 

Total national long distance service revenues (in millions)

  Php5,046    Php5,537    (Php491  (9

National long distance call volumes (in million minutes)

   971     1,126     (155  (14

(1)

Includes Digitel’s national long distance service revenue contribution of Php279 million and call volume of 39 million minutes for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes Digitel’s national long distance service revenue contribution of Php50 million and call volume of 10 million minutes for the period from October 26, 2011 to December 31, 2011.

Our national long distance service revenues decreased by Php238Php491 million, or 4%9%, to Php5,969Php5,046 million in 20092012 from Php6,207Php5,537 million in 20082011, primarily due to a decrease in call volumes, partially offset by an increase in Digitel’s national long distance service revenue contribution by Php229 million and an increase in the average revenue per minute forof our national long distance services due to the cessation of certain promotions on our national long distance calling rates. The percentage contribution of national long distance revenues to our fixed line service revenues was 9% and 10% in 2012 and 2011, respectively.

Our national long distance service revenues, net of interconnection costs, decreased by Php294 million, or 7%, to 12%Php3,903 million in 20092012 from 13%Php4,197 million in 2008.

952011, primarily due to a decrease in call volumes, partially offset by an increase in the average revenue per minute of our national long distance services.


Data and Other Network Services

The following table shows information of our data and other network service revenues for the years ended December 31, 20092012 and 2008:

                 
          Increase
  2009 2008 Amount %
Data and other network service revenues (in millions) Php21,567  Php18,607  Php2,960   16 
Domestic  16,391   14,155   2,236   16 
Broadband
  7,232   5,563   1,669   30 
DSL  7,024   5,360   1,664   31 
WeRoam  208   203   5   2 
Leased Lines and Others
  9,159   8,592   567   7 
                 
International                
Leased Lines and Others
  5,176   4,452   724   16 
                 
Subscriber base:                
Broadband
  576,687   448,826   127,861   28 
DSL  559,664   432,583   127,081   29 
WeRoam  17,023   16,243   780   5 
SWUP
  12,383   6,516   5,867   90 
2011:

           Increase 
   2012(1, 2)   2011(2, 3)   Amount   % 

Data and other network service revenues (in millions)

  Php25,059    Php22,544    Php2,515     11  

Domestic

   18,436     16,404     2,032     12  

Broadband

   11,246     9,517     1,729     18  

Leased Lines and Others

   7,190     6,887     303     4  

International

        

Leased Lines and Others

   5,524     5,229     295     6  

Data Centers

   1,099     911     188     21  

Subscriber base

        

Broadband

   887,399     842,273     45,126     5  

SWUP

   22,720     20,153     2,567     13  

(1)

Includes Digitel’s data and other network service revenue contribution of Php1,239 million for the full year 2012 and DSL subscribers of 74,921 as at December 31, 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

(3)

Includes Digitel’s data and other network service revenue contribution of Php221 million for the period from October 26, 2011 to December 31, 2011 and DSL subscribers of 99,367 as at December 31, 2011.

Our data and other network services posted revenues of Php21,567Php25,059 million in 2009,2012, an increase of Php2,960Php2,515 million, or 16%11%, from Php18,607Php22,544 million in 20082011, primarily due to increases in domestic data revenues, owing to higher revenues fromPLDT DSLDiginet,, the increase in Digitel’s data and other network service revenue contribution by Php1,018 million, an increase in domestic leased line revenues resulting from the higher revenue contribution of internet protocol-virtual private network, or IP-VPN, and Metro Ethernet, andSWUP, as well as higher an increase in international data revenues particularlyprimarily due to higher revenues from i-Gate.i-Gate and inland cable lease. The percentage contribution of this service segment to our fixed line service revenues increased towas 42% and 39% in 2009 from 38% in 2008.

2012 and 2011, respectively.

Domestic

Domestic data services contributed Php16,391Php18,436 million in 2009,2012, an increase of Php2,236Php2,032 million, or 16%12%, as compared with Php14,155Php16,404 million in 20082011 mainly due to the continued growth inhigher DSL, SWUP, IP-VPNFibr and Metro Ethernet revenues, andShops.Worksubscribers as customer locations and bandwidth requirements continued to expand and demand for offshoring, and outsourcing services increased.increased, partially offset by lower Diginet revenues. The percentage contribution of domestic data service revenues to total data and other network services accounted for 76%was 74% and 73% in each of 20092012 and 2008.

2011, respectively.

Broadband

Broadband data services includePLDT DSLbroadband internet service, which is intended for individual internet users, small and medium enterprises, and large corporatecorporations with multiple branches, andPLDT WeRoamFibr, our mobilemost advanced broadband service, running on the PLDT Group’s nationwide wireless network (using GPRS, EDGE, 3G/HSDPA/HSPA and WiFi technologies). internet connection, which is intended for individual internet users.

Broadband data revenues amounted to Php7,232Php11,246 million in 2009,2012, an increase of Php1,669Php1,729 million, or 30%18%, from Php5,563Php9,517 million in 2008 primarily due to the higher revenue contribution2011 as a result of DSL which contributed revenues of Php7,024 million in 2009 from Php5,360 million in 2008 owing to the increase in the number of subscribers.subscribers by 45,126, or 5%, to 887,399 subscribers, including Digitel’s DSL subscriber base of 74,921, as at December 31, 2012, from 842,273 subscribers, which includes Digitel’s subscriber base of 99,367, as at December 31, 2011. Broadband revenues accounted for 33%46% and 29%42% of total data and other network service revenues in 20092012 and 2008,2011, respectively. DSL subscribers increased by 29% to 559,664 subscribers as at December 31, 2009 from 432,583 subscribers as at December 31, 2008.WeRoamrevenues amounted to Php208 million in 2009 from Php203 million in 2008 as subscribers increased by 5%, to 17,023 subscribers as at December 31, 2009 from 16,243 subscribers as at December 31, 2008.

Leased Lines and Others

Leased lines and other data services include: (1) Diginet, our domestic private leased line service providing Smart’s fiber optic and leased line data requirements; (2) IP-VPN,a managed corporate IP network that offers a secure means to access corporate network resources; (3) Metro Ethernet, our high-speed wide area networking services that enable mission-critical data transfers; (4)Shops.Work, our connectivity solution for retailers and franchisers that links company branches to their head office; and (5)SWUP, our wireless VPN service that powers mobile point-of-sale terminals and off-site bank ATMs, as well as other retail outlets located in remote areas. As at December 31, 2009,2012,SWUPhas had a total subscriber base of 12,38322,720 up by 2,567, or 13%, from 6,51620,153 subscribers as at December 31, 2008.in 2011. Leased lines and other data revenues amounted to Php9,159Php7,190 million in 2009,2012, an increase of Php567Php303 million, or 7%4%, from Php8,592Php6,887 million in 20082011, primarily due to an increase in Diginet andhigher revenues from IP-VPN, internet exchange, Metro Ethernet andShops.Work revenues, partially offset by lower Diginet revenues. The percentage

96


contribution of leased lines and other data service revenues to the total data and other network services accounted for 42%were 29% and 46%31% in 20092012 and 2008,2011, respectively.

International

Leased Lines and Others

International leased lines and other data services consist mainly of: (1) i-Gate, our premium dedicated internet access service that provides high speed, reliable and managed connectivity to the global internet, and is intended for enterprises and VAS providers; (2) Fibernet, which provides cost-effective and reliable bilateral point-to-point private networking connectivity, through the use of our extensive international alliances to offshore and outsourcing, banking and finance, and semiconductor industries; and (3) other international managed data services in partnership with other Global Service Providers, such as AT&T, BT-Infonet, NTT Arcstar, Orange Business, SingTel, Tata, Telstra, Verizon Business, among others,global service providers, which provide data networking services to multinational companies. International data service revenues increased by Php724Php295 million, or 16%6%, to Php5,176Php5,524 million in 20092012 from Php4,452Php5,229 million in 20082011, primarily due to higher i-Gate revenues and an increase in i-Gate revenues.revenues from various global service providers, partially offset by lower Fibernet revenues, and the unfavorable effect of the appreciation of the Philippine peso relative to the U.S. dollar. The percentage contribution of international data service revenues to total data and other network service revenues accounted for 24%was 22% and 23% in 2012 and 2011, respectively.

Data Centers

Data centers provide co-location or rental services, server hosting, disaster recovery and business continuity services, intrusion detection, security services, such as firewalls and managed firewalls. Data center revenues increased by Php188 million, or 21%, to Php1,099 million in 2012 from Php911 million in 2011 mainly due to higher co-location and managed services as a result of the consolidation of IPCDSI in October 2012. The percentage contribution of this service segment to our total data and other network service revenues was 4% in each of 20092012 and 2008.

2011.

Miscellaneous Services

Miscellaneous service revenues are derived mostly from directory advertising,rental and facilities management fees, internet and rental fees.online gaming, and directory advertising. These service revenues increaseddecreased by Php202Php247 million, or 13%, to Php1,707 million in 2009, or 14%, to Php1,668 million2012 from Php1,466Php1,954 million in 20082011 mainly due to an increasea decrease in internet and online gaming revenues as a result of the disposal of ePLDT’s 75% interest in Digital Paradise on April 1, 2011 and 57.51% interest in Level Up! on July 11, 2011, partially offset by the effect of the inclusion in the consolidation of the financial results of ePDS (ePLDT increased its equity interest in ePDS from 50% to 67% effective August 24, 2011), higher revenue contribution of PGNL, which is the exclusive distributor and licensee of the programs, shows, films and channels of TV5 abroad, the distribution of which is via syndication and international linear channels, and higher rental and facilities management fees and rental income owing to higher co-location charges.fees. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues was 3% in each of 20092012 and 2008.

2011.

Non-service Revenues

Non-service revenues decreased by Php187Php19 million, or 45%2%, to Php233Php1,175 million in 20092012 from Php420Php1,194 million in 20082011, primarily due to lower computercomputer-bundled sales and a decrease in the cost of fixed wireless service handsets.

several managed PABX andOnCall solutions, partially offset by higher revenues fromTelpadunits.

Expenses

Expenses related to our fixed line business totaled Php39,081Php52,776 million in 2009,2012, an increase of Php3,348Php3,602 million, or 9%7%, as compared with Php35,733Php49,174 million in 2008.2011. The increase was primarily due to higher asset impairment,expenses related to compensation and employee benefits, repairs and maintenance, rent, cost of sales, selling and promotions, depreciation and amortization, and asset impairment, partly offset by lower expenses related to interconnection costs, taxes and licenses, professional and other contracted services, and rent, which were partly offset by decreases in repairs and maintenance, depreciation and amortization selling and promotions expenses, cost of sales, and other business-related expenses.intangible assets. As a percentage of our total fixed line revenues, expenses associated with our fixed line business accounted for 76%88% and 72%84% in 20092012 and 2008,2011, respectively.

The following table shows the breakdown of our total fixed line-related expenses for the years ended December 31, 2012 and 2011 and the percentage of each expense item to the total for the years ended December 31, 2009 and 2008:

                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
Fixed Line Services:                        
Depreciation and amortization Php11,619   30  Php11,901   33  Php(282)  (2)
Compensation and employee benefits(1)
  10,637   27   9,093   25   1,544   17 
Repairs and maintenance  4,345   11   4,634   13   (289)  (6)
Asset impairment  2,901   8   888   3   2,013   227 
Rent  2,749   7   2,492   7   257   10 
Professional and other contracted services  2,485   6   2,143   6   342   16 
Selling and promotions  1,590   4   1,715   5   (125)  (7)
Taxes and licenses  755   2   769   2   (14)  (2)
Communication, training and travel  658   2   608   2   50   8 
Insurance and security services  488   1   487   1   1    
Cost of sales  310   1   356   1   (46)  (13)
Provisions        1      (1)  (100)
Other expenses  544   1   646   2   (102)  (16)
                   
Total Php39,081   100  Php35,733   100  Php3,348   9 
                   
total:

           Increase (Decrease) 
   2012(1, 2)   %   2011(2, 3)   %   Amount  % 
   (in millions) 

Compensation and employee benefits

  Php13,439     26    Php10,177     21    Php3,262    32  

Depreciation and amortization

   13,354     25     13,244     27     110    1  

Interconnection costs

   7,623     15     8,099     17     (476  (6

Repairs and maintenance

   5,325     10     4,992     10     333    7  

Professional and other contracted services

   3,296     6     3,363     7     (67  (2

Rent

   2,374     5     2,164     4     210    10  

Cost of sales

   1,374     3     1,177     2     197    17  

Selling and promotions

   1,786     3     1,664     3     122    7  

Taxes and licenses

   1,097     2     1,319     3     (222  (17

Asset impairment

   1,068     2     1,003     2     65    6  

Communication, training and travel

   752     1     741     2     11    1  

Insurance and security services

   632     1     576     1     56    10  

Amortization of intangible assets

   —       —       9     —       (9  (100

Other expenses

   656     1     646     1     10    2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php52,776     100    Php49,174     100    Php3,602    7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

(1)
(1)

Includes salariesDigitel’s expenses of Php2,897 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and employee benefits, LTIP, pensionthe application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and MRP costs.Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

97

(3)

Includes Digitel’s expenses of Php715 million for the period from October 26, 2011 to December 31, 2011.


     Depreciation and amortization charges decreased by Php282 million, or 2%, to Php11,619 million due to a lower depreciable asset base in 2009 as compared with 2008.
Compensation and employee benefits expenses increased by Php1,544Php3,262 million, or 32%, to Php13,439 million primarily due to higher MRP costs, net of the retroactive adjustment of the application of the Revised IAS 19 of Php750 million in 2012, salaries and employee benefits, LTIP costs, as well as the increase in Digitel’s contribution to compensation and employee benefits expense by Php603 million, partially offset by lower provision for pension costs. Employee headcount decreased to 10,462 in 2012 as compared with 11,409 in 2011 mainly due to a decrease in PLDT’s and Digitel’s headcounts as a result of the MRP, partially offset by an increase in the number of employee headcount of iPlus.

Depreciation and amortization charges increased by Php110 million, or 1%, to Php13,354 million due to the increase in Digitel’s contribution to depreciation and amortization expense by Php435 million, partly offset by PLDT’s lower depreciable asset base.

Interconnection costs decreased by Php476 million, or 6%, to Php7,623 million primarily due to due to lower international and national long distance interconnection/settlement costs as a result of lower international received paid and domestic sent paid calls that terminated to other domestic carriers, and lower settlement costs for data and other network services particularly Fibernet and Infonet, partially offset by the increase in Digitel’s contribution to interconnection costs by Php294 million.

Repairs and maintenance expenses increased by Php333 million, or 7%, to Php5,325 million primarily due to the increase in Digitel’s contribution to repairs and maintenance expense by Php385 million, higher repairs and maintenance costs for buildings, IT software, and office electricity cost, partially offset by lower repairs and maintenance costs on central office/telecoms equipment, site fuel consumption, and vehicles, furniture and other work equipment.

Professional and other contracted service expenses decreased by Php67 million, or 2%, to Php3,296 million primarily due to lower consultancy and bill printing fees, partially offset by higher contracted service, transfer agents’, technical service, collection agency, and other professional fees, as well as the increase in Digitel’s contribution to professional and other contracted fees by Php144 million.

Rent expenses increased by Php210 million, or 10%, to Php2,374 million primarily due to the increase in Digitel’s contribution to rent expense by Php103 million, as well as higher international leased circuits, and site rental charges, partially offset by lower domestic leased circuit, office building and equipment rental charges.

Cost of sales increased by Php197 million, or 17%, to Php10,637Php1,374 million primarily due to increased salariesthe increase in Digitel’s contribution to cost of sales by Php32 million and employee benefits due to an increase in headcount resulting from the acquisitionsale of PhilcomTelpad units, partially offset by lower sales of several managed PABX and the transfer of Smart’s corporate business group to PLDT,OnCall solutions, and higher provisions for pension costsPLP units.

Selling and LTIP. For further discussion on our LTIP and pension benefits, please see Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18.

     Repairs and maintenancepromotion expenses decreasedincreased by Php289Php122 million, or 6%7%, to Php4,345Php1,786 million primarily due to lower maintenance costs of IT software and domestic cable and wire facilities as less operating and maintenance-related restorations were incurred in 2009 as compared with 2008.
     Asset impairment increased by Php2,013 million, or 227%, to Php2,901 million mainly due to impairment loss on the prepaid transponder lease payment to ProtoStar and provision for uncollectible customer receivables. Please see Note 18 — Prepayments and Note 26 — Contractual Obligations and Commercial Commitments to the accompanying consolidated financial statements in Item 18 for the discussion of the prepaid transponder lease to ProtoStar.
     Rent expenses increased by Php257 million, or 10%, to Php2,749 million due to an increase in international leased circuit chargesDigitel’s contribution to selling and satellite link rental charges,promotions expense by Php11 million, as well as higher advertising expenses, partially offset by a decrease in site rental charges.
     Professionallower public relations and other contracted services increased by Php342 million, or 16%, to Php2,485 million primarily due to higher technical and contracted service fees for customer relationship management outsourcing project services.
     Selling and promotion expenses decreased by Php125 million, or 7%, to Php1,590 million primarily due to lower spending on marketing and promotion expenses as a result of curtailment on major advertising campaigns in 2009.
commissions expense.

Taxes and licenses decreased by Php14Php222 million, or 2%17%, to Php755Php1,097 million as a result of lower business-related taxes.

real property taxes and NTC license fees, partly offset by the increase in Digitel’s contribution to taxes and license expense by Php39 million.

Asset impairment increased by Php65 million, or 6%, to Php1,068 million mainly due to the increase in Digitel’s contribution to asset impairment charge by Php45 million, partially offset by lower provision for uncollectible receivables mainly by Philcom.

Communication, training and travel expenses increased by Php50Php11 million, or 8%1%, to Php658Php752 million mainly due to increaseshigher local training and travel, and the increase in Digitel’s contribution to communication, training and travel expense by Php36 million, partially offset by a decrease in foreign travel, and local training expenses, higher mailing and courier, and communicationfuel consumption charges.

Insurance and security services increased by Php1Php56 million, or 10%, to Php488Php632 million primarily higher office security services, and the increase in Digitel’s contribution to insurance and security expense by Php43 million, partially offset by lower expenses insurance and bond premiums.

Amortization of intangible assets amounted to Php9 million in 2011 relating to the amortization of intangible assets related to PLDT’s acquisition of the customer list of PDSI in 2011.

Other expenses increased by Php10 million, or 2%, to Php656 million primarily due to higher security services.

     Cost of sales decreasedthe increase in Digitel’s contribution to other expense by Php46Php12 million, or 13%, to Php310 million due topartially offset by lower computer-bundled sales in relation to our DSL promotion andWeRoamsubscriptions.
     Other expenses decreased by Php102 million, or 16%, to Php544 million due to decreases in various business and fixed line operational-related expenses.

Other Expenses

The following table summarizes the breakdown of our total fixed line-related other expenses — net for the years ended December 31, 20092012 and 2008:

                 
          Change 
  2009  2008  Amount  % 
  (in millions) 
Other Income (Expenses):                
Foreign exchange gains (losses) — net Php532  Php(4,513) Php5,045   112 
Interest income  402   448   (46)  (10)
Equity share in net losses of joint ventures  (98)  (74)  (24)  32 
Gains (losses) on derivative financial instruments — net  (2,180)  3,444   (5,624)  (163)
Financing costs — net  (3,796)  (3,903)  107   (3)
Others  970   1,425   (455)  (32)
             
Total Php(4,170) Php(3,173) Php(997)  31 
             

98

2011:


         Change 
   2012(1, 2)  2011(2, 3)  Amount  % 
   (in millions) 

Other Expenses:

  

Gains (losses) on derivative financial instruments – net

  (Php1,958 Php211   (Php2,169  1,028  

Interest income

   713    590    123    21  

Equity share in net earnings of associates

   108    307    (199  (65

Foreign exchange gains (losses) – net

   863    (15  878    5,853  

Financing costs – net

   (4,193  (3,710  (483  13  

Others

   2,686    1,651    1,035    63  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (Php1,781 (Php966 (Php815  84  
  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Includes Digitel’s other income of Php438 million for the full year 2012.

(2)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

(3)

Includes Digitel’s other expenses of Php178 million for the period from October 26, 2011 to December 31, 2011.

Our fixed line business’ other expenses — net amounted to Php4,170Php1,781 million in 2009, an increase of Php9972012, increased by Php815 million, or 31%84%, as compared with Php3,173from Php966 million in 2008.2011. The changeincrease was due to the combined effects of the following: (i) net losses on derivative financial instruments of Php2,180Php1,958 million in 20092012 as against net gains on derivative financial instruments of Php3,444Php211 million in 20082011 due to the loss on mark-to-market valuationeffect of foreign currency swaps contracts; (ii) decrease in other income by Php455 million primarily due to lower gain on salenarrower dollar and peso interest rate differentials and higher level of fixed assets partially offset by the gain on fair value adjustment of investment properties; (iii) net foreign exchange gains of Php532 million on account of gain on foreign exchange revaluation of net foreign currency-denominated liabilities owing to the appreciation of the Philippine peso to the U.S. dollar; (ii) an increase in net financing costs by Php483 million due to higher interest expense on loans and related items, financing charges and an increase in Digitel’s financing costs by Php8 million; (iii) decrease in equity share in net earnings of associates and joint ventures by Php199 million mainly due to the disposal of investment in Philweb; (iv) an increase in interest income by Php123 million due to a higher principal amount of placements and an increase in Digitel’s contribution to interest income by Php27 million, partially offset by lower average interest rates, shorter average tenor of placements, and the impact of the appreciation of the Philippine peso on dollar to Php46.43 as at December 31, 2009 from Php47.65 as at December 31, 2008placements; (v) foreign exchange gains of Php863 million in 2012 as against net foreign exchange losses of Php4,513Php15 million in 2011 on account of an increase in Digitel’s contribution to foreign exchange gains by Php181 million and on account of foreign exchange revaluation of foreign currency-denominated assets and liabilities due to the revaluation of net foreign currency-denominated liabilities on accounteffect of the depreciationhigher level of appreciation of the Philippine peso to the U.S. dollar to Php47.65 as at December 31, 2008 from Php41.41 as at December 31, 2007;dollar; and (iv) a decrease(vi) an increase in net financing costsother income by Php107��Php1,035 million mainly due to lower premium payment in relation with the buybackgain on the first and second tranches of bonds in 2009 as compared with 2008disposal of Philweb shares and higher capitalized interest partlyreversal of prior year provisions, partially offset by higher financing charges.
lower gain on sale of investments, lower gain on disposal of fixed assets and lower income from consultancy.

Provision for (Benefit from) Income Tax

     Provision for

Benefit from income tax amounted to Php2,258Php51 million in 2012, a decreasechange of Php790Php2,354 million, or 26%102%, in 2009 as compared with Php3,048against a provision for income tax of Php2,303 million in 20082011, primarily due to lower taxable income and the reduction in the regular corporate incomeincome. The effective tax rate from 35% to 30% beginning January 2009.

for our fixed line business was negative 1% in 2012 and 28% in 2011.

Net Income

     Our

As a result of the foregoing, our fixed line business contributed a net income of Php5,864Php5,740 million in 2009, a decrease of Php1,868 million, or 24%, as compared with Php7,732 million in 2008 primarily as a result of increases in fixed line-related expenses2012, decreased by Php3,348 million mainly due to the impairment loss on the prepaid transponder lease to ProtoStar, increases in compensation and employee benefits, increases in other expenses — net by Php997 million, and a decrease in non-service revenues of Php187 million. The increase in fixed line-related expenses was partially offset by an increase in fixed line service revenues by Php1,874 million and a lower provision for income tax by Php790 million.

Adjusted EBITDA
     Our fixed line business’ adjusted EBITDA was Php25,215 million in 2009, a decrease of Php639Php107 million, or 2%, as compared with Php25,854Php5,847 million in 2008 primarily due2011.

Adjusted EBITDA

As a result of the foregoing, our fixed line business’ Adjusted EBITDA decreased by Php2,293 million, or 10%, to higher expenses particularly compensation and employee benefits, provision for uncollectible receivables, professional and other contracted services, and rent expenses, partially offset by higher service revenues.

Php20,089 million in 2012 from Php22,382 million in 2011.

Core Income

Our fixed line business’ core income in 2009 was Php7,502 million, a decrease of Php388increased by Php459 million, or 5%9%, as compared with Php7,890to Php5,769 million in 2008 primarily due to higher expenses, partially offset by higher revenues and lower provision for income tax.

Information and Communications Technology
Revenues
     Our ICT business provides knowledge processing solutions, customer relationship management, internet and online gaming, and data center services.
     Our ICT business generated revenues of Php11,5492012 from Php5,310 million in 2009, an increase of Php566 million, or 5%, as compared with Php10,983 million in 2008. This increase was primarily due to the continued growth of our data center service revenues and our internet and online gaming businesses, partially offset by decreases in the revenue contribution of our customer relationship management and knowledge processing solutions businesses.
     The following table summarizes our total revenues from our ICT business for the years ended December 31, 2009 and 2008 by service segment:

99


                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
Service Revenues:                        
Knowledge processing solutions Php5,215   45  Php5,272   48  Php(57)  (1)
Customer relationship management  3,319   29   3,402   31   (83)  (2)
Internet and online gaming  1,113   10   976   9   137   14 
Data center and others  1,284   11   767   7   517   67 
                   
   10,931   95   10,417   95   514   5 
Non-Service Revenues:                        
Point-product sales  618   5   566   5   52   9 
                   
                         
Total ICT Revenues Php11,549   100  Php10,983   100  Php566   5 
                   
Service Revenues
     Service revenues generated by our ICT business amounted to Php10,931 million in 2009, an increase of Php514 million, or 5%, as compared with Php10,417 million in 20082011, primarily as a result of higher fixed line revenues and a benefit from income tax, partially offset by higher fixed line expenses, excluding the retroactive effect of the application of the Revised IAS 19 in our MRP costs of Php750 million in 2012, and an increase in co-location revenues and disaster recovery revenues fromother expenses.

Others

Expenses

Expenses associated with our data centerother business complemented by the growth in our internet and online gaming business. Furthermore, the depreciation of the weighted average exchange rate of the Philippine peso against the U.S. dollar in 2009 complemented the increase in ICT business revenues. This was partially offset by the decline in revenues from our knowledge processing solutions and customer relationship management businesses. As a percentage of our total ICT business revenues, service revenues remained stable at 95% in 2009 and 2008.

Knowledge Processing Solutions
     We provide our knowledge processing solutions business primarily through the SPi Group. Knowledge processing solutions business contributed revenues of Php5,215segment totaled Php18 million in 2009, a decrease2012, an increase of Php57Php7 million, or 1%64%, as compared with Php5,272Php11 million in 20082011, primarily due to lower revenues contributed by SPi’s healthcare and litigation services. Knowledge processing solutions accounted for 48% and 51% of total service revenues of our ICT business in 2009 and 2008, respectively.
Customer Relationship Management
     We provide our customer relationship management primarily through SPi CRM. Revenues relating to our customer relationship management business decreased by Php83 million, or 2%, to Php3,319 million in 2009 from Php3,402 million in 2008 primarily due to the decrease in international dollar-denominated revenues as a result of termination of contracts with certain international clients and shrinkage from existing programs, partially offset by the favorable effect of the depreciation of the weighted average exchange rate of the Philippine peso to the U.S. dollar and an increase in domestic revenues. In total, we own and operate approximately 7,140 seats with an average of 5,190 CSRs in 2009 as compared with approximately 6,580 seats with 5,800 CSRs in 2008. SPi CRM had seven customer relationship management sites as at December 31, 2009 and 2008. Customer relationship management revenues accounted for 30% and 33% of total service revenues of our ICT business in 2009 and 2008, respectively.
Internet and Online Gaming
     Revenues from our internet and online gaming businesses increased by Php137 million, or 14%, to Php1,113 million in 2009 from Php976 million in 2008 primarily due to an increase in the revenue contribution of Level Up! resulting from its new online games and Infocom’s revenues from handling PLDT’s DSL-related nationwide technical helpdesk operations. Our internet and online gaming business revenues accounted for 10% and 9% of total service revenues of our ICT business in 2009 and 2008, respectively.

100

PCEV’s higher other operating expenses.


Data Center and Others
     ePLDT operates an internet data center under the brand nameVitroä, which provides co-location or rental services, server hosting, data disaster recovery and business continuity services, intrusion detection, security services such as firewalls and managed firewalls and other data services. In 2009, our data center contributed revenues of Php1,284 million, an increase of Php517 million, or 67%, from Php767 million in 2008 primarily due to an increase in demand for our co-location or rental services and server hosting services. Our data center revenues accounted for 12% and 7% of total service revenues of our ICT business in 2009 and 2008, respectively.
Non-Service Revenues
     Non-service revenues consist of sales generated from reselling certain software licenses, server solutions, networking products, storage products and data security products. Non-service revenues generated by our ICT business increased by Php52 million in 2009, or 9%, to Php618 million from Php566 million in 2008 primarily due to higher revenues from sales of software licenses.
     In 2009, ePLDT acquired majority equity interest in BayanTrade, Inc., a leading licensed software reseller in the Philippines.
Expenses
     Expenses associated with our ICT business totaled Php11,289 million in 2009, a decrease of Php1,978 million, or 15%, as compared with Php13,267 million in 2008 primarily due to lower asset impairment, professional and other contracted services, selling and promotions expenses, depreciation and amortization, and communication, training and travel expenses, partially offset by increases in compensation and employee benefits, cost of sales, and repairs and maintenance. As a percentage of our total ICT revenues, expenses related to our ICT business accounted for 98% and 121% in 2009 and 2008, respectively.
     The following table shows the breakdown of our total ICT-related expenses and the percentage of each expense item to the total for the years ended December 31, 2009 and 2008:
                         
                  Increase (Decrease) 
  2009  %  2008  %  Amount  % 
  (in millions) 
ICT Services:                        
Compensation and employee benefits(1)
 Php6,418   57  Php6,131   46  Php287   5 
Cost of sales  799   7   660   5   139   21 
Depreciation and amortization  751   7   833   6   (82)  (10)
Rent  716   6   665   5   51   8 
Repairs and maintenance  669   6   573   4   96   17 
Professional and other contracted services  592   5   747   6   (155)  (21)
Communication, training and travel  500   4   573   4   (73)  (13)
Amortization of intangible assets  242   2   244   2   (2)  (1)
Asset impairment  134   1   2,286   17   (2,152)  (94)
Selling and promotions  113   1   203   2   (90)  (44)
Taxes and licenses  104   1   98   1   6   6 
Insurance and security services  68   1   61      7   11 
Other expenses  183   2   193   2   (10)  (5)
                   
Total Php11,289   100  Php13,267   100  Php(1,978)  (15)
                   
(1)Includes salaries and employee benefits, LTIP, pension and MRP costs.
     Compensation and employee benefits increased by Php287 million, or 5%, to Php6,418 million mainly due to basic pay increases as a result of salary rate adjustments, as well as an increase in MRP costs and provisions for LTIP partially offset by the decrease in ePLDT and subsidiaries’ employee headcount by 908, or 6%, to 15,581 in 2009 as compared with 16,489 in 2008.
     Cost of sales increased by Php139 million, or 21%, to Php799 million primarily due to higher volume of sales of software licenses and hardware products.

101


     Depreciation and amortization charges decreased by Php82 million, or 10%, to Php751 million primarily due to a decrease in the depreciable asset base of our knowledge processing solutions business on account of lower capital expenditures in 2009 as compared with 2008.
     Rent expenses increased by Php51 million, or 8%, to Php716 million primarily due to higher office building and site rental charges.
     Repairs and maintenance expenses increased by Php96 million, or 17%, to Php669 million primarily due to higher building, site, IT software and hardware repairs and maintenance costs as a result of data center expansion, and higher electricity charges.
     Professional and other contracted services decreased by Php155 million, or 21%, to Php592 million primarily due to lower technical service and subcontracted service fees incurred by the SPi Group related to its knowledge processing solutions business.
     Communication, training and travel expenses decreased by Php73 million, or 13%, to Php500 million primarily due to lower local and foreign training and travel expenses incurred by our customer relationship management and knowledge processing solutions businesses.
     Amortization of intangible assets decreased by Php2 million, or 1%, to Php242 million due to lower foreign exchange rate in 2009. Please see Note 14 — Goodwill and Intangible Assets to the accompanying consolidated financial statements in Item 18 for further discussion.
     Asset impairment decreased by Php2,152 million, or 94%, to Php134 million primarily due to lower impairment on goodwill and other intangibles from the investment in SPi and Level Up! in 2009 as compared with 2008.
     Selling and promotion expenses decreased by Php90 million, or 44%, to Php113 million mainly due to the SPi Group’s lower commission, advertising and marketing expenses.
     Taxes and licenses increased by Php6 million, or 6%, to Php104 million primarily due to higher business-related taxes.
     Insurance and security services increased by Php7 million, or 11%, to Php68 million primarily due to higher security services.
     Other expenses decreased by Php10 million, or 5%, to Php183 million mainly due to lower various business and ICT operational-related costs.
Other Income (Expenses)

The following table summarizes the breakdown of our total ICT-related other income (expenses) — netfor other business segment for the years ended December 31, 20092012 and 2008:

                 
          Change 
  2009  2008  Amount  % 
  (in millions) 
Other Income (Expenses):                
Equity share in net earnings of associates Php168  Php17  Php151   888 
Interest income  28   22   6   27 
Gains (losses) on derivative financial instruments — net  8   (59)  67   114 
Foreign exchange gains (losses) — net  (12)  93   (105)  (113)
Financing costs — net  (171)  (172)  1   (1)
Others  195   98   97   99 
             
Total Php216  Php(1) Php217   21,700 
             
     Our ICT business generated other2011:

           Change 
   2012   2011   Amount  % 
   (in millions) 

Other Income:

       

Equity share in net earnings of associates

  Php1,508    Php1,843    (Php335  (18

Interest income

   76     90     (14  (16

Others

   2,774     65     2,709    4,168  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  Php4,358    Php1,998    Php2,360    118  
  

 

 

   

 

 

   

 

 

  

 

 

 

Other income — net of Php216increased by Php2,360 million, or 118%, to Php4,358 million in 2009, an increase of Php217 million as against other expenses — net of Php12012 from Php1,998 million in 20082011 primarily due to the combined effects of the following: (i) an increase in other income by Php2,709 million mainly due to the realized portion of deferred gain on the transfer of Meralco shares to Beacon of Php2,012 million and preferred dividends from Beacon of Php720 million; (ii) a decrease in interest income by Php14 million as a result of lower average level of temporary cash investments by our PCEV business; and (iii) a decrease in equity share in net earnings of associates by Php151 million; (ii)Php335 million mainly due to the decrease in PCEV’s indirect share in the net earnings of Meralco.

Net Income

As a result of the foregoing, our other business segment registered a net income of Php4,333 million, an increase of Php2,348 million, or 118%, in 2012 from Php1,985 million in 2011.

Adjusted EBITDA

As a result of the foregoing, negative Adjusted EBITDA from our other business segment increased by negative Php7 million, or 64%, to negative Php18 million in 2012 from negative Php11 million in 2011.

Core Income

Our other business segment’s core income amounted to Php4,424 million in 2012, an increase of Php1,963 million, or 80%, as compared with Php2,461 million in 2011 mainly as a result of an increase in other income, by Php97 million on account of the de-recognition of liabilities; (iii) an increase in net gains on forward foreign exchange contracts by Php67 million; and (iv) net foreign exchange losses of Php105 million due to the revaluation of net

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foreign currency-denominated assets as a result of the effect of the appreciation of the Philippine peso to the U.S. dollar in 2009.
Benefit from Income Tax
     Benefit from income tax decreased by Php71 million, or 72%, to Php28 million in 2009 from Php99 million in 2008 primarily due to a higher taxable income and expiration of tax incentives.
Net Income (Loss)
     Our ICT business registered a net income of Php504 million in 2009, an improvement of Php2,690 million, or 123%, from a net loss of Php2,186 million in 2008 mainly as a result of Php566 million increase in ICT revenues, other income — net of Php217 million and Php1,978 million decrease in ICT-related expenses partially offset by lower benefit from income taxa decrease in the adjustment in equity share of Php71 million.
Meralco.

Adjusted EBITDA

     Our ICT business’ adjusted EBITDA was Php1,330 million in 2009, an increase of Php274 million, or 26%, as compared with Php1,056 million in 2008 primarily due to higher revenues, partially offset by the increase in expenses particularly compensation and employee benefits, cost of sales, repairs and maintenance, and rent expenses.
Core Income
     Our ICT business’ core income in 2009 was Php613 million, an increase of Php475 million, or 344%, as compared with Php138 million in 2008 primarily due to lower expenses and higher revenues, partially offset by lower benefit from income tax.
Plans and Prospects

We are the largest and most diversified telecommunications company in the Philippines.Philippines in terms of revenues and subscribers. We offer the broadest range of telecommunications services among all operators in the Philippines. We plan to capitalize on this position to attain undisputed market leadership across all metrics. We plan to adopt an integrated approach to our customers with the delivery of a superior customer experience. We will reinforce our leading position in network quality and reach while offering a broader range and higher quality of products and services. In addition, we intend to align the deployment of our fixed line and wireless platforms and technologies such that these initiatives dovetail and result in cost efficiencies. We will continue to consider value-accretive investments in related businesses such as those in the global outsourcing and off-shoring industry.

Our 20112014 budget for consolidated capital expenditures is approximately Php34.4Php32 billion, of which approximately Php19.5Php17 billion is budgeted to be spent by Smart, approximately Php13.5Php12 billion is budgeted to be spent by PLDT, approximately Php1 billion is budgeted to be spent by DMPI and the balance represents the budgeted capital spending of our other subsidiaries. Smart’s capital spending is currently anticipated to focus on building out its coverage, leveraging the capabilities of its newly modernized network, expanding its transmission network, increasing international bandwidth capacity and expanding its 3G and wireless broadband networks in order to enhance its data transmission capabilities. Smart also contemplates enhancing its network and platforms infrastructure and systems to support solutions deployment, campaign analytics and service delivery to enable customized and targeted services. PLDT’s capital spending is currently intended principally to continue the build-out and upgrade of its broadband data and IP infrastructures, its fixed line data services and to maintain its network. DMPI’s capital spending is currently anticipated to further expand its mainstream services and integration with the PLDT Group network of its core and transmission network to increase penetration, particularly in provincial areas to achieve greater business benefits from a closely synergized environment. The higher than usual level of capital expenditures stems from the acceleration of our investments in technology, roadmap, given current market dynamics and theour anticipated surge in demand for data. The budget also includes provisions for the further modernization of our networks, adapting to the more voice- and data-centric environment.

Our capital expenditure budget includes projects can be classified as follows:

addressing the following objectives:

 (1)Technical Objectives these include the upgrade and modernizationtransformation of service delivery platform of the wireless networkgroup in order to realize operating and cost efficiencies, provide greater resilience and redundancy for the network, as well as investments in additional cable systems;

 (2)Commercial Objectives these include the provisioningexpansion of expanded capacity and coveragefootprint of wired and wireless, as well as new platforms to expand service offerings; and

 (3)IT/Support Systems these include the upgrade of our IT and support systems.

Given the favorable state of our financial position, we expect to fund incremental capital expenditures from both debt and free cash flow.

Liquidity and Capital Resources

The following table shows our consolidated cash flows for the years ended December 31, 2010, 20092013, 2012 and 20082011 as well as our consolidated capitalization and other consolidated selected financial data as at December 31,

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2013 and 2012:


   2013  2012  2011 
   (in millions) 

Cash Flows

    

Net cash provided by operating activities

  Php73,763   Php80,370   Php79,209  

Net cash used in investing activities

   21,045    39,058    29,712  

Capital expenditures

   28,838    36,396    31,207  

Net cash used in financing activities

   59,813    48,628    40,204  

Net increase (decrease) in cash and cash equivalents

   (6,391  (7,761  9,379  

   2013   2012 
   (in millions) 

Capitalization

    

Interest-bearing financial liabilities:

    

Long-term financial liabilities:

    

Long-term debt

  Php88,924    Php102,811  

Obligations under finance lease

   6     10  
  

 

 

   

 

 

 
   88,930     102,821  
  

 

 

   

 

 

 

Current portion of interest-bearing financial liabilities:

    

Long-term debt maturing within one year

   15,166     12,981  

Obligations under finance lease maturing within one year

   5     8  
  

 

 

   

 

 

 
   15,171     12,989  
  

 

 

   

 

 

 

Total interest-bearing financial liabilities

   104,101     115,810  

Total equity attributable to equity holders of PLDT(1)

   137,147     145,550  
  

 

 

   

 

 

 
  Php241,248    Php261,360  
  

 

 

   

 

 

 

Other Selected Financial Data

    

Total assets(1)

  Php399,638    Php405,815  

Property, plant and equipment – net

   192,665     200,078  

Cash and cash equivalents

   31,905     37,161  

Short-term investments

   718     574  

2010 and 2009:
             
  2010  2009  2008 
      (in millions)     
Cash Flows
            
Net cash provided by operating activities Php77,260 Php74,386 Php78,302 
Net cash used in investing activities  23,283   49,132   17,014 
Capital expenditures
  28,766   28,069   25,203 
Net cash used in financing activities  55,322   20,293   45,464 
Net increase (decrease) in cash and cash equivalents  (1,641)  4,635   16,237 
         
  2010  2009 
  (in millions) 
Capitalization
        
Interest-bearing financial liabilities:        
Long-term portion of financial liabilities:        
Long-term debt Php75,879  Php86,066 
Obligations under finance lease  9   13 
       
   75,888   86,079 
       
         
Current portion of interest-bearing financial liabilities:        
Notes payable     2,279 
Long-term debt maturing within one year  13,767   10,384 
Obligations under finance lease maturing within one year  34   51 
       
   13,801   12,714 
       
Total interest-bearing financial liabilities  89,689   98,793 
Total equity  97,069   98,575 
       
  Php186,758  Php197,368 
       
         
Other Selected Financial Data
        
Total assets Php277,815  Php280,148 
Property, plant and equipment — net  163,184   161,256 
Cash and cash equivalents  36,678   38,319 
Short-term investments  669   3,824 

(1)The December 31, 2012 comparative information was restated to reflect the adjustments on the application of the Revised IAS 19 – Employee Benefits. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Our consolidated cash and cash equivalents and short-term investments totaled Php37,347Php32,623 million as at December 31, 2010.2013. Principal sources of consolidated cash and cash equivalents in 2013 were cash flows from operating activities amounting to Php77,260Php73,763 million, proceeds from availment of long-term debt of Php7,246Php39,798 million, proceeds from disposal of investments, net of cash of deconsolidated subsidiaries, of Php12,075 million, proceeds from net assets classified as held-for-sale of Php2,298 million, net proceeds from maturityadditions to capital expenditures under long-term financing of short-term investments of Php3,142Php868 million, and interest received of Php1,165Php845 million and dividends received of Php438 million. These funds were used principally for: (1) dividend payments of Php41,080 million; (2) capital outlays of Php28,766 million; (3) total debt principal and interest payments of Php14,645Php57,033 million and Php5,580Php4,959 million, respectively; (2) dividend payments of Php37,804 million; (3) capital outlays, including capitalized interest, of Php28,838 million; (4) payment for investments in joint ventures, associates and (4) settlementdeposits for PDR subscription of Php5,557 million; (5) net payment for purchase of investment in debt securities of Php2,046 million; and (6) settlements of derivative financial instruments of Php1,095Php453 million.

Our consolidated cash and cash equivalents and short-term investments totaled Php42,143Php37,735 million as at December 31, 2009.2012. Principal sources of consolidated cash and cash equivalents in 2012 were cash flows from operating activities amounting to Php74,386Php80,370 million, in 2009proceeds from availment of long-term debt and drawings mainly from PLDT’s and Smart’s debt facilities, including notes payable aggregating Php43,989of Php52,144 million, and net proceeds from maturitydisposal of short-term investmentsinvestment available for sale of Php2,890Php3,563 million, proceeds from net assets classified as held-for-sale of Php1,913 million, interest received of Php1,294 million and dividends received of Php784 million. These funds were used principally for: (1) dividend payments of Php39,286 million; (2) payments for purchase of investments in subsidiaries and associates of Php27,059 million, including PCEV’s acquisition of Meralco shares of Php18,070 million and settlement of the tender offer to PCEV’s non-controlling interests of Php6,618 million; (3) capital outlays of Php28,069 million; (4) total debt principal and interest payments of Php19,228Php50,068 million and Php5,239Php5,355 million, respectively; (5)(2) dividend payments of Php36,934 million; (3) capital outlays, including capitalized interest, of Php36,396 million; (4) payment for purchase of investment in an exchangeable note issued by First Pacific Utilities Corporation, or FPUC, to PCEV (including derivative option) of Php2,000 million;associate and (6) a buybackpurchase of shares of PLDTnoncontrolling shareholders of Php1,752Php10,500 million; (5) a trust fund, net of settlement, created for the redemption of preferred shares in the amount of Php5,912 million; (6) net payment of capital expenditures under long-term financing of Php1,471 million; and (7) settlements of derivative financial instruments of Php1,126 million.

Operating Activities

Our consolidated net cash flows from operating activities decreased by Php6,607 million, or 8%, to Php73,763 million in 2013 from Php80,370 million in 2012, primarily due to higher settlement of accounts payable and other various liabilities, and higher pension contributions, partially offset by higher level of collection of receivables.

Our consolidated net cash flows from operating activities increased by Php2,874Php1,161 million, or 4%1%, to Php77,260Php80,370 million in 20102012 from Php74,386Php79,209 million in 20092011, primarily due to lower pension contribution and lower level of settlement of various payables. Netan increase in the Digitel Group’s net cash flows from operating activities decreased by Php3,916Php11,317 million, or 5%, to Php74,386 million in 2009 from Php78,302 million in 2008 primarily due to higher pension contributions made to the beneficial trust fundlower settlement of accounts payable and other various liabilities and lower corporate taxes paid, partially offset by lower other working capital requirements.

operating income and lower collection of receivables.

Cash flows from operating activities of our wireless business decreased by Php3,518 million, or 7%, to Php50,601 million in 2013 from Php54,119 million in 2012, primarily due to higher level of settlement of other current liabilities, higher income taxes paid and lower operating income, partially offset by higher level of collection of outstanding receivables and lower level of settlement of accounts payable. Conversely, cash flows provided by operating activities of our fixed line business increased by Php5,467 million, or 22%, to Php29,869 million in 2013 from Php24,402 million in 2012, primarily due to higher operating income and and lower settlement of other noncurrent liabilities, partially offset by lower level of collection of receivables and prepayments, higher level of settlement of other liabilities, higher income taxes paid and higher refund of customers’ deposits.

Cash flows provided by operating activities of our BPO business in 2012 amounted to Php55,497Php1,926 million, in 2010, an increase of Php439Php13,139 million, or 1%117%, as compared with Php55,058against cash flows used in operating activities of Php11,213 million in 2009 as2011, primarily due to higher operating income and a resultlower level of settlement of accounts payable and other liabilities, partially offset by a lower level of collection of outstanding receivables. Conversely, cash flows provided by operating activities of our fixed line business decreased by Php11,073 million, or 31%, to Php24,402 million in 2012 from Php35,475 million in 2011, primarily due to lower operating income, lower collection of receivables and higher contribution to the pension plan, partially offset by lower level of settlement of other current liabilities. Cash flows from operating activities of our wireless business also decreased by Php852 million, or 2%, to Php54,119 million in 2012 from Php54,971 million in 2011, primarily due to lower level of collection of outstanding receivables and higher level of settlement of accounts payable, partially offset by higher level of outstanding receivables mainly from dealers, carriers and subscribers and LTIP payout in 2010. Cash flows from operating activities of our fixed line business

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amounted to Php20,454 million in 2010, an increase of Php2,544 million, or 14%, as compared with Php17,910 million in 2009 primarily due to higher collection of accounts receivables andincome, lower pension contributions made to the beneficial trust fund, partially offset by LTIP payout in 2010 and higher level of settlement of accounts payable and other current liabilities in 2010. Cash flows from operating activities of our ICT business decreased by Php96 million, or 7%, to Php1,327 million in 2010 from Php1,423 million in 2009 mainly due to higher working capital requirements in 2010.
     Cash flows from operating activities of our wireless business amounted to Php55,058 million in 2009, an increase of Php12,278 million, or 29%, as compared with Php42,780 million in 2008. The increase in our wireless business’ cash flows from operating activities was primarily a result of lower prepayments of leased circuits, higher collection of receivables, and higher level of various current liabilities in 2009 as compared with 2008. On the other hand, cash flows from operating activities of our ICT business decreased by Php329 million, or 19%, to Php1,423 million in 2009 from Php1,752 million in 2008 mainly due to higher working capital requirements in 2009. Cash flows from operating activities of our fixed line business decreased by Php15,884 million, or 47%, to Php17,910 million in 2009 from Php33,794 million in 2008 primarily due to lower level of advance payments received from various customers, higher pension contributions made to the beneficial trust fund and lower collection of accounts receivable.
     Dividend payments received by PLDT from Smart amounted to Php33,500 million, Php37,440 million and Php24,200 million in 2010, 2009 and 2008, respectively. Of this, Php7,000 million, Php6,000 million and Php5,500 million were paid on July 16, 2010, September 7, 2010 and December 10, 2010, respectively, while the remaining Php15,000 million remains unpaid. Of the Php37,440 million declared in 2009, Php14,800 million, Php5,640 million and Php17,000 million were paid on April 13, 2009, September 11, 2009 and April 6, 2010, respectively, while of the Php24,200 million declared in 2008, Php10,000 million, Php7,200 million and Php7,000 million were paid on April 11, 2008, September 3, 2008 and September 18, 2008, respectively.
     PCEV paid cash dividends to common shareholders amounting to Php6,077 million and Php5,061 million in 2009 and 2008, of which Php5,640 million and Php4,664 million, respectively, was paid to Smart. PCEV paid cash dividends to various preferred shareholders in the aggregate amount of Php2,943 million in 2007, of which Php2,930 million was paid to PLDT.
corporate taxes paid.

Investing Activities

Consolidated net cash flows used in investing activities amounted to Php23,283Php21,045 million in 2010,2013, a decrease of Php25,849Php18,013 million, or 53%46%, as compared with Php49,132from Php39,058 million in 20092012, primarily due to the combined effects of the following: (1) proceeds from sale of BPO business, net of cash of deconsolidated subsidiaries, of Php12,075 million; (2) lower payment for investment in joint ventures, associates and deposits for PDR subscription by Php3,285 million, and acquisition of subsidiaries and shares of noncontrolling interest by Php1,646 million; (3) the decrease in capital expenditures by Php7,558 million; (4) lower net proceeds from disposal of investments available for sale of Php3,579 million; (5) net payment for purchase of investment in subsidiaries and associates by Php26,858 million mainly due to PCEV’s acquisition of Meralco shares amounting to Php18,070 million and the settlement of the tender offer of PCEV’s non-controlling shareholders of Php6,618 million in 2009; (2) higher net proceeds from the maturity of short-term investments by Php252 million; (3) higher dividends received in 2010 by Php174 million; (4) increase in capital expenditures by Php697 million in 2010; (5) lower net proceeds of investments in debt securities by Php427of Php2,218 million; (6) increase in advances and refundable depositsnotes receivable of Php1,224 million; (7) higher proceeds from sale of Philweb shares by Php230Php385 million; and (7) lower interestdividends received by Php187Php346 million.

Consolidated net cash flows used in investing activities amounted to Php49,132Php39,058 million in 2009,2012, an increase of Php32,118Php9,346 million, or 189%31%, as compared with Php17,014from Php29,712 million in 2008. This increase was2011, primarily due to the combined effects of the following: (1) higher payments forproceeds from disposal of investments in subsidiaries2011 of Php15,136 million; (2) higher payment for purchase of investments by Php11,296 million in 2012; (3) the increase in capital expenditures by Php5,189 million; (4) the lower proceeds from disposal of property, plant and associates by Php26,303 million mainly due to PCEV’s acquisitionequipment of Meralco shares amounting to Php18,070 million and the settlement of the tender offer to PCEV’s non-controlling shareholders of Php6,618Php324 million; (2)(5) lower net proceeds from the maturity of short-term investments by Php4,514Php91 million; (3) an increase in capital expenditures by Php2,866 million in 2009; and (4)(6) higher net proceeds from disposal of investment available for sale by Php18,741 million in 2012; (7) proceeds from the maturitysale of investmentsnet assets held for sale of Php1,913 million; (8) payment for contingent consideration arising from business acquisition of Php1,910 million in debt securities2011; and (9) higher dividends received by Php1,214 million, mainly from net redemption of various treasury bonds of Php2,651 million partially offset by the payment of Php1,437 million for the purchase of an exchangeable note with face value of Php2,000 million issued by FPUC to PCEV as part of the Meralco shares acquisition transaction.

Php264 million.

Our consolidated capital expenditures, including capitalized interest, in 2013 totaled Php28,766Php28,838 million, in 2010, an increasea decrease of Php697Php7,558 million, or 2%21%, as compared with Php28,069Php36,396 million in 20092012, primarily due to increasedecreases in Smart’s capital spending. Smart’sthe Digitel Group’s and Smart Group’s capital spending, of Php16,944 million in 2010 was used primarily to build a secondary network for unlimited services, to expand its 3G broadband network, and to further upgrade its core, access and transmission network facilities.partially offset by PLDT’s higher capital spending. PLDT’s capital spending of Php10,874Php11,302 million in 20102013 was principally used to finance the expansion and

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upgrade of its domestic fiber optic networksubmarine cable facilities, DFON facilities, NGN roll-out, fixed line data and IP-based network services and outside plant rehabilitation. ePLDTSmart Group’s capital spending of Php16,595 million in 2013 was used primarily to modernize and expand its 2G/3G cellular and mobile broadband networks, as well as to purchase additional customer premises equipment for the fixed wireless broadband business. DMPI’s capital spending of Php500 million in 2013 was intended principally to finance the expansion of fixed mobile convergence and continued upgrade of its core and transmission network to increase penetration, particularly in provincial areas. The balance represented other subsidiaries’ capital spending.

Our consolidated capital expenditures in 2012 totaled Php36,396 million, an increase of Php5,189 million, or 17%, as compared with Php31,207 million in 2011, primarily due to increases in Smart and its subsidiaries’ capital spending, and the Digitel Group’s capital spending, partially offset by the decrease in PLDT’s capital spending. Smart and its subsidiaries’ capital spending of Php750Php19,152 million in 2010 was primarily used to fund the continued expansion of its customer relationship management facilities. The balance represented other subsidiaries’ capital spending.

     Our consolidated capital expenditures totaled Php28,069 million in 2009, an increase of Php2,866 million, or 11%, as compared with Php25,203 million in 2008 primarily due to an increase in PLDT’s capital spending. Smart’s capital spending of Php16,247 million in 20092012 was used primarily to modernize and expand its HSPA 8502G/3G cellular and mobile broadband networks, andas well as to further upgrade its core, access and transmission network facilities.purchase additional customer premises equipment for the fixed wireless broadband business. PLDT’s capital spending of Php10,991Php12,269 million in 20092012 was principally used to finance the expansion and upgrade of its submarine cable facilities, DFON facilities, NGN roll-out, fixed line data and IP-based network services and outside plant rehabilitation. ePLDT and its subsidiaries’Digitel’s capital spending of Php729Php3,753 million in 20092012 was primarily usedintended principally to fundfinance the continued expansion of fixed mobile convergence and integration with the PLDT Group network of its customer relationship management facilities.core and transmission network to increase penetration, particularly in provincial areas. The balance represented other subsidiaries’ capital spending.

As part of our growth strategy, we may from time to time, continue to make acquisitions and investments in companies or businesses.

     On July 14, 2009, PCEV completed its acquisition

Dividends received in 2013 amounted to Php438 million, a decrease of 223Php346 million, sharesor 44%, as compared with Php784 million in 2012. The dividends received in 2013 were from Beacon and Philweb. Dividends received in 2012 amounted to Php784 million, an increase of Php264 million, or 51%, as compared with Php520 million in 2011. The dividends received in 2012 were mostly from Beacon and Philweb while dividends received in 2011 were mostly from Meralco for a cash consideration of Php18,070 million for the purchase of approximately 200.8 million shares and the conversion into approximately 22.2 million shares of an exchangeable note issued by FPUC with a market value, including its derivative option, of Php3,286 million. Thus, the investment in 223 million shares in Meralco was recorded at Php21,356 million and a gain of Php1,286 million was recognized on the exchangeable note representing the mark-to-market gains of Php1,170 million from the derivative option and the amortization of the note’s discount of Php116 million. Please see Item 4.“Information on the Company — Development Activities (2008-2010)” and Note 10 — Investments in Associates and Joint Ventures to the accompanying consolidated financial statements in Item 18 for further information on the acquisition of Meralco shares.

     In view of the change in PCEV’s business direction upon the acquisition of Meralco shares, Smart’s Board of Directors approved a tender offer to acquire the approximately 840 million shares from PCEV’s non-controlling shareholders (representing approximately 7.19% of the outstanding shares of PCEV) at Php8.50 per share payable entirely in cash on August 12, 2009. Approximately 93% of PCEV’s non-controlling shares tendered and Smart paid Php6,618 million to tendering shareholders on August 12, 2009, thereby increasing its ownership in PCEV to approximately 99.5% of PCEV’s outstanding common stock. Smart recognized an excess of acquisition cost over the carrying value of non-controlling interests acquired of Php5,479 million presented as part of capital in excess of par value account under “Equity” in our consolidated statements of financial position. Please see Note 2 — Summary of Significant Accounting Policies and Note 13 — Business Combinations and Acquisition of Non-Controlling Interests to the accompanying consolidated financial statements in Item 18 for further discussion.
Philweb.

Financing Activities

On a consolidated basis, net cash flows used in financing activities amounted to Php55,322Php59,813 million, in 2010, an increase of Php35,029Php11,185 million, or 173%,23% as compared with Php20,293Php48,628 million in 20092012, resulting largely from the combined effects of the following: (1) higher net payments of long-term debt and notes payable by Php6,965 million; (2) lower proceeds from the issuance of long-term debt and notes payable by Php36,743Php12,346 million; (3) higher cash dividends paid by Php870 million; (4) creation of a Trust Fund for the redemption of preferred shares of Php5,561 million in 2010; (2) lower availment of2012; (5) net additions to capital expenditures under long-term financing of Php2,339 million; (6) lower settlement of derivative financial instruments of Php673 million; and (7) lower interest payment by Php3,240 million; (3) higherPhp396 million.

On a consolidated basis, net cash dividend payments by Php1,794 million; (4) higher interest payments by Php341 million; (5) lowerflows used in financing activities amounted to Php48,628 million in 2012, an increase of Php8,424 million, or 21% as compared with Php40,204 million in 2011, resulting largely from the combined effects of the following: (1) increase in repayments of long-term debt and notes payable by Php4,583Php35,012 million; (6) lower share buyback(2) a trust fund, net of settlement, created for the redemption of preferred shares in the amount of Php5,912 million; (3) higher net settlement of capital expenditures under long-term financing by Php1,646Php4,351 million; and (7) lower settlement(4) higher settlements of derivative financial instruments by Php818 million. The netPhp494 million; (5) higher proceeds from the issuance of long-term debt and notes payable by Php32,544 million; (6) lower cash used in financing activities in 2008 was mainly utilized for dividend payments distributed to PLDT commonby Php4,664 million; and preferred stockholders, debt repayments, interest payments and buyback(7) higher proceeds from issuance of PLDT’s common stock.

capital stock by Php225 million.

Debt Financing

     Additions to our consolidated

Proceeds from availment of long-term debt including notes payable, totaled Php7,246 million and Php43,989 million for the yearsyear ended December 31, 2010 and 2009, respectively,2013 amounted to Php39,798 million, mainly from PLDT’s and Smart’s drawings related to the financing of our capital expenditure requirements and maturing loan obligations. Payments of principal and interest on our total debt amounted to Php14,645Php57,033 million and Php5,580Php4,959 million, respectively, in 2010 and Php19,228 million and Php5,239 million, respectively, in 2009.

2013.

Our consolidated long-term debt decreased by Php6,804Php11,702 million, or 7%10%, to Php89,646Php104,090 million in 2010, largelyas at December 31, 2013 from Php115,792 million as at December 31, 2012, primarily due to debt amortizations and prepayments, partially offset by drawings from our term loan facilities and the appreciationdepreciation of the Philippine peso relative to the U.S.

106


dollar to Php43.81 inPhp44.40 as at December 31, 20102013 from Php46.43 inPhp41.08 as at December 31, 2009, partially offset by drawings from our term loan facilities. The2012. As at December 31, 2013, the long-term debt levels of PLDT, Smart and SmartDigitel decreased by 9%1%, 6% and 5%39% to Php49,017Php58,584 million, Php35,754 million and Php40,514Php11,172 million respectively, as at December 31, 2010 as compared with December 31, 2009.
2012.

On July 13, 2010,January 16, 2013, PLDT issued Php2,500signed a US$300 million five-year fixed rate corporate notes underterm loan facility agreement with a Notes Facility Agreement dated July 12, 2010 to mature on July 13, 2015. Proceeds fromsyndicate of banks with the Bank of Tokyo-Mitsubishi UFJ, Ltd., as the facility will be usedagent, to finance capital expenditures and/or to refinance its loanexisting obligations which were also used to finance capital expendituresutilized for network expansion and improvement.improvement programs. The loan is payable over five years in nine equal semi-annual installments commencing on the date which falls 12 months after the date of the loan, with final installment on January 16, 2018. The amounts of US$40 million, US$160 million and US$100 million were drawn on March 6, 2013, April 19, 2013 and July 3, 2013, respectively. The amount of Php2,500US$300 million, or Php13,319 million, remained outstanding as at December 31, 2010.

2013.

On July 13, 2010,January 28, 2013, Smart issued Php2,500signed a US$35 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010 to mature on July 13, 2015. Proceeds from theterm loan facility will be usedagreement with China Banking Corporation to finance Smart’s capital expendituresthe equipment and service contracts for network improvementthe modernization and expansion.expansion projects. The loan is payable over five years in ten equal semi-annual installments. The loan was fully drawn on May 7, 2013. The amount of Php2,484US$31 million, or Php1,398 million, remained outstanding as at December 31, 2013.

On February 22, 2013, Smart signed a US$46 million five-year term loan facility agreement with Nordea Bank as the original lender, arranger and facility agent, to finance the supply and services contracts for the modernization and expansion project. On July 3, 2013, Nordea Bank assigned its rights and obligations to the AB Svensk Exportkredit (Swedish Export Credit Corporation) guaranteed by Exportkreditnamnden. The loan is comprised of Tranches A1 and A2 in the amounts of US$25 million and US$19 million, respectively, and Tranches B1 and B2 in the amounts of US$0.9 million and US$0.7 million, respectively. The facility is payable semi-annually in ten equal installments commencing six months after the applicable mean delivery date. The loan was partially drawn on December 19, 2013 for Tranche A1 and B1 in the amounts of US$18 million and US$0.9 million, respectively. The aggregate amount of US$18 million, or Php787 million, net of unamortized debt discount, remained outstanding as at December 31, 2010.

2013.

On March 9, 2011,25, 2013, Smart signed a Notes Facility AgreementUS$50 million term loan facility agreement with BDO Private Bank, Inc. amounting to Php2,000 millionFEC as the original lender, to finance capital expenditures. Tranche A amounting to Php1,000the supply and services contracts for the modernization and expansion project. The loan was arranged by the Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mizuho Corporate Bank, Ltd. The loan is payable over five years in nine equal semi-annual installments commencing six months after drawdown date. The amount of US$18 million was issuedpartially drawn on MarchSeptember 16, 20112013 and Tranche B amounting to Php1,000subsequently, the amount of US$6 million to be issued in multiple drawdownson November 19, 2013. The amount of Php250US$23 million, each, allor Php1,030 million, net of which are payable in full in five years from their respective issue dates. Asunamortized debt discount, remained outstanding as at March 29, 2011, Php1,250 million has been drawn from this facility.

December 31, 2013.

On March 15, 2011,May 31, 2013, Smart signed a Philippine PesoUS$80 million term loan facility agreement with Metropolitan BankChina Banking Corporation to refinance existing loan obligations which were utilized for network expansion and Trust Company to finance capital expenditures for animprovement programs of Smart. The loan is payable over five years in ten equal semi-annual installments commencing six months after drawdown date, with final installment on May 31, 2018. The loan was fully drawn on September 25, 2013. The amount of Php1,500US$72 million, which was drawn in full on March 22, 2011. The facility is a five-year loan, payable in full upon maturity on March 22, 2016.

or Php3,197 million, remained outstanding as at December 31, 2013.

On March 24, 2011, PLDTJune 19, 2013, Smart issued Php5,000Php1,376 million fixed rate corporate notes under a Notes Facility Agreement dated March 22, 2011,June 14, 2013, comprised of Series A five-year notes amounting to Php3,435Php742 million and Series B seven-yearten-year notes amounting to Php700 million and Series C ten-year rate notes amounting to Php865Php634 million. Proceeds from the facilities willissuance of these notes were used primarily for debt refinancing of Smart. The Series A note facility has annual amortization equivalent to 1% of the principal amount starting June 19, 2014 with the balance of 97% payable on March 20, 2017. The Series B note facility has annual amortization equivalent to 1% of the principal amount starting June 19, 2014 with the balance of 92% payable on March 19, 2022. The aggregate amount of Php1,345 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

On June 20, 2013, Smart signed a US$120 million term loan facility agreement with Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation, as the lead arrangers and creditors with Sumitomo Mitsui Banking Corporation, as the facility agent. Proceeds of the facility are intended to be used to refinance existing loan obligations which were utilized for network expansion and improvement program of Smart. The loan is payable over five years in eight equal semi-annual installments commencing six months after drawdown date, with final installment on June 20, 2018. The loan was fully drawn on September 25, 2013. The amount of US$118 million, or Php5,238 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

On June 21, 2013, PLDT issued Php2,055 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated June 14, 2013, comprised of Series A notes amounting to Php1,735 million and Series B notes amounting to Php320 million. Proceeds from the issuance of these notes were used to refinance existing loan obligations which were used for capital expenditures for network expansion and improvement. The Series A notes are payable over six years with an annual amortization rate of 1% of the issued price up to the fifth year and the balance payable upon maturity on September 21, 2019. The Series B notes are payable over nine years with an annual amortization rate of 1% of the issue price up to the eight year and the balance payable upon maturity on September 21, 2022. The aggregate amount of Php2,034 million remained outstanding as at December 31, 2013.

On July 29, 2013, PLDT issued Php1,188 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated July 19, 2013. Proceeds from the issuance of these notes were used to finance capital expenditures for network expansion and improvement. The notes are payable over six years with an annual amortization rate of 1% of the issue price on the first year up to the fifth year from the issue date and the balance upon maturity on July 29, 2019. The amount of Php1,188 million remained outstanding as at December 31, 2013.

On November 13, 2013, PLDT signed a Php2,000 million term loan facility agreement with Bank of the Philippine Islands, or BPI, to finance capital expenditures and/or refinance existing loan obligations. The loan is payable over seven years with an annual amortization rate of 1% on the first year up to the sixth year from initial drawdown date and the balance payable upon maturity on November 22, 2020. The amount of Php1,000 million was partially drawn on November 22, 2013 and remained outstanding as at December 31, 2013. The loan was fully drawn on February 11, 2014.

On November 25, 2013, Smart signed a Php3,000 million term loan facility agreement with Metrobank to refinance existing loan obligations of Smart. The loan is payable over seven years in six annual installments with an amortization rate of 10% of the total amount drawn and the final installment is payable on November 27, 2020. The amount of Php3,000 million was fully drawn on November 29, 2013. The amount of Php2,985 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

On December 3, 2013, Smart signed a Php3,000 million term loan facility agreement with BPI to refinance existing loan obligations of Smart. The loan is payable over seven years in six annual installments with an amortization rate of 1% of the total amount drawn and the final installment is payable on December 10, 2020. The amount of Php3,000 million was fully drawn on December 10, 2013. The amount of Php2,985 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

On January 29, 2014, Smart signed a Php3,000 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over seven years with an annual amortization rate of 1% of the principal amount on the first year up to the sixth year commencing on the first anniversary of the initial drawdown and the balance payable upon maturity on February 5, 2021. The amount of Php3,000 million was fully drawn on February 5, 2014.

On February 3, 2014, Smart signed a Php500 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over seven years with an annual amortization rate of 1% of the principal amount on the first year up to the sixth year commencing on the first anniversary of the initial drawdown and the balance payable upon maturity on February 5, 2021. The amount of Php500 million was fully drawn on February 7, 2014.

On February 6, 2014, PLDT issued Php15,000 million Philippine SEC-registered fixed rate peso retail bonds under the Indenture dated January 22, 2014. Proceeds from the issuance of these bonds are intended to be used to finance capital expenditures andand/or refinance existing debt obligations which were also used to finance service improvements and expansion programs.

     On March 24, 2011, Smart signed a Philippine Peso term loan facility with Philippine National Bank to financefor capital expenditures for annetwork expansion and improvements. The amount comprises of Php2,000Php12,400 million which was drawnand Php2,600 million bonds due in full on March 29, 2011. The facility is2021 and 2024, with a five-year loan, payable in full upon maturity on March 29, 2016.
coupon rate of 5.2250% and 5.2813%, respectively.

Approximately Php63,969Php67,840 million principal amount of our consolidated outstanding long-term debt as at December 31, 20102013 is scheduled to mature over the period from 20112014 to 2014.2017. Of this amount, Php39,410Php34,749 million is attributable to Smart, Php24,443PLDT, Php23,667 million to PLDT,Smart and the remainderPhp9,424 million to ePLDT.

DMPI.

For further details on our long-term debt, seeNote 20 Interest-bearing Financial Liabilities Long-term Debtto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Debt Covenants

Our consolidated debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS, at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments. Furthermore, certain

As at December 31, 2013, we were in compliance with all of PLDT’sour debt instruments contain provisions wherein PLDT may be required to repurchase or prepay certain indebtedness in case of a change in control of PLDT.

     Please see covenants.

SeeNote 20 Interest-bearing Financial Liabilities Debt Covenantsto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for a more detailed discussion of our debt covenants.

Financing Requirements

We believe that our available cash, including cash flow from operations, will provide sufficient liquidity to fund our projected operating, investment, capital expenditures and debt service requirements for the next 12 months.

Consolidated cash dividend payments in 2013 amounted to Php41,080Php37,804 million in 2010, an increase of Php1,794 million, or 5%, as compared with Php39,286Php36,934 million paid to shareholders in 2009. On March 1, 2011, we2012.

The following table shows the dividends declared regularto common and special cash dividends of Php78 per sharepreferred shareholders from the earnings for the years ended December 31, 2013 and Php66 per share, respectively, in addition to the Php78 per share regular cash dividend declared last August 3, 2010, altogether representing approximately 100% payout of our

107

2012:


   Date  Amount 

Earnings

  Approved  Record  Payable  Per
share
   Total
Declared
 
         (in millions, except per share amount) 

2012

          

Common

          

Regular Dividend

  August 7, 2012  August 31, 2012  September 28, 2012   60.00    Php12,964  

Regular Dividend

  March 5, 2013  March 19, 2013  April 18, 2013   60.00     12,963  

Special Dividend

  March 5, 2013  March 19, 2013  April 18, 2013   52.00     11,235  
        

 

 

   

 

 

 
           37,162  

Preferred

          

Series IV Cumulative Non-convertible Redeemable Preferred Stock(1)

  Various  Various  Various   —       49  

10% Cumulative Convertible Preferred Stock

  Various  Various  Various   1.00     —    

Voting Preferred Stock

  December 4, 2012  December 19, 2012  January 15, 2013     2  
        

 

 

   

 

 

 

Charged to Retained Earnings

          Php37,213  
          

 

 

 

2013

          

Common

          

Regular Dividend

  August 7, 2013  August 30, 2013  September 27, 2013   63.00     13,611  

Regular Dividend

  March 4, 2014  March 18, 2014  April 16, 2014   62.00     13,395  

Special Dividend

  March 4, 2014  March 18, 2014  April 16, 2014   54.00     11,667  
        

 

 

   

 

 

 
           38,673  

Preferred

          

Series IV Cumulative Non-convertible Redeemable Preferred Stock(1)

  Various  Various  Various   —       49  

10% Cumulative Convertible Preferred Stock

  Various  Various  Various   1.00     —    

Voting Preferred Stock

  Various�� Various  Various     10  
        

 

 

   

 

 

 

Charged to Retained Earnings

          Php38,732  
          

 

 

 

(1)

Dividends are declared based on total amount paid up.

2010 core earnings per share. On August 4, 2009, we declared a regular cash dividend of Php77 per share and on March 2, 2010, we declared regular and special cash dividends of Php76 and Php65 per share, respectively, representing in aggregate approximately a 100% payout of our 2009 core earnings per share.
     On August 5, 2008, we declared a regular cash dividend of Php70 per share and on March 3, 2009, we declared regular and special cash dividends of Php70 per share and Php60 per share, respectively, representing approximately 100% payout of our 2008 core earnings per share.
See “Item 3 Key Information Dividends Declared” and “ Dividends Paid” andNote 19 Equityto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for further information on our dividend payments.

Off-StatementCredit Ratings

None of Financial Positionour existing indebtedness contains provisions under which credit rating downgrades would trigger a default, changes in applicable interest rates or other similar terms and conditions.

PLDT’s current credit ratings are as follows:

Rating Agency

Credit Rating

Outlook

Standard & Poor’s Ratings Services, or S&P

Long-term Foreign Issuer Credit

BBBStable

ASEAN regional scale

axAPositive
Moody’s Investor Service, or Moody’s

Foreign Currency Senior Unsecured Debt Rating

Baa2Stable

Local Currency Issuer Rating

Baa2Stable
Fitch Ratings, or Fitch

Long-term Foreign Currency Issuer Default Rating

BBBStable

Long-term Local Currency Issuer Default Rating

A-Stable

National Long-term Rating

AAA(ph1)Stable

Foreign senior unsecured rating

BBB

Credit Ratings and Investor Services Philippines, Inc., or CRISP

Issuer rating

AAAStable

On May 3, 2013, S&P has upgraded our long-term foreign issuer credit rating at “BBB”, which was upgraded from“BBB-” on December 24, 2012 with a stable outlook. On the S&P Asean regional scale, PLDT’s rating improved to “aXA” with a positive outlook from “aXA” with a stable outlook.

On October 18, 2013, Fitch affirmed PLDT’s long-term foreign and local currency issuer default ratings at “BBB” and“A-”, respectively. These ratings are considered “investment grade”. Also, our national long-term rating has been affirmed at “AAA(ph1)”, as well as our global bonds and senior notes at “BBB”. The outlook is stable. The ratings reflect PLDT’s market leadership position in the Philippine telecommunications industry across the wireless, fixed line and broadband segments, reinforced by its successful acquisition of Digitel in an all-equity deal.

On July 26, 2013, Moody’s affirmed PLDT’s foreign currency bond rating and local currency issuer rating at “Baa2”. Both ratings are considered “investment grade.” The outlook in both ratings is stable.

On January 6, 2014, CRISP rated PLDT’s inaugural peso retail bonds as “AAA” issuer rating with a “stable” outlook, the highest on th scale. CRISP cited PLDT’s dominant market leadership, strong historical financial performance and excellent management and governance as key considerations for providing their rating.

Off-Balance Sheet Arrangements

There are no off-statement financial positionoff-balance sheet arrangements that have or are reasonably likely to have any current or future effect on our financial position, results of operations, cash flows, changes in stockholders’ equity, liquidity, capital expenditures or capital resources that are material to investors.

Equity Financing

     Through our subscriber investment plan which provides postpaid fixed line subscribers the opportunity to buy shares of our 10% Cumulative Convertible Preferred Stock as part of the upfront payments collected from subscribers, PLDT was able to raise Php3 million in each of 2010 and 2009 from this source. PLDT raised Php15 million from the exercise by certain officers and executives of stock options in 2009.

As part of our goal to maximize returns to our shareholders, we obtained boardin 2008 an approval from the Board of directors’ approval forDirectors to conduct a share buyback program offor up to five million shares of PLDT’sPLDT common stock, representing approximately 3% of PLDT’s total outstanding shares of common stock.shares. We had acquired a total of approximately 2.72 million shares of PLDT’s common stock, representing approximately 1% of PLDT’s outstandingdid not buy back any shares of common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million in accordance with the share buyback program as at December 31, 2010. We had acquired a total of approximately 2.68 million shares of PLDT’s common stock at a weighted average price of Php2,387 per share for a total consideration of Php6,405 million as at December 31, 2009. The effect of the acquisition of shares of PLDT’s common stock pursuant to the share buyback program was considered in the computation of our basic and diluted earnings per common share for the years ended December 31, 2010 and 2009. Our weighted average number of common shares was approximately 186.8 million and 186.9 million in the years ended December 31, 2010 and 2009, respectively. Please see “Item 16E — Purchases of Equity Securities by the Issuer and Affiliated Purchaser” and Note 8 — Earnings Per Common Share, Note 19 — Equity and Note 28 — Financial Assets and Liabilities to the accompanying consolidated financial statements in Item 18 for further details.

108

2013.


Contractual Obligations and Commercial Commitments

Contractual Obligations

The following table showsdiscloses a summary of maturity profile of our financial liabilities based on our consolidated contractual undiscounted obligations outstanding as at December 31, 2010:

                     
  Payments Due by Period
      Less than         More than
  Total 1 year 1-3 years 3-5 years 5 years
       (in million pesos)     
December 31, 2010
                    
Debt(1):
  113,394   6,569   51,308   33,978   21,539 
Principal  92,590   6,206   38,263   29,335   18,786 
Interest  20,804   363   13,045   4,643   2,753 
Lease obligations:
  8,003   4,383   1,710   948   962 
Operating lease  7,959   4,353   1,697   947   962 
Finance lease  44   30   13   1    
Unconditional purchase obligations(2)
  797   271   263   263    
Other obligations:
  68,714   50,247   13,895   683   3,889 
Derivative financial liabilities(3):
  4,173      1,667   674   1,832 
Long-term currency swaps  4,173      1,667   674   1,832 
Various trade and other obligations:  64,541   50,247   12,228   9   2,057 
Suppliers and contractors  32,997   20,957   12,040       
Utilities and related expenses  16,477   16,446   10   3   18 
Employee benefits  3,853   3,853          
Customers’ deposits  2,223      178   6   2,039 
Dividends  2,086   2,086          
Carriers  1,866   1,866          
Others  5,039   5,039          
 
Total contractual obligations
  190,908   61,470   67,176   35,872   26,390 
 
2013 and 2012:

   Payments Due by Period 
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

Debt(1):

   123,623     2,774     48,824     35,908     36,117  

Principal

   104,472     2,576     37,822     31,549     32,525  

Interest

   19,151     198     11,002     4,359     3,592  

Lease obligations:

   14,574     7,711     3,198     2,016     1,649  

Operating lease

   14,562     7,710     3,187     2,016     1,649  

Finance lease

   12     1     11     —       —    

Unconditional purchase obligations(2)

   231     66     44     44     77  

Other obligations:

   109,405     84,869     14,841     7,627     2,068  

Derivative financial liabilities(3):

   2,274     92     923     1,259     —    

Long-term currency swap

   2,086     —       833     1,253     —    

Interest rate swap

   188     92     90     6     —    

Various trade and other obligations:

   107,131     84,777     13,918     6,368     2,068  

Suppliers and contractors

   49,314     29,799     13,183     6,332     —    

Utilities and related expenses

   31,576     31,483     68     5     20  

Liability from redemption of preferred shares

   7,952     7,952     —       —       —    

Employee benefits

   5,350     5,350     —       —       —    

Customers’ deposits

   2,545     —       466     31     2,048  

Carriers

   2,264     2,264     —       —       —    

Dividends

   932     932     —       —       —    

Others

   7,198     6,997     201     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   247,833     95,420     66,907     45,595     39,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)

(1)

ConsistConsists of notes payable and long-term debt, including current portion;portion, and notes payable; gross of unamortized debt discount and debt issuance costs.

(2)

Based on the Amended ATPA with AIL. See Note 24 – Related Party Transactions – Air Time Purchase Agreement between PLDT and AIL Related Party Agreements.

(3)

Gross liabilities before any offsetting application.

For a detailed discussion of our consolidated contractual undiscounted obligations as at December 31, 20102013 and 2009, please2012, seeNote 26 — Contractual Obligations27 – Financial Assets and Commercial Commitments Liabilitiesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Commercial Commitments

Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php1,145Php20 million and Php1,317Php342 million as at December 31, 20102013 and 2009,2012, respectively. TheseThe outstanding commitments will expire within one year.

Impact of Inflation and Changing Prices

Inflation can be a significant factor in the Philippine economy, and we are continually seeking ways to minimize its impact. The average inflation rate in the Philippines in 20102013 and 2012 was 3.8% as compared with 3.2% in 2009.2.9% and 3.1%, respectively. Moving forward, we currently expect inflation to increase, which may have an adverse impact on our operations.

     Please see

See “Item 11. Quantitative and Qualitative Disclosures about Market Risks—Risks – Foreign Currency Exchange Risk” for a description of the impact of foreign currency fluctuations on us.

109our business.


Item 6.Directors, Senior Management and Employees

Item 6. Directors, Senior Management and Employees
Directors, Key Officers and Advisors

The Board is principally responsible for PLDT’s overall direction and governance. PLDT’s Articles of Association provide for 13 members of the Board, who shall be elected by the stockholders. At present, three of PLDT’s 13 directors are independent directors. The Board holds office for one year and until their successors are elected and qualified in accordance with the By-laws.

The name, age and period of service, of each of the current directors, including independent directors, of PLDT are as follows:

Name  Age  
NameAgePeriod during which individual has served as such

Manuel V. Pangilinan

67November 24, 1998 to present

Napoleon L. Nazareno

  64  November 24, 1998 to present
Napoleon L. Nazareno

Helen Y. Dee

  6169June 18, 1986 to present

Ray C. Espinosa

57  November 24, 1998 to present
Donald G. Dee(1)

James L. Go

  6474  September 30, 2008 to December 5, 2010
Helen Y. Dee66June 18, 1986November 3, 2011 to present
Ray C. Espinosa

Setsuya Kimura

  5456  November 24, 1998July 5, 2011 to present
Tatsu Kono

Hideaki Ozaki

  5848December 6, 2011 to present

Ret. Chief Justice Artemio V. Panganiban(1,2)

77April 23, 2013 to present

Pedro E. Roxas(1)

57  March 28, 20061, 2001 to present
Rev. Fr. Bienvenido F. Nebres, S.J.(2)

Juan B. Santos

  70November 24, 1998 to present
Takashi Ooi49November 6, 2007 to present
Juan B. Santos(3)
7275  January 25, 2011 to present
Oscar S. Reyes

Tony Tan Caktiong

  6461  April 5, 2005July 8, 2008 to present
Albert F. del Rosario

Alfred V. Ty(4)(1)

  71November 24, 1998 to present
Pedro E. Roxas(2)
54March 1, 2001 to present
Alfred V. Ty(2)
4346  June 13, 2006 to present
Tony Tan Caktiong58July 8, 2008 to present

Ma. Lourdes C. Rausa-Chan(5)

  5760  March 29, 2011 to present

(1)
(1)Resigned effective December 6, 2010.
(2)

Independent Director.

(3)(2)

Elected effective January 25, 2011.on April 23, 2013.

(4)Resigned effective March 25, 2011.
(5)Elected effective March 29, 2011.

The name, age, position and period of service of the keyexecutive officers and advisorall other officers of PLDT as at February 28, 20112014 are as follows:

Name

  

Age

  

Position(s)

  
NameAgePosition(s)

Period during which

individual has served as such

Executive Officers:

Manuel V. Pangilinan

  6467  

Chairman of the Board

  February 19, 2004 to present

Napoleon L. Nazareno

  6164  

President and Chief Executive OfficerCEO

  February 19, 2004 to present
    

President and Chief Executive OfficerCEO of Smart

  January 2000 to present
Ray C. Espinosa

Ernesto R. Alberto

  5552  Regulatory Affairs and Policies Head

Executive Vice President

  March 4, 2008January 1, 2012 to present
Ma. Lourdes C. Rausa-Chan  57  Corporate Secretary

Enterprise, International and Carrier Business Head

  November 24, 1998September 16, 2011 to present
Senior Vice PresidentJanuary 5, 1999 to present
Corporate Affairs and Legal Services Head  
  Chief Governance OfficerMarch 4, 2008 to present
Anabelle L. Chua50Senior Vice PresidentFebruary 26, 2002 to present
Corporate Finance and Treasury HeadMarch 1, 1998 to present
TreasurerFebruary 1, 1999 to present
Chief Financial Officer of SmartDecember 1, 2005 to present
Ernesto R. Alberto49Senior Vice PresidentMay 15, 2003 to present

Customer Sales and Marketing Head

  February 1, 2008 to presentSeptember 15, 2011
    

Corporate Business Head

  May 15, 2003 to January 31, 2008

Isaias P. Fermin

45

Executive Vice President

June 14, 2013 to present

HOME Business Head

January 1, 2012 to present

Ray C. Espinosa

57

Regulatory Affairs and Policies Head

March 4, 2008 to present

Ma. Lourdes C. Rausa-Chan

60

Senior Vice President

January 5, 1999 to present

Corporate Secretary

November 24, 1998 to present

Corporate Affairs and Legal Services Head

January 5, 1999 to present

Chief Governance Officer

March 4, 2008 to present

Anabelle L. Chua

53

Senior Vice President

February 26, 2002 to present

Corporate Finance and Treasury Head

March 1, 1998 to present

Treasurer

February 1, 1999 to present

Chief Financial Officer of Smart

December 1, 2005 to present

Rene G. Bañez

  5558  

Senior Vice President

  January 25, 2005 to present
    Administration

Supply Chain, Asset Protection and MaterialsManagement Head

  January 1, 2008 to present
Management Head  
  

Chief Governance Officer

  October 5, 2004 to March 3, 2008

Jun R. Florencio

  5558  

Senior Vice President

  June 14, 2005 to present
    

Internal Audit and Fraud Risk Management Head

  February 16, 2006 to present
Management Head  
  

Audit and Assurance Head

  September 1, 2000 to February 15, 2006

Menardo G. Jimenez, Jr.

  4750  

Senior Vice President

  December 9, 2004 to present
    

Human Resources Head and Business Transformation Office Head

  August 1, 2010 to present
Transformation Office Head  
  

Business Transformation Office – Revenue Team Head

  January 1, 2008 to July 2010
Revenue Team Head  
  

Retail Business Head

  June 16, 2004 to December 31, 2007
    

Corporate Communications and
Public Affairs Head

  December 1, 2001 to June 15, 2004

Claro Carmelo P. Ramirez

  53  Public Affairs Head

Senior Vice President

  

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NameAgePosition(s)Period during which individual has served as such
George N. Lim58Senior Vice PresidentFebruary 26,July 1, 1999 to present
    Network Services Assurance HeadOctober 16, 2010 to present
Business Transformation

Office of the President and CEO

  January 1, 2008 to present
    Network Team Head

Seconded to MediaQuest

  
    Network Services

Consumer Affairs Group Head

  February 1, 2003December 5, 2005 to December 31, 2007
Alfredo S. Panlilio(1)
  47  Senior Vice PresidentMay 8, 2001 to December 15, 2010

International and Carrier Business Head

June 16, 2004 to December 4, 2005

Retail Business Head

  February 1, 2003 to June 15, 2004

Alejandro O. Caeg

  53  PLDT Global Corp. PresidentJune 16, 2004 to December 15, 2010
Claro Carmelo P. Ramirez50

Senior Vice President

July 1, 1999 to present
Office of the President and CEO

  January 1, 20082012 to present
    Consumer Affairs HeadDecember 5, 2005 to December 31, 2007

International and Carrier Business Head

June 16, 2004 to December 4, 2005
Retail Business HeadFebruary 1, 2003 to June 15, 2004
Victorico P. Vargas(2)
59Senior Vice PresidentFebruary 15, 2000 to August 1, 2010
Human Resources HeadFebruary 15, 2000 to August 1, 2010
International and Carrier Business Head

  March 1, 20072009 to December 31, 2007present
Business Transformation Office HeadJanuary 1, 2008 to August 1, 2010

June Cheryl A. CabalCabal-Revilla

  3740  

First Vice President

  May 6, 2008 to present
    

Financial Reporting and Controllership Head

  November 15, 2006 to present
    

Financial Reporting and Planning Head

  May 1, 2002 to November 15, 2006

Christopher H. Young

Name

Age

Position(s)

Period during which

individual has served as such

All Other Officers:

Florentino D. Mabasa, Jr.

55

First Vice President

February 19, 2004 to present

Emiliano R. Tanchico, Jr.

58

First Vice President

May 8, 2001 to present

Ricardo M. Sison

52

First Vice President

February 26, 2002 to present

Miguela F. Villanueva

62

First Vice President

January 31, 2003 to present

Cesar M. Enriquez

61

First Vice President

February 19, 2004 to present

Alfredo B. Carrera

59

First Vice President

February 27, 2006 to present

Leo I. Posadas

47

First Vice President

March 6, 2007 to present

Katrina L. Abelarde

38

First Vice President

March 5, 2013 to present

Anna Isabel V. Bengzon

41

First Vice President

March 5, 2013 to present

Juan Victor I. Hernandez

40

First Vice President

March 5, 2013 to present

Melissa V. Vergel De Dios

51

First Vice President

March 5, 2013 to present

Martin T. Rio

  53  Chief Financial Advisor

First Vice President

  November 24, 1998October 22, 2012 up to present

Jesus M. Tañedo

62

Vice President

January 1, 2001 to present

Ricardo C. Rodriguez

55

Vice President

February 26, 2002 to present

Rebecca Jeanine R. de Guzman

51

Vice President

March 1, 2003 to present

Emeraldo L. Hernandez

56

Vice President

February 19, 2004 to present

Joseph Nelson M. Ladaban

49

Vice President

February 19, 2004 to present

Genaro C. Sanchez

52

Vice President

January 25, 2005 to present

Jose A. Apelo

55

Vice President

June 14, 2005 to present

Ma. Josefina T. Gorres

50

Vice President

June 14, 2005 to present

Elisa B. Gesalta

55

Vice President

February 27, 2006 to present

Ma. Criselda B. Guhit

51

Vice President

February 27, 2006 to present

Oliver Carlos G. Odulio

43

Vice President

March 6, 2007 to present

Ana Maria A. Sotto

55

Vice President

March 6, 2007 to present

Julieta S. Tañeca

54

Vice President

March 6, 2007 to present

Marco Alejandro T. Borlongan

46

Vice President

September 14, 2007 to present

Rafael M. Bejar

56

Vice President

March 3, 2009 to present

Renato L. Castañeda

62

Vice President

March 3, 2009 to present

Alexander S. Kibanoff

50

Vice President

March 3, 2009 to present

Javier C. Lagdameo

49

Vice President

March 3, 2009 to present

Alona S. Dingle

40

Vice President

March 26, 2010 to present

Gil Samson D. Garcia

42

Vice President

March 26, 2010 to present

Luis Ignacio A. Lopa

54

Vice President

March 26, 2010 to present

Marven S. Jardiel

46

Vice President

March 26, 2010 to present

Victor Y. Tria

44

Vice President

March 26, 2010 to present

Margarito G. Dujali, Jr.

39

Vice President

August 31, 2010 to present

Patrick S. Tang

40

Vice President

August 31, 2010 to present

Albert Mitchell L. Locsin

43

Vice President

June 1, 2011 to present

Raul S. Alvarez

63

Vice President

March 5, 2013 to present

Joselito S. Limjap

51

Vice President

March 5, 2013 to present

Ma. Carmela F. Luque

45

Vice President

March 5, 2013 to present

Walter M. Gaffud

38

Vice President

May 1, 2013 to present

Joseph Ian G. Gendrano

37

Vice President

May 1, 2013 to present

John John R. Gonzales

45

Vice President

June 1, 2013 to present

(1)Availed of the MRP effective at the close of business hours on December 15, 2010.
(2)Availed of the MRP effective at the close of business hours on August 1, 2010.
     Under

At least three of our directors, namely, Artemio V. Panganiban, Pedro E. Roxas and Alfred V. Ty, are independent directors who are neither officers nor employees of PLDT or any of its subsidiaries, and who are free from any business or other relationship with PLDT or any of its subsidiaries which could, or could reasonably be perceived to, materially interfere with the Shareholders Agreement entered into among the FP Parties, NTT Communications and NTTC-UK on September 28, 1999,exercise of independent judgment in carrying out their responsibilities as amended by the Cooperation Agreement dated January 31, 2006, NTT Communications is entitled to nominate two directors to the PLDT board of directors and the FP Parties are entitled to nominate sixindependent directors. The Shareholders Agreement also entitles NTT Communicationsindependence standards/criteria are provided in our By-Laws and CG Manual pursuant to nominate two directors towhich, in general, a director may not be deemed independent if such director is, or in the board of directors of Smart and, subject to specified conditions, one member topast five years had been, employed in an executive capacity by us or any company controlling, controlled by or under common control with us or he is, or within the board of directors of all other PLDT subsidiaries. However,past five years had been, retained as a resultprofessional adviser by us or any of the Cooperation Agreement,our related companies, or he is not free from any business or other relationships with us which could, or could reasonably be perceived, to materially interfere with his exercise of independent judgment in respect of NTT Communications’ right to nominate two directors to each of the board of directors of PLDT and Smart, respectively, NTT Communications and the FP Parties agreed to votecarrying out his responsibilities as a PLDT shareholder, lobby the directors of PLDT and otherwise use reasonable efforts to procure a shareholders’ vote in favor of replacing on each of the board of directors of PLDT and Smart, respectively, one NTT Communications nominee with one NTT DoCoMo nominee. Under the Shareholders Agreement, NTT Communications is also entitled to appoint members or advisors of certain PLDT management and board committees, including the audit, governance and nomination, executive compensation and technology strategy committees described below under “— Audit, Governance and Nomination, Executive Compensation and Technology Strategy Committees,” and as a result of the Cooperation Agreement, the FP Parties and NTT Communications agreed to use reasonable efforts to procure that NTT DoCoMo be entitled to appoint one individual, who may be replaced at any time, to attend any board committee of PLDT as a member, advisor or observer. Moreover, the Cooperation Agreement provides that upon NTT Communications, NTT DoCoMo and their subsidiaries owning in the aggregate 20% or more of the shares of PLDT’s common stock and for as long as NTT Communications, NTT DoCoMo and their subsidiaries continue to own in the aggregate 17.5% of the shares of PLDT’s common stock then outstanding, NTT DoCoMo will be entitled to additional rights under the Stock Purchase and Strategic Investment Agreement and the Shareholders Agreement, including the right to nominate one additional NTT DoCoMo nominee to the board of directors of each of PLDT and Smart. Pursuant to publicly available filings made with the PSE, as at February 28, 2011, NTT Communications and NTT DoCoMo together beneficially owned approximately 21% of the outstanding shares of PLDT’s common stock. As a result, NTT DoCoMo is currently entitled to nominate one additional NTT DoCoMo nominee to the board of directors of each of PLDT and Smart. Under the Shareholders Agreement and the Cooperation Agreement, each party has agreed, under certain circumstances, to vote its shares of common stock in favor of the nominees designated by the other parties. For more information about the Cooperation Agreement, see Item 7. “Major Shareholders and Related Party Transactions — Related Party Transactions.”

     The business address of each of the other directors, key officers and advisors identified above is the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

111

director.


The following is a brief description of the business experiences of each of our directors, keyexecutive officers and advisors for at least the past five years.
years:

Mr. Manuel V. Pangilinan, 67 years old, has been a director of PLDT since November 24, 1998. He was appointed as Chairman of the Board of PLDT after serving as its President and Chief Executive Officer or CEO, from November 1998 to February 2004. He is the Chairman of the Governance and Nomination, Executive Compensation and Technology Strategy Committees of the Board of Directors of PLDT. He also serves as Chairman of MPIC, Meralco and Philex Mining Corporation, all of which are PSE-listed companies, and of several subsidiaries or affiliates of PLDT or MPIC, including, among others, Smart, PCEV, ePLDT, SPi, SPi CRM, MPIC, Landco PacificBeacon, Manila North Tollways Corporation, Maynilad Water Services Inc., Philex Mining Corporation, Manila North TollwaysLandco Pacific Corporation, Medical Doctors Inc.Incorporated (Makati Medical Center), Colinas Verdes Inc.Corporation (Cardinal Santos Medical Center), and Davao Doctors Inc.Incorporated, Riverside Medical Center Incorporated, Our Lady of Lourdes Hospital and Asian Hospital Incorporated. He is also a directorthe Chairman of MediaQuest, Associated Broadcasting Corporation (TV5) and the President and Chief Executive Officer of Meralco.

PLDT-Smart Foundation, Inc.

Mr. Pangilinan founded First Pacific in 1981 and served as Managing Director until 1999. He was appointed as Executive Chairman until June 2003, when he was named as Chief Executive OfficerCEO and Managing Director. HeWithin the First Pacific Group, he also holds the position of President Commissioner of P.T. Indofood Sukses Makmur Tbk, the largest food company in Indonesia.

Outside the First Pacific Group, Mr. Pangilinan is the Chairman of the Board of Trustees of San Beda College PLDT-Smart Foundation, Inc.,and the HongkongHong Kong Bayanihan Trust, a non-stock, non-profit foundation which provides vocational, social and cultural activities for Hongkong’s foreign domestic helpers. In February 2007, he was named the President of the Samahang Basketbol Ng Pilipinas, a national sports association for basketball. In January 2009, he assumed the chairmanship of the Amateur Boxing Association of the Philippines, a governing body of the amateur boxers in the country. In October 2009, Mr. Pangilinan was appointed as Chairman of the Philippine Disaster Recovery Foundation, Incorporated (PDRF), a non-stock, non-profit foundation established to formulate and implement a reconstruction strategy to rehabilitate and rebuild areas devastated by floods and other calamities. He is the Chairman of Philippine Business for Social Progress, a social action organization made up of the country’s largest corporations, Vice Chairman of the Foundation for Crime Prevention, a private sector group organized to assist the government with crime prevention, and a member of the Board of Trustees of Caritas Manila and Radio Veritas-Global Broadcasting Systems, Inc., a former Commissioner of the Pasig Rehabilitation Commission, and a former Governor of the PSE. In February 2007,June 2012, he was named the Presidentappointed as Co-Chairman of the Samahang Basketbol ng Pilipinas,newly organized US-Philippine Business Society, a newly formed national sport association for basketball,non-profit society which seeks to broaden the relationship between the United States and effective January 2009, he assumed the chairmanship of the Amateur Boxing Association of the Philippines the governing body of amateur boxers in the country.

areas of trade, investment,education, foreign and security policies and culture.

Mr. Pangilinan has received numerous prestigious awards including the Ten Outstanding Young Men of the Philippines (TOYM) Award for International Finance (1983), the PresidentPresidential Pamana ng Pilipino Award by the Office of the President of the Philippines (1996), Honorary Doctorate in Humanities by the San Beda College (2002), Best CEO in the Philippines by Institutional Investor (2004), CEO of the Year (Philippines) by Biz News Asia (2004), People of the Year by People Asia Magazine (2004), Distinguished World Class Businessman Award by the Association of Makati Industries, Inc. (2005), Man of the Year by Biz News Asia (2005), Management Man of the Year by the Management Association of the Philippines (2005), Order of Lakandula (Rank of a Komandante) in recognition of his contributions to the country by the Office of the President of the Republic of the Philippines (2006), Honorary DoctorateBusiness Icon Gold Award for having greatly contributed to the Philippine economy through achievements in Humanitiesbusiness and society by Biz News Asia magazine (2008), Sports Patron of the Year for his invaluable contributions to the Philippine Sports by the Xavier University (2007)Philippine Sportswriters Association or PSA (2010), and Global Filipino Executive of the Year (Asiayear for 2010 by Asia CEO Awards, 2010). He was also voted as CorporatePhilippines Best CEO for 2012 by Finance Asia and Executive Officer of the Year (Philippines), Best Executive (Philippines) atby the 2007 and 2008 Best-Managed Companies and Corporate Governance Polls conducted byAsiamoneyPSA (2013).

Mr. Pangilinan graduated cum laude from the Ateneo de Manila University, with a Bachelor of Arts Degree in Economics. He received his Master’s Degree in Business Administration from Wharton School of Finance and& Commerce at the University of Pennsylvania.

He was conferred a Doctor of Humanities (Honoris Causa) Degree by the San Beda College (2002), Xavier University (2007), Holy Angel University (2009) and Far Easter University (2010).

Mr. Napoleon L. Nazareno, 64 years old, has been a director of PLDT since November 24, 1998 and is a member of the TSCTechnology Strategy Committee of the Board of Directors of PLDT. He was appointedhas served as President and Chief Executive Officer of PLDT since his appointment on February 19, 2004 and is concurrently the President and Chief Executive Officer of Smart PCEV and CURE, positions he has held since January 2000 November 2004 and April 2008, respectively.CURE since 2008. He also serves as Chairman or is a director of several subsidiaries of PLDT and Smart including PCEV, Wolfpac, SBI, I-Contacts.I-Contacts, ePLDT, MIC, ACeS Philippines, Digitel, DMPI, PGIH and PLDT Global. His other directorships include Mabuhay Satellite where he is Chairman, ACeS Philippines where he is also the President, PLDT Global, ePLDT, SPi Technologies, Inc., SPi CRM, Inc., and Meralco.Rufino Pacific Tower Condominium Corporation. He is a non-executive director of First Pacific.

     Mr. Nazareno is also a board member of the GSM Association Worldwide and a director of the Wireless Applications Community, an international alliance of telecommunications companies. Mr. Nazareno is also the Chairman of the Board of Trustees and Governors of Asian Institute of Management.

Mr. Nazareno’s business experience spans several countries in over 30 years and his exposure cuts across a broad range of industries, namely, packaging, bottling, petrochemicals, real estate and, in the last decade,13 years, telecommunications and information technology. In 1981, he started a successful career in the international firm Akerlund & Rausing, occupying senior management to top level positions and, in 1989, became the President and

112


Chief Executive Officer of Akerlund & Rausing (Phils.), Inc. In August 1995, he moved to Metro Pacific Corporation where he served as President and Chief Executive Officer until December 1999.
     In November 2004, Mr. Nazareno was appointed by President Gloria Macapagal-Arroyo as Private Sector Representative of the Public-Private Sector Task Force for the Development of Globally Competitive Philippine Service Industries. In February 2006, he became part of the Private Sector Advisory Board of the Commission on Information and Communications Technology, under the Office of the President of the Philippines.

Mr. Nazareno is also the Chairman of the Board of Trustees and Governors of Asian Institute of Management, the President and Trustee of First Pacific Leadership Academy and a director of Operation Smile. He was a board member of the GSM Association Worldwide sincefrom November 2004.2004 to November 2012. He was voted Corporate Executive Officer of the Year (Philippines) for three consecutive years at the 2004, 2005 and 2006 Best-Managed Companies and Corporate Governance Polls conducted byAsiamoney,.

was awarded the Telecom CEO of the Year at the 15th Telecoms Asia Awards, an influential Asian telecommunications industry magazine in Bangkok, and was cited as “Best Telecom CEO in Asia 2013 by the All-Asia Executive Team Survey conducted by the New York-based Institutional Investor 2013.

Mr. Nazareno received his Master’s Degree in Business Management from the Asian Institute of Management, and completed the INSEAD Executive Program of the European Institute of Business Administration in Fountainbleu, France.

France, and was conferred a Doctor of Technology (Honoris Causa) Degree by the University of San Carlos.

Ms. Helen Y. Dee, 69 years old, has been a director of PLDT since June 18, 1986. She is the ChairmanChairperson or a director of several companies engaged inEEI Corporation, National Reinsurance Corporation of the banking, insurancePhilippines, Petro Energy Resources Corporation, Rizal Commercial Banking Corporation and real property businesses andSeafront Resources Corporation, all of which are PSE-listed companies. She is also the President and/or Chief Executive Officer of Hydee Management and Resource Corp., Moira Management, Inc., Tameena Resources, Inc., YGC Corporate Services, Inc., Financial Brokers Insurance Agency, Inc., GPL Holdings, Inc., House of Investments, and Mijo Holdings, Inc., Grepalife Asset Management Corporation, Grepalife Fixed Income Fund Corporationthe Vice President of A. T. Yuchengco, Inc., and Chairpersonthe Treasurer of Rizal Commercial Banking Corporation, RCBC Savings Bank and Malayan Insurance Company.Business Harmony Realty, Inc. Ms. Dee received her Master’s Degree in Business Administration from De La Salle University.

Ms. Dee’s directorships in other public and private companies are listed in the succeeding table.

Mr. Tatsu KonoAtty. Ray C. Espinosa, 57 years old, has been a director of PLDT since November 24, 1998, the Head of Regulatory Affairs and Policies of PLDT since March 28, 2006.2008, and General Counsel of Meralco since 2009. In June 2013, he joined First Pacific and was appointed as First Pacific Group’s Head of Government and Regulatory Affairs and Head of Communications Bureau for the Philippines. Atty. Espinosa is also a director of Meralco, and an independent director and Chairman of the Audit Committee of Lepanto Consolidated Mining Company, which are PSE-listed companies. He is also a trustee of the Beneficial Trust Fund of PLDT and PLDT-Smart Foundation, Inc. Atty. Espinosa’s directorships in other public and private companies are listed in the succeeding table.

Atty. Espinosa served as President & CEO of MediaQuest,TV5 Network, Inc., Cignal TV, Inc. and prior thereto, was the President & CEO of ePLDT and its subsidiaries until April 15, 2010.

Atty. Espinosa has a Master of Laws degree from the University of Michigan Law School and is a member of the Integrated Bar of the Philippines. He was a partner of Sycip Salazar Hernandez & Gatmaitan from 1982 to 2000, a foreign associate at Covington and Burling (Washington, D. C., USA) from 1987 to 1988, and a law lecturer at the Ateneo de Manila School of Law from 1983 to 1985 and in 1989.

Mr. James L. Go, 74 years old, has been a director of PLDT since November 3, 2011, and is a member of the Technology Strategy Committee and Advisor of the Audit Committee of the Board of Directors of PLDT. He is the Chairman and Chief Executive Officer of JG Summit Holdings, Inc., and Oriental Petroleum and Minerals Corporation, the Chairman of Universal Robina Corporation, Robinsons Land Corporation, and a director of Cebu Air, Inc and Robinsons Holdings, Inc., which are PSE-listed companies. He is also the Chairman and Chief Executive Officer of Robinsons, Inc. , Robinson’s Supermarket, Inc., and Robinsons Handyman, Inc., the Chairman of JG Summit Petrochemical Corporation and JG Summit Olefins Corporation, and a director of CFC Corporation, Singapore Land Ltd., Marina Center Holdings, Inc., United Industrial Corporation and Hotel Marina City Private Limited. He is also the President and Trustee of the Gokongwei Brothers Foundation. He was the Chairman, President and Chief Executive Officer of Digitel Mobile and the Vice Chairman, President and Chief Executive Officer of Digitel, until October 26, 2011. Mr. Go received his Bachelor of Science Degree and Master of Science Degree in Chemical Engineering from Massachusetts Institute of Technology, USA.

Mr. Setsuya Kimura,56 years old, has been a director of PLDT since July 5, 2011. He is a member of the Governance and Nomination, Executive Compensation and Technology Strategy Committees, and advisor toAdvisor of the Audit Committee of the Board of Directors of PLDT. He is also the Chief Operating Advisor of PLDT. He joined NTT DoCoMo in 2000 and served as Executive Director of the Global Investment Group. In 2001, he was appointed as a member of the Board of Directors and Vice President In-Charge for Sales and Marketing of KG Telecom. He has been a Managing Director of Corporate SalesNetwork Department Corporate Marketing Division of NTT DoCoMo, since 2003.Inc. He also served as Regional CEO, Asia Pacific of NTT Communications and President and CEO of NTT Singapore Pte Ltd from 2007 to 2009, and as President and CEO of NTT Communications (Thailand) Co. Ltd from 2003 to 2007. Prior to that, he occupied various management positions in Kokusai Denshin Denwa Co.Nippon Telephone and Telegraph Company. Mr. Kimura obtained his Bachelor’s Degree in Civil Engineering from Hokkaido University.

Mr. Hideaki Ozaki, Ltd. (KDD). Mr. Kono received his Bachelor of Law Degree from the Waseda University.

Rev. Fr. Bienvenido F. Nebres, S.J.48 years old, has been a director of PLDT since November 24, 1998.December 6, 2011. He is the Vice President of Planning, Global Business of NTT Communications, a company which provides telecommunication and ICT services such as Global Network, Data Centre, Cloud Services inside and outside of Japan. He served as part-time Director of NTT Communications Philippines from July 2009 to February 2012. Prior to that, he served as Vice President of Global Strategy, Global Business Division of NTT Com since 2006 and as Director of Legal and Internal Audit Department of NTT Com from 2003 to 2006. He also served as Vice President of Sales and Corporate Planning of NTT Communications (Thailand) Co., Ltd. from 1999 to 2003 and as Manager of Overseas Business Planning, Global Service Division of Nippon Telegraph and Telephone Corporation from 1995 to 1999. Mr. Ozaki obtained his Bachelor’s Degree in Law from University of Tokyo and Master’s Degree in Law from University of Pennsylvania.

Hon. Artemio V. Panganiban, 77 years old, was elected as independent director on April 23, 2013. He was appointed as an independent member of the Audit, Governance and Nomination and Executive Compensation Committees of the Board of Directors of PLDT on May 7, 2013. He served as an independent member of the Advisory Board and an independent non-voting member of the Governance and Nomination Committee of the Board of Directors of PLDT from June 9, 2009 to May 6, 2013. Currently, he is also an independent director of Meralco, Petron Corporation, Bank of the Philippine Islands, First Philippine Holdings Corporation, Metro Pacific Investments Corporation, Robinsons Land Corporation, GMA Network, GMA Holdings, and Asian Terminals, Inc., and a regular director of Jollibee Foods Corporation, all of which are PSE-listed companies. He also holds directorships in Metro Pacific Tollways Corporation and Tollways Management Corporation. He is the Chairman of the Board of Trustees of the Foundation for Liberty and Prosperity and Chairman-Emeritus of the Philippine Dispute Resolution Center, Inc., President of the Manila Metropolitan Cathedral-Basilica Foundation, Chairman of the Board of Advisers of Metrobank Foundation, Inc., Asian Institute of Management Ramon V. Del Rosario, Sr., C.V. Starr Center for Corporate Governance and University of Asia and the Pacific, senior adviser of the Metropolitan Bank and Trust Company and V. Mapa Falcon Honor Society, adviser of Doubledragon Properties Corp., and a column writer of the Philippine Daily Inquirer.

Hon. Panganiban served the Supreme Court of the Philippines for more than 11 years, first as Justice (October 10, 1995 to December 20, 2005) and later, as Chief Justice (December 21, 2005 to December 6, 2006) during which he sat concurrently as Chairperson of the Presidential Electoral Tribunal, Judicial and Bar Council and Philippine Judicial Academy.

He was the recipient of numerous awards in recognition of his role as jurist, practising lawyer, professor, civic leader, Catholic lay worker and business entrepreneur, including as “The Renaissance Jurist of the 21st Century” given by the Supreme Court on the occasion of his retirement from the Court.

Hon. Panganiban obtained his Bachelor of Laws Degree (Cum Laude) from the Far Eastern University in 1960, and was conferred a Doctor of Laws (Honoris Causa) Degree by the University of Iloilo (1997), Far Eastern University (2002), University of Cebu (2006), Angeles University (2006) and Bulacan State University (2006). He was co-founder and past president of the National Union of Students of the Philippines.

Mr. Pedro E. Roxas, 57 years old, has been a director of PLDT since March 1, 2001 and qualified as an independent director since 2002. He is the Chairman of the Audit Committee and serves as a member of the Governance and Nomination and Executive Compensation Committees of the Board of Directors of PLDT. He is the Chairman and/or CEO/President of Roxas Holdings, Inc. and a member of the Board of Trustees of the Ateneo de Manila University, the Chairman of the Board of Trustees of the Center for LeadershipRoxas and Change,Company, Inc., the Vice Chairman of the Board of Trustees of the Asian Institute of Management and a member of the Board of Trustees of several private educational institutions including Loyola School of Theology, and Sacred Heart School — Jesuit Cebu City. He is also a member of the Board of Trustees of Manila Observatory and Philippine Institute of Pure and Applied Chemistry. Rev. Fr. Nebres received his Ph.D in Mathematics from the Stanford University.

Mr. Takashi Ooihas been a director of PLDT since November 6, 2007. He built his career in NTT and its subsidiaries NTT Communications and NTT America. He is presently the Senior Vice President for Global Business of NTT Communications, in charge of product/service development and global network design/engineering and proposal/installation/delivery of global network and solutions for global multi-national companies. Prior to that, he held management positions in various departments of NTT Communications and served as Vice President for Product Management Global Division of NTT Communications, Director of NTT America and Technical Advisor to Telegent, Inc. Mr. Ooi obtained his Master of Science Degree in Physics and Master of Business Administration Degree from the University of Tokyo and Boston University, respectively.
Mr. Oscar S. Reyeshas been an independent director of PLDT since April 5, 2005. Effective August 2010, his status changed to a regular director in view of his appointment as Senior Executive Vice PresidentMeralco and Chief Operating Officer/Chief Energy Adviser of Meralco. He serves as a member of the TSC of the Board of Directors of PLDT.BDO Private Bank, which are reporting or PSE-listed companies. He is also the Chairman, of Link Edge, Inc. and MRL Gold Phils., Inc. and a director/independent director of various public companies and private firms engaged in electricity, banking, energy, financial and business advisory services, manufacturing, mining, shipping, real estate and related activities.
     Mr. Reyes was the Country Chairman of the Shell Companies in the Philippines from 1997 to 2001 and concurrently the Managing Director of Shell Philippines Exploration B.V. until 2002. From 1997 to 2004, he was the Senior Management Adviser of Shell Exploration B.V. and from 2002 to 2006, the CEO Adviser of Pilipinas Shell

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Petroleum Corporation. Mr. Reyes completed the Master in Business Administration Program of the Ateneo Graduate School of Business and the Program in Management Development of Harvard Business School, and holds a Diploma in International Business from the Waterloo Lutheran University, Canada.
Mr. Pedro E. Roxashas beenPresident or a director of PLDT since March 1, 2001. He serves as a member of the Governance and Nomination, Audit and Executive Compensation Committees of the Board of Directors of PLDT. He is the Chairman and/companies or Chief Executive Officer/President of various business organizationsassociations in the fields of agri-business, sugar manufacturing and real estate development including Roxas Holdings Inc., Roxas and Company, Inc., Roxaco Land Corporation, Central Azucarera Don Pedro, Inc., Central Azucarera de la Carlota, Inc., Roxol Bioenergy Corporation, Fuego Land Corporation and Hawaiian Philippine Sugar Company, an independent director of Meralco, and a director of Brightnote Assets Corporation, Club Punta Fuego, Inc. and BDO Private Bank.Philippine Sugar Millers Association, and a member of the Board of Trustees of Philippine Business for Social Progress and Fundacion Santiago (where he is also the President). Mr. Roxas received his Bachelor of Science Degree in Business Administration from the University of Notre Dame, Indiana, U.S.A.

Mr. Juan B. Santos, 75 years old, has been a director of PLDT since January 25, 2011. He is the Chairman of the Social Security Commission, or SSC,Commission/Social Security System, and a member of the Board of Directors of Alaska Milk Corporation, FPHC, Grepalife Financials, Inc.,First Philippine Holdings Corporation and Philex Mining Corporation, which are PSE-listed companies. He is also a member of the Board of Directors of Philippine Investment Management (PHINMA), Inc., Sun Life Grepa Financial, Inc. and Zuellig Group Inc., a member of the Board of Advisors of Coca Cola Bottlers Phils., Inc. andCoca-Cola FEMSA Asia Division, East-West Seeds Co., Inc., a trustee of Ramon Magsaysay Award Foundation and St. LukesLuke’s Medical Center, and a consultant of the Marsman-Drysdale Group of Companies.

Mr. Santos retired as Chief Executive Officer of Nestle Philippines, Inc. (NPI) in 2003 and continued to serve as Chairman of NPI until 2005. Prior to his appointment as President and CEO of NPI, he was the CEO of NPI of the Nestle Group of Companies in Thailand and Nestle Singapore Pte Ltd.Singapore. He served as Secretary of Trade and Industry from February 2005 to July 2005.2005 and was designated as a member of the Governance Advisory Council, and Private Sector Representative for the Public-Private Sector Task Force for the Development of Globally Competitive Philippine Service Industries.

Mr. Santos was bestowed the prestigious Management Man of the Year Award for 1994 by the Management Association of the Philippines and was the Agora Awardee for Marketing Management given by the Philippine Marketing Association in 1992. He obtained his Bachelor of Science Degree in Business Administration from Ateneo de Manila University, and pursued post graduate studies at the Thunderbird Graduate School of Management in Arizona, U.S.A.USA and completed the Advanced Management Course at IMD in Lausanne, Switzerland.

Mr. Tony Tan Caktiong, 61 years old, has been a director of PLDT since July 8, 2008. He is the Chairman and Chief Executive Officer of Jollibee Foods Corporation, a leader in the fastfood business, which owns and operates a chain of restaurants nationwide and abroad. He is also the Chairman of Jollibee Foundation, aan independent director of First Gen Corporation (a PSE listed company), and a member of the Board of Trustees of TemasekJollibee Group Foundation and St. Luke’s Medical Center.Temasek Foundation. Mr. Tan Caktiong obtained his Bachelor of Science Degree in Chemical Engineering from University of Santo Tomas and honed his business skills by attending various courses and seminars in several educational institutions such asincluding, among others, the Asian Institute of Management, Stanford University (Singapore) and Harvard University.

Mr. Alfred V. Ty, 46 years old, has been aan independent director of PLDT since June 13, 2006. He serves as a member of the Audit, Governance and Nomination and Executive Compensation Committees of the Board of Directors of PLDT. He is the Chairman of Lexus Manila, Inc. and Asia Pacific Top Management International Resources, Corp. (Marco Polo Plaza Cebu), the Vice Chairman of Toyota Motors Philippines Corporation, the President of Federal Land,GT Capital Holdings, Inc., a director of Global Business Power Corp. and the Corporate Secretary of Metropolitan Bank and Trust Company, both of which are PSE-listed companies. He is also the Vice Chairman of Toyota Motor Philippines Corporation, the President of Federal Land, Inc., the Chairman of Lexus Manila, Inc., Cathay International Resources, Inc. and Bonifacio Landmark Realty & Development Corporation, a director of Global Business Power Corp., a trustee of Metrobank Foundation, Inc., Norberto Tytana Foundation and GT-Metro Foundation, Inc. Mr. Ty received his Bachelor of Science Degree in Business Administration from the University of Southern California.

Atty. RayMa. Lourdes C. EspinosaRausa-Chan, 60 years old, has been a director of PLDT since November 24, 1998. HeMarch 29, 2011 and is the Heada non-voting member of the Regulatory AffairsGovernance and Policies GroupNomination Committee of PLDT since March 2004. He also serves as the President and Chief Executive Officer of MediaQuest Holdings, Inc., ABC Development Corporation (TV5), Mediascape, Inc. (Cignal TV), Nation Broadcasting Corporation and other subsidiaries of MediaQuest Holdings, Inc. and is the Vice Chairman of Philweb, and the Board of TrusteesDirectors of the PLDT Beneficial Trust Fund. He is a director of several companies engaged in electricity, mining, other public utility and media businesses.

     Atty. Espinosa served as President and Chief Executive Officer of ePLDT from August 21, 2000 until April 15, 2010. Prior to joining PLDT, he was a partner and member of the Executive Committee of the law firm Sycip Salazar Hernandez & Gatmaitan until June 2000. He topped the Philippine Bar examination in 1982 after graduating Salutatorian of Law Class 1982 from the Ateneo de Manila University and received his Master of Laws Degree from the University of Michigan Law School.
Atty. Ma. Lourdes C. Rausa-Chanwas appointed as director of PLDT on March 29, 2010.PLDT. She has been serving as Corporate Secretary, Corporate Affairs and Legal Services Head and Chief Governance Officer of PLDT since November 1998, January 1999 and March 2008, respectively. She is a director of ePLDT and PLDT Global Investments Holdings, Inc. and also serves as Corporate Secretary of PCEV and several subsidiaries of PLDT.PLDT, PCEV, PLDT-Smart Foundation Inc. and Philippine Disaster Recovery Foundation, Inc. Prior to joining PLDT, she was the Group Vice President for Legal Affairs of

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Metro Pacific Corporation and the Corporate Secretary of some of its subsidiaries. Atty.Ms. Rausa-Chan obtained her Bachelor of Arts Degree in Political Science and Bachelor of Laws Degree from the University of the Philippines.
     Except for Messrs. Tatsu Kono and Takashi Ooi who are Japanese citizens, all of the other directors/independent directors are Filipino citizens.
Ms. Anabelle L. Chua, Treasurer and Corporate Finance and Treasury Head, concurrently holds the position of Chief Financial Officer of Smart since 2006. She holds directorships in Smart and several subsidiaries of PLDT and Smart including ePLDT, PCEV, Wolfpac, SBI, CURE, Airborne Access, SHI, and Chikka Holdings Limited. She is a member of the Board of Trustees of the PLDT Beneficial Trust Fund. She has over 20 years of experience in the areas of corporate finance, treasury, financial control and credit risk management, and was a Vice President at Citibank, N.A. where she worked for 10 years prior to joining PLDT in 1998. She graduated magna cum laude from the University of the Philippines with a Bachelor of Science Degree in Business Administration and Accountancy.

Mr. Ernesto R. Alberto, 52 years old, was appointed as Enterprise and International and Carrier Business Head in September 2011. Prior to that, he was the Customer Sales and Marketing Group Head since February 2008. He leads all revenue generation relationship initiatives of PLDTthe Enterprise, International & Carrier Business, including product/market development, product management, marketing, sales and distribution, and customer relationship management. He is the Chairman director and/orand President of Subictel, Clarktel,Telesat, Inc., the President and CEO of ePLDT, the Chairman of ABM Solutions, Inc., Acasia, BCC, ePDS, Inc., iPlus Intelligent Network, Inc., ClarkTel, SubicTel and Smart-NTT Multimedia, Inc., a director of Asean Telecoms Holdings, Mabuhay Investments, PLDT Global (Philippines and Malaysia), Philcom, Maratel Telesat, SBI-Cruztelco, BCC and Mabuhay Satellite, SNMI and NTT Communications Phils.IPCDSI. He has over 20 years of work experience in the areas of corporate banking, relationship management and business development and, prior to joining PLDT in 2003, was a Vice President and Head of the National Corporate Group of Citibank N.A., Manila from 1996 to May 2003. He previously served as Vice President and Head of the Relationship Management Group of Citytrust Banking Corporation. Mr. Alberto obtained his Master’s Degree in Economic Research from the University of Asia and the Pacific.

Mr. Isaias P. Fermin, 45 years old, was designated, on January 1, 2012, as Executive Vice President and Head of Home Business of the PLDT Group. He is responsible for delivering revenue and profit growth for the Home Business through a much defined brand positioning that consistently engages the consumer in all touch points, a balanced product portfolio that propels both subscriber and ARPU growth and introduction of a new line of products and services that significantly improves the consumer use experience. Concurrently, he is the Chairman of the Board of Directors of Philcom and Maratel, the Chief Operating Officer of Digitel and a director of PLDT Global.

Mr. Fermin has over 20 years of experience covering general management, consumer marketing, wholesale and retail sales, and retail store management gained from leading fast moving consumer group companies locally and globally. Prior to joining the PLDT Group, Mr. Fermin was the President of Greenwich Food Corporation and Chowking Food Corporation of the Jollibee Foods Corporation from 2008 to 2011. He also served as Country Director of Nike Philippines from 2006 to 2008 and handled various posts in Unilever-Bestfoods from 1998 to 2005 as senior executive for sales, marketing, media and innovation process management. Mr. Fermin obtained his Bachelor of Science in Chemical Engineering Degree from the University of the Philippines.

Ms. Anabelle L. Chua, 53 years old, Treasurer and Corporate Finance and Treasury Head, concurrently holds the position of Chief Financial Officer of Smart since 2006. She holds directorships in PTIC, Smart and several subsidiaries of PLDT and Smart including ePLDT, Digitel and DMPI, ACeS Philippines, PCEV, Wolfpac, SBI, Smart Hub, Inc. and Chikka. She is a member of the Board of Directors of PSE and Securities Clearing Corporation of the Philippines and the Board of Trustees of the PLDT-Smart Foundation and PLDT Beneficial Trust Fund, and is a director of MediaQuest and certain of its subsidiaries. She has over 20 years of experience in the areas of corporate finance, treasury, financial control and credit risk management and was a Vice President at Citibank, N.A. where she worked for 10 years prior to joining PLDT in 1998. She graduated magna cum laude from the University of the Philippines with a Bachelor of Science Degree in Business Administration and Accountancy.

Mr. Rene G. Bañez, Administration58 years old, Supply Chain, Asset Protection and Materials Management Group Head, was the Chief Governance Officer of PLDT from October 2004 to March 3, 2008 and the Support Services and Tax Management Group Head of PLDT from January 1999 to January 2001. He is director of FEP Printing Corp., Meralco Industrial Engineering Services Corp., ClarkTel, SubicTel, Maratel and Philcom. He served as Commissioner of the Philippine Bureau of Internal Revenue from February 2001 to August 2002. Prior to joining PLDT, he was the Group Vice President for Tax Affairs of Metro Pacific Corporation for 3three years until December 1998. He holds directorships in some subsidiaries of PLDT. He obtained his Bachelor of Laws Degree from the Ateneo de Manila University.

Mr. Alejandro O. Caeg, 53 years old, is the President and CEO of PLDT Global Corporation and concurrently the Head of PLDT, Smart, Digitel and Sun International & Carrier Business. He is Smart’s representative to the Conexus Mobile Alliance, or Conexus, (one of Asia’s largest cellular roaming alliances), where he was also designated as its Deputy Chairman until 2012 and is currently Conexus Chairman till 2014. Prior to joining PLDT in 2009, he worked in PT Smart Telecom (Indonesia) as its Chief Commercial Strategy Officer from July 2008 to December 2008 and as Chief Commercial Officer from January 2006 to June 2008. He also held various sales, marketing and customer service-related positions in Smart including that of Group Head of Sales and Distribution from 2003 to 2005, Group Head of Customer Care and National Wireless Centers from 1998 to 2001 and Marketing Head of International Gateway Facilities and Local Exchange Carrier from 1997 to 1998. He also served as President and CEO of Telecommunications Distributors Specialist, Inc. in 2002 and as Chief Operations Adviser of I-Contacts Corporation (Smart’s Call Center subsidiary) from 2001 to 2002. Mr. Caeg graduated with a Bachelor’s Degree in AB Applied Economics and obtained MBA credits from De La Salle University, Manila.

Mr. Jun R. Florencio, 58 years old, Internal Audit and Fraud Risk Management Head, handles the overall coordination of the internal audit function of the PLDT group of companies and is in-charge of the fraud risk management function of the PLDT fixed business. He has over 25 years of work experience in the areas of external and internal audit, revenue assurance, credit management, information technology, financial management, and controllership. He was the Financial Controller of Smart for four years before he joined PLDT in April 1999.1999 as Head of Financial Management Sector. He held various positions in the finance organization of another telecommunications company prior to joining Smart. Mr. Florencio obtained his Bachelor of Science Degree in Commerce, Major in Accounting from the University of Santo Tomas and attended the Management Development Program of the Asian Institute of Management.

Mr. Menardo G. Jimenez, Jr., 50 years old, Customer Service Assurance Head, Human Resources Group Head, and concurrently Business Transformation Office Head, was Revenue Team Head of the Business Transformation Office from January 2008 to July 2010, the Retail Business Head of PLDT from June 2004 to December 31, 2007 and, prior to that, the Corporate Communications and Public Affairs Head. He had a stint at GMA Network, Inc., where he served as head of a creative services and network promotions. He won the first CEO Excel Awards (Communications Excellence in Organizations) given by the International Association of Business Communicators mainly for effectively using communications strategies in managing the PLDT retail business team to meet its targets and achieve new heights in the landline business. In 2006, his further achievements in handling the retail business of PLDT and his stint in Smart as officer-in-charge for marketing were recognized by the Agora Awards which chose him as its Marketing Man of the Year. Mr. Jimenez obtained his AB Economics Degree from the University of the Philippines.

Mr. George N. Lim,Network Service AssuranceTeam Head and concurrently Network Team Head of the Business Transformation Office, has over 30 years of work experience in telecommunications management. He was the Network Services Head from February 2003 to December 2007, Network Development and Provisioning Head from February 1999 to January 2003 and Marketing Head from December 1993 to February 1999. Mr. Lim holds directorships in some subsidiaries of PLDT. He obtained his Bachelor of Science Degree in Electrical Engineering from the Mapua Institute of Technology and Master of Science Degree in Industrial Economics from the University of Asia and Pacific (formerly Center for Research and Communication).

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Mr. Claro Carmelo P. Ramirez, 53 years old, was appointed as President of Pilipinas Global Network Limited, the international distribution arm of TV5 in 2011. He has over 20 years of work experience in the field of marketing. Prior to joining PLDT, he held various managerial positions in Colgate Palmolive Philippines, Inc., and served as Associate Director for Global Business Development of Colgate PalmoliveColgate-Palmolive Company in New York and as Marketing Director of Colgate PalmoliveColgate-Palmolive Argentina, S.A.I.C. and Colgate-Palmolive Phils, Inc. While in PLDT, he was the Head of Consumer Marketing, Retail Business Group (RBG), International and Carrier Business Group (ICBG), and Customer Care. He holds directorshipsalso held director positions in Intelligent Network Plus, Inc.various PLDT subsidiaries and Sidera Technologies, Inc.affiliates and served as President and CEO of ClarkTel, SubicTel, and Maratel. He graduated with honors from the Ateneo de Manila University with a Bachelor of Arts Degree Major in Economics.

Ms. June Cheryl A. CabalCabal-Revilla, 40 years old, Controller and Financial Reporting and Controllership Head, is also a director and the chief financial officer/treasurer of certain subsidiaries of PLDT and the PLDT-Smart Foundation, Inc. She is also the Chief Financial Officer of Cignal TV, Inc. and Pacific Global One Aviation Company, Trustee and Chief Finance Officer of the Philippine Disaster Recovery Foundation.Foundation, Controller of First Pacific Leadership Academy, Inc. and the

President of Tahanan Mutual Building and Loan Association. Prior to joining PLDT in June 2000 as an executive trainee in the Finance Group, she was a senior associate in the business audit and advisory group of Sycip Gorres Velayo & Co. She was the 2008 Young Achievers Awardee for Commerce and Industry conferred by the Philippine Institute of Certified Public Accountants.Accountants and recently joined the ranks of the distinguished pool of awardees of The Outstanding Young Men (TOYM) for community service through the program known as the Gabay Guro (2G). In March 2010, she was appointed as a member of the Financial Reporting Standards Council of the Philippines. Ms. CabalCabal-Revilla obtained her Bachelor of Science Degree in Accountancy from De La Salle University and Master in Business Management Degree from the Asian Institute of Management.

Mr. Christopher H. Youngis our chief financial advisor.Chief Financial Advisor. He worked in PricewaterhouseCoopers in London and Hong Kong from 1979 until 1987, at which time he joined First Pacific in Hong Kong as group financial controller. He joined Metro Pacific Corporation in 1995 as finance director,Finance Director, a position he held until he joined us in November 1998.

The following is a brief description of the business experience of the other membermembers of senior management of PLDT as at February 28, 2011:

2014:

Mr. Rolando G. Peñawas designated, in January 2011, to head, 52 years old, is the Technology Head for PLDT, Smart, Digitel and Digitel Mobile and is responsible for developing and overseeing the Technology Roadmap for the PLDT Group. He heads the evaluation, analysis and execution of the accelerated network build-out program encompassing fixed, wireless and broadband networks to ensure the PLDT Group’s undisputed leadership in network capability, innovation and IT networkcustomer experience. He is a director of Smart and other subsidiaries of Smart including SBI and i-Contacts where he is also the President, Wolfpac, Smart e-Money, Inc., Smart Money Holdings Corporation, PH Communications Holdings Corporation, Chikka, Wireless Card, Inc., Smart Hub, Inc., Airborne Access Corporation, CURE, and Primeworld Digital Systems, Inc., and PCEV. He also holds directorships in Mabuhay Satellite, ClarkTel, SubicTel, BCC, E-Meralco Ventures, Inc. and Radius Telecoms, Inc.

Mr. Peña has over 31 years of experience in telecommunication operations and was chosen as Electronics and Communications Engineer for the year 2000 by the Institute of Electronics and Communications Engineers of the Philippines. From 2008 to January 2011, he was the Customer Service Assurance Group Head of PLDT and Smart. Prior to that, he was Head of Customer Service Assurance Group since January 2008 and was responsible for overseeing all customer fulfillment services, including customer service and network engineering and operations. From 1999 to 2007, he was the Head of Network Services Division of Smart and prior to joining Smart in 1994, he was the First Vice President in charge of Technical Operations of Digital Telecommunications Philippines, Inc. Digitel.

Mr. Peña holds directorships in some subsidiaries of PLDT and Smart. He obtained his Bachelor of Science Degree in Electronics and Communications Engineering Degree from the Pamantasan ng Lungsod ng Maynila.

     The followingMaynila where he received the Distinguished Alumnus Award for Telecommunications. He is a Fellow at the Telecommunications Management Institute of Canada (TEMIC) and has attended various telecommunications management courses in Hongkong, Japan, Sweden, Finland, Spain and Germany.

Mr. Charles A. Lim, 51 years old, is the Executive Vice President and Head for Consumer Wireless Business of Smart. Concurrently, he is also the Chief Operating Officer of Digitel Mobile which carries the brand Sun Cellular. Prior to the acquisition of Digitel by PLDT, Mr. Lim was Business Unit CEO for the Landline and Cellular business of Digitel. He was previously the Strategic Business Unit Head for Mobile Communications of Globe Telecom Inc. before joining Digitel. He was also the Director for Brand Marketing Greater China of CocaCola China Limited Hongkong and the Business Unit HeadVan den Bergh Foods of Unilever Philippines Illc. He obtained his Bachelor of Science in Business Management Degree Degree from Ateneo de Manila University.

Mr. Emmanuel Ramon C. Lorenzana, 47 years old, Executive Vice President, is the Head of the newly created Multi Media Office of the PLDT Group, which is tasked with coordinating a multi- media/multi-screen strategy for the PLDT Group. He is concurrently the President and CEO of Mediaquest and several of its subsidiaries including, among others, TV5 Network, Inc. and Cignal TV, Inc. He served as the Head of the Individual Business of Smart and Wireless Business and was responsible for driving the commercial objectives and directions for the Wireless Business and establishing the Brand DNA, providing over-all directions, and creating a consumer/market-driven organization. He headed and defined the strategies for the functions of brand management, product marketing, product research and development, sales and aftersales, and strategic business support units focusing on customer experience, analytics, digital media, and all customer touchpoints including credit and payment systems. Prior to joining the PLDT Group, he was the President and Chief Operating Officer of NutriAsia Group, makers of leading food brands, since November 2008. He was the Chairman and Managing Director of Unilever Malaysia and Singapore from 2007 until October 2008 and held leadership positions in several Unilever companies including Unilever Philippines Home and Personal Care, as Managing Director from 2004 to 2007 and as Business Planning and Trade Marketing Director of Unilever Philippines from 2000 to 2001, Unilever Oral Care Category, Jakarta, Indonesia, as Vice President Asia and Africa from 2001 to 2004 and Unilever Shanghai Toothpaste Company, Shanghai, China, as Consumer and Trade Marketing Director from 1997 to 1999. Mr. Lorenzana obtained his Bachelor of Science in Chemical Engineering Degree from the University of the Philippines and attended various Executive Programs at the Massachusetts Institute of Technology in Boston, Kellog School of Management in Chicago, and Ashridge Management School in London.

Below is a list of directorships in other private and public companies of the directors/independent directors named below:

below. All directoships of our other directors are included in their respective biographies in the preceding pages.

Name of Director

  

Names of Companies

   Name of Companies
Name of Director

Public

  Public

Private

Helen Y. Dee

  Private
Helen Y. Dee

EEI Corporation (Regular Director)

  AY Holdings, Inc. (Regular Director)
  

National Reinsurance Corporation of the Philippines (Chairman)

Great Life Financial Assurance Corporation Great Pacific Life Assurance Corp.
(Regular Director/Chairman)

Petro Energy Resources Corporation

Hi-Eisai Pharmaceuticals, Inc. (Chairman)
(Regular Director/Chairman)

Rizal Commercial Banking Corporation (Chairman)(Regular Director/Chairman)

Seafront Resources Corporation (Regular Director/Chairman)

Seafront Resources Corporation (Regular Director/Chairman)

  

GPL Holdings, Inc. (Regular Director)

Financial Brokers Insurance Agency, Inc. (Regular Director/Chairman)

Hi-Eisai Pharmaceuticals, Inc. (Regular Director/Chairman)

Honda Cars, Kalookan

Seafront Resources CorporationKaloocan (Regular Director)

Honda Cars Philippines, Inc.

Bankard, (Regular Director)

House of Investments, Inc.

(Regular Director/Chairman)]

Hydee Management & Resource Corp. (Regular Director/Chairman)

Isuzu Philippines, Inc.

(Regular Director)

La Funeraria Paz Inc. (Chairman)

Sucat (Regular Director/Chairman)

Landev Corp. (Chairman)

(Regular Director/Chairman)

Maibarara Geothermal, Inc. (Regular Director/Chairman)

Malayan Insurance Company (Chairman)

(Regular Director/Chairman)

Manila Memorial Park Cemetery, Inc. (Chairman)

(Regular Director/Chairman)

Mapua Information Technology Center, Inc. (Chairman)

Merchants Bank (Chairman)

(Regular Director/Chairman)

MICO Equities, Inc.

(Regular Director)

Mijo Holdings, Inc. (Regular Director/Chairman)

Moira Management, Inc. (Regular Director)

Pan Malayan Express

(Regular Director)

Pan Malayan Management and Investment

Corporation (Vice(Regular Director/Vice Chairman)

Pan Malayan Realty Corp. (Chairman)(Regular Director/Chairman)

Petro Green Energy Corporation(Regular Director/Chairman)

Philippine Integrated Advertising Agency, Inc. (Regular Director)

RCBC Forex Brokers Corp (Regular Director)

RCBC Leasing & Finance Corp (Regular Director/Chairman)

RCBC Savings Bank (Regular Director/Chairman)

Sunlife Grepa Financial, Inc. (Regular Director)

Tameena Resources, Inc. (Regular Director/Chairman)

West Spring Development Corp. (Regular Director/Vice Chairman)

Xamdu Motors, Inc. (Regular Director/Chairman)

YGC Corporate Services, Inc. (Regular Director)

    RCBC Forex Brokers Corp.(Chairman)
    RCBC Savings Bank (Chairman)
    South Western Cement Corporation (Chairman)
    Xamdu Motors, Inc. (Chairman)
    
Ray C. Espinosa  Cyber Bay CorporationABC Development Corporation

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Digital Telecommunications Phils., Inc.(Regular Director)


Name of Companies
Name of DirectorPublicPrivate
Lepanto Consolidated Mining Company
(Independent Director)
  Beacon Electric Asset Holdings, Inc. (Regular Director)
  Metro Pacific Investments Corporation

Lepanto Consolidated Mining Company (Independent Director)

  Bonifacio Communications CorporationCorp. (Regular Director)
  

Manila Electric Company (Regular Director)

  ePDS, Inc.Business World Publishing Corporation (Regular Director)
  Philweb

Metro Pacific Investments Corporation (Vice Chairman)(Regular Director)

  Cinegear, Inc. (Regular Director/Chairman)

Digitel Crossing, Inc. (Regular Director)

Digitel Mobile Phils, Inc. (Regular Director)

Hastings Holdings, Inc. (Regular Director/Chairman)

Med Vision Resources, Inc. (Regular Director/ Chairman)

Media5 Marketing Corporation (Regular Director)

Meralco PowerGen Corporation

(Regular Director)

Metro Pacific Assets Holdings, Inc.

