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POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (In Philippine Peso)

1. GENERAL INFORMATION

The need for reforms in the entire power industry became evident when the power crisis started in 1989 and continued well into the 1990s. Series of laws were then enacted that instituted reforms in the industry. The latest law, and one that embodies the most extensive reforms, was Republic Act No. 9136, known as the Electric Power Industry Reform Act of 2001 or “EPIRA”, enacted on 26 June 2001. The major aspects of the reforms embodied in the EPIRA include: 1) restructuring of the entire power industry to introduce competition in the generation sector; 2) change from government to private ownership; and 3) introduction of a stable regulatory framework for the electricity sector.

Restructuring of the Electric Power Industry The EPIRA restructured the power industry by organizing it into four (4) sectors: generation, transmission, distribution and supply. The structural reforms resulted in the following: a) Two government-owned and controlled corporations (GOCCs), the Power

Sector Assets and Liabilities Management Corporation (PSALM) and the National Transmission Corporation (TransCo) were created. PSALM takes over the generation and other disposable assets of the National Power Corporation (NPC) and manages its financial obligations, while TransCo takes over the transmission functions of NPC;

b) NPC was retained as a GOCC performing the missionary electrification function through the Small Power Utility Group (SPUG);

c) The distribution and supply sectors were separated to promote retail competition and open access was introduced;

d) The sale of sub-transmission assets to distribution utilities (DUs) was mandated;

e) A wholesale trading market for electricity was established; f) The end-user rates and retail distribution rates were unbundled according to

specific electricity services provided by industry participants; g) A universal charge was imposed as part of electricity tariffs; h) The Department of Energy (DOE) was given the added role of supervising the

restructuring of the electricity industry; i) The Energy Regulatory Board (ERB) was abolished and the Energy Regulatory

Commission (ERC) was created instead; j) The National Electrification Administration (NEA) was given the additional

mandate of preparing electric cooperatives to operate and compete under a deregulated electricity market;

k) Electric cooperatives (ECs) were given the option to convert into either a stock cooperative under the Cooperatives Development Act or a stock corporation under the Corporation Code; and

l) The Joint Congressional Power Commission (JCPC) was created to monitor and ensure the proper implementation of the EPIRA, determine inherent weaknesses in the law and recommend necessary remedial legislation or executive measures.

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PSALM was created under the EPIRA to take ownership of all the existing generation assets, independent power producer (IPP) contracts, real estate and all other disposable assets, and to assume all liabilities and obligations of the NPC. The principal purpose of PSALM is to manage the orderly sale, disposition and privatization of NPC’s assets with the objective of liquidating in an optimal manner all of NPC’s financial obligations and stranded contract costs. To strengthen the financial viability of electric cooperatives, PSALM was also tasked to assume all outstanding financial obligations of electric cooperatives with the National Electric Administration (NEA) and other government agencies incurred for the purpose of financing the Rural Electrification Program (REP).

PSALM shall exist for a period of twenty-five (25) years from the effectivity of the EPIRA, unless otherwise provided by law, and all assets and liabilities of the Corporation outstanding upon the expiration of its term of existence shall revert to and be assumed by the National Government. Included in PSALM’s mandate are the collection, administration and application of NPC’s portion of the universal charge (UC). The universal charge refers to the charge, if any, imposed on all electricity end-users for the following purposes: a) Recovery of the stranded debts and stranded contract costs of NPC as well as

the qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry. The stranded debts of NPC refer to any unpaid obligations which have not been liquidated by the proceeds from the sales and privatization of its assets. Stranded contract costs of NPC or distribution utility refer to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of such contracts in the market. Such contracts should have been approved by the Energy Regulatory Board as of 31 December 2000;

b) Missionary electrification, which refers to the provision by NPC-SPUG of power

generation and its associated power delivery systems in areas that are not connected to the transmission system;

c) Equalization of taxes and royalties applied to indigenous or renewable sources

of energy vis-à-vis imported energy fuels; and

d) Rehabilitation and management of watershed areas. An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh) sales to be used solely for this purpose which shall accrue to an environmental fund to be managed by NPC.

The UC is a non-bypassable charge which is passed on and collected from all end-users on a monthly basis by the distribution utilities. The collections by the distribution utilities and TransCo in any given month shall be remitted to PSALM on or before the fifteenth (15th) of the succeeding month. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding UC directly to TransCo.

NPC Assets/Debts transferred to PSALM As of 31 December 2008, the following NPC assets and liabilities were transferred to PSALM.

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Assets transferred to PSALM Electric plants under capital lease, net 456,777,856,390

Current assets 101,008,390,595 Utility plants, net 77,103,244,049 Investment and other assets 64,081,241,964 Deferred charges 16,350,152,971 Net assets transferred to TransCo 115,693,280,923 Total assets 831,014,166,892

Liabilities assumed by PSALM BOT lease obligation 487,876,887,631 Long-term debts 326,031,895,265 Other current liabilities 69,590,238,676 Deferred credits 21,356,158,403 Total liabilities 904,855,179,975 Capital from asset-debt transfer (73,841,013,083)

The generation assets transferred by NPC to PSALM include the following: Lands

Angat HEPP Botocan HEPP (CBK-IMPSA)

Mak-Ban GPP Ilijan Gas Pipeline

Mak-Ban GPP Ormat Naga CTPP 1 (Cebu CTPP)

Tiwi GPP Power Barge 117 (Nasipit) -

Masinloc CFTPP Upper Agno HEPP

Batangas CFTPP Pantabangan-Masiway HEPP

Panay DPP Barit-Cauayan HEPP

Bohol DPP Loboc HEPP

Agus HEPP 1,2,4,5,6,7 Talomo HEPP

Pulangui HEPP 4 Agusan HEPP

Sual CFTPP Manila TPP 1 & 2

Bauang First Private Power Corp Sucat TPP 1,2,3,4

San Roque Power Corp Bataan TPP 1 & 2

Luzon HEPP (Bakun 1) Bataan GT

ABB Bataan Combined Cycle 1 & 2 Malaya GT

Malaya TPP 1 - Land Talavera DPP (Cebu DPP 2)

Kalayaan HEPP (CBK-IMPSA) Aplaya DPP

Caliraya HEPP (CBK-IMPSA) Gen. Santos DPP

Generation Plants

Operating

Angat HEPP Panay DPP 1

Amlan HEPP Panay DPP 3

Mak-Ban GPP 1,2,3,4,5,6, Ormat, 7,8,9,10 Bohol DPP

Tiwi GPP 1,2,3,4,5,6 Power Barge 101

Bac-Man GPP 1 Power Barge 102

Bac-Man GPP 2 (Cauayan) Power Barge 103

Bac-Man GPP 2 (Botong) Power Barge 104

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Tongonan (Leyte) GPP Agus HEPP 1,2,4,5,6,7

Palinpinon GPP 1 Pulangui HEPP 4

Palinpinon GPP 2 (Nasuji) Iligan DPP 1

Palinpinon GPP 2 (Okoy) Talomo HEPP

Palinpinon GPP 2 (Sogongon) Agusan HEPP

Batangas CFTPP 1 Upper Agno HEPP

Batangas CFTPP 2 Masinloc CFTPP

Decommissioned

Manila TPP 1 & 2 Aplaya DPP

Sucat TPP 1,2,3,4 Gen. Santos DPP

Sucat GT LB Iligan DPP 2

Bataan TPP 1 & 2 Navotas GT 1 (Energy) U1, U2, U3

Bataan GT Navotas GT 2 (Tileman)

Malaya GT Naga GT LB 1

Cebu DPP 2 Naga GT LB 2

Independent Power Producers (IPPs)

Bataan CC DPP 1 & 2 Naga DPP 1

Malaya TPP 1 & 2 Naga CFTPP 1 & 2

Kalayaan HEPP Power Barge 117

Caliraya HEPP Power Barge 118

Botocan HEPP

Liabilities assumed by PSALM include the following:

a. BOT Lease Obligations

b. Long-term debts

Bonds/loans transferred by NPC to PSALM in 2008 on a per bank/creditor basis are summarized as follows:

Independent Power Producer Power Plant Amount

Team Energy Corp.

Pagbilao Power 1 73,974,440,000

Pagbilao Power 2 73,864,971,808

Team Sual Corporation Sual Coal Plant I 68,351,625,443 Sual Coal Plant 2 69,076,173,279

KEPCO Ilijan Corp. Ilijan Natural Gas 67,139,210,724 Bauang Private Power Corp. Bauang Diesel PP 59,040,076,630 Luzon Hydro Corp. Bakun Plant Unit I 17,220,523,078 Bakun Plant Unit II 16,721,247,938 Steag State Power Inc. Mindanao Coal Fired 1 11,108,008,722 Mindanao Coal Fired 2 11,121,120,943 CBK Power Co. Ltd. Kalayaan 2 Unit 3 9,407,576,712 Kalayaan 2 Unit 4 9,551,725,614 San Roque Power Corp. San Roque Hydro Electric PP 1,300,186,740

487,876,887,631

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Name of Bank/Creditor Amount Deutsche Bank 71,227,500,000 Bank of New York/JP Morgan Chase Manhattan 54,082,775,000 Citibank 39,504,700,000 Bureau of Treasury 38,613,000,000 Department of Energy 28,297,252,592 Land Bank of the Phils./Development Bank of the Phils. 20,000,000,000 International Bank for Reconstruction and Development 14,089,134,555 Eximbank of Japan 12,896,683,445 US Bank 11,305,952,376 Bank of Tokyo-Mitsubishi UFJ 10,859,680,000 Asian Development Bank 10,499,244,261 Kreditanstalt fur Wiederafbau 8,169,007,897 Overseas Economic Cooperation Fund 4,244,439,155 Japan Bank for International Cooperation 3,816,088,342 National Government 3,322,310,817 Instituto de Credito Oficial 1,244,024,282 Caliraya-Botocan-Kalayaan Power Corporation 1,210,707,950 Natixis/Credit National 1,144,865,889 Artigiancassa MCA 707,348,640 Nordic Investment/Development Fund 625,780,896 Banco de Oro/Development Bank of Phils. 350,000,000 Eximbank of Korea 305,550,909 Erste Bank Osterreischischen 262,324,906 US Agency for International Development 48,088,129 Total 336,826,460,041 Less bond discount 10,794,564,776 Net 326,031,895,265

Operation and Maintenance Agreement (OMA) Pursuant to the Implementing Rules and Regulations (IRR) of the EPIRA, PSALM has the power to operate the generation assets, directly or through NPC, prior to privatization of such assets. The Operation and Maintenance Agreement signed on 17 February 2009 between PSALM and NPC provides for the continued orderly operation and maintenance of the transferred generation and other disposable assets and the provision of necessary corporate services from transfer date until the turnover of such assets to buyers. NPC shall also provide preservation services to all decommissioned plants and mothballed plants in accordance with the agreed performance standards to prevent the deterioration of serviceable equipment and systems prior to disposal. Furthermore, NPC shall continue to discharge its duties and contractual obligations under existing IPP contracts such as the supply of fuel, payment of capacity, energy and other fees, purchase of power generated, etc. NPC shall turn over the IPP plants under IPP contracts to PSALM after the termination/expiration of the IPP contracts, with PSALM having the option to include these plants in the OMA. NPC shall prepare the budget it needs annually to perform its obligations under the OMA and submit the O&M Budget to PSALM for review and approval. Upon approval, PSALM shall release the funding in accordance with the O&M Budget subject to existing accounting and auditing rules and regulations. NPC shall

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regularly submit to PSALM reports on the performance of the generation and other assets and the use of the funds. Using the privatization proceeds and income from the operation of the generation and other assets, PSALM shall be responsible in servicing outstanding financial obligations of NPC arising from: (1) loans, issuances of bonds, securities and other instruments of indebtedness; and (2) IPP contracts. Operation and Maintenance Service Contract (OMSC) Pursuant to its privatization mandate, PSALM schedules the selling of the plants thru open and competitive bidding on dates such that the date of turnover to the winning bidder/new owner would correspond with the termination of the plants’ operation and maintenance agreements with third parties. In some instances, the biddings would not proceed as planned due to various constraints, delaying the turnover of the plants to the new owners. Pending these plants’ privatization and to still continue the operation of the plants, prevent their deterioration, and service the power requirements of the public, an OMSC contract was entered into with the winning bidders. IPP Administrator (IPPA) PSALM was mandated under the EPIRA to competitively select and appoint qualified independent entities called Independent Power Producer Administrators (IPPAs) to administer and manage the contracted energy output of NPC/PSALM IPP contracts. The IPPAs are qualified private sector independent entities with whom PSALM will enter into “back to back” contracts referred to as “Administration Agreements,” with NPC as a concurring party and the respective IPPs as counterparties. These Administration Agreements mirror applicable provisions of the Energy Conversion Agreements (ECAs)/Power Purchase Agreements (PPAs) that NPC entered into with the IPPs, in effect transferring the rights and obligations of NPC under these contracts to the IPPAs. The IPPAs will be appointed through public biddings to be conducted by PSALM. A major responsibility that has been transferred to the IPPA under the Sual and Pagbilao Administration Agreements is the management of fuel (coal) procurement. A number of risks associated with the ECAs of these plants were also transferred under the Administration Agreements but PSALM will continue to bear risks that the IPPA cannot manage, such as government, force majeure and extended outage risks. In return, the IPPA will have the unfettered opportunity to manage and trade the contracted capacities of these plants in the Wholesale Electricity Spot Market (WESM) and through bilateral contracts. For thermal plants, revenues for the first few years are guaranteed to the IPPA through the assignment of Transition Supply Contracts (TSCs). The IPPA process gives successful bidders a way to enter the WESM for a very low capital outlay. The Sual and Pagbilao structure, for example, enables bidders to pay the fixed monthly fees and the pass through energy fees of the IPPs out of cash flows. Thus, no upfront financing is required. This is a unique way to enter the WESM. The assets are relatively new, high quality plants that were built and are well maintained by some of the best IPP developers in the world. The IPPAs will have most of the benefits of being owners of generating stations, such as controlling the fuel and its dispatch, trading, and contracting of the plant, but without maintenance cost or capital upgrades. Also,

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many of the risks of owning a plant are explicitly managed through the contract. If there is an extended outage, for example, there is up to a 90% discount on the monthly fees.

Wholesale Electricity Spot Market (WESM)

The commercial operation of the WESM (26 June 2006) is one of the pre-conditions to retail competition and open access. Other conditions as required in the Implementing Rules and Regulations (IRR) of the EPIRA are the: (i) approval of the unbundling of the transmission and distribution charges; (ii) initial implementation of the Cross Subsidy Removal System; (iii) privatization of 70% of the total capacity of NPC plants in Luzon and the Visayas; and (iv) transfer of the management and control of at least 70% of the total energy output of power plants under contract with IPPs. The WESM is initially a market for energy. Eventually, with the approval of the ERC, there will be a market for ancillary services for regulation, contingency reserve and dispatchable reserves. Electricity is offered and traded in a 24 hour by 7 days market. There are hourly prices published and used as basis for settlements. Prices in the spot market are volatile ranging from zero prices during off peak hours to as high as twelve pesos during peak hours. Distribution Utilities (DUs), Electric Cooperatives (ECs) and Suppliers/Aggregators can source their electricity requirements from the spot market or through Transition Supply Contracts (TSCs) with NPC. There is a provision in the EPIRA where DUs must source at least 10 percent of their requirements from the spot market. In parallel to the spot market, DUs, ECs and Suppliers can enter into Transition Supply Contracts (TSCs) with NPC. These contracts can have predetermined rates such as the NPC Grid Rate or Time of Use (TOU) rates (plus other charges as approved by the ERC) that eliminate the volatility if one will source from the spot market. On the demand side of the spot market, MERALCO is the biggest customer of the WESM. There are electric cooperatives such as the Camarines Sur Electric Cooperative (CASURECO) and the Ilocos Norte Electric Cooperative (INEC) which have registered as market participants in the WESM. Since 2006, when the WESM commenced its operations, PSALM has been effectively acting as the interim IPPA by bidding the NPC/PSALM IPPs’ energy output into the WESM on a day-to-day basis.

