Public Disclosure Authorized

Document of
The World Bank
FOR OFFICIAL USE ONLY

4 //
A ;?i f / -P/
ReportNo. 7754-PH
Public Disclosure Authorized

STAFF APPRAISALREPORT

PHILIPPINES
Public Disclosure Authorized

MANILA POWER DISTRIBUTIONPROJECT

IMAV4, 1989
Public Disclosure Authorized

Industryand Energy OperationsDivision

Country DepartmentII
Asia RegionalOffice

This document hasa restricted distribution and may be used by recipients only In the perfonmanceof
their official duties. Its contents may nototherwise be disclosed without WorldBank authorization.
 CURRENCY EQUIVALENTS
(As of December. 1988)

Currency Unit - Philippine Pesos (P)

US$1.00 = P 21.4
P 1,000 - US$46.73
P 1 = 100 Centavos (Ctvs.)

WEIGHTS AND MEASURES

kW = Kilowatt (1,000 watts)

MW = Megawatt (1,000 kilowatts)
kWh = Kilowatt-hours (1,000 watts)
MWh = Megawatt hour (1,000 kilowatt-hours)
MkWh Million kilowatt-hours
GWh Gigawatt-hours (million kilowatt-hours)
TWh = Terrawatt-hours (billion kilowatt-hours)
kV Kilovolt (1,000 volts)
m e meter (3.2808 foot)
km = Kilometer (0.6214 mile)

ABBREVIATIONS AND ACRONYMS

APT Asset Privatization Trust

APEX = Apex Development Finance Program
BOT = Build-Operate-Transfer Program
DBP = Development Bank of the Philippines
ECC e Energy Coordination Council
ERB = Energy Regulatory Board
ERL = Economic Recovery Loan (Loan 2787-PH)
ERR = Economic Rate of Return
ICB = International Competitive Bidding
IGLF = Industrial Guarantee and Loan Fund
IRR = Internal Rate of Return
UfW = Kreditanstalt fur Wiederaufbau
LRMC = Long Run Marginal Cost
MERALCO = Manila Electric Company
MIS = Management Information System
NEA = National Electrification Administration
NPC = National Power Corporation
NPV = Net Present Value
OEA = Office of Energy Affairs
OECF = Overseas Economic Cooperation Fund
PCIB = Philippine Commercial and Industrial Bank
PNOC = Philippine National Oil Company
REC = Rural Electric Cooperative
SCADA = Supervisory Control and Data Acquisition
SOEs = Statements of Expenditures

FISCAL YEAR

January 1 to December 31
 FOR OMCIALUSEONLY

I-
i

PHILIPPINES

itANILA POWERDISTRIBUTIONPROJECT

Loan and Project Summary

Borrower: Development Bank of the Philippines (DBP)

Guarantor: Republic of the Philippines

Beneficiary: Manila ElectricCompany (MERALCO)

Amount: US$65.5 million

Lending Terms: Repayable over 20 years, including five years of grace,

at the standardvariable interest rate.

Relending Terms: DBP would relend the funds to MERALCO under terms thut
include a twenty year maturity and a five year grace
period, and a fixed spread not to exceed 3.65Z over the
Bank's interest rate.

ProJect Obiectives: The proposedproject aims to improve MERALCO's

subtransmissionand distributionsystems,facilitate
better communicationbetween substations,and revitalize
the organization'smaintenance capabilities.

Proiect Description: Under the proposed project,HERALCO would undertake the

followingactivities: (a) constructionmnd upgradingof
subtransmissionlines, and additionof substation
capacity; (b) upgrading of existingdistribution
networks; (c) improvementand expansionof the radio-
multiplex facilitiesfor system monitoringand control;
and (d) provision of equipment and vehicles to improve
maintenance.

This document has a restricteddistributionand may be used by recipientsonly in the performance

of their officialduties. Its contents may not otherwisebe disclosedwithout WorldBank authorization.
 - ii -

Benefits: The benefits of the proposed project are primarily (i)

the enhancement of the reliability of supply to existing
consumers; (ii) the decrease of system losses to achieve
greater efficiency in transmission and distribution; and
(iii) the provision of additional distribution capacity
to satisfy strongly growing demand.

Risk: No technical risks are foreseen. As a result of the

occasional liquidity constraints that are normal to a
public utility, MERALCO could have difficulty realizing
counterpart funds and thereby keeping to the project
implementation schedule.

EstimatelICosts:

Local Foreign Total

--------USS Million-------

Subtransmission Lines and Substations 34.3 33.4 67.7

Upgrading of Distribution System 15.1 9.7 24.8
Radio-Multiplex Facilities 0.9 2.0 2.9
Mairtenance Equipment and Vehicles 1.4 4.7 6.1

Base Cost 51.7 49.8 101.5

Physical Contingencies 5.2 5.0 10.2

Price Contingencies 4.1 4.2 8.3

iotal Project Cost /a 61.0 59.0 120.0

Interest During Construction 3.5 6.5 10.0

Total Financing Requirements 64.5 65.5 130.0

Financing Plan:

IBRD 6.5 59.0 65.5

MERALCO 58.0 6.5 64.5

Total , 64.5 65.5 130.0

Estimated Disbursements:

IBRD Fiscal Year 1990 1991 1992 1993 1994 1995

- _______________ (USS million) ------------

Annual 0.5 5.9 12.8 17.0 14.0 15.3

Cumulative 0.5 6.4 19.2 36.2 50.2 65.5

Economic Rate of Return: 32Z

/a The project cost includes an estimated US$9 million equivalent of taxes

nt" g,t 4 -
 - iii -

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE ENERGY SECTOR ............................................. 1

A. Overview ..................................................
1
B. Energy Sector Institutions ................................ 1
C. The Power Sector ....... ................. 2
D. Bank Lending for the Sector ............................... 4
E. Sectoral Issues ......................... S
F. Rationale for Bank Involvement ..... ............. 8

II. THE PROJECT.8

A. Project Origin and Formulation ..

B. Project Objectives ..
C. Project Description.. 9
D. Project Costs .. 10
E. Financing Plan .. 11
F. Project Implementation and Schedule .. 12
G. Procurement ........................................... 13
H. Disbursements.. 15
I. Monitoring and Reporting. 15
............................
J. Environment ...............................................16

III. THE BORROWER................................................... 16

A. Background 1958-1986...................................... 16
B. DBP's New Role and Strategic Orientation.................. 17
C. Organization and Management ............................... 19

This project was appraised originally in August 1987 by a mission consisting

of Messrs. Jamil Sopher, Darayes B. Mehta, and Anil K. Malhotra (World Bank).
It was reappraised in November 1988 by a mission consisting of Messrs. Jamil
Sopher, Vinod Busjeet, Karl Jechoutek, Mihir Mitra, and Joachim Iske (World
Bank). This report is based on the findings of these two missions.
 - iv -

Page No.

D. Personnel Policy and Training .. 19

E. Accounting and Management Information System . . 20
F. Loan Activity and Asset Management . . 20
G. Liability Management .. 21
H. Firancial Position and Performance . . 22
I. Audit..................................................... 24
J. The Proposed Loan .................... ......................
24

IV. THE BENEFICIARY................................................ 25

A. Introduction ............................................... 25
B. Ownership .................................................25
C. Organization, Management and Staff ............ ............26
D. Training .. 27
E. Operations, Maintenance and Losses ............ ............27
F. Accounting System ....... ............. .....................28
G. Financial Planning and Budgeting ............. .............28
H. Commercial Systems ....... ............. ....................28
I. Audit .....................................................39
J. Taxes .....................................................39
K. Insurance .................................................39
L. Dividends .................................................30

V. FINANCIAL ANALYSIS OF MERALCO ................................. 30

A. Introduction .. 30
B. Past and Present Financi-- Performance .......... .......... 30
C. Tariff .................................................... 33
D. Revaluation of Assets .. 34
E. Financing Plan ........ .............. ......................35
F. Future Financial Performance ............. I................
. 36

VI. PROJECT JUSTIFICATION AND RISKS ............................... 38

A. Design Optimization ....... ................. ............... 38

B. Economic Rate of Return ................. ..................39
C. Benefits and Risks . .............................. 40

VII. AGREEMENTS AND RECOMMENDATION ................................. 41

 v

ANNEXES

1.01 Load Forecast for the Luzon Grid

1.02 Load Forecast for the MERALCO FranchiseArea 1988-97
2.01 Detailed Descriptionof the Project
2.02 Detailed Project Cost
2.03 Project ImplementationSchedule
2.04 Major Project ProcurementContracts
2.05 DisbursementSchedule
3.01 DBP's Annual Financial Statements1984-87
3.02 DBP's ProjectedAnnual Financial Statements1988-94
3.03 OrganizationChart for DBP
3.04 DBP's Policy Statement
4.01 OrganizationChart for MERALCO
4.02 MERALCO - Staffing Profile
5.01 HERALCO'sAnnual FinancialStatementsand Projections 1984-95
5.02 MERALCO's Program to Reduce System Losses, Receivabl.es
and Payables.
6.01 Economic Rate of Return
6.02 List of Documents in Project File

MAP

IBRD 21390 - Expansion of the MERALCO System

 - 1 -

I. THE ENERGY SECTOR

A. Overview

1.1 The energy sector'spreeminencein the Philippineeconomy grew as a

result of the oil crisis of the 1970s. At the time of the first major oil
price increase in 1973. importedoil accounted for 95Z of total energy
consumption. The Governmentrespondedto that price increaseby implementing
an iergydiversification/management policy,which was based on:
(a) replacingimported oil with indigenousprimary energy; and (b) using
pricing as the major means of encouragingthe efficient utilizationof energy.
Since then, the ratio of importedoil to total energy usage declined to 562 in
1986 and is expected to drop further to about 482 by 1992; and the price paid
by users of petroleum and derivativeproducts, includingelectricity,
increasedsubstantially. With the recent economicrecovery, energy usage has
begun increasingrapidly; in particular,electricalenergy consumptionreached
19,337 GWh in 1987, representinga growth rate of 13.4X over 1986. Power
consumptionin 1988 and beyond is expected to continue to grow at a rate of
about 72 per annum.

1.2 The shares of energy consumptionby sector have remained stable over
the years. The residentialand commercialsectors account for about 162 of
usage, with the industrialsector consuming 442, and the transport sector,
352. The share of electricityas a proportionof energy consumptionhas
increasedconsiderably;electricalenergy accountedfor about 472 of primary
energy consumptionin 1986, comparedto only 222 in 1973.

B. Energy Sector Institutions

1.3 Before the change in governmentin 1986, the Ministry of Energy

coordinatedall policies, plans and programs for the energy sector. The
ministry served as the parent organizationfor two of the largest Government
owned corporationss(i) the NationalPcwer Corporation (NPC), which had
responsibilityfor power generationani transmission;and (ii) the Philippine
National Oil Company (PNOC),which was responsiblefor assuring the adequacy
of oil suppliesand for developmentof indigenousenergy resources. The
National ElectrificationAdministration(NEA),which has been the organization
responsiblefor formulatingand implementingthe Government'srural
electrificationpolicies,wap sIot within the control of the Ministry of
Energy, but ratner under the Ministry of Human Settlements.

1.4 Foilowing the change in Governmentin 1986, both the Ministry of

Energy and the Ministry of Human Settlementswere dissolved;all energy
agencies as well as NEA were brought temporarilyunder the Office of the
President. In mid 1987, the Office of Energy Affairs (OEA), which was given
responsibilityfor planning and coordinatingpolicies and programs for the
energy sector,was formally placed under the Office of the President. At the
same time, NPC and PNOC were brought under the formal control of the Office of
the Pr sident while NEA was placed under the jurisdictionof the Departmentof
Environmentand Natural Resources. The Energy RegulatoryBoard (ERB)was
formed, and was given inter alia price setting authorityover private sector
suppliersof electricity. Recently, to develop formal linkagesbetween the
 -2-

energy sector participants,the Governmentformed an Energy Coordinating

Council (ECC) that would (i) be chaired by the Executive Secretary;(ii) have
as members NPC, PNOC, and NEA; and (iii) have OEA acting as its Secretariat.