(Regular Director)

Metro Pacific Holdings, Inc. (Regular Director)

Metro Pacific Resources, Inc.

(Regular Director)

NTT Communications Philippines Corporation (Regular Director)

Philippine Telecommunications Investment

Corp. (Regular Director)

Philstar Daily, Inc. (Regular Director)

Philstar Global Corporation

Oscar S. ReyesAlcorn Gold Resources, (Regular Director)

Pilipinas Global Network Limited (Regular Director)

Pilipino Star Ngayon, Inc. (Independent(Regular Director)

Mindoro Resources

SatVentures, Inc. (Regular Director)

Studio5, Inc. (Regular Director/Chairman)

Telemedia Business Ventures, Inc. (Regular Director/Chairman)

The Philippine Home Cable Holdings, Inc (Regular Director)

Unilink Communications Corp (Regular Director/Chairman)

Unitel Productions, Inc. (Regular Director)

Upbeam Investments, Inc. (Regular Director/Chairman)

Winner Asset Holdings, Ltd.

Ayala Land, Inc. (Independent Drector)Petrolift, Inc. (Independent (Regular Director)
Bank of the Philippine IslandsSmart Communications, Inc.
Basic Energy Corporation (Independent Director)Sun Life Dollar Advantage Fund, Inc. (Independent Director)
Manila Water Company, Inc. (Independent Director)Sun Life Dollar Abundance Fund, Inc. (Independent Director)
Pepsi Cola Products Philippines, Inc. (Independent Director)Sun Life Financial Plans, Inc. (Independent Director)

Terms of Office

The directors of PLDT are elected each year to serve until the next annual meeting of stockholders and until their successors are elected and qualified.qualified, except in case of death, resignation, disqualification or removal from office. The term of office of all officers is coterminous with that of the board of directors that elected or appointed them.

Family Relationships

None of the directors/independent directors keyand officers and advisors of PLDTthe Company or persons nominated to such positions has any family relationships up to the fourth civil degree either by consanguinity or affinity.

affinity, except Mr. James L. Go and Ms. Anabelle L. Chua who are relatives to the fourth civil degree by consanguinity.

Compensation of Key Management Personnel

The aggregate compensation paid to our key officers and directors named above, as a group, for 20102013 amounted to approximately Php877Php447 million.

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The following table below sets forth the aggregate amount of compensation paid in 20102013 and 20092012 and estimated amount of compensation expected to be paid in 20112014 to: (1) the President and Chief Executive Officer,CEO, Napoleon L. Nazareno and four most highly compensated officers of PLDT, as a group, namely; Menardo G. Jimenez, Jr.,namely: Anabelle L. Chua, Ernesto R. Alberto, Rene G. Bañez and Ma. Lourdes C. Rausa-Chan in 2010 and 2011, and Victorico P. Vargas, Anabelle L. Chua, Ernesto R. Alberto and Ma. Lourdes C. Rausa-Chan in 2009;Rausa-Chan; and (2) all other key officers, other officers and directors, as a group.
             
  2011 2010 2009
  Estimate Actual
      (in millions)
President and CEO(1)and four most highly compensated key officers:
            
Salary(2)
  Php55   Php51   Php47 
Bonus(3)
  14   12   10 
Other compensation(4)
  46   225   52 
          
   115   288   109 
          
             
All other key officers, other officers and directors as a group (excluding the President and CEO and four most highly compensated key officers):            
Salary(2)
  227   232   204 
Bonus(3)
  62   61   54 
Other compensation(4)
  215   1,087   246 
          
   Php504   Php1,380   Php504 
          

   2014   2013   2012 
   Estimate   Actual 
   (in millions) 

President and CEO(1) and four most highly compensated key officers:

      

Salary(2)

  Php66    Php60    Php58  

Bonus(3)

   16     14     15  

Other compensation(4)

   53     59     65  
  

 

 

   

 

 

   

 

 

 
  Php135    Php133    Php138  
  

 

 

   

 

 

   

 

 

 

All other key officers, other officers and directors as a group

      

(excluding the President and CEO and four most highly compensated key officers):

      

Salary(2)

  Php274    Php247    Php244  

Bonus(3)

   68     62     62  

Other compensation(4)

   212     327     264  
  

 

 

   

 

 

   

 

 

 
  Php554    Php636    Php570  
  

 

 

   

 

 

   

 

 

 

(1)
(1)

The President and CEO receives compensation from Smart but not from PLDT.

(2)

Basic monthly salary.

(3)

Includes longevity pay, mid-year bonus, 13th month and Christmas bonus.

(4)

Includes variable pay and other payments. Variable pay is based on an annual incentive system that encourages and rewards both the individual and group/group team performance and is tied to the achievement of Corporate/Unit/Customer Satisfaction Objectives. It covers regular officers and executives of PLDT and is based on a percentage of their guaranteed annual cash compensation. The 2010 other compensation includes LTIP payments duringSee Note 24 – Related Party Transactions – Compensation of Key Officers of the year.PLDT Group to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for further discussion.

Each of the directors of the Company is entitled to a director’s fee for each meeting of the Board of Directors attended. In addition, the directors who serve in the committees of the Board of Directors, namely, the Audit, Governance and Nomination, Executive Compensation and Technology Strategy Committees, are each entitled to a fee for each committee meeting attended.

On January 27, 2009, the Board of Directors of PLDT approved an increase in director’s board meeting attendance fees to Php200 thousandPhp200,000, payable to each director from Php125 thousandPhp125,000 and board committee meeting attendance fees to Php75 thousandPhp75,000 from Php50 thousand.Php50,000. The attendance fees for directors were last adjusted in July 1998. The Executive Compensation CommitteeECC recommended the increase taking into consideration PLDT’s profitability growth (versus Board remuneration) and the results of the survey on Board remuneration conducted by Watson Wyatt, which showed that PLDT’s directors’ remuneration, consisting only of fees for meeting attendance, and/or retainer fees and profit share were below the median of directors’ remuneration among participating companies in the survey.

Except for the fees mentioned above, the directors are not compensated, directly or indirectly, for their services as such directors. The aggregate amount ofper diems paid to the directors for their attendance in Board and Board Committee meetings is included in other compensation in the above table. The total amount ofper diems paid in 20102013 and 20092012 were approximately Php35Php32 million and Php36Php35 million, respectively. The total amount ofper diems estimated to be paid in 20112014 is approximately Php39Php36 million.

There are no agreements between PLDT Group and any of its key management personnel providing for benefits upon termination of employment, except for such benefits to which they may be entitled under PLDT Group’s retirement and incentive plans.

Long-term Incentive Plan
     On August 28, 2006, the PLDT’s Board of Directors approved, in principle, the broad outline of the PLDT Group’s strategic plans for 2007 to 2009 focusing on the development of new revenue streams to drive future growth while protecting the existing core communications business. To ensure the proper execution of the three-year

Our long-term incentive plan, particularly with respect to the manpower resources being committed to such plans, 2007 to 2009or LTIP, upon endorsement of the ECC, was approved by the Board of Directors to cover the period from January 1, 2007 to December 31, 2009, or the 2007 to 2009 Performance Cycle. The payment under the 2007 to 2009 LTIP was intended to be made at the end of the 2007 to 2009 Performance Cycle (without interim payments) and contingent upon the achievement of an approved target increase in PLDT’s common share price by the end of the 2007 to 2009

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Performance Cycle and a cumulative consolidated net income target for the 2007 to 2009 Performance Cycle. The 2007 to 2009 LTIP payments were made in April 2010.
     The new LTIP, or 2010 to 2012 LTIP, has been presented to and approved by the Employees Compensation Commission and Board of Directors, and is based on profit targets covering the Performance Cycle. The cost of the new LTIP is determined using the projected unit credit method based on assumed discount rates and profit targets.
     The LTIP was a cash plan that wasis intended to provide meaningful, contingent, financial incentive compensation for eligible executives, officers and advisors of the PLDT Group, who are consistent performers and contributors to the achievement of the long-term strategic plans and objectives, as well as the functional strategy and goals of the PLDT Group, and administered by the ECC which has the authority to determine: (a) eligibility and identity of participants; (b) the award attributable to each participant based on the participant’s annual base compensation and taking into account such participant’s seniority, responsibility level, performance potential, tenure with the PLDT Group, job difficulty and such other measures as the Committee deems appropriate; (c) the level of achievement of the performance objectives; and (d) the actual award payable to each participant based on the level of achievement of the performance objectives.
     The fair value

To ensure the proper execution of our strategic and operational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, the 2012 to 2014 LTIP, covering the period from January 1, 2012 to December 31, 2014, was approved by the Board of Directors with the endorsement of the 2007ECC on March 22, 2012. The award in the 2012 to 20092014 LTIP recognized as expense amountedis contingent upon the successful achievement of certain profit targets, intended to Php1,833 millionalign the execution of the business strategies of the expanded Group, including Digitel, over the three year period from 2012 to 2014. In addition, the 2012 to 2014 LTIP allows for the participation of a number of senior executives and Php1,281 million, respectivelycertain newly hired executives and ensures the continuity of management in line with the succession planning of the PLDT Group. LTIP costs recognized for the years ended December 31, 20092013 and 2008. The outstanding LTIP liability2012 amounted to Php4,582Php1,638 million as at December 31, 2009, which was paid in April 2010.and Php1,491 million, respectively. Total outstanding liability and fair value of the 20102012 to 20122014 LTIP cost amounted to Php1,392Php3,129 million and Php1,491 million as at and for the year ended December 31, 2010. See Note 3 — Management’s Use of Judgments, Estimates2013 and Assumptions, Note 5 — Income and Expenses, Note 23 — Accrued and Other Current Liabilities and Note 25 — Share-based Payments and Employee Benefits to the accompanying consolidated financial statements in Item 18.

2012, respectively.

There are no other warrants or options held by PLDT’s officers or directors either singly or collectively.

SeeNote 3 – Management’s Use of Judgments, Estimates and Assumptions,Note 5 – Income and Expenses,Note 23 – Accrued and Other Current Liabilities andNote 25 – Share-based Payments and Employee Benefits to the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for related discussion.

Share Ownership

The following table sets forth information regarding ownership of our common stock, and preferred stock, as at February 28, 2011,2014 by our continuing directors, key officers and advisors. Each individual below owns less than 1% of our outstanding common and preferred shares.

         
  Shares of Shares of
Name of Owner Common Stock Preferred Stock
Manuel V. Pangilinan  227,450(1)  360 
Napoleon L. Nazareno  13,927(1)  495 
Helen Y. Dee  98   180 
Ray C. Espinosa  18,743(1)   
Takashi Ooi  1    
Tatsu Kono  100    
Rev. Fr. Bienvenido F. Nebres, S.J.  2    
Oscar S. Reyes  1   360 
Albert F. del Rosario(2)
  140,005(3)  2,100 
Pedro E. Roxas  21   540 
Juan B. Santos(4)
  2   360 
Alfred V. Ty  1    
Tony Tan Caktiong  1   50 
Ma. Lourdes C. Rausa-Chan  699(1)  350 
Ernesto R. Alberto  9,000(1)   
Rene G. Bañez  1   540 
Anabelle L. Chua  13,878(1)   
Jun R. Florencio  15   530 
Menardo G. Jimenez, Jr.  22    
George N. Lim  5,356(1)  360 
Claro Carmelo P. Ramirez  11,500    
June Cheryl A. Cabal      
Christopher H. Young  54,313(1)   

Name of Owner

  Shares of
Common Stock
  Percentage of
Class
 

Manuel V. Pangilinan

   244,450(1)   0.113142  

Napoleon L. Nazareno

   19,927(1)   0.009223  

Helen Y. Dee

   273    0.000126  

Ray C. Espinosa

   19,743(1)   0.009138  

James L. Go

   134,914(1)   0.062444  

Setsuya Kimura

   1    —    

Artemio V. Panganiban(2)

   1    —    

Hideaki Ozaki

   1    —    

Pedro E. Roxas

   21    0.000010  

Juan B. Santos

   2    0.000001  

Alfred V. Ty

   1    —    

Tony Tan Caktiong

   1    —    

Ma. Lourdes C. Rausa-Chan

   699(1)   0.000324  

Ernesto R. Alberto

   —      —    

Rene G. Bañez

   1    —    

Anabelle L. Chua

   12,328(1)   0.005706  

Jun R. Florencio

   515(1)   0.000238  

Menardo G. Jimenez, Jr.

   22    0.000010  

Isaias P. Fermin

   —      —    

Claro Carmelo P. Ramirez

   11,500    0.005323  

Alejandro O. Caeg

   200    0.000093  

June Cheryl A. Cabal-Revilla

   —      —    

Christopher H. Young

   54,313(1)   0.025138  

(1)
(1)

Includes PLDT common shares that have been lodged with the Philippine Depository and Trust Co., or PDTC.

(2)

Resigned effective March 25, 2011.

(3)OutAlso includes 175 shares thru RCBC Trust for the account of the 140,005 commonMichelle Y. Dee-Santos and 175 shares 140,004 common shares are under the name of Albert F. del Rosario and/or Margaret Gretchen del Rosario.Helen Y. Dee both thru PCD Nominee Corporation.

(4)(3)

Elected effective January 25, 2011.Includes 210 shares which were bought by a Trust controlled by Mr. Pedro E. Roxas for his children.

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The aggregate number of shares of common and preferred stock directly and indirectly owned by directors, keyexecutive officers and advisors listed above, as at February 28, 2011,2014, was 495,136 and 6,225 respectively,498,913, or approximately 0.265% and less than 0.001%0.230919% of PLDT’s outstanding shares of common stock.

On January 19, 2012, August 30, 2012 and preferred stock, respectively.

May 16, 2013, all outstanding shares of 10% Cumulative Convertible Preferred Stock Series A to FF, Series GG and Series HH issued in 2007, respective, were redeemed and retired. See Item 10. “Additional Information – Redemption of Preferred Stock” for further discussion.

On January 28, 2014 the Board of Directors approved the redemption of all outstanding shares of PLDT’s 10% Cumulative Convertible Preferred Stock Series HH which were issued in 2008 effective May 16, 2014.

Board Practices

Board of Directors – Independent Directors

At least three of our directors, namely, Rev. Fr. Bienvenido F. Nebres, S.J.,Artemio V. Panganiban, Pedro E. Roxas and Alfred V. Ty, are independent directors who are neither officers nor employees of PLDT or any of its subsidiaries, and who are free from any business or other relationship with PLDT or any of its subsidiaries which could, or could reasonably be perceived to, materially interfere with the exercise of independent judgment in carrying out their responsibilities as independent directors. The independence standards/criteria are provided in our By-Laws and CG Manual on Corporate Governance pursuant to which, in general, a director may not be deemed independent if such director is, or in the past five years had been, employed in an executive capacity by us or any company controlling, controlled by or under common control with us or he is, or within the past five years had been, retained as a professional adviser by us or any of our related companies, or he is not free from any business or other relationships with us which could, or could reasonably be perceived, to materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director.

Audit, Governance and Nomination, Executive Compensation and Technology Strategy Committees

Our boardBoard of directorsDirectors is authorized under the by-lawsBy-Laws to create committees, as it may deem necessary. We currently have four boardBoard committees, namely, the audit, governanceAudit, Governance and nomination, executive compensationNomination, Executive Compensation and technology strategy committees,Technology Strategy Committees, the purpose of which is to assist our boardBoard of directors.Directors. Each of these committees has a board-approvedBoard-approved written charter that provides for such committee’s composition, membership qualifications, functions and responsibilities, conduct of meetings, and reporting procedure to the boardBoard of directors.

Directors.

Audit Committee

Our audit committeeAudit Committee is composed of three members, all of whom are independent directors, namely, Rev. Fr. Bienvenido F. Nebres, S.J., who chairsdirectors. As at the committee,date of this report, the Audit Committee members are former Supreme Court Chief Justice Artemio V. Panganiban, Mr. Pedro E. Roxas and Mr. Alfred V. Ty. Mr. Tatsu Kono, aSetsuya Kimura and Mr. James L. Go, non-independent membermembers of our boardBoard of directors,Directors, Mr. Roberto R. Romulo, an independenta member of our advisory board/committee,Advisory Board/Committee, and Ms. Corazon de la Paz-Bernardo, a former member of our boardBoard of directors,Directors, serve as advisors to the audit committee.Audit Committee. All of the members of our audit committeeAudit Committee are financially literate and Ms. Corazon S. de la Paz-Bernardo an advisor tohas expertise in accounting and financial management. She was a former Chairman and Senior Partner of Joaquin Cunanan & Company, now Isla Lipana & Co., a member firm of Pricewaterhouse Coopers (PwC).

As provided for in our Audit Committee charter, any member of the audit committee is an accounting and financial management expert.

may cause the Audit Committee advisor to be excluded from the committee’s meetings, as such member deems appropriate in order for the committee to carry out its responsibilities, until the committee has completed discussion of the topic for which the member requested the Audit Committee advisor to be excluded or until such member has withdrawn his request.

As provided for in the audit committeeAudit Committee charter, the purpose of the audit committeeAudit Committee is to assist our board of directors in fulfilling its oversight responsibilitiesresponsibility for: (i) PLDT’s accounting and financial reporting principles and policies, and system of internal audit controls, and procedures; (ii)including the integrity of PLDT’s financial statements and the independent audit thereof; (iii)(ii) PLDT’s compliance with legal and regulatory requirements; (iii) PLDT’s assessment and management of enterprise risks including credit, market, liquidity, operational and legal risks; and (iv) the performance of the internal audit organization and the external auditors.

To carry its direct responsibility for the appointment, setting of compensation, retention and removal of the external auditors, the audit committeeAudit Committee has the following duties and powers:

to review and evaluate the qualifications, performance and independence of the external auditors and the lead partner of the external auditors;
to select and appoint the external auditors and to remove or replace the external auditors;
to review and approve in consultation with the head of the internal audit organization and the chief financial advisor the fees charged by the external auditors for audit and non-audit services;
to pre-approve all audit and non-audit services to be provided by and all fees to be paid to the external auditors;
to ensure that the external auditors prepare and deliver annually the statement as to independence, to discuss with the external auditors any relationships or services disclosed in such statements that may impact the objectivity, independence or quality of services of said external auditors and to take appropriate action in response to such statement to satisfy itself of the external auditor’s independence;

review and evaluate the qualifications, performance and independence of the external auditors and its lead partner;

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select and appoint the external auditors and to remove or replace the external auditors;


review and approve in consultation with the head of the internal audit organization and the head of the finance organization all audit and non-audit services to be performed by the external auditors and the fees to be paid to the external auditors for such services, and to ensure disclosure of any allowed non-audit services in PLDT’s annual report;

periodically review fees for non-audit services paid to the external auditors and disallow non-audit services that will conflict with the external auditor’s duties to PLDT or pose a threat to the external auditor’s independence;

ensure that the external auditors prepare and deliver annually its Statement as to Independence, discuss with the external auditors any relationships or services disclosed in such Statement that may impact the objectivity, independence or quality of services of said external auditors and take appropriate action in response to such statement to satisfy itself of the external auditor’s independence;

to ensure that the external auditors or the lead partner of the external auditors having the primary responsibility for the audit of PLDT’s accounts is rotated at least once every five years;
to advise the external auditors that they are expected to provide the committee a timely analysis of significant/critical financial reporting issues and practices;
to obtain assurance from the external auditors that the audit was conducted in a manner consistent with the requirement under applicable rules; and
to resolve disagreements between management and the external auditors regarding financial reporting.

review the external auditor’s internal quality-control procedures based on the external auditors’ Statement submitted at least annually, any material issues raised by recent internal quality-control review or peer review of the external auditor, or by any inquiry or investigation by governmental or professional authorities within the preceding five years, regarding one or more independent audits carried out by the external auditor and steps taken to deal with any such issues;

ensure that the external auditors or the lead partner of the external auditors having the primary responsibility for the audit of PLDT’s accounts is rotated at least once every five years or such shorter or longer period provided under applicable laws and regulations;

advise the external auditors that they are expected to provide the committee a timely analysis of significant/critical financial reporting issues and practices;

obtain assurance from the external auditors that the audit was conducted in a manner consistent with the requirement under applicable rules; and

resolve disagreements between management and the external auditors regarding financial reporting.

The audit committee alsoAudit Committee has the authority to retain or obtain advice from special counsel or other experts or consultants in the discharge of their responsibilities without the need for board approval.

Audit Committee Report

Further to our compliance with applicable corporate governance laws and rules, our audit committeeAudit Committee confirmed in its report for 20102013 that:

Each voting member of the Audit Committee is an independent director as determined by the Board of Directors;

Each voting member of the audit committee is an independent director as determined by the board of directors;
In the performance of their oversight responsibilities, the audit committee has reviewed and discussed our financial statements as at and for the year ended December 31, 2009 with management, which has the primary responsibility for the financial statements, and with SGV & Co., our independent auditor, who is responsible for expressing an opinion on the conformity of our financial statements with generally accepted accounting principles;
The audit committee has discussed with SGV & Co. the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communication with Audit Committees) as modified or supplemented;
The audit committee has received written disclosures and the letter from SGV & Co. pursuant to Rule 3526 of the Public Company Accounting Oversight Board (Communication with Audit Committees Concerning Independence) and has discussed with SGV & Co. its independence from the PLDT Group and the PLDT Group’s management;
The audit committee likewise discussed with our internal audit group and SGV & Co. the overall scope and plans for their respective audits. The audit committee also met with our internal audit group and representatives of SGV & Co. to discuss the results of their examinations, their evaluations of our internal controls and the overall quality of our financial reporting;
Based on the reviews and discussions referred to above, in reliance on management and SGV & Co. and subject to the limitations of the audit committee’s role, the audit committee recommended to our board of directors and our board has approved, the inclusion of our financial statements as at and for the year ended December 31, 2009 in our Annual Report to the Stockholders and to the Philippine SEC and U.S. SEC on Form 17-A; and
Based on a review of SGV & Co.’s performance and qualifications, including consideration of management’s recommendation, the audit committee approved the appointment of SGV & Co. as our independent auditor.

The Audit Committee had eight regular meetings during the year;

The Audit Committee has reviewed and approved for retention the existing audit committee charter until the next review in 2014;

The Audit Committee likewise discussed with PLDT’s internal audit group and independent auditors, SyCip Gorres Velayo & Co., or SGV, the overall scope and plans for their respective audits, and the results of their examinations, their evaluations of PLDT Group’s internal controls and the overall quality of the PLDT Group’s financial reporting;

The Audit Committee has reviewed and approved all audit and non-audit services provided by SGV to the PLDT Group, and the related fees for such services, and concluded that the non-audit fees are not significant to impair their independence;

The Audit Committee has discussed with SGV the matters required to be discussed by the prevailing applicable Auditing Standard, and has received written disclosures and the letter from SGV as required by the prevailing applicable Independence Standards (Statement as to Independence) and has discussed with SGV its independence from the PLDT Group and the PLDT Group’s management;

The Audit Committee has discussed with the PLDT’s Group Enterprise Risk Management (ERM) Officer the PLDT Group top risks for 2013 and the ERM assessment results for the Consumer (Individual) Wireless Business and has received periodic status reports on PLDT Group’s ERM activities;

In the performance of its oversight responsibilities, the Audit Committee has reviewed and discussed the audited consolidated financial statements of the PLDT Group as at and for the year ended December 31, 2013 with the PLDT Group’s management, which has the primary responsibility for the financial statements, and with SGV, the PLDT Group’s independent auditors, who are responsible for expressing an opinion on the conformity of the PLDT Group’s audited consolidated financial statements with IFRS;

Based on the reviews and discussions referred to above, in reliance on the PLDT Group’s management and SGV and subject to the limitations of the Audit Committee’s role, the Audit Committee recommended to the Board of Directors and the Board has approved, the inclusion of the PLDT Group’s consolidated financial statements as at and for the year ended December 31, 2013 in the PLDT Group’s Annual Report to the Stockholders and to the Philippine SEC on Form 17-A and U.S. SEC on Form 20-F; and

Based on a review of SGV’s performance and qualifications, including consideration of management’s recommendation, the Audit Committee approved the appointment of SGV as the PLDT Group’s independent auditors.

Governance and Nomination Committee

Our GNC is composed of five voting members, all of whom are regular members of our Board of Directors and threetwo non-voting members, including Former Chief Justice Artemio V. Panganiban, who serves as an independent non-voting member.members. Three of the voting members are independent directors namely, Rev. Fr. Bienvenido F. Nebres, S.J.,former Chief Justice Artemio V. Panganiban, Mr. Pedro E. Roxas and Mr. Alfred V. Ty and Mr. Pedro E. Roxas.Ty. Two are non-independent directors namely, Mr. Tatsu KonoSetsuya Kimura and Mr. Manuel V. Pangilinan who is the chairman of this committee. Former Chief Justice Artemio V. Panganiban is the independent non-voting member; Mr. Menardo G. Jimenez, Jr., and Atty. Ma. Lourdes C. Rausa-Chan are the non-voting members.

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The principal functions and responsibilities of our GNC are:

 1.To developOversee the development and recommend to the board for approval and oversee the implementation of corporate governance principles and policies;

 2.To reviewReview and evaluate the qualifications of the persons nominated for electionto the Board as directors (including independent directors) orwell as those nominated to other positions requiring board appointment;appointment by the Board;

 3.To identifyIdentify persons believed to be qualified to become members of the qualified nominees and recommend thatBoard and/or the board select and recommend such qualified nominees for election as directors/independent directors at the annual meeting of shareholders; andBoard committees;

 4.To provideAssist the Board in making an assessment on our board’sof the Board’s effectiveness in the process of replacing or appointing new directors or members of the board committees.Board and/or Board committees; and

5.Assist the Board in developing and implementing the Board’s performance evaluation process.

Executive Compensation Committee

Our ECC is composed of five voting members, all of whom are regular members of our Board of Directors, and one non-voting member. Three of the voting members are independent directors, namely former Chief Justice Artemio V. Panganiban, Mr. Pedro E. Roxas Rev. Fr. Bienvenido F. Nebres, S.J., and Mr. Alfred V. Ty, and two are non-independent directors, namely, Mr. Tatsu KonoSetsuya Kimura and Mr. Albert F. del Rosario,Manuel V. Pangilinan, who is chairman of this committee as at December 31, 2010.committee. Mr. Menardo G. Jimenez, Jr. is the non-voting member.

The principal functions and responsibilities of our ECC are:

 1.To provideProvide guidance to and assist our board of directorsthe Board in developing a compensation philosophy or policy consistent with ourthe culture, strategy and control environment;environment of PLDT;

 2.To overseeOversee the development and administration of ourPLDT’s executive compensation programs;programs, including long term incentive plans and equity based plans for officers and executives; and

 3.To review and approve corporate goals and objectives relevant toAssist the compensation of our chief executive officer, evaluateBoard in the performance evaluation of our chief executive officerand succession planning for officers, including the CEO, and in lightoverseeing the development and implementation of those goals and objectives, and set the compensation level of our chief executive officer based on such evaluation.professional development programs for officers.

Technology Strategy Committee

Our TSC is composed of sixseven members, all of whom are voting members. Five are non-independent directors, namely, Mr. Manuel V. Pangilinan, who serves as chairman, Mr. Napoleon L. Nazareno, Atty. Ray C. Espinosa, Mr. James L. Go, and Mr. Setsuya Kimura all of whom are non-independent directors, Mr. Oscar S. Reyes and Mr. Tatsu Kono. Mr. Orlando B. Vea a memberwho are members of our advisory board/committee, is the non-voting member of this committee.

Advisory Board/Committee.

The principal functions and responsibilities of our TSC are:

are to assist and enable the Board to:

 1.To reviewReview and approve ourthe strategic vision for the role of technology in PLDT’s overall business strategy, including the technology strategy and roadmap and to review and advise our board on major technology trends and strategies;of PLDT;

 2.To evaluate and advise our board on actual and proposedFulfill its oversight responsibilities for PLDT’s effective execution of its technology investmentsrelated strategies; and transactions;

 3.To reviewEnsure the optimized use and submit to the board recommendations regarding management’s formulation and execution and overall performance in achieving technology-related strategic goals and objectives; and
4.To recommend to the board approaches to acquiring and maintaining technology positions and maximizing our access to relevant technologies, and to ensure optimized contribution of technology to ourPLDT’s business strategyand strategic objectives and growth targets.
     Effective June 12, 2007, our board

Advisory Committee

Our Advisory Board/Committee is composed of directors dissolved the finance committee, since, for several years thereto, all financial transactions which were within the authority of the finance committee to review and/or approve were elevated directly to our board.

Mr. Roberto R. Romulo, Mr. Benny S. Santoso, Mr. Orlando B. Vea, Mr. Christopher H. Young, Mr. Oscar S. Reyes and Mr. Washington Z. Sycip. The Advisory Board/Committee provides guidance and suggestions, as necessary, on matters deliberated upon during Board meetings.

Directors’ and Officers’ Involvement in Certain Legal Proceedings

The Company is not aware, and none of the directors/independent directors and officers or persons nominated for election to such positions has informed the Company, of any of the following events that occurred

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during the past five years:

 (b)(a)any bankruptcy petition filed by or against any business of which a director/independent director or officer or person nominated for election as a director/independent director or officer was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 (c)(b)any conviction by final judgment in a criminal proceeding, domestic or foreign, or any criminal proceeding, domestic or foreign, pending against any director/independent director or officer or person nominated for election as a director/independent director or officer, except as noted below;

 (d)(c)any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting the involvement of any director/independent director or officer or person nominated for election as a director/independent director or officer in any type of business, securities, commodities or banking activities; and
     any finding by a domestic or foreign court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self regulatory organization, that any director/independent director or officer or person nominated for election as a director/independent director or officer, has violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated.

(d)any finding by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization, that any director/independent director or officer or person nominated for election as a director/independent director or officer, has violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated.

The following is a description of the complaints in which our director and President and Chief Executive Officer,CEO, Mr. Napoleon L. Nazareno and our director and Corporate Secretary, Ms.Atty. Ma. Lourdes C. Rausa-Chan are respondents:

 1.Mr. Napoleon L. Nazareno and other directorsAtty. Ma. Lourdes C. Rausa-Chan, in their respective capacities as director and officerscorporate secretary of the former PDCP Bank and some officers of the BSP and Development Bank of the Philippines (hereinafter the “Respondents”), were chargedSteniel Cavite Packaging Corporation, are impleaded as private respondents in a complaintSupplemental Complaint docketed as I.S. No. 2004-631OMB C-C-05-0473-1, filed by Chung Hing Wong/Unisteel/Unisco Metals, Inc. (the “Complainants”) with the DepartmentField Investigation of Justice, or DOJ, for alleged syndicated estafa, estafa thru falsification of documents, other deceits, malversation and robbery. In the complaint-affidavit, the Complainants alleged that the officers and directors of PDCP Bank deceived the Complainants to secure a loan from PDCP Bank through misrepresentation and with the sinister purpose of taking over the Complainants’ corporation. As stated in Mr. Nazareno’s counter-affidavit, the charges against him are manifestly unmeritorious since he has not personally met the Complainants, nor is he a party to the questioned transactions and, as such, could not have deceived the Complainants in any manner. The complaint was referred to the Office of the Ombudsman or OMB, by the DOJ on October 30, 2007 considering that some of the Respondents are public officers and the offenses charged were committed in the performance of their official functions.
Meanwhile, on July 23, 2008, the Complainants filed with the DOJ a Motion for Reconsideration of a Resolution of the DOJ dated September 7, 2007 dismissing their complaint. It appears that prior to forwarding the case records to the OMB, the DOJ has prepared a Resolution recommending the dismissal of all the charges against the Respondents but did not release the said Resolution to the parties because it wanted the OMB to conduct a review of the DOJ Resolution in view of the fact that some of the Respondents are public officers.
In an Order dated July 30, 2008, the OMB confirmed that it was conducting a review of the said DOJ Resolution for the abovestated reason and that its authority relative to the case forwarded to it by the DOJ is limited to conducting a review of the DOJ Resolution and not to conduct another preliminary investigation of the case.
In the OMB’s Review and Recommendation dated November 28, 2008, the OMB approved the DOJ Resolution dated September 7, 2007 dismissing the complaint and referred the case to the DOJ for appropriate action.
The Complainants filed separate Motions for Reconsideration(“OMB”) before the DOJ and OMB on July 16, 2008 and December 1, 2009, respectively. On December 16, 2009, the DOJ issued a ResolutionOMB.

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The Supplemental Complaint dated April 16, 2012 is for the alleged commission of: (a) violation of Section 3(e) of R. A. No. 3019 (otherwise known as the Anti-Graft and Corrupt Practices Act); and (b) estafa through falsification of public documents in relation to Article 171 and Article 172 of the Revised Penal Code. The case relates to the alleged illegal and fraudulent acquisition by Mannequin International Corporation of several tax credit certificates (TCCs) from the One Stop Shop Inter Agency Tax Credit and Duty Drawback Center purportedly through the use of fake and spurious documents and the subsequent transfer of said TCC’s to several transferee corporations, including Steniel Cavite Packaging Corporation.


Mr. Nazareno and Atty. Rausa-Chan have informed the Company that they each had no participation or involvement in the alleged anomalous acquisition and transfer of the subject TCCs and had accordingly filed their counter-affidavits on March 1, 2013 and March 5, 2013, respectively, seeking the dismissal of the supplemental complaint. The case is now pending resolution with the OMB.

denying the Complainants’ Motion for Reconsideration for lack of merit. In response, the Complainants filed a Petition for Review with the Secretary of Justice on March 2, 2010. Mr. Nazareno and the other Respondents have filed their respective Comments to the petition, which remain pending to date with the Office of the Secretary of Justice.
With respect to the Complainants’ Motion for Reconsideration with the OMB, the latter issued an Order dated December 4, 2009 denying the same and affirming its Review and Recommendation of November 28, 2008. In response, the Complainants filed a Petition for Certiorari with the Court of Appeals (“CA”) on July 12, 2010. In a Resolution dated July 26, 2010, the CA dismissed the petition for lack of jurisdiction. The Complainants filed a Motion for Reconsideration on August 17, 2010. Acting on the said motion, the CA issued a Resolution dated September 1, 2010, requiring the Respondents to file their Comment to the motion. On September 28, 2010, the Respondents through counsel filed their Opposition to the Complainants’ Motion for Reconsideration. In a Resolution dated December 1, 2010, the CA noted the respective Comments and/or Opposition filed by the Respondents and considered the Complainants’ Motion for Reconsideration submitted for resolution.
 2.Atty. Ma. Lourdes C. Rausa-Chan and other former directors/officers and corporate secretaries/assistant corporate secretaries of Steniel Cavite Packaging Corporation, Metro Paper and Packaging Products, Inc., AR Packaging Corporation and Starpack Philippines Corporation are respondents in a complaintComplaint docketed as OMB C-C-04-0363-HOMB-C-C-04-0363-H (CPL No. C-04-1248)04-128), filed with the OMB. The complaintComplaint is for alleged: (a) violation of Republic ActR. A. No. 3019 (otherwise known as the Anti-Graft and Corrupt PracticesPolicies Act); (b) estafa through falsification of public documents; (c) falsification of public documents under Article 171, in relation to Article 172, of the Revised Penal Code;Code (RPC); (d) infidelity in the custody of public documents under Article 226 of the RPC; and (e) grave misconduct. It relates to various tax credit certificatesTCCs (allegedly fraudulent, with spurious and fake supporting documents) issued to Victory Textile Mills, Inc. (allegedly a non-existent corporation with fictitious incorporators and directors) and transferred to several companies including the aforesaid companies. The complaintsComplaint against Atty. Rausa-Chan involveinvolves the first two offenses only, and in her capacity as corporate secretaryCorporate Secretary of Metro Paper and Packaging Products, Inc. In the opinion of the legal counsel of Atty. Rausa-Chan, there are no legal and factual bases for her inclusion as respondent in this complaint. Atty. Rausa-Chan had no participation or involvement in the alleged anomalous acquisition and transfer of the subject tax credit certificates. The case is still pending with the OMB.

Although Atty. Rausa-Chan informed the Company that she had no participation or involvement in the alleged anomalous acquisition and transfer of the subject TCCs, the OMB, through a Resolution dated March 6, 2012, found probable cause to charge Atty. Rausa-Chan, together with the other respondents, with several counts of Estafa Thru Falsification of Public and Official Documents and Violation of Section 3(e) of R. A. No. 3019. Atty. Rausa-Chan, thereafter, timely filed a motion for reconsideration dated June 30, 2012 seeking the reconsideration of the resolution of the OMB.

In an Order dated June 3, 2013, the OMB granted the motion for reconsideration of Atty. Rausa-Chan and accordingly dismissed the complaint as against her.

Employees and Labor Relations

As at December 31, 2010,2013, we had 28,77017,899 employees within the PLDT Group, with 5,165, 7,3957,680 and 16,21010,219 employees in our wireless and fixed line and ICT groups,businesses, respectively. PLDT had 7,0086,882 employees as at December 31, 2010,2013, of which 26%17% were rank-and-file employees, 68%76% were management/supervisory staff and 6%7% were executives. This number represents a decrease of 535,265, or approximately 7%4%, from the staff level as at December 31, 2009, mainly as a result of the ongoing MRP.2012. From a peak of 20,312 employees, as at December 31, 1994, PLDT’s number of employees declined by 13,30413,430 employees, or 65%66%, as at December 31, 2010.

2013.

We and our business units had the following employees as at December 31 of each of the following years:

             
  2010 2009 2008
PLDT Group  28,770   29,035   29,904 
Wireless
  5,165   5,507   5,602 
Fixed Line
  7,395   7,947   7,813 
ICT
  16,210   15,581   16,489 
PLDT Only  7,008   7,543   7,590 

   December 31, 
   2013   2012   2011 

PLDT Group

   17,899     19,125     19,452  

Wireless

   7,680     8,663     8,043  

Fixed Line

   10,219     10,462     11,409  

LEC

   7,415     7,546     9,072  

Others

   2,804     2,916     2,337  

PLDT Only

   6,882     6,617     7,067  

The decrease in the number of employees within the PLDT Group from 20092012 to 20102013 was primarily resulted fromdue to the implementation of the MRP in our fixed lineby Smart and wireless businesses.

DMPI as at December 31, 2013.

PLDT has three employee unions, representing in the aggregate 4,811,5,494, or 17%31% of the employees of the PLDT Group. We consider our relationship with our rank-and-file employees’ union, our supervisors’ union and our sales supervisors’ union to be good.

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On October 7, 2009,December 3, 2012, PLDT and theManggagawa ng Komunikasyon sa Pilipinas, or MKP, our rank-and-file employees’ union, concluded and signed a new three-year CBA, covering the period from November 9, 20092012 to November 8, 2012.2015. This CBA provides each member a signingspecial bonus equivalent to one month’s salary (computed at the salary rate prevailing prior to November 9, 2009)2012) plus Php15,000; expeditious agreement bonus of Php20,000;Php37,000; increase of the monthly salary of Php2,500, Php2,600Php2,700, Php2,900 and Php2,800Php3,300 for the first, second and third year, respectively; an increase in the yearly Christmas gift certificate from Php8,000Php9,000 to Php9,000;Php10,000; an increase in the amount of coverage under the group life insurance plan from Php650,000Php750,000 to Php750,000; and Php45,000Php850,000; Php55,000 funeral assistance for the death of a dependent.dependent; additional contribution of Php2 million to the Educational Trust Fund; and relocation assistance of Php40,000. Other provisions of this CBA include increases in the rice subsidy, hospitalization benefits for dependents, dailyper diem. New features of this CBA include prescription eyeglass subsidy and professional fee subsidyfunding assistance for dependent’s hospitalization.
a joint Management-Union environmental awareness education program.

On DecemberJanuary 22, 2010,2014, a CBA was signed by PLDT andGabay ng Unyon sa Telekomunikasyon ng mga Superbisor, or GUTS, our supervisors’ union, or GUTS, covering a three-year period from January 1, 20112014 to December 31, 2016, following the completion of the negotiations between the parties and the signing of the Memorandum of Agreement on December 17, 2013. This CBA provides for increases of the monthly salary by 8%, 9% and 9%8.5% of basic pay or Php3,500, whichever is higher, for each of the first and second year of the CBA, and 7% of basic pay or Php3,000, whichever is higher, for the third year of the CBA, respectively, or Php3,000 whichever is higher;CBA; a goodwill signing and expeditious agreement bonuses of Php30,000 and Php43,000,Php45,000, respectively; an increase in the yearly Christmas gift certificate from Php9,000Php10,000 to Php10,000; Php45,000Php11,000; Php55,000 funeral assistance for the death of a qualified dependent; Php1 million group insurance plan; and additional contribution of Php2Php3 million to the Educational Trust Fund. Other provisions include increases in rice subsidy,per diem allowance and hospitalization benefits for dependents.

dependents, as well as new grants pertaining to prescription eyeglass subsidy and funding assistance for global warming reduction awareness program.

On January 6, 2011,10, 2014, a Memorandum of Agreement on a new CBA covering a three-year period starting from January 1, 20112014 was signed by PLDT and PLDT Sales Supervisors’ Union, or PSSU, which provided for salary increases for the period from January 1, 20112014 to December 31, 2013.2016. This CBA provides for increases of the monthly salary by 8%, 9% and 9%8.5% of basic pay or Php3,500, whichever is higher, for each of the first and second year of the CBA, and 7% of basic pay or Php3,000, whichever is higher, for the third year of the CBA, respectively, or Php3,000 whichever is higher;CBA; a one-time lump sum clothing accessory allowance of Php8,000;Php10,000; a goodwill signing bonus of Php30,000 and an expeditious agreement bonus of Php43,000;Php40,000; an increase in the yearly Christmas gift certificate from Php9,000Php10,000 to Php10,000; Php45,000Php11,000; Php55,000 funeral assistance for the death of a qualified dependent; and additional contribution of Php350,000Php750,000 to the Educational Trust Fund.Fund; and Php1 million group insurance plan. Other provisions included increases in rice subsidy,per diem allowance and hospitalization benefits for dependents.

Pension and Retirement Benefits

Defined Benefit Pension Plans

     We have defined benefit pension plans covering substantially all

We have separate and distinct retirement plans for PLDT and majority of our Philippine-based operating subsidiaries, administered by the respective Fund’s Trustees, covering permanent employees. Retirement costs are separately determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and regular employees, exceptincorporates assumptions concerning employees’ projected salaries.

Retirement costs comprise the employees of Smart and its subsidiary, I-Contacts. The plans require contributions to be made to a separate administrative fund.following:

Service cost;

     PLDT has a trustee-managed, non-contributory

Net interest on the net defined benefit pension plan covering all permanentobligation or asset; and regular employees. The

Remeasurements of net defined benefit pension plan providesobligation or asset.

Service cost which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as part of compensation and employee benefits upon normal retirement beginning at age 65, early retirement beginning at age 50account in the consolidated income statements.

Net interest on the net defined benefit asset or completionobligation is the change during the period in the net defined benefit asset or obligation that arises from the passage of at least 30 years of credited service, voluntary resignation with completion of at least 15 years of credited service, total and physical disability, death and involuntary separation. Benefits aretime which is determined by applying the discount rate based on the employee’s final monthly basic salarygovernment bonds to the net defined benefit liability or asset. Net deferred benefit asset is recognized as part of advances and lengthother noncurrent assets and net defined benefit obligation is recognized as part of service.

     The normal retirement benefit is equal to a percentagepension and other employee benefits in our consolidated statement of financial position.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the final monthly basic salary per yearasset ceiling (excluding net interest on defined benefit obligation) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not classified to profit or loss in subsequent periods.

The net defined benefit asset or liability comprises the present value of credited service. The percentage is 100% for those with less than 15 years of service at retirement and 125% for those with 15 years of service at retirement. Thereafter, the percentage increases by 5% for every additional year of credited service up todefined benefit obligation (using a maximum of 200%. Early retirement benefit is equal to the accrued normal retirement benefitdiscount rate based on salary and service at the date of early retirement.

     In the event the benefit pension plan’s assets are insufficient to pay the required retirement benefits, PLDT would be obligated to fund the amount of the shortfall. In addition, claims of PLDT’s employees for retirement benefits that have accrued would rank above the claims of all other creditors of PLDT,government bonds, as explained in the event of PLDT’s bankruptcy or liquidation.
Defined Contribution Plan
     Smart maintains a trustee-managed, tax-qualified, multi-employer plan covering substantially all permanent and regular employees. The plan has a defined contribution format limiting Smart’s obligation to a specified contribution to the plan. It is being financed by the participating companies (Smart and its subsidiary, I-Contacts) and contribution by employees is optional.

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     Total consolidated pension benefit costs amounted to Php236 million, Php1,306 million and Php725 million for the years ended December 31, 2010, 2009 and 2008, respectively. Unrecognized net actuarial gains as at December 31, 2010 amounted to Php479 million and unrecognized net actuarial losses as at December 31, 2009 amounted to Php2,474 million. As at December 31, 2010 and 2009, the prepaid benefit costs amounted to Php5,333 million and Php5,414 million, respectively. The accrued benefit costs amounted to Php415 million and Php359 million as at December 31, 2010 and 2009, respectively. For more information about the benefit plan including the total amount set aside to provide pension retirement or similar benefits, see Note 3 Management’s Use of Accounting Judgments, Estimates and Assumptions Note 5 — Income– Estimating Pension Benefit Costs and Expenses and Note 25 — Share-based Payments andOther Employee Benefitsto the accompanying audited consolidated financial statements in Item 18.
“Financial Statements”), net of the fair value of plan assets out of which the obligations are to be settled directly. Plan assets are assets held by a long-term employee benefit fund or qualifying insurance policies and are not available to our creditors nor can they be paid directly to us. Fair value is based on market price information and in the case of quoted securities, the published bid price. The value of any defined benefit asset recognized is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. SeeNote 25 – Employee Benefits – Defined Benefit Pension Plans Plansto the accompanying audited consolidated financial statements in Item 7. Major Shareholders18. “Financial Statements” for more details.

Defined contribution plans

Smart and Related Party Transactions

certain of its subsidiaries maintains a defined contribution plan that covers all regular full-time employees under which it pays fixed contributions based on the employees’ monthly salaries. Smart and certain of its subsidiaries, however, are covered under R.A. 7641 otherwise known as “The Philippine Retirement Law”, which provides for its qualified employees a defined benefit minimum guarantee. The defined benefit minimum guarantee is equivalent to a certain percentage of the monthly salary payable to an employee at normal retirement age with the required credited years of service based on the provisions of R.A. 7641.

Accordingly, Smart and certain of its subsidiaries accounts for its retirement obligation under the higher of the defined benefit obligation related to the minimum guarantee and the obligation arising from the defined contribution plan.

For the defined benefit minimum guarantee plan, the liability is determined based on the present value of the excess of the projected defined benefit obligation over the projected defined contribution obligation at the end of the reporting period. The defined benefit obligation is calculated annually by a qualified independent actuary using the projected unit credit method. Smart and certain of its subsidiaries determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to the defined benefit plan are recognized in profit or loss.

The defined contribution liability, on the other hand, is measured at the fair value of the defined contribution assets upon which the defined contribution benefits depend, with an adjustment for margin on asset returns, if any, where this is reflected in the defined contribution benefits.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income.

When the benefits of the plan are changed or when the plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. Gains or losses on the settlement of the defined benefit plan are recognized when the settlement occurs. SeeNote 25 – Employee Benefits – Defined Contribution Plansto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for more details.

Item 7.Major Shareholders and Related Party Transactions

The following table sets forth information regarding ownership of shares of PLDT’s common stockvoting stocks (common and voting preferred stocks) as at February 28, 2011,2014, of all shareholders known to us to beneficially own 5% or more than 5% of PLDT’s shares of common stock,voting stocks, or, collectively, our Major Shareholders. All shares of PLDT’s common stockvoting stocks have one vote per share. Our Major Shareholders do not have voting rights that are different from other holders of shares of PLDT’s common stock.

               
  Name and Address   Name of Beneficial Number of  
Title of Record Owner and Place of Owner and Relationship Shares Held of Percentage
of Class Relationship With Issuer Incorporation with Record Owner Record of Class
 
Common Philippine Telecommunications
 Philippine Same as Record Owner  26,034,263(2)  13.94 
  
Investment Corporation(1)
 Corporation          
  12th Floor Ramon Cojuangco Bldg.
Makati Avenue, Makati City
            
 
Common 
Metro Pacific Resources, Inc.(3)
 Philippine Same as Record Owner  15,745,172(2)  8.43 
  c/o Corporate Secretary
 Corporation          
  18th Floor, Liberty Center,
104 H. V. dela Costa St.
Salcedo Village, Makati City
            
 
Common 
NTT Communications Corporation(4)
 Japanese See Footnote (5)  12,633,487   6.76 
  1-1-6 Uchisaiwai-cho
 Corporation          
  1-Chome, Chiyoda-ku
Tokyo 100-8019, Japan
            
 
Common 
NTT DoCoMo, Inc.(6)
 Japanese See Footnote (5)  18,234,821(7)  9.76 
  41st Floor, Sanno Park Tower
 Corporation          
  2-11-1 Nagata-cho, Chiyoda-ku Tokyo
100-6150, Japan
            
 
Common 
Social Security System(8)
 Philippine Same as Record Owner  5,024,789(9)  2.69 
  SSS Building
 Corporation          
  East Avenue, Quezon City            
 
Common 
PCD Nominee Corporation(10)
 Philippine See Footnote (10)  53,084,846   28.42 
  37/F Enterprise Building, Tower I
 Corporation          
  Ayala Avenue cor. Paseo de Roxas St.
Makati City
            
 
Common J. P. Morgan Asset Holdings
 HongKong See Footnote (11)  45,102,238   24.15 
  
(HK) Limited(11)
 Corporation          
  (various accounts)
20/F Chater House 8 Connaught Road
Central, Hongkong
            
 
Common 
Lazard Asset Management LLC(12)
 Delaware Corporation See Footnote (12)  13,525,292   7.24 
voting stocks.

Title of Class

  

Name and Address
of Record Owner and
Relationship With Issuer

  Citizenship  

Name of Beneficial
Owner and Relationship
with Record Owner

  Number of
Shares Held of
Record
  Percentage
of Class
 
Common  

Philippine Telecommunications

Investment Corporation(1)

12th Floor Ramon Cojuangco Bldg.

Makati Avenue, Makati City

  Philippine

Corporation

  Same as Record Owner   26,034,263(2)   12.05  
Common  

Metro Pacific Resources, Inc.(3)

c/o Corporate Secretary

18th Floor, Liberty Center,

104 H. V. dela Costa St.

Salcedo Village, Makati City

  Philippine

Corporation

  Same as Record Owner   21,556,676(2)   9.98  
Common  

NTT Communications Corporation(4)

1-1-6 Uchisaiwai-cho, 1-chome, Chiyoda-ku

Tokyo 100-8019, Japan

  Japanese

Corporation

  See Footnote (7)   12,633,487    5.85  
Common  

NTT DOCOMO, Inc.(5)

41st Floor, Sanno Park Tower

2-11-1 Nagata-cho, Chiyoda-ku Tokyo 100-6150, Japan

  Japanese

Corporation

  See Footnote (7)   22,796,902(6)   10.55  
Common  

JG Summit Group(8)

42/F Robinsons Equitable Tower

ADB Avenue corner Poveda Road

Ortigas Center, Pasig City

  Philippine
Corporation
  See Footnote (8)   17,305,625    8.01  
Common  

PCD Nominee Corporation(8)

37/F Enterprise Building, Tower I

Ayala Avenue cor. Paseo de Roxas St.

Makati City

  Philippine
Corporation
  See Footnote (9)   77,300,585    35.78  
Common  

J. P. Morgan Asset Holdings

(HK) Limited(10)

(various accounts)

20/F Chater House 8 Connaught Road

Central, Hong Kong

  Hong Kong

Corporation

  See Footnote (10)   43,288,083    20.04  
Voting Preferred  

BTFHI

12th Floor Ramon Cojuangco Bldg.

Makati Avenue, Makati City

  Philippine
Corporation
  See Footnote (11)   150,000,000    100  

(1)
(1)

Based on a resolution adopted by the Board of Directors of PTIC, the Chairman of the Board of PTIC, Mr. Manuel V. Pangilinan, has the continuing authority to represent PTIC at any and all meetings of the stockholders of a corporation in which PTIC owns of record or beneficially any shares of stock or other voting security, and to sign and deliver, in favor of any person he may deem fit, a proxy or other power of attorney, with full power of delegation and substitution, authorizing his designated proxy or attorney-in-fact to vote any and all shares of stock and other voting securities owned of record or beneficially by PTIC at any and all meetings of the stockholders of the corporation issuing such shares of stock or voting securities.

(2)

In addition to the 26,034,263 shares and 21,556,676 shares of PLDT common stock owned on record by PTIC and Metro Pacific Resources, Inc., or MPRI, respectively, both of which are Philippine affiliates of First Pacific, Group beneficially7,653,703 ADRs, whose underlying common shares represents approximately 3.54% of the outstanding common stock of PLDT are owned 26%by a non-Philippine wholly-owned subsidiary of First Pacific. The common shares and the underlying common shares of the ADRs owned by PTIC, MPRI and the non-Philippine wholly-owned subsidiary of First Pacific (collectively referred to herein as First Pacific Group), collectively owned 25.57% of the outstanding common stock of PLDT as at February 28, 2011 by virtue of PLDT common2014.

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(3)
shareholdings by intermediate holding companies, including PTIC and MPRI.
(3)

Based on a resolution adopted by the Board of Directors of MPRI, Mr. Manuel V. Pangilinan has been appointed as proxy or duly authorized representative of MPRI to represent and vote the PLDT shares of common stock of MPRI in the June 14, 2013 Annual Meeting.

(4)

Based on publicly available information, NTT Communications is a wholly-owned subsidiary of NTT. Based on a certification signed by a duly authorized officer of NTT Communications, Mr. Jun Sawada is authorized to execute for and on behalf of NTT Communications, endorsements, transfers and other matters relating to the PLDT shares of common stock held by NTT Communications.

(5)

Based on publicly available information, NTT DOCOMO, is a majority-owned and publicly traded subsidiary of NTT. Based on a certification signed by a duly authorized officer of NTT DOCOMO, Mr. Hajime Kii or Mr. Mutsuo Yamamoto, is authorized to execute for and on behalf of NTT DOCOMO, endorsements, transfers and other matters relating to the PLDT shares of common stock held by NTT DOCOMO.

(5)(6)

In addition to the 22,796,902 common shares owned on record by NTT DOCOMO, NTT DOCOMO also owns 8,533,253 ADRs whose underlying common shares represent approximately 3.95% of the outstanding common stock of PLDT. The common shares and the underlying common shares of the ADS owned by NTT DOCOMO collectively represent 14.50% of the outstanding common stock of PLDT as at February 28, 2014.

(7)

In publicly available reports filed by NTT Communications and NTT DoCoMo,DOCOMO, it is stated that because of NTT’s ownership of all the outstanding capital stock of NTT Communications and a majority of the common stock of NTT DoCoMo,DOCOMO, NTT, NTT Communications and NTT DoCoMoDOCOMO may be considered to constitute a “group” within the meaning of Section 13(d)(3)Rule 18.1(5)(C) of the U.SAmended Implementing Rules and Regulations of the Philippine Securities Exchange Act of 1934, as amended.Regulation Code. Therefore, each of them may be deemed to have beneficial ownership of the 39,401,56143,963,642 shares in aggregate held by NTT Communications and NTT DoCoMo, representing approximately 21%DOCOMO, which collectively represents 20.35% of the outstanding common stock of PLDT as at February 28, 2011.2014.

(6)(8)

BasedThe total shareholdings of JG Summit Group is 17,305,625 shares, of which 17,208,753 shares are beneficially owned by JGSHI, 86,723 shares are beneficially owned by Express Holdings, Inc., 10,148 shares are beneficially owned by Ms. Elizabeth Yu Gokongwei and 1 share is beneficially owned by Mr. James L. Go, all held on publicly available information, NTT DoCoMo, is a majority-owned and publicly traded subsidiaryrecord by PCD Nominee Corporation, collectively representing 8.01% of NTT.the outstanding common stock of PLDT as at February 28, 2014. Based on a certification signed by a duly authorized officer of NTT DoCoMo, Mr. Toshinari Kunieda or Mr. Mutsuo Yamamoto,JGSHI, under the By-Laws of JGSHI, each of the Chairman and CEO of JGSHI (Mr. James L. Go) and President and Chief Operating Officer of JGSHI (Mr. Lance Y. Gokongwei) is authorized to execute for and on behalf of NTT DoCoMo, endorsements, transfers and other matters relating to the PLDT shares of common stock held by NTT DoCoMo.

(7)The total PLDT shareholdings of NTT DoCoMo is 26,768,074 shares, of which 18,234,821 are owned on record by NTT DoCoMo, and 8,533,253 are shares underlying ADSs, collectively representing 14.33% of the outstanding common stock of PLDT as at February 28, 2011.
(8)Based on a resolution adopted by the Board of Directors of the SSC, Mr. Juan B. Santos, as Chairman of the SSC, has been authorized to sign the proxy constituting the lawful attorney/proxy of SSS with full power to represent and vote the PLDT shares of17,208,753 common stock of SSS in the Annual Meeting of PLDT.
(9)The total PLDT shareholdings of SSS is 10,703,748 shares of PLDT owned by JGSHI and to appoint and/or sign proxies in behalf of which 5,024,789 are owned on record by SSS and 5,678,959 shares are held on record by PCD, collectively representing 5.73% ofJGSHI in connection with the outstanding common stock of PLDT as at February 28, 2011.Annual Meeting.

(10)(9)

PCD is the registered owner of shares held by participants in the Philippine Depository and Trust Co., or PDTC, a private company organized to implement an automated book entry system of handling securities transactions in the Philippines. Under the PDTC procedures, when an issuer of a PDTC-eligible issue will hold a stockholders’ meeting, the PDTC will execute a pro-forma proxy in favor of its participants for the total number of shares in their respective principal securities account as well as for the total number of shares in their client securities account. For the shares held in the principal securities account, the participant concerned is appointed as proxy with full voting rights and powers as registered owner of such shares. For the shares held in the client securities account, the participant concerned is appointed as proxy, with the obligation to constitute a sub-proxy in favor of its clients with full voting and other rights for the number of shares beneficially owned by such clients. Based on available information, none of the owners of the PLDT common shares registered under the name of PCD, owned more than 5% of PLDT’s outstanding common stock as at February 28, 2011, except The Hongkong and Shanghai Banking Corp. Ltd.—Clients, which owned approximately 14.92% of PLDT’s outstanding common stock as of such date. PLDT has no knowledge if any beneficial owner of the shares under The Hongkong and Shanghai Banking Corp. Ltd.—Clients owned more than 5% of PLDT’s outstanding common stock as at February 28, 2011.

This account also includes 17,305,625 shares beneficially owned by JG Summit Group. Please refer to Footnote 10.

Based on available information, none of the owners of the PLDT common shares registered under the name of PCD, owned more than 5% of PLDT’s outstanding common stock as at February 28, 2014, except for JG Summit Group as provided above, Deutsch Bank Manila – Clients Account which owned approximately 7.88% of PLDT’s outstanding common stock as of such date and The Hong Kong and Shanghai Banking Corp. Ltd.–Clients, which owned approximately 7.95% of PLDT’s outstanding common stock as of such date. PLDT has no knowledge if any beneficial owner of the shares under Deutsche Bank Manila-Clients and The Hong Kong and Shanghai Banking Corp. Ltd.–Clients owned more than 5% of PLDT’s outstanding common stock as at February 28, 2014.

(10)The PCD account also includes 5,678,959 shares of PLDT common stock beneficially owned by the SSS.
(11)

JP Morgan Asset Holdings (HK) Limited holds shares as nominee of JPMorganJP Morgan Chase Bank, successor depositary under the Common Stock Deposit Agreement, dated October 14, 1994, as amended on February 10, 2003, between JPMorgan Chase Bank and the holders of ADRs evidencing ADSs, representing shares of common stock of PLDT (the “Deposit Agreement”). Under the Deposit Agreement, if the depositary does not receive voting instructions from a holder of ADRs, such holder will be deemed to have instructed the depositary to provide a discretionary proxy to a person designated by PLDT for the purpose of exercising the voting rights pertaining to the shares of common stock represented by such holder of ADRs, except that no discretionary proxy will be given with respect to any matter as to which substantial opposition exists or which materially and adversely affects the rights of the holders of such ADRs.

This account also includes 8,533,253 shares of PLDT common stock underlying ADS beneficially owned by NTT DOCOMO and 7,653,703 shares of PLDT common stock underlying ADS beneficially owned by non-Philippine wholly-owned subsidiaries of First Pacific.

(11)

A wholly-owned company of the Board of Trustees for the Account of the Beneficial Trust Fund created pursuant to the Benefit Plan of PLDT Co. or PLDT Beneficial Trust Fund. Based on a resolution adopted by the Board of Directors of BTFHI, the Chairman of the Board of PLDT has been appointed as proxy or duly authorized representative of BTFHI to represent and vote the PLDT shares of PLDT commonvoting preferred stock underlying ADS beneficially owned by NTT DoCoMo, and 13,525,292 shares of PLDT common stock underlying ADSs beneficially owned by Lazard Asset Management LLC, or LAMLLC.

(12)According toBTFHI in the Schedule 13G/A of LAMLLC filed with the U.S. Securities and Exchange Commission on February 11, 2011, LAMLLC, as an investment adviser, beneficially owned 13,525,292 shares of PLDT common stock. LAMLLC confirmed that all of the 13,525,292 shares of PLDT common stock are underlying ADSs.Annual Meeting.

As at February 28, 2011,2014, approximately 86.25%68.67% of the outstanding voting stocks and 82.78% of the outstanding capital stock of PLDT was registered inwere owned by Philippine persons.

The First Pacific and certain Philippine affiliates and wholly-owned non-Philippine subsidiary, or FP Parties, had beneficial ownership of approximately 26% of our outstanding common stock and 15% of outstanding voting stocks as at February 28, 2014. As at February 28, 2014, NTT Communications and NTT DOCOMO together beneficially owned approximately 20% of our outstanding common stock and 12% of our outstanding voting stocks. BTFHI had beneficial ownership of 41% of our outstanding voting stocks. As a result of their respective stockholdings, the namesFP Parties and/or NTT Communications and/or NTT DOCOMO and/or BTFHI are able to influence our actions and corporate governance, including (i) elections of Philippine persons.

our directors; and (ii) approval of major corporate actions, which require the vote of holders of common and voting preferred stocks.

Related Party Transactions

PLDT, in the ordinary course of business, engages in transactions with stockholders, its subsidiaries and affiliates, and directors and officers and their close family members. For a detailed discussionPLDT’s Guidelines on the Proper Handling of our material related party transactions, see Note 24 — Related Party Transactions, please refer to:

http://pldt.com/docs/default-source/policies/pldt-code-of-business-conduct-and-ethics.pdf?sfvrsn=4

Except for the transactions discussed in Item 4. “Information on the Company – Development Activities (2011-2013)”,Note 18 – Prepayments and Note 24 – Related Party Transactionsto the accompanying consolidated financial statements in Item 18.

     Except for the transactions discussed in Note 24 — Related Party Transactions to the accompanying consolidated financial statements in Item 18, “Financial Statements”, there were no other material related party transactions during the last three financial years, nor are there any material transactions currently proposed between PLDT and any: (i) director, officer, direct or indirect owner of 10% or more of the outstanding shares in PLDT; (ii) close family member of such director, officer or owner; (iii) associates of PLDT; (iv) enterprises controlling, controlled by or under common control with PLDT; or (v) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any director, officer or owner of 10% or more of the outstanding shares in PLDT or any close family member of such director, key officer or owner, or collectively, the Related Parties.

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Item 8.Financial Information

     There was no outstanding indebtedness at any time during the last three financial years that was owed to PLDT and/or its subsidiaries by any Related Party.
Item 8. Financial Information
Consolidated Financial Statements and Other Financial Information

See “Item 18 Financial Statements.”

Legal Proceedings

Except as disclosed in the following paragraphs, neither PLDT nor any of its subsidiaries is a party to, and none of their respective properties is subject to, any pending legal proceedings that PLDT considers to be potentially material to its and its subsidiaries’ business.

NTC SRF

     Since 1994, following the rejection of PLDT’s formal protest against the assessments by the NTC of SRF, PLDTMatters Relating to Gamboa Case and the NTC have been involved in legal proceedings beforerecent Jose M. Roy III Petition

In the Court of Appeals and Gamboa Case,the Supreme Court. The principal issue in these proceedings was the basis for the computation of the SRF. PLDT’s opinion, which was upheld by the Court of Appeals, but, as set forth below, rejected by the Supreme Court, was that the SRF should be computed based only on the par value of the subscribed or paid up capital of PLDT, excluding stock dividends, premium or capital in excess of par. The Supreme Court in its decision dated JulyJune 28, 1999, ordered2011, or the NTC to make a recomputationGamboa Case Decision, held that “the term ‘capital’ in Section 11, Article XII of the SRF based on PLDT’s1987 Constitution refers only to shares of stock entitled to vote in the election of directors and thus, in the case of PLDT, only to voting common shares, and not to the total outstanding capital stock subscribed(common and paid. Subsequently,non-voting preferred shares)”. The Gamboa Case Decision reversed earlier opinions issued by the Philippine SEC that non-voting preferred shares are included in February 2000, the NTC issued an assessment letter for the balance of the SRF, but in calculating said fees, the NTC used as a basis not only capital stock subscribed or paid but also the stock dividends. PLDT questioned the inclusion of the stock dividends in the calculation of the SRF and sought to restrain the NTC from enforcing/implementing its assessment until the resolution of the said issue. Prior to the resolution of the issue mentioned above, PLDT paid the SRF due in 2000 together with the balance due from the recalculation of the SRF and had been paying the SRF due in September of each year thereafter, excluding the portion that was based on stock dividends.

     The Supreme Court, in a resolution promulgated on December 4, 2007, held that the computation of SRF shouldthe 60%-40% Filipino-alien equity requirement of certain economic activities, such as telecommunications which is a public utility under Section 11, Article XII of the 1987 Constitution. Several motions for reconsideration of the Gamboa Case Decision were filed by the parties. On October 18, 2012, the Gamboa Case Decision became final and executory.

While PLDT was not a party to the Gamboa Case, the Supreme Court directed the Philippine SEC in the Gamboa Case “to apply this definition of the term ‘capital’ in determining the extent of allowable foreign ownership in PLDT, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.”

On July 5, 2011, the Board of Directors of PLDT approved the amendments to the Seventh Article of PLDT’s Articles of Incorporation consisting of the sub-classification of its authorized preferred capital stock into preferred shares with full voting rights, or Voting Preferred Stock, and serial preferred shares without voting rights, and other conforming amendments, or the Amendments. The Amendments were approved by the stockholders of PLDT on March 22, 2012 and by the Philippine SEC on June 5, 2012.

On October 12, 2012, the Board of Directors of PLDT approved the specific rights, terms and conditions of the Voting Preferred Stock and authorized the subscription and issuance thereof to BTFHI, a Filipino corporation. On October 16, 2012, BTFHI subscribed to 150 million newly issued shares of Voting Preferred Stock, or the Voting Preferred Shares, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement dated October 15, 2012 between BTFHI and PLDT.

On May 30, 2013, the Philippine SEC issued SEC Memorandum Circular No. 8, or the Philippine SEC Guidelines, which provides under Section 2 thereof, as follows: “All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of compliance therewith, the required percentage of Filipino ownership shall be based onapplied to both: (a) the total number of outstanding shares of stock entitled to vote in the election of directors; and (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.” PLDT was, and continues to be, compliant with the Philippine SEC Guidelines. As at end of December 31, 2013, PLDT’s foreign ownership was 31.53% of its outstanding shares entitled to vote (Common and Voting Preferred Shares), and 17.33% of its total outstanding capital stock.

On June 10, 2013, PLDT was served a copy of a Petition for Certiorari under Rule 65 of the Revised Rules of Court, or the Petition, filed with the Supreme Court by Jose M. Roy III as petitioner against the Chairperson of the Philippine SEC, Teresita Herbosa, the Philippine SEC and PLDT as respondents. The Petition primarily questions the constitutionality of the Philippine SEC Guidelines in determining the nationality of a Philippine company pursuant to the Gamboa Case Decision and Section 11, Article XII of the Constitution. Per the Philippine SEC Guidelines, the Philippine nationality requirement of Section 11, Article XII of the Constitution is met if at least 60% of: (a) the outstanding voting stocks; and (b) the outstanding capital stock of the company is owned by Filipinos.

The Petition admits that if the Philippine SEC Guidelines were to be followed, PLDT including stock dividends. In a letter to PLDT on February 29, 2008,would be compliant with the NTC assessed PLDT the total amount of Php2,870 million, as SRF, which included penalties and interest. On April 3, 2008, PLDT paid NTC the outstanding principal amount relating to SRF on stock dividends in the amount of Php455 million, but did not pay the penalties and interest assessed by the NTC. PLDT believes that it is not liable for penalties and interest, and therefore protested and disputed NTC’s assessmentsnationality requirement of the same amount. In letters dated April 14, 2008Philippine Constitution. However, the Petition claims that the Philippine SEC Guidelines do not conform to the letter and June 18, 2008, the NTC demanded paymentspirit of the balanceConstitution and the Gamboa Case Decision supposedly requiring the application of its assessment. On July 9, 2008, PLDT filed athe 60%-40% ownership requirement in favor of Filipino citizens separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares, or the Other Gamboa Statements. The Petition for Certiorari and Prohibition with the Court of Appeals (the “Petition”) prayingalso claims that the NTC be restrained from enforcingPLDT-BTF does not satisfy the effective Filipino-control test for purposes of incorporating BTFHI which acquired the 150 million Voting Preferred Shares.

Wilson C. Gamboa, Jr., Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto Martin Y. Mamon and Gerardo C. Erebaren, or implementing its assessment letter of February 29, 2008, and demand letters dated April 14, 2008 and June 18, 2008, all demanding payment of SRF including penalties and interests. The Petition further prayed that after notice and hearing, the NTC be ordered to forever cease and desist from implementing and/or enforcing, and annulling and reversing and setting aside, the said assessment letter and demand letters. The Court of Appeals, in its Decision dated May 25, 2010, granted PLDT’s Petition and set aside/annulled the NTC’s letters-assessments dated February 29, 2008, April 14, 2008 and June 18, 2008. The NTC did not fileIntervenors, filed a Motion for Reconsideration of the decision of the Court of Appeals. Instead, the NTC, through the Solicitor General, filed a petition for review directly with the Supreme Court. PLDT, through counsel, received a copy of the petition onLeave to file Petition-In-Intervention dated July 29, 2010, and after receiving the order of16, 2013 which the Supreme Court to file its comment,granted in a Resolution dated August 6, 2013. The Petition-In-Intervention raised identical arguments and issues as that of the Petition.

PLDT, through counsels, filed its Comment on the Petition on September 5, 2013. In its Comment, PLDT raised the following defenses: (a) Petitioner’s direct recourse to the Supreme Court in filing the petition violates the fundamental doctrine of the hierarchy of courts. There are no compelling reasons to invoke the Supreme Court’s original jurisdiction; (b) The Petition was prematurely brought before the Supreme Court. Petitioner failed to exhaust administrative remedies before the Philippine SEC, and there are facts yet to be established (in the lower courts) that are necessary for a proper and complete ruling; (c) The Petition is in the nature of a petition for mandamus and/or declaratory relief which, under Rules 65 and 63 of the Rules of Court, are not within the exclusive and/or original jurisdiction of the Supreme Court, as provided under Article VIII, Sections 5(1), 5(5), 6 and 11 of the Constitution and Rule 56 of the Rules of Court; (d) The Petition must be dismissed in as much as it is challenging the validity and constitutionality of a Memorandum Circular, which was issued in the exercise of the Philippine SEC’s quasi-legislative power, for which a petition for certiorari is an inappropriate remedy; (e) Assuming arguendo that the issuance of Philippine SEC Memorandum Circular No. 8 involved the exercise by the Philippine SEC of its quasi-judicial power, the Petition still cannot prosper since the issue of the validity and constitutionality of Philippine SEC Memorandum Circular No. 8 does not pertain to errors of jurisdiction on December 7, 2010. Asthe part of the Philippine SEC; (f) Petitioner is not the proper party to question the constitutionality of the Philippine SEC Guidelines and PLDT’s compliance with the Gamboa decision and the Petition is likewise not a valid taxpayer’s suit and should not be entertained by the Supreme Court; (g) The Petition seeks relief that effectively deprives the necessary and indispensable parties affected thereby (such as, BTFHI, MediaQuest, PLDT-BTF, and all corporations in which PLDT-BTF made an investment and their subsidiaries) of their constitutional right to due process, all of whom were not impleaded as parties; and (h) Philippine SEC Memorandum Circular No. 8 merely implemented the dispositive portion of the Gamboa Case Decision.

Particularly, for the defense under (h) above, PLDT argued that: (a) the only binding and enforceable part of the Gamboa Case Decision is the dispositive portion, which defined the term “capital” under Article XII, Section 11 of the 1987 Constitution as “shares of stock entitled to vote in the election of directors”, and such dispositive

portion of the Gamboa Case Decision is properly reflected and enforced in Philippine SEC Memorandum Circular No. 8. The Other Gamboa Statements were just “obiter dicta” or expressions of opinion which have no precedential value and binding effect; and (b) with respect to the nationality of PLDT-BTF and BTFHI, the fundamental requirements which needs to be satisfied in order for PLDT-BTF and BTFHI to be considered Filipino is for PLDT-BTF’s Trustees to be Filipinos and 60% of the Fund will accrue to the benefit of Philippine nationals. This is reflected in Section 3(a) of Republic Act No. 7042, as amended, or the Foreign Investment Act, which provides that the term “Philippine national” includes “a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at March 29, 2011, this caseleast 60% of the fund will accrue to the benefit of “Philippine nationals”. Both requirements are present with respect to the PLDT-BTF. Consequently, there is stillno question that PLDT-BTF and BTFHI are Filipino shareholders for purposes of classifying their 150 million shares of Voting Preferred Stock in PLDT and as a result, more than 60% of PLDT’s total voting stock is Filipino-owned. PLDT is thus compliant with the Philippine nationality requirement under Article XII, Section 11 of the 1987 Constitution.

PLDT filed its Comment on the Petition-in-intervention on October 22, 2013. PLDT raised identical defenses and arguments in its Comment on the Petition-in-intervention as that of its Comment on the Petition.

The resolution of the Jose M. Roy III Petition and the Petition-In-Intervention remains pending with the Supreme Court.

Matters Relating to a Third Party Aggregator
     In late 2009, PLDT informally received a communication which provided a complaint, or the Draft, setting forth a securities class action lawsuit in the United States District Court for the Southern District of New York against PLDT and certain PLDT officers and indicated that such Draft may be filed against PLDT. The Draft alleges that some PLDT officers and employees caused PLDT’s subsidiary, Smart to enter into contracts with a third-party entity in order to divert long distance telephone traffic and profits to such third-party entity. The Draft further alleges that these officers and employees personally created and controlled the third-party entity and were personally enriched as a result. The Draft alleges that this alleged scheme was accomplished by causing Smart to offer a lower rate for long distance telephone traffic to that third-party entity so that long distance traffic which otherwise would have been handled by PLDT at a higher rate was redirected to equipment owned by the third-party entity. The Draft alleges that

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PLDT failed to disclose material facts regarding the alleged scheme and that, as a result, PLDT misstated its true financial condition in its annual reports from 2002 through 2008.
     In light of the nature of the allegations and out of an abundance of caution, PLDT’s Board of Directors referred the Draft for review by the Audit Committee. The Audit Committee appointed an independent Investigation Committee to oversee an investigation into the allegations contained in the Draft. The Audit Committee retained independent counsel to lead in the investigation. To preserve the confidential nature of the inquiry, the investigation was limited to internal sources at PLDT, including current PLDT and Smart employees, internal records and discrete inquiries and public records searches.
     The independent counsel, under the oversight of the Investigation Committee, has concluded on the basis of the evidence within the control of PLDT or otherwise reasonably available, that: (i) while the investigation cannot definitively exclude the possibility, the investigation has found no evidence to establish that PLDT’s officers and employees were personally involved in the creation of the third-party entity referred to in the Draft and has found no evidence of any improper personal financial benefit or gain by these officers and employees, directly or indirectly from such third party entity; and (ii) while Smart had substantial business relationships with various third-party aggregators of long-distance telephone traffic during the relevant period, including the third-party entity referred to in the Draft (with which Smart ceased doing business in 2008), there is no evidence that the relationship with such third-party entity in fact resulted in a material adverse impact on PLDT’s revenues during the relevant period and may have in fact benefited PLDT overall through an increase in overall call volume.
     On May 7, 2010, the Audit Committee of PLDT approved the recommendation and conclusion of the independent counsel, as endorsed by the Investigation Committee.
Taxation

Local Business and Franchise Taxes

PLDT, Smart, PCEV and PCEVDigitel currently face various local business and franchise tax assessments by different local government units.

PLDT, Smart, PCEV and PCEVDigitel believe that under Philippine laws then prevailing, they are exempt from payment of local franchise and business taxes to local government units and are contesting the assessment of these taxes in some of these cases.

     For more information, see Note 27 — Provisions and Contingencies to the accompanying consolidated financial statements in Item 18.

Arbitration with Eastern Telecommunications Philippines, Inc., or ETPI

Since 1990, (up to present), PLDT and ETPI have been engaged in legal proceedings involving a number of issues in connection with their business relationship. While they have entered into Compromise Agreements in the past (one in February 1990, and another one in March 1999), these agreements have not put to rest their issues against each other. Accordingly, to avoid further protracted litigation and improve their business relationship, both PLDT and ETPI have agreed in April 2008 to submit their differences and issues to voluntary arbitration. For this arbitration (after collating various claims of one party against the other) ETPI, on one hand, initially submitted its claims of about Php2.9 billion against PLDT; while PLDT, on the other hand, submitted its claims of about Php2.8 billion against ETPI. Currently,Pursuant to an agreement between PLDT and ETPI, have agreed to suspend the arbitration proceedings between them.

     Other disclosures required byIAS 37, Provisions, Contingent Liabilities and Contingent Assets were not provided as it may prejudice our position in on-going claims, litigations and assessments.
have been suspended.

For more information, seeNote 27 —26 – Provisions and Contingenciesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Dividend Distribution Policy
     Please see

See Item 3. “Key Information Dividends Declared” for a description of our dividend distribution policy, andNote 19 Equityto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements” for tables that show dividends declared in 2010.

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2013.


Item 9.The Offer and Listing

Item 9. The Offer and Listing
Common Capital Stock and ADSs

The shares of common stock of PLDT are listed and traded on the Philippine Stock Exchange, or PSE and, prior to October 19, 1994, were listed and traded on the American Stock Exchange and Pacific Exchange in the United States. On October 19, 1994, an ADR facility was established, pursuant to which Citibank, N.A., as the Depositary,depositary, issued ADRs evidencing ADSs with each ADS representing one PLDT common share with a par value of Php5 per share. Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary of PLDT’s ADR Facility.facility. The ADSs are listed on the NYSE and are traded on the NYSE under the symbol of “PHI”.

     For

The public ownership level of PLDT common shares listed on the period from January 1 toPSE as at February 28, 2014 is 53.86%.

On November 9, 2011, the PSE approved the listing of the additional 27.7 million common shares of PLDT, which were issued on October 26, 2011 at the issue price of Php2,500 per share, as consideration for the acquisition by PLDT of the Enterprise Assets of Digitel, see Item 4. “Information on the Company – Development Activities (2011-2013) –PLDT’s Acquisition of a Controlling Interest in Digitel from JGSHI”.

On January 27, 2012, a total of 4.91.61 million PLDT common shares were issued for settlement of the purchase price of 2,518 million common shares of PLDT’sDigitel tendered by the noncontrolling Digitel stockholders under the mandatory tender offer conducted by PLDT, and which opted to receive payment of the purchase price in the form of PLDT common capital stock were traded on the Philippine Stock Exchange. During the same period, the volume of trading was 3.3 million ADSs on the NYSE.

shares.

As at February 28, 2011, 10,4922014, 10,483 stockholders were Philippine persons and held approximately 35.53%46.92% of PLDT’s common capital stock. In addition, as at February 28, 2011,2014, there were a total of approximately 53.844.0 million ADSs outstanding, substantially all of which PLDT believes were held in the United States by 335302 holders.

For the period from January 1, 2014 to February 28, 2014, a total of 7.4 million shares of PLDT’s common capital stock were traded on the PSE. During the same period, the volume of trading was 1.7 million ADSs on the NYSE.

High and low sales prices for PLDT’s common shares on the PSE and ADSs on the NYSE for each of the five most recent fiscal years, each full quarterly period during the two most recent fiscal years, and each month in the most recent six months were as follows:

                 
  Philippine Stock New York Stock
  Exchange Exchange
  High Low High Low
2011                
First Quarter                
January  2,550.00   2,456.00   58.80   55.55 
February  2,524.00   2,150.00   56.44   49.48 
March (until March 29, 2011)  2.292.00   1,990.00   53.50   46.08 
2010                
First Quarter  2,775.00   2,420.00   60.65   53.05 
Second Quarter  2,540.00   2,320.00   57.49   50.04 
Third Quarter  2,630.00   2,355.00   59.92   51.47 
September  2,630.00   2,398.00   59.92   54.10 
Fourth Quarter  2,764.00   2,360.00   64.35   53.61 
October  2,764.00   2,596.00   64.35   59.52 
November  2,684.00   2,364.00   63.45   53.61 
December  2,558.00   2,360.00   58.70   54.28 
2009  2,670.00   1,830.00   58.17   38.43 
First Quarter  2,310.00   1,830.00   49.80   38.43 
Second Quarter  2,620.00   2,125.00   52.16   43.01 
Third Quarter  2,625.00   2,300.00   54.50   48.12 
Fourth Quarter  2,670.00   2,405.00   58.17   51.12 
2008  3,175.00   1,810.00   76.72   36.05 
2007  3,285.00   2,250.00   76.30   45.25 
2006  2,610.00   1,675.00   51.90   32.15 

   Philippine Stock
Exchange
   New York Stock
Exchange
 
   High   Low   High   Low 

2014

        

First Quarter

   Php2,826.00     Php2,604.00    US$63.63    US$56.88  

January

   2,810.00     2,608.00     61.46     58.00  

February

   2,734.00     2,604.00     60.51     56.88  

March (through March 28, 2014)

   2,826.00     2,654.00     63.63     59.01  

2013

        

First Quarter

   3,004.00     2,530.00     74.08     62.11  

Second Quarter

   3,290.00     2,682.00     78.63     62.30  

Third Quarter

   3,110.00     2,680.00     71.76     59.04  

Fourth Quarter

        

October

   3,054.00     2,832.00     71.36     65.75  

November

   2,870.00     2,572.00     66.44     59.26  

December

   2,756.00     2,590.00     62.80     58.63  

2012

        

First Quarter

   2,886.00     2,542.00     67.50     58.46  

Second Quarter

   2,750.00     2,290.00     63.71     52.34  

Third Quarter

   2,940.00     2,670.00     69.44     62.47  

Fourth Quarter

   2,794.00     2,480.00     66.30     59.53  

2011

   2,598.00     1,990.00     58.95     46.08  

2010

   2,775.00     2,320.00     64.35     50.04  

2009

   2,670.00     1,830.00     58.17     38.43  

Item 10.Additional Information

Share Capital

Not applicable.

Item 10. Additional Information
Articles of Incorporation and By-Laws
     The following summarizes certain provisions of PLDT’s Articles of Incorporation and By-Laws and applicable Philippine law. This summary is qualified in its entirety by reference to the Corporation Code of the Philippines (the Corporation Code) and PLDT’s Articles of Incorporation and By-Laws. Information on where investors can obtain copies of the Articles of Incorporation and By-Laws is described under the heading “Documents Available.”
Purpose of PLDT
     PLDT’s Articles of Incorporation have been filed with the Philippine SEC and PLDT has been issued Philippine SEC Reg. No. 55. The Second Article of PLDT’s Articles of Incorporation provides that the purposes for which PLDT was formed are to install, maintain, and operate any and all kinds of equipment for communications; to install, maintain, operate or lease telephone lines and systems, and to purchase, sell and deal in all kinds of products which may be combined with the building, installing and operation of those systems and lines and in general, to engage in any and all acts and business which may be necessary or convenient, in the furtherance of such lines of

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communication and business.
Directors
     PLDT’s Amended By-Laws provide that the board of directors shall consist of thirteen members, or such number of members provided in the Articles of Incorporation of the Corporation, as amended from time to time, each of whom must hold at least one share of the common stock of PLDT in his own name and possess the minimum qualifications and have none of the disqualifications provided in the By-Laws. There are no provisions in PLDT’s Amended Articles of Incorporation or Amended By-Laws with respect to: (a) a director’s power to vote on a proposal, arrangement or contract

On April 23, 2013 and June 14, 2013, the Board of Directors and stockholders, respectively, approved the following actions: (1) decrease in which the director is materially interested; (b) the directors’ power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body; (c) borrowing powers exercisable by the directors and how such borrowing powers can be varied; or (d) retirement or non-retirement of directors under an age limit requirement.

Description of PLDT Capital Stock
Authorized Capital Stock
     ThePLDT’s authorized capital stock of PLDT isfrom Php9,395 million divided into two classes consisting of: (a) Preferred Capital Stock sub-classified into 150 million shares of Voting Preferred Stock of the par value of Php1.00 each and 807.5 million shares of Non-Voting Serial Preferred Stock of the par value of Php10.00 each; and (b) 234 million shares of Common Capital Stock with aof the par value of Php5 per share (the Common Stock) and 822.5Php5.00 each, to Php5,195 million, divided into two classes consisting of: (a) Preferred Capital Stock sub-classified into: 150 million shares of serialVoting Preferred Stock with aof the par value of Php10 per share (thePhp1.00 each and 387.5 million shares of Non-Voting Serial Preferred Stock).
Common Stock
     Set out below is a statement of the dividend, voting, pre-emptionpar value of Php10.00 each; and other rights(b) 234 million shares of Common Capital Stock of the holderspar value of Common Stock as set out inPhp5.00 each; and (2) corresponding amendments to the Seventh Article of the Articles of Incorporation and/or By-Laws of PLDT:
(a)After the requirements with respectPLDT. On October 3, 2013, the Philippine SEC approved the decrease in authorized capital stock and amendments to preferential dividends on the serial Preferred Stock shall have been met and after PLDT shall have complied with all the requirements, if any, with respect to the setting aside of sums as purchase, retirement or sinking funds, the holders of the Common Stock shall be entitled to receive such dividends as may be declared from time to time by the board of directors out of funds legally available therefore.
(b)After distribution in full of the preferential amounts to be distributed to the holders of serial Preferred Stock in the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of PLDT, the holders of Common Stock shall be entitled to receive all the remaining assets of PLDT of whatever kind available for distribution to stockholders ratably in proportion to the number of Common Stock held by them, respectively.
(c)Except as may be otherwise required by law, or by the Articles of Incorporation of PLDT, each holder of Common Stock shall have one vote in respect of each share of such stock held by him on all matters to be voted upon by the stockholders, and the holders of Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. At every election of directors, each holder of Common Stock is entitled to vote such shares of Common Stock held by him and he may vote such number of shares for as many persons as there are directors to be elected, or to cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or to distribute such votes on the same principle among as many candidates as he shall think fit.
     In addition to the foregoing rights, the Corporation Code provides for other stockholders’ rights generally, which include:
(a)Appraisal right or the right of a dissenting stockholder to demand payment of the fair value of his shares of stock in the following instances: (i) in case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; (ii) in case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets of the corporation; (iii) in case of merger or consolidation; and (iv) in case of investment of funds of the corporation in any other corporation or business or for any purpose other than the primary purpose for which it was organized, except where the investment by the corporation is reasonably necessary to

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accomplish its primary purpose as stated in its articles of incorporation.
(b)The right to approve certain corporate acts, such as: (i) election of directors; (ii) removal of directors; (iii) extension or shortening of the corporate term; (iv) increase or decrease of capital stock, and incurring, creating or increasing bonded indebtedness; (v) sale or other disposition of all or substantially all of the corporate assets; (vi) investment of corporate funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized except where the investment is reasonably necessary to accomplish its primary purpose as stated in the corporation’s articles of incorporation; (vii) declaration of stock dividend; (viii) entering into a management contract with another corporation; (ix) plan of merger or consolidation; and (x) voluntary dissolution of the corporation by shortening the corporate term.
(c)The right to inspect at reasonable hours on business days the records of all business transactions of the corporation and the minutes of any meeting; however, the stockholders’ right to inspect corporate records and books is not an absolute right so that the corporation may deny said right on the basis of impropriety of the purpose or motive of the stockholder.
(d)The right to be furnished the most recent financial statements of the corporation, within ten (10) days from receipt by the corporation of a written request from a stockholder. The same right exists at the annual meeting of stockholders at which the board of directors must present to the stockholders a financial report of the operations of the corporation for the preceding year which shall include financial statements duly signed and certified by an independent certified public accountant.
Restrictions on Foreign Ownership
     The Constitution of the Republic of the Philippines (Section 11, Article XII) states that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens.
     While the Articles of Incorporation and By-Laws of PLDT do not contain any specific restriction on the sale, assignment or transfer of shares that would violate the aforecited ownership requirement, the Articles of Incorporation of PLDT, provide that the boarda copy of directors shall have full power and authority to authorize (whether by adoption of amendments which is hereby furnished under Item 19. “Exhibits”.

SeeNote 19 – Equity – Decrease in Authorized Capital Stockto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

By-Laws

A summary of PLDT orcertain provisions of resolutions, the promulgation of rules or regulations or otherwise) the taking by said corporation of all such actions as the board of directors may deem necessary or appropriate to ensure compliance by said corporation with any applicable provision of the Constitution of the Republic of the Philippines or any other applicable law, treaty, rule or regulation relating to the ownership of securities of said corporation by citizens of the Philippines, aliens or other persons or group of persons.

Meetings
     The Corporation Code requires corporations to hold an annual meeting of stockholders and to send notice thereof to stockholders. Under PLDT’s By-Laws theand applicable Philippine laws as previously disclosed in our annual meeting of stockholders shall be held at the principal office of the corporation, or at such other place designated by the board of directors in the city or municipality where the principal office of the corporation is located,report on the second Tuesday in June of each year. In the annual meeting, the board of directors shall be elected and such other business may be transacted as shall come before the meeting. At least fifteen (15) business days written or printed notice of the date, time and place of holding every annual stockholders’ meeting shall be given by the Secretary or by the Assistant Secretary by personal delivery or by mail to each stockholder at his or her last known place of residence or business. Special meetings of stockholders may be called at any time by the Chairman of the Board or three (3) of the Directors or by any number of stockholders representing two-thirds (2/3) of the subscribed capital stock. Notice in writing of such meeting, stating the date, time and place thereof and the purpose or purposes for which such meeting is called, shall be given to each stockholder by the Secretary or Assistant Secretary or, in case of his absence, inability, refusal or neglect to act, then by the President, Directors or stockholders calling the said meeting, by personal delivery or by mail to each stockholder at his or her last known place of residence, at least fifteen (15) business days before the date fixedForm 20-F for the meetingcalendar year ended December 31, 2010, filed on March 29, 2011, is herein incorporated by reference.

Issuance and the statement of service by such delivery or mailing shall be entered upon the minutes of meeting and the said minutes as certified correct by the secretary of the meeting and attested by the chairman of the meeting shall be conclusive on the question of service.

     The By-Laws of PLDT provide that each share of common stock which has voting rights on any matter under consideration may be represented at any meeting of stockholders by the holder thereof or by his attorney duly

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authorized by proxy executed in writing on forms prescribed by the board of directors which shall be furnished to a stockholder upon his request. Unless otherwise provided in the proxy, it shall be valid only for the meeting in respect of which such proxy was issued. Proxies must be filed with the Secretary, Assistant Secretary or transfer agent of PLDT at least seven (7) days before the day of the meeting. Any proxy filed with the Secretary, Assistant Secretary or transfer agent of the corporation may be revoked by the stockholder concerned either in an instrument in writing duly presented to the Secretary, Assistant Secretary or transfer agent of the corporation at least three (3) days before the day of the meeting or by his personal presence at the meeting. Validation of proxies shall be done at least five (5) days before the day of the meeting by the Secretary or by a special committee of inspectors composed of the Secretary, Assistant Secretary and a representative of the transfer agent of PLDT. The decision of the Secretary or the special committee of inspectors, as the case may be, on the validity of proxies shall be final and binding until and unless set aside by a court of competent jurisdiction. As provided in the Corporation Code, unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended and no proxy shall be valid and effective for a period longer than five (5) years at any one time.
     The By-Laws of PLDT also provide that at any meeting of the stockholders, persons representing, in person or by proxy, a majority of the shares issued and outstanding and entitled to vote at said meeting shall constitute a quorum for the transaction of any business, except as otherwise provided by law, and except that a lesser number may adjourn the meeting.
Issues of Shares
     The board of directors of PLDT has the power to authorize without seeking shareholders approval the issue and sale of authorized but unissued shares of Common Stock of said corporation for such consideration as it shall determine, provided that such consideration shall not be less than the par value of such shares and, provided further, that such issue and sale is not otherwise prohibited under applicable laws.
     Under the SRC (R.A. No. 8799), no securities except of a class exempt under the provisions thereof or unless sold in any transaction exempt under any of the provisions thereof, shall be sold or offered for sale or distribution to the public unless such securities shall have been registered and permitted to be sold pursuant to the SRC.
Transfer of Shares
     The shares of Common Stock may be transferred by delivery of certificate(s) endorsed by the shareholder named in the certificate or his duly authorized attorney or representative. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the stock and transfer books of PLDT maintained by
     Hong Kong and Shanghai Banking Corporation, the stock transfer agent of PLDT for its Common Stock.
     Philippine law does not require transfers of Common Stock to be effected on the PSE, but any off-exchange transfers will subject the transferor to a capital gains tax that may be significantly greater than the stock transfer tax applicable to transfers effected on the PSE. All transfers of shares of Common Stock on the PSE must be effected through a licensed broker in the Philippines.
Share Certificates
     Certificates representing fully paid shares of Common Stock are issued in such denominations as stockholders may request, except that certificates will not be issued for any fractional part of a share or any undivided interest in any share.
Dividends
     Under the Corporation Code, the board of directors may declare dividends on the Common Stock out of the unrestricted retained earnings which may be payable in cash, in property or in stock to all stockholders on the basis of outstanding shares held by them. The declaration of stock dividends requires the approval of the stockholders of PLDT representing not less than two-thirds of the outstanding capital stock of PLDT. If a stock dividend would require an increase in the authorized capital stock, Philippine SEC approval would be required. Common Stock issued as stock dividends should be registered with and licensed by the Philippine SEC and listed on the PSE.
     The Corporation Code requires a Philippine corporation with retained earnings in excess of 100% of its paid-in capital to declare and distribute as dividends the amount of such surplus. Notwithstanding this general

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requirement, a Philippine corporation may retain all or any portion of such surplus in the following cases: (i) when justified by definite corporate expansion projects or programs approved by the board of directors; (ii) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (iii) when it can be clearly shown that such retention is necessary under special circumstances relevant to the corporation, such as when there is a need for special reserve for probable contingencies.
     See Item 5. “Liquidity and Capital Resources—Financing Activities—Financing Requirements” and Item 3. “Key Information — Dividends Declared” and “Key Information — Dividends Paid”.
Preferred Stock
     Preferred Stock may be issued from time to time in one or more series as the board of directors may determine. The board of directors is authorized to establish and designate the title and number of shares of each series and to fix the terms thereof, including dividend rate, redemption and sinking fund provisions, conversion rights and the amount to be received upon liquidation, provided that the amounts payable upon redemption or liquidation may not be more than 110%, nor less than 100%, of par value, plus in each such case accrued and unpaid dividends. Except as otherwise provided by law, the holdersRedemption of Preferred Stock are not entitled to vote for the election of directors or for any other purpose; provided, however, that PLDT may not change the rights of the holders of any series of Preferred Stock in any manner prejudicial to the holders thereof without the affirmative vote of the holders of a majority of the

All outstanding shares of such series. No such approval is needed to increase the number of shares of Preferred Stock (up to the number from time to time authorized by the Articles) or to authorize classes of shares ranking on a parity with the Preferred Stock.

Issued and Outstanding Preferred Stock
     The series of Preferred Stock and the number of shares issued and outstanding under each series as at February 28, 2011 and December 31, 2010 are as follows:
         
Series No. of Shares
  February 28, 2011 December 31, 2010
Series A to HH 10% Cumulative Convertible  405,912,897   405,887,387 
Series IV Cumulative Non-convertible Redeemable  36,000,000*  36,000,000*
*Total subscribed shares is 300 million with a total subscription price of Php3 billion, out of which amount Php360 million has been paid.
     The Series A to IIPLDT 10% Cumulative Convertible Preferred Stock are entitledSeries A to receive cumulative dividends at the rate of 10% per annum; redeemable at the option of PLDT, at par value plus accrued dividends, five years after the year of issuance; convertible to shares of Common Stock a year after the year of share issuance, at a price equivalent to 10% below the average market price of the Common Stock at the PSE over a period ofSeries FF, Series GG and Series HH, which were issued in 2007, were redeemed and retired effective on January 19, 2012, August 30, consecutive trading days before the conversion date;2012 and entitled to be paid an amount equal to the par value of the shares plus accrued and unpaid dividends thereon to the date fixed for such payment in the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the affairs of the corporation.
     The Series IV Cumulative Non-convertible Redeemable Preferred Stock are entitled to receive cumulative dividends at the rate of 13.5% per annum based on the paid-up subscription price. It is redeemable at the option of PLDT one year at any time after subscription at an amount equal to the par value of such shares so redeemed or if such shares are not yet fully paid, the actual amount paid, plus accrued and unpaid dividends thereon; and in the event of a voluntary or involuntary liquidation, dissolution or winding up of affairs of PLDT, shall be entitled to be paid an amount equal to the par value of such shares or if such shares are not yet fully paid, the actual amount paid, plus an amount equal to the dividends accrued thereon to the date fixed for payment. The outstanding shares of Series IV Cumulative Non-convertible Redeemable Preferred Stock have not been fully paid.
Change in Control
     Article V, Section 1 of PLDT’s Amended By-Laws may have the effect of preventing a change in control of PLDT. This section provides that any person who is engaged in any business that competes with or is antagonistic to that of PLDT or its subsidiaries is ineligible for nomination or election to the board of directors.

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May 16, 2013, respectively.


     Under the Cooperation Agreement, each of NTT Communications, NTT DoCoMo and the FP Parties agreed that to the extent permissible under applicable laws and regulations of the Philippines and other jurisdictions, subject to certain conditions, it shall cast its vote as a PLDT shareholder in support of any resolution proposed by the PLDT board of directors for the purpose of safeguarding PLDT from any Hostile Transferee (as defined in the Cooperation Agreement). See Item 7. “Major Shareholders and Related Party Transactions — Related Party Transactions”.
Material Contracts

Other than the contracts described in Item 4. “Information on the Company Development Activities (2008-2010)(2011-2013)” and Item 7. “Major Shareholders and Related Party Transactions,” we have not entered into any material contract that areis not in the ordinary course of business within the two years preceding the date of this annual report.

Exchange Controls and Other Limitations Affecting Securities Holders

In Circular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, of the BSP, foreign investments in the shares of stock of Philippine companies listed in the PSE may be registered either with the BSP or with an investor’s designated custodian bank. The foreign investments in listed shares of stock, which are duly registered with the BSP or with a custodian bank duly designated by the foreign investor, are entitled to full and immediate capital repatriation and dividend and interest remittance privileges. Without the need to obtain prior BSP approval, commercial banks are authorized to sell and to remit the equivalent foreign exchange (at the exchange rate prevailing at the time of actual remittance) representing sales and divestment proceeds or dividends of a duly registered foreign equity investment upon presentation of a BSP Registration Document, (“BSRD”)or BSRD, together with other supporting documents. The BSRD is issued by the BSP or the custodian bank upon registration of the foreign investment and serves as the authority to repatriate such divestment and sales proceeds or remittance of cash dividends. Effective April 3, 2000, only pre-numbered BSRD forms, printed on BSP security paper may be used and issued as proof of registration of foreign investments in accordance with existing BSP rules. The remitting commercial bank must submit to the BSP a statement of remittance together with the supporting documents within two banking days from date of actual remittance. Foreign investments not duly registered with the BSP or with the investor’s designated custodian bank are not entitled to repatriation and remittance privileges through the banking system except capital repatriation or dividend remittance of direct foreign equity investments made prior to March 15, 1973 when BSP registration was not yet required. The BSP should be notified of the transfer of sale of foreign investments in equity or securities already registered with the BSP, in order that the registration of the foreign investment may be transferred in the name of the transferee or purchaser.

Cash dividends on PLDT’s stock are paid in Philippine peso, except dividends on the Series VI Convertible Preferred Stock, which were paid in U.S. dollars. PLDT’s Transfer Agent for its common stock, The Hong Kong and Shanghai Banking Corporation, which also acts as dividend paying agent, converts and remits in U.S. dollars, at the prevailing exchange rate, cash dividends due to all common shareholders residing outside the Philippines. Under the above-mentioned regulations, PLDT has been able to remit the cash dividends due to shareholders residing outside the Philippines. As at December 31, 2010,2013, approximately 86%87% of PLDT’s outstanding shares of common and preferred stock were held by Philippine persons. For certain restrictions on the declaration and payment of dividends by PLDT, seeNote 19 —Equity –EquityandNote 20 Interest-bearing Financial Liabilitiesto the accompanying audited consolidated financial statements in Item 18.

“Financial Statements”.

Principal of and interest on PLDT’s 11.375%8.35% Notes due 2012 and 8.35% Notes dueMarch 2017 are payable in U.S. dollars which may be paid through the local banking system either pursuant to the registration of such Notes with the BSP or otherwise pursuant to specific BSP approval of such payment. Such principal and interest may also be paid utilizing PLDT’s own dollar resources without necessity of BSP approval. The BSP, with the approval of the President of the Philippines, may, however, restrict the availability of foreign exchange during an exchange crisis, when an exchange crisis is imminent, or in times of national emergency.

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Taxation

Taxation
The following is a description of the material Philippine and United States federal income tax consequences to United States Holders (as defined below) of owning shares of Common Stock and ADSs. It applies to you only if you hold your Common Stock or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including a dealer in securities, a trader in securities that elects to use a mark-to-market method of accounting for securities holdings, a tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a person that actually or constructively owns 10% or more of PLDT’s voting stock, a person that holds Common Stock or ADSs as part of a straddle or a hedging or conversion transaction, or a person whose functional currency is not the U.S. dollar.

This section is based on the United States Internal Revenue Code of 1986, as amended (the “U.S. Tax Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, and the laws of the Philippines including the Philippine National Internal Revenue Code of 1997 (the “Philippine Tax Code”) all as currently in effect, as well as on the Convention Between the Philippines and the United States (the “Philippines-United States Tax Treaty”). These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part on the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed according to its terms.

You are a United States Holder if you are a beneficial owner of Common Stock or ADSs and you are a citizen or resident of the United States, a domestic corporation, an estate whose income is subject to United States federal income tax regardless of its source, or a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

This discussion addresses only United States federal income taxation and Philippine income taxation, estate and donor’s taxation, stock transaction taxation and documentary stamp taxes.

Philippine Taxation

Taxes on Exchange of ADSs for Common Stock

Philippine capital gains or stock transaction taxes and documentary stamp taxes may be payable upon the transfer of shares of Common Stock to a holder of ADRs or to a holder of GDRs. See “—“– Capital Gains Tax and Stock Transaction Tax” and “—“– Documentary Stamp Taxes.”

Taxation of Dividends

Under the Philippine Tax Code, dividends paid by a Philippine corporation to citizens of the Philippines and resident aliens in the Philippines are subject to a final withholding tax of 10% while those paid to non-resident aliens engaged in trade or business within the Philippines are subject to a final withholding tax of 20%. Dividends paid to non-resident aliens not engaged in trade or business within the Philippines are subject to a final withholding tax of 25%. Dividends paid by a Philippine corporation to other Philippine corporations or to resident non-Philippine corporations are not subject to tax. Dividends paid to non-resident non-Philippine corporations not engaged in a trade or business in the Philippines by Philippine corporations shall be subject to a final withholding tax of 15%, subject to the condition that the country in which the non-resident non-Philippine corporation is domiciled either: (i) allows a credit against the tax due from the non-resident non-Philippine corporation taxes deemed to have been paid in the Philippines equivalent to 15% effective January 1, 2009 (which represents the difference between the regular income tax on non-resident non-Philippine corporations of 30% effective January 1, 2009 and the 15% tax on dividends) (this condition is not satisfied in the case of corporations domiciled in the United States if such corporations own less than 10% of the voting stock of PLDT) or (ii) imposes no income taxes on dividends received by such non-resident non-Philippine corporations from Philippine corporations (this condition is not satisfied in the case of corporations domiciled in the United States). If neither of the foregoing conditions are met, the dividends paid to the non-resident non-Philippine corporation shall be subject to the regular income tax (in the form of final withholding tax) at the rate of 30% effective January 1, 2009. Under rulings issued by Philippine tax authorities, Hong Kong is viewed as falling within clause (ii) and, thus, companies that are organized in Hong Kong that are not engaged in trade or business in the Philippines may be entitled to the benefit of the 15% rate. Such rulings, however, were based upon the laws of Hong Kong as in effect at the time such rulings were issued, and any subsequent changes in the relevant laws of Hong Kong may affect the validity of such rulings. PLDT reserves the right to change the rate at which it makes

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payments of withholding tax whenever it deems it appropriate under applicable law.

If the holder of Common Stock is a non-resident foreign partnership, which is treated as a corporation for Philippine tax purposes, dividends on the Common Stock should be subject to a final withholding tax of 30% effective January 1, 2009. Cede & Co., the partnership nominee of Depository Trust Company, (DTC), should qualify as a non-resident foreign partnership that would be treated as a corporation for Philippine tax purposes.

In certain circumstances where the holder holds Common Stock, a tax treaty rate may be applicable with respect to the Philippine withholding tax. For instance, holders under such circumstances and as to which the Philippines-United States Tax Treaty would be applicable would be eligible for a treaty rate of 25% (or 20% in certain instances). The 20% treaty rate is generally not applicable in the case of non-resident non-Philippine corporations domiciled in the United States which own less than 10% of the voting stock of PLDT. Holders are required, however, to establish to the Philippine taxing authorities their eligibility for such treaty rate. Philippine tax authorities have prescribed, through an administrative issuance, procedures for availment of tax treaty relief. Provided that it complies with the procedures for availment of tax treaty relief, PLDT intends to pay withholding tax at the reduced treaty rate in respect of shares the registered holder of which is Cede & Co., on the basis that Cede & Co. is a resident of the United States for purposes of the Philippines-United States Tax Treaty. PLDT reserves the right to change the rate at which it makes payments of withholding tax whenever it deems it appropriate under applicable law.

Capital Gains Tax and Stock Transaction Tax

The Philippine Tax Code provides that gain from the sale of shares of stock in a Philippine corporation shall be treated as derived entirely from sources within the Philippines, regardless of where the shares are sold. Subject to applicable tax treaty rates, the rate of tax on such gain, where the share is not disposed of through the PSE, is a final tax (i.e., capital gains tax) of 5% for gains not exceeding Php100,000 and 10% for gains in excess of that amount. The rate is the same for both non-resident individuals and non-resident non-Philippine corporations. While this tax is not collected through withholding, the Philippine Tax Code prohibits a sale or transfer of shares of stock from being recorded in the Stock and Transfer Books of the corporation unless the Philippine Commissioner of Internal Revenue certifies that the tax has been paid or certain other conditions are met.

The sale of shares which are listed in and sold through the PSE are subject to the stock transaction tax imposed at the rate of 1/2 of 1% of the gross selling price. This tax is required to be collected and paid to the government by the selling stockbroker on behalf of his client. In a letter from the BIR dated December 28, 2010 and addressed to the Securities and Exchange Commission,SEC, the BIR sets out the policy that, for tax purposes: (i) listed companies should continually maintain, if not surpass, their initial public ownership requirement (the “MPO”)in order to continually enjoy the preferential tax rate of 1/2 of 1% of the gross selling price of gross value on money arising from the disposal by the stockholders of their listed shares through the PSE; and (ii) failure of listed companies to do so exposes the stockholders selling their shares to the 5%/10% capital gains tax as these companies are no longer compliant with their “public ownership” status and will, thus, not be considered publicly-listed companies for taxation purposes. While such letter fromOn November 7, 2012, the BIR providesissued Revenue Regulations No. 16-2012 prescribing the tax treatment of sales, barters, exchanges or other dispositions of shares of stock of publicly-listed companies that this new policydo not meet the MPO. The salient provisions of such BIR issuance are as follows: (i) publicly-listed companies which are not compliant with the MPO level will be implemented beginningallowed up to December 31, 2012 to comply; (ii) from and after January 1, 2011,2013, the sale barter, transfer or assignment of shares of stock of publicly-listed companies which is not compliant with the MPO shall be subject to the 5%/10% capital gains tax; and (iii) listed companies are required to submit to the BIR has not yet issued guidelines for its implementation.

certain reportorial requirements to enable the BIR to monitor compliance with the MPO requirement.

Sales of shares other than through a Philippine stock exchange will be subject to Philippine capital gains tax in the manner described above.

Under the Philippines-United States Tax Treaty, gains derived by a United States resident from the sale of shares of stock of a Philippine corporation will not be subject to capital gains tax (i.e., where the share is not disposed of through the PSE), unless the shares are those of a corporation of which over 50% of the assets (in terms of value) consist of real property interests located in the Philippines. PLDT does not believe that it currently is such a corporation.

Holders are required, however, to establish to the Philippine taxing authorities their eligibility for such treaty exemption. Philippine tax authorities have prescribed, through an administrative issuance, procedures for availment of tax treaty relief.

Documentary Stamp Taxes

The Philippines imposes a documentary stamp tax upon transfers of shares of stock issued by a Philippine corporation at a rate of Php0.75 on each Php200, or fractional part thereof, of the par value of the shares. The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted or transferred, when the obligation or right arises from Philippine sources or the property is situated in the Philippines. However, theThe sale, barter, transfer or exchange of shares of stock of a Philippine Corporation which is listed and traded through the facilities of the Philippine Stock Exchange is exempt from the document stamp tax.

137

However, Revenue Regulations No. 16-2012 provides that transfers of shares of stock of publicly-listed companies which are not compliant with the MPO requirement shall be subject to documentary stamp tax.


Estate and Donor’s Taxes

Shares of stock issued by a corporation organized or constituted in accordance with Philippine law are deemed to have a Philippine situs and their transfer by way of succession or donation is subject to Philippine estate and gift taxes. The transfer of shares of stock by a deceased individual to his heirs by way of succession, whether such an individual was a citizen of the Philippines or an alien, regardless of residence, will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the net estate is over Php200,000. Individual and corporate shareholders, whether or not citizens or residents of the Philippines, who transfer the Equity Securities by way of gift or donation will be liable for Philippine donor’s tax on such transfers at progressive rates ranging from 2% to 15%, if the net gifts made during the calendar year exceed Php100,000. The rate of tax with respect to net gifts made to a stranger, who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity in the collateral line within the fourth degree of relationship of the donor, is a flat rate of 30%. Donations to or from corporations are considered donations from a stranger for donor’s tax purposes. Estate and gift taxes will not be collected in respect of intangible personal property such as the Equity Securities:

if the deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or

if the deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or
if the laws of the foreign country of which the deceased or the donor was a citizen and resident at the time of his death or donation allow a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

if the laws of the foreign country of which the deceased or the donor was a citizen and resident at the time of his death or donation allow a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

Shares of stock of a deceased shareholder or shares that have been donated may not be transferred on the books of the corporation without a certificate from the Philippine Commissioner of Internal Revenue that the applicable estate or donor’s taxes have been paid. In the case of ADRs, however, there is no corresponding requirement, unless a transfer of the ADRs would also entail a change in the registration of the underlying shares.

United States Federal Taxation

In general, taking into account the earlier assumptions that each obligation of the Deposit Agreement and any related agreement will be performed according to its terms, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADRs. Exchanges of shares of Common Stock for ADRs, and ADRs for shares of Common Stock, generally will not be subject to United States federal income tax.

Taxation of Dividends

Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a United States Holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate United States Holder, dividends paid to you in taxable years beginning before January 1, 2013 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15%the preferential rates applicable to long-term capital gains provided that, in the case of Common Stock or ADSs you hold the Common Stock or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Dividends we pay with respect to the Common Stock or ADSs generally will be qualified dividend income.

You must include any Philippine tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of Common Stock, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a United States Holder will be the U.S. dollar value of the Philippine peso payments made, determined at the spot Philippine peso/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated

138


earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the Common Stock or ADSs and thereafter as capital gain.

Subject to certain limitations, the Philippine tax withheld in accordance with the Philippines-United States Tax Treaty and paid over to the Philippines will be creditable or deductible against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate.

preferential rates applicable to long-term capital gains.

Dividends will be income from sources outside the United States. Dividends will, depending on your circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to you.

Sale or Other Disposition of Equity Securities

Subject to the PFIC rules discussed below, a United States Holder will recognize capital gain or loss upon the sale of Common Stock or ADSs in an amount equal to the difference between such United States Holder’s basis in the Common Stock or ADSs and the amount realized upon the sale. Such gain or loss generally will be long-term capital gain or loss if, at the time of sale, exchange or retirement, the Common Stock or ADSs have been held for more than one year. Capital gain of a non-corporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. Generally, any such gain or loss will be treated as realized income or loss from sources within the United States for foreign tax credit limitation purposes. United States Holders may not be eligible to credit against their United States federal income tax liability amounts paid in respect of the Philippine stock transaction tax. See “—Item 10. “Additional Information – Philippine Taxation Capital Gains Tax and Stock Transaction Tax.”

The U.S. Tax Code does not authorize a comparable credit for foreign gift or donor’s taxes such as those imposed by the Philippines. See “—Item 10. “Additional Information – Philippine Taxation Estate and Donor’s Taxes.”

Passive Foreign Investment Company Rules

We believe that the Common Stock orand ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, unless the Common Stock or ADSs are “marketable stock” and a United States Holder electsyou elect to be taxed annually on a mark-to-market basis with respect to the Common Stock or ADSs, gain realized on the sale or other disposition of your Common Stock or ADSs would in general not be treated as capital gain. Instead, if you are a United States Holder, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the Common Stock or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividendsWith certain exceptions, your shares of ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs. Dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are a PFIC either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.

Dividends and Paying Agents

Not applicable.

Statement by Experts

Not applicable.

Documents on Display

We are subject to the informational requirements of the Exchange Act, and file reports and other information with the Commission, as required by this Act. Reports and other information filed by us with the Commission may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a website that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Copies of these materials may be obtained by mail from the public reference section of the Commission, 100 F Street, N.E., Washington, D.C. 20549,D.C.20549, at prescribed rates. These reports and other information may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005,York10005, on which the ADSs representing our Common Stock are listed.

Item 11. Quantitative and Qualitative Disclosures About Market Risks

Item 11.Quantitative and Qualitative Disclosures About Market Risks

The main risks arising from our financial instruments are liquidity risk, foreign currency exchange risk, interest rate risk and credit risk. The importance of managing those risks has significantly increased in light of the considerable change and continuing volatility in both the Philippine and international financial markets. Our Board of Directors reviews and approves policies for managing each of these risks. Our policies for managing these risks are summarized below. We also monitor the market price risk arising from all financial instruments.

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Liquidity Risk

Our exposure to liquidity risk refers to the risk that our financial liabilities are not reviewed in a timely manner and that our working capital requirements and planned capital expenditures are not met.

We manage our liquidity profile to be able to finance our operations and capital expenditures, service our maturing debts and meet our other financial obligations. To cover our financing requirements, we use internally generated funds and proceeds from debt and equity issues and sales of certain assets.

As part of our liquidity risk management program, we regularly evaluate our projected and actual cash flows, including our loan maturity profiles, and continuously assess conditions in the financial markets for opportunities to pursue fund-raising initiatives. These activities may include bank loans, export credit agency-guaranteed facilities, debt capital and equity market issues.

Any excess funds are primarily invested in short-datedshort-term and principal-protected bank products that provide flexibility of withdrawing the funds anytime. We also allocate a portion of our cash in longer tenor investments such as fixed income securities issued or guaranteed by the Republic of the Philippines, and Philippine banks and corporates, managed funds and other structured products linked to the Republic of the Philippines. We regularly evaluate available financial products and monitor market conditions for opportunities to enhance yields at acceptable risk levels. Our investments are also subject to certain restrictions contained in our debt covenants. Our funding arrangements are designed to keep an appropriate balance between equity and debt and to provide financing flexibility while enhancing our businesses.

Our cash position remains strong and more than sufficient to support our capital expenditure requirements and service our debt and financing obligations as a consequence of higher cash from operations following more rational competition for the wireless business and the expected growth in data revenues. Furthermore, we can easily tap bank credit facilities to settle obligations, as necessary. We have letters of credit amounting to Php1,145 million as at December 31, 2010 and certain financial instruments that are allocated to meet our short-term liquidity needs. These financial instruments are cash and cash equivalents, and short-term investments amounting to Php36,678Php31,905 million and Php669Php718 million, respectively, as at December 31, 2010.2013, which we can use to meet our short-term liquidity needs. SeeNote 15 Cash and Cash Equivalentsto the accompanying audited consolidated financial statements in Item 1818. “Financial Statements”.Details

The following table discloses a summary of maturity profile of our financial assets based on our consolidated undiscounted claims outstanding as at December 31, 2013 and 2012:

   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

December 31, 2013

          

Loans and receivables:

   70,738     66,169     2,819     1,608     142  

Advances and other noncurrent assets

   10,384     7,987     958     1,297     142  

Cash equivalents

   25,967     25,967     —       —       —    

Short-term investments

   127     127     —       —       —    

Investment in debt securities and other long-term investments

   2,172     —       1,861     311     —    

Retail subscribers

   12,563     12,563     —       —       —    

Corporate subscribers

   7,904     7,904     —       —       —    

Foreign administrations

   5,840     5,840     —       —       —    

Domestic carriers

   1,461     1,461     —       —       —    

Dealers, agents and others

   4,320     4,320     —       —       —    

HTM investments:

   471     —       —       321     150  

Investment in debt securities and other long-term investments

   471     —       —       321     150  

Financial instruments at FVPL:

   591     591     —       —       —    

Short-term investments

   591     591     —       —       —    

Available-for-sale financial investments

   220     —       —       —       220  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   72,020     66,760     2,819     1,929     512  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

          

Loans and receivables:

   70,437     69,158     686     453     140  

Advances and other noncurrent assets

   8,989     7,915     686     248     140  

Cash equivalents

   31,550     31,550     —       —       —    

Short-term investments

   24     24     —       —       —    

Investment in debt securities and other long-term investments

   205     —       —       205     —    

Retail subscribers

   10,568     10,568     —       —       —    

Corporate subscribers

   8,100     8,100     —       —       —    

Foreign administrations

   4,960     4,960     —       —       —    

Domestic carriers

   1,707     1,707     —       —       —    

Dealers, agents and others

   4,334     4,334     —       —       —    

HTM investments:

   150     150     —       —       —    

Investment in debt securities and other long-term investments

   150     150     —       —       —    

Financial instruments at FVPL:

   550     550     —       —       —    

Short-term investments

   550     550     —       —       —    

Available-for-sale financial investments

   5,651     —       —       —       5,651  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   76,788     69,858     686     453     5,791  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table discloses a summary of maturity profile of our financial liabilities based on our consolidated contractual undiscounted obligations outstanding as at December 31, 2013 and 2012:

   Payments Due by Period 
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

December 31, 2013

          

Debt(1):

   123,623     2,774     48,824     35,908     36,117  

Principal

   104,472     2,576     37,822     31,549     32,525  

Interest

   19,151     198     11,002     4,359     3,592  

Lease obligations:

   14,574     7,711     3,198     2,016     1,649  

Operating lease

   14,562     7,710     3,187     2,016     1,649  

Finance lease

   12     1     11     —       —    

Unconditional purchase obligations(2)

   231     66     44     44     77  

Other obligations:

   109,405     84,869     14,841     7,627     2,068  

Derivative financial liabilities(3):

   2,274     92     923     1,259     —    

Long-term currency swap

   2,086     —       833     1,253     —    

   Payments Due by Period 
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

Interest rate swap

   188     92     90     6     —    

Various trade and other obligations:

   107,131     84,777     13,918     6,368     2,068  

Suppliers and contractors

   49,314     29,799     13,183     6,332     —    

Utilities and related expenses

   31,576     31,483     68     5     20  

Liability from redemption of preferred shares

   7,952     7,952     —       —       —    

Employee benefits

   5,350     5,350     —       —       —    

Customers’ deposits

   2,545     —       466     31     2,048  

Carriers

   2,264     2,264     —       —       —    

Dividends

   932     932     —       —       —    

Others

   7,198     6,997     201     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   247,833     95,420     66,907     45,595     39,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012 (As Adjusted – Note 2)

          

Debt(1):

   144,467     3,981     56,353     48,417     35,716  

Principal

   117,115     3,641     41,469     42,492     29,513  

Interest

   27,352     340     14,884     5,925     6,203  

Lease obligations:

   13,655     7,059     3,641     1,832     1,123  

Operating lease

   13,634     7,057     3,623     1,831     1,123  

Finance lease

   21     2     18     1     —    

Unconditional purchase obligations(2)

   413     167     246     —       —    

Other obligations:

   105,492     80,443     12,505     10,515     2,029  

Derivative financial liabilities(3):

   3,507     418     871     2,218     —    

Long-term currency swap

   2,968     —       770     2,198     —    

Equity forward sale contract

   348     348     —       —       —    

Interest rate swap

   191     70     101     20     —    

Various trade and other obligations:

   101,985     80,025     11,634     8,297     2,029  

Suppliers and contractors

   45,331     26,128     10,942     8,261     —    

Utilities and related expenses

   31,305     31,098     202     5     —    

Liability from redemption of preferred shares

   7,884     7,884     —       —       —    

Employee benefits

   5,488     5,488     —       —       —    

Customers’ deposits

   2,529     —       469     31     2,029  

Carriers

   2,007     2,007     —       —       —    

Dividends

   827     827     —       —       —    

Others

   6,614     6,593     21     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   264,027     91,650     72,745     60,764     38,868  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)

Consists of long-term debt, including current portion, and notes payable; gross of unamortized debt discount and debt issuance costs.

(2)

Based on the Amended ATPA with AIL. See Note 24 – Related Party Transactions – Air Time Purchase Agreement between PLDT and AIL Related Party Agreements.

(3)

Gross liabilities before any offsetting application.

Debt

SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debtto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for a detailed discussion of our debt.

Operating Lease Obligations

The PLDT Group has various lease contracts for periods ranging from one to ten years covering certain offices, warehouses, cell sites telecommunications equipment locations and various office equipment. These lease contracts are subject to certain escalation clauses.

The consolidated future minimum lease commitments payable with non-cancellable operating leases as at December 31, 2013 and 2012 are as follows:

   December 31, 
   2013   2012 
       (in million pesos) 

Within one year

   7,809     7,136  

After one year but not more than five years

   5,104     5,375  

More than five years

   1,649     1,123  
  

 

 

   

 

 

 

Total

   14,562     13,634  
  

 

 

   

 

 

 

Finance Lease Obligations

SeeNote 20 – Interest-bearing Financial Liabilities – Obligations under Finance Leasesto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for the detailed discussion of our long-term finance lease obligations.

Unconditional Purchase Obligations

SeeNote 24 – Related Party Transactions – Air Time Purchase Agreement between PLDT and AIL Related Agreementsto the accompanying audited consolidated financial statements in Item 18. “Financial Statements” for a detailed discussion of PLDT’s obligation under the Original and the Amended ATPA.

Under the Amended ATPA, PLDT’s aggregate remaining minimum obligation is approximately Php231 million Php413 and million as at December 31, 2013 and 2012, respectively.

Other Obligations – Various Trade and Other Obligations

PLDT Group has various obligations to suppliers for the acquisition of phone and network equipment, contractors for services rendered on various projects, foreign administrations and domestic carriers for the access charges, shareholders for unpaid dividends distributions, employees for benefits and other related obligations, and various business and operational related agreements. Total obligations under these various agreements amounted to approximately Php107,131 million and Php101,895 million as at December 31, 2013 and 2012, respectively. SeeNote 22 – Accounts PayableandNote 23 – Accrued Expenses and Other Current Liabilitiesto the accompanying audited consolidated financial statements in Item 18. “Financial Statements”.

Commercial Commitments

Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php20 million and a summary of the maturity profile ofPhp342 million as at December 31, 2013 and 2012, respectively. These commitments will expire within one year.

Collateral

We have not made any pledges with respect to our financial liabilities as at December 31, 20102013 and 2009 based on contractual undiscounted payments is set out in Note 26 — Contractual Obligations and Commercial Commitments to the accompanying consolidated financial statements in Item 182012.

.

Foreign Currency Exchange Risk

Foreign currency exchange risk is the risk that the fair value of future cash flows of a financial instruments will fluctuate because of changes in foreign exchange rates.

The revaluation of our foreign currency-denominated financial assets and liabilities as a result of the appreciation or depreciation of the Philippine peso is recognized as foreign exchange gains or losses as at the end of the reporting period. The extent of foreign exchange gains or losses is largely dependent on the amount of foreign currency debt. While a certain percentage of our revenues are either linked to or denominated in U.S. dollars, most of our indebtedness and related interest expense, a substantial portion of our capital expenditures and a portion of our operating expenses are denominated in foreign currencies, mostly in U.S. dollars. As such, a strengthening or weakening of the Philippine peso against the U.S. dollar will decrease or increase in Philippine peso terms both the principal amount of our foreign currency-denominated debts and the related interest expense, our foreign currency-denominated capital expenditures and operating expenses as well as our U.S. dollar-linked and U.S. dollar-denominated revenues. In addition, many of our financial ratios and other financial tests are affected by the movements in the Philippine peso to U.S. dollar exchange rate.

To manage our foreign exchange risks and to stabilize our cash flows in order to improve investment and cash flow planning, we enter into forward foreign exchange contracts, currency swap contracts, currency option contracts and other hedging products aimed at reducing and/or managing the adverse impact of changes in foreign exchange rates on our operating results and cash flows. We use forward foreign exchange sale and purchase contracts, currency swap contracts and foreign currency option contracts to manage the foreign currency risks associated with our foreign currency-denominated loans. We also enter into forward foreign exchange sale contracts to manage foreign currency risks associated with our U.S. dollar-linked and U.S. dollar-denominated revenues. In order to manage the hedge costs of these contracts, we utilize structures that include credit-linkage with PLDT as the reference entity, a combination of foreign currency option contracts, and fixed to floating coupon only swap contracts. We accounted for these instruments as either cash flow hedges, wherein changes in the fair value are recognized as cumulative translationconversion adjustments in other comprehensive income until the hedged transaction affects our consolidated income statement or when the hedging instrument expires, or transactions not designated as hedges, wherein changes in the fair value are recognized directly as income or expense for the year.

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The following table shows our consolidated foreign currency-denominated monetary financial assets and liabilities and their Philippine peso equivalents as at December 31, 20102013 and 2009:
                 
  2010  2009 
  U.S. Dollar  Php(1)  U.S. Dollar  Php(2) 
  (in millions) 
Noncurrent Financial Assets
                
Note receivable  2   84   2   81 
Derivative financial assets  4   178       
Advances and refundable deposits  1   38      7 
 
Total noncurrent financial assets  7   300   2   88 
 
Current Financial Assets
                
Cash and cash equivalents  138   6,050   140   6,496 
Short-term investments  15   652   47   2,164 
Trade and other receivables — net  214   9,361   206   9,573 
Derivative financial assets     5      6 
 
Total current financial assets  367   16,068   393   18,239 
 
Total Financial Assets
  374   16,368   395   18,327 
 
Noncurrent Financial Liabilities
                
Interest-bearing financial liabilities — net of current portion  782   34,244   837   38,871 
Derivative financial liabilities  82   3,604   59   2,751 
 
Total noncurrent financial liabilities  864   37,848   896   41,622 
 
Current Financial Liabilities
                
Accounts payable  169   7,415   155   7,180 
Accrued expenses and other current liabilities  143   6,267   95   4,409 
Current portion of interest-bearing financial liabilities  103   4,537   155   7,220 
 
Total current financial liabilities  415   18,219   405   18,809 
 
Total Financial Liabilities
  1,279   56,067   1,301   60,431 
 
2012:

   December 31, 
   2013   2012 
   U.S. Dollar   Php(1)   U.S. Dollar   Php(2) 
   (in millions)         

Noncurrent Financial Assets

        

Investment in debt securities and other long-term investments

   49     2,172     5     205  

Derivative financial assets

   1     24     —       —    

Advances and other noncurrent assets

   1     32     1     28  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial assets

   51     2,228     6     233  
  

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Assets

        

Cash and cash equivalents

   145     6,450     128     5,267  

Short-term investments

   13     591     14     562  

Trade and other receivables – net

   173     7,685     179     7,360  

Derivative financial assets

   —       10     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial assets

   331     14,736     321     13,189  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Assets

   382     16,964     327     13,422  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noncurrent Financial Liabilities

        

Interest-bearing financial liabilities – net of current portion

   1,047     46,477     1,058     43,442  

Derivative financial liabilities

   42     1,869     68     2,802  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial liabilities

   1,089     48,346     1,126     46,244  
  

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Liabilities

        

Accounts payable

   166     7,381     165     6,762  

Accrued expenses and other current liabilities

   125     5,552     166     6,832  

Current portion of interest-bearing financial liabilities

   292     12,966     221     9,065  

Derivative financial liabilities

   2     105     2     70  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial liabilities

   585     26,004     554     22,729  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Liabilities

   1,674     74,350     1,680     68,973  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)
(1)

The exchange rate used to translateconvert the U.S. dollar amounts into Philippine peso was Php43.81Php44.40 to US$1.00, the peso-dollarPhilippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at December 31, 2010.2013.

(2)

The exchange rate used to translateconvert the U.S. dollar amounts into Philippine peso was Php46.43Php41.08 to US$1.00, the peso-dollarPhilippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at December 31, 2009.2012.

As at March 29, 2011,28, 2014, the Philippine peso-dollarpeso-U.S. dollar exchange rate was Php43.53Php45.00 to US$1.00. Using this exchange rate, our consolidated net foreign currency-denominated financial liabilities as at December 31, 2010 would have decreasedincreased in Philippine peso terms by Php253 million.

Php775 million as at December 31, 2013.

Approximately 43%57% and 46%45% of our total consolidated debts (net of consolidated debt discount) waswere denominated in U.S. dollars as at December 31, 20102013 and 2009,2012, respectively. Consolidated foreign currency-denominated debt decreased to Php38,414Php59,132 million as at December 31, 20102013 from Php45,633Php52,298 million as at December 31, 2009.2012. SeeNote 20 Interest-bearing Financial Liabilitiesto the accompanying consolidated financial statements in Item 18 for further discussion.item 18. “Financial Statements”. The aggregate notional amount of PLDT’s outstanding long-term principal only currencyonly-currency swap contracts werewas US$262 million and US$391202 million as at December 31, 20102013 and 2009, respectively.2012. Consequently, the unhedged portion of our consolidated debt amounts was approximately 30%48% (or 23%41%, net of our consolidated U.S. dollar cash balances) and 28%38% (or 19%33%, net of our consolidated U.S. dollar cash balances) as at December 31, 20102013 and 2009,2012, respectively.

Approximately, 26%21% of our consolidated service revenues were denominated in U.S. dollars and/or were linked to U.S. dollars for the years ended December 31, 2013 and 2012 as compared with approximately 30% for the year ended December 31, 20102011. Our consolidated expenses denominated in U.S. dollars and/or linked to U.S. dollars was approximately 11% for the year ended December 31, 2013 as compared with approximately 28%12% to 17% for each of the years ended December 31, 20092012 and 2008.2011, respectively. In this respect, the appreciation of the weighted average exchange rate of the Philippine peso against the U.S. dollar decreased our revenues and expenses, and consequently, affects our cash flow from operations in Philippine peso terms.

The Philippine peso had appreciateddepreciated by 5.64%8.08% against the U.S. dollar to Php43.81Php44.40 to US$1.00 as at December 31, 20102013 from Php46.43Php41.08 to US$1.00 as at December 31, 2009.2012. As at December 31, 2009,2012, the Philippine peso had appreciated by 2.56%6.47% against the U.S. dollar to Php46.43Php41.08 to US$1.00 from Php47.65Php43.92 to US$1.00 as at December 31, 2008.January 1, 2012. As a result of our consolidated foreign exchange movements, as well as the amount of our consolidated outstanding net foreign currency financial assets and liabilities, we recognized net consolidated foreign exchange gainslosses of Php1,807Php2,893 million and Php909Php735 million in 2010for the years ended December 31, 2013 and 2009,2011, respectively, andwhile we recognized net consolidated foreign exchange lossesgains of Php6,170Php3,282 million in 2008.for the year ended December 31, 2012. SeeNote 4 Operating Segment Informationto the accompanying consolidated financial statements in Item 18 for further discussion.

141

item 18. “Financial Statements”.


Management conducted a survey among our banks to determine the outlook of the Philippine peso-dollarpeso-U.S. dollar exchange rate until our next reporting date of DecemberMarch 31, 2011.2014. Our outlook is that the Philippine peso-dollarpeso-U.S. dollar exchange rate may weaken/strengthen by 5.27%1% as compared to the exchange rate of Php43.81Php44.40 to US$1.00 as at December 31, 2010.2013. If the Philippine peso-dollarpeso-U.S. dollar exchange rate had weakened/strengthened by 5.27%1% as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year end 2010ended 2013 would have been approximately Php1,099Php305 million higher/lower and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php1,089Php301 million higher/lower, mainly as a result of consolidated foreign exchange gains and losses on translationconversion of U.S. dollar-denominated net assets/liabilities and mark-to-market valuation of derivative financial instruments. If the Philippine peso-dollar exchange rate had weakened/strengthened by approximately 4% as at December 31, 2009, with all other variables held constant, profit after tax for the year would have been approximately Php877 million higher/lower and our consolidated stockholders’ equity as at year end 2009 would have been approximately Php849 million higher/lower, mainly as a result of consolidated foreign exchange gains and losses on translation of U.S. dollar-denominated net assets/liabilities and mark-to-market valuation of derivative financial instruments.

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 change in market interest rates.

Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and short-term borrowings with floating interest rates.

Our policy is to manage interest cost through a mix of fixed and variable rate debts. We evaluate the fixed to floating ratio of our loans in line with movements of relevant interest rates in the financial markets. Based on our assessment, new financing will be priced either on a fixed or floating rate basis. On a limited basis, we enter into interest rate swap agreements in order to manage our exposure to interest rate fluctuations. We make use of hedging instruments and structures solely for reducing or managing financial risk associated with our liabilities and not for trading purposes.

The following tables set out the carrying amounts, by maturity, of our financial instruments that are expected to have exposure on interest rate risk as at December 31, 20102013 and 2009.2012. Financial instruments that are not subject to interest rate risk were not included in the table.