National Transmission Corporation (TransCo) TransCo started operations as a functional unit in charge of the transmission functions of NPC. It started independent operations in March 2003, although its operations continued to be carried in NPC’s books of accounts. On 31 December 2008, its books were separated from the books of NPC and it ceased as one of NPC’s functional units. The creation of TransCo under the EPIRA as a GOCC that will assume the transmission function of NPC and the responsibility for the planning, construction and centralized operation and maintenance of the high voltage transmission facilities (the Grid), including grid interconnections and ancillary services, was

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meant to separate the power transmission system from the power generation system. TransCo was also mandated to privatize sub-transmission assets transferred from NPC by selling these assets to qualified distribution utilities. As provided in the EPIRA, TransCo is wholly-owned by PSALM and its transmission function is also subject to privatization. Based on the government’s Privatization Plan, PSALM privatized the transmission assets by way of an award of a Concession to a qualified bidder in an open and competitive bidding process. The concession contract was awarded to the consortium of Monte Oro Grid Corporation, Inc., the winning bidder in the fourth round of bidding for the TransCo concession contract held on 12 December 2007. The consortium, composed of Monte Oro Grid Resources Corp., Calaca High Power Corp. and State Grid Corp. of China, won with its bid price of US$3.95 billion. The consortium established the National Grid Corporation of the Philippines (NGCP) as the “Concessionaire.” On 28 February 2008, the Concession Agreement became effective. Republic Act No. 9511 (The TransCo Franchise Law) was enacted on 01 December 2008 and became effective on 20 December 2008. The operation and management of the transmission business by NGCP commenced on 15 January 2009 upon receipt by PSALM of 25% of the concession fee as upfront payment (Commencement Fee). The balance of the concession fee will be paid by the Concessionaire with interest in semi-annual installments for 20 years.

KEY UNDERTAKINGS The major activities and endeavors of PSALM in 2012 are summarized below:

I. Financial Management Improved Financial Performance Over the years PSALM has shown tenacity in pursuing its mandate despite facing a confluence of odds from both internal and external factors. This staunch commitment and determination to always deliver a high level of performance is manifested in the Agency’s 2012 results of operations. Income for 2012 stood at P16.7 billion, which is lower by P.5 billion or 3 percent than the previous year. The slight drop in revenue is largely accounted by the P5.3 billion or 46% decrease in the recognized dividend income from TransCo. Nonetheless, similar to the previous year, the cut in revenue was offset by the remarkable improvement (from a loss of P1.0 billion in 2011 to an income of P2.8 billion in 2012) in the operation of the power generation business and the P1.8 billion or 30% increase in revenue in the Independent Power Producers Administrator Agreements (IPPAA). These activities combined with PSALM’s conscious effort to implement economy measures led to a net income from operations before financial expenses of P15.4 billion in 2012, which is slightly lower by P0.4 billion or 3 percent from that of 2011. Managing Cash Flow The year 2012 started with a cash balance of P26.3 billion and ended with P45.7 billion, posting a net increase of P 19.4 billion. Deficit for the year 2012 dropped by P41.8 billion or 53% compared to 2011 (P78.6 billion). The notable improvement is attributed to the decrease in cash outflow for

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debt service, operating expenses and considerable increase in the collection of generation payments and the monthly IPPA receivable, which is structured in an increasing manner. As a result, PSALM borrowed less in 2012 compared to 2011. A condensed version of the Statement of Cash Flow is presented below:

(In million pesos)

2012 2011

Cash inflow from operations

Proceeds from privatization* 70,088 60,058 Operations (31,975) (46,156)

38,113 13,902

Cash inflow from financing

Debt service – principal & interest** (45,251) (62,750) BOT lease obligation (29,379) (29,713)

(74,630) (92,463)

Capex and foreign exchange effect (270) (31)

Surplus (deficit) for the year (36,787) (78,592)

Funding of deficit:

Borrowings 55,578 75,000 Other receipts 677 3,061 Cash, beginning balance 26,251 26,782

Total sources 82,506 104,843

Cash, ending balance 45,719 26,251

* includes proceeds from concession of transmission assets and collections from

IPPAs. ** includes all loan related expenses

The cash shortfall for 2012 was adequately covered by the P55.6 billion relending facility contracted from the NG, the P.7 billion advances for debt service from the NG and the P26.3 billion remaining cash balance as of 31 December 2011. Handling Financial Obligations PSALM’s outstanding financial obligations (FO), composed of long-term debts and IPP lease obligation, trimmed down by P34.4 billion or 5 percent from the P696.5 billion level in 2011 to P662.1 billion in 2012 as shown below:

In Billion Pesos

Outstanding FO 2012

Outstanding FO 2011

Increase (Decrease)

Long-term debts 364.7 348.1 16.6 IPP lease obligation 297.4 348.4 (51.0)

Total 662.1 696.5 (34.4)

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Long-term debts

Long-term debts increased by P16.6 billion or 5 percent from the P348.1 billion level in 2011 to P364.7 billion in 2012. This is primarily due to the P55 billion Relending Agreement/Facility entered into by PSALM with the NG to cover debt maturities. The increase is partly offset by the appreciation of the peso to US$ exchange rates at year-end (P41.190/US$ in December 2012 vs. P43.928/US$ in December 2011) and principal payments (P22.2 billion) made in 2012.

IPP lease obligation

On the other hand, lease obligation decreased by P51 billion or 15% from the P348.4 billion level in 2011 to P297.4 billion in 2012. The decline was on account of the debt service of lease maturities in 2012 (P29.4 billion) and the effect of the appreciation of the peso to US$ exchange rates at year end of 2012 (P21.6 billion).

Reducing Borrowing Cost of New Debts On 08 November 2012, PSALM signed a Relending Agreement with the National Government (NG) for a P35 billion Relending Facility. This is a 10-year amortizing loan with an interest rate of 6.0058 percent per annum, (benchmarked at 10-year PDST-F + 100 bps). Draw downs were made on 27 November 2012 and 20 December 2012 for P20 billion and P15 billion, respectively. The second tranche (P15 billion) was applied to the advances made by the NG for IPP obligations and for debt service. On 18 December 20012, another Relending Agreement with the NG was entered into by the Agency for a USD500 million On-shore Dollar Bond. This Facility is also a 10-year amortizing loan with an interest rate of 3.35 percent per annum (2.75 percent + 60 bps). The full amount was transferred to PSALM’s US Dollar Account with the Bangko Sentral ng Pilipinas on 27 December 2012. To further boost PSALM’s funding requirements the Agency also signed an Amendment Agreement with Land Bank of the Philippines (LBP) on 30 October 2012. This Facility has not been utilized in 2012 as this is an extension of the 2011 P25 billion Standby Credit Facility which expired only last 28 February 2013. For 2012 debt service coverage ratio (DSCR) was computed at P0.51, which is way above the P0.15 DSCR in 2011. This notable improvement is on account of lower operating expenses, diminished level of debt service for principal and improved collection of receivables. Approval of Deferred Accounting Adjustment (DAA) for GRAM and ICERA On 26 March 2012, ERC approved PSALM’S petition for the recovery/refund of the P44.7 billion Deferred Accounting Adjustments (DAA) representing recovery of incremental fuel and IPP costs under the 10th to 17th GRAM and incremental costs on foreign currency exchange rate fluctuations under the 15th to 16th ICERA for the Luzon, Visayas and Mindanao Grids, effective March 26, 2012 to April 25, 2012 billing period until the end of the corresponding recovery periods or until such time that the full amount shall have been recovered/refunded, whichever comes earlier. Recovery/refund rate and period are shown below:

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Generation Rate Adjustment Mechanism (GRAM)

Grid

Rate (PhP/kWh)

Recovery Period (Months)

Luzon 0.3267 120 Visayas 0.4847 126 Mindanao 0.0536 54

Incremental Currency Exchange Rate Adjustment (ICERA)

Grid

Rate (PhP/kWh)

Recovery Period (Months)

Luzon 0.3637 96 Visayas 0.1213 60 Mindanao (0.0094) 36

As of 31 December 2012, total DAA collections sum up to P6.5 billion leaving a balance of P38.2 billion. Weighted Average Maturity The Weighted Average Maturity (WAM) of the Corporation now stands at 7 years. This means that on the average, PSALM's loan will mature before its corporate life ends in 2026. Though the WAM is 7 years, it should be noted that PSALM still has FO payable until year 2036. PHP Share in the FO Portfolio Of the P663.15 billion (gross of bond discount) outstanding obligations as of 31 December 2012, 22% is denominated in PHP. It exceeded the targeted 21% PHP share in the FO portfolio for the year. The 22% share is a significant improvement compared with the 17.94% PHP share in 2011. The increase in PHP component is attributed to the implementation of PSALM's policy to reduce risk exposure on the foreign exchange fluctuations through refinancing in PHP and to service foreign-currency denominated obligations. It is worthy to note that the PHP share in the debt portfolio has also increased from the 35.52% share in 2011 to 39.70% in 2012. Collection Efficiency Starting 2011, the PSALM Board instructed the Management to measure collection efficiency of receivables from power customers (excluding WESM) based on current and non-current sales. Collection efficiency for current sales is 94.95% which is equivalent to around P40.9 billion from the current power sales of P43.1 billion. Meanwhile, collection efficiency for non-current power sales stood at 6.97 percent. The actual collection of P2.2 billion from non-current power sales is attributed to the implementation of the Restructuring Program for Overdue Accounts.

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II. Asset Management Operations of Power Generation Assets Results of operation for 2012 showed immense progress compared to 2011. A remarkable upsurge of 363% in power generation activities bared recovery from the P1 billion loss in 2011 to the P3 billion income in 2012. (See Note 27) Implementation of PSALM’s Privatization Program Privatization of Naga Power Plant Complex On 23 November 2012, PSALM declared the bidding a failure for lack of an interested party for its procurement of the operation and maintenance service contract (OMSC) for the 145.8-megawatt (MW) Naga Power Plant Complex located in Naga City, Cebu. PSALM commenced the latest round of bidding for the Naga Complex OMSC on 24 October 2012, with the publication of the Invitation to Bid. Only one bidder, SPC Power Corporation (SPC), expressed interest in joining the procurement project. The Naga Complex is currently being operated and maintained by SPC through an OMSC that will expire on 25 December 2012 but extended for another three (3) months or until 25 March 2013. The Naga Complex consists of three (3) thermal power plants that use a combination of diesel, bunker C oil and coal as fuel. These are the coal-fired 50-MW Cebu Thermal Power Plant 1 and 56.8-MW Cebu Thermal Power Plant 2; and the 39-MW Cebu Diesel Power Plant 1 which consists of six (6) diesel-fed power units with a capacity of 6.5 MW each. Privatization of Malaya Thermal Power Plant The PSALM Board deferred the approval of the commencement of the privatization activity pending a clear timeline on the project on Liquefied Natural Gas pipeline of the Department of Energy (DOE).

Privatization of the Power Barges On 20 June 2012, PSALM commenced the second round of bidding for Power Barge Nos. 101, 102, 103, and 104. The Pre-bid Conference for interested bidders was scheduled on 05 July 2012, while the bidding is set on 15 August 2012. The second round of bidding and the subsequent negotiations held last 17 August 2012 were unsuccessful after only one (1) of the seven qualified bidders submitted a proposal and later unable to meet the reserve price set by the PSALM Board. Appointment of IPP Administrator for Unified Leyte On 10 July 2012, the PSALM Board approved the commencement of bidding activities for the contracted capacity of Unified Leyte. The Asset Management Group is guided by the following timeline- Invitation to Bid by November 2012, Pre-Bid Conference by January 2013, and Bid Date by February 2013.

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Appointment of IPP Administrator for Casecnan-Benguet The approval on the commencement of bidding activities for the contracted capacities of Benguet and Casecnan is still pending subject to the review and resolution of pending issues such as ownership issue between the National Irrigation Administration (NIA) and NPC/PSALM. Disposal of Real Estate Properties and Other Disposable Assets In June 2012 through the Option Exercise Notice, PSALM disposed five (5) lots in Bohol DPP equivalent to 15,536 square meters which generated a total amount of P19,293 million or 24% gain. This is one month earlier than the targeted schedule in July, however, lower than the 50% gain on sale target for real estate assets. Retail Competition and Open Access In public hearings conducted in March and April 2011, PSALM represented to the ERC that it has reached the required privatization threshold for the privatization of its owned power plants (79.56%) and appointment of IPP Administrators for its contracted energy output (76.85%). On 06 June 2011, ERC certified the fulfillment of the five (5) pre-conditions for the implementation of the Retail Competition and Open Access (RCOA):

a) Establishment of the Wholesale Electricity Spot Market (WESM). The WESM started its commercial operation in Luzon on 26 June 2006, while Visayas Grid was integrated in the WESM on 26 December 2010;

b) Approval of unbundled transmission and distribution wheeling charges. The

ERC approved the unbundled rates of NPC on 26 March 2002, which includes the transmission tariffs of TransCo and the NPC generation tariffs. Likewise, the ERC has rendered its decisions on the various applications unbundling of distribution wheeling charges of distribution utilities;

c) Initial implementation of the cross subsidy removal scheme. The ERC

approved the removal of inter-class cross-subsidies simultaneously with the unbundling of rates application filed by NPC and Distribution Utilities (DUs). Since 2002, the NPC and TransCo have completely removed the inter-and intra-grid cross subsidies in their tariffs, while almost all of DUs have completed their cross-subsidy removal process;

d) Privatization of at least seventy (70%) percent of the total capacity of

generating assets of NPC in Luzon and Visayas. Pursuant to its mandate, the PSALM has privatized a total of nineteen (19) power plants of power plants of different fuel resources in Luzon and Visayas with a total capacity of 3,222 megawatts (MW), equivalent to 79.56 percent (79.56%) of the total generating capacity of NPC in Luzon and Visayas, thereby breaching the 70% condition for RCOA;

e) Transfer of the management and control of at least seventy percent (70%)

of the total energy output of power plants under contract with NPC to the IPP Administrators. PSALM has successfully bid out 3,345.75 MW of NPC-contracted energy outputs with equivalent proceeds of US$3,228.00 Million. This is equivalent to 76.85 percent (76.85%) of the total NPC-IPP contracted energy output in Luzon and Visayas.

