Philippines - 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 PH their offciail duties. Its contents may not Type: MOP  CURRENCY SQUIVALENTS (as of December 31, 1993) Currency Unit Pesos (P) p 1 t US$0.036 US$1 927.6 WEIGHTS AND MSASURES GWh Gigawatt hour (1,000,000 kwh) MWe Million Watts of energy kWh Kilowatt-hour (860 kilo-calories) TWh Tera watt nour (109 watt-hours) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BOT Build-Operate-Transfer BTO Build-Transfer-and-Operate DENR Department of Environment and Natural Resources DOE Department of Energy EDC Energy Developing Cooperation/Subsidiary of PNOC ECO Expanded Cofinancing Operation EOIS Efficiency and Operational Improvement Study RkB Energy Regulatory Board ESMAP Energy Sector Management Assistance Program GEF Global Environment Facility GET Global Environment Trust Fund JEXIM Export-Import Bank of Japan NPC National Power Corporation OPSF Oil Price Stabilization Fund PNOC Philippine National Oil Company RECs Rural Electrification Cooperatives ROL Rehabilitate-Operate-Lease ROP Republic of the Philippines FISCAL YZAR January 1 to December 31  FOR OFFICIAL USE ONLY PHILIPPINE8 L3YTA-LUZON GEOTHERMAL PROJECT Loan and Project Sumnarv Borrowers: National Power Corporation (NPC) and Philippine National Oil Company (PNOC). Guarantor( Republic of the Philippines. Amounts: US$227 million equivalent, of which US$113 million to NPC and US$114 million to PNOC. An Expanded Cofinancing operation (ECO) is also proposed to support commercial financing 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 114.0 114.0 IBRD-NPC 113.0 113.0 Energy Sector Loan (3163-PH)-On going works 13.3 13.3 JEXIM-PNOC 114.0 114.0 JEXIM-NPC 56.0 56.0 BOT-Contract 63.9 556.5 620.4 ECO-Supported Bond Issue-NPC 100.0 100.0 BITS Grant for Converter 26.6 12.4 39.0 GEF Grant PNOC 15.0 15.0 GEF Grant NPC 15.0 15.0 PNOC Internal Cash Generation 71.7 20.3 92.0 NPC 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 Poverty Catecqorv: 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 thedr oficial duties Its contents may not otheise be dilosed nftout World Bank atorzati  MEMORANDUM AND RECOM3WWATION OF TUE PRUSIDENT OF THE IBRD TO TIM EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS AND AN EXPANDED COFINANCING OPERATION TO THE NATIONAL POWER CORPORATION AND THE PHILIPPINE NATIONAL OIL COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF PHILIPPINES FOR A LEYTE-LUZON GEOTHERMAL PROJECT 1. I submit for your approval the' following memorandum and recommendation on two proposed loans to the National Power Corporation (NPC) and the Philippine National Oil Company (PNOC) for an aggregate equivalent of US$227 million (UJS$113 million to NPC and US$114 million to PNOC) and an Expanded Cofinancing Operation for an aggregate equivalent of US$100 million to NPC with the guarantee of the Republic of the Philippines to help finance a Leyte-Luzon Geothermal Project. The loans would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. 2. Country/Sector Background. Power demand growth in the Philippines has been uneven, largely following variations in GDP growth. In the last two years, it was severely restricted due to supply constraints; still, power sales increased 6.2% p.a. between 1986-92. Once adequate power supply is restored in 1994 due to substantial new capacity added, sales are expected to rise by an average of 9% p a. until the year 2000. In absolute terms, 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 and conservative estimates of GDP growth, peak demand is expected to double by the 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 the private sector role in power generation and operational management is adequate. The private sector has emerged as a principal player in the energy sector: Exploration for hydrocarbons is exclusively with the private sector and oil refining and distribution are carried out by two private companies (CALTEX and Pilipinas Shell Petroleum Corporation) in addition to Petron (the oil subsidiary of state-owned PNOC). However, the Government sold 40% of Petron's shares to Aramco in March 1994, and will sell another 20% to Petron staff and the public by mid-1994. PNOC, one of the largest corporations in the Philippines, was created in 1973 as a holding company for several energy subsidiaries (oil refining, coal, geothermal), which were established to ensure the country's oil supply and to develop indigenous resources. After Petron's privatization, the main activity of PNOC would be to develop geothermal energy through its subsidiary PNOC's Energy Development Corporation (PNOC-EDC). In the power sector, practically all distribution is with the private sector, which includes the following: (a) MERALCO (Manila Electricity Company), a private utility in Metro Manila that distributes about 60% of the total electricity in the country; (b) 12 private utilities that retail electricity in different cities; and (c) about 120 member-owned rural electrification cooperatives (RECs), that distribute power and manage retail sales in rural areas. However, two state-owned corporations also operate in the power sector: (a) the National Power Corporation (NPC), which sells power in bulk to power utilities and is responsible for power generation and transmission; and (b) the National Electrification Administration (NEA), responsible for financing and  -2- providing related technical support to the RECs. Under the Energy Sector Plan (ESP), the Government is studying options for NPC's gradual privatization, which is likely to require sevweral years, given constitutional, regulatory, commercial and financial constraints and the need to analyze the options broadly identified by a USAID-funded study. It is in this context that the Bank is currently conducting a sector study on the Power Sector Structure, to be completed by mid-1994, after which detailed transactional studies could be conducted. 