As at December 31, 2010

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value 
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                        (in millions) 
Assets:
                                            
Cash in Bank
                                            
U.S. Dollar  11               11   474      474   11   474 
Interest rate 0.0025% to 0.7840%                               
Philippine Peso  31               31   1,362      1,362   31   1,362 
Interest rate 0.0625% to 2.9000%                               
Other Currencies  3               3   118      118   3   118 
Interest rate 0.0100% to 2.4000%                               
Temporary Cash Investments
                                            
U.S. Dollar  110               110   4,813      4,813   110   4,813 
Interest rate 0.1000% to 1.7000%                               
Philippine Peso  661               661   28,959      28,959   661   28,959 
Interest rate 1.0000% to 4.8100%                               
Short-term Investments
                                            
U.S. Dollar  15               15   652      652   15   652 
Interest rate 1.9000% to 10.672%                               
Philippine Peso                    17      17      17 
Interest rate  3.2500%                               
Investment in Debt Securities
                                            
Philippine Peso        8   3      11   484      484   11   502 
Interest rate        6.8750%  7.0000%                    ��� 
 
   831      8   3      842   36,879      36,879   842   36,897 
 
                                             
Liabilities:
                                            
Long-term Debt
                                            

142

2013


   In U.S. Dollars       Discount/
Debt
Issuance
Cost

In Php
   Carrying
Value

In  Php
   Fair Value 
   Below 1 year   1-2 years   2-3 years   3-5 years   Over 5
years
   Total   In Php       In U.S.
Dollar
   In Php 
                               (in millions) 

Assets:

                      

Investment in Debt Securities and Other Long-term Investments

                      

U.S. Dollar

   —       —       42     7     —       49     2,172     —       2,172     49     2,185  

Interest rate

   —       —       10.0000%     

 

3.5000 to

4.000%

  

  

   —       —       —       —       —       —       —    

Philippine Peso

   —       —       —       7     3     10     471     —       471     11     483  

Interest rate

   —       —       —       4.2500%     4.8370%     —       —       —       —       —       —    

Cash in Bank

                      

U.S. Dollar

   20     —       —       —       —       20     882     —       882     20     882  

Interest rate

   
 
0.0100% to
0.7500%
  
  
   —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   97     —       —       —       —       97     4,303     —       4,303     97     4,303  

Interest rate

   
 
0.0010% to
2.0000%
  
  
   —       —       —       —       —       —       —       —       —       —    

Other Currencies

   2     —       —       —       —       2     96     —       96     2     96  

Interest rate

   
 
0.0100% to
0.5000%
  
  
   —       —       —       —       —       —       —       —       —       —    

Temporary Cash Investments

                      

U.S. Dollar

   116     —       —       —       —       116     5,164     —       5,164     116     5,164  

Interest rate

   
 
0.2500% to
4.0000%
  
  
   —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   469     —       —       —       —       469     20,803     —       20,803     469     20,803  

Interest rate

   
 
0.5600% to
4.7500%
  
  
   —       —       —       —       —       —       —       —       —       —    

Short-term Investments

                      

U.S. Dollar

   13     —       —       —       —       13     591     —       591     13     591  

Interest rate

   0.6050%     —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   3     —       —       —       —       3     127     —       127     3     127  

Interest rate

   1.5000%     —       —       —       —       —       —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   720     —       42     14     3     779     34,609     —       34,609     780     34,634  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                      

Long-term Debt

                      

Fixed Rate

                      

U.S. Dollar Notes

   —       —       —       234     —       234     10,401     67     10,334     274     12,160  

Interest rate

   —       —       —       8.3500%     —       —       —       —       —       —       —    

U.S. Dollar Fixed Loans

   —       65     26     33     —       124     5,493     99     5,394     126     5,598  

Interest rate

   —       
 
1.4100% to
3.9550%
  
  
   
 
1.4100% to
3.9550%
  
  
   
 
1.4100% to
3.9550%
  
  
   —       —       —       —       —       —       —    

Philippine Peso

   17     29     14     197     647     904     40,125     46     40,079     949     42,120  

Interest rate

   6.3981%     
 
3.9250% to
6.2600%
  
  
   
 
3.9250% to
6.2600%
  
  
   
 
3.9250% to
6.3462%
  
  
   
 
3.9250% to
6.3462%
  
  
   —       —       —       —       —       —    

Variable Rate

                      

U.S. Dollar

   21     480     235     245     —       981     43,560     156     43,404     981     43,560  

Interest rate

   
 
 
0.3500% to
1.8000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   —       —       —       —       —       —       —    

Philippine Peso

   20     2     1     1     86     110     4,893     14     4,879     110     4,893  

Interest rate

   
 
PHP PDST-F
+ 0.3000%
  
  
   
 
BSP overnight rate
- 0.3500%
  
  
   
 
BSP overnight rate
- 0.3500%
  
  
   
 
BSP overnight rate
- 0.3500%
  
  
   
 
BSP overnight rate
- 0.3500%
  
  
   —       —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   58     576     276     710     733     2,353     104,472     382     104,090     2,440     108,331  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value 
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                        (in millions) 
Fixed Rate
                                            
U.S. Dollar Notes     146         234   380   16,650   200   16,450   440   19,274 
Interest rate     11.3750%        8.3500%                  
U.S. Dollar Fixed Loans  9   29   15   295      348   15,264   2,586   12,678   276   12,120 
Interest rate  4.7000%  2.9900% to 3.7900%  2.9900% to 3.7900%  2.2500% to 2.9900%                      
Philippine Peso  68   146   121   339   195   869   38,066   74   37,992   961   42,091 
Interest rate 6.0323% to 8.7792%  5.6250% to 8.4346%  6.5000% to 8.4346%  6.5000% to 9.1038%  6.5000% to 9.1038%                   
Variable Rate
                                            
U.S. Dollar   6   148   45   15      214   9,357   71   9,286   212   9,286 
Interest rate US$ LIBOR + 0.8150%  US$ Swap rate + 2.7900%;
LIBOR + 0.4200% to 1.8500%
  US$ Swap rate + 2.7900%;
LIBOR + 0.4200%
to 1.8500%
  US$ Swap rate + 2.7900%;
LIBOR + 1.3500% to 1.8500%
                      
Philippine Peso  58   150   74   20      302   13,253   13   13,240   302   13,240 
Interest rate PDST-F + 0.3000% to 1.2500%  PDST-F + 0.3000% to 1.3750%; AUB’s prime rate  PDST-F + 0.3000%  PDST-F + 0.3000%                      
 
   141   619   255   669   429   2,113   92,590   2,944   89,646   2,191   96,011 
 
As at December 31, 2009
                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value 
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                        (in millions) 
Assets:
                                            
Cash in Bank
                                            
U.S. Dollar  11               11   540      540   11   540 
Interest rate 0.0025% to 0.88%                               
Philippine Peso  36               36   1,673      1,673   36   1,673 
Interest rate 0.625% to 2.90%                               
Other Currencies  1               1   31      31   1   31 
Interest rate 0.0014 to 2.40%                               
Temporary Cash Investments
                                            
U.S. Dollar  384               384   17,870      17,870   384   17,870 
Interest rate 0.50% to 1.75%                               
Philippine Peso  369               369   17,149      17,149   369   17,149 
Interest rate 1.25% to 5.50%                               
Short-term Investments
                                            
U.S. Dollar  46               46   2,132      2,132   46   2,132 
Interest rate 4.25% to 7.006%                               
Philippine Peso  36               36   1,692      1,692   36   1,692 
Interest rate  4.40%                               
Investment in Debt Securities
                                            
Philippine Peso           10      10   462      462   10   474 
Interest rate           6.92%                      
 
   883         10      893   41,549      41,549   893   41,561 
 
                                             
Liabilities:
                                            
Long-term Debt
                                            
Fixed Rate
                                            
U.S. Dollar Notes        146      245   391   18,161   285   17,876   449   20,837 
Interest rate        11.375%     8.350%                  
U.S. Dollar Fixed Loans  14   27   5   285      331   15,397   3,338   12,059   229   10,654 
Interest rate  4.515%  3.79% to 4.70%   3.79%  2.25% to 3.79%                      
Philippine Peso     63   126   236   305   730   33,858   84   33,774   744   34,535 
Interest rate    6.0323% to 8.4346%  5.625% to 8.4346%  6.125% to 9.1038%  6.50% to 9.1038%                   
Variable Rate
                                            
U.S. Dollar  41   160   74   60      335   15,543   124   15,419   332   15,419 
Interest rate US$ LIBOR + 0.05% to 2.5%  US$ LIBOR + 0.42% to 1.85%; swap rate + 2.79%  US$ LIBOR + 0.42% to 1.85%; swap rate + 2.79%  US$ LIBOR + 0.42% to 1.85%; swap rate + 2.79%                      
Philippine Peso     185   81   107      373   17,349   27   17,322   373   17,322 

143

2012


   In U.S. Dollars       Discount/
Debt
Issuance
Cost

In Php
   Carrying
Value

In Php
   Fair Value 
   Below 1 year   1-2 years   2-3 years   3-5 years   Over 5
years
   Total   In Php       In U.S.
Dollar
   In Php 
                               (in millions) 

Assets:

                      

Investment in Debt Securities and Other Long-term Investments

                      

U.S. Dollar

   —       —       —       5     —       5     205     —       205     5     219  

Interest rate

   —       —       —       4.0000%     —       —       —       —       —       —       —    

Philippine Peso

   4     —       —       —       —       4     150     —       150     4     154  

Interest rate

   7.0000%       —         —       —       —       —       —       —       —    

Cash in Bank

                      

U.S. Dollar

   37     —       —       —       —       37     1,529     —       1,529     37     1,529  

Interest rate

   
 
0.0100% to
0.7500%
  
  
   —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   84     —       —       —       —       84     3,445     —       3,445     84     3,445  

Interest rate

   
 
0.1000% to
3.0000%
  
  
   —       —       —       —       —       —       —       —       —       —    

Other Currencies

   4     —       —       —       —       4     161     —       161     4     161  

Interest rate

   
 
0.0100% to
0.7500%
  
  
   —       —       —       —       —       —       —       —       —       —    

Temporary Cash Investments

                      

U.S. Dollar

   74     —       —       —       —       74     3,062     —       3,062     74     3,062  

Interest rate

   
 
0.2500% to
4.7500%
  
  
   —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   694     —       —       —       —       694     28,488     —       28,488     694     28,488  

Interest rate

   
 
1.1250% to
5.0000%
  
  
   —       —       —       —       —       —       —       —       —       —    

Short-term Investments

                      

U.S. Dollar

   14     —       —       —       —       14     557     —       557     14     557  

Interest rate

   9.1730%     —       —       —       —       —       —       —       —       —       —    

Philippine Peso

   —       —       —       —       —       —       17     —       17     —       17  

Interest rate

   3.0000%     —       —       —       —       —       —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   911     —       —       5     —       916     37,614     —       37,614     916     37,632  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                      

Long-term Debt

                      

Fixed Rate

                      

U.S. Dollar Notes

   —       —       —       234     —       234     9,623     79     9,544     283     11,644  

Interest rate

   —       —       —       8.3500%     —       —       —       —       —       —       —    

U.S. Dollar Fixed Loans

   5     337     23     32     9     406     16,674     1,143     15,531     410     16,843  

Interest rate

   3.7900%     
 
1.9000% to
3.9550%
  
  
   
 
1.9000% to
3.9550%
  
  
   
 
1.9000% to
3.9550%
  
  
   3.9550%     —       —       —       —       —       —    

Philippine Peso

   —       35     132     522     686     1,375     56,469     45     56,424     1,475     60,576  

Interest rate

   —       
 
4.9110% to
7.7946%
  
  
   
 
4.9110% to
7.7946%
  
  
   
 
4.9110% to
7.7946%
  
  
   
 
4.9110% to
7.7946%
  
  
   —       —       —       —       —       —    

Variable Rate

                      

U.S. Dollar

   27     312     127     175     23     664     27,278     55     27,223     664     27,278  

Interest rate

   
 
 
0.4000% to
0.5000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   
 
 
0.3000% to
1.9000%
over LIBOR
  
  
  
   
 
1.8000%
over LIBOR
  
  
   —       —       —       —       —       —    

Philippine Peso

   55     45     —       72     —       172     7,071     1     7,070     172     7,071  

Interest rate

   
 
PHP PDST-F
+ 0.3000%
  
  
   
 
PHP PDST-F
+ 0.3000%
  
  
   —       
 
 
BSP overnight rate +
0.3000% to
0.5000%
  
  
�� 
   —       —       —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   87     729     282     1,035     718     2,851     117,115     1,323     115,792     3,004     123,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value 
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                        (in millions) 
Interest rate    PDST-F + 0.75% to 1.5%; AUB’s prime rate  PDST-F + 1.0% to 1.50%; AUB’s prime rate  PDST-F + 1.0% to 1.50%                      
Short-term Debt
                                            
Notes Payable
                                            
U.S. Dollar  6               6   279      279   6   279 
Interest rate  3.25%                               
Philippine Peso  43               43   2,000      2,000   43   2,000 
Interest rate PDST-F + 1.5%; 6.0896%                               
 
   104   435   432   688   550   2,209   102,587   3,858   98,729   2,176   101,046 
 
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.

Repricing of floating rate financial instruments is mostly done on intervals of three months or six months. Interest on fixed rate financial instruments is fixed until maturity of the particular instrument.

Management conducted a survey among our banks to determine the outlook of the U.S. dollar and Philippine peso interest rates until our next reporting date of DecemberMarch 31, 2011.2014. Our outlook is that the U.S. dollar and Philippine peso interest rates may move 155 basis points and 220135 basis points higher/lower, respectively, as compared to levels as at December 31, 2010.2013. If U.S. dollar interest rates had been 155 basis points higher/lower as compared to market levels as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php56Php16 million and Php67 million, respectively, lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If Philippine peso interest rates had been 220135 basis points higher/lower as compared to market levels as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php785Php274 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If U.S. dollar interest rates had been 90 basis points higher/lower as compared to market levels as at December 31, 2009, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 2009 would have been approximately Php527 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If Philippine peso interest rates had been 55 basis points higher/lower as compared to market levels as at December 31, 2009, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 2009 would have been approximately Php241 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions.

Credit Risk

Credit risk is the risk that we will incur a loss arising from our customers, clients or counterparties that fail to discharge their contracted obligations. We manage and control credit risk by setting limits on the amount of risk we are willing to accept for individual counterparties and by monitoring exposures in relation to such limits.

We trade only with recognized and creditworthy third parties. It is our policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis to reduce our exposure to bad debts.

We established a credit quality review process to provide regular identification of changes in the creditworthiness of counterparties. Counterparty limits are established and reviewed periodically based on latest available financial data on our counterparties’ credit ratings, capitalization, asset quality and liquidity. Our credit quality review process allows us to assess the potential loss as a result of the risks to which we are exposed and allow us to take corrective actions.

144


The table below shows the maximum exposure to credit risk for the components of our consolidated statementstatements of financial position, including derivative financial instruments as at December 31, 20102013 and 2009:
                 
  Gross Maximum Exposure(1) Net Maximum Exposure(2)
  2010 2009 2010 2009
  (in million pesos)
Loans and receivables:                
Advances and refundable deposits  1,000   849   999   848 
Cash and cash equivalents  36,678   38,319   36,458   38,101 
Short-term investments  152   3,338   152   3,338 
Foreign administrations  4,321   4,064   4,277   4,011 
Retail subscribers  3,872   3,546   3,799   3,505 
Corporate subscribers  2,042   2,429   1,918   2,328 
Domestic carriers  1,453   1,184   1,453   1,184 
Dealers, agents and others  4,740   3,506   4,740   3,506 
Held-to-maturity investments:                
Investment in debt securities  484   462   484   462 
Available-for-sale financial assets  147   134   147   134 
Fair value through profit or loss:                
Short-term investments  517   486   517   486 
Long-term currency swap  178      178    
Bifurcated embedded derivatives  5   6   5   6 
 
Total
  55,589   58,323   55,127   57,909 
 
2012:

   December 31, 2013 
   Gross
Maximum
Exposure
   Collateral and
Other Credit
Enhancements*
   Net
Maximum
Exposure
 
   (in million pesos) 

Loans and receivables:

      

Advances and other noncurrent assets

   10,272     —       10,272  

Cash and cash equivalents

   31,905     241     31,664  

Short-term investments

   127     —       127  

Investment in debt securities and other long-term investments

   2,172     —       2,172  

Foreign administrations

   5,721     —       5,721  

Retail subscribers

   5,414     41     5,373  

Corporate subscribers

   2,055     135     1,920  

Domestic carriers

   1,381     —       1,381  

Dealers, agents and others

   2,993     1     2,992  

HTM investments:

      

Investment in debt securities and other long-term investments

   471     —       471  

Available-for-sale financial investments

   220     —       220  

Financial instruments at FVPL:

      

Short-term investments

   591     —       591  

Short-term currency swaps

   10     —       10  

Derivatives used for hedging:

      

Interest rate swap

   24     —       24  
  

 

 

   

 

 

   

 

 

 

Total

   63,356     418     62,938  
  

 

 

   

 

 

   

 

 

 

*
(1)Gross financial assets before taking into account anyIncludes bank insurance, security deposits and customer deposits. We have no collateral held or other credit enhancements or offsetting arrangements.as at December 31, 2013.

   December 31, 2012 
   Gross
Maximum
Exposure
   Collateral and
Other Credit
Enhancements*
   Net
Maximum
Exposure
 
   (in million pesos) 

Loans and receivables:

      

Advances and other noncurrent assets

   8,877     12     8,865  

Cash and cash equivalents

   37,161     528     36,633  

Short-term investments

   24     —       24  

Investment in debt securities and other long-term investments

   205     —       205  

Foreign administrations

   4,861     —       4,861  

Retail subscribers

   4,079     27     4,052  

Corporate subscribers

   1,963     246     1,717  

Domestic carriers

   1,601     —       1,601  

Dealers, agents and others

   3,875     31     3,844  

HTM investments:

      

Investment in debt securities and other long-term investments

   150     —       150  

Available-for-sale financial investments

   5,651     —       5,651  

Financial instruments at FVPL:

      

Short-term investments

   550     —       550  
  

 

 

   

 

 

   

 

 

 

Total

   68,997     844     68,153  
  

 

 

   

 

 

   

 

 

 

(2)*Gross financial assets after taking into account anyIncludes bank insurance, security deposits and customer deposits. We have no collateral held or other credit enhancements or offsetting arrangements or deposit insurance.as at December 31, 2012.

145


The table below provides information regarding the credit quality by class of our financial assets according to our credit ratings of counterparties as at December 31, 20102013 and 2009:
                     
      Neither past due    
      nor impaired Past due but  
  Total Class A(1) Class B(2) not impaired Impaired
  (in million pesos)
December 31, 2010
                    
Loans and receivables:                    
Advances and refundable deposits  1,000   951   49       
Cash and cash equivalents  36,678   35,368   1,310       
Short-term investments  152   152          
Retail subscribers  8,917   946   926   2,000   5,045 
Corporate subscribers  7,998   393   612   1,037   5,956 
Foreign administrations  4,479   1,756   699   1,866   158 
Domestic carriers  1,591   191   23   1,239   138 
Dealers, agents and others  5,273   2,599   2,013   128   533 
Held-to-maturity investments:                    
Investment in debt securities  484   484          
Available-for-sale financial assets  147   108   39       
Fair value through profit or loss(3):
                    
Short-term investments  517   517          
Long-term currency swap  178   178          
Bifurcated embedded derivatives  5   5          
 
Total
  67,419   43,648   5,671   6,270   11,830 
 
                     
December 31, 2009
                    
Loans and receivables:                    
Advances and refundable deposits  849   790   59       
Cash and cash equivalents  38,319   37,767   552       
Short-term investments  3,338   2,971   367       
Corporate subscribers  9,106   1,078   283   1,068   6,677 
Retail subscribers  8,026   1,236   518   1,792   4,480 
Foreign administrations  4,353   1,261   451   2,352   289 
Domestic carriers  1,267   157   8   1,019   83 
Dealers, agents and others  3,927   2,068   1,022   416   421 
Held-to-maturity investments:                    
Investment in debt securities  462   462          
Available-for-sale financial assets  134   103   31       
Fair value through profit or loss(3):
                    
Short-term investments  486   486          
Bifurcated embedded derivatives  6   6          
 
Total
  70,273   48,385   3,291   6,647   11,950 
 
2012:

       Neither past due
nor impaired
   Past due but     
   Total   Class A(1)   Class B(2)   not impaired   Impaired 
   (in million pesos) 

December 31, 2013

          

Loans and receivables:

   76,676     46,362     7,772     7,906     14,636  

Advances and other noncurrent assets

   10,384     10,241     22     9     112  

Cash and cash equivalents

   31,905     29,129     2,776     —       —    

Short-term investments

   127     127     —       —       —    

Investment in debt securities and other long-term investments

   2,172     2,172     —       —       —    

Retail subscribers

   12,563     1,318     1,822     2,274     7,149  

Corporate subscribers

   7,904     698     343     1,014     5,849  

Foreign administrations

   5,840     1,242     1,765     2,714     119  

Domestic carriers

   1,461     350     22     1,009     80  

Dealers, agents and others

   4,320     1,085     1,022     886     1,327  

HTM investments:

   471     471     —       —       —    

Investment in debt securities and other long-term investments

   471     471     —       —       —    

Available-for-sale financial investments

   220     166     54     —       —    

Financial instruments at FVPL(3):

   601     601     —       —       —    

Short-term investments

   591     591     —       —       —    

Short-term currency swaps

   10     10     —       —       —    

Derivatives used for hedging:

   24     24     —       —       —    

Interest rate swaps

   24     24     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77,992     47,624     7,826     7,906     14,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

          

Loans and receivables:

   76,048     47,710     6,682     8,254     13,402  

Advances and other noncurrent assets

   8,989     8,848     3     26     112  

Cash and cash equivalents

   37,161     34,381     2,780     —       —    

Short-term investments

   24     24     —       —       —    

Investment in debt securities and other long-term investments

   205     205     —       —       —    

Retail subscribers

   10,568     967     989     2,123     6,489  

Corporate subscribers

   8,100     478     540     945     6,137  

Foreign administrations

   4,960     1,043     923     2,895     99  

Domestic carriers

   1,707     266     27     1,308     106  

Dealers, agents and others

   4,334     1,498     1,420     957     459  

Available-for-sale financial investments

   5,651     159     5,492     —       —    

Financial instruments at FVPL(3):

   550     550     —       —       —    

Short-term investments

   550     550     —       —       —    

HTM investments:

   150     150     —       —       —    

Investment indebt securities and other long-term investments

   150     150     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   82,399     48,569     12,174     8,254     13,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)

(1)

This includes low risk and good paying customer accounts with no history of account treatment for a defined period and no overdue accounts as at report date; and deposits or placements to counterparties with good credit rating or bank standing financial review.

(2)

This includes medium risk and average paying customer accounts with no overdue accounts as at report date, and new customer accounts for which sufficient credit history has not been established; and deposits or placements to counterparties not classified as Class A.

(3)

Gross receivables from counterparties before any offsetting arrangements.

146


The aging analysis of past due but not impaired class of financial assets as at December 31, 20102013 and 20092012 are as follows:
                         
          Past due but not impaired    
      Neither past due        
  Total nor impaired 1-60 days 61-90 days Over 91 days Impaired
  (in million pesos)
December 31, 2010
                        
Loans and receivables:                        
Advances and refundable deposits  1,000   1,000             
Cash and cash equivalents  36,678   36,678             
Short-term investments  152   152             
Retail subscribers  8,917   1,872   1,387   150   463   5,045 
Corporate subscribers  7,998   1,005   642   159   236   5,956 
Foreign administrations  4,479   2,455   616   393   857   158 
Domestic carriers  1,591   214   165   182   892   138 
Dealers, agents and others  5,273   4,612   21   20   87   533 
Held-to-maturity investments:                        
Investment in debt securities  484   484             
Available-for-sale financial assets  147   147             
Fair value through profit or loss:                        
Short-term investments  517   517             
Long-term currency swap  178   178             
Bifurcated embedded derivatives  5   5             
 
Total
  67,419   49,319   2,831   904   2,535   11,830 
 
                         
December 31, 2009
                        
Loans and receivables:                        
Advances and refundable deposits  849   849             
Cash and cash equivalents  38,319   38,319             
Short-term investments  3,338   3,338             
Corporate subscribers  9,106   1,361   433   198   437   6,677 
Retail subscribers  8,026   1,754   1,362   184   246   4,480 
Foreign administrations  4,353   1,712   1,320   405   627   289 
Domestic carriers  1,267   165   283   293   443   83 
Dealers, agents and others  3,927   3,090   332   21   63   421 
Held-to-maturity investments:                        
Investment in debt securities  462   462             
Available-for-sale financial assets  134   134             
Fair value through profit or loss:                        
Short-term investments  486   486             
Bifurcated embedded derivatives  6   6             
 
Total
  70,273   51,676   3,730   1,101   1,816   11,950 
 

           Past due but not impaired     
   Total   Neither past due
nor impaired
   1-60 days   61-90 days   Over 91 days   Impaired 
   (in million pesos) 

December 31, 2013

            

Loans and receivables:

   76,676     54,134     3,303     787     3,816     14,636  

Advances and other noncurrent assets

   10,384     10,263     1     —       8     112  

Cash and cash equivalents

   31,905     31,905     —       —       —       —    

Short-term investments

   127     127     —       —       —       —    

Investment in debt securities and other long-term investments

   2,172     2,172     —       —       —       —    

Retail subscribers

   12,563     3,140     1,615     172     487     7,149  

Corporate subscribers

   7,904     1,041     384     224     406     5,849  

Foreign administrations

   5,840     3,007     740     158     1,816     119  

Domestic carriers

   1,461     372     129     134     746     80  

Dealers, agents and others

   4,320     2,107     434     99     353     1,327  

HTM investments:

   471     471     —       —       —       —    

Investment in debt securities and other long-term investments

   471     471     —       —       —       —    

Available-for-sale financial investments

   220     220     —       —       —       —    

Financial instruments at FVPL:

   601     601     —       —       —       —    

Short-term investments

   591     591     —       —       —       —    

Short-term currency swaps

   10     10     —       —       —       —    

Derivatives used for hedging:

   24     24     —       —       —       —    

Interest rate swaps

   24     24     —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77,992     55,450     3,303     787     3,816     14,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

            

Loans and receivables:

   76,048     54,392     3,017     1,079     4,158     13,402  

Advances and other noncurrent assets

   8,989     8,851     —       —       26     112  

Cash and cash equivalents

   37,161     37,161     —       —       —       —    

Short-term investments

   24     24     —       —       —       —    

Investment in debt securities and other long-term investments

   205     205     —       —       —       —    

Retail subscribers

   10,568     1,956     1,363     270     490     6,489  

Corporate subscribers

   8,100     1,018     351     198     396     6,137  

Foreign administrations

   4,960     1,966     645     452     1,798     99  

Domestic carriers

   1,707     293     174     144     990     106  

Dealers, agents and others

   4,334     2,918     484     15     458     459  

HTM investments:

   150     150     —       —       —       —    

Investment in debt securities and other long-term investments

   150     150     —       —       —       —    

Available-for-sale financial investments

   5,651     5,651     —       —       —       —    

Financial instruments at FVPL:

   550     550     —       —       —       —    

Short-term investments

   550     550     —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   82,399     60,743     3,017     1,079     4,158     13,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment Assessments

The main consideration for the impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. Our impairment assessments are classified into two areas: individually assessed allowance and collectively assessed allowances.

Individually assessed allowance

We determine the allowance appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral, if any, and the timing of the expected cash flows. We also recognize an impairment for accounts specifically identified to be doubtful of collection when there is information on financial incapacity after considering the other contractual obligations between us and the subscriber. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances that are not individually significant and for individually significant loans and advances where there is no objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.

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The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it is identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. The impairment allowance is then reviewed by credit management to ensure alignment with our policy.

Capital Management Risk

We aim to achieve an optimal capital structure in pursuit of our business objectives which include maintaining healthy capital ratios and strong credit ratings, and maximizing shareholder value.

In recent years, our cash flow from operations has allowed us to substantially reduce debts and, in 2005, resume payment of dividends on common shares. Since 2005, our strong cash flow has enabled us to make investments in new areas and pay higher dividends.

Our approach to capital management focuses on balancing the allocation of cash and the incurrence of debt as we seek new investment opportunities for new businesses and growth areas. Our current dividend policy is to pay out 70% of our core income per common share.EPS. Further, in the event no investment opportunities arise, we may consider the option of returning additional cash to our shareholders in the form of special dividends or share buybacks. Philippine corporate regulations prescribe, however, that we can only pay out dividends or make capital distribution up to the amount of our unrestricted retained earnings.

As part of our goal to maximize returns to our shareholders, we obtained in 2008 an approval from the Board of Directors to conduct a share buyback program for up to five million PLDT common shares. We had acquired a total of approximately 2.72 milliondid not buy back any shares of PLDT’s common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million as at December 31, 2010. We had acquired at total of approximately 2.68 million shares of PLDT’s common stock at a weighted average price of Php2,387 per share for a total consideration of Php6,405 million as at December 31, 2009. See Note 8 — Earnings Per Common Share and Note 19 — Equity to the accompanying consolidated financial statements in Item 18 for further discussion.

2013.

Some of our debt instruments contain covenants that impose maximum leverage ratios. In addition, our credit ratings from the international credit ratings agencies are based on our ability to remain within certain leverage ratios.

We monitor capital using several financial leverage measurements calculated in conformity with PFRS, such as net consolidated debt to equity ratio. Net consolidated debt is derived by deducting cash and cash equivalents and short-term investments from total debt (long-term debt, including current portion and notes payable)., excluding discontinued operations. Our objective is to maintain our net consolidated debt to equity ratio below 100%.

The table below provides information regarding our consolidated debt to equity ratio as at December 31, 20102013 and 2009:

         
  2010 2009
  (in million pesos)
Long-term debt, including current portion (Note 20)  89,646   96,450 
Notes payable (Note 20)     2,279 
 
Total consolidated debt  89,646   98,729 
Cash and cash equivalents (Note 15)  (36,678)  (38,319)
Short-term investments  (669)  (3,824)
 
Net consolidated debt  52,299   56,586 
 
         
Equity attributable to equity holders of PLDT  97,069   98,575 
 
Net consolidated debt to equity ratio  54%  57%
 

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2012:


   December 31, 
   2013  2012 
      (As adjusted) 
      (in million pesos) 

Long-term debt, including current portion (Note 20)

   104,090    115,792  

Notes payable (Note 20)

   —      —    
  

 

 

  

 

 

 

Total consolidated debt

   104,090    115,792  

Cash and cash equivalents (Note 15)

   (31,905  (37,161

Short-term investments

   (718  (574
  

 

 

  

 

 

 

Net consolidated debt

   71,467    78,057  
  

 

 

  

 

 

 

Equity attributable to equity holders of PLDT

   137,147    145,550  
  

 

 

  

 

 

 

Net consolidated debt to equity ratio

   52  54
  

 

 

  

 

 

 

No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2013, 2012 and 2011.

Item 12.Description of Securities Other than Equity Securities

Item 12. Description of Securities Other than Equity Securities
Item 12.D.3 — Fees and Charges for Holders of American Depositary Receipts

JP Morgan Chase Bank, N.A., or the depositary, as depositary of our ADS collects fees from each person to whom ADS are issued, US$5.00 for each 100 ADS (or portion thereof) issued, delivered, reduced, cancelled or surrendered.

The depositary also collects the following fees from holders of ADRs or intermediaries acting in their behalf:

US$0.02 or less per ADS (or portion thereof) for any cash distribution made;

US$0.02 or less per ADS (or portion thereof) for any cash distribution made;
US$1.50 per ADR for transfer made (to the extent such fee is not prohibited by the rules of the primary stock exchange upon which the ADSs are listed);
a fee in an amount equal to the fee for the execution and delivery of ADSs for the distribution or sale of securities, which would have been charged as a result of the deposit of such securities but which securities or the net proceeds from the sale thereof are instead distributed by the depositary to the holders entitled thereto;
US$0.02 per ADS (or a portion thereof) per year for the services rendered by the depositary for administering the ADR program (which fee shall be assessed as of the record date or dates set by the depositary not more than once each calendar year and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distribution);
such fees and expenses as are incurred by the depositary (including without limitation expenses incurred on behalf of holders in compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in the delivery of the common stock or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules or regulations;
stock transfer and other taxes and governmental charges (which are payable by the holder or person depositing the common stock), cable, telex and facsimile transmission and delivery charges incurred at the request of the person depositing the common stock or holder delivering the common stock, ADRs or deposited common stock (which are payable by such person or holder), transfer or registration fees for the registration or transfer of deposited common stock in connection with the deposit or withdrawal of the deposited common stock (which are payable by the person depositing or withdrawing deposited common stock), expense by the depositary in the conversion of foreign currency into U.S. dollars; and
any other charge payable by the depositary or its agents in connection with its service as depositary in implementation of the Company’s ADR Program pursuant to Section 4.02, 4.03, 4.04, or 4.05 of the Deposit Agreement, as amended.

US$1.50 per ADR for transfers made (to the extent such fee is not prohibited by the rules of the primary stock exchange upon which the ADSs are listed);

a fee in an amount equal to the fee for the execution and delivery of ADSs for the distribution or sale of securities, which would have been charged as a result of the deposit of such securities but which securities or the net proceeds from the sale thereof are instead distributed by the depositary to the holders entitled thereto;

US$0.02 per ADS (or a portion thereof) per year for the services rendered by the depositary for administering the ADR program (which fee shall be assessed as of the record date or dates set by the depositary not more than once each calendar year and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distribution);

such fees and expenses as are incurred by the depositary (including without limitation expenses incurred on behalf of holders in compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in the delivery of the common stock or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules or regulations;

stock transfer and other taxes and governmental charges (which are payable by the holder or person depositing the common stock), cable, telex and facsimile transmission and delivery charges incurred at the request of the person depositing the common stock or holder delivering the common stock, ADRs or deposited common stock (which are payable by such person or holder), transfer or registration fees for the registration or transfer of deposited common stock in connection with the deposit or withdrawal of the deposited common stock (which are payable by the person depositing or withdrawing deposited common stock), expense by the depositary in the conversion of foreign currency into U.S. dollars; and

any other charge payable by the depositary or its agents in connection with its service as depositary in implementation of the Company’s ADR Program pursuant to Section 4.02, 4.03, 4.04, or 4.05 of the Deposit Agreement, as amended.

Item 12.D.4 — Fees and Other Payments Made by the Depositary to Us

The depositary has agreed to reimburse certain reasonable expenses of PLDT related to PLDT’s ADR program and incurred by PLDT in connection with the ADR program. In the year ended December 31, 2010, the depositary reimbursed US$958,900. The amounts reimbursable by the depositary reimbursed are not necessarily related to the fees collected by the depositary from ADR holders. Under certain circumstances, including termination of the ADR program prior to December 31, 2011, PLDT is required to repay to the depositary amounts reimbursed in prior periods. The table below sets forth the types of expensestotal amount that the depositary has agreed to reimburse and the amounts reimbursedreimbursable for the year ended December 31, 2010:

Category of ExpensesAmount Reimbursed for
Investor relations and investor event feesUS$643,783
Legal and accounting fees incurred in connection with the preparation of Form 20-F, ongoing SEC compliance and listing requirements258,103
Listing fees57,014
Total
US$958,900
     As part of its service to PLDT, the depositary has agreed to waive2013 was US$150,000 per year in annual maintenance fees for the administration1,136,000. No amount was reimbursed out of the ADR program and absorb up tototal reimbursable expenses of US$50,000 per year of the depositary’s out-of-pocket expenses, which in aggregate is estimated to total US$200,000 for the year ended1,136,000 as at December 31, 2010.

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2013.


PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies

Item 13.Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Item 15.Controls and Procedures

Disclosure Controls and Procedures.Our management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation on the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as at December 31, 2010.2013. Based on this evaluation, our chief executive officerCEO and principal financial officer concluded that our disclosure controls and procedures were effective as at December 31, 2010.

2013.

Management’s Annual Report on Internal Control Over Financial Reporting.Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed and implemented under the supervision of our principal executive officers and principal finance officers, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting StandardsIFRS as issued by the International Accounting Standards Board (“IFRS”).Board. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the PLDT Group; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the PLDT Group are being made only in accordance with authorizations of our management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation, and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Our management assessed the effectiveness of the PLDT Group’s internal control over financial reporting as of December 31, 2010,2013, based on the criteria set forth in Internal Control Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).in 1992. Based on this assessment, our management has determined that the internal control over financial reporting of the PLDT Group was effective as of December 31, 2010.

2013.

We reviewed the results of management’s assessment with the Audit Committee of the Board of Directors.

     SyCip, Gorres, Velayo & Co. (“SGV”,

SGV, a member practicefirm of the Ernst & Young Global),Global Limited, an independent registered public accounting firm, has audited our consolidated financial statements included in this annual report and has issued an attestation report on our internal control over financial reporting as at December 31, 2010.2013. This attestation report is dated March 29, 2011April 1, 2014 and is set forth in Item 18 “Financial Statements”.

of the Annual Report on Form 20-F for the year ended December 31, 2013.

Changes in Internal Control Over Financial Reporting.During 2010,2013, no change to our internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

Item 16A.Audit Committee Financial Expert

Our boardBoard of directorsDirectors has determined that currently none of the members of the Audit Committee is an audit committee financial expert as defined under the applicable rules of the U.S. SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Because our boardBoard of directorsDirectors believes that the audit committeeAudit Committee members along with its advisors, possess sufficient financial knowledge and experience, our boardBoard of directorsDirectors has not separately appointed an audit committee member who qualifies as an audit committee financial expert. Our boardBoard of directorsDirectors has appointed Ms. Corazon de la Paz-Bernardo, a former member of our boardBoard of directors,Directors, as Audit Committee advisor to render advice on complex financial reporting or accounting issues that may be raised in our Audit Committee’s evaluation of our financial statements and other related matters. Formerly the Chairman and a Senior

150


Partner of Joaquin Cunanan & Company,Co., now Isla Lipana & Co., and a member firm of PricewaterhouseCoopers Worldwide, Ms. Corazon de la Paz-Bernardo is a certified public accountant and possesses in-depth knowledge of accounting principles (including IFRS), internal controls and procedures for financial reporting and audit committee functions, as well as extensive experience in overseeing or actively supervising the preparation, audit, analysis or evaluation of financial statements and in addressing complex and general financial reporting, accounting and audit issues.

Item 16B.
Code of Business Conduct and Ethics

PLDT is fully aware that responsible business conduct and a corporate culture anchored on the values of accountability, integrity, fairness and transparency bring about indubitable benefits for the Company and all its stakeholders and allow a commercial enterprise to sustain its profitability. As it celebrated its 85th year of operations and corporate life, PLDT re-affirmed its commitment to the highest standards of corporate governance as articulated in our Articles of Incorporation, By-Laws, CG Manual, Code of Business ConductEthics and Ethics

     PLDT recognizes thatpertinent laws, rules and regulations.

These standards are found in the corporate governance rules and regulations of the Philippine SEC and the PSE inasmuch as PLDT is a key elementpublic and listed Philippine corporation. PLDT, however, also complies with the corporate governance standards of the United States, since its ADSs are listed and traded in its strategythe NYSE. Finally, as an associated company of First Pacific, which is listed in the Hong Kong Stock Exchange, PLDT also refers to accomplish the Company’s mission,corporate governance standards of Hong Kong for guidance and benchmarking purposes. These high standards of corporate governance that the Company has voluntarily imposed on itself reflects PLDT’s complete acceptance of the duty to create value for its shareholders, andfulfill its obligations to various other stakeholders, and sustain its long-term viability. The Company’s approach islive up to continuously improve its governance structures and processes on three levels: (1) compliance with the standards and requirements of laws and regulatory issuances and guidelines; (2) benchmarking against recognized international best practices and monitoring developments in corporate governance; and (3) fostering an ethical corporate culture guided by the principles of accountability, integrity, fairness and transparency.

     PLDT conforms to the corporate governance laws, issuances, guidelines and standards of three jurisdictions. PLDT is subject to Philippine corporate governance laws, issuances, guidelines and standards as established by the Philippine SEC and the PSE. The Company is also subject to the standards set forth in U.S. Securities Exchange Act, the Sarbanes-Oxley Act of 2002 and the NYSE Listed Company Manual. As an investee company of various Philippine and other affiliates of First Pacific, PLDT likewise endeavours to conform with certain corporate governance guidelines of First Pacific which are based on the rules of the Hong Kong Stock Exchange in which First Pacific’s shares are listed. The demanding regulatory regime under which PLDT operates has provided the impetus for PLDT to impose upon itself high standardsa brand of corporate governance that constantly challenges the Company’s leadership and business conduct.
A. Codeemployees to observe responsible professional conduct and behavior that strives for more than just mere compliance.

PLDT’s disclosure containing a summary of Ethicsdifferences on corporate governance practices based on requirements of Philippine law on one hand, and Other Policies

US law on the other, is found in this link:http://pldt.com/docs/default-source/compliance/nyse-pldt_303a-11_2013.pdf?sfvrsn=2

A.Code of Ethics and Other Policies

The Code of Ethics was approved by the Board on March 30, 2004 and subsequently updated on July 11, 2006, the2004. The Code of Ethics sets out the Company’s business principles and values which aimand aims to promote a culture of good corporate governance. It provides standards that govern and guide all business relationships of PLDT, its directors, officers and employees, especially with respect to the following:

Compliance with applicable laws, rules and regulations;

Ethical handling of conflicts of interest, corporate opportunities and confidential information;
Protection and proper use of company assets;
Fair dealing with employees, customers, service providers, suppliers, and competitors;
Compliance with reporting and disclosure obligations to the relevant regulators and to investors;
Compliance with disclosure and financial reporting controls and procedures;
Assessment and management of risks involved in business endeavors; and
Adoption of international best practices of good corporate governance in the conduct of the Company’s business.
     The Code of Ethics undergoes a mandatory review process every two years. The latest review was in October 2010. The review revealed that the Code is appropriate for the Company and compliant with the applicable laws, rules and regulations, including anti-graft and listing standardsanti-corruption laws;

Ethical handling of conflicts of interest, corporate opportunities and that no revision was needed at that time. The GNC approvedconfidential information;

Protection and proper use of Company assets;

Fair dealing with employees, customers, service providers, suppliers, and competitors;

Compliance with reporting and disclosure obligations to the review on November 2010.relevant regulators and to investors;

151

Compliance with disclosure and financial reporting controls and procedures;


Assessment and management of risks involved in business endeavors; and

Adoption of international best practices of good corporate governance in the conduct of the Company’s business.

Other policies

The Company also has other policies adopted by the Board to provide both general and specific guidelines that complement the Code of Ethics.

 (a)CG Manual The PLDT CG Manual was approved and adopted by the Board of Directors on March 26, 2010 pursuant to Philippine SEC Memorandum Circular No. 6 Series of 2009 or the Revised Code of Corporate Governance. It supersedes the CG Manual approved and adopted on September 24, 2002, as amended on March 30, 2004 and January 30, 3007.2007. The structures and processes set forth in the CG Manual as well as thesets forth our fundamental framework on corporate governance. Together with our Articles of Incorporation and By-Laws, combined withit sets our corporate governance structures which establish responsibilities, confer the Company’s commitment tonecessary authority and provide adequate resources for the principlesexecution of transparency, accountability, fairness and integrity, form PLDT’s basic framework of governance by which our Board of Directors, officers, executives and employees strive to achieve the Company’s strategic objectives, create value for all its stakeholders, and sustain its long-term viability.such responsibilities.

In compliance with the Revised Code of Corporate Governance of the Philippine SEC and consistent with the relevant provisions of the Securities Regulation CodeSRC and Corporation Code of the Philippines, ourPLDT’s CG Manual covers the following key areas:

the composition of the Board of Directors as well as the qualifications and grounds for disqualification for directorship;

the composition of our Board of Directors as well as the qualifications and grounds for disqualification for directorship;
the requirement that at least 20% of the membership of the Board of Directors, and in no case less than two members, must be independent directors and the standards/criteria for the determination of independent directors;
the duties and responsibilities of our board of directors and the individual directors;
the manner of conduct of Board meetings including the requirement to have an independent director present in every meeting to promote transparency and the need to have an executive session for non-executive and independent directors;
establishment of board committees, specifically, the audit committee, ECC and GNC including the composition and the principal duties and responsibilities of such committees, as well as the requirement for each board committee to have its own charter;
the role of the Chairman as the leader of the Board and as the prime mover in ensuring compliance with, and the performance of, corporate governance policies and practices ;
the role of the President/Chief Executive Officer in ensuring that the Company’s business affairs are managed in a sound and prudent manner and that operational, financial and internal controls are adequate and effective to ensure reliability and integrity of financial and operational information, effectiveness and efficiency of operations, safeguarding of assets and compliance with laws, rules, regulations and contracts;
the duties and responsibilities of the Corporate Secretary/Assistant Corporate Secretary in terms of the support services that they need to provide the Board in upholding sound corporate governance;
the duties and responsibilities of the head of internal audit organization that would provide the Board of Directors, management and shareholders with reasonable assurance that the Company’s key organizational and procedural controls are appropriate, adequate, effective and reasonably complied with;

the requirement that at least 20% of the membership of the Board of Directors, and in no case less than two members, must be independent directors and the standards/criteria for the determination of independent directors;

the duties and responsibilities of the Board of Directors and the individual directors;

the manner of conduct of Board meetings including the requirement to have an independent director present in every meeting to promote transparency and the need to have an executive session for non-executive and independent directors;

establishment of Board Committees, specifically, the Audit Committee, ECC, and the GNC, including the composition and the principal duties and responsibilities of such committees, as well as the requirement for each board committee to have its own charter;

the role of the Chairman as the leader of the Board and as the prime mover in ensuring compliance with, and the performance of, corporate governance policies and practices;

the role of the President and CEO in ensuring that the Company’s business affairs are managed in a sound and prudent manner and that operational, financial and internal controls are adequate and effective to ensure reliability and integrity of financial and operational information, effectiveness and efficiency of operations, safeguarding of assets and compliance with laws, rules, regulations and contracts;

the duties and responsibilities of the Corporate Secretary/Assistant Corporate Secretary in terms of the support services that they need to provide the Board in upholding sound corporate governance;

the duties and responsibilities of the head of internal audit organization that would provide the Board of Directors, Management and shareholders with reasonable assurance that the Company’s key organizational and procedural controls are appropriate, adequate, effective and reasonably complied with;

the functions of the independent auditors that would reasonably ensure an environment of sound corporate governance as reflected in the Company’s financial records and reports; the requirement that non-audit work of the independent auditors should not conflict with their function as independent auditors; the requirement to rotate, at least once every five years, the independent auditors or the lead partner assigned to handle the independent audit of financial statements;

the requirement to appoint a Chief Governance Officer and the duties and responsibilities of such Chief Governance Officer including the establishment of an evaluation system to determine and measure compliance with the provisions of our CG Manual;

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the requirement to appoint a Chief Governance Officer and the duties and responsibilities of such Chief Governance Officer including the establishment of an evaluation system to determine and measure compliance with the provisions of our CG Manual;

the duty of the Board of Directors to promote and uphold stockholders’ rights, such as, the right to vote, pre-emptive right, the right to inspect corporate books and records, the right to timely receive relevant information, the right to dividends, and the appraisal right;

the requirement for the Board to explore and implement steps to reduce excessive or unnecessary costs that impede stockholders’ participation and to act with transparency and fairness at the annual and special stockholders’ meetings;

the Company’s undertaking to disclose material information promptly and accurately, as well as the imposition of reasonable rules regarding the treatment and handling of material non-public information; and

the establishment of an appropriate evaluation system for purposes of monitoring and assessing compliance with the CG Manual and other applicable laws and administrative issuances.

The Company also has other policies adopted by the Board to provide both general and specific guidelines that complement the Code of Ethics.

Conflict of Interest Policy

the duty of the Board of Directors to promote and uphold stockholders’ rights such as the right to vote, pre-emptive right, the right to inspect corporate books and records, right to timely receive relevant information, right to dividends, and the appraisal right;
the requirement for the Board to explore and implement steps to reduce excessive or unnecessary costs that impede stockholders’ participation and to act with transparency and fairness at the annual and special stockholders’ meetings;
the Company’s undertaking to disclose material information promptly and accurately as well as the imposition of reasonable rules regarding the treatment and handling of material non-public information; and
the establishment of an appropriate evaluation system for purposes of monitoring and assessing compliance with the CG Manual and other applicable laws and administrative issuances.
(b)Conflict of Interest Policy approved on October 24, 2005.This Policy aims to ensure that work-related actions of our directors, officers, employees and consultants are based on sound business principles and judgment devoid of bias or partiality. It enjoins all employees to be aware of the possibility of such bias and partiality in dealings with various entities or individuals in the course of or in relation to their work. The policy likewise mandates that employees who find themselves in a possible conflict of interest situation should promptly disclose the matter to the relevant authorities. If warranted, the employee concerned should also obtain appropriate approvals and inhibit himself from any action, transaction or decision involving an existing or potential conflict of interest.
(c)Policy on Gifts, Entertainment and Sponsored Travel approved on January 31, 2006.This Policy provides safeguards so that the custom of giving gifts is handled in accordance with the principles of integrity, accountability, fairness and transparency. It aims to prevent the occurrence of situations or actions that could significantly affect objective, independent or effective performance of an employee’s duties. Specifically, it prohibits the solicitation of gifts, sponsored travel, and entertainment from third parties. Receipt and acceptance of gifts voluntarily given by such third parties are handled according to this policy as well.
(d)Supplier/Contractor Relations Policy approved on January 31, 2006. This Policy seeks to ensure that the Company upholds the highest professional standards in business practices and ethics in its dealings with suppliers and contractors in the procurement of goods and services. The policy also seeks to maintain PLDT’s reputation for equal opportunity and honest treatment of suppliers in all business transactions. The policy establishes clear rules for arm’s length transactions and fair treatment of prospective and existing suppliers with the objective of always obtaining the best value for the company.
(e)Policy on Employee Disclosure on Violations of the Corporate Governance Rules, Questionable Accounting or Auditing Matters, and Offenses covered by PLDT’s Table of Penalties (or the Expanded Whistleblowing Policy) approved on May 9, 2006.This Policy provides guidelines on handling employee disclosure or complaints of violation of rules pertaining to the aforestated matters, protects whistleblowers from retaliation and ensures confidentiality and fairness in the handling of a disclosure or complaint.
This policy aims to ensure that work-related actions of PLDT’s directors, officers, employees and consultants are based on sound business principles and judgment devoid of bias or partiality. It enjoins all employees to be aware of the possibility of such bias and partiality in dealings with various entities or individuals in the course of or in relation to their work. The policy likewise mandates that employees who find themselves in a possible conflict of interest situation should promptly disclose the matter to the relevant authorities. If warranted, the employee concerned should also obtain appropriate approvals and inhibit himself from any action, transaction or decision involving an existing or potential conflict of interest.

Policy on Gifts, Entertainment and Sponsored Travel

This policy provides safeguards so that the custom of giving gifts is handled in accordance with the values of integrity, accountability, fairness and transparency. It aims to prevent the occurrence of situations or actions that could significantly affect objective, independent or effective performance of an employee’s duties. Specifically, it prohibits the solicitation of gifts, sponsored travel and entertainment from third parties. Receipt and acceptance of gifts voluntarily given by such third parties are handled according to this policy as well.

Supplier/Contractor Relations Policy

This policy seeks to ensure that the Company upholds the highest professional standards in business practices and ethics in its dealings with suppliers and contractors in the procurement of goods and services. The policy also seeks to maintain PLDT’s reputation for equal opportunity and honest treatment of suppliers in all business transactions. It establishes clear rules for arm’s length transactions and fair treatment of prospective and existing suppliers with the objective of always obtaining the best value for the Company. The policy specifically adopts the processes of vendor accreditation and competitive bidding as the general rule and established practices to ensure that contracts are awarded only to qualified and duly-accredited suppliers and vendors who offer the best value for money for PLDT’s requirements.

Expanded Whistleblowing Policy

This policy provides guidelines on handling employee disclosure or complaints of violation of rules pertaining to the aforestated matters, protects whistleblowers from retaliation and ensures confidentiality and fairness in the handling of a disclosure or complaint.

Detailed implementing guidelines are likewise issued for the said policies to ensure their wide observance. All these policies, including the Code of Ethics and rules (collectively, the Corporate Governance, or CG Manual (CG Rules), are periodically reviewed at least once every two years to ensure that they are appropriate for PLDT, keep pace with comparable and applicable global best practices, and are compliant with the requirements of the Philippine and U.S. SEC NYSE and Hong Kong Stock ExchangeNYSE corporate governance rules, as may be appropriate and applicable.

To access the Code of Ethics, the CG Manual or information on how ourPLDT’s corporate governance practices and those required of U.S. listed companies under NYSE Section 303A.11 differ, please refer to:

http://www.pldt.com.ph/governance/about/Documents/27623c20007849698da4df57179ec70dPLDT_Code_of_Business_Conduct _and_Ethics.pdf
http://www.pldt.com.ph/governance/about/Documents/22336f71c88c495793d15575c2addffcpldtcorpgov_manual.pdf
http://www.pldt.com.ph/governance/about/Documents/f7933d17962d4b2c942e50ba4980f21bpldtdisclosure.pdf

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to Section 16G. “Corporate Governance”:


http://pldt.com/docs/default-source/policies/pldt-code-of-business-conduct-and-ethics.pdf?sfvrsn=4

http://pldt.com/docs/default-source/policies/22336f71c88c495793d15575c2addffcpldtcorpgov_manual.pdf?sfvrsn=2.

     Ourhttp://pldt.com/docs/default-source/compliance/nyse-pldt_303a-11_2013.pdf?sfvrsn=2

PLDT’s subsidiaries and their respective subsidiaries have also adopted corporate governance rules and policies similar in substance and form to PLDT’s CG Rules, as well as appointed their respective corporate governance officers.

     As part

Pursuant to the Conflict of the embedding of corporate governance standards in performance evaluation of personnel, the Company includes corporate governance policy violations as a cause for disqualification in incentivesInterest Policy, PLDT directors, officers, executives and rewards in its Policy on Employee Qualification for Incentives and Rewards. PLDT Officers and Executives have also beenemployees are required to submit Conflict of Interest DisclosuresDisclosures. If a transaction is affected by conflict of interest, it is subject to approval by the appropriate approving authorities and the conflicted director, officer, executive or employee is prohibited from participating in order to maintain strict observance of the PLDT Conflict of Interest Policy. PLDT is progressively institutionalizing the practice of timely and transparent disclosures downany activity related to the level of ranksaid transaction. PLDT’s suppliers, vendors and filecontractors are also required to make prompt disclosures with respect to relationships and affiliations that they or their personnel may have with respect to PLDT directors, officers, executives and employees.

     Pursuant to the

PLDT’s Expanded Whistleblowing Policy facilitates the anonymous reporting of violations of CG Rules, accounting and auditing rules and regulations or the PLDT Personnel Manual. PLDT maintains an Expandeda Whistleblowing Hotline and other reporting facilities, such as a dedicated electronic mailbox, post office box, and facsimile transmission system. Any employeeAll employees and stakeholders who come forward in good faith, regardless of rank or status, to report any of the violations mentioned above or any act that may be considered as contrary to the Company’s values of accountability, integrity, fairness, and transparency may submit a complaint or disclosure ofon such violations to the above nature toCGO, which is headed by the Chief Governance OfficerOfficer. Upon receipt of a report, complaint or todisclosure by the CGO, verbally or in writing. The CGO then conducts a preliminary evaluation is conducted to determine the veracity and plausibility of the allegations contained in the complaint or report, as well as the appropriate investigating unit to which the case shall be assigned for further action.action as may be deemed appropriate. The CGO monitors the developments in the cases reported and ensures appropriate reporting to the Audit Committee, the GNC, orand any other relevant committee, body or bodyauthority on the results of the investigations and the prompt referrals of findings to the appropriate units concerned. The Company’s committees on officer or employee discipline, as the case may be, are responsible for evaluating and approving the appropriate disciplinary action against erring officers and employees.

     The system In all processes and activities related to a whistleblowing complaint or disclosure, utmost confidentiality is openobserved in order to ensure the integrity of the process and/or protect the parties, employees or offices who may be involved. By way of an added feedback mechanism for whistleblowers and for transparency, a brief bulletin describing in general terms the cases handled and their status is made available in the Company website.

In line with all of these, PLDT has incorporated corporate governance standards in the performance evaluation of employees who come forward in good faith, regardless of rank or status to reportand has included violations of CG Rules oras cause for disqualification in being awarded incentives and rewards in its Policy on Employee Qualification for Incentives and Rewards and any act that may be considered as contrary to the Company’s values of accountability, integrity, fairnesslong term incentive plan in place for executives and transparency. Finally, the Company, also promptly addresses queries and requests for opinions from operating units to provide guidance and ensure adherence to CG rules and values.

officers.

To make sure that relations between the Company and its business partners are imbued with shared standards on good corporate governance, the Company has developed written corporate governance guidelines for suppliers and contractors to which the Company’s suppliers and contractors are expected to consent in writing, thereby ensuring that they understand and accept these standards as indispensable in doing business with PLDT. The Company also conducts suppliers’/contractors’ briefings and communicates to its business partners, including suppliers, the Company’s commitment to, as well as expectations on, good corporate governance.

B. Enhancements

Further information on PLDT’s Code of Ethics, CG Manual and Education

the Charters of the Board Committees are available on the Company website. PLDT recognizesmaintains a website athttp://pldt.com/on which reports filed by the needCompany and other information may be accessed. The Company has undertaken to provide a copy, without charge, to any person requesting for providinga copy of any, or both, of the appropriate environmentCode of Ethics and CG Manual from our Chief Governance Officer, Atty. Ma. Lourdes C. Rausa-Chan,who can be reached at e-mail address lrchan@pldt.com.phor telephone number +632-816-8556.

B.Education and Enhancements

PLDT provides continuing training for encouraging ethical behavior as a meansits Board and Management. The highlight of developing the desired corporate culture. PLDT’s corporate governancethis continuing education and communication activities aimprogram is the annual enhancement session which is conducted by internationally-known experts who share their experience, expertise and insights to reach outPLDT’s Board and Management. Our directors are updated on the latest technology trends and developments that have an impact on the Company’s strategy through technology briefings organized by the Technology Strategy Committee.

In addition to allface to face training, PLDT personnel through face-to-facehas on-line training modules for its employees. PLDT executives with the rank of manager, senior manager and on-line trainingsassistant vice president are required to access and workshops,complete an online training course on the PLDT Expanded Whistleblowing Policy. Supervisory and rank and file employees, on the other hand, are required to take and complete a module on the PLDT Conflict of Interest Policy.

Education and training is supplemented by the production and dissemination of relevant corporate governance materials. In 2010,communication materials, including thematic posters, calendars and newsletters. Directors and key officers and executives of PLDT are also provided with weekly CG Newsbriefs, which contain summaries of news articles from global online sources. The Board of Directors is also provided with CG Updates of articles on relevant topics written by noted authors and/or authorities. The Company also issues periodic advisories on corporate governance.

C.Monitoring and Evaluation

PLDT’s governance materials revolved aroundmonitoring and evaluation system consists of the theme “Our Values at Work”annual performance self-assessment conducted by the Board and the Board Committees, the review of the effectiveness of the Company’s CG Rules and their implementation every two years, the annual compliance evaluation conducted by Management, and other tools employed to monitor observance of the CG Rules and corporate values by Company personnel.

Our Board conducts a self-assessment each calendar year to evaluate the performance of the Board as a whole, the Board Committees and the individual directors. The process, which exhorted all company personnelincludes an evaluation of the performance of the CEO and Management, enables the Board to applyidentify strengths and areas for improvement and to elicit individual director’s feedback and views on the Company’s strategy, performance and future direction. Similarly, each Board Committee also conducts an annual self-assessment of its performance. The members of the Board and the Board Committees accomplish their respective Self-Assessment Questionnaires for this purpose. The Board Self-Assessment Questionnaire contains the following criteria based on leading practices and principles on good governance: (1) for the Board: Leadership, Roles and Responsibilities, Independence, Stewardship, Reporting and Disclosure, Shareholders’ Benefits and Training; (2) for individual directors: the specific duties and responsibilities of a director; and (3) for the Board Committees: Performance and Compliance. Each Board Committee Self-Assessment Questionnaire contains the following criteria: Performance & Compliance and Committee Governance. The results of the assessment process are duly reported to, and discussed as necessary, by the Board.

PLDT monitors and assesses compliance with the CG Rules through a cross-functional evaluation system whereby the heads of the various business and support units/groups, including, but not limited to, Enterprise, International & Carrier Business, Home Business, Finance, Human Resources, Customer Service Assurance, Technology, Supply Chain, Asset Protection & Management, Public Affairs, Enterprise Risk Management, Information Technology, Regulatory, Internal Audit, Corporate Counsel and Legal Services, Corporate Governance Office, and Investor Relations, conduct an evaluation of their unit/group’s compliance using an evaluation questionnaire consisting of the governance regulations applicable and relevant to their respective functions, including the requirements of the Revised Code of Corporate Governance and the PSE Corporate Governance Guidelines (PSE CG Guidelines). The results of the evaluation conducted by the heads are submitted to the Corporate Finance & Treasury Head and the Chief Governance Officer, who submit the consolidated report to the President and CEO for approval. The consolidated report is considered as an important input in the preparation of the Company’s Certification of Compliance with the CG Manual and Disclosure Report on the PSE CG Guidelines. The results of the compliance evaluation are reported to the GNC by the CGO.

The level of observance of the CG Rules and the values of accountability, integrity, fairness, and transparency, as aidsare monitored through focus group discussions across all personnel levels in order to gain insights into the effectiveness of its efforts. A Governance and toolsEthics Survey has been tested and will be rolled out regularly to personnel to provide more quantifiable information that is tracked over time to check for improvements or deficiencies. In similar fashion, a corporate governance follow through survey has been conducted in the pursuitpast two years to track the observations of outstandingnewly-hired personnel. The survey is administered to PLDT’s new hires six months after they are hired and principled performance.

     PLDT invests considerable resources inthereafter, on the continuous trainingsecond and fifth year of itstheir service. Valuable information is also obtained from the Board and senior managementBoard Committee assessment process. Finally, data is also obtained and analyzed from results of our education activities, trends in corporate governance, PLDT has organizedreported violations, whether within the whistleblowing system or not, key business indicators such as customer complaints, reports from business partners and conducted four (4) corporate governance enhancement sessions since 2007 and has invited internationally-known experts to share their insights and interact with PLDT’s Board and senior management. Allall other sources of the PLDT Directors have attended at least one (1) corporate governance enhancement session. On the other hand, fifty (50) out of the fifty seven (57) active members of PLDT’s senior management have attended at least one (1) corporate governance enhancement session.
C. Performance Evaluation
     The Board commits itself to a process of self-improvement. In the past year, the Board continued its pioneering practice in the Philippines of conducting a periodic performance self—assessment. The Board, through its individual members, assessed its collective performance as well as that of the individuals that comprise it and its committees. The Board utilizes a self-assessment tool developed with reference to the Philippine SEC’s Revised Code of Corporate Governance and Self-Rating Form, PLDT’s CG Manual and Code of Ethics, Sarbanes-Oxley Act, NYSE Rules, the survey questions of the Institute of Corporate Directors, and established global best-practices. The

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relevant information.


D.Governance Structures

assessment instrument includes an evaluation of the Board’s structure, processes and responsibilities, as well as the performance of the Chief Executive Officer. Results of the assessment are used to develop strategies to strengthen and enhance, among others, PLDT’s governance practices.
D. Governance Structures
Board of Directors

Our Board of Directors is responsible for establishing and sustaining good corporate governance practices pursuant to its overarching duty to foster the long-term success of the Company and secure its sustained competitiveness.

In accordance with our CG Manual, our Board has undertaken to: act within the scope of power and authority of the Company and the Board as prescribed in the Articles of Incorporation, By-Laws, and legislative franchise of the Company and in existing laws, rules and regulations; exercise their best care, skill, judgment and observe utmost good faith in the conduct and management of the business and affairs of the Company; and act in the best interest of the Company and for the common benefit of the Company’s stockholders and other stakeholders.

Our Board is composed of 13 qualified and competent members, each of whom has committed to the independent, diligent, responsible and judicious exercise of his/her duties. The composition of the Board and the qualifications and grounds for disqualification of directors are provided in our CG Manual. Diversity and complementation of skills, expertise, experience and knowledge is desired and encouraged in order to enrich the collective processes and practices of our Board. Our directors, each of whom is a business owner or leader, and/or holds senior management positions, have extensive experience in their respective fields or industries, such as telecommunications, ICT, infrastructure, power, petroleum, banking, insurance, real property development, agriculture, food manufacturing, and fast-food business. This enables them to contribute and add value in the Board’s performance of its functions, including the formulation of corporate vision and strategies, assessment of enterprise risks and adequacy and effectiveness of financial reporting and internal control systems.

Our CG Manual does not impose limitations or restrictions respecting race or gender in reference to the qualifications of our directors. With regard to directorships of individual directors in other stock or non-stock corporations, our Board has not set a “one size fits all” quantitative limit which may not give due regard to differences in individual capabilities and nature of directorships. Our Board has instead adopted a performance-based standard that other directorships should not compromise the capacity of a director to serve or perform his/her duties and responsibilities to the Company diligently and efficiently.

Our CG Manual requires that at least 20% of membership of our Board of Directors, and in no case less than two members thereof must be independent directors. Three independent directors in the persons of Mr. Pedro E. Roxas, Mr. Alfred V. Ty and Former Chief Justice Artemio V. Panganiban are currently serving in our Board. All of these independent directors were selected pursuant to the specific independence criteria set out under applicable laws and rules, our Articles of Incorporation and our CG Manual. Under our CG Manual, an independent director is, broadly, “a person who is independent of Management and who, apart from his fees and shareholdings, is free from any business or other relationship with the Company which could or reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director of the Company.” Our independent directors are subject to an initial term limit of five years. After completion of five consecutive years of service, an independent director shall no longer be eligible for re-election as such, unless said independent director has undergone a “cooling-off” period of two years. Thereafter, he/she may again qualify for election as an independent director annually, for five more consecutive years, after which he/she is perpetually barred from being elected as an independent director. The application of this term limit is reckoned from January 2, 2012. Moreover, an independent director may not be elected, as such, to more than five listed or public companies comprising the PLDT conglomerate (i.e. its parent company, subsidiaries or affiliates).

The position of Chairman of the Board is separate from that of the CEO. PLDT Chairman Manuel V. Pangilinan and PLDT President and CEO Napoleon L. Nazareno nonetheless share the responsibility of ensuring good corporate governance and principled performance in their respective areas of responsibility and influence. These two individuals are unrelated.

Except for our executive directors, our directors do not receive any form of compensation such as stock options, performance incentives and bonuses from the Company. However, all of our directors are entitled to a reasonableper diem for their attendance in Board and Board Committee meetings.

The Board has a duty to keep abreast with the statutory and regulatory requirements affecting the Company and its operations as well as industry developments and trends. In this regard, at the start of the service of a new director, the Chairman, President and CEO, Chief Financial Officer, Corporate Secretary and Chief Governance Officer give a newly appointed director a briefing on the Company’s structure, business, operating and financial highlights, responsibilities of the Board and its Committees and how each operates. The new director is also furnished with copies of all relevant information about Company policies applicable to the directors, including the Company’s Articles, By-Laws, Annual Report, CG Manual, Code of Ethics, and the charters of the Board Committees. Updates on business and governance policies and requirements principally from the Philippine SEC, PSE, US SEC, and NYSE, and new laws applicable or relevant to the Company and its business, particularly on financial reporting and disclosures and corporate governance, are presented in Board meetings and/or furnished to the directors.

To enable our directors to fully apprise themselves of relevant and material information, our CG Manual assures that our directors, both new and currently serving, have access to independent professional advice, at the Company’s expense, as well as access to Management as they may deem necessary to carry out their duties.

Our Board meets monthly and determines the schedule of such meetings at the beginning of the year. At least one meeting is devoted to discussions with senior management on the strategic plans and budget, and the enterprise risk report prepared by senior management through the Group Enterprise Risk Management Department (ERMD). As necessary, our Board reviews the Company’s Vision and Mission together with senior management. Once every quarter, our Board reviews the quarterly financial reports. Periodic reviews of the reports of Board Committees, business operations updates from the heads of our three business segments and network and technology strategic plans are likewise performed.

The Board has a duty to respect, uphold and facilitate the exercise of the rights of the stockholders. These rights are: right to vote; pre-emptive right; right to inspect corporate books and records including minutes of Board meetings and stock registries, subject to certain conditions; right to receive information which is required to be disclosed by the Company pursuant to the Corporation Code or Securities Regulation Code of the Philippines; right to dividends; and appraisal right.

Pursuant to its aforementioned duty, the Board promotes transparency and fairness in the conduct of the annual and special stockholders’ meetings of the Company. Stockholders are encouraged to personally attend such meetings, raise questions, and exercise their voting rights. Within a reasonable period of time before the meeting, stockholders are apprised of their right to appoint a proxy, in case they could not personally attend such meetings, and give their voting instructions in the proxy form provided. In connection with this, appropriate steps to remove excessive or unnecessary costs and other administrative impediments to stockholders’ participation in meetings, whether in person or by proxy, are undertaken. Relevant and timely information are made available to the stockholders in printed form and through the Company’s website to enable them to make a sound judgment on all matters brought to their attention for consideration or approval. The Board also ensures the timely disclosure and appropriate filing with the Philippine SEC, PSE and, as applicable, U.S. SEC and NYSE, of material information and/or transactions that could potentially affect the market price of the Company’s shares and such other information which are required to be disclosed pursuant to relevant laws and regulations.

It is the Board that leads the Company’s corporate social responsibility initiatives. Through the Board, the Company’s resources and expertise are harnessed to respond to pressing societal issues. The PLDT Group and the PLDT Smart Foundation have continuing projects in the areas of Directors which hasenvironment, education as well as in disaster response and rehabilitation. The PLDT Group continues to leverage on its business expertise to develop and implement innovative projects in health, community and livelihood development, and youth development and sports.

Our Board looks to ensure the primary responsibility for ensuring principled business conductcontinuity of executive leadership as a critical factor in pursuit of promoting and protectingsustaining the interestsuccess of the Company,PLDT Group. To this end, a succession planning process referred to as Leadership Succession Planning and Development has been established. This enterprise-wide process covers senior management positions, including the President and CEO. The Board’s involvement in Leadership Succession Planning and Development is performed through its stockholders,ECC, which reviews and all other stakeholders. Theupdates the criteria for employment and promotion, as well as any training and development plans for senior management, keeps track of their performance and development, and reviews their potential career paths.

Our directors take part in an annual assessment process which reviews and evaluates the performance of the whole Board, of Directors functions within the scope of its powers and authority provided in applicable laws, rules and regulations,Board Committees and the Company’s By-Laws, and conducts itself in accordance with Company policies such asindividuals that comprise these bodies. The assessment also includes an opportunity to evaluate the CG Manual and the Code of Ethics.

     The positions of Chairman and CEO are held separately by two individuals, Mr. Manuel V. Pangilinan and Mr. Naploeon L. Nazareno, respectively. Each position has been given distinct and separate duties and responsibilities pursuant to the provisions of PLDT’s By-Laws and CG Manual.
     Independent oversight by the PLDT Board over management is enhanced through PLDT’s independent directors and non-executive directors. PLDT has four (4) duly-screened and qualified independent directors, namely: Rev. Fr. Bienvenido F. Nebres, S.J., Mr. Oscar S. Reyes(1), Mr. Pedro E. Roxas, and Mr. Alfred V. Ty. The number of PLDT’s independent directors surpasses that required under local regulations of at least two (2) independent directors or twenty percent (20%)performance of the entire board membership, whichever is lower. WithCEO. This process has proven to be useful in identifying the exception of Mr. Napaleon L. NazarenoBoard’s strengths and Atty. Ray C. Espinosa, allareas for improvement and in eliciting individual directors’ feedback and views on the members of the Board are non-executive directors.
(1)Mr. Reyes’ status as an independent director ceased as at August 3, 2010 when he was appointed Chief Operating Officer of Meralco, an affiliateCompany’s strategies, performance and future direction.

President and investee company of the PLDT Group.

Chief Executive Officer
     Under the overall guidance

The President and oversight of the Board, the CEO is charged with the general care, management and administration of the business operations of the Company. He provides leadership for Management in developing and implementing business strategies, plans and budgets. More importantly, heHe ensures that:that the business and affairs of the Company are managed in a sound and prudent manner;manner and that operational, financial and internal controls are adequate and effective to ensure reliability and integrity of financial and operational information, effectiveness and efficiency of operations, safeguarding of assets and compliance with laws, rules, regulations and contracts. The President and CEO, with the assistance of the rest of PLDT’s Management, also has the responsibility to provide the Board with a balanced, understandable and understandableaccurate account of the Company’s performance, financial condition, results of operations, and prospects, on a regular basis.

Corporate Secretary

The Corporate Secretary and the Assistant Corporate Secretary are expected to possess appropriate administrative, interpersonal and legal skills, be aware of the laws, rules and regulations necessary in the performance of their duties or responsibilities, and have at least an understanding of basic financial and accounting matters. In equal measure, the Corporate Secretary and the Assistant Secretary must have a working knowledge of the operations of the Company.

The Corporate Secretary is responsible for the safekeeping and preservation of the integrity of the minutes of the meetings of the Board and Board Committees, as well as other official records of the Company. The Corporate Secretary is expected to work fairly and objectively with the Board, Management and stockholders and shall inform the directors of the schedule and agenda of Board meetings and ensure that Management provides the Board with complete and accurate information that will enable the Directors to arrive at intelligent or informed decisions on matters that require their approval. The Corporate Secretary is expected to attend all Board meetings, except for exceptional and justifiable causes that prevent attendance, and must ensure that all Board procedures, rules and regulations are strictly followed by the directors. The current Corporate Secretary is also the Chief Governance Officer of the Company.

Internal Audit Organization

     We have

PLDT has an internal audit organization that determines whether our network orstructure of risk management, control and governance processes, as designed and represented by Management, are adequate and functioning to ensure that:

 1.Risks are appropriately identified and managed;managed, and/or reported;

 2.Significant financial, managerial, and operating information are accurate, reliable and timely;

 3.Employees’ actions are in compliance with policies, standards, procedures, and applicable laws and regulations;

 4.Resources are acquired economically, used efficiently and adequately protected;

 5.Programs, plans and objectives are achieved;

 6.Quality and continuous improvement are fostered in our control process;processes; and

 7.Significant legislative or regulatory issues impacting us are recognized and addressed appropriately; and
8.Interaction with various governance groups occurs as needed.appropriately.

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To ensureprovide for the independence of the internal audit organization, its personnel report to the head of ourthe internal audit organization, being the Chief Audit Officer/Internal Audit Head, who reports functionally to our audit committeethe Audit Committee and administratively to our presidentthe President and chief executive officer. HeCEO. The Chief Audit Officer is accountable to managementManagement and our audit committeethe Audit Committee in the discharge of his duties and is required to:

 1.Provide annually an assessment on the adequacy and effectiveness of our processes for controlling our activities and managing our risks;

 2.Report significant issues related to the processes of controlling our activities, including potential improvements to those processes, and provide information concerning such issues; and

 3.Periodically provide information on the status and results of the annual internal audit plan and the sufficiency of our internal audit organization’s resources; and
4.Coordinate with and provide oversight of other control and monitoring functions (risk management, compliance, security, legal, ethics, environmental, external audit).resources.
     Our

The Company’s internal audit organization has a charter that has been approved by our audit committee. It seeks to complythe Audit Committee that complies with the International Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors, in the discharge of its scope of work and responsibilities.

External Audit

The external auditor is appointed by the Audit Committee which reviews its qualifications, performance and independence. To ensure objectivity in the performance of its duties, the external auditor is subject to the rules on rotation and change (every five years); general prohibitions on hiring of staff of the external auditor; and full and appropriate disclosure and prior approval by the Audit Committee of all audit and non-audit services and related fees for such services. Approval of non-audit work by the external auditor is principally tested against the standard of whether such work will conflict with its role as an independent auditor or would compromise its objectivity or independence as such.

Enterprise Risk Management

Also working in coordination with our internal audit organization and Audit Committee is the PLDT Group ERMD. The complex and dynamic business environment that the PLDT Group operates in gives rise to a variety of risks. The ERMD is in charge of managing an integrated risk management program with the goal of identifying, analyzing and managing the PLDT Group’s risks to an acceptable level, so as to enhance opportunities, reduce threats, and thus sustain competitive advantage.

Chief Governance Officer

The corporate governance compliance system established in the CG Manual includes the designation by the Board of a Chief Governance Officer who reports to the Chairman of the Board and the GNC. The primary responsibilities of the Chief Governance Officer include monitoring compliance with the provisions and requirements of corporate governance laws, rules and regulations, reporting violations and recommending the imposition of disciplinary actions, and adopting measures to prevent the repetition of such violations.

In addition, the Chief Governance Officer assists the Board and the GNC in the performance of their governance functions, including their duties to oversee the formulation or review and implementation of the corporate governance structure and policies of the Company, the establishment of an evaluation system to verify and measure compliance with the CG Manual in relation to related laws, rules and regulations, and to oversee the conduct of a self-assessment of the performance and effectiveness of the Board, the Board Committees, and individual Board members in carrying out their functions.

Corporate Governance Office

     The Chief Governance Officer is supported by a CGO.

The CGO personnel are entrusted with overseeing PLDT’s three Es of Corporate Governance: Engineering, Enforcement and Education. CG Engineering refers tois responsible for the continuing development, drafting, issuance and review of appropriate corporate governance-relatedgovernance policies, attending to guide company personnel. Enforcement is requiredreports received through the whistleblowing facility, addressing queries and providing opinions or guidance on corporate governance matters to operating units, initiating enforcement actions to ensure equal compliance by company personnel with the corporate governance policies, so issued and enacted. Education rounds off the process by ensuringmaintaining a corporate governance education and communication program that sees to the development of the proper knowledge, skills, attitudes, and habits that would promote voluntary observance of corporate governance policies and, more importantly, PLDT’s four core values of accountability, integrity, fairness and transparency.

     Further information on our Code of Ethics, Governance Manual and Charters of our Board Committees are available on our website. We undertake to provide a copy, without charge, to any person requesting for a copy of any, or both, of the Code of Ethics and Governance Manual from our chief governance officer, Atty. Ma. Lourdes C. Rausa-Chan,who can be reached at e-mail addresslrchan@pldt.com.phor telephone number +632-816-8556. We also maintain a website atwww.pldt.com.phon which reports filed by us and other information may be accessed.

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policies.


Item 16C. Principal Accountant Fees and Services

The following table summarizes the fees paid or accrued for services rendered by our independent auditorauditors for the years ended December 31, 20102013 and 2009:

         
  2010  2009 
  (in millions) 
Audit Fees Php39 Php46
All Other Fees  15   19 
       
Total
 Php54 Php65
       
2012:

   2013   2012 
   (in millions) 

Audit Fees

   Php41     Php44  

All Other Fees

   16     17  
  

 

 

   

 

 

 

Total

   Php57     Php61  
  

 

 

   

 

 

 

Audit Fees. This category includes the audit of our annual financial statements, review of interim financial statements and services that are normally provided by the independent auditorauditors in connection with statutory and regulatory filings or engagements for those fiscal years.

Audit-Related Fees.Other than the audit fees, we did not have any other audit-related fees for the years ended December 31, 2013 and 2012.

Tax Fees.We did not have any tax fees for the years ended December 31, 2013 and 2012.

All Other Fees. This category consists primarily of fees with respect to our Sarbanes-Oxley Act 404 assessment, certain projects and out-of-pocket and incidental expenses.

The fees presented above include out-of-pocket expenses incidental to our independent auditors’ work, the amount of which do not exceed 5% of the agreed-upon engagement fees.

Our audit committee pre-approved all audit and non-audit services as these are proposed or endorsed before these services are performed by our independent auditors.

Audit Committee’s Pre-approval Policies and Procedures

Audit Committee pre-approval of services rendered by our independent auditor follows:

The Audit Committee has adopted a policy for pre-approval of audit, audit-related and permitted non-audit services to be rendered by our independent auditor, that should be interpreted in conjunction with our policy on auditor independence.

The Audit Committee does not engage our independent auditor for “prohibited services” at any point during the audit and professional engagement period.

To ensure the prompt handling of unexpected matters, the Audit Committee may delegate its authority to specifically pre-approve services to one or more of its members. The member(s) to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next regularly scheduled meeting.

The Audit Committee is directly responsible for the appointment, setting of compensation, retention, removal and oversight of the work of our independent auditor.

Item 16D. Exemption from the Listing Standards for Audit Committees

Not applicable.

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchaser
     In 2008, we obtained

We did not repurchase any of our board of directors’ approval on a share buyback program of up to five million shares of PLDT’s common stock, representing approximately 3% of PLDT’s total outstanding shares of common stock. We had acquired a total of approximately 2.72 million shares of PLDT’s common stock, representing approximately 1% of PLDT’s outstanding shares of common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million in accordance with the share buyback program as at December 31, 2010. The table below sets forth purchases made by or on behalf of PLDT of shares of PLDT’s common stock for yearsyear ended December 31, 2010, 2009 and 2008:

                 
          Total Number ofShares  
      Average Price Purchased as Part of Maximum Number of Shares
  Total Number of Paid per Publicly Announced that May Yet Be Purchased
Period Shares Purchased(1) Share Plans or Programs Under the Programs
 
March 17-19, 2008  60,000   2,635   60,000   1,940,000(2)
March 24-27, 2008  92,440   2,708   152,440   1,847,560 
April 4, 2008  30,000   2,782   182,440   1,817,560 
April 8-11, 2008  62,000   2,777   244,440   1,755,560 
April 14-18, 2008  101,820   2,727   346,260   1,653,740 
May 9, 2008  25,000   2,588   371,260   1,628,740 
May 12-16, 2008  144,810   2,658   516,070   1,483,930 
May 19-23, 2008  115,920   2,660   631,990   1,368,010 
May 26-30, 2008  83,050   2,618   715,040   1,284,960 
June 2-6, 2008  137,710   2,556   852,750   1,147,250 
June 10-13, 2008  138,280   2,361   991,030   1,008,970 
June 16-20, 2008  168,030   2,449   1,159,060   840,940 
June 23-27, 2008  182,630   2,416   1,341,690   658,310 
June 30, 2008  41,720   2,394   1,383,410   616,590 
July 1-4, 2008  150,440   2,344   1,533,850   466,150 
July 7-10, 2008  121,890   2,430   1,655,740   344,260 
July 14-16, 2008  83,890   2,413   1,739,630   260,370 
September 15-16, 2008  16,410   2,571   1,756,040   2,243,960(2)
September 18, 2008  4,000   2,465   1,760,040   2,239,960 
September 23, 2008  3,100   2,595   1,763,140   2,236,860 
September 30, 2008  10,440   2,646   1,773,580   2,226,420 
October 3, 2008  20,000   2,695   1,793,580   2,206,420 
October 6-10, 2008  76,150   2,502   1,869,730   2,130,270 
October 13-17, 2008  90,160   2,328   1,959,890   2,040,110 
November 7, 2008  12,400   1,983   1,972,290   3,027,710(2)
March 17-18, 2009  39,060   1,876   2,011,350   2,988,650 
March 20, 2009  130,000   1,980   2,141,350   2,858,650 
March 23, 2009  523,226   2,020   2,664,576   2,335,424 
September 18, 2009  13,210   2,306   2,677,786   2,322,214 
September 22, 2009  5,170   2,330   2,682,956   2,317,044 
November 9, 2010  20,000   2,416   2,702,956   2,297,044 
November 10, 2010  21,155   2,421   2,724,111   2,275,889 
 
Total  2,724,111             
 
(1)Outside the share buyback program, we did not repurchase any of our shares in the year ended December 31, 2010.
(2)The Board of Directors approved the initial share buyback program of up to two million shares of PLDT’s common stock on January 29, 2008, authorized the repurchase of up to another two million shares on August 5, 2008, and approved the repurchase of an additional one million shares on December 9, 2008.
2013.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

PLDT is a Philippine company with its shares of common stock listed on the PSE and ADSs listed on the NYSE. As a foreign private issuer, PLDT is permitted under the NYSE listing standards to follow Philippine corporate governance practices on most corporate governance matters, and, accordingly, PLDT complies with the Philippine SEC Governance Code in respect of its corporate governance practices as well as with the NYSE listing standards applicable to foreign private issuers. PLDT’s corporate governance practices are generally consistent with the NYSE listing standards, except that PLDT’s corporate governance practices differ from U.S. companies under the NYSE listing standards in the significant ways summarized below.

158


 

Number of Independent Directors.The NYSE listing standards require a majority of the board of directors to be independent. We have fourthree independent directors out of 13 directors, which exceedsmeets the requirements under the Philippine SEC Governance Code that at least two members or 20% of the board of directors must be independent.

 

Director Independence Tests.There are differences between the director independence tests applied in PLDT’s corporate governance practice and those under the NYSE listing standards. In some cases, the independence tests set forth in the NYSE listing standards are more stringent than those under PLDT’s corporate governance practice andvice versa.versa.

Examples where the NYSE listing standards impose more stringent standards than PLDT’s corporate governance practices include the “auditor affiliation” test. In contrast to the NYSE listing standards, under PLDT’s By-Laws and Board Committee charters, present or previous affiliation or employment of a director’s immediate family member with the external auditors, or a director’s past or present affiliation with a firm that is PLDT’s internal auditor do not preclude a determination that such director is independent.

Examples where PLDT’s corporate governance practices impose more stringent standards than NYSE listing standards include the look back periods for the independence tests and the “material relationship with the listed company” test. The look back period for each of the “past employment” and the “auditor affiliation” tests under PLDT’s corporate governance practices is five years compared to three years under the NYSE listing standards. Furthermore, in respect of material relationships that preclude an independence finding, PLDT’s Corporate Governance Manual provides that a director who owns more than 2% of the shares of stock of PLDT, or whose relative is, a substantial shareholder of PLDT, any of its related companies or any of its substantial shareholders cannot be considered as independent.

oExamples where the NYSE listing standards impose more stringent standards than PLDT’s corporate governance practices include the “auditor affiliation” test. In contrast to the NYSE listing standards, under PLDT’s By-Laws and Board Committee charters, present or previous affiliation or employment of a director’s immediate family member with the external auditors, or a director’s past or present affiliation with a firm that is PLDT’s internal auditor do not preclude a determination that such director is independent.
oExamples where PLDT’s corporate governance practices impose more stringent standards than NYSE listing standards include the look back periods for the independence tests and the “material relationship with the listed company” test. The look back period for each of the “past employment” and the “auditor affiliation” tests under PLDT’s corporate governance practices is five years compared to three years under the NYSE listing standards. Furthermore, in respect of material relationships that preclude an independence finding, PLDT’s Corporate Governance Manual provides that a director who is, or whose relative is, a substantial shareholder of PLDT, any of its related companies or any of its substantial shareholders cannot be considered as independent.
 

Meetings of non-management/independent directors.The NYSE listing standards require regularly scheduled executive sessions consisting of non-management directors without management presentparticipation or regularly scheduled executive sessions consisting of only independent directors. As partPLDT’s Corporate Governance Manual mandates the holding of the Board assessment process formally adopted by the GNC, PLDT’s independent directors and/orexecutive sessions with non-management directors hold meetingsonly at least once a year to, amongand at such other things, discuss and evaluatetimes as the results of the Board’s annual self-assessment. In addition, while PLDT’s Corporate Governance Manual does not mandate the holding of regularly scheduled executive sessions with non-management directors nor executive sessions with only independent directors, PLDT’s independent and/Board may deem necessary or non-management directors, through the Audit Committee and the GNC, in either or both of which all independent directors and most non-management directors are serving as members or advisors, are provided the opportunity to have open discussions, whether individually or as a group, without the presence of management/executive directors.appropriate.

 

Nominating/Corporate Governance Committee and Compensation Committee.The NYSE listing standards require a listed company to maintain a nominating/corporate governance committee and a compensation committee, both composed entirely of independent directors. Our GNC and our ECC is each normally composed of five voting members, a majority of whom are normally independent directors, which exceeds the requirements under the Philippine SEC Governance Code that one of the at least three voting members of the nominating/corporate governance committee and one of the at least three members of the compensation committee must be independent.

The NYSE listing standards require the compensation committee to conduct an independent assessment with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee. There is no such requirement under the Philippine SEC Governance Code and PLDT.

 

Audit Committee.As required by NYSE listing standards, PLDT maintains an audit committee in full compliance with Rule 10A-3 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and Section 303A.06 of the NYSE Listed Company Manual. All of the members of PLDT’s Audit Committee are independent directors meeting the independence requirements of Rule 10A-3 as well as those under Section 303A.07 of the NYSE Listed Company Manual, except in those areas where our independence tests under the Philippine SEC Governance Code differ from those under the NYSE listing standards, as discussed above.

     The differences between our corporate governance practices and the NYSE listing standards is set forth on our website at: http://www.pldt.com.ph/governance/Documents/NYSE-PLDT_CG-DISC303A%2011_2010.pdf.

Item 16H. Mine Safety Disclosure

Not applicable.

PART III

Item 17. Financial Statements

PLDT has elected to provide the financial statements and related information specified in Item 1818. “Financial Statements” in lieu of Item 17.

159



Report of Independent Registered Public Accounting Firm

The Board of Directors and the Stockholders

Philippine Long Distance Telephone Company

We have audited Philippine Long Distance Telephone Company and its subsidiaries’ (collectively referred to as the “PLDT Group”) internal control over financial reporting as ofat December 31, 2010,2013, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 framework (the COSO criteria). The PLDT Group’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the PLDT Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IFRS”).Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

161


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the PLDT Group maintained, in all material respects, effective internal control over financial reporting as ofat December 31, 2010,2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of the PLDT Group as ofat December 31, 20102013 and 2009,2012, and January 1, 2012, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2010,2013, and our report dated March 29, 2011April 1, 2014 expressed an unqualified opinion thereon.

/s/ SyCip Gorres Velayo & Co.
Makati City, Philippines
March 29, 2011

162


/s/ SyCip Gorres Velayo & Co.
Makati City, Philippines
April 1, 2014

Report of Independent Registered Public Accounting Firm

The StockholdersBoard of Directors and the Board of Directors
Stockholders

Philippine Long Distance Telephone Company

We have audited the accompanying consolidated statements of financial position of Philippine Long Distance Telephone Company and Subsidiariesits subsidiaries (collectively referred to as the “PLDT Group”) as ofat December 31, 20102013 and 2009,2012, and January 1, 2012, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2010.2013. These consolidated financial statements are the responsibility of the PLDT Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the PLDT Group as at December 31, 20102013 and 2009,2012, and January 1, 2012, and the consolidated financial performanceresults of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

As discussed in Note 2 to the consolidated financial statements, the PLDT Group changed its accounting for post-employment defined benefit plans and termination benefits as a result of the adoption of the Revised International Accounting Standard 19,Employee Benefits, which became effective beginning January 1, 2013 with retrospective application.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the PLDT Group’s internal control over financial reporting as ofat December 31, 2010,2013, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 framework and our report dated March 29, 2011April 1, 2014 expressed an unqualified opinion thereon.

/s/ SyCip Gorres Velayo & Co.
Makati City, Philippines
March 29, 2011

163


/s/ SyCip Gorres Velayo & Co.
Makati City, Philippines
April 1, 2014

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at December 31, 20102013 and 2009

2012, and January 1, 2012

(in million pesos, except par value and number of shares)

         
  2010  2009 
 
ASSETS
         
Noncurrent Assets
        
Property, plant and equipment (Notes 3, 5, 9, 13, 20 and 28)  163,184   161,256 
Investments in associates and joint ventures (Notes 3, 4, 5, 10, 24 and 28)  23,203   22,233 
Available-for-sale financial assets (Notes 6, 13 and 28)  147   134 
Investment in debt securities (Notes 11 and 28)  484   462 
Investment properties (Notes 3, 6, 9, 12 and 28)  1,560   1,210 
Goodwill and intangible assets (Notes 3, 4, 5, 13, 14, 21 and 28)  11,485   13,024 
Deferred income tax assets — net (Notes 3, 4, 7, 13 and 28)  6,110   7,721 
Derivative financial assets (Note 28)  178    
Prepayments — net of current portion (Notes 3, 5, 13,18, 25 and 28)  8,679   8,663 
Advances and refundable deposits — net of current portion (Notes 13 and 28)  1,187   1,102 
 
Total Noncurrent Assets  216,217   215,805 
 
         
Current Assets
        
Cash and cash equivalents (Notes 13, 15 and 28)  36,678   38,319 
Short-term investments (Note 28)  669   3,824 
Trade and other receivables (Notes 3, 5, 13, 16, 18, 24 and 28)  16,428   14,729 
Inventories and supplies (Notes 3, 4, 5, 13, 17 and 28)  2,219   2,165 
Derivative financial assets (Note 28)  5   6 
Current portion of prepayments (Notes 13, 18 and 28)  5,418   5,098 
Current portion of advances and refundable deposits (Notes 13 and 28)  181   202 
 
Total Current Assets  61,598   64,343 
 
TOTAL ASSETS
  277,815   280,148 
 
         
EQUITY AND LIABILITIES
         
Equity
        
Preferred stock, Php10 par value per share, authorized - 822,500,000 shares; issued and outstanding - 441,887,387 shares as at December 31, 2010 and 441,631,062 shares as at December 31, 2009 (Notes 8, 19 and 28)  4,419   4,416 
Common stock, Php5 par value per share, authorized - 234,000,000 shares; issued - 189,480,549 shares and outstanding - 186,756,438 shares as at December 31, 2010; and issued - 189,480,260 shares and outstanding - 186,797,304 shares as at December 31, 2009 (Notes 8, 19 and 28)  947   947 
Treasury stock - 2,724,111 shares as at December 31, 2010 and 2,682,956 shares as at December 31, 2009 (Notes 8, 19 and 28)  (6,505)  (6,405)
Capital in excess of par value (Note 13)  62,890   62,890 
Retained earnings (Note 19)  36,594   37,744 
Other comprehensive income (Note 6)  (1,276)  (1,017)
 
Total Equity Attributable to Equity Holders of PLDT  97,069   98,575 
Non-controlling interests (Notes 6 and 13)  316   550 
 
TOTAL EQUITY
  97,385   99,125 
 

164

pesos)


   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted – Note 2) 
ASSETS    

Noncurrent Assets

    

Property, plant and equipment (Notes 3, 5, 9, 12 and 20)

   192,665    200,078    200,142  

Investments in associates, joint ventures and deposits (Notes 3, 4, 5, 10 and 24)

   41,310    27,077    17,865  

Available-for-sale financial investments (Notes 6, 10 and 27)

   220    5,651    7,181  

Investment in debt securities and other long-term investments – net of current portion (Notes 11 and 27)

   2,643    205    150  

Investment properties (Notes 3, 6, 9 and 12)

   1,222    712    1,115  

Goodwill and intangible assets (Notes 3, 4, 14 and 21)

   73,918    74,250    83,303  

Deferred income tax assets – net (Notes 3, 4 and 7)

   14,181    7,225    5,117  

Derivative financial assets (Note 27)

   24    —      —    

Prepayments – net of current portion (Notes 3, 5, 18, 24 and 25)

   3,031    4,500    11,697  

Advances and other noncurrent assets – net of current portion (Note 27)

   2,761    1,376    1,340  
  

 

 

  

 

 

  

 

 

 

Total Noncurrent Assets

   331,975    321,074    327,910  
  

 

 

  

 

 

  

 

 

 

Current Assets

    

Cash and cash equivalents (Notes 15 and 27)

   31,905    37,161    46,057  

Short-term investments (Note 27)

   718    574    558  

Trade and other receivables (Notes 3, 5, 16, 24 and 27)

   17,564    16,379    16,245  

Inventories and supplies (Notes 3, 4, 5 and 17)

   3,164    3,467    3,827  

Derivative financial assets (Note 27)

   10    —      366  

Current portion of investment in debt securities and other long-term investments (Notes 11 and 27)

   —      150    358  

Current portion of prepayments (Note 18)

   6,054    5,144    6,345  

Current portion of advances and other noncurrent assets (Notes 19, 27 and 28)

   8,248    8,116    126  
  

 

 

  

 

 

  

 

 

 
   67,663    70,991    73,882  

Assets classified as held-for-sale (Notes 2, 3, 4 and 10)

   —      13,750    —    
  

 

 

  

 

 

  

 

 

 

Total Current Assets

   67,663    84,741    73,882  
  

 

 

  

 

 

  

 

 

 

TOTAL ASSETS

   399,638    405,815    401,792  
  

 

 

  

 

 

  

 

 

 
EQUITY AND LIABILITIES    

Equity

    

Non-voting serial preferred stock (Notes 8, 19, 27 and 28)

   360    360    4,419  

Voting preferred stock (Note 19)

   150    150    —    

Common stock (Notes 8, 19, 27 and 28)

   1,093    1,093    1,085  

Treasury stock (Notes 8, 19 and 27)

   (6,505  (6,505  (6,505

Capital in excess of par value

   130,562    130,566    127,246  

Retained earnings (Note 19)

   22,968    25,416    26,160  

Other comprehensive income (Note 6)

   (11,481  (3,387  1,455  

Reserves of a disposal group classified as held-for-sale (Note 2)

   —      (2,143  —    
  

 

 

  

 

 

  

 

 

 

Total Equity Attributable to Equity Holders of PLDT (Note 27)

   137,147    145,550    153,860  

Noncontrolling interests (Note 6)

   179    184    386  
  

 

 

  

 

 

  

 

 

 

TOTAL EQUITY

   137,326    145,734    154,246  
  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(continued)

As at December 31, 20102013 and 2009
2012, and January 1, 2012

(in million pesos, except par value and number of shares)

         
  2010  2009 
 
Noncurrent Liabilities
        
Interest-bearing financial liabilities — net of current portion (Notes 3, 4, 5, 9, 13, 20, 23, 26 and 28)  75,888   86,079 
Deferred income tax liabilities — net (Notes 3, 4, 7, 13 and 28)  1,099   1,321 
Derivative financial liabilities (Notes 26 and 28)  3,604   2,751 
Pension and other employee benefits (Notes 3, 5, 13, 23, 25, 26 and 28)  1,834   374 
Customers’ deposits (Notes 26 and 28)  2,223   2,166 
Deferred credits and other noncurrent liabilities (Notes 3, 5, 9, 13, 14, 21, 23, 28 and 29)  13,567   14,438 
 
Total Noncurrent Liabilities  98,215   107,129 
 
 
Current Liabilities
        
Accounts payable (Notes 13, 22, 24, 26, 27 and 28)  25,804   19,601 
Accrued expenses and other current liabilities (Notes 3, 10, 13, 14, 20, 21, 23, 24, 25, 26, 27 and 28)  35,959   35,446 
Provision for assessments (Notes 3, 26, 27 and 28)  1,555   1,555 
Current portion of interest-bearing financial liabilities (Notes 3, 4, 5, 9, 13, 20, 23, 26 and 28)  13,801   12,714 
Dividends payable (Notes 13, 19, 26 and 28)  2,086   1,749 
Income tax payable (Notes 7, 13 and 28)  3,010   2,829 
 
Total Current Liabilities  82,215   73,894 
 
TOTAL LIABILITIES
  180,430   181,023 
 
TOTAL EQUITY AND LIABILITIES
  277,815   280,148 
 
pesos)

   December 31,   January 1, 
   2013   2012   2012 
       (As Adjusted – Note 2) 

Noncurrent Liabilities

      

Interest-bearing financial liabilities – net of current portion (Notes 3, 4, 5, 9, 20, 23 and 27)

   88,930     102,821     91,280  

Deferred income tax liabilities – net (Notes 3, 4 and 7)

   4,437     5,713     7,078  

Derivative financial liabilities (Note 27)

   1,869     2,802     2,235  

Customers’ deposits (Note 27)

   2,545     2,529     2,272  

Pension and other employee benefits (Notes 3, 5 and 25)

   13,439     1,982     552  

Deferred credits and other noncurrent liabilities (Notes 3, 5, 9, 21, 23, 27 and 28)

   22,045     21,950     22,642  
  

 

 

   

 

 

   

 

 

 

Total Noncurrent Liabilities

   133,265     137,797     126,059  
  

 

 

   

 

 

   

 

 

 

Current Liabilities

      

Accounts payable (Notes 22, 24, 26 and 27)

   34,882     30,451     29,554  

Accrued expenses and other current liabilities (Notes 3, 10, 14, 19, 20, 21, 23, 24, 25, 26, 27 and 28)

   74,256     71,624     58,271  

Current portion of interest-bearing financial liabilities (Notes 3, 4, 5, 9, 20, 23 and 27)

   15,171     12,989     26,009  

Provision for claims and assessments (Notes 3 and 26)

   897     1,555     1,555  

Dividends payable (Notes 19 and 27)

   932     827     2,583  

Derivative financial liabilities (Note 27)

   105     418     924  

Income tax payable (Note 7)

   2,804     1,809     2,591  
  

 

 

   

 

 

   

 

 

 
   129,047     119,673     121,487  

Liabilities directly associated with assets classified as held-for-sale (Notes 2 and 4)

   —       2,611     —    
  

 

 

   

 

 

   

 

 

 

Total Current Liabilities

   129,047     122,284     121,487  
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

   262,312     260,081     247,546  
  

 

 

   

 

 

   

 

 

 

TOTAL EQUITY AND LIABILITIES

   399,638     405,815     401,792  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

165


PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in million pesos, except earnings per common share amounts)

             
  2010 2009 2008
 
REVENUES
            
Service revenues (Notes 3 and 4)  142,242   145,567   142,873 
Non-service revenues (Notes 3, 4 and 5)  2,217   2,426   2,964 
 
   144,459   147,993   145,837 
 
             
EXPENSES
            
Depreciation and amortization (Notes 3, 4 and 9)  26,277   25,607   24,709 
Compensation and employee benefits (Notes 3, 5 and 25)  24,070   23,100   20,709 
Repairs and maintenance (Notes 12, 17 and 24)  9,434   8,631   8,569 
Selling and promotions (Note 8)  5,284   5,749   5,695 
Professional and other contracted services (Note 24)  4,853   4,361   4,591 
Cost of sales (Notes 5, 17 and 24)  4,771   5,432   5,252 
Rent (Notes 3 and 26)  3,970   4,055   3,656 
Taxes and licenses (Note 27)  2,571   2,881   2,736 
Asset impairment (Notes 3, 4, 5, 9, 10, 14, 16, 17, 18 and 28)  2,438   5,061   4,180 
Communication, training and travel  1,832   1,902   1,993 
Insurance and security services (Note 24)  1,252   1,264   1,196 
Amortization of intangible assets (Notes 3, 4 and 14)  388   368   377 
Other expenses (Note 24)  1,763   1,700   2,123 
 
   88,903   90,111   85,786 
 
   55,556   57,882   60,051 
 
             
OTHER INCOME (EXPENSES)
            
Foreign exchange gains (losses) — net (Notes 4, 9 and 28)  1,807   909   (6,170)
Equity share in net earnings (losses) of associates and joint ventures (Notes 4 and 10)  1,408   2   (176)
Interest income (Notes 4, 5, 11 and 15)  1,200   1,539   1,668 
Gains (losses) on derivative financial instruments — net (Notes 4 and 28)  (1,741)  (1,006)  3,115 
Financing costs — net (Notes 4, 5, 9, 20 and 28)  (6,698)  (6,556)  (6,104)
Other income (Notes 4 and 18)  2,153   2,069   1,665 
 
   (1,871)  (3,043)  (6,002)
 
             
INCOME BEFORE INCOME TAX(Note 4)
  53,685   54,839   54,049 
PROVISION FOR INCOME TAX(Notes 3, 4 and 7)
  13,426   14,744   19,073 
 
NET INCOME FOR THE YEAR(Note 4)
  40,259   40,095   34,976 
 
             
ATTRIBUTABLE TO:
            
Equity holders of PLDT (Notes 4 and 8)  40,217   39,781   34,317 
Non-controlling interests (Note 4)  42   314   659 
 
   40,259   40,095   34,976 
 
             
Earnings Per Share For The Year Attributable to Common Equity Holders of PLDT(Note 8)
            
Basic  212.85   210.38   179.96 
Diluted  212.85   210.36   179.95 
 
amounts which are in pesos)

   2013  2012  2011 
      (As Adjusted – Note 2) 

REVENUES

    

Service revenues (Notes 2, 3 and 4)

   164,052    159,738    145,834  

Non-service revenues (Notes 3, 4 and 5)

   4,279    3,295    2,645  
  

 

 

  

 

 

  

 

 

 
   168,331    163,033    148,479  
  

 

 

  

 

 

  

 

 

 

EXPENSES

    

Depreciation and amortization (Notes 3, 4 and 9)

   30,304    32,354    27,539  

Compensation and employee benefits (Notes 3, 5 and 25)

   21,369    21,999    15,411  

Repairs and maintenance (Notes 12, 17 and 24)

   13,107    12,604    10,053  

Cost of sales (Notes 5, 17 and 24)

   11,806    8,747    5,443  

Interconnection costs (Note 2)

   10,610    11,105    12,586  

Selling and promotions (Note 24)

   9,776    9,708    7,807  

Professional and other contracted services (Note 24)

   6,375    5,361    5,143  

Rent (Notes 3, 24 and 27)

   6,041    5,860    3,938  

Asset impairment (Notes 3, 4, 5, 9, 10, 16, 17 and 27)

   5,543    5,286    10,200  

Taxes and licenses (Note 26)

   3,925    3,506    3,554  

Communication, training and travel

   2,215    2,042    1,645  

Insurance and security services (Note 24)

   1,815    1,564    1,326  

Amortization of intangible assets (Notes 3, 4 and 14)

   1,020    921    117  

Other expenses

   1,609    1,472    1,662  
  

 

 

  

 

 

  

 

 

 
   125,515    122,529    106,424  
  

 

 

  

 

 

  

 

 

 
   42,816    40,504    42,055  
  

 

 

  

 

 

  

 

 

 

OTHER INCOME (EXPENSES)

    

Equity share in net earnings of associates and joint ventures (Notes 4 and 10)

   2,742    1,538    2,035  

Interest income (Notes 4, 5, 11 and 15)

   932    1,354    1,357  

Gains (losses) on derivative financial instruments – net (Notes 4 and 27)

   511    (2,009  201  

Foreign exchange gains (losses) – net (Notes 4, 9 and 27)

   (2,893  3,282    (735

Financing costs – net (Notes 4, 5, 9, 20 and 27)

   (6,589  (6,876  (6,454

Other income – net (Notes 3, 4, 12 and 18)

   4,113    5,813    2,626  
  

 

 

  

 

 

  

 

 

 
   (1,184  3,102    (970
  

 

 

  

 

 

  

 

 

 

INCOME BEFORE INCOME TAX FROM CONTINUING OPERATIONS(Note 4)

   41,632    43,606    41,085  

PROVISION FOR INCOME TAX(Notes 2, 3, 4 and 7)

   8,248    8,050    10,734  
  

 

 

  

 

 

  

 

 

 

NET INCOME FROM CONTINUING OPERATIONS(Note 4)

   33,384    35,556    30,351  

NET INCOME FROM DISCONTINUED OPERATIONS(Notes 2, 4 and 8)

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

NET INCOME(Note 4)

   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

ATTRIBUTABLE TO:

    

Equity holders of PLDT (Notes 4 and 8)

   35,420    36,148    31,278  

Noncontrolling interests (Notes 4 and 8)

   33    (49  (60
  

 

��

  

 

 

  

 

 

 
   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

Earnings Per Share Attributable to Common Equity Holders of PLDT(Notes 4 and 8)

    

Basic

   163.67    167.07    161.05  

Diluted

   163.67    167.07    160.91  
  

 

 

  

 

 

  

 

 

 

Earnings Per Share from Continuing Operations Attributable to Common Equity Holders of PLDT(Notes 4 and 8)

    

Basic

   154.09    164.55    156.52  

Diluted

   154.09    164.55    156.39  
  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

166


PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in million pesos)

             
  2010 2009 2008
 
NET INCOME FOR THE YEAR(Note 4)
  40,259   40,095   34,976 
OTHER COMPREHENSIVE INCOME (LOSS)(Note 6)
            
Revaluation increment on investment properties:  314       
Revaluation increment of property, plant and equipment transferred to investment properties during the year  449       
Income tax related to revaluation increment charged directly to equity  (135)      
Net gains (losses) on available-for-sale financial assets:  22   3   (9)
Gains (losses) from changes in fair value recognized during the year  23   3   (9)
Losses removed from other comprehensive income taken to income  3       
Income tax related to fair value adjustments charged directly to equity  (4)      
Foreign currency translation differences of subsidiaries  (761)  (657)  1,490 
Net transactions on cash flow hedges — net of tax:        (411)
Net losses on cash flow hedges        (662)
Income tax related to cash flow hedges:        251 
Charged directly to equity        251 
Total Other Comprehensive Income (Loss)  (425)  (654)  1,070 
 
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
  39,834   39,441   36,046 
 
ATTRIBUTABLE TO:
            
Equity holders of PLDT  39,958   39,142   35,322 
Non-controlling interests  (124)  299   724 
 
   39,834   39,441   36,046 
 

   2013  2012  2011 
      (As Adjusted – Note 2) 

NET INCOME(Note 4)

   35,453    36,099    31,218  

OTHER COMPREHENSIVE INCOME (LOSS) – NET OF TAX (Note 6)

    

Foreign currency translation differences of subsidiaries

   794    (795  634  

Net gains (losses) on available-for-sale financial investments:

   (8  23    3  

Gains (losses) from changes in fair value recognized during the year

   (7  25    3  

Income tax related to fair value adjustments charged directly to equity

   (1  (2  —    

Net transactions on cash flow hedges:

   (16  92    14  

Net fair value gains (losses) on cash flow hedges (Note 27)

   —      92    14  

Income tax related to fair value adjustments charged directly to equity

   (16  —      —    

Share in the other comprehensive income of associates and joint ventures accounted for using the equity method (Note 10)

   (92  —      (10
  

 

 

  

 

 

  

 

 

 

Net other comprehensive income (loss) to be reclassified to profit or loss in subsequent years

   678    (680  641  
  

 

 

  

 

 

  

 

 

 

Share in the other comprehensive income of associates and joint ventures accounted for using the equity method (Note 10)

   1,112    —      —    

Revaluation increment on investment properties:

   (1  31    —    

Income tax related to revaluation increment charged directly to equity

   1    32    —    

Depreciation of revaluation increment in investment property transferred to property, plant and equipment (Note 9)

   (2  (2  —    

Fair value adjustment of property, plant and equipment transferred to investment properties during the year (Note 12)

   —      1    —    

Actuarial gains (losses) on defined benefit obligations:

   (9,156  (6,233  2,099  

Remeasurement in actuarial gains (losses) on defined benefit obligations

   (13,005  (8,885  3,011  

Income tax related to remeasurement adjustments

   3,849    2,652    (912
  

 

 

  

 

 

  

 

 

 

Net other comprehensive income (loss) not to be reclassified to profit or loss in subsequent years

   (8,045  (6,202  2,099  
  

 

 

  

 

 

  

 

 

 

Total Other Comprehensive Income (Loss) – Net of Tax

   (7,367  (6,882  2,740  
  

 

 

  

 

 

  

 

 

 

TOTAL COMPREHENSIVE INCOME

   28,086    29,217    33,958  
  

 

 

  

 

 

  

 

 

 

ATTRIBUTABLE TO:

    

Equity holders of PLDT

   28,061    29,268    34,009  

Noncontrolling interests

   25    (51  (51
  

 

 

  

 

 

  

 

 

 
   28,086    29,217    33,958  
  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

167


PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in million pesos)

                                             
                  Equity                  
                  Portion of             Total Equity    
              Stock Convertible Capital in     Other Attributable to Non-  
  Preferred Common Treasury Options Preferred Excess of Retained Comprehensive Equity Holders controlling Total
  Stock Stock Stock Issued Stock Par Value Earnings Income of PLDT Interests Equity
 
Balances as at January 1, 2008
  4,417   943      9   6   67,057   39,894   (1,383)  110,943   1,402   112,345 
Total comprehensive income for the year:                    34,317   1,005   35,322   724   36,046 
Net income for the year (Notes 4 and 8)                    34,317      34,317   659   34,976 
Other comprehensive income (Note 6)                       1,005   1,005   65   1,070 
Cash dividends (Note 19)                    (37,034)     (37,034)  (398)  (37,432)
Issuance of capital stock — net of conversion (Note 19)  (2)  4         (6)  1,270         1,266      1,266 
Exercised option shares           (3)     10         7      7 
Acquisition of treasury stocks (Notes 2, 8, 19 and 25)        (4,973)                 (4,973)  (308)  (5,281)
Business combinations and others (Note 13)                             18   18 
 
Balances as at December 31, 2008
  4,415   947   (4,973)  6      68,337   37,177   (378)  105,531   1,438   106,969 
 
                                             
Balances as at January 1, 2009
  4,415   947   (4,973)  6      68,337   37,177   (378)  105,531   1,438   106,969 
Total comprehensive income for the year:                    39,781   (639)  39,142   299   39,441 
Net income for the year (Notes 4 and 8)                    39,781      39,781   314   40,095 
Other comprehensive income (Note 6)                       (639)  (639)  (15)  (654)
Cash dividends (Note 19)                    (39,214)     (39,214)  (436)  (39,650)
Issuance of capital stock — net of conversion (Note 19)  1               11         12      12 
Exercised option shares           (6)     21         15      15 
Acquisition of treasury stocks (Notes 2, 8, 19 and 25)        (1,432)                 (1,432)  (320)  (1,752)
Business combinations and others (Note 13)                 (5,479)        (5,479)  (431)  (5,910)
 
Balances as at December 31, 2009
  4,416   947   (6,405)        62,890   37,744   (1,017)  98,575   550   99,125 
 
                                             
Balances as at January 1, 2010
  4,416   947   (6,405)        62,890   37,744   (1,017)  98,575   550   99,125 
Total comprehensive income for the year:                    40,217   (259)  39,958   (124)  39,834 
Net income for the year (Notes 4 and 8)                    40,217      40,217   42   40,259 
Other comprehensive income (Note 6)                       (259)  (259)  (166)  (425)
Cash dividends (Note 19)                    (41,367)     (41,367)  (50)  (41,417)
Issuance of capital stock — net of conversion (Note 19)  3                        3      3 
Acquisition of treasury stocks (Notes 2, 8, 19 and 25)        (100)                 (100)  (6)  (106)
Business combinations and others (Note 13)                             (54)  (54)
 
Balances as at December 31, 2010
  4,419   947   (6,505)        62,890   36,594   (1,276)  97,069   316   97,385 
 

   Preferred
Stock
  Common
Stock
   Treasury
Stock
  Capital in
Excess of
Par Value
  Retained
Earnings
  Other
Comprehensive
Income
  Reserves of a
Disposal Group
Classified as
Held-for-Sale
  Total Equity
Attributable to
Equity Holders
of PLDT
  Noncontrolling
Interests
  Total
Equity
 

Balances as at January 1, 2013, as previously presented

   510    1,093     (6,505  130,566    24,794    790    (2,188  149,060    182    149,242  

Effect of changes in accounting policies for employee benefits (Note 2)

   —      —       —      —      622    (4,177  45    (3,510  2    (3,508
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2013 (As Adjusted – Note 2)

   510    1,093     (6,505  130,566    25,416    (3,387  (2,143  145,550    184    145,734  

Total comprehensive income:

   —      —       —      —      35,420    (7,359  —      28,061    25    28,086  

Net income (Notes 4 and 8)

   —      —       —      —      35,420    —      —      35,420    33    35,453  

Other comprehensive loss (Note 6)

   —      —       —      —      —      (7,359  —      (7,359  (8  (7,367

Cash dividends (Note 19)

   —      —       —      —      (37,868  —      —      (37,868  (46  (37,914

Discontinued operations (Notes 2 and 6)

   —      —       —      —      —      (735  2,143    1,408    —      1,408  

Acquisition and dilution of noncontrolling interests (Notes 2 and 13)

   —      —       —      (4  —      —      —      (4  (9  (13

Others (Notes 2 and 13)

   —      —       —      —      —      —      —      —      25    25  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2013

   510    1,093     (6,505  130,562    22,968    (11,481  —      137,147    179    137,326  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2012, as previously presented

   4,419    1,085     (6,505  127,246    26,232    (644  —      151,833    386    152,219  

Effect of changes in accounting policies for employee benefits (Note 2)

   —      —       —      —      (72  2,099    —      2,027    —      2,027  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2012 (As Adjusted – Note 2)

   4,419    1,085     (6,505  127,246    26,160    1,455    —      153,860    386    154,246  

Total comprehensive income:

   —      —       —      —      36,148    (6,880  —      29,268    (51  29,217  

Net income (Notes 4 and 8)

   —      —       —      —      36,148    —      —      36,148    (49  36,099  

Other comprehensive loss (Note 6)

   —      —       —      —      —      (6,880  —      (6,880  (2  (6,882

Cash dividends (Note 19)

   —      —       —      —      (36,997  —      —      (36,997  (7  (37,004

Issuance of capital stock – net of conversion (Note 19)

   120    8     —      4,423    —      —      —      4,551    —      4,551  

Redemption of preferred shares (Note 19)

   (4,029  —       —      —      —      —      —      (4,029  —      (4,029

Revaluation increment removed from other comprehensive income taken to retained earnings (Note 6)

   —      —       —      —      105    (105  —      —      —      —    

Discontinued operations (Notes 2 and 6)

   —      —       —      —      —      2,143    (2,143  —      —      —    

Acquisition and dilution of noncontrolling interests (Notes 2 and 13)

   —      —       —      (1,103  —      —      —      (1,103  (144  (1,247
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2012 (As Adjusted – Note 2)

   510    1,093     (6,505  130,566    25,416    (3,387  (2,143  145,550    184    145,734  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2011, as previously presented

   4,419    947     (6,505  62,890    36,594    (1,276  —      97,069    316    97,385  

Effect of changes in accounting policies for employee benefits (Note 2)

   —      —       —      —      347    —      —      347    —      347  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2011 (As Adjusted – Note 2)

   4,419    947     (6,505  62,890    36,941    (1,276  —      97,416    316    97,732  

Total comprehensive income:

   —      —       —      —      31,278    2,731    —      34,009    (51  33,958  

Net income (Notes 4 and 8)

   —      —       —      —      31,278    —      —      31,278    (60  31,218  

Other comprehensive income (Note 6)

   —      —       —      —      —      2,731    —      2,731    9    2,740  

Cash dividends (Note 19)

   —      —       —      —      (42,059  —      —      (42,059  (8  (42,067

Issuance of capital stock – net of conversion (Note 19)

   —      138     —      64,356    —      —      —      64,494    —      64,494  

Others (Notes 2 and 13)

   —      —       —      —      —      —      —      —      129    129  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2011 (As Adjusted – Note 2)

   4,419    1,085     (6,505  127,246    26,160    1,455    —      153,860    386    154,246  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

168


PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in million pesos)

             
  2010 2009 2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
            
Income before income tax (Note 4)  53,685   54,839   54,049 
Adjustments for:            
Depreciation and amortization (Notes 3, 4 and 9)  26,277   25,607   24,709 
Interest on loans and other related items — net (Notes 4, 5, 9, 20 and 28)  5,471   5,317   5,083 
Asset impairment (Notes 3, 4, 5, 9, 10, 14, 16, 17 and 28)  2,438   5,061   4,180 
Losses (gains) on derivative financial instruments — net (Notes 4 and 28)  1,741   1,006   (3,115)
Incentive plans (Notes 3, 5 and 25)  1,392   1,833   1,281 
Accretion on financial liabilities — net (Notes 5, 20 and 28)  1,177   1,062   956 
Amortization of intangible assets (Notes 3 and 14)  388   368   377 
Pension benefit costs (Notes 3, 5 and 25)  236   1,306   725 
Gains on disposal of property, plant and equipment (Note 9)  (913)  (127)  (534)
Interest income (Notes 4, 5 and 15)  (1,200)  (1,539)  (1,668)
Equity share in net losses (earnings) of associates and joint ventures (Notes 4 and 10)  (1,408)  (2)  176 
Foreign exchange losses (gains) — net (Notes 4, 9 and 28)  (1,807)  (909)  6,170 
Dividends on preferred stock subject to mandatory redemption (Notes 5 and 8)        4 
Others  (352)  (802)  830 
 
Operating income before changes in assets and liabilities  87,125   93,020   93,223 
Decrease (increase) in:            
Trade and other receivables  (3,132)  (1,324)  (3,003)
Inventories and supplies  89   (305)  (913)
Prepayments  (146)  (1,333)  (877)
Advances and refundable deposits  (15)  271   (1,338)
Increase (decrease) in:            
Accounts payable  6,407   130   5,244 
Accrued expenses and other current liabilities  3,722   8,227   2,084 
Pension and other employee benefits  (4,603)  (9,071)  (1,125)
Customers’ deposits  57   32   27 
Other noncurrent liabilities  50   (46)  1 
 
Net cash generated from operations  89,554   89,601   93,323 
Income taxes paid  (12,294)  (15,215)  (15,021)
 
Net cash provided by operating activities  77,260   74,386   78,302 
 
CASH FLOWS FROM INVESTING ACTIVITIES
            
Proceeds from:            
Maturity of short-term investments  6,256   9,728   28,476 
Disposal of property, plant and equipment (Note 9)  859   932   1,015 
Redemption of investment in debt securities  409   4,005   2,676 
Disposal of investment properties (Note 12)  89   18   9 
Disposal of investments held-for-sale  10       
Disposal of available-for-sale financial assets        174 
Disposal of investment in associates        3 
Interest received  1,165   1,352   1,461 
Dividends received  534   360    
Payments for:            
Available-for-sale financial assets  (2)     (206)
Acquisition of intangibles (Notes 13 and 14)  (13)  (21)  (69)
Purchase of subsidiaries and non-controlling interests — net of cash acquired (Note 13)  (188)  (8,989)  (743)
Purchase of investment in debt securities (Note 10)  (403)  (3,572)  (3,457)
Short-term investments  (3,114)  (6,838)  (21,072)
Notes receivable     (80)   
Purchase of investments in associates (Note 10)     (18,070)   
Interest paid — capitalized to property, plant and equipment (Notes 4, 5, 9, 20 and 28)  (710)  (691)  (778)
Additions to property, plant and equipment (Notes 4 and 9)  (28,056)  (27,378)  (24,425)
Decrease (increase) in advances and refundable deposits  (119)  112   (78)
 
Net cash used in investing activities  (23,283)  (49,132)  (17,014)
 

169


   2013  2012  2011 
      (As Adjusted – Note 2) 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Income before income tax and noncontrolling interest from continuing operations

   41,632    43,606    41,085  

Income before income tax and noncontrolling interest from discontinued operations (Note 2)

   2,124    971    985  
  

 

 

  

 

 

  

 

 

 

Income before income tax (Note 4)

   43,756    44,577    42,070  

Adjustments for:

    

Depreciation and amortization (Notes 3, 4 and 9)

   30,457    32,820    27,957  

Asset impairment (Notes 3, 4, 5, 9, 10, 16, 17 and 27)

   5,545    5,289    10,209  

Interest on loans and other related items – net (Notes 4, 5, 9, 20 and 27)

   4,669    5,430    5,312  

Foreign exchange losses (gains) – net (Notes 4, 9 and 27)

   2,889    (3,243  744  

Incentive plans (Notes 3, 5 and 25)

   1,749    1,598    38  

Accretion on financial liabilities – net (Notes 5, 20 and 27)

   1,541    1,053    1,062  

Amortization of intangible assets (Notes 3 and 14)

   1,075    1,101    264  

Pension benefit costs (Notes 3, 5 and 25)

   434    678    569  

Losses (gains) on disposal of property, plant and equipment (Note 9)

   86    (51  (172

Losses (gains) on derivative financial instruments – net (Notes 4 and 27)

   (512  1,981    (197

Interest income (Notes 4, 5 and 15)

   (935  (1,370  (1,372

Gains on disposal of associates (Note 10)

   (2,056  (1,760  —    

Gains on disposal of investments in subsidiaries

   (2,404  —      (216

Equity share in net earnings of associates and joint ventures (Notes 4 and 10)

   (2,604  (1,538  (2,035

Gain on disposal of available-for-sale financial investments (Note 10)

   —      (2,015  —    

Others

   (401  (1,170  (1,745
  

 

 

  

 

 

  

 

 

 

Operating income before changes in assets and liabilities

   83,289    83,380    82,488  

Decrease (increase) in:

    

Trade and other receivables

   (1,790  (8,338  2,064  

Inventories and supplies

   254    386    (1,017

Prepayments

   (663  97    (539

Advances and other noncurrent assets

   (59  (108  51  

Increase (decrease) in:

    

Accounts payable

   4,299    6,140    904  

Accrued expenses and other current liabilities

   2,615    11,112    7,011  

Pension and other employee benefits

   (2,611  (2,245  (236

Customers’ deposits

   17    257    45  

Other noncurrent liabilities

   (29  (205  12  
  

 

 

  

 

 

  

 

 

 

Net cash flows generated from operations

   85,322    90,476    90,783  

Income taxes paid

   (11,559  (10,106  (11,574
  

 

 

  

 

 

  

 

 

 

Net cash flows from operating activities

   73,763    80,370    79,209  
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Interest received

   845    1,294    1,359  

Dividends received (Note 10)

   438    784    520  

Proceeds from:

    

Disposal of investments in subsidiaries – net of cash of deconsolidated subsidiaries (Note 2)

   12,075    —      218  

Disposal of investment in an associate (Note 10)

   2,298    1,913    15,136  

Disposal of property, plant and equipment (Note 9)

   1,546    199    523  

Maturity of investment in debt securities

   241    380    —    

Disposal of available-for-sale financial investments

   —      3,567    1  

Disposal of investment properties (Note 12)

   —      108    1  

Cash acquired – net of payment for purchase of investment (Note 13)

   —      —      1,928  

Maturity of short-term investments

   —      —      315  
  

 

 

  

 

 

  

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31, 2010, 2009 and 2008
(in million pesos)
             
  2010 2009 2008
 
CASH FLOWS FROM FINANCING ACTIVITIES
            
Proceeds from availment of long-term debt (Note 20)  7,246   41,989   17,912 
Availment of long-term financing for capital expenditures  3,777   7,993   6,614 
Proceeds from issuance of capital stock  3   18   8 
Payments of obligations under finance lease  (29)  (24)  (474)
Payments for acquisition of treasury shares (Notes 8, 19 and 28)  (106)  (1,752)  (5,281)
Payments of debt issuance costs (Note 20)  (111)  (173)  (149)
Settlements of derivative financial instruments (Note 28)  (1,095)  (1,913)  (2,891)
Payments of notes payable (Note 20)  (2,274)  (270)  (678)
Settlement of long-term financing for capital expenditures  (3,702)  (4,678)  (5,519)
Interest paid — net of capitalized portion (Notes 5, 20 and 28)  (5,580)  (5,239)  (5,167)
Payments of long-term debt (Note 20)  (12,371)  (18,958)  (13,375)
Cash dividends paid (Note 19)  (41,080)  (39,286)  (37,124)
Proceeds from notes payable (Note 20)     2,000   660 
Net cash used in financing activities  (55,322)  (20,293)  (45,464)
 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
  (296)  (326)  413 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  (1,641)  4,635   16,237 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
  38,319   33,684   17,447 
 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  36,678   38,319   33,684 
 
See accompanying Notes to Consolidated Financial Statements.

170


PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)

For the Years Ended December 31, 2013, 2012 and 2011

(in million pesos)

   2013  2012  2011 
      (As Adjusted – Note 2) 

Payments for:

    

Purchase of shares of noncontrolling interest (Note 13)

   (6  (841  —    

Acquisition of available-for-sale financial investments (Note 10)

   (16  (4  (15,179

Purchase of short-term investments

   (114  (22  (246

Acquisition of intangible assets (Note 4)

   (290  —      (2

Purchase of investment in debt securities

   (2,287  (208  —    

Purchase of investments in associates, joint ventures and deposits (Note 10)

   (5,557  (8,842  (155

Purchase of subsidiaries – net of cash acquired

   —      (817  (977

Contingent consideration arising from business combinations

   —      —      (1,910

Interest paid – capitalized to property, plant and equipment (Notes 4, 5, 9, 20 and 27)

   (421  (914  (648

Decrease (increase) in notes receivable

   (1,224  —      85  

Additions to property, plant and equipment (Notes 4 and 9)

   (28,417  (35,482  (30,559

Increase in advances and other noncurrent assets

   (156  (173  (122
  

 

 

  

 

 

  

 

 

 

Net cash flows used in investing activities

   (21,045  (39,058  (29,712
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from:

    

Availments of long-term debt (Note 20)

   39,798    50,319    17,464  

Availments of long-term financing for capital expenditures (Note 21)

   868    —      2,880  

Notes payable (Note 20)

   —      1,825    2,136  

Issuance of capital stock

   —      227    2  

Payments for:

    

Redemption of shares

   (5  (62  —    

Obligations under finance leases

   (12  (12  (33

Debt issuance costs (Note 20)

   (213  (121  (42

Derivative financial instruments (Note 27)

   (453  (1,126  (632

Interest – net of capitalized portion (Notes 5, 20 and 27)

   (4,959  (5,355  (5,325

Cash dividends (Note 19)

   (37,804  (36,934  (41,598

Long-term debt (Note 20)

   (57,033  (45,341  (14,666

Redemption of liabilities

   —      (289  —    

Long-term financing for capital expenditures

   —      (1,471  —    

Trust fund for redemption of shares (Note 19)

   —      (5,561  —    

Notes payable (Note 20)

   —      (4,727  (390
  

 

 

  

 

 

  

 

 

 

Net cash flows used in financing activities

   (59,813  (48,628  (40,204
  

 

 

  

 

 

  

 

 

 

NET EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

   704    (445  86  
  

 

 

  

 

 

  

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   (6,391  (7,761  9,379  

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR

   38,296    46,057    36,678  
  

 

 

  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE YEAR

   31,905    38,296    46,057  

Discontinued operations (Note 2)

   —      1,135    —    
  

 

 

  

 

 

  

 

 

 

Continuing operations

   31,905    37,161    46,057  
  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

1.Corporate Information

The Philippine Long Distance Telephone Company, or PLDT, or the Parent Company, was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common U.S. ownership. Under its amended Articles of Incorporation, PLDT’s corporate term is currently limited through 2028. In 1967, effective control of PLDT was sold by the General Telephone and Electronics Corporation, then a major shareholder since PLDT’s incorporation, to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company, which at that time was the second largest telephone company in the Philippines. In 1998, thecertain subsidiaries of First Pacific Company Limited, or First Pacific, throughand its Philippine and other affiliates collectively(collectively the First Pacific Group and its Philippine affiliates), acquired a significant interest in PLDT. On March 24, 2000, NTT Communications Corporation, or NTT Communications, through its wholly-owned subsidiary NTT Communications Capital (UK) Ltd., or NTTC-UK, became PLDT’s strategic partner with approximately 15% economic and voting interest in the issued and outstanding common stock of PLDT at that time. Simultaneous with NTT Communications’ investment in PLDT, the latter acquired 100% of Smart Communications, Inc., or Smart. On March 14, 2006, NTT DoCoMo,DOCOMO, Inc., or NTT DoCoMo,DOCOMO, acquired from NTT Communications approximately 7% of PLDT’s then outstanding common shares held by NTT Communications with NTT Communications retaining ownership of approximately 7% of PLDT’s common shares. Since March 14, 2006, NTT DoCoMoDOCOMO has made additional purchases of shares of PLDT, and together with NTT Communications beneficially owned approximately 21%20% of PLDT’s outstanding common stock as at December 31, 2010.2013. NTT Communications and NTT DoCoMoDOCOMO are subsidiaries of NTT Holding Company. On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliate of First Pacific, completed the acquisition of an approximately 46% interest in Philippine Telecommunications Investment Corporation, or PTIC, a shareholder of PLDT. This investment in PTIC representsrepresented an attributable interest of approximately 6% of the then outstanding common shares of PLDT and thereby raised First Pacific Group’s and its Philippine affiliates’ beneficial ownership to approximately 28% of PLDT’s outstanding common stock as at that date. Since then, First Pacific Group’s beneficial ownership interest in PLDT decreased by approximately 2%, mainly due to the holders of Exchangeable Notes, which were issued in 2005 by a subsidiary of First Pacific and exchangeable into PLDT shares owned by First Pacific Group, who fully exchanged their notes. First Pacific Group and its Philippine affiliates had beneficial ownership of approximately 26% in PLDT’s outstanding common stock as at December 31, 2010.

2013. On October 26, 2011, PLDT completed the acquisition of a controlling interest in Digital Telecommunications Phils., Inc., or Digitel, from JG Summit Holdings, Inc., or JGSHI, and certain other seller-parties. As payment for the assets acquired from JGSHI, PLDT issued approximately 27.7 million common shares. In November 2011, JGSHI sold 5.81 million and 4.56 million PLDT shares to a Philippine affiliate of First Pacific and NTT DOCOMO, respectively, pursuant to separate option agreements that JGSHI had entered into with a Philippine affiliate of First Pacific and NTT DOCOMO, respectively. As at December 31, 2013, the JG Summit Group owned approximately 8% of PLDT’s outstanding common shares.

On October 16, 2012, PLDT and BTF Holdings, Inc., or BTFHI, a wholly-owned company of the Board of Trustees for the Account of the Beneficial Trust Fund, or PLDT Beneficial Trust Fund, created pursuant to PLDT’s Benefit Plan, subscribed to 150 million newly issued shares of Voting Preferred Stock of PLDT, or Voting Preferred Shares, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement dated October 15, 2012 between BTFHI and PLDT. As a result of the issuance of Voting Preferred Shares, the voting power of the NTT Group (NTT DOCOMO and NTT Communications), First Pacific Group and its Philippine affiliates, and JG Summit Group was reduced to 12%, 15% and 5%, respectively, as at December 31, 2013. SeeNote 19 – Equity – Voting Preferred StockandNote 26 – Provisions and Contingencies – Matters Relating to the Gamboa Case and the recent Jose M. Roy III Petition.

The common shares of PLDT are listed and traded on the Philippine Stock Exchange, Inc., or PSE. On October 19, 1994, an American Depositary Receipt, or ADR, facility was established, pursuant to which Citibank N.A., as the depositary, issued ADRs evidencing American Depositary Shares, or ADSs, with each ADS representing one PLDT common share with a par value of Php5 per share. Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary for PLDT’s ADR facility. The ADSs are listed on the New York Stock Exchange, or NYSE, in the United States and are traded on the NYSE under the symbol “PHI”. There were approximately 53445 million ADSs outstanding as at December 31, 2010.

2013.

PLDT and our Philippine-based fixed line and wireless subsidiaries operate under the jurisdiction of the Philippine National Telecommunications Commission, or NTC, which jurisdiction extends, among other things, to approving major services offered and certain rates charged to customers.

We are the leading telecommunications service provider in the Philippines. Through our three principal business segments, wireless, fixed line and information and communications technology,others, we offer the largest and most diversified range of telecommunications services across the Philippines’ most extensive fiber optic backbone and wireless, fixed line and satellite networks.

Our principal activities are discussed inNote 4 – Operating Segment Information.

Our registered office address is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

Our consolidated financial statements as at December 31, 20102013 and 20092012, and January 1, 2012 and for each of the three years in the period ended December 31, 20102013, 2012 and 2011 were approved and authorized for issuance by the Board of Directors on March 29, 2011,April 1, 2014, as reviewed and recommended for approval by the Audit Committee.

171


2.Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies
Basis of Preparation

Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRSs, as issued by the International Accounting Standards Board. PLDT files a separate financial statements of the Parent Company with the Philippine Securities and Exchange Commission, or Philippine SEC.

Our consolidated financial statements have been prepared under the historical cost basis, except for derivative financial instruments, available-for-sale financial assetsinvestments, certain short-term investments and investment properties that have been measured at fair value.

values.

Our consolidated financial statements are presented in Philippine peso, PLDT’s functional and presentation currency, and all values are rounded to the nearest million, except when otherwise indicated.

Basis of Consolidation

Our consolidated financial statements include the financial statements of PLDT and the following subsidiaries (collectively, the “PLDT Group”) as at December 31, 20102013 and 2009:

                     
      2010 2009
  Place of   Percentage of Ownership
Name of Subsidiary Incorporation Principal Business Activity Direct Indirect Direct Indirect
 
Wireless
                    
Smart: Philippines Cellular mobile services  100.0      100.0    
Smart Broadband, Inc., or SBI, and Subsidiaries, or SBI Group Philippines Internet broadband distribution     100.0      100.0 
Primeworld Digital Systems, Inc., or PDSI Philippines Internet broadband distribution services     100.0      100.0 
I-Contacts Corporation, or I-Contacts Philippines Call center services     100.0      100.0 
Wolfpac Mobile, Inc., or Wolfpac Philippines Mobile applications development and services     100.0      100.0 
Wireless Card, Inc., or WCI Philippines Promotion of the sale and/or patronage of debit and/or charge cards     100.0      100.0 
Smarthub, Inc., or SHI Philippines Software development and sale of maintenance and support services     100.0      100.0 
Smart Money Holdings Corporation, or SMHC: Cayman Islands Investment company     100.0      100.0 
Smart Money, Inc., or SMI Cayman Islands Mobile commerce solutions marketing     100.0      100.0 
Telecoms Solutions, Inc., or TSI Mauritius Mobile commerce platforms     100.0      100.0 
Far East Capital Limited and Subsidiary Cayman Islands Cost effective offshore financing and risk management activities for Smart     100.0      100.0 
PH Communications Holdings Corporation, or PHC Philippines Investment company     100.0      100.0 
Francom Holdings, Inc., or FHI: Philippines Investment company     100.0      100.0 
Connectivity Unlimited Resource Enterprise, Inc., or CURE Philippines Cellular mobile services     100.0      100.0 
Chikka Holdings Limited, or Chikka, and Subsidiaries, or Chikka Group British Virgin Islands Mobile applications development and services; Content provider     100.0      100.0 
PLDT Communications and Energy Ventures, Inc., or PCEV, (formerly known as Pilipino Telephone Corporation, or Piltel) and Subsidiaries, or PCEV Group Philippines Investment company     99.5      99.5 
SmartConnect Holdings Pte. Ltd., or SCH: Singapore Investment company     100.0      100.0 
SmartConnect Global Pte. Ltd., or SGP Singapore International trade of satellites and Global System for Mobile Communication, or GSM, enabled global telecommunications     100.0      100.0 
3rd Brand Pte. Ltd., or 3rd Brand Singapore Solutions and systems integration services     85.0      85.0 
Blue Ocean Wireless, or BOW Isle of Man Delivery of GSM communication capability for the maritime sector     51.0      51.0 
Telesat, Inc., or Telesat* Philippines Satellite communications services  100.0      100.0    
ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines Philippines Satellite information and messaging services  88.5   11.5   88.5   11.5 
Mabuhay Satellite Corporation,
or Mabuhay Satellite*
 Philippines Satellite communications services  67.0      67.0    
                     
Fixed Line
                    
PLDT Clark Telecom, Inc., or ClarkTel Philippines Telecommunications services  100.0      100.0    
PLDT Subic Telecom, Inc., or SubicTel Philippines Telecommunications services  100.0      100.0    
PLDT Global Corporation, or PLDT Global, and Subsidiaries, or PLDT Global Group British Virgin Islands Telecommunications services  100.0      100.0    
Smart-NTT Multimedia, Inc., or SNMI* Philippines Data and network services  100.0      100.0    
PLDT-Philcom, Inc. (formerly known as Philcom Corporation), or Philcom, and Subsidiaries, or Philcom Group Philippines Telecommunications services  100.0      100.0    
PLDT-Maratel, Inc., or Maratel Philippines Telecommunications services  97.8      97.8    
Bonifacio Communications Corporation, or BCC Philippines Telecommunications, infrastructure and related value-added services, or VAS  75.0      75.0    
                     
Information and Communications Technology, or ICT
                    
ePLDT, Inc., or ePLDT: Philippines Information and communications infrastructure for Internet-based services, e-commerce, customer relationship management and IT-related services  100.0      100.0    
SPi Technologies, Inc., or SPi, and Subsidiaries, or SPi Group Philippines Knowledge processing solutions     100.0      100.0 

172

2012, and January 1, 2012:


         Percentage of Ownership 
         December 31,   January 1, 
   Place of     2 0 1 3   2 0 1 2   2 0 1 2 

Name of Subsidiary

  

Incorporation

  

Principal Business Activity

  Direct   Indirect   Direct   Indirect   Direct   Indirect 

Wireless

                

Smart:

  Philippines  

Cellular mobile services

   100.0     —       100.0     —       100.0     —    

Smart Broadband, Inc., or SBI, and Subsidiary

  Philippines  

Internet broadband distribution services

   —       100.0     —       100.0     —       100.0  

Primeworld Digital Systems, Inc., or PDSI

  Philippines  

Internet broadband distribution services

   —       100.0     —       100.0     —       100.0  

I-Contacts Corporation

  Philippines  

Call center services

   —       100.0     —       100.0     —       100.0  

Wolfpac Mobile, Inc.

  Philippines  

Mobile applications development and services

   —       100.0     —       100.0     —       100.0  

Wireless Card, Inc.