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On 28 November 2012, the Department of Energy (DOE) issued in its Department Circular No. 2012-11-0010 the additional guidelines and implementing policies for retail competition and open access and amending DC 2012-05-0005 entitled “Prescribing the General Policies for the Implementation of the Retail Competition and Open Access.” Restructuring of Delinquent Power Accounts For the year 2012 total restructured power accounts amount to P0.4 billion representing eleven (11) delinquent customers. This brings the total restructured accounts to P10.4 billion in 2012 from P10 billion in 2011. Total collections made on the restructured accounts for the year 2012 amount to P1.5 billion. Of this amount, P1.4 billion pertains to the 2012 restructured amortization. Since the implementation in 2010 of the Department of Energy Circular Nos. 2010-05-0006 and 2010-08-0010, PSALM has restructured a total of fifty-six (56) overdue accounts amounting to P8.6 billion with a corresponding interest of P1.8 billion. Of the fifty-six (56) delinquent customers, twenty-three (23) have already fully settled their restructured power accounts. As of 31 December 2012 balance of the restructured accounts amount to P7.3 billion. IPP Contracts As of December 2012, the existing IPP contracts are the following:

Plant Name Contract Type End of Agreement NPC-owned Caliraya HEPP BROT-PPA February 2026 Botocan HEPP BROT-PPA February 2026 Kalayaan HEPP 1 & 2 BROT-PPA February 2026 IPP-owned

Casecnan HEPP BOO-PPA April 2022 Kalayaan HEPP 3 & 4 BROT-PPA February 2026 Bakun HEPP (NMHC) BOO-PPA January 2026 Ampohaw BOO-PPA January 2018 Unified Leyte GPP A & B BOO-PPA A-July 2022 & B-July 2021 Zamboanga DPP BOO-ECA December 2015 General Santos DPP BOO-ECA March 2016 Mt. Apo GPP 1 & 2 BOO-PPA 1-March 2022 & 2-June 2024 Mindanao Coal 1 & 2 BOT March 2034

As of December 2012, the existing OMS contracts are the following :

Plant Name Contract Type End of Agreement

Malaya TPP 1 & 2 OMSC-ECA 25 October 2013 Cebu DPP 1 OMSC-ECA 25 March 2013 Cebu TPP 1 OMSC-ECA 25 March 2013 Cebu TPP 2 OMSC-ECA 25 March 2013

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Privatization of Transmission Assets The transmission assets were privatized by way of the award of a Concession Contract to the National Grid Corporation of the Philippines (NGCP). The Concession commenced on 15 January 2009, upon payment of US$987.5 million or 25% of the Concession Fee of US$3.95 billion as Commencement Fee. The balance of US$2.96 billion of the Concession Fee will be paid by the Concessionaire with interest in semi-annual installments falling on the 15th day of January and July of each year for 20 years. In CY 2012, total deferred payments (6th and 7th) received from NGCP for the TransCo concession amounted to P13.2 billion.

Management of Privatization Proceeds PSALM started receiving privatization proceeds from the sale of NPC generating plants in January 2005. As of 31 December 2012, actual privatization proceeds collected amounted to US$2.933 billion and P145.017 billion. On 20 June 2007, the joint Boards of PSALM and NPC, under Board Resolution No. 07-29, approved the utilization of the privatization proceeds to liquidate principal and interest obligations of NPC as they fall due. This was amended on 04 October 2007 by Board Resolution No. 07-61, which granted authority to PSALM Management to utilize the privatization proceeds to:

• Prepay NPC’s principal obligations;

• Settle NPC’s principal and interest obligations as they become due only after NPC shows deficit in its cash flow after utilization of its own internally generated cash;

• Manage NPC’s liabilities with the objectives of reducing interest cost and liquidity risk in 2009-2012 and hedging foreign exchange risks at terms and conditions advantageous to the government; and

• Pay other financial obligations of NPC. From 22 August 2007 to 31 December 2012, a total of US$3.623 billion dollar proceeds and P111 billion peso proceeds were utilized to cover mostly the financial obligations of NPC such as the maturing obligations, IPP obligations and the prepayment of the more expensive Yen-denominated obligations of NPC, as well as other privatization-related expenditures. As of 31 December 2012, the balance of dollar proceeds is US$12.809 million, while the balance of the peso proceeds amounts to P3.677 billion. III. Universal Charge (UC) Administration UC-Stranded Contract Costs (UC-SCC) and Stranded Debts (UC-SD) The Energy Regulatory Commission (ERC) has not yet rendered its decision on PSALM’s application for the recovery of stranded debts (SD) and stranded contract costs (SCC) through the universal charge (UC). Seven (7) public hearings were conducted by the ERC in June 2011. It may be noted that PSALM was able to file its petition with the ERC in June 2011 for the recovery of P66 billion stranded debts and P74.29 billion stranded costs, as provided below:

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Particulars

Computed SD/SCC

Period Covered

Proposed Recovery

Period

Amount of UC per kWh

SD 66.00 billion 2011-2026 15-year 0.0313 / kWh

SCC 74.29 billion 2007-2010 4-year 0.3666 / kWh

2. BASIS OF PREPARATION Statement of Compliance The financial statements of the Corporation have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS and Philippine Accounting Standards (PAS) and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC), issued by the Financial Reporting Standards Council (FRSC). Basis of Measurement The financial statements of PSALM are prepared on a historical cost basis and transactions are recorded using the accrual basis of accounting. The assets transferred from NPC were recorded at their carrying amounts (balances as reflected in NPC books) as of the transfer date of 31 December 2008. Functional and Presentation Currency The financial statements are presented in Philippine Peso, which is the Corporation’s functional currency. Use of Estimates The preparation of the financial statements in accordance with PFRS require the Corporation to make estimates and assumptions that affect the reported amounts of resources, liabilities, income and expenses and the disclosures of contingent resources and liabilities. Future events may occur which can cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably probable. Estimates and judgments are continually evaluated and are based on historical experiences and other factors including expectations of future events that are believed to be reasonable under the circumstances.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents Cash and cash equivalents are defined as cash on hand, demand deposits, and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. In compliance to IAS 7 Statement of Cash Flows, any amount of significant cash and cash equivalent balances that are not available for use by the group shall be

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disclosed, together with a commentary by management, signifying words to that effect.

Receivables and Allowance for Bad Debts Receivables are initially measured at face value and subsequently at amortized cost. Impairment loss is recognized using an allowance account. A 10% impairment allowance is recognized for accounts past due for more than one year, while accounts with disputes are provided a 15% allowance for impairment. Dormant accounts are provided 100% impairment allowance. Power receivables are classified as current assets if it expects to realize the asset within twelve months after the financial reporting date. Otherwise, these are classified as noncurrent assets. Inventories Inventories are valued at cost using the moving-average method.

Assets Held for Sale Assets held for sale consist of generation plants in service and decommissioned plants that are scheduled for privatization in 2013. These also include those plants that have been previously bid out but whose sale was not consummated by end of 2012, either because the bidding was declared a failure or because the winning bidder failed to close the sale. Under Philippine Financial Reporting Standards (PFRS) 5, “Non-current Assets Held for Sale”, a non-current asset is classified as held for sale if its carrying amount 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 is available for immediate sale in its present condition. Management must be committed to the sale that should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell, the carrying amount being the amount reflected in the NPC books at the date of transfer. Build-Operate-Transfer (BOT) Plants During the asset-debt account transfer in 2008, one of the accounts turned over by NPC to PSALM is the BOT lease obligations, stated in nominal amounts, representing obligations to Independent Power Producers (IPP). Arising from the government’s efforts to mitigate the growing problem in the supply of electricity in the late 1980s to 1990s, these BOT lease obligations are due to private entities designated then by the government to build additional facilities to ensure a long-term and stable source of electricity that would reach more end-users. These facilities were operated and maintained by the private entities for a certain period before turning them over to the government. The arrangement resembled a finance lease wherein the paying entity (in this case, the government), has the option to acquire ownership of the property after the private sector partners recover most of the asset’s costs. Hence, the commissioned capacities were classified as BOT (build-operate-transfer) lease obligations.

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In the books, total capacity fees for the duration of the cooperation period are capitalized and recognized as asset under BOT Electric Plants under Capital Lease account. A liability corresponding to the unpaid portion of the capital recovery fees is set up under BOT Lease Obligation. Kalayaan 3 & 4 and Mindanao Coal are the remaining BOT assets which are amortized over 40 years and 25 years, respectively. Upon turnover of the privatized BOT plant to the appointed IPPA, the asset is derecognized from the books of PSALM in conformity with IAS/PAS 17 (Leases). However, the corresponding BOT lease obligations are not derecognized because they are not transferred to the appointed IPPA.

IPPA Receivable As structured, the contract (Administration Agreement) between the IPPA and PSALM can be classified as a finance lease because it substantially transfers the risks and rewards incidental to ownership to the IPPA. Based on IAS/PAS 17, the contract between the IPPA and PSALM may be classified as a finance lease because, in substance, the contract contains the following indicators of a finance lease: a) the lease transfers ownership of the asset to the lessee by the end of the

lease term;

b) the lease term is for the major part of the economic life of the asset even if title is not transferred; and

c) the leased assets are of such a specialized nature that only the lessee can

use them without major modifications. The IPPA structure provides that: a) full ownership of the generating plant and the right to use the land transfers to

the IPPA at the end of the contract period; b) the contract is for a period of fifteen (15) years, which is for the most part of

the economic life of the asset given that, on the average, the estimated economic life of the transferred generating plants is thirty (30) to forty (40) years, based on their last revaluation in 1996;

c) the leased generating plant is of a specialized nature and size that operating

this asset and managing its output require highly technical expertise and considerable financial capability that only qualified entities such as the IPPAs can bid for administration of their contracted capacity and eventually own and operate them.

The IPP asset under a finance lease is presented as a lease receivable from the IPPA in the amount equal to the aggregate of the monthly payments to be made by the winning bidder throughout the contract period. The schedule of monthly payments was part of the Financial Bid of the IPPA and is made part of the Administration Agreement as Annex 1 to Schedule I.

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IPPA receivables are classified as current assets if it expects to realize the asset within twelve months after the financial reporting date. Otherwise, these are classified as noncurrent assets.

Property, Plant and Equipment and Depreciation NPC-transferred assets Property, plant, and equipment transferred from NPC include electrification, power and energy structures and referred to as utility plants. The last external revaluation of these plants was of the 1996 asset prices. These structures are recognized in PSALM’s books at their carrying amounts as stated in NPC books as of the transfer date of 31 December 2008. While these assets were carried in NPC books, regular annual maintenance, repairs and minor replacements were charged to expense as they were incurred, whereas major maintenance, which was done on periodic three-to five-year intervals, was deferred, amortized and charged to operations over the number of year’s interval. Rehabilitation expenditures that would result in improvement of the plant’s efficiency beyond five years were capitalized and transferred to plant cost upon completion of work orders. Depreciation was charged from the date of acquisition of the fixed assets or after the completion of work orders and computed on a straight-line basis. Depreciating the asset based on the sound value over its remaining useful life will result in amortizing the remaining cost of the asset reflective of its true physical state. The average remaining useful life was determined by subtracting the age of the asset from the estimated standard economic life. Depletion, which shows the periodic provision for the depletion of extractable natural resources such as steam, natural gas, etc., was also computed on a straight-line basis. The same NPC depreciation policies were adopted by PSALM on the transferred assets, including the estimated standard economic life as ascertained by the last independent appraiser of NPC, as follows:

Type of Plant

Economic Life

1. Thermal Production a. Oil-fired b. Coal-fired

35 yrs

2. Hydraulic Production 40 yrs 3. Geothermal Production 30 yrs 4. Other Production a. Combined-cycle b. Diesel Plants and Barges c. Gas Turbine

20 yrs

PSALM-acquired assets Property and equipment consisting of computers, office furniture and fixtures, vehicles and communication equipment are stated at cost less accumulated depreciation and any impairment in value. The stated cost comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Generally, tangible assets that are expected to be used for more than one year are considered as capital assets. Expenditures for repairs and maintenance are charged to expense as incurred.

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Depreciation is computed on a straight-line basis over the useful lives of the assets as follows:

Furniture, fixtures and equipment 5 – 10 years Transportation equipment 7 years Computers and accessories 5 years

Residual value equivalent to 10 percent of the acquisition cost is deducted before dividing the same by the estimated useful life. The carrying values of property and equipment are reviewed for impairment when changes in circumstances indicate that the carrying value may not be recoverable or may have diminished. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount and impairment losses are recognized in profit or loss. On 09 January 2009, PSALM filed with the ERC its petition for the adoption of proposed asset valuation guidelines using an indexation method to revalue NPC’s assets to its current cost level in lieu of the conduct of an appraisal by an external appraiser. The public consultation on the petition was held on 23 February 2009, whereupon ERC directed PSALM to revise the Asset Valuation Guidelines based on comments from interested parties. Taxes

Taxes for current and prior periods are, to the extent unpaid, recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess payment is recognized as an asset. Unlike the NPC whose Charter provides that NPC shall be exempt from direct and indirect taxes, the EPIRA (the law that created PSALM) does not contain a provision that exempts PSALM, as an entity, from taxation. While PSALM as an entity is not per se tax-free, there are certain transactions of PSALM which are exempt from taxation. The tax treatment of PSALM’s transactions is set forth and further clarified in BIR Revenue Memorandum Circular (RMC) No. 11-2012 dated 22 March 2012, which supersedes previous BIR Ruling No. 020-02 dated 13 May 2002, the pertinent provisions of which are summarized as follows:

I. On the Sale of the NPC Generation Assets and other Real Properties in view of the Privatization

a. No income and withholding taxes are due from the sale of the

NPC generation assets and other real properties to winning bidders;

PSALM, the principal purpose of which is to manage the orderly sale, disposition, and privatization of NPC generation assets and other real properties, with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner, will not derive gain from the said sale of the NPC generation assets and other real properties.

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Accordingly, no income tax and consequently withholding tax is due from PSALM on its sale of the NPC generation assets and other real properties.

b. The sale by PSALM of the NPC generation assets and other

real properties to winning bidders, is subject to Value-Added Tax (VAT);

c. In 2005, Republic Act No. 9337 or the R-VAT law was enacted. RA 9337 imposed 12% Value-added tax (VAT) on the sale of electricity, except for the sale of electricity sourced from renewable resources such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy resources, which is subject to zero percent rate VAT. Thus, the sale by PSALM of generated power shall be subject to VAT at 12% or zero percent rate as may be applicable.

d. Moreover, BIR Revenue Regulations (RR) No. 16-2005 was accordingly amended by BIR RR 04-2007 and subjected the sale of real properties not primarily held for sale or for lease, but used in business.

II. The sale by PSALM of the NPC generation assets and other real

properties is subject to Documentary Stamp Tax (DST); and

Pursuant to Section 196 of the Tax Code of 1997, the sale of real properties by PSALM will be subject to DST at the rate of P15.00 for every P1,000 based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) thereof, whichever is higher. When one of the contracting parties is the Government, the tax to be imposed shall be based on the actual consideration subject to the proviso that, where one party to the transaction is exempt, the other party shall pay the tax. (Section 173 of the Tax Code of 1997).

Accordingly, the sale of the NPC generation assets and other real properties by PSALM pursuant to the privatization will be subject to DST based on the fair market value or the actual consideration that PSALM will receive, whichever is higher.