4. With regard to incremental investment in power generation, NPC's Board of Directors is sucessfully implementing a policy to bring the private sector into the development of all new power plants (except milxti- purpose hydro), and has entered into 35 contracts with private companies to construct, finance and operate power plants under Build-Own-Transfer (BOT), Build-Transfer-Operate (BTO), Rehabilitate-Operate-Lease (ROL) and other schemes. About 27 of these projects will be in operation by end of 1994. Total power generation contracted with the private sector amounts to abo^t 5,000 MW, about 80t of the incremental capacity between 1993-99. To support such vast private sector investments, ways and means are needed to improve planning systems to ensure an optimal integration of private and public efforts. S. The Power Crisis and the Prolect. Over the 1991-93 period, the Philippines experienced an acute power shortage; this posed a grave threat to its economic recovery because it translated into prolonged outages that hampered industrial and commercial activities. As a result, unemployment increased and economic losses may have reached almost one billion dollars per year. Conventional power supply projects (coal, geothermal and hydro) require construction times of three to six years, and so cannot provide relief in the short term. Thus, the Government launched a "fast-track"l generation expansion program based on combustion turbine or diesel engine- driven systems which were contracted as BOT/BTO projects with the private sector. While these plants are operationally more expensive than base-load plants, they were the only power sources that could bi commissioned within one or two years. These plants played a critical role in meeting the Philippines' power deficiencies and will provide peak system power in the future, but they are not a cost effective way to meet the base-load power needs. However, by using geothermal energy in Leyte and substantially connecting the country's power systems, the proposed project provides a more cost effective option for Luzon. In addition, it is environmentally preferable to other thermal options. In any case, the substantial private participation already achieved (para. 4) has resulted in a de facto transformation of the sector, and additional studies under the Leyte-Cebu Geothermal Project are focussing in further strengthening private sector contracting and establishing adequate dispatching for such complex systems. 6. It is also important to continue ongoing efforts to strengthen the regulatory authority and to improve energy efficiency and demand-side management. These efforts have already succeeded in introducing efficient lighting schemes, rating of electrical appliances, conducting energy audits, applying strict conservation measures at public offices and, given the high price of electricity (more than twice the average in Washington D.C.), in promoting other energy conservation measures. Power demand charges to reduce peak loads will be introduced under the project and further actions for demand side management are being studied by the Bank's  - 3 - Energy Sector Management Assistance Program (ESMAP) and by several grants from other donnors. 7. Institutional Issues. While a severe three-year drought, which seriously curtailed hydro capacity, was in large part responsible for the power shortages, poor institutional performance also contributed to the crisis: Environmental approvals for new power projects were substantially delayed and financial and institutional weaknesses in NPC prevented it from making needed investments. Moreover, NPC's finances deteriorated severely in 1991 when costs rose sharply due to a large currency devaluation and higher oil prices (resulting from the Gulf War). The Supreme Court decision to stay a pari passu tariff increase added to NPC's financial difficulties; as a result, the Government needed to contribute about US$135 million to NPC. In 1991-92, the Corporation's cash situation was also problematic because it was required to pay oil taxes that were not calculated into its tariffs (pending an appeal to the Supreme Court). However, the final Court decision (May 1993) reconfirmed that NPC is exempt from such taxes and will allow it to recover in the next few years about US$400 million in overdue tax 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 Price Stabilization Fund (OPSF). NPC further agreed to a reform program whose implementation streamlined its structure, reduced the number of vice- presidencies from 26 to nine between 1991-93, and eliminated more than 2,000 staff. NPC is also establishing targets for improving project implementation, internal audits and control, and rationalizing and decentralizing functions (including a plan to establish separate units for Luzon, Visayas and Mindanao). Under the Electric Power Crisis Act of 1993, the President was given special powers to solve the power crisis; these include facilitating tariff increases, speeding-up project approvals, and increasing technical salaries in the sector. A comprehensive management audit ("Efficiency and Operational Improvement Study") was completed in October 1993 and its recommendations would be implemented under the project (para. 20). 