  Philippines  

Promotion of the sale and/or patronage of debit and/or charge cards

   —       100.0     —       100.0     —       100.0  

Smart e-Money, Inc., or SeMI, (formerly Smarthub, Inc.)(a)

  Philippines  

Software development and sale of maintenance and support services

   —       100.0     —       100.0     —       100.0  

Smart Money Holdings Corporation, or SMHC:

  Cayman Islands  

Investment company

   —       100.0     —       100.0     —       100.0  

Smart Money, Inc., or SMI

  Cayman Islands  

Mobile commerce solutions marketing

   —       100.0     —       100.0     —       100.0  

Far East Capital Limited, or FECL, and Subsidiary, or FECL Group

  Cayman Islands  

Cost effective offshore financing and risk management activities for Smart

   —       100.0     —       100.0     —       100.0  

PH Communications Holdings Corporation

  Philippines  

Investment company

   —       100.0     —       100.0     —       100.0  

Francom Holdings, Inc.:

  Philippines  

Investment company

   —       100.0     —       100.0     —       100.0  

Connectivity Unlimited Resource Enterprise, or CURE

  Philippines  

Cellular mobile services

   —       100.0     —       100.0     —       100.0  

Chikka Holdings Limited, or Chikka, and Subsidiaries, or Chikka Group

  British Virgin Islands  

Content provider, mobile applications development and services

   —       100.0     —       100.0     —       100.0  

Chikka Communications Consulting (Beijing) Co. Ltd., or CCCBL

  China  

Mobile applications development and services

   —       100.0     —       100.0     —       100.0  

Chikka Pte. Ltd., or CPL

  Singapore  

Managing patent and trademark portfolio

   —       100.0     —       100.0     —       100.0  

Smarthub Pte. Ltd., or SHPL:

  Singapore  

Investment company

   —       100.0     —       100.0     —       100.0  

Takatack Pte. Ltd., or TPL, (formerly SmartConnect Global Pte. Ltd.)(b)

  Singapore  

International trade of satellites and Global System for Mobile Communication, or GSM, enabled global telecommunications

   —       100.0     —       100.0     —       100.0  

3rd Brand Pte. Ltd., or 3rd Brand

  Singapore  

Solutions and systems integration services

   —       85.0     —       85.0     —       85.0  

Voyager Innovations, Inc., or Voyager(c)

  Philippines  

Mobile applications development and services

   —       100.0     —       —       —       —    

Telesat, Inc.(d)

  Philippines  

Satellite communications services

   100.0     —       100.0     —       100.0     —    

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

  Philippines  

Satellite information and messaging services

   88.5     11.5     88.5     11.5     88.5     11.5  

Mabuhay Investments Corporation, or MIC,(formerly Mabuhay Satellite Corporation)(e)

  Philippines  

Investment company

   67.0     —       67.0     —       67.0     —    

Digitel Mobile Philippines, Inc., or DMPI, (a wholly-owned subsidiary of Digitel)

  Philippines  

Cellular mobile services 

   —       99.6     —       99.5     —       70.2  

         Percentage of Ownership 
         December 31,   January 1, 
   Place of     2 0 1 3   2 0 1 2   2 0 1 2 

Name of Subsidiary

  

Incorporation

  

Principal Business Activity

  Direct   Indirect   Direct   Indirect   Direct   Indirect 

Fixed Line

                

PLDT Clark Telecom, Inc., or ClarkTel

  Philippines  

Telecommunications services

   100.0     —       100.0     —       100.0     —    

PLDT Subic Telecom, Inc., or SubicTel

  Philippines  

Telecommunications services

   100.0     —       100.0     —       100.0     —    

PLDT Global Corporation, or PLDT Global, and Subsidiaries

  British Virgin Islands  

Telecommunications services

   100.0     —       100.0     —       100.0     —    

Smart-NTT Multimedia, Inc.(d)

  Philippines  

Data and network services

   100.0     —       100.0     —       100.0     —    

PLDT-Philcom, Inc., or Philcom, and Subsidiaries, or Philcom Group

  Philippines  

Telecommunications services

   100.0     —       100.0     —       100.0     —    

ePLDT, Inc., or ePLDT(f):

  Philippines  

Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and information technology, or IT, related services

   100.0     —       100.0     —       100.0     —    

IP Converge Data Services, Inc., or IPCDSI(g)

  Philippines  

Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and IT related services

   —       100.0     —       100.0     —       —    

iPlus Intelligent Network, Inc.,or iPlus(h)

  Philippines  

Managed IT outsourcing

   —       100.0     —       100.0     —       100.0  

Curo Teknika, Inc., or Curo(h)

  Philippines  

Managed IT outsourcing

   —       100.0     —       —       —       —    

ABM Global Solutions, Inc., or AGS, and Subsidiaries, or AGS Group(i)

  Philippines  

Internet-based purchasing, IT consulting and professional services

   —       99.2     —       97.1     —       93.5  

ePDS, Inc., or ePDS

  Philippines  

Bills printing and other related value-added services, or VAS

   —       67.0     —       67.0     —       67.0  

netGames, Inc., or netGames(j)

  Philippines  

Gaming support services

   —       57.5     —       57.5     —       57.5  

Digitel

  Philippines  

Telecommunications services

   99.6     —       99.5     —       70.2     —    

Digitel Capital Philippines Ltd., or DCPL(k)

  British Virgin Islands  

Telecommunications services

   —       99.6     —       99.5     —       70.2  

Digitel Information Technology Services, Inc.(l)

  Philippines  

Internet services

   —       99.6     —       99.5     —       70.2  

PLDT-Maratel, Inc., or Maratel

  Philippines  

Telecommunications services

   98.0     —       97.8     —       97.8     —    

Bonifacio Communications Corporation, or BCC

  Philippines  

Telecommunications, infrastructure and related VAS

   75.0     —       75.0     —       75.0     —    

Pilipinas Global Network Limited, or PGNL, and Subsidiaries

  British Virgin Islands  

International distributor of Filipino channels and content

   60.0     —       60.0     —       60.0     —    

Others

                

PLDT Global Investments Holdings, Inc., or PGIH, (formerly SPi Global Holdings, Inc.)(m)(n):

  Philippines  

Investment company

   100.0     —       100.0     —       —       100.0  

PLDT Global Investments Corporation, or PGIC

  British Virgin Islands  

Investment company

   —       100.0     —       —       —       —    

PLDT Communications and Energy Ventures, Inc., or PCEV

  Philippines  

Investment company

   —       99.8     —       99.8     —       99.5  

                     
      2010 2009
  Place of   Percentage of Ownership
Name of Subsidiary Incorporation Principal Business Activity Direct Indirect Direct Indirect
 
SPi CRM Inc., or SPi CRM (formerly ePLDT Ventus, Inc.)** Philippines Customer relationship management     100.0      100.0 
Parlance Systems, Inc., or Parlance** Philippines Customer relationship management           100.0 
Vocativ Systems, Inc., or Vocativ** Philippines Customer relationship management           100.0 
Infocom Technologies, Inc., or Infocom Philippines Internet services     99.6      99.6 
BayanTrade, Inc. (formerly BayanTrade Dotcom, Inc.), or BayanTrade, and Subsidiaries, or BayanTrade Group Philippines Internet-based purchasing, IT consulting and professional services     93.5      93.5 
Digital Paradise, Inc., or Digital Paradise Philippines Internet services     75.0      75.0 
Level Up!, Inc., or Level Up! Philippines Publisher of online games     57.5      60.0 
netGames, Inc., or netGames Philippines Customer relationship management     57.5      60.0 
 
(a)

On July 12, 2013, the Philippine SEC approved the change in the business name of Smarthub, Inc. to Smart e-Money, Inc.

(b)

On September 29, 2013, by a special resolution of the Board of Directors of SmartConnect Global Pte. Ltd., resolved to change its registered business name to Takatack Pte. Ltd.

*(c)

On January 7, 2013, Voyager was registered with the Philippine SEC to provide mobile applications development and services.

(d)

Ceased commercial operations.

(e)

Ceased commercial operations; however, on January 13, 2012, the Philippine SEC approved the amendment of MIC’s Articles of Incorporation changing its name from Mabuhay Satellite Corporation to Mabuhay Investments Corporation and its primary purpose from satellite communication to holding company.

(f)

On June 11, 2012, MySecureSign, Inc., or MSSI, and ePLDT were merged, wherein ePLDT became the surviving company.

(g)

On October 12, 2012, ePLDT acquired 100% equity interest in IPCDSI.

(h)

On October 30, 2013, Curo was incorporated to take-on the Outsourced IT Services as a result of the spin-off of iPlus.

(i)

In December 2012 and January 2013, ePLDT acquired an additional 5.7% equity interest in AGS from its minority shareholders, thereby increasing ePLDT’s ownership in AGS from 93.5% to 99.2%.

(j)

Ceased commercial operations in January 2013.

(k)

Liquidated in January 2013.

**(l)

Corporate life shortened until June 2013.

(m)

On December 4, 2012, our Board of Directors authorized the sale of our Business Process Outsourcing, or BPO, segment, which was wholly-owned by PGIH. The sale was completed in April 8, 2010, SPi CRM, Parlance2013. Consequently, as at December 31, 2013, the BPO segment was classified as discontinued operations and Vocativ were merged, with SPi CRMa disposal group held-for-sale. See Note 2 Summary of Significant Accounting Policies – Discontinued Operations and Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as the surviving entity.Held-for-Sale and Discontinued Operations.

Basis of Consolidation from January 1, 2009
(n)

On June 3, 2013, the Philippine SEC approved the change in the business name of SPi Global Holdings, Inc. to PLDT Global Investments Holdings, Inc.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the PLDT Group obtains control, and continue to be consolidated until the date that such control ceases.

We control an investee when we are exposed, or have rights, to variable returns from our involvement with the investee and when we have the ability to affect those returns through our power over the investee.

The financial statements of our subsidiaries are prepared for the same reporting period as PLDT. We prepare our consolidated financial statements using uniform accounting policies for like transactions and other events with similar circumstances. All intra-group balances, income and expenses, unrealized gains and losses and dividends resulting from intra-group transactions are eliminated in full.

Non-controlling interest shares

Noncontrolling interests share in losses even if the losses exceed the non-controllingnoncontrolling equity interest in the subsidiary.

A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction.

If the PLDT Group loses control over a subsidiary, it: (a) derecognizes the assets (including goodwill) and liabilities of the subsidiary; (b) derecognizes the carrying amount of any non-controllingnoncontrolling interest; (c) derecognizes the cumulative translation differences recorded in equity; (d) recognizes the fair value of the consideration received; (e) recognizes the fair value of any investment retained; (f) recognizes any surplus or deficit in profit or loss; and (g) reclassifies the parent’s share of components previously recognized in other comprehensive income to profit or loss.

loss or retained earnings, as appropriate.

BasisPCEV’s Common Stock

On November 2, 2011, the Board of Consolidation priorDirectors of PCEV authorized PCEV’s management to January 1, 2009

In comparison to the above mentioned policies which are applied on a prospective basis, the following differences applied: (a) acquisition of non-controlling interests was accounted for using the parent entity extension method, whereby, the difference between the consideration and the net book value of the proportionate share in the net assets acquired is recognized as goodwill; (b) the non-controlling interest share in the losses incurred by the PLDT Group until the non-controlling equity interest in the subsidiary was reduced to nil and any further excess losses were attributable to the parent, unless the non-controlling interest had a binding obligation to cover these excess losses; and (c) upon loss of control, the PLDT Group accountedtake such steps necessary for the investment retained at its proportionate sharevoluntary delisting of net asset value atPCEV from the datePSE in accordance with the control was lost.
Non-controlling interests represent the equity interests in Philcom subsidiaries namely, Metro Kidapawan Telephone Corp., or MKTC, and Datelco Global Communications, Inc., or DGCI; equity interest in BOW, PCEV, Level Up!, Mabuhay Satellite, 3rd Brand, Maratel, BCC, Digital Paradise, netGames, Chikka, BayanTrade and Infocom not held directly by PLDT or indirectly through one of our subsidiaries.
PCEV’s Share Buyback Program
PSE Rules on Voluntary Delisting. On December 2, 2011, PCEV’s Board of Directors approved three share buyback programs during its meetings on November 3, 2008, March 2, 2009also created a special committee to review and August 3, 2009. For all three programs,evaluate any tender offer to be made by Smart (as the buyback was done through the trading facilitiesowner of 99.51% of the outstanding common shares of PCEV) to purchase the shares owned by the remaining noncontrolling shareholders representing 0.49% of the outstanding common stock of PCEV. Smart’s tender offer commenced on March 19, 2012 and ended on April 18, 2012, with approximately 25.1 million shares, or 43.4% of PCEV’s noncontrolling shares tendered, thereby increasing Smart’s ownership to 99.7% of the outstanding common stock of PCEV at that time. The aggregate cost of the tender offer paid by Smart to noncontrolling shareholders on April 30, 2012 amounted to Php115 million. PCEV filed its petition with the PSE via open market purchases, block tradesfor voluntary delisting on March 19, 2012. On April 25, 2012, the PSE approved the petition for voluntary delisting and PCEV’s shares were delisted and ceased to be tradable on the PSE effective May 18, 2012.

Following the voluntary delisting of the common stock of PCEV from the PSE on May 18, 2012, PCEV’s Board of Directors and stockholders approved on June 6, 2012 and July 31, 2012, respectively, the following resolutions and amendments to the articles of incorporation of PCEV to decrease the authorized capital stock of PCEV, increase the par value of PCEV’s common stock (and thereby decrease the number of shares of such common stock) and decrease the number of shares of preferred stock of PCEV as follows:

   Prior to Amendments   After Amendments 
   Authorized Capital   Number of Shares   Par Value   Authorized Capital   Number of Shares   Par Value 

Common Stock

   Php12,060,000,000     12,060,000,000     Php1     Php12,060,006,000     574,286     Php21,000  

Class I Preferred Stock

   240,000,000     120,000,000     2     66,661,000     33,330,500     2  

Class II Preferred Stock

   500,000,000     500,000,000     1     50,000,000     50,000,000     1  
  

 

 

       

 

 

     

Total Authorized Capital Stock

   Php12,800,000,000         Php12,176,667,000      
  

 

 

       

 

 

     

The decrease in authorized capital and amendments to the articles of incorporation were approved by the Philippine SEC on October 8, 2012. As a result of the increase in the par value of PCEV common stock, each multiple of 21,000 shares of PCEV common stock, par value Php1, was reduced to one PCEV share of common stock, with a par value of Php21,000. Shareholdings of less than 21,000 shares or other modes,in excess of an integral multiple of 21,000 shares of PCEV which could not be replaced with fractional shares were paid the fair value of such residual shares equivalent to Php4.50 per share of pre-amendments PCEV common stock, the same amount as the tender offer price paid by Smart during the last tender offer conducted from March 19 to April 18, 2012.

As a consequence of the foregoing, the number of outstanding shares of PCEV common stock decreased to approximately 555,716 from 11,683,156,455 (exclusive of treasury shares). The number of holders of PCEV common stock decreased to 121 as at December 31, 2013 and because the number of shareholders still exceeds 100 shareholders under the rules of the Philippine SEC, PCEV is still required to make filings of updates with the Philippine SEC. Smart’s percentage of ownership in PCEV stood at 99.8% as at December 31, 2013.

Divestment of CURE

On October 26, 2011, PLDT received the Order issued by the NTC approving the application jointly filed by PLDT and Digitel for the sale and transfer of approximately 51.6% of the outstanding common stock of Digitel to PLDT. The approval of the application was subject to conditions which included the divestment by PLDT of CURE, in accordance with the Divestment Plan, as follows:

CURE must sell itsRed Mobilebusiness to Smart consisting primarily of its subscriber base, brand and fixed assets; and

Smart will sell all of its rights and interests in CURE whose remaining assets will consist of its congressional franchise, 10 MHz of 3G frequency in the 2100 band and related permits.

In compliance with applicable laws, rulesthe commitments in the divestment plan, CURE completed the sale and regulations. Numbertransfer of itsRed Mobile business to Smart on June 30, 2012 for a total consideration of Php18 million through a series of transactions, which included: (a) the sale of CURE’sRed Mobiletrademark to Smart; (b) the transfer of CURE’s existingRed Mobilesubscriber base to Smart; and (c) the sale of CURE’s fixed assets to Smart at net book value.

In a letter dated July 26, 2012, Smart informed the NTC that it has complied with the terms and conditions of the divestment plan as CURE had rearranged its assets, such that, except for assets necessary to pay off obligations due after June 30, 2012 and certain tax assets, CURE’s only remaining assets as at June 30, 2012 were its congressional franchise, the 10 MHz of 3G frequency in the 2100 band and related permits.

In a letter dated September 10, 2012, Smart informed the NTC that the minimum Cost Recovery Amount, or CRA, to enable the PLDT Group to recover its investment in CURE includes, among others, the total cost of equity investments in CURE, advances from Smart for operating requirements, advances from stockholders and associated funding costs. Smart also informed the NTC that the divestment will be undertaken through an auction sale of CURE’s shares of stock to the winning bidder and submitted CURE’s audited financial statements as at June 30, 2012 to the NTC. In a letter dated January 21, 2013, the NTC referred the computation of the CRA to the Commissioners of the NTC. Smart sent a reply agreeing to the proposal and is awaiting advice from the NTC on the bidding and auction of the 3G license of CURE.

As at December 31, 2013, CURE is still waiting for NTC’s advice on how to proceed with the planned divestment.

The divestment of CURE-related franchise and licenses qualifies as noncurrent assets held-for-sale as at December 31, 2013, but was not presented separately in our consolidated statement of financial position as the carrying amounts are not material.

Corporate Merger of MSSI and ePLDT

In April 2012, the Board of Directors of MSSI and ePLDT approved the plan of merger between MSSI and ePLDT, with ePLDT as the surviving company, in order to realize economies in operation and achieve greater efficiency in the management of their business. The merger was approved by two-thirds vote of MSSI and ePLDT’s stockholders on April 13, 2012 and April 27, 2012, respectively. On June 11, 2012, the Philippine SEC approved the plan and articles of merger. The merger has no impact on our consolidated financial statements.

ePLDT’s Acquisition of IPCDSI

On October 12, 2012, ePLDT and IP Ventures, Inc., or IPVI, and IPVG Employees, Inc., or IEI, entered into a Sale and Purchase Agreement whereby ePLDT acquired 100% of the issued and outstanding capital stock of IPCDSI and advances to IPCDSI for repurchase undera total adjusted purchase price of Php693 million.

The final purchase price, after the buyback programs were 58adjustments on retention payable and escrow amount, amounted to Php621 million 25as at June 30, 2013. The adjusted purchase price amounted to Php734 million as at December 31, 2012. SeeNote 13 – Business Combinations – ePLDT’s Acquisition of IPCDSI.

ePLDT’s Acquisition of Shares of AGS’ Minority Stockholders

In December 2012 and 61.5January 2013, ePLDT acquired an additional 5.67% equity interest in AGS from its minority shareholders for a total consideration of Php5 million, forthereby increasing ePLDT’s ownership in AGS from 93.5% to 99.2%.

Discontinued Operations

On December 4, 2012, our Board of Directors authorized the programs approved on November 3, 2008, March 2, 2009 and August 3,

173


2009, respectively. The program approved on November 3, 2008sale of our BPO segment, which sale was completed in January 2009April 2013. Consequently, the BPO segment as at December 31, 2012 has been classified as discontinued operations and a disposal group held-for-sale. The BPO segment met the criteria of an asset to be classified as held-for-sale as at December 31, 2012 for the following reasons: (1) the BPO segment was then available for immediate sale and could be sold to a potential buyer in its current condition; (2) the Board of Directors had approved the plan to sell the BPO segment and we had entered into preliminary negotiations with a potential buyer and a number of other potential buyers had been identified; and (3) the Board of Directors expected negotiations to be finalized and the sale to be completed in April 2013. The results of operations of our BPO business for the four months ended April 30, 2013 and for the years ended December 31, 2012 and 2011 were presented as discontinued operations. SeeNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as Held-for-Sale and Discontinued Operations.

On February 5, 2013, PLDT entered into an agreement to sell the BPO business owned by its wholly-owned subsidiary, PGIH, to Asia Outsourcing Gamma Limited, or AOGL, a company controlled by CVC Capital Partners, or CVC. The sale of the BPO business was completed on April 30, 2013. PLDT reinvested approximately US$40 million of the proceeds from the sale in our acquisition of shares of Asia Outsourcing Beta Limited, or Beta, resulting in an approximately 18.24% economic interest, and will continue to participate in the growth of the business as a partner of CVC. Pursuant to the completion of the sale, PLDT is subject to certain obligations, including: (1) an obligation, for a period of five years, not to carry on or be engaged or concerned or interested in or assist any business which competes with the business process outsourcing business as carried on at the relevant time or at any time in the 12 months prior to such time in any territory in which business is carried on (excluding activities in the ordinary course of PLDT’s business); and (2) an obligation, for a period of five years, to provide certain transitional services on a most-favored-nation basis (i.e., no less favorable material terms (including pricing) than those offered by PLDT or any of its controlled affiliates to any other customer in relation to services substantially similar to those provided or to be provided to AOGL and/or its designated companies). In addition, PLDT may be liable for certain damages actually suffered by AOGL until the time of sale arising out of, among others, breach of representation, tax matters and non-compliance with Indian employment laws by SPi Technologies India Pvt. Ltd., a joint subsidiary of SPi Technologies, Inc., or SPi, and SPi India Holdings (Mauritius), Inc., for the transactions that transpired up to the time of sale.

The results of the BPO segment, net of intercompany transactions, classified as discontinued operations for the four months ended April 30, 2013 (closing period of the sale) and for the years ended December 31, 2012 and 2011 are as follows:

   April 30,  December 31, 
   2013  2012  2011 
      (As Adjusted – Note 2) 
   (in million pesos) 

Revenues (Notes 3 and 4)

   3,132    9,142    8,124  
  

 

 

  

 

 

  

 

 

 

Expenses:

    

Compensation and employee benefits (Notes 3 and 25)

   2,047    5,630    5,026  

Professional and other contracted services (Note 24)

   267    654    525  

Depreciation and amortization (Notes 3, 4 and 9)

   153    466    418  

Repairs and maintenance (Notes 12, 17 and 24)

   129    428    338  

Communication, training and travel

   118    361    301  

Rent (Notes 3, 24 and 27)

   86    263    224  

Amortization of intangible assets (Notes 3 and 14)

   55    180    147  

Selling and promotions

   27    78    40  

Insurance and security services (Note 24)

   21    63    58  

Taxes and licenses (Note 26)

   14    43    43  

Asset impairment (Notes 3, 4, 9, 10, 16, 17 and 27)

   —      3    9  

Other expenses (Note 24)

   57    110    115  
  

 

 

  

 

 

  

 

 

 
   2,974    8,279    7,244  
  

 

 

  

 

 

  

 

 

 
   158    863    880  
  

 

 

  

 

 

  

 

 

 

Other income (expenses):

    

Gains (losses) on derivative financial instruments – net (Note 27)

   1    28    (4

Interest income (Notes 11 and 15)

   3    16    15  

Financing costs (Notes 9, 20 and 27)

   (4  (24  (37

Foreign exchange gains (losses) – net (Notes 9 and 27)

   4    (39  (9

Other income – net (Note 18)*

   1,962    127    140  
  

 

 

  

 

 

  

 

 

 
   1,966    108    105  
  

 

 

  

 

 

  

 

 

 

Income before income tax from discontinued operations

   2,124    971    985  

Provision for income tax (Notes 2, 3 and 7)

   55    428    118  
  

 

 

  

 

 

  

 

 

 

Income after tax from discontinued operations (Note 8)

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

Earnings per share (Note 8):

    

Basic – income from discontinued operations

   9.58    2.52    4.53  

Diluted – income from discontinued operations

   9.58    2.52    4.52  
  

 

 

  

 

 

  

 

 

 

*Includes gain on sale of BPO business of Php2,164 million in 2013.

As indicated above, the sale of BPO segment was completed on April 30, 2013. Thus, our consolidated statement of financial position does not include any assets and liabilities of the BPO segment as at December 31, 2013. Below are the major classes of assets and liabilities of BPO segment, net of intercompany transactions, classified as held-for-sale as at December 31, 2012:

2012
(As Adjusted –
Note 2)
(in million pesos)

Assets:

Property, plant and equipment (Notes 3 and 9)

1,529

Available-for-sale financial investments (Notes 6 and 10)

2

Goodwill and intangible assets (Notes 3 and 14)

7,033

Deferred income tax assets – net (Note 7)

212

Prepayments – net of current portion

9

Advances and other noncurrent assets – net of current portion

117

Cash and cash equivalents

1,135

Trade and other receivables (Note 16)

2,704

Derivative financial assets (Note 27)

68

Current portion of prepayments

296

Current portion of advances and other noncurrent assets

7

Assets classified as held-for-sale

13,112

Liabilities:

Interest-bearing financial liabilities – net of current portion (Note 20)

425

Deferred income tax liabilities – net (Note 7)

147

Pension and other employee benefits (Notes 3 and 25)

221

Accounts payable

481

Accrued expenses and other current liabilities

885

Current portion of interest-bearing financial liabilities (Note 20)

278

Dividends payable

6

Derivative financial liabilities (Note 27)

7

Income tax payable

161

Liabilities directly associated with assets classified as held-for-sale

2,611

Net assets directly associated with disposal group

10,501

Included in other comprehensive income:

Net transactions on cash flow hedges – net of tax (Note 6)

62

Actuarial gains on defined benefit plans

45

Foreign currency translation differences of subsidiaries (Note 6)

(2,250

Reserves of a disposal group classified as held-for-sale (Note 6)

(2,143

The net cash flows generated by the BPO segment for the four months ended April 30, 2013 (closing period of sale) and for the years ended December 31, 2012 and 2011 are as follows:

   April 30,  December 31, 
   2013  2012  2011 
   (in million pesos) 

Operating activities

   144    1,926    (11,213

Investing activities

   (1,202  (712  (3,295

Financing activities

   (10  (608  14,272  

Net effect of foreign exchange rate changes on cash and cash equivalents

   (67  (45  11  
  

 

 

  

 

 

  

 

 

 

Net cash inflow (outflow)

   (1,135  561    (225
  

 

 

  

 

 

  

 

 

 

PLDT’s Acquisition of Subscription Assets of Digitel

On July 1, 2013, PLDT entered into an agreement to acquire the subscription assets of Digitel for a total cost of Php403approximately Php5.3 billion. The agreement covers the transfer, assignment and conveyance of Digitel’s subscription agreements and subscriber list, and includes a transition mechanism to ensure uninterrupted availability of services to the Digitel subscribers until migration to the PLDT network is completed. This transaction is eliminated and has no impact on our consolidated financial statements.

IPCDSI’s Acquisition of Rack I.T. Data Center, Inc., or Rack IT

On January 28, 2014, IPCDSI entered into a Sale and Purchase Agreement to acquire 100% ownership in Rack IT for an indicative purchase price of Php170 million while the program approved on March 2, 2009subject to certain pre-closing price adjustments. Rack IT was completed in March 2009 at a total cost of Php188 million. The program approved on August 3, 2009 is still ongoing and will continue until the number of shares earmarked for the program has been fully repurchased or until such time as PCEV’s Board of Directors determines otherwise. The most recent share buyback program was undertakenincorporated to accommodate minority shareholders who may not have had the opportunity to participateengage in the tender offerbusiness of Smart due to various constraints. The maximum price under this program is Php8.50 per share. As at December 31, 2010, approximately 3.6 million shares at a cost of Php29.8 million have been repurchased under the third buyback program.

As at December 31, 2010 and 2009, cumulative shares repurchased under the share buyback programs totaled approximately 86.6 million and 85.8 million at an aggregate cost of Php621 million and Php614 million, respectively, which reduced the amount of non-controlling interest by the same amount.
Corporate Merger of Vocativ, Parlance and SPi CRM
On June 26, 2009, ePLDT’s Board of Directors approved the plan for merger of its wholly-owned subsidiaries, Vocativ and Parlance, as the absorbed entities, and SPi CRM, as the surviving entity. The Articles and Plan of Merger was approved by the Philippine Securities and Exchange Commission, or Philippine SEC, on April 8, 2010. The merger did not have any impact on the consolidated financial statements of PLDT Group.
Reorganization of ePLDT
On July 7, 2010, our Board of Directors approved the reorganization of the ePLDT Group into two business groups: (i) the ICT business group, which providesproviding data center services, internetencompassing all the information technology and online gaming servicesfacility-related components or activities that support the operations of a data center. As at the date of this report, Rack IT is still at the pre-operating phase and business solutions and applications; and (ii) the business process outsourcing, or BPO, business group,construction of its data center facility, which covers customer relationship management or call center operations under SPi CRM; and content solutions, medical billing and coding and medical transcription services under SPi. The BPO business group will be eventually transferred to PLDT, subject to the finalization of the terms and conditions thereof and the execution of relevant agreements. The reorganization is not expected to have an impact on PLDT’s consolidated financial statements. SeeNote 4 — Operating Segment Information.
Statement of Compliance
Our consolidated financial statements have been preparedlocated in conformity with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
Sucat, Parañaque, is still on-going.

Changes in Accounting Policies and Disclosures

Our accounting policies adopted in the preparation of our consolidated financial statements are consistent with those of the previous financial year, except for the adoption of the following amendmentsnew standards and improvements to existing IFRSs and new interpretationinterpretations effective as at January 1, 2010:

Amendment to IFRS 2, Share-based Payment — Group Cash-settled Share-based Payment Transactions;
Improvements to IFRS 5, Noncurrent Assets Held-for-Sale and Discontinued Operations;
Amendment to International Accounting Standard, or IAS, 39, Financial Instruments: Recognition and Measurement — Eligible Hedged Items;
IFRIC 17, Distributions of Non-cash Assets to Owners;and
Improvements to IFRSs (2009)
The changes introduced by such amendments, improvements and new interpretation are as follows:
2013:

AmendmentAmendments to IFRS 2, Share-based Payment.7, Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities. These amendments require an entity to disclose information about rights of set–off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set–off in accordance with International Accounting Standards, orIAS, 32, Financial Instruments: Presentation – Tax Effect of Distribution to Holders of Equity Instruments. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or “similar arrangement”, irrespective of whether they are set–off in accordance withIAS 32. The amendments clarify how an individual subsidiary in a group should account for the share-based payment arrangements in its own financial statements. It further states that an entity that receives goods or services in a share-based payment arrangement must account for these goods or servicesaffect disclosures only and have no matter which entity in the group settles the transaction, and regardless of whether the transaction is equity-settled or cash-settled. The adoption of this amendment did not have any impact on our financial position or performance.

The additional disclosure required by the amendments is presented inImprovements to IFRS 5, NoncurrentNote 27 – Financial Assets Held-for-Sale and Discontinued Operations.LiabilitiesWhen a subsidiary is held-for-sale, all of its assets and liabilities will be classified as held-for-sale under.

IFRS 510, Consolidated Financial Statements.IFRS 10replaces the portion ofIAS 27, Consolidated and Separate Financial Statements, which addresses the accounting for consolidated financial statements. It also includes the issues raised inStandards Interpretation Committee, or SIC, 12, Consolidation – Special Purpose Entities.IFRS 10establishes a single control model that applies to all entities including special purpose entities. The changes introduced byIFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were inIAS 27.

As a result of the adoption ofIFRS 10, even whenwe changed our accounting policy with respect to determining whether we have control over and consequently whether we consolidate our investees.IFRS 10 introduces a new control model that is applicable to all investees; among other things, it requires the entity retains a non-controlling interest inconsolidation of an investee if, and only if, we have: (1) the subsidiary afterpower over the sale. The amendment was applied

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investee, i.e., the investor has existing rights that give it the ability to direct the relevant activities, i.e., the activities that significantly affect the investee’s returns; (2) the exposure, or rights, to variable returns from its involvement with the investees; and (3) the ability to use its power over the investee to affect the amount of the investor’s returns.


prospectivelyIn accordance with the transitional provisions ofIFRS 10, we re-assessed the control conclusion for our investees beginning January 1, 2013 and based on the reassessment there were no additional investees that should be consolidated on the basis of the above circumstances and therefore, the adoption of this revised standard has no impact on either our financial position or performance.

AmendmentIFRS 11, Joint Arrangements.IFRS 11supersededIAS 31, Interests in Joint Ventures, andSIC 13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11removes the option to account for jointly controlled entities, or JCEs, using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.

As a result of the adoption ofIFRS 11, we changed our accounting policy with respect to our interest in joint arrangements.

UnderIFRS 11, we classified our interest in joint arrangements as either joint operations or joint ventures depending on our rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, we consider the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification.

We re-evaluated our involvement in our joint arrangements and assessed that its classification as joint ventures is in accordance withIFRS 11 and therefore, the adoption of this revised standard has no impact on our financial position or performance.

IFRS 12, Disclosure of Interests in Other Entities.IFRS 12includes all of the disclosures that were previously inIAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included inIAS 31 andIAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required.

The adoption of the revised standard has no significant impact on our consolidated financial statements. See alsoNote 2 – Summary of Significant Accounting Policies – Basis of ConsolidationandNote 10 – Investments in Associates, Joint Ventures and Deposits for a more comprehensive disclosure about our interest in subsidiaries, associates and joint ventures. The impact of the adoption affects disclosures only.

IFRS 13, Fair Value Measurement.IFRS 13establishes a single source of guidance under IFRS for all fair value measurements.IFRS 13does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS.IFRS 13 defines fair value as an exit price. As a result of the guidance inIFRS 13, we reassessed our policies for measuring fair values, in particular, our valuation inputs such as non-performance risk for fair value measurement of liabilities.IFRS 13also requires additional disclosures.

We have assessed that the application ofIFRS 13 has no material impact on our fair value measurements. Additional disclosures required are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided inNote 12 – Investment Properties andNote 27 – Financial Assets and Liabilities.

Revised IAS 19, Employee Benefits.Amendments toIAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording.

The RevisedIAS 19 requires all actuarial gains and losses under defined benefit plans to be recognized in other comprehensive income and unvested past service costs previously recognized over the average vesting period to be recognized immediately in profit or loss when incurred.

Prior to adoption of the RevisedIAS 19, we recognized actuarial gains and losses as income or expense when the net cumulative unrecognized gains and losses

for each individual plan at the end of the previous period exceeded 10% of the higher of the defined benefit obligation and the fair value of the plan assets and recognized unvested past service costs as an expense on a straight-line basis over the average vesting period until the benefits become vested. Upon adoption of the RevisedIAS 19, we changed our accounting policy to recognize all actuarial gains and losses in other comprehensive income and all past service costs in profit or loss in the period they occur.

The RevisedIAS 19 replaced the interest cost and expected return on plan assets with the concept of net interest on defined benefit liability or asset which is calculated by multiplying the net balance sheet defined benefit liability or asset by the discount rate used to measure the employee benefit obligation, each as at the beginning of the annual period.

The RevisedIAS 19 also amended the definition of short-term employee benefits and requires employee benefits to be classified as short-term based on expected timing of settlement rather than the employee’s entitlement to the benefits. In addition, the RevisedIAS 19 modified the timing of recognition for termination benefits. The modification requires the termination benefits to be recognized at the earlier of when the offer cannot be withdrawn or when the related restructuring costs are recognized.

The changes in our accounting policies as a result of the adoption of the RevisedIAS 19 have been applied retrospectively.

Consequently, we reviewed our existing employee benefits and determined that the revised standard has significant impact on our accounting for defined benefit retirement plans. We obtained the services of an external actuary to compute the impact on the consolidated financial statements upon adoption of the standard and have increased (decreased) the following accounts in our consolidated statements of financial position as at December 31, 2012 and January 1, 2012 and our consolidated statements of income for the years ended December 31, 2012 and 2011:

   As at December 31,  As at January 1, 
   2012  2012 
   (in million pesos) 

Increase (decrease) in:

   

Consolidated Statements of Financial Position

   

Prepaid benefit costs under prepayments – net of current portion

   (6,393  2,828  

Accrued benefit costs under pension and other employee benefits

   160    (57

Accrued benefit costs under liabilities directly associated with assets classified as held-for-sale

   (18  —    

Assets classified as held-for-sale

   (2  —    

Deferred income tax assets – net

   1,908    (858

Other comprehensive income – net of tax

   (4,177  2,099  

Reserves of a disposal group classified as held-for-sale

   45    —    

Retained earnings

   (499  (72

Noncontrolling interests

   2    —    
   For the Years Ended December 31, 
   2012  2011 
   (in million pesos) 

Increase (decrease) in:

   

Consolidated Income Statements

   

Net benefit costs under compensation and employee benefits

   244    322  

Net benefit income under other income – net

   (190  (321

Income tax expense

   (128  (188

Income (loss) after tax from discontinued operations

   (117  36  

Profit attributable to equity holders of PLDT

   (427  (419

Noncontrolling interests

   4    —    

Our adoption of this standard also affected the recognition of termination benefits, wherein certain cost of manpower rightsizing program, or MRP, accrued based on formal detailed plan on December 31, 2012 was reversed and was recognized in 2013 based on the date of actual acceptance of the employees by signing the acceptance letter. This reduced our consolidated deferred income tax assets – net by Php166 million, accrued expenses and other current liabilities by Php1,287 million and increased our retained earnings by Php1,121 million as at December 31, 2012. A total of Php1,269 million of MRP cost was recognized for the year ended December 31, 2013 as a result of this change in the recognition of termination benefits.

As a result of the adoption ofIAS 19, our consolidated basic and diluted earnings per common share, or EPS, attributable to common equity holders of PLDT increased by Php3.21 for the year ended December 31, 2012 and decreased by Php2.19 for the year ended December 31, 2011.

The RevisedIAS 19 requires additional disclosures for defined benefit plans. These disclosures, among others, include the following: (a) a description of the risks to which the plan exposes the entity, focused on any unusual, entity-specific or plan-specific risks, and of any significant concentrations of risk; (b) a sensitivity analysis for each significant actuarial assumption including the methods and assumptions used in preparing the sensitivity analysis and any changes and reasons for such changes from the previous period in the methods and assumptions used; (c) a description of any asset-liability matching strategies used by the plan or the entity, including the use of annuities and other techniques, such as longevity swaps, to manage risk; (d) a description of funding arrangements, including the funding policy of the defined benefit plan; (e) expected contributions for the next annual reporting period; and (f) information about the maturity profile of the defined benefit obligation, including but not limited to weighted average duration of the defined benefit obligation.

Revised IAS 27, Separate Financial Statements.As a consequence of the newIFRS 10 andIFRS 12,IAS 27is now limited to accounting for investments in subsidiaries, joint ventures and associates when an entity elects, or is required by local regulations, to present separate financial statements.

This revised standard has no impact on our financial position or performance.

Revised IAS 28, Investments in Associates and Joint Ventures.SupersedingIAS 28, Investments in Associates,isIAS 28, Investments in Associates and Joint Ventures, which prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

This revised standard has no impact on our financial position or performance.

Amendments to IAS 39,1, Financial Instruments: Recognition and Measurement — Eligible Hedged Items.Statement Presentation – Presentation of Items of Other Comprehensive Income.Amendment The amendments toIAS 391addresseschange the designationgrouping of items presented in other comprehensive income. Items that could be reclassified (or “recycled”) to profit or loss at a one-sided riskfuture point in a hedged item, and the designation of inflation as a hedged risktime (for example, upon derecognition or portionsettlement) would be presented separately from items that may not be reclassified at any point in particular situations.time. The amendment clarifiessolely affects presentation and therefore has no impact on our financial position or performance.

Improvements to IFRS

The annual improvements to IFRS contain non-urgent but necessary amendments to IFRS. The amendments are effective for annual periods beginning on or after January 1, 2013 and to be applied retrospectively.

IFRS 1, First-time Adoption of International Financial Reporting Standards. The amendments clarify that an entity is permittedthat has stopped applying IFRS may choose to designateeither: (a) re-applyIFRS 1, even if the entity appliedIFRS 1 in a portionprevious reporting period; or (b) apply IFRS retrospectively in accordance withIAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, in order to resume reporting under IFRS. It also clarifies that upon adoption of IFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles may carryforward, without adjustment, the fair value changes or cash flow variabilityamount previously capitalized in its opening statement of a financial instrument as a hedged item. We have concluded thatposition at the date of transition. Such borrowing costs are then recognized in accordance withIAS 23, Borrowing Costs. The amendment hadhas no impact on our financial position or performance, as we haveare not entered into such hedges.

a first-time adopter of IFRS.

IFRIC 17, DistributionsIAS 1, Presentation of Non-cash Assets to Owners.Financial Statements – Clarification of the Requirements for Comparative Information.This interpretation provides guidance on non-reciprocal distribution of assets by The amendment requires an entity to present a: (a) comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period; and (b) opening statement of financial position (known as the “third balance sheet”) when an entity changes its owners acting in their capacity as owners, including distributionsaccounting policies, makes retrospective restatements or makes reclassifications, and that change has a material effect on the statement of non-cash assets and those givingfinancial position. The opening statement will be at the shareholders a choice of receiving non-cash assets or cash, provided that: (a) all ownersbeginning of the same class of equity instruments are treated equally; and (b) the non-cash assets distributed are not ultimately controlled by the same party or parties both before and after the distribution, and as such, excluding transactions under common control.preceding period. The interpretation had no effect on either our financial position or performance.

Improvements to IFRSs
Improvements to IFRSs is an omnibus of amendments to standards that deals primarily with a view to remove inconsistencies and clarify wording. There are separate transitional provisions for each standard, all of which were effective beginning January 1, 2010. The adoption of the following amendments resulted in changes to our accounting policies but hadamendment has no impact on our financial position or performance.
IFRS 2, Share-based Payment.The amendment clarifies that the contribution

IAS 16, Property, Plant and Equipment – Classification of Servicing Equipment.The amendment clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. The improvement has no impact on our financial position or performance.

IAS 32, Financial Instruments: Presentation – Tax Effect of Distribution to Holders of Equity Instruments.The amendment removes existing income tax requirements fromIAS 32 and requires entities to apply requirements inIAS 12, Income Taxes, to any income tax arising from distributions to equity holders. The amendment has no impact on our financial position or performance.

IAS 34, Interim Financial Reporting and Segment Information for Total Assets and Liabilities. The amendment clarifies the requirements inIAS 34 relating to segment information for total assets and liabilities for each reportable segment to enhance consistency with the requirement inIFRS 8, Operating Segments. The amendment has no impact on our financial position or performance.

We have not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Summary of a business on formation of a joint venture and combinations under common control are not within the scope ofIFRS 2, even though they are out of scope of RevisedIFRS 3, Business Combinations.

IFRS 5, Noncurrent Assets Held-for-Sale and Discontinued Operations.The amendment clarifies that the disclosures required in respect of noncurrent assets or disposal groups classified as held-for-sale or discontinued operations are only those set out inIFRS 5. The disclosure requirements of other IFRSs apply only if specifically required for such noncurrent assets or discontinued operations.
It also clarifies that the general requirements ofIAS 1, Presentation of Financial Statements,still apply, particularly paragraphs 15 (to achieve fair presentation) and 125 (sources of estimation and uncertainty).
IFRS 8, Operating Segments.The amendment clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. As the chief operating decision maker reviews segment revenues, net income (loss) for the year, assets, liabilities, and other segment information of our reportable operating segments, we have continued to disclose this information inNote 4 — Operating Segment Information.
IAS 1, Presentation of Financial Statements.The amendment terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification.
IAS 7, Statement of Cash Flows.The amendment explicitly states that only expenditure that results in a recognized asset can be classified as a cash flow from investing activities. This amendment will impact, among others, the presentation in the statement of cash flows of the contingent consideration on the business combination completed in 2010 upon cash settlement.
IAS 17, Leases.The amendment removes the specific guidance on classifying land as lease so that only the general guidance remains.
IAS 36, Impairment of Assets.The amendment clarifies that the largest unit permitted for allocating goodwill acquired in a business combination is the operating segment, as defined inIFRS 8, before aggregation for reporting purposes. The amendment had no impact on us as the annual impairment test is performed before aggregation.

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IAS 38, Intangible Assets.The amendment clarifies that if an intangible asset acquired in a business combination is identifiable only with another intangible asset, the acquirer may recognize the group of intangible assets as a single asset, provided that the individual assets have similar useful lives. It also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination that are not traded in active markets are only examples and are not restrictive on the methods that can be used.
IAS 39, Financial Instruments: Recognition and Measurement.The amendment clarifies that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. The amendment also clarifies that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell and acquiree at a future date, applies only to forward binding contracts, and not derivative contracts where some actions by either party have yet to be taken. It also clarifies that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the year that the hedged forecast cash flows affected profit or loss.
IFRIC 9, Reassessment of Embedded Derivatives.The improvement clarifies that it does not apply to possible reassessment, at the date of acquisition, of embedded derivatives in contracts acquired in a combination between entities or businesses under common control or in the formation of a joint venture.
IFRIC 16, Hedges of a Net Investment in a Foreign Operation.The improvement states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements ofIAS 39that relate to a net investment hedge are satisfied.
Significant Accounting Policies

The following is the summary of significant accounting policies we applied in preparing our consolidated financial statements:

Business Combinations and Goodwill

Business combinations from January 1, 2009

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controllingnoncontrolling interest in the acquiree. For each business combination, the acquirer has the option to measure the non-controllingcomponents of the noncontrolling interest in the acquiree that are present ownership interest and entitle their holders to a proportionate share of the net assets in the event of liquidation either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred.

When we acquire a business, we assess the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquirer’s previously held equity interest in the acquiree is remeasured toat its acquisition date fair value as at the acquisition date throughand any resulting gain or loss is recognized in profit or loss.

The fair value of previously held equity interest is then included in the amount of total consideration transferred.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingentContingent consideration which is deemed to beclassified as an asset or liability will be recognized in accordance withthat is a financial instrument and within the scope ofIAS 39, Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognized either in profit or loss or as a charge tochange in other comprehensive income. If the contingent consideration is not within the scope ofIAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity it shallis not be remeasured until itand subsequent settlement is finally settledaccounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for noncontrolling interests and any previous interest held, over the fair values of net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets acquired is in excess of the subsidiaryaggregate consideration transferred, we reassess whether we correctly identified all of the assets acquired and all of the differenceliabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain in the form of negative goodwill is recognized in profit or loss.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we report in our consolidated financial statements provisional amounts for the items for which the accounting is incomplete. At measurement period which is no longer than one year from the acquisition date, the provisional amounts recognized at acquisition date are retrospectively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date. During the measurement period, we also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to

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each of our cash-generating units, or CGUs, that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill acquired in a business combination has yet to be allocated to identifiable CGUs because the initial accounting is incomplete, such provisional goodwill is not tested for impairment unless indicators of impairment exist and we can reliably allocate the carrying amount of goodwill to a CGU or group of CGUs that are expected to benefit from the synergies of the business combination.

Where goodwill forms part of a cash-generating unitCGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unitCGU retained.

Business combinations prior to January 1, 2009
In comparison to the above policies, the following differences applied:
Business combinations were accounted for using purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest was measured at the proportionate share of the acquiree’s identifiable net assets.
Business combination achieved in stages was accounted for as separate steps. Additional acquisitions do not affect previously recognized goodwill.
When we acquire a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition date unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.
Contingent consideration is recognized if, and only if, we have present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration are charged to goodwill except for accretion of interest which is recognized in profit or loss.

Investments in Associates

An associate is an entity in which we have significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but has no control or joint control over those policies. The existence of significant influence is presumed to exist when we hold between 20% and 50% of the voting power of another entity. Significant influence is also exemplified when we have: (a) a representation on the board of directors or the equivalent governing body of the investee; (b) participation in policy-making processes, including participation in decisions about dividends or other distributions; (c) material transactions with the investee; (d) interchange managerial personnel with the investee; or (e) provision of essential technical information.

Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. An associate is an entityThe cost of the investments includes transaction costs. The details of our investments in which we have significant influenceassociates are disclosed inNote 10 – Investments in Associates, Joint Ventures and which is neither a subsidiary nor a joint venture.

Deposits – Investments in Associates.

Under the equity method, an investment in an associate is carried in our consolidated statement of financial position at cost plus post acquisition changes in our share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized nor individually tested for impairment. Our consolidated income statement reflects our share in the financial performance of our associates. Where there has been a change recognized directly in the equity of the associate, we recognize our share in such change and disclose this, when applicable, in our consolidated statements: (1) statement of comprehensive incomeincome; and (2) statement of changes in equity. Unrealized gains and losses resulting from our transactions with and among our associates are eliminated to the extent of our interest in those associates.

Our share in the profitprofits or losses of our associates is shown on the face of our consolidated income statement. This is the profit or lossesloss attributable to equity holders of the associate and therefore is profit or lossesloss after tax and net of non-controllingnoncontrolling interest in the subsidiaries of the associates.

associate.

When our share of losses exceeds our interest in an equity-accounted investee, the carrying amount of the investment, including any long-term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that we have an obligation or has made payments on behalf of the investee.

Our reporting dates and that of our associates are identical and our associates’ accounting policies conform to those used by us for like transactions and events in similar circumstances. WhereWhen necessary, adjustments are made to bring such accounting policies in line with those of PLDT Group.

our policies.

After application of the equity method, we determine whether it is necessary to recognize an additional impairment loss on our investments in associates. We determine at the end of each reporting period whether there is any objective evidence that our investment in associate is impaired. If this is the case, we calculate the amount of impairment as the difference between the recoverable amount of our investment in the associate and its carrying value and recognize the amount in our consolidated income statement.

Upon loss of significant influence over the associate, we measure and recognize any retained investment at its fair value. Any difference between the carrying amounts of our investment in the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss.

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Joint Arrangements

Investments in Joint Ventures
Investments in aarrangements are arrangements with respect to which we have joint venturecontrol, established by contracts requiring unanimous consent for decisions about the activities that is a jointly controlled entity issignificantly affect the arrangements’ returns. They are classified and accounted for as follows:

Joint operation – when we have rights to the assets, and obligations for the liabilities, relating to an arrangement, we account for each of our assets, liabilities and transactions, including our share of those held or incurred jointly, in relation to the joint operation.

Joint venture – when we have rights only to the net assets of the arrangements, we account for our interest using the equity method, of accounting. same as investments in associates.

The financial statements of the joint venture are prepared for the same reporting period as our consolidated financial statements. Where necessary, adjustments are made to bring the accounting policies of the joint venture in line with thoseour policies. The details of PLDT Group.

our investments in joint ventures are disclosed inNote 10 – Investments in Associates, Joint Ventures and Deposits – Investments in Joint Ventures.

Adjustments are made in our consolidated financial statements to eliminate our share of unrealized gains and losses on transactions between PLDTus and our jointly controlled entity.joint venture. The joint venture is carried at equity method until the date on which we cease to have joint control over the jointly controlled entity.

joint venture.

Upon loss of joint control and provided that the former jointly controlled entityjoint venture does not become a subsidiary or associate, we measure and recognize our remaining investment at fair value. Any difference between the carrying amount of the former jointly controlled entityjoint venture upon loss of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted for as an investment in an associate.

Foreign Currency Transactions and Translations

Our consolidated financial statements are presented in Philippine peso, which is also the Parent Company’s functional currency. The Philippine peso is the currency of the primary economic environment in which we operate. This is also the currency that mainly influences the revenue from and cost of rendering products and services. Each entity in the PLDTour Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.

The functional and presentation currency of the entities under PLDT Group (except for SCH, SGP, 3rd Brand, BOW, SMHC, SMI, TSI, Mabuhay Satellite, PLDT Global, SPi and certain of its subsidiaries, certain subsidiaries of Chikka, and certain subsidiaries of BayanTrade) is the Philippine peso.

Transactions in foreign currencies are initially recorded inby entities under our Group at the respective functional currency raterates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange prevailing at the end of the reporting period. All differences arising on settlement or translation of monetary items are recognized in our consolidated income statement except for foreign exchange differences that qualify as capitalizable borrowing costs for qualifying assets. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange raterates as at the datedates of the initial transaction.transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

The functional currency of SMHC, SMI, TSI, Mabuhay Satellite,FECL Group, Piltel International Holdings Corporation, or PIHC, PLDT Global SPi and certain of its subsidiaries, PGNL, DCPL, and certain subsidiaries of Chikka is the U.S. dollar; the functional currency of SHPL, TPL, 3rd Brand, CPL and CITP Singapore dollar for SCH, SGP, 3rd Brand, BOW,Pte. Ltd., or CISP, is the Singapore dollar; the functional currency of CCCBL is the Chinese renminbi; the functional currency of BayanTrade (Malaysia) Sdn Bhd., or BTMS, is the Malaysian ringgit; and certain subsidiariesthe functional currency of BayanTrade.PT Columbus IT Indonesia, or PTCI, is the Indonesian rupiah. As at the reporting date, the assets and liabilities of these subsidiaries are translated into Philippine peso at the rate of exchange prevailing at the end of the reporting period, and income and expenses of these subsidiaries are translated monthly using the weighted average exchange rate for the month. The exchange differences arising on translation are recognized as a separate component of other comprehensive income as cumulative translation adjustments. On disposal of these subsidiaries, the amount of deferred cumulative translation adjustments recognized in other comprehensive income relating to subsidiaries areis recognized in our consolidated income statement.

When there is a change in an entity’s functional currency, the entity applies the translation procedures applicable to the new functional currency prospectively from the date of the change. The entity translates all assets and liabilities into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as the new historical cost. Exchange differences arising from the translation of a foreign operation previously recognized in other comprehensive income are not reclassified from equity to profit or loss until the disposal of the operation.

Foreign exchange gains or losses of PLDTthe Parent Company and our Philippine-based subsidiaries are treated as taxable income or deductible expenses in the yearperiod such exchange gains or losses are realized.

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Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

Noncurrent Assets Held-for-sale and Discontinued Operations

Noncurrent assets and disposal groups classified as held-for-sale are measured at the lower of their carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held-for-sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

In the consolidated income statement, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when we retain a noncontrolling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated income statement.

Property, plant and equipment and intangible assets once classified as held-for-sale are neither depreciated nor amortized.

Financial Instruments – Initial recognition and subsequent measurement

Financial Assets

Initial recognition and measurement

Financial assets within the scope ofIAS 39are classified as financial assets at fair value through profit or loss, or FVPL, loans and receivables, held-to-maturity, or HTM, investments, available-for-sale financial assets,investments, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. We determine the classification of financial assets at initial recognition and, where allowed and appropriate, re-evaluate the designation of such assets at each financial year-end.

Financial assets are recognized initially at fair value plus transaction costs, except in the case of financial assets notrecorded at fair value through profit or loss, directly attributable transaction costs.

FVPL.

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 purchases or sales) are recognized on the trade date, i.e., the date that we commit to purchase or sell the asset.

Our financial assets include cash and cash equivalents, short-term investments, trade and other receivables, quoted and unquoted equity and debt securities, advances and refundable deposits, and derivative financial assets.

Subsequent measurement

The subsequent measurement of financial assets depends on the classification as follows:

described below:

Financial assets at fair value through profit or lossFVPL

Financial assets at fair value through profit or lossFVPL include financial assets held-for-trading and financial assets designated upon initial recognition at fair value through profit or loss.FVPL. Financial assets are classified as at fair value through profit or lossheld-for-trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivative assets, including separated embedded derivatives are also classified as at fair value through profit or lossheld-for-trading unless they are designated as effective hedging instruments. Financial assets at fair value through profit or lossFVPL are carried in our consolidated statement of financial position at fair value with net changes in gains or losses recognized in our consolidated income statement under “Gains (losses) on derivative financial instruments net” for derivative instruments and “Other income”income – net” for non-derivative financial assets. Interest earned and dividends received from financial assets at fair value through profit or lossFVPL are recognized in our consolidated income statement under “Interest income” and “Other income”income – net”, respectively.

Financial assets may be designated at initial recognition as at fair value through profit or lossFVPL if any of the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing gains or losses on them on a different bases; (ii) the assets are part of a group of financial assets which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the company is provided internally on that basis to the entity’s key management personnel; or (iii) the financial assets contain onean embedded derivative, unless the embedded derivative does not significantly modify the cash flows or more embedded derivativesit is clear, with little or no analysis, that it would need tonot be separately recorded.

Derivatives embedded in host contracts are accounted for as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. These embedded derivatives are measured at fair value with gains or losses arising from changes in fair value recognized in our consolidated income statement. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

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 derivatives 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.

Our financial assets at FVPL include portions of short-term investments and short-term currency swap as at December 31, 2013, and portion of short-term investments as at December 31, 2012, and long-term swap portion and portion of short-term investments as at January 1, 2012.See Note 27 – Financial Assets and Liabilities.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments andwhich are not quoted in an active market. Such financial assets are carried at amortized cost using the effective interest rate, or EIR, method. This method uses an EIR that exactly discounts the estimated future cash receipts throughover the expected life of the financial assetinstrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Gains and losses are recognized in our consolidated income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process. Interest earned or incurred is recorded in “Interest income” in our consolidated income

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statement. Assets in this category are included in the current assets except for those with maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when we have the positive intention and ability to hold it to maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using the EIR method. Gains or losses are recognized in our consolidated income statement when the investments are derecognized or impaired, as well as through the amortization process. Interest earned or incurred is recorded in “Interest income” in our consolidated income statement. Assets in this category are included in the current assets except for those with maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets.

Our loans and receivables include trade and other receivables, portions of investment in debt securities and other short-term and long-term investments, and portions of advances and other noncurrent assets as at December 31, 2013 and 2012, and January 1, 2012. SeeNote 16 – Trade and Other ReceivablesandNote 27 – Financial Assets and Liabilities.

HTM investments

Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as HTM when we have the positive intention and ability to hold it to maturity. After initial measurement, HTM investments are measured at amortized cost using the EIR method. Gains or losses are recognized in our consolidated income statement when the investments are derecognized or impaired, as well as through the amortization process. Interest earned or incurred is recorded in “Interest income” in our consolidated income statement. Assets in this category are included in current assets except for those with maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets.

Our HTM investments include portion of investment in debt securities and other long-term investments as at December 31, 2013 and 2012, and January 1, 2012. SeeNote 11 – Investment in Debt Securities and Other Long-term InvestmentsandNote 27 – Financial Assets and Liabilities.

Available-for-sale financial assetsinvestments

Available-for-sale financial assetsinvestments include equity investments and debt securities. Equity investments classified as available-for-sale are non-derivative financial assetsthose that are neither classified as held-for-trading nor designated as available-for-saleat fair value through profit or loss. Debt securities in this category are not classified in anythose that are intended to be held for an indefinite period of the three preceding categories. They are purchasedtime and held indefinitely andthat may be sold in response to liquidity requirements or in response to changes in the market conditions.

After initial measurement, available-for-sale financial assetsinvestments are subsequently measured at fair value with unrealized gains or losses recognized in other comprehensive income in the “Net gains available-for-sale financial investments – net of tax” account until the investment is derecognized, at which time the cumulative gain or loss recorded in other comprehensive income reserve account is recognized in our consolidated income statement; or the investment is determined to be impaired, at which time the cumulative loss recorded in other comprehensive income reserve account is recognized in our consolidated income statement. Interest earned on holding available-for-sale debt securitiesfinancial investments are included under “Interest income” using the EIR method in our consolidated income statement. Dividends earned on holding available-for-sale equity investments are recognized in our consolidated income statement under “Other income”income – net” when the right of theto receive payment has been established. These financial assets are included under noncurrent assets unless we intend to dispose of the investment within 12 months offrom the end of the reporting period.

We evaluate whether the ability and intention to sell our available-for-sale financial investments in the near term is still appropriate. When, in rare circumstances, we are unable to trade these financial investments due to inactive markets and management’s intention to do so significantly changes in the foreseeable future, we may elect to reclassify these financial investments. Reclassification to loans and receivables is permitted when the financial investments meet the definition of loans and receivables and we have the intent and ability to hold these assets for the foreseeable future or until maturity. Reclassification to the held-to-maturity category is permitted only when the entity has the ability and intention to hold the financial investment to maturity accordingly.

For a financial investment reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on the asset has been recognized in other comprehensive income is amortized to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in other comprehensive income is reclassified to the consolidated income statement.

Our available-for-sale financial investments include listed and unlisted equity securities as at December 31, 2013 and 2012, and January 1, 2012. SeeNote 27 – Financial Assets and Liabilities.

Financial Liabilities

Initial recognition and measurement

Financial liabilities within the scope ofIAS 39are classified as financial liabilities at fair value through profit or loss,FVPL, other financial liabilities or as derivatives designated as hedging instruments in an effective hedge, as appropriate. We determine the classification of our financial liabilities at initial recognition.

Financial liabilities are recognized initially at fair value andplus, in the case of other financial liabilities, inclusive ofloans and borrowings, directly attributable transaction costs.

Our financial liabilities include accounts payable, accrued expenses and other current liabilities, interest-bearing financial liabilities, customers’ deposits, derivative financial liabilities, dividends payable, and accrual for long-term capital expenditures included under “Deferred credits and other noncurrent liabilities” account.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

described below:

Financial liabilities at fair value through profit or lossFVPL

Financial liabilities at fair value through profit or lossFVPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.FVPL. Financial liabilities are classified as at fair value through profit or lossheld-for-trading if they are acquired for the purpose of repurchasingselling in the near term. Derivative liabilities, including separated embedded derivatives are also classified as at fair value through profit or lossFVPL unless they are designated as effective hedging instruments. Financial liabilities at fair value through profit or lossFVPL are carried in our consolidated statement of financial position at fair value with gains or losses on liabilities held-for-trading recognized in our consolidated income statement under “Gains (losses) on derivative financial instruments net” for derivative instruments and “Other income”income – net” for non-derivative financial liabilities.

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Financial liabilities may be designated at initial recognition as at fair value through profit or lossFVPL if any of the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognizing gains or losses on them on a different bases; (ii) the liabilities are part of a group of financial liabilities which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the company is provided internally on that basis to the entity’s key management personnel; or (iii) the financial liabilities contain onean embedded derivative, unless the embedded derivative does not significantly modify the cash flows or more embedded derivativesit is clear, with little or no analysis, that it would need tonot be separately recorded.

Our financial liabilities at FVPL include long-term principal only currency swaps and interest rate swaps as at December 31, 2013 and 2012, and January 1, 2012. SeeNote 27 – Financial Assets and Liabilities.

Other financial liabilities

After initial recognition, other financial liabilities are subsequently measured at amortized cost using the EIR method.

Gains and losses are recognized in our consolidated income statement when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included under “Financing costs net” in our consolidated income statement.

Our other financial liabilities include accounts payable, accrued expenses and other current liabilities, with the exemption of statutory payables, interest-bearing financial liabilities, customers’ deposits, dividends payable, and accrual for long-term capital expenditures included under “Deferred credits and other noncurrent liabilities” account as at December 31, 2013 and 2012, and January 1, 2012. SeeNote 20 – Interest-bearing Financial Liabilities, Note 21 – Deferred Credits and Other Noncurrent Liabilities, Note 22 – Accounts Payable,andNote 23 – Accrued Expenses and Other Current Liabilities.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in our 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 net basis, or to realize the assets and settle the liabilities simultaneously.

Fair value of financial instruments
The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market prices at the close of business at the end of the reporting period. For financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.

Amortized cost of financial instruments

Amortized cost is computed using the EIR method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of EIR.

“Day 1” difference

Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique which variables include only data from observable market, we recognize the difference between the transaction price and fair value (a “Day 1” difference) in our consolidated income statement unless it qualifies for recognition as some other type of asset or liability. In cases where data used are not observable, the difference between the transaction price and model value is only recognized in our consolidated income statement when the inputs become observable or when the instrument is derecognized. For each transaction, we determine the appropriate method of recognizing the “Day 1” difference amount.

Impairment of Financial Assets

We assess at the end of each reporting period whether there is any objective evidence that a financial asset or a 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 have occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that the debtor 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 conditions that correlate with

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defaults.


Impairment of Trade and Other Receivables

Individual impairment

defaults.
Retail subscribers

We recognize impairment losses for the whole amount of receivables from permanently disconnected wireless and fixed line subscribers. Permanent disconnections are made after a series of collection steps following nonpayment by postpaid subscribers. Such permanent disconnection usually occurs within a predetermined period from the last statement date.

We also recognize impairment losses for accounts with extended credit arrangements or promissory notes.

Regardless of the age of the account, additional impairment losses are also made for accounts specifically identified to be doubtful of collection when there is information on financial incapacity after considering the other contractual obligations between us and the subscriber.

Corporate subscribers

Receivables from corporate subscribers are provided with impairment losses when they are specifically identified as impaired. Full allowance is generally provided for the whole amount of receivables from corporate accounts based on aging of individual account balances. In making this assessment, we take into account normal payment cycle, counterparty’s payment history and industry-observed settlement periods.

Foreign administrations and domestic carriers

For receivables from foreign administration and domestic carriers, impairment losses are recognized when they are specifically identified as impaired regardless of the age of balances. Full allowance is generally provided after quarterly review of the status of settlement with the carriers. In making this assessment, we take into account normal payment cycle, counterparty carrier’s payment history and industry-observed settlement periods.

Dealers, agents and others

Similar to carrier accounts, we recognize impairment losses for the full amount of receivables from dealers, agents and other parties based on our specific assessment of individual balances based on age and payment habits, as applicable.

Collective impairment

Postpaid wireless and fixed line subscribers

We estimate impairment losses for temporarily disconnected accounts for both wireless and fixed line subscribers based on the historical trend of temporarily disconnected accounts which eventually become permanently disconnected. Temporary disconnection is initiated after a series of collection activities is implemented, including the sending of a collection letter, call-out reminders and collection messages via text messaging. Temporary disconnection generally happens 90 days after the due date of the unpaid balance. If the account is not settled within 60 days from temporary disconnection, the account is permanently disconnected.

We recognize impairment losses on our postpaid wireless and fixed line subscribers through net flow-rate methodology which is derived from account-level monitoring of subscriber accounts between different age brackets, from current to one day past due to 120 days past due. The criterion adopted for making the allowance for doubtful accounts takes into consideration the calculation of the actual percentage of losses incurred on each range of accounts receivable.

Other subscribers

Receivables that have been assessed individually and found not to be impaired are then assessed collectively based on similar credit risk characteristics to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident in the individual impairment assessment. Retail subscribers are provided with collective impairment based on a certain percentage derived from historical data/statistics.

Financial assets carried at amortized cost

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 estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.

For financial assets carried at amortized cost, we first assess 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 we determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, we include the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of 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 estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized under “Asset impairment” in our consolidated income statement. Interest income continues to be accrued on the reduced carrying amount based on the original EIR of the asset. The financial asset together with the associated allowance are written-off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to us. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in our consolidated income statement, to the extent that the carrying value of the asset does not exceed its original amortized cost at the reversal date. If a future write-off is later recovered, the recovery is recognized in profit or loss.

Available-for-sale financial assetsinvestments

For available-for-sale financial investments, we assess at each reporting date whether there is objective evidence that an investment or a group of investment is impaired.

In the case of equity investments classified as available-for-sale financial assets,investments, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. The determination of what is “significant” or “prolonged” requires judgment. We treat “significant” generally as decline of 20% or more below the original cost of investment, and “prolonged” as greater than 12 months. When a decline in the fair value of an available-for-sale financial assetinvestment has been recognized in other comprehensive income reserve account and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income reserve account is reclassified from other comprehensive income reserve account to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. The amount of the cumulative loss that is reclassified from other comprehensive income account to profit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss. Impairment losses recognized in profit or loss for an investment in an equity instrument are not reversed in profit or loss. Subsequent increases in the fair value after impairment are recognized directly in other comprehensive income reserve account.

income.

In the case of debt instruments classified as available-for-sale financial assets,investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost less any impairment loss on that investment previously recognized in our consolidated income statement and the current fair value. Future interest income iscontinues to be accrued based on the reduced carrying amount and is accrued based onof the asset, using the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest income” in our consolidated income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in our consolidated income statement, the impairment loss is reversed in profit or loss.

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Derecognition of Financial Assets and Liabilities

Financial assets

A financial asset (or where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: (1) the rights to receive cash flows from the asset have expired; or (2) we have transferred its rights to receive cash flows from the asset or have 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: (a) we have transferred substantially all the risks and rewards of the asset; or (b) we have neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset.

When we have transferred the rights to receive cash flows from an asset or have entered into a “pass-through” arrangement, and have neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognized to the extent of our 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 the consideration that we could be required to repay.

When continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred

asset, the extent of our continuing involvement is the amount of the transferred asset that we may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of our continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired.

When an existing financial liability is 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 carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.

The financial liability is also derecognized when equity instruments are issued to extinguish all or part of the financial liability. The equity instruments issued are recognized at fair value if it can be reliably measured, otherwise, it is recognized at the fair value of the financial liability extinguished. Any difference between the fair value of the equity instruments issued and the carrying value of the financial liability extinguished is recognized in profit or loss.

Derivative Financial Instruments and HedgingHedge Accounting

Initial recognition and subsequent measurement

We use derivative financial instruments, such as long-term currency swaps, short-term currency swaps, forward foreign currency options, forward currencyexchange contracts and interest rate swaps to hedge our risks associated with interest rate and foreign currency fluctuations.fluctuations and interest rate. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting are taken directly to the “Gains (losses) on derivative financial instruments — net” in our consolidated income statement.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of long-term currency swaps, foreign currency options, forward currency contracts and interest rate swap contracts is determined using applicable valuation techniques. SeeNote 28 —27 – Financial Assets and Liabilities.

Any gains or losses arising from changes in fair value on derivatives during the period that do not qualify for hedge accounting are taken directly to the “Gains (losses) on derivative financial instruments – net” in our consolidated income statement.

For the purpose of hedge accounting, hedges are classified as: (1) fair value hedges when hedging the exposure to changes in the fair value of a recognized financial asset or liability or an unrecognized firm commitment (except for foreign-currencyforeign currency risk); or (2) cash flow hedges when hedging exposure to variability in cash flows that is neithereither attributable to a particular risk associated with a recognized financial asset or liability, or a highly

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probable forecast transaction or the foreign-currencyforeign currency risk in an unrecognized firm commitment; or (3) hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how we will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated. In a situation when that hedged item is a forecast transaction, we assess whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect our consolidated income statement.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Fair value hedges

The change in the fair value of a hedging derivative is recognized in our consolidated income statement. The change in the fair value of the hedged item attributable to the risk being hedged is recorded as part of the carrying value of the hedged item and is also recognized in our consolidated income statement.

The fair value for financial instruments traded in active markets at the end of the reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models and other relevant valuation models.

When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as a financial asset or liability with a corresponding gain or loss recognized in our consolidated income statement. The changes in the fair value of the hedging instrument are also recognized in our consolidated income statement.

We do not have financial instruments designated as fair value hedges as at December 31, 2013 and 2012, and January 1, 2012.

Cash flow hedges

The effective portion of the gain or loss on the hedging instrument is recognized in our statement ofother comprehensive income, while any ineffective portion is recognized immediately in our consolidated income statement.

SeeNote 27 – Financial Assets and Liabilitiesfor more details.

Amounts taken to other comprehensive income are transferred to our consolidated income statement when the hedged transaction affects our consolidated income statement, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognized in other comprehensive income are transferred to our consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in other comprehensive income remain in other comprehensive income until the forecast transaction or firm commitment occurs.

We use an equity forward contract to hedge the sale of Philweb Corporation, or Philweb, shares. We also use interest rate swaps and forward foreign exchange contracts to hedge our risks associated with fluctuations in interest rates and foreign currency exchange rates, respectively. SeeNote 27 – Financial Assets and Liabilities – ePLDT Group.

Hedges of a net investment in a foreign operation

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized in other comprehensive income

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while any gains or losses relating to the ineffective portion are recognized in our consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized in other comprehensive income is transferred to our consolidated income statement.

We do not have derivative financial instruments designated as hedges of a net investment in foreign operation as at December 31, 2013 and 2012, and January 1, 2012.

Current versus noncurrent classification

Derivative instruments that are not designated as effective hedging instruments are classified as current or noncurrent or separated into a current and noncurrent portion based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows).

Where the group willwe expect to hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond 12 months after the reporting date, the derivative is classified as noncurrent (or separated into current and noncurrent portions) consistent with the classification of the underlying item.

Embedded derivatives that are not closely related to the host contract are classified consistent with the cash flows of the host contract.

Derivative instruments that are designated as effective hedging instruments are classified consistently with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and a noncurrent portion only if a reliable allocation can be made.

We recognize transfers into and transfers out of fair value hierarchy levels as at the date of the event or change in circumstances that caused the transfer.

Property, Plant and Equipment

Property, plant and equipment, except for land, is stated at cost less accumulated depreciation and amortization and any accumulated impairment losses. CostThe initial cost of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the property, plant and equipment to its working condition and location for its intended use. Such cost includes the cost of replacing partcomponent parts of the property, plant and equipment when the cost is incurred, if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, we recognize such parts as individual assets with specific useful lives and depreciate them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in our consolidated income statement as incurred. The present value of the expected cost offor the decommissioning of the asset after use is included in the cost of the respective assetsasset if the recognition criteria for a provision are met. Land is stated at cost less any impairment in value.

Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally recognized as expense in the period such costs are incurred. In situations where it can be clearly 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, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the property, plant and equipment.

Depreciation and amortization commence once the property, plant and equipment are available for use and are calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used in depreciating our property, plant and equipment are disclosed inNote 9 – Property, Plant and Equipment.

The asset’s residual value, estimated useful life, and depreciation and amortization method are reviewed at least at each financial year-end to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment and are adjusted prospectively, if appropriate.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the yearperiod the asset is derecognized.

Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used in depreciating our property, plant and equipment are disclosed in
Note 9 — Property, Plant and Equipment.
The asset’s residual value, estimated useful life and depreciation and amortization method are reviewed at least at each financial year-end to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

Property under construction is stated at cost.cost less any impairment in value. This includes cost of construction, plant and equipment, capitalizable borrowing costs and other direct costs.costs associated to construction. Property under construction is not depreciated until such time that the relevant assets are completed and available for its intended use.

Construction-in-progress is transferred to the related property, plant and equipment when the construction or installation and related activities necessary to prepare the property, plant and equipment for their intended use have been completed, and the property, plant and equipment are ready for commercial service.

Borrowing Costs

Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Qualifying assets are assets that necessarily takestake a substantial period of time to get ready for its intended use or sale. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization shall be determined by applying a capitalizable rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to our borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during the period shall not exceed the amount of borrowing costs incurred during that period.

Capitalization of borrowing costs commences when the activities necessary to prepare the asset for intended use are in progress and expenditures and borrowing costs are being incurred. Borrowing

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costs are capitalized until the asset is available for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as exchange differences arising from foreign currency borrowings used to finance these projects, to the extent that they are regarded as an adjustment to interest costs.

All other borrowing costs are expensed as incurred.

Asset Retirement Obligations

We are legally required under various lease agreements to dismantle the installation in leased sites and restore such sites to their original condition at the end of the lease contract term. We recognize the liability measured at the present value of the estimated costs of these obligations and capitalize such costs as part of the balance of the related item of property, plant and equipment. The amount of asset retirement obligations are accreted and such accretion is recognized as interest expense.

SeeNote 21 – Deferred Credits and Other Noncurrent Liabilities.

Investment Properties

Investment properties are initially measured at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met and excludes the cost of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value,values, which hashave been determined annually based on the latest valuationsappraisal performed by an independent firm of appraisers.appraisers, an industry specialist in valuing these types of investment properties. Gains or losses arising from changes in the fair values of investment properties are included in our consolidated income statement in the yearperiod in which they arise.arise, including the corresponding tax effect. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time that fair value can be determined or construction is completed.

Investment properties are derecognized when they have been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal.

Any gain or loss on the retirement or disposal of an investment property is recognized in our consolidated income statement in the year of retirement or disposal.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupiedowner-occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If an owner occupiedowner-occupied property becomes an investment property, we account for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use. The difference between the carrying amount of the occupiedowner-occupied property and its fair value at the date of change is accounted for as revaluation increment recognized in other comprehensive income.

On subsequent disposal of the investment property, the revaluation increment recognized in other comprehensive income is transferred to retained earnings.

No assets held under operating lease have been classified as investment properties.

Intangible Assets

Intangible assets acquired separately are measured at cost on initial recognition. The cost of intangible assets acquired from business combinations is initially recognized at fair value on the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment loss. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or indefinite useful life.

indefinite.

Intangible assets with finite lives are amortized over the useful economic life using the straight-line method of accounting and assessed for impairment whenever there is an indication that the intangible assets may be impaired. At a minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statement.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unitCGU level. Such intangible assets are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

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The estimated useful lives used in amortizing our intangible assets are disclosed inNote 14 – Goodwill and Intangible Assets.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in our consolidated income statement when the asset is derecognized.

Intangible assets created within the business are not capitalized and expenditures are charged against operations in the yearperiod in which the expenditures are incurred.

Research and Development Costs
Research costs are expensed as incurred. Development expenditure on an individual project is recognized as an intangible asset when we can demonstrate: (1) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (2) our intention to complete and our ability to use or sell the asset; (3) how the asset will generate future economic benefits; (4) the availability of resources to complete the asset; and (5) the ability to measure reliably the expenditure during development.
Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortization and accumulated impairment losses. Amortization of the asset begins when development is complete and the asset is available for use. It is amortized over the period of expected future benefit. During the period of development, the asset is tested for impairment annually.

Inventories and Supplies

Inventories and supplies, which include cellular phone units, materials, spare parts, terminal units and accessories, are valued at the lower of cost and net realizable value.

Cost

Costs incurred in bringing each items of inventories and supplies to its present location and condition are accounted using the weighted average method. Net realizable value is determined by either estimating the selling price in the ordinary course of the business, less the estimated cost to sell or determining the prevailing replacement costs.

Impairment of Non-Financial Assets

Property, plant and equipment

We assess at each reporting period whether there is an indication that an asset may be impaired. If any such indication exists, or when the annual impairment testing for an asset is required, we make an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’sCGU’s fair value less costs to sell or its value in use, anduse. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from those of other assets or groups of assets. WhereWhen the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining the fair value less costs to sell, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. Impairment losses are recognized in our consolidated income statement.

For assets, excluding goodwill, 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, we make an estimate of the recoverable amount. 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 last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The 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 our consolidated income statement. After such reversal, the depreciation and amortization charges are adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining economic useful life.

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The following criteria are also applied in assessing impairment ofassets have specific assets:
Goodwill
Goodwill is reviewedcharacteristics for impairment annually or more frequently if events or changes in circumstances indicate thattesting:

Property, plant and equipment

For property, plant and equipment, we also assess for impairment on the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amountbasis of the cash-generating unit, or group of cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-generating unit, or group of cash-generating units, is less than the carrying amount of the cash-generating unit, or group of cash-generating units, to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

If there is incomplete allocation of goodwill acquired in a business combination to cash generating units, or group of cash generating units, an impairment testing of goodwill is only carried out when impairment indicators exist. Where impairment indicators exist, impairment testingsuch as evidence of goodwill is performed at a level at which the acquirer can reliably test for impairment.
Intangible assets
Intangible assets with indefinite useful lives are tested for impairment annually either individuallyinternal obsolescence or at the cash-generating unit level, as appropriate. We calculate the amount of impairment as being the difference between the recoverable amount of the intangible asset and its carrying amount and recognize the amount of impairment in our consolidated income statement. Impairment losses relating to intangible assets can be reversed in future periods.
physical damage.

Investments in associates and joint ventures

We determine at the end of each reporting period whether there is any objective evidence that our investments in associates and joint ventures are impaired. If this is the case, the amount of impairment is calculated as the difference between the recoverable amount of the investments in associates and joint ventures, and its carrying amount. The amount of impairment loss is recognized in our consolidated income statement.

Goodwill

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU, or group of CGUs, to which the goodwill relates. When the recoverable amount of the CGU, or group of CGUs, is less than the carrying amount of the CGU, or group of CGUs, to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

If there is incomplete allocation of goodwill acquired in a business combination to CGUs, or group of CGUs, an impairment testing of goodwill is only carried out when impairment indicators exist. Where impairment indicators exist, impairment testing of goodwill is performed at a level at which the acquirer can reliably test for impairment.

Intangible assets

Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually either individually or at the CGU level, as appropriate. We calculate the amount of impairment as being the difference between the recoverable amount of the intangible asset and its carrying amount and recognize the amount of impairment in our consolidated income statement. Impairment losses relating to intangible assets can be reversed in future periods.

Investment in Debt Securities

Investment in debt securities are government securities which are carried at amortized cost using the EIR method. Interest earned from these securities is recognized as “Interest income” in our consolidated income statement.

Cash and Cash Equivalents

Cash includes cash on hand and in banks. Cash equivalents, which include temporary cash investments, are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from the date of acquisition, and for which there is an insignificant risk of change in value.

Short-term Investments

Short-term investments are money market placements, which are highly liquid with maturities of more than three months but less than one year from the date of acquisition.

TradeFair value measurement

We measure financial instruments such as derivatives, available-for-sale financial investments, certain short-term investments and Other Receivables

Trade and other receivables, categorizednon-financial assets such as loans and receivables, are recognized initiallyinvestment properties, at fair value and subsequentlyat each reporting date. Also, fair values of financial instruments measured at amortized cost are disclosed inNote 27 – Financial Assets and Liabilities.

Fair value is the price that would be received to sell an asset or paid to transfer a liability 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: (i) in the principal market for the asset or liability, or (ii) 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 to us.

The fair value of an asset or a liability is measured using the EIR method, less provisionassumptions 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.

We use valuation techniques that are appropriate in the circumstances and for impairment.

A provisionwhich sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for impairmentwhich fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: (i) Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities; (ii) Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and (iii) 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 financial statements on a recurring basis, we determine whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of tradeeach reporting period.

We determine the policies and procedures for both recurring fair value measurement, such as investment properties and unquoted available-for-sale financial assets, and for non-recurring measurement, such as assets held for distribution in discontinued operation.

External valuers are involved for valuation of significant assets, such as properties. Involvement of external valuers is decided upon annually. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. At each reporting date, we analyze the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per our accounting policies. For this analysis, we verify the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other receivablesrelevant documents.

We, in conjunction with our external valuers, also compare the changes in the fair value of each asset and liability with relevant external sources to determine whether the change is established when there is objective evidence that we will not be able to collect all amounts due according to the original termsreasonable. This includes a discussion of the receivables. Significant financial difficultiesmajor assumptions used in the valuations. For the purpose of fair value disclosures, we have determined classes of assets and liabilities on the basis of the debtor, probability that the debtor will enter bankruptcy or financial reorganization,nature, characteristics and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original EIR. Cash flows relating to short-term receivables are not discounted if the

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effect of discounting is immaterial. The carrying amountrisks of the asset is reduced through the use of an allowance accountor liability and the amountlevel of the loss is recognized in our consolidated income statement.
When a trade and other receivable is uncollectible, it is written-off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written-off are recognizedfair value hierarchy as income in our consolidated income statement.
explained above.

Revenue Recognition

Revenues for services are stated

Revenue is recognized to the extent that it is probable that the economic benefits will flow to us and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at amounts invoiced to customers, netthe fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding value-added tax, or VAT, andor overseas communication tax, where applicable. When deciding the most appropriate basis for presenting revenue and cost of revenue, we assess our revenue arrangements against specific criteria to determine if we are acting as principal or agent. We consider both the legal form and the substance of our agreement, to determine each party’s respective roles in the agreement. When our role in a transaction is that of principal, revenue is presented on a gross basis, otherwise, revenue is presented on a net basis.

Service revenues from continuing operations

Our revenues are principally derived from providing the following telecommunications services: cellular voice and data services in the wireless business; and local exchange, international and national long distance, data and other network, and information and communications services in the fixed line business. When determining the amount of revenue to be recognized in any period, the overriding principle followed is to match the revenue with the provision of service. Services may be sold separately or bundled with goods or other services. The specific recognition criteria are as follows:

Subscribers

We provide telephone, cellular and data communication services under prepaid and postpaid payment arrangements as follows:

Postpaid service arrangements include fixed monthly charges generated from postpaid cellular voice and data services through the postpaid plans of Smart andSun Cellular, from cellular and local exchange services primarily through wireless, communication,landline and related services, and from data and other network services primarily through broadband and leased line services, which we recognized on a straight-line basis over the customer’s subscription period. Services provided to postpaid subscribers are billed throughout the month according to the billing cycles of subscribers. Services availed by subscribers in addition to these fixed fee arrangements are charged separately and recognized as the additional service is provided or as availed by the subscribers.

Our prepaid services include over-the-air reloading channels and prepaid cards provided bySmart Prepaid, Talk ‘N TextandSun Cellular Prepaid. Proceeds from over-the-air reloading channels and prepaid cards are initially recognized as unearned revenue and realized upon actual usage of the airtime value (i.e., the pre-loaded airtime value of subscriber identification module, or SIM, cards and subsequent top-ups) for voice, short messaging services, or SMS, multimedia messaging services, or MMS, content downloading (inclusive of browsing), infotext services and prepaid unlimited and bucket-priced SMS and call subscriptions, net of free SMS allocation and bonus credits (load package purchased, i.e. free additional SMS or minute calls or Peso credits), or upon expiration of the usage period, whichever comes earlier. Interconnection fees and charges arising from the actual usage of prepaid cards are recorded as incurred.

Revenue from international and national long distance calls carried via our network is generally based on rates which vary with distance and type of service (direct dial or operator-assisted, paid or collect, etc.). Revenue from both wireless and fixed line communication, and ICT serviceslong distance calls is recognized as the service is provided.

Nonrecurring upfront fees such as activation fees charged to subscribers for connection to our subscribersnetwork are deferred and customers. We provide suchare recognized as revenue throughout the estimated average customer relationship. The related incremental costs are similarly deferred and recognized over the same period in our consolidated income statement.

Connecting carriers

Interconnection revenue for call termination, call transit and network usages is recognized in the period the traffic occurs. Revenue related to local, long distance, network-to-network, roaming and international call connection services to mobile, business, residential and payphone customers. Revenues represent the value of fixed consideration that have been received or are receivable. Revenues are recognized when therethe call is evidence of an arrangement, collectibilityplaced or connection is reasonably assured,provided and the deliveryequivalent amounts charged to us by other carriers are recorded under interconnection costs in our consolidated income statement. Inbound revenue and outbound charges are based on agreed transit and termination rates with other foreign and local carriers and content providers.

Value-Added Services, or VAS

Revenues from VAS include SMS in excess of consumable fixed monthly service fees (for postpaid) and free SMS allocations (for prepaid), MMS, content downloading and infotext services. The amount of revenue recognized is net of amount settled with carriers owning the network where the outgoing voice call or SMS terminates and payout to content providers.

Incentives

We operate customer loyalty programmes in our wireless business which allows customers to accumulate points when they purchase services or prepaid credits from us. The points can then be redeemed for free services and discounts, subject to a minimum number of points being obtained. Consideration received is allocated between the services and prepaid credits sold and the points issued, with the consideration allocated to the points equal to their value. The fair value of the productpoints issued is deferred and recognized as revenue when the points are redeemed.

Product-based incentives provided to dealers and customers as part of a transaction are accounted for as multiple element arrangements and recognized when earned.

Multiple-deliverable arrangements

In revenue arrangements including more than one deliverable, the deliverables are assigned to one or renderingmore separate units of service has occurred. In certain circumstances, revenueaccounting and the arrangement consideration is split into separately identifiable componentsallocated to each unit of accounting based on their relative fair value to reflect the substance of the transactions.transaction. Where fair value is not directly observable, the total consideration is allocated using an appropriate allocation method. Under certain arrangements where the above criteria are met, but there is uncertainty regarding the outcome of the transaction for which service was rendered, revenue is recognized only to the extent of expenses incurred for rendering the service,

Other services

Revenue from server hosting, co-location services and such amount is determined to be recoverable. We do not provide our customers with the right to a refund. The following specific recognition criteria must also be met before revenue is recognized:

Service Revenues
Subscriptions
We provide telephone and data communication services under prepaid and postpaid payment arrangements. Installation and activation related fees and the corresponding costs, not exceeding the activation revenue, are deferred and recognized over the expected average periods of customer relationship for fixed line and cellular services. Postpaid service arrangements include subscription fees, typically fixed monthly fees, which are recognized over the subscription period on a pro-rata basis.
Air time, traffic and VAS
Prepaid service revenues collected in advance are deferred and recognized as revenue based on the earlier of actual usage or upon expiration of the usage period. Interconnection revenues for call termination, call transit and network usage are recognized in the year the traffic occurs. Revenues related to local, long distance, network-to-network and international call connectionsupport services are recognized whenas the callservice is placed or connection is provided, net of amounts payable to other telecommunication carriers for calls terminating in their territories. Revenues related to, products and VASperformed.

Service revenues from discontinued operations

Our revenues are recognized upon delivery of the product or service, net of content providers share in revenue.

Knowledgeprincipally derived from knowledge processing solutions and customer relationship management
services in the business process outsourcing business.

Revenue isfrom outsourcing contracts under our knowledge processing solutions and customer relationship management businesses are recognized when itevidence of an arrangement exists, the service has been provided, the fee is probable that the economic benefits associated with the transaction will flow to usfixed or determinable, and the amount of revenue can be measured reliably. Advance customer receipts that have not been recognized as revenue are recorded as advances from customers and presented as a liability in our consolidated statement of financial position.collectability is reasonably assured. If the fee is not measurable,fixed or determinable, or collectability is not reasonably assured, revenue is not recognized on those arrangements until the customer payment is received. For arrangements requiring specific customer acceptance, revenue recognition is deferred until the earlier of the end of the deemed acceptanceacceptable period or until a written notice of acceptance is received from the customer. Revenue on services rendered to customers whose ability to pay is in doubt at the time of performance of services is also not recorded. Rather, revenue is recognized from these customers as payment is received.

Incentives
We record insignificant commission expenses based Revenue contingent on meeting specific performance conditions are recognized to the numberextent of new subscriber connections initiated by certain dealers. All other cash incentives providedcosts incurred to dealers and customers are recorded as a reductionprovide the service. Outsourcing contracts may also include incentive payments dependent on achieving performance targets. Revenue relating to revenues. Product-based incentives provided to dealers and customers as part of a transaction are accounted for

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as multiple element arrangements andsuch incentive payments is recognized when earned.
Our wireless segment operates two loyalty points programmes, one forthe performance target is achieved.

Smart MoneyNon-service revenuescardholders

Revenues from handset and another for subscribersequipment sales are recognized when the significant risks and rewards ofSmart Gold, Smart BuddyandSmartBro. ownership of the goods have passed to the buyer, usually on delivery of the goods. The loyalty programme forSmart Moneyallows cardholders, upon enrollment,related cost or net realizable value of handsets or equipment, sold to accumulate points when they use their card for purchases,Smart Loadpayments, and reloads for Smart’s prepaid cards,SmartBroprepaid Airtime andSmart Money Cash Load. The points for the programme can then be redeemed for airtime or load wallet. On the other hand, the loyalty programme for Smart’s cellular and broadband subscribers allows postpaid subscribers to accumulate points for billed transactions and prepaid subscribers for reloads or top-ups and VAS, and international direct dialing usage and tenurecustomers is presented as “Cost of sales” in the network for both postpaid and prepaid subscribers. The points for the loyalty programme for the subscribers can then be redeemed, upon registration, for bill rebates, discounts on cellular phonekit purchases, on-network short messaging services or internet surf time. Redemption for both programmes are subject to a minimum number of points being required. Consideration received is allocated between the services sold and the points issued, with the consideration allocated to the points equal to their fair value. Fair value of the points is determined by applying statistical analysis. The fair value of the points issued are deferred and recognized as revenue when the points are redeemed.

Non-service Revenues
Handset and equipment sales
Sale of cellular handsets and communication equipment are recognized upon delivery to the customer.
consolidated income statements.

Interest income

Interest income is recognized as it accrues on a time proportion basis taking into account the principal amount outstanding and the EIR. The majority of interest

Dividend income represents interest earned from cash and cash equivalents, short-term investments and investment in debt securities.

Revenue is recognized when our right to receive the payment is established.

Expenses

Expenses are recognized as incurred.

Provisions

We recognize a provision when we have a present obligation, legal or constructive, as a result of a past event, and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. WhereWhen we expect some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in our consolidated income statement, net of any reimbursements. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, 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 interest expense.

Retirement Benefits

Defined benefit pension plans

We have separate and distinct retirement plans for PLDT and majority of our Philippine-based operating subsidiaries, administered by the respective Fund’s Trustees, covering permanent employees. Retirement costs are separately determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries.

Retirement costs comprise the following:

Service cost;

Net interest on the net defined benefit obligation or asset; and

Remeasurements of net defined benefit obligation or asset

Service cost which include current service cost plus amortization ofcosts, past service cost, experience adjustments, changescosts and gains or losses on non-routine settlements are recognized as part of compensation and employee benefits account in actuarial assumptions and the effectconsolidated income statements.

Net interest on the net defined benefit asset or obligation is the change during the period in the net defined benefit asset or obligation that arises from the passage of any curtailmentstime which is determined by applying the discount rate based on the government bonds to the net defined benefit liability or settlements. Past service costasset. Net deferred benefit asset is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits vest immediately following the introductionpart of or changes to, a pension plan, past service costadvances and other noncurrent assets and net defined benefit obligation is recognized immediately. Actuarial gainsas part of pension and losses are recognized as income or expense when the net cumulative unrecognizedother employee benefits in our consolidated statement of financial position.

Remeasurements comprising actuarial gains and losses, for each individualreturn on plan atassets and any change in the endeffect of the previous reporting period exceeded 10% of the higher of theasset ceiling (excluding net interest on defined benefit obligation and the fair value of plan assets at that date. These gains and lossesobligation) are recognized over the expected average remaining working lives of the employees participatingimmediately in other comprehensive income in the plan.

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period in which they arise. Remeasurements are not classified to profit or loss in subsequent periods.


The net defined benefit asset or liability comprises the present value of the defined benefit obligation (using a discount rate based on government bonds)bonds, as explained inNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Estimating Pension Benefit Costs and Other Employee Benefits), net of past service cost and actuarial gains and losses not yet recognized, and less the fair value of plan assets out of which the obligations are to be settled directly. Plan assets are assets held by a long-term employee benefit fund or qualifying insurance policies and are not available to our creditors nor can they be paid directly to us. Fair value is based on market price information and in the case of quoted securities, the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service cost and actuarial gains and losses not yet recognized, and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
SeeNote 25 – Employee Benefits – Defined Benefit Pension Plansfor more details.

Defined contribution plans

Smart and I-Contacts recordcertain of its subsidiaries maintain a defined contribution plan that covers all regular full-time employees under which it pays fixed contributions based on the employees’ monthly salaries. Smart and certain of its subsidiaries, however, are covered under R.A. 7641 otherwise known as “The Philippine Retirement Law”, which provides for qualified employees to receive a defined benefit minimum guarantee. The defined benefit minimum guarantee is equivalent to a certain percentage of the monthly salary payable to an employee at normal retirement age with the required credited years of service based on the provisions of R.A. 7641.

Accordingly, Smart and certain of its subsidiaries accounts for its retirement obligation under the higher of the defined benefit obligation related to the minimum guarantee and the obligation arising from the defined contribution plan.

For the defined benefit minimum guarantee plan, the liability is determined based on the present value of the excess of the projected defined benefit obligation over the projected defined contribution obligation at the end of the reporting period. The defined benefit obligation is calculated annually by a qualified independent actuary using the projected unit credit method. Smart and certain of its subsidiaries determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses for their contributionrelated to the defined benefit plan are recognized in profit or loss.

The defined contribution plansliability, on the other hand, is measured at the fair value of the defined contribution assets upon which the defined contribution benefits depend, with an adjustment for margin on asset returns, if any, where this is reflected in the defined contribution benefits.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income.

When the benefits of the plan are changed or when the employee rendersplan is curtailed, the resulting change in benefit that relates to past service to Smart and I-Contacts, respectively, essentially coinciding with their cash contributions toor the plans.

gain or loss on curtailment is recognized immediately in profit or loss. Gains or losses on the settlement of the defined benefit plan are recognized when the settlement occurs. SeeNote 25 – Employee Benefits – Defined Contribution Plansfor more details.

Other Long-term Employee Benefits

Our liability arising from 2010 to 2012 Long-term Incentive Plan, or 2010 to 2012 LTIP, areand 2012 to 2014 Long-term Incentive Plan, or the revised LTIP, is determined using the projected unit credit method. Employee benefit costs include current service cost, net interest cost, actuarial gainson the net defined benefit obligation, and losses and past service costs.remeasurements of the net defined benefit obligation. Past service costs and actuarial gains and losses are recognized immediately.

immediately in profit or loss. SeeNote 25 – Employee Benefits – Other Long-term Employee Benefitsfor more details.

The long-term employee benefit liability comprises the present value of the defined benefit obligation (using a discount rate based on government bonds) at the end of the reporting period.

Share-based Payment Transactions
Cash-settled transactions
Our 2007 to 2009 LTIP grants share appreciation rights, or SARs, to our eligible key executives and advisors. Under the 2007 to 2009 LTIP, we recognize the services we receive from our eligible key executives and advisors, and our liability to pay for those services, as the eligible key executives and advisors render services during the vesting period. We measure our liability, initially and at each reporting date until settled, at the fair value of the SARs, by applying an option valuation model, taking into account the terms and conditions on which the SARs were granted, and the extent to which the eligible key executives and advisors have rendered service to date. We recognize any changes in fair value at each reporting date until settled in our consolidated income statement for the year.

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date ofdate. The arrangement is assessed for 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.asset or assets, 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 or extension of the agreement; (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 the fulfillment is dependent on a specified asset; or (d) there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and the date of renewal or extension period for scenario (b).

As a Lessor.Leases where we retain substantially all the risks and benefits of ownership of the asset are classified as operating leases. Any initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rental income. Rental income is recognized in our consolidated income statement on a straight-line basis over the lease term.

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All other leases are classified as finance leases. At the inception of the finance lease, the asset subject to lease agreement is derecognized and lease receivable is recognized. Interest income is accrued over the lease term and lease amortization is accounted for as reduction of lease receivable.

As a Lessee.Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. Operating lease payments are recognized as expense in our consolidated income statement on a straight-line basis over the lease term.

All other leases are classified as finance leases. A finance lease gives rise to the recognition of a leased asset and finance lease liability. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, if there is no reasonable certainty that we will obtain ownership of the leased asset at the end of the lease term. Interest expense is recognized over the lease term.

Income Taxes

Current income tax

Current income tax assets and liabilities for the current and prior years 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 are enacted or substantively enacted as at the end of the reporting period.

period where we operate and generate taxable income.

Deferred income tax

Deferred income tax is provided using the balance sheet liability method on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

purposes at the end of the reporting period.

Deferred income tax liabilities are recognized for all taxable temporary differences except: (1) when the deferred income tax liability arises from the initial recognition of goodwill or 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 loss; and (2) with respect to taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, wherewhen the timing of the reversal of the temporary differences can be controlled and it is possibleprobable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, the carryforward benefits of unused tax credits from excess minimum corporate income tax, or MCIT, over regular corporate income tax, or RCIT, and unused net operating loss carry over, or NOLCO,NOLCO. 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 carryforward benefits of unused tax credits and unused tax losses can be utilized, except: (1) 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 loss; and (2) with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, 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 the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit 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 the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are 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 at the end of the reporting period.

Deferred income tax relating to items recognized in other comprehensive income account is included in the statement of comprehensive income and not in our consolidated income statement.

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Deferred income tax assets and liabilities are offset, if a legally enforceable right exists to offset deferredcurrent income tax assets against deferredcurrent income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it is incurred during the measurement period or in profit or loss.

VAT

Revenues, expenses and assets are recognized net of the amount of VAT except: (1) where the VAT incurred on a purchase of assets or services is not recoverable from the tax authority, in which case, the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and (2) where receivables and payables are stated with the amount of VAT included.

Contingencies

Contingent liabilities are not recognized in our consolidated financial statements. They are disclosed in the notes to our consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable.

Events After the End of the Reporting Period

Post quarter-endyear-end events up to the date of approval of the Board of Directors that provide additional information about our financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post quarter-endyear-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

Equity

Preferred and common stocks are measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Proceeds and/or fair value of considerations received in excess of par value are recognized as capital in excess of par value.

Treasury stocks are our own equity instruments which are reacquired and recognized at cost and presented as reduction in equity. No gain or loss is recognized in our consolidated income statement on the purchase, sale, reissuance or cancellation of our own equity instruments. Any difference between the carrying amount and the consideration upon reissuance or cancellation of shares is recognized as capital in excess of par value.

Change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction and any impact is presented as part of capital in excess of par value.

Retained earnings represent our net accumulated earnings less cumulative dividends declared.

Other comprehensive income comprise itemscomprises of income and expense, including reclassification adjustments, that are not recognized in profit or loss as required or permitted by other IFRSs.

Non-controlling interests represent the equity interests in MKTC, DGCI, BOW, PCEV, Level Up!, Mabuhay Satellite, 3rd Brand, Maratel, BCC, Digital Paradise, netGames, Chikka, BayanTrade and Infocom not held directly by PLDT or indirectly through one of our subsidiaries.

New Accounting Standards and Amendments and Interpretations to Existing Standards Effective Subsequent to December 31, 2010

2013

We will adopt the following revised standards, amendments and interpretations to existing standards enumerated below which are relevant to us when these become effective. Except as otherwise indicated, we do not expect the adoption of these revised standards, amendments and amendmentsinterpretations to IFRS to have a significant impact on our consolidated financial statements.

Effective 2011

2014

RevisedAmendments to IFRS 10, IFRS 12and IAS 24, Related Party Disclosures.27 – Investment Entities.The standard has been revised to simplify the identification of related party relationship and re-balance the extent of disclosures of transactions between related parties based on the costs to preparers and the benefits to users in having this information available in consolidated financial statements. Also, the revised standard provides a partial exemption from the disclosure requirements for government-related entities. This revised standard is applied retrospectively and is applicable These amendments are effective for annual periods beginning on or after January 1, 2011.

2014. They provide an exception to the consolidation requirement for entities that meet the definition of an investment entity underIFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is expected that this amendment would not be relevant to us since none of our investees would qualify to be an investment entity underIFRS 10.

AmendmentAmendments to IAS 32, Financial Instruments: Presentation — Classification– Offsetting Financial Assets and Financial Liabilities. These amendments toIAS 32 clarify the meaning of Rights Issues.The definition“currently has a legally enforceable right to set-off” and also clarify the application of a financial liability in the standard has been amendedIAS 32 offsetting criteria to classify right issues (and certain options or warrants)

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settlement systems (such as equity instruments if: (a)central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments; and (b) the instruments are used to acquire fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment is appliedexpected not to have any impact on our net assets, any changes in offsetting are expected to impact leverage ratios and regulatory capital requirements. The amendments toIAS 32 are to be retrospectively and is applicable for annual periods beginning on or after February 1, 2010.
Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement.The interpretation has been amended to permit an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment should be applied to the beginning of the earliest period presented in the first financial statements in which the entity applied the original interpretation. This amendment is applied retrospectively and is applicable for annual periods beginning on or after January 1, 2011.
IFRIC 19, Extinguishing Financial Liabilities with Equity Instrument.The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability2014. We are consideration paid. As a result,currently assessing the financial liability is derecognized and the equity instruments issued are treated as consideration paid to extinguish that financial liability. The interpretation states that equity instruments issued in a debt for equity swap should be measured at the fair valueimpact of the equity instruments issued, if this can be determined reliably. Ifamendments toIAS 32on our financial position or performance.

Amendments to IAS 36, Recoverable Amount of Disclosures for Non-Financial Assets. These amendments remove the fair valueunintended consequences ofIFRS 13on the disclosures required underIAS 36. In addition, these amendments require disclosure of the equity instruments issued is not reliably determinable,recoverable amounts for the equity instruments shouldassets or CGUs for which impairment loss has been recognized or reversed during the period. The amendments are to be measured by reference to the fair value of the financial liability extinguished as of the date of extinguishment. Any difference between the carrying amount of the financial liability that is extinguished and the fair value of the equity instruments issued is recognized immediately in profit or loss. This interpretation is applied retrospectively and is applicable for annual periods beginning on or after JulyJanuary 1, 2010 from2014 but cannot be applied in periods (including comparative periods) in whichIFRS 13 is not applied. The amendments affect disclosures only and will have no impact on our financial position or performance.

IFRIC Interpretation 21, Levies. The interpretation clarifies that an entity recognizes a liability for a levy when the beginning of the earliest comparative period presented.

Improvements to IFRSs
Improvements to IFRSs were issuedactivity that triggers payment, as identified by the IASB in May 2010. There are separate transitional provisions for each standard which are all effective beginning January 1, 2011.
IFRS 3, Business Combinations.The improvements include: (a) clarification that the amendments toIFRS 7, Financial Instruments: Disclosures, IAS 32, Financial Instruments: Presentation,andIAS 39, Financial Instruments: Recognition and Measurement,that eliminate the exemption for contingent consideration, do not apply to contingent consideration that arose from business combinations whose acquisition dates precede the application ofIFRS 3(as revised in 2008); (b) guidance that the choice of measuring non-controlling interests at fair value or at the proportionate share of the acquiree’s net assets applies only to instruments that represent present ownership interests and entitle their holders to a proportionate share of the net assets in the event of liquidation. All other components of non-controlling interest are measured at fair value unless another measurement basis is required by IFRS; and (c) clarification that the application guidance inIFRS 3applies to all share-based payment transactions that are part of a business combination, including un-replaced and voluntarily replaced share-based payment awards. These improvements are applied prospectively.
IFRS 7, Financial Instruments.The amendment emphasizes the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with financial instruments. This amendment is applied retrospectively.
IAS 1, Presentation of Financial Statements.The amendment clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. This amendment is applied retrospectively.
IAS 27, Consolidated and Separate Financial Statements.The improvement clarifies that the consequential amendments fromIAS 27made toIAS 21, The Effect of Changes in Foreign Exchange Rates, IAS 28, Investments in Associates,andIAS 31, Interests in Joint Ventures,apply prospectively for annual periods beginning on or after July 1, 2009, or earlier whenIAS 27is applied earlier. This improvement is applied retrospectively.
IAS 34, Interim Financial Reporting.The amendment provides guidance on how to apply disclosure principles inIAS 34and add disclosure requirements around: (a) the circumstances likely to affect fair

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values of financial instruments and their classification; (b) transfers of financial instruments between different levels of the fair value hierarchy; (c) changes in classification of financial assets; and (d) changes in contingent liabilities and assets. This amendment is applied retrospectively.
IFRIC 13, Customer Loyalty Programmes.The amendment clarifies the meaning of fair value in the context of measuring award credits under customer loyalty programmes.
Effective 2012
Amendments to IFRS 7, Disclosures — Transfers of Financial Assets.relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. These amendments are applied prospectively and are applicable for annual periods beginning on or after July 1, 2011.
Amendment to IAS 12, Income Taxes — Deferred Income Tax: Recovery of Underlying Assets.The amendment provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will normally be through sale. This amendmentinterpretation is effective for annual periods beginning on or after January 1, 2012.
Effective 2013
2014. The interpretation has no significant impact on our financial position or performance.

IFRS 9,Amendments to IAS 39, Financial Instruments: ClassificationRecognition and Measurement.Measurement – Novation of Derivatives and Continuation of Hedge Accounting.IFRS9, These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as issued in 2010, reflects the first phase of the work on the replacement ofIAS 39and applies to classification and measurement of financial assets and financial liabilities as defined inIAS 39. The standard isa hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after January 1, 2013. In subsequent2014. We have not novated our derivatives during the current period. However, these amendments would be considered for future novations.

Effective Subsequent 2014

IFRS 9, Financial Instruments: Classification and Measurement.IFRS 9, as issued, reflects the first and third phases of the project to

replaceIAS 39and applies to the classification and measurement of financial assets and financial liabilities and hedge accounting, respectively. Work on the second phase, which relate to impairment of financial instruments, and derecognition willthe limited amendments to the classification and measurement model is still on-going, with a view to replaceIAS 39 in its entirety.IFRS 9requires all financial to be addressed. The completionmeasured at fair value at initial recognition. A debt financial asset may, if the fair value option, or FVO, is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of this project is expectedprincipal and interest on the principal outstanding. All other debt instruments are subsequently measured at FVPL. All equity financial assets are measured at fair value either through other comprehensive income or profit or loss. Equity financial assets held-for-trading must be measured at FVPL. For liabilities designated as at FVPL using the fair value option, the amount of change in the middlefair value of 2011.a financial liability that is attributable to changes in credit risk must be presented in other comprehensive income. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change relating to the entity’s own credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. All otherIAS 39classification and measurement requirements for financial liabilities have been carried forward toIFRS 9, including the embedded derivative bifurcation rules and the criteria for using the FVO. The adoption of the first phase ofIFRS 9will have an effect on the classification and measurement of our financial assets.assets, but will potentially have no impact on the classification and measurement of financial liabilities.

On hedge accounting,IFRS 9 replaces the rules-based hedge accounting model ofIAS 39 with a more principles-based approach. Changes include replacing the rules-based hedge effectiveness test with an objectives-based test that focuses on the economic relationship between the hedged item and the hedging instrument, and the effect of credit risk on that economic relationship; allowing risk components to be designated as the hedged item, not only for financial items, but also for non-financial items, provided that the risk component is separately identifiable and reliably measurable; and allowing the time value of an option, the forward element of a forward contact and any foreign currency basis spread to be excluded from the designation of a financial instrument as the hedging instrument and accounted for as costs of hedging.IFRS 9 also requires more extensive disclosures for hedge accounting.

IFRS 9 currently has no mandatory effective date.IFRS 9 may be applied before the completion of the limited amendments to the classification and measurement model and impairment methodology. We will quantifynot adopt the standard before the completion of the limited amendments and the second phase of the project.

IAS 40, Investment Property. The amendment clarifies the inter-relationship betweenIFRS 3 andIFRS 40 when classifying property as investment property or owner-occupied property. The amendment stated that judgment is needed when determining whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope ofIFRS 3. This judgment is based on the guidance ofIFRS 3. This amendment is effective for annual periods beginning on or after July 1, 2014 and is applied prospectively. The amendment has no significant impact on our financial position or performance.

Amendments to IAS 19, Employee Benefits – Defined Benefit Plans: Employee Contributions. The amendments apply to contributions from employees or third parties to defined benefit plans. Contributions that are set out in the formal terms of the plan shall be accounted for as reductions to current service costs if they are linked to service or as part of the remeasurements of the net defined benefit asset or liability if they are not linked to service. Contributions that are discretionary shall be accounted for as reductions of current service cost upon payment of these contributions to the plans. The amendments toIAS 19are to be retrospectively applied for annual periods beginning on or after July 1, 2014. The amendments do not apply to us since our employees are not required to make contributions to the Plan.

Improvement to IFRS

The Annual Improvements to IFRSs (2010-2012 Cycle) contain non-urgent but necessary amendments to the following standards:

IFRS 2, Share-based Payment – Definition of Vesting Condition. The amendment revised the definitions of vesting condition and market condition and added the definitions of performance condition and service condition to clarify various issues. This amendment shall be prospectively applied to share-based payment transactions for which the grant date is on or after July 1, 2014. This amendment does not apply to us as we have no share-based payments.

IFRS 3, Business Combinations – Accounting for Contingent Consideration in a Business Combination. The amendment clarifies that a contingent consideration that meets the definition of a financial instrument should be classified as a financial liability or as equity in accordance withIAS 32. Contingent consideration that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope ofIFRS 9 (orIAS 39,ifIFRS 9is not yet adopted). The amendment shall be prospectively applied to business combinations for which the acquisition date is on or after July 1, 2014. We shall consider this amendment for future business combinations.

IFRS 8, Operating Segments – Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments’ Assets to the Entity’s Assets. The amendments require entities to disclose the judgment made by management in aggregating two or more operating segments. This disclosure should include a brief description of the operating segments that have been aggregated in this way and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics. The amendments also clarify that an entity shall provide reconciliations of the total of the reportable segments’ assets to the entity’s assets if such amounts are regularly provided to the chief operating decision maker. These amendments are effective for annual periods beginning on or after July 1, 2014 and are applied retrospectively. The amendments affect disclosures only and have no impact on our financial position or performance.

IFRS 13, Fair Value Measurement – Short-term Receivables and Payables. The amendment clarifies that short-term receivables and payables with no stated interest rates can be held at invoice amounts when the effect of discounting is immaterial.

IAS 16, Property, Plant and Equipment – Revaluation Method – Proportionate Restatement of Accumulated Depreciation. The amendment clarifies that, upon revaluation of an item property, plant and equipment, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways: (a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated depreciation at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses; and (b) the accumulated depreciation is eliminated against the gross carrying amount of the asset.

The amendment is effective for annual periods beginning on or after July 1, 2014. The amendment shall apply to all revaluations recognized in annual periods beginning on or after the date of initial application of this amendment and in the immediately preceding annual period. The amendment has no impact on our consolidatedfinancial position or performance.

IAS 24, Related Party Disclosures – Key Management Personnel. The amendments clarify that an entity is a related party of the reporting entity if the said entity, or any member of a group for which it is a part of, provides key management personnel services to the reporting entity or to the parent company of the reporting entity. The amendments also clarify that a reporting entity that obtains management personnel services from another entity (also referred to as management entity) is not required to disclose the compensation paid or payable by the management to its employees or directors. The reporting entity is required to disclose the amounts incurred for the key management personnel services provided by a separate management entity. The amendments are effective for annual periods beginning on or after July 1, 2014 and are applied retrospectively. The amendments affect disclosures only and have no impact on our financial position or performance.

IAS 38, Intangible Assets – Revaluation Method – Proportionate Restatement of Accumulated Amortization. The amendments clarify that, upon revaluation of an intangible asset, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways: (a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated amortization at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses; and (b) the accumulated amortization is eliminated against the gross carrying amount of the asset.

The amendments also clarify that the amount of the adjustment of the accumulated amortization should form part of the increase or decrease in the carrying amount accounted for in accordance with the standard.

The amendments are effective for annual periods beginning on or after July 1, 2014. The amendments shall apply to all revaluations recognized in annual periods beginning on or after the date of initial application of this amendment and in the immediately preceding annual period. The amendments have no impact on our financial position or performance.

The Annual Improvements to IFRS (2011-2013 Cycle) contain non-urgent but necessary amendments to the following standards:

IFRS 1, First-time Adoption of International Financial Reporting Standards – Meaning of “Effective IFRSs”. The amendment clarifies that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but that permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first IFRS financial statements. This amendment is not applicable to us as we are not a first-time adopter of IFRS.

IFRS 3, Business Combinations – Scope Exceptions for Joint Arrangements. The amendment clarifies thatIFRS 3does not apply to the accounting for the formation of a joint arrangement in the financial statements in conjunction withof the joint arrangement itself. The amendment is effective for annual periods beginning on or after July 1, 2014 and is applied prospectively.

IFRS 13, Fair Value Measurement – Portfolio Exception. The amendment clarifies that the portfolio exception inIFRS 13 can be applied to financial assets, financial liabilities and other phases, whencontracts. The amendment is effective for annual periods beginning on or after July 1, 2014 and is applied prospectively. The amendment has no significant impact on our financial position and performance.

We have not early adopted any standard, interpretation or amendment that has been issued to present a comprehensive picture.

3. Management’s Use of Judgments, Estimates and Assumptions
but is not yet effective.

3.Management’s Use of Accounting Judgments, Estimates and Assumptions

The preparation of our consolidated financial statements in conformity with IFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities and disclosure of contingent liabilities at the end of each reporting date.period. The uncertainties inherent in these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the assets or liabilities affected in the future years.

Judgments

In the process of applying the PLDT Group’s accounting policies, management has made the following judgments, apart from those including estimations and assumptions, which have the most significant effect on the amounts recognized in our consolidated financial statements.

Assets classified as held-for-sale and discontinued operations

On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which sale was completed in April 2013. Consequently, the BPO segment as at December 31, 2012 has been classified as discontinued operations and a disposal group held-for-sale. The BPO segment met the criteria of an asset to be classified as held-for-sale as at December 31, 2012 for the following reasons: (1) the BPO segment was then available for immediate sale and could be sold to a potential buyer in its current condition; (2) the Board of Directors had approved the plan to sell the BPO segment and we had entered into preliminary negotiations with a potential buyer and a number of other potential buyers had been identified; and (3) the Board of Directors expected negotiations to be finalized and the sale to be completed in April 2013. The results of operations of our BPO business for the four months ended April 30, 2013 and for the years ended December 31, 2012 and 2011 were presented as discontinued operations. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations.

On July 10, 2012, ePLDT entered into a Share Purchase Agreement with Philweb for the sale of 398 million common shares of Philweb, representing ePLDT’s 27% equity interest in Philweb. The sale of the 398 million common shares was executed in four tranches, and was completed by December 2013. Thus, the investment in Philweb was classified as assets held-for-sale as at December 31, 2012. SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in PhilwebandNote 27 – Financial Assets and Liabilities – ePLDT Group.

Determination of functional currency

The functional currencies of the entities under the PLDT Group are the currency of the primary economic environment in which each entity operates. It is the currency that mainly influences the revenue from and cost of rendering products and services.

The presentation currency of the PLDT Group is the Philippine peso. Based on the economic substance of the underlying circumstances relevant to the PLDT Group, the functional currency of all entities under PLDT Group is the Philippine peso, except forfor: (a) SMHC, SMI, TSI, BOW, Mabuhay Satellite,FECL Group, Piltel International Holdings Corporation, PLDT Global SPi and certain of its subsidiaries, PGNL, DCPL, and certain subsidiaries of Chikka, which isuse the U.S. dollar; (b) SHPL, TPL, 3rd Brand, CPL and CISP, which use the Singapore dollar for SCH, SGP, 3rd Brand,dollar; (c) CCCBL, which use the Chinese renminbi; (d) BTMS, which use the Malaysian ringgit; and certain subsidiaries of BayanTrade.

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(e) PTCI, which use the Indonesian rupiah.


Leases

As a lessee, we have various lease agreements in respect of our certain equipment and properties. We evaluate whether significant risks and rewards of ownership of the leased properties are transferred to us (finance lease) or retained by the lessor (operating lease) based onIAS 17, Leaseswhich requires us to make judgments and estimates of transfer of risk and rewards of ownership of the leased properties.. Total lease expense arising from operating leases from continuing operations amounted to Php3,970Php6,041 million, Php4,055Php5,860 million and Php3,656Php3,938 million for the years ended

December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php86 million, Php263 million and Php224 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total finance lease obligations from continuing operations amounted to Php43Php11 million, Php18 million and Php64Php14 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php7 million as at December 31, 2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 20 Interest-bearing Financial Liabilities Note 26 — Contractual Obligations and Commercial Commitmentsunder Finance LeasesandNote 28 —27 – Financial Assets and Liabilities – Liquidity Risk.

Significant influenceAccounting for investments in Manila Electric Company, or Meralco, on which PCEV has less than 20% ownership

UnderIAS 28, significant influence must be present and currently exercisable over an investee to account for any interest in that investee as investment in an associate and carried at equity method of accounting. If an investor holds, directly or indirectly, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
On March 30, 2010, following the transfer of PCEV’s Meralco shares to Beacon Electric AssetMediaQuest Holdings, Inc., or Beacon, PCEV’sMediaQuest, through Philippine Depositary Receipts, or PDRs

ePLDT made various investments in PDRs issued by MediaQuest in relation to its direct ownershipinterest in Meralco was reduced to approximately 6% from approximately 20%. BeaconSatventures, Inc., or Satventures, and indirect interest in Cignal TV, Inc., or Cignal TV. Satventures is a jointly controlled entitywholly-owned subsidiary of PCEVMediaQuest and Metro Pacific Investments Corporation,Cignal TV is a wholly-owned subsidiary of Satventures. ePLDT’s investments in PDRs are part of our overall strategy to broaden our distribution platform and increase our ability to deliver multi-media content. On September 27, 2013, the Satventures and Cignal TV PDRs were issued and provided ePLDT a 40% economic interest each in the common shares of Satventures and Cignal TV, or MPIC, for the purposean aggregate of consolidating the ownership interest of PCEV and MPIC in Meralco. The decrease in PCEV’s direct ownership in Meralco, however, did not result in a change in PCEV’s representation on the Meralco Board of Directors. Prior to the transfer of approximately 14%64% economic interest in Meralco to Beacon, PCEV had three out of the 11 Board of Directors seats in Meralco. Cignal TV.

Based on the Omnibus Agreement, or OA, among PCEV, MPIC and Beacon, both PCEV and MPIC agreed that an equal number of Meralco nominee directors shall be chosen from each list of nominees provided by PCEV and MPIC. If the number of Meralco Nominee Directors for Beacon is an odd number, the remaining one Meralco Nominee Director shall be chosen alternatively first from the list of nominees provided by MPIC and then from the list provided by PCEV. The total Beacon ownershipour judgment, ePLDT’s investments in Meralco entitles it to nominate three Board of Directors seats, two of whom are the Chairman of the Board and the President of PCEV. For Meralco Board of Directors, committees and officers, these are jointly nominated fromPDRs give ePLDT a list of nominees mutually agreed to by MPIC and PCEV and affirmative votes for the appointment of individuals to different Board of Directors committees and officers that Beacon are also provided for under the current MPIC-PCEV shareholders agreement. The Board of Directors members, committees and Meralco officers, which are the operating decision makers of Meralco, are represented by MPIC and PCEV through nominations. On this basis, PCEV has retained significant influence over Meralco, despite having less than 20% ownership interest,Satventures and Cignal TV as evidenced by virtueinter-change of PCEV’s 6% direct ownership interest together with its indirect interestmanagerial personnel, provision of about 17.5% through PCEV’s investmentessential technical information and material transactions among PLDT, Smart, Satventures and Cignal TV, thus accounted for as investments in Beacon.associates using the equity method.

The carrying value of our investments in PDRs issued by MediaQuest amounted to Php9,522 million as at December 31, 2013. See

related discussion onNote 10 — Investments– Investment in Associates, and Joint Ventures and Deposits – Investment in MediaQuest.

Estimates and Assumptions

The key estimates and assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognized in the consolidated financial statements within the next financial year are discussed as follows:

below. We based our estimates and assumptions on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of PLDT. Such changes are reflected in the assumptions when they occur.

Asset impairment

IFRS requires that an impairment review be performed when certain impairment indicators are present. In the case of goodwill, at a minimum, such asset is subject to an annual impairment test and more frequently whenever there is an indication that such asset may be impaired. This requires an estimation of the value in use of the cash-generating unitsCGUs to which the goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the cash-generating unitCGU and to choose a suitable discount rate in order to calculate the present value of those cash flows.

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Determining the recoverable amount of property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets, requires us to make estimates and assumptions in the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets. Future events could cause us to conclude that property, plant and equipment, investments in associates and joint ventures, intangible assets and other noncurrent assets associated with an acquired business are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and financial performance.

The preparation of estimated future cash flows involves significant estimations and assumptions. While we believe that our assumptions are appropriate and reasonable, significant changes in our assumptions may materially affect our assessment of recoverable values and may lead to future additional impairment charges under IFRS. Total

In December 2011, Smart recognized full impairment charges (including provision of Php8,457 million for doubtful account receivablescertain network equipment and write-downfacilities which no longer efficiently support our network modernization program, which was discussed and approved by Smart’s Board of inventoriesDirectors on February 28, 2011 and supplies) amountedhave been identified for replacement. The full impairment provision recognized represents the net book value of these network equipment and facilities.

In December 2012, DMPI recognized an impairment loss of Php2,881 million pertaining to Php2,438 million, Php5,061the net book values of certain identified network equipment and facilities that are affected by the unified wireless strategy as the overall business of DMPI became anchored on PLDT’s wireless business unit, Smart. The network modernization program resulted in network impairment of DMPI due to advancement in technologies.

In 2013, Smart and DMPI launched a network convergence program designed to consolidate the networks of Smart and DMPI into a single network enabling subscribers of both companies to take advantage of the combined network. The convergence is expected to result in savings from synergies in terms of optimized capital expenditures and cost efficiencies from colocation of base stations, consolidation of core systems, and operating expenses. The program, however, rendered certain network equipment and site facilities obsolete. In view of this, Smart and DMPI recognized full impairment provision on the net book value of the affected network equipment and site facilities amounting to Php378 million and Php4,180Php1,764 million, respectively.

SeeNote 5 – Income and Expenses – Asset Impairment and Note 9 – Property, Plant and Equipment – Impairment of Certain Wireless Network Equipment and Facilities.

Total asset impairment on noncurrent assets from continuing operations amounted Php2,143 million, Php2,896 million and Php8,514 million for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively.2011, respectively, while that from discontinued operations amounted to nil for the years ended December 31, 2013 and 2012 and Php3 million for the year ended December 31, 2011. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment Information, Note 5 Income and Expenses – Asset ImpairmentandNote 10 — Investments in Associates9 – Property, Plant and Joint VenturesEquipment.

The carrying values of our property, plant and equipment, investments in associates, and joint ventures and deposits, goodwill and intangible assets, trade and other receivables, inventories and supplies and prepayments are separately disclosed inNotes 9, 10, 14 16, 17and18,respectively.

Estimating useful lives of property, plant and equipment

We estimate the useful lives of each item of our property, plant and equipment based on the periods over which our assets are expected to be available for use. Our estimate of the useful lives of our property, plant and equipment is based on our collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful lives of our property, plant and equipment are reviewed at least at each financialevery year-end and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of our assets. It is possible, however, that future results of operations could be materially affected by changes in our estimates brought about by changes in the factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of our property, plant and equipment would increase our recorded expensesdepreciation and amortization and decrease our noncurrent assets.

property, plant and equipment.

The total depreciation and amortization of property, plant and equipment from continuing operations amounted to Php26,277Php30,304 million, Php25,607Php32,354 million and Php24,709Php27,539 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php153 million, Php466 million and Php418 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total carrying values of property, plant and equipment, net of accumulated depreciation and amortization from continuing operations, amounted to Php163,184Php192,665 million, Php200,078 million and Php161,256Php200,142 million as at December 31, 20102013 and 2009, respectively. SeeNote 4 — Operating Segment InformationandNote 9 — Property, Plant2012, and Equipment.

Determining the fair value of investment properties
We have adopted the fair value approach in determining the carrying value of our investment properties. We opted to rely on independent appraisers in determining the fair values of our investment properties, and such fair values were determined based on recent prices of similar properties, with adjustments to reflect any changes in economic conditions since the date of those transactions. The amounts and timing of recorded changes in fair value for any period would differ if we made different judgments and estimates or utilized a different basis for determining fair value. Appraisal of investment properties is annually performed every December 31.
Net gainsJanuary 1, 2012, respectively, while that from fair value adjustments charged to profit or lossdiscontinued operations amounted to Php6 million, Php352 million and Php59 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total carrying values of our investment properties amounted to Php1,560 million and Php1,210Php1,529 million as at December 31, 2010 and 2009, respectively. SeeNote 12 — Investment Properties.

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2012.


Goodwill andEstimating useful lives of intangible assets with finite life
Our consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the acquisition method starting
January 1, 2009 and purchase method for prior year acquisitions, which both require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect our financial performance.

Intangible assets acquired from business combination with finite lives are amortized over the expected useful economic life using the straight-line method of accounting. At a minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statement.

The total amortization of intangible assets from continuing operations with finite life amounted to Php388Php1,020 million, Php368Php921 million and Php377Php117 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php55 million, Php180 million and Php147 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total carrying values of intangible assets with finite life from continuing operations amounted to Php7,286 million, Php7,505 million and Php8,698 million as at December 31, 2013 and 2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php354 million as at December 31, 2012.

SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 – Operating Segment Information, Note 9 – Property, Plant and EquipmentandNote 14 – Goodwill and Intangible Assets.

Goodwill and intangible assets with indefinite useful life

Our consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the acquisition method, which require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Any excess in the purchase price over the estimated fair market values of the net assets acquired is recorded as goodwill in our consolidated statement of financial position. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect our financial performance.

Total carrying values of goodwill and intangible assets with indefinite useful life from continuing operations amounted to Php11,485Php66,632 million, Php66,745 million and Php13,024Php74,605 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php6,679 million as at December 31, 2012. SeeNote 13 — Business Combinations and Acquisition2 – Summary of Non-Controlling InterestsSignificant Accounting Policies – Discontinued OperationsandNote 14 Goodwill and Intangible Assets.

Recognition of deferred income tax assets and liabilities

We review the carrying amounts of deferred income tax assets at the end of each reporting period and reduce these to the extent that these are no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Our assessment on the recognition of deferred income tax assets on deductible temporary differences is based on the level and timing of forecasted taxable income of the subsequent reporting periods. This forecast is based on our past results and future expectations on revenues and expenses as well as future tax planning strategies. However, there is no assurance that we will generate sufficient taxable income to allow all or part of our deferred income tax assets to be utilized. We also review the level of projected gross margin for the use of Optional Standard Deduction, or OSD method, and assess the future tax consequences for the recognition of deferred income tax assets and deferred income tax liabilities.assets. Based on Smart’sSmart and Wolfpac’sSBI’s projected gross margin, they expect to continue using the OSD method in the foreseeable future.

Based on the above assessment, our consolidated unrecognized deferred income tax assets amounted to Php1,477Php12,426 million, Php15,351 million and Php1,236Php16,098 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. In addition, our unrecognized net deferred income tax assets for items which would not result in future tax benefits when using the OSD method amounted to Php2,805Php4,496 million, Php3,655 million and Php3,296Php4,240 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. Total consolidated provision forbenefit from deferred income tax from continuing operations amounted to Php1,198Php4,401 million, Php656Php919 million and Php2,715Php1,174 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from

discontinued operations amounted to Php30 million, Php28 million and Php275 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total consolidated net deferred income tax assets from continuing operations amounted to Php6,110Php14,181 million, Php7,225 million and Php7,721Php5,117 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively, while total consolidated net deferred income tax liabilitiesthat from discontinued operations amounted to Php1,099 million and Php1,321Php212 million as at December 31, 2010 and 2009, respectively.2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment InformationandNote 7 Income Taxes.

Estimating allowance for doubtful accounts

If we assessed that there iswas an objective evidence that an impairment loss has been incurred in our trade and other receivables, we estimate the allowance for doubtful accounts related to our trade and other receivables that are specifically identified as doubtful of collection. The amount of allowance is evaluated by management on the basis of factors that affect the collectibilitycollectability of the accounts. In these cases, we use judgment based on the best available facts and circumstances, including, but not limited to, the length of our relationship with the customer and the customer’s credit status based on third party credit reports and known market factors, to record specific reserves for customers against amounts due in order to reduce our receivables to amounts that we expect to collect. These specific reserves are re-evaluated and adjusted as additional information received affect the

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amounts estimated.

In addition to specific allowance against individually significant receivables, we also assess a collective impairment allowance against credit exposures of our customer which were grouped based on common credit characteristic, which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when the receivables were originally granted to customers. This collective allowance is based on historical loss experience using various factors, such as historical performance of the customers within the collective group, deterioration in the markets in which the customers operate, and identified structural weaknesses or deterioration in the cash flows of customers.

Total asset impairment provision for doubtful accounts for trade and other receivables from continuing operations recognized in our consolidated income statements amounted to Php834Php3,171 million, Php2,335Php2,175 million and Php1,079Php1,543 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively, while that from discontinued operations amounted to Php2 million, Php3 million and Php6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Trade and other receivables, net of asset impairment,allowance for doubtful accounts, from continuing operations amounted to Php16,428Php17,564 million, Php16,379 million and Php14,729Php16,245 million as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php2,704 million as at December 31, 2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 4 Operating Segment Information, Note 5 Income and Expenses – Asset Impairment, Note 16 Trade and Other ReceivablesandNote 28 —27 – Financial Assets and Liabilities.

Estimating net realizable value of inventories and supplies

We write down the cost of inventories whenever the net realizable value of inventories becomes lower than cost due to damage, physical deterioration, obsolescence, change in price levels or other causes. The lower of cost and net realizable value of inventories is reviewed on a periodic basis. Inventory items identified to be obsolete or unusable are written-off and charged as expense in our consolidated income statement.
Total write-down of inventories and supplies amounted to Php108 million, Php389 million and Php242 million for the years ended December 31, 2010, 2009 and 2008, respectively. The carrying values of inventories and supplies amounted to Php2,219 million and Php2,165 million as at December 31, 2010 and 2009, respectively. SeeNote 4 — Operating Segment Information, Note 5 — Income and ExpensesandNote 17 — Inventories and Supplies.
Share-based payment transactions
Our 2007 to 2009 LTIP grants SARs to our eligible key executives and advisors. Under the 2007 to 2009 LTIP, we recognize the services we receive from the eligible key executives and advisors, and our liability to pay for those services, as the eligible key executives and advisors render services during the vesting period. We measure our liability, initially and at each reporting date until settled, at the fair value of the SARs, by applying an option valuation model, taking into account the terms and conditions on which the SARs were granted, and the extent to which the eligible key executives and advisors have rendered service to date. We recognize any changes in fair value at each reporting date until settled in our consolidated income statement. The estimates and assumptions are described inNote 25 — Share-based Payments and Employee Benefitsand include, among other things, annual stock volatility, risk-free interest rate, dividends yield, the remaining life of options, and the fair value of common stock. While management believes that the estimates and assumptions used are reasonable and appropriate, significant differences in our actual experience or significant changes in the estimates and assumptions may materially affect the stock compensation costs charged to operations. The fair value of the 2007 to 2009 LTIP recognized as expense amounted to Php1,833 million and Php1,281 million for the years ended December 31, 2009 and 2008, respectively. The outstanding 2007 to 2009 LTIP liability of Php4,582 million as at December 31, 2009 was paid in full in April 2010. SeeNote 5 — Income and Expenses, Note 23 — Accrued Expenses and Other Current LiabilitiesandNote 25 — Share-based Payments and Employee Benefits.
Estimation of pension benefit costs and other employee benefits

The cost of defined benefit and contribution plans and present value of the pension obligation are determined using projected unit credit method. Actuarial valuation includes making various assumptions which consists, among other things, discount rates, expected rates of return on plan assets, rates of compensation increases and mortality rates. SeeNote 25 — Share-based Payments and Employee Benefits. Actual results that differ from our assumptions are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. These excess actuarial gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan. Due to complexity of valuation, the

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underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in assumptions. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for pension and other retirement obligations. All assumptions are reviewed atevery year-end.
Total

Net consolidated pension benefit costs from continuing operations amounted to Php236Php856 million, Php1,306Php584 million and Php725Php570 million for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively. Unrecognized2011, respectively, while net actuarial gainsconsolidated pension benefit costs from discontinued operations amounted to Php479Php9 million, Php170 million and Php8 million for the years ended December 31, 2013, 2012 and 2011, respectively. The prepaid benefit costs from continuing operations amounted to Php199 million, Php1,625 million and Php8,626 million as at December 31, 20102013 and unrecognized net actuarial losses2012, and January 1, 2012, respectively. The accrued benefit costs from continuing operations amounted to Php2,474Php10,310 million, Php492 million and Php438 million as at December 31, 2009. The prepaid benefit costs2013 and 2012, and January 1, 2012, respectively, while that from discontinued operations amounted to Php5,333 million and Php5,414Php206 million as at December 31, 2010 and 2009, respectively. The accrued benefit costs amounted to Php415 million and Php359 million as at December 31, 2010 and 2009, respectively.2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations, Note 5 Income and Expenses – Compensation and Employee Benefits, Note 18 Prepaymentsand

Note 25 — Share-based Payments– Employee Benefits – Defined Benefit Pension Plans.

To ensure the proper execution of our strategic and Employee Benefits.

The newoperational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, the 2012 to 2014 LTIP, or 2010covering the period from January 1, 2012 to 2012 LTIP, has been presented to andDecember 31, 2014, was approved by the Board of Directors with the endorsement of the Executive Compensation Committee, or ECC, andon March 22, 2012. The award in the Board2012 to 2014 LTIP is contingent upon the successful achievement of Directors, and is based oncertain profit targets, intended to align the execution of the business strategies of the expanded PLDTGroup, including Digitel, over the three year period from 2012 to 2014. In addition, the 2012 to 2014 LTIP allows for the covered Performance Cycle. The costparticipation of 2010a number of senior executives and certain newly hired executives and ensures the continuity of management in line with the succession planning of the PLDT Group. LTIP costs recognized for the years ended December 31, 2013 and 2012 amounted to 2012 LTIP is determined using the projected unit credit method based on prevailing discount ratesPhp1,638 million and profit targets. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our cost for other employee benefits. All assumptions are reviewed on a monthly basis.Php1,491 million, respectively. Total outstanding liability and fair value of 20102012 to 20122014 LTIP cost amounted to Php1,392Php3,129 million and Php1,491 million as at and for the year ended December 31, 2010.2013 and 2012, respectively. SeeNote 5 Income and Expenses – Compensation and Employee BenefitsandNote 25 — Shared-based Payments and– Employee Benefits – Other Long-term Employee Benefits.

Provision for asset retirement obligations

Provision for asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. This requires an estimation of the cost to restore/dismantle on a per square meter basis, depending on the location, and is based on the best estimate of the expenditure required to settle the obligation at the future restoration/dismantlement date, discounted using a pre-tax rate that reflects the current market assessment of the time value of money and, where appropriate, the risk specific to the liability. Total provision for asset retirement obligations amounted to Php1,344Php2,144 million, Php2,543 million and Php1,204Php2,107 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. SeeNote 21 Deferred Credits and Other Noncurrent Liabilities.

Provision for legal contingencies and tax assessments

We are currently involved in various legal proceedings and tax assessments. Our estimate of the probable costs for the resolution of these claims hashave been developed in consultation with our counsel handling the defense in these matters and is based upon our analysis of potential results. We currently do not believe these proceedings will have a material adverse effect oncould materially reduce our consolidated financial statements.revenues and profitability. It is possible, however, that future financial performance could be materially affected by changes in our estimates or effectiveness of our strategies relating to these proceedings and assessments. SeeNote 27 —26 – Provisions and Contingencies.

Based on management’s assessment, appropriate provisions were made; however, management has decided not to disclose further details of these provisions as they may prejudice our position in certain legal proceedings.

Revenue recognition

Our revenue recognition policies require us to make use of estimates and assumptions that may affect the reported amounts of our revenues and receivables.

Our agreements with domestic and foreign carriers for inbound and outbound traffic subject to settlements require traffic reconciliations before actual settlement is done, which may not be the actual volume of traffic as measured by us. Initial recognition of revenues is based on our observed traffic adjusted by our normal experience adjustments, which historically are not material to our consolidated financial statements. Differences between the amounts initially recognized and the actual settlements are taken up in the accounts upon reconciliation. However, we cannot assure you that the use of such estimates will not result in material adjustments in future periods.

Revenues under a multiple element arrangement specifically applicable to our fixed line and wireless businesses are split into separately identifiable components based on their relative fair value in order to reflect the substance of the transaction. Where fair value is not directly observable, the total consideration is allocated using an appropriate allocation method.

200

We account for mobile contracts in accordance withIAS 18, Revenue Recognition, and have concluded that the handset and the mobile services may be accounted for as separate identifiable components. The handset (with activation) is delivered first, followed by the mobile service (which is provided over the contract period, generally one or two years). Because some amount of the arrangement consideration that may be allocated to the handset generally is contingent on providing the mobile service, the amount that is allocated to the handset is limited to the cash received (i.e., the amount paid for the handset) at the time of the handset delivery.


Under certain arrangements with our knowledge processing solutions services, if there is uncertainty regarding the outcome of the transaction for which service was rendered, revenue is recognized only to the extent of expenses incurred for rendering the service and only to such amount isas determined to be recoverable.

We recognize our revenues from installation and activation related fees and the corresponding costs over the expected average periods of customer relationship for fixed line and cellular services. We estimate the expected average period of customer relationship based on our most recent churn-ratechurn rate analysis.

Determination of fair values of financial assets and liabilities

Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

Total

Other than those whose carrying amounts are reasonable approximations of fair values, total fair values of financial assets and liabilities amounted to Php55,538 million and Php167,396 million as at December 31, 2010,2013 amounted to Php4,965 million and Php115,885 million, respectively, while the total fair values of financial assets and liabilities amounted to Php58,225 million and Php165,063 million as at December 31, 2009,2012 amounted to Php6,782 million and Php134,036 million, respectively. Total fair values of financial assets and liabilities as at January 1, 2012 amounted to Php8,766 million and Php119,410 million, respectively. SeeNote 28 —27 – Financial Assets and Liabilities.