C. The Power Sector

1.5 Overview. The electricpower industryin the Philippinesis divided

into two segments: (a) generationand transmission;and (b) distribution.
The sector has a number of participatingorganizations,some of which are
publicly,and others privately,owned. By far, the largest organizationis
NPC, which is responsiblefor the generationof bulk power and its transmis-
sion through a number of grids that serve virtually the entire country except
for remote rural areas and small outlying islands. Power is distributed
within major urban areas by a number of investor-ownedutilities. Of these,
the largest is the Manila ElectricCompany (MERALCO),which serves Metro
Manila and surroundingtural areas, and accounts for about 70? of NPC's sales
in Luzon (about 502 of NPC's sales nationwide). The rural areas are served by
117 Rural Electric Cooperatives(REC), a few of which generated all or patt cf
their power. Recently, NPC agreed to take control over these RECs' generating
facilities;and the RECs are becoming electricitydistributionoutfits
exclusively. NEA was establishedto service the cooperativesby
(i) mobilizing funds; (ii) providing technicalassistance;and (iii) arranging
procurementof common materials.

1.6 At the end of 1987, the total installedcapacityof the Philippine

power subsectorwas abo 6,600 MW, of which 5,788 MW (88Z) belonged to NPC.
'

Total generationfrom be,; facilitieswas about 21.0 TWh in 1987, accounting

for about 90Z of the Philippinec'total generation. The residentialsector
accounted for 23Z of aggregateelectricitysales; the commercialsector, 22Z;
the industrialsector, 50Z; and the Government,street lightingand water
supply, 5X. Losses exceeded212 of gross generation.

1.7 As a result of absorbing the franchisesof failing rural electrifica-

tion cooperativesalong its fringes,MERALCO's service area expanded from
3,244 sq km in 1982 to 8,813 sq km in 1986, and its number of customers rose
by 45?, from 1.1 million to 1.6 million during the same n-riod. While its
franchisearea remainedessentiallythe same in 1987, its number of consumers
increasedby nearly 62 to about 1.7 million during that year. MERALCO's
energy sales rose from a 1982 level of 8.5 TWh to a high of 9.2 TWh in 1983,
and then fluctuatedwith the performanceof the economy; sales declinedto
about 8 TWh during both 1985 and 1986 before rising again to about 8.8 TWh in
1987. Annual financialperformancehas been averaginga healthy 8? return on
revalued assets; however,because of liquidityconstraints (para. 5.3),
MERALCO's capital expenditureshave been less than 70Z of the company'sown
estimateof requirementsfor sustainingits standardsof service,especially
during the economic recessionof 1982-86. During that period system losses
increased from 11? to 21Z. While MERALCO stabilizedits losses at essentially
the same level in 1987, it succeededin reducingthem considerablyto an
average of 17Z during 1988.

1.8 Load Forecasts for Luzon and the MERALCO FranchiseArea. The strong
growth in demalndrecorded in 1987 has continuedinto 1988. As a result of the
economic recovery and expectationsthat the deeper economicproblems of the
mid-1980shave been overcome,growth in electricitydemand is expected to
remain strong well into the 19909. The latest system load forecastfor the
Luzon grid through the year 2002 (Annex 1.01) assumes a growth rate of 7.01
for energy sold for the period 1988-90; this growth rate increasesto 7.52 for
the period 1991-2002. An even more robust growth is forecast for the MERALCO
franchisearea (Annex 1.02). Total sales are forecast to grow by slightly
more than 10? per year during the period 1988-92;this rate would then be
expected to drop to about 7.82 for the period 1993-97. The projected growth
in demand is expected to be led by industry (whose demand for electricityis
expected to grow by nearly 12X per year during 1988-92 and about 8.4? per year
during 1993-97) and commerce (whose demand for electricityis expected to grow
by nearly 112 per year during 1988-92 and about 8? per year during 1993-97);
during the same period, the number of MERALCO's consumers is only expectedto
increaseby about 4.22 per year (4.72 per year during 1988-92 and 3.7? during
1993-97). These growth rateswill require that (a) NPC make substantial
investmentsin generationand transmissionequipmentbetween 1989-98;
(b) MERALCO expand and upgrade its distributionsystem substantiallyduring
the same period; and (c) MERALCO improve substantiallyits system reliability,
inter alia by reducing losses, during 1989-92.

1.9 Power Sector InvestmentProgram. The existinggeneratingcapacity

in Luzon is 4,100 MW. NPC's oil-basedpower plants (about 1,925 MW), many of
which had originallybeen built and owned by MERALCO, have not been maintained
adequatelyduring the recent past and have deterioratedto conditionsof poor
reliabilityand low thermal efficiency. Currently,those plants are operating
at substantiallyless than their rated capacity, and NPC has begun
implementinga program to rehabilitatethem. In addition, about 220 MW at the
Tiwi Geothermalplant will be retired by 1990 due to technical problemswith
the steam supply. Therefore,the total availablecapacity, after
rehabilitationof the oil-firedplants, will be about 3,000 MW. In contrast,
the Luzon grid's current peak demand of 2,600 MW is expected to reach 3,700 MW
by 1992. New generationdue to be commissionedbefore 1992 includes some
500 MW of gas turbinesand the 110 MW Bacon Manito 'eothermalPower Plant
(financedin part by Loan 2969-1-PH). As a result, system reliabilityis
expected to fall somewhat;the loss of load probability is expected to
increase from its present level of about four days/year to about seven
days/yearby 1991.

1.10 Meeting increasedload demand and improvingNPC's system reliability

will require some heavy investment,estimated at about US$7 billion equivalent
between 1989 and 1995, a time when both NPC and the Governmentwill face
serious resourcemobilizationconstraints. Short-termincreases in capacity
can only be provided through projects involvingshort lead time for which
substantialfinancingwill have to be obtainedon attractiveterms. Longer-
term investmentdecisionsneed to be optimized in order that available
resourcescan be stretchedas far as possible. NPC is exploringways of
relieving the Governmentand itself of a part of this investmentburden by
creating a climate conduciveto private sector participationin generation
through Build-Operate-Transfer (BOT) or Build-Operate-Own(BOO) programs;
alternatively,mechanismsare being developed to char..elprivate sector
financing into the power sector. The DevelopmentBank of the Philippines
(DBP), which has been designatedby the Government to become the nation's
principalwholesale bank (para. 3.6), is consideringa number of initiatives
for encouragingprivate sector investmentin the power sector. In the context
 -4 -

of its role as a wholesale bank, DBP ir participatingin the proposedproject

as the prospectiveBorrowerof the RanK loan and will onlend the proceeds to
MERALCO (paras.2.12 and 3.27).

1.11 The plannez:investmentsin generationard transmissionneed to be

supplementedwith investmentsby the private distributioncompanies and the
RECs in improvementand augmentationof distributionsystems. Investmentsin
reducingdistributionlosses are particularlyurgent, as these can delay the
need for additions to generatingcapacity. However, throughoutthe 19809,
investmentsin distributionsystem upgradeswere well below what was needed
and focussedprimarily on adding new connections. MERALCO alone is facing
investmentsof about US$460 million during 1989-93,merely to restore its
system to its 1982 operating standards. These investmentswould expand the
capacity of its transmissionand subtransmissionnetworks as well as its
system of substations,ard extend primary and secondarydistributionlines to
meet the load. To the extent that MERALCO can obtain financing for this
program from commercialsources,the investmentburden facing NPC and the
Governmentwould be reduced still further. To ensure not only that MERALCO
developsan investmentprogram that addressesadequatelythe need for system
expansionand improvement,but also actually implementsthose investmentsin a
timely fashion,at negotiationsMERALCO agreed (i) to conduct not later than
December 1 of each year jointlywith DBP and the Bank, a review of its
investmentprogram for the next five years as well as its investment
accomplishmentsfor the past two years, and (ii) to adopt the reviews'
mutually acceptablerecommendations.

1.12 While MERALCO'smedium term investmentswill have the biggest and

most immediate impact on upgrading the quality and reliabilityof distribution
services, the Governmentalso needs to address the issue of inadequate
distributionsystems in the rural electrificationsector. To this end, the
Bank is consideringincludingin some future operationto finance power
investmentsa rural electrificationcomponent targetingurgentlyneeded
rehabilitatior.and major maintenance. In addition,a Rural Electrification
Sector Study will help prioritizeinvestmentsin system expansion and
improvement.The Bank could then considera program of investmentlending for
that sector.

D. Bank Lending for the Sector

1.13 Over a period of 30 years, the Bank Group has made seven Bank Loans
and one IDA Credit, aggregatingUS$267.2million, to NPC. These eight
operationsfinanced seven projects, includingone to develop geothermalpower,
three to finance hydroelectricfacilities,two to support thermal power
plants, and one to improve NPC's transmissionsystem. However, between the
Seventh Power Project (Loan 1460-PH) and the Bacon Manito GeothermalPower
Project (Loan 2969-1-PH),the Bank did not have an active policy dialoguewith
NPC for about ten years (1978-88). All of the early projects successfullymet
their objectivesand were completedwithout major problems;however,most
encounteredproject implementationdelays caused in part by design changes and
in other part by cumbersomeproceduresfor contract award. Some of those
delays led to cost overrunsand delayed loans closings. This was particularly
true of the Fifth and Sixth Power Projectsduring the mid 19709 and, to a
 -5-

lesser extent, of the Seventh Power Project (the last project to be financed
before the ten year hiatus). The Bank Group also made one loan for US$60
million to NEA. PPARs were prepared for (i) the Fourth Power Project (PPAR
No. P-0980, january 1976), and (ii) the Rural ElectrificationProject (PPAR
No. 5372, June 1985). Both audit reports confirmed that the projects
encounteredimplementationdelays and some cost overruns resultingfrom design
changes and cumbersomecontract award procedures. These problems should be
minimized under the proposed project because (i) detaileddesigns were
comprehensiveand thorough,and were either completedor well advancedby
project appraisal in November 1988, and (ii) the appraisalmission
concentratedon procurementpackagingwith the expectationthat bidding
procedureswould be completed ahead of schedule,thereby accommodatingsome
delays in contract award.

1.14 Another member of the Bank Group, the InternationalFinance

Corporation (IFC) has made two loans to MERALCO: (i) one for US$12 million
equivalentin 1967, and (ii) a second for US$32 million equivalentin 1588.
The recent lTan is intendedto finance a time slice of MERALCO's investment
program between 1989-91. In addition,IFC has indicatedan interestin taking
a lead role in placingwith other investorsfuture MERALCO issues of common
stock or equivalentpermanent equity instruments. With IFC as the anchor for
its foreign financingefforts,MERALCO is seeking investmentfinancing from
(i) the Bank for the proposed project; (ii) the Kreditanstaltfur Wiederaufbau
(KfW) for a project to strengthenits system of substations,and (iii) the
Overseas EconomicCooperationFund (OECF) for projectsthat will improve and
augment distributionfacilitiesserving depressed areas in Metro Manila and
rural areas within MERALCO's franchise. IFC is taking an active role
throughoutthe Philippinepower sect-or. In addition to its activitieswith
i MERALCO, IFC is participatingin the first BOT venture to construct and
operate generatingfacilitiesand sell the output in bulk to NPC.

E. SectoralIssues

1.15 In conjunctionwith the recentlycompletedEnergy Sector Study

(Report 7269-PH; September15, 1988), the Governmenthas developeda strategy
for exploitingalternativefuels in future power sector developments. As a
derivativeof that strategy,NPC developeda least cost investmentprogram
that was eviewed in detail with the Bank. In conjunctionwith the Bacon
Manito GeothermalPower Project (Loan 2969-1-PH),NPC has agreed to annual
reviews by the Bank of its investmentprogram. The other issues, which need
to be addressed in the context of the proposedproject and future operations
in the Philippinepower sector, are operationalin nature and concern the need
to (i) mobilize long-termfunds, especiallyfrom private sector sources,to
finance power sector investments;(ii) reduce distributionsystem losses;
(ili) rationalizetariffs in line #ith long run marginal cost; and (iv)
restructurethe financesof the power utilitiesand RECs.

1.16 Financing of Power Sector Investments. As mentioned previously

(para. 1.10), the power sector'sinvestmentrequirementsexceed the financing
capabilitiesof the Government. Steps to engage private sector participation
in investmentsin electric power are needed urgently. NPC is proceedingon
one track to interestprivate parties in the constructionand operation of
 - 6 -

generatingfacilities. In those cases, NPC would purchase the output from

these facilitiesat a price based on its own cost of supply; the operator
could realize a substantialreturn on investment,depending on the efficiency
with which the facilitywas built and operated. If successful,these programs
would reduce the extent of power sector investmentsthat the C'vernmentwould
need to address.

1.17 In addition,the Governmentneeds to develop a strategy for financing

power sector investments. For the short and medium terms, that strategyneeds
to emphasizeborrowing from foreign lenders,with an immediatefocus on
official sources. NPC is already authorizedto borrow from abroad and has
developed direct access to a wide varietv of foreign lenders and development
institu'tions.However, the Governmentmust also arrange for the private
distributionutilities and the RECs to obtain financingfrom similar sources
for their criticallyneeded investments. In the longer term, resourcesneed
to be mobilized from the private sector and channeled into instrumentswith
maturitiesappropriateto the longer term needs of the power sector.

