World Bank Document · document of the world bank ... of the presidet of the international bank 'for reconstruction and development to the ... leyte-luzon geothermal project

Document of

The World Bank

FOR OFFICIAL USE ONLY

At/ 3ZY- 7 /

Reoort No. P-6213-PH

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDET OF THE

INTERNATIONAL BANK 'FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON WO

PROPOSED LOANS

IN AN AGGREGATE AMOUNT EQUIVALENT TO US$227 MILLION

AND A PROPOSED EXPANIDED COFINANCING OPERATION

IN AN AGGREGATE AMOUNT EQUIVALENT TO US$100 MILON

TO TEE

NATIONAL POWE CORPORATION AND

THE PHILIPPINE NATIONAL OIL COMPAY

WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES

FOR THE

LEYTE-LUZON GEOTHERMAL PROJECT

MAY 9, 1994

MICROGRAPHICS

This document has a restdcted distribution an Report No: P- 6213 PHtheir offciail duties. Its contents may not Type: MOP

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CURRENCY SQUIVALENTS(as of December 31, 1993)

Currency Unit Pesos (P)p 1 t US$0.036US$1 927.6

WEIGHTS AND MSASURES

GWh Gigawatt hour (1,000,000 kwh)MWe Million Watts of energykWh Kilowatt-hour (860 kilo-calories)TWh Tera watt nour (109 watt-hours)

ABBREVIATIONS AND ACRONYMS

ADB Asian Development BankBOT Build-Operate-TransferBTO Build-Transfer-and-OperateDENR Department of Environment and Natural ResourcesDOE Department of EnergyEDC Energy Developing Cooperation/Subsidiary of PNOCECO Expanded Cofinancing OperationEOIS Efficiency and Operational Improvement StudyRkB Energy Regulatory Board

ESMAP Energy Sector Management Assistance ProgramGEF Global Environment FacilityGET Global Environment Trust FundJEXIM Export-Import Bank of JapanNPC National Power CorporationOPSF Oil Price Stabilization FundPNOC Philippine National Oil CompanyRECs Rural Electrification CooperativesROL Rehabilitate-Operate-LeaseROP Republic of the Philippines

FISCAL YZARJanuary 1 to December 31

FOR OFFICIAL USE ONLY

PHILIPPINE8

L3YTA-LUZON GEOTHERMAL PROJECT

Loan and Project Sumnarv

Borrowers: National Power Corporation (NPC) and Philippine NationalOil Company (PNOC).

Guarantor( Republic of the Philippines.

Amounts: US$227 million equivalent, of which US$113 million to NPCand US$114 million to PNOC. An Expanded Cofinancingoperation (ECO) is also proposed to support commercialfinancing for US$100 million for the project high-voltage

DC/AC converter stations.

Terms: 20 years, including five years of grace, at the Bank's

standard variable interest rate.

Financinq Plan 1/:Local Foreion Total---- US$ million ------

IBRD-PNOC 114.0 114.0IBRD-NPC 113.0 113.0

Energy Sector Loan (3163-PH)-On going works 13.3 13.3JEXIM-PNOC 114.0 114.0JEXIM-NPC 56.0 56.0BOT-Contract 63.9 556.5 620.4ECO-Supported Bond Issue-NPC 100.0 100.0BITS Grant for Converter 26.6 12.4 39.0GEF Grant PNOC 15.0 15.0GEF Grant NPC 15.0 15.0PNOC Internal Cash Generation 71.7 20.3 92.0NPC Internal Cash Generation 9.2 32.7 41.9

TOTAL FINANCBD 171.4 1162.2 1333.6

1/ Totals may not add due to rounding.

Economic Rate of Return: 11it

PovertyCatecqorv: Not applicable.

Staff ApDraisal Reoort: Report No. 12568-PH

Mar): IBRD No. 25290

This document has a resticted distriuon and may be used by recipiens only in Xt pefom of thedroficial duties Its contents may not otheise be dilosed nftout World Bank atorzati

MEMORANDUM AND RECOM3WWATION OF TUE PRUSIDENTOF THE IBRD TO TIM EXECUTIVE DIRECTORS

ON TWO PROPOSED LOANSAND AN EXPANDED COFINANCING OPERATIONTO THE NATIONAL POWER CORPORATION AND

THE PHILIPPINE NATIONAL OIL COMPANYWITH THE GUARANTEE OF THE REPUBLIC OF PHILIPPINES

FOR A LEYTE-LUZON GEOTHERMAL PROJECT

1. I submit for your approval the' following memorandum andrecommendation on two proposed loans to the National Power Corporation(NPC) and the Philippine National Oil Company (PNOC) for an aggregateequivalent of US$227 million (UJS$113 million to NPC and US$114 million toPNOC) and an Expanded Cofinancing Operation for an aggregate equivalent ofUS$100 million to NPC with the guarantee of the Republic of the Philippinesto help finance a Leyte-Luzon Geothermal Project. The loans would be at theBank's standard variable interest rate, with a maturity of 20 years,including five years of grace.

2. Country/Sector Background. Power demand growth in thePhilippines has been uneven, largely following variations in GDP growth. Inthe last two years, it was severely restricted due to supply constraints;still, power sales increased 6.2% p.a. between 1986-92. Once adequate powersupply is restored in 1994 due to substantial new capacity added, sales areexpected to rise by an average of 9% p a. until the year 2000. In absoluteterms, the annual per capita consumption for power is very low (371 kWh)--equal to just a couple of weeks of per capita use in developed countries.Even considering the effect of proposed energy conservation programs andconservative estimates of GDP growth, peak demand is expected to double bythe year 2000 to 8,260 MW. This will require substantial investments,sound financial policies and increased private sector participation.

3. The Government's present strategy of steadily increasing theprivate sector role in power generation and operational management isadequate. The private sector has emerged as a principal player in theenergy sector: Exploration for hydrocarbons is exclusively with the privatesector and oil refining and distribution are carried out by two privatecompanies (CALTEX and Pilipinas Shell Petroleum Corporation) in addition toPetron (the oil subsidiary of state-owned PNOC). However, the Governmentsold 40% of Petron's shares to Aramco in March 1994, and will sell another20% to Petron staff and the public by mid-1994. PNOC, one of the largestcorporations in the Philippines, was created in 1973 as a holding companyfor several energy subsidiaries (oil refining, coal, geothermal), whichwere established to ensure the country's oil supply and to developindigenous resources. After Petron's privatization, the main activity ofPNOC would be to develop geothermal energy through its subsidiary PNOC'sEnergy Development Corporation (PNOC-EDC). In the power sector, practicallyall distribution is with the private sector, which includes the following:(a) MERALCO (Manila Electricity Company), a private utility in Metro Manilathat distributes about 60% of the total electricity in the country; (b) 12private utilities that retail electricity in different cities; and (c)about 120 member-owned rural electrification cooperatives (RECs), thatdistribute power and manage retail sales in rural areas. However, twostate-owned corporations also operate in the power sector: (a) the NationalPower Corporation (NPC), which sells power in bulk to power utilities andis responsible for power generation and transmission; and (b) the NationalElectrification Administration (NEA), responsible for financing and

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providing related technical support to the RECs. Under the Energy SectorPlan (ESP), the Government is studying options for NPC's gradualprivatization, which is likely to require sevweral years, givenconstitutional, regulatory, commercial and financial constraints and theneed to analyze the options broadly identified by a USAID-funded study. Itis in this context that the Bank is currently conducting a sector study onthe Power Sector Structure, to be completed by mid-1994, after whichdetailed transactional studies could be conducted.