4. Operating Segment Information

4.Operating Segment Information

Operating segments are components of the PLDT Group that engage in business activities from which they may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of PLDT Group), which operating results are regularly reviewed by the chief operating decision maker, or our Management Committee, to make decisions about how resources are to be allocated to each of the segments and to assess their performances, and for which discrete financial information is available.

For management purposes, we are organized into business units based on our products and services and based on the reorganization as discussed below. We have three reportable operating segments, as follows:

  

Wireless wireless telecommunications services provided throughby Smart, CURE and DMPI, which owns theSun Cellular business and is a wholly-owned subsidiary of Digitel, our cellular service providers namely, Smart, PCEV, (on August 17, 2009, Smart acquired the cellular business of PCEV, which is formerly known as Pilipino Telephone Corporation) and CURE;providers; SBI BOW, Airborne Access Corporation and PDSI, our wireless broadband service providers; WolfpacVoyager and Chikka Group, our wireless content operators; and ACeS Philippines, our satellite operator;

Fixed Line — fixed line telecommunications services primarily provided by PLDT. We also provide fixed line services through PLDT’s subsidiaries ClarkTel, SubicTel, Philcom, Maratel, SBI, PDSI, BCC and PLDT Global, all of which together account for approximately 4%

Fixed Line – fixed line telecommunications services primarily provided by PLDT. We also provide fixed line services through PLDT’s subsidiaries, namely, ClarkTel, SubicTel, Philcom Group, Maratel, SBI, PDSI, BCC, PLDT Global and Digitel, all of which together account for approximately 8% of our consolidated fixed line subscribers; andICT — information and communications infrastructure and services for internet applications, internet protocol-based solutions and multimedia content delivery provided by ePLDT and BayanTrade Group; knowledge processing solutions provided by the SPi Group; customer relationship management provided by SPi CRM (on April 8, 2010, SPi CRM, Parlance and Vocativ were merged wherein SPi CRM became the surviving entity); internet and online gaming services provided by Infocom, Digital Paradise, netGames and Level Up!; ande-commerce, and IT-related services provided by other investees of ePLDT, as discussed inNote 10 — Investments in Associates and Joint Ventures.

On July 7, 2010, our Board of Directors approved the reorganization of the ePLDT Group into two business groups: (i) the ICT business group, which provides data center services, internet and online gaming services and business solutions and applications;multimedia content delivery provided by ePLDT, IPCDSI, AGS Group and (ii) the BPO business group, which covers customer relationshipCuro; and bills printing and other VAS-related services provided by ePDS; and

201

Others – PGIH, PGIC and PCEV, our investment companies.

SeeNote 2 – Summary of Significant Accounting Policiesand Note 13 – Business Combinations and Acquisition of Noncontrolling Interests,for further discussion.


management or call center operations under SPi CRM; and content solutions, medical billing and coding and medical transcription services under SPi. The BPO business group will be eventually transferred to PLDT, subject to the finalization of the terms and conditions thereof and the execution of relevant agreements.
Although our Board of Directors already approved the reorganization of ePLDT into two business groups — ICT business group and BPO business group, the actual reorganization has not yet been consummated as at March 29, 2011 and therefore, asAs at December 31, 2010, the2013, our chief operating decision maker continues to viewcategorizes our business activities using theinto three business units: Wireless, Fixed Line and ICT.Others. On December 4, 2012, our Board of Directors authorized the sale of our BPO segment, which was completed in April 2013. Consequently, the BPO segment as at December 31, 2012 has been classified as discontinued operations and a disposal group held-for-sale. The reorganization is not expectedBPO segment met the criteria of an asset to have an impact on PLDT’s consolidated financial statements.
be classified as held-for-sale as at December 31, 2012. The results of operations of our BPO business for the four months ended April 30, 2013 and for the years ended December 31, 2012 and 2011 were presented as discontinued operations. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued OperationsandNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as Held-for-Sale and Discontinued Operations.

The chief operating decision maker and management monitormonitors the operating results of each business unit separately for purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on net income (loss) for the year; earnings before interest, taxes and depreciation and amortization, or adjustedAdjusted EBITDA; adjustedAdjusted EBITDA margin; and core income. Net income (loss) for the year is measured consistent with net income (loss) in the consolidated financial statements.

Adjusted EBITDA for the year is measured as net income from continuing operations excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity share in net earnings (losses) of associates and joint ventures, foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net, provision for (benefit from) income tax and other income.

income (expenses) – net.

Adjusted EBITDA margin for the year is measured as adjustedAdjusted EBITDA from continuing operations divided by service revenues.

Core income for the year is measured as net income attributable to equity holders of PLDT (net income less net income attributable to non-controllingnoncontrolling interests), excluding foreign exchange gains (losses) net, gains (losses) on derivative financial instruments net (excluding hedge costs), asset impairment on noncurrent assets, other nonrecurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures.

Transfer prices between operating segments are determined on an arm’s length basis similar to transactions with third parties. Segment revenues, segment expenses and segment results include transfers between business segments. These transfers are eliminated in full upon full consolidation.

Core earnings per common share, or core EPS, for the year is measured as core income divided by the weighted average number of outstanding common shares. SeeNote 8 – Earnings Per Common Share for the weighted average number of common shares.

Adjusted EBITDA, Adjusted EBITDA margin, core income and core EPS are non-IFRS measures.

The amount of segment assets and liabilities and segment profit or loss are based on measurement principles that are similar to those used in measuring the assets and liabilities and profit or loss in the consolidated financial statement, which is in accordance with IFRS.

The segment revenues, net income for the year, assets, liabilities, and other segment information of our reportable operating segments as at and for the years ended December 31, 2010, 20092013, 2012 and 20082011 are as follows:

                     
              Inter-segment    
  Wireless  Fixed Line  ICT  Transactions  Consolidated 
  (in million pesos) 
As at and for the year ended December 31, 2010
                    
Revenues
                    
External customer:  94,343   40,167   9,949      144,459 
Service revenues (Note 3)  92,986   39,825   9,431      142,242 
Non-service revenues (Notes 3 and 5)  1,357   342   518      2,217 
Inter-segment transactions:  844   8,784   1,409   (11,037)   
Service revenues (Note 3)  844   8,784   1,246   (10,874)   
Non-service revenues (Notes 3 and 5)        163   (163)   
 
Total revenues  95,187   48,951   11,358   (11,037)  144,459 
 
                     
Results
                    
Depreciation and amortization (Notes 3 and 9)  13,243   12,292   742      26,277 
Asset impairment (Notes 3, 5, 9, 10, 14, 16, 17, 18 and 28)  824   291   1,323      2,438 
Financing costs — net (Notes 5, 9, 20 and 28)  2,683   3,856   176   (17)  6,698 
Equity share in net earnings of associates and joint ventures (Note 10)  1,221      187      1,408 
Interest income (Note 5)  698   484   35   (17)  1,200 
Provision for (benefit from) income tax (Notes 3 and 7)  11,414   2,050   (38)     13,426 
Net income (loss) for the year / Segment profit (loss) for the year  35,376   5,210   (327)     40,259 
Adjusted EBITDA for the year  58,945   22,668   1,723   381   83,717 
Adjusted EBITDA margin for the year  63%  47%  16%     59%
Core income for the year  35,418   5,580   1,030      42,028 
 

202


  Wireless  Fixed
Line
  Others  Inter-segment
Transactions
  Consolidated 
  (in million pesos) 

December 31, 2013

     

Revenues

     

External customers

  117,615    50,716    —      —      168,331  

Service revenues (Note 3)

  114,971    49,081    —      —      164,052  

Non-service revenues (Notes 3 and 5)

  2,644    1,635    —      —      4,279  

Inter-segment transactions

  1,708    12,851    —      (14,559  —    

Service revenues (Note 3)

  1,708    12,789    —      (14,497  —    

Non-service revenues (Notes 3 and 5)

  —      62    —      (62  —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  119,323    63,567    —      (14,559  168,331  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Results

     

Depreciation and amortization (Notes 3 and 9)

  16,358    13,946    —      —      30,304  

Asset impairment (Notes 3, 5, 9, 10, 16, 17 and 27)

  3,918    1,625    —      —      5,543  

Equity share in net earnings (losses) of associates and joint ventures (Note 10)

  (54  (86  2,882    —      2,742  

Interest income (Note 5)

  324    392    249    (33  932  

Financing costs – net (Notes 5, 9, 20 and 27)

  3,232    3,390    —      (33  6,589  

Provision for (benefit from) income tax (Notes 3 and 7)

  8,862    (698  84    —      8,248  

Net income / Segment profit

  21,921    7,809    3,508    146    35,453  

Continuing operations

  21,921    7,809    3,508    146    33,384  

Discontinued operations (Notes 2 and 8)

  —      —      —      —      2,069  

Adjusted EBITDA from continuing operations

  54,703    22,274    (5  580    77,552  

Adjusted EBITDA margin

  47  36  —      (4%)   47

Core income

  26,499    9,061    3,110    146    38,717  

Continuing operations

  26,499    9,061    3,110    146    38,816  

Discontinued operations

  —      —      —      —      (99
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Assets and liabilities

     

Operating assets

  195,212    172,293    15,522    (38,880  344,147  

Investments in associates, joint ventures and deposits (Notes 3, 5 and 10)

  —      11,685    29,625    —      41,310  

Deferred income tax assets – net (Notes 3 and 7)

  999    13,182    —      —      14,181  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  196,211    197,160    45,147    (38,880  399,638  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating liabilities

  133,977    143,891    1,220    (21,213  257,875  

Deferred income tax liabilities – net (Notes 3 and 7)

  3,591    819    27    —      4,437  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  137,568    144,710    1,247    (21,213  262,312  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other segment information

     

Capital expenditures, including capitalized interest (Notes 5, 9, 20 and 21)

  17,092    11,746    —      —      28,838  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2012(1, 2)

     

Revenues

     

External customers

  114,260    48,773    —      —      163,033  

Service revenues (Note 3)

  112,107    47,631    —      —      159,738  

Non-service revenues (Notes 3 and 5)

  2,153    1,142    —      —      3,295  

Inter-segment transactions

  1,672    11,473    —      (13,145  —    

Service revenues (Note 3)

  1,672    11,440    —      (13,112  —    

Non-service revenues (Notes 3 and 5)

  —      33    —      (33  —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  115,932    60,246    —      (13,145  163,033  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Results

     

Depreciation and amortization (Notes 3 and 9)

  19,000    13,354    —      —      32,354  

Asset impairment (Notes 3, 5, 9, 10, 16, 17 and 27)

  4,218    1,068    —      —      5,286  

Equity share in net earnings (losses) of associates and joint ventures (Note 10)

  (78  108    1,508    —      1,538  

Interest income (Note 5)

  565    713    76    —      1,354  

Financing costs – net (Notes 5, 9, 20 and 27)

  2,683    4,193    —      —      6,876  

Provision for (benefit from) income tax (Notes 3 and 7)

  8,094    (51  7    —      8,050  

Net income / Segment profit

  25,014    5,740    4,333    469    36,099  

Continuing operations

  25,014    5,740    4,333    469    35,556  

Discontinued operations (Notes 2 and 8)

  —      —      —      —      543  

Adjusted EBITDA from continuing operations

  54,480    20,089    (18  837    75,388  

Adjusted EBITDA margin

  48  34  —      (6%)   47

Core income

  25,694    5,769    4,424    469    36,907  

Continuing operations

  25,694    5,769    4,424    469    36,356  

Discontinued operations

  —      —      —      —      551  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Assets and liabilities

     

Operating assets

  202,494    182,223    9,979    (36,933  357,763  

Investments in associates, joint ventures and deposits (Notes 3, 5 and 10)

  54    6,222    20,801    —      27,077  

Deferred income tax assets – net (Notes 3 and 7)

  754    6,471    —      —      7,225  

Assets classified as held-for-sale (Notes 2, 3 and 10)

  —      638    —      —      13,750  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  203,302    195,554    30,780    (36,933  405,815  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating liabilities

  134,524    138,338    4,788    (25,893  251,757  

Deferred income tax liabilities – net (Notes 3 and 7)

  4,918    795    —      —      5,713  

Liabilities directly associated with assets classified as held-for-sale (Note 2)

  —      —      —      —      2,611  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  139,442    139,133    4,788    (25,893  260,081  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other segment information(1)

     

Capital expenditures, including capitalized interest (Notes 5, 9, 20 and 21)

  22,058    13,726    —      —      36,396  

Continuing operations

  22,058    13,726    —      —      35,784  

Discontinued operations

  —      —      —      —      612  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2011(1, 2)

     

Revenues

     

External customers

  102,043    46,436    —      —      148,479  

Service revenues (Note 3)

  100,574    45,260    —      —      145,834  

Non-service revenues (Notes 3 and 5)

  1,469    1,176    —      —      2,645  

Inter-segment transactions

  1,495    11,854    —      (13,349  —    

Service revenues (Note 3)

  1,495    11,836    —      (13,331  —    

Non-service revenues (Notes 3 and 5)

  —      18    —      (18  —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  103,538    58,290    —      (13,349  148,479  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  Wireless  Fixed
Line
  Others  Inter-segment
Transactions
  Consolidated 
  (in million pesos) 

Results

     

Depreciation and amortization (Notes 3 and 9)

  14,295    13,244    —      —      27,539  

Asset impairment (Notes 3, 5, 9, 10, 16, 17 and 27)

  9,197    1,003    —      —      10,200  

Equity share in net earnings (losses) of associates and joint ventures (Note 10)

  (115  307    1,843    —      2,035  

Interest income (Note 5)

  677    590    90    —      1,357  

Financing costs – net (Notes 5, 9, 20 and 27)

  2,744    3,710    —      —      6,454  

Provision for income tax (Notes 3 and 7)

  8,429    2,303    2    —      10,734  

Net income / Segment profit

  22,366    5,847    1,985    153    31,218  

Continuing operations

  22,366    5,847    1,985    153    30,351  

Discontinued operations (Notes 2 and 8)

  —      —      —      —      867  

Adjusted EBITDA from continuing operations

  55,433    22,382    (11  421    78,225  

Adjusted EBITDA margin

  54  39  —      3  54

Core income

  29,903    5,310    2,461    153    38,616  

Continuing operations

  29,903    5,310    2,461    153    37,827  

Discontinued operations

  —      —      —      —      789  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Assets and liabilities

     

Operating assets

  172,259    256,644    9,982    (73,283  365,602  

Investments in associates, joint ventures and deposits (Notes 3, 5 and 10)

  —      1,272    16,593    —      17,865  

Deferred income tax assets – net (Notes 3 and 7)

  1,071    3,820    —      —      4,891  

Discontinued operations (Note 2)

  —      —      —      —      13,434  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  173,330    261,736    26,575    (73,283  401,792  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating liabilities

  133,030    127,642    754    (24,179  237,247  

Deferred income tax liabilities – net (Notes 3 and 7)

  1,158    1,363    —      4,450    6,971  

Discontinued operations (Note 2)

  —      —      —      —      3,328  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  134,188    129,005    754    (19,729  247,546  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other segment information(1)

     

Capital expenditures, including capitalized interest (Notes 5, 9, 20 and 21)

  17,152    13,654    1    —      31,207  

Continuing operations

  17,152    13,654    1    —      30,807  

Discontinued operations

  —      —      —      —      400  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments and the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures for further discussion.

(2)

Includes the Digitel Group’s results of operations for the period from October 26, 2011 to December 31, 2011 and consolidated financial position as at December 31, 2011.

                     
              Inter-segment    
  Wireless  Fixed Line  ICT  Transactions  Consolidated 
  (in million pesos) 
Assets and liabilities
                    
Operating assets  111,852   197,318   15,095   (75,763)  248,502 
Investments in associates and joint ventures (Notes 3, 5, 10 and 28)  22,275      928      23,203 
Deferred income tax assets — net (Notes 3, 7 and 28)  41   5,908   161      6,110 
 
Consolidated total assets  134,168   203,226   16,184   (75,763)  277,815 
 
                     
Operating liabilities  96,895   104,944   4,435   (26,943)  179,331 
Deferred income tax liabilities — net (Notes 3, 7 and 28)  596   22   178   303   1,099 
 
Consolidated total liabilities  97,491   104,966   4,613   (26,640)  180,430 
 
                     
Other segment information
                    
Capital expenditures (including capitalized interest)  16,959   11,057   750      28,766 
 
                     
As at and for the year ended December 31, 2009
                    
Revenues
                    
External customer:  96,560   41,318   10,115      147,993 
Service revenues (Note 3)  94,865   41,085   9,617      145,567 
Non-service revenues (Notes 3 and 5)  1,695   233   498      2,426 
Inter-segment transactions:  964   10,055   1,434   (12,453)   
Service revenues (Note 3)  964   10,055   1,234   (12,253)   
Non-service revenues (Notes 3 and 5)        200   (200)   
 
Total revenues  97,524   51,373   11,549   (12,453)  147,993 
 
Results
                    
Depreciation and amortization (Notes 3 and 9)  13,237   11,619   751      25,607 
Asset impairment (Notes 3, 5, 9, 10, 14, 16, 17, 18 and 28)  2,026   2,901   134      5,061 
Financing costs — net (Notes 5, 9, 20 and 28)  2,619   3,796   171   (30)  6,556 
Interest income (Note 5)  1,139   402   28   (30)  1,539 
Equity share in net earnings (losses) of associates and joint ventures (Note 10)  (68)  (98)  168      2 
Provision for (benefit from) income tax (Notes 3 and 7)  12,514   2,258   (28)     14,744 
Net income for the year / Segment profit for the year  33,727   5,864   504      40,095 
Adjusted EBITDA for the year  59,411   25,215   1,330   238   86,194 
Adjusted EBITDA margin for the year  62%  49%  12%     59%
Core income for the year  33,026   7,502   613   (3)  41,138 
 
                     
Assets and liabilities
                    
Operating assets  107,880   206,385   16,297   (80,368)  250,194 
Investments in associates and joint ventures (Notes 3, 5, 10 and 28)  21,440      793      22,233 
Deferred income tax assets — net (Notes 3, 7 and 28)  187   7,346   188      7,721 
 
Total assets  129,507   213,731   17,278   (80,368)  280,148 
 
                     
Operating liabilities  96,194   111,294   4,574   (32,360)  179,702 
Deferred income tax liabilities — net (Notes 3, 7 and 28)  640   21   328   332   1,321 
 
Total liabilities  96,834   111,315   4,902   (32,028)  181,023 
 
                     
Other segment information
                    
Capital expenditures (including capitalized interest)  16,281   11,059   729      28,069 
 
                     
As at and for the year ended December 31, 2008
                    
Revenues
                    
External customer:  95,365   40,736   9,736      145,837 
Service revenues  93,106   40,316   9,451      142,873 
Non-service revenues (Note 5)  2,259   420   285      2,964 
Inter-segment transactions:  487   8,950   1,247   (10,684)   
Service revenues  487   8,950   966   (10,403)   
Non-service revenues        281   (281)   
 
Total revenues  95,852   49,686   10,983   (10,684)  145,837 
 
                     
Results
                    
Depreciation and amortization (Notes 3 and 9)  11,975   11,901   833      24,709 
Asset impairment (Notes 3, 5, 9, 10, 14, 16, 17, 18 and 28)  1,006   888   2,286      4,180 
Provisions (Notes 3, 26 and 27)  897   1         898 
Interest income (Note 5)  1,197   448   22   1   1,668 
Equity share in net earnings (losses) of associates and joint ventures (Note 10)  (119)  (74)  17      (176)
Financing costs — net (Notes 5, 9, 20 and 28)  2,029   3,903   172      6,104 

203


                     
              Inter-segment    
  Wireless  Fixed Line  ICT  Transactions  Consolidated 
  (in million pesos) 
Provision for (benefit from) income tax (Notes 3 and 7)  16,124   3,048   (99)     19,073 
Net income (loss) for the year / Segment profit (loss) for the year  29,499   7,732   (2,186)  (69)  34,976 
Adjusted EBITDA for the year  60,967   25,854   1,056   119   87,996 
Adjusted EBITDA margin for the year  65%  52%  10%     62%
Core income for the year  30,250   7,890   138   (64)  38,214 
 
                     
Assets and liabilities
                    
Operating assets  112,162   189,377   15,963   (75,723)  241,779 
Investments in associates and joint ventures (Notes 3, 5, 10 and 28)  531      643      1,174 
Deferred income tax assets — net (Notes 3, 7 and 28)  251   9,131   223      9,605 
 
Total assets  112,944   198,508   16,829   (75,723)  252,558 
 
                     
Operating liabilities  67,656   89,636   4,222   (17,213)  144,301 
Deferred income tax liabilities — net (Notes 3, 7 and 28)  911      377      1,288 
 
Total liabilities  68,567   89,636   4,599   (17,213)  145,589 
 
                     
Other segment information
                    
Capital expenditures (including capitalized interest)  16,728   7,651   824      25,203 
 
The following table shows the reconciliation of our consolidated adjustedAdjusted EBITDA to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 2008:
             
  2010  2009  2008 
  (in million pesos) 
Consolidated adjusted EBITDA  83,717   86,194   87,996 
Amortization of intangible assets (Notes 3 and 14)  (388)  (368)  (377)
Depreciation and amortization (Notes 3 and 9)  (26,277)  (25,607)  (24,709)
Asset impairment:            
Investments in associates and joint ventures (Notes 3, 5 and 10)  (78)     (282)
Property, plant and equipment (Notes 3, 5 and 9)  (120)  (634)  (104)
Goodwill and intangible assets (Notes 3, 5 and 14)  (1,243)  (379)  (2,450)
Prepayments and others (Notes 3, 5 and 18)  (55)  (1,324)  (23)
 
Consolidated operating profit for the year  55,556   57,882   60,051 
Foreign exchange gains (losses) — net (Notes 9 and 28)  1,807   909   (6,170)
Equity share in net earnings (losses) of associates and joint ventures (Note 10)  1,408   2   (176)
Interest income (Note 5)  1,200   1,539   1,668 
Gains (losses) on derivative financial instruments — net (Note 28)  (1,741)  (1,006)  3,115 
Financing costs — net (Notes 5, 9, 20 and 28)  (6,698)  (6,556)  (6,104)
Other income  2,153   2,069   1,665 
 
Consolidated income before income tax  53,685   54,839   54,049 
Provision for income tax (Notes 3 and 7)  13,426   14,744   19,073 
 
Consolidated net income for the year  40,259   40,095   34,976 
 
2011:

   2013  2012(1)  2011(1, 2) 
   (in million pesos) 

Adjusted EBITDA from continuing operations

   77,552    75,388    78,225  

Add (deduct) adjustments to continuing operations:

    

Other income – net (Notes 2 and 18)

   4,113    5,813    2,626  

Equity share in net earnings of associates and joint ventures (Note 10)

   2,742    1,538    2,035  

Interest income (Notes 2, 5, 11 and 15)

   932    1,354    1,357  

Gains (losses) on derivative financial instruments – net (Notes 2 and 27)

   511    (2,009  201  

Amortization of intangible assets (Notes 3 and 14)

   (1,020  (921  (117

Retroactive effect of adoption of RevisedIAS 19 (Note 2)

   (1,269  1,287    —    

Asset impairment on noncurrent assets (Notes 3 and 5)

   (2,143  (2,896  (8,514

Foreign exchange gains (losses) – net (Notes 2, 9 and 27)

   (2,893  3,282    (735

Financing costs – net (Notes 2, 5, 9, 20 and 27)

   (6,589  (6,876  (6,454

Provision for income tax (Notes 2, 3 and 7)

   (8,248  (8,050  (10,734

Depreciation and amortization (Notes 3 and 9)

   (30,304  (32,354  (27,539
  

 

 

  

 

 

  

 

 

 

Total adjustments

   (44,168  (39,832  (47,874
  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

   33,384    35,556    30,351  

Net income from discontinued operations (Notes 2 and 8)

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

Consolidated net income

   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures for further discussion.

(2)

Includes the Digitel Group’s Adjusted EBITDA for the period from October 26, 2011 to December 31, 2011.

The following table shows the reconciliation of our consolidated core income to our consolidated net income for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010  2009  2008 
  (in million pesos) 
Consolidated core income for the year  42,028   41,138   38,214 
Foreign exchange gains (losses) — net (Notes 9 and 28)  1,819   908   (6,170)
Core income adjustment on equity share in net earnings of associates and joint ventures  (699)  (517)   
Gains (losses) on derivative financial instruments — net, excluding hedge cost (Note 28)  (1,307)  (407)  3,934 
Asset impairment on noncurrent assets (Notes 3, 5, 9, 10, 14 and 18)  (1,492)  (1,948)  (2,486)
Net tax effect of aforementioned adjustments  (132)  607   825 
 
Net income for the year attributable to equity holders of PLDT (Notes 6 and 8)  40,217   39,781   34,317 
Net income for the year attributable to non-controlling interests  42   314   659 
 
Consolidated net income for the year  40,259   40,095   34,976 
 

204

2011:


   2013  2012(1)  2011(1, 2) 
   (in million pesos) 

Core income from continuing operations

   38,816    36,356    37,827  

Core income from discontinued operations

   (99  551    789  
  

 

 

  

 

 

  

 

 

 

Consolidated core income

   38,717    36,907    38,616  

Add (deduct) adjustments to continuing operations:

    

Gains (losses) on derivative financial instruments – net, excluding hedge cost (Notes 2 and 27)

   816    (1,689  564  

Core income adjustment on equity share in net earnings (losses) of associates and joint ventures

   59    (91  (476

Net income (loss) attributable to noncontrolling interests

   33    (49  (60

Casualty losses due to typhoon “Yolanda”

   (878  —      —    

Retroactive effect of adoption of RevisedIAS 19 (Note 2)

   (1,269  1,287    —    

Asset impairment (Notes 3, 5 and 9)

   (2,143  (2,896  (8,514

Foreign exchange gains (losses) – net (Notes 2, 9 and 27)

   (2,893  3,282    (741

Net tax effect of aforementioned adjustments

   843    (644  1,608  

Others

   —      —      143  
  

 

 

  

 

 

  

 

 

 

Total adjustments

   (5,432  (800  (7,476
  

 

 

  

 

 

  

 

 

 

Adjustments to discontinued operations

   2,168    (8  78  
  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

   33,384    35,556    30,351  

Net income from discontinued operations (Notes 2 and 8)

   2,069    543    867  
  

 

 

  

 

 

  

 

 

 

Consolidated net income

   35,453    36,099    31,218  
  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures for further discussion.

(2)

Includes the Digitel Group’s core income for the period from October 26, 2011 to December 31, 2011.

The following table shows the reconciliation of our consolidated basic and diluted core EPS to our consolidated basic and diluted EPS attributable to common equity holders of PLDT for the years ended December 31, 2013, 2012 and 2011:

   2013  2012(1)  2011(1, 2) 
   Basic  Diluted  Basic  Diluted  Basic  Diluted 

Core EPS from continuing operations

   179.38    179.38    168.03    168.03    195.27    195.10  

Core EPS from discontinued operations

   (0.45  (0.45  2.55    2.55    4.12    4.12  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated core EPS

   178.93    178.93    170.58    170.58    199.39    199.22  

Add (deduct) adjustments to continuing operations:

       

Gains (losses) on derivative financial instruments – net, excluding hedge cost (Notes 2 and 27)

   2.65    2.65    (5.47  (5.47  2.06    2.06  

Core income adjustment on equity share in net earnings (losses) of associates and joint ventures

   0.27    0.27    (0.42  (0.42  (2.48  (2.48

Casualty losses due to typhoon “Yolanda”

   (3.58  (3.58  —      —      —      —    

Retroactive effect of adoption of RevisedIAS 19 (Note 2)

   (5.10  (5.10  5.18    5.18    —      —    

Foreign exchange gains (losses) – net (Notes 2, 9 and 27)

   (9.61  (9.61  10.63    10.63    (2.68  (2.67

Asset impairment (Notes 3, 5 and 9)

   (9.92  (9.92  (13.40  (13.40  (36.47  (36.44

Gain on disposal of investment and others

   —      —      —      —      0.82    0.82  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total adjustments

   (25.29  (25.29  (3.48  (3.48  (38.75  (38.71
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjustments to discontinued operations

   10.03    10.03    (0.03  (0.03  0.41    0.40  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

EPS from continuing operations attributable to common equity holders of PLDT (Note 8)

   154.09    154.09    164.55    164.55    156.52    156.39  

EPS from discontinued operations attributable to common equity holders of PLDT (Notes 2 and 8)

   9.58    9.58    2.52    2.52    4.53    4.52  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated EPS attributable to common equity holders of PLDT (Note 8)

   163.67    163.67    167.07    167.07    161.05    160.91  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

As adjusted to reflect the adjustments on the application of the Revised IAS 19. See Note 2 – Summary of Significant Accounting Policies – Changes in Accounting Policies and Disclosures for further discussion.

(2)

Includes the Digitel Group’s core income for the period from October 26, 2011 to December 31, 2011.

The following table presents our revenues from external customers by category of products and services for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010  2009  2008 
  (in million pesos) 
Wireless services
            
Service revenues:            
Cellular  85,555   87,829   87,410 
Broadband  6,286   5,383   4,327 
Satellite and others  1,145   1,653   1,369 
 
   92,986   94,865   93,106 
Non-service revenues:            
Sale of cellular handsets, cellular subscriber identification module, or SIM,-packs and broadband data modems  1,357   1,695   2,259 
 
Total wireless revenues  94,343   96,560   95,365 
 
             
Fixed line services
            
Services revenues:            
Local exchange  15,205   15,530   15,794 
International long distance  5,217   6,250   7,044 
National long distance  4,651   6,239   6,143 
Data and other network  14,448   12,585   10,864 
Miscellaneous  304   481   471 
 
   39,825   41,085   40,316 
Non-service revenues:            
Sale of computers  342   233   420 
 
Total fixed line revenues  40,167   41,318   40,736 
 
             
ICT services
            
Service revenues:            
Knowledge processing solutions  5,289   5,215   5,272 
Customer relationship management  2,284   2,676   2,922 
Internet and online gaming  1,027   1,079   945 
Data center and others  831   647   312 
 
   9,431   9,617   9,451 
Non-service revenues:            
Point-product-sales  518   498   285 
 
Total ICT revenues  9,949   10,115   9,736 
 
Total products and services from external customers  144,459   147,993   145,837 
 
2011:

   2013   2012(1)   2011(1) 
   (in million pesos) 

Wireless services

      

Service revenues:

      

Cellular

   104,278     102,044     92,150  

Broadband, satellite and others

   10,693     10,063     8,424  
  

 

 

   

 

 

   

 

 

 
   114,971     112,107     100,574  

Non-service revenues:

      

Sale of cellular handsets, cellular SIM-packs and broadband data modems

   2,644     2,153     1,469  
  

 

 

   

 

 

   

 

 

 

Total wireless revenues

   117,615     114,260     102,043  
  

 

 

   

 

 

   

 

 

 

Fixed line services

      

Service revenues:

      

Local exchange

   16,173     16,357     15,616  

International long distance

   6,848     6,909     7,092  

National long distance

   4,205     4,678     5,218  

Data and other network

   21,077     18,975     16,426  

Miscellaneous

   778     712     908  
  

 

 

   

 

 

   

 

 

 
   49,081     47,631     45,260  

Non-service revenues:

      

Sale of computers

   1,160     551     658  

Point-product-sales

   475     591     518  
  

 

 

   

 

 

   

 

 

 

Total fixed line revenues

   50,716     48,773     46,436  
  

 

 

   

 

 

   

 

 

 

Total revenues from continuing operations

   168,331     163,033     148,479  
  

 

 

   

 

 

   

 

 

 

(1)

As adjusted to reflect certain presentation adjustments to conform with the current presentation of our business segments.

Disclosure of the geographical distribution of our revenues from external customers and the geographical location of our total assets are not provided since the majority of our consolidated revenues are derived from our operations within the Philippines.

In

For each of the years ended December 31, 2010, 20092013, 2012 and 2008,2011, no revenue transactions with a single external customer had accounted for 10% or more of our consolidated revenues from external customers.

5. Income and Expenses

5.Income and Expenses

Non-service Revenues

Non-service revenues for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Sale of computers, cellular handsets, cellular SIM-packs and broadband data modems  1,699   1,928   2,679 
Point-product-sales  518   498   285 
 
(Note 4)  2,217   2,426   2,964 
 

205


   2013   2012   2011 
   (in million pesos) 

Sale of computers, cellular handsets, cellular SIM-packs and broadband data modems

   3,804     2,704     2,127  

Point-product-sales

   475     591     518  
  

 

 

   

 

 

   

 

 

 

(Note 4)

   4,279     3,295     2,645  
  

 

 

   

 

 

   

 

 

 

Compensation and Employee Benefits

Compensation and employee benefits for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Salaries and other employee benefits  20,259   19,468   18,286 
Manpower rightsizing program, or MRP  2,183   493   417 
Incentive plans (Notes 3 and 25)  1,392   1,833   1,281 
Pension benefit costs (Notes 3 and 25)  236   1,306   725 
 
   24,070   23,100   20,709 
 

   2013   2012   2011 
       (As Adjusted –Note 2) 
   (in million pesos) 

Salaries and other employee benefits

   17,034     17,462     14,718  

Manpower rightsizing program, or MRP

   1,869     2,521     132  

Incentive plans (Notes 3 and 25)

   1,638     1,491     —    

Pension benefit costs (Notes 3 and 25)

   828     525     561  
  

 

 

   

 

 

   

 

 

 
   21,369     21,999     15,411  
  

 

 

   

 

 

   

 

 

 

Over the past years, we have been implementing MRP in line with our continuing effortefforts to reduce the cost base of our businesses. The total MRP cost charged to operations amounted to Php2,183 million, Php493 million and Php417 million for the years ended December 31, 2010, 2009 and 2008, respectively. The decision to implement the MRP was anchored on thea result of challenges faced by our businesses as significant changes in technology, increasing competition, and shifting market preferences have reshaped the future of our businesses. The MRP is being implemented in compliance with the Labor Code of the Philippines and all other relevant labor laws and regulations in the Philippines.

Cost of Sales

Cost of sales for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Cost of computers, cellular handsets, cellular SIM-packs sold and broadband data modems  4,061   4,690   4,573 
Cost of point-product-sales  588   584   511 
Cost of satellite air time and terminal units (Notes 24 and 26)  122   158   168 
 
   4,771   5,432   5,252 
 

   2013   2012   2011 
   (in million pesos) 

Cost of computers, cellular handsets, cellular SIM-packs sold and broadband data modems

   11,380     8,074     4,851  

Cost of point-product-sales

   376     593     487  

Cost of satellite air time and terminal units (Note 24)

   50     80     105  
  

 

 

   

 

 

   

 

 

 
   11,806     8,747     5,443  
  

 

 

   

 

 

   

 

 

 

Asset Impairment

Asset impairment for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Goodwill and intangible assets (Notes 3 and 14)  1,243   379   2,450 
Trade and other receivables (Notes 3 and 16)  834   2,335   1,079 
Property, plant and equipment (Notes 3 and 9)  120   634   104 
Inventories and supplies (Notes 3 and 17)  108   389   242 
Investments in associates and joint ventures (Notes 3 and 10)  78      282 
Prepayments and others (Notes 3 and 18)  55   1,324   23 
 
   2,438   5,061   4,180 
 

   2013   2012   2011 
   (in million pesos) 

Trade and other receivables (Notes 3 and 16)

   3,171     2,175     1,543  

Property, plant and equipment (Notes 3 and 9)

   2,142     2,881     8,470  

Inventories and supplies (Notes 3 and 17)

   229     215     143  

Investments in associates and joint ventures (Notes 3 and 10)

   1     —       44  

Prepayment and others (Note 3)

   —       15     —    
  

 

 

   

 

 

   

 

 

 
   5,543     5,286     10,200  
  

 

 

   

 

 

   

 

 

 

Interest Income

Interest income for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Interest income on other loans and receivables  1,134   1,406   1,545 
Interest income on fair value through profit or loss  37   86   58 
Interest income on held-to-maturity investments  29   47   65 
 
(Note 4)  1,200   1,539   1,668 
 

206


   2013   2012   2011 
   (in million pesos) 

Interest income on other loans and receivables

   790     1,310     1,321  

Interest income on HTM investments (Note 11)

   135     31     31  

Interest income on FVPL

   7     13     5  
  

 

 

   

 

 

   

 

 

 

(Note 4)

   932     1,354     1,357  
  

 

 

   

 

 

   

 

 

 

Financing Costs net

Financing costs net for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of the following:

             
  2010  2009  2008 
  (in million pesos) 
Interest on loans and other related items (Notes 4, 20 and 28)  6,181   6,008   5,861 
Accretion on financial liabilities — net (Notes 20, 21 and 28)  1,177   1,062   956 
Financing charges  50   177   61 
Capitalized interest (Notes 4 and 9)  (710)  (691)  (778)
Dividends on preferred stock subject to mandatory redemption (Note 8)        4 
 
(Note 4)  6,698   6,556   6,104 
 
Interest expense for short-term borrowings amounted to Php5 million, Php21 million and Php28 million for the years ended December 31, 2010, 2009 and 2008, respectively.
6. Other Comprehensive Income
The movements

   2013  2012  2011 
   (in million pesos) 

Interest on loans and other related items (Notes 20 and 27)

   5,086    6,319    5,948  

Accretion on financial liabilities (Notes 20 and 27)

   1,541    1,053    1,037  

Financing charges

   383    418    117  

Capitalized interest (Note 9)

   (421  (914  (648
  

 

 

  

 

 

  

 

 

 

(Note 4)

   6,589    6,876    6,454  
  

 

 

  

 

 

  

 

 

 

6.Components of Other Comprehensive Income

Changes in other comprehensive income under equity of our consolidated statements of financial position for the years ended December 31, 2010, 20092013, 2012 and 20082011 are as follows:

                             
      Net gains         Total other      
  Foreign (losses) on     Revaluation comprehensive      
  currency available-for- Net transactions increment on income     Total other
  translation sale financial on cash flow investment attributable to     comprehensive
  differences of assets hedges properties equity holders Non-controlling income (loss)
  subsidiaries – net of tax – net of tax – net of tax of PLDT interests – net of tax
  (in million pesos)
Balances as at January 1, 2008  (1,827)  33   411      (1,383)  115   (1,268)
Other comprehensive income for the year  1,425   (9)  (411)     1,005   65   1,070 
 
Balances as at December 31, 2008
  (402)  24         (378)  180   (198)
 
                             
Balances as at January 1, 2009  (402)  24         (378)  180   (198)
Other comprehensive income for the year  (642)  3         (639)  (15)  (654)
 
Balances as at December 31, 2009
  (1,044)  27         (1,017)  165   (852)
 
                             
Balances as at January 1, 2010  (1,044)  27         (1,017)  165   (852)
Other comprehensive income for the year  (595)  22      314   (259)  (166)  (425)
 
Balances as at December 31, 2010
  (1,639)  49      314   (1,276)  (1)  (1,277)
 

  Foreign
currency
translation
differences
of
subsidiaries
  Net gains on
available-for-sale
financial
investments –
net of tax
  Net
transactions
on cash
flow hedges
– net

of tax
  Revaluation
increment
on
investment
properties

– net of tax
  Actuarial
gains
(losses)
on
defined

benefit
plans

– net of
tax
  Share in the
other
comprehensive
income of
associates and
joint ventures
accounted for
using the
equity method
  Total other
comprehensive
income (loss)
attributable to
equity holders
of PLDT
  Share of
noncontrolling
interests
  Total other
comprehensive
income (loss) –
net of tax
 
  (in million pesos) 

Balances as at January 1, 2013 (As Adjusted – Note 2)

  441    75    44    240    (4,177  (10  (3,387  6    (3,381

Other comprehensive income (loss)

  802    (8  (16  (1  (9,156  1,020    (7,359  (8  (7,367

Discontinued operations (Note 2)

  (747  —      12    —      —      —      (735  —      (735
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2013

  496    67    40    239    (13,333  1,010    (11,481  (2  (11,483
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2012 (As Adjusted – Note 2)

  (1,014  52    14    314    2,099    (10  1,455    8    1,463  

Revaluation increment removed from other comprehensive income taken to retained earnings

  —      —      —      (105  —      —      (105  —      (105

Other comprehensive income (loss)

  (795  23    92    31    (6,231  —      (6,880  (2  (6,882

Discontinued operations (Note 2)

  2,250    —      (62  —      (45  —      2,143    —      2,143  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2012 (As Adjusted – Note 2)

  441    75    44    240    (4,177  (10  (3,387  6    (3,381
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at January 1, 2011 (As Adjusted – Note 2)

  (1,639  49    —      314    —      —      (1,276  (1  (1,277

Other comprehensive income

  625    3    14    —      2,099    (10  2,731    9    2,740  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as at December 31, 2011 (As Adjusted – Note 2)

  (1,014  52    14    314    2,099    (10  1,455    8    1,463  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Revaluation increment on investment properties pertains to the difference between the carrying value and fair value of property, plant and equipment reclassifiedtransferred to investment property at the time of change in classification.

7. Income Taxes

7.Income Taxes

Corporate Income Tax

The major components of consolidated net deferred income tax assets (liabilities) recognized in our consolidated statements of financial position as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:

         
  2010  2009 
  (in million pesos) 
Net deferred income tax assets (Notes 3 and 4)  6,110   7,721 
Net deferred income tax liabilities (Notes 3 and 4)  (1,099)  (1,321)
 

207


   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted –Note 2) 
   (in million pesos) 

Net deferred income tax assets (Notes 3 and 4)

   14,181    7,225    5,117  

Net deferred income tax liabilities (Note 4)

   (4,437  (5,713  (7,078

The components of our consolidated net deferred income tax assets (liabilities)and liabilities as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:
         
  2010  2009 
  (in million pesos) 
Net deferred income tax assets:        
Unearned revenues  2,586   3,412 
Unamortized past service pension costs  2,548   2,974 
Accumulated provision for doubtful accounts  2,488   2,708 
Derivative financial instruments  1,028   825 
Unrealized foreign exchange losses  924   1,291 
MCIT  446   21 
Provision for impaired assets  379   767 
Accumulated write-down of inventories to net realizable values  289   293 
NOLCO  119   44 
Asset impairment  27   24 
Capitalized taxes and duties — net of amortization  (186)  (246)
Capitalized foreign exchange differential — net of depreciation  (363)  (495)
Pension and other employee benefits  (1,361)  (891)
Undepreciated capitalized interest charges  (2,685)  (2,976)
Others  (129)  (30)
 
   6,110   7,721 
 
         
Net deferred income tax liabilities:        
Unearned revenues  668   1,047 
Pension and other employee benefits  35   100 
Fair value adjustment on fixed assets  (303)  (332)
Undepreciated capitalized interest charges  (304)  (536)
Intangible assets and fair value adjustments on assets acquired — net of amortization  (423)  (478)
Unrealized foreign exchange gains  (707)  (879)
Others  (65)  (243)
 
   (1,099)  (1,321)
 
Movements of

   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted – Note 2) 
   (in million pesos) 

Net deferred income tax assets:

    

Pension and other employee benefits

   3,623    (369  (2,511

Unearned revenues

   2,980    2,305    2,726  

Accumulated provision for doubtful accounts

   2,597    2,379    2,466  

Unamortized past service pension costs

   2,312    2,244    2,124  

Unrealized foreign exchange losses

   1,548    970    111  

Customer list

   1,318    —      —    

Derivative financial instruments

   528    922    768  

Provision for other assets

   367    367    441  

Accumulated write-down of inventories to net realizable values

   205    135    198  

NOLCO

   130    145    326  

Fixed asset impairment

   125    24    1,469  

MCIT

   34    33    9  

Capitalized taxes and duties – net of amortization

   (5  (65  (125

Undepreciated capitalized interest charges

   (1,751  (1,964  (2,624

Capitalized foreign exchange differential – net of depreciation

   —      (100  (231

Others

   170    199    (30
  

 

 

  

 

 

  

 

 

 

Total deferred income tax assets

   14,181    7,225    5,117  
  

 

 

  

 

 

  

 

 

 

Net deferred income tax liabilities:

    

Intangible assets – net of amortization

   3,182    3,607    3,725  

Unrealized foreign exchange gains

   675    2,049    1,756  

Unamortized fair value adjustment on fixed assets from business combinations

   644    687    997  

Undepreciated capitalized interest charges

   9    82    582  

Debt issuance costs

   —      (3  —    

Fixed asset impairment

   —      (28  —    

Others

   (73  (681  18  
  

 

 

  

 

 

  

 

 

 

Total deferred income tax liabilities

   4,437    5,713    7,078  
  

 

 

  

 

 

  

 

 

 

Changes in our consolidated net deferred income tax assets (liabilities) for the years ended December 31, 20102013 and 20092012 are as follows:

         
  2010  2009 
  (in million pesos) 
Net deferred income tax assets — balance at beginning of year (Notes 3, 4 and 28)  7,721   9,605 
Net deferred income tax liabilities — balance at beginning of year (Notes 3, 4 and 28)  (1,321)  (1,288)
 
Net balance at beginning of year  6,400   8,317 
Provision for deferred income tax (Note 3)  (1,198)  (656)
Movement charged directly to equity  (139)   
Business combinations (Note 13)     (349)
Excess MCIT deducted against RCIT due     (766)
Others  (52)  (146)
 
Net balance at end of year  5,011   6,400 
 
Net deferred income tax assets — balance at end of year (Notes 3, 4 and 28)  6,110   7,721 
Net deferred income tax liabilities — balance at end of year (Notes 3, 4 and 28)  (1,099)  (1,321)
 

   2013  2012 
      (As Adjusted – Note 2) 
   (in million pesos) 

Net deferred income tax assets – balance at beginning of the year (Notes 3 and 4)

   7,225    5,117  

Net deferred income tax liabilities – balance at beginning of the year (Notes 3 and 4)

   (5,713  (7,078
  

 

 

  

 

 

 

Net balance at beginning of the year

   1,512    (1,961

Movement charged directly to other comprehensive income

   3,833    2,682  

Benefit from deferred income tax (Note 3)

   4,401    947  

Discontinued operations (Note 2)

   —      (65

Others

   (2  (91
  

 

 

  

 

 

 

Net balance at end of the year

   9,744    1,512  
  

 

 

  

 

 

 

Net deferred income tax assets – balance at end of the year (Notes 3 and 4)

   14,181    7,225  

Net deferred income tax liabilities – balance at end of the year (Notes 3 and 4)

   (4,437  (5,713
  

 

 

  

 

 

 

The analysis of our consolidated net deferred income tax assets as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:

         
  2010  2009 
  (in million pesos) 
Deferred income tax assets:        
Deferred income tax assets to be recovered after 12 months  8,789   9,565 
Deferred income tax assets to be recovered within 12 months  2,222   3,605 
 
   11,011   13,170 
 
         
Deferred income tax liabilities:        
Deferred income tax liabilities to be settled after 12 months  (4,240)  (4,793)
Deferred income tax liabilities to be settled within 12 months  (661)  (656)
 
   (4,901)  (5,449)
 
Net deferred income tax assets (Notes 3, 4 and 28)  6,110   7,721 
 

208


   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted – Note 2) 
   (in million pesos) 

Deferred income tax assets:

    

Deferred income tax assets to be recovered after 12 months

   13,181    7,135    8,505  

Deferred income tax assets to be recovered within 12 months

   3,283    2,820    2,541  
  

 

 

  

 

 

  

 

 

 
   16,464    9,955    11,046  
  

 

 

  

 

 

  

 

 

 

Deferred income tax liabilities:

    

Deferred income tax liabilities to be settled after 12 months

   (1,645  (2,040  (5,159

Deferred income tax liabilities to be settled within 12 months

   (638  (690  (770
  

 

 

  

 

 

  

 

 

 
   (2,283  (2,730  (5,929
  

 

 

  

 

 

  

 

 

 

Net deferred income tax assets (Notes 3 and 4)

   14,181    7,225    5,117  
  

 

 

  

 

 

  

 

 

 

The analysis of our consolidated net deferred income tax liabilities as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:
         
  2010  2009 
  (in million pesos) 
Deferred income tax assets:        
Deferred income tax assets to be recovered after 12 months  690   1,161 
Deferred income tax assets to be recovered within 12 months  72   20 
 
   762   1,181 
 
         
Deferred income tax liabilities:        
Deferred income tax liabilities to be settled after 12 months  (1,746)  (2,289)
Deferred income tax liabilities to be settled within 12 months  (115)  (213)
 
   (1,861)  (2,502)
 
Net deferred income tax liabilities (Notes 3, 4 and 28)  (1,099)  (1,321)
 

   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted – Note 2) 
   (in million pesos) 

Deferred income tax assets:

    

Deferred income tax assets to be recovered after 12 months

   58    835    —    

Deferred income tax assets to be recovered within 12 months

   15    263    274  
  

 

 

  

 

 

  

 

 

 
  ��73    1,098    274  
  

 

 

  

 

 

  

 

 

 

Deferred income tax liabilities:

    

Deferred income tax liabilities to be settled after 12 months

   (4,005  (6,173  (6,982

Deferred income tax liabilities to be settled within 12 months

   (505  (638  (370
  

 

 

  

 

 

  

 

 

 
   (4,510  (6,811  (7,352
  

 

 

  

 

 

  

 

 

 

Net deferred income tax liabilities (Notes 3 and 4)

   (4,437  (5,713  (7,078
  

 

 

  

 

 

  

 

 

 

Provision for (benefit from) corporate income tax from continuing operations for the years ended December 31, 2010, 20092013, 2012 and 20082011 consists of:

             
  2010  2009  2008 
  (in million pesos) 
Current  12,228   14,088   16,358 
Deferred (Note 3)  1,198   656   2,715 
 
   13,426   14,744   19,073 
 

   2013  2012  2011 
      (As Adjusted – Note 2) 
   (in million pesos) 

Current

   12,649    8,969    11,908  

Deferred (Note 3)

   (4,401  (919  (1,174
  

 

 

  

 

 

  

 

 

 
   8,248    8,050    10,734  
  

 

 

  

 

 

  

 

 

 

The reconciliation between the provision for income tax at the applicable statutory tax ratesrate and the actual provision for corporate income tax for the years ended December 31, 2010, 20092013, 2012 and 2008 is2011 are as follows:

             
  2010  2009  2008 
  (in million pesos) 
Provision for income tax at the applicable statutory tax rates  16,105   16,452   18,917 
Tax effects of:            
Losses (income) subject to lower tax rate  450   (443)  1,408 
Nondeductible expenses  442   201   724 
Income not subject to income tax  (324)  (1,483)  (846)
Income subject to final tax  (404)  (502)  (616)
Equity share in net losses (earnings) of associates and joint ventures  (423)  (1)  62 
Net movement in unrecognized deferred income tax assets and other adjustments  (661)  3,830   (576)
Difference between OSD and itemized deductions  (1,759)  (3,310)   
Others         
 
Actual provision for corporate income tax  13,426   14,744   19,073 
 
The RCIT rate for domestic corporations and both resident and non-resident foreign corporations in the Philippines increased from 32% to 35% effective November 1, 2005 and was reduced to 30% effective January 1, 2009.
On December 18, 2008, the Bureau of Internal Revenue, or BIR, issued

   2013  2012  2011 
      (As Adjusted – Note 2) 
   (in million pesos) 

Provision for income tax at the applicable statutory tax rate:

  

Continuing operations

   12,490    13,082    12,325  

Discontinued operations (Note 2)

   637    291    295  
  

 

 

  

 

 

  

 

 

 
   13,127    13,373    12,620  
  

 

 

  

 

 

  

 

 

 

Tax effects of:

  

Nondeductible expenses

   235    1,372    520  

Income not subject to income tax

   (622  (1,853  (1,090

Losses (income) subject to lower tax rate

   (702  (834  412  

Equity share in net earnings of associates and joint ventures

   (822  (461  (610

Income subject to final tax

   (899  (933  (408

Difference between OSD and itemized deductions

   (1,397  —      (1,578

Net movement in unrecognized deferred income tax assets and other adjustments

   (617  (2,186  986  
  

 

 

  

 

 

  

 

 

 
   (4,824  (4,895  (1,768
   

 

 

  

 

 

 

Actual provision for corporate income tax:

  

Continuing operations

   8,248    8,050    10,734  

Discontinued operations (Note 2)

   55    428    118  
  

 

 

  

 

 

  

 

 

 
   8,303    8,478    10,852  
  

 

 

  

 

 

  

 

 

 

In accordance with Republic Act 9504 as implemented by Revenue Regulations No. 16-2008, which implemented the provisions of Republic Act 9504, or R.A. 9504 on OSD. Under the OSD method in computing taxable income, corporations may elect a standard deduction in an amount equivalent to 40% of gross income as provided by law, in lieu of the itemized allowed deductions.

For thetaxable year ended December 31, 2010,2013, Smart and Wolfpac opted to use OSD method in computing theirits taxable income. For the year ended December 31, 2009, Smart, PCEV, SHI and Wolfpac availed of the OSD in computing their taxable income.

Smart and Wolfpac expect to continue to use the OSD method for the foreseeable future. The availment of OSD method affected their recognition ofIn line with this, certain deferred income tax assets and liabilities. Deferred income tax assets and liabilities of Smart, and Wolfpac, for which the related income and expenseexpenses are not considered in determining gross income for income tax purposes, are not recognized as deferred income tax assets and liabilities onin the consolidated statements of financial position. This is because the manner by which they willexpect to recover or settle the underlying assets and liabilities would not result in any future tax consequence assuming OSD were applied.consequence. Deferred income tax assets and liabilities, for which the related income and expenseexpenses are considered in determining gross income for income tax purposes, are recognized only to the extent of their future tax consequence assuming OSD weremethod was applied, which results in such deferred income tax assets and liabilities being

209


reduced by the 40% allowable deduction that are provided for under the OSD method. Accordingly, the deferred income tax assets and liabilities that were not recognized due to the OSD method amounted to Php2,805Php4,496 million, Php3,655 million and Php3,296Php4,240 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. SeeNote 3 Management’s Use of Accounting Judgments, Estimates and Assumptions – Recognition of Deferred Income Tax Assets and Liabilities.

The breakdown of our consolidated deductible temporary differences, carry forwardcarryforward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO (excluding those not recognized due to the adoption of OSD)the OSD method) for which no deferred income tax assets were recognized and the equivalent amount of unrecognized deferred income tax assets as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:

         
  2010  2009 
  (in million pesos) 
NOLCO  2,292   2,341 
Accumulated provision for doubtful accounts  1,257   894 
Unearned revenues  712   188 
Provisions for other assets  170   163 
Accumulated write-down of inventories to net realizable values  155   261 
Fixed asset impairment  112   111 
Pension and other employee benefits  60   44 
MCIT  36   19 
Unrealized foreign exchange losses  29   33 
Derivative financial instruments  11   19 
 
Operating lease and others  6   3 
   4,840   4,076 
 
Unrecognized deferred income tax assets (Note 3)  1,477   1,236 
 

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Fixed asset impairment

   20,507     23,881     29,029  

Provisions for other assets

   5,694     8,303     6,532  

Unearned revenues

   6,529     5,023     893  

Accumulated provision for doubtful accounts

   3,765     3,177     4,113  

NOLCO

   2,085     8,741     11,372  

Asset retirement obligation

   537     902     627  

MCIT

   382     133     133  

Pension and other employee benefits

   362     155     127  

Accumulated write-down of inventories to net realizable values

   191     167     270  

Derivative financial instruments

   130     132     155  

Unrealized foreign exchange losses

   34     28     22  

Operating lease and others

   314     217     76  
  

 

 

   

 

 

   

 

 

 
   40,530     50,859     53,349  
  

 

 

   

 

 

   

 

 

 

Unrecognized deferred income tax assets (Note 3)

   12,426     15,351     16,098  
  

 

 

   

 

 

   

 

 

 

As at December 31, 2013, Digitel Group’s deferred income tax assets were not recognized because management believes that there is no sufficient future taxable income that will be available upon which these can be utilized. Digitel Group’s unrecognized deferred income tax assets amounted to Php12,172 million, Php15,098 million and Php14,766 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Our consolidated deferred income tax assets have been recorded to the extent that such consolidated deferred income tax assets are expected to be utilized against sufficient future taxable profit. Deferred income tax assets related to the preceding table were not recognized as we believe that future taxable profit will not be sufficient to realize these deductible temporary differences and carry forwardcarryforward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO in the future.

The breakdown of our consolidated excess MCIT and NOLCO as at December 31, 2010 is2013 are as follows:

           
Date Incurred Expiry Date MCIT  NOLCO 
    (in million pesos) 
December 31, 2008 December 31, 2011  5   622 
December 31, 2009 December 31, 2012  10   970 
December 31, 2010 December 31, 2013  467   1,096 
 
     482   2,688 
 
Consolidated tax benefits    482   806 
Consolidated unrecognized deferred income tax assets    (36)  (687)
 
Consolidated recognized deferred income tax assets    446   119 
 

Date Incurred

  Expiry Date  MCIT  NOLCO 
      (in million pesos) 

December 31, 2011

  December 31, 2014   61    233  

December 31, 2012

  December 31, 2015   107    269  

December 31, 2013

  December 31, 2016   248    2,017  
    

 

 

  

 

 

 
     416    2,519  
    

 

 

  

 

 

 

Consolidated tax benefits

     416    756  

Consolidated unrecognized deferred income tax assets

     (382  (626
    

 

 

  

 

 

 

Consolidated recognized deferred income tax assets

     34    130  
    

 

 

  

 

 

 

The excess MCIT totaling Php482Php416 million as at December 31, 2013 can be deducted against future RCIT due. The excess MCIT that was deducted against RCIT due amounted to Php156Php9 million, Php766Php37 million and Php857Php446 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. The amount of expired portion of excess MCIT amounted to Php5Php11 million, Php3Php8 million and Php2Php16 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

NOLCO totaling Php2,688Php2,519 million as at December 31, 20102013 can be claimed as deduction against future taxable income. The NOLCO that was claimed as deduction against taxable income amounted to Php445Php6,643 million,

Php56 Php3,989 million and Php17,710Php827 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. The amount of expired portion of excess NOLCO amounted to Php95Php23 million, Php462Php425 million and Php140Php330 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

There are no income tax consequences attached to the payment of dividends in 2013, 2012 and 2011 by the PLDT Group to its shareholders.

Registration with Subic Bay Freeport and Clark Special Economic Zone

Mabuhay Satellite and

SubicTel areis registered as a Subic Bay Freeport Enterprises,Enterprise, while ClarkTel is registered as a Clark Special Economic Zone Enterprise under Republic Act No. 7227, or R.A. 7227, otherwise known as the Bases Conversion and Development Act of 1992. As registrants, Mabuhay Satellite, SubicTel and ClarkTel are entitled to all the rights, privileges and benefits established thereunder including tax and duty-free importation of

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capital equipment and a special income tax rate of 5% of gross income, as defined in R.A. 7227.
With the transfer of Mabuhay Satellite’s leasehold rights over the parcel of land where its satellite facility within the Subic Bay Freeport Zone is located as discussed onNote 9 — Property, Plant and Equipment, the registration of Mabuhay Satellite as a Subic Bay Freeport Enterprise was cancelled on July 1, 2010. Mabuhay Satellite is now subject to 30% RCIT on taxable income or 2% MCIT on total gross income, whichever is higher.

Registration with Philippine Economic Zone Authority,Authorities, or PEZA

SPi is registered as an Ecozone information technology enterprise to provide IT enabled services with emphasis on the creation of electronic discovery, presentation of content in electronic information formats, data analysis, capture, abstracting and data processing, design, development and implementation of healthcare documentation solutions.
SPi CRM is registered as an Ecozone export enterprise to develop and operate a customer relationship management that serves local and overseas clients by providing customer relationship management services.
As registered PEZA enterprises, SPi and SPi CRM are entitled to certain tax and non-tax incentives which include, among other things, tax and duty-free importations, exemption from local tax and is liable for a final tax, in lieu of all taxes, of 5% gross income less allowable deductions as defined under R.A. 7916. The 5% final tax must be paid and remitted in accordance with the amendments contained in R.A. 8748, as follows: (a) 3% to the National Government; and (b) 2% which will be directly remitted by the business establishments to the Treasurer’s Office of the Municipality or City where the enterprise is located.
Parlance, which is now merged into SPi CRM, was previously registered with the Board of Investments, or BOI, and became entitled to the same tax incentive provided to SPi CRM as set out earlier. Parlance’s ITH incentive under BOI expired on May 31, 2010 and its registration with PEZA was approved on April 30, 2010.
Two of its facilities (SPi CRM Iloilo and SPi CRM Pasig) will continue to enjoy ITH incentive as a BOI registered entity in PEZA registered locations. ITH incentive commenced in March 2005 up to February 2011 for SPi CRM Iloilo. Upon expiration of the ITH, SPi CRM Iloilo is now subject to a special income tax rate of 5% of gross income as a PEZA registered location. ITH incentive commenced in August 2006 up to July 2012 for SPi CRM Pasig. In relation to this, they are required to comply with specific terms and conditions stated in their PEZA Supplemental Agreement.
The registration with PEZA for the operations of SPi CRM in Dumaguete is still in progress and therefore it is subject to the regular corporate income tax. However, the Local Investment Board of Dumaguete City had issued a Certificate of Registration and Eligibility which granted SPi CRM the exemption to pay local business taxes and basic real property taxes on improvements for the period from November 2010 to October 2013.
SHI

SeMI was registered with the PEZA as an Ecozone information technologyIT enterprise on a non-pioneer status last July 31, 2009. Under the terms of registration, SHISeMI is entitled to certain tax and non-tax incentives which include, among other things, an income tax holiday, or ITH, for four years starting June 2009.

Chikka Philippines, Inc., or CPI, was registered SeMI availed Php1 million tax incentive in December 2011. However, SeMI is in a net loss position in December 2013 and 2012, hence, no tax incentives were availed from the registration with the Economic Zone.

On July 23, 2013, PEZA approved IPCDSI’s application for pioneer status as an Ecozone information technology enterprise onIT enterprise. IPCDSI was granted a non-pioneer status last July 28, 2005. Under the terms of registration, CPI was entitled to certain tax and non-tax incentives which include, among other things, anthree-year ITH for four yearsits expansion project up to June 29, 2015, among others. Income from July 2005 to July 2009. Upon expiration of the ITH, CPI is now subject to 5% special tax on gross revenue, net of certain deductions specifically provided forits IT operations shall be covered by the Act,5% gross income tax incentive, in lieu of all national and local taxes, except real property taxes imposed by the local government. Income derived from non-registered activities is subject to 30% RCIT on taxable income or 2% MCIT on total gross income, whichever is higher.

including additional deductions for training expenses.

Registration with BOI

On January 3, 2007, the BOI approved ePLDT’s application for pioneer status as a new IT service firm in the field of services related to Internet Data Center for its new data center facility. ePLDT was granted a six-year ITH for its new data center facility fromstarting January 2007.

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Level Up! was originally registered with Income derived after the BOI as a new IT service firm inexpiration of the field of application service provider on a non-pioneer status. Under such registration, Level Up! is entitled to certain tax incentives, which includes a four-year ITH from January 2003 and a tax credit for taxes on duties on materials used in export products for ten years starting January 2003. In April 2004, the BOI approved Level Up!’s request for upgrading its status from non-pioneer to pioneer in connection with its IT service activity in the field of application service provider for entertainment and education project. Accordingly, the ITH period was extended from four years to six years and expired in January 2009. Level Up! is now subject to 30% RCIT on taxable income or 2% MCIT on total gross income, whichever is higher.
Wolfpac is registered with the BOI as a new IT service firm in the field of an application service provider on a non-pioneer status. Under the terms of its registration, it is entitled to certain tax and non-tax incentives which include, among other things, an ITH for four years starting February 2004. On November 29, 2007, the BOI approved Wolfpac’s application for a one-year extension of ITH incentive on the basis that the capital equipment to labor ratio did not exceed US$10 thousand to one direct labor employee, as provided under Article 39 of Executive Order 226. The approved additional ITH is for the period from February 13, 2008 to February 12, 2009 and was not further extended. As such, Wolfpac is now subject to 30% RCIT on taxable income or 2% MCIT on total gross income, whichever is higher.
SBI is registered with the BOI on a pioneer status, namely as: (i) a new operator of telecommunications systems (inter-exchange carrier for data services); (ii) new information technology service firm in the field of providing internet services; and (iii) a new operator of telecommunications facilities (nationwide broadband wireless access). Under the terms of registration, SBI is entitled to certain tax and non-tax incentives which include, among other things, an ITH for six years. As at December 31, 2010, only the BOI registration for nationwide broadband wireless access continues to enjoy the ITH incentive, which will expire in July 2011.

Consolidated income derived from non-registered activities with Economic Zone and BOI is subject to the RCIT rate enacted as at the end of the reporting period.

Consolidated tax incentives that were availed from registration with Economic Zone and BOI amounted to

Php686 Php39 million, Php1,241Php190 million and Php1,763Php1,136 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.
8. Earnings Per Common Share

8.Earnings Per Common Share

The following table presents information necessary to calculate the earnings per common share, or EPS for the years ended December 31, 2010, 20092013, 2012 and 2008:

                         
  2010  2009  2008 
  Basic  Diluted  Basic  Diluted  Basic  Diluted 
  (in million pesos) 
Consolidated net income for the year attributable to equity holders of PLDT (Note 4)  40,217   40,217   39,781   39,781   34,317   34,317 
Dividends on preferred shares (Note 19)  (458)  (458)  (457)  (457)  (455)  (455)
 
Consolidated net income for the year attributable to common equity holders of PLDT  39,759   39,759   39,324   39,324   33,862   33,862 
 
                         
  (in thousands, except per share amounts) 
Outstanding common shares at beginning of year  186,797   186,797   187,484   187,484   188,741   188,741 
Effect of issuance of common shares during the year (Note 19)        15   15   542   542 
Average incremental number of shares under executive stock option plan, or ESOP, during the year           21      13 
Effect of purchase of treasury stock during the year (Note 19)  (7)  (7)  (583)  (583)  (1,120)  (1,120)
 
Weighted average number of common shares for the year  186,790   186,790   186,916   186,937   188,163   188,176 
 
Earnings per share for the year attributable to common equity holders of PLDT Php212.85  Php212.85  Php210.38  Php210.36  Php179.96  Php179.95 
 
2011:

   2013  2012  2011 
      (As Adjusted – Note 2) 
   Basic  Diluted  Basic  Diluted  Basic  Diluted 
   (in million pesos) 

Net income attributable to equity holders of PLDT from: Continuing operations

   33,351    33,351    35,605    35,605    30,411    30,411  

Discontinued operations (Notes 2 and 4)

   2,069    2,069    543    543    867    867  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated net income attributable to common shares (Note 4)

   35,420    35,420    36,148    36,148    31,278    31,278  

Dividends on preferred shares (Note 19)

   (60  (60  (52  (52  (458  (458
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated net income attributable to common equity holders of PLDT

   35,360    35,360    36,096    36,096    30,820    30,820  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (in thousands, except per share amounts which are in pesos) 
       

Outstanding common shares at beginning of the year

   216,056    216,056    214,436    214,436    186,756    186,756  

Effect of issuance of common shares during the year (Note 19)

   —      —      1,619    1,619    4,613    4,613  

Effect of mandatory tender offer for all remaining Digitel shares

   —      —      —      —      —      164  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average number of common shares

   216,056    216,056    216,055    216,055    191,369    191,533  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

EPS from continuing operations (Note 4)

   154.09    154.09    164.55    164.55    156.52    156.39  

EPS from discontinued operations (Notes 2 and 4)

   9.58    9.58    2.52    2.52    4.53    4.52  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

EPS attributable to common equity holders of PLDT (Note 4)

   Php163.67    Php163.67    Php167.07    Php167.07    Php161.05    Php160.91  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Basic EPS isamounts are calculated by dividing our consolidated net income for the year attributable to common equity holders of PLDT (consolidated net income adjusted for dividends on all series of preferred shares, except for dividends on preferred stock subject to mandatory redemption) by the weighted average number of common

212


shares issued and outstanding during the year.

Diluted EPS isamounts are calculated in the same manner assuming that, at the beginning of the year or at the time of issuance during the year, all outstanding options are exercised and convertible preferred shares are converted to common shares, and appropriate adjustments to consolidated net income are effected for the related income and expenses on preferred shares. Outstanding stock options will have a dilutive effect only when the average market price of the underlying common share during the year exceeds the exercise price of the stock option.

Convertible preferred shares are deemed dilutive when required dividends declared on each series of convertible preferred shares divided by the number of equivalent common shares, assuming such convertible preferred shares are converted to common shares, decreasedecreases the basic EPS. As such, the diluted EPS is calculated by dividing our consolidated net income attributable to common shareholders (consolidated net income, adding back any dividends and/or other charges recognized for the year related to the dilutive convertible preferred shares classified as liability, less dividends on non-dilutive preferred shares except for dividends on preferred stock subject to mandatory redemption) by the weighted average number of common shares excluding the weighted average number of common shares held as treasury shares, and including the common shareshares equivalent arising from the conversion of the dilutive convertible preferred shares.

Since the amount of dividends on Series A to HH in 2010, Series A to EE in 2009 and Series A to EE, Series V Convertible Preferred Stock and Series VI Convertible Preferred Stock in 2008 over its equivalent number of common shares increased the basic EPS, these Convertible Preferred Stock were deemed anti-dilutive. The calculation is based on the required dividends on these preferred shares divided by the number of equivalent common shares assuming such preferred shares are converted into common shares, including the effect of shares under the ESOP and treasury shares and compared againstfrom the basic EPS.
mandatory tender offer for all remaining Digitel shares.

Where the effect of the assumed conversion of the preferred shares and the exercise of all outstanding options have an anti-dilutive effect, basic and diluted EPS are stated at the same amount.

In 2008, the Board of Directors approved a share buyback program of up to five million shares of PLDT’s common stock, representing approximately 3% of PLDT’s total outstanding shares of common stock. We had acquired a total of approximately 2.72 million shares of PLDT’s common stock, representing approximately 1% of PLDT’s outstanding shares of common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million

9.Property, Plant and Equipment

Changes in accordance with the share buyback program as at December 31, 2010. We had acquired a total of approximately 2.68 million shares of PLDT’s common stock at a weighted average price of Php2,387 per share for a total consideration of Php6,405 million as at December 31, 2009. The effect of the acquisition of shares of PLDT’s common stock pursuant to the share buyback program was considered in the computation of our basicproperty, plant and diluted earnings per common shareequipment account for the years ended December 31, 20102013 and 2009. SeeNote 19 — EquityandNote 28 — Financial Assets and Liabilitiesfor further discussion.

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2012 are as follows:


  Cable
and
wire
facilities
  Central
office
equipment
  Cellular
facilities
  Buildings
and
improvements
  Vehicles,
furniture
and other
network
equipment
  Communications
satellite
  Information
origination
and
termination
equipment
  Land and
land
improvements
  Property
under
construction
  Total 
  (in million pesos) 

As at January 1, 2012

          

Cost

  146,430    92,953    119,791    24,299    40,731    966    9,102    3,014    44,361    481,647  

Accumulated depreciation, impairment and amortization

  (86,947  (72,368  (68,473  (11,716  (32,881  (966  (7,876  (278  —      (281,505
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net book value (Note 3)

  59,483    20,585    51,318    12,583    7,850    —      1,226    2,736    44,361    200,142  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Year Ended December 31, 2012

          

Net book value at beginning of the year (Note 3)

  59,483    20,585    51,318    12,583    7,850    —      1,226    2,736    44,361    200,142  

Additions

  2,750    415    8,879    562    2,549    —      387    2    21,144    36,688  

Disposals/Retirements

  (10  (5  (26  (4  (74  —      —      (7  —      (126

Translation differences charged directly to cumulative translation adjustments

  (2  (10  —      (15  (49  —      —      —      (7  (83

Acquisition through business combinations (Note 13)

  112    104    —      45    6    —      —      —      —      267  

Impairment losses recognized during the year (Note 5)

  (5  —      (2,876  —      —      —      —      —      —      (2,881

Reclassifications (Notes 12 and 17)

  1,543    (321  (3,452  131    2,438    —      (65  401    (253  422  

Transfers and others

  8,000    4,045    4,227    449    990    —      47    —      (17,758  —    

Depreciation of revaluation increment on investment properties transferred to property, plant and equipment charged to other comprehensive income

  —      —      —      (2  —      —      —      —      —      (2

Depreciation and amortization (Notes 2, 3 and 4)

  (11,380  (4,130  (9,678  (1,493  (5,606  —      (532  (1  —      (32,820

Discontinued operations (Note 2)

  —      (155  —      (340  (694  —      —      (165  (175  (1,529
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net book value at end of the year (Note 3)

  60,491    20,528    48,392    11,916    7,410    —      1,063    2,966    47,312    200,078  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As at December 31, 2012

          

Cost

  157,036    95,258    100,935    24,333    42,628    966    9,341    3,224    47,312    481,033  

Accumulated depreciation, impairment and amortization

  (96,545  (74,730  (52,543  (12,417  (35,218  (966  (8,278  (258  —      (280,955
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net book value (Note 3)

  60,491    20,528    48,392    11,916    7,410    —      1,063    2,966    47,312    200,078  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Year Ended December 31, 2013

          

Net book value at beginning of the year (Note 3)

  60,491    20,528    48,392    11,916    7,410    —      1,063    2,966    47,312    200,078  

Additions

  2,456    583    5,331    333    1,908    —      627    437    16,802    28,477  

Disposals/Retirements

  (626  (128  (269  (42  (107  —      (1  (440  (384  (1,997

Translation differences charged directly to cumulative translation adjustments

  8    (3  —      (3  10    —      —      —      —      12  

Impairment losses recognized during the year (Note 5)

  (305  —      (1,778  —      (50  —      (9  —      —      (2,142

Reclassifications (Notes 12 and 17)

  21    64    1,086    (147  (10  —      —      (280  (2,191  (1,457

Transfers and others

  4,643    3,172    5,172    272    1,053    —      179    3    (14,494  —    

Depreciation of revaluation increment on investment properties transferred to property, plant and equipment charged to other comprehensive income

  —      —      —      (2  —      —      —      —      —      (2

Depreciation and amortization (Notes 2, 3 and 4)

  (9,984  (3,788  (10,923  (1,325  (3,680  —      (602  (2  —      (30,304
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net book value at end of the year (Note 3)

  56,704    20,428    47,011    11,002    6,534    —      1,257    2,684    47,045    192,665  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As at December 31, 2013

          

Cost

  175,695    115,625    152,885    26,441    48,595    966    11,091    2,943    47,045    581,286  

Accumulated depreciation, impairment and amortization

  (118,991  (95,197  (105,874  (15,439  (42,061  (966  (9,834  (259  —      (388,621
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net book value (Note 3)

  56,704    20,428    47,011    11,002    6,534    —      1,257    2,684    47,045    192,665  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

9. Property, Plant and Equipment
As at December 31, 2010 and 2009, this account consists of:
                                         
                  Vehicles,            
                  furniture and     Information      
  Cable and Central     Buildings other     origination and Land and Property  
  wire office Cellular and network Communications termination land under  
  facilities equipment facilities improvements equipment satellite equipment improvements construction Total
  (in million pesos)
As at December 31, 2008
                                        
Cost  115,980   83,562   76,229   21,040   34,816   9,581   8,251   2,527   25,234   377,220 
Accumulated depreciation, impairment and amortization  (58,380)  (62,644)  (43,419)  (8,173)  (28,742)  (8,675)  (6,588)  (273)     (216,894)
 
Net book value  57,600   20,918   32,810   12,867   6,074   906   1,663   2,254   25,234   160,326 
 
                                         
Year Ended December 31, 2009
                                        
Net book value at beginning of year  57,600   20,918   32,810   12,867   6,074   906   1,663   2,254   25,234   160,326 
Additions  1,834   513   4,040   316   1,970   149   225   67   19,091   28,205 
Disposals/Retirements  (530)  (6)  (843)  (6)  (107)  (463)  (3)  (5)  (1,228)  (3,191)
Translation differences charged directly to cumulative translation adjustments  3   (2)     (10)  (13)  (47)           (69)
Acquisition through business combinations (Note 13)  1,348   194   141   186   104      420   105   (10)  2,488 
Impairment losses recognized during the year (Notes 3, 4 and 5)        (96)  (54)  (17)     (418)  (49)     (634)
Reclassifications/Transfers (Note 12)  6,949   2,776   8,404   326   386      110   (184)  (19,029)  (262)
Depreciation and amortization (Notes 3 and 4)  (8,793)  (3,381)  (9,013)  (1,151)  (2,176)  (545)  (542)  (6)     (25,607)
 
Net book value at end of year (Note 3)  58,411   21,012   35,443   12,474   6,221      1,455   2,182   24,058   161,256 
 
                                         
As at December 31, 2009
                                        
Cost  126,327   87,517   83,451   21,693   35,282   966   8,940   2,458   24,058   390,692 
Accumulated depreciation, impairment and amortization  (67,916)  (66,505)  (48,008)  (9,219)  (29,061)  (966)  (7,485)  (276)     (229,436)
 
Net book value (Note 3)  58,411   21,012   35,443   12,474   6,221      1,455   2,182   24,058   161,256 
 
                                         
Year Ended December 31, 2010
                                        
Net book value at beginning of year (Note 3)  58,411   21,012   35,443   12,474   6,221      1,455   2,182   24,058   161,256 
Additions  1,494   245   2,336   228   2,045      184      22,284   28,816 
Disposals/Retirements  (10)  (60)  (59)  (286)  (67)           (2)  (484)
Translation differences charged directly to cumulative translation adjustments  23   7      (5)  (59)           (4)  (38)
Acquisition through business combinations (Note 13)              73               73 
Impairment losses recognized during the year (Notes 3, 4 and 5)     (11)     (13)  (5)     (91)        (120)
Reclassifications/Transfers (Notes 12 and 13)  4,578   2,440   5,653   823   1,740      104   (54)  (15,326)  (42)
Depreciation and amortization (Notes 3 and 4)  (7,851)  (3,705)  (9,418)  (2,004)  (2,792)     (506)  (1)     (26,277)
 
Net book value at end of year (Note 3)  56,645   19,928   33,955   11,217   7,156      1,146   2,127   31,010   163,184 
 
                                         
As at December 31, 2010
                                        
Cost  132,356   89,992   90,574   21,873   38,078   966   9,136   2,405   31,010   416,390 
Accumulated depreciation, impairment and amortization  (75,711)  (70,064)  (56,619)  (10,656)  (30,922)  (966)  (7,990)  (278)     (253,206)
 
Net book value (Note 3)  56,645   19,928   33,955   11,217   7,156      1,146   2,127   31,010   163,184 
 
Substantially all of our telecommunications equipment are purchased from outside the Philippines. Our significant sources of financing for such purchases are foreign loans requiring repayment in currencies other than the Philippine pesos,peso, which are principally in U.S. dollars. SeeNote 20 Interest-bearing Financial Liabilities – Long-term Debt.

Interest and net foreign exchange losses capitalized to property, plant and equipment that qualified as borrowing costs amounted to Php421 million, Php914 million and Php648 million for the years ended December 31, 2010, 20092013, 2012 and 2008 are2011, respectively. SeeNote 5 – Income and Expenses – Financing Costs, net. Our undepreciated interest capitalized to property, plant and equipment that qualified as follows:

             
  2010  2009  2008 
  (in million pesos) 
Interest (Note 5)  710   691   778 
Foreign exchange losses (gains) — net     (119)  385 
 
borrowing costs amounted to Php6,885 million, Php7,686 million and Php10,357 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. The average interest capitalization rates used were approximately 7%, 6% and 8%5% each for the years ended December 31, 2010, 20092013 and 2008, respectively.

2142012, and 4% for the year ended December 31, 2011.


Our undepreciated capitalized net foreign exchange losses whichthat qualified as borrowing costs amounted to Php1,325Php80 million, Php353 million and Php1,799Php837 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively.
Our net foreign exchange gains differences which qualified as deduction against borrowing costs amounted to Php80 million for the year ended December 31, 2013. There were no additional capitalized foreign exchange differences, which qualified as borrowing costs for the years ended December 31, 2012 and 2011.

The useful lives of our assetsproperty, plant and equipment are estimated as follows:

Cable and wire facilities

  10 – 15 years

Central office equipment

  1032015 years

Cellular facilities

  3 – 10 years

Buildings

  25 years

Vehicles, furniture and other network equipment

  3 – 5 years

Information origination and termination equipment

  3 – 155 years

Leasehold improvements

3 – 5 years

Land and land improvements

  10 years

Property, plant and equipment include the net carrying value of capitalized vehicles, furniture and other network equipment under financing leases, which amounted to Php4Php18 million, Php22 million and Php24Php6 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. SeeNote 20 Interest-bearing Financial Liabilities – Obligations under Finance Leases.

Satellite Wholesale LeaseImpairment of Certain Wireless Network Equipment and Purchase Agreement, or SWLPA,Facilities

In 2013, Smart and Operations Management Agreement, or OMA, between Mabuhay SatelliteDMPI launched a network convergence program designed to consolidate the networks of Smart and Asia Broadcast Satellite Holdings, Ltd.

On October 22, 2009, Mabuhay Satellite enteredDMPI into SWLPA and OMA with Asia Broadcast Satellite Holdings, Ltd., or ABS, a Bermuda company engaged in the satellite business, involving the wholesale lease by ABSsingle network enabling subscribers of both companies to take advantage of the Agila 2 satellitecombined network. The convergence is expected to result in savings from Mabuhay Satellitesynergies in terms of optimized capital expenditures and uponcost efficiencies from colocation of base stations, consolidation of core systems, and operating expenses. The program, however, rendered certain network equipment and site facilities obsolete. In view of this, Smart and DMPI recognized full impairment provision on the satisfaction of various conditions precedent, the purchase by ABSnet book value of the affected network equipment and site facilities amounting to Php378 million and Php1,764 million, respectively.

In 2012, DMPI recognized an impairment loss of Php2,881 million pertaining to the net book values of certain identified network equipment and facilities that are affected by the unified wireless strategy as the overall business of Mabuhay Satellite.

UnderDMPI became anchored on PLDT’s wireless business unit, Smart.

In December 2011, Smart recognized full impairment provision of Php8,457 million for certain network equipment and facilities which no longer efficiently support our network modernization program, which was discussed and approved by Smart’s Board of Directors on February 28, 2011 and have been identified for replacement. The full impairment provision recognized represents the SWLPA, Mabuhay Satellite, in exchange for a total considerationnet book value of US$12.5 million, or Php580 million, will: (i) lease to ABS the Agila 2 satellite; (ii) assign the customer contracts to ABS;these network equipment and (iii) transfer to ABS the Mabuhay Satellite’s ground control facilities, employees, leasehold rights, other assetsfacilities.

SeeNote 3 – Management’s Use of Accounting Judgments, Estimates and the Agila 2 satellite. The term of the lease is for a period starting from the effective date of SWLPA to the earlier of: (a) the end of life of Agila 2 satellite; or (b) the date when Mabuhay Satellite assigns, transfersAssumptions – Asset ImpairmentandNote 5 – Income and conveys to ABS all of its rights, title and interest in the Agila 2 satellite. As part of the wholesale lease, Mabuhay Satellite is required to assign to ABS all its rights, title, interest, benefits and obligations in the customer contracts attached to all transponders that are covered by the SWLPA.

Under the OMA, after the closing of the agreement but prior to the transfer and conveyance of the ground control facilities to ABS pending the receipt of International Traffic in Arms Regulations approval, the parties agree that Mabuhay Satellite will operate and manage the Agila 2 satellite, the transponders and the ground control facilities for and on behalf of ABS. Mabuhay Satellite is required to provide the operations and management services for and in consideration of: (a) one-time payment by ABS to Mabuhay Satellite of the amount of US$500 thousand, or Php23 million; and (b) the reimbursement by ABS to Mabuhay Satellite of the amount equivalent to the actual expenses, costs, losses and liabilities incurred by Mabuhay Satellite in providing the services.
Expenses – Asset Impairment.

10.Investments in Associates, Joint Ventures and Deposits

As at December 31, 2009, all significant closing conditions had been secured. On2013 and 2012, and January 18, 2010, Mabuhay Satellite, ABS and Asia Broadcast Satellite, Ltd., formally executed a Conditions Precedent Waiver and First Closing Confirmation, confirming that the first closing was deemed to have occurred effective December 31, 2009. First Closing means the date when the assignment of customer contracts to ABS became effective and the approval or confirmation of SWLPA by stockholders of Mabuhay Satellite representing at least 2/3 of its outstanding capital stock was obtained. Following the confirmation of first closing, the wholesale lease of transponders by Mabuhay Satellite to ABS was considered as a finance lease and the transaction was recognized as sale of satellite for a total consideration of US$9.9 million, or Php460 million, including the cost of customer contracts as at December 31, 2009.

On July 1, 2010, Mabuhay Satellite, ABS and Broadband Broadcast Services Pte. Ltd., or BBS, executed a Conditions Precedent Waiver and Second Closing Confirmation, confirming that the second closing was deemed to have occurred on July 1, 2010. Second Closing means that date when transfer to BBS of Mabuhay Satellite’s ground control facilities, employees, leasehold rights and other assets and the transfer of ABS of the Agila 2 satellite became effective. Following the confirmation of second closing, the OMA was terminated.

215


Impairment of BOW’s Property and Equipment
In 2009, impairment losses were recognized equal to the net carrying value of BOW’s property and equipment amounting to Php524 million. The impairment losses resulted from the annual asset impairment test comparing the recoverable amount of the asset against its carrying value. The recoverable amount was determined based on value in use calculation using cash flow projections of the most recent financial budgets and forecasts approved by the Board of Directors. The pre-tax discount rate applied to cash flow projections is 8.7% and cash flows beyond the five-year period are determined using a 2.5% growth rate that is the same as the long-term average growth rate for the telecommunications industry. SeeNote 14 — Goodwill and Intangible Assets.
Impairment of Smart’s Payphone Business
In September 2010, Smart recognized impairment losses on its public telephone equipment in the amount of
Php92 million and engaged a third party contractor to operate and maintain its payphone business. Prior to the engagement of the third party, an impairment test was done to assess net cash flows from the business. The result showed that the future net cash flows were not enough to recover the carrying value of the related assets over the useful life of such assets. The recoverable amount was determined based on value in use, calculated using cash flow projections covering a three-year period from 2011 to the end of the assets expected useful lives in 2013. The pre-tax discount rate applied to cash flow projections was 7%.
10. Investments in Associates and Joint Ventures
As at December 31, 2010 and 2009,2012, this account consists of:
         
  2010  2009 
  (in million pesos) 
Carrying Value of Investments in Associates:        
Meralco  6,733   21,420 
Philweb Corporation, or Philweb  878   750 
ACeS International Limited, or AIL      
 
   7,611   22,170 
 
Carrying Value of Investments in Joint Ventures:        
Beacon  15,438    
Mobile Payment Solutions Pte. Ltd., or MPSPL  104    
ePDS, Inc., or ePDS  50   43 
PLDT Italy S.r.l., or PLDT Italy     20 
 
   15,592   63 
 
Total carrying value of investments in associates and joint ventures (Note 28)  23,203   22,233 
 
Movements

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Carrying value of investments in associates:

      

MediaQuest

   9,522     —       —    

Pacific Global One Aviation Co., Inc., or PG1

   111     132     155  

Digitel Crossing, Inc., or DCI

   102     90     92  

Philweb

   —       —       1,025  

Beta

   —       —       —    

ACeS International Limited, or AIL

   —       —       —    

Asia Netcom Philippines Corp., or ANPC

   —       —       —    
  

 

 

   

 

 

   

 

 

 
   9,735     222     1,272  
  

 

 

   

 

 

   

 

 

 

Carrying value of investments in joint ventures:

      

Beacon Electric Asset Holdings, Inc., or Beacon

   29,625     20,801     16,593  

Mobile Payment Solutions Pte. Ltd., or MPS

   —       54     —    

PLDT Italy S.r.l., or PLDT Italy

   —       —       —    
  

 

 

   

 

 

   

 

 

 
   29,625     20,855     16,593  
  

 

 

   

 

 

   

 

 

 

Deposit for future PDRs subscription:

      

MediaQuest

   1,950     6,000     —    
  

 

 

   

 

 

   

 

 

 

Total carrying value of investments in associates, joint ventures and deposits

   41,310     27,077     17,865  
  

 

 

   

 

 

   

 

 

 

Changes in the cost of investments and deposits for the years ended December 31, 20102013 and 20092012 are as follows:

         
  2010  2009 
  (in million pesos) 
Balance at beginning of year  24,170   4,346 
Additions during the year (including transfer of interests in Meralco to Beacon)  15,245   21,555 
Disposal during the year (including transfer of interests in Meralco to Beacon)  (14,767)   
Business combinations (Note 13)     (821)
Dissolution of Mabuhay Space Holdings Limited, or MSHL     (887)
Translation and other adjustments  (12)  (23)
 
Balance at end of year  24,636   24,170 
 

216


   2013  2012 
   (in million pesos) 

Balance at beginning of the year

   26,312    18,196  

Additions during the year

   5,557    8,843  

Reclassification

   5,440    —    

Disposal during the year

   (254  —    

Assets classified as held-for-sale

   —      (712

Translation and other adjustments

   19    (15
  

 

 

  

 

 

 

Balance at end of the year

   37,074    26,312  
  

 

 

  

 

 

 

MovementsChanges in the accumulated impairment losses for the years ended December 31, 20102013 and 20092012 are as follows:
         
  2010  2009 
  (in million pesos) 
Balance at beginning of year  1,906   2,903 
Impairment for the year (Notes 3, 4 and 5)  78    
Dissolution of MSHL     (887)
Translation and other adjustments  (10)  (110)
 
Balance at end of year  1,974   1,906 
 
Movements

   2013   2012 
   (in million pesos) 

Balance at beginning of the year

   1,877     1,882  

Translation and other adjustments

   6     (5
  

 

 

   

 

 

 

Balance at end of the year

   1,883     1,877  
  

 

 

   

 

 

 

Changes in the accumulated equity share in net earnings (losses) of associates and joint ventures for the years ended December 31, 20102013 and 20092012 are as follows:

         
  2010  2009 
  (in million pesos) 
Balance at beginning of year  (31)  (269)
Equity share in net earnings (losses) of associates and joint ventures for the year (Note 4):  1,408   2 
Meralco  874   398 
Beacon  354    
Philweb  161   152 
ePDS  26   21 
SHI  (7)   
BayanTrade     (5)
PLDT Italy     (98)
BOW     (466)
Disposals  (316)   
Dividends  (530)  (357)
Translation and other adjustments  10   593 
 
Balance at end of year  541   (31)
 

   2013  2012 
   (in million pesos) 

Balance at beginning of the year

   2,642    1,551  

Equity share in net earnings (losses) of associates and joint ventures (Note 4):

   2,742    1,538  

Beacon

   2,769    1,508  

Beta

   113    —    

DCI

   13    (2

PG1

   (21  (26

MPS

   (54  (78

MediaQuest

   (78  —    

Philweb

   —      136  

Share in the other comprehensive income of associates and joint ventures accounted for using the equity method

   1,020    —    

Disposals

   253    —    

Dividends

   (405  (33

Assets classified as held-for-sale

   —      (416

Translation and other adjustments

   (133  2  
  

 

 

  

 

 

 

Balance at end of the year

   6,119    2,642  
  

 

 

  

 

 

 

Investments in Associates

PCEV’s AcquisitionInvestment in MediaQuest

In 2012, ePLDT made deposits totaling Php6 billion to MediaQuest, an entity wholly-owned by the PLDT Beneficial Trust Fund, for the issuance of SharesPDRs by MediaQuest in Meralco

On March 12, 2009, First Philippine Holdings Corporation, or FPHC, First Philippine Utilities Corporation, or FPUC, and Lopez, Inc., (collectively, the Lopez Group) and PLDT entered intorelation to its indirect interest in Cignal TV. Cignal TV is a wholly-owned subsidiary of Satventures, which is a wholly-owned subsidiary of MediaQuest. The Cignal TV PDRs confer an investment and cooperation agreement under which: (a) PLDT acquired, through PCEV as its designated affiliate, 223 million shareseconomic interest in Meralco representing approximately 20% of Meralco’s outstandingcommon shares of common stock, for a cash consideration of Php20,070 million, or Php90 per share;Cignal TV indirectly owned by MediaQuest, and (b) PLDT and the Lopez Group agreed on certain governance matters, including the right of PLDT or its assignee to nominate certain senior management officers and members of the board of directors and board committees of Meralco.
As part of the transaction, PCEV and FPUC also entered into an exchangeable note agreement under which PCEV purchased an exchangeable note dated April 20, 2009,when issued, by FPUC,will provide ePLDT with a face value of Php2,000 million, exchangeable into approximately 22.2 million shares of common stock of Meralco,40% economic interest in Cignal TV. Cignal TV operates a direct-to-home, or DTH, Pay-TV business under the brand name “Cignal TV”, which form part ofis the 223 million shares or approximately 20% of Meralco’s voting common shares to be acquired by PCEVlargest DTH Pay-TV operator in the transaction. The exchange option was exercised simultaneouslyPhilippines with the acquisition of such shares by PCEV. PCEV recognized a derivative asset of Php563 million on April 20, 2009 for the exchange option feature of the agreement. The residual amount of Php1,437 million was allocated as the value of the host contract of the exchangeable note. The derivative asset was subsequently carried at fair value through profit or loss while the host contract was carried at amortized cost using effective interest rate.
On July 14, 2009, PCEV completed its acquisition of 223 million shares in Meralco for a cash consideration of Php18,070 million for the purchase of approximately 200.8 million shares and the conversion into approximately 22.2 million shares of an exchangeable note issued by FPUC with a market value, including its derivative option, of Php3,286 million. Thus, the investment in 223 million shares in Meralco was recorded at Php21,356 million and a gain of Php1,286 million was recognized on the exchangeable note, representing the mark-to-market gains of Php1,170 million from the derivative option and the amortization of the note’s discount of Php116 million. The acquisition of the shares was implemented through a special block sale/cross sale executed at the PSE.

217


PCEV engaged the services of an independent appraiser to determine the fair value of Meralco’s specific identifiable assets and liabilities and allocate the purchase price of PCEV’s investment in Meralco among the identified assets and liabilities based on fair value. Based on the final purchase price allocation, the difference of Php8,377 million between PCEV’s share on the total fair value of Meralco’s specific identifiable assets and liabilities and the total cost of PCEV’s investments was allocated as follows: (a) Php1,517 million for utility, plant and others; (b) Php320 million for investment properties; (c) Php36 million for investments in associates and joint ventures; (d) Php1,286 million for intangible assets particularly for franchise; (e) Php137 million for contingent liability; (f) Php1,295 million for deferred income tax liability; and (g) Php6,650 million for goodwill.
On March 30, 2010, PCEV reduced its investment in Meralco by Php15,083 million, the proportionate carrying amount of the 154.2 million Meralco shares sold and transferred to Beacon, see discussion under “Investments in Joint-Ventures — Transfer of PCEV’s Equity Interest in Meralco” section. PCEV will continue to use the equity method to account for its remaining investment in 68.8 million of Meralco’s common shares. SeeNote 3 — Management’s Use of Judgments, Estimates and Assumptions. The carrying value of investment in Meralco based on quoted share price of
Php228 per share amounted to Php6,733 million with market value of Php15,686 million602 thousand net subscribers as at December 31, 2010.2013.

On March 5, 2013, PLDT’s Board of Directors approved two further investments in additional PDRs of MediaQuest:

a Php3.6 billion investment by ePLDT in PDRs to be issued by MediaQuest in relation to its interest in Satventures. The Satventures PDRs confer an economic interest in common shares of Satventures owned by MediaQuest, and when issued, will provide ePLDT with a 40% economic interest in Satventures; and

a Php1.95 billion investment by ePLDT in PDRs to be issued by MediaQuest in relation to its interest in Hastings Holdings, Inc., or Hastings. The Hastings PDRs confer an economic interest in common shares of Hastings owned by MediaQuest, and when issued, will provide ePLDT with a 100% economic interest in Hastings. Hastings is a wholly-owned subsidiary of MediaQuest and holds all the print-related investments of MediaQuest, including minority positions in the three leading newspapers: The Philippine Star, the Philippine Daily Inquirer, and Business World. SeeNote 25 – Employee Benefits – Unlisted Equity Investments – Investment in MediaQuest.

The Php6 billion Cignal TV PDRs and Php3.6 billion Satventures PDRs were issued on September 27, 2013. These PDRs will provide ePLDT an aggregate of 64% economic interest in Cignal TV.

ePLDT’s deposit for future PDRs subscription amounted to Php1.95 billion for Hastings PDRs as at December 31, 2013 and Php6 billion for Cignal TV PDRs as at December 31, 2012.

On March 4, 2014, PLDT’s Board of Directors approved an additional investment of up to Php500 million in Hastings PDRs to be issued by MediaQuest, which will increase ePLDT’s investment in Hastings PDRs from Php1.95 billion up to Php2.45 billion representing a 60% economic interest in Hastings. A new investor is expected to subscribe for a 40% economic interest in Hastings either directly through Hastings or PDRs to be issued by MediaQuest in relation to its interest in Hastings.

As at the date of issuance of this report, the Hastings PDRs have not yet been issued.

The PLDT Group’s financial investment in PDRs of MediaQuest is part of the PLDT Group’s overall strategy of broadening its distribution platforms and increasing the Group’s ability to deliver multi-media content to its customers across the Group’s broadband and mobile networks.

Investment in PG1

On June 14, 2011, PLDT, Meralco Powergen Corporation, or MPG, Philex Mining Corporation, or Philex, Metro Pacific Tollways Corporation, or MPTC, MPIC and Jubilee Sky Limited, or JSL, entered into a shareholders’ agreement to establish PG1, with the purpose of carrying on, by means of aircraft of every kind or description, the general business of common and/or private carrier. PLDT subscribed to 125 million common shares with an aggregate value of Php125 million, representing 50% equity interest in PG1 and 30 million preferred shares with an aggregate value of Php30 million, which were all paid by assigning to PG1 certain aircraft and other related assets of PLDT. The difference between the Php244 million fair value of the assets and the Php155 million total subscription price amounting to Php89 million was booked as advances and shall be paid by PG1 to PLDT in cash as soon as reasonably practicable after incorporation. PLDT has agreed to transfer 10% of its common shares to MPG, within a reasonable time after incorporation of PG1, to increase MPG’s ownership to 15% and reduce PLDT’s ownership to 40% of the outstanding common shares of PG1.

As at December 31, 2013, MPG, Philex, MPTC, MPIC and JSL own 5%, 15%, 5%, 10% and 15% of PG1, respectively. PLDT has significant influence in PG1; consequently, PLDT has accounted for its investment in PG1 as an investment in associate.

On January 28, 2014, PLDT’s Board of Directors approved the purchase of 37.5 million shares of PG1 owned by JSL which effectively increases PLDT’s ownership in PG1 from 50% to 65%. The cash consideration for the shares purchased was Php23 million.

Investment of Digitel in DCI and ANPC

Digitel has 60% and 40% interest in Asia Netcom Philippines Corporation, or ANPC, and Digitel Crossing, Inc., or DCI, respectively. DCI is involved in the business of cable system linking Philippines, United States and other neighboring countries in Asia. ANPC is an investment holding company owning 20% of DCI.

In December 2000, Digitel, Pacnet Network (Philippines), Inc., or PNPI, (formerly Asia Global Crossing Ltd.) and BT Group O/B Broadband Infrastructure Group Ltd., or BIG, entered into a Joint Venture Agreement, or JVA, under which the parties agreed to form DCI with each party owning 40%, 40% and 20%, respectively. DCI was incorporated to develop, provide and market backhaul network services, among others.

On April 19, 2001, after BIG withdrew from the proposed joint venture, or JV, Digitel and PNPI formed ANPC to replace BIG. Digitel contributed US$2 million, or Php69 million, for a 60% equity interest in ANPC while PNPI owned the remaining 40% equity interest.

Digitel provided full impairment loss on its investment in DCI and ANPC in prior years on the basis that DCI and ANPC have incurred significant recurring losses in the past. In 2011, Digitel recorded a reversal of impairment loss amounting to Php92 million following recent improvement in the associates’ operations.

Digitel has no control over ANPC despite owning more than half of voting interest because of certain governance matters, and management has assessed that Digitel only has significant influence.

Digitel’s investment in DCI does not qualify as investment in JV as there is no provision for joint control in the JV agreement among Digitel, PNPI and ANPC.

Following PLDT’s acquisition of a controlling stake in Digitel, PNPI, on November 4, 2011, sent a notice to exercise its Call Right under Section 6.3 of the JVA, which provides for a Call Right exercisable by PNPI following the occurrence of a Digitel change in control. As at the date of issuance of this report, Digitel management is ready to conclude the transfer of its investment in DCI, subject to PNPI’s ability to meet certain regulatory and valuation requirements.

Investment of ePLDT in Philweb

In May 2006, ePLDT subscribed to newly issued common shares of Philweb, an internet-based online gaming company, equivalent to 20% of the total outstanding capital stock of Philweb at a price of Php0.020 per share or an aggregate amount of Php503 million. Of the total subscription price, Php428 million was paid by ePLDT on the closing date. A portion of the unpaid subscription price amounting to Php25 million will be paid by ePLDT at the same time as the Philweb majority stockholders pay the remaining unpaid portion of the subscription pursuant to a general call on subscription to be made by Philweb’s Board of Directors. The remaining unpaid balance of
Php50 million will be paid upon the lapse of certain post-closing price adjustment periods.
In October 2006, ePLDT acquired an additional 8,038 million shares of Philweb at a price of Php0.026 per share or an aggregate amount of Php209 million. This represents an additional 6.2% of the outstanding shares of Philweb, raising ePLDT’s total equity stake to 26.87%. As at December 31, 2010 and 2009, ePLDT’s equity interest in Philweb is 26.4%.

Philweb is primarily engaged in internet-based online gaming, through its appointment as Principal Technology Service Provider under the Marketing Consultancy Agreement for Internet Sports Betting and Internet Casino with the Philippine Amusement and Gaming Corporation, or PAGCOR. Philweb offers Internet Sports Betting in over 180 PAGCOR Internet Sports Betting Stations and over 180 Internet Casino Stations nationwide.

In May 2006, ePLDT subscribed to newly issued common shares of Philweb for an aggregate amount of Php503 million, representing 20% of the total outstanding capital stock of Philweb at a price of Php0.020 per share. Of the total subscription price, Php428 million was paid by ePLDT on the closing date. The remaining Php75 million was paid in July 2012, as discussed below.

In October 2006, ePLDT acquired an additional 8,038 million shares of Philweb at a price of Php0.026 per share for an aggregate amount of Php209 million.

On September 22, 2009, PSE approved the change in par value of Philweb shares from Php0.01 to Php1.00. Thus, the total number of shares subscribed by ePLDT was reduced to 332 million shares from 33,157 million shares.

The market value of ePLDT’s investment in Philweb amounted to Php5,093 million, based on quoted share price amountedof Php15.36 as at January 1, 2012.

On April 19, 2012, Philweb approved the 20% stock dividend declaration payable on May 30, 2012 to Php5,358stockholders of record as at May 4, 2012, thereby increasing ePLDT’s shares to 398 million shares.

On June 30, 2012, as a result of the committed plan of ePLDT to sell its interest over Philweb following a strategic review of the PLDT Group’s business, the investment in Philweb was reclassified as assets held-for-sale in accordance withIFRS 5, Noncurrent Assets Held-for-Sale and

Php6,134 Discontinued Operations. Consequently, the assets classified as held-for-sale was carried at the carrying value of the investment in Philweb, which is lower than the fair value less costs to sell of the Philweb shares.

On July 10, 2012, ePLDT entered into a Share Purchase Agreement with Philweb for the sale of 398 million common shares of Philweb, representing ePLDT’s 27% equity interest in Philweb. Based on the agreement, the sale of the 398 million common shares will be executed in four tranches, and is expected to be completed by the end of 2013. Philweb shall have the unilateral option to accelerate the acquisition of the portion of the subject shares corresponding to the second to fourth tranches upon prior written notice of five days to ePLDT. The rights (including the rights to receive dividend) to the first to fourth tranches of the subject shares shall belong to Philweb after the closing of the sale of each tranche. The first tranche, which was transacted on July 13, 2012, was for 93.5 million common shares for a purchase price of Php1 billion. The first tranche payment is net of subscriptions payable of Php75 million.

On October 17, 2012, a Supplement to the Share Purchase Agreement was entered into wherein Philweb designated its wholly-owned subsidiary, Philweb Casino Corporation, or PCC, to act as the buyer of the second to fourth tranches and to make the second to fourth payments.

Subsequently, on October 18, 2012, a Second Supplement to the Share Purchase Agreement was agreed among Philweb, ePLDT and PCC, wherein PCC, as the designee of Philweb notified ePLDT of its desire to exercise its option to accelerate the acquisition of the portion of the Philweb shares corresponding to the second tranche from December 12, 2012 to October 18, 2012, or one day after the PSE approves the special block sale, whichever is later. The acquisition of the second tranche, which was for 93.5 million common shares for a purchase price of Php1 billion, was completed on October 19, 2012.

On June 13, 2013, the third tranche was paid for 93.5 million common shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from December 12, 2012 to the actual date of payment of the third tranche, or Php1 billion.

On December 13, 2013, the fourth tranche was paid for 118 million common shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from December 12, 2012 to the actual date of payment of the fourth tranche, or Php1.3 billion. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments – ePLDT Group.

The investment in Philweb with a remaining balance of Php638 million was classified as assets held-for-sale as at December 31, 20102012. SeeNote 3 – Management’s Use of Accounting Judgments, Estimates and 2009, respectively.

Assumptions – Assets Classified as Held-for-Sale and Discontinued Operations.

Investment of PLDT Global Investments Corporation, or PGIC, in Beta

On February 5, 2013, PLDT entered into a Subscription and Shareholders’ Agreement with Asia Outsourcing Alpha Limited, or Alpha, and Beta, wherein PLDT, through its indirect subsidiary PGIC, acquired from Alpha approximately 19.7% equity interest in Beta for a total cost of approximately US$40 million, which consists of preferred shares of US$39.8 million and ordinary shares of US$0.2 million. In June 2013, PGIC transferred 112 ordinary shares and 41,069 preferred shares to certain employees of Beta for a total consideration price of US$42 thousand. The equity interest of PGIC in Beta remained at 19.7% after the transfer with economic interest of 18.24%. See related discussion onNote 2 – Summary of Significant Accounting Policies – Discontinued Operations.

Alpha and Beta are both exempted limited liability companies incorporated under the laws of Cayman Islands and are both controlled by CVC. Beta has been designated to be the holding company of the SPi Technologies, Inc. and Subsidiaries, or SPi Group.

The carrying value of PGIC’s investment in Beta’s preferred shares amounting to Php1,862 million was presented as part of investment in debt securities and other long-term investments in our consolidated statement of financial position as at December 31, 2013.

PGIC is a wholly-owned subsidiary of PLDT Global, which was incorporated under the laws of British Virgin Islands.

Investment of ACeS Philippines in AIL

As at December 31, 2010,2013, ACeS Philippines had aheld 36.99% investmentequity interest in AIL, a company incorporated under the laws of Bermuda. AIL owns the Garuda I Satellite and the related system control equipment in Batam, Indonesia.

AIL has incurred recurring significant operating losses, negative operating cash flows, and significant levels of debt. The financial condition of AIL was partly due to the National Service Providers’, or NSPs, inability to generate the amount of revenues originally expected as the growth in subscriber numbers has been significantly lower than budgeted. These factors raised substantial doubt about AIL’s ability to continue as a going concern. On this basis, we recognized a full impairment provision of Php1,896 million in respect of our investment in AIL in 2003.

Unrecognized share in net lossesincome of AIL amounted to Php35Php361 million, Php3 million and Php1Php57 million for the years ended December 31, 20102013, 2012 and 2009, respectively, while the unrecognized share in net gains of AIL amounted to

Php27 million for the year ended December 31, 2008.2011, respectively. Share in net cumulative losses amounting to
Php3,639 Php1,412 million, Php2,005 million and Php3,820Php2,035 million as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively, were not recognized as we do not have any legal or constructive obligation to pay for such losses and have not made any payments on

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behalf of AIL.

SeeNote 24 Related Party Transactions – Air Time Purchase Agreement between PLDT and AIL Related AgreementsandNote 26 — Contractual27 – Financial Assets and Liabilities – Liquidity Risk – Unconditional Purchase Obligations and Commercial Commitmentsfor further details as to the contractual relationships with respect to AIL.

Summarized Financial Information of Associates

The following tables present our share in the summarized financial information of our investments in associates in conformity with IFRS for equity investees in which we have significant influence as at December 31, 20102013 and 20092012, and January 1, 2012 and for the years ended December 31, 2010, 20092013, 2012 and 2008:

         
  2010  2009 
  (in million pesos) 
Statements of Financial Position:
        
Noncurrent assets  131,812   128,954 
Current assets  57,058   46,098 
Equity  60,983   52,411 
Noncurrent liabilities  79,501   78,949 
 
Current liabilities  48,386   43,692 
 
             
  2010  2009  2008 
  (in million pesos) 
Income Statements:
            
Revenues  246,807   186,227   572 
Expenses  229,145   178,018   359 
Other expenses  1,242   1,966   76 
Net income  10,834   6,634   290 
 
The above information includes the financial information of Meralco, which were adjusted to conform2011:

   As at December 31,  As at January 1, 
   2013  2012  2012 
   (in million pesos) 

Statements of Financial Position:

    

Noncurrent assets

   5,547    296    894  

Current assets

   2,563    610    912  

Equity

   (725  (1,679  (858

Noncurrent liabilities

   4,935    873    1,489  

Current liabilities

   3,900    1,712    1,175  
   For the Years Ended  December 31, 
   2013  2012  2011 
   (in million pesos) 

Income Statements:

    

Revenues

   1,993    138    484  

Expenses

   1,865    158    249  

Other income – net

   216    5    16  

Net income (loss)

   344    (15  251  

Other comprehensive income

   —      —      —    

Total comprehensive income (loss)

   344    (15  251  

We have no outstanding contingent liabilities or capital commitments with our accounting policy on investment properties,associates as at and for the years ended December 31, 20102013 and 2009 as shown below:

         
  2010  2009 
  (in million pesos) 
Statements of Financial Position:
        
Noncurrent assets  130,423   127,444 
Current assets  54,831   44,685 
Equity  68,339   61,146 
Noncurrent liabilities  72,552   68,860 
Current liabilities  44,363   42,123 
         
Income Statements:
        
Revenues  245,461   184,872 
Expenses  228,288   173,927 
Other expenses  1,281   1,966 
Net income  10,117   6,005 
 
2012, and January 1, 2012.

Investments in Joint Ventures

Transfer of PCEV’s Equity Interest in Meralco
On March 1, 2010, PCEV, MPIC and Beacon, entered into an Omnibus Agreement, or OA. Beacon, formerly known as Rightlight Holdings, Inc., was organized with the sole purpose of holding the respective shareholdings of PCEV and MPIC in Meralco. PCEV and MPIC are Philippine affiliates of First Pacific and both held equity shares in Meralco. Under the OA, PCEV and MPIC have agreed to set out their mutual agreement in respect of, among other matters, the capitalization, organization, conduct of business and the extent of their participation in the management of the affairs of Beacon.

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Investment in Beacon
     Prior

On March 1, 2010, PCEV, Metro Pacific Investments Corporation, or MPIC, and Beacon, entered into an Omnibus Agreement, or OA. Beacon was incorporated in the Philippines and organized with the sole purpose of holding the respective shareholdings of PCEV and MPIC in Meralco. Under the OA, PCEV and MPIC have agreed to set out their mutual agreement in respect of, among other matters, the capitalization, organization, conduct of business and the extent of their participation in the management of the affairs of Beacon. Beacon, PCEV and MPIC have also agreed on certain corporate governance matters, including Board composition, election of officers, shareholders’ action, representation to the transactions contemplated underMeralco Board, nomination of the Meralco Board Committees, and nomination of Meralco officers.

Beacon is merely a special purpose vehicle created for the main purpose of holding and investing in Meralco using the same Meralco shares as collateral for funding such additional investment. The OA entered into by Beacon, PCEV and MPIC effectively delegates the decision making power of Beacon over the Meralco shares to PCEV and MPIC and that Beacon does not exercise any discretion over the vote to be taken in respect of the Meralco shares but is obligated to vote on the Meralco shares strictly in accordance with the instructions of PCEV and MPIC. Significant influence over the relevant financing and operating activities of Meralco is exercised at the respective board of directors of PCEV and MPIC.

PCEV accounts for its investment in Beacon as investment in joint venture since the OA MPIC beneficially owned the entire outstandingestablishes joint control over Beacon.

Beacon’s Capitalization

Beacon’s authorized capital stock of Beacon, consistingPhp5,000 million consists of 25,0003,000 million common shares of Beacon, with a total par value of Php25,000.

     On April 29, 2010, the Philippine SEC approved Beacon’s application to increase its authorized capital stock to Php5 billion consisting of 3 billion common shares with par value of Php1 per share and 2 billion2,000 million preferred shares with a par value of Php1 per share. The preferred shares of Beacon are non-voting, not convertible to common shares or any shares of any class of Beacon and have no pre-emptive rights to subscribe to any share or convertible debt securities or warrants issued or sold by Beacon. The preferencepreferred shareholder is entitled to liquidation preference and yearly cumulative dividends at the rate of 7% of the issue value subject to: (a) availability of unrestricted retained earnings; and (b) dividend payment restrictions imposed by Beacon’s bank creditors.
     Under the OA, each of PCEV and MPIC agreed to subscribe to 1,156.5 million common shares of Beacon, for a subscription price of Php20 per share or a total of Php23,130 million. PCEV and MPIC also agreed that their resulting equity after such subscriptions and PCEV’s purchase from MPIC of 12,500 Beacon common shares will be 50% each of the outstanding common shares of Beacon.
     MPIC additionally agreed to subscribe to 801 million shares of Beacon’s preferred stock for a subscription price of Php10 per share or a total of Php8,010 million.
     The completion of the subscription of MPIC to 1,156.5 million common shares and 801 million preferred shares of Beacon was subject to the following conditions, all of which have been satisfied: (a) approval of MPIC’s Board of Directors, which was obtained on March 1, 2010; (b) approval of the shareholders of First Pacific, which was obtained on March 30, 2010; and (c) full payment of the subscription price, which was made on March 30, 2010. Consequently, on

On March 30, 2010, MPIC completed its subscriptionsubscribed to 1,156.5 million common shares of Beacon and approximately 801 million preferred shares of Beacon in consideration of: (1) the transfer of 163.6 million Meralco shares at a price of Php150 per share, or an aggregate amount of Php24,540 million in the aggregate;million; and (2) Php6,600 million in cash as further describeddiscussed below in “Transfer of Meralco Shares to Beacon”.

     The completion of the subscription of section below for further information.

PCEV likewise subscribed to 1,156.5 million common shares of Beacon was subject to the following conditions, all of which have been satisfied: (a) PCEV Board of Directors’ approval, which was obtained on March 1, 2010; (b) the approval of the shareholders of First Pacific, which was obtained on March 30, 2010; (c) the approval of the shareholders of PCEV, which was obtained on May 7, 2010; and (d) the full payment of the subscription price, which was made on May 12, 2010.

     Although PCEV secured the approval of its shareholders only on May 7, 2010, such approval was deemed to be a formality as Smart owns 99.5% of PCEV’s capital stock. Consequently, upon receipt of all other required approvals under the OA on March 30, 2010 including thatin consideration of the shareholders of First Pacific, PCEV recognized as an asset the deposit for future stock subscription of Php23,130 million for its subscription to 1,156.5 million common shares of Beacon. The deposit for future stock subscription was eventually reclassified to investment account when Beacon’s increase in authorized capital stock was approved by the Philippine SEC.
     The subscription price of PCEV’s and MPIC’s subscription to Beacon shares was offset in full (in the case of PCEV) and in part (in the case of MPIC) against the consideration for the transfer of 154.2 million Meralco shares held by PCEV and MPIC as described in “Transfer of Meralco Shares to Beacon” section below. In addition, MPIC settled its remaining balance in cash. On May 12, 2010, PCEV also completed the purchase from MPIC of 12,500 shares or 50% of the 25,000 Beacon common shares originally owned by MPIC.

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at a price of Php150 per share, or an aggregate amount of Php23,130 million.


Transfer of Meralco Shares to Beacon

Alongside with the subscription to the Beacon shares described above,pursuant to the OA, Beacon agreed to purchasepurchased 154.2 million and 163.6 million Meralco common shares, or the Transferred Shares, from PCEV and MPIC, respectively, for a consideration of Php150 per share or a total of Php23,130 million for the PCEV Meralco shares and Php24,540 million for the MPIC Meralco shares.

     The completion of PCEV transferred the sale of the MPIC154.2 million Meralco common shares to Beacon was subject to the following conditions, all of which have been satisfied: (a) approval of MPIC’s Board of Directors, which was obtained on March 1, 2010; (b) approval of the Board of Directors of First Pacific, which was obtained on March 1, 2010; (c) approval of the shareholders of First Pacific, which was obtained on March 30, 2010; and (d) release of the pledge over the MPIC Meralco shares, which was completed on March 30, 2010. Consequently, on March 30, 2010, MPIC transferred 163.6 million Meralco shares to Beacon at a price of Php150 per share for a total consideration of Php24,540 million.
     The completion of the sale of the PCEV Meralco shares to Beacon was subject to the following conditions, all of which have been satisfied: (a) PCEV Board of Directors’ approval, which was obtained on March 1, 2010; (b) the approval of the Board of Directors of First Pacific, which was obtained on March 1, 2010; (c) the approval of the shareholders of First Pacific, which was obtained on March 30, 2010; and (d) the approval of the shareholders of PCEV, which was obtained on May 7, 2010. Consequently, on May 12, 2010, PCEV transferred 154.2 million Meralco shares to Beacon at a price of Php150 per share for a total consideration of Php23,130 million.
2010. The transfer of legal title to the Meralco shares was implemented through a special block sale/cross sale in the PSE.
     Although PCEV secured the approval of its shareholders only on May 7, 2010, such approval was deemed to be a formality as Smart owns 99.5% of PCEV’s capital stock. Consequently, upon receipt of all other required approvals under the OA on March 30, 2010, including that of the shareholders of First Pacific, PCEV recognized a Php15,083 million investment (initially recognized as deposit for future stock subscription, see discussion above) in Beacon representing the proportionate carrying cost of the 154.2 million Meralco shares transferred to Beacon under the OA.

PCEV recognized a deferred gain of Php8,047 million for the difference between the Php23,130 million transfer price of the Meralco shares to Beacon and the Php15,083 million carrying amount in PCEV’s books of the Meralco shares transferred.transferred since the transfer was between entities with common shareholders. The deferred gain, presented as a reduction in PCEV’s investment in Beacon common shares, will only be realized upon the disposal of the investmentMeralco shares to a third party.

     Subject to rights over certain property dividends that may be declared or distributed in respect of the approximately 317.8 million Transferred Shares, which will be assigned to FPHC if the Call Option (as discussed below), is exercised, the rights, title and interest

On October 25, 2011, PCEV transferred to Beacon by MPIC and PCEV in respect of the approximately 317.8 million Transferred Shares includes: (a) all shares issued by Meralco by way of stock dividends on the Transferred Shares from March 1, 2010; (b) all property or cash dividends declared or paid on the Transferred Shares from March 1, 2010; (c) all other rights accruing on the Transferred Shares from March 1, 2010; and (d) the proceeds of all of the foregoing.

     PCEV may, at some future time and under such terms and conditions as may be agreed by PCEV and Beacon, transfer to Beacon its remaining investment in 68.8 million of Meralco’s common shares for a total cash consideration of Php15,136 million. PCEV also subscribed to 1,199 million Beacon preferred shares of the same value. The transfer of the Meralco shares was implemented by a cross sale through the PSE.

Since the transactions involve entities with common shareholders, PCEV recognized a deferred gain on transfer of the Meralco shares amounting to Php8,145 million, equivalent to the difference between the Php15,136 million transfer price of the Meralco shares and the Php6,991 million carrying amount in PCEV’s books of the Meralco shares transferred. The deferred gain was presented as an adjustment to the investment cost of the Beacon preferred shares in 2011. Similar to the deferred gain on the transfer of the 154.2 million Meralco shares, the deferred gain will only be realized upon the disposal of the Meralco shares to a third party.

The carrying value of PCEV’s investment in Beacon, representing 50% of Beacon’s common shares outstanding, was Php29,625 million, Php20,801 million and Php16,593 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

PCEV’s Additional Investment in Beacon

On January 20, 2012, PCEV subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million. On the same date, MPIC also subscribed to 135 million Beacon common shares for a total cash consideration of Php2,700 million.

Sale of Beacon Preferred Shares to MPIC

On June 6, 2012, PCEV sold 282.2 million of its investment in Beacon preferred shares to MPIC for a total cash consideration of Php3,563 million which took effect on June 29, 2012. Because the Beacon preferred shares were sold to an entity not included in PLDT Group, PCEV realized a portion of the deferred gain amounting to Php2,012 million. This amount was recorded when the underlying Meralco shares were transferred to Beacon. The carrying value of PCEV’s investment in Beacon’s preferred shares, amounting to Php5,440 million and Php6,991 million was presented as part of available-for-sale financial investments in our consolidated statements of financial position as at December 31, 2012 and January 1, 2012, respectively.

Change in View and Purpose of Investment in Beacon Preferred Shares

On October 30, 2013, PCEV’s Board of Directors approved the change in view and purpose of investment in Beacon preferred shares, from investment available-for-sale to strategic investment intended to generate safe and steady returns which PCEV intends to hold on to for the long-term, similar to its investment in common shares.

Call Option
     Under the OA, MPIC assigned its right to acquire the call option, or the Call Option, over 74.7 million common shares of Meralco held by FPHC, or the Option Shares, to Beacon. As a result, the investment in Beacon preferred shares was reclassified from available-for-sale investments to investment in joint venture (both are noncurrent assets). The carrying value of this assignment,PCEV’s investment in Beacon and FPHC executed an Option Agreement dated March 1, 2010 pursuantpreferred shares amounted to which FPHC granted the Call Option over the OptionPhp6,250 million as at December 31, 2013.

Beacon’s Acquisition of Additional Meralco Shares to Beacon.

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     The Call Option is exercisable at the optionA summary of Beacon during the period from March 15, 2010 until midnight of May 15, 2010. The exercise price for the Option Shares is Php300 per share or an aggregate exercise price of Php22,410 million. Beacon exercised the Call Option on March 30, 2010 and FPHC transferred the 74.7 million sharesBeacon’s purchases of Meralco common stock toshares are shown below:

Date

  Beneficial
Ownership
  Number of
Shares
   Nominal Value
Per Share
   Aggregate
Cost*
 
      (in million pesos, except for nominal value per share) 

Various dates in 2011

   4.40  49.9     —       14,310.0  

January 2012

   2.70  30.0     295     9,103.8  

November 2012

   0.30  3.2     263     841.7  

December 2012

   0.03  0.3     249     89.5  

July 19, 2013

   0.89  10.0     270     2,728.0  

July 30, 2013

   0.74  8.3     291     3,207.0  

*Inclusive of transaction costs.

As at December 31, 2013, Beacon in consideration of the payment by Beacon of Php22,410 million in cash on March 30, 2010.

     Subject to rights over certain property dividends that may be declared or payable in respect of the 74.7 million shares of Meralco common stock, which are retained by FPHC following the Call Option exercise, the rights, title and interest transferred to Beacon by FPHC in respect of the Option Shares includes: (a) all shares issued by Meralco by way of stock dividends on the Option Shares from March 1, 2010; (b) all property or cash dividends declared or paid on the Transferred Shares from March 1, 2010; (c) all other rights accruing on the Transferred Shares from March 1, 2010; and (d) the proceeds of any sale or disposition of any of the foregoing.
Property Dividends
     With respect to the approximately 317.8 million Transferred Shares, the remaining 68.8effectively owned 563 million Meralco common shares held by PCEVrepresenting approximately 49.96% effective ownership in Meralco with a carrying value of Php123,322 million and the 74.7market value of Php141,313 million Option Shares transferred by FPHC tobased on quoted price of Php251 per share. As at December 31, 2012, Beacon pursuant to the Call Option, FPHC has the benefiteffectively owned 545 million Meralco common shares representing approximately 48% effective ownership in Meralco with a carrying value of being assigned, or retainingPhp113,934 million and market value of Php142,245 million based on quoted price of Php261 per share. As at January 1, 2012, Beacon beneficially owned 511.2 million Meralco common shares representing approximately 45.4% beneficial ownership in the caseMeralco with a carrying value of the Option Shares, certain property dividends that may be declaredPhp104,092 million and market value of Php126,379 million based on such shares.
quoted price of Php247 per share.

Governance Arrangements

Beacon PCEV and MPIC have also agreed on certain corporate governance matters, including Board composition, election of officers, shareholders’ action, representation to the Meralco Board, nomination of the Meralco Board Committees, and nomination of Meralco officers. The corporate governance agreements and Beacon equity structure resulted in a jointly-controlled entity.
Financing

On March 30,22, 2010, Beacon also entered into an Php18,000 million ten-year corporate notes facility with First Metro Investment Corporation, or FMIC, and PNB Capital and Investment Corporation, or PNB Capital, as joint lead arrangers and various local financial institutions as noteholders. The proceedsinitial drawdown of thePhp16,200 million (Php16,031 million, net of debt issuance cost of Php168.5 million) under this notes facility partially financed the acquisition of Meralco shares by Beacon pursuant to its exercise of the Call Option.Option in March 2010. In May 2011, the remaining Php1,800 million was drawn to partially finance the acquisition of the additional 49.9 million Meralco common shares including shares purchased under a deferred payment scheme. The outstanding balance of the facility amounted to Php17,441 million and Php17,835 million as at December 31, 2012 and January 1, 2012, respectively. The loan was prepaid in full on March 27, 2013.

On May 24, 2011, Beacon entered into an Php11,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The amount drawn under this facility as at January 1, 2012 amounting to Php4,000 million was also used to partially finance the acquisition of the additional 49.9 million Meralco common shares. The remaining Php7,000 million was subsequently drawn on July 9, 2012 and used for the payment of the final tranche of the deferred purchase made in May 2011. The outstanding balance of the facility amounted to Php16,200Php10,780 million, (Php16,027Php10,856 million net of debt issuance cost of Php173 million), and the remaining undrawn balance amounted to Php1,800Php3,897 million as at December 31, 2010.

In 2010,2013 and 2012, and January 1, 2012, respectively.

On November 9, 2011, Beacon engagedentered into a Php5,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The full amount was drawn on February 1, 2012 and was used to finance the services of an independent appraiser to provide the fair market valuesacquisition of the operating equity investments, fixed assets and intangible assets ofadditional 30 million Meralco at the time of Beacon’s acquisition of its Meralco shares and allocate the purchase price of Beacon’s investment in Meralco among the identifiable assets and liabilities based on fair value. Based on the final purchase price allocation, the difference of Php50,595 million between Beacon’s sharecommon stock from FPUC. The outstanding balance of the total fair value of Meralco’s specific identifiable assets and liabilities and the total cost of Beacon’s investment was allocated as follows: (a) Php2,521facility amounted to Php5,000 million for utility plant and others; (b) Php341 million for investment properties; (c) Php59 million for investment in associates and joint ventures; (d) Php1,814 million for intangible assets particularly for franchise; (e) Php26 million for contingent liability; (f) Php2,018 million for deferred income tax liabilities; and (g) Php47,904 million for goodwill.

Beacon also recognized in March 2010, a liability for contingent consideration amounting to Php2,373 million for certain property dividends that may be declared on its Meralco shares pursuant to the Option Agreement between Beacon and FPHC. The liability for contingent consideration was remeasured based on the fair value of said property dividends as at December 31, 2010,2012. The loan was prepaid in full on August 1, 2013.

On February 6, 2013, Beacon entered into a Php17,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The proceeds were used to refinance the Php18,000 million ten-year Corporate Notes Facility under a Facility Agreement dated March 22, 2010. The loan facility is divided into two tranches with the first tranche amounting to Php2,285 million (the “Tranche A”) and the resulting re-measurement losssecond tranche amounting to Php14,715 million (the “Tranche B”).

Both tranches have a term of Php331ten years with semi-annual interest and principal payments starting May 27, 2013 with final repayment on March 27, 2023. The Tranche A bears a fixed interest rate based on the ten-year PDST-F plus a spread, subject to a floor rate. The Tranche B bears a fixed interest rate for the first five years from the Drawdown Date based on the five-year PDST-F plus a spread, subject to a floor rate. For the next five years, the fixed interest rate for Tranche B will be repriced based on the five-year PDST-F on the Business Day immediately preceding the Repricing Date plus a spread, provided that such interest rate shall not be lower than the applicable interest rate for the first five years. The outstanding balance of the facility amounted to Php16,872 million was charged to profit or loss.

Asas at December 31, 2010,2013.

On May 27, 2013, Beacon entered into a Forward Starting Interest Rate Swap, or Forward Starting IRS, to hedge the carryinginterest repricing risk on the outstanding balance of the Tranche B (Php14,715 million) by the end of the fifth year. The Forward Starting IRS will have a receive leg based on a rate which will be determined on March 26, 2018 and pay leg of 6.98% fixed rate that virtually matches the debt’s critical terms (i.e., benchmark rate and fixing date). The hedge is expected to be highly effective and such as Beacon designates the Forward Starting IRS as a cash flow hedge. The changes in fair value of the Forward Starting IRS will be deferred in equity under Beacon’s investment inother comprehensive income (loss) reserve account.

On July 29, 2013, Beacon entered into a Php9,000 million ten-year corporate notes facility with FMIC and PNB Capital as joint lead arrangers and various local financial institutions as noteholders. The proceeds were used to refinance the Php5,000 million ten-year corporate notes facility under a Facility Agreement dated November 9, 2011 and to partially finance the acquisition of the additional 18.3 million Meralco common shares. This facility was fully drawn on August 1, 2013 with semi-annual interest and principal payments starting July 31, 2013 with final repayment on July 31, 2023. The loan facility is divided into two tranches with the first tranche amounting to Php2,950 million (the “Tranche A”) and the second tranche amounting to Php6,050 million (the “Tranche B”). The outstanding balance of Php73,322the facility amounted to Php8,933 million includes: (a) consideration for the Transferred Shares from PCEV of Php23,130 million and from MPIC of Php24,540 million; (b) consideration for the Option Shares from FPHC of Php22,410 million; (c) liability for contingent consideration of Php2,373 million; (d) capitalized costs of Php942 million pursuant to an agreement between PCEV and MPIC; and (e) equity share in net earnings of Meralco of Php2,655 million less (f) dividends received of Php2,728 million from Meralco.

222


Asas at December 31, 2010,2013.

On August 13, 2013, Beacon held 393 millionavailed of two short-term notes from local banks, each with a principal sum of Php200 million. Both notes bear interest at a fixed rate equivalent to the higher of 4.5% per annum and the Bangko Sentral ng Pilipinas Overnight Reverse Repurchase Agreement Rate prevailing on the interest setting date plus 1%. Both notes were paid in full on November 13, 2013.

The above facilities were secured by a pledge over the Meralco common shares representing approximately 35% equity interestand were not guaranteed by PLDT. Also, the above facilities were not included in Meralco with market value of Php89,490 million based on quoted price of Php228 per share.

our consolidated long-term debt.

Investment of SHISeMI in MPSPLMPS

In June 2010, SHISeMI and MasterCard Asia/Pacific Pte. Ltd., or MasterCard Asia, entered into a joint venture agreementJVA under which the parties agreed to form MPSPL.MPS. The joint venture will develop, provide and market certain mobile payment services among other activities as stipulated in the agreement. MPSPLMPS was incorporated in Singapore on June 4, 2010 and is 40% and 60% owned by SHISeMI and MasterCard Asia, respectively. On November 9, 2010, SHISeMI contributed US$2.4 million representing 40% ownership in MPSPL.

InvestmentMPS.

On November 21, 2011, the Board of ePLDT in ePDS

ePLDTDirectors of MPS approved the allotment and issuance of additional 5 million shares for US$5 million and 3 million shares for US$3 million to MasterCard Asia and SeMI, respectively. On April 25, 2012, SeMI remitted the amount of US$2 million representing the 60% payment for the additional shares allotted to SeMI. On August 23, 2012, the balance of US$1 million representing the 40% of the remaining additional shares was paid.

On March 26, 2012, SeMI entered into a joint venturelicensing agreement on June 27, 2003 with DataPost Pte. Ltd., or DataPost, a subsidiaryMasterCard Asia to accept and process MasterCard Asia’s debit and credit card transactions of Singapore Post, or Spring, and G3 Worldwide ASPAC pursuant to whichaccredited merchants. SeMI became the parties formed ePDS, a bills printing company that performs laser printing and enveloping services for statements, bills and invoices, and other VAS for companiesfirst non-bank institution in the Philippines. ePLDT hascountry to be granted an acquiring license by MasterCard Asia.

On November 21, 2013, SeMI and MasterCard Asia executed a 50% equity interestStock Purchase Agreement wherein SeMI sold all of its shares in ePDS, while DataPost hasMPS totaling to approximately 6 million shares to MasterCard Asia for a 30% equity interest. Spring,purchase price of US$1.00. On the largest international mail services provider, ownssame date, both companies executed a Settlement Agreement wherein MPS agreed to settle its outstanding payables to SeMI as at August 31, 2013, after deducting SeMI’s 40% share in the remaining 20% equity interest. ePDS has an initial paid-up capitalnet liabilities of Php11MPS. The net settlement amount as at the cut-off date amounted to US$2.18 million.

However, SeMI shall continue to be a supplier of MPS by virtue of their independent Contractor Services Agreement.

The carrying values of SeMI’s investment in MPS amounted to nil as at December 31, 2013 and January 1, 2012, and Php54 million as at December 31, 2012.

Investment of PLDT Global in PLDT Italy

PLDT Global holds 100% nominalequity interest in PLDT Italy, a company incorporated under the laws of Italy, which is intended to carry the joint venture business between PLDT Global and Hutchison Global Communications Limited, or HGC, a company based in Hong Kong. On March 12, 2008, PLDT Global and HGC entered into a Co-operation Agreement wherein the parties agreed to launch their first commercial venture in Italy by offering mobile telecommunications services through PLDT Italy. Under the terms of the agreement, the aggregate amount of funding to be contributed by PLDT Global and HGC to PLDT Italy, in equal proportions, is capped at Euro 7.0 million. PLDT Global and HGC agreed to share equally the profit or loss from the operations of PLDT Italy. As a condition precedent to the effectiveness of the Co-Operation Agreement, PLDT Global pledged 50% of its shareholdingshareholdings in PLDT Italy to HGC.

In May and December 2010, the PLDT Italy Board of Directors, during its special meetings, approved the conversion of both partner’s loans to PLDT Italy totaling Euro 730 thousand into equity and to infuse additional cash of Euro 1 million.

The aggregate amount of funding contributed by PLDT Global and HGCeach partner to PLDT Italy wasthe joint venture is Euro 7.73.9 million, andor a total of Euro 6.07.8 million each as at December 31, 20102013 and 2009, respectively.2012, and January 1, 2012. PLDT Global’s share of equity in the joint venture amountedGlobal has made a full impairment provision on its investment to Euro 3.9 million, or Php238 million, and Euro 3.0 million, or Php200 million,PLDT Italy as at December 31, 20102013 and 2009, respectively.

2012, and January 1, 2012.

Summarized Financial Information of Joint Ventures

The table below presents the summarized financial information of Beacon as at December 31, 2013 and 2012, and January 1, 2012 and for the years ended December 31, 2013, 2012 and 2011:

   As at December 31,   As at January 1, 
   2013   2012   2012 
   (in million pesos) 

Statements of Financial Position:

      

Noncurrent assets

   124,717     113,934     103,960  

Current assets

   686     2,149     1,528  

Equity

   87,664     80,914     72,393  

Noncurrent liabilities

   35,556     32,896     21,732  

Current liabilities

   2,183     2,273     11,363  

Additional Information:

      

Cash and cash equivalents

   683     2,146     1,472  

Current financial liabilities*

   936     374     7,819  

Noncurrent financial liabilities*

   35,195     32,896     21,225  

*Excluding trade, other payables and provisions.

   For the Years Ended December 31, 
   2013   2012   2011 
   (in million pesos) 

Income Statements:

      

Revenues – equity share in net earnings

   8,017     7,359     4,832  

Expenses

   170     141     10  

Interest income

   28     94     37  

Interest expense

   2,369     2,570     1,932  

Net income

   5,450     4,396     2,850  

Other comprehensive income

   1,817     —       —    

Total comprehensive income

   7,267     4,396     2,850  

The following table presents the reconciliation between the share in Beacon’s equity and the carrying value of investment in Beacon as at December 31, 2013 and 2012, and January 1, 2012:

   December 31,  January 1, 
   2013  2012  2012 
   (in million pesos) 

Beacon’s equity

   87,664    80,887    72,393  

Less: Cumulative dividends to preferred shares

   (1,620  —      —    

Preferred shares

   (23,146  (23,146  (23,146
  

 

 

  

 

 

  

 

 

 

Net assets attributable to common shares

   62,898    57,741    49,247  

PCEV’s ownership interest

   50  50  50
  

 

 

  

 

 

  

 

 

 

Share in net assets of Beacon

   31,449    28,871    24,624  

Carrying value of investment in preferred shares

   6,250    —      —    

Purchase price allocation adjustments

   (39  (23  16  

Deferred gain on transfer of Meralco shares

   (8,047  (8,047  (8,047

Others

   12    —      —    
  

 

 

  

 

 

  

 

 

 

Carrying amount of interest in Beacon

   29,625    20,801    16,593  
  

 

 

  

 

 

  

 

 

 

The following table presents our aggregate share in the summarized financial information of our investments in individually immaterial joint ventures as at December 31, 20102013 and 20092012, and January 1, 2012 and for the years ended December 31, 2010, 20092013, 2012 and 2008.

         
  2010  2009 
        (in million pesos)
Statements of Financial Position:
        
Noncurrent assets  73,366   103 
Current assets  1,807   244 
Equity  55,047   57 
Noncurrent liabilities  16,037   88 
Current liabilities  4,089   202 
 
             
  2010  2009  2008 
      (in million pesos)
Income Statements:
            
Revenues  2,884   387   175 
Expenses  297   527   387 
Other expenses  1,503   3   2 
Net income  1,065   154   223 
 

223

2011:


   As at December 31,   As at January 1, 
   2013   2012   2012 
   (in million pesos) 

Statements of Financial Position:

      

Noncurrent assets

   —       4     5  

Current assets

   4     83     58  

Equity

   4     50     13  

Current liabilities

   —       37     50  
   For the Years Ended December 31, 
   2013   2012   2011 
   (in million pesos) 

Income Statements:

      

Revenues

   —       72     34  

Expenses

   1     72     76  

Other expenses – net

   —       104     84  

Net loss

   1     104     126  

Other comprehensive income

   —       —       —    

Total comprehensive loss

   1     104     126  

The above information includes the financial information of Beacon as at and for the year ended December 31, 2010 as shown below:
(in million pesos)
Statement of Financial Position:
Noncurrent assets73,322
Current assets1,658
Equity54,956
Noncurrent liabilities16,027
Current liabilities3,997
Income Statements:
Equity share in net income of Meralco2,655
Expenses78
Other expenses1,501
Net income1,077
As at December 31, 2010, weWe have no outstanding contingent liabilities or capital commitments with our joint ventures.
11. Investment in Debt Securities
ventures as at December 31, 2013 and 2012, and January 1, 2012.