The rental income of PSALM from the NPC generation assets and other real properties, prior to its sale to winning bidders, is subject to income tax and VAT. After the transfer of the NPC generation assets and other real properties to PSALM but prior to the privatization, PSALM enters into contracts of lease with private entities where the subject of the lease are the NPC generation assets and other real properties transferred to PSALM. The income received by PSALM from the lease is subject to corporate income tax provided under Section 27(A) of the Tax Code of 1997. Thus, while no income tax is due on PSALM on its mandate to sell the NPC generation assets and other real properties to winning bidders, revenues derived by PSALM from its leasing activities are nevertheless subject to income tax. Moreover, gross receipts of PSALM from the lease of NPC transferred

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assets and other assets are deemed in the ordinary course of trade or business, hence, subject to VAT under the Tax Code of 1997.

III. On the Operation of the Generation Facilities

a. Income and Withholding Tax

Currently, government-owned and/or controlled corporations (GOCCs) are now subject to income tax pursuant to Section 27 (C) of the Tax Code except for the four (4) government corporations specifically enumerated therein. PSALM is not one of the exempt GOCCs under the said provision of the Tax Code of 1997. The operation by PSALM of the NPC assets transferred to it is not its principal purpose but only incidental to its mandate to privatize the generating plants of NPC in order to avoid a massive interruption in the supply of electricity. In this regard, any income derived therefrom is subject to income tax imposed under Section 27(A) and (E) of the Tax Code of 1997.

b. Value Added Tax

Since the sale of the electricity and sale of service by PSALM are deemed made in the course of its business, the same is subject to VAT under Section 108 of the Tax Code of 1997 (as amended by RA 9337).

IV. Miscellaneous Activities

Other income/receipts derived by PSALM from miscellaneous activities such as forfeiture of performance bonds, interest income from persons other than the winning bidders, and from other activities not related with its mandate are subject to all applicable taxes under the Tax Code of 1997.

Bonds Payable Bonds payable are presented net of unamortized discount and are revalued at year-end to reflect Philippine peso exchange rate prevailing as of the end of reporting date.

Revenue Recognition Revenue/gain from sale of the generation plants is recognized in full upon receipt of cash payment. The sale price is payable in cash or on installment. Normal terms for installment is 40% cash upfront and the 60% balance payable in 14 equal semi-annual payments at an agreed interest. The 60% deferred payment is recorded as Asset Sale Receivable. Gain from the privatization of IPPs is recorded as Other Deferred Credits – Unearned Finance Income. The earned portion will subsequently be recorded as Finance Income over the life of the Administration Agreement. Other revenues are recognized when it is probable that future economic benefits will be received and such future benefits can be measured reliably.

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Foreign Currency Transactions The accounting records of the Corporation are maintained in Philippine pesos. Transactions denominated in foreign currencies are translated into Philippine pesos at exchange rates prevailing on the transaction dates in accordance with PAS 21, “The Effects of Changes in Foreign Exchange Rates,” which requires that a foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of transaction. The Corporation translates its foreign currency-denominated deposits and loans at year-end rates in accordance with PAS 21, which requires foreign currency monetary items to be translated at end of reporting date using the closing rate. The resulting gains and losses from the exchange differences are recognized in profit or loss.

Year-end foreign currency exchange rates follow:

2012 2011

Philippine Peso (P) : US Dollar ($) 41.1920 43.9280

Philippine Peso (P) : Japanese Yen (Y) 0.4787 0.5638

Philippine Peso (P) : Korean Won (KRW) 0.0384 0.0380

Philippine Peso (P) : Euro (EUR) 54.5300 56.8428

Subsidiary As a wholly-owned subsidiary of PSALM, TransCo remits its income for the period to the former thru declaration of dividend. PSALM, upon knowledge of its right over those dividends been established, recognizes dividend income in its Statement of Comprehensive Income for the period. Assumption and Condonation of Rural Electric Cooperatives’ (REC) Loans In line with the EPIRA, a Memorandum of Agreement was entered into by and between the National Electrification Administration (NEA) and PSALM on 03 October 2003 to implement the assumption and condonation by PSALM of duly audited REC loans. The basis in recording the amount of REC loans to be assumed by PSALM Corporation is the initial amount recorded by the NEA, confirmed by the REC and validated by the Commission on Audit (COA). This amount is subsequently credited with the actual amount audited condoned and paid by PSALM to NEA. This condonation will benefit the consumers in terms of reduced electricity rates and improved services by the electric cooperatives as well as NPC/PSALM in terms of making current settlement of electricity bills with the electric cooperatives. Administration of the Universal Charge PSALM administers the Special Trust Funds created in accordance with the Guidelines on the Remittance and Disbursements duly promulgated by PSALM Corp., concurred by the Department of Finance (DOF) and approved by the Energy Regulatory Board as provided for in the EPIRA.

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PSALM maintains separate books of accounts for these Special Trust Funds and records.

Government Grants (Subsidy from National Government) An unconditional government grant is recognized in Statement of Comprehensive Income as other income when the grant becomes receivable. A conditional government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. 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 arrangement;

(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 fulfillment is

dependent on a specific 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 gives rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). Improvements to Philippine Financial Reporting Standards (PFRS)/Financial Reporting Standards Council (FRSC)

The adoption of the following amendments resulted in changes to accounting policies but did not have significant impact on the financial position and performance of the Corporation.

PAS 1, Presentation of Financial Statements, clarifies that an entity may

present an analysis of each component of other comprehensive income maybe either in the statement of changes in equity or in the notes to the financial statements.

PFRS 7, Financial Instruments - Disclosures, intends to simplify the

disclosures provided by reducing the volume of disclosures around

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collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context.

The Corporation will adopt the following new or revised standards, amendments to standards and interpretations on the respective effective dates:

Presentation of Items of Other Comprehensive Income (Amendments to

PAS 1, Presentation of Financial Statements). The amendments: (a) require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss; (b) do not change the existing option to present profit or loss and other comprehensive income in two statements; and (c) change the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. However, an entity is still allowed to use other titles. The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other PFRS continue to apply in this regard. The effective date of the amendment is for periods beginning on or after 01 January 2013.

PFRS 10, Consolidated Financial Statements, introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. An investor controls an investee when: (a) it is exposed or has rights to variable returns from its involvement with that investee; (b) it has the ability to affect those returns through its power over that investee; and (c) there is a link between power and returns. Control is reassessed as facts and circumstances change. PFRS 10 supersedes PAS 27, Consolidated and Separate Financial Statements (2008). The new standard is effective for annual periods beginning on or after 01 January 2013.

PFRS 12, Disclosure of Interests in Other Entities, contains the

disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e., joint operations or joint ventures), associates and/or unconsolidated structured entities, aiming to provide information to enable users to evaluate the nature of, and risks associated with, an entity’s interests in other entities; and the effects of those interests on the entity’s financial position, financial performance and cash flows. The new standard is effective for annual periods beginning on or after 01 January 2013.

PFRS 13, Fair Value Measurement, replaces the fair value measurement

guidance contained in individual PFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other PFRS. It does not introduce new requirements to measure assets or liabilities at fair value nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The new standard is effective for annual periods beginning on or after 01 January 2013. Early application is permitted and required to be disclosed.

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PAS 19, Employee Benefits (amended 2011), includes the following requirements: (a) actuarial gains and losses are recognized immediately in other comprehensive income; this change will remove the corridor method and eliminate the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which is currently allowed under PAS 19; and (b) expected return on plan assets recognized in profit or loss is calculated based on the rate used to discount the defined benefit obligation. The adoption of the amended or revised standard is required for annual periods beginning on or after 01 January 2013.

PFRS 9 , Financial Instruments (2009) is the first standard issued as part

of a wider project to replace PAS 39. PFRS 9 (2009) retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply. Prior periods need not be restated if an entity adopts the standard for reporting periods beginning before 01 January 2012. PFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and derecognition of financial assets and liabilities to the version issued in November 2009. It also includes those paragraphs of PAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of Philippine Interpretation - IFRIC 9, Reassessment of Embedded Derivatives. The adoption of the new standard is required for annual periods beginning on or after 01 January 2015.

4. CASH AND CASH EQUIVALENTS

This account consists of the following:

2012 2011

Cash-Collecting Officer 10,536,749 425,675

Cash-Disbursing Officers 157,932 112,620

Petty Cash Fund - 77,996

Cash in Bank-Local Currency, CA 2,267,834,545 2,334,132,158

Cash in Bank-Local Currency, TD 21,574,086,460 22,086,210,000

Cash in Bank-Foreign Currency, SA 350,141,242 422,379,100

Cash in Bank-Foreign Currency, TD 1,029,595,464 1,397,612,639

Cash-Bangko Sentral ng Pilipinas 20,487,056,946 10,152,729

45,719,409,338 26,251,102,917

Cash-Bangko Sentral ng Pilipinas pertains to the proceeds from PSALM’s bond exchange in 2009 deposited with the bank in compliance with BSP Monetary Board Resolution No. 1720 dated 01 December 2009 and pursuant to Section 113 of Republic Act (RA) No. 7653, (The New Central Bank Act), dated 14 June 1993, which states:

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“The Bangko Sentral shall be the official depository of the Government, its political subdivisions and instrumentalities as well as of government-owned or controlled corporations and, as a general policy, their cash balances should be deposited with the Bangko Sentral, with only minimum working balances to be held by government-owned banks and such other banks incorporated in the Philippines as the Monetary Board may designate, subject to such rules and regulations as the Board may prescribe: Provided, That such banks may hold deposits of the political subdivisions and instrumentalities of the Government beyond their minimum working balances whenever such subdivisions or instrumentalities have outstanding loans with said banks.”

5. POWER RECEIVABLES

Power receivables consists of the trade collectibles for the power generation charges, including ancillary service charges and restructured power receivables, net of refunds to power customers as a result of ERC decisions. The basic power generation rate is based on a return-on-rate-base (“RORB”) method with time-of-use pricing. The RORB method takes a ratio (calculated as a percentage of investment in facilities and working capital necessary for day to day operations, or “rate base”) of rate base to determine the return on rate base that will be considered together with the operating costs in determining the generation charge. This account is composed of receivables from the following entities:

2012 2011

Utilities 68,077,519,110 62,840,649,464

Cooperatives 14,811,754,215 14,513,335,796

Industries 6,454,995,974 6,700,264,067

Government 6,454,752,171 6,506,775,291

Others 413,364,738 421,435,699

Total 96,212,386,208 90,982,460,317 Recovery/(Refunds) 37,760,542,540 (63,926,316)

133,972,928,748 90,918,534,001 Interest receivables 7,630,750,805 7,741,324,071

141,603,679,553 98,659,858,072

Current portion 83,365,690,266 28,103,942,613 Allowance for bad debts (2,405,902,137) -

80,959,788,129 28,103,942,613

Non-current portion 58,237,989,287 70,555,915,459 Allowance for bad debts (9,826,139,809) (11,626,040,142)

48,411,849,478 58,929,875,317

Power receivables, net of allowance for bad debts increased by P42.3 billion or 49% in 2012 as shown below. This came as a result primarily of the recognition of the P44.7 billion Deferred Accounting Adjustments (DAA) representing recovery of incremental fuel and IPP costs under the 10th to 17th GRAM and incremental costs on foreign currency exchange rate fluctuations under the 15th to 16th ICERA for the Luzon, Visayas and Mindanao Grids.

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In Billion Pesos

2012 2011 Inc (Dec) %

Current 81.0 28.1 52.9 Non-Current 48.4 58.9 (10.5)

Total 129.4 87.0 42.4 49%

Power receivables include long outstanding accounts of the Public Utilities Department (PUD) of Olongapo City – P3.7 billion, Lanao Sur Electric Cooperative, Inc. (LASURECO) – P3.3 billion and Maguindanao Electric Cooperative, Inc. (MAGELCO) – P0.7 billion. PSALM and NPC jointly filed the Application for a revised basic generation charge in Luzon, Visayas and Mindanao grids with the ERC on 16 January 2009, docketed as ERC Case No. 2009-004RC. The revised basic generation charge application sought, among others, the issuance of a provisional authority and for an automatic adjustment in the succeeding quarters of the basic generation charges, to reflect the impact of the sale, transfer and disposal of NPC generation assets. An Order dated 16 February 2009 was issued by the ERC, provisionally approving the implementation of the following new generation rate adjustments effective March 2009 billing period:

Grid

Provisionally Approved Generation Rate

(PhP/kWh)

Provisionally Approved Rate Increase

(PhP/kWh) Luzon 4.3648 0.4682 Visayas 4.0339 * 1.1460 *

Mindanao 2.8177 0.7147

*On 23 March 2009, the ERC issued an Order modifying the 16 February 2009 Order and provisionally authorizing NPC and PSALM to implement, for the Visayas grid, a P0.8376 per kWh rate increase, instead of P1.1460 per kWh, effective 26 February to 25 March 2009 billing. Thus, the new basic generation rate for Visayas, as provisionally approved by the ERC, is P3.7255 per kWh.

The ERC provisional authority (PA) issued on 16 February 2009 was implemented starting the March 2009 billing period. On 14 August 2008, PSALM submitted to the ERC its Proposed Rules for the Automatic Recovery of NPC/PSALM’s Generation Assets’ Monthly Fuel, Purchased Power and Foreign Exchange-Related Costs. After several consultative processes, the ERC passed Resolution No. 19 dated 3 August 2009 adopting the Rules for Automatic Recovery of Monthly Fuel and Purchased Power Costs and Foreign Exchange-Related Costs. This effectively replaced the existing GRAM and ICERA guidelines, thus eliminating the need for PSALM and NPC to file for cost recoveries every quarter and await a decision from the ERC before passing the costs to customers. However, on 12 November 2009, PSALM filed a Motion for Clarification of the Rules. Acting on the said Motion, the ERC issued an Order dated 14 December 2009 amending the Rules. The Rules took effect on 27 February 2010. The Automatic Cost Adjustment (ACA) Mechanism based on these Rules was reflected as a separate item in the power bill starting 27 February to 25 March 2010 billing period.

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In an Order dated 6 September 2010, the ERC directed PSALM to collect modified ACA rates equivalent to P0.5916/kWh for the Luzon Grid. This Order limits the increase in ACA rates for August 2010 billing period at 10 percent based on the July 2010 billing period. Additionally, in its Order dated 27 September 2010, ERC directed PSALM to calculate the ACA rate equivalent to the percentage of the changes in the computed Fuel and Purchased Power Cost Adjustments (FPPCA) and Foreign Exchange Adjustments (FxA) with base cost of the previous month’s ACA rates computation effective September 2010 billing period. In compliance with the ERC rules, PSALM calculates after twelve (12) months and every year thereafter the true-up adjustments on the monthly ACRM to reflect the difference from the actual allowable costs and the amount already billed from PSALM regular customers through the monthly ACRM. On 18 August 2011, PSALM filed before the ERC the Petition on the true-up adjustments on FPPCA and FxA.

6. RECEIVABLE FROM IPPAs

Below is the breakdown of the account:

2012 2011

IPPA receivable 388,538,059,417 404,831,432,935

Less non-current portion 349,728,973,019 386,079,066,094

Total IPPA receivable - current 38,809,086,398 18,752,366,841

IPPA Power Plant Amount

San Miguel Energy Corporation (SMEC) Sual 113,281,228,133

Therma Luzon, Inc. (TLI) Pagbilao 86,877,272,503

Strategic Power Dev. Corp. (SPDC) San Roque 66,568,940,642

South Premiere Power Corp. (SPPC) Ilijan 61,816,075,806

Amlan Hydro Power, Inc. (AHPI) Bakun 21,185,455,935

Total Non-Current 349,728,973,019

IPPA Monthly

Payments Generation Payments*

Total

SMEC 5,416,324,683 304,291,778 5,720,616,461 TLI 5,388,683,600 522,093,126 5,910,776,726 SPDC 4,368,436,398 117,633,984 4,486,070,382 SPPC 6,318,258,713 14,646,207,510 20,964,466,223 AHPI 1,714,786,145 12,370,461 1,727,156,606

Total Current 23,206,489,539 15,602,596,859 38,809,086,398 *Presented under other receivables in 2011

IPPA receivable-monthly payments received by PSALM are used to pay the capacity fees of the IPPs under the BOT scheme, whereas the IPPA receivable-generation payments are used to pay the energy fees of the IPPs.

