30 June COA Annual Audit Report Metro Manila Wastewater Management Project (MWMP) Loan Number 8162-PH. Subject

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized LAND BANK OF THE PHILIPPINES 30 June 2017 MR. CHRISTOPHER C. ANCHETA Task Team Leader The World Bank East Asia and Urban Development Unit Sustainable Development Department 25th Floor, One Global Place 5th Ave. corner 25th Street Bonifacio Global City Taguig City Subject Dear Mr. Ancheta: COA Annual Audit Report Metro Manila Wastewater Management Project (MWMP) Loan Number 8162-PH We are transmitting herewith a copy of the COA Annual Audit Report for the years ended December 31, 2016 and 2015 on the World Bank funded Metro Manila Wastewater Management Project (MWMP). Thank you. Very truly yours, Public Disclosure Authorized GEN OSO S. DAVID D artment Manager Program Management Department II cc: The VP, LPMG The VP, CBD 1 LANDBANK Plaza, 1598 M.H.del Pilar corner Dr.J. Quintos Sts. Malate, Manila 1004 * Tel. Nos *

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3 EXECUTIVE SUMMARY INTRODUCTION The Metro Manila Wastewater Management Project (MWMP) was established on May 31, 2012 through a loan agreement between the International Bank for Reconstruction and Development (IBRD) of World Bank and Land Bank of the Philippines (LBP). This Project aims to improve wastewater services in selected sub-catchments of Metro Manila and surrounding areas. To finance the Project, IBRD granted LBP a loan in the principal amount of US$275 million (or around PHP billion) for a term of 25 years inclusive of seven years grace period, with a guarantee from the Government of the Republic of the Philippines. The loan would be re-lent to Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI) as the implementing entities of the Project. The commitment period of the loan is five (5) years from date of loan signing. SCOPE AND OBJECTIVE OF AUDIT The audit covered the examination, on a test basis, of the accounts and financial transactions of the MWMP for the period from January 1 to December 31, 2016 in accordance with Philippine Public Sector Standards on Auditing to enable us to express an opinion on the fairness of presentation of the financial statements for the years ended December 31, 2016 and FINANCIAL HIGHLIGHTS 1. Comparative Financial Position Particulars USD PHP USD PHP Assets 109,465,749 5,442,637,046 66,116,572 3,111,445,859 Liabilities 107,840,558 5,361,832,559 65,539,974 3,084,311,165 Equity 1,625,191 80,804, ,598 27, 134,694 1I. Comparative Results of Operations Particulars USD PHP USD PHP Interest income 2,271, ,944, ,840 39,052,267 Interest expense 1,223,015 60,808, ,718 16,693,016 Net income 1,048,593 52,136, ,122 22,359,251

4 INDEPENDENT AUDITOR'S OPINION The Auditor rendered an unmodified opinion on the fairness of presentation of the financial statements of the MWMP for the years ended December 31, 2016 and li

5 TABLE OF CONTENTS Page No. AUDITED FINANCIAL STATEMENTS Independent Auditor's Report 1 Statement of Management's Responsibility 3 for the Financial Statements Statements of Financial Position 5 Statements of Financial Performance 6 Statements of Cash Flows 7 Notes to Financial Statements 8

6 AUDITED FINANCIAL STATEMENTS

7 Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City CORPORATE GOVERNMENT SECTOR CLUSTER I- BANKING AND CREDIT INDEPENDENT AUDITOR'S REPORT The Board of Directors Land Bank of the Philippines Malate, Manila REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Metro Manila Wastewater Management Project, a Project implemented by Land Bank of the Philippines and funded by International Bank for Reconstruction and Development of World Bank under Loan No Ph, which comprise the statements of financial position as at December 31, 2016 and 2015, statements of financial performance, and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory Information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Public Sector Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting

8 estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Metro Manila Wastewater Management Project as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. COMMISSION ON AUDIT CORAD Z Supervising Auditor June 28, 2017

9 LAND BANK OF THE PHILIPPINES March 01, 2017 MS. CORA D. MARQUEZ Supervising Auditor Land Bank of the Philippines Dear Ms. Marquez: In connection with your examination of the Financial Statement for the Metro Manila Wastewater Management Project as of December 31, 2016 and for the year then ended, for the purpose of expressing an opinion as to whether the financial position, results of operations and changes in financial position, we confirm to the best of our knowledge and belief, the following representations made to you during your examinations: 1. We are responsible for the fair presentation in the financial statements of financial position, results of operations and changes in financial position in conformity with generally accepted accounting principles; 2. We have made available to you all financial records and related data; 3. There have been no: Irregularities involving management or employees who have significant roles in the system of internal accounting records; > Irregularities involving other employees that could have a material effect on the financial statements; > Communications from regulatory agencies concerning non-compliance with or deficiencies in financial reporting practices that could have material effect on the financial statements. 4. We have no plans or intentions that may materially affect the carrying value classification of assets and liabilities; 5. There are no material transaction that have not been properly recorded in the accounting records underlying the financial statements; 6. The bank has satisfactory title to all itemi of property and equipment shown in the financial statements; 7. Provision have been made for any material loss for the non-performing loans classified as substandard as of the period audited; 8. We have completed with all aspects of contractual agreements that would have a material effect on the financial statements in the event of non-compliance; LANL)ANK Plaza, M.H.del Pilar comer Dr. J.Ouintos Sts., Malte, Manila Tel. Nos * wwwjandi1bnktom