11.Investment in Debt Securities and Other Long-term Investments

As at December 31, 20102013 and 2009,2012, and January 1, 2012, this account consists of:

         
  2010  2009 
        (in million pesos)
National Power Corporation, or NAPOCOR, Zero Coupon Bond  334   312 
Rizal Commercial Banking Corporation, or RCBC, Note  150   150 
 
Noncurrent portion of investment in debt securities (Note 28)  484   462 
 

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Beta’s preferred shares (Note 10)

   1,862     —       —    

PSALM Bond

   321     —       —    

Security Bank Corporation, or Security Bank, Time Deposits

   310     205     —    

GT Capital Bond

   150     —       —    

Rizal Commercial Banking Corporation, or RCBC, Note

   —       150     150  

National Power Corporation, or NAPOCOR, Zero Coupon Bond

   —       —       358  
  

 

 

   

 

 

   

 

 

 
   2,643     355     508  

Less current portion (Note 27)

   —       150     358  
  

 

 

   

 

 

   

 

 

 

Noncurrent portion (Note 27)

   2,643     205     150  
  

 

 

   

 

 

   

 

 

 

NAPOCOR Zero Coupon BondsInvestment in Beta’s Preferred Shares

SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment of PGIC in Beta for the detailed discussion of our investment.

PSALM Bond

In 2007,April 2013, Smart purchased, at a discount,premium, a NAPOCOR Zero CouponPSALM Bond or NAPOCOR Bond, with a face value of Php380Php200 million maturing on November 29, 2012April 22, 2017 with yield-to-maturity at 4.25% gross. The bond has a net yield to maturitygross coupon of 6.88%. The NAPOCOR Bond, which7.25% payable on a quarterly basis, and was recognized as held-to-maturity investment. Premium is classified as a financial asset held-to-maturity, is carried at amortized cost using the effective interest rate method. Interest income recognized on the NAPOCORPSALM Bond amounted to Php22Php9 million Php20for the year ended December 31, 2013.

In August 2013, Smart purchased, at a premium, a PSALM Bond with face value of Php100 million maturing on April 22, 2015 with yield-to-maturity at 3.25% gross. The bond has a gross coupon of 6.875% payable on a quarterly basis, and was recognized as held-to-maturity investment. Premium is amortized using the effective interest rate method. Interest income recognized on the PSALM Bond amounted to Php2 million for the year ended December 31, 2013.

Security Bank Time Deposits

In October 2012, PLDT and Smart invested US$2.5 million each in a five-year time deposit with Security Bank maturing on October 11, 2017 at a gross coupon rate of 4%. These long-term fixed rate time deposits pay interest on a monthly basis or an estimate of 30 days. The deposits may be terminated prior to maturity at the applicable pretermination rates. Foreign exchange gain of Php7 million and Php19foreign exchange loss of Php1 million was recognized as at December 31, 2013 and 2012, respectively. Interest income (net of withholding tax) recognized on the time deposits amounted to US$282 thousand, or Php12 million, and US$42 thousand, or Php2 million, for the years ended December 31, 2010, 20092013 and 2008,2012, respectively.

In May 2013, PLDT invested US$2.0 million in a five-year time deposit with Security Bank maturing on May 31, 2018 at a gross coupon rate of 3.5%. These long-term fixed rate time deposits pay interest on a monthly basis or an estimate of 30 days. The deposits may be terminated prior to maturity at the applicable pretermination rates. Interest income (net of withholding tax) recognized on the time deposit amounted to US$38 thousand, or Php2 million, for the year ended December 31, 2013.

GT Capital Bond

In February 2013, Smart purchased at par a seven-year GT Capital Bond with a face value of Php150 million, maturing on February 27, 2020. The bond has a gross coupon of 4.8371% payable on a quarterly basis, and was recognized as held-to-maturity investment. Interest income, net of withholding tax, recognized on the GT Capital Bond amounted to Php5 million for the year ended December 31, 2013.

RCBC Note

In 2008, Smart purchased at par a ten-year RCBC Tier 2 Note, or RCBC Note, with a face value of Php150 million bearing a fixed rate of 7.00% for the first five years and the step-up interest rate from the fifth year up to maturity date. The RCBC early redeemed its Tier 2 Note may be redeemedwith face value of Php150 million and interest payment of Php2 million on February 22, 2013 pursuant to the exercise of Redemption at the optionOption of the Issuer at par plus accrued and unpaid interest on February 22, 2013. Smart designatedas approved by the RCBC Note as held-to-maturity financial asset.Bangko Sentral ng Pilipinas. Interest income recognized on the RCBC Note amounted to Php1.2 million for the year ended December 31, 2013 and Php8 million forin each of the years ended December 31, 20102012 and 2009 and Php72011.

NAPOCOR Zero Coupon Bond

In 2007, Smart purchased, at a discount, a NAPOCOR Zero Coupon Bond, or NAPOCOR Bond, with a face value of Php380 million, forthat matured on November 29, 2012 at a net yield to maturity of 6.88%. The NAPOCOR Bond was carried at amortized cost using the yeareffective interest rate method. Interest income recognized on the NAPOCOR Bond amounted to Php23 million in each of the years ended December 31, 2008.

12. Investment Properties
Movements2012 and 2011.

12.Investment Properties

Changes in investment properties account for the years ended December 31, 20102013 and 20092012 are as follows:

         
  2010  2009 
      (in million pesos)
Balance at beginning of year  1,210   617 
Transfers from property, plant and equipment (Note 9)  491   262 
Net gains from fair value adjustments charged to profit or loss(1) (Note 3)
  6   352 
Disposals  (147)  (21)
 
Balance at end of year (Notes 3 and 28)  1,560   1,210 
 

   2013   2012 
   (in million pesos) 

Balance at beginning of the year

   712     1,115  

Transfers from (to) property, plant and equipment – net (Note 9)

   431     (289

Net gains from fair value adjustments charged to profit or loss(1) (Note 3)

   79     21  

Disposals

   —       (135
  

 

 

   

 

 

 

Balance at end of the year (Note 3)

   1,222     712  
  

 

 

   

 

 

 

(1)

(1)Presented as part of “Other income”income – net” in our consolidated income statement.

224


Investment properties, which consist of land and building, are stated at fair values, which have been determined annually based on the year-end appraisal performed by an independent firm of appraisers, an industry specialist in valuing these types of investment properties. The valuation was based on an open market value, supported by a market evidence in which such assets could be exchanged between a knowledgeable and willing buyer and seller in an arm’s length transaction at the date of valuation. None of our investment properties are being leased to third parties that earn rental income.

The valuation for land was based on market approach valuation technique using price per square meter ranging from Php8 to Php154 thousand. The valuation for building and land improvements were based on cost approach valuation technique using current material and labor costs for improvements based on external and independent reviewers.

We have determined that the highest and best use of some of the idle or vacant land properties at the measurement date would be to convert the properties for residential or commercial development. For strategic reasons, the properties are not being used in this manner.

We have no restrictions on the realizability of our investment properties and no contractual obligations to either purchase, construct or develop investment properties or for repairs, maintenance and enhancements.

Repairs and maintenance expenses relatingrelated to investment properties that do not generate rental income amounted to Php75Php57 million, Php24Php54 million and Php3Php70 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

The above investment properties were categorized under Level 3 fair value hierarchy. There were no transfers in and out of Level 3 fair value hierarchy.

Significant increases (decreases) in price per square meter for land and current material and labor costs of improvements would result in a significantly higher (lower) fair value measurement.

13.Business Combinations

13. Business Combinations and2012 Acquisitions

ePLDT’s Acquisition of Non-Controlling Interests

2009 AcquisitionsIPCDSI
PLDT’s Acquisition of Philcom

On January 3, 2009, PLDT, PremierGlobal ResourcesOctober 12, 2012, ePLDT, IPVI and Philippine Global Communications, Inc., or PGCI, executedIEI entered into a Share AssignmentSale and Purchase Agreement wherein PGCIwhereby IPVI and IEI sold its 100% ownership in IPCDSI to PLDT the rights, title and interest in all of the outstanding shares of Philcom’s common stockePLDT for a cash consideration of Php75 million.

The purchase price consideration has been allocatedof Php728 million and Php72 million shareholder advances subject to the assets and liabilities on the basis of fair valuesclosing adjustments as at the date of acquisition and additional consideration if the Adjusted EBITDA valuation exceeds Php140 million. The final purchase price, after adjustments on retention payable and escrow amount, amounted to Php621 million.

IPCDSI owns and operates two internet data centers in the country and provides enterprises with managed data services and cloud-based business solutions across a wide range of industries including IT solutions providers, gaming companies, e-learning and healthcare. IPCDSI is the country’s first and only Salesforce.com Cloud Alliance Partner providing Salesforce CRM licenses and consulting services to businesses. In addition, IPCDSI is also the country’s premier Google Enterprise Partner, allowing local organizations to adopt a cloud computing mindset and to ThinkOutCloudTM. Our investment in IPCDSI allows us to complete our multi-tiered data center product suite and expand our cloud solutions business. SeeNote 2 – Summary of Significant Accounting Policies – ePLDT’s Acquisition of IPCDSI.

The fair value of the identifiable assets and liabilities of IPCDSI at the date of acquisition are as follows:

   Fair Values
Recognized on
Acquisition
 
   (in million pesos) 

Assets:

Assets:

Property, plant and equipment (Note 9)

   267  
Property, plant and equipment1,851
Available-for-sale financial

Intangible assets

5
Deferred income tax assets — net3
Cash and cash equivalents51
Trade and other receivables204
Inventories and supplies — net15
Prepayments8
2,137
Liabilities:
Long-term debt340
Deferred income tax liabilities — net381
Pension and other employee benefits13
Accounts payable1,206
Accrued expenses and other current liabilities77
Dividends payable (Note 14)

   2  
Income tax payable

Other noncurrent assets

   37  

Cash and cash equivalents

   2,02214  

Trade and other receivables

   115159  
Non-controlling interests

Prepayments and other current assets

   4030  

 
Net assets acquired   75479  

 

Liabilities:

Long-term debt

26

Obligations under finance lease

18

Other noncurrent liabilities

43

Accounts payable

212

Accrued expenses and other current liabilities

20

319

Total identifiable net assets acquired

160

Goodwill from the acquisition (Note 14)

461

Purchase consideration transferred

621

Cash flows from investing activity:

Net cash acquired with subsidiary

14

Cash paid

(621

Purchase of subsidiary – net of cash acquired

(607

Non-controlling interests represent the interest not owned by Philcom in its two subsidiaries, which is measured at proportionate share in fair values

The valuation of identifiable assets and liabilities acquired at the date of acquisition.

The fair value and gross amount of trade and other receivables amounted to Php204 million and Php679 million, respectively. The amount of allowance for impairment for uncollectible trade and other receivables amounted to Php475 million.
Total revenues and net income of Philcom included in our 2009 consolidated income statement from the time of acquisition until December 31, 2009 amounted to Php387 million and Php2 million, respectively.
ePLDT’s Acquisition of BayanTrade
On January 20, 2009 and April 15, 2009, ePLDT acquired additional equity interest of 34.3% and 48.4%, respectively, in BayanTrade for a cash consideration of Php28 million and Php39 million, respectively, thereby increasing its ownership interest to 93.5% as at April 15, 2009.

225


The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values on April 15, 2009 as follows:
         
    Fair Value
  Previous Carrying Recognized on
  Value Acquisition
  (in million pesos)
Assets:
        
Property, plant and equipment  21   21 
Goodwill (Note 14)  184   216 
Deferred income tax assets — net  19   19 
Advances and refundable deposits  11   7 
Cash and cash equivalents  6   6 
Trade and other receivables  179   156 
Prepayments and other current assets  6    
 
   426   425 
 
Liabilities:
        
Long-term debt  150   150 
Pension and other employee benefits  5   5 
Other noncurrent liabilities  59   16 
Accounts payable  85   121 
Accrued expenses and other current liabilities  75   82 
 
   374   374 
 
   52   51 
Non-controlling interests  (9)  (10)
 
Net assets acquired  61   61 
 
TheIPCDSI’s net assets, acquired in the December 31, 2009 consolidated financial statements werewhich was initially based on a provisional assessment of fair value, as we are still in the process of determining the fair value of BayanTrade’s identifiable assets and liabilities. The results of this valuation had not been finalized as at the date the 2009 consolidated financial statements were approved for issuance by the Board of Directors.
The valuation of BayanTrade’s assets was completed in 20102013 and the fairfinal value of goodwill increaseddecreased by Php32Php113 million to Php216Php461 million as a result of adjustments in the fair valuesfinal purchase price to Php621 million from the initial purchase price of certain assets and liabilities as presented in the above table.Php734 million. The 20092012 comparative information were no longer restated to reflect the adjustments and instead were accounted for as current year adjustments.
adjustments since resulting adjustment is not material.

The fair value of trade and other receivables and advances and refundable deposits amounted to Php156 million and Php7 million, respectively. The gross amount of trade and other receivables and advances and refundable deposits amounted to Php165Php159 million and Php7Php196 million, respectively. The amount of allowance for impairment for uncollectible trade and other receivables amounted to Php9Php37 million. None of the advances and refundable deposits has been impaired and it is expected that the full contractual amount can be collected.

The goodwill of Php216Php461 million pertains to the fair value of assembled workforceIPCDSI’s data center business, which offersincludes operations of data centers, managed information technologydata services and has personnel with skills in Systems, Applicationscloud-based business solutions across a wide range of industries. The intangible assets of Php2 million pertain to the fair value of IPCDSI’s customer list and Products, Microsoft and other Enterprise Resource Planning, or ERP. BayanTrade has the largest pool of ERP practitioners in the South East Asia region.

licenses.

Our consolidated revenues and net income would have increased by Php61Php228 million while our consolidated net income would have decreased by Php19and Php24 million, respectively, for the year ended December 31, 20092012 had the acquisition of BayanTradeIPCDSI actually taken place on January 1, 2009. Total revenues and net losses of BayanTrade included in our 2009 consolidated income statement from April 15, 2009 to December 31, 2009 amounted to Php275 million and Php27 million, respectively.

Smart’s Acquisition of Non-Controlling Interests in PCEV
Smart’s Board of Directors approved on June 19, 2009 a tender offer to acquire at Php8.50 per share, fully payable in cash on August 12, 2009, from PCEV’s non-controlling shareholders up to approximately 840 million shares which is approximately 7.2% of the outstanding common stock of PCEV at that time. Smart filed the Tender Offer Report with the Philippine SEC and the PSE on June 23, 2009 pursuant to Section 19 of the Securities Regulation Code, or SRC. The tender offer commenced on July 1, 2009 and ended on July 29, 2009, with approximately 93.0% of PCEV’s non-controlling shares tendered, thereby increasing Smart’s ownership to

226


approximately 99.5% of the outstanding common stock of PCEV. The aggregate cost for the tender offer paid by Smart to non-controlling shareholders on August 12, 2009 amounted to Php6,618 million, from which Smart recognized an excess of acquisition cost over the carrying value of non-controlling interests acquired of Php5,479 million presented as part of capital in excess of par value account under “Equity” in our consolidated statement of financial position.
Smart’s Acquisition of Shares in BOW
In July 2009, Smart (through its subsidiary, SCH) increased its shareholdings in BOW, a Dublin-based company delivering GSM communication capability for the merchant maritime sector to approximately 1.2 million shares representing 51.0% of the total issued and outstanding shares of BOW from 381 thousand shares or 28.3%. Total acquisition cost for Smart’s investment in BOW amounted to US$9 million, or Php439 million, which consists of: (a) US$4 million, or Php182 million, in cash; (b) US$2 million, or Php119 million, worth of advances; and (c) fair value of previously held interest amounting to US$3 million, or Php138 million. Net cash outflow related to the acquisition was US$12 million, or Php552 million, representing cash payment of US$17 million, or Php783 million, net of cash acquired from BOW of US$5 million, or Php231 million.
The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values in July 2009 as follows:
         
  In U.S. Dollar In Php(1)
  (in millions)
Assets:
        
Property, plant and equipment  12   558 
Goodwill (Note 14)  1   45 
Intangible assets (Note 14)  5   221 
Advances and refundable deposits     7 
Cash and cash equivalents  5   231 
Trade and other receivables     33 
Prepayments     31 
 
   23   1,126 
 
Liabilities:
        
Long-term debt  4   203 
Accrued expenses and other current liabilities  2   106 
 
   6   309 
 
   17   817 
Non-controlling interests  8   378 
 
Net assets acquired  9   439 
 
(1) Converted to Philippine Peso using the exchange rate at the time of purchase of Php48.07 to US$1.00.
Non-controlling interests represent interest not owned by Smart, which is measured at proportionate share in fair values of identifiable assets and liabilities acquired at the date of acquisition.
The fair value of trade and other receivables and advances and refundable deposits, which is equal to gross amount, amounted to Php33 million and Php7 million, respectively.
The acquisition date fair value of previously held equity interest of 28.3% by Smart immediately before the acquisition date amounted to Php138 million. The amount of loss recognized as a result of remeasuring previously held equity interest to fair value amounted to Php381 million and is included in “Equity share in net earnings of associates and joint ventures” in our consolidated income statement.
The goodwill of Php45 million pertains to the fair value of the synergies arising from the acquisition of BOW by SCH. BOW complementsSmart Link, Smart’s satellite service catering to the mobile communication requirements of the international maritime market.
Our consolidated revenues would have increased by Php68 million while our consolidated net income would have decreased by Php300 million for the year ended December 31, 2009 had the additional acquisition of BOW actually taken place on January 1, 2009. Total revenues and net losses of BOW included in our 2009 consolidated income statement from July 2009 to December 31, 2009 amounted to Php10 million and Php906 million, respectively.

227


SPi’s Acquisition of Laguna Medical Systems, Inc., or Laguna Medical
On August 31, 2009, SPi acquired through SPi-America, a wholly-owned U.S. subsidiary of SPi, a 100% equity interest in Laguna Medical for a cash contribution of US$6.6 million, or Php313 million, plus a contingent consideration in the form of a mandatory put-call option with an aggregate fair value at acquisition date of US$5.4 million, or Php257 million. As at date of the acquisition, the net cash outflows related on acquisition was US$5.6 million, or Php287 million, representing cash payments of US$6.6 million, or Php313 million, net of cash acquired from Laguna Medical of US$1 million, or Php26 million. Total purchase price consideration including the fair market value of contingent liability at acquisition date amounted to US$12 million, or Php579 million. Incidental cost related to the acquisition was recognized as expense. SeeNote 21 — Deferred Credits and Other Noncurrent LiabilitiesandNote 23 — Accrued Expenses and Other Current Liabilities.
The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values at the date of acquisition as follows:
                 
          Fair Value Recognized on
  Previous Carrying Value Acquisition
  In U.S. Dollar In Php(1) In U.S. Dollar In Php(1)
  (in millions)
Assets:
                
Property, plant and equipment     8      8 
Goodwill (Note 14)  10   494   10   463 
Intangible assets (Note 14)        2   73 
Deferred income tax assets — net  1   10      3 
Cash and cash equivalents  1   26   1   26 
Trade and other receivables  1   59   1   53 
Other current assets           15 
 
   13   597   14   641 
 
Liabilities:
                
Accounts payable           4 
Accrued expenses and other current liabilities  1   27   1   24 
Deferred income tax liabilities — net        1   26 
Other current liabilities           8 
 
   1   27   2   62 
 
Net assets acquired  12   570   12   579 
 
(1) Converted to Philippine Peso using the exchange rate at the time of purchase of Php47.42 to US$1.00.
The net assets acquired in the December 31, 2009 consolidated financial statements were based on a provisional assessment of fair value, while the PLDT Group sought an independent valuation on the value of Laguna Medical’s assets. The results of this valuation had not been received as at the date the 2009 consolidated financial statements were approved for issuance by the Board of Directors.
The valuation of Laguna Medical’s assets was completed in 2010 and the fair value of intangible assets were determined to be Php73 million. The fair value of goodwill decreased by Php31 million to Php463 million as a result of adjustments in the fair values of intangible assets and certain assets and liabilities as presented in the above table. The 2009 comparative information was not restated to reflect these adjustments and instead these adjustments were applied directly to the respective assets and liabilities accounts in 2010.
The goodwill of Php463 million pertains to the fair value of expansion of the healthcare product offering of SPi and other unidentified intangible assets that did not qualify as intangible assets underIAS 38.
The intangible assets pertaining to Laguna Medical’s customer relationship and internally developed software were determined at Php50 million and Php23 million, respectively, with estimated useful lives of eight and three years, respectively. Intangible assets were valued by an independent appraiser based on multiple excess earnings approach using weighted average cost of capital of 10.7%.
The fair value of trade and other receivables, which is equal to gross amount, amounted to Php53.4 million. The amount of allowance for impairment for uncollectible trade and other receivables amounted to Php0.4 million.
Our consolidated revenues would have increased by Php237 million while our consolidated net income would have increased by Php8 million for the year ended December 31, 2009 had the acquisition of Laguna Medical actually taken place on January 1, 2009.2012. Total revenues and net income of Laguna MedicalIPCDSI included in our 2009

228


consolidated income statement from August 31, 2009October 12 to December 31, 20092012 amounted to Php103Php206 million and Php0.3Php32 million, respectively.
Smart’s Acquisition of PDSI
In May and October 2009, Smart acquired an aggregate of approximately 84 million shares, representing the total issued and outstanding capital stock of PDSI, for a total consideration of Php1,569 million. The acquisition was completed on two dates: (a) the first closing took place on May 14, 2009 and involved the acquisition of approximately 34 million shares representing 40% of the issued and outstanding shares of PDSI for a consideration of Php632 million; and (b) the second closing took place on October 2, 2009 and involved the acquisition of the remaining approximately 50 million shares representing 60% of the issued and outstanding shares of PDSI for a consideration of Php937 million.
The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values at the date of acquisition as follows:
         
    Fair Value
  Previous Carrying Recognized on
  Value Acquisition
       (in million pesos)
Assets:
        
Property, plant and equipment  42   115 
Goodwill (Note 14)  1,597   1,530 
Intangible assets (Note 14)     23 
Prepayments  10   10 
Advances and refundable deposits — net of current portion  8   8 
Cash and cash equivalents  12   12 
Trade and other receivables  42   42 
Current portion of advances and refundable deposits  6   6 
 
   1,717   1,746 
 
Liabilities:
        
Deferred income tax liabilities — net     29 
Accounts payable  30   30 
Accrued expenses and other current liabilities  116   116 
Income tax payable  2   2 
 
   148   177 
 
Net assets acquired  1,569   1,569 
 
The net assets acquired in the December 31, 2009 consolidated financial statements were based on a provisional assessment of fair value, while the PLDT Group sought an independent valuation on the value of PDSI’s assets. The results of this valuation had not been received as at the date the 2009 consolidated financial statements were approved for issuance by the Board of Directors.
The valuation of PDSI’s assets was completed in 2010 and the fair value of property, plant and equipment and intangible assets were determined to be Php115 million and Php23 million, respectively. The fair value of goodwill decreased by Php67 million to Php1,530 million as a result of adjustments in the fair values of property, plant and equipment, intangible assets and deferred income tax liabilities — net. The 2009 comparative information was not restated to reflect these adjustments and instead these adjustments were applied directly to the respective assets and liabilities accounts in 2010.
The goodwill of Php1,530 million pertains to the fair value of the synergies arising from the acquisition of PDSI by Smart. PDSI complements SBI’s broadband internet service.
Our consolidated revenues would have increased by Php241 million while our consolidated net income would have decreased by Php9 million for the year ended December 31, 2009 had the acquisition of PDSI actually taken place on January 1, 2009. Total revenues and net losses of PDSI included in our 2009 consolidated net income from October 2, 2009 to December 31, 2009 amounted to Php80 million and Php13 million, respectively.
Smart’s Acquisition of Chikka
On December 18, 2009, Smart acquired 120 thousand common shares, representing 100% of the outstanding share capital of Chikka for a total consideration of US$13.5 million, or Php629 million, of which US$12.1

229


14.Goodwill and Intangible Assets

million, or Php564 million, was paid in cash on December 18, 2009 and the balance of US$1.4 million, or Php65 million, was paid on September 27, 2010 upon completion of the post closing provisions. SeeNote 23 — Accrued Expenses and Other Current Liabilities.
The purchase price consideration has been allocated to the assets and liabilities on the basis of fair values at the date of acquisition, as described below:
         
    Fair Value
  Previous Carrying Recognized on
  Value Acquisition
     (in million pesos)
Assets:
        
Property, plant and equipment  8   8 
Goodwill (Note 14)  561   469 
Intangible assets (Note 14)  27   159 
Advances and refundable deposits — net of current portion  1   1 
Cash and cash equivalents  89   89 
Trade and other receivables  51   51 
Current portion of advances and refundable deposits  19   19 
 
   756   796 
 
Liabilities:
        
Deferred income tax liabilities — net     40 
Accounts payable  8   8 
Accrued expenses and other current liabilities  105   105 
Accrued retirement benefits  12   12 
Income tax payable  2   2 
 
   127   167 
 
Net assets acquired  629   629 
 
The net assets acquired in the December 31, 2009 consolidated financial statements were based on a provisional assessment of fair value, while the PLDT Group sought an independent valuation on the value of Chikka’s assets. The results of this valuation had not been received as at the date the 2009 consolidated financial statements were approved for issuance by the Board of Directors.
The valuation of Chikka’s assets was completed in 2010 and the fair value of intangible assets for technology tradename, patents and trademarks were determined to be Php119 million. The fair value of goodwill decreased by Php92 million to Php469 million as a result of adjustments in the fair values of intangible assets and deferred income tax liabilities — net. The 2009 comparative information was not restated to reflect these adjustments and instead these adjustments were applied directly to the respective assets and liabilities accounts in 2010.
The fair value of trade and other receivables and advances and refundable deposits amounted to Php51 million and Php20 million, respectively. The gross amount of trade and other receivables and advances and refundable deposits amounted to Php67 million and Php20 million, respectively. The amount of allowance for impairment for uncollectible amount for trade and other receivables amounted to Php16 million. None of the advances and refundable deposits has been impaired and it is expected that the full contractual amount can be collected.
The goodwill of Php469 million pertains to the fair value of the synergies arising from the acquisition of Chikka by Smart. As a content provider, Chikka enhances Smart’s revenue stream from VAS.
Our consolidated revenues would have increased by Php189 million while our consolidated net income would have decreased by Php6 million for the year ended December 31, 2009 had the acquisition of Chikka actually taken place on January 1, 2009. The results of operation of Chikka from December 18, 2009 to December 31, 2009 were not included in our 2009 consolidated income statement since it was not material.

230


14. Goodwill and Intangible Assets
MovementsChanges in goodwill and intangible assets for the years ended December 31, 20102013 and 20092012 are as follows:
                                 
                              Total
  Intangible Assets         Goodwill
                      Total     and
  Customer         Technology     Intangible     Intangible
  List Spectrum Licenses Application Trademark Assets Goodwill Assets
  (in million pesos)
December 31, 2010
                                
Costs:                                
Balance at beginning of year  1,655   1,205   613   967   27   4,467   15,201   19,668 
Additions  19      19   4   1   43      43 
Translation and other adjustments (Note 13)  (42)     (78)  22   131   33   (468)  (435)
 
Balance at end of year  1,632   1,205   554   993   159   4,543   14,733   19,276 
 
                                 
Accumulated amortization and impairment:                                
Balance at beginning of year  995   428   448   964      2,835   3,809   6,644 
Impairment during the year (Notes 4 and 5)  56      18         74   1,169   1,243 
Amortization during the year (Note 3)  219   81   36   11   41   388      388 
Translation and other adjustments (Note 13)  (58)     (76)  2      (132)  (352)  (484)
 
Balance at end of year  1,212   509   426   977   41   3,165   4,626   7,791 
 
Net balance at end of year(Notes 3 and 28)
  420   696   128   16   118   1,378   10,107   11,485 
 
                                 
Estimated useful lives (in years)  1 — 8   15   2 — 18   3 — 5   1 — 10          
Remaining useful lives (in years)  1 — 7   9   1 — 12   2 — 4   9          
 
                                 
December 31, 2009
                                
Costs:                                
Balance at beginning of year  1,696   1,205   370   894      4,165   12,289   16,454 
Business combinations (Notes 3, 13 and 21)        221      27   248   3,013   3,261 
Translation and other adjustments (Note 13)  (41)     22   73      54   (101)  (47)
 
Balance at end of year  1,655   1,205   613   967   27   4,467   15,201   19,668 
 
                                 
Accumulated amortization and impairment:                                
Balance at beginning of year  794   348   203   860      2,205   3,799   6,004 
Impairment during the year        213   73      286   93   379 
Amortization during the year (Note 3)  220   80   37   31      368      368 
Translation and other adjustments  (19)     (5)        (24)  (83)  (107)
 
Balance at end of year  995   428   448   964      2,835   3,809   6,644 
 
Net balance at end of year(Notes 3 and 28)
  660   777   165   3   27   1,632   11,392   13,024 
 
                                 
Estimated useful lives (in years)  1 — 7   15   3 — 18   4 — 5   6          
Remaining useful lives (in years)  1 — 4   10   2 — 13   1   6          
 

  Intangible
Assets with
Indefinite Life
  Intangible Assets with Definite Life  

Total

Intangible
Assets with

  Total     Total
Goodwill
and
 
  Trademark  Customer
List
  Franchise  Licenses  Spectrum  Others  Definite
Life
  Intangible
Assets
  Goodwill  Intangible
Assets
 
  (in million pesos) 

December 31, 2013

          

Costs:

          

Balance at beginning of the year

  4,505    4,726    3,016    135    1,205    1,177    10,259    14,764    62,939    77,703  

Additions

  —      —      —      801    —      —      801    801    —      801  

Business combinations (Note 13)

  —      —      —      —      —      —      —      —      (113  (113

Translation and other adjustments

  —      —      —      —      —      22    22    22    —      22  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of the year

  4,505    4,726    3,016    936    1,205    1,199    11,082    15,587    62,826    78,413  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated amortization and impairment:

          

Balance at beginning of the year

  —      722    217    62    669    1,084    2,754    2,754    699    3,453  

Amortization during the year (Note 3)

  —      515    186    225    81    13    1,020    1,020    —      1,020  

Translation and other adjustments

  —      —      —      —      —      22    22    22    —      22  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of the year

  —      1,237    403    287    750    1,119    3,796    3,796    699    4,495  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance at end of the year(Note 3)

  4,505    3,489    2,613    649    455    80    7,286    11,791    62,127    73,918  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Estimated useful lives (in years)

  —      1 – 9    16    1 – 18    15    1 – 10    —      —      —      —    

Remaining useful lives (in years)

  —      7    14    1 – 9    6    1 – 6    —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2012

          

Costs:

          

Balance at beginning of the year

  4,505    6,231    3,016    120    1,205    1,211    11,783    16,288    74,322    90,610  

Business combinations (Note 13)

  —      1    —      1    —      —      2    2    574    576  

Noncontrolling interest adjustments (Note 13)

  —      —      —      —      —      —      —      —      (919  (919

Discontinued operations (Note 2)

  —      (1,691  —      —      —      (20  (1,711  (1,711  (10,097  (11,808

Translation and other adjustments

  —      185    —      14    —      (14  185    185    (941  (756
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of the year

  4,505    4,726    3,016    135    1,205    1,177    10,259    14,764    62,939    77,703  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated amortization and impairment:

          

Balance at beginning of the year

  —      1,360    —      41    589    1,095    3,085    3,085    4,222    7,307  

Amortization during the year (Note 3)

  —      778    217    7    80    19    1,101    1,101    —      1,101  

Discontinued operations (Note 2)

  —      (1,338  —      —      —      (19  (1,357  (1,357  (3,418  (4,775

Translation and other adjustments

  —      (78  —      14    —      (11  (75  (75  (105  (180
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of the year

  —      722    217    62    669    1,084    2,754    2,754    699    3,453  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance at end of the year (Note 3)

  4,505    4,004    2,799    73    536    93    7,505    12,010    62,240    74,250  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Estimated useful lives (in years)

  —      1 – 9    16    1 – 18    15    1 – 10    —      —      —      —    

Remaining useful lives (in years)

  —      1 – 8    15    2 – 10    7    3 – 7    —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The goodwill and intangible assets of our reportable segments as at December 31, 2013 and 2012, and January 1, 2012 are as follows:

   December 31, 2013 
   Wireless   Fixed Line   Total 
   (in million pesos) 

Trademark

   4,505     —       4,505  

Customer list

   3,489     —       3,489  

Franchise

   2,613     —       2,613  

Licenses

   649     —       649  

Spectrum

   455     —       455  

Others

   80     —       80  
  

 

 

   

 

 

   

 

 

 

Total intangible assets

   11,791     —       11,791  

Goodwill

   57,322     4,805     62,127  
  

 

 

   

 

 

   

 

 

 

Total intangible assets and goodwill (Note 3)

   69,113     4,805     73,918  
  

 

 

   

 

 

   

 

 

 

   December 31, 2012 
   Wireless   Fixed Line   Total 
   (in million pesos) 

Trademark

   4,505     —       4,505  

Customer list

   4,003     1     4,004  

Franchise

   2,799     —       2,799  

Spectrum

   536     —       536  

Licenses

   73     —       73  

Others

   93     —       93  
  

 

 

   

 

 

   

 

 

 

Total intangible assets

   12,009     1     12,010  

Goodwill

   57,322     4,918     62,240  
  

 

 

   

 

 

   

 

 

 

Total intangible assets and goodwill (Note 3)

   69,331     4,919     74,250  
  

 

 

   

 

 

   

 

 

 

   January 1, 2012 
   Wireless   Fixed Line   Discontinued
Operations
   Total 
   (in million pesos) 

Customer list

   4,605     —       266     4,871  

Trademark

   4,505     —       —       4,505  

Franchise

   3,016     —       —       3,016  

Spectrum

   616     —       —       616  

Licenses

   79     —       —       79  

Others

   108     —       8     116  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

   12,929     —       274     13,203  

Goodwill

   57,140     5,263     7,697     70,100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets and goodwill (Note 3)

   70,069     5,263     7,971     83,303  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets

Intangible Assets from Acquisition of SPi, Level Up! and CyMed,

In April 2013, Smart entered into a three-year licensing agreement with MCA Music, Inc., or CyMed

In 2008, ePLDT recognized impairment in its intangible assets in SPi and Level Up! amounting to Php123 million and Php5 million, respectively, representing write-downs to recoverable amount using the value in use approach. The impairment resulted from a projected decline in revenues related to certain customer relationship and license agreements. The value in use was based on the discounted cash flow projection using the most recent financial forecast approved by management. In 2009, ePLDT performed an impairment testing in its intangible assets from the acquisition of SPi and Level Up! and no additional impairment charge was recognized.
In 2010, ePLDT recognized an impairment of its remaining intangible assets from the acquisition of SPi and CyMed amounting to Php19 million and Php38 million, respectively, pertaining to the medical transcription business of SPi, since the carrying amountaffiliate of the individual assets from SPi and CyMed were deemed unrecoverable. Further, ePLDT also recognized an impairment charge of Php4 million representing all remaining intangible assets fromUniversal Music Group, the acquisition of Level Up!.

231


Intangible Assets from Acquisition of BOW
In 2009,world’s largest music company with wholly-owned record operations in 77 countries. Smart recognized intangible assets of Php221Php600 million for licensesthe license contents and feesmarketing partnership in BOW for the perpetual and exclusive worldwide maritime licenses granted by Altobridge, LimitedPhilippines, while amortization amounted to BOW to facilitate the successful communication between GSM and satellite communication networks. Smart recognized an impairment charge of Php213 million, net of amortization of Php8Php150 million for the year ended December 31, 2009, reducing2013.

In July 2013, Smart entered into an 18-month licensing agreement with Ivory Music and Video, Inc., a domestic corporation and one of the amount of intangible assetsmajor labels in BOW to zero as at December 31, 2009. The impairment loss resulted from the annual impairment test done on the Company’s assets. SeeNote 9 — Property, Plant and Equipmentfor the basis of impairment valuation.

Intangible Assets from Acquisition of Chikka and PDSI
In 2009,Philippine music industry. Smart recognized intangible assets of Php27 million in Chikka for patents and trademark relating to Chikka’s internet-based instant messaging facility.
In 2010, Smart recognized intangible assets of Php92Php201 million for technologythe license contents and tradename and Php16marketing partnership, while amortization amounted to Php67 million for technology and customer base acquired in the purchase of Chikka Group and PDSI, respectively, based on the result of the valuation done by an independent appraiser. SeeNote 13 — Business Combinations and Acquisition of Non-Controlling Interests.
year ended December 31, 2013.

The consolidated future amortization of intangible assets with definite life as at December 31, 20102013 is as follows:

     
Year (in million pesos)
 
2011  274 
2012  260 
2013  208 
2014  123 
2015 and onwards  513 
 
Balance at end of year  1,378 
 

Year

  (in million pesos) 

2014

   1,133  

2015

   998  

2016

   848  

2017

   798  

2018 and onwards

   3,509  
  

 

 

 

(Note 3)

   7,286  
  

 

 

 

Impairment Testing of Goodwill and Intangible Assets with Indefinite Life

Goodwill from Acquisition of SBI, CURE, Airborne Access, PDSI and Chikka

The organizational structure of SmartPLDT and its subsidiaries is designed to monitor financial operations based on fixed line and wireless segmentation. Management provides guidelines and decisions on resource allocation, such as continuing or disposing of asset and operations by evaluating the performance of each segment through review and analysis of available financial information on the fixed line and wireless segments. As at December 31, 2010, Smart’s2013, the PLDT Group’s goodwill comprised of goodwill resulting from Smart’sePLDT’s acquisition of SBIIPCDSI in 2004, CURE in 2008, SBI’s2012, PLDT’s acquisition of a 99.4% equity interestDigitel in Airborne Access from ePLDT2011, ePLDT’s acquisition of ePDS in 2008 and2011, Smart’s acquisition of PDSI and Chikka in 2009.2009, CURE in 2008, and Smart’s acquisition of SBI in 2004. The test for recoverability of the PLDT’s and Smart’s goodwill was applied to the fixed line and wireless asset group, respectively, which representsrepresent the lowest level forwithin our business at which identifiable cash flows are largely independent of the cash inflows from other groups of assets and liabilities.

we monitor goodwill.

Although revenue streams may be segregated among Smart, CURE, SBI and PDSI through subscribers availing themselves of their respective cellular (for Smart and CURE) and wireless broadband (for SBI and PDSI) services,the companies within the Group, the cost items and cash flows are difficult to carve out due largely to the significant portion of shared and common-usedcommon used network/platform. In the case of CURE, it providesprovided cellular services to its subscribers using Smart’s 2G network. SBI, on the other hand, provides broadband wireless access to its subscribers using Smart’s cellular base stations and fiber optic and IP backbone, as well as the Worldwide Interoperability for Microwave Access technology of PDSI. With the common use of wireless assets ofThe same is true for Sun, wherein Smart in providing 2G/3G network, cellular base stations and wireless broadband access, the lowest level of assets of CURE, SBIfiber optic backbone are shared for areas where Sun has limited connectivity and PDSI for which cash flows are clearly identifiable from other groups of assets is Smart’s wireless business segment.facilities. On the other hand, Chikka’s mobile applicationsPLDT has the largest fixed line network in the Philippines. PLDT’s transport facilities are installed nationwide to cover both domestic and contentinternational IP backbone to route and transmit IP traffic generated by the customers. In the same manner, PLDT has the most Internet Gateway facilities which is composed of high capacity IP routers and switches that serve as the main gateway of the Philippines to the Internet connecting to the World Wide Web. With PLDT’s network coverage, other fixed line subsidiaries shared the same facilities to leverage on a Group perspective.

Given the significant common use of network facilities among fixed line and wireless companies within the Group, Management views that the wireless and fixed line operating segments are developed mainly for the cellular subscribers of Smartlowest CGU to which goodwill is to be allocated and CURE.

which are expected to benefit from the synergies.

The recoverable amount of this segmentthe wireless and fixed line segments had been determined using the value in use approach calculated using cash flow projections based on the financial budgets approved by the Board of Directors, covering a five-yearthree-year period from 20112014 to 2015.2016. The pre-tax discount rate applied to cash flow projections is 8.8%11% and cash10% for the wireless and fixed line segments, respectively. Cash flows

232


beyond the five-yearthree-year period are determined using a 2.5% growth rate thatfor the wireless and fixed line segments, which is the same as the long-term average growth rate for the telecommunications industry.
Goodwill from Acquisition of BOW
In December 2009, SCH recognized full impairment loss of Php45 million on goodwill resulting from its acquisition of BOW. The impairment loss resulted from the annual impairment test

Based on the assets. SeeNote 9 — Property, Plant and Equipmentfor the basis of impairment valuation.

Goodwill from Acquisition of SPi and its Subsidiaries, CyMed, Springfield Service Corporation, or Springfield, and Laguna Medical
The goodwill acquired through the SPi, CyMed, Springfield and Laguna Medical transactions was allocated for impairment testing to eachassessment of the cash-generating unitsvalue-in-use of those businesses, namely medical transcription, litigation, content solutions, medical billingthe wireless and medical coding, respectively. Thefixed line segments, the recoverable amount of goodwill was determined using the value in use approach. Value in use was based on the cash flow projections of the most recent financial budgets and forecasts approved by the Board of Directors, which management believes are reasonable and are management’s best estimate of the ranges of economic conditions that will exist over the remaining useful life of the asset. The pre-tax discount rate of 15% was applied based on the weighted average cost of capital adjusted for the difference in currency and specific risks associated with the assets or business of such cash-generating units.
Sinceexceeded the carrying amount of the individual assets exceeded the recoverable amount, ePLDTCGUs, which as a result, no impairment was recognized an impairment losses of Php905 million and Php1,815 million for the years endedas at December 31, 20102013 and 2008, respectively, pertaining2012, and January 1, 2012 in relation to the medical transcription business of SPi and CyMed and medical transcription and litigation businesses of SPi, respectively. In 2009, ePLDT performed an impairment testing in its goodwill resulting from the acquisition of SPiIPCDSI, Digitel, ePDS, PDSI, Chikka, CURE and its Subsidiaries, CyMed, Springfield and Laguna Medical, and no additional impairment charge was recognized.
Goodwill from Acquisition of Level Up!
Goodwill acquired from our acquisition in 2006 of a 60% equity interest in Level Up! was tested for impairment where the recoverable amount was determined using the value in use approach. Value in use was based on the cash flow projections of the most recent financial budgets and forecasts approved by the Board of Directors of ePLDT. The pre-tax discount rate of 22% was applied based on the weighted average cost of capital adjusted for specific risks associated with the assets or business. ePLDT recognized an impairment charge of Php48 million and Php203 million for the years ended December 31, 2010 and 2008, respectively, pertaining to the goodwill from acquisition of Level Up!. In 2009, ePLDT performed an impairment testing in its goodwill from the acquisition of Level Up! and no additional impairment charge was recognized.
Goodwill from Acquisition of Digital Paradise
Goodwill acquired from the acquisition of Digital Paradise was tested for impairment based on the recoverable amount of the long lived assets where recoverable amount was determined based on the cash flow projections on the most recent financial budgets and forecasts approved by the Board of Directors. The pre-tax discount rate applied was 22% which was based on the weighted average cost of capital. ePLDT recognized full impairment provision of Php85 million as at December 31, 2009.
Goodwill from Acquisition of BayanTrade
Goodwill acquired from the acquisition of BayanTrade was tested for impairment based on the recoverable amount of the long lived assets, determined based on the cash flow projections on the most recent financial budgets and forecasts approved by the Board of Directors. The pre-tax discount rate applied was 22%, which was based on the weighted average cost of capital. ePLDT recognized full impairment provision of Php216 million as at December 31, 2010.

233SBI.


15.Cash and Cash Equivalents

15. Cash and Cash Equivalents
As at December 31, 20102013 and 2009,2012, and January 1, 2012, this account consists of:
         
  2010  2009 
       (in million pesos)
Cash on hand and in banks (Note 28)  2,906   3,300 
Temporary cash investments (Note 28)  33,772   35,019 
 
   36,678   38,319 
 

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Cash on hand and in banks (Note 27)

   5,938     5,611     4,637  

Temporary cash investments (Note 27)

   25,967     31,550     41,420  
  

 

 

   

 

 

   

 

 

 
   31,905     37,161     46,057  
  

 

 

   

 

 

   

 

 

 

Cash in banks earn interest at prevailing bank deposit rates. Temporary cash investments are made for varying periods of up to three months depending on our immediate cash requirements, and earn interest at the prevailing temporary cash investment rates. Due to the short-term nature of such transactions, the carrying value approximates the fair value of our temporary cash investments. SeeNote 28 —27 – Financial Assets and Liabilities.

Interest income earned from cash in banks and temporary cash investments amounted to Php1,081Php740 million, Php1,185Php1,295 million and Php1,523Php1,317 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

16. Trade and Other Receivables

16.Trade and Other Receivables

As at December 31, 20102013 and 2009,2012, and January 1, 2012, this account consists of receivables from:

         
  2010  2009 
       (in million pesos)
Retail subscribers (Note 28)  8,917   8,026 
Corporate subscribers (Notes 24 and 28)  7,998   9,106 
Foreign administrations (Note 28)  4,479   4,353 
Domestic carriers (Notes 24 and 28)  1,591   1,267 
Dealers, agents and others (Notes 18, 24 and 28)  5,273   3,927 
 
   28,258   26,679 
Less allowance for doubtful accounts (Notes 3, 5 and 28)  11,830   11,950 
 
(Notes 3, 5 and 28)  16,428   14,729 
 
Movements in the allowance for doubtful accounts for the years ended December 31, 2010 and 2009 are as follows:
                         
                      Dealers,
      Corporate       Domestic Agents and
  Total Subscribers Retail Subscribers Foreign Administrations Carriers Others
  (in million pesos)
December 31, 2010
                        
Balance at beginning of year  11,950   6,677   4,480   289   83   421 
Provisions for the year (Notes 3, 4 and 5)  834   152   493      64   125 
Write-offs  (932)  (562)  (284)  (5)     (81)
Translation and other adjustments  (22)  (311)  356   (126)  (9)  68 
 
Balance at end of year  11,830   5,956   5,045   158   138   533 
 
                         
Individual impairment  8,861   5,413   2,745   158   138   407 
Collective impairment  2,969   543   2,300         126 
 
   11,830   5,956   5,045   158   138   533 
 
                         
Gross amount of receivables individually impaired, before deducting any impairment allowance  8,861   5,413   2,745   158   138   407 
 
                         
December 31, 2009
                        
Balance at beginning of year  12,336   6,323   5,089   439   174   311 
Provisions for the year (Notes 3, 4 and 5)  2,335   670   1,512   18   35   100 
Business combinations (Note 13)  513   36   454         23 
Write-offs  (22)  (1,178)  (1,657)  (216)  (157)  (4)
Translation and other adjustments  (3,212)  826   (918)  48   31   (9)
 
Balance at end of year  11,950   6,677   4,480   289   83   421 
 
                         
Individual impairment  9,624   6,256   2,595   289   83   401 
Collective impairment  2,326   421   1,885         20 
 
   11,950   6,677   4,480   289   83   421 
 
                         
Gross amount of receivables individually impaired, before deducting any impairment allowance  9,624   6,256   2,595   289   83   401 
 

234


   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Retail subscribers (Note 27)

   12,563     10,568     11,302  

Corporate subscribers (Notes 24 and 27)

   7,904     8,100     9,200  

Foreign administrations (Note 27)

   5,840     4,960     4,961  

Domestic carriers (Notes 24 and 27)

   1,461     1,707     1,323  

Dealers, agents and others (Notes 24 and 27)

   4,320     4,334     4,231  
  

 

 

   

 

 

   

 

 

 
   32,088     29,669     31,017  

Less allowance for doubtful accounts (Notes 3, 5 and 27)

   14,524     13,290     14,772  
  

 

 

   

 

 

   

 

 

 
   17,564     16,379     16,245  
  

 

 

   

 

 

   

 

 

 

Receivables from foreign administrations and domestic carriers represent receivables arising frombased on interconnection agreements with other telecommunications carriers. The aforementioned amounts of receivables are shown net of related payable to the same telecommunications carriers where a legal right of offset exists and settlement is facilitated on a net basis.
17. Inventories

Receivables from dealers, agents and Supplies

others consist mainly of receivables from credit card companies, dealers and distributors having collection arrangements with the Group.

Trade receivables are non interest-bearing and are generally on terms of 30 to 180 days.

For terms and conditions relating to related party receivables, seeNote 24 – Related Party Transactions.

SeeNote 24 – Related Party Transactionsfor the summary of transactions with related parties andNote 27 – Financial Assets and Liabilities – Credit Riskon credit risk of trade receivables to understand how we manage and measure credit quality of trade receivables that are neither past due nor impaired.

Changes in the allowance for doubtful accounts for the years ended December 31, 2013 and 2012 are as follows:

   Total  Retail
Subscribers
  Corporate
Subscribers
  Foreign
Administrations
   Domestic
Carriers
  Dealers,
Agents and
Others
 
   (in million pesos) 

December 31, 2013

        

Balance at beginning of the year

   13,290    6,489    6,137    99     106    459  

Provisions (Notes 2, 3, 4 and 5)

   3,171    1,983    1,072    10     19    87  

Write-offs

   (2,085  (1,394  (666  —       (24  (1

Translation and other adjustments

   148    71    (694  10     (21  782  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Balance at end of the year

   14,524    7,149    5,849    119     80    1,327  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Individual impairment

   8,717    2,134    5,183    119     80    1,201  

Collective impairment

   5,807    5,015    666    —       —      126  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 
   14,524    7,149    5,849    119     80    1,327  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

   Total  Retail
Subscribers
  Corporate
Subscribers
  Foreign
Administrations
  Domestic
Carriers
  Dealers,
Agents and
Others
 
   (in million pesos) 

Gross amount of receivables individually impaired, before deducting any impairment allowance

   8,717    2,134    5,183    119    80    1,201  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2012

       

Balance at beginning of the year

   14,772    7,264    6,492    199    111    706  

Provisions (Notes 2, 3, 4 and 5)

   2,178    1,404    675    6    7    86  

Business combinations and others (Note 13)

   36    —      36    —      —      —    

Discontinued operations (Note 2)

   (118  (2  (87  —      —      (29

Write-offs

   (3,564  (2,700  (531  (95  —      (238

Translation and other adjustments

   (14  523    (448  (11  (12  (66
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of the year

   13,290    6,489    6,137    99    106    459  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Individual impairment

   8,705    2,653    5,514    99    106    333  

Collective impairment

   4,585    3,836    623    —      —      126  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   13,290    6,489    6,137    99    106    459  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross amount of receivables individually impaired, before deducting any impairment allowance

   8,705    2,653    5,514    99    106    333  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

17.Inventories and Supplies

As at December 31, 20102013 and 2009,2012, and January 1, 2012, this account consists of:

         
  2010  2009 
       (in million pesos)
Spare parts and supplies:        
At net realizable value  1,152   982 
At cost  2,163   1,998 
Terminal and cellular phone units:        
At net realizable value  737   652 
At cost  918   981 
Others:        
At net realizable value  330   531 
At cost  333   534 
 
Total inventories and supplies at the lower of cost or net realizable value (Notes 3, 4, 5 and 28)  2,219   2,165 
 

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Terminal and cellular phone units:

      

At net realizable value

   2,550     1,605     1,349  

At cost

   3,004     1,942     1,728  

Spare parts and supplies:

      

At net realizable value

   99     1,372     1,606  

At cost

   558     1,985     2,256  

Others:

      

At net realizable value

   515     490     872  

At cost

   560     494     875  
  

 

 

   

 

 

   

 

 

 

Total inventories and supplies at the lower of cost or net realizable value (Notes 3, 4 and 5)

   3,164     3,467     3,827  
  

 

 

   

 

 

   

 

 

 

The cost of inventories and supplies recognized as expense for the years ended December 31, 2010, 20092013, 2012 and 20082011 are as follows:

             
  2010  2009  2008 
      (in million pesos)
Cost of sales  3,517   4,714   4,380 
Repairs and maintenance  357   429   549 
Write-down of inventories and supplies (Notes 3, 4 and 5)  108   389   242 
 
   3,982   5,532   5,171 
 
18. Prepayments

   2013   2012   2011 
   (in million pesos) 

Cost of sales

   11,674     8,035     2,037  

Repairs and maintenance

   474     443     517  

Write-down of inventories and supplies (Notes 3, 4 and 5)

   229     215     143  
  

 

 

   

 

 

   

 

 

 
   12,377     8,693     2,697  
  

 

 

   

 

 

   

 

 

 

18.Prepayments

As at December 31, 20102013 and 2009,2012, and January 1, 2012, this account consists of:

         
  2010  2009 
       (in million pesos)
Prepaid taxes  7,476   7,768 
Prepaid benefit costs (Notes 3 and 25)  5,333   5,414 
Prepaid selling and promotions  1,011   102 
Prepaid insurance (Note 24)  122   109 
Prepaid rent — net (Notes 3 and 5)  53   208 
Prepaid fees and licenses  40   44 
Other prepayments  62   116 
 
   14,097   13,761 
Less current portion of prepayments (Note 28)  5,418   5,098 
 
Noncurrent portion of prepayments (Note 28)  8,679   8,663 
 

   December 31,   January 1, 
   2013   2012   2012 
       (As Adjusted – Note 2) 
   (in million pesos) 

Prepaid taxes (Note 5)

   6,456     6,340     8,219  

Prepaid selling and promotions

   1,370     902     907  

Prepaid fees and licenses

   435     318     13  

Prepaid rent – net (Note 3)

   292     246     137  

Prepaid benefit costs (Notes 3 and 25)

   199     1,471     8,482  

Prepaid insurance (Note 24)

   103     144     156  

Other prepayments

   230     223     128  
  

 

 

   

 

 

   

 

 

 
   9,085     9,644     18,042  

Less current portion of prepayments

   6,054     5,144     6,345  
  

 

 

   

 

 

   

 

 

 

Noncurrent portion of prepayments

   3,031     4,500     11,697  
  

 

 

   

 

 

   

 

 

 

Prepaid taxes include creditable withholding taxes, input VAT and real property taxes.

Prepaid benefit costs represent excess of fair value of plan assets over present value of defined benefit obligations less unrecognized net actuarial gains or losses recognized in our consolidated statements of financial position. SeeNote 25 — Share-based Payments and Employee Benefits.

Agreement betweenof PLDT and Smart with ABCAssociated Broadcasting Company Development Corporation, (TV5)or TV5

In 2010, PLDT and Smart entered into advertising placement agreements with TV5, a subsidiary of MediaQuest, which is a wholly-owned investee company of PLDT Beneficial Trust Fund through its investee company, MediaQuest Holdings, Inc., for the airing and telecast of

235


advertisements and commercials of PLDT and Smart on TV5’s television network for a period of five years. The costs of telecast of each advertisement shall be applied and deducted from the placement amount only after the relevant advertisement or commercial is actually aired on TV5’s television network. Total prepayment under the advertising placement agreements amounted to Php893Php868 million as at December 31, 2010.
2013 and Php893 million each as at December 31, 2012 and January 1, 2012. SeeOption to Purchase Series C Preferred SharesNote 24 – Related Party Transactions.

19.Equity

PLDT’s number of ProtoStar

On September 16, 2008, PLDT signed an option to purchase Series C Preferred Sharesshares of ProtoStar pursuant to which PLDT was entitled to subscribe forissued and purchase 39.7 million Series C Preferred Sharesoutstanding capital stock as at the exercise price of US$0.6925 per share during the exercise period. PLDT paid US$27.5 million to ProtoStarDecember 31, 2013 and 2012, and January 1, 2012 are as a deposit to pay the exercise price if PLDT exercised the option or, if not exercised, such payment would be applied as payment of Priority Deposit to ProtoStar under the Space Segment Services Agreement between PLDT and ProtoStar. On May 15, 2009, PLDT formally advised ProtoStar that it will not exercise its option to purchase ProtoStar’s Series C Preferred Shares and that it has elected to apply the US$27.5 million it had paid for such option as Priority Deposit under the Space Segment Services Agreement, which amount will be deemed as full payment of the space segment services upon Commencement Date under said agreement.
On July 29, 2009, ProtoStar and its affiliates ProtoStar Satellite Systems, Inc., ProtoStar I Ltd., ProtoStar II Ltd., ProtoStar Development Ltd. and ProtoStar Asia Pte. Ltd. each filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. An auction of ProtoStar’s ProtoStar I satellite was heldfollows:

   December 31,   January 1, 
   2013   2012   2012 
   (in millions) 

Authorized

      

Non-Voting Serial Preferred Stock

   388     808     808  

Voting Preferred Stock

   150     150     —    

Common Stock

   234     234     234  

Issued

      

Non-Voting Serial Preferred Stock

   36     36     442  

Voting Preferred Stock

   150     150     —    

Common Stock

   219     219     217  

Outstanding

      

Non-Voting Serial Preferred Stock

   36     36     442  

Voting Preferred Stock

   150     150     —    

Common Stock

   216     216     214  

Treasury Stock

      

Common Stock

   3     3     3  

Changes in October 2009 and of ProtoStar’s ProtoStar II satellite in December 2009, the proceeds of which were to be distributed to ProtoStar’s secured lenders and the balance, if any, to its unsecured lenders. During the pendency of the proceedings, however, the unsecured creditors challenged the perfection of the secured lenders’ security over the satellites. Thereafter, settlement negotiations were commenced among ProtoStar, the secured lenders and the unsecured creditors. The parties reached a settlement, the terms of which are embodied in ProtoStar’s “Plan of Reorganization.” This Plan was confirmed by the bankruptcy court at a hearing held on October 6, 2010 in Delaware. The filing of the bankruptcy case and the eventual sale of the ProtoStar I satellite constitute a breach by ProtoStar of the Space Segment Services Agreement. On this basis, we recognized a full impairment provision of US$27.5 million, or Php1,304 million, in 2009 with respect to our Priority Deposit to ProtoStar under the Space Segment Services Agreement. On October 22, 2010, PLDT received approximately US$3.3 million as settlement of its claim and recognized such as “Other income” in the consolidated income statements. The remaining amount of US$24.2 million, for which full provision was made in 2009, was permanently written-off in our consolidated statement of financial position.

19. Equity
The movements of PLDT’s issued capital account for the years ended December 31, 2008, 20092013, 2012 and 20102011 are as follows:
                         
  Preferred Stock –    
  Php10 par value per share      
          Total      
  Series     Preferred     Common Stock –
  A to HH IV Stock     Php5 par value per share
  Number of Shares     Amount Number of Shares Amount
  (in millions)
Authorized
          823  Php8,230   234  Php1,170 
 
Issued
                        
Balances as at January 1, 2008  405   36   441  Php4,417   188  Php943 
Issuance           1      1 
Conversion           (3)  1   3 
 
Balances as at December 31, 2008
  405   36   441  Php4,415   189  Php947 
 
                         
Balances as at January 1, 2009  405   36   441  Php4,415   189  Php947 
Issuance           2       
Conversion           (1)      
 
Balances as at December 31, 2009
  405   36   441  Php4,416   189  Php947 
 
                         
Balances as at January 1, 2010  405   36   441  Php4,416   189  Php947 
Issuance  1      1   3       
 
Balances as at December 31, 2010
  406   36   442  Php4,419   189  Php947 
 

236


   Non-Voting
Preferred  Stock –
Php10 par value
per share
   Voting Preferred Stock –
Php1 par value
per share
           
   Series
A to II
  IV   Voting   Total
Preferred
Stock
     Common Stock –
Php5 par value per share
 
   Number of Shares      Amount  Number of Shares   Amount 
   (in millions) 

Balances as at January 1, 2013

   —      36     150     186   Php510    219    Php1,093  

Issuance

   —      —       —       —      —      —       —    

Conversion

   —      —       —       —      —      —       —    

Redemption

   —      —       —       —      —      —       —    
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balances as at December 31, 2013

   —      36     150     186   Php510    219    Php1,093  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balances as at January 1, 2012

   406    36     —       442   Php4,419    217    Php1,085  

Issuance

   —      —       150     150    150    2     8  

Conversion

   (3  —       —       (3  (30  —       —    

Redemption

   (403      (403  (4,029  —       —    
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balances as at December 31, 2012

   —      36     150     186   Php510    219    Php1,093  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balances as at January 1, 2011

   406    36     —       442   Php4,419    189    Php947  

Issuance

   —      —       —       —      2    28     138  

Conversion

   —      —       —       —      (2  —       —    
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balances as at December 31, 2011

   406    36     —       442   Php4,419    217    Php1,085  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Preferred Stock

Non-Voting Serial Preferred Stocks

On January 26, 2010, the Board of Directors designated 100 thousand100,000 shares of preferred stock as Series II 10% Cumulative Convertible Preferred Stock for issuanceto be issued from January 1, 2010 to December 31, 2012. There were no issued2012, pursuant to the PLDT Subscriber Investment Plan, or SIP.

The Series HH and II 10% Cumulative Convertible Preferred Stock, as at March 31, 2011.

The preferred stock is non-voting, except as specifically provided by law, and is preferred as to liquidation.
The Series A to II 10% Cumulative Convertible Preferred Stockor SIP shares, earns cumulative dividends at an annual rate of 10%. After the lapse of one year from the last day of the year of issuance of a particular seriesSeries of 10% Cumulative Convertible Preferred Stock, any holder of such series may convert all or any of the shares of 10% Cumulative Convertible Preferred Stock held by him into fully paid and non-assessable shares of Common Stock of PLDT, at a conversion price equivalent to 10% below the average of the high and low daily sales price of a share of Common Stock on the PSE, or if there have been no such sales on the PSE on any day, the average of the bid and the ask prices of a share of Common Stock of PLDT at the end of such day on such Exchange, in each such case averaged over a period of 30 consecutive trading days prior to the conversion date, but in no case shall the conversion price be less than the price set by the Board of Directors which, as at December 31, 2010,2013 was Php5.00 each per share. The number of shares of Common Stock issuable at any time upon conversion of one share of the subscriber investment plan, or SIP, or the 10% Cumulative Convertible Preferred Stock is determined by dividing Php10.00 by the then applicable conversion price.

In case the shares of Common Stock outstanding are at anytime subdivided into a greater or consolidated into a lesser number of shares, then the minimum conversion price per share of Common Stock will be proportionately decreased or increased, as the case may be, and in the case of a stock dividend, such price will be proportionately decreased, provided, however, that in every case the minimum conversion price shall not be less than the par value per share of Common Stock. In the event the relevant effective date for any such subdivision or consolidation of shares of stock dividend occurs during the period of 30 trading days preceding the presentation of any shares of 10% Cumulative Convertible Preferred Stock for conversion, a similar adjustment will be made in the sales prices applicable to the trading days prior to such effective date utilized in calculating the conversion price of the shares presented for conversion.

In case of any other reclassification or change of outstanding shares of Common Stock, or in case of any consolidation or merger of PLDT with or into another corporation, the Board of Directors shall make such provisions, if any, for adjustment of the minimum conversion price and the sale price utilized in calculating the conversion price as the Board of Directors, in its sole discretion, shall deem appropriate.

At PLDT’s option, the Series A toHH and II 10% Cumulative Convertible Preferred Stock are redeemable at par value plus accrued dividends five years after the year of issuance.

The Series IV Cumulative Non-convertibleNon-Convertible Redeemable Preferred Stock earns cumulative dividends at an annual rate of 13.5% based on the paid-up subscription price. It is redeemable at the option of PLDT at any time one year after subscription and at the actual amount paid for such stock, plus accrued dividends.

The Non-Voting Serial Preferred Stocks are non-voting, except as specifically provided by law, and are preferred as to liquidation.

All preferred stocks limit the ability of PLDT to pay cash dividends unless all dividends on such preferred stock for all past dividend payment periods have been paid and or declared and set apart and provision has been made for the currently payable dividends.

Voting Preferred Stock

On June 5, 2012, the Philippine SEC approved the amendments to the Seventh Article of PLDT’s Articles of Incorporation consisting of the sub-classification of its authorized Preferred Capital Stock into: 150 million shares of Voting Preferred Stock with a par value of Php1.00 each, and 807.5 million shares of Non-Voting Serial Preferred Stock with a par value of Php10.00 each, and other conforming amendments, or the Amendments. The shares of Voting Preferred Stock may be issued, owned, or transferred only to or by: (a) a citizen of the Philippines or a domestic partnership or association wholly-owned by citizens of the Philippines; (b) a corporation organized under the laws of the Philippines of which at least 60% of the capital stock entitled to vote is owned and held by citizens of the Philippines and at least 60% of the board of directors of such corporation are citizens of the Philippines; and (c) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee qualifies under paragraphs (a) and (b) above and at least 60% of the funds accrue to the benefit of citizens of the Philippines, or Qualified Owners. The holders of Voting Preferred Stock will have voting rights at any meeting of the stockholders of PLDT for the election of directors and for all other purposes, with one vote in respect of each share of Voting Preferred Stock. The Amendments were approved by the Board of Directors and stockholders of PLDT on July 5, 2011 and March 22, 2012, respectively.

On October 12, 2012, the Board of Directors, pursuant to the authority granted to it in the Seventh Article of PLDT’s Articles of Incorporation, determined the following specific rights, terms and features of the Voting Preferred Stock: (a) entitled to receive cash dividends at the rate of 6.5% per annum, payable before any dividends are paid to the holders of Common Stock; (b) in the event of dissolution or liquidation or winding up of PLDT, holders will be entitled to be paid in full, or pro-rata insofar as the assets of PLDT will permit, the par value of such shares of Voting Preferred Stock and any accrued or unpaid dividends thereon before any distribution shall be made to the holders of shares of Common Stock; (c) redeemable at the option of PLDT; (d) not convertible to Common Stock or to any shares of stock of PLDT of any class; (e) voting rights at any meeting of the stockholders of PLDT for the election of directors and all other matters to be voted upon by the stockholders in any such meetings, with one vote in respect of each Voting Preferred Share; and (f) holders will have no pre-emptive right to subscribe for or purchase any shares of stock of any class, securities or warrants issued, sold or disposed by PLDT.

On October 16, 2012, BTFHI subscribed to 150 million newly issued shares of Voting Preferred Stock, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement dated October 15, 2012 between BTFHI and PLDT. As a result of the issuance of Voting Preferred Shares, the voting power of the NTT Group (NTT DOCOMO and NTT Communications), First Pacific Group and its Philippine affiliates, and JG Summit Group was reduced to 12%, 15% and 5%, respectively, as at December 31, 2013. SeeNote 1 – Corporate InformationandNote 26 – Provisions and Contingencies – Matters Relating to the Gamboa Case and the recent Jose M. Roy III Petition.

Redemption of Preferred Stock

On September 23, 2011, the Board of Directors approved the redemption, or the Redemption, of all outstanding shares of PLDT’s Series A to FF 10% Cumulative Convertible Preferred Stock, or the SIP Preferred Shares, and all such shares were redeemed and retired effective on January 19, 2012, or the Redemption Date. The record date for the determination of the holders of outstanding SIP Preferred Shares subject to Redemption, or Holders of SIP Preferred Shares, was fixed on October 10, 2011, or the Record Date. In accordance with the terms and conditions of the SIP Preferred Shares, the Holders of SIP Preferred Shares as of the Record Date are entitled to payment of the redemption price in an amount equal to the par value of such shares, plus accrued and unpaid dividends thereon up to the Redemption Date, or the Redemption Price.

PLDT has set aside Php5.9 billion (the amount required to fund the redemption price for the SIP Preferred Shares) in addition to Php2.3 billion for unclaimed dividends on SIP Preferred Shares, or a total amount of Php8.2 billion, to fund the redemption of the SIP Preferred Shares, or the Redemption Trust Fund, in a trust account, or the Trust Account, in the name of RCBC, as Trustee. Pursuant to the terms of the Trust Account, the Trustee will continue to hold the Redemption Trust Fund or any balance thereof, in trust, for the benefit of Holders of SIP Preferred Shares, for a period of ten years from the Redemption Date, or until January 19, 2022. After the said date, any and all remaining balance in the Trust Account shall be returned to PLDT and revert to its general funds. Any interests on the Redemption Trust Fund shall accrue for the benefit of, and be paid from time to time, to PLDT.

On May 8, 2012, the Board of Directors approved the redemption of all outstanding shares of PLDT’s Series GG 10% Cumulative Convertible Preferred Stock and all such shares were redeemed and retired effective on August 30, 2012. The record date for purposes of determining the holders of the outstanding Series GG Shares subject to redemption, or Holders of Series GG Shares, was fixed on May 22, 2012. In accordance with the terms and conditions of the Series GG Shares, the Holders of the Series GG Shares as at May 22, 2012 are entitled to the payment of the redemption price in an amount equal to the par value of such shares, plus accrued and unpaid dividends thereon up to August 30, 2012, or the Redemption Price of Series GG Shares.

PLDT has set aside Php247 thousand (the amount required to fund the redemption price for the Series GG Shares) in addition to Php63 thousand for unclaimed dividends on Series GG Shares, or a total amount of Php310 thousand, to fund the redemption price for the Series GG Shares, or the Redemption Trust Fund for Series GG Shares, which forms an integral part of the Redemption Trust Fund previously set aside in the trust account with RCBC, as Trustee, for the purpose of funding the payment of the Redemption Price of PLDT Series A to FF 10% Cumulative Convertible Preferred Stock.

As at January 19, 2012 and August 30, 2012, notwithstanding that any stock certificate representing the Series A to FF 10% Cumulative Convertible Preferred Stock and Series GG 10% Cumulative Convertible Preferred Stock, respectively, were not surrendered for cancellation, the Series A to FF 10% Cumulative Convertible Preferred Stock and Series GG 10% Cumulative Convertible Preferred Stock were no longer deemed outstanding and the right of the holders of such shares to receive dividends thereon ceased to accrue and all rights with respect to such shares ceased and terminated, except only the right to receive the Redemption Price of such shares, but without interest thereon.

A total amount of Php353 million was withdrawn from the Trust Account, representing total payments on redemption as at December 31, 2013. The balance of the Trust Account of Php7,952 million was presented as part of the current portion of advances and other noncurrent assets and the related redemption liability of the same amount was presented as part of accrued expenses and other current liabilities in our consolidated statement of financial position as at December 31, 2013. SeeNote 23 – Accrued Expenses and Other Current LiabilitiesandNote 27 – Financial Assets and Liabilities.

On January 29, 2013, the Board of Directors approved the redemption of all outstanding shares of PLDT’s Series HH 10% Cumulative Convertible Preferred Stock which were issued in 2007 effective on May 16, 2013. The record date for purpose of determining the holders of the outstanding Series HH shares issued in 2007 subject to redemption, or Holders of Series HH Shares issued in 2007, was fixed on February 14, 2013. In accordance with the terms and conditions of Series HH Shares issued in 2007, the Holders of Series HH Shares issued in 2007 as at February 14, 2013 are entitled to the payment of the redemption price in an amount equal to the par value of such shares, plus accrued and unpaid dividends thereon up to May 16, 2012, or the Redemption Price of Series HH Shares issued in 2007.

On January 28, 2014, the Board of Directors authorized/approved the redemption of PLDT’s Series HH 10% Cumulative Convertible Preferred Stock which were issued in 2008, which will be effective on May 16, 2014. The record date for the purpose of determining the holders of the outstanding Series HH Shares issued in 2008 subject to redemption was fixed on February 14, 2014.

PLDT expects to similarly redeem the outstanding shares of Series II 10% Cumulative Convertible Preferred Stock as and when they become eligible for redemption.

Common Stock

In 2008, the

The Board of Directors approved a share buyback program of up to five million shares of PLDT’s common stock, representing approximately 3% of PLDT’s then total outstanding shares of common stock.stock in 2008. The share buyback program reflects PLDT’s commitment to capital management as an important element in enhancing shareholdershareholders value. This also reinforces initiatives that PLDT has already undertaken, such as the declaration of special dividends on common stock in addition to the regular dividend payout equivalent to 70% of our earnings per share,core EPS, after having determined that PLDT has the capacity to pay additional returns to shareholders. Under the share buyback program, PLDT reacquired shares on an opportunistic basis, directly from the open market through the trading facilities of the PSE and NYSE.

We had acquired a total of approximately 2.72 million shares of PLDT’s common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million in accordance with the share buyback program as at December 31, 2010. We had acquired2013 and 2012, and January 1, 2012.

On November 9, 2011, the PSE approved the listing of the additional 27.7 million common shares of PLDT, which were issued on October 26, 2011 at the issue price of Php2,500 per share, as consideration for the acquisition by PLDT of the Enterprise Assets of Digitel.

On January 27, 2012, a total of approximately 2.681.61 million PLDT common shares were issued for settlement of the purchase price of 2,518 million common shares of Digitel tendered by the noncontrolling Digitel stockholders under the mandatory tender offer conducted by PLDT, and which opted to receive payment of the purchase price in the form of PLDT common shares.

Decrease in Authorized Capital Stock

On April 23, 2013 and June 14, 2013, the Board of Directors and stockholders, respectively, approved the following actions: (1) decrease in PLDT’s authorized capital stock from Php9,395 million divided into two classes consisting of: (a) Preferred Capital Stock sub-classified into 150 million shares of PLDT’s

237Voting Preferred Stock of the par value of Php1.00 each and 807.5 million shares of Non-Voting Serial Preferred Stock of the par value of Php10.00 each; and (b) 234 million shares of Common Capital Stock of the par value of Php5.00 each, to Php5,195 million, divided into two classes consisting of: (a) Preferred Capital Stock sub-classified into: 150 million shares of Voting Preferred Stock of the par value of Php1.00 each and 387.5 million shares of Non-Voting Serial Preferred Stock of the par value of Php10.00 each; and (b) 234 million shares of Common Capital Stock of the par value of Php5.00 each; and (2) corresponding amendments to the Seventh Article of the Articles of Incorporation of PLDT. On October 3, 2013, the Philippine SEC approved the decrease in authorized capital stock and amendments to the Articles of Incorporation of PLDT.


Dividends Declared

Our dividends declared for the years ended December 31, 2013, 2012 and 2011 are detailed as follows:

common stock at a weighted average price of Php2,387 per share for a total consideration of Php6,405 million as at December 31, 2009. SeeNote 8 — Earnings Per Common ShareandNote 28 — Financial Assets and Liabilities.
Dividends Declared For The Year Ended December 31, 2010
                     
  Date  Amount 
Class Approved  Record  Payable  Per Share  Total 
                  (in million pesos) 
10% Cumulative Convertible Preferred Stock
                    
Series CC January 26, 2010 February 25, 2010 March 31, 2010 Php1.00   17 
Series DD January 26, 2010 February 11, 2010 February 26, 2010  1.00   3 
Series EE March 26, 2010 April 23, 2010 May 31, 2010  1.00    
Series A, I, R, W, AA and BB July 7, 2010 August 5, 2010 August 31, 2010  1.00   128 
Series B, F, Q, V and Z August 3, 2010 September 2, 2010 September 30, 2010  1.00   92 
Series E, K, O and U August 31, 2010 September 30, 2010 October 29, 2010  1.00   44 
Series C, D, J, T and X September 28, 2010 October 28, 2010 November 30, 2010  1.00   57 
Series G, N, P and S November 4, 2010 December 2, 2010 December 29, 2010  1.00   26 
Series H, L, M and Y December 7, 2010 January 4, 2011 January 31, 2011  1.00   42 
 
                   409 
 
                     
Cumulative Non-convertible Redeemable Preferred Stock
                    
Series IV* January 26, 2010 February 19, 2010 March 15, 2010 Php—   12 
  May 13, 2010 May 27, 2010 June 15, 2010     13 
  August 3, 2010 August 18, 2010 September 15, 2010     12 
  November 4, 2010 November 19, 2010 December 15, 2010     12 
 
                   49 
 
                     
Common Stock
                    
Regular Dividend March 2, 2010 March 17, 2010 April 20, 2010 Php76.00   14,197 
  August 3, 2010 August 19, 2010 September 21, 2010  78.00   14,570 
Special Dividend March 2, 2010 March 17, 2010 April 20, 2010  65.00   12,142 
 
                   40,909 
 
Charged to retained earnings                  41,367 
 
December 31, 2013

   Date   Amount 

Class

  Approved   Record   Payable   Per Share   Total 
               (in million pesos, except per share amounts) 

10% Cumulative Convertible Preferred Stock

          

Series HH

   April 23, 2013     May 9, 2013     May 31, 2013     1.00     —    

Series HH (Final Dividends)

   April 23, 2013     February 14, 2013     May 16, 2013     0.0027/day     —    

Series II

   April 23, 2013     May 9, 2013     May 31, 2013     1.00     —    
        

 

 

   

 

 

 
           —    
          

 

 

 

Cumulative Non-Convertible Redeemable Preferred Stock

          

Series IV*

   January 29, 2013     February 28, 2013     March 15, 2013     —       12  
   May 7, 2013     May 27, 2013     June 15, 2013     —       13  
   August 7, 2013     August 23, 2013     September 15, 2013     —       12  
   November 5, 2013     November 20, 2013     December 15, 2013     —       12  
        

 

 

   

 

 

 
           49  
          

 

 

 

Voting Preferred Stock

   March 5, 2013     March 20, 2013     April 15, 2013     —       3  
   June 14, 2013     June 28, 2013     July 15, 2013     —       3  
   August 27, 2013     September 11, 2013     October 15, 2013     —       2  
   December 3, 2013     December 19, 2013     January 15, 2014     —       2  
        

 

 

   

 

 

 
           10  
          

 

 

 

Common Stock

          

Regular Dividend

   March 5, 2013     March 19, 2013     April 18, 2013     60.00     12,963  
   August 7, 2013     August 30, 2013     September 27, 2013     63.00     13,611  

Special Dividend

   March 5, 2013     March 19, 2013     April 18, 2013     52.00     11,235  
        

 

 

   

 

 

 
           37,809  
          

 

 

 

Charged to retained earnings

           37,868  
          

 

 

 

*Dividends were declared based on total amount paid up.
Dividends Declared For The Year Ended December 31, 2009
                     
  Date  Amount 
Class Approved  Record  Payable  Per Share  Total 
                  (in million pesos) 
Preferred Stock Subject to Mandatory Redemption
                  
Series V March 3, 2009 March 19, 2009 April 15, 2009 Php4.675    
  June 9, 2009 June 25, 2009 July 15, 2009  4.675    
  *August 4, 2009 August 22, 2009 September 10, 2009 0.051944 per day    
Series VI March 3, 2009 March 19, 2009 April 15, 2009  US$0.09925    
  June 9, 2009 June 25, 2009 July 15, 2009  0.09925    
  August 25, 2009 September 24, 2009 October 15, 2009  0.09925    
  **November 3, 2009 November 8, 2009 December 8, 2009 Php0.001103 per day    
 
Charged to income                   
 
                     
10% Cumulative Convertible Preferred Stock
                  
Series CC January 27, 2009 February 26, 2009 March 31, 2009 Php1.00   17 
Series DD January 27, 2009 February 13, 2009 February 27, 2009  1.00   3 
Series EE March 31, 2009 April 30, 3009 May 29, 2009  1.00    
Series A, I, R, W, AA and BB July 7, 2009 August 6, 2009 August 28, 2009  1.00   128 
Series B, F, Q, V and Z August 4, 2009 September 1, 2009 September 30, 2009  1.00   91 
Series E, K, O and U August 25, 2009 September 24, 2009 October 30, 2009  1.00   44 
Series C, D, J, T and X September 29, 2009 October 29, 2009 November 26, 2009  1.00   57 
Series G, N, P, and S November 3, 2009 December 3, 2009 December 29, 2009  1.00   26 
Series H, L, M and Y December 8, 2009 January 4, 2010 January 29, 2010  1.00   40 
 
                   406 
 
                     
Cumulative Non-convertible Redeemable Preferred Stock
                    
Series IV*** January 27, 2009 February 20, 2009 March 15, 2009 Php—   12 
  May 5, 2009 May 22, 2009 June 15, 2009     13 
  August 4, 2009 August 19, 2009 September 15, 2009     13 
  November 3, 2009 November 20, 2009 December 15, 2009     12 
 
                   50 
 
                     
Common Stock
                    
Regular Dividend March 3, 2009 March 18, 2009 April 21, 2009 Php70.00   13,124 
  August 4, 2009 August 20, 2009 September 22, 2009  77.00   14,384 
Special Dividend March 3, 2009 March 18, 2009 April 21, 2009  60.00   11,250 
 
                   38,758 
 
Charged to retained earnings                  39,214 
 

December 31, 2012

   Date   Amount 

Class

  Approved   Record   Payable   Per Share   Total 
               (in million pesos, except per share amounts) 

10% Cumulative Convertible Preferred Stock

          

Series GG

   January 31, 2012     February 29, 2012     March 30, 2012     1.00     —    

Series GG (Final Dividends)

   July 3, 2012     May 22, 2012     August 30, 2012     0.0027/day     —    

Series HH

   March 22, 2012     April 21, 2012     May 31, 2012     1.00     —    

Series II

   March 22, 2012     April 21, 2012     May 31, 2012     1.00     —    
        

 

 

   

 

 

 
           —    
          

 

 

 

Cumulative Non-Convertible Redeemable Preferred Stock

          

Series IV*

   January 31, 2012     February 20, 2012     March 15, 2012     —       12  
   May 8, 2012     May 28, 2012     June 15, 2012     —       13  
   August 7, 2012     August 22, 2012     September 15, 2012     —       12  
   November 6, 2012     November 20, 2012     December 15, 2012     —       12  
        

 

 

   

 

 

 
           49  
          

 

 

 

Voting Preferred Stock

   December 4, 2012     December 19, 2012     January 15, 2013     0.0001806/day     2  
        

 

 

   

 

 

 

Common Stock

          

Regular Dividend

   March 6, 2012     March 20, 2012     April 20, 2012     63.00     13,611  
   August 7, 2012     August 31, 2012     September 28, 2012     60.00     12,964  

Special Dividend

   March 6, 2012     March 20, 2012     April 20, 2012     48.00     10,371  
        

 

 

   

 

 

 
           36,946  
          

 

 

 

Charged to retained earnings

           36,997  
          

 

 

 

*Only the holders of Series V Convertible Preferred Stock whose shares were originally issued on August 22, 2002 and mandatorily converted on August 23, 2009 are entitled to this final dividend.
**Only the holders of Series VI Convertible Preferred Stock whose shares were originally issued on November 8, 2002 and mandatorily converted on November 9, 2009 are entitled to this final dividend.
***Dividends are declared based on total amount paid up.

238


Dividends Declared For The Year Ended December 31, 2008
                     
  Date  Amount 
Class Approved  Record  Payable  Per Share  Total 
                  (in million pesos) 
Preferred Stock Subject to Mandatory Redemption
                  
Series V March 4, 2008 March 20, 2008 April 15, 2008 Php4.675    
  *May 6, 2008 June 4, 2008 June 23, 2008 0.051944 per day    
  June 10, 2008 June 26, 2008 July 15, 2008  4.675    
  August 26, 2008 September 25, 2008 October 15, 2008  4.675    
  December 9, 2008 December 24, 2008 January 15, 2009  4.675    
Series VI March 4, 2008 March 20, 2008 April 15, 2008  US$0.09925   2 
  *May 6, 2008 June 4, 2008 June 23, 2008 0.001103 per day   1 
  June 10, 2008 June 26, 2008 July 15, 2008  0.09925    
  August 26, 2008 September 25, 2008 October 15, 2008  0.09925    
  December 9, 2008 December 24, 2008 January 15, 2009  0.09925    
 
Charged to income                  3 
 
                     
10% Cumulative Convertible Preferred Stock
                  
Series CC January 29, 2008 February 28, 2008 March 31, 2008 Php1.00   17 
Series DD January 29, 2008 February 15, 2008 February 29, 2008  1.00   3 
Series EE March 25, 2008 April 24, 2008 May 30, 2008  1.00    
Series A, I, R, W, AA and BB July 8, 2008 August 1, 2008 August 29, 2008  1.00   128 
Series B, F, Q, V and Z August 5, 2008 September 3, 2008 September 30, 2008  1.00   90 
Series E, K, O and U August 26, 2008 September 25, 2008 October 31, 2008  1.00   44 
Series C, D, J, T and X September 30, 2008 October 30, 2008 November 28, 2008  1.00   57 
Series G, N, P and S November 4, 2008 December 4, 2008 December 29, 2008  1.00   26 
Series H, L, M and Y December 9, 2008 January 2, 2009 January 30, 2009  1.00   41 
 
                   406 
 
                     
Cumulative Non-convertible Redeemable Preferred Stock
                    
Series IV** January 29, 2008 February 22, 2008 March 15, 2008 Php—   12 
  May 6, 2008 May 23, 2008 June 15, 2008     12 
  July 8, 2008 August 7, 2008 September 15, 2008     13 
  November 4, 2008 November 21, 2008 December 15, 2008     13 
 
                   50 
 
                     
Common Stock
                    
Regular Dividend March 4, 2008 March 19, 2008 April 21, 2008 Php68.00   12,853 
  August 5, 2008 August 22, 2008 September 22, 2008  70.00   13,140 
Special Dividend March 4, 2008 March 19, 2008 April 21, 2008  56.00   10,585 
 
                   36,578 
 
Charged to retained earnings                  37,034 
 
*Only the holders of Series V and VI Convertible Preferred Stock whose shares were originally issued on June 4, 2001 and mandatorily converted on June 5, 2008 are entitled to these final dividends.
**Dividends are declared based on total amount paid up.
Dividends Declared After December 31, 2010
                     
  Date  Amount 
Class Approved  Record  Payable  Per Share  Total 
                  (in million pesos) 
Cumulative Non-convertible Redeemable Preferred Stock
                    
Series IV* January 25, 2011 February 18, 2011 March 15, 2011 Php—   12 
 
                     
10% Cumulative Convertible Preferred Stock
                    
Series CC January 25, 2011 February 24, 2011 March 31, 2011 Php1.00   17 
Series DD January 25, 2011 February 10, 2011 February 28, 2011  1.00   2 
Series FF January 25, 2011 February 10, 2011 February 28, 2011  1.00    
Series GG January 25, 2011 February 24, 2011 March 31, 2011  1.00    
Series EE March 29, 2011 April 28, 2011 May 31, 2011  1.00    
Series HH March 29, 2011 April 28, 2011 May 31, 2011  1.00    
 
                   19 
 
                     
Common Stock
                    
Regular Dividend March 1, 2011 March 16, 2011 April 19, 2011 Php78.00   14,567 
Special Dividend March 1, 2011 March 16, 2011 April 19, 2011  66.00   12,326 
 
                   26,893 
 
                   26,924 
 
*Dividends were declared based on total amount paid up.

239


December 31, 2011

  Date   Amount 

Class

 Approved  Record  Payable   Per Share   Total 
            (in million pesos, except per share amounts) 

10% Cumulative Convertible Preferred Stock

       

Series CC

  January 25, 2011    February 24, 2011    March 31, 2011     1.00     17  

Series DD

  January 25, 2011    February 10, 2011    February 28, 2011     1.00     3  

Series FF

  January 25, 2011    February 10, 2011    February 28, 2011     1.00     —    

Series GG

  January 25, 2011    February 24, 2011    March 31, 2011     1.00     —    

Series EE

  March 29, 2011    April 28, 2011    May 31, 2011     1.00     —    

Series HH

  March 29, 2011    April 28, 2011    May 31, 2011     1.00     —    

Series A, I, R, W, AA and BB

  July 5, 2011    August 3, 2011    August 31, 2011     1.00     128  

Series B, F, Q, V and Z

  August 2, 2011    September 1, 2011    September 30, 2011     1.00     91  

Series E, K, O and U

  September 20, 2011    October 7, 2011    October 31, 2011     1.00     44  

Series C, D, J, T and X

  September 20, 2011    October 20, 2011    November 29, 2011     1.00     57  

Series G, N, P and S

  November 3, 2011    December 1, 2011    December 29, 2011     1.00     26  

Series H, L, M and Y

  December 6, 2011    January 3, 2012    January 19, 2012     1.00     42  
     

 

 

   

 

 

 
        408  

Final Dividends

       

Series A to FF

  December 6, 2011    October 10, 2011    January 19, 2012     0.0027/day     142  
     

 

 

   

 

 

 
        550  
       

 

 

 

Cumulative Non-Convertible Redeemable Preferred Stock

       

Series IV*

  January 25, 2011    February 18, 2011    March 15, 2011     —       12  
  May 10, 2011    May 27, 2011    June 15, 2011     —       12  
  August 2, 2011    August 18, 2011    September 15, 2011     —       13  
  November 3, 2011    November 18, 2011    December 15, 2011     —       12  
     

 

 

   

 

 

 
        49  
       

 

 

 

Common Stock

       

Regular Dividend

  March 1, 2011    March 16, 2011    April 19, 2011     78.00     14,567  
  August 2, 2011    August 31, 2011    September 27, 2011     78.00     14,567  

Special Dividend

  March 1, 2011    March 16, 2011    April 19, 2011     66.00     12,326  
     

 

 

   

 

 

 
        41,460  
       

 

 

 

Charged to retained earnings

        42,059  
       

 

 

 

20.*Interest-bearing Financial LiabilitiesDividends were declared based on total amount paid up.

Our dividends declared after December 31, 2013 are detailed as follows:

   Date   Amount 

Class

  Approved   Record   Payable   Per Share   Total 
               (in million pesos, except per share amounts) 

Cumulative Non-Convertible Redeemable Preferred Stock

          

Series IV*

   January 28, 2014     February 27, 2014     March 15, 2014     —       12  
        

 

 

   

 

 

 

Voting Preferred Stock*

   March 4, 2014     March 20, 2014     April 15, 2014     —       3  
        

 

 

   

 

 

 

Common Stock

          

Regular Dividend

   March 4, 2014     March 18, 2014     April 16, 2014     62.00     13,395  

Special Dividend

   March 4, 2014     March 18, 2014     April 16, 2014     54.00     11,667  
        

 

 

   

 

 

 
           25,062  
          

 

 

 

Charged to retained earnings

           25,077  
          

 

 

 

*As at December 31, 2010 and 2009, this account consists of the following:Dividends were declared based on total amount paid up.
         
  2010  2009 
  (in million pesos)
Long-term portion of interest-bearing financial liabilities:
        
Long-term debt (Notes 4, 5, 9, 23, 26 and 28)  75,879   86,066 
Obligations under finance lease (Notes 3, 4, 5, 23, 26 and 28)  9   13 
 
   75,888   86,079 
 
         
Current portion of interest-bearing financial liabilities:
        
Long-term debt maturing within one year (Notes 4, 5, 9, 23, 26 and 28)  13,767   10,384 
Obligations under finance lease maturing within one year (Notes 3, 4, 5, 23, 26 and 28)  34   51 
Notes payable (Notes 4, 5, 23, 26 and 28)     2,279 
 
   13,801   12,714 
 
Unamortized debt discount, representing debt issuance costs and any difference between the fair value of consideration given or received at initial recognition, included in the financial liabilities as at December 31, 2010 and 2009 are as follows:
         
  2010  2009 
  (in million pesos)
Long-term debt (Note 28)  2,944   3,858 
Obligation under finance lease  1   3 
 
Unamortized debt discount at end of year  2,945   3,861 
 
The following table describes all changes to unamortized debt discount as at December 31, 2010 and 2009.
         
  2010  2009 
  (in million pesos)
Unamortized debt discount at beginning of year  3,861   4,577 
Additions during the year  114   182 
Revaluations during the year  (16)  22 
Accretion during the year included as part of “Financing costs — net — Accretion on financial liabilities — net” (Note 5)  (1,014)  (920)
 
Unamortized debt discount at end of year  2,945   3,861 
 
Long-term Debt
As at December 31, 2010 and 2009, long-term debt consists of:
                     
Description Interest Rates  2010  2009 
      (in millions)
U.S. Dollar Debts:
                    
Export Credit Agencies-Supported Loans:                    
Finnvera, Plc, or Finnvera 2.99% and US$ LIBOR + 0.05% to 1.35% in 2010 and US$ LIBOR + 0.05% to 1.35% in 2009 US$82  Php  3,590  US$58  Php  2,681 
Exportkreditnamnden, or EKN 3.79% in 2010 and 2009  14   613   18   860 
Kreditanstalt für Wiederaufbau, or KfW US$ LIBOR + 0.65% to 2.50% in 2010 and 5.65% and US$ LIBOR + 0.65% to 2.50% in 2009        31   1,454 
 
       96   4,203   107   4,995 
Fixed Rate Notes 8.35% to 11.375% in 2010 and 2009  375   16,450   385   17,876 
Term Loans:                    
Debt Exchange Facility 2.25% in 2010 and 2009  223   9,791   209   9,725 
GSM Network Expansion Facilities 4.515% to 4.70% and US$ LIBOR + 0.42% to 1.85% in 2010 and 4.49% to 4.70% and US$ LIBOR + 0.42% to 1.85% in 2009  97   4,230   157   7,274 
Others 2.79% + swap rate and US$ LIBOR + 0.42% to 0.50% in 2010 and 6%; 2.79% + swap rate and US$ LIBOR + 0.42% to 0.50% in 2009  85   3,740   118   5,484 
 
      US$876  Php  38,414  US$976  Php  45,354 
 

240


Retained Earnings Available for Dividend Declaration

                     
Description Interest Rates  2010  2009 
      (in millions)
Philippine Peso Debts:
                    
Corporate Notes 5.625% to 9.1038% and PDST-F + 1.25% in 2010 and 2009     Php  29,677      Php  24,863 
Term Loans:                    
Unsecured Term Loans 6.125% to 8.7792% and PDST-F + 0.30% to 1.50% in 2010 and 6.125% to 8.7792% and PDST-F + 0.75% to 1.50% in 2009      21,439       26,088 
Secured Term Loans PDST-F + 1.375% and AUB’s prime rate in 2010 and PDST-F + 5.70% + Bank’s cost of funds; PDST-F + 1.375% and AUB’s prime rate in 2009      116       145 
 
           51,232       51,096 
 
Total long-term debt          89,646       96,450 
Less portion maturing within one year (Note 28)          13,767       10,384 
 
Noncurrent portion of long-term (Note 28)         Php  75,879      Php  86,066 
 
Note: Amounts presented are net of unamortized debt discount and debt issuance costs.
The scheduled maturities of our consolidated outstanding long-term debt at nominal values as at December 31, 2010 are as follows:
                 
  U.S. Dollar Debt  Php Debt  Total  
Year In U.S. Dollar  In Php  In Php  In Php 
  (in millions)
2011  104   4,535   9,400   13,935 
2012  234   10,273   9,127   19,400 
2013  60   2,606   8,528   11,134 
2014  305   13,375   6,125   19,500 
2015 and onwards  239   10,482   18,139   28,621 
 
   942   41,271   51,319   92,590 
 
U.S. Dollar Debts:
Export Credit Agencies-Supported Loans
In order to acquire imported componentsThe following table shows the reconciliation of our retained earnings available for dividend declaration for our network infrastructure in connection with our expansion and service improvement programs, we obtained loans extended and/or guaranteed by various export credit agencies.
Finnvera, Plc, or Finnvera
On February 11, 2005, Smart signed a refinancing facility with Finnish Export Credit, Plc, as Lender, and ING Bank N.V., as Arranger and Facility Agent under an export credit agency-backed facility in connection with Smart’s GSM expansion program. This facility was covered by a guarantee from Finnvera, the Finnish Export Credit Agency, for 100% of the political and commercial risk for the refinancing facility of GSM Phases 5A and 5B. The principal benefit of refinancing the Phase 5 loan was the savings from a lower interest margin on the refinancing facility. The facility was payable in equal semi-annual payments over five years starting
September 1, 2005. The outstanding balance amounted to US$9.98 million, or Php464 million, net of unamortized discount, as at December 31, 2009 was paid in full on March 1, 2010.
On May 14, 2009, Smart signed a US$50 million five-year term facility to finance the Phase 10 (Extension) GSM equipment and services contract with Finnish Export Credit, Plc guaranteed by Finnvera and awarded to Calyon as the Arranger. The facility was drawn on July 15, 2009. The loan is payable over five years in ten equal semi-annual payments. The amounts of US$39 million, or Php1,703 million, and US$48 million, or Php2,240 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
On October 9, 2009, Smart signed a US$50 million five-year term loan facility to finance GSM equipment and services contracts with Finnish Export Credit, Plc guaranteed by Finnvera, the Finnish Export Credit Agency, for 100% political and commercial risk cover. The facility was awarded to Citicorp as the Arranger. The loan is payable over five years in ten equal semi-annual payments. As at December 31, 2009, no amount had been drawn under the facility. The amount of US$43 million, or Php1,887 million, net of unamortized debt discount,

241


which was drawn on April 7, 2010, remained outstanding as at December 31, 2010.
Exportkreditnamnden, or EKN
On November 25, 2008, Smart signed a US$22 million five-year term loan facility to finance the supply, installation, commissioning and testing of Wireless-Code Division Multiple Access, or W-CDMA/High Speed Packet Access project with Nordea Bank AB as Original Lender, Arranger and Facility Agent and subsequently assigned its rights and obligations to the Swedish Export Credit Corporation (AB Svensk Exportkredit) supported by EKN on December 10, 2008. The amounts of US$8 million, US$13 million and US$1 million were drawn on December 15, 2008, August 5, 2009 and September 1, 2009, respectively. This facility is payable semi-annually in ten equal installments commencing six months from December 10, 2008. The outstanding balance under the facility amounted to US$14 million, or Php613 million, and US$18 million, or Php860 million, both net of unamortized debt discount, as at December 31, 2010 and 2009, respectively.
Kreditanstalt für Wiederaufbau, or KfW
On January 25, 2002, PLDT signed two loan agreements with KfW, which provided PLDT with a US$149 million facility to refinance in part the repayment installments under its existing loans from KfW due from January 2002 to December 2004. The facility is composed of a nine-year loan, inclusive of a three-year disbursement period and a two-year grace period during which no principal is payable. It partly enjoys the guarantee of HERMES, the export credit agency of the Federal Republic of Germany. On various dates from 2002 to 2004, we had drawn a total of US$140 million under this facility. PLDT waived further disbursements under this refinancing facility effective September 1, 2004 and the undrawn portion of US$9 million was cancelled.
The outstanding balance under the facility amounted to US$31 million, or Php1,454 million, as at December 31, 2009. Final repayment was made on October 15, 2010 and there are no outstanding amounts remaining under the facility as at December 31, 2010.
Fixed Rate Notes
PLDT has the following non-amortizing fixed rate notes outstanding as at December 31, 2010 and 2009:
                         
Principal Amount Interest Rate  Maturity Date  2010  2009 
          (in millions)
US$234,259,000  8.350% March 6, 2017  US$ 231  Php 10,149  US$ 242  Php 11,256 
US$145,789,000  11.375% May 15, 2012   144   6,301   143   6,620 
 
          US$ 375  Php 16,450  US$ 385  Php 17,876 
 
Term Loans
US$283 Million Term Loan Facility, or Debt Exchange Facility
On July 2, 2004, Smart acquired from PCEV’s creditors approximately US$289 million, or 69.4%, the aggregate of PCEV’s outstanding restructured debt at that time, in exchange for Smart debt and a cash payment by Smart. In particular, Smart paid an amount in cash of US$1.5 million, or Php84 million and issued new debt of
US$283.2 million, or Php15,854 million, at fair value of Php8,390 million, net of unamortized debt discount amounting to Php7,464 million.
The outstanding balance of the Facility amounted to US$223 million, or Php9,791 million, and US$209 million, or Php9,725 million, both net of unamortized debt discount, as at December 31, 2010 and 2009, respectively. The Facility will be payable in full on June 30, 2014.
GSM Network Expansion Facilities
On August 8, 2005, Smart signed a US$30 million commercial facility with Nordic Investment Bank to partly finance the related Phase 8 GSM equipment and services contracts. The facility is a five-year term loan payable semi-annually in ten equal installments with final repayment on July 11, 2011. The facility was drawn on July 11, 2006 for the full amount of US$30 million. The amounts of US$6 million, or Php263 million, and

242


US$12 million, or Php556 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
On August 10, 2005, Smart signed a loan facility for its GSM Phase 8 financing in the amount of US$70 million. The facility was awarded to the Bank of Tokyo Mitsubishi Ltd., Mizuho Corporate Bank Ltd., Standard Chartered Bank and Sumitomo Mitsui Banking Corporation as the Lead Arrangers, with Finnish Export Credit, Plc as the Lender. Smart opted to utilize only a total of US$67 million of which US$10 million and US$57 million were drawn on February 15, 2006 and March 13, 2006, respectively. The undrawn balance of US$3 million was cancelled. The facility is a five-year term loan payable in ten equal semi-annual installments. The amount of US$15 million, or Php678 million, net of unamortized discount, remained outstanding as at December 31, 2009. The facility was paid in full on September 1, 2010.
On July 31, 2006, Smart signed a U.S. Dollar term loan facility for US$44.2 million to partly finance the related Phase 9 GSM equipment and services contracts. The Lender is Finnish Export Credit, Plc with ABN AMRO Bank N.V., Standard Chartered Bank, Sumitomo Mitsui Banking Corporation and Mizuho Corporate Bank Ltd. as the Lead Arrangers. The facility is a five-year term loan payable in ten equal semi-annual installments with final repayment on July 15, 2011. The facility was drawn on November 10, 2006 for the full amount of US$44.2 million. The amounts of US$9 million, or Php387 million, and US$18 million, or Php819 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
On October 16, 2006, Smart signed a U.S. Dollar term loan facility with Metropolitan Bank and Trust Company to finance the related Phase 9 GSM facility for an amount of US$50 million. The facility is a five-year loan payable in 18 equal quarterly installments commencing on the third quarter from initial drawdown date with final repayment on October 10, 2012. The facility was drawn on October 10, 2007 for the full amount of US$50 million. The amounts of US$22 million, or Php973 million, and US$33 million, or Php1,547 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
On October 10, 2007, Smart signed a US$50 million five-year term loan facility to finance the related Phase 10 GSM equipment and service contracts. The facility was awarded to Norddeutsche Landesbank Girozentrale Singapore Branch as the Original Lender with Standard Chartered Bank (Hong Kong) Ltd. as the Facility Agent. The full amount of the facility was drawn on March 10, 2008. The loan is payable over five years in ten equal semi-annual payments with final repayment on March 11, 2013. The amounts of US$25 million, or Php1,091 million, and US$35 million, or Php1,616 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
On November 27, 2008, Smart signed a US$50 million five-year term loan facility to finance the Phase 10 GSM equipment and service contracts with Finnish Export Credit, Plc. The facility was awarded to ABN AMRO Bank N.V., Australia and New Zealand Banking Group Limited, Standard Chartered Bank, Mizuho Corporate Bank Ltd. as the Lead Arrangers. The loan is payable over five years in ten equal semi-annual installments with final repayment on January 23, 2014. The facility was drawn on January 23, 2009 and May 5, 2009 in the amounts of US$5 million and US$45 million, respectively. The amounts of US$35 million, or Php1,516 million, and US$44 million, or Php2,058 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
Other Term Loans
On January 15, 2008, PLDT signed a US$100 million term loan facility agreement with Norddeutsche Landesbank Girozentrale Singapore Branch to be used for the capital expenditure requirements of PLDT. Two separate drawings of US$50 million each was drawn from the facility on March 27, 2008 and April 10, 2008 and is payable over five years in ten equal semi-annual installments with final repayment on March 27, 2013. The amounts of US$50 million, or Php2,191 million, and US$70 million, or Php3,250 million, remained outstanding as at December 31, 2010 and 2009, respectively.
On July 15, 2008, PLDT signed a loan agreement amounting to US$50 million with the Bank of the Philippine Islands to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on July 21, 2008 in the amount of US$15 million and the balance of US$35 million was drawn on September 30, 2008. This loan is payable in 17 equal quarterly installments commencing on the fourth quarter from initial drawdown date with final repayment on July 22, 2013. The amounts of US$32 million, or Php1,417 million, and US$44 million, or Php2,048 million, remained outstanding

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as at December 31, 2010 and 2009, respectively.
2013:

On September 24, 2008, BOW signed an Islamic finance facility agreement granted by the Bank of London and the Middle East for a total of US$19 million, which will mature on various dates from June 30, 2013 to September 30, 2014. The amounts of US$3 million, or Php132 million, and US$4 million, or Php186 million, remained outstanding as at December 31, 2010 and 2009, respectively.
 
Philippine Peso Debts:
Corporate Notes
Php5,000 Million Fixed Rate Corporate Notes
On February 15, 2007, Smart issued Php5,000 million fixed rate corporate notes, comprised of Series A five-year notes amounting to Php3,800 million and Series B ten-year notes amounting to Php1,200 million. Proceeds from the issuance of these notes have been used primarily for Smart’s capital expenditures for network improvement and expansion. The amounts of Php4,962 million and Php4,968 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
Php5,000 Million Fixed Rate Corporate Notes
On December 12, 2008, Smart issued a five-year term unsecured fixed rate corporate notes amounting to Php5,000 million. The facility has annual amortizations equivalent to 1% of the principal amount with the balance of 96% payable on December 13, 2013. Funds raised from the issuance of these notes were used primarily to finance Smart’s capital expenditures for network upgrade and expansion. The amounts of Php4,867 million and Php4,907 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
Php5,000 Million Fixed Rate Corporate Notes
On February 20, 2009, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated February 18, 2009, comprised of Series A five-year notes amounting to Php2,390 million, Series B seven-year notes amounting to Php100 million, and Series C ten-year notes amounting to Php2,510 million. Proceeds from the facility were used to finance capital expenditures of PLDT. The aggregate amounts of Php4,976 million and Php5,000 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php3,000 Million Corporate Notes
On June 29, 2009, Smart signed a Notes Facility Agreement with BDO Private Bank, Inc. amounting to Php3,000 million to finance capital expenditures. The facility is comprised of Php1,000 million Series A1 note payable in full in 1.5 years and Php1,000 million each for Series B1 and B2 notes payable in full in two years. The aggregate amount of Php2,000 million of Series A1 and B1 notes were drawn on July 8, 2009 while the amount of Php1,000 million of Series B2 notes was drawn on September 1, 2009. The aggregate amounts of Php2,997 million and Php2,988 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively. The Series A1 amounting to Php1,000 million was repaid on January 10, 2011.
Php7,000 Million Fixed Rate Corporate Notes
On December 10, 2009, PLDT issued Php7,000 million fixed rate corporate notes under a Notes Facility Agreement dated December 8, 2009, comprised of Series A 5.25-year notes amounting to Php5,050 million, Series B seven-year notes amounting to Php850 million, and Series C ten-year notes amounting to Php1,100 million. Proceeds from the facility were used to finance capital expenditures and/or to refinance its loan obligations which were also used to finance capital expenditures for network expansion and improvement. The aggregate amounts of Php6,891 million and Php7,000 million remained outstanding as at December 31, 2010 and 2009, respectively.

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Php2,500 Million Fixed Rate Corporate Notes
On July 13, 2010, PLDT issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. The notes are non-amortizing and will mature on July 13, 2015. Proceeds from the facility were used to finance capital expenditures and/or to refinance PLDT’s loan obligations. The amount of Php2,500 million remained outstanding as at December 31, 2010.
Php2,500 Million Fixed Rate Corporate Notes
On July 13, 2010, Smart issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. The notes are non-amortizing and will mature on July 13, 2015. Proceeds from the facility was used primarily to finance Smart’s capital expenditures for network improvement and expansion. The amount of Php2,484 million, net of unamortized debt discount, remained outstanding as at December 31, 2010.
Php2,000 Million Fixed Rate Corporate Notes
On March 9, 2011, Smart signed a Notes Facility Agreement with BDO Private Bank, Inc. amounting to Php2,000 million to finance capital expenditures. Tranche A amounting to Php1,000 million was issued on March 16, 2011 and Tranche B amounting to Php1,000 million to be issued in multiple drawdowns of Php250 million each, all of which are payable in full in five years from their respective issue dates. As at March 29, 2011, Php1,500 million has been drawn from this facility.
Php5,000 Million Fixed Rate Corporate Notes
On March 24, 2011, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated March 22, 2011, comprised of Series A 5-year notes amounting to Php3,435 million, Series B 7-year notes amounting to Php700 million and Series C ten-year rate notes amounting to Php865 million. Proceeds from the facilities will be used to finance capital expenditures and refinance existing debt obligations which were also used to finance service improvements and expansion programs.
Term Loans
Unsecured Term Loans
Php2,500 Million Term Loan Facility
On August 14, 2006, Smart signed a Philippine Peso term loan facility with Metropolitan Bank and Trust Company amounting to Php2,500 million to finance the related Phase 9 GSM facility. The facility is payable over five years in 18 equal quarterly installments commencing on the third quarter from initial drawdown date with final repayment on December 9, 2011. The facility was drawn on December 11, 2006. The amounts of Php555 million and Php1,109 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
Php400 Million and Php20 Million Refinancing Loans
On May 22, 2007, PLDT signed loan agreements with The Philippine American Life and General Insurance Company for Php400 million and The Philam Bond Fund, Inc. for Php20 million to refinance their respective participations in the ten-year note under the Php1,270 million Fixed Rate Corporate Notes which were repaid on June 12, 2007. Both refinancing loans will mature on June 12, 2014. The amounts of Php400 million and Php20 million remained outstanding as at December 31, 2009 were both prepaid in full on December 13, 2010.
Php2,500 Million Term Loan Facility
On October 21, 2008, Smart signed a Philippine Peso term loan facility with Metropolitan Bank and Trust Company to finance capital expenditures for an amount of Php2,500 million, which was drawn in full on November 13, 2008. The facility is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown with final repayment on November 13, 2013. The amounts of Php1,870 million and Php2,492 million, both net of unamortized debt discount, remained

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outstanding as at December 31, 2010 and 2009, respectively.
Php2,400 Million Term Loan Facility
On November 21, 2008, PLDT signed a loan agreement with Land Bank of the Philippines amounting to Php2,400 million to finance capital expenditures and/or to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on December 12, 2008 in the amount of Php500 million and the balance of Php1,900 million was subsequently drawn on May 20, 2009 and July 31, 2009 in two equal Php500 million tranches and on September 15, 2009 in the amount of Php900 million. The loan is payable over five years in ten equal semi-annual installments with final repayment on December 12, 2013. The amounts of Php1,533 million and Php2,044 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php3,000 Million Term Loan Facility
On November 26, 2008, PLDT signed a loan agreement with Union Bank of the Philippines amounting to Php3,000 million to finance capital expenditures and/or to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on December 22, 2008 in the amount of Php500 million and the balance of Php2,500 million was subsequently drawn on April 14, 2009. The loan is payable over five years in nine equal semi-annual installments commencing on the second semester from initial drawdown date with final repayment on December 23, 2013. The amounts of Php2,000 million and Php2,667 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php2,000 Million Term Loan Facility
On November 28, 2008, PLDT signed a loan agreement with Philippine National Bank amounting to Php2,000 million to be used for its capital expenditure requirements in connection with PLDT’s service improvement and expansion programs. The initial drawdown under this loan was made on December 19, 2008 in the amount of Php500 million and the balance of Php1,500 million was subsequently drawn on January 30, 2009, February 27, 2009 and March 13, 2009 in three equal Php500 million tranches. The loan is payable over five years in 17 equal quarterly installments commencing on the fourth quarter from initial drawdown date with final repayment on December 19, 2013. The amounts of Php1,412 million and Php1,882 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php1,000 Million Term Loan Facility
On February 20, 2009, Smart signed a Philippine Peso term loan facility with China Trust (Philippines) Commercial Bank Corporation to finance capital expenditures for an amount of Php1,000 million, which was drawn in full on April 27, 2009. The facility is a five-year term loan payable in eight equal semi-annual installments starting on the eighteenth month from initial drawdown date. The amount of Php996 million, net of unamortized debt discount, remained outstanding as at December 31, 2009 was repaid on October 27, 2010.
Php2,500 Million Term Loan Facility
On March 6, 2009, PLDT signed a loan agreement with Banco de Oro Unibank, Inc. amounting to Php2,500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on April 17, 2014. The amount of Php2,500 million was fully drawn on April 17, 2009 and remained outstanding as at December 31, 2010 and 2009.
Php1,500 Million Term Loan Facility
On May 12, 2009, Smart signed a Philippine Peso term loan facility with Banco de Oro Unibank, Inc. amounting to Php1,500 million to finance capital expenditures which was fully drawn on May 20, 2009. The facility is a three-year loan payable in full upon maturity on May 20, 2012. The amounts of Php1,494 million and Php1,491 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.

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Php1,000 Million Term Loan Facility
On May 14, 2009, Smart signed a Philippine Peso term loan facility with Asia United Bank amounting to Php1,000 million to finance capital expenditures, which was drawn in full on July 3, 2009. The facility is payable over five years in eight equal semi-annual installments commencing on the eighteenth month from initial drawdown date with final repayment on July 3, 2014. The amounts of Php997 million and Php996 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively. The debt was paid in full on January 3, 2011.
Php1,000 Million Term Loan Facility
On May 15, 2009, Smart signed a Philippine Peso term loan facility with Philippine National Bank amounting to Php1,000 million to finance capital expenditures, which was drawn in full on July 2, 2009. The facility is a seven-year loan, payable in full upon maturity on July 2, 2016. The amounts of Php996 million and Php995 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively. The debt was paid in full on January 3, 2011.
Php2,500 Million Term Loan Facility
On June 8, 2009, PLDT signed a loan agreement with Rizal Commercial Banking Corporation amounting to Php2,500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over seven years with an annual amortization of 1% on the fifth and sixth year from initial drawdown date and the balance payable upon maturity on September 28, 2016. The amount of Php2,500 million was fully drawn on September 28, 2009 and remained outstanding as at December 31, 2010 and 2009.
Php1,500 Million Term Loan Facility
On June 16, 2009, PLDT signed a loan agreement with Allied Banking Corporation amounting to Php1,500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments commencing on September 15, 2010 with final repayment on September 15, 2014. The amount of Php1,500 million was fully drawn on September 15, 2009. The amounts of Php1,324 million and Php1,500 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php500 Million Term Loan Facility
On June 29, 2009, PLDT signed a loan agreement with Insular Life Assurance Company, Ltd. amounting to Php500 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The loan will mature on July 1, 2016. The amount of Php500 million was fully drawn on July 1, 2009 and remained outstanding as at December 31, 2010 and 2009.
Php1,000 Million Term Loan Facility
On July 16, 2009, Smart signed a Philippine Peso term loan facility with Metropolitan Bank and Trust Company to finance capital expenditures for an amount of Php1,000 million, which was drawn in full on August 3, 2009. The facility is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown with final repayment on August 1, 2014. The amounts of Php935 million and Php996 million, both net of unamortized debt discount, remained outstanding as at December 31, 2010 and 2009, respectively.
Php2,000 Million Term Loan Facility
On September 18, 2009, PLDT signed a loan agreement with Bank of the Philippine Islands amounting to Php2,000 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments with final repayment on October 27, 2014. The initial drawdown under this loan was made on October 26, 2009 in the amount of Php1,000 million and the balance of Php1,000 million was subsequently drawn on December 4, 2009. The amounts of Php1,882 million and Php2,000 million remained outstanding as at

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December 31, 2010 and 2009, respectively.
Php1,000 Million Term Loan Facility
On November 23, 2009, PLDT signed a loan agreement with Bank of the Philippine Islands amounting to Php1,000 million to finance capital expenditures and/or refinance its obligations which were utilized for service improvements and expansion programs. The facility is payable over five years in 17 equal quarterly installments with final repayment on December 18, 2014. The amount of Php1,000 million was fully drawn on December 18, 2009. The amounts of Php941 million and Php1,000 million remained outstanding as at December 31, 2010 and 2009, respectively.
Php1,500 Million Term Loan Facility
On March 15, 2011, Smart signed a Philippine Peso term loan facility with Metropolitan Bank and Trust Company to finance capital expenditures for an amount of Php1,500 million, which was drawn in full on March 22, 2011. The facility is a five-year loan, payable in full upon maturity on March 22, 2016.
Php2,000 Million Term Loan Facility
On March 24, 2011, Smart signed a Philippine Peso term loan facility with Philippine National Bank to finance capital expenditures for an amount of Php2,000 million, which was drawn in full on March 29, 2011. The facility is a five-year loan, payable in full upon maturity on March 29, 2016.
Secured Term Loans
Php150 Million Term Loan Facility
On June 7, 2007, BayanTrade obtained a medium term loan facility with Bank of the Philippine Islands amounting to Php150 million, which was fully availed of in December 2007. Each interest period will cover a 90-day period commencing on the initial drawdown date and the interest rate will be determined at the first day of each interest period and payable at the end of the interest period. The loan facility was obtained to facilitate the purchase of a subsidiary and to support its working capital requirements. The aggregate loan amount is due as follows: (a) 20% within the third year from first drawdown date; (b) 20% within the fourth year from first drawdown date; and (c) 60% within the fifth year from first drawdown date. BayanTrade is given a right to repay the principal and the interest accruing thereon on each interest payment date or interest rate setting date without any prepayment penalty. BayanTrade and the bank has agreed to the following terms: (a) pledge of BayanTrade’s shares of stock of the subsidiary purchased at a collateral loan ratio of 2:1; (b) assignment of receivables at a collateral-to-loan of 2:1; and (c) negative pledge on other present and future assets of BayanTrade. The outstanding principal balance of the loan was Php113 million and Php139 million as at December 31, 2010 and 2009, respectively.
Php8 Million Term Loan Facility
On March 31, 2009, Level Up! secured a three-year loan facility with Asia United Bank amounting to Php8 million maturing on March 30, 2012. Principal is payable in twelve equal successive quarterly installments of Php673 thousand starting June 30, 2009 and every quarter thereafter. This loan has a floating interest rate payable every 30 days starting April 30, 2009. The loan is secured by the equipment where the proceeds of the loan were used. The amounts of Php3 million and Php6 million remained outstanding as at December 31, 2010 and 2009, respectively.
Notes Payable
On April 23, 2009, PLDT signed the notes facility agreement with BDO Private Bank, Inc. amounting to Php2,000 million to finance capital expenditures and/or refinance its loan obligations which were utilized for service improvements and expansion programs. The facility is comprised of a Php1,000 million Tranche A fixed rate note and a Php1,000 million Tranche B floating rate note, which were fully drawn on April 28, 2009 and were fully paid on April 28, 2010.

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SPi had an outstanding balance of short-term notes of US$6 million, or Php279 million, as at December 31, 2009, which matured on various dates from April 26, 2010 to June 4, 2010.
Debt Covenants
Our debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with Philippine Financial Reporting Standards, or PFRS, at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments.
The principal factors that can negatively affect our ability to comply with these financial ratios and other financial tests are depreciation of the Philippine peso relative to the U.S. dollar, poor operating performance of PLDT and its consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries, and increases in our interest expense. Interest expense may increase as a result of various factors including issuance of new debt, the refinancing of lower cost indebtedness by higher cost indebtedness, depreciation of the Philippine peso, the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions. Since approximately 43% of PLDT’s total consolidated debts as at December 31, 2010 were denominated in foreign currencies, principally in U.S. dollars, many of these financial ratios and other tests are negatively affected by any weakening of the Philippine peso.
PLDT’s debt instruments contain a number of other negative covenants that, subject to certain exceptions and qualifications, restrict PLDT’s ability to take certain actions without lenders’ approval, including: (a) incurring additional indebtedness; (b) disposing of all or substantially all of its assets or of assets in excess of specified thresholds of its tangible net worth; (c) creating any lien or security interest; (d) permitting set-off against amounts owed to PLDT; (e) merging or consolidating with any other company; (f) entering into transactions with stockholders and affiliates; and (g) entering into sale and leaseback transactions.
Further, certain of PLDT’s debt instruments contain provisions wherein PLDT may be required to repurchase or prepay certain indebtedness in case of a change in control of PLDT.
PLDT’s debt instruments also contain customary and other default provisions that permit the lender to accelerate amounts due or terminate their commitments to extend additional funds under the debt instruments. These default provisions include: (a) cross-defaults that will be triggered only if the principal amount of the defaulted indebtedness exceeds a threshold amount specified in these debt instruments; (b) failure by PLDT to meet certain financial ratio covenants referred to above; (c) the occurrence of any material adverse change in circumstances that a lender reasonably believes materially impairs PLDT’s ability to perform its obligations under its debt instrument with the lender; (d) the revocation, termination or amendment of any of the permits or franchises of PLDT in any manner unacceptable to the lender; (e) the nationalization or sustained discontinuance of all or a substantial portion of PLDT’s business; and (f) other typical events of default, including the commencement of bankruptcy, insolvency, liquidation or winding up proceedings by PLDT.
Smart’s debt instruments contain certain restrictive covenants that require Smart to comply with specified financial ratios and other financial tests at semi-annual measurement dates. Smart’s loan agreements include compliance with financial tests such as consolidated debt to consolidated equity, consolidated debt to consolidated EBITDA and debt service coverage ratios. The agreements also contain customary and other default provisions that permit the lender to accelerate amounts due under the loans or terminate their commitments to extend additional funds under the loans. These default provisions include: (a) cross-defaults and cross-accelerations that permit a lender to declare a default if Smart is in default under another loan agreement. These cross-default provisions are triggered upon a payment or other default permitting the acceleration of Smart debt, whether or not the defaulted debt is accelerated; (b) failure by Smart to comply with certain financial ratio covenants; and (c) the occurrence of any material adverse change in circumstances that the lender reasonably believes materially impairs Smart’s ability to perform its obligations or impair guarantors’ ability to perform their obligations under its loan agreements.
As at December 31, 2010, we were in compliance with all of our debt covenants.

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Obligations Under Finance Lease
The consolidated future minimum payments for finance leases as at December 31, 2010 are as follows:
Year  (in million pesos) 
Within one year

Consolidated unappropriated retained earnings as at December 31, 2012 (As Adjusted – Note 2)

   3525,416  
After one year but not more than five years

Effect ofIAS 27 Adjustments

   92,913  

 
Total minimum finance lease payments (Note 26)

Parent Company’s unappropriated retained earnings at beginning of the year

   4428,329  
Less amount representing unamortized interest

Less: Cumulative unrealized income – net of tax:

Unrealized foreign exchange gains – net (except those attributable to cash and cash equivalents)

   1(1,096) 
Present

Fair value of net minimum finance lease payments (Notes 3 and 28)adjustments (mark-to-market gains)

   43(1,132) 
Less obligations under finance lease maturing within one year (Notes 9 and 28)

Fair value adjustments of investment property resulting to gain

   34(535

 
Long-term portion

Unappropriated retained earnings as adjusted at beginning of obligations under finance lease (Notes 9 and 28)the year

   925,566  

 

Parent Company’s net income attributable to equity holders of PLDT for the year

   Municipal Telephone Projects38,784
  

Less: Unrealized income – net of tax during the year

Fair value adjustments of investment property resulting to gain

   PCEV has an existing finance lease agreement for the Palawan Telecommunications System of the Municipal Telephone Project Office, or MTPO, with the Department of Transportation and Communications, or DOTC. Presently, the 18 public calling office stations that were put up pursuant to the MTPO Contract are no longer working. The last payment by PCEV to the DOTC was in July 2000 and no payments have been made since then. PCEV made several attempts to pre-terminate the MTPO Contract in letters to the DOTC where PCEV also manifested its willingness to discuss mutually beneficial compromise agreements for the pre-termination.(285

Fair value adjustments (mark-to-market gains)

   The DOTC denied PCEV’s petition and reiterated a provision in the MTPO Contract that the pre-termination will result in the imposition of sanctions in the form of liquidated damages not exceeding Php23 million.(370

 
   PCEV maintains that it had pre-terminated the MTPO Contract as early as 2003, and that the issue of PCEV’s pre-termination of the MTPO Contract be referred for arbitrations in accordance with the provisions of the MTPO Contract.38,129
  

Realized income during the year

Realized foreign exchange gains

   On May 8, 2009, PCEV filed with the Philippine Dispute Resolution Center, Inc., or PDRCI, a Request for Arbitration against the DOTC for the PDRCI to commence the formation of the tribunal and such other procedures required under the PDRCI rules. In the Request for Arbitration, PCEV prayed for the following: (1) as interim relief: ordering the DOTC to cease and desist from enforcing collection and charging additional interests and penalties against PCEV pending the resolution of the arbitration proceedings; and (2) as final relief: (a) ordering the suspension of the MTPO Contract; (b) ordering the termination of the MTPO Contract as at March 20, 2003 and holding PCEV free from any liability for non-performance of the obligations thereunder from March 20, 2003; and (c) ordering the DOTC to pay PCEV attorney’s fees and the expenses and cost of arbitration.432
  

Cash dividends declared during the year

Common stocks

   Last April 13, 2010, the Arbitral Tribunal issued a Final Award for the arbitration case. In the Disposition portion of the Final Award, the Arbitral Tribunal declared valid and justified PCEV’s suspension of the MTPO contract as at March 20, 2003 on the basis of Section 9.3 (Force Majeure) of the MTPO contract, thereby holding PCEV free from liquidated damages for non-performance of the obligations thereunder. PCEV, however, was ordered to pay the DOTC the unpaid annual lease rentals after September 2000 to January 14, 2003 in the amount of Php5.2 million as well as interest and penalties of Php2 million for non-payment of such rentals. Further, PCEV was declared as entitled to the automatic transfer of the ownership of the facilities as provided in Section 7.8 of the MTPO contract. Accordingly, PCEV shall pay DOTC 50% of the Net Present Value of the unpaid lease up to 30 years in the amount of Php21.3 million for the facilities.(37,809

Preferred stocks

   The total amount to be paid by PCEV to DOTC is Php28.5 million. As at December 31, 2010, PCEV already advanced Php1 million to DOTC for arbitration expenses and site inspection costs. The remaining balance of Php27.5 million will be paid in two parts: (1) Php26.1 million shall be released directly to DOTC; and (2) Php1.4 million shall be remitted to the Bureau of Treasury to be recorded under Fund Code 152, Special Account of the General Fund for the Office of the Solicitor General.(59

 
   On April 30, 2010, PCEV filed a Petition for Confirmation of the Final Award with the Regional Trial Court, or RTC, of the City of Mandaluyong. In a Manifestation and Motion filed by the DOTC in the same court, the DOTC joined PCEV in the latter’s Petition for Confirmation of the Final Award. In a July 5, 2010 Decision, Branch 212 of the RTC of the City of Mandaluyong, finding the Final Award to be not contrary to law, morals,(37,868

250


  good customs and public policy, confirmed the Final Award. PCEV is now in the process of discussing with DOTC the finalization of an agreement for the transfer of the facilities to PCEV and the payment of the amounts due, as stated in the Final Award.

 
Other Long-term Finance Lease Obligations
The PLDT Group has various long-term lease contracts

Parent Company’s unappropriated retained earnings available for a period of three years covering various office equipment. In particular, PLDT, Smart and ePLDT have finance lease obligations in the aggregate amounts of Php18 million and Php24 milliondividends as at December 31, 2010 and 2009, respectively, in respect of office equipment. SeeNote 9 — Property, Plant and Equipment.2013

   Under the terms of certain loan agreements and other debt instruments, PLDT may not create, incur, assume, permit or suffer to exist any mortgage, pledge, lien or other encumbrance or security interest over the whole or any part of its assets or revenues or suffer to exist any obligation as lessee for the rental or hire of real or personal property in connection with any sale and leaseback transaction.26,259
21.  

As at December 31, 2013, the consolidated unappropriated retained earnings amounted to Php22,968 million while the Parent Company’s unappropriated retained earnings amounted to Php29,245 million. The difference of Php6,277 million pertains to the accumulated losses of consolidated subsidiaries, associates and joint ventures accounted for under the equity method.

20.Interest-bearing Financial Liabilities

As at December 31, 2013 and 2012, and January 1, 2012, this account consists of the following:

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Long-term portion of interest-bearing financial liabilities:

      

Long-term debt (Notes 4, 5, 9, 23 and 27)

   88,924     102,811     91,273  

Obligations under finance leases (Notes 3, 4, 5, 23 and 27)

   6     10     7  
  

 

 

   

 

 

   

 

 

 
   88,930     102,821     91,280  
  

 

 

   

 

 

   

 

 

 

Current portion of interest-bearing financial liabilities:

      

Long-term debt maturing within one year (Notes 4, 5, 9, 23 and 27)

   15,166     12,981     22,893  

Obligations under finance leases maturing within one year (Notes 3, 4, 5, 23 and 27)

   5     8     7  

Notes payable (Notes 4, 5, 23 and 27)

   —       —       3,109  
  

 

 

   

 

 

   

 

 

 
   15,171     12,989     26,009  
  

 

 

   

 

 

   

 

 

 

Unamortized debt discount, representing debt issuance costs and any difference between the fair value of consideration given or received at initial recognition, included in the financial liabilities as at December 31, 2013 and 2012, and January 1, 2012 are as follows:

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Long-term debt (Note 27)

   382     1,323     2,136  

Obligation under finance lease

   1     3     2  
  

 

 

   

 

 

   

 

 

 

Unamortized debt discount at end of the year

   383     1,326     2,138  
  

 

 

   

 

 

   

 

 

 

The following table describes all changes to unamortized debt discount for the years ended December 31, 2013 and 2012.

   2013  2012 
   (in million pesos) 

Unamortized debt discount at beginning of the year

   1,326    2,138  

Revaluations during the year

   385    121  

Additions during the year

   213    121  

Accretion during the year included as part of Financing costs – net (Note 5)

   (1,541  (1,053

Discontinued operations (Note 2)

   —      (1
  

 

 

  

 

 

 

Unamortized debt discount at end of the year

   383    1,326  
  

 

 

  

 

 

 

Long-term Debt

As at December 31, 2013 and 2012, and January 1, 2012, long-term debt consists of:

    December 31,  January 1, 

Description

 

Interest Rates

 2013  2012  2012 
           (in millions)       

U.S. Dollar Debts:

        

Export Credit Agencies-Supported Loans:

        

China Export and Credit Insurance Corporation, or Sinosure

 

US$ LIBOR + 0.55% to 1.80% in 2013 and 2012

 US$117    Php5,174   US$204   Php8,363   US$248   Php10,879  

Exportkreditnamnden, or EKN

 

1.41% to 3.79% and US$ LIBOR + 0.30% to 0.35% in 2013 and 1.90% to 3.79% and US$ LIBOR + 0.30% to 0.35% in 2012

  101     4,506    104    4,253    102    4,483  

EKN and AB Svensk Exportkredit, or SEK

 

3.9550% in 2013 and 2012

  56     2,476    67    2,771    79    3,475  

Finnvera, Plc, or Finnvera

 

2.99% and US$ LIBOR + 1.35% in 2013 and 2012

  25     1,098    44    1,813    63    2,775  

Others

 

US$ LIBOR + 0.35% to 0.40% in 2013 and 2012

  —       17    2    101    6    256  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   299     13,271    421    17,301    498    21,868  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fixed Rate Notes

 

8.35% in 2013 and 8.35% to 11.375% in 2012

  233     10,334    232    9,544    377    16,567  

Term Loans:

        

GSM Network Expansion Facilities

 

US$ LIBOR + 0.42% to 1.85% in 2013 and 2012

  118     5,251    172    7,041    50    2,201  

Debt Exchange Facility

 

2.25% in 2013 and 2012

  —       —      254    10,450    238    10,472  

Others

 

US$ LIBOR + 0.42% to 1.90% in 2013 and 2012

  682     30,276    194    7,962    51    2,222  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  US$1,332     59,132   US$1,273    52,298   US$1,214    53,330  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Philippine Peso Debts:

        

Corporate Notes

 

5.3300% to 7.7946% in 2013 and 5.3300% to 9.1038% in 2012

    22,499     40,006     38,510  

Term Loans:

        

Unsecured Term Loans

 

3.9250% to 7.4292%, PDST-F + 0.3000% to 0.8000%; BSP overnight rate + 0.3000% to 0.5000% and BSP overnight rate - 0.3500% in 2013 and 4.9110% to 8.6271%, PDST-F + 0.3000% and BSP overnight rate + 0.3000% to 0.5000% in 2012

    22,459     23,488     22,277  

Secured Term Loans

 

5.2604% to 5.659%, PDST-F + 1.375% in 2012

    —       —       49  
    

 

 

   

 

 

   

 

 

 
     44,958     63,494     60,836  
    

 

 

   

 

 

   

 

 

 

Total long-term debt

     104,090     115,792     114,166  

Less portion maturing within one year (Note 27)

     15,166     12,981     22,893  
    

 

 

   

 

 

   

 

 

 

Noncurrent portion of long-term (Note 27)

    Php88,924    Php102,811    Php91,273  
    

 

 

   

 

 

   

 

 

 

Note:    Amounts presented are net of unamortized debt discount and debt issuance costs.

The scheduled maturities of our consolidated outstanding long-term debt at nominal values as at December 31, 2013 are as follows:

   U.S. Dollar Debt   Php Debt   Total 

Year

  In U.S. Dollar   In Php   In Php   In Php 
   (in millions) 

2014

   292     12,969     2,318     15,287  

2015

   275     12,203     675     12,878  

2016

   260     11,559     674     12,233  

2017

   433     19,232     8,210     27,442  

2018 and onwards

   79     3,491     33,141     36,632  
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,339     59,454     45,018     104,472  
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Dollar Debts:

Export Credit Agencies-Supported Loans

In order to acquire imported components for our network infrastructure in connection with our expansion and service improvement programs, we obtained loans extended and/or guaranteed by various export credit agencies.

Sinosure

On December 1, 2005, DMPI signed a US$23.6 million Export Credit Agreement with Societe Generale and Credit Agricole Corporate and Investment Bank (formerly Calyon) as the lenders, to finance the supply of the equipment, software, and offshore services for the GSM 1800 in the National Capital Region, or NCR. The loan is covered by a guarantee from China Export and Credit Insurance Corporation, or Sinosure, the export-credit agency of China. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on December 1, 2013. The loan was fully drawn on various dates in 2005, 2006 and 2007. The amounts of US$3 million, or Php138 million, and US$7 million, or Php296 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on December 2, 2013.

On May 4, 2006, DMPI signed a US$12.7 million Export Credit Agreement with the Societe Generale and Calyon as the lenders, to finance the supply of the equipment and software for the expansion of its GSM services in the NCR. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on October 6, 2014. The loan was drawn on various dates in 2007 and 2008 in the total amount of US$12.2 million. The undrawn amount of US$0.5 million was cancelled. The amounts of US$2 million, or Php77 million, US$4 million, or Php143 million, and US$5 million, or Php229 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On June 1, 2006, DMPI signed a US$12 million Buyer’s Credit Agreement with ING Bank N.V., or ING Bank, as the lender, to finance the equipment and service contracts for the upgrading of GSM Phase 5 Core Intelligent Network Project. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on June 1, 2014. The loan was drawn in 2006 and 2007 in the amounts of US$8 million and US$2 million, respectively. The undrawn amount of US$2 million was cancelled. The amounts of US$1 million, or Php31 million, US$2 million, or Php86 million, and US$4 million, or Php153 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On May 24, 2007, DMPI signed a US$21 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment for the Phase 6 South Luzon Change Out and Expansion Project. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on May 24, 2015. The loan was drawn on various dates in 2008 in the total amount of US$20.8 million. The undrawn amount of US$0.2 million was cancelled. The amounts of US$5 million, or Php198 million, US$7 million, or Php305 million, and US$10 million, or Php457 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On May 24, 2007, DMPI signed a US$12.1 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment for the Phase 6 NCR Expansion Project. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on May 24, 2015. The loan was fully drawn on various dates in 2008. The amounts of US$3 million, or Php115 million, US$4 million, or Php178 million, and US$6 million, or Php266 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On November 10, 2008, DMPI signed a US$23.8 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment and service contracts for the Phase 7 Core Expansion Project. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on September 1, 2016. The loan was fully drawn on various dates in 2008 and 2009. The amounts of US$10 million, or Php452 million, US$14 million, or Php558 million, and US$17 million, or Php746 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On November 10, 2008, DMPI signed a US$5.5 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment and service contracts for the supply of 3G network in the NCR. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on September 1, 2016. The loan was fully drawn on various dates in 2008 and 2009. The amounts of US$2 million, or Php105 million, US$3 million, or Php129 million, and US$4 million, or Php172 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On November 10, 2008, DMPI signed a US$4.9 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment and service contracts for the Phase 7 Intelligent Network Expansion Project. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on September 1, 2016. The loan was fully drawn on various dates in 2008 and 2009. The amounts of US$2 million, or Php94 million, US$3 million, or Php116 million, and US$4 million, or Php155 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On August 14, 2009, DMPI signed a US$24.7 million loan agreement with Credit Suisse as the lead arranger, to finance the supply of telephone equipment for the Phase 7 NCR Base Station Expansion. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on August 14, 2017. The loan was fully drawn on various dates in 2009 and 2010. The amounts of US$18 million, or Php725 million, and US$21 million, or Php930 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The facility was prepaid in full on February 14, 2013.

On August 14, 2009, DMPI signed a US$15.9 million loan agreement with The Hong Kong and Shanghai Banking Corporation Limited, or HSBC, as the lender, to finance the supply of telephone equipment for the Phase 7 South Luzon Base Station Expansion. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on August 14, 2017. The loan was drawn in 2009 and 2010 in the amounts of US$14.1 million and US$1.4 million, respectively. The undrawn amount of US$0.4 million was cancelled. The amounts of US$11 million, or Php453 million, and US$13 million, or Php581 million, remained outstanding as at December 31, 2012 and 2011, respectively. The facility was prepaid in full on February 14, 2013.

