June 13, 2000

Annual Benpres Holdings Stockholders' Meeting

OPENING REMARKS by OSCAR M. LOPEZ
Meralco Theater

Fellow shareholders:

The year 2000 was a most difficult year for your company. The downturn in the economy was aggravated by political turmoil that severely affected the business environment. With business sector confidence at an all time low, investors, local and foreign, withheld and withdrew their funds from the local economy. The value of the peso plummeted to as low as P56 to US, effectively doubling the magnitude of foreign exchange liabilities in peso terms.

It was not until the middle of January 2001 when People Power 2 brought fresh hope that the confidence of the business sector could be won back. But the problems of the economy cannot be fixed overnight. Indeed, it is already conceded that 2001 will be difficult for business. There will be a continuing squeeze on investments, revenues and profits as the world economy is threatened by new uncertainties.

Peso devaluation
The one problem that has hit everyone with some intensity is the devaluation of the peso.

For us, it was BayanTel that first felt the aftershock. It had just completed a rollout of its landline in working class population centers at a cost of about 0 million, largely financed by supplier and bank credit. While BayanTel was partly covered by a hedge against devaluation, its currency adjustment mechanism did not completely shield it from the impact of the peso's fall.

The areas assigned to BayanTel were more vulnerable to the financial pressures that followed which led to a decline in subscriber count. It did not help that we initially had problems interconnecting with PLDT, the leading carrier.

BayanTel's inability to meet market projections meant that it was unable to generate enough cash to service its debts, which had grown larger in peso terms. An investment in cell phone service provider, Extelcom, also turned sour and had to be written off.

Thus, we began in 2000, a process to find a suitable and permanent solution to BayanTel's debt burden. We are seeking a restructuring of almost US0 million in loans incurred for network and service rollout and have engaged Bank of America to assist and advice us on it.

Also hard hit by the peso's devaluation is our other subsidiary, Maynilad Water Services Inc.. In March 2001, Maynilad filed a notice of force majeure with the Regulatory Office of Metropolitan Waterworks and Sewerage System (MWSS). Unforeseen circumstances, especially the doubling of the exchange rate, from P26.30 per US dollar during the 1997 auction to the current P50.00 per US dollar, have derailed our operations and the business model on which our bid was based. The US0 million debt Maynilad absorbed from the MWSS, valued only at P20 billion at the time of the bid, is now about P40 billion.

Maynilad is now working on a program to ensure the long-term viability of the concession, based on negotiating a 0 million term loan from a consortium of banks, including the Asian Development Bank, and securing a regulatory framework that would allow prompt relief from foreign exchange losses, rate rebasing and a mutually acceptable action plan on service targets. In accordance with the parameters set by government, the package of relief measures are to be accomplished within the terms of the existing Concession Agreement. The plan also calls for securing a series of bridge loans until the financial closing and availment of the 0 million term loan, expectedly by the first quarter of the year 2002.

Based on the latest round of discussions with government and MWSS, which can be described as very constructive, a final solution appears in sight for Maynilad as well as Benpres' investment in the venture. In formulating the solution, Maynilad and the government are guided primarily by the goal of assuring the viability of the concession and the welfare of the consumers.

Communications Group
The economic problems of the year did not affect our main income generator, ABS-CBN. The country's leading provider of entertainment and information registered record sales for most of the year. As in similar times in the past, the tough economic environment led advertisers to the high audience drawing capacity of ABS-CBN. Flagship station Channel 2 maintained its overwhelming lead over its nearest competitor in all program categories, across all time segments all over the country.

The investments made by ABS-CBN in its regional operations have also paid off. The volume of local advertising in its regional stations grew significantly, capitalizing on the rising buying power in the countryside as the agricultural sector registered impressive growth.

ABS-CBN's other entertainment subsidiaries like Star Cinema and Star Records also performed well in year 2000. Again, investments in the development of high potential performers, discovered and nurtured in-house, have delivered on their promise in year 2000.

And in terms of public service, ABS-CBN led the broadcast industry in the coverage of the dramatic impeachment hearings that generated historic levels of audience attention. ABS-CBN's all news channel on cable has established itself as a principal source of news anytime of the day in areas served by SkyCable and its affiliates. Our international operations catering to the millions of Filipinos abroad also started to deliver profits in 2000.

Our cable subsidiary, selling under the trade name SkyCable, consolidated its market leadership. SkyCable also developed a way of jointly selling its products with sister company BayanTel in a converged offering under the brand name 'Fusion'. The synergy in the joint operations of the two companies enhanced efficiency that benefits both consumers and the stockholders. Profitability was however, significantly affected by the peso devaluation as foreign program costs went up from 19% of operating costs to 23% and still rising. The cost of expanding and upgrading its network was also severely affected by the peso's devaluation.

Bringing the convergence theme a step forward, we have entered negotiations with Mediaquest, the media holding company of PLDT, for a tie-up with their Home Cable operations. We are looking at this option as a means of rationalizing the high capital expenditure requirements of the business as well as foreign program costs.

Infrastructure and Power
The Manila North Tollways project moved closer to a financial closing in 2000. Negotiations with the financial institutions tapped to finance the project have progressed well. Right-of-way (ROW) requirements, however, continue to pose questions that preoccupy the government, since ROW is a government responsibility.

Turning to the power sector, First Philippine Holdings Corporation, umbrella company for our power-related businesses, reported a robust net income of P1.1 Billion for the year 2000. On the power generation side, the 1,000-megawatt Sta. Rita natural gas power plant was successfully commissioned and entered into commercial operation last August. Together with the Bauang and Panay power plants, Sta. Rita contributed approximately 62% of total revenues and 82% of earnings, displacing Meralco as the largest contributor to profitability. Construction of an additional block of 500 megawatts known as the San Lorenzo plant is now ongoing. Once the Malampaya natural gas project goes on stream late this year, these state of the art power plants are expected to help bring down the cost of power to the consumer and save the country valuable foreign exchange. These plants are also going to contribute more significantly to your company's bottomline.