1.18 Following its successfulrestructuringand institutional

strengtheningduring the last two years, DBP has been designatedas the
financialinstitutionresponsiblefor tapping long-termfunds currently
available in the Philippines (such as, funds from the Social SecuritySystem,
insurancecompanies,pension funds, etc.) for channelinginto capital
intensivesectors. It would perform this resourcemobilizationfunctionby
acting as a (i) wholesale bank, providing funds raised locally as well as from
official foreign borrowingsto retail financialinstitutionsfor onlendingto
eventual borrowers;and (ii) syrndicator of local currency loans. This
strategicreorientationof DBP from a traditionaldevelopmentfinance
institutioninto a wholesale bank will lead to it playing an important role in
financingpower sector investmentsin the future. By acting as the
prospectiveBorrowerand onlenderot the proposed loan, DBP is undertakingits
first significantinitiativestoward fulfillingits wholesale banking
responsibilitiesin this sector.

1.19 Reducing DistributionLosses. Nationwide,distributionlosses

exceeded 21? in 1987. System losses within Luzon increasedfrom 14Z in 1978
to 24? in 1987. During the same period, MERALCO's system losses increased
from about 9? to about 21Z. The Government,however, has lacked a strategy
for investmentin distribution. Whatever investmentwas made during this
period, be it within the franchiseareas of the private distributionutilities
or the RECs, focussedon adding new connections,frequentlyat the expense of
quality of service for existingconsumers.

1.20 In 1987, when MERALCO r.ecognizci

the urgency of addressingthis
problem, it developedprograms for reducingtechnicaland non-technical
losses. An investmentprogram was developed to improve and augment its
facilitiesso that they would be adequate to meet growing demand throughout
its franchisearea. Specific investmentswere selectedinter alia based on
the benefits they would provide in reducingsystem losses (para. 6.2). The
proposed project includesmany componentsthat address the issue of technical
losses, either by strengtheningor replacingsystem weak points. In addition,
MERALCO has developedand begun implementingsuccessfullya program to reduce
non-technicallosses (para. 5.8 and Annex 5.02). In conjunctionwith the
proposed project,MERALCO agreed to continue implementingthat program.
 - 7 -

1.21 In part to assist in developingan approach for reducing rural

distributionlosses, the Government invited the Bank to conduct a Rural
ElectrificationSector Study. The main field mission for that study was
undertakenin March 1989, and the results of the study are expected to be
discussedwith the Governmentduring the summer of 1989. That study will seek
to help NEA develop a strategy for investment,and identifymeasures that NEA
and the RECs can take to improve their operationaleffectiveness.

1.22 Tariff Rationalization. Although NPC's revenuesper kWh are similar

to what would be expected from a marginal cost based tariff, and revenuesper
kWh of the distributionutilities and the RECs often exceed marginal cost
based levels, the structureof tariffs is inconsistentwith marginal cost
considerations. Demand charges are low and do not reflect the cost of adding
capacity; in contrast,high voltage consumerspay energy charges that exceed
considerablythe cost of supply. Moreover,virtually all distributiontariffs
include (i) extremely generousblocks of electricitybeing provided to low
voltage consumers at highly subsidizedrates, and (ii) provisionsto enable
the distributionutilities and the RECs to recover from the consumer the cost
of purchasingelectricitythat has either been subsidizedor dissipatedas
losses. Thus, some consumers are paying negligibleamounts for much more than
their minimal power requirements,while others are paying much more than the
cost of supply for their electricity.

1.23 In early 1987, the Governmentadopted a policy that electricity

tariffs should be based on marginal cost. In that context,NPC is
restructuringits tariffs to reflectmarginal cost considerations. The
distributionutilities and the RECs would then redesigntheir own tariffs
based on the new NPC tariff that applies to them. The Bank has an active
dialoguewith the Governmentand NPC regarding this issue. The proposed
project does not address this issue specificallybecause the initiativein
resolvingthis issue rests with NPC and not MERALCO.

1.24 FinancialRestructuringof the Power Utilities and the REC8. Because

of the absence of long-term financialinstrumentsbearing maturitiesthat are
appropriateto the long-termneeds of the power sector, the power utilities
and the RECs must necessarilybe more conservativethan their counterpartsin
developedcountries in their use of leverage. However, the power utilities
(including,in this instance,NFC) have built their equity foundationon
revaluationreserves (which are non-cashbook entries) rather than on paid-in
capital or retainedearnings (which representactual cash inflows). In turn,
the RECs have only minimal paid-in capital and generally lack the revenues
needed to build a solid base of retained earnings.

1.25 Until an appropriatelong-termdebt instrumentis developed,the

power utilitiesneed to be encouragedto raise more permanent capital. Since
they will need to pay dividendsto attract that capital, rates will need to be
kept high enough to enable the retention of satisfactoryamounts of earnings.
The proposed project addresses this issue through the raising of new equity
capital and the substantialretained earningsthat are vital constituentsof
MERALCO's financingplan for 1989-93 (para. 5.13 et seq. and Annex 5.01). The
Rural ElectrificationSector Study is examining prospects for the RECs to use
electricitypricing to improve their retainedearnings.
 -8-

F. Rationale for Bank Involvement

1.26 The Governmentis facing major investmentsin the power sector over
the next several years. These investmentsare intendedto provide major gene-
ration and transmisqionfacilitiesneeded to meet existingdemand as well qs
rapidly increasingnew demand resultingfrom recent and projected economic
growth. However, the benefits of new investmentin generationand transmis-
sion cannot be optimizedunless balancedby appropriateinvestmentsin distri-
bution. The Governmenthas developed a strategyfar least-costpower
developmentand for strengtheningthe policy and institutionalframeworkin
the sector. It would like the Bank to help in implementingthat strategyby
supportinga series of projects.

1.27 Through the Bacon Manito GeothermalPower Project (Loan 2969-1-PH;

June 23, 1988), this proposed project, and an Energy Sector Loan that is
currentlyunder preparation,the Bank has developedclose working
relationshipswith the principal sector entities and is thus in a positionto
assist the Governmentin achievingmuch needed sector coordination. While the
other operationsaddress issues related to generetionand transmission,this
project addresses issues facing the entity responsiblefor distributingabout
half of the country's commerciallyavailableelectricity. In particular,the
project will support overdue system extensionsand improvements,and will
ensure that MERALCO maintains investmentsat appropriatelevels in the future.
Also, the project would enable the Bank to support specificmeasures for
strengtheningMERALCO's operationaland commercialcapabilities.

1.28 The proposed loan would also support DBP in its new wholesale banking
role. More specifically,the Bank's participationin the project will help
develop DBP's capacity to appraiseand superviselarge loans to the power
sector.

II. THE PROJECT

A. Project Origin and Formulation

2.1 The Bank was originallyasked to considerfinancingmuch of the

proposedproject as a componentof the Bacon Manito GeothermalPower Project
(Loans 2969-0-PHand 2969-1-PH). Therefore,the proposedproject was
appraised for the first time in August 1987, in conjunctionwith the appraisal
of the Bacon Manito Project. However, the MERALCO componentwas dropped from
the Bacon Manito Project when an arrangementfor channelingthe proceeds of a
Bank loan to MERALCO, acceptableto the Government,MERALCO and the Bank,
could not be established. Since then, DBP has been successfullyrestructured
and designaW.edas the nation's principalwholesale Bank (para. 3.6); in that
capacity, it can serve as conduit for official foreign loans to private sector
companies. The Bank reappraisedthe proposedproject in that context in
November 1988.
 - 9 -

B. Project Obiectives

2.2 The proposedproject is designedto improve MERALCO's subtransmission

and distribuitionsystems, facilitatebetter communicationbetween substations,
and revitalizethe organization'smaintenancecapabilities. In so doing, it
will er-ableMERALCO to meet increasingload demands in the coming years,
reduce losses and ensure more effectivedistributionof electricitywithin its
franchisearea. The proposed project will also support improvementof
MERALCO's technical and commercialoperations.

C. Project Description

2.3 The main componentsof the project are:

(a) Constructionand upgrading of subtransmissionlines, and addition

of substationcapacity;

(b) Constructionand upgrading of distributionsystems;

(c) Improvementand expansion of the radio-multiplexfacilitiesfor

system monitoringand control;and

(d) Provision of equipmentand vehicles to improve maintenance.

2.4 SubtransmissionLines and Substations. This componententails

constructionof about 78 km of 115 kV, 31 km of 34.5 kV and 6 km of 13.8 kV
subtransmissionlines, in addition to some small sections of 230 kV and 69
kV lines; reconductoringof about 14 km of 34.5 kV and 4 km of 13.8 kV
lines; installationof about 1,355 MVA of substationcapacity;and addition
of approximately104 MVAR of reactivecompensationdevices. It will enable
MERALCO to strengthenits transmissionand distributionnetwork to cope
with projected increases in demand for power, reduce system losses, improve
quality of service,and enhance the reliabilityof its distributionsystem.
While the subtransmissionlines will also relieve overloadingof existing
lines and provide additionaloutlets for power, the substationswill assure
efficient distributionof energy.

2.5 Upgrading of DistributionSystems. Due primarily to resource

constraints,MERALCO's distributionnetwork had not been maintained
adequatelyin the recent past (paras. 4.9 and 5.4), resulting in increased
system interruptions,loss of reliabilityand higher system losses. Since
mid-1987,however, MERALCO has embarkedupon a distributionsystem
improvementprogram. Not only are the constituentsof this component
intendedto reverse the deterioratingtrend, but they also aim to reduce
technical losses through optimum design of extensionsand improvementsin
existing distributionfacilities. Activitiesincludedunder this program
are rehabilitationof lines, conversionto higher voltages, reconductoring
of overloadedlines, and improvementof power factor, metering and
monitoring facilities. This latter activityinvolves inter alia
installationof voltage regulators,line capacitors,kWh-meters, load break
 - 10 -

switches, transformercooling fans, conductorsand power cables. This

combinationof activitieshas been formulatedas an on-going program for
which MERALCO has developed annual implementationplans. This project
component envisages financinga time slice of HERALCO's annual distribution
system improvementplans for the years 1990 to 1993.

2.6 Radio-MultiplexFacilities. Effective system operationand

control includesensuring adequatecommunicationfacilitiesbetween the
electric system control center and the substations. A SCADA (Supervisory
Control and Data Acquisition)system is being installedwith the financial
and technical support of the suppliers/manufacturers of the equipment;
however, the effective use of the SCADA system as well as other equipment
for system operation and control requiresthat the existing communication
facilitieslinkingMERALCO's substationsbe rehabilitatedand expandedto
accommodateincreasedcommunicationtraffic brought about by increasesin
the number of customers and the expansion of the franchisearea. A radio
multiplex system currently serves as MERALCO's primary communicationlink
for supervisorycontrol,pilot-wirerelaying, telemetering,and voice and
data communication. Rehabilitationand improvementof this radio multiplex
system will require purchaseand installationof 30 sets of radio multiplex
equipment to link the master control stationwith 18 remote stations.
Other communicationand control activitiesincludedunder this component
are: (i) installationof a system to monitor remote substations;
(ii) replacementof old communicationequipmentand cables; and
(iii) installationof a voice frequencytelegraph system.

2.7 Maintenance Equipmentand Vehicles. To operate and maintain its

vast array of transmissionand distributionnetworks effectively,MERALCO
needs specialmaintenanceequipment and mechanizedconstructionand
maintenancevehicles as well es spares of importantline equipment.
Included in this componentare the purchase of cranes, basket and derrick
trucks and a wrecker to facilitateboth constructionand maintenance,and
spare transformers,capacitors,switchgear,and circuit breakers to
facilitaterepairs.

2.8 A detailed descriptionof the proposed project is presented in

Annex 2.01.