On December 16, 2009, DMPI signed a US$50 million Buyer’s Credit Agreement with China Citic Bank Corporation Ltd., or China CITIC Bank, as the original lender, to finance the equipment and related materials for the Phase 2 3G Expansion and Phase 8A NCR and South Luzon BSS Expansion Projects. The loan is covered by a guarantee from Sinosure. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on December 17, 2017. The loan was drawn on various dates in 2010 in the total amount of US$48 million. The undrawn amount of US$2 million was cancelled. On December 9, 2011, China CITIC Bank and ING Bank signed a Transfer Certificate and Assignment of Guarantee whereby ING Bank took over the debt under the Buyers Credit Agreement. The assignment of debt was completed on December 16, 2011. The amounts of US$27 million, or Php1,203 million, US$34 million, or Php1,392 million, and US$41 million, or Php1,786 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On September 15, 2010, DMPI signed a US$117.3 million loan agreement with China Development Bank and HSBC as the lenders, to finance the purchase of equipment and related materials for the expansion of: (1) Phase 8A and 8B Core and IN; (2) Phase 3 3G; and (3) Phase 8B NCR and SLZ BSS. The loan is covered by a guarantee from Sinosure. The loan is payable over seven and a half years in 15 equal semi-annual installments, with final installment on April 10, 2019. The loan was drawn on various dates in 2011 in the total amount of US$116.3 million. The undrawn amount of US$1 million was cancelled. The amount of US$20 million was partially prepaid on April 10, 2013 and the remaining balance is now payable over five years in 10 semi-annual installments, with final installment on April 10, 2018. The amounts of US$65 million, or Php2,899 million, US$101 million, or Php4,140 million, and US$116 million, or Php5,108 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

EKN

On April 4, 2006, DMPI signed a US$18.7 million loan agreement with Nordea Bank AB (publ), or Nordea Bank, as the lender, to finance the supply of GSM mobile telephone equipment and related services. The loan is covered by a guarantee from EKN, the export-credit agency of Sweden. The loan is payable over nine years in 18 equal semi-annual installments, with final installment on April 30, 2015. The loan was fully drawn on various dates in 2006 and 2007. The amounts of US$3 million, or Php143 million, US$5 million, or Php220 million, and US$7 million, or Php329 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On December 20, 2006, DMPI signed a US$43.2 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment and service contracts for the GSM Expansion in Visayas and Mindanao. The loan is covered by a guarantee from EKN. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on May 30, 2014. The loan was drawn on various dates in 2007 and 2008 in the total amount of US$42.9 million. The undrawn amount of US$0.3 million was cancelled. The amounts of US$3 million, or Php142 million, US$10 million, or Php393 million, and US$16 million, or Php700 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On December 17, 2007, DMPI signed a US$59.2 million Buyer’s Credit Agreement with ING Bank, Societe Generale and Calyon as the lenders, to finance the equipment and service contracts for the Phase 7 North Luzon Expansion and Change-out Project. The loan is covered by a guarantee from EKN. The loan is payable over nine years in 18 equal semi-annual installments, with final installment on March 30, 2017. The loan was drawn on various dates in 2008 and 2009 in the total amount of US$59 million. The undrawn amount of US$0.2 million was cancelled. The amounts of US$24 million, or Php1,049 million, US$31 million, or Php1,248 million, and US$38 million, or Php1,631 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On December 17, 2007, DMPI signed a US$51.2 million Buyer’s Credit Agreement with ING Bank, Societe Generale and Calyon as the lenders, to finance the equipment and service contracts for the Phase 7 Expansion Project in Visayas and Mindanao. The loan is covered by a guarantee from EKN. The loan is payable over nine years in 18 equal semi-annual installments, with final installment on June 30, 2017. The loan was drawn on various dates in 2008 and 2009 in the total amount of US$51.1 million. The undrawn amount of US$0.1 million was cancelled. The amounts of US$20 million, or Php911 million, US$26 million, or Php1,084 million, and US$32 million, or Php1,416 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On November 25, 2008, Smart signed a US$22 million term loan facility agreement with Nordea Bank as the original lender, arranger and facility agent and subsequently assigned its rights and obligations to the AB Svensk Exportkredit (Swedish Export Credit Corporation), or SEK, supported by EKN on December 10, 2008, to finance the supply, installation, commissioning and testing of Wireless-Code Division Multiple Access, or W-CDMA/High Speed Packet Access project. The loan is payable over five years in ten equal semi-annual installments, with final installment on December 10, 2013. The loan was fully drawn on various dates in 2008 and 2009. The amounts of US$5 million, or Php195 million, and US$9 million, or Php414 million, net of unamortized debt discount, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on December 10, 2013.

On June 10, 2011, Smart signed a US$49 million term loan facility agreement with Nordea Bank as the original lender, arranger and facility agent, to finance the supply and services contracts for the modernization and expansion project. On July 5, 2011, Nordea Bank assigned its rights and obligations to the SEK guaranteed by EKN. The loan is comprised of Tranche A1, Tranche A2 and Tranche B in the amounts of US$24 million, US$24 million and US$1 million, respectively. The loan is payable over five years in ten equal semi-annual installments, with final installment on December 29, 2016 for Tranche A1 and B and October 30, 2017 for Tranche A2. The loan was drawn on various dates in 2012 in the total amount of US$33 million (US$24 million for Tranche A1, US$8 million

for Tranche A2 and US$1 million for Tranche B) and the remaining balance of US$16 million for Tranche A2 was drawn on February 21, 2013. The aggregate amounts of US$33 million, or Php1,474 million, and US$27 million, or Php1,113 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, respectively.

On February 22, 2013, Smart signed a US$46 million five-year term loan facility agreement with Nordea Bank as the original lender, arranger and facility agent, to finance the supply and services contracts for the modernization and expansion project. In July 3, 2013, Nordea Bank assigned its rights and obligations to the SEK guaranteed by EKN. The loan is comprised of Tranches A1 and A2 in the amounts of US$25 million and US$19 million, respectively, and Tranches B1 and B2 in the amounts of US$0.9 million and US$0.7 million, respectively. The facility is payable semi-annually in ten equal installments commencing six months after the applicable mean delivery date. The loan was partially drawn on December 19, 2013 for Tranche A1 and B1 in the amounts of US$18 million and US$0.9 million, respectively. The aggregate amount of US$18 million, or Php787 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

EKN and SEK

On April 28, 2009, DMPI signed a US$96.6 million loan agreement with Nordea Bank and ING Bank as the lenders, to finance the supply of GSM mobile telephone equipment and related services. The loan is comprised of Tranche 1 and Tranche 2 in the amounts of US$43 million and US$53.6 million, respectively. The loan is covered by a guarantee from EKN and SEK, the export-credit agency of Sweden. Both tranches are payable over eight and a half years in 17 equal semi-annual installments, with final installment on February 28, 2018 for Tranche 1 and November 30, 2018 for Tranche 2. Tranches 1 and 2 were fully drawn on various dates in 2009, 2010 and 2011. The aggregate amounts of US$56 million, or Php2,476 million, US$67 million, or Php2,771 million, and US$79 million, or Php3,475 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Finnvera, Plc, or Finnvera

On May 14, 2009, Smart signed a US$50 million term loan facility agreement with Finnish Export Credit, Plc, or FEC, guaranteed by Finnvera, the Finnish Export Credit Agency, and awarded to Calyon as the arranger, to finance the Phase 10 (Extension) GSM equipment and services contract. The loan is payable over five years in ten equal semi-annual installments, with final installment on July 15, 2014. The loan was fully drawn on July 15, 2009. The amounts of US$10 million, or Php442 million, US$20 million, or Php811 million, and US$29 million, or Php1,290 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

On October 9, 2009, Smart signed a US$50 million term loan facility agreement with FEC guaranteed by Finnvera for 100% political and commercial risk cover to finance GSM equipment and services contracts. The loan was awarded to Citicorp as the arranger which was subsequently transferred to ANZ on January 4, 2011. The loan is payable over five years in ten equal semi-annual installments, with final installment on April 7, 2015. The loan was fully drawn on April 7, 2010. The amounts of US$15 million, or Php656 million, US$24 million, or Php1,002 million, and US$34 million, or Php1,485 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Others – Export Credit Agencies

Compagnie Francaise d’ Assurance pour le Commerce Exterieur, or COFACE

On August 18, 2005, DMPI signed a US$19 million Export Credit Agreement with ING Bank, Societe Generale and Calyon as the lenders, to finance the supply of telecommunications materials, software, and services for the GSM Cellular Mobile Short Term Core Expansion Project. The loan is covered by a guarantee from COFACE, the export-credit agency of France. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on February 8, 2013. The loan was drawn on various dates in 2005 and 2006 in the total amount of US$18.2 million. The undrawn amount of US$0.8 million was cancelled. The amounts of US$1 million, or Php53 million, and US$4 million, or Php171 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on February 8, 2013.

Atradius N.V., or Atradius

On July 3, 2006, DMPI signed a US$6 million Buyer’s Credit Agreement with ING Bank as the lender, to finance the equipment and service contracts for the Phase 5 Mobile Messaging Core Network. The loan is covered by a guarantee from Atradius, the export-credit agency of Amsterdam, the Netherlands. The loan is payable over seven years in 14 equal semi-annual installments, with final installment on June 27, 2014. The loan was drawn in 2006 and 2007 in the total amount of US$5.4 million. The undrawn amount of US$0.6 million was cancelled. The amounts of US$0.4 million, or Php17 million, US$1 million, or Php48 million, and US$2 million, or Php85 million, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Fixed Rate Notes

On March 6, 1997, PLDT issued a US$300 million 20-year non-amortizing fixed rate note with a coupon rate of 8.350% under the Indenture dated April 19, 1996 between PLDT and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company) as trustee (“2017 Notes”). Proceeds from the issuance of these notes were used to finance service improvements and expansion programs. The 2017 Notes will mature on March 6, 2017. On various dates in 2008 to 2010, PLDT repurchased the 2017 Notes from the secondary market in the aggregate amount of US$65.7 million. The amounts of US$233 million, or Php10,334 million, US$232 million, or Php9,544 million, and US$232 million, or Php10,189 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On May 15, 2002, PLDT issued a US$250 million ten-year non-amortizing fixed rate note with a coupon rate of 11.375% under the Indenture dated April 1, 1994 between PLDT and JP Morgan Chase Bank (formerly The Chase Manhattan Bank (National Association)) as trustee (“2012 Notes”). Proceeds from the issuance of these notes were used to refinance existing short-term and medium-term debts maturing up to 2005. On various dates in 2008 and 2009, PLDT repurchased the 2012 Notes from the secondary market in the aggregate amount of US$104.2 million. The amount of US$145 million, or Php6,378 million, remained outstanding as at January 1, 2012. The 2012 Notes was paid in full on maturity date on May 15, 2012. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

Term Loans

GSM Network Expansion Facilities

On October 16, 2006, Smart signed a US$50 million term loan facility agreement with Metropolitan Bank and Trust Company, or Metrobank, to finance the related Phase 9 GSM facility. The loan is payable over five years in 18 equal quarterly installments commencing on the third quarter from initial drawdown date, with final installment on October 10, 2012. The loan was fully drawn on October 10, 2007. The amount of US$11 million, or Php488 million, remained outstanding as at January 1, 2012. The loan was paid in full on October 10, 2012.

On October 10, 2007, Smart signed a US$50 million term loan facility agreement with Norddeutsche Landesbank Girozentrale Singapore Branch, or Nord LB, as the lender with Standard Chartered Bank (Hong Kong) Ltd., or Standard Chartered, as the facility agent, to finance the related Phase 10 GSM equipment and service contracts. The loan is payable over five years in ten equal semi-annual payments, with final installment on March 11, 2013. The loan was fully drawn on March 10, 2008. The amounts of US$5 million, or Php205 million, and US$15 million, or Php657 million, net of unamortized debt discount, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on March 11, 2013.

On November 27, 2008, Smart signed a US$50 million term loan facility agreement with FEC to finance the Phase 10 GSM equipment and service contracts. The loan was awarded to ABN AMRO Bank N.V., Australia and New Zealand Banking Group Limited, Standard Chartered, Mizuho Corporate Bank Ltd. as the lead arrangers. The loan is payable over five years in ten equal semi-annual installments, with final installment on January 23, 2014. The loan was fully drawn on various dates in 2009. The amounts of US$5 million, or Php222 million, US$15 million, or Php614 million, and US$25 million, or Php1,090 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively. The loan was paid in full on January 23, 2014.

On June 6, 2011, Smart signed a US$60 million term loan facility agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the lender, to finance the equipment and service contracts for the modernization and expansion project. The loan is payable over five years in eight equal semi-annual installments commencing on the 18th month from signing date, with final installment on June 6, 2016. The loan was fully drawn on various dates in 2012. The amounts of US$38 million, or Php1,665 million, and US$53 million, or Php2,157 million, remained outstanding as at December 31, 2013 and 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On August 19, 2011, Smart signed a US$50 million term loan facility agreement with FEC as the lender, to finance the supply contracts for the modernization and expansion project. The loan was arranged by The Bank of Tokyo-Mitsubishi UFJ, Ltd., HSBC and Mizuho Corporate Bank, Ltd. The loan is payable over five years in ten equal semi-annual installments commencing six months after August 19, 2012, with final installment on August 19, 2016. The loan was fully drawn on various dates in 2012. The amounts of US$37 million, or Php1,657 million, and US$50 million, or Php2,040 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On May 29, 2012, Smart signed a US$50 million term loan facility agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd. as the lender, to finance the equipment and service contracts for the modernization and expansion project. The loan is payable over five years in nine equal semi-annual installments commencing on May 29, 2013, with final installment on May 29, 2017. The loan was fully drawn on various dates in 2012. The amounts of US$38 million, or Php1,707 million, and US$49 million, or Php2,025 million, net of unamortized debt discount, remained outstanding as at December 31, 2013 and 2012, respectively. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

US$283 Million Term Loan Facility, or Debt Exchange Facility

On July 2, 2004, Smart acquired from PCEV’s creditors approximately US$289 million, or 69.4%, of the aggregate of PCEV’s outstanding restructured debt at that time, in exchange for debt and a cash payment by Smart. In particular, Smart paid cash amounting to US$1.5 million, or Php84 million and issued new debt of US$283.2 million, or Php15,854 million, with fair value of Php8,390 million, net of unamortized debt discount amounting to Php7,464 million. The loan is payable in full upon maturity on June 30, 2014. The amounts of US$254 million, or Php10,450 million, and US$238 million, or Php10,472 million, net of unamortized debt discount, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. In September 2013, the loan was prepaid in full and the remaining debt discount of US$13 million, or Php731 million, was amortized and charged to profit and loss for the year.

Other Term Loans

On January 15, 2008, PLDT signed a US$100 million term loan facility agreement with Nord LB to be used for its capital expenditure requirements. The loan is payable over five years in ten equal semi-annual installments. Two separate drawdowns of US$50 million each were drawn from the facility on March 27, 2008 and April 10, 2008. The amounts of US$10 million, or Php411 million, and US$30 million, or Php1,318 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on March 27, 2013.

On July 15, 2008, PLDT signed a US$50 million term loan facility agreement with the Bank of the Philippine Islands, or BPI, to refinance its loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years in 17 equal quarterly installments commencing on the fourth quarter from initial drawdown date, with final installment on July 22, 2013. The loan was fully drawn on various dates in 2008. The amounts of US$9 million, or Php362 million, and US$21 million, or Php904 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on July 22, 2013.

On March 7, 2012, PLDT signed a US$150 million term loan facility agreement with a syndicate of banks with The Bank of Tokyo-Mitsubishi UFJ, Ltd., as the facility agent, to finance capital expenditures and/or to refinance existing loan obligations which were utilized for network expansion and improvement programs. The loan is payable over five years in nine equal semi-annual installments commencing on the date which falls 12 months after the date of the loan agreement, with final installment on March 7, 2017. Two separate drawdowns of US$100 million and US$50 million were drawn on May 10, 2012 and September 4, 2012, respectively. The amounts of US$117 million, or Php5,180 million, and US$150 million, or Php6,162 million, remained outstanding as at December 31, 2013 and 2012, respectively.

On March 16, 2012, PLDT signed a US$25 million term loan facility agreement with Citibank, N.A. Manila to refinance loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years in 17 equal quarterly installments commencing 12 months from initial drawdown date, with final installment on May 30, 2017. The loan was fully drawn on May 29, 2012. The amounts of US$21 million, or Php914 million, and US$25 million, or Php1,027 million, remained outstanding as at December 31, 2013 and 2012, respectively.

On March 23, 2012, SPi signed a US$15 million term loan facility agreement with Security Bank to finance working capital requirements. The loan is payable over five years in 19 quarterly installments commencing on September 24, 2012, with final installment on March 27, 2017. The loan was fully drawn on March 26, 2012. The amounts of US$13 million, or Php551 million, has been presented as part of interest-bearing financial liabilities under liabilities directly associated with assets classified as held-for-sale as at December 31, 2012. The loan was prepaid in full on April 24, 2013. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations.

On January 16, 2013, PLDT signed a US$300 million term loan facility agreement with a syndicate of banks with The Bank of Tokyo-Mitsubishi UFJ, Ltd., as the facility agent, to finance capital expenditures and/or to refinance existing obligations which were utilized for network expansion and improvement programs. The loan is payable over five years in nine equal semi-annual installments commencing on the date which falls 12 months after the date of the loan agreement, with final installment on January 16, 2018. The amounts of US$40 million, US$160 million and US$100 million were drawn on March 6, 2013, April 19, 2013 and July 3, 2013, respectively. The amount of US$300 million, or Php13,319 million, remained outstanding as at December 31, 2013. SeeNote 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

On January 28, 2013, Smart signed a US$35 million term loan facility agreement with China Banking Corporation to finance the equipment and service contracts for the modernization and expansion project. The loan is payable over five years in ten equal semi-annual installments. The loan was fully drawn on May 7, 2013. The amount of US$31 million, or Php1,398 million, remained outstanding as at December 31, 2013.

On March 25, 2013, Smart signed a US$50 million term loan facility agreement with FEC as the original lender, to finance the supply and services contracts for the modernization and expansion project. The loan was arranged by the Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mizuho Corporate Bank, Ltd. The loan is payable over five years in nine equal semi-annual installments commencing six months after drawdown date. The amount of US$18 million was partially drawn on September 16, 2013 and subsequently, the amount of US$6 million on November 19, 2013. The amount of US$23 million, or Php1,030 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

On May 31, 2013, Smart signed a US$80 million term loan facility agreement with China Banking Corporation to refinance existing loan obligations which were utilized for network expansion and improvement program of Smart. The loan is payable over five years in ten equal semi-annual installments commencing six months after drawdown date, with final installment on May 31, 2018. The loan was fully drawn on September 25, 2013. The amount of US$72 million, or Php3,197 million, remained outstanding as at December 31, 2013.

On June 20, 2013, Smart signed a US$120 million term loan facility agreement with Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation, as the lead arrangers and creditors with Sumitomo Mitsui Banking Corporation, as the facility agent. Proceeds of the facility are intended to be used to refinance existing loan obligations which were utilized for network expansion and improvement program of Smart. The loan is payable over five years in eight equal semi-annual installments commencing six months after drawdown date, with final installment on June 20, 2018. The loan was fully drawn on September 25, 2013. The amount of US$118 million, or Php5,238 million, net of unamortized debt discount, remained outstanding as at December 31, 2013. See Note 27 – Financial Assets and Liabilities – Derivative Financial Instruments.

Philippine Peso Debts:

Corporate Notes

Php5,000 Million Fixed Rate Corporate Notes

On February 15, 2007, Smart issued Php5,000 million fixed rate corporate notes, comprised of Series A five-year notes amounting to Php3,800 million and Series B ten-year notes amounting to Php1,200 million. Proceeds from the issuance of these notes were used to finance the capital expenditures for network improvement and expansion program of Smart. The amounts of Php1,152 million and Php4,963 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The Series A note and Series B note were prepaid in full on February 16, 2012 and November 15, 2013, respectively.

Php5,000 Million Fixed Rate Corporate Notes

On December 12, 2008, Smart issued Php5,000 million unsecured fixed rate corporate notes. Proceeds from the issuance of these notes were used primarily to finance the capital expenditures for network upgrade and expansion program of Smart. The notes are payable over five years with an annual amortization rate of 1% of the principal amount on the first year up to the fourth year from issue date and the balance payable upon maturity on December 13, 2013. The amounts of Php4,827 million, net of unamortized debt discount, remained outstanding as at January 1, 2012. The facility was prepaid in full on March 12, 2012.

Php5,000 Million Fixed Rate Corporate Notes

On February 20, 2009, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated February 18, 2009, comprised of Series A five-year notes amounting to Php2,390 million, Series B seven-year notes amounting to Php100 million, and Series C ten-year notes amounting to Php2,510 million. Proceeds from the issuance of these notes were used to finance capital expenditures of PLDT. The Series A notes are payable over five years with an annual amortization rate of 1% of the issue price on the first year up to the fourth year from issue date and the balance payable upon maturity on February 21, 2014. The Series B notes are payable over seven years with an amortization rate of 1% of the issue price on the fifth year and sixth year from issue date and the balance payable upon maturity on February 22, 2016. The Series C notes are payable over ten years with an amortization rate of 1% of the issue price on the fifth year up to the ninth year from issue date and the balance payable upon maturity on February 20, 2019. Proceeds from the facility were used to finance capital expenditures of PLDT. The aggregate amount of Php4,952 million remained outstanding as at January 1, 2012. The notes were prepaid in full on November 20, 2012.

Php7,000 Million Fixed Rate Corporate Notes

On December 10, 2009, PLDT issued Php7,000 million fixed rate corporate notes under a Notes Facility Agreement dated December 8, 2009, comprised of Series A five-year notes amounting to Php5,050 million, Series B seven-year notes amounting to Php850 million, and Series C ten-year notes amounting to Php1,100 million. Proceeds from the issuance of these notes were used to finance capital expenditures and/or to refinance existing loan obligations which were utilized for network expansion and improvement. The Series A notes are payable over five years with an annual amortization rate of 2% of the issue price on the first year up to the fourth year from issue date and the balance payable upon maturity on March 10, 2015. The Series B notes are payable over seven years with an annual amortization rate of 1% of the issue price on the first year up to the sixth year from issue date and the balance payable upon maturity on December 12, 2016. The Series C notes are payable in full upon maturity on December 10, 2019. Proceeds from the facility were used to finance capital expenditures and/or to refinance its loan obligations which were also used to finance capital expenditures for network expansion and improvement. The aggregate amount of Php6,781 million remained outstanding as at January 1, 2012. The notes were prepaid in full on December 10, 2012.

Php2,500 Million Fixed Rate Corporate Notes

On July 13, 2010, PLDT issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. Proceeds from the issuance of these notes were used to finance capital expenditures and/or to refinance existing loan obligations which were utilized for network expansion and improvement. The notes are non-amortizing and will mature on July 13, 2015. The amount of Php2,500 million each remained outstanding as at December 31, 2012 and January 1, 2012. The notes were prepaid in full on July 15, 2013.

Php2,500 Million Fixed Rate Corporate Notes

On July 13, 2010, Smart issued Php2,500 million five-year fixed rate corporate notes under a Notes Facility Agreement dated July 12, 2010. Proceeds from the issuance of these notes were used primarily to finance capital expenditures for network improvement and expansion program of Smart. The notes are non-amortizing and will mature on July 13, 2015. The amounts of Php2,490 million and Php2,487 million, net of unamortized debt discount, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The notes were prepaid in full on July 15, 2013.

Php2,000 Million Fixed Rate Corporate Notes

On March 9, 2011, Smart signed a Php2,000 million Notes Facility Agreement with BDO Private Bank, Inc. comprised of Tranche A amounting to Php1,000 million which was issued on March 16, 2011 and Tranche B amounting to Php1,000 million which was fully drawn and issued in multiple drawdowns of Php250 million each on various dates in 2011. Proceeds from the issuance of these notes were used to finance capital expenditures for network improvement and expansion program of Smart. The notes are payable in full, five years from their respective issue dates. The notes were partially prepaid in the amounts of Php1,000 million and Php250 million on December 16, 2013 and December 23, 2013, respectively. The amounts of Php750 million remained outstanding as at December 31, 2013 and Php2,000 million each as at December 31, 2012 and January 1, 2012. The remaining balance were prepaid in full on January 2014.

Php5,000 Million Fixed Rate Corporate Notes

On March 24, 2011, PLDT issued Php5,000 million fixed rate corporate notes under a Notes Facility Agreement dated March 22, 2011, comprised of Series A five-year notes amounting to Php3,435 million, Series B seven-year notes amounting to Php700 million and Series C ten-year notes amounting to Php865 million. Proceeds from the issuance of these notes were used to finance capital expenditures for network expansion and improvement and/or to refinance existing loan obligations which were utilized for service improvements and expansion programs. The Series A notes are payable over five years with an annual amortization rate of 1% of the issue price on the first year up to the fourth year from issue date and the balance payable upon maturity on March 25, 2016. The Series B notes are payable over seven years with an annual amortization rate of 1% of the issue price on the first year up to the sixth year from issue date and the balance payable upon maturity on March 26, 2018. The Series C notes are payable over ten years with an annual amortization rate of 1% of the issue price on the first year up to the ninth year from issue date and the balance payable upon maturity on March 24, 2021. The aggregate amounts of Php4,950 million and Php5,000 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The notes were prepaid in full on March 25, 2013.

Php5,000 Million Fixed Rate Corporate Notes

On November 8, 2011, PLDT issued Php5,000 million fixed rate notes under a Notes Facility Agreement dated November 4, 2011, comprised of Series A five-year notes amounting to Php2,795 million, Series B seven-year notes amounting to Php230 million and Series C ten-year notes amounting to Php1,975 million. Proceeds from the issuance of these notes were used to finance capital expenditures for network expansion and improvement and/or to refinance existing loan obligations which were utilized for service improvements and expansion programs. The Series A notes are payable over five years with an annual amortization rate of 1% of the issue price on the first year up to the fourth year from issue date and the balance payable upon maturity on November 9, 2016. The Series B notes are payable over seven years with an annual amortization rate of 1% of the issue price on the first year up to the sixth year from issue date and the balance payable upon maturity on November 8, 2018. The Series C notes are payable over ten years with an annual amortization rate of 1% of the issue price on the first year up to the ninth year from issue date and the balance payable upon maturity on November 8, 2021. The aggregate amounts of Php4,950 million and Php5,000 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The notes were prepaid in full on November 8, 2013.

Php5,500 Million Fixed Rate Corporate Notes

On March 19, 2012, Smart issued Php5,500 million fixed rate corporate notes under a Notes Facility Agreement dated March 15, 2012, comprised of Series A five-year notes amounting to Php1,910 million and Series B ten-year notes amounting to Php3,590 million. Proceeds from the issuance of these notes were used primarily for debt refinancing and capital expenditures of Smart. The Series A note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 96% payable on March 20, 2017. The Series B note facility has annual amortization equivalent to 1% of the principal amount starting March 19, 2013 with the balance of 91% payable on March 21, 2022. The notes were partially prepaid in the amount of Php1,376 million on July 19, 2013. The aggregate amounts of Php4,069 million and Php5,464 million, remained outstanding as at December 31, 2013 and 2012,respectively.

Php1,500 Million Fixed Rate Corporate Notes

On July 27, 2012, PLDT issued Php1,500 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement dated July 25, 2012. Proceeds from the issuance of these notes were used to finance capital expenditures for network expansion and improvement. The notes are payable over seven years with an annual amortization rate of 1% of the issue price on the first year up to the sixth year from issue date and the balance payable upon maturity on July 29, 2019. The notes were partially prepaid in the amount of Php1,188 million on July 29, 2013. The amounts of Php297 million and Php1,500 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php8,800 Million Fixed Rate Corporate Notes

On September 21, 2012, PLDT issued Php8,800 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated September 19, 2012, comprised of Series A seven-year notes amounting to Php4,610 million and Series B ten-year notes amounting to Php4,190 million. Proceeds from the issuance of these notes were used to refinance existing loan obligations which were used for capital expenditures for network expansion and improvement. The Series A notes are payable over seven years with an annual amortization rate of 1% of the issue price on the first year up to the sixth year from issue date and the balance payable upon maturity on September 21, 2019. The Series B notes are payable over ten years with an annual amortization rate of 1% of the issue price on the first year up to the ninth year from issue date and the balance payable upon maturity on September 21, 2022. The notes were partially prepaid in the amount of Php2,055 million on June 21, 2013. The aggregate amounts of Php6,678 million and Php8,800 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php6,200 Million Fixed Rate Corporate Notes

On November 22, 2012, PLDT issued Php6,200 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated November 20, 2012, comprised of Series A seven-year notes amounting to Php3,775 million and Series B ten-year notes amounting to Php2,425 million. Proceeds from the issuance of these notes were used to refinance existing loan obligations which were used for capital expenditures for network expansion and improvement. The Series A notes are payable over seven years with an annual amortization rate of 1% of the issued price on the first year up to the sixth year from issue date and the balance payable upon maturity on November 22, 2019. The Series B notes are payable over ten-years with an annual amortization rate of 1% of the issue price on the first year up to the ninth year from issue date and the balance payable upon maturity on November 22, 2022. The aggregate amounts of Php6,138 million and Php6,200 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php1,376 Million Fixed Rate Corporate Notes

On June 19, 2013, Smart issued Php1,376 million fixed rate corporate notes under a Notes Agreement dated June 14, 2013, comprised of Series A five-year notes amounting to Php742 million and Series B ten-year notes amounting to Php634 million. Proceeds from the issuance of these notes were used primarily for debt refinancing of Smart. The Series A note facility has annual amortization equivalent to 1% of the principal amount starting June 19, 2014 with the balance of 97% payable on March 20, 2017. The Series B note facility has annual amortization equivalent to 1% of the principal amount starting June 19, 2014 with the balance of 92% payable on March 19, 2022. The aggregate amount of Php1,345 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

Php2,055 Million Fixed Rate Corporate Notes

On June 21, 2013, PLDT issued Php2,055 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated June 14, 2013, comprised of Series A notes amounting to Php1,735 million and Series B notes amounting to Php320 million. Proceeds from the issuance of these notes were used to refinance existing loan obligations which were used for capital expenditures for network expansion and improvement. The Series A notes are payable over six years with an annual amortization rate of 1% of the issue price up to the fifth year and the balance payable upon maturity on September 21, 2019. The Series B notes are payable over nine years with an annual amortization rate of 1% of the issue price up to the eight year and the balance payable upon maturity on September 21, 2022. The aggregate amount of Php2,034 million remained outstanding as at December 31, 2013.

Php1,188 Million Fixed Rate Corporate Notes

On July 29, 2013, PLDT issued Php1,188 million fixed rate corporate notes under a Fixed Rate Corporate Notes Facility Agreement, dated July 19, 2013. Proceeds from the issuance of these notes were used to finance capital expenditures for network expansion and improvement. The notes are payable over six years with an annual amortization rate of 1% of the issue price on the first year up to the fifth year from the issue date and the balance upon maturity on July 29, 2019. The amount of Php1,188 million remained outstanding as at December 31, 2013.

Php15,000 Million Fixed Rate Retail Bonds

On February 6, 2014, PLDT issued Php15,000 million Philippine SEC-registered fixed rate peso retail bonds under the Indenture dated January 22, 2014. Proceeds from the issuance of these bonds are intended to be used to finance capital expenditures and/or refinance existing obligations which were used for capital expenditures for network and expansion improvement. The amount comprises of Php12,400 million and Php2,600 million bonds due in 2021 and 2024, with a coupon rate of 5.2250% and 5.2813%, respectively.

Term Loans

Unsecured Term Loans

Php2,500 Million Term Loan Facility

On October 21, 2008, Smart signed a Php2,500 million term loan facility agreement with Metrobank to finance capital expenditures for network improvement and expansion program. The loan is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown, with final installment on November 13, 2013. The loan was fully drawn on November 13, 2008. The amounts of Php624 million and Php1,248 million, net of unamortized debt discount, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on November 13, 2013.

Php2,400 Million Term Loan Facility

On November 21, 2008, PLDT signed a Php2,400 million term loan facility agreement with Land Bank of the Philippines, or LBP, to finance capital expenditures and/or to refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan was drawn on various dates in 2008 and 2009 in the total amount of Php2,400 million. The loan is payable over five years in ten equal semi-annual installments, with final installment on December 12, 2013. The loan was fully drawn on various dates in 2008 and 2009. The amounts of Php511 million and Php1,022 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on December 12, 2013.

Php3,000 Million Term Loan Facility

On November 26, 2008, PLDT signed a Php3,000 million term loan facility agreement with Union Bank of the Philippines, or Union Bank, to finance capital expenditures and/or to refinance its loan obligations which were utilized for service improvements and expansion programs. The loan was drawn on various dates in 2008 and 2009 in the total amount of Php3,000 million. The loan is payable over five years in nine equal semi-annual installments commencing on the second semester from initial drawdown date, with final installment on December 23, 2013. The loan was fully drawn on various dates in 2008 and 2009. The amounts of Php667 million and Php1,333 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on December 23, 2013.

Php2,000 Million Term Loan Facility

On November 28, 2008, PLDT signed a Php2,000 million term loan facility agreement with Philippine National Bank, or PNB, to be used for its capital expenditure requirements in connection with PLDT’s service improvement and expansion programs. The loan was drawn on various dates in 2008 and 2009 in the total amount of Php2,000 million. The loan is payable over five years in 17 equal quarterly installments commencing on the fourth quarter from initial drawdown date, with final installment on December 19, 2013. The loan was fully drawn on various dates in 2008 and 2009. The amounts of Php470 million and Php941 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was paid in full on December 19, 2013.

Php2,500 Million Term Loan Facility

On March 6, 2009, PLDT signed a Php2,500 million term loan facility agreement with Banco de Oro Unibank, Inc., or BDO, to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on April 17, 2014. The loan was fully drawn on April 17, 2009. The amount of Php2,500 million remained outstanding as at January 1, 2012. The loan was prepaid in full on October 17, 2012.

Php1,500 Million Term Loan Facility

On May 12, 2009, Smart signed a Php1,500 million term loan facility agreement with BDO to finance capital expenditures for network improvement and expansion program. The loan is payable in full upon maturity on May 20, 2012. The loan was fully drawn on May 20, 2009. The amounts of Php1,498 million, net of unamortized debt discount, remained outstanding as at January 1, 2012. The loan was paid in full on May 20, 2012.

Php2,500 Million Term Loan Facility

On June 8, 2009, PLDT signed a Php2,500 million term loan facility agreement with RCBC to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over seven years with an annual amortization of 1% on the fifth and sixth year from initial drawdown date and the balance payable upon maturity on September 28, 2016. The loan was fully drawn on June 28, 2009. The amount of Php2,500 million remained outstanding as at January 1, 2012. The facility was prepaid in full on September 28, 2012.

Php1,500 Million Term Loan Facility

On June 16, 2009, PLDT signed a Php1,500 million term loan facility agreement with Allied Banking Corporation to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years in 17 equal quarterly installments commencing on September 15, 2010, with final installment on September 15, 2014. The loan was fully drawn on September 15, 2009. The amounts of Php618 million and Php971 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was prepaid in full on June 17, 2013.

Php500 Million Term Loan Facility

On June 29, 2009, PLDT signed a Php500 million term loan facility agreement with Insular Life Assurance Company, Ltd. to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on July 1, 2016. The loan was fully drawn on July 1, 2009. The amount of Php500 million remained outstanding as at January 1, 2012. The loan was prepaid in full on October 1, 2012.

Php1,000 Million Term Loan Facility

On July 16, 2009, Smart signed a Php1,000 million term loan facility agreement with Metrobank to finance capital expenditures for network improvement and expansion program. The loan is payable over five years in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown, with final installment on August 1, 2014. The loan was fully drawn on August 3, 2009. The amounts of Php188 million, Php438 million and Php688 million remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Php2,000 Million Term Loan Facility

On September 18, 2009, PLDT signed a Php2,000 million term loan facility agreement with BPI to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years in 17 equal quarterly installments, with final installment on October 27, 2014. The initial drawdown under this loan was made on October 26, 2009 in the amount of Php1,000 million and the balance of Php1,000 million was subsequently drawn on December 4, 2009. The amounts of Php471 million, Php941 million and Php1,412 million remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Php1,000 Million Term Loan Facility

On November 23, 2009, PLDT signed a Php1,000 million term loan facility agreement with BPI to finance capital expenditures and/or refinance its obligations which were utilized for service improvements and expansion programs. The loan is payable over five years in 17 equal quarterly installments, with final installment on December 18, 2014. The amount of Php1,000 million was fully drawn on December 18, 2009. The amounts of Php235 million, Php471 million and Php706 million remained outstanding as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Php1,500 Million Term Loan Facility

On March 15, 2011, Smart signed a Php1,500 million term loan facility agreement with Metrobank to finance capital expenditures for network improvement and expansion program. The loan is a five-year loan, payable in full upon maturity on March 22, 2016. The amount of Php1,500 million was fully drawn on March 22, 2011 and remained outstanding as at December 31, 2012 and January 1, 2012. The loan was paid in full on December 23, 2013.

Php2,000 Million Term Loan Facility

On March 24, 2011, Smart signed a Php2,000 million term loan facility agreement with PNB to finance capital expenditures for network improvement and expansion program. The loan is a five-year loan, payable in full upon maturity on March 29, 2016. The loan was fully drawn on March 29, 2011. The loan was partially prepaid on December 28, 2012 in the amount of Php200 million. The amounts of Php1,800 million and Php2,000 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The outstanding principal balance of the loan amounting to Php1,800 million was prepaid in full on December 23, 2013.

Php500 Million Term Loan Facility

On April 4, 2011, PLDT signed a Php500 million term loan facility agreement with the Manufacturers Life Insurance Co. (Phils.), Inc., or Manulife, to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on June 17, 2016. The amount of Php500 million was fully drawn on June 16, 2011 and remained outstanding as at December 31, 2012 and January 1, 2012. The loan was prepaid in full on June 17, 2013.

Php300 Million Term Loan Facility

On April 4, 2011, PLDT signed a Php300 million term loan facility agreement with the Manulife to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on April 29, 2016. The loan was fully drawn on April 28, 2011. The amount of Php300 million each remained outstanding as at December 31, 2012 and January 1, 2012. The loan was prepaid in full on July 29, 2013.

Php1,000 Million Term Loan Facility

On April 12, 2011, Digitel signed a Php1,000 million term loan facility agreement with Metrobank as the lender, to finance additional capital expenditure requirements. The loan is payable in full upon maturity on June 23, 2016. The loan was partially drawn on various dates in June 2011 in the aggregate amount of Php710 million and the remaining balance was subsequently drawn on June 21, 2012. The amounts of Php1,000 million and Php710 million remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The loan was prepaid in full on September 10, 2013.

Php2,000 Million Term Loan Facility

On April 14, 2011, Digitel signed a Php2,000 million five-year term loan facility agreement with BDO as the lender, to finance the capital expenditures and/or refinance existing loan obligations. The loan is payable in full upon maturity on May 26, 2016. The loan was drawn on various dates in 2011 in the total amount of Php1,948 million and remained outstanding as at December 31, 2012 and January 1, 2012. The undrawn amount of Php52 million was cancelled. The loan was prepaid in full on August 27, 2013.

Php2,000 Million Term Loan Facility

On March 20, 2012, PLDT signed a Php2,000 million term loan facility agreement with RCBC to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over ten years with an annual amortization rate of 1% on the fifth year up to the ninth year from initial drawdown date and the balance payable upon maturity on April 12, 2022. The amount of Php2,000 million was fully drawn on April 12, 2012 and remained outstanding as at December 31, 2013 and 2012.

Php3,000 Million Term Loan Facility

On April 27, 2012, PLDT signed a Php3,000 million term loan facility agreement with LBP to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from drawdown date and the balance payable upon maturity on July 18, 2017. The amount of Php3,000 million was fully drawn on July 18, 2012. The amounts of Php2,970 million and Php3,000 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php2,000 Million Term Loan Facility

On May 29, 2012, PLDT signed a Php2,000 million term loan facility agreement with LBP to finance capital expenditures and/or refinance existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable over five years with an annual amortization rate of 1% on the first year up to the fourth year from initial drawdown date and the balance payable upon maturity on June 27, 2017. The amount of Php2,000 million was fully drawn on June 27, 2012. The amounts of Php1,980 million and Php2,000 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php1,000 Million Term Loan Facility

On June 7, 2012, Smart signed a Php1,000 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over five years with an annual amortization rate of 1% of the principal amount commencing on the first anniversary of the initial drawdown up to the fourth year and the balance payable upon maturity on August 22, 2017. The amount of Php1,000 million was fully drawn on August 22, 2012. The amounts of Php990 million and Php1,000 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php1,500 Million Term Loan Facility

On June 27, 2012, DMPI signed a Php1,500 million term loan facility agreement with BPI, BPI Asset Management and Trust Group and ALFM Peso Bond Fund, Inc. to finance capital expenditures for network expansion and improvements. The loan is payable over seven years with an annual amortization rate of 1% of the outstanding principal amount on the first year up to the sixth year and the balance payable on June 2019. The amount of Php700 million was partially drawn on June 29, 2012 and the remaining balance of Php800 million was subsequently drawn on September 24, 2012. The amounts of Php1,485 million and Php1,500 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php200 Million Term Loan Facility

On August 31, 2012, PLDT signed a Php200 million term loan facility agreement with Manulife to refinance PLDT’s existing loan obligations which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on October 9, 2019. The amount of Php200 million was fully drawn on October 9, 2012. The amount of Php200 million each remained outstanding as at December 31, 2013 and 2012.

Php1,000 Million Term Loan Facility

On September 3, 2012, PLDT signed a Php1,000 million term loan facility agreement with Union Bank to finance capital expenditures and/or refinance PLDT’s existing loan obligations which were utilized for service improvements and expansion programs. The facility is payable over seven years with an annual amortization rate of 1% on the first year up to the sixth year from initial drawdown date and the balance payable upon maturity on June 13, 2020. The facility was fully drawn on January 11, 2013. The amount of Php1,000 million remained outstanding as at December 31, 2013.

Php1,000 Million Term Loan Facility

On October 11, 2012, PLDT signed a Php1,000 million term loan facility agreement with Philippine American Life and General Insurance to refinance existing loan obligations, the proceeds of which were utilized for service improvements and expansion programs. The loan is payable in full upon maturity on December 5, 2022. The amount of Php1,000 million was fully drawn on December 3, 2012. The amount of Php1,000 million each remained outstanding as at December 31, 2013 and 2012.

Php3,000 Million Term Loan Facility

On December 17, 2012, Smart signed a Php3,000 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over seven years with an annual amortization rate of 1% of the principal amount on the first year up to the sixth year commencing on the first anniversary of the initial drawdown and the balance payable upon maturity on December 20, 2019. The amount of Php1,000 million was partially drawn on December 20, 2012 and the remaining balance of Php2,000 million was subsequently drawn on March 15, 2013. The amounts of Php2,970 million and Php1,000 million remained outstanding as at December 31, 2013 and 2012, respectively.

Php2,000 Million Term Loan Facility

On November 13, 2013, PLDT signed a Php2,000 million term loan facility agreement with BPI to finance capital expenditures and/or refinance existing loan obligations. The loan is payable over seven years with an annual amortization rate of 1% on the first year up to the sixth year from initial drawdown date and the balance payable upon maturity on November 22, 2020. The amount of Php1,000 million was partially drawn on November 22, 2013 and remained outstanding as at December 31, 2013. The loan was fully drawn on February 11, 2014.

Php3,000 Million Term Loan Facility

On November 25, 2013, Smart signed a Php3,000 million term loan facility agreement with Metrobank to refinance existing loan obligations of Smart. The loan is payable over seven years in six annual installments with an amortization rate of 10% of the total amount drawn and the final installment is payable on November 27, 2020. The amount of Php3,000 million was fully drawn on November 29, 2013. The amount of Php2,985 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

Php3,000 Million Term Loan Facility

December 3, 2013, Smart signed a Php3,000 million term loan facility agreement with BPI to refinance existing loan obligations of Smart. The loan is payable over seven years in six annual installments with an amortization rate of 1% of the total amount drawn and the final installment is payable on December 10, 2020. The amount of Php3,000 million was fully drawn on December 10, 2013. The amount of Php2,985 million, net of unamortized debt discount, remained outstanding as at December 31, 2013.

Php3,000 Million Term Loan Facility

On January 29, 2014, Smart signed a Php3,000 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over seven years with an annual amortization rate of 1% of the principal amount on the first year up to the sixth year commencing on the first anniversary of the initial drawdown and the balance payable upon maturity on February 5, 2021. The amount of Php3,000 million was fully drawn on February 5, 2014.

Php500 Million Term Loan Facility

On February 3, 2014, Smart signed a Php500 million term loan facility agreement with LBP to finance capital expenditures for its network upgrade and expansion program. The loan is payable over seven years with an annual amortization rate of 1% of the principal amount on the first year up to the sixth year commencing on the first anniversary of the initial drawdown and the balance payable upon maturity on February 5, 2021. The amount of Php500 million was fully drawn on February 7, 2014.

Secured Term Loans

Php150 Million Term Loan Facility

On June 7, 2007, AGS obtained a Php150 million medium term loan facility agreement with BPI, which was fully availed of in December 2007. Each interest period will cover a 90-day period commencing on the initial drawdown date and the interest rate will be determined at the first day of each interest period and payable at the end of the interest period. The loan facility was obtained to facilitate the purchase of a subsidiary and to support its working capital requirements. The aggregate loan amount is due as follows: (a) 20% within the third year from first drawdown date; (b) 20% within the fourth year from first drawdown date; and (c) 60% within the fifth year from first drawdown date. AGS is given a right to repay the principal and the interest accruing thereon on each interest payment date or interest rate setting date without any prepayment penalty. AGS and the bank has agreed to the following terms: (a) pledge of AGS’s shares of stock of the subsidiary purchased at a collateral loan ratio of 2:1; (b) assignment of receivables at a collateral-to-loan of 2:1; and (c) negative pledge on other present and future assets of AGS. The outstanding principal balances of the loan amounting to Php49 million as at January 1, 2012, was paid in full on June 30, 2012.

Notes Payable

Vendor Financing

On January 5, 2006, DMPI issued a US$1.3 million Promissory Note in relation to the Purchase Agreement between DMPI and Ceragon Networks Ltd., dated December 1, 2005, as payment for the financeable portion of the Contract Price. The Promissory Note is payable in ten consecutive semi-annual installments, with final installment on February 22, 2012. The outstanding balance amounting to US$0.1 million, or Php5 million, as at January 1, 2012 was paid in full on February 22, 2012.

On January 5, 2006, DMPI issued a US$1.2 million Promissory Note in relation to the Purchase Agreement between DMPI and Ceragon Networks Ltd., dated December 1, 2005, as payment for the financeable portion of the Contract Price. The Promissory Note is payable in ten consecutive semi-annual installments, with final installment on June 28, 2012. The outstanding balance amounting to US$0.1 million, or Php5 million, as at January 1, 2012 was paid in full on June 28, 2012.

As at January 1, 2012, DMPI has trust receipts with an aggregate outstanding balance of Php1,562 million, which were fully paid as at December 31, 2012.

On April 1, 2011, SPi availed US$9 million and US$16 million short-term loans from BPI and Security Bank, respectively. The additional loan of US$10 million was availed last October 28, 2011 from Security Bank. Proceeds of the loans were used for working capital requirements. Interest rate on each loan is repriced every month with final installment on December 18, 2012. The loans were prepaid on various dates in 2012 in the aggregate amount of US$31.5 million. The aggregate amounts of US$3.5 million, or Php144 million, and US$35 million, or Php1,537 million, remained outstanding as at December 31, 2012 and January 1, 2012, respectively. The remaining balance of US$3.5 million, or Php144 million, was fully paid in February 2013. The December 31, 2012 outstanding balance was presented as part of interest-bearing financial liabilities under liabilities directly associated with assets classified as held-for-sale. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations.

Debt Covenants

Our debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments.

The principal factors that can negatively affect our ability to comply with these financial ratios and other financial tests are depreciation of the Philippine peso relative to the U.S. dollar, poor operating performance of PLDT and its consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries, and increases in our interest expense. Interest expense may increase as a result of various factors including issuance of new debt, the refinancing of lower cost indebtedness by higher cost indebtedness, depreciation of the Philippine peso, the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions. Since approximately 57%, 45% and 47% of PLDT’s total consolidated debts as at December 31, 2013 and 2012, and January 1, 2012, respectively, were denominated in foreign currencies, principally in U.S. dollars, many of these financial ratios and other tests are negatively affected by any weakening of the Philippine peso. SeeNote 27 – Financial Assets and Liabilities – Foreign Currency Exchange Risk.

PLDT’s debt instruments contain a number of other negative covenants that, subject to certain exceptions and qualifications, restrict PLDT’s ability to take certain actions without lenders’ approval, including: (a) making or permitting any material change in the character of its business; (b) disposing of all or substantially all of its assets or any significant portion thereof other than in the ordinary course of business; (c) creating any lien or security interest; (d) permitting set-off against amounts owed to PLDT; and (e) merging or consolidating with any other company.

Furthermore, certain of DMPI’s debt instruments contain provisions wherein DMPI may be declared in default in case of a change in control in DMPI.

PLDT’s debt instruments and guarantees for DMPI loans also contain customary and other default provisions that permit the lender to accelerate amounts due or terminate their commitments to extend additional funds under the debt instruments. These default provisions include: (a) cross-defaults that will be triggered only if the principal amount of the defaulted indebtedness exceeds a threshold amount specified in these debt instruments; (b) failure by PLDT to meet certain financial ratio covenants referred to above; (c) the occurrence of any material adverse change in circumstances that a lender reasonably believes materially impairs PLDT’s ability to perform its obligations under its debt instrument with the lender; (d) the revocation, termination or amendment of any of the permits or franchises of PLDT in any manner unacceptable to the lender; (e) the nationalization or sustained discontinuance of all or a substantial portion of PLDT’s business; and (f) other typical events of default, including the commencement of bankruptcy, insolvency, liquidation or winding up proceedings by PLDT.

Smart’s debt instruments contain certain restrictive covenants that require Smart to comply with specified financial ratios and other financial tests at semi-annual measurement dates. Smart’s loan agreements include compliance with financial tests such as consolidated debt to consolidated equity, consolidated debt to consolidated Adjusted EBITDA and debt service coverage ratios. Previously, Smart was required to comply with certain consolidated debt to consolidated equity ratio under Variable Loan Agreement 2014 debt with Marubeni Corporation as original lender and under the 2014 (A) Debt under Metrobank as Facility Agent. On August 16, 2012 and September 3, 2012, the approvals to amend the covenant from “the ratio of Consolidated Debt to Consolidated Equity” to “the ratio of Consolidated Debt to Consolidated Adjusted EBITDA” were obtained. The agreements also contain customary and other default provisions that permit the lender to accelerate amounts due under the loans or terminate their commitments to extend additional funds under the loans. These default provisions include: (a) cross-defaults and cross-accelerations that permit a lender to declare a default if Smart is in default under another loan agreement. These cross-default provisions are triggered upon a payment or other default permitting the acceleration of Smart debt, whether or not the defaulted debt is accelerated; (b) failure by Smart to comply with certain financial ratio covenants; and (c) the occurrence of any material adverse change in circumstances that the lender reasonably believes materially impairs Smart’s ability to perform its obligations or impair the guarantors’ ability to perform their obligations under its loan agreements.

DMPI’s debt instruments contain customary and other default provisions that permit the lender to accelerate amounts due under the loans, including: (a) cross-defaults and cross-accelerations that permit a lender to declare a default if DMPI or PLDT, as guarantor, is in default under another loan agreement; (b) failure by PLDT to comply with certain financial ratio covenants; (c) occurrence of any material adverse change in circumstances that the lender reasonably believes materially impairs DMPI’s and PLDT’s ability to perform its obligations under its loan agreements; (d) change of control; and (e) other typical events of default including the commencement of bankruptcy, insolvency, liquidation, or winding up proceedings by DMPI.

As at December 31, 2013 and 2012, and January 1, 2012, we were in compliance with all of our debt covenants.

Obligations Under Finance Leases

The consolidated future minimum payments for finance leases as at December 31, 2013 are as follows:

Year

  (in million pesos) 

2014

   6  

2015

   5  

2016 and onwards

   1  
  

 

 

 

Total minimum finance lease payments (Note 27)

   12  

Less amount representing unamortized interest

   1  
  

 

 

 

Present value of net minimum finance lease payments (Notes 2, 3 and 27)

   11  

Less obligations under finance leases maturing within one year (Notes 9 and 27)

   5  
  

 

 

 

Long-term portion of obligations under finance leases (Notes 9 and 27)

   6  
  

 

 

 

Long-term Finance Lease Obligations

The PLDT Group has various long-term lease contracts for a period of three years covering various office equipment. In particular, PLDT, ePLDT and PLDT Global have finance lease obligations in the aggregate amounts of Php12 million and Php21 million as at December 31, 2013 and 2012, respectively, while PLDT and SPi have finance lease obligations in the aggregate amount of Php16 million as at January 1, 2012. SeeNote 9 – Property, Plant and Equipment.

Under the terms of certain loan agreements and other debt instruments, PLDT may not create, incur, assume, permit or suffer to exist any mortgage, pledge, lien or other encumbrance or security interest over the whole or any part of its assets or revenues or suffer to exist any obligation as lessee for the rental or hire of real or personal property in connection with any sale and leaseback transaction.

21.Deferred Credits and Other Noncurrent Liabilities

As at December 31, 2013 and 2012, and January 1, 2012, this account consists of:

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Accrual of capital expenditures under long-term financing

   19,515     19,203     20,128  

Provision for asset retirement obligations (Notes 3 and 9)

   2,144     2,543     2,107  

Unearned revenues (Note 23)

   173     174     172  

Others

   213     30     235  
  

 

 

   

 

 

   

 

 

 
   22,045     21,950     22,642  
  

 

 

   

 

 

   

 

 

 

Accrual of capital expenditures under long-term financing represent expenditures related to the expansion and upgrade of our network facilities which are not due to be settled within one year. Such accruals are settled through refinancing from long-term loans obtained from the banks.

The following table summarizes all changes to asset retirement obligations for the years ended December 31, 2013 and 2012:

   2013  2012 
   (in million pesos) 

Provision for asset retirement obligations at beginning of the year

   2,543    2,107  

Accretion expenses (Note 5)

   44    146  

Additional liability recognized during the year (Note 28)

   32    290  

Settlement of obligations and others

   (475  —    
  

 

 

  

 

 

 

Provision for asset retirement obligations at end of the year (Note 3)

   2,144    2,543  
  

 

 

  

 

 

 

22.As at December 31, 2010 and 2009, this account consists of:Accounts Payable
         
  2010  2009 
  (in million pesos)
Accrual of capital expenditures under long-term financing  12,040   11,966 
Provision for asset retirement obligations (Notes 3 and 9)  1,344   1,204 
Unearned revenues (Note 23)  114   66 
Contingent consideration for business acquisitions — net of current portion (Notes 13, 14 and 23)     1,193 
Others  69   9 
 
   13,567   14,438 
 

As at December 31, 2013 and 2012, and January 1, 2012, this account consists of:

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Suppliers and contractors (Note 27)

   29,799     26,128     25,476  

Carriers (Note 27)

   2,264     2,007     1,642  

Taxes (Note 26)

   1,734     1,421     1,555  

Related parties (Notes 24 and 27)

   863     668     626  

Others

   222     227     255  
  

 

 

   

 

 

   

 

 

 
   34,882     30,451     29,554  
  

 

 

   

 

 

   

 

 

 

Accounts payable are non-interest bearing and are normally settled within 180 days.

For terms and conditions pertaining to related parties, seeNote 24 – Related Party Transactions.

For explanation on the PLDT Group’s liquidity risk management processes, seeNote 27 – Financial Assets and Liabilities – Liquidity Risk.

23.Accrual of capital expenditures under long-term financing represent expenditures related to the expansion and upgrade of our network facilities which are not due to be settled within one year. Such accruals are settled through refinancing from long-term loans obtained from the banks.
The following table summarizes all changes to asset retirement obligations for the years ended December 31, 2010 and 2009:
         
  2010  2009 
  (in million pesos)
Provision for asset retirement obligations at beginning of year  1,204   1,100 
Accretion expenses for the year (Note 5)  97   94 
Additional liability recognized during the year (Note 29)  49   17 
Settlement of obligations  (6)  (7)
 
Provision for asset retirement obligations at end of year (Note 3)  1,344   1,204 
 
22.Accounts Payable
As at December 31, 2010 and 2009, this account consists of:
         
  2010  2009 
  (in million pesos)
Suppliers and contractors (Notes 26 and 28)  20,957   14,975 
Taxes (Notes 27 and 28)  2,114   1,894 
Carriers (Notes 26 and 28)  1,866   1,937 
Related parties (Notes 24, 26 and 28)  244   233 
Others  623   562 
 
   25,804   19,601 
 

251


23.Accrued Expenses and Other Current Liabilities

As at December 31, 2013 and 2012, and January 1, 2012, this account consists of:

   December 31,   January 1, 
   2013   2012   2012 
       (As Adjusted – Note 2) 
    

 

 

 
   (in million pesos) 

Accrued utilities and related expenses (Notes 24 and 27)

   37,937     36,800     28,429  

Accrued taxes and related expenses (Note 26)

   8,878     8,281     11,817  

Liability from redemption of preferred shares (Notes 19, 27 and 28)

   7,952     7,884     —    

Unearned revenues (Note 21)

   7,333     6,291     5,664  

Accrued employee benefits (Notes 2, 3, 24, 25 and 27)

   5,364     5,494     4,463  

Accrued interests and other related costs (Notes 20 and 27)

   878     1,174     1,122  

Mandatory tender offer option liability (Note 28)

   —       —       4,940  

Others

   5,914     5,700     1,836  
  

 

 

   

 

 

   

 

 

 
   74,256     71,624     58,271  
  

 

 

   

 

 

   

 

 

 

Accrued utilities and related expenses pertain to cost incurred for electricity and water consumption, repairs and maintenance, selling and promotions, professional and other contracted services, rent, insurance and security services, and other operational-related expenses pending receipt of billings and statement of accounts from suppliers.

Accrued taxes and related expenses pertain to licenses, permits and other related business taxes.

Unearned revenues represent advance payments for leased lines, installation fees, monthly service fees and unused and/or unexpired portion of prepaid loads.

Accrued expenses and other current liabilities are non-interest bearing and are normally settled within a year.

24.Related Party Transactions

Parties are considered to be related if one party has the ability, directly and indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities.

The PLDT Group has not recorded any impairment of receivables relating to amounts owed by related parties as at December 31, 2013 and 2012, and January 1, 2012. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

The following table provides the summary of outstanding balances as at December 31, 2013 and 2012, and January 1, 2012 transactions that have been entered into with related parties:

         December 31,   January 1, 
  

Classifications

 Terms Conditions  2013   2012   2012 
         (in million pesos) 

Indirect investment in joint ventures through PCEV:

         

Meralco

 

Accrued expenses and other current liabilities (Note 23)

 Electricity charges –
immediately upon
receipt of invoice
 Unsecured   317     266     271  
  Pole rental – 45 days
upon receipt of billing
 Unsecured   10     12     6  

Meralco Industrial Engineering Services Corporation, or MIESCOR

 

Accrued expenses and other current liabilities (Note 23)

 Outside and inside
plant – 20 days upon
receipt of invoice
 Unsecured   —       2     —    

Indirect investment in associate through ACeS Philippines:

         

AIL

 

Accrued expenses and other current liabilities (Note 23)

 30 days upon receipt of

billing

 Unsecured   44     43     147  

Transactions with major stockholders, directors and officers:

         

Asia Link B.V., or ALBV

 

Accounts payable (Note 22)

 15 days from end of
quarter
 Unsecured   336     252     234  

NTT World Engineering Marine Corporation

 

Accrued expenses and other current liabilities (Note 23)

 1st month of each
quarter; non-interest
bearing
 Unsecured   32     29     29  

NTT Communications

 

Accrued expenses and other current liabilities (Note 23)

 30 days; non-interest
bearing
 Unsecured   13     18     12  

NTT Worldwide Telecommunications Corporation

 

Accrued expenses and other current liabilities (Note 23)

 30 days; non-interest
bearing
 Unsecured   1     2     —    

NTT DOCOMO

 

Accrued expenses and other current liabilities (Note 23)

 30 days; non-interest
bearing
 Unsecured   23     8     8  

JGSHI

 

Accounts payable and accrued expenses and other current liabilities (Notes 22 and 23)

 Immediately upon
receipt of invoice
 Unsecured   10     5     70  

Malayan Insurance Co., Inc., or Malayan

 

Accrued expenses and other current liabilities (Note 23)

 Immediately upon
receipt of invoice
 Unsecured   9     1     1  

Others:

         

Various

 

Trade and other receivables (Note 16)

 30 days upon receipt of
billing
 Unsecured;
no impairment
   476     297     325  

The following table provides the summary of transactions for the years ended December 31, 2013, 2012 and 2011 in relation with the table above for the transactions that have been entered into with related parties.

  

Classifications

  2013   2012   2011 
     (in million pesos) 

Indirect investment in joint ventures through PCEV:

       

Meralco

 

Repairs and maintenance

   3,049     3,096     2,319  
 

Rent

   250     250     226  

MIESCOR

 

Repairs and maintenance

   68     51     28  
 

Construction-in-progress

   48     35     25  

Republic Surety and Insurance Co., Inc. or RSIC

 

Insurance and security services

   3     3     —    

Indirect investment in associate through ACeS Philippines:

       

AIL

 

Cost of sales (Note 5)

   50     80     105  

Transactions with major stockholders, directors and officers:

       

JGSHI

 

Rent

   95     82     29  
 

Repairs and maintenance

   14     67     10  
 

Communication, training and travel

   13     14     3  
 

Selling and promotions

   3     6     2  
 

Professional and other contracted services

   1     1       

ALBV

 

Professional and other contracted services

   289     332     581  

Malayan

 

Insurance and security services

   231     234     230  

NTT DOCOMO

 

Professional and other contracted services

   73     56     72  

NTT World Engineering Marine Corporation

 

Repairs and maintenance

   14     32     14  

NTT Worldwide Telecommunications Corporation

 

Selling and promotions

   15     13     11  

NTT Communications

 

Professional and other contracted services

   73     69     69  
 

Rent

   10     10     8  

Others:

       

Various

 

Revenues

   717     418     296  

 a.As at December 31, 2010Agreements between PLDT and 2009, this account consists of:certain subsidiaries with Meralco
         
  2010  2009 
  (in million pesos)
Accrued utilities and related expenses (Notes 24, 26 and 28)  19,941   17,549 
Unearned revenues (Note 21)  4,698   4,588 
Accrued employee benefits (Notes 3, 25, 26 and 28)  3,853   8,074 
Accrued taxes and related expenses (Notes 26 and 27)  2,236   1,941 
Current portion of contingent consideration for business acquisitions (Notes 13, 14 and 21)  1,632   14 
Accrued interests and other related costs (Notes 20, 26 and 28)  1,028   1,167 
Liability arising from purchase of investment (Notes 10, 13 and 28)     65 
Others  2,571   2,048 
 
   35,959   35,446 
 

In the ordinary course of business, Meralco provides electricity to PLDT and certain subsidiaries’ offices within its franchise area. The rates charged by Meralco are the same as those with unrelated parties. Total electricity costs, which was presented as part of repairs and maintenance in our consolidated income statements, amounted to Php3,049 million, Php3,096 million and Php2,319 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under these agreements, the outstanding utilities payable, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php317 million, Php266 million and Php271 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

In 2009, PLDT and Smart renewed their respective Pole Attachment Contracts with Meralco, wherein Meralco leases its pole spaces to accommodate PLDT’s and Smart’s cable network facilities. Total fees under these contracts, which was presented as part of rent in our consolidated income statements, amounted to Php250 million each for the years ended December 31, 2013 and 2012, and Php226 million for the year ended December 31, 2011. Under these agreements, the outstanding obligations, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php10 million, Php12 million and Php6 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

See alsoNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in Beacon – Beacon’s Acquisition of Additional Meralco Sharesfor additional transactions involving Meralco.

 b.Accrued utilitiesAgreements between PLDT and related expenses pertain to cost incurred for repairs and maintenance (mostly pertaining to electricity and water consumption), selling and promotions, professional and other contracted services, rent, insurance and security services, and other operational-related expenses pending receipt of billings and statement of accounts from suppliers.
Unearned revenues represent advance payments for leased lines, installation fees, monthly service fees and unused and/or unexpired portion of prepaid loads.
Contingent Consideration for Business AcquisitionsMIESCOR
Contingent consideration for business acquisitions were recognized in relation to SPi’s acquisition cost of Springfield and Laguna Medical on April 12, 2007 and August 31, 2009, respectively. SeeNote 13 — Business Combinations and Acquisition of Non-Controlling Interests andNote 14 — Goodwill and Intangible Assets.
SPi acquired 100% of Springfield plus contingent consideration with fair value at acquisition date of US$18 million, or Php894 million. The adjusted fair value of contingent consideration, as revised after effecting adjustments on forecasted earn-out and accretion, amounted to US$35.3 million, or Php1,547 million, and US$20.5 million, or Php951 million, as at December 31, 2010 and 2009, respectively.
SPi acquired 80% of Laguna Medical with a mandatory Put-Call option in respect of the remaining 20% of the outstanding common stock of Laguna Medical. The estimated fair value of the contingent consideration from the mandatory Put-Call option at the acquisition date amounted to US$5.4 million, or Php257 million. The adjusted fair value of contingent consideration after accretion amounted to US$1.9 million, or Php85 million, and US$5.5 million, or Php256 million, as at December 31, 2010 and 2009, respectively.
Movements in contingent consideration for business acquisitions for the years ended December 31, 2010 and 2009 are as follows:

                 
  2010  2009 
  In U.S. Dollar  In Php  In U.S. Dollar  In Php 
  (in millions)
Balance at beginning of year  26   1,207   15   720 
Business combinations (Note 13)  8   344   8   389 
Accretion for the year  3   163   3   142 
Payments     (11)     (13)
Translation     (71)     (31)
 
Balance at end of year  37   1,632   26   1,207 
Less current portion of contingent consideration for business acquisitions  37   1,632      14 
 
Contingent consideration for business acquisitions — net of current portion (Note 21)        26   1,193 
 

252

PLDT has an existing Outside and Inside Plant Contracted Services Agreement with MIESCOR, a subsidiary of Meralco, covering the periods from November 25, 2011 until December 31, 2014, renewable upon mutual agreement by both parties. Under the agreement, MIESCOR assumes full and overall responsibility for the implementation and completion of any assigned project such as cable works, civil and electrical engineering works and subscriber line installation and maintenance that are required for the provisioning and restoration of lines and recovery of existing plant.


Total fees under this agreement, which was presented as part of repairs and maintenance in our consolidated income statements, amounted to Php33 million, Php19 million and Php8 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total amount capitalized to property, plant and equipment amounted to Php2 million, Php6 million and Php1 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under this agreement, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to nil as at December 31, 2013 and January 1, 2012, and Php2 million as at December 31, 2012.

PLDT also has an existing agreement with MIESCOR for the provision of work for outside plant rehabilitation and related activities. Under the agreement, MIESCOR is responsible for the preventive and corrective maintenance of cables and cabinets in the areas awarded to them. The original contract covers the period from January 1, 2011 up to December 31, 2012, however, both parties mutually agreed to an extension until March 31, 2014.

24.Related Party Transactions
Total fees under this agreement, which was presented as part of repairs and maintenance in our consolidated income statements, amounted to Php35 million, Php32 million and Php20 million for the years ended December 31, 2013, 2012 and 2011, respectively. Total amount capitalized to property, plant and equipment amounted to Php46 million, Php29 million and Php24 million for the years ended December 31, 2013, 2012 and 2011, respectively. There were no outstanding obligations under this agreement as at December 31, 2013 and 2012, and January 1, 2012.

 a.c.Transactions with RSIC

In 2012, PLDT has insurance policies with RSIC, a wholly-owned subsidiary of Meralco, covering material damages for buildings, building improvements and equipment. Total fees under these contracts, which was presented as part of insurance and security services in our consolidated income statements, amounted to Php3 million each for the years ended December 31, 2013 and 2012, respectively. There were no outstanding obligations for these contracts as at December 31, 2013 and 2012.

 d.Air Time Purchase Agreement between PLDT and AIL and Related Agreements

Under the Founder NSP Air Time Purchase Agreement, or ATPA, entered into with AIL in March 1997, which was amended in December 1998, or Original ATPA, PLDT was granted the exclusive right to sell AIL services, through ACeS Philippines, as national service provider, or NSP, in the Philippines. In exchange, the Original ATPA required PLDT to purchase from AIL a minimum of US$5 million worth of air time, or Minimum Air Time Purchase Obligation, annually over ten years commencing on January 1, 2002, or Minimum Purchase Period, the expected date of commercial operations of the Garuda I Satellite. In the event that AIL’s aggregate billed revenue was less than US$45 million in any given year, the Original ATPA also required PLDT to make supplemental air time purchase payments not to exceed US$15 million per year during the Minimum Purchase Period, or Supplemental Air Time Purchase Obligation.

On February 1, 2007, the parties to the Original ATPA entered into an amendment to the Original ATPA on substantially the terms attached to the term sheet negotiated with the relevant banks, or Amended ATPA. Under the Amended ATPA, the Minimum Air Time Purchase Obligation was amended and replaced in its entirety with an obligation of PLDT to purchase from AIL a minimum of US$500 thousand worth of air time annually over a period ending upon the earlier of: (i) the expiration of the Minimum Purchase Period; and (ii) the date on which all indebtedness incurred by AIL to finance the AIL System is repaid. Furthermore, the Amended ATPA unconditionally released PLDT from any obligations arising out of or in connection with the Original ATPA prior to the date of the Amended ATPA, except for obligations to pay for billable units used prior to such date.

Total fees under the Amended ATPA, which was presented as part of cost of sales in our consolidated income statements, amounted to Php50 million, Php80 million and Php105 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under the Amended ATPA, the outstanding obligations of PLDT, which was presented as part of accounts payable in our consolidated statements of financial position, amounted to Php44 million, Php43 million and Php147 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 5 – Income and Expenses – Cost of Sales.

 e.Transactions with Major Stockholders, Directors and Officers

Material transactions to which PLDT or any of its subsidiaries is a party, in which a director, key officer or owner of more than 10% of the outstanding common stock of PLDT, or any member of the immediate family of a director, key officer or owner of more than 10% of the outstanding common stock of PLDT had a direct or indirect material interest as at December 31, 2013 and 2012, and January 1, 2012 and for the years ended December 31, 2013, 2012 and 2011 are as follows:

1.Agreement between Smart and ALBV

Smart has an existing Technical Assistance Agreement with ALBV, a subsidiary of the First Pacific Group and its Philippine affiliates. ALBV provides technical support services and assistance in the operations and maintenance of Smart’s cellular business. The agreement, which expired on

February 23, 2012 was renewed until February 23, 2016 and is subject to further renewal upon mutual agreement of the parties, provides for payment of technical service fees equivalent to a rate of 0.5% of the consolidated net revenues of Smart. Effective February 1, 2014, the parties agreed to reduce the technical service fee rate from 0.5% to 0.4% of the consolidated net revenues of Smart. Total service fees under this agreement, which was presented as part of professional and other contracted services in our consolidated income statements, amounted to Php289 million, Php332 million and Php581 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under this agreement, the outstanding obligations, which was presented as part of accounts payable in our consolidated statements of financial position, amounted to Php336 million, Php252 million and Php234 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

2.Other Agreements with NTT Communications and/or its Affiliates

PLDT is a party to the following agreements with NTT Communications and/or its affiliates:

 Under the Founder NSP Air Time Purchase Agreement, or ATPA, entered into with AIL in March 1997, which was amended in December 1998 (as amended, the “Original ATPA”), PLDT was granted the exclusive right to sell AIL services, through ACeS Philippines, as national service provider, or NSP, in the Philippines. In exchange, the Original ATPA required PLDT to purchase from AIL a minimum of US$5 million worth of air time (the “Minimum Air Time Purchase Obligation”) annually over ten years commencing on January 1, 2002 (the “Minimum Purchase Period”), the expected date of commercial operations of the Garuda I Satellite. In the event that AIL’s aggregate billed revenue was less than US$45 million in any given year, the Original ATPA also required PLDT to make supplemental air time purchase payments not to exceed US$15 million per year during the Minimum Purchase Period (the “Supplemental Air Time Purchase Obligation”).

Service Agreement.On February 1, 2007, the parties to the Original ATPA2008, PLDT entered into an amendment toagreement with NTT World Engineering Marine Corporation wherein the Original ATPA on substantiallylatter provides offshore submarine cable repair and other allied services for the terms attached to the term sheet negotiated with the relevant banks (the “Amended ATPA”). Under the Amended ATPA, the Minimum Air Time Purchase Obligation was amended and replaced in its entirety with an obligationmaintenance of PLDT (the “Amended Minimum Air Time Purchase Obligation”) to purchase from AIL a minimum of US$500 thousand worth of air time annually over a period ending upon the earlier of: (i) the expiration of the Minimum Purchase Period; and (ii) the date on which all indebtedness incurred by AIL to finance the AIL System is repaid. Furthermore, the Amended ATPA unconditionally released PLDT from any obligations arising out of or in connection with the Original ATPA prior to the date of the Amended ATPA, except for obligations to pay for billable units used prior to such date.

TotalPLDT’s domestic fiber optic network submerged plant. The fees under the Amended ATPAthis agreement, which was presented as part of repairs and maintenance in our consolidated income statements, amounted to Php122Php14 million, Php158Php32 million and Php168Php14 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. Under the Amended ATPA,this agreement, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php140 million and Php114Php32 million as at December 31, 20102013 and 2009, respectively. SeeNote 5 — IncomePhp29 million each as at December 31, 2012 and Expenses.January 1, 2012;

 b. 

Agreements betweenAdvisory Services Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Communications, as amended on March 31, 2003, March 31, 2005 and certain subsidiariesJune 16, 2006, under which NTT Communications provides PLDT with Meralco

In the ordinary coursetechnical, marketing and other consulting services for various business areas of business, Meralco provides electricity to PLDT starting April 1, 2000. The fees under this agreement, which was presented as part of professional and certain subsidiaries’ offices within its franchise area. The rates charged by Meralco are the same as those with unrelated parties. Total electricity costsother contracted services in our consolidated income statements, amounted to Php2,438 million and Php911Php73 million for the year ended December 31, 20102013 and Php69 million each for the period from July 14, 2009 (the date Meralco became an associate of PCEV) toyears ended December 31, 2009, respectively.2012 and 2011. Under these agreements,this agreement, the outstanding utilities payableobligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php183Php12 million each as at December 31, 2013 and Php188January 1, 2012, and Php17 million as at December 31, 2010 and 2009, respectively.2012;

  In 2009,

Conventional International Telecommunications Services Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Communications under which PLDT and Smart renewedNTT Communications agreed to cooperative arrangements for conventional international telecommunications services to enhance their respective Pole Attachment Contracts with Meralco, wherein Meralco leases its pole spaces to accommodate PLDT’s and Smart’s cable network facilities. Totalinternational businesses. The fees under these contractsthis agreement, which was presented as part of rent in our consolidated income statements, amounted to Php199Php10 million each for the years ended December 31, 2013 and Php672012, and Php8 million for the year ended December 31, 2010 and for the period from July 14, 2009 to December 31, 2009, respectively.2011. Under these agreements,this agreement, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php111Php1 million and Php135 millioneach as at December 31, 20102013 and 2009, respectively.2012, and nil as at January 1, 2012; and

  See also

Note 10 — Investments in AssociatesArcstar Licensing Agreement and Joint VenturesArcstar Service Provider Agreementfor additional transactions involving Meralco.

c.Transactions. On March 24, 2000, PLDT entered into an agreement with Major Stockholders, Directors and Officers
Material transactions toNTT Worldwide Telecommunications Corporation under which PLDT or anymarkets, and manages data and other services under NTT Communications’ “Arcstar” brand to its corporate customers in the Philippines. PLDT also entered into a Trade Name and Trademark Agreement with NTT Communications under which PLDT has been given the right to use the trade name “Arcstar” and its related trademark, logo and symbols, solely for the purpose of its subsidiaries is a party,PLDT’s marketing, promotional and sales activities for the Arcstar services within the Philippines. The fees under this agreement, which was presented as part of selling and promotions in which a director, key officer or owner of more than 10% of the outstanding common stock of PLDT, or any member of the immediate family of a director, key officer or owner of more than 10% of the outstanding common stock of PLDT had a direct or indirect material interest, as at December 31, 2010our consolidated income statements, amounted to Php15 million, Php13 million and 2009 andPhp11 million for the years ended December 31, 2010, 20092013, 2012 and 2008 are2011, respectively. Under this agreement, the outstanding obligations of PLDT, which was presented as follows:part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php1 million, Php2 million and nil as at December 31, 2013 and 2012, and January 1, 2012, respectively.

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 1.3.Transactions with JGSHI and Subsidiaries

PLDT and certain of its subsidiaries have existing agreements with Universal Robina Corporation and Robinsons Land Corporation for office and business office rental. Total fees under these contracts, which was presented as part of rent in our consolidated income statements, amounted to Php95 million, Php82 million and Php29 million for the years ended December 31, 2013 and 2012 and for the period from October 26, 2011 to December 31, 2011, respectively. Under these agreements, the outstanding obligations, which was presented as part of accounts payable and accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php8 million, Php4 million and Php67 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

There were also other transactions such as airfare, electricity, marketing expenses and bank fees, which was presented as part of communication, training and travel, selling and promotions, repairs and maintenance and professional and other contracted services, totaling to Php31 million, Php88 million and Php15 million for the years ended December 31, 2013 and 2012 and for the period from October 26, 2011 to December 31, 2011, respectively. The outstanding obligations for these transactions, which was presented as part of accounts payable and accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php2 million, Php1 million and Php3 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

 4.Advisory Service Agreement between NTT DOCOMO and PLDT

An Advisory Services Agreement was entered into by NTT DOCOMO and PLDT on June 5, 2006, in accordance with the Cooperation Agreement dated January 31, 2006. Pursuant to the Advisory Services Agreement, NTT DOCOMO will provide the services of certain key personnel in connection with certain aspects of the business of PLDT and Smart. Also, this agreement governs the terms and conditions of the appointments of such key personnel and the corresponding fees related thereto. Total fees under this agreement, which was presented as part of professional and other contracted services in our consolidated income statements, amounted to Php73 million, Php56 million and Php72 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under this agreement, the outstanding obligations of PLDT, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php23 million as at December 31, 2013 and Php8 million each as at December 31, 2012 and January 1, 2012.

5.Transactions with Malayan

PLDT and certain of its subsidiaries have insurance policies with Malayan covering directors, officers, employees liability and material damages for buildings, building improvements, equipment and motor vehicles. The premiums are directly paid to Malayan. Total fees under these contracts, which was presented as part of insurance and security services in our consolidated income statements, amounted to Php231 million, Php234 million and Php230 million for the years ended December 31, 2013, 2012 and 2011, respectively. Under this agreement, the outstanding obligations, which was presented as part of accrued expenses and other current liabilities in our consolidated statements of financial position, amounted to Php9 million as at December 31, 2013 and Php1 million each as at December 31, 2012 and January 1, 2012. One director of PLDT has direct/indirect interests in or serves as a director/officer of Malayan as at December 31, 2013 and 2012, and January 1, 2012.

6.Cooperation Agreement with First Pacific and certain affiliates, or the FP Parties, NTT Communications and NTT DoCoMoDOCOMO
In connection with the transfer by NTT Communications of approximately 12.6 million shares of PLDT’s common stock to NTT DoCoMo pursuant to a Stock Sale and Purchase Agreement dated January 31, 2006 between NTT Communications and NTT DoCoMo, the FP Parties, NTT Communications and NTT DoCoMo entered into a Cooperation Agreement, dated January 31, 2006. Under the Cooperation Agreement, the relevant parties extended certain rights of NTT Communications under the Stock Purchase and Strategic Investment Agreement dated September 28, 1999, as amended, and the Shareholders Agreement dated March 24, 2000, to NTT DoCoMo, including:

In connection with the transfer by NTT Communications of approximately 12.6 million shares of PLDT’s common stock to NTT DOCOMO pursuant to a Stock Sale and Purchase Agreement dated January 31, 2006 between NTT Communications and NTT DOCOMO, the FP Parties, NTT Communications and NTT DOCOMO entered into a Cooperation Agreement, dated January 31, 2006. Under the Cooperation Agreement, the relevant parties extended certain rights of NTT Communications under the Stock Purchase and Strategic Investment Agreement dated September 28, 1999, as amended, and the Shareholders Agreement dated March 24, 2000, to NTT DOCOMO, including:

certain contractual veto rights over a number of major decisions or transactions; and

rights relating to the representation on the Board of Directors of PLDT and Smart, respectively, and any committees thereof.

Moreover, key provisions of the Cooperation Agreement pertain to, among other things:

  certain contractual veto rights over a number of major decisions or transactions; and
rights relating to the representation on the Board of Directors of PLDT and Smart, respectively, and any committees thereof.
Moreover, key provisions of the Cooperation Agreement pertain to, among other things:

Restriction on Ownership of Shares of PLDT by NTT Communications and NTT DoCoMoDOCOMO. Each of NTT Communications and NTT DoCoMoDOCOMO has agreed not to beneficially own, directly or indirectly, in the aggregate with their respective subsidiaries and affiliates, more than 21% of the issued and outstanding shares of PLDT’s common stock. If such event does occur, the FP Parties, as long as they own in the aggregate not less than 21% of the issued and outstanding shares of PLDT’s common stock, have the right to terminate their respective rights and obligations under the Cooperation Agreement, the Shareholders Agreement and the Stock Purchase and Strategic Investment Agreement.

  

Limitation on Competition. NTT Communications, NTT DoComoDOCOMO and their respective subsidiaries are prohibited from investing in excess of certain thresholds in businesses competing with PLDT in respect of customers principally located in the Philippines and from using their assets in the Philippines in such businesses. Moreover, if PLDT, Smart or any of Smart’s subsidiaries intend to enter into any contractual arrangement relating to certain competing businesses, PLDT is required to provide, or to use reasonable efforts to procure that Smart or any of Smart’s subsidiaries provide, NTT Communications and NTT DoCoMoDOCOMO with the same opportunity to enter into such agreement with PLDT or Smart or any of Smart’s subsidiaries, as the case may be.

  

Business Cooperation. PLDT and NTT DoCoMoDOCOMO agreed in principle to collaborate with each other on the business development, roll-out and use of a wireless-code division multiple access mobile communication network. In addition, PLDT agreed, to the extent of the power conferred by its direct or indirect shareholding in Smart, to procure that Smart will: (i) become a member of a strategic alliance group for international roaming and corporate sales and services; and (ii) enter into a business relationship concerning preferred roaming and inter-operator tariff discounts with NTT DoCoMo.DOCOMO.

  

Additional Rights of NTT DoCoMoDOCOMO. Pursuant to amendments effected by the Cooperation Agreement to the Stock Purchase and Strategic Investment Agreement and the Shareholders Agreement, upon NTT Communications and NTT DoCoMoDOCOMO and their respective subsidiaries owning in the aggregate 20% or more of PLDT’s shares of common stock and for as long as they continue to own in the aggregate at least 17.5% of PLDT’s shares of common stock then outstanding, NTT DoCoMoDOCOMO has additional rights under the Stock Purchase and Strategic Investment Agreement and Shareholders Agreement, including that:

 1.NTT DoCoMoDOCOMO is entitled to nominate one additional NTT DoCoMoDOCOMO nominee to the Board of Directors of each PLDT and Smart;

 2.PLDT must consult NTT DoCoMoDOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees of any proposal of investment in an entity that would primarily engage in a business that would be in direct competition or substantially

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the same business opportunities, customer base, products or services with business carried on by NTT DoCoMo,DOCOMO, or which NTT DoCoMoDOCOMO has announced publicly an intention to carry on;

 3.PLDT must procure that Smart does not cease to carry on its business, dispose of all of its assets, issue common shares, merge or consolidate, or effect winding up or liquidation without PLDT first consulting with NTT DoCoMoDOCOMO no later than 30 days prior to the first submission to the board of PLDT or Smart, or certain of its committees; and

 4.PLDT must first consult with NTT DoCoMoDOCOMO no later than 30 days prior to the first submission to the board of PLDT or certain of its committees for the approval of any transfer by any member of the PLDT Group of Smart common capital stock to any person who is not a member of the PLDT Group.

NTT Communications and NTT DOCOMO together beneficially owned approximately 20% of PLDT’s outstanding common stock as at December 31, 2013 and 2012, and January 1, 2012.

As at December 31, 2010, NTT Communications and NTT DoCoMo together beneficially owned approximately 21% of PLDT’s outstanding common stock.
  

Change in Control. Each of NTT Communications, NTT DoCoMoDOCOMO and the FP Parties agreed that to the extent permissible under applicable laws and regulations of the Philippines and other jurisdictions, subject to certain conditions, to cast its vote as a shareholder in support of any resolution proposed by the Board of Directors of PLDT for the purpose of safeguarding PLDT from any Hostile Transferee. A“Hostile Transferee”is defined under the Cooperation Agreement to mean any person (other than NTT Communications, NTT DoCoMo,DOCOMO, First Pacific or any of their respective affiliates) determined to be so by the PLDT Board of Directors and includes, without limitation, a person who announces an intention to acquire, seeking to acquire or acquires 30% or more of PLDT common shares then issued and outstanding from time to time or having (by itself or together with itself) acquired 30% or more of the PLDT common shares who announces an intention to acquire, seeking to acquire or acquires a further 2% of such PLDT common shares: (a) at a price per share which is less than the fair market value as determined by the Board of Directors of PLDT, as advised by a professional financial advisor; (b) which is subject to conditions which are subjective or which could not be reasonably satisfied; (c) without making an offer for all PLDT common shares not held by it and/or its affiliates and/or persons who, pursuant to an agreement or understanding (whether formal or informal), actively cooperate to obtain or consolidate control over PLDT; (d) whose offer for the PLDT common shares is unlikely to succeed; or (e) whose intention is otherwise notbona fide; provided that, no person will be deemed a Hostile Transferee unless prior to making such determination, the Board of Directors of PLDT has used reasonable efforts to discuss with NTT Communications and NTT DoCoMoDOCOMO in good faith whether such person should be considered a Hostile Transferee.

  

Termination.If NTT Communications, NTT DoCoMoDOCOMO or their respective subsidiaries cease to own, in the aggregate, full legal and beneficial title to at least 10% of the shares of PLDT’s common stock then issued and outstanding, their respective rights and obligations under the Cooperation Agreement and the Shareholders Agreement will terminate and the Strategic Arrangements (as defined in the Stock Purchase and Strategic Investment Agreement) will terminate. If the FP Parties and their respective subsidiaries cease to have, directly or indirectly, effective voting power in respect of shares of PLDT’s common stock representing at least 18.5% of the shares of PLDT’s common stock then issued and outstanding, their respective rights and obligations under the Cooperation Agreement, the Stock Purchase and Strategic Investment Agreement, and the Shareholders Agreement will terminate.

f. Others

 2.1.Integrated i-modeTelecommunications Services Package Agreement between NTT DoCoMo and Smart
An Integrated i-mode Services Package Agreement was entered intoprovided by Smart and NTT DoCoMo on February 15, 2006, under which NTT DoCoMo agreed to grant Smart, on an exclusive basis within the territory of the Philippines for a period of five years, an integrated i-mode services package including a non-transferable license to use the licensed materials and the i-mode brand, as well as implementation support and assistance and post-commercial launch support from NTT DoCoMo. Pursuant to this agreement, Smart is required to pay an initial license fee and running royalty fees based on the revenue arising from i-mode subscription fees and data traffic. There was no royalty fees for the years ended

255


December 31, 2010 and 2009 while total royalty fees charged to operations under this agreement amounted to Php55 million for the year ended December 31, 2008. Smart has no outstanding obligation under this agreement as at December 31, 2010 and 2009.
3.Advisory Service Agreement between NTT DoCoMo and PLDT
An Advisory Services Agreement was entered into by NTT DoCoMo and PLDT on June 5, 2006, in accordance with the Cooperation Agreement dated January 31, 2006. Pursuant to the Advisory Services Agreement, NTT DoCoMo will provide the services of certain key personnel in connection with certain aspects of the business of PLDT and Smart. Also, this agreement governs the terms and conditions of the appointments of such key personnel and the corresponding fees related thereto. Total fees under this agreement amounted to Php75 million each for the years ended December 31, 2010 and 2009 and Php76 million for the year ended December 31, 2008. Under this agreement, the outstanding obligations of PLDT amounted to Php13 million and Php6 million as at December 31, 2010 and 2009, respectively.
4.Other Agreements with NTT Communications and/or its Affiliates
PLDT is a party to the following agreements with NTT Communications and/or its affiliates:
Advisory Services Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Communications, as amended on March 31, 2003, March 31, 2005 and June 16, 2006, under which NTT Communications provides PLDT with technical, marketing and other consulting services for various business areas of PLDT starting April 1, 2000;
Arcstar Licensing Agreement and Arcstar Service Provider Agreement. On March 24, 2000, PLDT entered into an agreement with NTT Worldwide Telecommunications Corporation under which PLDT markets, and manages data and other services under NTT Communications’ “Arcstar” brand to its corporate customers in the Philippines. PLDT also entered into a Trade Name and Trademark Agreement with NTT Communications under which PLDT has been given the right to use the trade name “Arcstar” and its related trademark, logo and symbols, solely for the purpose of PLDT’s marketing, promotional and sales activities for the Arcstar services within the Philippines;
Conventional International Telecommunications Services Agreement.On March 24, 2000, PLDT entered into an agreement with NTT Communications under which PLDT and NTT Communications agreed to cooperative arrangements for conventional international telecommunications services to enhance their respective international businesses; and
Service Agreement.On February 1, 2008, PLDT entered into an agreement with NTT World Engineering Marine Corporation wherein the latter provides offshore submarine cable repair and other allied services for the maintenance of PLDT’s domestic fiber optic network submerged plant.
Total fees under these agreements amounted to Php114 million each for the years ended December 31, 2010 and 2009 and Php99 million for the year ended December 31, 2008. Under these agreements, the outstanding obligations of PLDT amounted to Php44 million and Php39 million as at December 31, 2010 and 2009, respectively.
5.Agreement between Smart and Asia Link B.V., or ALBV
Smart has an existing Technical Assistance Agreement with ALBV, a subsidiary of the First Pacific Group. ALBV provides technical support services and assistance in the operations and maintenance of Smart’s cellular business. The agreement, which upon its expiration on February 23, 2008 was renewed until February 23, 2012 and is subject to further renewal upon mutual agreement of the parties, provides for payment of technical service fees equivalent to 1% of the consolidated net revenues of Smart. Total service fees charged to operations under this agreement amounted to Php615 million, Php634 million and Php630 million for the years ended December 31, 2010, 2009 and 2008, respectively. Under this agreement, the outstanding obligations of Smart amounted to Php200 million and Php188 million as at December 31, 2010 and 2009, respectively.

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6.Agreements Relating to Insurance Companies
Gotuaco del Rosario and Associates, or Gotuaco, acts as the broker for certain insurance companies to cover certain insurable properties of the PLDT Group. Insurance premiums are remitted to Gotuaco and the broker’s fees are settled between Gotuaco and the insurance companies. In addition, PLDT has an insurance policy with Malayan Insurance Co., Inc., or Malayan, wherein premiums are directly paid to Malayan. Total insurance expenses under these agreements amounted to Php328 million, Php404 million and Php419 million for the years ended December 31, 2010, 2009 and 2008, respectively. Two directors of PLDT have direct/indirect interests in or serve as a director/officer of Gotuaco and Malayan.
d.Others
SeeNote 18 — Prepaymentsfor other related party transactions.
Compensation of Key Officers of the PLDT Group
The compensation of key officers of the PLDT Group by benefit type for the years ended December 31, 2010, 2009 and 2008 are as follows:
             
  2010  2009  2008 
  (in million pesos)
Short-term employee benefits  664   593   498 
Share-based payments and other long-term employee benefits (Note 25)  277   418   233 
Post-employment benefits (Note 25)  25   33   24 
 
Total compensation paid to key officers of the PLDT Group  966   1,044   755 
 
In 2008, each of the directors, including the members of the advisory board of PLDT, is entitled to a director’s fee in the amount of Php125 thousand for each board meeting attended. Each of the members or advisors of the audit, executive compensation, governance and nomination and technology strategy committees is entitled to a fee in the amount of Php50 thousand for each committee meeting attended.
On January 27, 2009, the Board of Directors of PLDT approved the increase in director’s fee to Php200 thousand for board meeting attendance and to Php75 thousand for Board Committee meeting attendance. The director’s fee was last adjusted in July 1998.
There are no agreements between PLDT Group and any of its key management personnel providing for benefits upon termination of employment, except for such benefitssubsidiaries to which they may be entitled under PLDT Group’s retirement and incentive plans.various related parties

PLDT and certain of its subsidiaries provide telephone, data communication and other services to various related parties at arm’s length similar to transactions with other customers. The revenues under these services amounted to Php717 million, Php418 million and Php296 million for the years ended December 31, 2013, 2012 and 2011, respectively. The outstanding receivables of PLDT and certain of its subsidiaries, which was presented as part of trade and other receivables in our consolidated statements of financial position, from these services amounted to Php476 million, Php297 million and Php325 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

SeeNote 10 – Investments in Associates, Joint Ventures and DepositsInvestment in MediaQuest andNote 18 – Prepayments – Agreement between PLDT and Smart with TV5for other related party transactions.

Compensation of Key Officers of the PLDT Group

The compensation of key officers of the PLDT Group by benefit type for the years ended December 31, 2013, 2012 and 2011 are as follows:

   2013   2012   2011 
   (in million pesos) 

Short-term employee benefits

   791     995     820  

Post-employment benefits (Note 25)

   31     20     33  

Other long-term employee benefits (Note 25)

   305     272     —    
  

 

 

   

 

 

   

 

 

 

Total compensation paid to key officers of the PLDT Group

   1,127     1,287     853  
  

 

 

   

 

 

   

 

 

 

Each of the directors, including the members of the advisory board of PLDT, is entitled to a director’s fee in the amount of Php200 thousand for each board meeting attended. Each of the members or advisors of the audit, executive compensation, governance and nomination and technology strategy committees is entitled to a fee in the amount of Php75 thousand for each committee meeting attended.

There are no agreements between PLDT Group and any of its key management personnel providing for benefits upon termination of employment, except for such benefits to which they may be entitled under PLDT Group’s retirement and incentive plans.

The amounts disclosed in the table are the amounts recognized as expenses during the reporting period related to key management personnel.

25.Share-based Payments and Employee Benefits
Share-based Payments
On August 28, 2006, the PLDT’s Board of Directors approved, in principle, the broad outline of the PLDT Group’s strategic plans for 2007 to 2009 focusing on the development of new revenue streams to drive future growth while protecting the existing core communications business. To ensure the proper execution of the three-year plan, particularly with respect to the manpower resources being committed to such plans, 2007 to 2009 LTIP, upon endorsement of the ECC, was approved by the Board of Directors to cover the period from January 1, 2007 to December 31, 2009, or the 2007 to 2009 Performance Cycle. The payment under the 2007 to 2009 LTIP was intended to be made at the end of the 2007 to 2009 Performance Cycle (without interim payments) and contingent upon the achievement of an approved target increase in PLDT’s common share price by the end of the 2007 to 2009 Performance Cycle and a cumulative consolidated net income target for the 2007 to 2009 Performance Cycle.

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Pension


Defined Benefit Pension Plans

PLDT have defined benefit pension plans, operating under the legal name “The Board of Trustees for the account of the Beneficial Trust Fund created pursuant to the Benefit Plan of PLDT Company” and covering substantially all of our permanent and regular employees. Certain subsidiaries of PLDT have not yet drawn up a specific retirement plan for its permanent or regular employees. For the purpose of complying withIAS 19, pension benefit expense has been actuarially computed based on defined benefit plan.

The value of the reward and accrued as at December 31, 2009, was computed in accordance with the formula prescribed in 2007 to 2009 LTIP, subject to the minimum and maximum award level to be granted, following the terms and formula as described therein. The fair value of the 2007 to 2009 LTIP were estimated using an option pricing model, which considered annual stock volatility, risk-free interest rates, dividends yield, the remaining life of options and share price. The cost per share of the 2007 to 2009 LTIP, which amounted to Php1,029 as at December 31, 2009, was based on the computed minimum award level. The fair value of the 2007 to 2009 LTIP recognized as expense amounted to Php1,833 million and Php1,281 million for the years ended December 31, 2009 and 2008, respectively. The outstanding 2007 to 2009 LTIP liability of Php4,582 million as at December 31, 2009 was paid in April 2010. SeeNote 3 — Management’s Use of Judgments, Estimates and Assumptions, Note 5 — Income and Expenses, Note 23 — Accrued Expenses and Other Current Liabilities andNote 26 — Contractual Obligations and Commercial Commitments.
Pension
Defined Benefit Pension Plans
We have defined benefit pension plans, covering substantially all of our permanent and regular employees, excluding those employees of Smart and its subsidiary, I-Contacts, which require contributions to be made to a separate administrative fund.

Our actuarial valuation is performed every year-end. Based on the latest actuarial valuation, the actual present value of accrued (prepaid) benefit costs, net periodic benefit costs and average assumptions used in developing the valuation as at and for the years ended December 31, 2010, 2009 and 2008 are as follows:

             
  2010  2009  2008 
  (in million pesos)
Changes in present value of defined benefit obligations:            
Present value of defined benefit obligations at beginning of year  17,399   10,917   10,160 
Interest costs  1,559   1,193   834 
Current service costs  997   643   600 
Actuarial losses (gains) on obligations  (2,855)  4,720   (101)
Liabilities of newly acquired subsidiaries     19    
Actual benefits paid/settlements  (2,504)  (93)  (576)
Curtailment  8       
 
Present value of defined benefit obligations at end of year  14,604   17,399   10,917 
 
             
Changes in fair value of plan assets:            
Fair value of plan assets at beginning of year  19,980   7,168   8,519 
Actual contributions  (17)  8,866   914 
Expected return on plan assets  2,340   673   865 
Actual benefits paid/settlements  (2,481)  (93)  (576)
Actuarial gains (losses) on plan assets  179   3,366   (2,554)
 
Fair value of plan assets at end of year  20,001   19,980   7,168 
 
Unfunded (surplus) status — net  (5,397)  (2,581)  3,749 
Unrecognized net actuarial gains (losses) (Note 3)  479   (2,474)  (1,126)
 
   (4,918)  (5,055)  2,623 
 
Accrued benefit costs (Note 3)  415   359   2,623 
 
Prepaid benefit costs (Notes 3 and 18)  5,333   5,414    
 
             
Components of net periodic benefit costs:            
Interest costs  1,559   1,193   834 
Current service costs  997   643   600 
Net actuarial losses (gains) recognized for the year  23   (3)  (11)
Event gains — net  (62)      
Expected return on plan assets  (2,340)  (673)  (865)
 
Net periodic benefit costs (Notes 3 and 5)  177   1,160   558 
 
Actual return on plan assets amounted to gain of Php2,519 million and Php4,036 million for the years ended December 31, 2010 and 2009, respectively, and loss of Php1,690 million for the year ended December 31, 2008.

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The present value of defined benefit obligation, fair values of assets and experience adjustment as at and for the years ended December 31, 2010, 2009, 2008, 20072013, 2012 and 20062011 are as follows:
                     
  2010  2009  2008  2007  2006 
  (in million pesos) 
Present value of defined benefit obligation  14,604   17,399   10,917   10,160   13,314 
Fair value of assets  20,001   19,980   7,168   8,519   5,768 
Experience adjustment arising on:                    
Liability (gain) loss due to experience as percentage of defined benefit obligation  (1.43%)  5.10%  (7.23%)  0.05%  (1.61%)
Asset (gain) loss due to experience as percentage of plan assets  0.77%  16.86%  (35.66%)  14.01%  5.96%
 

   2013  2012  2011 
      (As Adjusted – Note 2) 
   (in million pesos) 

Changes in present value of defined benefit obligations:

    

Present value of defined benefit obligations at beginning of the year

   17,456    15,662    14,604  

Actuarial losses (gains) – economic assumptions

   1,180    1,622    (528

Service costs

   970    869    812  

Interest costs on benefit obligation

   958    980    1,164  

Actuarial losses (gains) – experience

   552    478    (201

Actual benefits paid/settlements

   (1,348  (1,985  (203

Discontinued operations and others (Notes 2 and 13)

   (271  (170  14  
  

 

 

  

 

 

  

 

 

 

Present value of defined benefit obligations at end of the year

   19,497    17,456    15,662  
  

 

 

  

 

 

  

 

 

 

Changes in fair value of plan assets:

    

Fair value of plan assets at beginning of the year

   18,435    23,706    20,001  

Actual contributions

   2,073    2,012    26  

Interest income on plan assets

   1,023    1,482    1,600  

Actual benefits paid/settlements

   (1,348  (1,957  (203

Actuarial gains (losses) on plan assets (excluding amount included in net interest)

   (10,996  (6,785  2,282  

Discontinued operations and others (Notes 2 and 13)

   —      (23  —    
  

 

 

  

 

 

  

 

 

 

Fair value of plan assets at end of the year

   9,187    18,435    23,706  
  

 

 

  

 

 

  

 

 

 

Surplus (unfunded) status – net

   (10,310  979    8,044  

Accrued benefit costs (Note 3)

   10,310    492    438  
  

 

 

  

 

 

  

 

 

 

Prepaid benefit costs (Notes 3 and 18)

   —      1,471    8,482  
  

 

 

  

 

 

  

 

 

 

Components of net periodic benefit costs:

    

Service costs

   970    869    812  

Interest income – net

   (65  (502  (436

Curtailment/settlement gains (losses) and other adjustments

   (275  160    6  
  

 

 

  

 

 

  

 

 

 

Net periodic benefit costs (Notes 3 and 5)

   630    527    382  

Discontinued operations (Note 2)

   —      170    8  
  

 

 

  

 

 

  

 

 

 

Net periodic benefit costs from continuing operations

   630    357    374  
  

 

 

  

 

 

  

 

 

 

Actual net losses on plan assets amounted to Php9,973 million and Php5,303 million for the years ended December 31, 2013 and 2012, respectively, while actual net gains on plan assets amounted to Php3,882 million for the year ended December 31, 2011.

We expect to contribute the amount of Php1,443 million to our defined benefit plan in 2014.

The following table sets forth the expected future settlements by the Plan of maturing defined benefit obligation as at December 31, 2013:

   (in million pesos) 

2014

   160  

2015

   247  

2016

   284  

2017

   338  

2018

   396  

2019 to 2057

   95,315  

The average duration of the defined benefit obligation at the end of the reporting period is 16 to 28 years.

The weighted average assumptions used to determine pension benefits for the years ended December 31, 2010, 20092013, 2012 and 20082011 are as follows:

             
  2010  2009  2008 
 
Average remaining working years of covered employee  19   18   20 
Expected rate of return on plan assets  11%  12%  9%
Discount rate  8%  9%  11%
Rate of increase in compensation  8%  9%  10%
 

   2013  2012  2011 

Rate of increase in compensation

   6  6  6

Discount rate

   5  5  6

We have adopted mortality rates in accordance with the 1994 Group Annuity Mortality Table developed by the U.S. Society of Actuaries, which provides separate rates for males and females.

The assetssensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at the end of the Beneficial Trust Fund established for reporting period, assuming if all other assumptions were held constant:

   2013 
   Increase (Decrease) 
      (in million pesos) 

Discount rate

   1  (2,427
   (1%)   2,879  

Future salary increases

   1  2,877  
   (1%)   (2,425

PLDT’s pension plan include investments in sharesRetirement Plan

The Board of stocksTrustees performed an asset-liability matching study of our retirement plan. The Board of Trustees, which manages the beneficial trust fund, is composed of: (i) a member of the Board of Directors of PLDT, who is not a beneficiary of the Plan; (ii) a member of the Board of Directors or a senior officer of PLDT, who is a beneficiary of the Plan; (iii) a senior member of the executive staff of PLDT; and (iv) two persons who are not executives or employees of PLDT.

Benefits are payable in the event of termination of employment due to: (i) compulsory, optional, or deferred retirement; (ii) death while in active service; (iii) physical disability; (iv) voluntary resignation; or (v) involuntary separation from service. For a plan member with less than 15 years of credited services, retirement benefit is equal to 100% of final compensation for every year of service. For those with at least 15 years of service, retirement benefit is equal to 125% of final compensation for every year of service, with such percentage to be increased by an additional 5% for each completed year of service in excess of 15 years, but not to exceed a fair value amountingmaximum of 200%. In case of voluntary resignation after attainment of age 40 and completion of at least 15 years of credited service, benefit is equal to Php428 million and Php430 million as at December 31, 2010 and 2009, respectively, which represent about 2% eacha percentage of such beneficial trust fund’s assets available for plan benefits.

his vested retirement benefit, in accordance with percentages prescribed in the retirement plan.

The Board of Trustees of the beneficial trust fund uses an investment approach with the objective of mixed equity and fixed income investments to maximizemaximizing the long-term expected return of plan assets. The investment portfolio has been structured to achieve the objective of regular income with capital growth and out-performance of benchmarks. A majority of the investment portfolio consists of variouslisted and unlisted equity securities, debt and fixed income securities while the remaining portion consists of multi-currencypassive investments like temporary cash investments and fixed income investments.

The plan assets are primarily exposed to financial risks such as liquidity risk and price risk.

Liquidity risk pertains to the plan’s ability to meet its obligation to the employees upon retirement. To effectively manage liquidity risk, the Board of Trustees invests at least the equivalent amount of actuarially computed expected compulsory retirement benefit payments for the year to liquid/semi-liquid assets such as treasury notes, treasury bills, savings and time deposits with commercial banks.

Price risk pertains mainly to fluctuations in market prices of equity securities listed in the Philippine SEC. In order to effectively manage price risk, the Board of Trustees continuously assesses these risks by closely monitoring the market value of the securities and implementing prudent investment strategies.

For the year 2013, PLDT contributed a total of Php2,073 million to the beneficial trust fund.

The following table sets forth the fair values, which are equal to the carrying values, of PLDT’s plan assets recognized as at December 31, 2013 and 2012:

   2013   2012 
   (in million pesos) 

Noncurrent Financial Assets

    

Investments in:

    

Unlisted equity investments

   5,877     14,930  

Shares of stock

   2,435     3,064  

Mutual funds

   64     120  

Government securities

   43     48  

Investment properties

   11     8  
  

 

 

   

 

 

 

Total noncurrent financial assets

   8,430     18,170  
  

 

 

   

 

 

 

Current Financial Assets

    

Cash and cash equivalents

   340     181  

Receivables

   336     3  
  

 

 

   

 

 

 

Total current financial assets

   676     184  
  

 

 

   

 

 

 

Total PLDT’s Plan Assets

   9,106     18,354  

Subsidiaries Plan Assets

   81     81  
  

 

 

   

 

 

 

Total Plan Assets of Defined Benefit Pension Plans

   9,187     18,435  
  

 

 

   

 

 

 

Investment in shares of stocks is valued using the latest bid price at reporting date. Investments in mutual funds and government securities are valued using the market values at reporting date. Investment properties are valued using the latest available appraised values.

Unlisted Equity Investments

As at December 31, 2013 and 2012, this account consists of:

   2013  2012  2013   2012 
   % of Ownership  (in million pesos) 

MediaQuest

   100  100  5,373     14,468  

Tahanan Mutual Building and Loan Association, or TMBLA (net of subscriptions payable of Php32 million)

   100  100  302     271  

BTF Holdings, Inc., or BTFHI

   100  100  162     152  

Superior Multi Parañaque Homes, Inc.

   100  100  39     38  

Bancholders, Inc., or Bancholders

   100  100  1     1  

Superior Parañaque Homes, Inc.

   100  100  —       —    
    

 

 

   

 

 

 
     5,877     14,930  
    

 

 

   

 

 

 

Investment in MediaQuest

MediaQuest was registered with the Philippine SEC on June 29, 1999 primarily to purchase, subscribe for or otherwise acquire and own, hold, use, manage, sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of real and personal property or every kind and description, and to pay thereof in whole or in part, in cash or by exchanging, stocks, bonds and other evidences of indebtedness or securities of this any other corporation. Its investments include common shares of stocks of various communication, broadcasting and media entities.

The Board of Trustees of the Beneficial Trust Fund approved to make additional investments in MediaQuest amounting to Php750 million each on November 5, 2012 and January 25, 2013 to fund the latter’s operational and capital expenditure requirements. Subsequently, on March 1, 2013, the Board of Directors of MediaQuest approved its application of the additional investment to additional paid in capital on the existing subscribed shares of stock.

On May 8, 2012, the Board of Trustees of the Beneficial Trust Fund approved the issuance by MediaQuest of PDRs amounting to Php6 billion. The underlying shares of these PDRs are the shares of stocks of Cignal TV held by MediaQuest (Cignal TV PDRs). On the same date, MediaQuest Board of Directors approved the investment in Cignal TV PDRs by ePLDT, which will give ePLDT a 40% economic interest in Cignal TV. In June 2012, MediaQuest received a deposit for future PDRs subscription of Php4 billion from ePLDT. Additional deposits of Php1 billion each were received on July 6, 2012 and August 9, 2012. The Cignal TV PDRs were subsequently issued on September 27, 2013.

On January 25, 2013, the Board of Trustees of the Beneficial Trust Fund and the MediaQuest Board of Directors approved the issuance of additional MediaQuest PDRs amounting to Php3.6 billion. The underlying shares of these additional PDRs are the shares of stocks of Satventures held by MediaQuest (Satventures PDRs), the holder of which will have a 40% economic interest in Satventures. Satventures is a wholly-owned subsidiary of MediaQuest and the investment vehicle for Cignal TV. From March to August 2013, MediaQuest received from ePLDT an amount aggregating to Php3.6 billion representing deposits for future PDRs subscription. The Satventures PDRs were subsequently issued on September 27, 2013.

Also, on January 25, 2013, the Board of Trustees of the Beneficial Trust Fund and the MediaQuest Board of Directors of approved the issuance of additional MediaQuest PDRs amounting to Php1.95 billion. The underlying shares of these additional PDRs are the shares of stocks of Hastings held by MediaQuest (Hastings PDRs), the holder of which will have a 100% economic interest in Hastings. Hastings is a wholly-owned subsidiary of MediaQuest, which holds all the print-related investments of MediaQuest, including noncontrolling interests in the three leading newspapers: The Philippine Star, the Philippine Daily Inquirer, and Business World. In 2013, MediaQuest received from ePLDT an amount aggregating to Php1.95 billion representing deposits for future PDRs subscription. SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in MediaQuest.

In November 2013, the Board of Trustees of the Beneficial Trust Fund and the Board of Directors of MediaQuest approved the additional investment of Hastings in Philippine Star Group and approved the issuance of PDRs by MediaQuest for its interest in Hastings. SeeNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment in MediaQuest.

As at the date of issuance of this report, the Hastings PDRs have not yet been issued.

The fair values of the investments in MediaQuest were measured using an income approach valuation technique using cash flows projections based on financial budgets and forecasts approved by MediaQuest’s Board of Directors, covering a five-year period from 2014 to 2018.

The pre-tax discount rates applied to cash flow projections range from 11% to 12%. Cash flows beyond the five-year period are determined using 3% to 7% growth rates.

Investment in TMBLA

TMBLA was incorporated for the primary purpose of accumulating the savings of its stockholders and lending funds to them for housing programs. The beneficial trust fund has a direct subscription in shares of stocks of TMBLA in the amount of Php112 million. The related unpaid subscription of Php32 million is included in “unlisted equity investments” in the total financial assets table. The cumulative change in the fair market value of this investment amounted to Php222 million and Php191 million as at December 31, 2013 and 2012, respectively.

Investment in BTFHI

BTFHI was incorporated for the primary purpose of acquiring voting preferred shares in PLDT and while the owner, holder of possessor thereof, to exercise all the rights, powers, and privileges of ownership or any other interest therein.

On October 26, 2012, BTFHI subscribed to a total of 150 million shares of Voting Preferred Stock of PLDT at a subscription price of Php1.00 per share for a total subscription price of Php150 million. Total cash dividend income amounted to Php12 million and Php2 million for the years ended December 31, 2013 and 2012, respectively. Dividend receivable amounted to Php2 million each as at December 31, 2013 and 2012.

Investment in Shares of Stocks

As at December 31, 2013 and 2012, this account consists of:

   2013   2012 
   (in million pesos) 

Common shares

   2,075     2,704  

Preferred shares

   360     360  
  

 

 

   

 

 

 
   2,435     3,064  
  

 

 

   

 

 

 

Common shares pertain to shares listed in the PSE with fair value of Php2,075 million, which include shares of PSE with fair value of Php1,668 million, shares of PLDT with fair value of Php71 million and other shares with fair value of Php336 million as at December 31, 2013. Total gain from investment in shares of PLDT for the year ended December 31, 2013 amounted to Php9 million comprising of Php5 million in dividend income and Php4 million unrealized gain from increase in market value of investment.

Common shares pertain to shares listed in the PSE with fair value of Php2,704 million, which include shares of PSE with fair value of Php2,286 million, shares of PLDT with fair value of Php67 million and other shares with fair value of Php351 million as at December 31, 2012. Total gain from investment in shares of PLDT for the year ended December 31, 2012 amounted to Php5 million comprising of Php5 million in dividend income and Php159 thousand unrealized gain from increase in market value of investment.

Preferred shares represent 300 million preferred shares of PLDT at Php10 par value as at December 31, 2013 and 2012, net of subscription payable of Php2,640 million. These shares, which bear dividend of 13.5% per annum based on the paid-up subscription price, are cumulative, non-convertible and redeemable at par value at the option of PLDT. Dividend earned on this investment amounted to Php49 million each for the years ended December 31, 2013 and 2012.

Mutual Funds

Investment in mutual funds include various U.S. dollar and Euro denominated equity funds, which aims to out-perform benchmarks in various international indices as part of its investment strategy. Total investment in mutual funds amounted to Php64 million and Php120 million as at December 31, 2013 and 2012, respectively.

Government Securities

Investment in government securities include retail treasury bonds bearing interest ranging from 5.88% to 7.00%. These securities are fully guaranteed by the government of the Republic of the Philippines. Total investment in government securities amounted to Php43 million and Php48 million as at December 31, 2013 and 2012, respectively.

Investment Properties

Investment properties include two condominium units (bare, separate 127 and 58 square meter units) located in Ayala-FGU Building along Alabang-Zapote Road in Muntinlupa City.

The asset allocation of the Plan is set and reviewed from time to time by the Plan Trustees taking into account the membership profile, the liquidity requirements of the Plan and risk appetite of the Plan sponsor. This considers the expected benefit cashflows to be matched with asset durations. Total investment properties amounted to Php11 million and Php8 million as at December 31, 2013 and 2012, respectively.

The allocation of the fair value of the beneficial trust fund’s assets for the PLDT pension plan as at December 31, 2010, 20092013 and 2008 is2012, and January 1, 2012 are as follows:

             
  2010  2009  2008 
 
Investments in listed and unlisted equity securities  70%  78%  51%
Temporary cash investments  24%  7%  8%
Investments in real estate  3%  5%  9%
Investments in debt and fixed income securities  2%  9%  27%
Investments in mutual funds  1%  1%  5%
 
   100%  100%  100%
 
Total contributions of PLDT to the pension plan amounted to Php8,848 million and Php914 million for the years ended December 31, 2009 and 2008, respectively. PLDT made no contribution to the pension plan for the year ended December 31, 2010. The Php8,848 million contributions to the benefit trust fund in 2009 was used to invest in various listed and unlisted equity securities. As a result of the contributions in 2009, PLDT expects substantial reduction in net periodic benefit costs moving forward. In addition, PLDT does not expect to make contributions to the beneficial trust fund in the next few years.

   December 31,  January 1, 
   2013  2012  2012 

Investments in listed and unlisted equity securities

   95  98  96

Temporary cash investments

   4  1  3

Investments in mutual funds

   1  1  —    

Investments in debt and fixed income securities

   —      —      1
  

 

 

  

 

 

  

 

 

 
   100  100  100
  

 

 

  

 

 

  

 

 

 

Defined Contribution PlanPlans

Smart and I-Contactscertain of its subsidiaries contributions to the plan are made based on the employee’semployees’ years of tenure and range from 5% to 10% of the employee’s monthly salary. Additionally, an employee has an option to make a personal contribution to the fund, at an amount not exceeding 10% of his monthly salary. The employer then provides an additional contribution to the fund ranging from 10% to 50% of the employee’s contribution based on the employee’s years of tenure. Although the plan has a defined contribution format, Smart and I-Contactscertain of its subsidiaries regularly monitor compliance with R.A. 7641, otherwise known as “The Retirement Pay Law”.7641. As at December 31, 2010

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2013 and 2009,2012, and January 1, 2012, Smart and I-Contactscertain of its subsidiaries were in compliance with the requirements of R.A. 7641.

Smart and certain of its subsidiaries actuarial valuation is performed every year-end. Based on the latest actuarial valuation, the actual present value of prepaid benefit costs, net periodic benefit costs and average assumptions used in developing the valuation as at and for the years ended December 31, 2013, 2012 and 2011 are as follows:

   2013  2012  2011 
   (in million pesos) 

Changes in present value of defined benefit obligations:

  

Present value of defined benefit obligations at beginning of the year

   1,606    1,470    1,196  

Service costs

   226    226    203  

Interest costs on benefit obligation

   95    101    119  

Actuarial losses (gains) – economic assumptions

   (6  —      2  

Actuarial losses (gains) – experience

   (59  6    121  

Actual benefits paid/settlements

   (177  (197  (162

Others (Notes 2 and 13)

   —      —      (9
  

 

 

  

 

 

  

 

 

 

Present value of defined benefit obligations at end of the year

   1,685    1,606    1,470  
  

 

 

  

 

 

  

 

 

 

Changes in fair value of plan assets:

  

Fair value of plan assets at beginning of the year

   1,760    1,614    1,483  

Actual contributions

   208    185    176  

Interest income on plan assets

   95    100    117  

Actuarial gains (losses) on plan assets (excluding amount included in net interest)

   (2  58    1  

Actual benefits paid/settlements

   (177  (197  (163
  

 

 

  

 

 

  

 

 

 

Fair value of plan assets at end of the year

   1,884    1,760    1,614  
  

 

 

  

 

 

  

 

 

 

Surplus status – net

   199    154    144  
  

 

 

  

 

 

  

 

 

 

Components of net periodic benefit costs:

  

Service costs

   226    226    203  

Interest cost – net

   —      1    2  

Curtailment/settlement losses and other adjustments

   —      —      (9
  

 

 

  

 

 

  

 

 

 

Net periodic benefit costs (Notes 3 and 5)

   226    227    196  
  

 

 

  

 

 

  

 

 

 

Actual net gains on plan assets amounted to Php93 million, Php158 million and Php118 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Approximately Php234 million are expected to be contributed by Smart and certain of its subsidiaries to the fund in 2014.

The following table sets forth the expected future settlements by the Plan of maturing defined benefit obligation as at December 31, 2013:

   (in million pesos) 

2014

   101  

2015

   53  

2016

   67  

2017

   73  

2018

   97  

2019 to 2054

   21,436  

The average duration of the defined benefit obligation at the end of the reporting period is 21 to 34 years.

The weighted average assumptions used to determine pension benefits for the years ended December 31, 2013, 2012 and 2011 are as follows:

   2013  2012  2011 

Rate of increase in compensation

   6  7  7

Discount rate

   5  5  6

The overall expected rate on return on assets is determined based on the market expectations prevailing, applicable to the period over which the obligation is to be settled.

The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at the end of the reporting period, assuming if all other asumptions were held constant:

   2013 
   Increase (Decrease) 
      (in million pesos) 

Discount rate

   1  —    
   (1%)   —    

Future salary increases

   1  6  
   (1%)   (2

Smart’s Retirement Plan

The fund is being managed and invested by BPI Asset Management and Trust Group, as Trustee, pursuant to an amended trust agreement dated February 21, 2012.

The plan’s investment portfolio seeks to achieve regular income, and long-term capital growth and consistent performance over its own portfolio benchmark. In order to attain this objective, the trustee’sTrustee’s mandate is to invest in a diversified portfolio of bonds and equities, both domestic and international. The portfolio mix is kept at 60% to 90% for debt and fixed income securities while 10% to 40% is allotted to equity securities.

The following table sets forth the fair values, which are equal to the carrying values, of Smart’s plan assets recognized as at December 31, 2013 and 2012:

   2013   2012 
   (in million pesos) 

Noncurrent Financial Assets

    

Investments in(1):

    

Domestic fixed income

   989     1,280  

International equities

   635     350  

Domestic equities

   342     513  

International fixed income

   188     175  
  

 

 

   

 

 

 

Total noncurrent financial assets

   2,154     2,318  
  

 

 

   

 

 

 

Current Financial Assets

    

Cash and cash equivalents

   294     12  

Receivables

   1     15  
  

 

 

   

 

 

 

Total current financial assets

   295     27  
  

 

 

   

 

 

 

Total plan assets

   2,449     2,345  

Employee’s share

   660     664  
  

 

 

   

 

 

 

Smart’s plan assets

   1,789     1,681  

Subsidiaries’ plan assets

   95     79  
  

 

 

   

 

 

 

Total Plan Assets of Defined Contribution Plans

   1,884     1,760  
  

 

 

   

 

 

 

(1)

Carrying value includes accumulated equity on investees.

Investment in Domestic Fixed Income

Investments in domestic fixed income include Philippine peso denominated bonds, such as government securities, corporate bonds and notes, special savings, debt securities and other deposit products of the banks. The investments under this category earned between 7.2% and 9.1% interest for the year ended December 31, 2013 and between 6.2% to 9.1% interest in 2012.

Investment in International Equities

This category consists of international mutual funds being managed by ING International. Total investment in international equities amounted to Php635 million and Php350 million as at December 31, 2013 and 2012, respectively.

Investment in Domestic Equities

Investments in domestic equities include common shares and convertible preferred shares listed in the PSE. These investments earn on stock price appreciation and dividend payments. Total investment in domestic equities amounted to Php342 million and Php513 million as at December 31, 2013 and 2012, respectively.

Investment in International Fixed Income

Investments in international fixed income include foreign currency denominated bonds, such as mutual funds and unit investment trust funds. The Philippine sovereign debt, the only interest-bearing investment in this category, earned 5% interest for the year ended December 31, 2012. Total investment in international fixed income amounted to Php188 million and Php175 million as at December 31, 2013 and 2012, respectively.

Cash and Cash Equivalents

This pertains to the fund’s excess liquidity in Philippine peso and U.S. dollars including time deposits and mutual funds and other deposit products of banks with tenor of less than one year.

The asset allocation of the Plan is set and reviewed from time to time by the Plan Trustees taking into account the membership profile, the liquidity requirements of the Plan and risk appetite of the Plan sponsor. This considers the expected benefit cashflows to be matched with asset durations.

The allocation of the fair value of the beneficial trust fund’s assets for Smart and I-Contactscertain of its subsidiaries pension plan assets as at December 31, 2010, 20092013 and 20082012, and January 1, 2012 is as follows:

             
  2010  2009  2008 
 
Investments in debt and fixed income securities  58%  61%  68%
Investments in listed and unlisted equity securities  37%  34%  23%
Others  5%  5%  9%
 
   100%  100%  100%
 
Smart

   December 31,  January 1, 
   2013  2012  2012 

Investments in debt and fixed income securities

   48  56  57

Investments in listed and unlisted equity securities

   40  37  29

Others

   12  7  14
  

 

 

  

 

 

  

 

 

 
   100  100  100
  

 

 

  

 

 

  

 

 

 

Other Long-term Employee Benefits

To ensure the proper execution of our strategic and I-Contacts currently expectoperational business plans while taking into account the acquisition of Digitel in 2011 and other recent market developments, the 2012 to make approximately Php188 million2014 LTIP, covering the period from January 1, 2012 to December 31, 2014, was approved by the Board of cash contributionsDirectors with the endorsement of the ECC on March 22, 2012. The award in the 2012 to their pension plans2014 LTIP is contingent upon the successful achievement of certain profit targets, intended to align the execution of the business strategies of the expanded Group, including Digitel, over the three year period from 2012 to 2014. In addition, the new LTIP allows for the participation of a number of senior executives and certain newly hired executives and ensures the continuity of management in 2011.

Pension Benefit Costs
Total consolidated pension benefitline with the succession planning of the PLDT Group. LTIP costs recognized for the years ended December 31, 2010, 20092013 and 2008 are as follows:
             
  2010  2009  2008 
  (in million pesos) 
Expense recognized for defined benefit plans  177   1,160   558 
Expense recognized for defined contribution plans  59   146   167 
 
Total expense recognized for consolidated pension benefit costs (Notes 3 and 5)  236   1,306   725 
 
Other Long-term Employee Benefits
The new LTIP, or 20102012 amounted to 2012 LTIP, has been presented toPhp1,638 million and approved by the ECC and the Board of Directors, and is based on profit targets for the covered Performance Cycle. The cost of 2010 to 2012 LTIP is determined using the projected unit credit method based on assumed discount rates and profit targets.Php1,491 million, respectively. Total outstanding liability and fair value of 20102012 to 20122014 LTIP cost amounted to Php1,392Php3,129 million and Php1,491 million as at and for the year ended December 31, 2010.2013 and 2012, respectively. SeeNote 3 Management’s Use of Accounting Judgments, Estimates and Assumptions – Estimating Pension Benefit Costs and Other Employee Benefitsand
Note 5 Income and Expenses – Compensation and Employee Benefits.

Net periodic benefit costs computed for the yearyears ended December 31, 20102013 and 2012 are as follows:

   2013   2012 
   (in million pesos) 

Components of net periodic benefit costs:

    

Current service costs

   1,532     1,459  

Interest costs

   42     21  

Net actuarial loss

   64     11  
  

 

 

   

 

 

 

Net periodic benefit costs (Note 3)

   1,638     1,491  
  

 

 

   

 

 

 

26.
(in million pesos)
Components of net periodic benefit costs:
Current service costs1,327
Interest costs28
Net actuarial loss37
Net periodic benefit costs1,392
Provisions and Contingencies

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26. Contractual Obligations and Commercial Commitments
Contractual Obligations
The following table discloses our consolidated contractual undiscounted obligations outstanding as at December 31, 2010 and 2009:
                     
  Payments Due by Period
      Less than         More than
  Total 1 year 1-3 years 3-5 years 5 years
  (in million pesos)
December 31, 2010
                    
Debt(1):
  113,394   6,569   51,308   33,978   21,539 
Principal  92,590   6,206   38,263   29,335   18,786 
Interest  20,804   363   13,045   4,643   2,753 
Lease obligations:
  8,003   4,383   1,710   948   962 
Operating lease  7,959   4,353   1,697   947   962 
Finance lease  44   30   13   1    
Unconditional purchase obligations(2)
  797   271   263   263    
Other obligations:
  68,714   50,247   13,895   683  ��3,889 
Derivative financial liabilities(3):
  4,173      1,667   674   1,832 
Long-term currency swaps  4,173      1,667   674   1,832 
Various trade and other obligations:  64,541   50,247   12,228   9   2,057 
Suppliers and contractors  32,997   20,957   12,040       
Utilities and related expenses  16,477   16,446   10   3   18 
Employee benefits  3,853   3,853          
Customers’ deposits  2,223      178   6   2,039 
Dividends  2,086   2,086          
Carriers  1,866   1,866          
Others  5,039   5,039          
 
Total contractual obligations
  190,908   61,470   67,176   35,872   26,390 
 
                     
December 31, 2009
                    
Debt(1):
  130,075   5,241   56,398   38,073   30,363 
Principal  102,587   4,876   40,226   31,953   25,532 
Interest  27,488   365   16,172   6,120   4,831 
Lease obligations:
  7,564   3,778   1,956   994   836 
Operating lease  7,497   3,730   1,940   991   836 
Finance lease  67   48   16   3    
Unconditional purchase obligations(2)
  834   137   279   279   139 
Other obligations:
  64,456   44,322   15,528   826   3,780 
Derivative financial liabilities(3):
  4,759      2,153   789   1,817 
Long-term currency swaps  4,759      2,153   789   1,817 
Various trade and other obligations:  59,697   44,322   13,375   37   1,963 
Suppliers and contractors  26,941   14,975   11,966       
Utilities and related expenses  14,737   14,687   18   5   27 
Employee benefits  8,082   8,082          
Customers’ deposits  2,166      198   32   1,936 
Carriers  1,937   1,937          
Dividends  1,749   1,749          
Others  4,085   2,892   1,193       
 
Total contractual obligations
  202,929   53,478   74,161   40,172   35,118 
 
(1)Consists of notes payable and long-term debt, including current portion; gross of unamortized debt discount and debt issuance costs.
(2)Based on the Amended ATPA with AIL. See Note 24 — Related Party Transactions.
(3)Gross liabilities before any offsetting application.
Debt
SeeNote 20 — Interest-bearing Financial Liabilitiesfor a detailed discussion of our debt.
Operating Lease Obligations
The PLDT Group has various lease contracts for periods ranging from one to ten years covering certain offices, warehouses, cell sites telecommunications equipment locations and various office equipment.

261


The consolidated future minimum lease commitments payable with non-cancellable operating leases as at December 31, 2010 are as follows:
(in million pesos)
Within one year4,469
After one year but not more than five years2,528
More than five years962
7,959
Finance Lease Obligations
SeeNote 20 — Interest-bearing Financial Liabilitiesfor the detailed discussion of our long-term finance lease obligations.
Unconditional Purchase Obligations
SeeNote 24 — Related Party Transactionsfor a detailed discussion of PLDT’s obligation under the Original and the Amended ATPA.
Under the Amended ATPA, PLDT’s aggregate remaining minimum obligation is approximately Php797 million and Php834 million as at December 31, 2010 and 2009, respectively.
Other Obligations
Derivative Financial Liabilities
SeeNote 28 — Financial Assets and Liabilitiesfor the detailed discussion of our derivative financial liabilities.
Various Trade and Other Obligations
PLDT Group has various obligations to suppliers for the acquisition of phone and network equipment, contractors for services rendered on various projects, foreign administrations and domestic carriers for the access charges, shareholders for unpaid dividends distributions, employees for benefits related obligations, and various business and operational related agreements. Total obligations under these various agreements amounted to approximately Php64,541 million and Php59,697 million as at December 31, 2010 and 2009, respectively. SeeNote 22 — Accounts PayableandNote 23 — Accrued Expenses and Other Current Liabilities.
Commercial Commitments
Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php1,145 million and Php1,317 million as at December 31, 2010 and 2009, respectively. These commitments will expire within one year.
SeeNote 28 — Financial Assets and Liabilitiesfor discussion of Liquidity Risk Management.
27. Provisions and Contingencies
NTC Supervision and RegulationRegulatory Fees, or SRF, due to the NTC

Since 1994, following the rejection of PLDT’s formal protest against the assessments by the NTC of SRF, pursuant to Section 40 of Commonwealth Act No. 146, otherwise known as the Public Service Act, PLDT and the NTC havehad been involved in legal proceedings before the Court of Appeals and the Supreme Court. The principal issue in these proceedings was the basis for the computation of the SRF. PLDT’s opinion,position, which was upheld by the Court of Appeals, but, as set forth below, was rejected by the Supreme Court, was that the SRF should be computed based only on the par value of the subscribed or paid up capital of PLDT, excluding stock dividends, premium or capital in excess of par. The Supreme Court, in its decision dated July 28, 1999, ordered the NTC to make a recomputation of the SRF based on PLDT’s capitalthe actual amount paid (inclusive of premiums) for the “capital stock subscribed or paid” and paid.not on par or market value. Subsequently, in February 2000, the NTC issued an assessment letter for the balance of the SRF, but in calculating said fees, the NTC used as a basis not only capital stock subscribed or paid, but also the stock dividends. PLDT questioned

262


the inclusion of the stock dividends in the calculation of the SRF and sought to restrain the NTC from enforcing/implementingenforcing its assessment until the resolution of the said issue. Prior to the resolution of the issue mentioned above, PLDT paid the SRF due in 2000 together with the balance due from the recalculation of the SRF and had been paying the SRF due in September of each year thereafter, excluding the portion that was based on stock dividends.
The Supreme Court, in

In a resolution promulgated on December 4, 2007, held that the computationSupreme Court upheld the NTC assessment of the SRF should be based on the outstanding capital stock of PLDT, including stock dividends. In a letter to PLDT on February 29, 2008, or the Assessment Letter, the NTC assessed PLDT the total amount of SRF on stock dividends due from PLDT to be Php2,870 million, as SRF, which assessment included penalties and interest. On April 3, 2008, PLDT paidcomplied with the Supreme Court resolution by paying to the NTC the outstanding principal amount relating to SRF on stock dividends in the amount of Php455 million, but did not pay theincluding penalties and interest assessed by the NTC.interest. PLDT believes that it is not liable for penalties and interest, and therefore protested and disputed NTC’s assessments in the total amount of the same.Php2,870 million, which included penalties. In letters dated April 14, 2008 and June 18, 2008, or the Demand Letters, the NTC demanded payment of the balance of its assessment. On July 9, 2008, PLDT filed a Petition for Certiorari and Prohibition with the Court of Appeals, (the “Petition”)or the PLDT Petition, praying that the NTC be restrained from enforcing or implementing its assessment letter of February 29, 2008,Assessment Letter and demand letters dated April 14, 2008 and June 18, 2008,Demand Letters, all demanding payment of SRF including penalties and interests. The PLDT Petition further prayed that after notice and hearing, the NTC be ordered to forever cease and desist from implementing and/or enforcing, and annulling and reversing and setting aside, the said assessment letterAssessment Letter and demand letters.Demand Letters. The Court of Appeals, in its Decision dated May 25, 2010, granted PLDT’s Petition and set aside/annulled the NTC’s letters-assessments dated February 29, 2008, April 14, 2008Assessment Letter and June 18, 2008.Demand Letters. The NTC did not file a Motion for Reconsideration of the decision of the Court of Appeals. Instead,Appeals but instead filed a Petition for Review, or the NTC through the Solicitor General, filed a petition for reviewPetition, directly with the Supreme Court. PLDT received a copy of the petitionNTC Petition on July 29, 2010, and after receiving the order of the Supreme Court, to filefiled its comment filed its Comment on the petitionNTC Petition on December 7, 2010. As at March 29,The NTC filed a Reply dated August 26, 2011 this case is still pending withand PLDT filed a Rejoinder on October 12, 2011.

On January 30, 2013, the Supreme Court’s Third Division issued a resolution denying the NTC Petition for failure to show any reversible error in the challenged judgment as to warrant the exercise of the Supreme Court’s discretionary appellate jurisdiction. The Supreme Court resolution affirms the decision of the Court of Appeals, which declared that the NTC erred in imposing/assessing penalties and interest on the SRF payment of PLDT for the period 1987-2007, and annulled and set aside the Assessment Letter and Demand Letters. On April 10, 2013, the NTC filed a Motion for Reconsideration of the decision of the Supreme Court.

PLDT received the Motion for Reconsideration on April 15, 2013 and filed its Comment/Opposition on May 15, 2013.

On June 26, 2013, the Supreme Court issued a resolution denying with finality the Motion for Reconsideration of the NTC. PLDT received the Supreme Court’s resolution on August 6, 2013, which serves as the termination of the case.

PLDT’s Local Business and Franchise Tax Assessments

The Local Government Code of 1991, or Republic Act (R.A.) 7160, which took effect on January 1, 1992, extended

Pursuant to local government units, or LGUs, the power to tax businesses within their territorial jurisdiction granted under Batas Pambansa 337, and withdrew tax exemptions previously granted to franchise grantees under Section 12 of R.A. 7082.

PLDT believes that the Public Telecommunications Policy Act, or R.A. 7925, which took effect on March 16, 1995, and the grant of local franchise and business taxes exemption privileges to other franchise holders subsequent to the effectivity of R.A. 7160, implicitly restored its local franchise and business taxes exemption privilege under Section 12 of R.A. 7082, or the PLDT Franchise pursuant to Section 23 thereof or the equality of treatment clause. To confirm this position, PLDT sought and obtained on June 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF,decision of the Philippine Department of Finance, which ruled that PLDT is exempt from the payment of local franchise and business taxes imposable by LGUs under R.A. 7160. However,Supreme Court on March 25, 2003 in a ruling relating to a tax assessment by the case ofPLDT vs. City of Davao the Supreme Court decided thatdeclaring PLDT was not exempt from the local franchise tax.
Althoughtax, PLDT believes that it is not liable to paystarted paying local franchise and business taxes, PLDT has entered into compromise settlements with several LGUs, including the City of Makati, in ordertax to maintain and preserve its good standing and relationship with these LGUs. Under these compromise settlements, which have mostly been approved by the relevant courts,various local government units. PLDT has paid a total amount of Php936Php1,163 million as at December 31, 20102013 for local franchise tax covering prior periods up to December 31, 2010.
2013.

As at December 31, 2010,2013, PLDT has no contested Local Government Unit, or LGU, assessments for franchise taxes based on gross receipts received or collected for services within their respective territorial jurisdiction.

However, PLDT contested the imposition of local business taxes in addition to local franchise tax by the City of Tuguegarao in the amount of Php1.9 million for the years 1998 to 2003. The Regional Trial Court, or RTC, rendered a decision stating that the City of Tuguegarao cannot impose local business tax on PLDT, there being no ordinance enacted for that purpose. The City of Tuguegarao has filed aIts Motion for Reconsideration which washaving been denied by the court in its Order dated March 2, 2009. The2009, the City of Tuguegarao has filed a Notice of Appeal before the Court of Appeals. PLDT filed a motion to dismiss on the said appeal on the ground of lack of jurisdiction as the appeal should have been filed before the Court of Tax Appeals, or CTA. The CityIn a resolution dated February 9, 2012, the Court of Tuguegarao filed its Comment to PLDT’s

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Motion to Dismiss. PLDT will file its Reply onAppeals dismissed the said Commentcase for failure of the City of Tuguegarao. Said motionTuguegarao and its Treasurer to dismiss is now submitted for resolution by the honorable court.
Moreover,file their Appellants’ Brief. PLDT also contested the imposition of local business tax in addition to local franchise tax also by the Province of Cagayan based on gross receipts derived from outside its territorial jurisdiction specifically that of the City of Tuguegarao in the amount of Php3Php2.3 million for the years 19992006 to 2006. The2011. PLDT filed a Petition with the RTC in its decision dated February 25, 2009, ruled in favor of PLDT, stating that the Province of Cagayan can no longer tax PLDT for transactions taking place in the City of Tuguegarao.Makati on July 8, 2011. The ProvinceCity of CagayanTuguegarao filed its Answer with Motion to Dismiss claiming that the RTC of the City of Makati does not have jurisdiction over the case. Both parties have filed their respective Memorandum on the issue of Jurisdiction. A judicial dispute resolution, or JDR, conference was set by the court after the parties failed to settle the case in the mediation proceedings. Due to the failure of the City of Tuguegarao to appear on the JDR conference last May 15, 2012, the court transmitted the case to the Office of the Clerk of Court of the City of Makati for re-raffling in accordance with the JDR guidelines. The case was raffled to Branch 132 of Makati City and a Pre-Trial Conference, which was scheduled on October 19, 2012, was postponed by the court due to the Motion for Resolution on the previously filed Motion to Dismiss by Tuguegarao City on the ground of lack of jurisdiction. In an order dated October 12, 2012, the court

granted the Motion to Dismiss for lack of jurisdiction. PLDT filed a Motion for Reconsideration which waswhile the City of Tuguegarao has filed its corresponding Comment. In a Resolution dated January 18, 2013, the court denied the Motion for Reconsideration filed by the RTC in its Order dated October 7, 2009. The Province of CagayanPLDT. On March 8, 2013, PLDT filed a Petition for Review on the said dismissal of the case before the CTA. TheActing on the Petition for Review filed by PLDT, the Second Division of the CTA ordered PLDTissued a Resolution dated March 13, 2013 ordering the Respondents City of Tuguegarao and City Treasurer to file itstheir Comment on the Petition which PLDT timelyfor Review filed on February 25, 2010.by PLDT. In a resolutionResolution dated April 30, 2010,July 2, 2013 and received on July 12, 2013, the courtCTA ordered both parties to submit its respective Memorandum. PLDT has already submitted its Memorandum together with its Motion to Admit Memorandum and submit case for Resolution after Respondent City of Tuguegarao and City Treasurer failed to file their respective memoranda which PLDT timely compliedComment on the Petition for Review filed by filing its memorandum on June 4, 2010. Last September 20, 2010PLDT. On January 3, 2014, PLDT received an Entry of Appearance with Motion for Extension of Time to File Memorandum filed by the Decisionnew counsel of the CTA which Affirmed with Modifications the Decision of the RTC. Though said Decision affirmed that the Province of Cagayan cannot impose franchise tax on gross receipts realized in the City of Tuguegarao asking the CTA ruled that PLDT is subject to surcharge and interestallow the City of Tuguegarao to file its Memorandum on or before January 14, 2014. Said Motion for the years 1999Extension of Time to 2004 thereby reducing the amount refundable to PLDT from Php2.8 million to Php1 million. Both parties filed a partial motion for reconsideration of the said decision as well as comment on the other party’s motion. Both motions are now submitted for resolutionFile Memorandum was denied by the honorable court.