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7. DUE FROM GOCCs AND GOVERNMENT AGENCIES

Bureau of Internal Revenue (BIR) This account pertains mostly to deferred taxes and duties corresponding to estimated fuel specific tax of P2.595 billion transferred from NPC, taxes paid under protest in the amount of P10.867 billion, and input taxes of P40.669 billion.

San Roque Multi-Purpose Project The P26.471 billion advanced by NPC as of 31 December 2012 to the San Roque Multi-Purpose Project (SRMP) arose from a Memorandum of Agreement (MOA) in 1998 by and between the Department of Finance (DOF), Department of Budget and Management (DBM), Department of Environment and Natural Resources (DENR), Department of Public Works and Highways (DPWH), National Irrigation Administration (NIA), and NPC. The SRMP is a power project of NPC approved by the National Economic Development Authority (NEDA) as one of the projects for development by the

2012 2011

Due from NGAs Bureau of Internal Revenue (BIR) 54,178,002,909 49,524,668,919 Dept. of Finance/Bureau of the

Treasury (San Roque Multi-purpose Project/Advances for BNPP)

26,478,203,057

30,877,251,823 Bureau of Customs 1,555,026,568 1,555,026,568 Dept. of Budget and Management 1,146,104,025 31,891,751 Department of National Defense 22,712,634 22,712,634 Court of First Instance 13,602,054 13,602,054 Metropolitan Manila Dev. Authority 4,245,469 4,245,469 Dept. of Public Works & Highways 600,000 600,000 Phil. Nuclear Research Institute 309,735 309,735

Supreme Court of the Philippines 64,011 64,011 Department of Energy 27,897 20,000 Commission on Audit 14,324 14,324 Nat’l. Comm. on Indigenous People 9,658 9,658

83,398,922,341 82,030,416,946

Due from GOCCs NPC – for reconciliation 2,649,694,203 9,394,822,652 Metropolitan Waterworks and

Sewerage System (MWSS) 602,939,653 602,939,653

National Transmission Corporation 281,116,703 279,085,364 Advances to Phi. Geothermal Inc. 58,425,588 58,425,588 PHIVIDEC Industrial Authority 38,037,650 38,037,650 Government Service Insurance

System (GSIS) 34,246,924 34,246,924

Clark Development Corporation 2,422,084 2,422,084 National Electrification Admin. 451,586 451,586 Others 3,106,808 3,106,807

3,670,441,199 10,413,538,308

Due from LGUs 4,815,103 4,815,103

87,074,178,643 92,448,770,357

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Government. San Roque is located in San Manuel, at the lower Agno River in Pangasinan. The project was bid out by NPC on a Build-Operate-Transfer (BOT) basis which gave rise to a Power Purchase Agreement (PPA) between NPC and the Consortium (Marubeni Corporation, Sithe Philippine Holdings, Ltd., and Italian Thai Development Public Company, Limited). As signatory to this PPA, NPC becomes responsible for the disbursement of the cost of the non-power component of the project estimated at $400 million. SRMP is the non-power component of the project. It is a project serving several purposes: (i) annual generation of 1000 GWh energy; (ii) irrigation of about 87,000 hectares service areas in Pangasinan; (iii) flood forecasting and control; and (iv) water quality and environmental protection. As the project encompasses several functional areas, its implementation was a multi-agency effort with NPC tasked to lead in the project development. To ensure that the agencies meet their obligations in the implementation of the project and the terms of the PPA, the agencies entered into a MOA.

The MOA provided, among others, that:

2. DOF shall (i) secure the financing of the $400 million for disbursement to the Consortium through NPC, (ii) ensure the timely transfer of the $400 million fund to NPC, and (iii) ensure that the advances to be made by NPC for the project’s non-power component shall not be offset against any receivables of the Government from NPC;

3. NIA, DENR, DPWH shall (i) include SRMP as a priority project in their programs, (ii) cause the inclusion in their annual budget, over and above its ceiling, their share in the $400 million non-power cost, (iii) give authority to DBM and BTr to remit funds directly to NPC’s account; (iv) coordinate with NPC and the Consortium in the implementation of project matters under their jurisdiction;

4. DBM shall ensure the inclusion of each agency’s contribution to SRMP, as

defined in the MOA, in the agencies’ respective annual budgets from 1999 to 2000; and

5. NPC shall, among others, disburse to the Consortium the $400 million non-

power component funding in accordance with the schedule.

On September 1998, the following amendments were made to the above MOA:

1. NPC to borrow for the $400 million non-power component of the project, with repayments to NPC made over the same debt service period as the said loan;

2. DOF shall secure the full government guarantee for the NPC financing of the $400 million non-power component of SRMP; and

3. Longer spread of the agency’s budget allocation for the contribution to the $400 million non-power component (from years 1999 to 2000 to years 1999 to 2014).

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8. OTHER RECEIVABLES

The following comprise this account:

2012 2011

IPPA receivables-generation payments - 12,247,849,632 Bond swap receivable 329,538,265 261,703,300 Interest receivable 37,316,303 37,194,586 Lease receivable 16,361,519 16,361,519 Due from officers & employees 1,487,710 1,860,254 Other receivables 4,339,333,937 4,042,701,887

4,724,037,734 16,607,671,178 Allowance for bad debts (825,033,058) (825,033,058)

3,899,004,676 15,782,638,120

IPPA receivables-generation payments pertains to cost of energy delivered by the plant as billed by the IPP-BOT proponent. This was reported and presented under the Receivable from IPPAs in CY 2012.

Interest receivable represents interest income accruing on short-term placements/time deposits with authorized government depository banks.

Other receivables pertain to transferred accounts of NPC from various private corporations, government agencies, suppliers and persons. The account is subject to validation upon submission of supporting documents/further details by NPC.

9. ASSETS HELD FOR SALE This account represents assets taken out from the property, plant and equipment account, which are identified based on the Corporation’s work plan for the year to be sold in CY 2013.

2012 2011

Angat HEPP 4,872,969,578 4,844,597,218 Bataan TPP 1 - 457,545,008 Bataan TPP 2 - 375,781,495 Cebu (Naga) CFTPP 1 1,064,226,300 1,064,226,300 Cebu (Naga) CFTPP 2 878,539,000 878,539,000 Cebu (Naga) Diesel DPP 473,966,628 473,966,628 Malaya TPP 1 2,093,412,128 - Malaya TPP 2 1,174,245,535 - Power Barge 101 417,157,283 403,505,497 Power Barge 102 417,419,332 417,419,332 Power Barge 103 Power Barge 104

249,757,831 531,489,849

239,103,367 473,551,258

Excluded assets from privatized plants 2,133,909,432 2,188,539,973 Excluded assets from privatized IPPA 2,562,632,342 2,562,632,342

16,869,725,238 14,379,407,418

Bataan TPP 1 & 2 was reclassified

from Assets Held for Sale to Property, Plant and Equipment (PPE) in 2012. Malaya TPP 1 & 2 was reclassified

from PPE to Assets Held for Sale in 2012.

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10. OTHER CURRENT ASSETS

This account consists of the following:

2012 2011

Assets in trust with NPC 3,766,546,041 6,922,886,957 Inventory and prepaid expenses 2,536,049,066 418,411,826 Universal Charge 1,683,120,872 1,726,677,408 Guaranty deposits 934,474,961 934,232,071 Advances to contractors 35,151,036 39,812,832 Other advances 22,290,047 12,871,429

8,977,632,023 10,054,892,523

Assets in trust with NPC represents the current assets held by NPC as part of its working capital as “Operator” under the Operations and Management Agreement with PSALM.

Guaranty deposits include the marginal and guaranty deposits for Letters of Credit and for the Nomura bonds issuance. Universal Charge (UC) refers to the charge imposed on all electricity end-users for various purposes. As of end of 2012, two (2) UC components are being collected by the collecting entities from electricity end-users, namely: (1) UC for Missionary Electrification (UC-ME) and (2) UC for Environmental Charge (UC-EC), pursuant to the approval made by the Energy Regulatory Commission starting on 20 December 2002 and 02 April 2003, respectively. The account was previously presented under Other Non-current Assets account.

As at year-end, the UC consists of the following:

2012 2011

Special Trust Fund (STF) 928,526,630 814,131,801

Receivables 754,594,242 912,545,607

1,683,120,872 1,726,677,408

Special Trust Fund pertains to remittances made by the collecting entities covering UC-ME and UC-EC. Bulk of the STF balance corresponds to UC-EC which has been held in abeyance pending approval by the ERC of the petition filed by NPC.

Receivables, on the other hand, pertain to collections made by the collecting entities which are due for remittance to PSALM the following month. Bulk of the balance pertains to UC-ME, and the rest represents UC-EC.

Transactions affecting the UC are as follows (cumulative) since March 2003:

2012 2011

Remittances by collecting entities (CEs):

For missionary electrification 25,983,149,060 19,189,613,216

For watershed rehabilitation 1,318,307,266 1,019,980,567

Others 226,081 226,081

27,301,682,407 20,209,819,864 Interest earnings 179,850,039 163,412,670

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27,481,532,446 20,373,232,534 Releases to NPC (26,553,005,816) (19,559,100,733)

STF balance 928,526,630 814,131,801

Receivables from CEs 754,018,711 912,155,301

Interest receivable 575,531 390,306

1,683,120,872 1,726,677,408

11. PROPERTY, PLANT AND EQUIPMENT

This consists of PSALM-acquired and NPC-transferred property, plant and equipment, as follows:

PSALM - acquired Furniture, Fixtures/

Equipment Transportation

Equipment

Total

Cost

01 January 2012 175,158,827 23,323,718 198,482,545 Additions/Adjustments 9,855,203 (375,000) 9,480,203

Less: Disposals 8,145,310 - 8,145,310

Balance, 31 December 2012 176,868,720 22,948,718 199,817,438

Accumulated Depreciation

01 January 2012 120,567,676 11,074,888 131,642,564 Provision/ Adjustment 11,928,691 1,381,600 13,310,291

Less: Disposals 7,303,907 - 7,303,907

Balance, 31 December 2012 125,192,460 12,456,488 137,648,948

Carrying amount, 31 December 2012 51,676,260 10,492,230 62,168,490

Cost 175,158,828 23,323,718 198,482,545 Accumulated Depreciation 120,567,676 11,074,888 131,642,564

Carrying amount, 31 December 2011 54,591,151 12,248,830 66,839,981

Adjustments/additions include the following:

Bataan TPP 1 & 2 was reclassified from Assets Held for Sale to Property, Plant

and Equipment (PPE) in 2012. Malaya TPP 1 & 2 was reclassified from PPE to Assets Held for Sale in 2012.

12. BOT ELECTRIC PLANTS UNDER CAPITAL LEASE

NPC-transferred asset: Electric Plants in Service

Electric Plants Leased to

Others Other Utility

Plants Non-Utility Properties Total

Cost 01 January 2012 79,101,282,012 13,842,183,328 2,007,340,982 23,453,076,405 118,403,882,727 Additions/Adjustments (11,153,351,636) 5,147,783,593 (6,005,568,043)

Balance, 31 December 2012 67,947,930,376 13,842,183,328 2,007,340,982 28,600,859,998 112,398,314,684

Accumulated depreciation 01 January 2012 47,676,908,760 13,205,617,007 425,953,162 17,563,093,120 78,871,572,049

Provision/ Adjustment (6,050,256,723) 5,044,487,998 (1,005,768,725)

Balance, 31 December 2012 41,626,652,037 13,205,617,007 425,953,162 22,607,581,118 77,865,803,324

Carrying amount, 31 Dec 2012 26,321,278,339 636,566,321 1,581,387,820 5,993,278,880 34,532,511,360

Cost 79,101,282,012 13,842,183,328 2,007,340,982 23,453,076,405 118,403,882,727 Accum. Depreciation 47,676,908,760 13,205,617,007 425,953,162 17,563,093,120 78,871,572,049

Carrying amount, 31 Dec 2011 31,424,373,252 636,566,321 1,581,387,820 5,889,983,285 39,532,310,678

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This account represents the total computed capacity fees of remaining Build-Operate-Transfer (BOT) projects for the duration of the cooperation period, net of accumulated amortization, as follows:

Plant

Total Capacity Fee

Accumulated Amortization

Net

Kalayaan 2 Unit 3 17,387,881,744 3,948,498,147 13,439,383,597 Kalayaan 2 Unit 4 17,387,881,743 3,948,498,147 13,439,383,596 Mindanao Coal Fired I 13,738,656,531 3,441,014,469 10,297,642,062 Mindanao Coal Fired 2 13,660,516,257 3,330,800,239 10,329,716,018

31 December 2012 62,174,936,275 14,668,811,002 47,506,125,273

31 December 2011 62,174,936,275 12,709,704,146 49,465,232,129

13. INVESTMENT IN TRANSCO

This account represents the cost or fair value of investments in TransCo acquired pursuant to EPIRA. It is a reciprocal account adjusted appropriately in the books for draw downs and payments for loans incurred to finance TransCo’s projects, other loan-related transactions such as recognition of interest and gain/(loss) on forex due to revaluation, adjustments and corrections of TransCo’s account balances prior to the asset-debt accounts transfer, and TransCo’s appraisal capital and any movement thereof.

Investment in TransCo increased by P40.5 billion or 22% in 2012 compared to 2011. The increment resulted from adjustments made on account of the reconciliation of balances recorded in the books of PSALM as against the books of TransCo (P5.2 billion) and adjustments made by TransCo in its appraisal capital (P35.3 billion), a considerable portion of which pertains to the roll forward effect of the 2008 SKM asset valuation.

14. OTHER NON-CURRENT ASSETS

This account consists of the following:

2012 2011

Stored energy- Leyte A & B 5,210,126,396 5,241,828,596

Other non-current receivables, net 4,512,892,406 4,512,892,406

Stored fuel-Ilijan natural gas 93,113,629 1,437,921,282

Various 2,189,878,500 2,913,663,885

12,006,010,931 14,106,306,169

Other non-current receivables, net consists primarily of the receivable from Metropolitan Waterworks and Sewerage System (MWSS) which has accumulated since 1992. The amount represents energy and capacity losses incurred by the Angat Hydroelectric Power Plant (AHEPP) due to the implementation of MWSS Angat Water Supply Optimization Project (AWSOP). The Memorandum of Understanding between NPC and MWSS on 09 February 1990 provides that MWSS shall compensate NPC the energy and capacity losses, if any, which the latter may incur as a result of the operation of the former’s Auxiliary Unit No. 5.

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Stored fuel represents the difference between the actual gas lifted by NPC versus the contracted volume per the Gas Supply and Purchase Agreement with Shell Philippines Exploration B. V. (SPEX).

15. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Below is the breakdown of the account:

2012 2011

Accounts payable: Check vouchers payable 3,491,665,232 2,550,562,271 Accounts payable – others 7,261,048,541 11,451,165,201 Fuel, oil and other oil products 710,326,821 2,655,741,193 Materials, supplies and equipment 72,154,410 101,017,755 Current portion – fixed O&M payable: Sual 1,556,357,039 1,646,431,759 Pagbilao 1,528,587,523 1,617,755,784 Ilijan 1,232,878,515 1,189,782,374 San Roque 473,134,596 436,721,552 Bakun 52,715,105 40,782,519 Performance/bidders bonds 775,647,203 789,644,159 Interest payable 8,754,667,221 8,583,841,023 Due to officers & employees 57,103,475 77,850,084 Guaranty deposits payable 323,964,689 306,600,057 Trust Liability Other payables:

1,297,000 -

Financial assistance/benefits payable

200,622,960 889,336,235

Suppliers and contractors 3,006,738,658 2,402,848,996

Various 3,393,239 3,393,239

29,502,302,227 34,743,474,201

16. BOT LEASE OBLIGATION

This account pertains to the outstanding balances of the liability set up for capital cost recovery fees of the BOT power plants during the cooperation period indicated in the BOT contracts.

2012 2011

Total lease obligation 297,444,127,797 348,355,907,494

Less current portion 32,087,802,327 34,261,795,770

Non-current portion 265,356,325,470 314,094,111,724

The following are the details: Name of IPP Power Plant Current Non-current San Roque Power Corp. San Roque 6,636,042,880 23,667,359,091 KEPCO Ilijan Corp. Ilijan Natural Gas 4,661,231,358 36,214,182,089 Team Sual Corp. Sual 1 4,595,994,105 42,502,757,863 Sual 2 4,596,358,300 42,502,757,863 Team Energy Corp. Pagbilao 1 4,541,418,000 43,467,858,000 Pagbilao 2 4,541,418,000 44,166,632,000 Luzon Hydro Corp. Bakun I 884,592,760 10,344,341,000

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Steag State Power Inc. Mindanao Coal Fired I 514,581,125 7,498,185,708

Mindanao Coal Fired 2 514,581,125 7,498,185,708

CBK Power Co. Ltd. Kalayaan 2 Unit 3 300,751,154 3,772,033,074

Kalayaan 2 Unit 4 300,833,520 3,772,033,074

32,087,802,327 265,356,325,470

17. LONG-TERM LIABILITIES

This account pertains to outstanding financial obligations which consist mainly of domestic and foreign borrowings. The details of the account:

2012 2011

Bonds payable 228,271,416,434 238,034,063,348 Loans payable 97,574,314,702 106,642,501,578 Other long-term liabilities 39,978,254,917 5,631,055,033

365,823,986,053 350,307,619,959

Add bond premium 12,257,120 14,498,318 Less bond discount 1,105,065,584 2,199,729,039

Net 364,731,177,589 348,122,389,238

Less current portion 19,025,165,353 27,403,542,861

Non-current portion 345,706,012,236 320,718,846,377

On a per bank/creditor basis, the amounts are summarized as follows:

2012 2011

LBP Syndicated Loan 73,875,000,000 74,625,000,000 DBP/Morgan Stanley and UBS AG 49,430,400,000 52,713,600,000 Bank of New York/JP Morgan Chase

Manhattan 48,508,045,000 55,021,530,000 HSBC/Deutsche/Morgan 41,192,000,000 43,928,000,000 Bureau of Treasury 36,320,000,000 50,320,000,000 ROP Relending Facility 35,000,000,000 - ROP Relent US$500M Onshore Dollar

Bonds 20,596,000,000 - Deutsche Bank 20,596,000,000 21,964,000,000 US Bank 5,884,571,434 7,321,333,348 Asian Development Bank 5,856,970,435 6,995,069,208 Citibank 5,744,400,000 6,765,600,000 Kreditanstalt fur Wiederafbau 5,415,845,722 6,000,448,356 Int’l Bank for Reconst. and Dev’t 4,731,457,447 6,960,588,322 Eximbank of Japan 3,664,233,164 6,273,706,119 National Government 2,800,273,352 2,986,269,368 Overseas Economic Coop. Fund 2,566,524,096 3,245,734,311 Japan Bank for International Coop. 1,974,788,240 2,798,097,055 Instituto de Credito Oficial 579,381,519 751,107,588 Natixis/Credit National 525,506,402 656,434,928 Nordic Investment/Dev.Fund 247,436,208 293,718,401 Artigiancassa MCA - Eximbank of Korea 181,880,563 216,298,546 Department of Energy 118,381,565 118,381,565 USAID 14,890,906 22,698,744 Caliraya-Botocan-Kalayaan Power Corp. - 280,004,100 Banco de Oro/Dev’t. Bank of Phils. - 50,000,000

365,823,986,053 350,307,619,959

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Add bond premium 12,257,120 14,498,318 Less bond discount 1,105,065,584 2,199,729,039

Net 364,731,177,589 348,122,389,238

Further details of the account follow:

CREDITOR / PROJECT MATURITIES INTEREST RATES CURR ORIGINAL

CURRENCY PESO

LBP Syndicated Loan

General Funding Requirements 2021 PDST-F + .5% PhP 73,875,000,000 73,875,000,000

DBP/Morgan Stanley and UBS AG

General Funding Requirements 2024 FIXED at 7.39% USD 600,000,000 24,715,200,000

General Funding Requirements 2024 FIXED at 7.39% USD 579,014,000 23,850,744,688

General Funding Requirements 2019 FIXED AT 7.25% USD 20,986,000 864,455,312

Bank of New York/JP Morgan Chase Manhattan

General Funding Requirements 2022 FIXED at 3.55% JPY 37,000,000,000 17,711,900,000

General Funding Requirements 2028 FIXED at 9.625% USD 300,000,000 12,357,600,000

General Funding Requirements 2020 FIXED at 3.22% JPY 24,750,000,000 11,847,825,000

General Funding Requirements 2016 FIXED at 8.40% USD 160,000,000 6,590,720,000

HSBC/DEUTSCHE/MORGAN

General Funding Requirements 2019 FIXED AT 7.25% USD 1,000,000,000 41,192,000,000

Bureau of Treasury

General Funding (Liability Management Program)

2017 FIXED at 7.750% PhP 18,678,000,000 18,678,000,000

2015 FIXED at 6.875% PhP 11,322,000,000 11,322,000,000

General Funding Requirements 2016 FIXED at 5.875% PhP 6,320,000,000 6,320,000,000

ROP Relending Facility

General Funding Requirements 1/ 2022 FIXED at 6.058% PhP 35,000,000,000 35,000,000,000

ROP Relent USD$500M Onshore Dollar Bonds

General Funding Requirements 1/ 2023 FIXED AT 3.35% USD 500,000,000 20,596,000,000

Deutsche Bank

General Funding Requirements 2016 FIXED at 6.875% USD 500,000,000 20,596,000,000

US Bank

General Funding Requirements 2018 FIXED at 5.40% USD 142,857,143 5,884,571,434

Asian Development Bank

1662-PHI Power Sector Restructuring Program

1/ 2013 Cost of Qualified Borrowings USD 50,000,000 2,059,600,000

1984-PHI Electricity Market & Trans Dev't Proj.

2022 LIBOR + 0.60% USD 29,828,052 1,228,677,126

SPIA Special Project Implementation Agreement

2026 FIXED at 9.65% USD 28,459,465 1,172,302,282

1590-PHI Power Transmission Reinforcement Project

2017 Cost of Qualified Borrowings USD 20,246,755 834,004,324

1288-PHI Power Transmission Project 2013 Cost of Qualified Borrowings USD 13,652,814 562,386,704

Citibank

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CREDITOR / PROJECT MATURITIES INTEREST RATES CURR ORIGINAL

CURRENCY PESO

General Funding Requirements 2015 FIXED at 4.65% JPY 12,000,000,000 5,744,400,000

Kreditanstalt fur Wiederafbau

Sucat/Sta.Mesa/Balintawak Trans Project 2033 FIXED at 9.0% EUR 23,292,924 1,270,163,158

Northern Luzon Generation & Trans Proj. 2035 FIXED at 7.50% EUR 20,175,431 1,100,166,279

Sucat 2&3 Rehabilitation 2032 FIXED at 9.0% EUR 19,620,315 1,069,895,757

Energy Sector Loan 2035 FIXED at 7.0% EUR 10,834,854 590,824,588

Sucat/Sta.Mesa/Balintawak Trans Project 2023 FIXED at 9.0% EUR 9,601,039 523,544,654

Sucat 1&4 Rehabilitation Project 2018 FIXED at 6.50% EUR 6,467,842 352,691,442

Sucat 2&3 Rehabilitation (Additional) 2036 FIXED at 7.0% EUR 5,046,451 275,182,966

Various Spare Parts 1/ 2019 FIXED at 3.50% EUR 4,243,852 231,417,254

Northern Luzon Generation & Trans Proj. 2025 FIXED at 7.50% EUR 35,937 1,959,624

Int'l Bank for Reconstruction and Development

3997-0 PH Transmission Grid Reinforcement Project

2016 LIBOR + 0.50% USD 35,470,006 1,461,080,493

3700-0-PH Leyte-Cebu Geothermal 2014 Cost of Qualified Borrowings + 0.50%

USD 19,732,755 812,831,643

3746-0-PH Leyte-Luzon Geothermal 2014 Cost of Qualified Borrowings + 0.50%

USD 13,731,891 565,644,040

4887-PH Bicol Power Restoration Project

2025 USD 11,706,865 482,229,188

3996-0 PH Transmission Grid Reinforcement Project

2016 Cost of Qualified Borrowings + 0.50%

USD 11,258,996 463,780,554

3996-A-PH Transmission Grid Reinforcement Project

2016 Cost of Qualified Borrowings + 0.50%

JPY 968,614,457 463,675,740

3626-PH Power Transmission Project

2013 Cost of Qualified Borrowings + 0.50%

USD 5,343,252 220,099,228

296-PHI Bataan Thermal 2 1/ 2022 Service Charge at 0.75% USD 2,854,540 117,584,202

3700-A-PH Leyte-Cebu Geothermal 2014 Cost of Qualified Borrowings + 0.50%

USD 1,941,886 79,990,184

3746-A-PH Leyte-Luzon Geothermal 2014 Cost of Qualified Borrowings + 0.50%

USD 1,566,862 64,542,175

Eximbank of Japan

San Roque Multi-Purpose Proj (Series A) 2014 Long-Term Prime Rate + 0.20%

JPY 3,905,136,000 1,869,388,603

San Roque Multi-Purpose Proj (Series B) 2014 LIBOR + 0.90% USD 36,929,000 1,521,179,368

Leyte-Luzon Interconnection Project 2014 Long-Term Prime Rate + 0.20%

JPY 571,684,130 273,665,193

National Government - Bond Conversion

General Funding Requirements 1/ 2018 FIXED at 6.50% USD 67,981,000 2,800,273,352

Overseas Economic Cooperation Fund (OECF)

PH-C8 Extra High Voltage T/Line Project 1&2

1/ 2004 FIXED at 3.50% JPY 5,361,445,783 2,566,524,096

Japan Bank for International Cooperation

Electricity Market & Transmission Dev't Proj 2022 Tokyo Swap Reference Rate + 1.25%

JPY 2,303,613,034 1,102,739,559

Leyte-Cebu Interconnection Uprating Proj 2015 FIXED at 3.69% JPY 1,821,701,860 872,048,680

Instituto de Credito Oficial

200MW Mindanao Barge 2023 FIXED at 1.25% USD 13,146,342 541,524,102

Palawan Backbone Transmission Line 2013 FIXED at 2.0% USD 919,048 37,857,417

Natixis/Credit National

1528 Navotas Gas Turbine 2016 FIXED at 5.45% EUR 3,658,776 199,513,077

467-OB1 Bataan Gas Turbine 2020 FIXED at 3.0% EUR 2,508,681 136,798,377

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CREDITOR / PROJECT MATURITIES INTEREST RATES CURR ORIGINAL

CURRENCY PESO

467-OA1 Pielstick for Diesel Power Plant

2022 FIXED at 3.0% EUR 1,436,089 78,309,953

1543 Sucat Gas Turbine 2019 FIXED at 5.45% EUR 1,394,908 76,064,359

747-OD1 Northern Luzon 230KV Transmission Line

2016 FIXED at 3.10% EUR 638,559 34,820,636

Nordic Investment/Development Fund

Leyte-Cebu HV Interconnection Project

2034 Service Charge at 0.75% EUR 3,516,442 191,751,605

PIL95/1 Leyte-Cebu HV Interconnection Project

2014 LIBOR + 0.85% USD 1,351,830 55,684,603

Eximbank of Korea

Transmission & Substation Project in Luzon

2018 FIXED at 3.50% KRW 2,399,650,000 92,146,560

Mindanao Power Transmission 2017 FIXED at 3.50% KRW 2,336,823,000 89,734,003

Department of Energy

Gas Sale and Purchase Agreement

PhP 118,381,565 118,381,565

USAID

492-H-032 Tiwi Geothermal 1&2 1/ 2015 FIXED at 3.0% USD 361,500 14,890,906

Total 365,823,986,053

Bond Discount (1,105,065,584)

Bond Premium 12,257,120

Total Outstanding Loan, net 364,731,177,589

1/ Bureau of Treasury Relent Loans

18. ASSUMED RURAL ELECTRIFICATION PROGRAM (REP) LOANS

Section 60 of the EPIRA provides that all outstanding financial obligations of the electric cooperatives (ECs) to NEA and other government agencies incurred for the purpose of financing the REP shall be assumed by PSALM in accordance with the program approved by the President of the Philippines within one (1) year from the effectivity of the Act which shall be implemented and completed within three (3) years from the effectivity of the Act. Section 2, Rule 31 of the Implementing Rules and Regulations of the EPIRA states that the assumption covers all outstanding REP-related financial obligations of the ECs as of 26 June 2001.

The Act also provides that ERC shall ensure a reduction in the rates of ECs commensurate with the resulting savings due to the removal of the amortization payments of their loans. However, any EC which shall transfer ownership or control of its assets, franchise or operations within five years shall repay PSALM the total debts including accrued interests thereon.

To carry out the aforementioned objective and that of Executive Order (EO) No. 119, Restructuring Program for Electric Cooperatives, PSALM and NEA entered into a Memorandum of Agreement (MOA) on 03 October 2003 to lay down the operational legal framework upon which the financial obligations of ECs to NEA shall be lawfully assumed by PSALM. Article IV of the MOA provides that repayment by PSALM to

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NEA of the assumed loans shall be for the period of 10 years in accordance with the amortization schedule as may be mutually agreed by the parties. The condonation was subject to compliance with certain conditions required under Executive Order (EO) No. 119. On 02 September 2006, EO 460 was issued amending EO 119 by giving retroactive effect to the effectivity of the assumption by PSALM of the rural electrification loan obligations of the ECs to NEA and other government agencies.

For the year 2012, PSALM has paid a total of P2 billion out of the P18.1 billion assumed rural electrification loans of electric cooperatives (ECs) from the National Electrification Administration (NEA), other government agencies (OGAs) and Local Government Units (LGUs) and Other Government Agencies (OGAs). This brings the total EC loans paid by PSALM to P15.6 billion leaving a total outstanding balance of P2.5 billion as of 31 December 2012.

