Conformed Copy - L3084 PH- Manila Power Distribution Project - Project Agreement

Page 1 CONFORMED COPY LOAN NUMBER 3084 PH (Manila Power Distribution Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and MANILA ELECTRIC COMPANY Dated August 2, 1989 LOAN NUMBER 3084 PH PROJECT AGREEMENT AGREEMENT, dated August 2, 1989, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and MANILA ELECTRIC COMPANY (MERALCO). WHEREAS (A) by the Loan Agreement of even date herewith between Development Bank of the Philippines (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to sixty five million five hundred thousand dollars ($65,500,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that MERALCO agree to undertake such obligations toward the Bank as are set forth in this Agreement; (B) by a subsidiary loan agreement to be entered into Page 2 between the Borrower and MERALCO, the proceeds of the loan provided for under the Loan Agreement will be made available to MERALCO on the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS MERALCO, in consideration of the Bank's entering into the Loan Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Loan Agreement, the Preamble to this Agreement and the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. (a) MERALCO declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Loan Agreement, and, to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and public utility practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section, MERALCO shall carry out the Project in accordance with sound environmental protection measures. Section 2.02. Except as the Bank shall otherwise agree, procurement of the goods and works required for the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of the Schedule to this Agreement. Section 2.03. MERALCO shall carry out the obligations set forth in Sections 9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the Project Agreement. Section 2.04. MERALCO shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Bank shall otherwise agree, MERALCO shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) MERALCO shall, at the request of the Bank, exchange views with the Bank with regard to progress of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Loan. (b) MERALCO shall promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of Loan, or the performance by MERALCO of its obligations under this Agreement and under the Subsidiary Loan Agreement. Section 2.06. MERALCO shall by June 15, 1989, appoint a Project Manager with qualifications and experience acceptable to the Bank. ARTICLE III Page 3 Management and Operations of MERALCO Section 3.01. MERALCO shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and public utility practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. MERALCO shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and public utility practices. Section 3.03. MERALCO shall take out and maintain with responsible insurers, or make other provision satisfactory to the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. Section 3.04. (a) MERALCO shall at all times maintain its corporate existence and right to carry on its operations, and take all steps necessary to acquire, maintain and renew all rights, powers, privileges and franchises which are necessary or useful in the conduct of its business and for the execution of the Project. (b) Except in the normal course of its business, MERALCO shall not, without the prior approval of the Bank, sell, lease, transfer or otherwise dispose of any of its properties or assets which shall or may adversely affect, in a substantial manner, the efficient operation of its business and undertaking. Section 3.05. During Project implementation period, MERALCO shall implement the Action Plan in order to: (a) reduce system losses; (b) maintain receivable at existing or improved levels; and (c) remain current in meeting MERALCO's obligations towards suppliers and creditors. Section 3.06. By December 31, 1989 and each year thereafter during Project implementation period, MERALCO shall: (a) carry out, in consultation with the Bank and the Borrower, a review of its investment program for the succeeding five years and its investment accomplishments for the preceding two years; and (b) adopt the recommendations arising from these reviews taking into account the comments made by the Bank and the Borrower. ARTICLE IV Financial Covenants Section 4.01. (a) MERALCO shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition. (b) MERALCO shall: (i) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than six months after the end of each such year, (A) certified copies of its financial statements for such year as so audited, and (B) the report of such audit by said auditors of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information Page 4 concerning said records, accounts and financial statements as well as the audit thereof, as the Bank shall from time to time reasonably request. Section 4.02. (a) Except as the Bank shall otherwise agree, MERALCO shall earn, for each of its fiscal years after its fiscal year ending on December 31, 1989, an annual return of not less than 8% of the average current net value of MERALCO's fixed assets in operation. (b) Before November 15 in each of its fiscal years, MERALCO shall, on the basis of forecasts prepared by MERALCO and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Bank the results of such review upon its completion. (c) If any such review shows that MERALCO would not meet the requirements set forth in paragraph (a) for MERALCO's fiscal years covered by such review, MERALCO shall promptly take all necessary measures (including, without limitation, making proposals to the Guarantor for adjustments of the structure or levels of its tariff) in order to meet such requirements. (d) For the purposes of this Section: (i) The annual return shall be calculated by dividing MERALCO's net operating income for the fiscal year in question by one half of the sum of the current net value of MERALCO's fixed assets in operation at the beginning and at the end of that fiscal year. (ii) The term "net operating income" means total operating revenues less total operating expenses. (iii) The term "total operating revenues" means revenues from all sources related to operations. (iv) The term "total operating expenses" means all expenses related to operations, including admini- stration, adequate maintenance, net taxes and payments in lieu of taxes, and provision for depreciation in a manner consistent