D. Project Costs

2.9 The total project cost is estimatedat US$120 million (excluding

interestduring construction),of which about US$59 million is the foreign
cost includingthe indirect foreign cost of local components. Detailed cost
estimates for the project are presented in Annex 2.02 and summarizedbelow in
Table 2.1:
 - 11 -

Table2.1: PROJECTCOST ESTIMATE

ForeignCoat
Po oUMillion million
USIJ as X of
Local Foreign Total Local Forelgn Total Total

Subtran"miaainLinesand Substations 784.0 714.0 1,443.6 84.8 18.4 67.7 49.8

Upgradin of DistributionSystem 828.1 207.6 580.7 15.1 9.7 24.8 89.1
Rodlo-Multiplox
Fel'lltl"
n19.8 42.6 62.1 0.9 2.0 i.9 69.0
MeintenanceEquipmentand Vehicles 80.0 100.6 180.6 1.4 4.7 6.1 77.1
TotalB*se Coat 1,106.4 1,065.6 2,172.2 61.7 49.6 101.6 49.1
Phyulcl Contingencies 111.8 107.0 216.8 6.2 6.0 10.2 --
Price Contingencies 67.7 86.5 174.2 4.1 4.2 6.8 --
Total Project Cost / 1,806.4 1,269.8 2,6e4.7 61.0 59.0 120.0 49.2
INTEREST
OURINQCONSTRUCTION 74.9 189.1 214.0 8.5 6.6 10.0 --
TOTALFINANCING
REQUIRED 1,860.3 1,896.4 2,776.7 64.5 65.5 180.0 50.4

/a USS9million
The projectcost Includesan estimated equivalent of taxes and duties.

2.10 All costs are in December 1988 prices and are based on recent price
quotations from equipment suppliers. Physical contingencies are computed at
102. The price escalation for all costs expressed in US dollars is calculated
according to anticipated international price movements of 5.32 for 1988-90.
and 4.12 for 1991 and thereafter. The price escalation for all costs
expressed in local currency is calculated according to projected local
inflation rates of 7.5Z for 1988. 9Z for 1989-90 and 8.02 for 1991 and
thereafter. Interest during construction on the Bank loan is calculated by
applying the Bank's current interest rate of 7.652 to the average amount
expected to be drawn down in each year of construction. Interest during
construction on other loans is calculated similarly, using the aggregate
interest rate to HERALCO of 11.3Z. and adding applicable costs including the
commitment fee for the undrawn portion of the Bank loan before substracting
the amount payable to the Bank.

E. Financing Plan

2.11 The financing plan for the project is presented in Table 2.2 below:

Table 2.2: FINANCING PLAN FOR THE PROJECT

(USS Million)

Local Foreign Total Percent

IBRD 6.5 59.0 65.5 50.4

MERALCO 58.0 6.5 64.5 49.6

Total 64.5 65.5 130.0 100

 - 12 -

The Bank would finance the entire foreign component of the Total Project Cost
(which excludes interest during construction). In addition, the project
entails a substantial amount of civil works for the subtransmission and
distribution components. The Bank would finance about 652 (about US$6.5
million) of civil works that would be undertaken by contractors.

2.12 The proposed Bank loan of US$65.5 million would be lent to DBP for 20
years, including five years of grace on repayment of principal, at the
standard variable interest rate. DBP would relend the proceeds of the Bank
loan to MERALCO on terms that include a maturity of twenty years and grace
period of five years, and a fixed interest rate spread of not more than 3.65Z
over the Bank loan. MERALCO would finance from internal cash generation the
interest during construction associated with the onlent Bank loan and also
would bear the full foreign exchange risk. Execution of a Subsidiary Loan
Agreement between DBP and MERALCO,that shall have been reviewed and found
satisfactory by the Bank, is a condition of loan effectiveness.

2.13 The Government would guarantee the proposed Bank loan to DBP. In
turn, DBP would rely on collateral provided by MERALCOto secure the onlending
of the Bank loan proceeds (para. 3.30).

F. Project Implementation and Schedule

2.14 The transmission and distribution components are well within

MERALCO'stechnical and managerial capabilities for design, engineering and
implementation. By June 15, 1989, MERALCO will appoint a project manager for
coordinating its activities in connection with the proposed project. The
stringing of subtransmission lines will be undertaken by MERALCO'sown work
force. Construction under the project will be managed by MERALCO. In cases
where the civil works involved are relatively small and well within the
purview of its normal activities, that construction would also be handled by
MERALCO'sown work force. Otherwise, the civil works would be undertaken by
contractors. Erection of equipment for the substations will be undertaken by
the equipment suppliers under the overall coordination of the MERALCO Project
Manager. Assembly of the communications system will, be implemented by
MERALCO,with supervisory assistance from the equipment suppliers.

2.15 The implementation schedule for the subtransmission and distribution

components has been determined according to the order of priority derived for
each individual constituent of MERALCO's least-cost development plan. Those
two components are scheduled to be implemented entirely during the period
1989-93. For most individual constituents of the subtransmission component,
engineering and design as well as procurement will need to be completed in
1989, primarily because of the long lead time involved in the procurement of
transformers. In contrast, the design for substations can only be finalized
after the equipment is purchased; therefore the implementation schedule for
the substations indicate that they will be designed in parallel with
implementation of the rest of the project components.

2.16 Implementation of the distribution system upgrade component is

scheduled according to annual plans, within which MERALCOhas identified
constituent activities needed to address: ' , system loss reduction;
 - 13 -

(b) enhancementof system reliabilityand quality of service;and

(c) requirementsto meet load growth. In effect, the year-by-yearwork
scheduleshave been prioritizedbased on current levels of technical losses,
service interruptions,and projected load growth.

2.17 The engineeringand design for the radio multiplex facilitieshas

already been completed,and tender documents for this componentare under
preparation.

2.18 MERALCO plans to procure the maintenanceequipmentand vehicles in a

phased manner during the period 1990-92.

2.19 Annex 2.03 gives the implementationschedulewith key dates for the
completionof importantmilestone activitiesfor each component of the
proposed project. The project is scheduledfor completionby end 1994.

G. Procurement

2.20 The procurementarrangementsfor the project are summarizedin

Table 2.3 below.

Table 2.3: SUMMARY OF PROCUREMENTARRANCEMENTS

(US$ million)

ProcurementMethod
Project Component ICB LCB Other/a N/Alb Total Cost

SubtransmissionLines and Substations 43.6 8.3 1.0 27.2 80.1

(41.1) (2.0) (1.0) (0.0) (44.1)
DistributionSystem Upgrade 11.5 4.1 1.0 12.7 29.3
(10.5) (2.0) (1.0) (0.0) (13.5)
Radio-MultiplexFacilities 2.3 0.5 0.0 0.6 3.4
(2.3) (0.0) (0.0) (0-0) (2.3)
MaintenanceEquipment and Vehicles 5.6 0.0 0.0 1.6 7.2
(5.6) (0.0) (0.0) (0.0) (5.6)

Total 63.0 12.9 2.0 42.1 120.0

(59.5) (4.0) (2.0) (O.O) (65.5)

NOTE: Figures in parenthesesindicatefinancingfrom the Bank loan.

/a Limited internationalbidding, and internationaland local shopping.

Lb Refsrs to expenditureson engineeringand administrativeoverheads and also

duties and taxes of the order of approximatelyUS$9.0 million.
 - 14 _

2.21 For this project,MERALCO will prepare separateprocurementpackager

for all items to be procured through InternationalCompetitiveBidding (ICB).
These packages,which were finalizedat negotiations,include: (i) power
transformer;(ii) mobile power transformer;(iii)metal clad switchgear;
(iv) gas-insulatedswitchgear; (v) power circuit breaker; (vi) disconnect
switch; (vii) station type capacitor base; (viii) transformercooling fan;
(ix) undergroundpower cable; (x) wire; (xi) storage battery and battery
charAer; (xii) fuse cutout; (xiii) distributiontransformer;(xiv) potential
transformerand current transformer;(xv) radio multiplex equipment;
(xvi) oill/vacuumcircuit recloser; (xvii)voltage regulator; (xviii) regulator
bypass disconnectswitch; xix) line capacitorand accessories;(xx) load
breaker switch and line disconnectswitch; (xxi) transmissionand distribution
on-line pole; (xxii) lightingarrestor; (xxiii)insulator; (xxiv) time-of-day
meter; (xxv)mechanizedvehicle; (xxvi) switchboardmaterial; (xxvii)hardware
and accessories;and (xxviii)civil works for transmissionand distribution
systems. Many of these procurementpackageswill be bid concurrentlyso that
potential bidders are able to obtain bidding documents for as many packages as
they like and bid on any number of packages. The procedures to be followed
will be ICB as specified in the Bank's ProcurementGuidelines,except in those
instancesnoted in para. 2.22, in which Local CompetitiveBidding (LCB),
Limited InternationalBidding (LIB), and/or internationaland local shopping
(accordingto procedures that 'havebeen reviewedand found satisfactoryby the
Bank) might be used. Annex 2.04 identifiesthe mode of procurementto be used
for each of the proposed packages togetherwith a list of the equipment
includedin each package and the expected delivery schedule for each category
of equipment. All civil works to be financedby the Bank will be bid
according to ICB. For all ICB procurement,local suppliersand contractors
will be permitted to participateand, at MERALCO's option,will be eligible in
the evaluationof bids for the lower of: (a) a preferenceof 15? on the CIF
cost of the importedgoods; or (b) the prevailingcustoms duties and other
import taxes. All essential procurementdocumentationfor goods being
financedby the Bank and having an estimatedcost of over US$1 million
equivalentwill be subject to the Bank's prior review. Procurementpackages
valued at approximately80X of the loan amount are likely to be reviewed.

2.22 While MERALCO intends that most of the major packages of materials
and equipmentwill be procured through ICB, some exceptionsare possible for
contracts for (i) small lots of low value items where a large number of
foreignmanufacturersare well representedin the Philippines;(ii) equipment
and materials that are proprietary;or (iii) purchasesthat are needed to
ensure standardizationand compatibilitywith existingequipment. In
particular,for the distributionsystem upgrade component,many small items,
such as voltage regulators,line capacitors,kWh-meters,and load break
switches,need to be purchased on an annual basis. Also items in constant
demand, such as hardware and accessoriesneeded for constructionand
installationof equipment,are usually availableoff the shelf and MERALCO
should be capable of procuring them at short notice. The administrative
burden involvedin procuring these items accordingto ICB may negate the
benefits of using that procedure. Contracts for these goods, not exceeding
US$200,000up to an aggregate of US$4 million may be procured through LCB
proceduresthat have been reviewedand found acceptableby the Bank.
Equipment standardizationmay also call for LIB proceduresthat have been
reviewedand found acceptableby the Bank, to be followedin some exceptional
 - 15 -

cases. Contracts for these goods, not exceedingUS$200,000up to an aggregate

of US$1 million, may be procured through LIB. Finally,contracts for goods not
exceedingUS$50,000 up to an aggregateof US$1 million, may be procured
through internationalor local shopping,based on price quotationsobtained
from several foreign and Local suppliers (usuallyat least three) to ensure
competitiveprices.

H. Disbursements

2.23 The Bank loan would be disbursedagainst (a) 100X of the foreign
expendituresof directly importedequipment and materials; (b) 100? of local
expenditures(ex-factorycost) of locallymanufactureditems procured through
ICB; and (c) 802 of local expendituresfor other items procured locally;and
(d) 652 of the cost of civil works to be performedby contractorswhose
serviceswould be procured through ICB.

2.24 Disbursementsfor small contracts,with a value of USS 200,000 or

less, would made on the basis of statementsof expenditures(SOEs).
Documentationsupportingthe SOEs would not be submittedto the Bank but would
be retainedby DBP and made available for review by the Bank supervision
missions. To facilitateproject disbursements,a SpecialAccount in a fully
convertiblecurrencywill be establishedby DBP on terms and conditions
satisfactoryto the Bank. The authorizedallocationto the Special Account
will be US$4 million, representingfour months' average project expenditure.
Replenishmentsto the Special Account would be made quarterly or whenever the
account is drawn down by about 50Z of the initial deposit. The otandard
procedure for auditing SOEs will apply.

2.25 Annex 2.05 gives the disbursementschedule for the proposedBank

loan. Since no specificdisbursementprofile has been compiled for power
projects in the Philippines,the Asia regionalprofile for power projectswas
used to derive the disbursementschedulefor this project. However,given
that the project consists of discreetcomponentsthat are characterizedby
standardmaterials and equipmentand relativelyshort constructionperiods,
this project is not likely to span the seven years implied by the Asia
Regional profile. Therefore,that profile has been followedfor the first
five and a half years and the remainderof the loan is assumed to be disbursed
in the last semesterof the sixth year. The project completiondate for the
proposed loan will be December 31, 1994 and the closing date of the loan will
be June 30, 1995. During appraisal,MERALCO indicatedeloquentlythe urgency
of these investmentsand its commitmentto implementingthem even ahead of
schedule. This commitmentcombinedwith the approachused in packaging
procurement suggeststhat flieloan could be disbursedfaster than projected
and that the project could be completedas early as December 1993.