CTA in a Resolution dated January 14, 2014.

Smart’s Local Business and Franchise Tax Assessments

InSmart Communications, Inc. vs. City

The Province of Makati(Civil Cases No. 02-249 and 02-725, August 3, 2004), the deficiency local franchise tax assessment issued against Smart by the City of Makati totaling approximately Php312 million, inclusive of surcharges and interests, covering the years 1995 and 1998 to 2001 had been ordered cancelled by the RTC of City of Makati. This was upheld by the Court of Appeals in its Resolution dated June 9, 2005 (CA G.R. SP No. 88681, June 9, 2005). The Court’s Decision declaring Smart as exempt from paying local franchise tax had become final and executory.

In a letter dated March 24, 2008, the Miscellaneous, Taxes, Fees and Charges Division of the City of Makati requested payment for alleged deficiency local franchise tax covering the years 1995 and 1997 to 2003. Smart replied and reiterated its exemption from local franchise tax based on its legislative franchise and theSmart vs. City of Makaticase, which covered the years 1995 and 1998 to 2001. On March 9, 2009, Smart received another letter from the City of Makati on alleged outstanding franchise tax obligations covering the period from 1995 to 2009. In November 2009, Smart received a Billing Statement from the City of Makati for alleged franchise tax liability covering the period from 1995 and 1997 to 2003. On December 16, 2009 and January 29, 2010, Smart filed its reply letters and refuted the alleged franchise tax liability based on theSmart vs. City of Makaticase and its BOI registration dated May 3, 2001.
In August 2009, the Business Tax Division of the City of MakatiCagayan issued a Letter of Authority for the examination of Smart’s local tax liabilities covering the years 2006, 2007 and 2008. The City of Makati issued a Notice of Assessment dated October 23, 2009assessment against Smart for alleged deficiency local business taxes, fees and charges, including interest and penalties, covering the years 2006 to 2008. Smart protested the assessment on December 16, 2009. On February 8, 2010, Smart received the City of Makati’s Revised Notice of Assessment, which showed deficiency local franchise and business taxes, including interest and penalties, for the years 2006 to 2008. Smart contested the revised deficiency local tax assessment on February 15, 2010. In a letter dated February 19, 2010, the City of Makati demanded the immediate settlement of the alleged tax liability.tax. On March 3, 2010, Smart requested the City of Makati for a reinvestigation and for it to further evaluate its arguments and supporting documents. Afterwhich, Smart had several meetings with the officials of the City of Makati to discuss its request for reinvestigation. During that period, the City of Makati officials advised Smart that they still need to study and internally discuss the arguments of Smart.
On August 3, 2010, Smart received the City of Makati’s Notice of Distraint and Levy dated July 23, 2010. Smart sent a letter to the City of Makati on August 10, 2010 inquiring on the status of Smart’s request for reinvestigation and requested for a meeting. On August 19, 2010, Smart’s representatives met with the City of Makati officials and they then informed Smart’s representatives that its decision on the matter is final.
On September 1, 2010,January 24, 2011, Smart filed an Appeal with application for the issuance of a Temporary Restraining Order and Writ of Preliminary InjunctionPetition before the RTC of the City of Makati, (Branch 133) docketed as SCAappealing the assessment on the ground that Smart cannot be held liable for local franchise tax mainly because it has no sales office within the Province of Cagayan pursuant to Section 137 of the Local Government Code (Republic Act No. 10-852. On September 6, 2010, the7160, or R.A. No. 7160). The RTC of the City of Makati (Branch 133) promulgated an Order granting the issuance ofissued a temporary restraining order for 20 days directing the City of Makati and the City Treasurer to

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maintain the status quo until a hearing can be had to determine the propriety of injunctive relief conditioned upon posting of a Php200 million bond by Smart. In an Order dated September 23, 2010, the RTC of the City of Makati (Branch 133) issued a Writ of Preliminary Injunction conditioned upon posting of Php500 million bond by Smart. Smart submitted the bond with the RTC of the City of Makati (Branch 133) on October 4, 2010. The City of Makati filed a Motion for Reconsideration of the Order dated September 23, 2010, which was denied.
Meanwhile, the City of Makati filed a Motion to Dismiss dated September 15, 2010 and a Motion to Inhibit dated September 21, 2010, which were both denied as well as the Motions for Reconsideration from the Orders denying the said motions.
Thus, the City of Makati filed with the Court of Appeals a Petition for Certiorari [With Urgent Application for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction] dated December 16, 2010, seeking to annul the following orders of the RTC of the City of Makati: Order dated September 23, 2010 (granting Smart’s prayer for the issuance of a Writ of Preliminary Injunction); and Order dated October 12, 2010 (denying the City of Makati’s Motion to Dismiss and Motion for Inhibition), as well as the denial of the motions for reconsideration of the Orders dated September 23, 2010 and October 12, 2010. To date, the Court of Appeals has not ordered Smart to file a Comment. However, the Court of Appeals directed the City of Makati to amend the Verification portion of the Petition to state that the representative signing the Petition has personal knowledge of the contents thereof.
Trial dates are set on March 7, 2011, March 21, 2011, and the writ of preliminary injunction on November 14, 2011. On April 4, 2011.
Meanwhile, Smart also received similar30, 2012, the RTC rendered a decision giving the petition due course and the assailed tax assessment nullified and set aside. The Province of Cagayan was directed to cease and desist from imposing local franchise tax assessments issued by the City of Iloilo amounting to approximately Php0.7 million, inclusive of surcharge and penalties. The RTC of Iloilo likewise ruled in favor of Smart in its Decision dated January 19, 2005 (Civil Case No. 02-27144) declaring Smart as exempt from payment of local franchise tax. The City of Iloilo appealed the Decision and the Supreme Court, on February 27, 2009, (G.R. No. 167260) ruled that Smart is liable to pay the local franchise tax to the City of Iloilo. On April 2, 2009, Smart filed its Motion for Reconsideration. On July 1, 2009, the Supreme Court’s Special Second Division issued a Resolution denying Smart’s Motion for Reconsideration. In accordance with this Decision, Smart paid the City of Iloilo.
In 2002, Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations under the Tax Code of the City of Davao. The relevant section of Smart’s franchise provided that the grantee shall pay a franchise tax equivalent to 3% of all gross receipts of the business transacted under the franchise by the grantee and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. On September 16, 2008, the Supreme Court’s Third Division ruled that Smart is liable for local franchise tax since the phrase“in lieuSmart’s gross receipts. The Province of all taxes”merely covers national taxes and was rendered inoperative when the VAT law took effect. On October 21, 2008, Smart filed its Motion for Reconsideration. Smart argued that the operative word in the“in lieu of all taxes”clause in Smart’s franchise is the word“all". The word“all”before“taxes”in the clause“in lieu of all taxes”covers all kinds of taxes, national and local, except only those mentioned in the franchise. Smart also argued that the BIR already clarified in its Revenue Memorandum Circular No. 5-96 dated March 31, 1997 that the VAT merely replaced the franchise tax. On July 21, 2009, the Supreme Court’s Third Division promulgated its Resolution denying Smart’s Motion for Reconsideration and affirming that Smart is liable to pay local franchise tax to the City of Davao. On June 3, 2010, Smart received an initial local franchise tax assessment from the City of Davao covering the years from 1997 to 2010. Smart filed on June 21, 2010 its letter of protest against the local franchise tax assessment citing its local tax exemption by virtue of its BOI registration. On July 6, 2010, Smart received a letter from the City of Davao requesting for the submission of additional documents. Smart submitted several documents on August 3, 2010. In reply to Smart’s protest, the City of Davao answered several issues, made an assessment and demanded for the settlement of the local franchise tax. Smart received the reply on October 26, 2010. On November 11, 2010, Smart protested the assessment. In an unsigned letter received by Smart on December 17, 2010, the City of Davao maintained that Smart is obligated to pay the local franchise tax assessed.
In an Indorsement dated February 10, 2011, the City of Davao Legal Office issued an Opinion recognizing that Smart’s Tax exemption, being a BOI registered enterprise, shall commence from the date of registration with the Board (six years for pioneer business enterprise), pursuant to the provisions of Section 133(g) of the Local Government Code in relation to Article 11 of the Omnibus Investment Code of 1987.

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With the finality of the Iloilo and Davao cases, several cities and provinces have began discussions with Smart on the settlement of alleged local franchise tax within their respective jurisdictions. To limit the years covered by Smart’s tax liability, Smart is invoking the prospective application of the Iloilo and Davao decisions and the recognition of its local tax exemption by virtue of its BOI registration issued on May 3, 2001.
PCEV’s Local Franchise Tax Assessment
In 2004, PCEV secured a favorable decision from a Trial Court involving the local franchise tax in the City of Makati. In the case entitled“Pilipino Telephone Corporation vs. City of Makati and Andrea Pacita S. Guinto” (Piltel vs. City of Makati)(Civil Case No. 01-1760), the RTC of the City of Makati rendered its Decision dated December 10, 2002 declaring PCEV exempt from the payment of local franchise and business taxes. The Trial Court ruled that the legislative franchise of PCEV, R.A. 7293, granting the corporation exemption from local franchise and business taxes took effect after R.A. 7160 which removed all prior tax exemptions granted by law or other special law. The Trial Court’s decision was affirmed by the Court of Appeals in its Decision dated July 12, 2004 andCagayan then subsequently, the Supreme Court denied the appeal of the City of Makati in its Entry of Judgment dated October 13, 2004. The Supreme Court ruled that the City of Makati, failed to sufficiently show that the Court of Appeals committed any reversible error in the questioned judgment to warrant the exercise of the Supreme Court’s discretionary appellate jurisdiction.
On March 9, 2009, PCEV received a letter from the City of Makati on alleged outstanding franchise tax obligations covering the period from 1995 to 2009. In November 2009, PCEV received a Billing Statement from the City of Makati for alleged franchise tax liability covering the period from 1999 to 2003. On December 16, 2009, PCEV filed its reply and refuted the alleged franchise tax liability based on thePiltel vs. City of Makaticase. As at March 29, 2011, this case is still pending with the City of Makati.
Real Property Tax Assessment
InSmart Communications, Inc. vs. Central Board of Assessment Appeals, or CBAA, Local Board of Assessment Appeals of Surigao City, and City Assessor of Surigao City, Smart filed a Petition for Review withbefore the Court of Tax Appeals assailing the prior decision of the CBAA which declared Smart as being liable to pay real property taxes toin the City of Surigao. TheQuezon on June 19, 2012, appealing the RTC Decision dated April 30, 2012. In a Decision promulgated on July 25, 2013, the Court of Tax Appeals ruled that the franchise tax assessment made by the Province of Cagayan against Smart covering the periods from 2004 to 2009 based on “presumptive tax” is null and void for lack of legal and factual justifications.

Digitel’s Franchise Tax Assessment and Real Property Tax Assessment

In the case ofDigitel vs. Province of Pangasinan (G.R. No. 152534, February 23, 2007), the Supreme Court held that Digitel is liable to the Province of Pangasinan for franchise tax from November 26, 2008 decided that Smart is exempt from the payment of13, 1992 and real property taxes for itstax only on real properties which arenot actually, directly and exclusively used in the operationfranchise operations from February 17, 1994. Digitel has fully settled its obligation with the Province of Pangasinan with respect to franchise tax and is currently in talks with the Province for the settlement of the real property tax. However, in the case ofDigitel vs. City Government of Batangas (G.R. No. 156040, December 11, 2008), the Supreme Court ruled that Digitel’s real properties used in its franchise.

telecommunications business are subject to the real property tax. On AugustJune 16, 2010,2009, the Supreme Court denied Digitel’s Motion for Reconsideration. Digitel has already fully settled its obligation with the City Government of Batangas and in an order dated January 8, 2012, the case has been terminated by the Regional Trial Court, Branch 8 of Batangas City.

DMPI’s Local Business and Real Property Taxes Assessments

InDMPI vs. City of Cotabato(Civil Case No. 2010-345, February 2010), DMPI filed a Petition for Prohibition and Mandamus against the City of Cotabato due to their threats to close its cell sites due to real property tax delinquencies. DMPI is awaiting confirmation from external counsel and there are still ongoing negotiations for the reassessment of the valuation of DMPI sites.

In theDMPI vs. City of Davao (Special Civil Case No. 33,823-11, March 2011), DMPI’s Petition for Prohibition and Mandamus sought the Court’s intervention due to the threats issued by the City of Davao to stop the operations of DMPI business centers in the locality due to lack of business permits. DMPI contended that the City of Davao’s act of refusing to process its applications due to failure to pay real property taxes and business taxes is unwarranted, being that it is exempt under its BOI registration and prevailing laws. The case is in pre-trial stage. DMPI paid local business taxes and real property tax on tower and improvements. The City of Davao’s Legal Officer issued a letter-opinion declaring DMPI’s machinery as exempt from real property tax. The Office of the City Assessor has already confirmed this ruling, and issued a Tax Declaration declaring all machineries of DMPI located in the City of Davao as “Tax-Exempt”. DMPI has filed a Motion seeking the dismissal of the case considering these developments and its pending resolution.

In theDMPI vs. City Government of Malabon(Special Civil Action 11-011-MN, November 2011), DMPI filed a Petition for Prohibition and Mandamus against the City of Malabon to prevent the auction sale of DMPI sites in its jurisdiction for alleged real property tax liabilities. DMPI was able to secure a Temporary Restraining Order to defer the sale. There is an ongoing mediation and the parties are exploring the possibility of settling amicably.

DMPI’s Local Tower Fee Assessments

InDMPI vs. Municipality of San Mateo (Special Civil Action Case No. Br. 20-542, September 2011), DMPI filed a petition for Prohibition and Mandamus with Preliminary Injunction and Temporary Restraining Order against the Tower Fee Ordinance of the Municipality of San Mateo. The parties have already submitted their respective memorandum and the case is already submitted for resolution. The RTC denied DMPI’s petition. In June, 2013, DMPI filed a motion for reconsideration and sought the inhibition of the presiding judge. The inhibition was granted, and the Motion for Reconsideration is now pending resolution by the newly assigned Judge.

Meanwhile, inDMPI vs. the City Government of Santiago City and the City Permits and License Inspection Office of Santiago City, Isabela (CA-G.R. SP No. 127253) (Special Civil Action Case No. 36-0360, February 2011), the City Government of Santiago City filed an appeal with the Court of Appeals issued an Entryafter the lower court granted DMPI’s petition and ruled as unconstitutional the provision of Judgment confirming that the November 26, 2008 Resolution had become finalordinance imposing the Php200,000 per cell site per annum. DMPI has already filed its comment to the petition and executory on December 22, 2008,the matter is now awaiting resolution.

DMPI vs. City of Trece Martires (Civil Case No. TMSCA-004-10, February 2010) – DMPI petitioned to declare void the Trece Martires ordinance of imposing tower fee of Php150,000 for each cell site annually. Application for the issuance of a preliminary injunction by DMPI is pending resolution.

Globe Telecoms, et al. vs. City of Lipa(Civil Case No. 2006-0568, 2006) – Globe filed a Protest of Assessment questioning the act of the LGU in assessing tower fees for its sites amounting to Php105,000 per year. A joint Memoranda for Smart, DTPI and itDMPI was recordedsubmitted in June 2013 pertaining to the bookissue of Entries of Judgments.

whether the Ordinance is a regulatory or tax imposition.

Arbitration with Eastern Telecommunications Philippines, Inc., or ETPI

Since 1990, (up to present), PLDT and ETPI have been engaged in legal proceedings involving a number of issues in connection with their business relationship. While they have entered into Compromise Agreements in the past (one in February 1990, and another one in March 1999), these agreements have not put to rest their issues against each other. Accordingly, to avoid further protracted litigation and improve their business relationship, both PLDT and ETPI have agreed in April 2008 to submit their differences and issues to voluntary arbitration. For this arbitration (after collating various claims of one party against the other) ETPI, on one hand, initially submitted its claims of about Php2.9 billion against PLDT; while PLDT, on the other hand, submitted its claims of about Php2.8 billion against ETPI. Currently,Pursuant to an agreement between PLDT and ETPI, have agreed to suspend the arbitration proceedings between them.

have been suspended.

Matters Relating to a Third Party Aggregatorthe Gamboa Case and the recent Jose M. Roy III Petition

In late 2009, PLDT informally received a communication which provided a complaint,the Gamboa Case,the Supreme Court in its decision dated June 28, 2011, or the Draft, setting forth a securities class action lawsuitGamboa Case Decision, held that “the term ‘capital’ in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the United States Districtelection of directors and thus, in the case of PLDT, only to voting common shares, and not to the total outstanding capital stock (common and non-voting preferred shares)”. The Gamboa Case Decision reversed earlier opinions issued by the Philippine SEC that non-voting preferred shares are included in the computation of the 60%-40% Filipino-alien equity requirement of certain economic activities, such as telecommunications which is a public utility under Section 11, Article XII of the 1987 Constitution. Several motions for reconsideration of the Gamboa Case Decision were filed by the parties. On October 18, 2012, the Gamboa Case Decision became final and executory.

While PLDT was not a party to the Gamboa Case, the Supreme Court fordirected the Southern DistrictPhilippine SEC in the Gamboa Case “to apply this definition of New York againstthe term ‘capital’ in determining the extent of allowable foreign ownership in PLDT, and certain PLDT officers and indicated that such Draft may be filed against PLDT. The Draft alleges that some PLDT officers and employees caused PLDT’s subsidiary, Smart to enter into contracts withif there is a third-party entity in order to divert long distance telephone traffic and profits to such third-party entity. The Draft further alleges that these officers and employees personally created and controlled the third-party entity and were personally enriched as a result. The Draft alleges that this alleged scheme was accomplished by causing Smart to

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offer a lower rate for long distance telephone traffic to that third-party entity so that long distance traffic which otherwise would have been handled by PLDT at a higher rate was redirected to equipment owned by the third-party entity. The Draft alleges that PLDT failed to disclose material facts regarding the alleged scheme and that, as a result, PLDT misstated its true financial condition in its annual reports from 2002 through 2008.
In lightviolation of Section 11, Article XII of the nature ofConstitution, to impose the allegations and out of an abundance of caution, PLDT’sappropriate sanctions under the law.”

On July 5, 2011, the Board of Directors referred the Draft for review by the Audit Committee. The Audit Committee appointed an independent Investigation Committee to oversee an investigation into the allegations contained in the Draft. The Audit Committee retained independent counsel to lead in the investigation. To preserve the confidential nature of the inquiry, the investigation was limited to internal sources at PLDT, including current PLDT and Smart employees, internal records and discrete inquiries and public records searches.

The independent counsel, under the oversight of the Investigation Committee, has concluded on the basis of the evidence within the control of PLDT or otherwise reasonably available, that: (i) while the investigation cannot definitively exclude the possibility, the investigation has found no evidence to establish that PLDT’s officers and employees were personally involved in the creation of the third-party entity referred to in the Draft and has found no evidence of any improper personal financial benefit or gain by these officers and employees, directly or indirectly from such third party entity; and (ii) while Smart had substantial business relationships with various third-party aggregators of long-distance telephone traffic during the relevant period, including the third-party entity referred to in the Draft (with which Smart ceased doing business in 2008), there is no evidence that the relationship with such third-party entity in fact resulted in a material adverse impact on PLDT’s revenues during the relevant period and may have in fact benefited PLDT overall through an increase in overall call volume.
On May 7, 2010, the Audit Committee of PLDT approved the recommendation and conclusionamendments to the Seventh Article of PLDT’s Articles of Incorporation consisting of the independent counsel, as endorsedsub-classification of its authorized preferred capital stock into preferred shares with full voting rights, or Voting Preferred Stock, and serial preferred shares without voting rights, and other conforming amendments, or the Amendments. The Amendments were approved by the Investigation Committee.
stockholders of PLDT on March 22, 2012 and by the Philippine SEC on June 5, 2012.

On October 12, 2012, the Board of Directors of PLDT approved the specific rights, terms and conditions of the Voting Preferred Stock and authorized the subscription and issuance thereof to BTFHI, a Filipino corporation. On October 16, 2012, BTFHI subscribed to 150 million newly issued shares of Voting Preferred Stock, or the Voting Preferred Shares, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement dated October 15, 2012 between BTFHI and PLDT.

On May 30, 2013, the Philippine SEC issued SEC Memorandum Circular No. 8, or the Philippine SEC Guidelines, which provides under Section 2 thereof, as follows: “All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of compliance therewith, the required percentage of Filipino ownership shall be applied to both: (a) the total number of outstanding shares of stock entitled to vote in the election of directors; and (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.” PLDT was, and continues to be, compliant with the Philippine SEC Guidelines. As at end of December 31, 2013, PLDT’s foreign ownership was 31.53% of its outstanding shares entitled to vote (Common and Voting Preferred Shares), and 17.33% of its total outstanding capital stock.

On June 10, 2013, PLDT was served a copy of a Petition for Certiorari under Rule 65 of the Revised Rules of Court, or the Petition, filed with the Supreme Court by Jose M. Roy III as petitioner against the Chairperson of the Philippine SEC, Teresita Herbosa, the Philippine SEC and PLDT as respondents. The Petition primarily questions the constitutionality of the Philippine SEC Guidelines in determining the nationality of a Philippine company pursuant to the Gamboa Case Decision and Section 11, Article XII of the Constitution. Per the Philippine SEC Guidelines, the Philippine nationality requirement of Section 11, Article XII of the Constitution is met if at least 60% of: (a) the outstanding voting stocks; and (b) the outstanding capital stock of the company is owned by Filipinos.

The Petition admits that if the Philippine SEC Guidelines were to be followed, PLDT would be compliant with the nationality requirement of the Philippine Constitution. However, the Petition claims that the Philippine SEC Guidelines do not conform to the letter and spirit of the Constitution and the Gamboa Case Decision supposedly requiring the application of the 60%-40% ownership requirement in favor of Filipino citizens separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares, or the Other Gamboa Statements. The Petition also claims that the PLDT Beneficial Trust Fund does not satisfy the effective Filipino-control test for purposes of incorporating BTFHI which acquired the 150 million Voting Preferred Shares.

Wilson C. Gamboa, Jr., Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto Martin Y. Mamon and Gerardo C. Erebaren, or the Intervenors, filed a Motion for Leave to file Petition-In-Intervention dated July 16, 2013 which the Supreme Court granted in a Resolution dated August 6, 2013. The Petition-In-Intervention raised identical arguments and issues as that of the Petition.

PLDT, through counsels, filed its Comment on the Petition on September 5, 2013. In its Comment, PLDT raised the following defenses: (a) Petitioner’s direct recourse to the Supreme Court in filing the petition violates the fundamental doctrine of the hierarchy of courts. There are no compelling reasons to invoke the Supreme Court’s original jurisdiction; (b) The Petition was prematurely brought before the Supreme Court. Petitioner failed to exhaust administrative remedies before the Philippine SEC, and there are facts yet to be established (in the lower courts) that are necessary for a proper and complete ruling; (c) The Petition is in the nature of a petition for mandamus and/or declaratory relief which, under Rules 65 and 63 of the Rules of Court, are not within the exclusive and/or original jurisdiction of the Supreme Court, as provided under Article VIII, Sections 5(1), 5(5), 6 and 11 of the Constitution and Rule 56 of the Rules of Court; (d) The Petition must be dismissed in as much as it is challenging the validity and constitutionality of a Memorandum Circular, which was issued in the exercise of the Philippine SEC’s quasi-legislative power, for which a petition for certiorari is an inappropriate remedy; (e) Assuming arguendo that the issuance of Philippine SEC Memorandum Circular No. 8 involved the exercise by the Philippine SEC of its quasi-judicial power, the Petition still cannot prosper since the issue of the validity and constitutionality of Philippine SEC Memorandum Circular No. 8 does not pertain to errors of jurisdiction on the part of the Philippine SEC; (f) Petitioner is not the proper party to question the constitutionality of the Philippine SEC Guidelines and PLDT’s compliance with the Gamboa decision and the Petition is likewise not a valid taxpayer’s suit and should not be entertained by the Supreme Court; (g) The Petition seeks relief that effectively deprives the necessary and indispensable parties affected thereby (such as, BTFHI, MediaQuest, PLDT Beneficial Trust Fund, and all corporations in which PLDT Beneficial Trust Fund made an investment and their subsidiaries) of their constitutional right to due process, all of whom were not impleaded as parties; and (h) Philippine SEC Memorandum Circular No. 8 merely implemented the dispositive portion of the Gamboa Case Decision.

Particularly, for the defense under (h) above, PLDT argued that: (a) the only binding and enforceable part of the Gamboa Case Decision is the dispositive portion, which defined the term “capital” under Article XII, Section 11 of the 1987 Constitution as “shares of stock entitled to vote in the election of directors”, and such dispositive portion of the Gamboa Case Decision is properly reflected and enforced in Philippine SEC Memorandum Circular No. 8. The Other Gamboa Statements were just “obiter dicta” or expressions of opinion which have no precedential value and binding effect; and (b) with respect to the nationality of PLDT Beneficial Trust Fund and BTFHI, the fundamental requirements which needs to be satisfied in order for PLDT Beneficial Trust Fund and BTFHI to be considered Filipino is for PLDT Beneficial Trust Fund’s Trustees to be Filipinos and 60% of the Fund will accrue to the benefit of Philippine nationals. This is reflected in Section 3(a) of Republic Act No. 7042, as amended, or the Foreign Investment Act, which provides that the term “Philippine national” includes “a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of “Philippine nationals”. Both requirements are present with respect to the PLDT Beneficial Trust Fund. Consequently, there is no question that PLDT Beneficial Trust Fund and BTFHI are Filipino shareholders for purposes of classifying their 150 million shares of Voting Preferred Stock in PLDT and as a result, more than 60% of PLDT’s total voting stock is Filipino-owned. PLDT is thus compliant with the Philippine nationality requirement under Article XII, Section 11 of the 1987 Constitution.

PLDT filed its Comment on the Petition-in-intervention on October 22, 2013. PLDT raised identical defenses and arguments in its Comment on the Petition-in-intervention as that of its Comment on the Petition.

The resolution of the Jose M. Roy III Petition and the Petition-In-Intervention remains pending with the Supreme Court.

Other disclosures required byIAS 37, Provisions, Contingent Liabilities and Contingent Assets, were not provided as it may prejudice our position in on-going claims, litigations and assessments.

28. Financial Assets SeeNote 3 – Management’s Use of Accounting Judgments, Estimates and Liabilities
Assumptions – Provision for Legal Contingencies and Tax Assessments.

27.Financial Assets and Liabilities

We have various financial assets such as trade and non-trade receivables and cash and short-term deposits, which arise directly from our operations. Our principal financial liabilities, other than derivatives, comprise of bank loans and overdrafts, finance leases, trade and non-trade payables. The main purpose of these financial liabilities is to finance our operations. We also enter into derivative transactions, primarily principal only-currency swap agreements, currency options, interest rate swaps and forward foreign exchange contracts to manage the currency and interest rate risks arising from our operations and sources of financing. Our accounting policies in relation to derivatives are set out inNote 2 Summary of Significant Accounting Policies – Financial Instruments.

The following table sets forth our financial assets and financial liabilities as at December 31, 20102013 and 2009:

                                 
                      
          Fairvalue      Total    
  Loans Held-to- through Available-for- Liabilities financial Non-financial  
  and maturity profit or sale financial carried at assets and assets and  
  receivables investments loss assets amortizedcost liabilities liabilities Total
  (in million pesos)
Assets as at December 31, 2010
                                
Noncurrent:
                                
Property, plant and equipment                    163,184   163,184 
Investments in associates and joint ventures                    23,203   23,203 
Available-for-sale financial assets           147      147      147 
Investment in debt securities     484            484      484 
Investment properties                    1,560   1,560 
Goodwill and intangible assets                    11,485   11,485 
Deferred income tax assets — net                    6,110   6,110 
Derivative financial assets        178         178      178 
Prepayments — net of current portion                    8,679   8,679 
Advances and refundable deposits — net of current portion  984               984   203   1,187 
Current:
                                
Cash and cash equivalents  36,678               36,678      36,678 
Short-term investments  152      517         669      669 
Trade and other receivables  16,428               16,428      16,428 
Inventories and supplies                    2,219   2,219 
Derivative financial assets        5         5      5 
Current portion of prepayments                    5,418   5,418 

267

2012, and January 1, 2012:


  Cash and
cash
equivalents
  Loans
and
receivables
  HTM
investments
  Financial
instruments
at FVPL
  Derivatives
used for
hedging
  Available-for-
sale financial
investments
  Financial
liabilities
carried at

amortized cost
  Total
financial
assets  and

liabilities
 
              (in million pesos)       

Assets as at December 31, 2013

        

Noncurrent:

        

Available-for-sale financial investments

  —      —      —      —      —      220    —      220  

Investment in debt securities and other long-term investments

   2,172    471    —      —      —      —      2,643  

Derivative financial assets

  —      —      —      —      24    —      —      24  

Advances and other noncurrent assets – net of current portion

  —      2,285    —      —      —      —      —      2,285  

Current:

        

Cash and cash equivalents

  31,905    —      —      —      —      —      —      31,905  

Short-term investments

  —      127    —      591    —      —      —      718  

Trade and other receivables

  —      17,564    —      —      —      —      —      17,564  

Derivative financial assets

  —      —      —      10    —      —      —      10  

Current portion of advances and other noncurrent assets

  —      7,987    —      —      —      —      —      7,987  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  31,905    30,135    471    601    24    220    —      63,356  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities as at December 31, 2013

        

Noncurrent:

        

Interest-bearing financial liabilities – net of current portion

  —      —      —      —      —      —      88,930    88,930  

Derivative financial liabilities

  —      —      —      1,853    16    —      —      1,869  

Customers’ deposits

  —      —      —      —      —      —      2,545    2,545  

Deferred credits and other noncurrent liabilities

  —      —      —      —      —      —      19,716    19,716  

Current:

        

Accounts payable

  —      —      —      —      —      —      33,144    33,144  

Accrued expenses and other current liabilities

  —      —      —      —      —      —      57,611    57,611  

Current portion of interest-bearing financial liabilities

  —      —      —      —      —      —      15,171    15,171  

Dividends payable

  —      —      —      —      —      —      932    932  

Derivative financial liabilities

  —      —      —      65    40    —      —      105  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  —      —      —      1,918    56    —      218,049    220,023  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net assets (liabilities)

  31,905    30,135    471    (1,317  (32  220    (218,049  (156,667
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Assets as at December 31, 2012

        

Noncurrent:

        

Available-for-sale financial investments

  —      —      —      —      —      5,651    —      5,651  

Investment in debt securities and other long-term investments – net of current portion

  —      205    —      —      —      —      —      205�� 

Advances and other noncurrent assets – net of current portion

  —      962    —      —      —      —      —      962  

Current:

        

Cash and cash equivalents

  37,161    —      —      —      —      —      —      37,161  

Short-term investments

  —      24    —      550    —      —      —      574  

Trade and other receivables

  —      16,379    —      —      —      —      —      16,379  

Current portion of investment in debt securities and other long-term investments

  —      —      150    —      —      —      —      150  

Current portion of advances and other noncurrent assets

  —      7,915    —      —      —      —      —      7,915  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  37,161    25,485    150    550    —      5,651    —      68,997  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities as at December 31, 2012 (As Adjusted – Note 2)

        

Noncurrent:

        

Interest-bearing financial liabilities – net of current portion

  —      —      —      —      —      —      102,821    102,821  

Derivative financial liabilities

  —      —      —      2,802    —      —      —      2,802  

Customers’ deposits

  —      —      —      —      —      —      2,529    2,529  

Deferred credits and other noncurrent liabilities

  —      —      —      —      —      —      19,224    19,224  

Current:

        

Accounts payable

  —      —      —      —      —      —      29,027    29,027  

Accrued expenses and other current liabilities

  —      —      —      —      —      —      56,662    56,662  

Current portion of interest-bearing financial liabilities

  —      —      —      —      —      —      12,989    12,989  

Dividends payable

  —      —      —      —      —      —      827    827  

Derivative financial liabilities

  —      —      —      70    348    —      —      418  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  —      —      —      2,872    348    —      224,079    227,299  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net assets (liabilities)

  37,161    25,485    150    (2,322  (348  5,651    (224,079  (158,302
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Assets as at January 1, 2012

        

Noncurrent:

        

Available-for-sale financial investments

  —      —      —      —      —      7,181    —      7,181  

Investment in debt securities and other long-term investments

  —      —      150    —      —      —      —      150  

Advances and other noncurrent assets – net of current portion

  —      1,147    —      —      —      —      —      1,147  

Current:

        

Cash and cash equivalents

  46,057    —      —      —      —      —      —      46,057  

Short-term investments

  —      24    —      534    —      —      —      558  

Trade and other receivables

  —      16,245    —      —      —      —      —      16,245  

Derivative financial assets

  —      —      —      366    —      —      —      366  

Current portion of investment in debt securities and other long-term investments

  —      —      358    —      —      —      —      358  

Current portion of advances and other noncurrent assets

  —      18    —      —      —      —      —      18  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  46,057    17,434    508    900    —      7,181    —      72,080  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities as at January 1, 2012

        

Noncurrent:

        

Interest-bearing financial liabilities – net of current portion

  —      —      —      —      —      —      91,280    91,280  

Derivative financial liabilities

  —      —      —      2,235    —      —      —      2,235  

Customers’ deposits

  —      —      —      —      —      —      2,272    2,272  

Deferred credits and other noncurrent liabilities

  —      —      —      —      —      —      20,343    20,343  

Current:

        

Accounts payable

  —      —      —      —      —      —      27,982    27,982  

Accrued expenses and other current liabilities

  —      —      —      —      —      —      40,459    40,459  

Current portion of interest-bearing financial liabilities

  —      —      —      —      —      —      26,009    26,009  

Dividends payable

  —      —      —      —      —      —      2,583    2,583  

Derivative financial liabilities

  —      —      —      922    2    —      —      924  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  —      —      —      3,157    2    —      210,928    214,087  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net assets (liabilities)

  46,057    17,434    508    (2,257  (2  7,181    (210,928  (142,007
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                 
          Fair value      Total    
  Loans Held-to- through Available-for- Liabilities financial Non-financial  
  and maturity profit or sale financial carried at assets and assets and  
  receivables investments loss assets amortizedcost liabilities liabilities Total
  (in million pesos)
Current portion of advances and refundable deposits  16               16   165   181 
 
Total assets  54,258   484   700   147      55,589   222,226   277,815 
 
 
Liabilities as at December 31, 2010
                                
Noncurrent:
                                
Interest-bearing financial liabilities — net of current portion              75,888   75,888      75,888 
Deferred income tax liabilities — net                    1,099   1,099 
Derivative financial liabilities        3,604         3,604      3,604 
Pension and other employee benefits                    1,834   1,834 
Customers’ deposits              2,223   2,223      2,223 
Deferred credits and other noncurrent liabilities              12,041   12,041   1,526   13,567 
Current:
                                
Accounts payable              23,673   23,673   2,131   25,804 
Accrued expenses and other current liabilities              28,822   28,822   7,137   35,959 
Provision for assessments                    1,555   1,555 
Current portion of interest-bearing financial liabilities              13,801   13,801      13,801 
Dividends payable              2,086   2,086      2,086 
Income tax payable                    3,010   3,010 
 
Total liabilities        3,604      158,534   162,138   18,292   180,430 
 
Net assets (liabilities)
  54,258   484   (2,904)  147   (158,534)  (106,549)  203,934   97,385 
 
                                 
Assets as at December 31, 2009
                                
Noncurrent:
                                
Property, plant and equipment                    161,256   161,256 
Investments in associates and joint ventures                    22,233   22,233 
Available-for-sale financial assets           134      134      134 
Investment in debt securities     462            462      462 
Investment properties                    1,210   1,210 
Goodwill and intangible assets                    13,024   13,024 
Deferred income tax assets — net                    7,721   7,721 
Prepayments — net of current portion                    8,663   8,663 
Advances and refundable deposits — net of current portion  842               842   260   1,102 
Current:
                                
Cash and cash equivalents  38,319               38,319      38,319 
Short-term investments  3,338      486         3,824      3,824 
Trade and other receivables  14,729               14,729      14,729 
Inventories and supplies                    2,165   2,165 
Derivative financial assets        6         6      6 
Current portion of prepayments                    5,098   5,098 
Current portion of advances and refundable deposits  7               7   195   202 
 
Total assets  57,235   462   492   134      58,323   221,825   280,148 
 
                                 
Liabilities as at December 31, 2009
                                
Noncurrent:
                                
Interest-bearing financial liabilities — net of current portion              86,079   86,079      86,079 
Deferred income tax liabilities — net                    1,321   1,321 
Derivative financial liabilities        2,751         2,751      2,751 
Pension and other employee benefits                    374   374 
Customers’ deposits              2,166   2,166      2,166 
Deferred credits and other noncurrent liabilities              13,159   13,159   1,279   14,438 
Current:
                                
Accounts payable              17,698   17,698   1,903   19,601 
Accrued expenses and other current liabilities              28,752   28,752   6,694   35,446 
Provision for assessments                    1,555   1,555 
Current portion of interest-bearing financial liabilities              12,714   12,714      12,714 
Dividends payable              1,749   1,749      1,749 
Income tax payable                    2,829   2,829 
 
Total liabilities        2,751      162,317   165,068   15,955   181,023 
 
Net assets (liabilities)
  57,235   462   (2,259)  134   (162,317)  (106,745)  205,870   99,125 
 

268


The following table sets forth the consolidated carrying values and estimated fair values of our financial assets and liabilities recognized as at December 31, 20102013 and 2009:
                 
  Carrying Value Fair Value
  2010  2009  2010  2009 
  (in million pesos) 
Noncurrent Financial Assets
                
Available-for-sale financial assets:                
Listed equity securities  78   68   78   68 
Unlisted equity securities  69   66   69   66 
Investment in debt securities  484   462   502   474 
Derivative financial assets:                
Long-term currency swap  178      178    
Advances and refundable deposits — net of current portion  984   842   915   732 
 
Total noncurrent financial assets  1,793   1,438   1,742   1,340 
 
Current Financial Assets
                
Cash and cash equivalents:                
Cash on hand and in banks  2,906   3,300   2,906   3,300 
Temporary cash investments  33,772   35,019   33,772   35,019 
Short-term investments  669   3,824   669   3,824 
Trade and other receivables — net:                
Foreign administrations  4,321   4,064   4,321   4,064 
Retail subscribers  3,872   3,546   3,872   3,546 
Corporate subscribers  2,042   2,429   2,042   2,429 
Domestic carriers  1,453   1,184   1,453   1,184 
Dealers, agents and others  4,740   3,506   4,740   3,506 
Derivative financial assets:                
Bifurcated embedded derivatives  5   6   5   6 
Current portion of advances and refundable deposits  16   7   16   7 
 
Total current financial assets  53,796   56,885   53,796   56,885 
 
Total Financial Assets
  55,589   58,323   55,538   58,225 
 
Noncurrent Financial Liabilities
                
Interest-bearing financial liabilities:                
Long-term debt — net of current portion  75,879   86,066   82,244   88,383 
Obligations under finance lease  9   13   8   12 
Derivative financial liabilities:                
Long-term currency swap  3,604   2,751   3,604   2,751 
Customers’ deposits  2,223   2,166   1,701   1,375 
Deferred credits and other noncurrent liabilities  12,041   13,159   11,457   11,629 
 
Total noncurrent financial liabilities  93,756   104,155   99,014   104,150 
 
Current Financial Liabilities
                
Accounts payable:                
Suppliers and contractors  20,957   14,975   20,957   14,975 
Carriers  1,866   1,937   1,866   1,937 
Related parties  244   233   244   233 
Others  606   553   606   553 
Accrued expenses and other current liabilities:                
Utilities and related expenses  19,739   17,388   19,739   17,388 
Employee benefits  3,852   8,071   3,852   8,071 
Interests and other related costs  1,028   1,167   1,028   1,167 
Liability arising from purchase of investment     65      65 
Others  4,203   2,061   4,203   2,061 
Interest-bearing financial liabilities:                
Current portion of long-term debt  13,767   10,384   13,767   10,384 
Obligations under finance lease  34   51   34   51 
Notes payable     2,279      2,279 
Dividends payable  2,086   1,749   2,086   1,749 
 
Total current financial liabilities  68,382   60,913   68,382   60,913 
 
Total Financial Liabilities
  162,138   165,068   167,396   165,063 
 

269

2012, and January 1, 2012 other than those whose carrying amounts are reasonable approximations of fair values:


   Carrying Value   Fair Value 
   December 31,   January 1,   December 31,   January 1, 
   2013   2012   2012   2013   2012   2012 
       (As Adjusted – Note 2)       (As Adjusted – Note 2) 
   (in million pesos) 

Noncurrent Financial Assets

            

Available-for-sale financial investments:

            

Listed equity securities

   97     89     81     97     89     81  

Unlisted equity securities

   123     5,562     7,100     123     5,562     7,100  

Investment in debt securities and other long-term investments – net of current portion

   2,643     205     150     2,668     219     158  

Derivative financial assets:

            

Interest rate swap

   24     —       —       24     —       —    

Advances and other noncurrent assets – net of current portion

   2,285     962     1,147     2,043     912     1,061  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial assets

   5,172     6,818     8,478     4,955     6,782     8,400  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Assets

            

Derivative financial assets:

            

Short-term currency swap

   10     —       —       10     —       —    

Long-term currency swaps

   —       —       356     —       —       356  

Forward foreign exchange contracts

   —       —       10     —       —       10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial assets

   10     —       366     10     —       366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Assets

   5,182     6,818     8,844     4,965     6,782     8,766  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncurrent Financial Liabilities

            

Interest-bearing financial liabilities:

            

Long-term debt – net of current portion

   88,924     102,811     91,273     93,165     110,431     95,052  

Obligations under finance leases

   6     10     7     6     9     7  

Derivative financial liabilities:

            

Long-term currency swap – net of current portion

   1,788     2,681     2,090     1,788     2,681     2,090  

Interest rate swap – net of current portion

   81     121     145     81     121     145  

Customers’ deposits

   2,545     2,529     2,272     2,044     2,200     1,772  

Deferred credits and other noncurrent liabilities

   19,716     19,224     20,343     18,696     18,176     19,420  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial liabilities

   113,060     127,376     116,130     115,780     133,618     118,486  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Liabilities

            

Derivative financial liabilities:

            

Current portion of interest rate swap

   105     70     89     105     70     89  

Equity forward sale contract

   —       348     —       —       348     —    

Current portion of long-term currency swap

   —       —       834     —       —       834  

Current portion of forward foreign exchange contracts

   —       —       1     —       —       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial liabilities

   105     418     924     105     418     924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Liabilities

   113,165     127,794     117,054     115,885     134,036     119,410  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the consolidated offsetting of financial assets and liabilities recognized as at December 31, 2013:

   Gross amounts of
recognized financial
assets and liabilities
   Gross amounts of
recognized financial
assets and liabilities set-off
in the statement of
financial position
   Net amount presented
in the statement of
financial position
 
   (in million pesos) 

December 31, 2013

      

Noncurrent Financial Assets

      

Derivative financial instruments

      

Interest rate swap

   180     156     24  

Current Financial Assets

  ��   

Trade and other receivables

      

Foreign administrations

   7,554     1,833     5,721  

Corporate subscribers

   2,162     107     2,055  

Domestic carriers

   6,348     4,967     1,381  

Derivative financial instruments

      

Interest rate swap

   73     73     —    
  

 

 

   

 

 

   

 

 

 

Total

   16,317     7,136     9,181  
  

 

 

   

 

 

   

 

 

 

Noncurrent Financial Liabilities

      

Derivative financial instruments

      

Interest rate swap – net of current portion

   246     165     81  

Current Financial Liabilities

      

Accounts payable

      

Suppliers and contractors

   29,911     112     29,799  

Carriers

   4,846     2,582     2,264  

Derivative financial instruments

      

Current portion of interest rate swap

   173     68     105  
  

 

 

   

 

 

   

 

 

 

Total

   35,176     2,927     32,249  
  

 

 

   

 

 

   

 

 

 

There were no financial instruments subject to an enforceable master netting arrangement that were not set-off in the consolidated statement of financial position.

Below are the list of financial assets and liabilities carried at fair value that are classified using a fair value hierarchy as required for complete sets of financial statements as at December 31, 20102013 and 2009:

                         
  2010 2009
  Level 1(1) Level 2(2) Total Level 1(1) Level 2(2) Total
  (in million pesos)
Noncurrent Financial Assets
                        
Available-for-sale financial assets — Listed equity securities  78      78   68      68 
Derivative financial assets     178   178          
Current Financial Assets
                        
Short-term investments     517   517      486   486 
Derivative financial assets     5   5      6   6 
 
Total
  78   700   778   68   492   560 
 
                         
Noncurrent Financial Liabilities
                        
Derivative financial liabilities     3,604   3,604      2,751   2,751 
 
Total
     3,604   3,604      2,751   2,751 
 
2012, and January 1, 2012. This classification provides a reasonable basis to illustrate the nature and extent of risks associated with those financial statements.

   December 31,   January 1, 
   2013   2012   2012 
   Level 1(1)   Level 2(2)   Total   Level 1(1)   Level 2(2)   Total   Level 1(1)   Level 2(2)   Total 
   (in million pesos) 

Noncurrent Financial Assets

                  

Available-for-sale financial investments – Listed equity securities

   97     —       97     89     —       89     81     —       81  

Derivative financial assets

   —       24     24     —       —       —       —       —       —    

Current Financial Assets

                  

Short-term investments

   —       591     591     —       550     550     —       534     534  

Derivative financial assets

   —       10     10     —       —       —       —       366     366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   97     625     722     89     550     639     81     900     981  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncurrent Financial Liabilities

                  

Derivative financial liabilities

   —       1,869     1,869     —       2,802     2,802     —       2,235     2,235  

Current Financial Liabilities

                  

Derivative financial liabilities

   —       105     105     —       418     418     —       924     924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   —       1,974     1,974     —       3,220     3,220     —       3,159     3,159  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)
(1)

Fair values determined using observable market inputs that reflect quoted prices in active markets for identical assets or liabilities.

(2)

Fair values determined using inputs other than quoted market prices that are either directly or indirectly observable for the assets or liabilities.

As at December 31, 20102013 and 2009,2012, and January 1, 2012, we do not have no financial instruments whosemeasured at fair values are determined using inputs that are not based on observable market data (Level 3).

As at December 31, 20102013 and 2009,2012, and January 1, 2012, there were no transfers into and out of Level 3 fair value measurements.

As at December 31, 2013 and 2012, and January 1, 2012, there were no transfers between Level 1 and Level 2 fair value measurements.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value:

Long-term financial assets and liabilities:

Fair value is based on the following:

Type

  
Type

Fair Value Assumptions

  Fair Value AssumptionsHierarchy
Noncurrent portion of advances and refundable depositsother noncurrent assets  Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus counterparties’ credit spread.
Fixed rate loans:  Level 3

Fixed Rate Loans:

U.S. dollar notes

Quoted market price.Level 1

Other loans in all other currencies

  Quoted market price. Estimated fair value is based on the discounted value of future cash flows using the applicable Commercial Interest Reference Rate and Philippine Dealing System Treasury Fixing, or PDST-F, rates for similar types of loans.loans plus PLDT’s credit spread.Level 3
Variable rate loansRate Loans  The carrying value approximates fair value because of recent and regular repricing based on market conditions.
  Level 2
Customers’ deposits and deferred credits and other noncurrent liabilities  Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus PLDT’s credit spread.
  Level 3

Derivative Financial Instruments:

Foreign currency options:The fair values were computed using an option pricing model using market volatility rates of the U.S. dollar and Philippine peso exchange rate as at valuation date.

Forward foreign exchange contracts, bifurcated foreign currency forwardsswaps and foreign currencyinterest rate swaps:The fair values were computed as the present value of estimated future cash flows using market U.S. dollar and Philippine peso interest rates as at valuation date.

Equity forward sale contract:The fair values were adjusted as the present value of estimated future cash flows using equity prices and Philippine peso interest rates as at valuation date.

The valuation techniques considered various inputs including the credit quality of counterparties.

Available-for-sale financial assets:investments:Fair values of available-for-sale financial assets,investments, which consist of proprietary listed shares, were determined using quoted prices. Investments in unlisted securitiesFor investment where there is no active market, investments are carried at cost less any accumulated impairment losses.

Investment in debt securities:Fair values were determined using quoted prices. For non-quoted securities, fair values were determined using discounted cash flow based on market observable rates.

270


Due to the short-term nature of the transactions, the fair value of cash and cash equivalents, short-term investments, current investment in debt securities, trade and other receivables, current portion of advances and refundable deposits, accounts payable, accrued expenses and other current liabilities, current portion of interest-bearing financial liabilities and dividends payable approximate their carrying values as at the end of the reporting period.

Derivative Financial Instruments

Our derivative financial instruments are accounted for as either cash flow hedges or transactions not designated as hedges. Cash flow hedges refer to those transactions that hedge our exposure to variability in cash flows attributable to a particular risk associated with a recognized financial asset or liability and exposures arising from forecast transactions. Changes in the fair value of these instruments representing effective hedges are recognized directly in other comprehensive income until the hedged item is recognized in our consolidated income statement. For transactions that are not designated as hedges, any gains or losses arising from the changes in fair value are recognized directly to income for the period. AsInterest rate swap agreements were designated as cash flow hedges by PLDT and Smart as at December 31, 2010 and 2009, we have no outstanding financial instruments2013. Equity forward sale contract was designated as hedges.

cash flow hedge by ePLDT as at December 31, 2012 and January 1, 2012 and forward foreign exchange contracts were designated as cash flow hedges by SPi and SPi CRM, Inc., or SPi CRM, as at January 1, 2012.

The table below sets out the information about our derivative financial instruments not designated as hedges as at December 31, 20102013 and 2009:

                     
      2010 2009
                  Mark-to- 
          Mark-to-market      market Gains 
  Maturity  Notional  Gains (Losses)  Notional  (Losses) 
      (in millions) 
PLDT
                    
Currency swaps  2017  US$222  Php(2,651) US$245  Php(1,803)
   2012   100   (953)  146   (948)
   2012   60(1)  178       
 
           (3,426)      (2,751)
 
                     
ePLDT
                    
Bifurcated embedded derivatives  2012   1   5   1   4 
 
                     
Smart
                    
Bifurcated embedded derivatives  2010            2 
 
Net liabilities         Php(3,421)     Php(2,745)
 
2012, and January 1, 2012:

       December 31,  January 1, 
       2013  2012  2012 
   Maturity   Notional   Mark-to-
market Gains
(Losses)
  Notional   Mark-to-
market
Losses
  Notional  Mark-to-
market Gains

(Losses)
 
       (in millions) 

Transactions not designated as hedges:

           

PLDT

           

Long-term currency swaps

   2017    US$202     (Php1,788  US$202     (Php2,681 US$222    (Php2,090
   2012     —       —      —       —      100    (834
   2012     —       —      —       —      60(1)   356  

Short-term currency swaps

   2014     6     4    —       —      —      —    

PGIH

           

Short-term currency swaps

   2014     10     6    —       —      —      —    

DMPI

           

Interest rate swaps

   2017     44     (130  57     (191  69    (234
    

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 
       (1,908    (2,872   (2,802
      

 

 

    

 

 

   

 

 

 

Transactions designated as hedges:

           

Cash flow hedges:

           

PLDT

           

Interest rate swaps

   2018     120     11    —       —      —      —    

Smart

           

Interest rate swaps

   2016     75     (11  —       —      —      —    
   2017     39     (6  —       —      —      —    
   2018     40     (26  —       —      —      —    

ePLDT Group

           

Equity forward sale contract

   2013     —       —      211 shares     (348  —      —    

SPi Group

           

Forward foreign exchange contracts

   2012     —       —      —       —      57    10  
   2013     —       —      —       —      (4  (1
    

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 
       (32    (348   9  
      

 

 

    

 

 

   

 

 

 

Net liabilities

       (Php1,940    (Php3,220   (Php2,793
      

 

 

    

 

 

   

 

 

 

(1)
(1)

Overlay principal only swap agreements to effectively unwind a portion of the outstanding long-term principal only swap agreement maturingmatured in 2012.

         
  2010  2009 
  (in million pesos) 
Presented as:        
Noncurrent assets  178    
Current assets  5   6 
Noncurrent liabilities  (3,604)  (2,751)
 
Net liabilities  (3,421)  (2,745)
 

   December 31,  January 1, 
   2013  2012  2012 
   (in million pesos) 

Presented as:

    

Noncurrent assets

   24    —      —    

Current assets

   10    —      366  

Noncurrent liabilities

   (1,869  (2,802  (2,235

Current liabilities

   (105  (418  (924
  

 

 

  

 

 

  

 

 

 

Net liabilities

   (1,940  (3,220  (2,793
  

 

 

  

 

 

  

 

 

 

Movements of mark-to-market losses for the years ended December 31, 2013 and 2012 are summarized as follows:

   2013  2012 
   (in million pesos) 

Net mark-to-market losses at beginning of the year

   (3,220  (2,793

Gains (losses) on derivative financial instruments

   816    (1,661

Effective portion recognized in the profit or loss for the cash flow hedges

   387    418  

Settlements, accretions and conversions

   156    785  

Interest expense

   (12  —    

Net gains (losses) on cash flow hedges charged to other comprehensive income

   (67  92  

Discontinued operations (Note 2)

   —      (61
  

 

 

  

 

 

 

Net mark-to-market losses at end of the year

   (1,940  (3,220
  

 

 

  

 

 

 

Analysis of gains (losses) on derivative financial instruments for the years ended December 31, 2010, 20092013, 2012 and 20082011 are as follows:

             
  2010  2009  2008 
  (in million pesos) 
Net mark-to-market losses at end of year  (3,421)  (2,745)  (1,792)
Net mark-to-market losses at beginning of year  (2,745)  (1,792)  (7,027)
 
Net change  (676)  (953)  5,235 
Hedge cost  (434)  (599)  (819)
Settlements, accretion and conversion  (631)  546   (2,367)
Net losses on cash flow hedges charged to other comprehensive income        662 
Effective portion recognized in the profit or loss for the cash flow hedge        286 
Ineffective portion recognized in the profit or loss for the cash flow hedge        118 
 
Net gains (losses) on derivative financial instruments (Note 4)  (1,741)  (1,006)  3,115 
 

271


   2013  2012  2011 
   (in million pesos) 

Gains (losses) on derivative financial instruments (Note 4)

   816    (1,661  560  

Hedge cost

   (305  (320  (363
  

 

 

  

 

 

  

 

 

 

Net gains (losses) on derivative financial instruments

   511    (1,981  197  

Discontinued operations (Notes 2 and 4)

   —      (28  4  
  

 

 

  

 

 

  

 

 

 

Net gains (losses) on derivative financial instruments from continuing operations (Note 4)

   511    (2,009  201  
  

 

 

  

 

 

  

 

 

 

PLDT

PLDT
Due to the amounts of PLDT’s foreign currency hedging requirements and the large interest differential between the Philippine peso and the U.S. dollar, the costs to book long-term hedges can be significant. In order to manage such hedging costs, PLDT utilizes structures that include currency option contracts, and fixed-to-floating coupon-only swaps that may not qualify for hedge accounting.

Interest Rate Swaps

On May 17, 2013, PLDT entered into a five-year interest rate swap agreement with a total notional amount of US$40 million to hedge its interest rate exposure on a portion of the outstanding balance of the US$300 million Loan Facility maturing in January 2018 into fixed interest rate. Under this agreement, PLDT is entitled to receive a floating rate of equivalent to the three-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of three months commencing on June 6, 2013) and in exchange, will pay a fixed rate of 1.945%.

On June 26, 2013, PLDT entered into a five-year interest rate swap agreement with a total notional amount of US$40 million to hedge its interest rate exposure on a portion of the outstanding balance of the US$300 million Loan Facility maturing in January 2018 into fixed interest rate. Under this agreement, PLDT is entitled to receive a floating rate of equivalent to the three-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of three months commencing on September 6, 2013) and in exchange, will pay a fixed rate of 2.385%.

On July 19, 2013, PLDT entered into a five-year interest rate swap agreement with a notional amount of US$40 million to hedge its interest rate exposure on a portion of the outstanding balance of the US$300 million Loan Facility maturing in January 2018 into fixed interest rate. Under this agreement, PLDT is entitled to receive a floating rate of equivalent to the three-month US$ LIBOR plus a margin at the end of each Calculation Period (comprising of successive periods of three months commencing on September 6, 2013) and in exchange, will pay a fixed rate of 2.25%.

The interest rate swap agreements were designated as cash flow hedges, wherein effective portion of the movements in the fair value is recognized in other comprehensive income while any ineffective portion is recognized immediately in our consolidated income statement. As at December 31, 2013, the mark-to-market gains of the interest swap with aggregate notional amount of US$120 million and recognized in other comprehensive income amounted to Php11 million. There was no ineffective portion in the fair value of these instruments recognized in the consolidated income statement for the year ended December 31, 2013. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

Long-term Currency Swaps

PLDT has entered into long-term principal-only currencyprincipal only-currency swap agreements with various foreign counterparties to hedge the currency risk on its fixed rate notes maturing in 2012 and 2017. These long-term currency swaps have an aggregate notional amount of US$322 million and US$391 million with total mark-to-market losses of

Php3,604 million and Php2,751 million as at December 31, 2010 and 2009, respectively. Under the swaps, PLDT effectively exchanges the principal of its U.S. dollar-denominated fixed rate notes into Philippine peso-denominated loan exposures at agreed swap exchange rates. The agreed swap exchange rates are reset to the lowest U.S. dollar/Philippine peso spot exchange rate during the term of the swaps, subject to a minimum exchange rate. The outstanding swap contracts have an agreed average swap exchange rates of Php50.45 and Php50.60 as atPhp49.85 for the years ended December 31, 20102013 and 2009, respectively.2012, and Php50.45 for the year ended December 31, 2011. The semi-annual fixed or floating swap cost payments that PLDT is required to make to its counterparties averaged about 2.93% and 2.83%3.42% per annum as atfor the years ended December 31, 20102013 and 2009, respectively.
2012, and 3.04% per annum for the year ended December 31, 2011.

The long-term currency swaps that we entered to hedge the 2012 fixed rate notes with notional amount of US$100 million matured on May 15, 2012, with total cash settlement of Php941 million. On various dates in 2009,from August to November 2012, the long-term principal-only currencyprincipal only-currency swap agreements maturing in 2012 and 2017 were partially terminated, with a total aggregate settlement amount of Php112 million and Php485 million, respectively.Php256 million. As a result of these unwinding transactions, the outstanding notional amount was reduced to US$146202 million and US$245 million for the swaps maturing in 2012 and 2017, respectively, with mark-to-market losses of Php948 million and Php1,803, respectively, as at December 31, 2009.

On various dates in 2010,2013 and 2012. The mark-to-market losses of the long-term principal only-currency swap agreements maturing in2017 swaps with a notional amount of US$202 million amounted to Php1,788 million and Php2,681 million as at December 31, 2013 and 2012, respectively. The mark-to-market losses of the 2012 and 2017 were partially terminated,swaps with a total aggregate settlement amountnotional amounts of Php372 million and Php168 million, respectively. As a result of these unwinding transactions, the outstanding notional amount was reduced to US$100 million and US$222 million, for the swaps maturing in 2012 and 2017, respectively, with mark-to-market losses of Php953amounted to Php834 million and Php2,651Php2,090 million, respectively, as at December 31, 2010.
January 1, 2012.

On various dates from October to November 2010, PLDT entered into several overlay principal only swap agreements with an aggregate notional amount of US$60 million to effectively unwind a portion of the outstanding long-term principal onlyonly-currency swap agreement maturing in 2012. The overlay swaps are offsetting swaps which carry the direct opposite terms and cashflowscash flows of our existing swap agreement. As consideration for the overlay swaps, PLDT will pay an average hedge costfixed rate of 10.84% on a semi-annual basis over the life of the offsetting swaps. These overlay swap agreements have an aggregate mark-to-market gains of Php178Php356 million as at December 31, 2010.

ePLDT
Level Up! embedded derivatives were bifurcated from various licenseJanuary 1, 2012. These overlay swaps matured on May 15, 2012, where PLDT received proceeds amounting to Php565 million. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

Short-term Currency Swaps

In November 2013, PLDT also entered into short-term currency swap contracts and other service agreements denominated into generate short-term peso liquidity while preserving U.S. dollar.dollar receipts for purposes of enhancing yields on our excess funds. The aggregate notional amount of these bifurcated embedded currency forwardstotal outstanding swaps amounted to US$16 million each aswith U.S. dollar forward purchase leg booked at December 31, 2010 and 2009. The totalan average exchange rate of Php43.79 resulting to mark-to-market gains of these bifurcated embedded currency forwards amounted to Php5 million and Php4 million as at December 31, 2010 and 2009, respectively.

Smart
Smart’s embedded derivatives2013. The spot leg of these swaps were bifurcated from service and purchase contracts.sold at an average exchange rate of Php43.84. There were no outstanding short-term currency swaps and forward foreign exchange contracts as at December 31, 2010. Outstanding2012 and January 1, 2012.

PGIH

Short-term Currency Swaps

In November 2013, PGIH entered into short-term currency swap contracts to generate short-term peso liquidity while preserving U.S. dollar cash for purposes of enhancing yields on the excess funds. The total outstanding swaps amounted to US$209 thousand as10 million with U.S. dollar forward purchase leg booked at December 31, 2009, including service contracts denominated in U.S. dollars, which is not the functional currencyan average exchange rate of a substantial partyPhp43.78 resulting to the contract or the routine currency of the transaction. Mark-to-marketmark-to-market gains of these bifurcated embedded currency forwards amounted to Php2Php6 million as at December 31, 2009.

2013. The spot leg of these swaps were sold at an average exchange rate of Php43.83. There were no outstanding short-term currency swaps and forward foreign exchange contracts as at December 31, 2012 and January 1, 2012.

DMPI

On October 7, 2008, DMPI entered into an eight-year interest rate swap agreement with a total notional amount of US$54.1 million to hedge its interest rate exposures on the US$59.2 million U.S. dollar Loan Facility maturing in March 2017 into fixed interest rate. Under this agreement, Digitel is entitled to receive a floating rate of equivalent to the US$ LIBOR rate as of the last Calculation Date and in exchange, will pay a fixed rate of 3.88%. The outstanding notional amounts under this agreement amounted to US$24 million, US$31 million and US$37 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. The mark-to-market losses amounted to Php70 million, Php102 million and Php125 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

On October 7, 2008, DMPI entered into an eight-year interest rate swap agreement with a total notional amount of US$46.5 million to hedge its interest rate exposures on the US$51.2 million U.S. dollar Loan Facility maturing in June 2017 into fixed interest rate. Under this agreement, Digitel is entitled to receive a floating rate of equivalent to the US$ LIBOR rate as of the last Calculation Date and in exchange, will pay a fixed rate of 3.97%. The outstanding notional amounts under this agreement amounted to US$20 million, US$26 million and US$32 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. The mark-to-market losses amounted to Php60 million, Php89 million and Php109 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

Smart

On May 8, 2013, Smart entered into a three-year interest rate swap agreement with a total notional amount of US$37 million to hedge its interest rate exposure on the outstanding balance of the US$60 million Loan Facility maturing in June 2016 into fixed interest rate. Under this agreement, Smart is entitled to receive a floating rate equivalent to the six-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of six months commencing on December 6, 2013) and in exchange, will pay a fixed rate of 1.527%. The outstanding notional amount under this agreement amounted to US$37 million as at December 31, 2013. The mark-to-market losses amounted to Php5 million as at December 31, 2013. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

On May 9, 2013, Smart entered into a three-year interest rate swap agreement with a total notional amount of US$38 million to hedge its interest rate exposure on the outstanding balance of the US$50 million Loan Facility maturing in August 2016 into fixed interest rate. Under this agreement, Smart is entitled to receive a floating rate equivalent to the six-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of six months commencing on February 19, 2014) and in exchange, will pay a fixed rate of 1.4275%. The outstanding notional amount under this agreement amounted to US$38 million as at December 31, 2013. The mark-to-market losses amounted to Php6 million as at December 31, 2013. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

On May 16, 2013, Smart entered into a four-year interest rate swap agreement with a total notional amount of US$39 million to hedge its interest rate exposure on the outstanding balance of the US$50 million Loan Facility maturing in May 2017 into fixed interest rate. Under this agreement, Smart is entitled to receive a floating rate equivalent to the six-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of six months commencing on November 29, 2013) and in exchange, will pay a fixed rate of 1.77%. The outstanding notional amount under this agreement amounted to US$39 million as at December 31, 2013. The mark-to-market losses amounted to Php6 million as at December 31, 2013. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

On July 18, 2013, Smart entered into a five-year interest rate swap agreement with a notional amount of US$40 million to hedge its interest rate exposure on a portion of the US$120 million Loan Facility maturing in June 2018 into fixed interest rate. Under this agreement, Smart is entitled to receive a floating rate equivalent to the six-month US$ LIBOR rate plus a margin at the end of each Calculation Period (comprising of successive periods of six months commencing on March 25, 2014) and in exchange, will pay a fixed rate of 2.36%. The outstanding notional amount under this agreement amounted to US$40 million as at December 31, 2013. The mark-to-market losses amounted to Php26 million as at December 31, 2013. SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debt.

The interest rate swap agreements were designated as cash flow hedges, wherein the effective portion of the movements in fair value is recognized in other comprehensive income while any ineffective portion is recognized immediately in our consolidated income statement. As at December 31, 2013, mark-to-market losses amounting to Php43 million was recognized in other comprehensive income and Php6 million was recorded as interest accrual on the interest swap with aggregate notional amount of US$154 million. There was no ineffective portion in the fair value movements recognized in the consolidated income statement for the year ended December 31, 2013.

ePLDT Group

On July 10, 2012, ePLDT entered into an equity forward sale contract amounting to Php4,310 million in order to hedge its exposure to the volatility of the share price of Philweb when it sold its investment in 398 million common shares of Philweb at a certain price in four tranches, which is expected to be completed by the end of 2013. The first and second tranches were transacted on July 13, 2012 and October 19, 2012, respectively. Each tranche was for 93.5 million common shares and for a total purchase price of Php1 billion each. On June 13, 2013, the third tranche was paid for 93.5 million common shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from December 12, 2012 to the actual date of payment of the third tranche, or Php1 billion. On December 13, 2013, the fourth tranche was paid for 118 million common shares for a purchase price of Php10.70 per share plus 3% per annum of the total thereof calculated from December 12, 2012 to the actual date of payment of the fourth tranche, or Php1.3 billion. SeeNote 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Assets Classified as Held-for-Sale and Discontinued OperationsandNote 10 – Investments in Associates, Joint Ventures and Deposits – Investment of ePLDT in Philweb. The mark-to-market losses recognized in the profit or loss at the inception of this contract amounted to Php727 million. The gains and losses from the inception of this contract will be recognized in cumulative translation adjustments and are expected to be realized in profit or loss upon occurrence of each tranche. The mark-to-market loss transferred from cumulative translation adjustment to profit or loss in relation with the first and second tranches in 2012 amounted to Php387 million and Php396 million in relation with the third and fourth tranches in 2013 were recognized as a reduction on the gain of sale of Philweb shares presented as part of other income – net in our consolidated income statements. The sale was completed on December 13, 2013 thus, no outstanding equity forward sale contract as at December 31, 2013. The mark-to-market losses as at December 31, 2012 amounted to Php348 million. The mark-to-market loss recognized for the years ended December 31, 2013 and 2012, representing the ineffective portion of the loss in the fair value of the contract, amounted to Php5 million and Php3 million, respectively,

SPi Group

In February and March 2011, SPi CRM and SPi entered into several forward foreign exchange contracts with various financial institutions to hedge a portion of monthly dollar denominated revenues and peso denominated expenses, respectively, maturing March 2011 up to October 2012. The gains and losses on such contracts are expected to be recognized in profit or loss upon occurrence of the monthly dollar revenues and monthly peso expenses hedged.

On December 6, 2011, SPi CRM changed its functional currency from Philippine peso to U.S. dollar resulting for all its outstanding hedges to become ineffective starting from that date and mark-to-market gains and losses thereafter are recognized in profit or loss. The mark-to-market gains of SPi CRM and SPi’s outstanding forward exchange contracts that were designated as hedges with notional amounts of US$24 million and US$29 million, respectively, amounted to Php9 million as at January 1, 2012. In January 2012, SPi CRM pre-terminated all outstanding ineffective hedges.

In March 2012, SPi CRM entered into several forward foreign exchange contracts with various financial institutions to hedge a portion of its monthly peso denominated expenses maturing from June 29, 2012 to December 26, 2013. The gains and losses on such contracts are expected to be recognized in profit or loss upon occurrence of the monthly peso expenses hedged.

The mark-to-market gains of SPi CRM and SPi’s outstanding forward exchange contracts that were designated as hedges and presented as part of derivative financial liabilities under liabilities directly associated with assets classified as held-for-sale with notional amounts of US$29 million and US$26 million, respectively, amounted to Php61 million as at December 31, 2012. SeeNote 2 – Summary of Significant Accounting Policies – Discontinued Operations.

The mark-to-market gains of SPi CRM and SPi’s outstanding forward exchange contracts were no longer included in our consolidated financial statements since April 30, 2013, which is the closing date of the sale of our BPO segment.

Financial Risk Management Objectives and Policies

272


The main risks arising from our financial instruments are liquidity risk, foreign currency exchange risk, interest rate risk and credit risk. The importance of managing those risks has significantly increased in light of the considerable change and volatility in both the Philippine and international financial markets. Our Board of Directors reviews and approves policies for managing each of these risks. Our policies for managing these risks are summarized below. We also monitor the market price risk arising from all financial instruments.

Liquidity Risk

Our exposure to liquidity risk refers to the risk that our financial liabilities are not reviewed in a timely manner and that our working capital requirements and planned capital expenditures are not met.

We manage our liquidity profile to be able to finance our operations and capital expenditures, service our maturing debts and meet our other financial obligations. To cover our financing requirements, we use internally generated funds and proceeds from debt and equity issues and sales of certain assets.

As part of our liquidity risk management program, we regularly evaluate our projected and actual cash flows, including our loan maturity profiles, and continuously assess conditions in the financial markets for opportunities to pursue fund-raising initiatives. These activities may include bank loans, export credit agency-guaranteed facilities, debt capital and equity market issues.

Any excess funds are primarily invested in short-term and principal-protected bank products that provide flexibility of withdrawing the funds anytime. We also allocate a portion of our cash in longer tenor investments such as fixed income securities issued or guaranteed by the Republic of the Philippines, and Philippine banks and corporates, managed funds and other structured products linked to the Republic of the Philippines. We regularly evaluate available financial

products and monitor market conditions for opportunities to enhance yields at acceptable risk levels. Our investments are also subject to certain restrictions contained in our debt covenants. Our funding arrangements are designed to keep an appropriate balance between equity and debt and to provide financing flexibility while enhancing our businesses.

Our cash position remains strong and more than sufficient to support our capital expenditure requirements and service our debt and financing obligations as a consequence of higher cash from operations following more rational competition for the wireless business and the expected growth in data revenues. Furthermore, we can easily tap bank credit facilities to settle obligations, as necessary. We have letters of credit amounting to Php1,145 million as at December 31, 2010 and certain financial instruments that are allocated to meet our short-term liquidity needs. These financial instruments are cash and cash equivalents, and short-term investments amounting to Php36,678Php31,905 million and Php669Php718 million, respectively, as at December 31, 2010.2013, which we can use to meet our short-term liquidity needs. SeeNote 15 Cash and Cash Equivalents.Details

The following table discloses a summary of maturity profile of our financial assets based on our consolidated undiscounted claims outstanding as at December 31, 2013 and 2012, and January 1, 2012:

   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

December 31, 2013

          

Cash equivalents

   25,967     25,967     —       —       —    

Loans and receivables:

   44,771     40,202     2,819     1,608     142  

Advances and other noncurrent assets

   10,384     7,987     958     1,297     142  

Short-term investments

   127     127     —       —       —    

Investment in debt securities and other long-term investments

   2,172     —       1,861     311     —    

Retail subscribers

   12,563     12,563     —       —       —    

Corporate subscribers

   7,904     7,904     —       —       —    

Foreign administrations

   5,840     5,840     —       —       —    

Domestic carriers

   1,461     1,461     —       —       —    

Dealers, agents and others

   4,320     4,320     —       —       —    

HTM investments:

   471     —       —       321     150  

Investment in debt securities and other long-term investments

   471     —       —       321     150  

Financial instruments at FVPL:

   591     591     —       —       —    

Short-term investments

   591     591     —       —       —    

Available-for-sale financial investments

   220     —       —       —       220  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   72,020     66,760     2,819     1,929     512  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

          

Cash equivalents

   31,550     31,550     —       —       —    

Loans and receivables:

   38,887     37,608     686     453     140  

Advances and other noncurrent assets

   8,989     7,915     686     248     140  

Short-term investments

   24     24     —       —       —    

Investment in debt securities and other long-term investments

   205     —       —       205     —    

Retail subscribers

   10,568     10,568     —       —       —    

Corporate subscribers

   8,100     8,100     —       —       —    

Foreign administrations

   4,960     4,960     —       —       —    

Domestic carriers

   1,707     1,707     —       —       —    

Dealers, agents and others

   4,334     4,334     —       —       —    

HTM investments:

   150     150     —       —       —    

Investment in debt securities and other long-term investments

   150     150     —       —       —    

Financial instruments at FVPL:

   550     550     —       —       —    

Short-term investments

   550     550     —       —       —    

Available-for-sale financial investments

   5,651     —       —       —       5,651  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   76,788     69,858     686     453     5,791  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

January 1, 2012

          

Cash equivalents

   41,420     41,420     —       —       —    

Loans and receivables:

   32,206     31,059     899     201     47  

Advances and other noncurrent assets

   1,165     18     899     201     47  

Short-term investments

   24     24     —       —       —    

Retail subscribers

   11,302     11,302     —       —       —    

Corporate subscribers

   9,200     9,200     —       —       —    

Foreign administrations

   4,961     4,961     —       —       —    

Domestic carriers

   1,323     1,323     —       —       —    

Dealers, agents and others

   4,231     4,231     —       —       —    

HTM investments:

   508     358     150     —       —    

Investment in debt securities and other long-term investments

   508     358     150     —       —    

Financial instruments at FVPL:

   534     534     —       —       —    

Short-term investments

   534     534     —       —       —    

Available-for-sale financial investments

   7,181     —       —       —       7,181  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   81,849     73,371     1,049     201     7,228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table discloses a summary of maturity profile of our financial liabilities based on our consolidated contractual undiscounted obligations outstanding as at December 31, 2013 and 2012, and January 1, 2012:

   Payments Due by Period 
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
   (in million pesos) 

December 31, 2013

          

Debt(1):

   123,623     2,774     48,824     35,908     36,117  

Principal

   104,472     2,576     37,822     31,549     32,525  

Interest

   19,151     198     11,002     4,359     3,592  

Lease obligations:

   14,574     7,711     3,198     2,016     1,649  

Operating lease

   14,562     7,710     3,187     2,016     1,649  

Finance lease

   12     1     11     —       —    

Unconditional purchase obligations(2)

   231     66     44     44     77  

Other obligations:

   109,405     84,869     14,841     7,627     2,068  

Derivative financial liabilities(3):

   2,274     92     923     1,259     —    

Long-term currency swap

   2,086     —       833     1,253     —    

Interest rate swap

   188     92     90     6     —    

Various trade and other obligations:

   107,131     84,777     13,918     6,368     2,068  

Suppliers and contractors

   49,314     29,799     13,183     6,332     —    

Utilities and related expenses

   31,576     31,483     68     5     20  

Liability from redemption of preferred shares

   7,952     7,952     —       —       —    

Employee benefits

   5,350     5,350     —       —       —    

Customers’ deposits

   2,545     —       466     31     2,048  

Carriers

   2,264     2,264     —       —       —    

Dividends

   932     932     —       —       —    

Others

   7,198     6,997     201     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   247,833     95,420     66,907     45,595     39,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012 (As Adjusted – Note 2)

          

Debt(1):

   144,467     3,981     56,353     48,417     35,716  

Principal

   117,115     3,641     41,469     42,492     29,513  

Interest

   27,352     340     14,884     5,925     6,203  

Lease obligations:

   13,655     7,059     3,641     1,832     1,123  

Operating lease

   13,634     7,057     3,623     1,831     1,123  

Finance lease

   21     2     18     1     —    

Unconditional purchase obligations(2)

   413     167     246     —       —    

Other obligations:

   105,492     80,443     12,505     10,515     2,029  

Derivative financial liabilities(3):

   3,507     418     871     2,218     —    

Long-term currency swap

   2,968     —       770     2,198     —    

Equity forward sale contract

   348     348     —       —       —    

Interest rate swap

   191     70     101     20     —    

Various trade and other obligations:

   101,985     80,025     11,634     8,297     2,029  

Suppliers and contractors

   45,331     26,128     10,942     8,261     —    

Utilities and related expenses

   31,305     31,098     202     5     —    

Liability from redemption of preferred shares

   7,884     7,884     —       —       —    

Employee benefits

   5,488     5,488     —       —       —    

Customers’ deposits

   2,529     —       469     31     2,029  

Carriers

   2,007     2,007     —       —       —    

Dividends

   827     827     —       —       —    

Others

   6,614     6,593     21     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   264,027     91,650     72,745     60,764     38,868  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

January 1, 2012

          

Debt(1):

   142,271     16,378     62,213     39,476     24,204  

Principal

   119,410     15,348     48,141     33,971     21,950  

Interest

   22,861     1,030     14,072     5,505     2,254  

Lease obligations:

   17,826     6,352     5,324     2,998     3,152  

Operating lease

   17,810     6,349     5,317     2,992     3,152  

Finance lease

   16     3     7     6     —    

Unconditional purchase obligations(2)

   674     279     263     132     —    

Other obligations:

   91,828     66,223     14,976     7,072     3,557  

Derivative financial liabilities(3):

   3,789     589     1,026     701     1,473  

Long-term currency swap

   3,552     500     907     673     1,472  

Interest rate swap

   237     89     119     28     1  

Various trade and other obligations:

   88,039     65,634     13,950     6,371     2,084  

Suppliers and contractors

   45,604     25,476     13,761     6,367     —    

Utilities and related expenses

   23,839     23,834     5     —       —    

Employee benefits

   4,452     4,452     —       —       —    

Dividends

   2,583     2,583     —       —       —    

Customers’ deposits

   2,272     —       184     4     2,084  

Carriers

   1,642     1,642     —       —       —    

Others

   7,647     7,647     —       —       —    
  

 

 

   

 

��

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

   252,599     89,232     82,776     49,678     30,913  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)

Consists of long-term debt, including current portion, and notes payable; gross of unamortized debt discount and debt issuance costs.

(2)

Based on the Amended ATPA with AIL. See Note 24 — Related Party Transactions — Air Time Purchase Agreement between PLDT and AIL Related Party Agreements.

(3)

Gross liabilities before any offsetting application.

Debt

SeeNote 20 – Interest-bearing Financial Liabilities – Long-term Debtfor a detailed discussion of our debt.

Operating Lease Obligations

The PLDT Group has various lease contracts for periods ranging from one to ten years covering certain offices, warehouses, cell sites telecommunications equipment locations and various office equipment. These lease contracts are subject to certain escalation clauses.

The consolidated future minimum lease commitments payable with non-cancellable operating leases as at December 31, 2013 and 2012, and January 1, 2012 are as follows:

   December 31,   January 1, 
   2013   2012   2012 
   (in million pesos) 

Within one year

   7,809     7,136     6,423  

After one year but not more than five years

   5,104     5,375     8,235  

More than five years

   1,649     1,123     3,152  
  

 

 

   

 

 

   

 

 

 

Total

   14,562     13,634     17,810  
  

 

 

   

 

 

   

 

 

 

Finance Lease Obligations

SeeNote 20 – Interest-bearing Financial Liabilities – Obligations under Finance Leasesfor the detailed discussion of our long-term finance lease obligations.

Unconditional Purchase Obligations

SeeNote 24 – Related Party Transactions – Air Time Purchase Agreement between PLDT and AIL Related Agreementsfor a detailed discussion of PLDT’s obligation under the Original and the Amended ATPA.

Under the Amended ATPA, PLDT’s aggregate remaining minimum obligation is approximately Php231 million, Php413 million and Php674 million as at December 31, 2013 and 2012, and January 1, 2012, respectively.

Other Obligations – Various Trade and Other Obligations

PLDT Group has various obligations to suppliers for the acquisition of phone and network equipment, contractors for services rendered on various projects, foreign administrations and domestic carriers for the access charges, shareholders for unpaid dividends distributions, employees for benefits and other related obligations, and various business and operational related agreements. Total obligations under these various agreements amounted to approximately Php107,131 million, Php101,895 million and Php88,039 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. SeeNote 22 – Accounts PayableandNote 23 – Accrued Expenses and Other Current Liabilities.

Commercial Commitments

Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to Php20 million, Php342 million and a summary of the maturity profile ofPhp913 million as at December 31, 2013 and 2012, and January 1, 2012, respectively. These commitments will expire within one year.

Collateral

We have not made any pledges with respect to our financial liabilities as at December 31, 20102013 and 2009 based on contractual undiscounted payments is set out inNote 26 — Contractual Obligations2012, and Commercial Commitments.

January 1, 2012.

Foreign Currency Exchange Risk

Foreign currency exchange risk is the risk that the fair value of future cash flows of a financial instruments will fluctuate because of changes in foreign exchange rates.

The revaluation of our foreign currency-denominated financial assets and liabilities as a result of the appreciation or depreciation of the Philippine peso is recognized as foreign exchange gains or losses as at the end of the reporting period. The extent of foreign exchange gains or losses is largely dependent on the amount of foreign currency debt. While a certain percentage of our revenues are either linked to or denominated in U.S. dollars, most of our indebtedness and related interest expense, a substantial portion of our capital expenditures and a portion of our operating expenses are denominated in foreign currencies, mostly in U.S. dollars. As such, a strengthening or weakening of the Philippine peso against the U.S. dollar will decrease or increase in Philippine peso terms both the principal amount of our foreign currency-denominated debts and the related interest expense, our foreign currency-denominated capital expenditures and operating expenses as well as our U.S. dollar-linked and U.S. dollar-denominated revenues. In addition, many of our financial ratios and other financial tests are affected by the movements in the Philippine peso to U.S. dollar exchange rate.

To manage our foreign exchange risks and to stabilize our cash flows in order to improve investment and cash flow planning, we enter into forward foreign exchange contracts, currency swap contracts, currency option contracts and other hedging products aimed at reducing and/or managing the adverse impact of changes in foreign exchange rates on our operating results and cash flows. We use forward foreign exchange sale and purchase contracts, currency swap contracts and foreign currency option contracts to manage the foreign currency risks associated with our foreign currency-denominated loans. We also enter into forward foreign exchange sale contracts to manage foreign currency risks associated with our U.S. dollar-linked and U.S. dollar-denominated revenues. In order to manage the hedge costs of these contracts, we utilize structures that include credit-linkage with PLDT as the reference entity, a combination of foreign currency option contracts, and fixed to floating coupon only swap contracts. We accounted for these instruments as either cash flow hedges, wherein changes in the fair value are recognized as cumulative translationconversion adjustments in other comprehensive income until the

273


hedged transaction affects our consolidated income statement or when the hedging instrument expires, or transactions not designated as hedges, wherein changes in the fair value are recognized directly as income or expense for the year.

The following table shows our consolidated foreign currency-denominated monetary financial assets and liabilities and their Philippine peso equivalents as at December 31, 20102013 and 2009:

                 
  2010 2009
  U.S. Dollar  Php(1)  U.S. Dollar  Php(2) 
  (in millions) 
Noncurrent Financial Assets
                
Note receivable  2   84   2   81 
Derivative financial assets  4   178       
Advances and refundable deposits  1   38      7 
 
Total noncurrent financial assets  7   300   2   88 
 
Current Financial Assets
                
Cash and cash equivalents  138   6,050   140   6,496 
Short-term investments  15   652   47   2,164 
Trade and other receivables — net  214   9,361   206   9,573 
Derivative financial assets     5      6 
 
Total current financial assets  367   16,068   393   18,239 
 
Total Financial Assets
  374   16,368   395   18,327 
 
                 
Noncurrent Financial Liabilities
                
Interest-bearing financial liabilities — net of current portion  782   34,244   837   38,871 
Derivative financial liabilities  82   3,604   59   2,751 
 
Total noncurrent financial liabilities  864   37,848   896   41,622 
 
Current Financial Liabilities
                
Accounts payable  169   7,415   155   7,180 
Accrued expenses and other current liabilities  143   6,267   95   4,409 
Current portion of interest-bearing financial liabilities  103   4,537   155   7,220 
 
Total current financial liabilities  415   18,219   405   18,809 
 
Total Financial Liabilities
  1,279   56,067   1,301   60,431 
 
2012, and January 1, 2012:

   December 31,   January 1, 
   2013   2012   2012 
   U.S. Dollar   Php(1)   U.S. Dollar   Php(2)   U.S. Dollar   Php(3) 
   (in millions) 

Noncurrent Financial Assets

            

Investment in debt securities and other long-term investments

   49     2,172     5     205     —       —    

Derivative financial assets

   1     24     —       —       —       —    

Advances and other noncurrent assets

   1     32     1     28     2     83  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial assets

   51     2,228     6     233     2     83  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Assets

            

Cash and cash equivalents

   145     6,450     128     5,267     165     7,248  

Short-term investments

   13     591     14     562     12     540  

Trade and other receivables – net

   173     7,685     179     7,360     215     9,445  

Derivative financial assets

   —       10     —       —       8     366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial assets

   331     14,736     321     13,189     400     17,599  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Assets

   382     16,964     327     13,422     402     17,682  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncurrent Financial Liabilities

            

Interest-bearing financial liabilities – net of current portion

   1,047     46,477     1,058     43,442     906     39,806  

Derivative financial liabilities

   42     1,869     68     2,802     51     2,235  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent financial liabilities

   1,089     48,346     1,126     46,244     957     42,041  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Financial Liabilities

            

Accounts payable

   166     7,381     165     6,762     198     8,688  

Accrued expenses and other current liabilities

   125     5,552     166     6,832     129     5,677  

Current portion of interest-bearing financial liabilities

   292     12,966     221     9,065     349     15,328  

Derivative financial liabilities

   2     105     2     70     21     924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current financial liabilities

   585     26,004     554     22,729     697     30,617  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Liabilities

   1,674     74,350     1,680     68,973     1,654     72,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)
(1)

The exchange rate used to translateconvert the U.S. dollar amounts into Philippine peso was Php43.81Php44.40 to US$1.00, the peso-dollarPhilippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at December 31, 2010.2013.

(2)

The exchange rate used to translateconvert the U.S. dollar amounts into Philippine peso was Php46.43Php41.08 to US$1.00, the peso-dollarPhilippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at December 31, 2009.2012.

(3)

The exchange rate used to convert the U.S. dollar amounts into Philippine peso was Php43.92 to US$1.00, the Philippine peso-U.S. dollar exchange rate as quoted through the Philippine Dealing System as at January 1, 2012.

As at March 29, 2011,28, 2014, the peso-dollarPhilippine peso-U.S. dollar exchange rate was Php43.53Php45.00 to US$1.00. Using this exchange rate, our consolidated net foreign currency-denominated financial liabilities would have decreasedincreased in Philippine peso terms by Php253Php775 million as at December 31, 2010.

2013.

Approximately 43%57%, 45% and 46%47% of our total consolidated debts (net of consolidated debt discount) were denominated in U.S. dollars as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively. Consolidated foreign currency-denominated debt decreased to Php38,414Php59,132 million as at December 31, 20102013 from Php45,633Php52,298 million as at December 31, 2009.2012 and Php54,877 million as at January 1, 2012. SeeNote 20 Interest-bearing Financial Liabilities. The aggregate notional amount of PLDT’s outstanding long-term principal only currencyonly-currency swap contracts werewas US$262 million and US$391202 million as at December 31, 20102013 and 2009, respectively.2012, and US$262 million as at January 1, 2012. Consequently, the unhedged portion of our consolidated debt amounts was approximately 30%48% (or 23%41%, net of our consolidated U.S. dollar cash balances), 38% (or 33%, net of our consolidated U.S. dollar cash balances) and 28%37% (or 19%30%, net of our consolidated U.S. dollar cash balances) as at December 31, 20102013 and 2009,2012, and January 1, 2012, respectively.

Approximately, 26%21% of our consolidated service revenues were denominated in U.S. dollars and/or were linked to U.S. dollars for the years ended December 31, 2013 and 2012 as compared with approximately 30% for the year ended December 31, 20102011. Approximately, 11% of our consolidated expenses were denominated in U.S. dollars and/or linked to the U.S. dollar for the year ended December 31, 2013 as compared with approximately 28%12% and 17% for each of the years ended December 31, 20092012 and 2008.2011, respectively. In this respect, the appreciation of the weighted average exchange rate of the Philippine peso against the U.S. dollar decreased our revenues and expenses, and consequently, affects our cash flow from operations in Philippine peso terms.

The Philippine peso had appreciateddepreciated by 5.64%8.08% against the U.S. dollar to Php43.81Php44.40 to US$1.00 as at December 31, 20102013 from Php46.43Php41.08 to US$1.00 as at December 31, 2009.2012. As at December 31, 2009,2012, the Philippine peso had appreciated by 2.56%6.47% against the U.S. dollar to Php46.43Php41.08 to US$1.00 from Php47.65Php43.92 to US$1.00 as at December 31, 2008.January 1, 2012. As a result of our consolidated foreign exchange movements, as well as the amount of our consolidated outstanding net foreign currency financial assets and liabilities, we recognized net consolidated foreign exchange gainslosses of Php1,807Php2,893 million and Php909Php735 million in 2010for the years ended December 31, 2013 and 2009,2011, respectively, andwhile we recognized net consolidated foreign exchange lossesgains of Php6,170Php3,282 million in 2008.for the year ended December 31, 2012. SeeNote 4 Operating Segment Information.

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Management conducted a survey among our banks to determine the outlook of the peso-dollarPhilippine peso-U.S. dollar exchange rate until our next reporting date of DecemberMarch 31, 2011.2014. Our outlook is that the peso-dollarPhilippine peso-U.S. dollar exchange rate may weaken/strengthen by 5.27%1% as compared to the exchange rate of Php43.81Php44.40 to US$1.00 as at December 31, 2010.2013. If the peso-dollarPhilippine peso-U.S. dollar exchange rate had weakened/strengthened by 5.27%1% as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year end 2010ended 2013 would have been approximately Php1,099Php305 million higher/lower and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php1,089Php301 million higher/lower, mainly as a result of consolidated foreign exchange gains and losses on translationconversion of U.S. dollar-denominated net assets/liabilities and mark-to-market valuation of derivative financial instruments.
If the peso-dollar exchange rate had weakened/strengthened by approximately 4% as at December 31, 2009, with all other variables held constant, profit after tax for the year would have been approximately Php877 million higher/lower and our consolidated stockholders’ equity as at year end 2009 would have been approximately
Php849 million higher/lower, mainly as a result of consolidated foreign exchange gains and losses on translation of U.S. dollar-denominated net assets/liabilities and mark-to-market valuation of derivative financial instruments.

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 change in market interest rates.

Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and short-term borrowings with floating interest rates.

Our policy is to manage interest cost through a mix of fixed and variable rate debts. We evaluate the fixed to floating ratio of our loans in line with movements of relevant interest rates in the financial markets. Based on our assessment, new financing will be priced either on a fixed or floating rate basis. On a limited basis, we enter into interest rate swap agreements in order to manage our exposure to interest rate fluctuations. We make use of hedging instruments and structures solely for reducing or managing financial risk associated with our liabilities and not for trading purposes.

The following tables set out the carrying amounts, by maturity, of our financial instruments that are expected to have exposure on interest rate risk as at December 31, 20102013 and 2009.2012, and January 1, 2012. Financial instruments that are not subject to interest rate risk were not included in the table.

As at December 31, 2010

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                       (in millions) 
Assets:
                                            
Cash in Bank
                                            
U.S. Dollar  11               11   474      474   11   474 
Interest rate  0.0025% to
0.7840%
                               
Philippine Peso  31               31   1,362      1,362   31   1,362 
Interest rate  0.0625% to 2.9000%                               
Other Currencies  3               3   118      118   3   118 
Interest rate  0.0100% to 2.4000%                               
Temporary Cash Investments
                                            
U.S. Dollar  110               110   4,813      4,813   110   4,813 
Interest rate  0.1000% to 1.7000%                               
Philippine Peso  661               661   28,959      28,959   661   28,959 
Interest rate  1.0000% to 4.8100%                               
Short-term Investments
                                            
U.S. Dollar  15               15   652      652   15   652 
Interest rate  1.9000% to 10.672%                               
Philippine Peso                    17      17      17 
Interest rate  3.2500%                              
Investment in Debt Securities
                                            
Philippine Peso        8   3      11   484      484   11   502 
Interest rate        6.8750%  7.0000%                     
 
   831      8   3      842   36,879      36,879   842   36,897 
 

275

2013


  

 

In U.S. Dollars

  Discount/
Debt
Issuance
Cost

In Php
  Carrying
Value

In Php
  Fair Value 
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php    In U.S.
Dollar
  In Php 
                       (in millions) 

Assets:

           

Investment in Debt Securities and Other Long-term Investments

           

U.S. Dollar

  —      —      42    7    —      49    2,172    —      2,172    49    2,185  

Interest rate

  —      —      10.0000  
 
3.5000 to
4.000
  
  —      —      —      —      —      —      —    

Philippine Peso

  —      —      —      7    3    10    471    —      471    11    483  

Interest rate

  —      —      —      4.2500  4.8370  —      —      —      —      —      —    

Cash in Bank

           

U.S. Dollar

  20    —      —      —      —      20    882    —      882    20    882  

Interest rate

  
 
0.0100% to
0.7500
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  97    —      —      —      —      97    4,303    —      4,303    97    4,303  

Interest rate

  
 
0.0010% to
2.0000
  
  —      —      —      —      —      —      —      —      —      —    

Other Currencies

  2    —      —      —      —      2    96    —      96    2    96  

Interest rate

  
 
0.0100% to
0.5000
  
  —      —      —      —      —      —      —      —      —      —    

Temporary Cash Investments

           

U.S. Dollar

  116    —      —      —      —      116    5,164    —      5,164    116    5,164  

Interest rate

  
 
0.2500% to
4.0000
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  469    —      —      —      —      469    20,803    —      20,803    469    20,803  

Interest rate

  
 
0.5600% to
4.7500
  
  —      —      —      —      —      —      —      —      —      —    

Short-term Investments

           

U.S. Dollar

  13    —      —      —      —      13    591    —      591    13    591  

Interest rate

  0.6050  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  3    —      —      —      —      3    127    —      127    3    127  

Interest rate

  1.5000  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  720    —      42    14    3    779    34,609    —      34,609    780    34,634  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

In U.S. Dollars

  Discount/
Debt
Issuance
Cost

In Php
  Carrying
Value

In Php
  Fair Value 
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php    In U.S.
Dollar
  In Php 
                       (in millions) 

Liabilities:

           

Long-term Debt

           

Fixed Rate

           

U.S. Dollar Notes

  —      —      —      234    —      234    10,401    67    10,334    274    12,160  

Interest rate

  —      —      —      8.3500  —      —      —      —      —      —      —    

U.S. Dollar Fixed Loans

  —      65    26    33    —      124    5,493    99    5,394    126    5,598  

Interest rate

  —      
 
1.4100% to
3.9550
  
  
 
1.4100% to
3.9550
  
  
 
1.4100% to
3.9550
  
  —      —      —      —      —      —      —    

Philippine Peso

  17    29    14    197    647    904    40,125    46    40,079    949    42,120  

Interest rate

  6.3981  
 
3.9250% to
6.2600
  
  
 
3.9250% to
6.2600
  
  
 
3.9250% to
6.3462
  
  
 
3.9250% to
6.3462
  
  —      —      —      —      —      —    

Variable Rate

           

U.S. Dollar

  21    480    235    245    —      981    43,560    156    43,404    981    43,560  

Interest rate

  
 

 

0.3500% to
1.8000

over LIBOR

  

  

  
 

 

0.3000% to
1.9000

over LIBOR

  

  

  
 

 

0.3000% to
1.9000

over LIBOR

  

  

  
 

 

0.3000% to
1.9000

over LIBOR

  

  

  —      —      —      —      —      —      —    

Philippine Peso

  20    2    1    1    86    110    4,893    14    4,879    110    4,893  

Interest rate

  
 
PHP PDST-F +
0.3000
  
  
 
 
BSP
overnight rate
-0.3500
  
  
  
 
 
BSP
overnight rate
- 0.3500
  
  
  
 
 
BSP
overnight rate
- 0.3500
  
  
  
 
 
BSP
overnight rate
- 0.3500
  
  
  —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  58    576    276    710    733    2,353    104,472    382    104,090    2,440    108,331  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                       (in millions) 
Liabilities:
                                            
Long-term Debt
                                            
Fixed Rate
                                            
U.S. Dollar Notes     146         234   380   16,650   200   16,450   440   19,274 
Interest rate     11.3750%        8.3500%                  
U.S. Dollar Fixed Loans  9   29   15   295      348   15,264   2,586   12,678   276   12,120 
Interest rate  4.7000%  2.9900% to 3.7900%  2.9900% to 3.7900%  2.2500% to                             
               2.9900%                     
Philippine Peso  68   146   121   339   195   869   38,066   74   37,992   961   42,091 
Interest rate  6.0323% to
8.7792
%  5.6250% to
8.4346
%  6.5000% to
8.4346
%  6.5000% to
9.1038
%  6.5000% to
9.1038%
                   
Variable Rate
                                            
U.S. Dollar  6   148   45   15      214   9,357   71   9,286   212   9,286 
Interest rate  US$ LIBOR
+ 0.8150%
   Swap rate + 2.7900%;   Swap rate + 2.7900%;   Swap rate + 2.7900%;                             
       US$ LIBOR +
0.4200% to 1.8500%
   US$ LIBOR + 0.4200%   US$ LIBOR + 1.3500%                             
           to 1.8500%   to 1.8500%                      
Philippine Peso  58   150   74   20      302   13,253   13   13,240   302   13,240 
Interest rate  PDST-F + 0.3000% to   PDST-F + 0.3000% to 1.3750%;                                     
   1.2500%   AUB’s prime rate   PDST-F + 0.3000%  PDST-F + 0.3000%                     
 
   141   619   255   669   429   2,113   92,590   2,944   89,646   2,191   96,011 
 
As at December 31, 2009
                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                       (in millions) 
Assets:
                                            
Cash in Bank
                                            
U.S. Dollar  11               11   540      540   11   540 
Interest rate  0.0025% to 0.88%                              
Philippine Peso  36               36   1,673      1,673   36   1,673 
Interest rate 0.625% to 2.90%                              
Other Currencies  1               1   31      31   1   31 
Interest rate  0.0014 to 2.40%                              
Temporary Cash Investments
                                            
U.S. Dollar  384               384   17,870      17,870   384   17,870 
Interest rate 0.50% to 1.75%                              
Philippine Peso  369               369   17,149      17,149   369   17,149 
Interest rate 1.25% to 5.50%                              
Short-term Investments
                                            
U.S. Dollar  46               46   2,132      2,132   46   2,132 
Interest rate 4.25% to 7.006%                              
Philippine Peso  36               36   1,692      1,692   36   1,692 
Interest rate  4.40%                              
Investment in Debt Securities
                                            
Philippine Peso           10      10   462      462   10   474 
Interest rate           6.92%                     
 
   883         10      893   41,549      41,549   893   41,561 
 
                                             
Liabilities:
                                            
Long-term Debt
                                            
Fixed Rate
                                            
U.S. Dollar Notes        146      245   391   18,161   285   17,876   449   20,837 
Interest rate        11.375%     8.350%                  
U.S. Dollar Fixed Loans  14   27   5   285      331   15,397   3,338   12,059   229   10,654 
Interest rate  4.515%  3.79% to 4.70%  3.79%  2.25% to                             
               3.79%                     
Philippine Peso     63   126   236   305   730   33,858   84   33,774   744   34,535 
Interest rate     6.0323% to 8.4346%  5.625% to 8.4346%  6.125% to 9.1038%  6.50% to                         
                   9.1038%                  
                                             
Variable Rate
                                            
U.S. Dollar  41   160   74   60      335   15,543   124   15,419   332   15,419 
Interest rate  US$ LIBOR +
0.05% to 2.5%
   US$ LIBOR +
0.42% to 1.85%;
   US$ LIBOR +
0.42% to 1.85%;
   US$ LIBOR +
0.42% to 1.85%;
                             
       swap rate + 2.79%   swap rate + 2.79%   swap rate + 2.79%                      
Philippine Peso     185   81   107      373   17,349   27   17,322   373   17,322 

276

2012


  

 

In U.S. Dollars

     Discount/
Debt
Issuance
Cost

In Php
  Carrying
Value

In Php
  Fair Value 
  Below 1 year  1-2 years  2-3 years  3-5 years  Over
5 years
  Total  In Php    In U.S.
Dollar
  In Php 
                       (in millions) 

Assets:

           

Investment in Debt Securities and Other Long-term Investments

           

U.S. Dollar

  —      —      —      5    —      5    205    —      205    5    219  

Interest rate

  —      —      —      4.0000  —      —      —      —      —      —      —    

Philippine Peso

  4    —      —      —      —      4    150    —      150    4    154  

Interest rate

  7.0000  —      —      —      —      —      —      —      —      —      —    

Cash in Bank

           

U.S. Dollar

  37    —      —      —      —      37    1,529    —      1,529    37    1,529  

Interest rate

  
 
0.0100% to
0.7500
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  84    —      —      —      —      84    3,445    —      3,445    84    3,445  

Interest rate

  
 
0.1000% to
3.0000
  
  —      —      —      —      —      —      —      —      —      —    

Other Currencies

  4    —      —      —      —      4    161    —      161    4    161  

Interest rate

  
 
0.0100% to
0.7500
  
  —      —      —      —      —      —      —      —      —      —    

Temporary Cash Investments

           

U.S. Dollar

  74    —      —      —      —      74    3,062    —      3,062    74    3,062  

Interest rate

  
 
0.2500% to
4.7500
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  694    —      —      —      —      694    28,488    —      28,488    694    28,488  

Interest rate

  
 
1.1250% to
5.0000
  
  —      —      —      —      —      —      —      —      —      —    

Short-term Investments

           

U.S. Dollar

  14    —      —      —      —      14    557    —      557    14    557  

Interest rate

  9.1730  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  —      —      —      —      —      —      17    —      17    —      17  

Interest rate

  3.0000  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  911    —      —      5    —      916    37,614    —      37,614    916    37,632  

Liabilities:

           

Long-term Debt

           

Fixed Rate

           

U.S. Dollar Notes

  —      —      —      234    —      234    9,623    79    9,544    283    11,644  

Interest rate

  —      —      —      8.3500  —      —      —      —      —      —      —    

U.S. Dollar Fixed Loans

  5    337    23    32    9    406    16,674    1,143    15,531    410    16,843  

Interest rate

  3.7900  
 
1.9000% to
3.9550
  
  
 
1.9000% to
3.9550
  
  
 
1.9000% to
3.9550
  
  3.9550  —      —      —      —      —      —    

Philippine Peso

  —      35    132    522    686    1,375    56,469    45    56,424    1,475    60,576  

Interest rate

  —      
 
4.9110% to
7.7946
  
  
 
4.9110% to
7.7946
  
  
 
4.9110% to
7.7946
  
  
 
4.9110% to
7.7946
  
  —      —      —      —      —      —    

Variable Rate

           

U.S. Dollar

  27    312    127    175    23    664    27,278    55    27,223    664    27,278  

Interest rate

  
 
 
0.4000% to
0.5000% over
LIBOR
  
  
  
  
 
 
0.3000% to
1.9000% over
LIBOR
  
  
  
  
 
 
0.3000% to
1.9000% over
LIBOR
  
  
  
  
 
 
0.3000% to
1.9000% over
LIBOR
  
  
  
  
 
1.8000% over
LIBOR
  
  
  —      —      —      —      —      —    

Philippine Peso

  55    45    —      72    —      172    7,071    1    7,070    172    7,071  

Interest rate

  
 
PHP PDST-F +
0.3000
  
  
 
PHP PDST-F +
0.3000
  
  —      
 
 
 
BSP
overnight rate
+ 0.3000% to
0.5000
  
  
  
  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  87    729    282    1,035    718    2,851    117,115    1,323    115,792    3,004    123,412  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As at January 1, 2012

                                             
                              Discount/       
                              Debt       
                              Issuance  Carrying  Fair Value
  In U.S. Dollar      Cost  Value  In U.S.    
  Below 1 year  1-2 years  2-3 years  3-5 years  Over 5 years  Total  In Php  In Php  In Php  Dollar  In Php 
                       (in millions) 
Interest rate      PDST-F +
0.75% to
   PDST-F +
1.0% to
   PDST-F +                             
      1.5%; AUB’s
prime rate
   1.50%; AUB’s
prime rate
   1.0% to
1.50%
                      
Short-term Debt
                                            
Notes Payable
                                            
U.S. Dollar  6               6   279      279   6   279 
Interest rate  3.25%                              
Philippine Peso  43               43   2,000      2,000   43   2,000 
Interest rate PDST-F + 1.5%;                                         
   6.0896%                               
 
   104   435   432   688   550   2,209   102,587   3,858   98,729   2,176   101,046 
 

  

 

In U.S. Dollars

     Discount/
Debt
Issuance
Cost

In Php
  Carrying
Value

In Php
  Fair Value 
  Below 1 year  1-2 years  2-3 years  3-5 years  Over
5 years
  Total  In Php    In U.S.
Dollar
  In Php 
                       (in millions) 

Assets:

           

Investment in Debt Securities and Other Long-term Investments

           

Philippine Peso

  8    4    —      —      —      12    508    —      508    12    516  

Interest rate

  6.8750  7.0000  —      —      —      —      —      —      —      —      —    

Cash in Bank

           

U.S. Dollar

  14    —      —      —      —      14    626    —      626    14    626  

Interest rate

  
 
0.0100% to
0.7663
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  66    —      —      —      —      66    2,886    —      2,886    66    2,886  

Interest rate

  
 
0.0100% to
3.1500
  
  —      —      —      —      —      —      —      —      —      —    

Other Currencies

  5    —      —      —      —      5    218    —      218    5    218  

Interest rate

  
 
0.0100% to
2.0000
  
  —      —      —      —      —      —      —      —      —      —    

Temporary Cash Investments

           

U.S. Dollar

  133    —      —      —      —      133    5,824    —      5,824    133    5,824  

Interest rate

  
 
0.2500% to
1.7000
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  810    —      —      —      —      810    35,596    —      35,596    810    35,596  

Interest rate

  
 
1.0000% to
4.8750
  
  —      —      —      —      —      —      —      —      —      —    

Short-term Investments

           

U.S. Dollar

  12    —      —      —      —      12    540    —      540    12    540  

Interest rate

  3.1020  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  —      —      —      —      —      —      18    —      18    —      18  

Interest rate

  3.5000  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  1,048    4    —      —      —      1,052    46,216    —      46,216    1,052    46,224  

Liabilities:

           

Long-term Debt

           

Fixed Rate

           

U.S. Dollar Notes

  146    —      —      —      234    380    16,691    124    16,567    427    18,740  

Interest rate

  11.3750  —      —      —      8.3500  —      —      —      —      —      —    

U.S. Dollar Fixed Loans

  —      53    302    28    21    404    17,738    1,900    15,838    359    15,770  

Interest rate

  —      
 
2.9900% to
3.9550
  
  
 
2.2500% to
3.9550
  
  
 
2.9900% to
3.9550
  
  3.9550  —      —      —      —      —      —    

Philippine Peso

  121    137    122    590    187    1,157    50,818    38    50,780    1,194    52,454  

Interest rate

  
 
5.6250% to
6.5708
  
  
 
5.4692% to
8.4346
  
  
 
5.4692% to
9.1038
  
  
 
5.4963% to
9.1038
  
  
 
5.4963% to
9.1038
  
  —      —      —      —      —      —    

Variable Rate

           

U.S. Dollar

  11    242    73    94    58    478    20,996    71    20,925    476    20,925  

Interest rate

  
 
US$ LIBOR +
0.7500
  
  
 
 
US$ LIBOR +
0.3000% to
1.8500
  
  
  
 
 
US$ LIBOR +
0.3000% to
1.8500
  
  
  
 
 
US$ LIBOR +
0.3000% to
1.8000
  
  
  
 
 
US$ LIBOR +
0.3000% to
1.8000
  
  
  —      —      —      —      —      —    

Philippine Peso

  1    147    20    61    —      229    10,059    3    10,056    229    10,056  

Interest rate

  
 
PDST-F +
1.3750
  
  
 
PDST-F +
0.3000
  
  
 
PDST-F +
0.3000
  
  
 
 
 
BSP
overnight rate
+ 0.3000% to
0.5000
  
  
  
  —      —      —      —      —      —      —    

Short-term Debt

           

Notes Payable

           

U.S. Dollar

  35    —      —      —      —      35    1,537    —      1,537    35    1,537  

Interest rate

  
 
Bank’s
prime rate
  
  
  —      —      —      —      —      —      —      —      —      —    

Philippine Peso

  36    —      —      —      —      36    1,572    —      1,572    36    1,572  

Interest rate

  4.0000  —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  350    579    517    773    500    2,719    119,411    2,136    117,275    2,756    121,054  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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.

Repricing of floating rate financial instruments is mostly done on intervals of three months or six months. Interest on fixed rate financial instruments is fixed until maturity of the particular instrument.

Management conducted a survey among our banks to determine the outlook of the U.S. dollar and Philippine peso interest rates until our next reporting date of DecemberMarch 31, 2011.2014. Our outlook is that the U.S. dollar and Philippine peso interest rates may move 155 basis points and 220135 basis points higher/lower, respectively, as compared to levels as at December 31, 2010.2013. If U.S. dollar interest rates had been 155 basis points higher/lower as compared to market levels as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php56Php16 million and Php67 million, respectively, lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If Philippine peso interest rates had been 220135 basis points higher/lower as compared to market levels as at December 31, 2010,2013, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 20102013 would have been approximately Php785Php274 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If U.S. dollar interest rates had been 90 basis points higher/lower as compared to market levels as at December 31, 2009, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 2009 would have been approximately Php527 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions. If Philippine peso interest rates had been 55 basis points higher/lower as compared to market levels as at December 31, 2009, with all other variables held constant, profit after tax for the year and our consolidated stockholders’ equity as at year end 2009 would have been approximately Php241 million lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and loss/gain on derivative transactions.

Credit Risk

Credit risk is the risk that we will incur a loss arising from our customers, clients or counterparties that fail to discharge their contracted obligations. We manage and control credit risk by setting limits on the amount of risk we are willing to accept for individual counterparties and by monitoring exposures in relation to such limits.

We trade only with recognized and creditworthy third parties. It is our policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis to reduce our exposure to bad debts.

We established a credit quality review process to provide regular identification of changes in the creditworthiness of counterparties. Counterparty limits are established and reviewed periodically based on latest available financial data on our counterparties’ credit ratings, capitalization, asset quality and liquidity. Our credit quality review process allows us to assess the potential loss as a result of the risks to which we are exposed and allow us to take corrective actions.

277


The table below shows the maximum exposure to credit risk for the components of our consolidated statementstatements of financial position, including derivative financial instruments as at December 31, 20102013 and 2009:
                 
  Gross Maximum Exposure(1) Net Maximum Exposure(2)
  2010  2009  2010  2009 
  (in million pesos) 
Loans and receivables:                
Advances and refundable deposits  1,000   849   999   848 
Cash and cash equivalents  36,678   38,319   36,458   38,101 
Short-term investments  152   3,338   152   3,338 
Foreign administrations  4,321   4,064   4,277   4,011 
Retail subscribers  3,872   3,546   3,799   3,505 
Corporate subscribers  2,042   2,429   1,918   2,328 
Domestic carriers  1,453   1,184   1,453   1,184 
Dealers, agents and others  4,740   3,506   4,740   3,506 
Held-to-maturity investments:                
Investment in debt securities  484   462   484   462 
Available-for-sale financial assets  147   134   147   134 
Fair value through profit or loss:                
Short-term investments  517   486   517   486 
Long-term currency swap  178      178    
Bifurcated embedded derivatives  5   6   5   6 
 
Total
  55,589   58,323   55,127   57,909 
 
2012, and January 1, 2012:

   December 31, 2013 
   Gross
Maximum
Exposure
   Collateral and
Other Credit
Enhancements*
   Net
Maximum
Exposure
 
   (in million pesos) 

Cash and cash equivalents

   31,905     241     31,664  

Loans and receivables:

      

Advances and other noncurrent assets

   10,272     —       10,272  

Short-term investments

   127     —       127  

Investment in debt securities and other long-term investments

   2,172     —       2,172  

Foreign administrations

   5,721     —       5,721  

Retail subscribers

   5,414     41     5,373  

Corporate subscribers

   2,055     135     1,920  

Domestic carriers

   1,381     —       1,381  

Dealers, agents and others

   2,993     1     2,992  

HTM investments:

      

Investment in debt securities and other long-term investments

   471     —       471  

Available-for-sale financial investments

   220     —       220  

Financial instruments at FVPL:

      

Short-term investments

   591     —       591  

Short-term currency swaps

   10     —       10  

Derivatives used for hedging:

      

Interest rate swap

   24     —       24  
  

 

 

   

 

 

   

 

 

 

Total

   63,356     418     62,938  
  

 

 

   

 

 

   

 

 

 

*
(1)Gross financial assets before taking into account anyIncludes bank insurance, security deposits and customer deposits. We have no collateral held or other credit enhancements or offsetting arrangements.as at December 31, 2013.

   December 31, 2012 
   Gross
Maximum
Exposure
   Collateral and
Other Credit
Enhancements*
   Net
Maximum
Exposure
 
   (in million pesos) 

Cash and cash equivalents

   37,161     528     36,633  

Loans and receivables:

      

Advances and other noncurrent assets

   8,877     12     8,865  

Short-term investments

   24     —       24  

Investment in debt securities and other long-term investments

   205     —       205  

Foreign administrations

   4,861     —       4,861  

Retail subscribers

   4,079     27     4,052  

Corporate subscribers

   1,963     246     1,717  

Domestic carriers

   1,601     —       1,601  

Dealers, agents and others

   3,875     31     3,844  

HTM investments:

      

Investment in debt securities and other long-term investments

   150     —       150  

Available-for-sale financial investments

   5,651     —       5,651  

Financial instruments at FVPL:

      

Short-term investments

   550     —       550  
  

 

 

   

 

 

   

 

 

 

Total

   68,997     844     68,153  
  

 

 

   

 

 

   

 

 

 

(2)*Gross financial assets after taking into account anyIncludes bank insurance, security deposits and customer deposits. We have no collateral held or other credit enhancements or offsetting arrangements or deposit insurance.as at December 31, 2012.

278


   January 1, 2012 
   Gross
Maximum
Exposure
   Collateral and
Other Credit
Enhancements*
   Net
Maximum
Exposure
 
   (in million pesos) 

Cash and cash equivalents

   46,057     574     45,483  

Loans and receivables:

      

Advances and other noncurrent assets

   1,165     13     1,152  

Short-term investments

   24     —       24  

Foreign administrations

   4,762     69     4,693  

Retail subscribers

   4,038     63     3,975  

Corporate subscribers

   2,708     213     2,495  

Domestic carriers

   1,212     —       1,212  

Dealers, agents and others

   3,525     28     3,497  

HTM investments:

      

Investment in debt securities and other long-term investments

   508     —       508  

Available-for-sale financial investments

   7,181     —       7,181  

Financial instruments at FVPL:

      

Short-term investments

   534     —       534  

Long-term currency swaps

   356     —       356  

Derivatives used for hedging:

      

Forward foreign exchange contracts

   10     —       10  
  

 

 

   

 

 

   

 

 

 

Total

   72,080     960     71,120  
  

 

 

   

 

 

   

 

 

 

*Includes bank insurance, security deposits and customer deposits. We have no collateral held as at January 1, 2012.

The table below provides information regarding the credit quality by class of our financial assets according to our credit ratings of counterparties as at December 31, 20102013 and 2009:
                     
      Neither past due  
      nor impaired Past due but     
  Total  Class A(1)  Class B(2)  not impaired  Impaired 
  (in million pesos) 
December 31, 2010
                    
Loans and receivables:                    
Advances and refundable deposits  1,000   951   49       
Cash and cash equivalents  36,678   35,368   1,310       
Short-term investments  152   152          
Retail subscribers  8,917   946   926   2,000   5,045 
Corporate subscribers  7,998   393   612   1,037   5,956 
Foreign administrations  4,479   1,756   699   1,866   158 
Domestic carriers  1,591   191   23   1,239   138 
Dealers, agents and others  5,273   2,599   2,013   128   533 
Held-to-maturity investments:                    
Investment in debt securities  484   484          
Available-for-sale financial assets  147   108   39       
Fair value through profit or loss(3):
                    
Short-term investments  517   517          
Long-term currency swap  178   178          
Bifurcated embedded derivatives  5   5          
 
Total
  67,419   43,648   5,671   6,270   11,830 
 
                     
December 31, 2009
                    
Loans and receivables:                    
Advances and refundable deposits  849   790   59       
Cash and cash equivalents  38,319   37,767   552       
Short-term investments  3,338   2,971   367       
Corporate subscribers  9,106   1,078   283   1,068   6,677 
Retail subscribers  8,026   1,236   518   1,792   4,480 
Foreign administrations  4,353   1,261   451   2,352   289 
Domestic carriers  1,267   157   8   1,019   83 
Dealers, agents and others  3,927   2,068   1,022   416   421 
Held-to-maturity investments:                    
Investment in debt securities  462   462          
Available-for-sale financial assets  134   103   31       
Fair value through profit or loss(3):
                    
Short-term investments  486   486          
Bifurcated embedded derivatives  6   6          
 
Total
  70,273   48,385   3,291   6,647   11,950 
 
2012, and January 1, 2012:

       Neither past due
nor impaired
   Past due but     
   Total   Class A(1)   Class B(2)   not impaired   Impaired 
   (in million pesos) 

December 31, 2013

          

Cash and cash equivalents

   31,905     29,129     2,776     —       —    

Loans and receivables:

   44,771     17,233     4,996     7,906     14,636  

Advances and other noncurrent assets

   10,384     10,241     22     9     112  

Short-term investments

   127     127     —       —       —    

Investment in debt securities and other long-term investments

   2,172     2,172     —       —       —    

Retail subscribers

   12,563     1,318     1,822     2,274     7,149  

Corporate subscribers

   7,904     698     343     1,014     5,849  

Foreign administrations

   5,840     1,242     1,765     2,714     119  

Domestic carriers

   1,461     350     22     1,009     80  

Dealers, agents and others

   4,320     1,085     1,022     886     1,327  

HTM investments:

   471     471     —       —       —    

Investment in debt securities and other long-term investments

   471     471     —       —       —    

Available-for-sale financial investments

   220     166     54     —       —    

Financial instruments at FVPL(3):

   601     601     —       —       —    

Short-term investments

   591     591     —       —       —    

Short-term currency swaps

   10     10     —       —       —    

Derivatives used for hedging:

   24     24     —       —       —    

Interest rate swaps

   24     24     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77,992     47,624     7,826     7,906     14,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

          

Cash and cash equivalents

   37,161     34,381     2,780     —       —    

Loans and receivables:

   38,887     13,329     3,902     8,254     13,402  

Advances and other noncurrent assets

   8,989     8,848     3     26     112  

Short-term investments

   24     24     —       —       —    

Investment in debt securities and other long-term investments

   205     205     —       —       —    

Retail subscribers

   10,568     967     989     2,123     6,489  

Corporate subscribers

   8,100     478     540     945     6,137  

Foreign administrations

   4,960     1,043     923     2,895     99  

Domestic carriers

   1,707     266     27     1,308     106  

Dealers, agents and others

   4,334     1,498     1,420     957     459  

Available-for-sale financial investments

   5,651     159     5,492     —       —    

Financial instruments at FVPL(3):

   550     550     —       —       —    

Short-term investments

   550     550     —       —       —    

HTM investments:

   150     150     —       —       —    

Investment indebt securities and other long-term investments

   150     150     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   82,399     48,569     12,174     8,254     13,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

       Neither past due
nor impaired
   Past due but     
   Total   Class A(1)   Class B(2)   not impaired   Impaired 
   (in million pesos) 

January 1, 2012

          

Cash and cash equivalents

   46,057     44,885     1,172     —       —    

Loans and receivables:

   32,206     6,804     3,945     6,685     14,772  

Advances and other noncurrent assets

   1,165     1,128     37     —       —    

Short-term investments

   24     24     —       —       —    

Retail subscribers

   11,302     1,449     1,050     1,539     7,264  

Corporate subscribers

   9,200     974     375     1,359     6,492  

Foreign administrations

   4,961     1,309     1,242     2,211     199  

Domestic carriers

   1,323     215     24     973     111  

Dealers, agents and others

   4,231     1,705     1,217     603     706  

HTM investments:

   508     508     —       —       —    

Investment in debt securities

   508     508     —       —       —    

Available-for-sale financial assets

   7,181     150     7,031     —       —    

Financial instruments at FVPL(3):

   890     890     —       —       —    

Short-term investments

   534     534     —       —       —    

Long-term currency swaps

   356     356     —       —       —    

Derivatives used for hedging:

   10     10     —       —       —    

Forward foreign exchange contracts

   10     10     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   86,852     53,247     12,148     6,685     14,772  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)
(1)

This includes low risk and good paying customer accounts with no history of account treatment for a defined period and no overdue accounts as at report date; and deposits or placements to counterparties with good credit rating or bank standing financial review.

(2)

This includes medium risk and average paying customer accounts with no overdue accounts as at report date, and new customer accounts for which sufficient credit history has not been established; and deposits or placements to counterparties not classified as Class A.

(3)

Gross receivables from counterparties before any offsetting arrangements.

279


The aging analysis of past due but not impaired class of financial assets as at December 31, 20102013 and 20092012, and January 1, 2012 are as follows:
                         
      Neither past due  Past due but not impaired    
  Total  nor impaired  1-60 days  61-90 days  Over 91 days  Impaired 
           (in million pesos)   
December 31, 2010
                        
Loans and receivables:                        
Advances and refundable deposits  1,000   1,000             
Cash and cash equivalents  36,678   36,678             
Short-term investments  152   152             
Retail subscribers  8,917   1,872   1,387   150   463   5,045 
Corporate subscribers  7,998   1,005   642   159   236   5,956 
Foreign administrations  4,479   2,455   616   393   857   158 
Domestic carriers  1,591   214   165   182   892   138 
Dealers, agents and others  5,273   4,612   21   20   87   533 
Held-to-maturity investments:                        
Investment in debt securities  484   484             
Available-for-sale financial assets  147   147             
Fair value through profit or loss:                        
Short-term investments  517   517             
Long-term currency swap  178   178             
Bifurcated embedded derivatives  5   5             
 
Total
  67,419   49,319   2,831   904   2,535   11,830 
 
                         
December 31, 2009
                        
Loans and receivables:                        
Advances and refundable deposits  849   849             
Cash and cash equivalents  38,319   38,319             
Short-term investments  3,338   3,338             
Corporate subscribers  9,106   1,361   433   198   437   6,677 
Retail subscribers  8,026   1,754   1,362   184   246   4,480 
Foreign administrations  4,353   1,712   1,320   405   627   289 
Domestic carriers  1,267   165   283   293   443   83 
Dealers, agents and others  3,927   3,090   332   21   63   421 
Held-to-maturity investments:                        
Investment in debt securities  462   462             
Available-for-sale financial assets  134   134             
Fair value through profit or loss:                        
Short-term investments  486   486             
Bifurcated embedded derivatives  6   6             
 
Total
  70,273   51,676   3,730   1,101   1,816   11,950 
 

           Past due but not impaired     
   Total   Neither past due
nor impaired
   1-60 days   61-90 days   Over 91 days   Impaired 
   (in million pesos) 

December 31, 2013

            

Cash and cash equivalents

   31,905     31,905     —       —       —       —    

Loans and receivables:

   44,771     22,229     3,303     787     3,816     14,636  

Advances and other noncurrent assets

   10,384     10,263     1     —       8     112  

Short-term investments

   127     127     —       —       —       —    

Investment in debt securities and other long-term investments

   2,172     2,172     —       —       —       —    

Retail subscribers

   12,563     3,140     1,615     172     487     7,149  

Corporate subscribers

   7,904     1,041     384     224     406     5,849  

Foreign administrations

   5,840     3,007     740     158     1,816     119  

Domestic carriers

   1,461     372     129     134     746     80  

Dealers, agents and others

   4,320     2,107     434     99     353     1,327  

HTM investments:

   471     471     —       —       —       —    

Investment in debt securities and other long-term investments

   471     471     —       —       —       —    

Available-for-sale financial investments

   220     220     —       —       —       —    

Financial instruments at FVPL:

   601     601     —       —       —       —    

Short-term investments

   591     591     —       —       —       —    

Short-term currency swaps

   10     10     —       —       —       —    

Derivatives used for hedging:

   24     24     —       —       —       —    

Interest rate swaps

   24     24     —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77,992     55,450     3,303     787     3,816     14,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

            

Cash and cash equivalents

   37,161     37,161     —       —       —       —    

Loans and receivables:

   38,887     17,221     3,017     1,079     4,158     13,402  

Advances and other noncurrent assets

   8,989     8,851     —       —       26     112  

Short-term investments

   24     24     —       —       —       —    

Investment in debt securities and other long-term investments

   205     205     —       —       —       —    

Retail subscribers

   10,568     1,956     1,363     270     490     6,489  

Corporate subscribers

   8,100     1,018     351     198     396     6,137  

Foreign administrations

   4,960     1,966     645     452     1,798     99  

Domestic carriers

   1,707     293     174     144     990     106  

Dealers, agents and others

   4,334     2,918     484     15     458     459  

HTM investments:

   150     150     —       —       —       —    

Investment in debt securities and other long-term investments

   150     150     —       —       —       —    

Available-for-sale financial investments

   5,651     5,651     —       —       —       —    

Financial instruments at FVPL:

   550     550     —       —       —       —    

Short-term investments

   550     550     —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   82,399     60,743     3,017     1,079     4,158     13,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

           Past due but not impaired     
   Total   Neither past due
nor impaired
   1-60 days   61-90 days   Over 91 days   Impaired 
   (in million pesos) 

January 1, 2012

            

Cash and cash equivalents

   46,057     46,057     —       —       —       —    

Loans and receivables:

   32,206     10,749     3,087     1,068     2,530     14,772  

Advances and other noncurrent assets

   1,165     1,165     —       —       —       —    

Short-term investments

   24     24     —       —       —       —    

Retail subscribers

   11,302     2,499     1,202     226     111     7,264  

Corporate subscribers

   9,200     1,349     706     263     390     6,492  

Foreign administrations

   4,961     2,551     897     282     1,032     199  

Domestic carriers

   1,323     239     100     98     775     111  

Dealers, agents and others

   4,231     2,922     182     199     222     706  

HTM investments:

   508     508     —       —       —       —    

Investment in debt securities

   508     508     —       —       —       —    

Available-for-sale financial assets

   7,181     7,181     —       —       —       —    

Financial instruments at FVPL:

   890     890     —       —       —       —    

Short-term investments

   534     534     —       —       —       —    

Long-term currency swaps

   356     356     —       —       —       —    

Derivatives used for hedging:

   10     10     —       —       —       —    

Forward foreign exchange contracts

   10     10     —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   86,852     65,395     3,087     1,068     2,530     14,772  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment Assessments

The main consideration for the impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. Our impairment assessments are classified into two areas: individually assessed allowance and collectively assessed allowances.

Individually assessed allowance

We determine the allowance appropriate for each individually significant loan or advance on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral, if any, and the timing of the expected cash flows. We also recognize an impairment for accounts specifically identified to be doubtful of collection when there is information on financial incapacity after considering the other contractual obligations between us and the subscriber. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances that are not individually significant and for individually significant loans and advances where there is no objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.

280


The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the approximate delay between the time a loss is likely to have been incurred and the time it is identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. The impairment allowance is then reviewed by credit management to ensure alignment with our policy.

Capital Management Risk

We aim to achieve an optimal capital structure in pursuit of our business objectives which include maintaining healthy capital ratios and strong credit ratings, and maximizing shareholder value.

In recent years, our cash flow from operations has allowed us to substantially reduce debts and, in 2005, resume payment of dividends on common shares. Since 2005, our strong cash flow has enabled us to make investments in new areas and pay higher dividends.

Our approach to capital management focuses on balancing the allocation of cash and the incurrence of debt as we seek new investment opportunities for new businesses and growth areas. Our current dividend policy is to pay out 70% of our core income per common share.EPS. Further, in the event no investment opportunities arise, we may consider the option of returning additional cash to our shareholders in the form of special dividends or share buybacks. Philippine corporate regulations prescribe, however, that we can only pay out dividends or make capital distribution up to the amount of our unrestricted retained earnings.

As part of our goal to maximize returns to our shareholders, we obtained in 2008 an approval from the Board of Directors to conduct a share buyback program for up to five million PLDT common shares. We had acquired a total of approximately 2.72 milliondid not buy back any shares of PLDT’s common stock at a weighted average price of Php2,388 per share for a total consideration of Php6,505 million as at December 31, 2010. We had acquired at total of approximately 2.68 million shares of PLDT’s common stock at a weighted average price of Php2,387 per share for a total consideration of Php6,405 million as at December 31, 2009. SeeNote 8 — Earnings Per Common ShareandNote 19 — Equity.

in 2013.

Some of our debt instruments contain covenants that impose maximum leverage ratios. In addition, our credit ratings from the international credit ratings agencies are based on our ability to remain within certain leverage ratios.

We monitor capital using several financial leverage measurements calculated in conformity with PFRS, such as net consolidated debt to equity ratio. Net consolidated debt is derived by deducting cash and cash equivalents and short-term investments from total debt (long-term debt, including current portion and notes payable)., excluding discontinued operations. Our objective is to maintain our net consolidated debt to equity ratio below 100%.

The table below provides information regarding our consolidated debt to equity ratio as at December 31, 20102013 and 2009:

         
  2010  2009 
  (in million pesos)
Long-term debt, including current portion (Note 20)  89,646   96,450 
Notes payable (Note 20)     2,279 
 
Total consolidated debt  89,646   98,729 
Cash and cash equivalents (Note 15)  (36,678)  (38,319)
Short-term investments  (669)  (3,824)
 
Net consolidated debt  52,299   56,586 
 
         
Equity attributable to equity holders of PLDT  97,069   98,575 
 
Net consolidated debt to equity ratio  54%  57%
 

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2012, and January 1, 2012:


   December 31,  January 1, 
   2013  2012  2012 
      (As Adjusted – Note 2) 
   (in million pesos) 

Long-term debt, including current portion (Note 20)

   104,090    115,792    114,166  

Notes payable (Note 20)

   —      —      3,109  
  

 

 

  

 

 

  

 

 

 

Total consolidated debt

   104,090    115,792    117,275  

Cash and cash equivalents (Note 15)

   (31,905  (37,161  (46,057

Short-term investments

   (718  (574  (558
  

 

 

  

 

 

  

 

 

 

Net consolidated debt

   71,467    78,057    70,660  
  

 

 

  

 

 

  

 

 

 

Equity attributable to equity holders of PLDT

   137,147    145,550    153,860  
  

 

 

  

 

 

  

 

 

 

Net consolidated debt to equity ratio

   52  54  46
  

 

 

  

 

 

  

 

 

 

No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2013, 2012 and 2011.

29. Cash Flow Information

28.Cash Flow Information

The table below shows non-cash investing activities for the years ended December 31, 2010, 20092013, 2012 and 2008:

             
  2010  2009  2008 
  (in million pesos) 
Transfer of Meralco shares to Beacon (Note 10)�� 15,083       
Recognition of asset retirement obligations (Note 21)  49   17   70 
Conversion of preferred stock subject to mandatory redemption     9   1,077 
 
30. Subsequent Event
PLDT’s Acquisition of Digital Telecommunications Philippines, Inc., or Digitel
On March 29, 2011, the boards of PLDT and JG Summit Holdings, Inc., or JGS, approved the acquisition by PLDT of JGS’s and certain other seller-parties’ ownership interest in Digitel, comprising of: (i) 3,277,135,882 common shares in Digitel, representing approximately 51.55% equity stake; (ii) zero-coupon convertible bonds issued by Digitel and its subsidiaries to JGS and its subsidiaries, which PLDT expects to be convertible into approximately 18.6 billion shares of Digitel by June 30, 2011; and (iii) intercompany advances of Php34.1 billion made by JGS and its subsidiaries and certain of such seller-parties to Digitel and its subsidiaries (the “Assets”). Digitel is the 100% owner of Digitel Mobile Philippines, Inc., or DMPI, which is engaged in the mobile telecommunications business and owns the brandSun Cellular.
PLDT agreed to pay JGS and certain other seller-parties Php69.2 billion, which will be settled by the issuance of one new PLDT share for every Php2,500 consideration payable for the Assets. In order to aid the board of PLDT in discharging their fiduciary duties, PLDT will engage an independent financial advisor to review the transaction and render a fairness opinion on the transaction and the consideration payable by PLDT.
PLDT further expects to announce its intention to conduct a tender offer for all the remaining Digitel shares, approximately 48.45% of the issued common stock of Digitel, held by the other remaining shareholders of Digitel. Under the contemplated tender offer, it is anticipated that PLDT will offer to purchase the remaining Digitel shares at the price of Php1.60 per Digitel share, which will be paid in the form of either PLDT shares issued at Php2,500 per share or cash, at the option of the Digitel shareholder. The contemplated tender offer price will be equivalent to the fully diluted price per share of Digitel, assuming full conversion of the convertible bonds. Should all remaining shareholders of Digitel accept the tender offer by PLDT, PLDT will issue a total of 29.65 million new PLDT shares for the acquisition of the Assets and of the remaining Digitel shares held by the other remaining shareholders of Digitel. The 29.65 million new PLDT shares will potentially represent approximately 13.7% of the enlarged issued share capital of PLDT on a fully diluted basis.
Assuming full acceptance by the minorities of Digitel, the total transaction consideration would be Php74.1 billion.
The completion of the acquisition will be subject to the procurement of regulatory approvals, including: (i) the approval by the NTC of the sale or transfer of JGS and the other seller-parties’ Digitel shares representing more than 40% of Digitel’s issued and outstanding common stocks; (ii) the approval by the Philippine SEC of the valuation of the Assets; (iii) the approval by the PSE of the block sale of the Digitel shares; (iv) the confirmation by the Philippine SEC that the issuance of the PLDT common shares to JGS and the other seller-parties is exempt from the registration requirement of the SRC; and (v) all other necessary approvals under applicable laws and regulations; and the approval by the stockholders of PLDT for the issuance of the PLDT common shares as payment for the purchase price of the Assets. In addition, the sale of the Digitel shares is subject to the consent of certain creditors of Digitel and DMPI.
This transaction is intended to be completed by the end of the second quarter of 2011.

282

2011:


   2013   2012   2011 
   (in million pesos) 

Shares issued for settlement of the purchase price of Digitel shares tendered by the noncontrolling Digitel stockholders

   —       4,401     64,492  

Put option liability for the mandatory tender offer (Notes 13 and 23)

   —       —       4,940  

Liability from redemption of preferred shares which consists of the following:

      

Recognition of asset retirement obligations (Note 21)

   32     290     29  

Preferred shares redeemed (Note 19)

   —       4,029     —    

Unclaimed dividends from stock agent form part of trust account

   —       2,323     —    

Unpaid dividends for preferred shares redeemed

   —       1,821     —    

Item 19.Exhibits

Item 19. Exhibits
See Item 1818. “Financial Statements” above for details of the financial statements filed as part of this annual report.

Exhibits to this report:

1(a). Amended Articles of Incorporation (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)(as amended on October 3, 2013)
  
1(b). Amended By-Laws (as amended on August 3, 2010) (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission on March 29, 2011)
  2(a). Terms and Conditions of the Voting Preferred Stock of PLDT
2.
  2(b). We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of our total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
4. Material Contracts
6. Computation of Earnings Per Share is included in Note 8 to the Audited Financial Statements
  
7. Calculation of Ratio of Earnings to Fixed Charges
8. Subsidiaries
12.1 Certification of Chief Executive OfficerCEO required by Rule 13a-14(a) of the Exchange Act
12.2 Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act
13.1 Certification of Chief Executive OfficerCEO required by Rule 13a-14(b) of the Exchange Act
13.2 Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

283


SIGNATURE

SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

April 2, 2014

March 29, 2011
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

By:

 
By:  

/s/    Ma. Lourdes C. Rausa-Chan        

 MA. LOURDES C. RAUSA-CHAN
 Senior Vice President, Corporate Affairs and Legal
Services Head and Corporate Secretary

284


EXHIBIT INDEX

Exhibit
Number
 
Exhibit
NumberDescription of Exhibit
  
1(a) Amended Articles of Incorporation (as amended on October 3, 2013)
  1(b)Amended By-Laws (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)on March 29, 2011)
  
1(b)Amended By-Laws (as amended on August 3, 2010)
2 We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of our total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
4(a) Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT’s Form 6-K for the month of September 1999)
4(b) Executive Stock Option Plan (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)
4(c) Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between PCEV, PCEV (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT’sForm 20-F as filed with the Securities and Exchange Commission in May 2001)
  
4(d) The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro Pacific Corporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc., Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications and NTT DoCoMoDOCOMO (incorporated by reference to Schedule 13D/A (Amendment No.2)No. 2) as filed with the United States Securities and Exchange Commission by Nippon Telegraph and Telephone Corporation and NTT Communications Corporation on January 31, 2006)
  4(e) Deed of Assignment dated April 30, 2013 between SPi Global Holdings, Inc. and Asia Outsourcing Philippines Holdings, Inc.
6 Computation of Earnings Per Share is included in Note 8 to the Audited Financial Statements
  
7 Calculation of Ratio of Earnings to Fixed Charges
8 Subsidiaries
12.1 Certification of Chief Executive OfficerCEO required by Rule 13a-14(a) of the Exchange Act
12.2 Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act
13.1 Certification of Chief Executive OfficerCEO required by Rule 13a-14(b) of the Exchange Act
13.2 Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

285