10 9. No events have occurred subsequent to the balance sheet date up to signing of this letter that would require adjustment to disclosure in the financial statements. Very truly yours, LAND BANK OF THE PHILIPPINES By: LANI U. PORNUEVO ANN4. BAUTISTA Department Manager First Vieident Loans lmplementati Department Banking Operations Group

11 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A project of Land Bank of the Philippines Funded by IBRD Loan 8162-Ph) STATEMENTS OF FINANCIAL POSITION December 31, 2016 and 2015 (Comparative in US Dollars translated In Philippine Peso based on PDS closing rate at year end) Nate USD PHP USD PHP ASSETS Cash and Cash Equivalents - FCDU 3 1,459,311 72,556, ,121 21,982,698 Loans and Receivables - FCDU 4 108,006,438 5,370,080,111 65,649,451 3,089,463,161 TOTAL ASSETS ,442,637,046 6,116,572 3,111,445,859 LIABILITIES AND EQUITY Liabilities Bills payable others - FCDU 5 107,592,402 5,349,494,221 65,452,716 3,080,204,825 Accrued interest expense-bp - FCDU 6 248,156 12,338,338 87,258 4,106, ,840,558 5,361,832,559 65,539, , Equity Retained Earnings 576,598 28,668, ,476 4,775,443 Net income 1,048,593 52,136, ,122 22,359,251 1,625,191 80,804, ,598 27,134,694 TOTAL LIABILITIES AND EQUITY 109,465,749 5,442,637,046 66,116,572 3,111,445,659 The Notes on pages 8 to 10 form part of these financial statements. 5

12 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A project of Land Bank of the Philippines Funded by IBRD Loan 8162-Ph) STATEMENTS OF FINANCIAL PERFORMANCE For the years ended December 31, 2016 and 2015 (Comparative in US Dollars translated in Philippine Peso based on PDS closing rate at year end) USD PHP USD PHP Income Interest income - FCDU 7 2,271, ,944, ,840 39,052,267 Expense Interest expense - FCDU 8 1,223,015 60, , ,93,016 NET INCOME 1,048,593 52,136, ,122 22,359,251 The Notes on pages 8 to 10 form part of these financlai statements. 6

13 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A project of Land Bank of the Philippines Funded by IBRD Loan 8162-Phy STATEMENTS OF CASH FLOWS For the years ended December 31, 2016 and 2015 (Comparative in US Dollars translated in Philippine Peso based on PDS closing rate at year end) USD PHP USD PHP CASH FLOW FROM OPERATING ACTIVITIES: Net Income 1,048,593 52,136, ,122 22,359,251 Changes In operating assets and liabilities: Increase in loans and receivables - FCDU (42,356,987) (2,105,989,411) (50,787,811) (2,390,074,381) Increase in accrued Interest expense-bp - FCDU 160,899 7,999,893 71,993 3,388,011 Net cash used by operating activities (41,147,495) (2,045,853,476) (50,240,100) (2,364,327,119) CASH FLOW FROM FINANCING ACTIVITIES: Increase in Bills Payable - FCDU 42,139,685 2,095,185,172 50, ,382,616,195 Not cash provided by financing activities 42,139,685 2,095,185,172 50,629,329 2,382,616,195 Net increase In Cash and cash equivalents 992,190 49,331, ,633 18,289,076 Cash and cash equivalents, beginning of year 467,121 23,225,239 78,488 3,693,623 CASH AND CASH EQUIVALENTS, END 1,459,311 72,556, ,121 21,982,898 The Notes on pages 8 to 10 form part of these financial statements. 7