I. Monitoringand Reporting

2.26 Satisfactoryprocedures for monitoring (i) the physicalexecution of

the project; (ii) project expenditures;and (iii)MERALCO's technical,
commercial,and financialperformancewere developedat appraisal. HERALCO
will furnish proaress reports to the Bank every six months.
 - 16 -

J. Environment

2.27 In and around Metro Manila, the subtransmissionlines will traverse

existing routes of N.PC-owned230 kV lines or MERALCO-owned115 kV and 34.5 kV
lines. None of the new lines will traversevirgin territory. They constitute
either second circuits of existing systems,or new lines supplementing
existing distributionnetworks. New substationsare mostly additions to
existingNPC or MERAEf-Ofacilities. As such, no significantt environmental
impacts are associatedwith these projects. The transmissionlines will be
designedaccording to internationalstandards. Within urban areas, high
voltage lines will be run on poles meeting necessary safety codes.

2.28 Noise pollution from distributionsubstationsis the one possible

environmentalhazard that could exceed prescribedlimits. After receiving
detaileddesign informationon the trah.sformers from the potential suppliers,
MERALCO will conduct environmentalimpact studies for each of the substation
project componentsunder this project. These studieswill determine if, with
the installationof the new transformers,the noise level at the boundary of
any substationwould exceed allowablelimits. The results of these studies
will be available for discussionwith the Bank. In the event the studies find
noise pollution that exceeds prescribedlimits,MERALCO will take measures to
enclose transformerswith adequate sound barriers so as to ensure compliance
with environmentalregulationsconcerningelectricalsubstations. These
arrangementsare expected to ensure that the installationsto be built will
meet the Bank's environmentalguidelinesand that the proposedproject will
not have an adverse impact on the environment.

2.29 Although MERALCO owns most of the land it needs for the project, it
will need to purchase some additionalsmall parcels in connectionwith a
number of the substations. In those cases, it has already identifiedthe
parcels and is negotiating their purchasewith the present owners. MERALCO
has confirmed that each of these parcels is vacant. However, in the event
that these parcels should become occupiedby squatters,MERALCO will ensure
that they are adequatelycompensated. This is satisfactoryto the Bank.

III. THE BORROWER

A. Background:1958-1986

3.1 Established in 1958 as a Government-owneddevelopmentbank, DBP's

financing operationsuntil 1986 encompassedalmost all segmentsof the
economy, and both large and small-scaleenterprises. In addition to its
industrial,agricultural,real estate and transportationlending,DBP engaged
heavily in lending to social sectors such as educationand health care.
Starting in the seventies,under the guise of its developmentalmission, DBP
financedhigh risk and low return Governmentdevelopmentprograms ('directed'
or 'behest"lending),and the takeoverof financiallydistressedfirms at
Government'sdirection.
 - 17 -

3.2 This lack of financialdisciplinein its lending,compoundedby

seriousweaknesses in internalorganizationand procedures (notablycredit
appraisal and supervision),led to serious financialproblems. In the early
1970s, the total debt to equity ratio rose to over 10:1; the current ratio
fell to 0.2:1; and arrears in the 1. a portfolio and defaults in the guarantee
portfoliowere high. With its resourcemobilizationcapacity undermined,DBP
had to rely mainly on Governmentdeposits for funding its activities.

3.3 Several capital increaseebetween 1972 and l180, substantial

governmentdeposits to support its liquidityposition, and strengtheningof
its organizationand proceduresall failed to stop DBP's deteriorationin the
eighties. Considerableproblems of portfolio arrears and poor collection
rates persisted,as did the more intractableissue of high-risk and low-rate
behest loans. As part of the Bank financed IndustrialFinance Project (Loan
1984-PH;1981), the Governmentand DBP were asked to implementan "Action
Program",which includedfurther organizationalchanges,measures to reduce
DBP's dependenceon Governmentdeposits, and actions to improve the collection
performance. The financialeffects of behest lendingwere to be made
transparent,and Governmentwas to provide financialassistanceif DBP's
financialviability would be impairedas a result of behest lending. However,
continuationof DBP's problems, exacerbatedby the economic and political
crises of the period, led to DBP losing its accreditationas a participating
financial institutionin the project. DBP's financialsituation in 1985
remainedpoor, with a net loss of P 6.9 billion (US$370million equivalent),
representinga negative return on average net worth of -182.3Z. Annex 3.01
presents the details of DBP's financialperformancefor the period 1984-87.

3.4 Following the change in Governmentin 1986, the severityof DBP's

problems and its technicalbankruptcywere addressedby a comprehensive
rehabilitationand financial restructuringprogram developed in conjunction
with the Bank financedEconomic RecoveryLoan (Loan 2787-PH) (ERL). Major
componentsincluded: (i) a new charter and policy statement, (ii) installation
of a new management team and Board of Directors,(iii) transferof P 74
billion of nonperformingaccounts to the Asset PrivatizationTrust (APT),
created by the Governmentto sell those assets; (iv) implementationof a
drastic cost reductionprogram through staff reductionand sale of branches;
(v) an internalreorganizationand strengtheningprogram focussingon credit
policies, legal procedures,financial controls,accountingand internal
cor.trols.and personnelmanagement; and (vi) phasing out of subsidized
Governmentdeposits.

B. DBP's New Role and Strategic Orientation

3.5 DBP's financial restructuringand the major elementsof its internal

strengtheningprogram under the ERL have essentiallybeen completed,with DBP
being solvent during the last two years. Despite its profitability,however,
DBP has been seeking to define its role in the financialsystem. Not endowed
with the financial,organizationaland personnel resourcesnecessary to
undertake commercialbanking, DBP was also not sure that traditional
developmentbanking activities (with the higher risks attendant on term
lending)would be adequate to sustain its profitability.
 - 18 -

3.6 A recent Bank study of the financialsector (IBRD Report No. 7177-PH,
August 23, 1988) identifiedthe lack of institutionalarrangementsfor
mobilizingand channelinglong-term funds as a major constraintto investment.
The study recommendedthat a revampedDBP could be developed to fill this
institutionalgap. This would involvemandating DBP to act primarilyas a
wholesalefinancialinstitution,catering to financialintermediariesrather
than directly to business enterprises. Agreementwith Governmenthas been
reached on this new orientation.

3.7 The wholesale DBP would mobilize and channel term funds to the
private s,ztor through retail financialinstitutions.Given the availability
of domestic long-termfunds from the Social SecuritySystem, insurance
companiesand pension funds, DBP is expected to play a major role in domestic
resourcenobilization.However,DBP's increasedrelianceon domestic resource
mobilizationcan only be gradual;in the near future, the lack of a developed
capital market and the Government'scontinuingneeds to tap domestic savings
through high-yieldTreasurybills would impede DBP's raising significantlong
term peso funds. In such an environment,DBP will have to fund itself to a
significantdegree through foreign sources in the coming years. In this
context, DBP has been designatedas a conduit for official foreign borrowings,
the proceeds of which are to be channeled through retail financial
institutionsfor use in financingprivate enterprises. In line with this, the
Governmenthas agreed to the transfer from the Central Bank to DBP of the
existing credit programswith foreign funding -- the Apex DevelopmentFinance
Program (APEX) and the IndustrialGuaranteeand Loan Fund (I6LF). As part of
the Financial Sector AdjustmentProgram, IBRD has helped DBP formulatean
InstitutionalDevelopmentPlan that would define and make operationalDBP's
wholesale banking strategy, includingan action plan for mobilizingdomestic
term funds.

3.8 DBP's transformationto a primarilywholesale bank will be

accomplishedthrough a gradual reductionof its tetail loan approvals and
outstandingretail loans to enterprisesrelativeto the wholesale loan
appro-alsand outstandingwholesale loans to financial institutions. By the
end of 1993, DBP's portfolio is to be predominentlywholesale. Subject to the
availabilityof expectedODA funds, DBP projects that 692 of its outstanding
loan portfoliowill consist of wholesale loans by 1994. Annex 3.02 provides
details of the gradual reduction,in relativeterms, of retail lending and the
concomitantgrowth of wholesale loans.

3.9 The transitionwill also entail the gradual disinvestmentfrom DBP's

br&nch network. With the exceptionof 15 regionaland metropolitanbranches,
all brancheswill be pooled into five regionaldevelopmentbanks, which are to
be privatizedaccordingto a scheduleagreed under the ERL. By 1993, DBP's
equity stake in these regionaldevelopmentbanks would have been reduced to
302.
 - 19 -

C. Organizationand Management

3.10 Before 1987, the Board of Directors held day-to-dayoperational

responsibilities.Under the revised charter,the Board is a policy making
body distinct from management;only the Chairman and the Vice Chairman of the
Board are also bank managers. Composed of nine members appointedby the
President of the Republicof the Philippines,the Board now includesfive
members from the private sector.

3.11 DBP has developed a revised organizationalstructure (Annex 3.03)

that is appropriatefor implementingits wholesale banking strategy. The
guiding principlesbehind the new organizationstructureare: (a) clear
separationof funding and lending operations;and (b) upgrading of the
resourcemobilizationfunctionby creating a Capital Markets Department.
Given the increased importanceof resourcemobilization,which has to be
carried out in the financialmarkets by an individualof high standing,the
Capital Markets Departmentwill be headed by an officer holding the rank of at
least Vice President,reporting to the ExecutiveVice-Presidentin charge of
the TreasuryGioup. On the lending side, an Executive Vice Presidentfor
Marketing will oversee the FinancialInstitutionsDepartmentthat will manage
wholesale loans; the EntrepreneurialBanking Departmentwill be in charge of
i the Metro Manila Branch, and the Corporate Banking Departmentwill be in
charge of project management. The IndustrialRestructuringUnit, which will
form part of the Strategic PlanningCenter, will report directly to the
Chairman. The two Executive Vice Presidentsand the Senior Vice President in
charge of Accountingand AdministrativeServiceswill also report to the Vice
Chairman,who in turn reports to the Chairman. An InternalAudit Department
reports directly to the Board of Directors.

D. Personnel Policy and Training

3.12 Under the ERL, DBP has reduced its staff from about 3500 to 2000,
mainly through an early retirementscheme. The new wholesale orientationof
DBP is expected to lead to a furthernet staff decrease of about 250:
selectiverecruitmentof a small number of qualified individualsto handle the
new wholesale banking functionswill be offset by reductionsin staff
resultingfrom DBP's disinvestmentfrom the branch network and reassignmentof
existing staff from retail banking to wholesale banking.

3.13 A job and performanceevaluationsystem as well as a merit oriented

financialreward system are in place, with the integrationof the two systems
planned for 1989. The Chairman and senior managementare aware that the
reorganizedDBP must be able to offer compensationcompetitivewith the
private financial sector, if it is to attract and retain the high caliber
staff necessary for it to perform its functionseffectively.

3.14 DBP has engaged in extensive trainingof its staff in corporate

finance,loan packaging,financialanalysis and legal issues. Aware that the
training effortswill have to be reorientedtowards DBP's new activitiesin
wholesale banking, DBP's management is reviewingits trainingneeds for the
period 1989-92, in the context of the InstitutionalDevelopmentPlan currently
under preparatior..This assessmentwill take into accounts (a) the
 - 20 -

incorporationof the APEX and IGLF units currentlyin the Central Bank; (b)
the increased importanceof resourcemobilizationefforts;and (c) DBP's role
in conductingindustrialrestructuringstudies and acting as a wholesale
channel for loans to support industrialrestructuringprograms.

E. Accountingand Management InformationSystem

3.15 The flow of accountingdata has improvedsubstantiallyover the last

two years. Revised Branch and Head Office Accountingand ProceduresManuals
have been completed. Liquidity and reserve summariesare generated daily;
financial statementsof branches and head office are consolidatedmonthly.
The general ledger is computerizedand closed daily. Subsidiaryledgers for
loans, which had been booked separatelyby lending groups and industries
before the reorganization,have been centralizedin the Transactions
ProcessingDepartment. A central mainframe computerizedinformationsystem,
acquired from Citibank, is expected to be operationalby 1990. This state-of-
the-art system will provide an integratedManagementInformationSystem that
allows immediateaccess to all transactionsiJrrmation that is stored in a
centralizeddata base. The system will also .......
egrate(i) on-line
authorizationand printingof customer advices,and (ii) contract
administrationfor loans, placeinents, bonds, deposits,commitments,
receivablesand sundriesuntil final maturity, thereby eliminatingthe need to
keep track manually of interestaccruals,principalpayments, liquidationsand
billings. The system will also incorporatean automatedaccountingservice.
Internalcommunicationswithin the head office and between branches and head
office are expected to be computerizedby the end of 1989. In the meantime,
the branches operate with stand-alonemicrocomputersystems for the general
ledger, loans and liabilitiesand the savings and current accounts. The
ongoing computerizationand a system of account profitabilityanalysisare
expected to improve the management informationsystem considerably.