4. With regard to incremental investment in power generation, NPC'sBoard of Directors is sucessfully implementing a policy to bring theprivate sector into the development of all new power plants (except milxti-purpose hydro), and has entered into 35 contracts with private companies toconstruct, finance and operate power plants under Build-Own-Transfer (BOT),Build-Transfer-Operate (BTO), Rehabilitate-Operate-Lease (ROL) and otherschemes. About 27 of these projects will be in operation by end of 1994.Total power generation contracted with the private sector amounts to abo^t5,000 MW, about 80t of the incremental capacity between 1993-99. To supportsuch vast private sector investments, ways and means are needed to improveplanning systems to ensure an optimal integration of private and publicefforts.

S. The Power Crisis and the Prolect. Over the 1991-93 period, thePhilippines experienced an acute power shortage; this posed a grave threatto its economic recovery because it translated into prolonged outages thathampered industrial and commercial activities. As a result, unemploymentincreased and economic losses may have reached almost one billion dollarsper year. Conventional power supply projects (coal, geothermal and hydro)require construction times of three to six years, and so cannot providerelief in the short term. Thus, the Government launched a "fast-track"lgeneration expansion program based on combustion turbine or diesel engine-driven systems which were contracted as BOT/BTO projects with the privatesector. While these plants are operationally more expensive than base-loadplants, they were the only power sources that could bi commissioned withinone or two years. These plants played a critical role in meeting thePhilippines' power deficiencies and will provide peak system power in thefuture, but they are not a cost effective way to meet the base-load powerneeds. However, by using geothermal energy in Leyte and substantiallyconnecting the country's power systems, the proposed project provides amore cost effective option for Luzon. In addition, it is environmentallypreferable to other thermal options. In any case, the substantial privateparticipation already achieved (para. 4) has resulted in a de factotransformation of the sector, and additional studies under the Leyte-CebuGeothermal Project are focussing in further strengthening private sectorcontracting and establishing adequate dispatching for such complex systems.

6. It is also important to continue ongoing efforts to strengthenthe regulatory authority and to improve energy efficiency and demand-sidemanagement. These efforts have already succeeded in introducing efficientlighting schemes, rating of electrical appliances, conducting energyaudits, applying strict conservation measures at public offices and, giventhe high price of electricity (more than twice the average in WashingtonD.C.), in promoting other energy conservation measures. Power demandcharges to reduce peak loads will be introduced under the project andfurther actions for demand side management are being studied by the Bank's

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Energy Sector Management Assistance Program (ESMAP) and by several grantsfrom other donnors.

7. Institutional Issues. While a severe three-year drought, whichseriously curtailed hydro capacity, was in large part responsible for thepower shortages, poor institutional performance also contributed to thecrisis: Environmental approvals for new power projects were substantiallydelayed and financial and institutional weaknesses in NPC prevented it frommaking needed investments. Moreover, NPC's finances deteriorated severelyin 1991 when costs rose sharply due to a large currency devaluation andhigher oil prices (resulting from the Gulf War). The Supreme Court decisionto stay a pari passu tariff increase added to NPC's financial difficulties;as a result, the Government needed to contribute about US$135 million toNPC. In 1991-92, the Corporation's cash situation was also problematicbecause it was required to pay oil taxes that were not calculated into itstariffs (pending an appeal to the Supreme Court). However, the final Courtdecision (May 1993) reconfirmed that NPC is exempt from such taxes and willallow it to recover in the next few years about US$400 million in overduetax refunds. NPC's equity was also increased by the Congress in 1993,mainly by a P3 billion equity infusion from the surplus in the Oil PriceStabilization Fund (OPSF). NPC further agreed to a reform program whoseimplementation streamlined its structure, reduced the number of vice-presidencies from 26 to nine between 1991-93, and eliminated more than2,000 staff. NPC is also establishing targets for improving projectimplementation, internal audits and control, and rationalizing anddecentralizing functions (including a plan to establish separate units forLuzon, Visayas and Mindanao). Under the Electric Power Crisis Act of 1993,the President was given special powers to solve the power crisis; theseinclude facilitating tariff increases, speeding-up project approvals, andincreasing technical salaries in the sector. A comprehensive managementaudit ("Efficiency and Operational Improvement Study") was completed inOctober 1993 and its recommendations would be implemented under the project(para. 20).

8. The Energy Sector Plan (ESP). Sector reform is the highestpriority of the new administration. As a result of its dialogue with theBank, in January 1993, the Government prepared and approved the ESP, whichcharts a course of action to improve the operations of the energy sector asa whole. This document presents measures and implementation schedules inall areas of concern, particularly for sector coordination, regulatorydevelopment, private sector participation, power and oil pricing,environmental management, energy conservation, operational efficiency andproject implementation. The Government would implement the ESP and reviewwith the Bank the progress achieved annually. Some of the plan's keymeasures have already been introduced, such as establishing the Departmentof Energy (DOE) and initiating actions to improve NPC's finances: Torexample, tariff increases tripled NPC's rate of return between 1991-92,from 2% to 7*. In fact, although NPC's situation in the last two years wasunusually difficult due to the drought and power outages, its net incomesurged from a deficit of US$135 million in 1991 to a surplus of US$168million in 1992 and US$110 million in 1993. In addition, NPC's powerinvestments doubled in 1993; thus, it achieved the covenanted 8% rate ofreturn on revalued assets. The project also involves other tariffimprovements such as the adjustment scheme recently approved by the EnergyRegulatory Board (ERB) that will compensate NPC for variations in the cost

of fuel and purchased energy and make future tariff adjustments largelyautomatic. These measures would ensure an adequate financial performance infuture years.

9. Lessons Learned from Previous Ba,ik ODerations. Between 1957-75,the Bank financed three hydro projects, two thermal plants, onetransmission project and one rural electrification scheme. Three loanswere also approved for coal, oil and geothermal exploration. ProjectPerformance Audit Reports (PPARs) were prepared for two projects with NPC(the fourth and seventh projects, PPAR No. 0980 and PPAR No. 8574). Themajor problems identified in the PPARs were implementation delays and costoverruns due to project design changes, cumbersome contract awardprocedures, and weak project management. Because of a disagreement onpolicies, the Bank discontinued lending until 1988, when it approved theBacon Manito Geothermal Project (Loan 2969-PH). In 1988-89, two otherprojects were approved for the Manila Power Distribution System (Loan 3083-PH) and for the Energy Sector Project (Loans 3163-PH, 3164-PH and 3165-PH).These projects financed sector investments and supported improved sectoralpolicies regarding investment strategy, financing and coordination. Theyare generally being implemented satisfactorily, but NPC had problemsachieving the covenanted rate of return in 1991, and, in the Bacon Manitoproject, although power generation started satisfactorily in October 1993,the completion of other transmission lines required a one year extension ofi:he closing date. The Bank has tried to resolve these problems bysupporting the establishment of an improved regulatory framework, placingthe responsibility for each project under a Project Director, improvingprocurement processes, bidding turnkey contracts rather than separatecomponents, implementing advance contracting and requiring theestablishment of automatic tariff increases. The Power Transmission andRehabilitation Project (Loan 3626-PH) approved in June 1993 will supportinstitutional improvements, rehabilitate the Bataan oil plant and financekey transmission lines required by fast-track private-generation projectsin Luzon. The Leyte-Cebu Geothermal Project (approved in February 1994)started to develop environmentally preferable geothermal energy in Leyte.Through these projects, the Bank is supporting major sectoral improvements,including substantial private sector participation ard institutional andfinancial reforms.