8. The Energy Sector Plan (ESP). Sector reform is the highest priority of the new administration. As a result of its dialogue with the Bank, in January 1993, the Government prepared and approved the ESP, which charts a course of action to improve the operations of the energy sector as a whole. This document presents measures and implementation schedules in all areas of concern, particularly for sector coordination, regulatory development, private sector participation, power and oil pricing, environmental management, energy conservation, operational efficiency and project implementation. The Government would implement the ESP and review with the Bank the progress achieved annually. Some of the plan's key measures have already been introduced, such as establishing the Department of Energy (DOE) and initiating actions to improve NPC's finances: Tor example, 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 was unusually difficult due to the drought and power outages, its net income surged from a deficit of US$135 million in 1991 to a surplus of US$168 million in 1992 and US$110 million in 1993. In addition, NPC's power investments doubled in 1993; thus, it achieved the covenanted 8% rate of return on revalued assets. The project also involves other tariff improvements such as the adjustment scheme recently approved by the Energy Regulatory Board (ERB) that will compensate NPC for variations in the cost  of fuel and purchased energy and make future tariff adjustments largely automatic. These measures would ensure an adequate financial performance in future years. 9. Lessons Learned from Previous Ba,ik ODerations. Between 1957-75, the Bank financed three hydro projects, two thermal plants, one transmission project and one rural electrification scheme. Three loans were also approved for coal, oil and geothermal exploration. Project Performance Audit Reports (PPARs) were prepared for two projects with NPC (the fourth and seventh projects, PPAR No. 0980 and PPAR No. 8574). The major problems identified in the PPARs were implementation delays and cost overruns due to project design changes, cumbersome contract award procedures, and weak project management. Because of a disagreement on policies, the Bank discontinued lending until 1988, when it approved the Bacon Manito Geothermal Project (Loan 2969-PH). In 1988-89, two other projects 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 sectoral policies regarding investment strategy, financing and coordination. They are generally being implemented satisfactorily, but NPC had problems achieving the covenanted rate of return in 1991, and, in the Bacon Manito project, although power generation started satisfactorily in October 1993, the completion of other transmission lines required a one year extension of i:he closing date. The Bank has tried to resolve these problems by supporting the establishment of an improved regulatory framework, placing the responsibility for each project under a Project Director, improving procurement processes, bidding turnkey contracts rather than separate components, implementing advance contracting and requiring the establishment of automatic tariff increases. The Power Transmission and Rehabilitation Project (Loan 3626-PH) approved in June 1993 will support institutional improvements, rehabilitate the Bataan oil plant and finance key transmission lines required by fast-track private-generation projects in 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 and financial reforms. 10. Rationale for Bank Involvement. The proposed project is consistent with the Country Assistance Strategy for the Philippines, which was discussed by the Board on February 3, 1994. Developing adequate infrastructure, particularly power supply, is one of the highest priority in the Bank's country lending strategy; the lack of it is the most constraining factor in the country's economic development. The project would help alleviate the power crisis, expand base-load power capacity (financed by the private sector) and help expand and reinforce the transmission system. With Bank support, the Government has already implemented far-reaching reforms in the power sector, as it has adopted policies and strategies and made institutional improvements which conform with Bank policy. Bank intervention in the sector has been critical in helping define the improved policies and actions in the Energy Sector Action Plan, establishing the DOE and strengthening NEPC's finances and institutional arrangements, improving its efficiency and promoting private sector generation of power to ensure a robust implementation of its power program. Bank support has also been critical in organizing the financial  - 5 - engineering required for the Leyte-Luzon Project. By completing the sector study, "Toward Improved Environmental Policies and Management", the Bank has also promoted a balance between the country's energy development and sound environmental practices. 11. The Government's energy strategy closely follows the recommendations in the Bank's Policy Paper for the power sector. First, NPC is trans'rring almost all its responsibility for incremental power generation to the private sector (requiring investments of about US$1.2 billion per year for power generation). Second, the basis for future tariff adjustments has been established, which will ensure NPC's long-term financial viability, including the indexation of its tariffs to fuel costs and purchased energy. Third, a transparent regulatory framework that covers the entire energy sector and provides adequate protection for producers, distributors and consumers was created under an independent, quasi-judicial regulator (ERB). Fourth, NPC is substantially improving its corporate policies and commercializing its operations: For example, it is entering into management contracts with the private sector. Finally, the Energy Sector Plan provides for measures that, along with demand charges, will further improve demand-side management and energy conservation. As a result of these actions, the sector can now grow vigorously and attract resources from private sources, the Bank Group and other bilateral and multilateral agencies. 12. Project Obiectives. The objectives of the proposed Leyte-Luzon Geothermal project are to: (a) meet the rapidly increasing demand for power in Luzon using indigenous and environmentally superior geothermal energy; (b) strengthen the energy sector by implementing institutional, planning and financial measures recommended by the ESP; (c) support the large, ongoing private sector participation in power generation, and facilitate it in other areas by extending the national grid; (d) strengthen NPC's capacity to analyze its environmental and social impacts; (e) introduce ECO co-financing in the Philippines; and (f) ensure the financial viability of NPC and PNOC-EDC for undertaking a long-overdue investment program. 