2012 2011

Current portion 2,521,057,231 1,797,795,136

Non-current - 2,764,445,011

2,521,057,231 4,562,240,147

19. DUE TO TRANSCO

This account corresponds to the payments received by PSALM from NGCP concerning the concession fees on the TransCo transmission business. The initial amount set up represents the payments received from NGCP for the years 2009-2012. This account will be offset by: (i) any remittances made by PSALM to TransCo; (ii) the receipt of dividends from TransCo; and (iii) the reduction in value of TransCo assets, represented by the amount of depreciation. Movements to this account are accounted as follows:

2012 2011

Concession fee

Principal 54,137,576,250 51,224,698,125

Interest 38,542,830,755 28,282,542,536

Dividend from TransCo (43,193,363,840) (37,098,248,516)

Funding for TransCo (436,399,355) (50,000,000)

49,050,643,810 42,358,992,145

As of 31 December 2012 total due to TransCo stood at P49.1 billion. This amount increased by P6.7 billion from that of the previous year (P42.4 billion) representing receipt of the 6th and 7th deferred payment of the concession fee (P13.2 billion) from NGCP, offset by the P6.1 billion dividend income (representing TransCo’s net profit for the fourth quarter of 2011- P3.1 billion, and first quarter of 2012- P3 billion) declared in 2012 by TransCo and the amount released by PSALM for the Agency’s 2011 operational requirements (P0.4 billion).

20. DUE TO GOCC AND GOVERNMENT AGENCIES

This account consists of the following:

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2012 2011

Due to NGAs 47,617,765,989 41,512,625,227

Due to NPC 2,777,039,965 9,928,827,140

50,394,805,954 51,441,452,367

Due to National Government Agencies (NGAs) consists mostly of liabilities to the National Treasury (P25.11 billion), the BIR (P22.43 billion) and the statutory payable (P72.52 million). Due to NPC is a reciprocal account between PSALM and NPC that is under continuing reconciliation (See Note 31) and the Universal Charge (See Note 10).

21. OTHER LONG-TERM LIABILITIES

This account consists of the following:

2012 2011

Liability for the fixed Operation & Maint: Pagbilao 15,217,073,150 17,564,205,654 Sual 14,439,826,164 16,699,522,129 Ilijan 9,037,327,087 10,433,476,207 San Roque 5,778,162,071 6,181,289,658 Bakun 463,310,658 533,571,290 Deferred credits 931,839,167 872,716,114

45,867,538,297 52,284,781,052

Liability for the Fixed O&M pertains to the obligation of PSALM to the IPPs for the fixed operating and maintenance expenses of the plants under IPP Administration Agreements. Deferred credits refer mostly to the unearned portion of the rent income from lease of land pertaining to sold plants.

22. ADJUSTMENTS-CAPITAL FROM ASSET- DEBT TRANSFER The increase was due to the following:

2012 2011

Investment in TransCo 40,411,841,969 (3,377,436,120) Cleaning of Accounts – Due to/from NPC 2,081,762,420 - Cleaning of Accounts – Accounts Payable 996,905,873 - Cleaning of Accounts – Due from BTr (4,367,611,637) - Recognition of IDPP fuel stock 55,885,680 - Recognition of DAA - 10th to 12th

GRAM and 9th to 11th ICERA

- 13,506,156,459 Receivable from PEMC - 728,557,962 Interest on restructured receivables - (8,982,249) Payable to NPC - (3,813,000,000)

39,178,784,305 7,035,296,052

Investment in TransCo pertains to unrecorded disbursements of TransCo and

various adjustments related to TransCo’s appraisal capital.

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Cleaning of Accounts – Due to/from NPC pertains to payables to NPC which were closed against transferred receivable from PSALM (sale of asset) on account of Magat HEP sale.

Cleaning of Accounts – Accounts Payable (transferred accounts) refers to

payables to various suppliers/contractors which remained dormant for over two (2) years and were dropped off from books in accordance with Presidential Decree No.1445.

Cleaning of Accounts – Due from BTr refers to NPC advances as of

December 31, 2010 for the preservation and maintenance of the mothballed Philippine Nuclear Power Plant. However, the Department of Budget Management reimbursed NPC in full through three releases of Special Allotment Release Orders (SARO) by the DBM as of the end of 2011.

Recognition of Iligan Diesel Power Plant (IDPP) Fuel Stock pertains to

industrial fuel oil and industrial diesel oil stocks which were transferred to PSALM’s books.

23. PRIOR YEAR’S ADJUSTMENTS This account consists of the following:

2012 2011

Recognition of DAA – 10th to 17th GRAM and 15th to 16th ICERA 44,783,824,963 - Adjustments related to plant operation 630,964,395 2,712,642,364 Adjustment on Investment in TransCo 134,052,546 - Unitization of completed work orders 36,140,217 172,203,224 Personnel related expenses 29,943,482 3,146,672 Cleaning of accounts – Accounts

Payable

1,152,228,803

- Cleaning of accounts – Due to/from

NPC 823,763 - VAT deficiency for sold plants and

assigned banked gas (2008-2010) (16,545,140,487) - Loan related expenses (1,401,728,123) 271,563,741 Real property taxes for IPP plants (832,553,768) (761,782,742) BOT lease obligations (87,920,692) 20,348,058,800 Adjustments on sold plants - 405,307,382 Derecognition of accrued DAA (4,995,634,878) Expenses related on sold assets (170,730,160) Depreciation on office equipments (10,522,744)

27,900,635,099 17,974,251,659

24. DIVIDEND INCOME

The account pertains to TransCo’s remittance of profit as a subsidiary. Remittances for CY 2012 and 2011 amounted P6.095 billion and P11.348 billion, respectively. Dividend income in 2011 consisted of four quarters (4th quarter of 2010 and 1st to 3rd quarters of 2011) of TransCo’s net profit while dividend income for 2012 consisted of only two quarters (4th quarter of 2011 and 1st quarter of 2012) net

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profits. Dividend declarations covering the 2012 2nd and 3rd quarters net profit of TransCo were made in 2013.

25. INCOME FROM IPPAs

The account pertains to payments by IPPAs upon the successful turn-over of the management of IPP contracts to the winning bidders. Revenue generated from this source amounted to P7.879 billion and P6.055 billion for CY 2012 and 2011, respectively.

This account consists of the following:’

2012 2011

Revenues Generation charges 35,387,262,192 33,825,759,825 Amortization of deferred finance

income (loss)

2,600,573,721

2,600,573,721 Fixed related adjustments (1,083,333,651) (3,759,395,022) Interest penalty income 1,265,982 -

36,905,768,244 32,666,938,524

Less: Expenses Natural gas 27,537,801,264 25,449,226,286 Energy fees 1,128,065,763 1,162,281,739 Financial assistance 176,270,381 - Diesel 100,585,987 - Taxes 84,121,918 - Administrative 207,144 -

29,027,052,457 26,611,508,025

IPPA, net 7,878,715,787 6,055,430,499

In 2012, operation of the Ilijan Natural Gas Plant was maximized at 74.7% of its rated capacity resulting to increased generation revenue of P34.1 billion. Likewise, San Roque and Bakun Hydro Plant generated revenues of P1.3 billion (32.9% of rated capacity) and P.03 billion (6 percent of rated capacity), respectively. Compared to 2011, Bakun Hydro Plant generated less revenue in 2012 as the plant was shut down from 23 November 2011 to 01 October 2012 due to rehabilitation.

26. SALE/DISPOSAL OF ASSETS

PSALM has sold a total of 15,536 sq.m. of land located in the Bohol Diesel Power Plant for P19.294 million through Option Existence Notice to Winning Bidder in the first half of 2012. The Corporation collected as well P35 million from disposal of waste oils stored at Sucat Thermal Plant and P17 million from sale of scrap items at Tiwi Geothermal Power Plant. It also pulled together P2 million from other privatization related fees. Details are as follows:

Particulars Unit Cost Cash

Received in Gain (Loss)

Sold Optioned Assets 15,536 sq.m. 15,536,000 19,293,977 3,757,977 Waste oils 17,765,473 liters 54,493,328 35,008,889 (19,484,439)

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Scrap items 17,000,000 17,000,000 Participation Fees 1,959,782 1,959,782 Others 45,208 45,208

73,307,856 3,278,528

27. POWER GENERATION This account consists of the following:’

2012 2011

Net utility revenue 53,074,016,423 50,614,297,776

Less variable costs Fuel oil 12,899,851,451 10,003,954,267 Coal 1,263,247,938 1,114,740,057 Other power supply 4,769,151,945 7,836,036,996 Station use 105,535,834 687,379,962 Pumping Cost 3,515,899,402 2,402,560,778 Purchases from PEMC 989,554,618 2,495,187,246

23,543,241,188 24,539,859,306

Gross contribution margin 29,530,775,235 26,074,438,470

Less fixed costs Depreciation 1,884,706,114 2,330,995,740 Opex allocation 2,110,260,202 1,999,011,126 Fixed O & M fees 21,223,602,454 21,351,620,907 Amortization of leased plant 1,959,106,854 1,959,106,854

27,177,675,624 27,640,734,627

Net generation margin/(loss) 2,353,099,611 (1,566,296,157) Add other income, net 402,864,966 519,165,727

Net income/(loss) from power generation 2,755,964,577 (1,047,130,430)

Total energy generation registered at 14,857.8 GWh in 2012 which is 466.7 GWh or 3.2 percent higher than that of the previous year (14,391.1 GWh). Of the total energy generation, hydro plants accounted for the largest share at 46.9%, followed by geothermal plants at 28.1%, coal plants at 13.9% and oil-based plants at 11.1%. Compared to 2011, net utility revenue grew higher by 5 percent in 2012 as a result of improved WESM trading operations which represented a significant climb of 109% (from P8.5 billion in 2011 to P17.8 billion in 2012) in terms of revenue. Spot sales rose from 1,544.1 to 3,128.9 GWh along with spot rate, which similarly soared from P5.5045 to P5.6778 per kWh, translating into an additional income of P9.266 billion. Concurrently, the expenses associated with purchasing energy from WESM (including station use and pumping cost) diminished from P5.585 billion to P4.611 billion or roughly 17.4%, contributing further to the increased revenue. Among the trading plants, Unified Leyte Geothermal Power Plant represented a substantial ration of 32.8% in spot sales and 34.5% in spot revenue. Malaya Thermal Power Plants ranked second with a fraction of 14.3% in spot sales and 16.8% in spot revenue. While the net operating income of owned and operated plants decreased by 13.4% (from P11.381 billion in 2011 to P9.861 billion in 2012), the net operating loss of IPP plants was reduced by 41.3% (from P12.781 billion in 2011 to P7.508 billion in 2012), resulting to an overall net operating income of P2.353 billion. This is

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attributable to the expiration of ROM contracts of Malaya Thermal and Naga Complex Power Plants on 25 January 2011 and 25 March 2012, respectively. Upon termination of the contracts and pending privatization, Operation and Maintenance Service Contracts (OMSC) were entered into by PSALM with IPP contractors for the continued operation and maintenance (O & M) of these IPPs. Under the OMSC, lower fixed service fees were incurred compared to the fixed (O&M) expenses. The corresponding savings boosted up operating income. Meanwhile, Power Barges 101 to 104 showed recurring losses of P0.438 billion in 2012 and P0.431 billion in 2011. Hefty chunks of these losses pertain to high operating costs. On the other hand, Southern Philippines Power Corp. (SPPC) Gen San and Western Mindanao Power Corp. (WMPC) are among the IPPs that posted the largest losses amounting to P1.808 billion and P3.305 billion, respectively. Similarly, the losses are ascribed to high fuel costs which comprise 75.2% and 73.6% of the respective plants’ production costs.

28. PERSONAL SERVICES

In line with the Government’s thrust and commitment to accountability and effective governance, the Corporation’s restraint approach in spending reflected improvement in Personal Services as it fell notably by P10 million or 6 percent to P144.7 million in 2012 from P154.6 million in 2011.

29. MAINTENANCE AND OTHER OPERATING EXPENSES (MOOE)

Despite of the Corporation’s several tax appeals that prompted P180 million in payment of filing fees, the total Maintenance and Other Operating Expenses remarkably decreased by P25 million, equivalent to 2 percent from P1.228 billion in 2011 to P1.203 billion in 2012. This can be attributed to the Corporation’s effective management of bad debts and the harmonization with the Government’s performance based incentives.

30. OTHER INCOME (LOSS)

Gain (Loss) on Foreign Exchange

As the Corporation translates its foreign currency transactions/monetary items in accordance with PAS 21, the resulting gains and losses from the exchange differences are recognized in profit or loss, as follows:

2012 2011

Realized forex gain (loss) on foreign currency-related transactions 1,112,443,388 (26,664,024) Unrealized forex gain (loss) on

translation

27,784,237,938

(2,247,782,626)

28,896,681,326 (2,274,446,650)

This account pertains to foreign exchange adjustments realized on repayment of loans and unrealized on restatement of outstanding balances of foreign currency-denominated loans, trade and other payables, short-term placements and cash in banks. Following are the exchange rates used to restate outstanding balances at financial reporting date:

2012 2011 Gain (Loss)

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PhP : US Dollar ($) 41.1920 43.9280 2.7360

PhP: Japanese Yen (Y) 0.4787 0.5638 0.0851

PhP: Korean Won (KRW) 0.0384 0.0380 (0.0004)

PhP: Euro (EUR) 54.5300 56.8428 2.3128

Interest Income Interest income pertains mainly to the interest earned, net of taxes, on the placements and regular deposits. Subsidy from National Government The Corporation has been awarded government grants specifically to cover various Value-Added Tax (VAT) deficiencies assessed by the BIR.

Amount

CY 2008 VAT from the sale of Masinloc, Ambuklao/Binga and Pantabangan Assets

6,485,010,035

CY 2009 VAT for the sale of generation assets 4,712,488,628

CY 2009 VAT covering the assignment of banked gas to the Department of Energy (DOE)

3,415,085,587

CY 2010 VAT for the sale of generation assets 1,932,556,237

16,545,140,487

Miscellaneous Income Miscellaneous income came primarily from the amortization of deferred credits on advance lease payments for the various sold plants. It also includes income from sale of bid documents, participation fees and others. Details follow:

2012 2011

Amortization of deferred credits-lease rental

Tiwi-Makban 19,681,377 19,681,377

Naga 6,883,848 6,883,848

Calaca 4,526,529 5,132,225

Masinloc 3,400,354 9,341,840

Maibarara Geothermal 2,700,444 -

Limay 1,503,257 1,503,257

Panay-Bohol 384,192 384,192

5 Mini Hydros 340,071 340,071

GT Land Based 121,532 121,532

Pantabangan 34,143 48,209

Palinpinon-Tongonan 18,834 18,834

Loss on sale of unserviceable assets (829,903) (557,795)

Others 1,197,057 3,126,616

39,961,735 46,024,206

31. CLEANING OF NPC ACCOUNTS RETAINED AT NPC/TRANSFERRED TO PSALM AND TRANSCO Even after years have passed since the EPIRA was passed into law, the need to speed up the process of addressing the management of NPC accounts has

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seemed to have settled into a drone. As it involved numerous and various transactions, measures taken were not enough to promptly cover transactions at a reasonable time.

As far as asset-debt management goes for particular NPC accounts, the task of swiftly but effectively checking and reconciling uncertain amounts has been placed upon a joint task force composed of members of PSALM, NPC and TransCo.

