Unraveling Meralco’s Mystifying Sales Numbers – By Methods We Learned in High School (Part 2/4)
Part 2
David Celestra Tan, MSK
4 August 2020
Meralco’s annual financial performance and status is audited and certified to by SGV, the country’s premier auditing firm. We have to trust that the income statement that they are certifying to reflect the true revenues and profits of Meralco. In search of answers on the perplexing sales numbers of Meralco vis-à-vis what they are reporting to the ERC, our researchers decided to look into this document beyond the Annual Report for 2019 that we used in our initial report. Meralco’s audited FS for 2019 is however not posted so we were able only to look at the 2018 SGV report and earlier.
Just like most Audit Reports it contained pages of template explanations on audit methodologies and financial reporting standards. Nonetheless, 2018 SGV Audit Report tells us the methodologies on the items in question.
a) Gross Sales in Pesos – let us assume that these have been verified from actual receipts and sales reports of Meralco and let’s consider it known and verifiable.
b) Purchased Power Cost (generation costs) – This is where the SGV Audit report and its notes were curiously kind of circuitous and vague. Note 23 that is supposed to explain Revenues and Purchased Power only said “The Company disaggregates its revenue information in the same manner as it reports its segment information.”
c) “Segment Information” in Note 6 in turn says
(1) Each operating segment of the MERALCO Group engages in business activities from which revenues are earned and expenses are incurred (including revenues and expenses relating to transactions with other business segments within the MERALCO Group.
(2) The Power segment consists of (a) electricity distribution, (b) power generation, and (c) RES. Electricity distribution – This is principally electricity distribution and supply of power on a pass through basis covering all captive customers in the MERALCO
The SGV Audit Report went to great lengths to discuss the power generation activities of the Meralco group and the web of sister companies and joint ventures but did not explain how the Power Generation Cost figure that they were certifying to in the audited statements, was audited and verified. SGV auditors however will not go out on a limb just like that. I am sure SGV was provided by Meralco power generation invoices and even payments totaling P241.032 Billion for 2019. Something good enough for SGV to accept. We are just wondering why they could not have certified to their verification so clearly.
This is a little like asking your marketer what he bought for P5,000. And the answer was the mall was so big and there are so many stores many of which are sister companies. Huh?
d) The Quantity of Sales and Purchases in KWH may not be covered by the SGV Audit report
We need to recognize that SGV as independent auditors is doing only a financial audit of Meralco’s financial condition and results of operations. They were not auditing Meralco for regulatory compliance and may not need to verify the QUANTITY of electricity that Meralco is buying and selling and declaring to the ERC.
Nonetheless, the amount of “Purchased Power Cost” figure is a material item in the financial statement they are certifying to and hence we would expect they had done the appropriate validation for the P241.032 Billion figure for 2019. Audit reports are carefully and meticulously prepared reports. On this material item, we did not expect the report to be ambiguous.
e) Quantity of Meralco energy sales in kwh in the Annual Report
Meralco’s energy sales figure quantity of 46.871 Billion kwh for 2019 is NOT part of the information in SGV’s report. And it is unlikely the quantity reports for the previous years were covered either. 44.313 Billion kwh in 2018, 42.102 Billion in 2017, 40.142 Billion for 2016 and 37.124 Billion for 2015.
Comparatively, Meralco’s generation cost report to ERC were 33.565 billion kwh in 2019, 32.5 billion in 2018, 32.803 billion in 2017, 33.49 billion in 2016, 30.772 billion in 2015. Big disparities in billions of both kwh and pesos.
Meralco’s energy sales numbers in the Annual Reports, including the annual sales growth being announced by Meralco management, are coming from somewhere but it does not appear to be part of the SGV validation and audit.
It appears ERC, for its part, only bases their assessments on data submitted by Meralco and had not actually had it audited by COA. It appears also that ERC is not comparing Meralco data with their audited financial statements and annual reports.
f) Meralco’s revenue per kwh of declared sales
We wondered how Meralco is determining these annual numbers so we tried to look for logical correlations.
1) Remember that Meralco’s sales of P310.098 Billion included Purchase power cost of (generation) P241.032 Billion which is only a pass on charge. Meaning Meralco is not supposed to make money on them.
2) If we deduct the power generation cost figure declared, what we will get is the gross profit of Meralco which is P69.066 Billion. This should be legally equivalent to the DSM charge (distribution, supply, and metering charges) which is supposed the authorized revenue of Meralco as a regulated entity. Save for some income from Meralco’s RES business.
3) Logically, if we divide this gross profit of Meralco by the declared energy sales it should average close to P1.38 per kwh, their supposed average rate to the consumers for DSM.
4) Out of curiosity, we correlated the gross profit of Meralco P69.066 billion with the declared quantity of kwh sales in the Annual Report of P46.871 Billion and what we got are symmetrical averages per kwh as follows:
P1.4735 per kwh for 2019. P1.4282 for 2018, P1.4397 for 2017, P1.4798 for 2016 and P1.5531 for 2015.
5) Since we cannot find a validation for the declared kwh sales of Meralco other than as a statistic in its Annual Report and it conflicts with its verifiable actual purchases of energy according to its report to the ERC and its consumers, we wonder if these annual number of energy sales in the Annual Report is calibrated to ensure that the “average” gross profit revenue of Meralco will translate to be close to its authorized average DSM rate of P1.38 per kwh approved by the ERC in July 2015 as Meralco’s interim rate to 2019.
6) If we correlate two verifiable numbers instead, the audited gross profit of Meralco of P69.066 billion for 2019 and divide it by the verified quantity of energy sales from the ERC report which is 33.565 Billion kwh, Meralco’s average DSM revenue is P2.0577 per kwh, which is 49% higher than its supposed approved DSM average rate of P1.38 per kwh.
Is this the one they are hiding from the ERC and the consuming public? And if so how is Meralco able to earn that kind of average DSM? How are they able to support a purchased power cost of P241.032 Billion for 2019 when their actual generation cost was only P174.859 billion?
We are not trying to be malicious here. But the disparities and unanswered questions cannot be ignored by the consumers because it affects the electricity they are paying for every month.
Neither should it be ignored by the ERC….lets hope.
Next: More Questions than Answers from a forensic-style deductive analyses.
Matuwid na Singil sa Kuryente Consumer Alliance Inc.
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david.mskorg@yahoo.com.ph