13. Project Description. The project includes the following components: (a) PNOC-EDC would develop a 440 MW geothermal energy field to expand 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 for geothermal drilling; (iii) constructing steam gathering systems; (iv) constructing the related subtransmission systems in Leyte; (v) constructing a pilot reinjection plant for C02; and (vi) recruiting consultants to assist with project implementation; (b) PNOC-EDC would also enter into BOT contracts with private sector companies to construct and operate 440 MW geothermal power plants; and (c) NPC would (i) contract two high voltage DC (HVDC) monopole converter stations and related electrode stations at Ormoc and Naga, to be financed by US$100 million foreign bonds operation supported 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) crossing the San Bernardino Strait (19 km) and linking the Leyte-Luzon lines; (iv) construct a twin circuit HVDC overhead transmission line from Ormoc to Matnog 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 strengthening its environmental and social engineering departments; and (vii) recruit consultants to design the Casecnan hydroelectric project and to support project implementation. 14. Prolect Imnlementation. NPC will implement the transmission component and PNOC-EDC will undertake the geothermal development component and contract the generation plants with the private sector. PNOC-EDC has already signed three BOT contracts for power generation in Leyte aggregating to 536 MW (for both Leyte-Cebu and Leyte-Luzon). These energy conversion agreements use the same basic contract employed by NPC for other BOT projects, and were signed in September-October 1993 with Ormat Inc. (125 MW), Magma Power Company (231 MW) and California Energy Company and CE Philippines Ltd. (180 MW), including 180 MW for Leyte-Cebu and 356 MW for Leyte-Luzon. Since the project construction will take five years, there is adequate time to contract the additional 100-140 MW BOT capacity. The BOO (build-own-operate) contract between NPC and PNOC-EDC to supply electricity was signed prior to Board presentation. The project preparation required considerable financial engineering by the Bank to complete a large financial plan for a complex project. In fact, the project financing would have not been feasible without Bank support and technical assistance. The project cost is estimated at US$1266.9 million equivalent, with a foreign exchange component of US$1095.5 million equivalent (86% of totai). The total financing required, including interest during construction, is US$1333.6 million and includes two proposed Bank loans, for a total of US$227 million (17.0* of total), US$114 million to PNOC and US$113 million to NPC. PNOC and NPC will bear the foreign exchange and interest rate risks for the loan, which will be guaranteed by the Government. 15. The remaining financing would be provided by: (a) internal cash generation of US$133.9 million (18.8% of the total excluding the BOTs), of which 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 million for PNOC and US$56 million for NPC, 12.7% of the total), which would review project procurement and the awarding of contracts; (c) a Global Environment Trust (GET) grant of US$30 million equivalent (2.2% of the total) to the Government to be made available on a grant basis in equal parts to NPC and PNOC. The grant makes the geothermal alternative more competitive with a least-cost coal plant; (d) foreign bonds for US$100 million (7.5%) to finance the converter stations, to be supported by an Expanded Cofinancing Operation (ECO); (e) a grant from the Swedish Government of about US$39 million equivalent (2.9%); (f) three BOT contracts for the generating plants (totalling US$620.4 million, or 46.5% of the total); and (g) US$13.3 million (1%) of ongoing geothermal exploration being carried out under the Energy Sector Project (Loan 3164-PH). 16. Advance contracting has been used to better define the large investment and financing needed. Retroactive financing of up to US$21 million (10% of the proposed loan) is included for project expenditures incurred after August 1993. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in the Philippines are given in Schedules C and D, respectively. A map is also  -7- attached. The Staff Appraisal Report No. 12568-DH, dated May 9, 1994 is being distributed separately. 17. The ProDosed ECO Cofinancinc. The proposed first ECO operation in the Philippines would support a US$100 million bond operation in the Eurobond market, which would include a tranche for placement in the United States pursuant to the SEC's Rule 144A. The bonds would have a tenor of 15 years. Based on initial market soundings, bond markets seem to offer more favorable conditions than loans to the Philippines. Interest payments on the bonds would be guaranteed by the Republic of the Philippines. Bank support would be in the form of a put option. It would be exercisable by a Trustee on behalf of the bondholders during a period commencing shortly before and ending shortly after the maturity date, regardless whether NPC defaulted in its obligations. If the put option were exercised, payment to the bondholders would, however, occur no earlier than the maturity date. This type of structure was contemplated in the 1989 .iemorandum of the President to the Executive Directors on Expanded Cofinancing Operations. The fee for the Bank put option, payable by NPC, would be 0.5% per annum of the present value of the principal amount of the bonds, subject to any applicable annual waiver. Under a Guarantee and Indemrity Agreement, the Republic of the Philippines and NPC will agree to purchase the bonds from the Bank if the put option were exercised. Although the Philippines has restructured its debt within the last five years, it is proposed that the country be eligible to use the ECO program since it has had a satisfactory macroeconomic program in place for some time and has carried out a debt restructuring operation that has reduced the debt burden to a sustainable level. 