10. Rationale for Bank Involvement. The proposed project isconsistent with the Country Assistance Strategy for the Philippines, whichwas discussed by the Board on February 3, 1994. Developing adequateinfrastructure, particularly power supply, is one of the highest priorityin the Bank's country lending strategy; the lack of it is the mostconstraining factor in the country's economic development. The projectwould help alleviate the power crisis, expand base-load power capacity(financed by the private sector) and help expand and reinforce thetransmission system. With Bank support, the Government has alreadyimplemented far-reaching reforms in the power sector, as it has adoptedpolicies and strategies and made institutional improvements which conformwith Bank policy. Bank intervention in the sector has been critical inhelping define the improved policies and actions in the Energy SectorAction Plan, establishing the DOE and strengthening NEPC's finances andinstitutional arrangements, improving its efficiency and promoting privatesector generation of power to ensure a robust implementation of its powerprogram. Bank support has also been critical in organizing the financial

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engineering required for the Leyte-Luzon Project. By completing the sectorstudy, "Toward Improved Environmental Policies and Management", the Bankhas also promoted a balance between the country's energy development andsound environmental practices.

11. The Government's energy strategy closely follows therecommendations in the Bank's Policy Paper for the power sector. First, NPCis trans'rring almost all its responsibility for incremental powergeneration to the private sector (requiring investments of about US$1.2billion per year for power generation). Second, the basis for future tariffadjustments has been established, which will ensure NPC's long-termfinancial viability, including the indexation of its tariffs to fuel costsand purchased energy. Third, a transparent regulatory framework that coversthe entire energy sector and provides adequate protection for producers,distributors and consumers was created under an independent, quasi-judicialregulator (ERB). Fourth, NPC is substantially improving its corporatepolicies and commercializing its operations: For example, it is enteringinto management contracts with the private sector. Finally, the EnergySector Plan provides for measures that, along with demand charges, willfurther improve demand-side management and energy conservation. As a resultof these actions, the sector can now grow vigorously and attract resourcesfrom private sources, the Bank Group and other bilateral and multilateralagencies.

12. Project Obiectives. The objectives of the proposed Leyte-LuzonGeothermal project are to: (a) meet the rapidly increasing demand for powerin Luzon using indigenous and environmentally superior geothermal energy;(b) strengthen the energy sector by implementing institutional, planningand financial measures recommended by the ESP; (c) support the large,ongoing private sector participation in power generation, and facilitate itin other areas by extending the national grid; (d) strengthen NPC'scapacity to analyze its environmental and social impacts; (e) introduce ECOco-financing in the Philippines; and (f) ensure the financial viability ofNPC and PNOC-EDC for undertaking a long-overdue investment program.

13. Project Description. The project includes the followingcomponents: (a) PNOC-EDC would develop a 440 MW geothermal energy field toexpand Leyte geothermal capacity from 200 MW to 640 MW, including: (i)drilling about 65 additional producer and injector wells in Malitbog,Mahanagdong and Alto-Peak; (ii) contracting technical services forgeothermal drilling; (iii) constructing steam gathering systems; (iv)constructing the related subtransmission systems in Leyte; (v) constructinga pilot reinjection plant for C02; and (vi) recruiting consultants to assistwith project implementation; (b) PNOC-EDC would also enter into BOTcontracts with private sector companies to construct and operate 440 MWgeothermal power plants; and (c) NPC would (i) contract two high voltage DC(HVDC) monopole converter stations and related electrode stations at Ormocand Naga, to be financed by US$100 million foreign bonds operationsupported by an Expanded Cofinancing Operation (ECO) of the Bank; (ii)construct overhead transmission lines in Leyte (about 77 km at 230 kV);(iii) install a submarine cable (about 19 km at 350 kV, 440 MW) crossingthe San Bernardino Strait (19 km) and linking the Leyte-Luzon lines; (iv)construct a twin circuit HVDC overhead transmission line from Ormoc toMatnog cable terminal (about 176 km at 350 kV) and from Cabacungan to Naga(about 256 km at 350 kV); (v) rehabilitate the Naga-Tayabas transmission

line (about 205 km at 500 kV); (vi) recruit two advisers for strengtheningits environmental and social engineering departments; and (vii) recruitconsultants to design the Casecnan hydroelectric project and to supportproject implementation.

14. Prolect Imnlementation. NPC will implement the transmissioncomponent and PNOC-EDC will undertake the geothermal development componentand contract the generation plants with the private sector. PNOC-EDC hasalready signed three BOT contracts for power generation in Leyteaggregating to 536 MW (for both Leyte-Cebu and Leyte-Luzon). These energyconversion agreements use the same basic contract employed by NPC for otherBOT projects, and were signed in September-October 1993 with Ormat Inc.(125 MW), Magma Power Company (231 MW) and California Energy Company and CEPhilippines Ltd. (180 MW), including 180 MW for Leyte-Cebu and 356 MW forLeyte-Luzon. Since the project construction will take five years, there isadequate time to contract the additional 100-140 MW BOT capacity. The BOO(build-own-operate) contract between NPC and PNOC-EDC to supply electricitywas signed prior to Board presentation. The project preparation requiredconsiderable financial engineering by the Bank to complete a largefinancial plan for a complex project. In fact, the project financing wouldhave not been feasible without Bank support and technical assistance. Theproject cost is estimated at US$1266.9 million equivalent, with a foreignexchange component of US$1095.5 million equivalent (86% of totai). Thetotal financing required, including interest during construction, isUS$1333.6 million and includes two proposed Bank loans, for a total ofUS$227 million (17.0* of total), US$114 million to PNOC and US$113 millionto NPC. PNOC and NPC will bear the foreign exchange and interest rate risksfor the loan, which will be guaranteed by the Government.