F. Loan Activitiesand Asset Management

3.16 The DBP loan window was reopened in mid-1986 after a hiatus of four
years during which no new loans were released. Since then, DBP's investment
policy has been conservative,with lendingbeing primarily short term and
excess liquiditybeing invested in securities,primarily Governmentissues.
In 1987, DBP realizedno positivenew net lending,while its securities
portfolio grew by P 2.8 billion. In 1988, outstandingloans grew by P 1.2
billion,while investmentsin bonds and securitieswere reduced by P 880
million.

3.17 DBP uses resourcesfrom its "RegionalDevelopmentFund" to extend

loans that do not completelysatisfy commercialbanking risk or collateral
criteria.Consideredessential from a developmentalpoint of view, these loans
involve concessionsin one or moie of the followingparameters-- interest
rates, repaymentterms, or collateralrequirements. The Regional Development
Fund comprises30? of each year's net income after taxes and repaymentsof
loans sourced from the Fund. In the first three quarters of 1988, P 517
million or 18.5 Z of new loans were approvedunder this "Window III" facility.
However, as of December 1988, only P 74 million of Window III loans were
 - 21 -

actually outstanding.DBP has agreed that (i) the risk exposure of these loans
and compliancewith the 30% net income ceiling will be monitored closely;and
(ii) appropriateprovisionswill be made to take into account the potentially
higher risk. These provisionswill amount to not less than a level of 10-202
above the average provisioningon conventionalperformingloans.

3.18 Loan recoveryof non performingloans, entrustedto branch loan

workout taskforcesand the RemedialManagementGroup at head office, has met
with some success. Out of 6000 non-performingaccounts,representingP 4
billion, that remainedon DBP's books after the transferof the bigger
accounts to APT, collectionsrepresentingP 1.2 billion were made on 3,800
accounts. In addition to standardloan collectionand foreclosureactivities,
an 8incentivescheme for pretermination"has been devised. By offering the
debtors a roll-back of interestto 1984 ( retroactivecomputing of interest
due on the basis of 1984 rates) and condonationof penalties in exchange for a
202 downpaymentand an agreed scheduleof repaymentof the recomputedpast
due, DBP has succeeded in collectingon about 300 formerlydoubtful accounts.
Loan loss reservescover 112 of the performingportfolioand 982 of the non
performingportfolio. Given DBP's past history, the conservativeprovisioning
policy is appropriate.

G. Liability Management

3.19 The current average maturity of funding liabilitiesis about 1.8

years, against an average loan maturity of 3.8 years. DBP's balance sheet is
now exceptionallyliquid,with cash and due from banks representing552 of
deposits and investmentsin bonds accountingfor 372 of total assets.
Liquiditywill decrease somewhatas (i) countrysidebonds issued by DBP mature
and the interest-freeGovernmentdepositsare repaid, and (ii) wholesale
lending activitiesgrow. Investmentsof over P 5.1 billion in bonds and
securitiesat 1987-endhave fallen to P 4.3 billion at 1988 end and are
projected to fall further. Wholesale lending is projected at P 3.8 billion in
1989, P 13.2 billion in 1990, P 18.0 billion in 1991, and P 23.9 billion in
1992. To fund its projected lending,DBP intends to supplementits foreign
currency sources by actively tapping the domestic capitalmarket.

3.20 As a wholesale institution,DBP aims at playing a major role in

domestic resourcemobilization. In additionto promoting an active secondary
market and lobbying for appropriateregulatorychanges designed to open up the
primary market, DBP will enter the market for its own account by issuing a
variety of instruments,speciallydesignedto tap differentcategoriesof
institutionalinvestors. Through recruitmentof a few experts in its Treasury
Group, DBP would acquire the requiredcapabilitiesfor designing,packaging,
timing, pricing and placing its debt instruments. Given investors'current
preferencefor short-termpaper, DBP envisages that it would initially launch
a P 300 million, 3 year, listed bond issue to re-establishits presence in the
market. Favorable receptionin the market would then be followedup by
further issues with longer maturitiesand lower coupons,to the extent allowed
by market conditionsand crowding-outeffects resultingfrom Government
funding requirements.
 - 22 -

H. FinancialPosition and Performance

3.21 DBP's financialstatementsfor the perlod 1984 to 1987 are given in

Annex 3.01. Unaudited results for 1988 are given in Annex 3.02. Its recent
financialperformance is summarizedin Table 3.1.

Table 3.1: SUMMARYOF DBP'S FINANCIAL PERFORMANCE--1986-88

(P billion;Ratios in Percent )

Year 1986 1987 3988

Total Loans Outstanding 5.27 4.39 6.15

Total Debt 6.82 7.07 6.63
Total Equity 2.68 3.46 5.2

Ratios:
Debt/Equity 2.5 2.0 1.3
Cash and Due from Banks/Depositsand
Short Term Borrowings (Z) 35.5 26.8 45.3
Provisionsfor Doubtful Accounts
/Total Loans (2) 47.3 53.6 48.9
Net InterestMargin/TotalAssets (Z) (29.5) 9.7 8.3
Return on Average Net Worth (2) (157.7) 25.5 20.1
Operating Expenses/TotalAssets (Z) 81.8 9.2 7.3

3.22 With the significantrelief resultingfrom transferand workout of

old non-performingaccountsand its conservativeinvestmentpolicy of the last
two years, DBP's debt to equity ratio is now a very conservative1.3:1,
comparedto the ceiling of 5:1 set under the ERL.

3.23 In 1988, DBP generatednet pretax income of P 898 million, compared

to P 800 mil'.ionin 1987. Earnings indicatorslook impressive:return on
assets is 14.02; return on net worth, 32.32. However, if the sale of DBP's
holdings in PhilippineCommercialand IndustrialBank (PCIB),one of its
subsidiaries,is excluded from the calculations,DBP's return on assets drops
to 7.22 and return on net worth to 20 12.

3.24 Nonetheless,this performanceis not fully indicativeof DBP's long

term earning capabilityon a going concern basis. Of the total operating
income of 2.6 billion, only 282 is interest from loans, whereas 362 comes from
gains in asset sales and 182 from investmentin securities,primarily
Governmentissues. On the revenue side, this reflectsthe cautious investment
approachtaken in the first year after the financialrestructuring,as well as
exceptionalgains of P 93' million realizedthrough sales of shares in PCIB.
Moreover, P 42 million of penalty intereston overdues contributedto 1988
earnings; this source of income will decline as more accounts are brought
current in future years. As for expenses, about P 2 billion of interestfree
Governmentdeposits, or 192 of total funds, were on DBP's books in early 1987;
 - 23 -

as these free depositsare graduallybeing repaid (the schedulecalls for full

repaymentby the end of 1989), these funds will have to be replacedwith
higher cost funds, which would decrease the spread DBP is realizing. This
combinationof factorswhich reduce revenuesand increaseexpenseswill lead
to lower, though still positive,net returns in the future. Detailed
projectionsof DBP's future financialperformanceare presented in Annex 3.02
and summarizedin Table 3.2. These projectionsare of an indicativenature,
as the assumptionsunderlyingthem are dependent on generalmacroeconomic
conditions,the developmentof the local capital market, and the availability
of ODA funds.

Table 3.2: SUMMARY OF DBP'S PROJECTED FINANCIALPERFORMANCE

(P Billion; Ratios in Percent)

Year 1989 1990 1991 1992

Wholesale Loans Outstanding 3.85 13.23 18.03 23.90

Retail Loans Outstanding 7.51 8.75 11.40 13.72
Total Debt 9.45 18.50 24.86 31.93
Total Equity 5.94 6.82 7.58 8.63

Ratios:
Debt/Equity 1.6 2.7 3.3 3.7
Cash and Due from Banks/Depositsand
Short Term Borrowings (X) 20.7 27.5 31.5 37.3
Provisionsfor Doubtful Accounts/
Total Loans (X) 8.1 3.9 4.0 3.7
Net InterestMargin/TotalAssets(Z) 6.6 6.7 6.6 6.4
Return on Average Net Worth (2) 15.1 15.0 12.2 14.6
OperatingExpenses/TotalAssets (2) 8.3 7.8 10.3 10.2

3.25 Though DBP's performancestill has room for improvement,its results

for the last two years show that DBP is now endowed with featuresthat enable
real optimism regarding its future prospects. It has a new managementthat
has demonstrateda willingness and an ability to make hard decisions;it has
developed a focused strategyand has restructuredits organizationto
implement that strategy;and it has developed and is implementingimproved
controlsand procedures. Of equal importance,its operationsare to be
governedby a set of policies designed to ensure that it avoids the mistakes
of the past. On April 5, 1989, DBP's Board approveda new Policy Statement
(Annex 3.04) which reflectsits wholesale lending orientationand which deals
with inter alia DBP's investmentpolicies, financialprudence limits and
capital structure. Salient featuresof the Policy Statementprovide for:
(a) private sector orientationwith autonomyin decision-making;(b) an
interest rate and fees policy that is consistentwith prevalentmarket rates
and that ensures full recoveryof all its direct and indirectcosts,
includingprovisionsas required,plus an adequateprofit margin; (c) prudent
interest rate and maturity match between its assets and liabilities;and
(d) a debt-equity ratio not exceeding5:1. Barring a deteriorationin the
macroeconomicenvironment,DBP is now poised for growth.
 - 24 -

I. Audit

3.26 In addition to the audit performedby the GovernmentCommissionon

Audit, a private independentfirm audits DBP's annual financial statements.
The independentauditor for 1987, Joaquin Cunanan and Company,a member of the
Price Waterhouse group, qualified its opinion by remarking that the volume of
loans from the NationalGovernment,mainly in the context of the transferof
non-performingassets to the APT, could not be establishedand audited. DBP
expects that this qualificationwill be dropped from the 1988 audit. At
negotiations,DBP agreed to furnish to the Bank by June 30 of each year, its
annual financial statementscertifiedby an auditor acceptableto the Bank.

J. The ProposedLoan

3.27 DBP would be the Borrower of the proposedBank loan and would onlend
the proceeds to MERALCO. As lender to MERALCO, DBP would bear the MERALCO
credit risk. MERALCO would bear the full foreign exchange risk and pay the
commitmentfee on the Bank loan as well as other costs related to the proposed
Bank loan. The terms and conditionsof onlending are given in para. 2.12.

3.28 The SubsidiaryLoan Agreement between DBP and MERALCO would cover,
inter alia, (i) the proceduresto be followedin executingthe project;
(ii) adequatearrangementsfor securingthe Loan (para. 3.30); and (iii) the
conditionalityto which MERALCO agreed at negotiations (paras.1.11, 4.16,
5.8, 5.17 and 5.18). The Bank would conduct its project supervisionjointly
with DBP.

3.29 As the proposed transactionwould lead to DBP exceeding its single

borrower limit, the Bank exploredvarious alternativesfor channellingthe
Bank funds to MERALCO. The only feasibleoption which met the requirementsof
all parties concernedwas for DBP to act as the Borrowerwith the Government
guaranteeingthe loan. Given that the investmnents to be financedby the loan
are needed urgently and that MERALCO is one of the nation's better credit
risks, DBP has sought, on an exceptionalbasis, a waiver of the single
borrower's limit for purposes of this project. The Monetary Board has
approvedthe waiver.

3.30 DBP would secure the onlendingof the proposed Bank loan with first
mortgage bonds that MERALCO would issue against its Trust Indenture. Taken
togetherwith the first mortgage bonds DBP will receive in connectionwith a
US$35 million equivalentKfW loan to MERALCO that is being channelledthrough
DBP, the exercise of rights from the bonds issued in connectionwith the
proposed loan offers DBP a sound and potent securitythat mitigates
substantiallythe MERALCO credit risk.
 - 25 -

IV. THE BENEFICIARY

A. Introduction

4.1 The beneficiaryof the proposedBank loan will be the Manila Electric
Company ("MERALCO"or "the Company"). MERALCO is a large corporationowned by
the private shareholders. The Company was founded as the Manila ElectricRail
and Lighting Company by U.S. interestsin the early 19009. It was awarded,
inter alia, a franchiseto provide electric servicewithin Metro Manila; this
franchiseentitled the Company to own and operate generatingstationsas well
as distributionfacilitieswithin a defined area. In the late 19609, prompted
by Governmentaction for economic reform, ownership of the Company was sold to
local interests;by then, MERALCO had become a full service electric utility
that was well regarded throughoutthe region. In the late 1970s, in
connectionwith the Government'sreorganizationof the power subsector,NPC
purchasedmost of MERALCO's generationfacilities;MERALCO was then recast as
a distributionutility. In 1982-86,the Company nearly tripled its franchise
area when, at Government'sbehest, it absorbed the activitiesof several
failing electric cooperativesalong its fringes (para. 5.5); even so, with
about 30% more customers,peak demand and energy sales did not increase (para.
1.8). As a result of (a) an aging rate base; (b) inordinatelyhigh system
losses; and (c) poor credit,MERALCO's performancehas ;ufferedin recent
years.