with the generally accepted accounting principles in the Philippines. (v) The average current gross value of MERALCO's fixed assets in operation shall be calculated as one half of the sum of the gross value of MERALCO's fixed assets in operation at the beginning and at the end of the fiscal year, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to the Bank. (vi) The term "current net value of MERALCO's fixed assets in operation" means the gross value of MERALCO's fixed assets in operation less the amount of accumulated depreciation, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to the Bank. Section 4.03. (a) Except as the Bank shall otherwise agree, for each of its fiscal years after its fiscal year ending on December 31, 1989, MERALCO shall not incur any debt unless a reasonable forecast of MERALCO's revenues and expenditures shows that MERALCO's estimated net revenues for each fiscal year during the term of the debt to be incurred shall, in the fiscal years 1990-91, be at least 1.0 times and, thereafter, 1.3 times MERALCO's estimated debt service requirements in such year on all debt of MERALCO including the debt to be incurred. Page 5 (b) For the purposes of this Section: (i) The term "debt" means any indebtedness of MERALCO maturing by its terms more than one year after the date on which it is originally incurred. (ii) Debt shall be deemed to be incurred: (A) under a loan contract or agreement or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into. (iii) The term "net revenues" means the difference between: (A) the sum of revenues from all sources related to operations and net non-operating income; and (B) the sum of all expenses related to operations including administration, adequate mainte- nance, net taxes and payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt. (iv) The term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including net taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above. (v) The term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt net of foreign exchange losses recovered by MERALCO in the normal course of business. (vi) The term "reasonable forecast" means a forecast prepared by MERALCO not earlier than four months prior to the incurrence of the debt in question, which both the Bank and MERALCO accept as reasonable and as to which the Bank has notified MERALCO of its acceptability, provided that no event has occurred since such notification which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition or future operating results of MERALCO. (vii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Bank. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect Page 6 on the date upon which the Loan Agreement becomes effective. Section 5.O2. This Agreement and all obligations of the Bank and of MERALCO thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify MERALCO thereof. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party's address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are: For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) For MERALCO: Manila Electric Company Ortigas Avenue Pasig, Metro Manila Philippines Cable address: Telex: MANILALECT 40116 Manila Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of MERALCO, may be taken or executed by the President of MERALCO or such other person or persons as the President of MERALCO shall designate in writing, and MERALCO shall furnish to the Bank sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. Page 7 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Amnon Golan Acting Regional Vice President Asia MANILA ELECTRIC COMPANY By /s/ Emmanuel Pelaez Authorized Representative SCHEDULE Procurement Procurement of Goods and Works Part A: International Competitive Bidding Except as provided in Part C hereof, goods and works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines). Part B: Preference for Domestic Manufacturers In the procurement of goods in accordance with the procedures described in Part A hereof, goods manufactured in the Republic of the Philippines may be granted a margin of preference in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraphs 1 through 4 of Appendix 2 thereto. Part C: Other Procurement Procedures 1. Items or groups of items estimated to cost less than the equivalent of $200,000 per contract, up to an aggregate amount not to exceed the equivalent of $1,000,000, may be procured under contracts awarded through limited international bidding procedures on the basis of evaluation and comparison of bids invited from a list of at least three qualified suppliers eligible under the Guidelines and in accordance with the procedures set forth in Sections I and II of the Guidelines (excluding paragraphs 2.8, 2.9, 2.55 and 2.56 thereof). 2. Items or groups of items estimated to cost less than the equivalent of $200,000 per contract, up to an aggregate amount not to exceed the equivalent of $4,000,000, may be procured under contracts awarded on the basis of competitive bidding, advertised locally, in accordance with procedures satisfactory to the Bank. 3. Items or groups of items estimated to cost less than the equivalent of $50,000 per contract, up to an aggregate amount not to exceed the equivalent of $1,000,000, may be procured under contracts awarded on the basis of comparison of price quotations solicited from a list of at least three suppliers from at least 3 different countries eligible under the Guidelines, in accordance with procedures acceptable to the Bank. Part D: Review by the Bank of Procurement Decisions 1. Review of invitations to bid and of proposed awards and final Page 8 contracts: (a) With respect to each contract estimated to cost the equivalent of $1,000,000 or more, the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Bank pursuant to said paragraph 2 (d) shall be furnished to the Bank prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the pre- ceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Bank pursuant to said paragraph 3 shall be furnished to the Bank as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 4 to the Loan Agreement. (c) The provisions of the preceding subparagraphs (a) and (b) shall not apply to contracts on account of which the Bank has authorized withdrawals from the Loan Account on the basis of statements of expenditure. Such contracts shall be retained in accordance with Section 4.02 (a) (ii) of the Loan Agreement. 2. The figure of 15% is hereby specified for purposes of para- graph 4 of Appendix 1 to the Guidelines.