15. The remaining financing would be provided by: (a) internal cashgeneration of US$133.9 million (18.8% of the total excluding the BOTs), ofwhich US$92.0 million is from PNOC and US$41.9 million is from NPC); (b)JEXIM would jointly cofinance US$170 million with the Bank (US$114 millionfor PNOC and US$56 million for NPC, 12.7% of the total), which would reviewproject procurement and the awarding of contracts; (c) a Global EnvironmentTrust (GET) grant of US$30 million equivalent (2.2% of the total) to theGovernment to be made available on a grant basis in equal parts to NPC andPNOC. The grant makes the geothermal alternative more competitive with aleast-cost coal plant; (d) foreign bonds for US$100 million (7.5%) tofinance the converter stations, to be supported by an Expanded CofinancingOperation (ECO); (e) a grant from the Swedish Government of about US$39million equivalent (2.9%); (f) three BOT contracts for the generatingplants (totalling US$620.4 million, or 46.5% of the total); and (g) US$13.3million (1%) of ongoing geothermal exploration being carried out under theEnergy Sector Project (Loan 3164-PH).

16. Advance contracting has been used to better define the largeinvestment and financing needed. Retroactive financing of up to US$21million (10% of the proposed loan) is included for project expendituresincurred after August 1993. A breakdown of costs and the financing plan areshown in Schedule A. Amounts and methods of procurement and disbursements,and the disbursement schedule are shown in Schedule B. A timetable of keyprocessing events and the status of Bank Group operations in thePhilippines are given in Schedules C and D, respectively. A map is also

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attached. The Staff Appraisal Report No. 12568-DH, dated May 9, 1994 isbeing distributed separately.

17. The ProDosed ECO Cofinancinc. The proposed first ECO operationin the Philippines would support a US$100 million bond operation in theEurobond market, which would include a tranche for placement in the UnitedStates pursuant to the SEC's Rule 144A. The bonds would have a tenor of 15years. Based on initial market soundings, bond markets seem to offer morefavorable conditions than loans to the Philippines. Interest payments onthe bonds would be guaranteed by the Republic of the Philippines. Banksupport would be in the form of a put option. It would be exercisable by aTrustee on behalf of the bondholders during a period commencing shortlybefore and ending shortly after the maturity date, regardless whether NPCdefaulted in its obligations. If the put option were exercised, payment tothe bondholders would, however, occur no earlier than the maturity date.This type of structure was contemplated in the 1989 .iemorandum of thePresident to the Executive Directors on Expanded Cofinancing Operations.The fee for the Bank put option, payable by NPC, would be 0.5% per annum ofthe present value of the principal amount of the bonds, subject to anyapplicable annual waiver. Under a Guarantee and Indemrity Agreement, theRepublic of the Philippines and NPC will agree to purchase the bonds fromthe Bank if the put option were exercised. Although the Philippines hasrestructured its debt within the last five years, it is proposed that thecountry be eligible to use the ECO program since it has had a satisfactorymacroeconomic program in place for some time and has carried out a debtrestructuring operation that has reduced the debt burden to a sustainablelevel.

18. Award of Mandate. NPC invited financing proposals on March 18,1994 from a cross-section of financial institutions from Europe, the US andJapan. Following the evaluation of financial bids, NPC has awarded aconditional mandate to lead and underwrite the bond issue to Morgan StanleyInternational. The mandated terms and conditions, which are indicative atthis stage, are presented in Schedule E. The mandate is conditional upon,and subject to, the authorization of the Bank's Executive Directors tonegotiate the terms of the ECO. Following Board approval of the Projectand to negotiate the ECO, NPC and the Bank would enter into negotiationswith Morgan Stanley to conclude the documentation relating to the ECOfinancing.

19. Benefit3 of the ECO. Some of the benefits of the SCO are clearlyreflected in the proposed financing terms. The ECO would facilitate themobilization of foreign currency funds required for completion of theLeyte-Luzon Project and, more importantly, would extend current marketterms to a credit period commensurate with the requirements of a powerproject with a long economic life and an extended construction period. Todate, the longest maturity achieved for Philippine sovereign issues in anymarket has been 7 years, while the ECO's credit enhancement would extendthe market term to 15 years. This would result in an ECO financingmaturity comparable to that of a Bank loan, thereby ensuring support forNPC on terms compatible with the rest of the financing package for theProject. In addition, the indicative spread range of 1.75% to 2% (seeSchedule E) for a 15 year maturity compares favorably with the pricing sofar achieved for Philippine issues with much shorter maturities, includingthe last NPC bond issue. The ECO would have a substantial leveraging

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effect, with the market assuming Philippine sovereign risk for interestpayments over 15 years, which would represent risk sharing by the market ofalmost 65% in present value terms. The ECO would also help to develop anew investor base for the Philippines by catalyzing 4.nstitutional investorinterest. This is likely to be important for both tNJC and the country inlight of its substantial future infrastructure investment requirements andthe need to diversify the country's borrowing sources.

20. Consent of the Relevant Countries. In accordance with ArticleIV, Section 1 (b) of the Articles of Agreement, the consent of the UnitedStates, as well as other relevant countries, would be sought for theproposed ECO prior to the launch of the bond issue.

21. Prolect Sustainabilitv. In developing and implementing the ESP,the Government has provided a sound environment in which the sector cangrow and strengthen its organization, planning and finances. NPC hasalready taken important steps that will require greater responsibility andaccountability from regional managers, has named project directors,improved its procurement systems and made plans to substantially increasestaff salaries, which would allow it to hire and retain competent staff. Inturn, these actions will improve project implementation and plantmaintenance. NPC's revised tariff structure, and particularly the approvedsystem of automatic adjustments for fuel and purchase energy costs, willensure adequate resources to cover its operation and debt service and helpfinance the large investment needed in the power sector. PNOC-EDC's.operation and maintenance of renewable geothermal resources (under previousprojects) has been satisfactory and is expected to continue as such. Thejoint action envisioned between PNOC-EDC and private BOT contractors willensure that power generation under the project will be reliable.

22. Acrreed Actions. Considerable progress has been achieved in thesector through the implementation of the ESP and key reform actions, and bythe approval of tariff increases for NPC. In addition, the followingactions have already been completed: (a) the implementation of a fuel andpurchase cost adjustment system (which will index about 82% of NPC costs);(b) the signing of energy conversion contracts between PNOC-EDC and threeBOT contractors for about 540 MW (of which 340 MW is allocated to Leyte-Luzon); (c) the appointment (by NPC and PNOC-EDC) of high-level ProjectDirectors for their project components; and (d) the signing of a Boocontract between PNOC-EDC and NPC for the supply of power under theproject. The signing of a 10-year power supply contract between NPC andMERALCO would allow the Government to properly define future capacityadditions and is a condition of effectiveness for the NPC loan. In order toensure that the large financing required by the project is in place, thefollowing are conditions of cross-effectiveness: (a) the signing of asubsidiary loan agreement between PNOC and PNOC-EDC; (b) the signing of BOTcontracts with PNOC-EDC for 300 MW; (c) the effectiveness of the GET grantagreement; and (d) the effectiveness of the JEXIM cofinancing loans.Failure to obtain financial closure by December 31, 1994 on foreign bondsfor US$100 million for the converter stations, (which are supported by theECO) or for the BITS grant, or to obtain such funds from other sourceswould give the Bank the right to suspend the NPC loan.