18. Award of Mandate. NPC invited financing proposals on March 18, 1994 from a cross-section of financial institutions from Europe, the US and Japan. Following the evaluation of financial bids, NPC has awarded a conditional mandate to lead and underwrite the bond issue to Morgan Stanley International. The mandated terms and conditions, which are indicative at this stage, are presented in Schedule E. The mandate is conditional upon, and subject to, the authorization of the Bank's Executive Directors to negotiate the terms of the ECO. Following Board approval of the Project and to negotiate the ECO, NPC and the Bank would enter into negotiations with Morgan Stanley to conclude the documentation relating to the ECO financing. 19. Benefit3 of the ECO. Some of the benefits of the SCO are clearly reflected in the proposed financing terms. The ECO would facilitate the mobilization of foreign currency funds required for completion of the Leyte-Luzon Project and, more importantly, would extend current market terms to a credit period commensurate with the requirements of a power project with a long economic life and an extended construction period. To date, the longest maturity achieved for Philippine sovereign issues in any market has been 7 years, while the ECO's credit enhancement would extend the market term to 15 years. This would result in an ECO financing maturity comparable to that of a Bank loan, thereby ensuring support for NPC on terms compatible with the rest of the financing package for the Project. In addition, the indicative spread range of 1.75% to 2% (see Schedule E) for a 15 year maturity compares favorably with the pricing so far achieved for Philippine issues with much shorter maturities, including the last NPC bond issue. The ECO would have a substantial leveraging  - 8 - effect, with the market assuming Philippine sovereign risk for interest payments over 15 years, which would represent risk sharing by the market of almost 65% in present value terms. The ECO would also help to develop a new investor base for the Philippines by catalyzing 4.nstitutional investor interest. This is likely to be important for both tNJC and the country in light of its substantial future infrastructure investment requirements and the need to diversify the country's borrowing sources. 20. Consent of the Relevant Countries. In accordance with Article IV, Section 1 (b) of the Articles of Agreement, the consent of the United States, as well as other relevant countries, would be sought for the proposed 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 can grow and strengthen its organization, planning and finances. NPC has already taken important steps that will require greater responsibility and accountability from regional managers, has named project directors, improved its procurement systems and made plans to substantially increase staff salaries, which would allow it to hire and retain competent staff. In turn, these actions will improve project implementation and plant maintenance. NPC's revised tariff structure, and particularly the approved system of automatic adjustments for fuel and purchase energy costs, will ensure adequate resources to cover its operation and debt service and help finance the large investment needed in the power sector. PNOC-EDC's. operation and maintenance of renewable geothermal resources (under previous projects) has been satisfactory and is expected to continue as such. The joint action envisioned between PNOC-EDC and private BOT contractors will ensure that power generation under the project will be reliable. 22. Acrreed Actions. Considerable progress has been achieved in the sector through the implementation of the ESP and key reform actions, and by the approval of tariff increases for NPC. In addition, the following actions have already been completed: (a) the implementation of a fuel and purchase cost adjustment system (which will index about 82% of NPC costs); (b) the signing of energy conversion contracts between PNOC-EDC and three BOT 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 Project Directors for their project components; and (d) the signing of a Boo contract between PNOC-EDC and NPC for the supply of power under the project. The signing of a 10-year power supply contract between NPC and MERALCO would allow the Government to properly define future capacity additions and is a condition of effectiveness for the NPC loan. In order to ensure that the large financing required by the project is in place, the following are conditions of cross-effectiveness: (a) the signing of a subsidiary loan agreement between PNOC and PNOC-EDC; (b) the signing of BOT contracts with PNOC-EDC for 300 MW; (c) the effectiveness of the GET grant agreement; and (d) the effectiveness of the JEXIM cofinancing loans. Failure to obtain financial closure by December 31, 1994 on foreign bonds for US$100 million for the converter stations, (which are supported by the ECO) or for the BITS grant, or to obtain such funds from other sources would 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  - 9 - its implementation; (b) the Government and NPC would annually review with the Bank the power development plan; (c) the Government would repay NPC outstanding tax refunds according to an agreed plan; (d) NPC would: (i) annually review with the Bank the implementation of the recommendations of the Efficiency and Operational Improverent Study; (ii) achieve an after-tax rate of return on its net revalued fixed assets in operation not lower than 8 and a debt service ratio higher than 1.3; (iii) carry out the project in accord with