On the power distribution side, the inability of Meralco to obtain its long delayed rate adjustment continued to have its negative impact on the bottomline. Return on rate base declined to 4.7%, keeping the utility company in technical default with its creditors. Meralco has not been awarded a rate adjustment in seven years. Its outstanding petition for a rate adjustment has also been kept pending, hostage to political and election-related considerations.

Lessons learned
In sum, the difficulties of the year 2000 brought a number of valuable lessons to the fore.

The first lesson is the need for reforms in the regulatory environment. When we decided to enter the local telecom market following its deregulation in 1995, we expected regulators to act swiftly and decisively on problem areas, particularly those of universal access, similar to the experience in developed countries.

Our unfortunate experience was that the interconnection issue became a tool to impede competition. Regulators, who were duty-bound to make deregulation work, could not be effectively relied upon to level the playing field, one that was tilted heavily in favor of the incumbent.

The issue of interconnection was only resolved after painstaking negotiations with PLDT. It helped that control of PLDT's management transferred to an international group that understood how smooth interconnection can provide a win-win-win environment for PLDT, competing carriers and the consumer.

Indeed, the existence of competent and independent regulators not only in telecommunications but in other utility businesses like water, electricity distribution and tollways, is a major factor on whether the Philippines will be considered a hospitable investment destination, not only for foreign investors but for domestic investors as well.

The second lesson comes from the weakness in emerging market funding in the last three years. The Asian contagion, which began in the second half of 1997, led international fund managers to lump the Philippines together with other countries in Southeast Asia. It made no difference that the Philippine economic fundamentals were initially not as bad as its neighbors. We were placed in the "isolation ward" of the world capital market just the same.

The third lesson is on the issue of governance. When we bought into Express Telecom in 1996, we assumed we would be able to exercise management control, with the cooperation of our partners in the country's first mobile phone company. That mistake was worth P6 billion. And as we wrote that off in 1999, we have revised and strengthened our internal processes that would make future mistakes like Extelcom difficult, if not impossible to make.

Meeting the Challenge
Indeed, because of the various problems we faced in the year 2000, we have undertaken a number of measures that improves total corporate governance.

First, we have endeavored to achieve focus through a corporate reorganization that emphasizes responsibility and accountability. Since we cannot change the big picture overnight, or the way the business environment operates outside of the Lopez Group, we have decided to start with the internal environment.

Our new organizational structure creates a tightly focused corporate center at Benpres with clear functional accountabilities and places oversight responsibilities over core business groups with logical compelling themes under Sector CEOs (or chief executive officers). The four main groupings are communications, power generation, utilities, and eLopez.

The corporate center exercises staff functions such as managing information flow, driving corporate information, strategic planning, supervising asset management, providing shared services and specialized expertise to the group, among others.

We have also established an executive council as the discussion forum for corporate level issues, investment decisions, portfolio compositions, and executive compensation.

The new governance structure strengthens the accountability of each officer and business unit within the Lopez Group of Companies.

This internal governance mechanism does not diminish or otherwise affect the powers and functions of the respective boards and management of the corporations affiliated with the Lopez Group. What is important is that the Group's directions are clear, unified and properly articulated in all fora.

We are also strengthening our alliances with foreign and local partners built on mutual respect and a healthy regard for the interest of all stakeholders.

Second, we are seeking a better balance between capital-intensive and knowledge-based businesses. We are subscribing to a clicks and bricks strategy to enhance our portfolio's value at little incremental cost to our shareholders. This also involves a thorough review of our portfolio with a view to disposing or selling-down investments in non-core businesses or leveraging our assets to restructure our portfolio, guided solely by a value-enhancing strategy that addresses the concerns of creditors and serves the long-term interest of our shareholders.

It all means that we continue to nurture new ventures, such as those being undertaken by e-Lopez, which take advantage of both tangible and intangible resources and relationships of the Lopez Group.

In communications, we have received good reception for our bundled services under the Integrated Broadband Services or IBS group. As the carriage unit for content provided by ABS-CBN, IBS is trailblazing using the resources of an enhanced Communications Group. Convergence is the name of the game and we have done this as early as 1998.

This assures us that your company, although rocked by a turbulent economy and beset with complex problems, is on the right track in implementing strategic convergence.

Third, we look forward to building a different utility model based on a stronger private-public partnership. We subscribe to a relationship with government that is dynamic and evolving, rather than static. Constant interaction will enable us to respond appropriately to changes in the business environment.

Regulators and the utilities under their watch must be proactive as they jointly take responsibility for basic public services as well as corporate viability. Having already invested so much in an enterprise and assumed market risks, it is not reasonable to ask the private sector to bear the additional burden of subsidizing public debt.

In closing, I want to assure you that your corporate officers are committed to enhance the value of your investment in Benpres. When my brother Geny led us in bringing Benpres public in 1993, we all knew we undertook public service initiatives for the long haul.

The normally long gestation for such projects as infrastructure and utilities, compounded by the effects of devastating regional and local political and economic crises, has derailed the payback period from the originally contemplated five to seven years to eight to 10 years.

But we are confident that the substantial assets we have accumulated thus far will help get us into New Economy ventures that require less in terms of financial capital, which is scarce nowadays, and more in intellectual capital, which we have in abundance.

We are, as always, committed to serve our various publics and to make a positive difference in their lives.

Thank you.