23. Agreement was also reached at negotiations on the following: (a)the Government will carry out the ESP and exchange views with the Bank on

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its implementation; (b) the Government and NPC would annually review withthe Bank the power development plan; (c) the Government would repay NPCoutstanding tax refunds according to an agreed plan; (d) NPC would: (i)annually review with the Bank the implementation of the recommendations ofthe Efficiency and Operational Improverent Study; (ii) achieve an after-taxrate of return on its net revalued fixed assets in operation not lower than8 and a debt service ratio higher than 1.3; (iii) carry out the project inaccord with environmental standards acceptable to the Bank; (iv) carry outa Relocation and Compensation Plan satisfactory to the Bank; (v) strengthenits environmental and social engineering departments by adding two advisersand at least five qualified staff; (vi) introduce demand charges (as acondition for goods disbursements under the NPC loan); and (vii) conduct asatisfactory valuation of its fixed assets and update it annually; and (e)PNOC Energy Development Corporation (PNOC-EDC) would: (i) carry out theproject in accord with environmental standards acceptable to the Bank; (ii)carry out a Resettlement Plan satisfactory to the Bank; (iii) maintain adebt-equity ratio not to exceed 70:30; (iv) maintain a current ratio notlower than 1.0; and (v) maintain a debt service ratio not lower than 1.25.Understandings weze also reached with the Government, NPC and PNOC on theimplementation, in a timely fashion, of an Action Plan that include projectand institutional improvements.

24. Environmental Aspects. After the mitigation measures in theEnvironmental Assessment are implemented, the project will only have aminor environmental impact; however, it will considerably reduce localpollution and global warming. This is because the C02, SOx and particulateemissions from the project will be small, in fact, only a fraction of whatwould otherwise be emitted by alternative coal or oil plants.Environmental impacts include minor deforestation at the site of thegeothermal plants and near the transmission lines (an Environmental Summaryfor the total Leyte Geothermal development was circulated to the Board onJune 30, 1992 and an update covering the capacity expansion from 350 MW to700 MW was circulated on June 22, 1993). The geothermal component isexpected to displace about 127 families (mainly as a result of H2S odors),whom PNOC-EDC would resettle within a short distance from their existingresidences. The resettlement plan prepared by PNOC-EDC is satisfactory andintends to increase the income and living standards of the familiesaffected. Transmission lines will be routed along existing roadways andhave been designed to avoid any environmentally sensitive areas andminimize the impact of the right-of-way on houses or crops. Nevertheless,some relocation (normally within a few meters) and compensation for theright-of-way will be needed for 361 households. NPC's Relocation andCompensation Plan for the transmission lines has been agreed upon andincludes satisfactory policies on resettlement and compensation for anypersons affected.

25. Prolect Benefits. The project would establish a reliable,environmentally superior power supply for the Luzon region, which includesMetro Manila, the largest industrial and population center in t aPhilippines. It would also irterconnect the total country through the Leytesystem, which would dispatch power in an optimal manner and reduce theresarve capacity required in the individual systems. The use of geothermalsteam for power generation, followed by re-injection of the exhaust liquidinto the ground, has considerable environmental advantages over otherfossil fuels in terms of reducing C02 emissions (and other gasses

- 10 -

responsible for global warming), sulphites, particulates and NOX.Therefore, the GEF's support would have a meaningful impact on globalwarming, since CO2 emissions from alternative coal-fired based plants wouldbe about 10-15 times larger. Also, the project would establish a soundbasis for sector development by restructuring and strengthening it,improving NPC's corporate efficiency, policies and finances, and increasingthe private sector participation in power generation. The project'seconomic rate of return, based on existing tariffs, is 11%, which issatisfactory.

26. Risks. In the past, NPC's slow procurement procedures have oftendelayed implementation; however, NPC has reorganized its procurement systemand key bids will be awarded before Board presentation. Further, asubstantial part of the project would be implemented by private BOTcontractors and PNOC-EDC; and, to minimize such delays, NPC and PNOC-EDChave appointed high-level Project Directors (supported by staff andconsultants) to coordinate all project activities. Another risk is that thelarge financing required for the project will not materialize, butcofinancing commitments have been received and would be confirmed prior tothe loan's effectiveness. The separation into three BOT contracts wouldfacilitate their financing and the replacement, if needed, of any non-performing contractor; moreover, the BOT contracts were awarded in August1993, and would be signed and guaranteed by substantial performance bondsbefore loan effectiveness. A third risk is that the geothermal capacitywill be lower than estimated, but this capacity has been confirmed by PNOC-EDC consultants and certified by independent foreign reviewers; moreover,the Leyte field is expected to yield about 300 MW more geothermal resourcesin nearby Alto-Peak. Finally, there is a risk that tariffs will not beincreased, but this risk has been reduced since present tariffs areadequate, the Energy Regulatory Board has approved the principles forsetting NPC's tariffs and automatic tariff adjustments for fuel costs andpurchased energy have been approved. The new Government has targeted theenergy problem as a top priority and has successfully restored NPC'sfinancial viability.

27. Recommendations. I am satisfied that the proposed loans to NPCand PNOC would comply with the Articles of Agreement of the Bank andrecommend that the Executive Directors approve them. I also recommend thatthe Executive Directors authorize the Bank to negotiate the ECO provisionsfor the proposed US$100 million bond operation for NPC, substantially inaccordance with the terms and conditions described in this Memorandum andwith the Operational Guidelines for Expanded Cofinancing Operations. Uponsatisfactory completion of negotiations, approval by the ExecutiveDirectors of the ECO would be sought prior to the launch of the bond issue.

Lewis T. PrestonPresident

AttachmentsWashington, D.C.May 9, 1994

Schedule A

PHILIPPINES

LEYTE-LUZON GEOTHERMAL PROJECT

Estimated Costs and Financing Plan

Estimated Cost Local Foreicrn Total---- (US$ million)---

A. PNOC-GEOTHERMAL DEVEL. 58.6 205.6 264.2Al. GOODS AND EQUIPMENT 5.4 136.0 141.4A2. WORKS 30.1 65.9 96.0A3. TECH. ASSISTANCE & OTHER 23.0 3.8 26.8

B. POWER PLANT (BOT) 52.7 482.3 535.0

C. NPC-TRANSMISSION LINES 30.0 256.7 286.7Cl. SUPPLY & ERECT CONTRACTS 24.9 249.2 274.1C2. TECH. ASSISTANCE & OTHER 5.1 7.5 12.6

TOTAL COST 141.3 944.6 1085.9PHYSICAL CONTINGENCIES 8.8 59.5 68.3PRICE CONTINGENCIES 21.5 91.3 112.8

TOTAL COST WITH CONTINGENCIKS 171.4 1095.5 1266.9Interest During Construction 66.7 66.7TOTAL FINANCING REQUIRED 171.4 1162.2 1333.6

FINANCING PLANIBRD-PNOC 114.0 114.0IBRD-NPC 113.0 113.0Energy Sector Loan (3163-PH)-On going works 13.3 13.3JEXIM-PNOC 114.0 114.0JEXIM-NPC 56.0 56.0BOT-Contract 63.9 556.5 620.4ECO-Supported Bond Issue-NPC 100.0 100.0BITS Grant for Converter 26.6 12.4 39.0GEP Grant PNOC 15.0 15.0GEF Grant NPC 15.0 15.0PNOC Internal Cash Generation 71.7 20.3 92.0NPC Internal Cash Generation 9.2 32.7 41.9

TOTAL FINANCED 171.4 1162.2 1333.6

1] Totals may not add due to rounding.