environmental standards acceptable to the Bank; (iv) carry out a Relocation and Compensation Plan satisfactory to the Bank; (v) strengthen its environmental and social engineering departments by adding two advisers and at least five qualified staff; (vi) introduce demand charges (as a condition for goods disbursements under the NPC loan); and (vii) conduct a satisfactory valuation of its fixed assets and update it annually; and (e) PNOC Energy Development Corporation (PNOC-EDC) would: (i) carry out the project in accord with environmental standards acceptable to the Bank; (ii) carry out a Resettlement Plan satisfactory to the Bank; (iii) maintain a debt-equity ratio not to exceed 70:30; (iv) maintain a current ratio not lower 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 the implementation, in a timely fashion, of an Action Plan that include project and institutional improvements. 24. Environmental Aspects. After the mitigation measures in the Environmental Assessment are implemented, the project will only have a minor environmental impact; however, it will considerably reduce local pollution and global warming. This is because the C02, SOx and particulate emissions from the project will be small, in fact, only a fraction of what would otherwise be emitted by alternative coal or oil plants. Environmental impacts include minor deforestation at the site of the geothermal plants and near the transmission lines (an Environmental Summary for the total Leyte Geothermal development was circulated to the Board on June 30, 1992 and an update covering the capacity expansion from 350 MW to 700 MW was circulated on June 22, 1993). The geothermal component is expected to displace about 127 families (mainly as a result of H2S odors), whom PNOC-EDC would resettle within a short distance from their existing residences. The resettlement plan prepared by PNOC-EDC is satisfactory and intends to increase the income and living standards of the families affected. Transmission lines will be routed along existing roadways and have been designed to avoid any environmentally sensitive areas and minimize the impact of the right-of-way on houses or crops. Nevertheless, some relocation (normally within a few meters) and compensation for the right-of-way will be needed for 361 households. NPC's Relocation and Compensation Plan for the transmission lines has been agreed upon and includes satisfactory policies on resettlement and compensation for any persons affected. 25. Prolect Benefits. The project would establish a reliable, environmentally superior power supply for the Luzon region, which includes Metro Manila, the largest industrial and population center in t a Philippines. It would also irterconnect the total country through the Leyte system, which would dispatch power in an optimal manner and reduce the resarve capacity required in the individual systems. The use of geothermal steam for power generation, followed by re-injection of the exhaust liquid into the ground, has considerable environmental advantages over other fossil 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 global warming, since CO2 emissions from alternative coal-fired based plants would be about 10-15 times larger. Also, the project would establish a sound basis for sector development by restructuring and strengthening it, improving NPC's corporate efficiency, policies and finances, and increasing the private sector participation in power generation. The project's economic rate of return, based on existing tariffs, is 11%, which is satisfactory. 26. Risks. In the past, NPC's slow procurement procedures have often delayed implementation; however, NPC has reorganized its procurement system and key bids will be awarded before Board presentation. Further, a substantial part of the project would be implemented by private BOT contractors and PNOC-EDC; and, to minimize such delays, NPC and PNOC-EDC have appointed high-level Project Directors (supported by staff and consultants) to coordinate all project activities. Another risk is that the large financing required for the project will not materialize, but cofinancing commitments have been received and would be confirmed prior to the loan's effectiveness. The separation into three BOT contracts would facilitate their financing and the replacement, if needed, of any non- performing contractor; moreover, the BOT contracts were awarded in August 1993, and would be signed and guaranteed by substantial performance bonds before loan effectiveness. A third risk is that the geothermal capacity will 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 resources in nearby Alto-Peak. Finally, there is a risk that tariffs will not be increased, but this risk has been reduced since present tariffs are adequate, the Energy Regulatory Board has approved the principles for setting NPC's tariffs and automatic tariff adjustments for fuel costs and purchased energy have been approved. The new Government has targeted the energy problem as a top priority and has successfully restored NPC's financial viability. 27. Recommendations. I am satisfied that the proposed loans to NPC and PNOC would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve them. I also recommend that the Executive Directors authorize the Bank to negotiate the ECO provisions for the proposed US$100 million bond operation for NPC, substantially in accordance with the terms and conditions described in this Memorandum and with the Operational Guidelines for Expanded Cofinancing Operations. Upon satisfactory completion of negotiations, approval by the Executive Directors of the ECO would be sought prior to the launch of the bond issue. Lewis T. Preston President Attachments Washington, D.C. May 9, 1994  Schedule A PHILIPPINES LEYTE-LUZON GEOTHERMAL PROJECT Estimated Costs and Financing Plan Estimated Cost Local Foreicrn Total ---- (US$ million)--- A. PNOC-GEOTHERMAL DEVEL. 