14 METRO MANILA WASTEWATER MANAGEMENT PROJECT (A Project implemented by LBP Funded by IBRD Loan No. 8f62-Ph) NOTES TO FINANCIAL STATEMENTS 1. Nature of the Project The term loan was established on May 31, 2012 to partially finance the Metro Manila Wastewater Management Project (MWMP). This Project aims to improve wastewater services in selected sub-catchments of Metro Manila and surrounding areas. The investment cost includes price and physical contingencies and taxes. The US$275 million or around PHP billion loan borrowed by Land Bank of the Philippines (LBP) from the World Bank would be re-lent to Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI) at US$137.5 million for each concessionaire as the implementing entities of the project. It is a 25-year term loan inclusive of seven years grace period, with a guarantee from the Government of the Philippines. The commitment period for the disbursement of the term loan shall be within a period of about five years from date of loan signing. 2. Summary of Significant Accounting Policies The financial statements have been prepared on a historical cost basis, in compliance with the Philippine Financial Reporting Standards (PFRS). In compliance with BSP requirement, recording of MWMP loan transactions is under LBP- Foreign Currency Deposit Unit (FCDU) books. For financial reporting purposes, the monetary assets and liabilities of the foreign currency denominated monetary assets and liabilities are translated In Philippine peso based on the Philippine Dealing System closing rate prevailing at the Statement of Financial Position date. Income is recorded on accrual basis except for interest on past due loans as provided under BSP Circular No. 342 dated April 14, Expenses are recognized on accrual basis. The effect of transactions and other financial events on the assets and liabilities are recognized at the time they have their primary impact, not necessarily when cash is disbursed. Cost is charged as an expense in the period in which it provides expected services in an effort to generate revenue. 8

15 3. Cash and Cash Equivalents - FCDU This account consists of: USD PHP USD PHP Collections of interest 2,854, ,927, ,232 37,658,908 Less: Payment to World Bank 1,395,227 69,370, ,111 15,676,210 1,459,311 72,556, ,121 21,982, Loans and receivables - FCDU The obligations of MWCI and MWSI to LBP are recognized on the same day that World Bank releases the loan to LBP through non-interest bearing US$ Designated Accounts (DAs) of MWCI and MWSI maintained at LBP. MWCI and MWSI acknowledge their obligations to LBP by executing Promissory Notes commencing on the date when World Bank releases the funds to the US$ DAs which will be converted into peso and transferred to MWCI's and MWSI's peso Project Accounts to fund eligible expenditures payable in peso. The term of the loan is twenty five (25) years inclusive of the maximum seven years grace period on payment of the principal. The interest rate is the same rate of interest rate payable by LBP under the World Bank Loan Agreement plus the LBP's fixed spread of 1.25 per cent per annum. USD PHP USD PHP Loans to private nonfinancial corporation 107,592,402 5,349,494,221 65,452,716 3,080,204,825 Accrued interest receivable - FCDU 414,036 20,585, ,735 9,258, ,006,438 5,370,080,111 65,649,451 3,089,463, Bills payable others - FCDU This pertains to the US$ balance of the loan drawdowns by LBP from World Bank that is booked at LBP's FCDU books on the date the loan proceeds was credited to the US$ DAs maintained at LBP which, as of December 31, 2016 amounted to US$ 107,592, USD PHP USD PHP Bills payable - FCDU 107,592,402 5,349,494,221 65,452,716 3,080,204,825 9

16 6. Accrued interest expense BP others - FCDU This pertains to the balances of the accruals for interest on Bills payable others-fcdu based on the Loan Agreement between LBP and World Bank. The US$ balances are booked at the LBP's FCDU. USD PHP USD PHP Accrued Interest expense - FCDU 248,156 12,338,338 87,258 4,106, Interest income - performing loans to private - FCDU The interest income is computed based on the outstanding loans starting from loan availment using the same rate of interest payable by LBP under the World Bank Loan Agreement plus LBP's fixed spread of 1.25 per cent per annum. 8. Interest expense BP others - FCDU The interest expense is based on the outstanding loan drawdown computed at World Bank's interest rate (US$ LIBOR plus World Bank spread). 9. Final tax The ten per cent final tax on the interest for the MWMP term loan shall be for the accounts of MWCI and MWSI. 10. Foreign exchange (FX) profitl(loss) Since the MWMP term loan was passed on to MWCI and MWSI, being the implementing entities of the Project with LBP's assistance as stated In the Loan Agreement, any foreign exchange revaluation profit/loss shall be for the account of MWCI and MWSI. 11. Guarantee fee The guarantee fee due to the Bureau of the Treasury shall be paid by MWCI and MWSI. It is computed at one per cent per annum based on the amount of each availment to be paid immediately upon receipt and booking. of the loan release and thereafter on the anniversary date of each availment until the loan is fully paid. The guarantee fee shall be paid directly by MWCI and MWSI and shall not be accounted for in this Project. 12. Front end fee The front end fee is computed at 0.25 per cent of the amount of the term loan subject to any waiver of a portion of such fee as maybe determined by World Bank from time to time, to be paid by MWCI and MWSI not later than 60 days after the loan effective date. 10