Schedule B Pacge 1 of 2

Suumary of Proposed Procurement Arrangements (US$ Million equivalent)

Procwremet tbtd ICB L us Other WS Total

1A.WOR= (FPWC) 62.2 0.0 W0.0 o.0 24.5 116.7(36.6) 0,0 (4.0) 0.0 (0.0) (40.8)

Civil, Structural 33.1 9.7 42.8(17 . 1 (0. 0) (17 .1)

Drilling Tech. Services 14.8 14.8(0.0) (0.0)

Insulation, Elect.Mechan. 27.2 10.0 37.2(10.9) (4.0) (14.9)

Tranem. & Substations 21.5 21.9(8.o) (8I.0)

18.00ODS (PNOC) 163.1 12.0 0.0 0.0 1.8 166.9(65.1) (6.0) (0.0) (0.0) (0.0) (71.2.)

Rig Lease 50.1 50.1(25.1) (25.1)

Drilling Materials 40.6 12.0 52.6(8.8) (6.0) (O.0) (0.0) (0.0) (14.8)

Pipes & Valves 35.6 35.6(17.8) (17.8)

Other Equipment 7.9 7.9(4.0) (4.0)

Pilot C02 Reinjection 0.0 1.8 1.80.0 (0.0) 0.0

Transmission & Substations 19.0 19.0(9.S) (9.6)

1c.0MVwLTMK= 0 U 0.0 0.0 0.0 4.3 27.3 31.60.0 (0.0) (0.0) (.-1) (0.0) (2.1)

Technical Assist. (Pl4OC) 4.3 4.3(2.1) (2.1)

Compensation & Adminlstration 27.3 27.3(0.0[ (0.0-)

TOTAL PNOC 235.3 12.0 10.0 4.3 S3.6 31S.1(101.8) (6.0) W4.0) (,41.) (t) (1t14.0)

2. DOM PpOwm wM=W 620.4 620.4I(0.0) (0.0)

3A.GOODB & INSTZLLATIC tlaC) 190.3 0.0 0,0 0.0 126.6 316.9(106.4) 0.0 0.0 0.0 (0.0) C1S.4)

Converter, Blectr.& Statio 0.0 126.6 126.6(0.0) (0.0) (0.0)

Luson EVDC T/L & Blect. 66.S 65.5(20,9) (20.9)

Submarine Cables 68.4 68.4(33.1) 113.1)

Naga-Taysbas T/L 56.4 S6.4(52.4) (62.4)

3B.0ONSTMNCIS & n .S 6.9 14.6(6.6) (0.0) (6.6)

Technical Assist. (NPC) 2.9 2.9(1.4) (1.4)

Enviromental Advisor 0.5 O.S(0.0) (0.0Wy

Hydro design 5.2 5.2(6.2) (6.2)

Compensation & Admin. 5.9 5.9(0.0) (0.0)

_ __* _t __ + _.O ._,_......... _. ..............

TYThAT NIC 190.3 0.0 0.0 8S 132.5 321.4(16.4) 0.0 0.0 (6.6) (0.0) (t13.0)

TOS PRp;ImCr 425.6 12.0 10.0 12.11 806S. 1.266.9(208.2) (6.0) (4.0) (3.81 W0.) (227.'0)

Note: Figures in parenthesis are the respecdve amounts financed by dte Bank loans.ICB: interaional competitive biddin. LIB: limited intenational bidding.NBF: Not-Bank-financed includes parallel coflnancing components, taxes and admstadon.Otber Odher inchudes consultancies.

Schedule B Paq6 2 of 2

Disbursements

Category Amount % of Expenditures to be FinancedUS$ NMilonl

Phlippine National OilCompany:Works for drilling geothermal 40.8 40%wells, steam gathering andtransmission systems

Goods for drilling geothermal 71.1 50% of foreign expenditures, 50% of localwells, steam gathering and expenditures (exfactory) and 35% oftransmission systems expenditures for other items procured locally!,.

Consultant's Services 2.1 50%11.

Subtotal PNOC 114.0

National Power CorporationGoods & Installation submarine 33.1 50% of foreign expenditures and 50% of localcable expenditures (exfactory) for goods and 50% for

related installation.

Goods and installation HVDC 20.9 50% of foreign expenditures, 50% of localLuzon Transmission Line expenditures (exfactory) and 35% of

expenditures for other items procured locallyand 50% in respect to related installationl,.

Goods and installation Naga- 52.4 100% of foreign expendituresTayabas transmission line

Caseenan hydro consultancy 5.2 100%

Consultant services for project 1.4 50%implementation

Subtotal NPC 113.0

Total 227.0

Estimated Disbursements:

Bankc Fiscal Year FY94 FY95 FY96 FY97 FY98 FY99------ (US$ million) ------

Annual 0.0 30.2 62.8 62.5 56.4 15.0Cumulative 0.0 30.3 93.1 155.6 212.0 227.0

Al Jointy coflnaied with the Japan Import and Export Bank

Schedule C

PHILIPPINES

LEYTE-LUZON GEOTHERMAL PROJECT

Timetable of Key Project Processina Events

(a) Time taken to prepare the project: 4 years

(b) Prepared by: PNOC and NPC

(c) First Bank mission: June 1989

(d) Completion of the appraisal: July 8, 1993

(e) Negotiations: March 10-18, 1994

(f) Planned date of effectiveness: August 1994

(g) List of relevant PCRs and PPARs: Fourth Power Project (PPAR P-0980);Fifth Power Project (PCR P-4388);

Six Power Project (PCR P-4847)Rural Electrification Project (PPARP-5732);Coal Exploration Project (PCR P-6960)Seven Power Project (PPAR No. P-8574)

This report is based on the findings of an appraisal mission consisting of ClaudioFernandez (Principal Financial Analyst), John Irving (Senior Power Engineer),Moiffak Hassan (Petroleum Specialist Engineer), Enrique Crousillat (EnergyEconomist) and P. T. Venugopal (Financial Consultant) who visited the Philippinesin June 1993. The report was edited by Mrs. Barbara Koeppel. Peer reviewers wereMessrs. Rafael Moscote, Albert B. Gulstone and Jamil Sopher. The project wascleared by Mr. Callisto E. Madavo, Director EA1, and Mr. Vineet Nayyar, Chief,

EA1IE.