B. Ownership

4.2 About 98.5% of the company's 43 million shares (followinga 702 stock
dividend paid in late 1988) are owned by one institution,the MERALCO
Foundation (the Foundation). The Foundationpurchased this stock from the
First PhilippineHoldingsCorporation (Holdings)using loans that were secured
by the shares themselvesand were to be repaid using the company'sdividends.
As of August 1987, four financialinstitutionshad about 61Z of the
Foundation'sstock pledged to them; the remaining392, representingshares
that were purchasedby the Foundationbut for which payment had not been
remitted,continued to be retainedby Holdings as collateralto be released
when the payments are eventuallymade. In turn, Holdingshas used the 39? of
shares it holds as collateralto secure borrowingsof its own from DBP. In
all, on a post-splitbasis, DFP retainedabout 28 million shares or 65.1? of
the outstanding43 million MERALCO shares as collateralfor loans advancedto
both the Foundationand Holdings.

4.3 In January 1987, in accordancewith governmentpolicy concerningnon-

performingassets, DBP transferredthese loan accounts, togetherwith the
stock being retainedas collateralfor these loans, to the Asset Privatization
Trust (APT) for disposition. In mid-1987, Holdings and the Foundation
arrangedwith a syndicateof banks led by the Bank of the PhilippineIslands
and the Morgan GuarantyTrust Company (the BPI-MorganGroup) to purchase from
APT these loans togetherwith the stock being held as collateral,and
liquidatethe loans by selling about 20 million MERALCO shares to the public
over a period of three to four years. Under this arrangement,the BPI-Morgan
Group would provide Holdings and the Foundationthe bridge financingof P 690
million needed to liquidatethe loans held by APT. In return, the MERALCO
shares being held as collateralby APT would be transferredto the BPI-Morgan
 - 26 -

Group. The BPI-MorganGroup would then sell the MERALCO shares into the
market; after its financinghas been liquidatedand it realizesa stipulated
fee based on predeterminedthresholds,the BPI-MorganGroup would share with
Holdings and the Foundation,the proceeds from the sale of the remaining
shares. In the process,MERALCO's ownershipwould become widely dispersed in
a manner consistentwith the Government'sstated objective.

4.4 This scheme was finally approvedby the Governmentin December 1988
after delays of nearly fifteenmonths. During that time, the scheme was
reviewedby several statutoryand ad hoc committees. Those committees
recommendedseveral adjustmentsto the scheme, including: (i) Government
receiving,after liquidationof the P690 million principle amount, a 30Z share
in the proceeds from the further sale to the public of the MERALCO stock; and
(ii) shorteningof the period during which MERALCO shares would be retainedby
the BP:-MorganGroup. After these changes were agreed by the Foundation,
Holdings and the BPI-MorganGroup, the Government authorizedAPT to proceed
with the transaction. Currently the shares are being registeredfor listing
on the various local Stock Exchanges;they are expected to be approved for
listing by mid 1989. At that time, the purchaseof the loans togetherwith
the shares from APT will be completed;and the Foundation,Holdingsand the
BPI-MorganGroup can begin selling the shares to the public.

4.5 In the course of the various committees'reviews of the

aforementionedscheme, the Governmentclarified the issues surrounding (i) the
potentiallyconflictingliens on MERALCO's stock; and (ii) the Company's
ownership. Albeit that the Foundationhad collateralizeda number of large
obligationswith MERALCO's stock, the Foundationretainedits rights and
privilegesas owner of the shares because neither DBP, Holdings,nor any of
the three other local banks retainingMERALCO shares as collateralfor the
Foundation'sdelinquentobligationsever formallydeclared the Foundationin
default. Therefore,the Foundationcould Pnd did properly exercise its right
to appoint MERALCO's Board and oversee the Company's affairs. Although the
Foundationhad been constitutedas a non-profitorganizationacting for the
benefit of MERALCO's consumers,the Governmentdeclared that it was better
qualified than any alternativeparty to act in the best interestof the
Foundation'sbeneficiaries;therefore,the Governmentassumed the
responsibilityfor nominatingthe Foundation'sBoard and overseeingthe
Foundation'sactivities. During implementationof the aforementionedscheme,
the Foundationwill retain ownershipof the shares being offered for sale
until the shares are actually sold. Upon completionof the privatization
scheme, the Foundationwill continue to own about 54Z of MERALCO's stock, and
the Governmentwill continue to control the affairs of the Foundationon
behalf of the beneficiaries. These clarificationshave satisfactorily
resolvedthe apprehensionsof DBP and the Bank regardingMERALCO's ownership.

C. Organization,Managementand Staff

4.6 MERALCO's corporatepowers are exercised by its eleven-memberBoard

of Directors. Although the Foundation,Holdings and DBP have all had claims
on major blocks of MERALCO shares, the Foundationhas given considerable
representationto Holdings, DBP and the Governmentwhen constitutingthe
Company's Board in recent years. As a result, the Company has not suffered a
 - 27 -

legal challenge to (i) the compositionof, (ii) any decisionmade by, or

(iii) any agreemententered into by, its Board. The present MERALCO Board,
which consists of bankers and businessmen,was endorsedby the shareholders
at the company's 1989 Annual Meeting. Each Board member is elected to serve
until the next Annual Meeting and may be re-electedwithout limitation.
MERALCO's management is vested in its President,who is himself a Director and
serves as the company'sChief Executive. He is reappointedeach year at the
first meeting of the reconstitutedBoard of Directors following the Annual
Meeting.

4.7 MERALCO's organization chart is presented in Annex 4.01. The

structurepresented therein is appropriate. A profile of staff, allocated
accordingto organizationalgroup, is presented in Annex 4.02. As of
September30, 1988, MERALCO had a total staff of 7,034; its 248 customers for
each employee, as of that date, representssteady improvementin that ratio
since 1982.

D. Training

4.8 MERALCO has an ample in-housetrainingprogram. The program focuses

on (a) orientationof new staff; (b) skills developmentfor working level and
clerical staff; (c) technicaldevelopmentfor engineersand other professional
staff; (d) managerial skills developmentfor (i) existingmanagers, and (ii)
staff identifiedas having potential for promotion to managementsand (e)
organizationalbehavior and communicationscourses and workshops for staff of
speciallytargetedunits. In addition,MERALCO arranges for on-the-jobor
external training for deserving staff to cover topics that are not available
in the in-houseprogram. These arrangementsare appropriate.

E. Operations,Maintenanceand Losses

4.9 While MERALCO has registeredsome recent declJnes in its forced

interruptionfrequency rate and its forced cumulativeinterruptiontime, it
continues to have considerablescope for improvingthe quality of its service.
MERALCO's service has sufferedas a result of its failure to (a) renew aging
facilities,and (b) extend its system to keep pace with the developmentof
demand (para. 5.4), and not because of factors relating to operationand
maintenance. In fact, HERALCO has operatedand maintained its system
satisfactorily,especiallyconsideringits resourceconstraintsin recent
years.

4.10 MERALCO's system losses,which in 1982 averaged about 112 of system

output, reache about 212 in 1986, and then dropped to about 20.8Z in 1987.
This improvemenLstrengthenedduring 1988, so that the company recorded losses
averaging172 for the year. MERALCO believes that technical losses, which
were about 82 in 1982, increased to the range of about 122; the remaining
losses are believed to result from pilferageand other non-technicalcauses.
The company has been seeking to reduce technical losses through (a) the
proposedproject,which is expected to strengtheninadequatelines and upgrade
some of its substations;and (b) a second project,being financed by KfW,
which is expected to upgrade its remainingsubstations. In addition, the
 - 28 -

Company is seeking to improve its quality of serviceby implementingtwo

projects being financedby OECF: (a) the first project will strengthen
existing distributionnetworks and build new lines to serve depressed areas in
Metro Manila; and (b) the second project will improve existing networks and
provide new lines in rural areas served by MERALCO. At the same time, MERALCO
is in the midst of implementingan action program,begun in August 1987, aimed
at reducingnon-technicallosses (para. 5.8 and Annex 5.02). Through various
measures included in this action program and the investmentsbeing undertaken
to reduce technical losses, MERALCO aims to reduce its aggregate system
losses to about 122 by 1992.

F. Accounting System

4.11 MERALCO's accountingsystem is based on acceptedpower utility

principlesand procedures. It was modeled after the Uniform System of
Accounts prescribedfor public utilitiesby the Federal Energy Regulatory
Commissionof the United States of America, and adapted to suit local
conditionsand requirements.

G. Financial Planningand Budgeting

4.12 MERALCO has well staffedunits for financialplanning and budgeting.

The financialplanning unit has developedan integratedcomputerizedfinancial
model, which it uses primarily to test the impact of investmentand financial
decisions and to provide informationto external financiers. MERALCO prepares
budgets annually. The budget is revised periodicallyduring the year and
comparisonsof actual performanceagainst budget is a regularmanagerial
exercise.

H. CommercialSystems

4.13 As of September30, 1988, MERALCO had about 1.7 million customers.

More than 902 of these customers subscribeto residentialservice;most of the
remainingcustomersare national or local Governmentunits. MERALCO has about
7,000 customers (0.5Z of its total) with loads of 40 kW or more. These 7,000
consumers,including large Governmentand commercialas well as industrial
establishments,account for more than 65? of revenues.

4.14 As of appraisal,after deducting receivablesdeemed uncollectiblebut

still on the books (about 17? of all private sector receivables),about 90? of
private sector accountswere current. MERALCO follows a policy of disconnect-
ing delinquentprivate sector customers,with action being taken more quickly
against those with large arrears. In contrast, only about 172 of receivables
from Governmentsector customerswere current. Past efforts to disconnect
delinquentpublic sector establishmentshad resultedin adverse consequences;
therefore,the Governmenthas decided to use a clearing-houseapproach to
settle agreed obligationsfrom public agenciesagainst MERALCO's obligations
to NPC. Agencies of the national Governmenthave so far cooperatedwith this
approach;however, local Governmentunits, which account for about 60? of
MERALCO's sales to the public sector, have not been as forthcomingin provid-
 - 29 -

ing the agreementsneeded to settle their bills in this manner. The program
for strengtheningMERALCO's commercialoperations(para. 5.8 and Annex 5.02),
includesmeasures to address this problem;however,progress in regularizing
these accounts is expected to continue to be slow.

4.15 Through 1986, MERALCO financed the shortfallcreated, inter alia,

from the slow payment of public sector obligationsby stretchingits own
obligationsto NPC. By September1987, its arrears to NPC reached P 1.7
billion; and, as a result of Governmentintercession,the two parties
concluded a reschedulingof those arrears. The terms of that rescheduling
includedMERALCO's making cash paymentsof about P 0.9 billion and issuing a
six-year17? note for the remainder. The reschedulingagreementcarries
penalties to dissuadeMERALCO from failing to meet current obligations.
MERALCO is current with its other obligationsand has been meeting its current
obligationsto NPC on time since executionof tte reschedulingagreement.

I. Audit

4.16 HERALCO has its annual financial statementsaudited for inclusionin

its Annual Report and presentationto its Annual Meeting. The audit is
normally performedby a well reputed independentaccountingfirm, not
necessarilythe same one every year. The 1987 statementswere audited by
Sycip, Gorres, Velayo and Company, an accountingfirm enjoyinga strong
professionalreputationregion-wide. The audit includeda review of account-
ing policies and practices,as well as transactions. At negotiations,MERALCO
agreed that, by June 30 of each year, it will furnish to the Bank audited
financialstatementsfor the previousyear, togetherwith the certification
and related report prepared by an acceptableauditor.

4.17 MERALCO has an internalaudit department. This unit has broad

responsibilities; yet, its primary activitiesinvolve reviewingblocks of
transactions. On a special assignmentbasis, it will review policies and
practices,systems and procedures,and the operationsof specifiedorganiza-
tional offices or units. Inputs to the computerizedaccountingsystem are
verified by the internalaudit departmentand reviewedby the external
auditor.

J. Taxes

4.18 Since February 1987, MERALCO has become liable for income tax,
assessed at 352 of net income. In addition, the company must pay a franchise
tax, assessableat 22 of gross revenues,and real estate taxes. Customs
duties in the range of about 15-302 are assessableon all imports.

