Privatization Update: GENCOS and TRANSCO

1. Privatization Update: GENCOS and TRANSCO Presentation to LEDAC January 2005

2. Ver 1.0 0.8 MW Amlan 22 MW Bohol Operating Plants 210 MW Navotas I / 100 MW Navotas II Decommissioned Plants/ Non-TSC Non-TSC TIMELINE OF NPC PRIVATIZATION & POWER SECTOR RESTRUCTURING Electric Market Reforms WESM Commercial Operation Supply Shortage (New Capacity Additions Needed) Start of Luzon Open Access Universal Charge for Stranded Contract 70% of GENCO assets privatized TRANSCO Privatization Preparation for Transco Privatization Transco Privatization 2006 2007 2005 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Jul Sale of Generation Assets 225 MW Bataan Thermal 54 MW Cebu II 600 MW Calaca 75 MW Ambuklao / 100 MW Binga 620 MW Limay/ Bataan Thermal Site 68.5 MW Iligan I 108 MW Aplaya 360 MW Magat 275 MW Tiwi /410 MW Makban 146.5 MW Dingle (110 MW Pinamucan/ 36.5 MW Panay I) 112.5 MW Tongonan 200 MW Manila Thermal 12 MW Masiway 44.8 MW Iligan II 192.5 MW Palinpinon 246 MW Angat 100 MW Pantabangan 150 MW Bacman 850 MW Sucat 22.3 MW Gen.Santos

3. Accelerated Genco Sale Sequence • Main objective is to bring assets to market as quickly as possible under a plan that maximizes proceeds, within PSALM’s procedures and limitations for fair and transparent auctions. • Key Considerations: • Need to expedite sale of most number of plants • Interest from strategic and financial investors • Time required by bidders for due diligence and to prepare binding bids • Availability of supply contracts (TSCs/BSCs) for certain plants • Funding requirement of bidders and capacity of loan market • Legal pre-conditions (creditor’s consent) and outstanding plant specific issues (e.g. steam supply agreements) • Fair and transparent process

4. Proposed Plan of Action(Subject to Investor Feedback) • Identify • assets expected to receive greatest interest from investors • assets with least plant specific issues still to be resolved (e.g., steam supply agreements) • Cluster auction of assets in specific weeks • Plants will be sold individually but sale clustered within a week • Avoid multiple bids on one day (logistically difficult); instead, schedule one bid per day during a “bidding week”

5. Proposed Plan of Action(Subject to Investor Feedback) • Fast-track negotiations of supply contracts (TSCs/BSCs) with distributors (especially Meralco). Assignment of TSCs to certain plants will make it easier for investors to finance acquisition of such assets • Offer bid financing (deferred payments with interest) for certain large plants to make them more affordable to investors, and maximize proceeds to government

6. Bid Financing (Deferred payments) • Allows for an accelerated sale process which would not be possible if bidders need to obtain financing (can take months to arrange particularly given the limited capacity of the Philippine lending market) • Further, the closing process can take considerable time due to lender requirements - the deferred payment mechanism could significantly reduce the closing period • Deferred Payment Structure & Terms • Allows refinancing. • Equal semi-annual payments to encourage refinancing. • Capture greater cash proceeds upfront by increasing down payment from 40% upfront to 50%. • Bidders will retain the flexibility to prepay if they are able to source cheaper external financing at a later date

7. Bid Financing (Deferred payments) Factors Considered in Determining Deferred Payment Terms for each Asset • Size (MW) • Offer financing for large plants (threshold set at > 150MW) • Remaining Life • Tenor stepped up according to remaining life of plants. • TSCs • Preference for financing given to plants to be sold without TSCs - also consider offering financing for non-TSC plants in the <150 MW category

8. Masinloc Case Study

9. YNN Payment Structure

10. Financial Terms and Conditions • YNN posted US$9 million irrevocable letter of credit from a reputable bank • YNN to pay 40% of the Purchase Price upfront amounting to US$ 222.80 million upon Closing • YNN to maintain DSCR of at least 1.3x (which based on our projections is achievable) • YNN to post performance bond amounting to US$ 35.95 million to secure semi-annual deferred payments • If YNN defaults on Deferred Payments, PSALM can draw from Performance Bond; if Performance Bond is not replenished within the prescribed period, YNN will be in default and PSALM can take over control and operations of plant without refunding YNN the upfront payment

11. Masinloc Revenue and Cashflow Projections Cashflows are sufficient to cover deferred payments and maintain a healthy Debt Service Coverage Ratio during the repayment period of Deferreds.

12. Masinloc Revenue and Cashflow Projections vis-à-vis Deferred Payments

13. Assumptions • Tariff • Pre-WESM, current regulated price of P3.91/kwh as approved by the ERC; • Upon implementation of WESM, a decline to an estimated market price of P3.09/kwh (real) by 2011 based on the Long-run Avoidable Cost (LRAC) of a base load plant • Capacity factor - 83% (long-term) • Total plant useful life - 30 years, with remaining useful life of 24 years as of January 1, 2005 • Accounts Receivable - 30 days • Operating Expenses (OPEX) – includes Fixed O&M expenses (FOM), Variable O&M expenses (VOM) as well as insurance. We assumed OPEX will improve and converge to international standards by 2009.

14. Masinloc Next Steps and Timetable

15. MASINLOC SALE Next Major Steps after Notice of Award

16. MASINLOC SALE Next Steps after Notice of Award (cont’d)

17. MASINLOC SALE Conclusion • Need to serve the Notice of Effectivity in order to trigger increase in the irrevocable LOC from US$ 9 million to US$11 million • After obtaining creditors’ consent, demand payment of the US$222.8 million upfront payment • Upon payment, of the US$222.8 million, plant possession transferred to winning bidder • Upon payment of the last installment, legal title to plant transferred to winning bidder.

18. TRANSCO

19. Systems Operations petition ERC repair & maintain assets finance & construct new assets invoice & collect transmission charges advise TRANSCO on Non-Delegable Functions Concession – Phase One TRANSCO Concessionaire Concession Agreement* F assets** Non-Delegable Functions * Concession Agreement suspends Concessionaire’s right to operate system until grant of Franchise. ** While Concessionaire obtains possession and control, TRANSCO retains title to Transmission Assets.

20. TRANSCO Concessionaire Concession Agreement F assets** Concession - Phase Two • Systems Operations • petition ERC • repair & maintain assets • invoice & collect transmission charges • finance & construct new assets ** While Concessionaire obtains possession and control, TRANSCO retains title to Transmission Assets.

21. Concession - Revenue Streams Phase One Phase Two TRANSCO Concessionaire TRANSCO Concessionaire Variable Fee* Transmission Charges Transmission Charges Grid Users Grid Users *Variable Fee = Transmission - System Charges Operation Expenses NET REVENUE (PHASE ONE) __ NET REVENUE (PHASE TWO)

22. Comparison of Priva vs. Non-Priva Cashflows

23. Cash Flows (Priva vs No Priva)Pre-financing

24. Cash Flows (Priva vs No Priva)Post-financing

25. Thank you!