Under the supervision of the Department of Finance, the Joint PSALM-NPC-TransCo Task Force (JPNTTF) was created to primarily validate and reconcile the remaining accounts in the temporary account registry of NPC, PSALM, and TransCo, and to eventually prepare the appropriate adjustments. The annual output would be recommendations addressing COA audit observations and a report reflecting progress made on the cleaning of the books.

In its first progress report, the JPNTTF turned up with adjustments arising from activities completed with regards the Power Receivables, Accounts Payable, Due from National Government, Investment in TransCo, and Property, Plant and Equipment.

32. SUPPLEMENTARY INFORMATION REQUIRED IN TAXES, DUTIES AND LICENSE FEES UNDER REVENUE REGULATION NO. 15-2010 In compliance with the requirements set forth by Bureau of Internal Revenue (BIR) through Revenue Regulations (RR) No. 15-2010, below are the information on taxes, duties, and license fees paid or accrued during the taxable year 2012.

Value added tax (VAT)

RMC 71-2012 dated 15 November 2012, which superseded RMC 62-2012 and RMC 61-2005, clarified the implementation of the VAT provisions of RA No. 9337 applicable to the power industry.

Details of the Corporation’s net sales/receipts and output VAT for the taxable year are as follows:

Net Sales/Receipts Output VAT

Vatable Sales 7,063,227,554 847,587,306 Sales to government 30,810,645 3,697,277 Zero-rated Sales 15,512,501,089 - Exempt Sales 5,946,705,953 -

28,553,245,241 851,284,583

The amount of VAT input taxes claimed for the taxable year 2012:

Balance at 01 January 2012 26,401,081,357 Add: Current year’s domestic purchases/payments for:

Purchase of Capital Goods not exceeding P1 million 64,156

Purchase of Capital Goods exceeding P1 million 31,686,278 Domestic Purchases of Goods Other than Capital Goods 1,394,391,046

Importation of Goods Other than Capital Goods -

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Domestic Purchases of Services 3,840,755,453 Services rendered by Non-residents 36,014 5,266,932,947

Total 31,668,014,304 Add :Claims for tax credit/refund and other adjustments

521,920

Balance at 31 December 2012 31,668,536,224

Other taxes, fees and licenses during the taxable year pertain to:

Court of Tax Appeals Filing Fees (SAJ) 178,077,182 Real property tax 160,075,475 Documentary stamp tax 3,843,419 Court of Tax Appeals Legal Research Fund 1,783,556 Licenses and registrations 305,525 Court of Tax Appeals Judiciary Development Fund 278,400 Transfer tax 167,922

The amounts of withholding taxes paid/accrued for the year are as follows:

Withholding Taxes on Compensation Income 18,854,618 Creditable Income Taxes Withheld Expanded 1,424,101,289 VAT/Other Percentage Taxes Withheld 2,325,764,348 Final Withholding Tax Paid to Non-

Resident/Consultants

450,926 Final Withholding Tax Paid for Interest Payments on

Various Loans

790,831,144

A Pre-Trial Conference is set on 14 February 2013 before the Court of Tax Appeals (CTA) on the petition to review the inaction of BIR on the administrative protest filed for the alleged deficiency tax assessments for CY 2008:

Income Tax 12,674,063,052 Value Added Tax (VAT) 76,838,029 Withholding Percentage on VAT 40,289,956 Expanded Withholding Tax (EWT) 41,371,763 Final Withholding Tax (FWT) 1,299,125,498 Documentary Stamp Tax (DST) 3,195,056,606 Unremitted Tax 462,987,634

An Initial Presentation is set on 05 February 2013 before the CTA on the petition to review the inaction of BIR on the administrative protest filed for the alleged VAT deficiency on the Sale of Generating Assets and Lease on Naga Power Plant Complex for CY 2008 in the amount of P10,103,158,715. On 27 December 2012, the Corporation filed a reply on the Preliminary Assessment Notice (PAN) served by the BIR regarding the alleged deficiency tax assessments for CY 2010:

Withholding Tax on Compensation (WTC) 25,000 Expanded Withholding Tax (EWT) 1,193,012,036 Final Withholding Tax (FWT) 419,517,398 Final Withholding Tax (FWV) 1,246,423,778

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On 14 December 2012, the Corporation filed a petition for review for the CTA to appeal the Final Decision of BIR on the administrative protest filed for the alleged VAT deficiency on the Sale of Generating Assets and Lease composed from collections from lease of land and the collection from the sale of power plants for CY 2009 in the amount of P7,642,925,211. On 26 November 2012, the Corporation filed a reply to the BIR’s comment and currently awaiting resolution for the alleged VAT deficiency on the privatization of Pantabangan and Masiway Hydroelectric Plant in the amount of P3,813,080,472. On 15 November 2012, the Corporation requested for a clarificatory letter with regard to RMC No. 11-2012 issued on 22 March 2012. The letter will clarify the tax treatment of PSALM transactions with respect to the IPPAs, such as the applicability of income tax on the monthly and generation payments made by the IPPAs to PSALM. On 17 September 2012, the Corporation thru the Office of the Government Corporate Counsel (OGCC) filed a memorandum and currently awaiting decision from the CTA on the petition to review the inaction of BIR on the administrative protest filed regarding the alleged deficiency tax assessments for CY 2006:

Value Added Tax (VAT) 146,823,587 Withholding Tax on Compensation (WTC) 10,555,170 Expanded Withholding Tax (EWT) 1,095,010 Final Withholding Tax (FWT) 144,568,738 Final Withholding Tax (FWV) 12,429,844 Withholding Percentage Tax (WPT) 168

33. SUPPLEMENTARY INFORMATION REQUIRED IN INCOME TAX RETURN UNDER REVENUE REGULATION NO. 19-2011 The BIR issued RR No. 19-2011 to prescribe the new BIR forms that will be used for Income tax filing and to modify Revenue Memorandum Circular No. 27-2013 to include in the Notes to the Audited Financial Statements, which will be attached to the income tax return (ITR), the following schedules and information on taxable income and deductions to be taken for CY 2012: Itemized Deductions Exempt Regular Total

Advertising and Promotions 1,541,519 764,541 2,306,060 Bad Debts 405,090,681 200,911,123 606,001,804 Communication, Light and

Water

17,263,312

8,562,013 25,825,325 Depreciation 8,912,282 4,420,187 13,332,469 Interest 13,719,614,353 6,804,459,486 20,524,073,839 Office Supplies 5,024,172 2,491,817 7,515,989 Professional Fees 79,796,482 39,576,326 119,372,808 Rental 11,564,744 5,735,718 17,300,462 Repairs and Maintenance 1,729,068 857,558 2,586,626 Representation and

Entertainment

3,003,577

1,489,672 4,493,249 Salaries and Allowances 87,974,218 43,632,203 131,606,421 GSIS, Philhealth, HDMF and

ECC Contributions

8,740,434

4,334,956 13,075,390 Taxes and Licenses 230,847,155 114,492,293 345,339,448 Trainings and Seminars 1,441,663 715,015 2,156,678 Transportation and Travel 9,883,812 4,902,033 14,785,845

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Others: Extraordinary & Miscellaneous

1,085,678

538,459 1,624,137

Loss on sale of unserviceable equipment

554,761

275,142 829,903

Other financial charges 2,937,002,909 1,456,652,993 4,393,655,902 Other maintenance & operating expenses

26,833,164

13,308,332 40,141,496

17,557,903,984 8,708,119,867 26,266,023,851

34. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES Objectives and Policies The Corporation has significant exposure to the following financial risks primarily from its use of financial instruments:

a. Credit Risk b. Foreign Currency Risk c. Interest Rate Risk d. Liquidity Risk

This note presents information about the Corporation’s exposure to each of the foregoing risks.

Credit Risk Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporation’s receivables. The Corporation manages its credit risk mainly through the application of transaction limits and close risk monitoring. The Corporation has regular internal control reviews to monitor the granting of credit and management of credit exposures. Foreign Currency Risk The Corporation’s exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect its foreign currency-denominated transactions The Corporation’s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Corporation’s exposure to changes in interest rates relates primarily to the Corporation’s long-term borrowings and investments. Liquidity Risk

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Liquidity risk pertains to the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. PSALM’s liability management program includes: (i) refinancing to ensure that the Corporation will meet all its outstanding debts and contractual obligations; (ii) hedging to mitigate foreign currency and interest risks; (iii) tariff rate application to update the cost of electricity generation to its current level and to implement the Universal Charge pursuant to the EPIRA; and (iv) monetization to guard against liquidity risks and match privatization cash flows with maturing debts.

35. ORGANIZATIONAL DEVELOPMENT AND EFFICIENCY

Laserfische advances PSALM’s records and information management On 09 January 2013, PSALM received the “Run Smarter Award,” a citation given to licensed corporate users of the Laserfiche technology that demonstrate excellence in utilizing and implementing the Electronic Document Record and Management System to achieve efficiency and higher productivity. Award-giving body Laserfiche USA, a software development company that conceptualized the enterprise content management, workflow, records management, document imaging and Web form software, declared PSALM the sole winner in the “Commercial Success Story” category, besting bigger and more prominent organizations. PSALM was among 135 highly detailed entries nominated, with 50 coming from the government and 30 coming from the commercial sector. PSALM was the only government nominee from the Asia-Pacific Region that competed against large multinational organizations in the academe, air transportation, logistics, energy, banking, and insurance. Laserfiche’s most prestigious accolade, the “Run Smarter Awards,” is given to honor the Run Smarter philosophy practiced in the Laserfiche community. Winners are chosen by a committee of Laserfiche staff based on criteria such as creativity of implementation, operational efficiencies realized, use of Laserfiche resources, and potential to inspire other users to think more inventively within their organizations. The award bolsters the efforts of PSALM to fully implement a Quality Management System that ensures the integrity of the Corporation’s business transactions, procedures, and processes. It is also a manifestation of its aspiration to achieve world-class service by adopting best practices and state-of-the art technology.

36. CONTINGENCIES Legal Proceedings Involving PSALM

PSALM is involved in various legal and administrative proceedings, including litigation and proceedings related to electricity charges and challenges to certain provisions of the EPIRA. Because of the nature of these proceedings, PSALM cannot predict the ultimate outcomes of these proceedings, some of which may be unfavorable. Case filed by NPC Drivers and Mechanics Association (DAMA) On 23 April 2009 and 7 May 2009, respectively, PSALM was impleaded in two separate actions by NPC’s employees to enjoin implementation of the Operations

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and Maintenance Agreement (OMA). The first case, G.R. No. 187359 (NECU and NEWU vs. NPC and PSALM), seeks to enjoin implementation of the OMA in an effort to collect on a judgment rendered in the employees’ favor against NPC for unpaid employment compensation-related claims. The second case, G.R. No. 187420 (PGEA-NPC vs. NPC, NPC Board, PSALM and PSALM Board), seeks to enjoin the OMA’s implementation based on a claim that it violates the EPIRA. PSALM does not expect these cases to have a material adverse effect on its results of operations or financial condition. The two cases were consolidated in the First Division of the Supreme Court in the Resolution dated 9 September 2009 of the Third Division of the Supreme Court. PSALM has filed the Consolidated Comment on these cases in coordination with the Office of the Government Corporate Counsel. Court resolution of these cases is still pending. The NPC Drivers and Mechanics Association (DAMA) were also successful in obtaining a judgment obligation against NPC under G.R. No. 156208 (DAMA vs NPC). The judgment included back wages, wage adjustments, and other benefits accruing from 31 January 2003 to the date of their reinstatement or payment of separation pay. In all, these benefits amount to approximately P37 billion. Although PSALM was not a party to the case, the Supreme Court declared in the Resolution dated 2 December 2009 that the properties acquired by PSALM from NPC “may be used to satisfy the Supreme Court judgment.” PSALM filed a Motion for Reconsideration, which still awaits resolution.

TransCo’s estimated potential Right-of-Way (ROW) liabilities amounted to P194.098 billion based on the current BIR zonal value at P133/sqm for agricultural properties at 100% easement fee and P1,815/sqm for non-agricultural properties. The potential obligation to pay the estimated ROW liabilities will remain for as long as there will be claimants. Case filed by MERALCO with the ERC re: Line Rental Loss On 09 September 2008, Meralco filed before the ERC a Petition for Dispute Resolution under ERC Case No. 2008-083MC with PSALM, Philippine Electricity Market Corporation (PEMC), TransCo, and NPC as respondents. ERC, in its decision issued last 10 March 2010, found double charging in transmission line costs for Transmission Supply Contract (TSC) quantities for the preceding months up to the start of the WESM Luzon commercial operation on 26 June 2006. Further, ERC directed PEMC to provide NPC and PSALM the required segregated line rental amounts for TSC quantities including actual line losses embedded in the said line rental amounts from the start of WESM operations up to the most current billing month. These inputs to be submitted by PEMC will be the basis of NPC for its refund/collect scheme which to be approved by ERC.

37. OTHER SUBSEQUENT EVENTS

Refund to Meralco Customers As early as 10 March 2010, the Energy Regulatory Commission (ERC) made its ruling that PSALM has overcharged its transmission rental line costs on the onset of the Luzon commercial operation of the Wholesale Electricity Spot Market (WESM) in 26 June 2006. PSALM recognized the finality of this decision, but maintains that unlike the proposed amount of refund by Meralco of roughly P10 Billion, the computation for the refund should be based on actual segregated line

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rentals that should even be lower than the initial proposed amount by Meralco of P9.1 Billion. Subsequent hearings on the case that would determine how much should be refunded and “by who, to whom, and how it will be flowed through the end consumers” were completed last December 2012. However, the decision that will ultimately determine PSALM’s liability is still pending release.

Universal Charge for NPC’s Stranded Debts and Stranded Contract Costs Under the EPIRA, PSALM is allowed to recover in incremental amounts the Stranded Contract Costs (SCC) and Stranded Debts (SD) of the National Power Corporation (NPC) through the collection of the Universal Charge. It further provides that the Energy Regulatory Commission (ERC) shall determine and fix the UC for the payment of NPC's SCC and SD based on PSALM's calculation thereof. In a recent decision received on 19 February 2013, the ERC set the UC for the recovery of the SCC at P 0.1938/kWh; more than 17 centavos but 47% lower than the P0.3666/kWh as proposed by PSALM. PSALM calculated NPC's stranded contract costs incurred for the period from 2007-2010 at P74.298 billion, but only P53.581 billion was approved by the ERC for recovery from the UC. On the other hand, the UC for SD has been set to zero. This means that no additional UC will be imposed on top of the UC for stranded contract costs, which was recently fixed at P0.1938/kWh. PSALM proposed to increase the amount to be collected in order to raise the amount needed to pay off the P65.01905 billion SD of NPC. However, ERC determined that no stranded debts will be incurred, and correspondingly resolved that there will be noadd-ons to the current UC. Despite judicious efforts, both amounts fall short of what PSALM finds ideal to improve its financial bearings. Both charges will be imposed until a new UC is determined by the ERC following the annual true-up application, which PSALM shall file on or before the 15th day of March each year for any excess or deficiency in the UC collections for settling NPC's stranded debts and stranded contract costs.

38. RESTATEMENT OF ACCOUNTS

The presentation of figures in CY 2012 financial statements has made it necessary, for comparative purposes, to restate relevant figures in CY 2011.