Schedule 0Page 1 of 3

STATUS OF BANK GROUP OPERATIONS IN PHILIPPINES

A. STATEMENT OF BANK LOANS AND IDA CREDITS La(As of March 31, 1994)

Amount (US$ million)Loan or (less cancellations)Credit Fhscal Undis-Number Year Borrower Purpose IRD IDA& bursed

One hundred and forty-seven loans and seven credits have been fully disbursed 4,764.65 171.18

Of which SALs, SECALs and Program Loans

1903 1981 Repubiic of the Philippines SAL 199.962266 1983 Republic of the Philippines SAL 11 302.252469 1985 Republic of the Philippines Agriculture Sector inputs 150.002787 1987 Republic of the Philippines Economic Recovery Program 300.002966 1988 Republic of the Philippines Program for Govt. Reform 200.003049 1989 Republic of the Philippines Financial Sector 300.002277 1991 Republic of the Philippines Environment & Natural Res. Mgt. 66.00

1,452.21 6.00

2418 1984 Republic of the Philippines Highways V 95.00 8.062435 1984 Republic of the Philippines Municipal Development 40.00 4.092676 1986 Republic of the Philippines Manila Water Distribution 38.00 3.232716 1986 Republic of the Philippines Rural Roads Improvement II 82.00 18.662823 1987 Republic of the Philippines Provincial Ports 32.00 3.182969-1 1988 Republic of the Philippines Bacon-Manito Geothermal Power 59.00 14.923084 1989 Dev. Bank of the Philippines Manila Power Distribution 65.50 31.173099 1989 Republic of the Philippines Health Development 70.10 27.473124 1990 Metro. Waterworks & Sew. Angat Water Supply 40.00 2.713146 1990 Republic of the Philippines Municipal Development II 40.00 18.343163 1990 Philippines National Power Corp. Energy Sector Loan 200.00 13.203164 1990 Philippines National Oil Co. Energy Sector Loan 150.00 71.593165 1990 .Republic of the Philippines Energy Sector Loan 40.00 14.653204 1990 Republic of the Philippines Coconut Farms Development 121.80 96.483242 1990 Republic of the Philippines WS/Sewer/Sanitation I 58.00 41.123244 1991 Republic of the Philippines Second Elementary Education 200.00 117.623261 1991 Republic of the Philippines Communal Irrigation II 46.20 39.073263 1991 Republic of the Philippines Earthquake Reconstruction 125.00 37.583287 1991 Republic of the Philippines Industrial Restructuring 175.00 4.853356 1991 Republic of the Philippines Rural Finance 150.00 9.523360- 1991 Republic of the Philippines Env. & Natural Res. Mgt. 158.00 51.643430 1992 Republic of the Philippines Highway Management 150.00 149.183435 1992 Republic of the Philippines Engineering & Science Educ. 61.00 56.823439 1992 National Electrif. Adm. Rural Electrification 91.30 . 91.293455 1992 Republic of the Philippines Municipal Development III 68.00 67.952392 1992 Republic of the Philippines Second Vocational Training 36.00 36.402606 1993 Republic of the Philippines Urban Health & Nutrition 70.00 71.323523 1993 Dev. Bank of the Philippines Telephone System Expansion 134.00 134.0035390 1993 Republic of the Philippines Economic Integration 200.00 80.003603 1993 Republic of the Philippines Tax Computerization 63.00 80.713607 1993 Republic of the Philippines Irrigation Operation Support II 51.30 51.163626 1993 Philippines National Power Corp. Power Transmission & Rehab. 110.00 96.673700 1994 National Power Corporation Leyte Cebu Geothermal 147.00 147.003702 1994 Philippines National Oil Co. Leyte Cebu Geothermal 64.00 64.00

Total 7,889.85 277.18 1,626.92of which has been repaid 43 7 a407Total now held by 8ank and IDA 5,585.13 269.13

Amount sold 31.35Of which repaid 31.35

Total Undisbursed 1_626-92 107.72 1,734.64

a The status of the projects listed in Part A is described in a separate report on all IBRD/IOA-financed projects in execution, which is updatedtwice yearly and citculated to the Executive Directors on April 30 and October 31. Amounts are presented net of cancellations.

2 Principal amounts in US$ equivalent at date of negotIations, and undisbursed amounts in equivalent are valued at exchange rate applicableon the date of this statement.Indicates SAL/SECAL Loan and Credits.

Schedule DPage 2 of 3

8. STATEMENT OF IFC INVESTMENTS(As of March 31, 1994)

Total Undisbursedheld including

Oriainal Commitments by IFC participants'Fiscal Loan Equity Total (at cost) portionYear Obligor Type of Business US$ million

1963n3 Private Dev. Corp. of the Phi. Development Finance 16.0 4.4 19.4 -

1967189 Manila Electric Co. Utilities 33.2 4.0 37.2 26.91970/86/ Philippine Long Distance Tel. Co. Utilities 127.7 0.8 128.5 68.9 16.788/90

1970/72 Mariwasa Manufacturing Co. Construction Materials 0.8 0.4 1.21970 Paper Industries Corp. Pulp & Paper * 2.2 2.2 - -

1971/77 Philippine Petroleum Chemicals/Petrochem. 6.2 2.1 8.31972 Marinduque Mining & Ind. Corp. Mining 15.0 15.01973 Victorias Chemical Corp. Chemical 1.9 0.3 2.21974 Filipinas Synthetic Fiber Corp. Textiles & Fibers 1.6 - 1.51974179 Maria Cristina Chemical Ind. Electro-chemicals 1.6 0.6 2.2 0.41974 RFM Corporation Food & Food Processing 1.2 1.2 -

1975 Phil. Polyamide Ind. Corp. Textiles & Fibers 7.0 - 7.01976 Philagro Edible Oils, Inc. Coconut Oil & Copra 2.7 0.2 2.91977 Sarmiento Ind. Plywood 3.5 3.51977 Acoje Mining Co. Inc. Mining 3.2 0.5 3.7 1.31978 Cebu Shipyard & Engineering Works Ship-repairing 2.1 - 2.1 -

1979/90 General Milling Corporation Food & Food Processing 4.0 1.7 6.7 1.71980 Ventures in industry & Business Venture Capital 0.2 0.2 -

Enterprise, Inc. (VIBES)1980/83/85 All Asia Capital & Leasing Equipment Leasing 11.1 0.8 11.9 1.11980 Consolidated Ind. Gas, Inc. pl Industrial Gases 4.5 4.5 -

1981 Philippines Associated Smelting Copper Smelting 5.0 6.0 .5and Refining Corp. (PASAR)

1981 Davao Union Cement Corporation Cement 16.0 .8 16.8 .81981 Loans to Small & Medium Scale Capital Markets 18.0 1.1 19.1

Ent. (SMSE) p/1983 NDC-Gutie Plantations, Inc. Agribusiness 11.0 - 11.0 .91985 Philippine Overseas Contractors Construction 38.0 38.01986191 Purefoods Food Processing 4.2 4.2 4.51988 BPI Agribank Financial Institution 1.0 1.0 1.01988 Philfund Debt Conversion Fund 4.2 4.21989 Kewalram Phil. Inc. l/ Textiles & Fibers 3.0 3.01989 AG & P Construction 10.0 10.0 -