58.6 205.6 264.2 Al. GOODS AND EQUIPMENT 5.4 136.0 141.4 A2. WORKS 30.1 65.9 96.0 A3. TECH. ASSISTANCE & OTHER 23.0 3.8 26.8 B. POWER PLANT (BOT) 52.7 482.3 535.0 C. NPC-TRANSMISSION LINES 30.0 256.7 286.7 Cl. SUPPLY & ERECT CONTRACTS 24.9 249.2 274.1 C2. TECH. ASSISTANCE & OTHER 5.1 7.5 12.6 TOTAL COST 141.3 944.6 1085.9 PHYSICAL CONTINGENCIES 8.8 59.5 68.3 PRICE CONTINGENCIES 21.5 91.3 112.8 TOTAL COST WITH CONTINGENCIKS 171.4 1095.5 1266.9 Interest During Construction 66.7 66.7 TOTAL FINANCING REQUIRED 171.4 1162.2 1333.6 FINANCING PLAN IBRD-PNOC 114.0 114.0 IBRD-NPC 113.0 113.0 Energy Sector Loan (3163-PH)-On going works 13.3 13.3 JEXIM-PNOC 114.0 114.0 JEXIM-NPC 56.0 56.0 BOT-Contract 63.9 556.5 620.4 ECO-Supported Bond Issue-NPC 100.0 100.0 BITS Grant for Converter 26.6 12.4 39.0 GEP Grant PNOC 15.0 15.0 GEF Grant NPC 15.0 15.0 PNOC Internal Cash Generation 71.7 20.3 92.0 NPC 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 1.8 0.0 (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 31.6 0.0 (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 620.4 620.4 I(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 Financed US$ NMilonl Phlippine National Oil Company: Works for drilling geothermal 40.8 40% wells, steam gathering and transmission systems Goods for drilling geothermal 71.1 50% of foreign expenditures, 50% of local wells, steam gathering and expenditures (exfactory) and 35% of transmission systems expenditures for other items procured locally!,. Consultant's Services 2.1 50%11. Subtotal PNOC 114.0 National Power Corporation Goods & Installation submarine 33.1 50% of foreign expenditures and 50% of local cable expenditures (exfactory) for goods and 50% for related installation. Goods and installation HVDC 20.9 50% of foreign expenditures, 50% of local Luzon Transmission Line expenditures (exfactory) and 35% of expenditures for other items procured locally and 50% in respect to related installationl,. Goods and installation Naga- 52.4 100% of foreign expenditures Tayabas 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 15.0 Cumulative 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 (PPAR P-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 Claudio Fernandez (Principal Financial Analyst), John Irving (Senior Power Engineer), Moiffak Hassan (Petroleum Specialist Engineer), Enrique Crousillat (Energy Economist) and P. T. Venugopal (Financial Consultant) who visited the Philippines in June 1993. The report was edited by Mrs. Barbara Koeppel. Peer reviewers were Messrs. Rafael Moscote, Albert B. Gulstone and Jamil Sopher. The project was cleared by Mr. Callisto E. Madavo, Director EA1, and Mr. Vineet Nayyar, Chief, EA1IE.  Schedule 0 Page 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 199.96 2266 1983 Republic of the Philippines SAL 11 302.25 2469 1985 Republic of the Philippines Agriculture Sector inputs 150.00 2787 1987 Republic of the Philippines Economic Recovery Program 300.00 2966 1988 Republic of the Philippines Program for Govt. Reform 200.00 3049 1989 Republic of the Philippines Financial Sector 300.00 2277 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 8.06 2435 1984 Republic of the Philippines Municipal Development 40.00 4.09 2676 1986 Republic of the Philippines Manila Water Distribution 38.00 3.23 2716 1986 Republic of the Philippines Rural Roads Improvement II 82.00 18.66 2823 1987 Republic of the Philippines Provincial Ports 32.00 3.18 2969-1 1988 Republic of the Philippines Bacon-Manito Geothermal Power 59.00 14.92 3084 1989 Dev. Bank of the Philippines Manila Power Distribution 65.50 31.17 3099 1989 Republic of the Philippines Health Development 70.10 27.47 3124 1990 Metro. Waterworks & Sew. Angat Water Supply 40.00 2.71 3146 1990 Republic of the Philippines Municipal Development II 40.00 18.34 3163 1990 Philippines National Power Corp. Energy Sector Loan 200.00 13.20 3164 1990 Philippines National Oil Co. Energy Sector Loan 150.00 71.59 3165 1990 .Republic of the Philippines Energy Sector Loan 40.00 14.65 3204 1990 Republic of the Philippines Coconut Farms Development 121.80 96.48 3242 1990 Republic of the Philippines WS/Sewer/Sanitation I 58.00 41.12 3244 1991 Republic of the Philippines Second Elementary Education 200.00 117.62 3261 1991 Republic of the Philippines Communal Irrigation II 46.20 39.07 3263 1991 Republic of the Philippines Earthquake Reconstruction 125.00 37.58 3287 1991 Republic of the Philippines Industrial Restructuring 175.00 4.85 3356 1991 Republic of the Philippines Rural Finance 150.00 9.52 3360- 1991 Republic of the Philippines Env. & Natural Res. Mgt. 158.00 51.64 3430 1992 Republic of the Philippines Highway Management 150.00 149.18 3435 1992 Republic of the Philippines Engineering & Science Educ. 61.00 56.82 3439 1992 National Electrif. Adm. Rural Electrification 91.30 . 91.29 3455 1992 Republic of the Philippines Municipal Development III 68.00 67.95 2392 1992 Republic of the Philippines Second Vocational Training 36.00 36.40 2606 1993 Republic of the Philippines Urban Health & Nutrition 70.00 71.32 3523 1993 Dev. Bank of the Philippines Telephone System Expansion 134.00 134.00 35390 1993 Republic of the Philippines Economic Integration 200.00 80.00 3603 1993 Republic of the Philippines Tax Computerization 63.00 80.71 3607 1993 Republic of the Philippines Irrigation Operation Support II 51.30 51.16 3626 1993 Philippines National Power Corp. Power Transmission & Rehab. 110.00 96.67 3700 1994 National Power Corporation Leyte Cebu Geothermal 147.00 147.00 3702 1994 Philippines National Oil Co. Leyte Cebu Geothermal 64.00 64.00 Total 7,889.85 277.18 1,626.92 of which has been repaid 43 7 a407 Total now held by 8ank and IDA 5,585.13 269.13 Amount sold 31.35 Of 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 updated twice 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 applicable on the date of this statement. Indicates SAL/SECAL Loan and Credits.  