1989 Hambrecht & Quist Capital Fund 2.3 2.3 2.31990 Hopewell Energy Power 10.0 1.1 11.1 7.11990 Manila Fund Money & Capital Markets 7.0 7.01990 First Phil. Ftund Money & Capital Markets * 29.7 29.7 -1990 Avantex Mill Corp. Textiles 11.3 2.3 13.6 11.81990 Makati Shangri-La Tourism 59.0 - 59.0 27.9 4.71991 Best Chemicals Chemicals 6.5 2.3 8.8 7.41991 Automated Microelectronics Electronics 9.0 2.8 11.8 .21991 PCI Sank I/ Financial Institution 20.0 - 20.01991 Mactan Shangri-La Tourism 24.0 24.0 12.01992 Bacnotan Cement Corp. Cement 18.0 5.3 23.3 26.7 3.11992 Pilipinas Shell Petrochemicals 120.0 15.0 135.0 50.0 81.01993 Hopewell Power Power 100.0 10.0 110.0 70.0 71.01993 Northern Mindanao Power 38.5 9.5 48.0 17.0 21.91993 H & QPV II Capital Fund 2.5 2.5 2.5 2.5

Subtotal 754.3 124.4 878.8 343.1 201.0

Schedule DPage 3 of 3

Total Undisbursedheld including

Oridinal Commitments by IFC participantsFiscal Loan Equity Total (at cost portionYear Obligor Type of Business US$ million

Approved but not yet signed

1992 Filsyn 11 Textile & Fibers 40.0 6.0 46.0 25.0 46.01994 Walden Management Capital Markets .1 .1 .1 .11994 Walden Ventures Capital Markets - 3.8 3.8 3.8 3.8

Total Gross Commitments 794.3 133. 9 27. 371.9 249.8

I/ Subsequently cancelled.k/ Guarantees.

Less than USS0.6 million.

Schedule E - Page 1

PHILIPPINES

LEYTE-LUZON GEOTHERMAL PROJECT

Summary of the Proposed Expanded Cofinancing Operation (ECO)

Issuer: National Power Corporation (NPC).

Guarantor: Republic of the Philippines (ROP): Payment of interest on the Bonds.

Investors: Institutional and retail investors in the Eurobond and US 144A markets.

Lead Manager: Morgan Stanley International.

Currency: U.S. Dollars.

Amount: US$100 million.

Use of Proceeds: The proceeds of the Bonds will be used to provide part of the fmancingrequirements for the high voltage converter stations of the transmission lines of theLeyte-Luzon Geothermal Project, to be supplied under a contract awarded by NPCto Asea Brown Boveri of Sweden, and for spare parts purchased in connection withthe Project.

Drawdown: NPC will receive the full amount less fees and commissions on the closing date ofthe issue. The entire net proceeds of the Bonds will be credited to a special accountin the name of NPC. Subsequent drawdowns from the special account will be madeto meet expenditures on the contract as they are incurred. The special account willbe audited annually by independent auditors acceptable to the World Bank and theaudit reports will be submitted to the World Bank.

Maturity: 15 years.

Repayment: Bullet repayment at maturity.

Indicative Re-offerSpread: 1.75%-2.00% per annum over 10-year US Treasury securities.

Coupon: Fixed rate, payable semi-annually in arrears.

Commissions: 0.9375% flat.

Syndication Strategy: Fixed price re-offer method.

Listig: Luxembourg.

Trustee: To be appointed.

Option Trustee: To be appointed.

Schedule B - Paae 2

Expenses: NPC shall reimburse the Lead Manager for all reasonable out-of-pocket expensesincurred in the negotiation, syndication, listing and execution of this Bond issue, upto a maximum of US$250,000.

Taxes and OtherDeductions: All payments to be made under or in connection with the Bonds to be free and

clear of any Philippine taxes, withholdings or other deductions whatsoever.

Documentation: Customary Eurobond/Rule 144A documentation, including a Prospectus,Subscription Agreement, Deed of Trust and Bonds. Special provisions will beincluded to reflect the World Bank's participation, to provide disclosure of materialinformation on the World Bank and terms of the put option provided by the WorldBank, which will be governed by an Option Trust Deed.

World Bank ECOProvisions: Put option granted by the World Bank and exercisable by an Option Trustee on

behalf of the Bondholders, regardless of NPC default, during a period commencingapproximately one month before and ending approximately one month after thematurity date. If exercised, payment to Bondholders would occur approximatelyfive days after notice of exercise, but in no event earlier than approximately sevendays after the maturity date. If the put option is exercised, the World Bank wouldpay out against delivery of the Bonds. The World Bank would be entitled toimmediate redemption of the Bonds by NPC or the ROP.

Put Option Fee: A fee of 0.5 percent per annum, less any applicable waivers, on the Bank's ECOexposure, payable by NPC on a semi-annual basis, in accordance with the Bank'scurrent ECO pricing policies.

Guarantee and Indemnity byROP and NPC: The ROP and NPC will enter into a Guarantee and Indemnity Agreement with the

World Bank in respect of the ECO. Under the agreement, NPC and the ROP wouldagree to purchase the Bonds from the World Bank if the put option is exercised,and will indemnify the World Bank in respect of any costs and expenses relating tothe put option.

Requisite Authorization: All requisite authorizations and approvals required to make the put option effectivewould have to be obtained and be in full force and effect.

Goveming Law &Jurisdiction: The laws of England. Non-exclusive jurisdiction will be vested in the courts of

England. In this regard, NPC and the ROP will appoint agents for service ofprocess in England and will waive all immunity from suit, attachment and/orexecution of judgment which they now enjoy or might enjoy in the future.

The Guaranwee and Indemnity Agreement will follow the legal regime, and icludedispute settlement provisions, which are customary in agreements between membercountries and the World Bank.

PHIUPPINES

3 -~ LEYTE - LUZON GEOTHERMAL PROJECTAtooxg'\ / WLUZON - VISAYAS TRANSMISSION SYSTEM

CurriTmo4 ta/ > C1~~~~~~~~~~~~~~~~~~~~~~~~N PROPOSED

Ban.ay I EXSESNG GENG PROJECC A R Tuouegoroo --- VC MONO POLA UNES WIN CIRCUITI

-- 500 kV TRANSMISSEON UNES

San + ' lPP Bu,ay .- 230 yV TRANSMISSION LNES

Esabean " AI=Pc0i *| SEAINE CALE ERMINAIS

I -- 11 5 138 kV TRANSMISSION LNES

ILO C G S A YAAAN NI ~~~~~~~~~~~~~' Q~~~~~~~~~~= HYDEREMIPOWER STAT S

/ ': i t 5/ I O 0 TERMAL POWER STATIONS

j 0* C C GEOTnERMAL POWER PrLANT

Baoang / A rbku -

-JOg pg c 7L )]ono S - - , P IPROVJNCEBOUNDARIES

3\- _- , _ . .. REGKON BOUNDAPIES

-t6 Sua t San ;iguel * ' / 16

tai,racor *4,\,' '._'

so'r; \ ~~~~~ ~~~~ ~~~~~~~~~~~~~~~~~0 s 00 15 2MO

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A. Tohsay ~~~~~~~IEASTERNI ° ' '' / " \ c n VASAYAS

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22' ~ ~ P4npns 124'. 120 t