Schedule D Page 2 of 3 8. STATEMENT OF IFC INVESTMENTS (As of March 31, 1994) Total Undisbursed held including Oriainal Commitments by IFC participants' Fiscal Loan Equity Total (at cost) portion Year 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 26.9 1970/86/ Philippine Long Distance Tel. Co. Utilities 127.7 0.8 128.5 68.9 16.7 88/90 1970/72 Mariwasa Manufacturing Co. Construction Materials 0.8 0.4 1.2 1970 Paper Industries Corp. Pulp & Paper * 2.2 2.2 - - 1971/77 Philippine Petroleum Chemicals/Petrochem. 6.2 2.1 8.3 1972 Marinduque Mining & Ind. Corp. Mining 15.0 15.0 1973 Victorias Chemical Corp. Chemical 1.9 0.3 2.2 1974 Filipinas Synthetic Fiber Corp. Textiles & Fibers 1.6 - 1.5 1974179 Maria Cristina Chemical Ind. Electro-chemicals 1.6 0.6 2.2 0.4 1974 RFM Corporation Food & Food Processing 1.2 1.2 - 1975 Phil. Polyamide Ind. Corp. Textiles & Fibers 7.0 - 7.0 1976 Philagro Edible Oils, Inc. Coconut Oil & Copra 2.7 0.2 2.9 1977 Sarmiento Ind. Plywood 3.5 3.5 1977 Acoje Mining Co. Inc. Mining 3.2 0.5 3.7 1.3 1978 Cebu Shipyard & Engineering Works Ship-repairing 2.1 - 2.1 - 1979/90 General Milling Corporation Food & Food Processing 4.0 1.7 6.7 1.7 1980 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 1.1 1980 Consolidated Ind. Gas, Inc. pl Industrial Gases 4.5 4.5 - 1981 Philippines Associated Smelting Copper Smelting 5.0 6.0 .5 and Refining Corp. (PASAR) 1981 Davao Union Cement Corporation Cement 16.0 .8 16.8 .8 1981 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 .9 1985 Philippine Overseas Contractors Construction 38.0 38.0 1986191 Purefoods Food Processing 4.2 4.2 4.5 1988 BPI Agribank Financial Institution 1.0 1.0 1.0 1988 Philfund Debt Conversion Fund 4.2 4.2 1989 Kewalram Phil. Inc. l/ Textiles & Fibers 3.0 3.0 1989 AG & P Construction 10.0 10.0 - 1989 Hambrecht & Quist Capital Fund 2.3 2.3 2.3 1990 Hopewell Energy Power 10.0 1.1 11.1 7.1 1990 Manila Fund Money & Capital Markets 7.0 7.0 1990 First Phil. Ftund Money & Capital Markets * 29.7 29.7 - 1990 Avantex Mill Corp. Textiles 11.3 2.3 13.6 11.8 1990 Makati Shangri-La Tourism 59.0 - 59.0 27.9 4.7 1991 Best Chemicals Chemicals 6.5 2.3 8.8 7.4 1991 Automated Microelectronics Electronics 9.0 2.8 11.8 .2 1991 PCI Sank I/ Financial Institution 20.0 - 20.0 1991 Mactan Shangri-La Tourism 24.0 24.0 12.0 1992 Bacnotan Cement Corp. Cement 18.0 5.3 23.3 26.7 3.1 1992 Pilipinas Shell Petrochemicals 120.0 15.0 135.0 50.0 81.0 1993 Hopewell Power Power 100.0 10.0 110.0 70.0 71.0 1993 Northern Mindanao Power 38.5 9.5 48.0 17.0 21.9 1993 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 D Page 3 of 3 Total Undisbursed held including Oridinal Commitments by IFC participants Fiscal Loan Equity Total (at cost portion Year Obligor Type of Business US$ million Approved but not yet signed 1992 Filsyn 11 Textile & Fibers 40.0 6.0 46.0 25.0 46.0 1994 Walden Management Capital Markets .1 .1 .1 .1 1994 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 fmancing requirements for the high voltage converter stations of the transmission lines of the Leyte-Luzon Geothermal Project, to be supplied under a contract awarded by NPC to Asea Brown Boveri of Sweden, and for spare parts purchased in connection with the Project. Drawdown: NPC will receive the full amount less fees and commissions on the closing date of the issue. The entire net proceeds of the Bonds will be credited to a special account in the name of NPC. Subsequent drawdowns from the special account will be made to meet expenditures on the contract as they are incurred. The special account will be audited annually by independent auditors acceptable to the World Bank and the audit reports will be submitted to the World Bank. Maturity: 15 years. Repayment: Bullet repayment at maturity. Indicative Re-offer Spread: 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 expenses incurred in the negotiation, syndication, listing and execution of this Bond issue, up to a maximum of US$250,000. Taxes and Other Deductions: 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 be included to reflect the World Bank's participation, to provide disclosure of material information on the World Bank and terms of the put option provided by the World Bank, which will be governed by an Option Trust Deed. World Bank ECO Provisions: 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 commencing approximately one month before and ending approximately one month after the maturity date. If exercised, payment to Bondholders would occur approximately five days after notice of exercise, but in no event earlier than approximately seven days after the maturity date. If the put option is exercised, the World Bank would pay out against delivery of the Bonds. The World Bank would be entitled to immediate 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 ECO exposure, payable by NPC on a semi-annual basis, in accordance with the Bank's current ECO pricing policies. Guarantee and Indemnity by ROP 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 would agree 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 to the put option. Requisite Authorization: All requisite authorizations and approvals required to make the put option effective would 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 of process in England and will waive all immunity from suit, attachment and/or execution of judgment which they now enjoy or might enjoy in the future. The Guaranwee and Indemnity Agreement will follow the legal regime, and iclude dispute settlement provisions, which are customary in agreements between member countries and the World Bank.  PHIUPPINES 3 -~ LEYTE - LUZON GEOTHERMAL PROJECT Atooxg'\ / WLUZON - VISAYAS TRANSMISSION SYSTEM CurriTmo4 ta / > C1~~~~~~~~~~~~~~~~~~~~~~~~N PROPOSED Ban.ay I EXSESNG GENG PROJEC C 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 N I ~~~~~~~~~~~~~' 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 CNTRAL N L U Z N I I Masiin Y s - _--^> F anmPenacJ San JoseV. 49aat -7,N-- - - Olangpo ,f' tinay A N5; A F ~~~Kclayaan TemtenA--l- cn i/ob