K. Insurance

4.19 MERALCO insures its assets through a combinationof self-insurance

and commerciallypurchased policies. Risk managementstudies are performed
regularlyby divisions responsiblefor the assets being insured. At
appraisal,these practiceswere reviewedand found satisfactory.
 - 30 -

L. Dividends

4.20 In the 1980s, the Company suspendedpayment of dividends,first on

common stock and later on preferred stock. During 1987, the Company met its
arrears for preferred stock dividends and has been meeting these obligations
in timely fashion thereafter. Different issues of preferred stock carry
different dividend rates, ranging between 10% and 182. To enhance the
marketabilityof its shares, MERALCO would like to resume paying dividendson
common stock; and it expects to resume these payments after the conclusionof
1989 if that year is as successfulfinanciallyas 1987 and 1988 have been.
Under the indenture that it uses to collateralizeborrowings,dividendson
common stock cannot exceed the previousyear's earnings.

V. FINANCIALANALYSISOF MERALCO

A. Introduction

5.1 MERALCO maintains its own accountsand manages its own financial
affairs. As such, it has authority to set prices, formulateits investment
program, enter into contractwith suppliersof goods and services,and borrow
from foreign, as well as domestic, lenders. However, its financialautonomy
is limited. As a utility, its pricing policy is subject to ERB's approval.
Because of its difficult financialsituation,MERALCO has recentlybeen
relying on Governmentguaranteesto raise foreign loans from officialand
commercialsources; this dependencegives the Governmentconsiderable
influence over MERALCO's investmentdecisions. Finally, the reschedulingof
its arrears to NPC has resultedin more constraintson MERALCO's financial
freedom.

B. Past and Present Financial Performance

5.2 MERALCO's financialperformancefor 1984-87 is presented in Annex

5.01 and summarizedin Table 5.1.
 - 31 -

Table 5.1: MERALCO'S KEY FINANCIAL INDICATORS- 1984-88

Financial Year Ended December 31 1984 1985 1986 1987 1988

----------
(Actual)---------- (Proj)

Energy Sales (GWh) 8,428 7,880 7,938 8,967 10,313

Average Revenue (Ctvs./kWh) 131 180 169 166 160
Capital Expen. (P Million) 562 420 636 702 747
operating Revenue (P Million) 11,029 14,165 13,455 14,843 16,459
Operating Income (P Million) 351 814 950 1,180 985
Net Income (P Million) (231) (70) 244 500 694
Rate Base (P Million) 7,377 9,230 10,504 11,420 12,209

Rate of Return - RevaluedAssets 4.762 8.82% 9.041 10.332 9.83?

Debt Service Coverage 0.06 4.06 11.82 0.98 2.31
Self-FinancingRatio -1982 832 2812 -99? 1572
Debt/Debt Plus Equity:
Including RevaluationReserve 42Z 242 37% 40? 30?
Excluding RevaluationReserve 632 542 66? 622 46?
Operating Ratio 972 94? 932 90? 922
Current Ratio 52? 47? 63? 77? 96?
Accounts Receivable- Months 2.19 2.07 2.08 1.87 1.64
Accounts Payable - Months 1.00 1.52 2.59 0.92 0.80

5.3 Although the key indicatorsmight suggest that the Company was a
strong performer throughoutthe period, a more detailed analysis indicates
that MERALCO experienceda dramaticturn around toward financialviability in
1987 that continued even more vigorouslyin 1988, after some years of weak
financialperformancecharacterizedby severe liquidityconstraints. The
rapid accelerationof technical losses during 1983-86 combinedwith declines
in the quality of service in those years attests to serious underinvestment
before and during that period. The high Self-financingRatio realizedduring
1985-86 resultedfrom a combinationof (i) a constrainedinvestmentprogram;
(ii) a roll-overof short term loans and currentmaturitiesof long-termdebt,
instead of meeting those obligationswhen scheduled!and (iii) stretchingof
accounts payable to NPC. During 1987 and 1988, the Company began planningand
implementingan investmentprogramwhile also (i) restructuringits arrears to
NPC; (ii) making timely paymentsto NPC for its current electricity
purchases;and (iii) meeting its amortizationobligationson time. Thus, the
low Self-Financingand Debt Service CoverageRatios recorded in 1987 are
actually indicatorsof improvingfinancialviability,given the need to
channel internalcash generationinto the front end payments associatedwith a
return to financial discipline. In fact, the high ratios expectedto be
recordedfor 1988 indicate remarkableperformance in view of the acceleration
of amortizationpaymentsdue in that year. Given that long term debt
instrumentsbearing maturitiesof appropriatelength for electricutilities
are not readily available,MERALCO's Debt/Paid in Equity (Equitynet of
RevaluationReserves) should be in the range of 402-50?. The improvingtrend
in MERALCO's financial performanceis confirmedby the drop in that important
ratio from 66? to 46? during 1986-88, indicatingthat the Company has realized
impressiveincreasesin retainedearnings during these two years.
 - 32 -

5.4 MERALCO's financialdifficultiesbegan in the mid-1970s,when the

Foundationpurchased some sizableblocks of stock from other shareholders
(para. 4.2) and financed these purchaseswith borrowings,the repaymentof
which was to be met from dividends. While these transactionsdid not infuse
any new equity capital into the Company, they did result in increasingthe
pressures on the Company to pay dividends. At the same time, margins declined
because growth in demand was lower than expected; thus, dividendswere paid,
on occasion in lieu of making necessary investments. This began a pattern of
undercapitalizationthat preventedMERALCO's system from expanding in parallel
with demand growth and caused the quality of its service to decline.

5.5 In 1983-84, the Governmentpressed MERALCO into absorbing the

businessesof several failing cooperativesalong the fringes of its franchise
area. As a result, W'RALC0 needed to raise substantialinvestmentfinance
just when it was unable to raise loans with appropriatelonger maturities,
either on its own credit or with Governmentguarantees,or raise sufficient
amounts of equity capital in depresseddomestic capitalmarkets. To solve
this problem, the Company chose to borrow extensivelyfor short and medium
terms from local and foreign commercialbanks.

5.6 In the meantime,MERALCO's quality of service continued to decline.

Technical losses rose sharply (para. 4.10), and outages remainedhigh. At the
same time, collectionsslowed. In effect, the businesswas increasingly
inefficientat producingcash. Although a return to financialdiscipline
should have begun with the reschedulingof the Company'soutstandingloans,
neither the former Governmentnor MERALCO's top managementwere preparedto
support the initiativesneeded to bring pilferage and consumer delinquency
under control. As a result, faced with heavy cash requirementsand restricted
in its access to short term borrowings,the Company generatedcash by delaying
its payments to NPC for power purchases. By the end of 1986, MERALCO was
obligated for a restructuredloan of US$148 million owed to a group of banks
headed by the Bank of Montreal,with the first of 17 unequal quarterly
payments due in December 1987. At the same time, arrears to NPC reached about
P 1.7 billion, or two months billingsover and above current charges.

5.7 In 1987, after changes in both the Governmentand MERALCO's top

management,the Company faced the inevitableneed for financialdiscipline.
Programswere developed and implementedto address the problems of increasing
non-technicallosses and accounts receivable;by the end of 1987, those two
problems had stabilized. In 1988, substantialimprovementwas re.ordedin
both of these areas. Amortizationpaymentswere met, reducingthe balance
outstandingon the restructuredloan to US$141 million at the end of 1987 and
US$112 million at the end of 1988. MERALCO rescheduledits arrears to NPC,
making various front end payments aggregatingP 915 million by September 30,
1987, and issuing six year first-mortgagebonds for the .emainingP 800
million. As importantly,the Company has since then been paying its current
bills for power purchaseson time.

5.8 Recognizingthe special importanceof MERALCO's service,the Govern-

ment has evolved a policy of enablingMERALCO to reverse the harm of under-
investmentby providing it with ausranteesfor borrowingsfrom official
lenders; however, the Governmentwants the Company to continue its positive
 - 33 -

actions towards financialdiscipline. The Bank supportsthis approach.

MERALCO expects to continue strengtheningits commercialand operational
practices. In August 1987, the Company began to implementan action program,
acceptableto the Governmentand to the Bank, tot (a) reduce losses:
(b) maintain accounts receivablesat existing or improvedlevels; and
(c) remain current in meeting its accountsand debt service payable. That
action program is given in Annex 5.02. At negotiations,MERALCO agreed to
continue implementingthat actiGn program throughoutthe per'!odof project
implementation. MERALCO will also be expected to increaseits capital by
selling substantialnew equity, and thereby develop for itself the capacityto
borrow as much as it would need for financingsatisfactorylevels of
investment. To support this objective,MERALCO has furnishedto the Bank an
action program for increasingits proportionof permanent capital (throughthe
sale of new common and preferred stock) during the period 1989-93 (Annex 5.01
and Table 5.2).

C. Tariff

5.9 MERALCO's tariff includes: (a) two lifelineblocks to enable

domestic and small commercialconsumersto purchase initial amounts of energy
at subsidizedrates; (b) a generationcharge, related to its cost of
purchasingpower from NPC; (c) an adjustmentto the generationcharge to allow
MERALCO to recover from the consumerthe cost of purchasingfrom NPC
incrementsof energy that were subsidizedor lost; (d) a distributioncharge,
related to its own system operationand administrativecosts: and (e) an
exchange rate adjustment. MERALCO's charter allows the company to set rates
at levels that cover operating costs (includingdepreciation)and provide a
maximum rate of return of 122 on revaluednet fixed assets. HERALCO's average
revenue of about US¢ 7.8 per kWh is currentlyhigher than most other utilities
in the region; however, this level of revenues includesgenerousblocks being
supplied to residentialand small commercialconsumersat highly subsidized
rates. As a result, poorer consumers receive considerableamounts of
electricityat affordablerates. In the meantime, industrialand large
commercialconsumers,who are cross-subsidizingthe brunt of the lifeline
blocks, are paying very high rates by regional standards. The Governmenthas
asked MERALCO to reduce to levels consistentwith what has been evaluatedas
the minimum requirementthe amount of power being sub idized; in turn, any
savings resultingfrom those reductionswould be passe] on to the higher
paying consumers. The resultant level of rates was reviewedat appraisaland
found appropriate.

5.10 To implementthe new Governmentpolicy of marginal cost pricing

(para. 1.23), MERALCO will be adjusting its rate structureafter NPC has
promulgatedits own adjustments. The new tariff will likely have three
predominantfeaturesaimed at ensuring that more consumerspay for electricity
at rates that reflect long run marginal cost: (a) the subsidizedportion of
MERALCO's rates will be reduced substantiallyover several years; (b) the rate
structurewill continueto be based on NPC's, with an added distribution
component designed to meet MERALCO's financialcosts and provide an adequate
rate of return; and (c) MERALCO will only be able to recover from the consumer
losses based on an efficiency indicator (currentlyexpected to be 152).
Because the new formulawill provide MERALCO with the incentive it currently
 - 34 -

lacks to operate efficiently,the expected adjustmentsare viewed as an

improvementover the current tariff.

5.11 MERALCO normally resets the adjustmentsevery month automaticallyin

accordancewith parameterspublished in its tariff; however, it must obtain
ERB's approval for changes in either the basic rate or the formulasfor
adjustments. WheneverMERALCO asks for a tariff increase,ERB conducts its
own professionalreview of the proposal and then holds public hearings at
which MERALCO's right to a rate of return as high as 122 is balancedagainst
the public interestand Governmentpolicy. In this case, the regulatory
process appears to functionappropriately. At negotiations,the Government
gave an undertakingthat, in future regulatoryreviews of tariff proposals,
MERALCO's financial requirementswill continuebeing cons dered.

D. Revaluationof Assets

5.12 MERALCO revaluesits assets yearly followingan acceptable

.aethodology.Prior to 1988, the revaluationwas made in memorandum form and
only taken into the books of accounts in conjunctionwith requests for tariff
increases;however, beginningwith 1988, the revaluationwill be taken into
the books annually. Either practice is approptiateand acceptable;still,
MERALCO'snew methodologyof booking the revaluationannuallyis preferable.
 - 35 -

E. FinancingPlan

5.13 MERALCO's financingplan for 1989-93, the period of expected

expenditureon the proposed project, is presented in Table 5.2.

Table 5.2: MERALCO'S FINANCINGPLAN - 1989-93

P Million $ Million Percent

Sources of Funds 20,752 988 100

Operations (Net of W.C. Reqs.) 14,262 679 69

PreferredStock Issues - Net (80) (4) -
Common Stock Issues 850 40 4
Long Term Borrowings:
= Bond Issues 1,550 74 7
World Bank 1,380 66 7
_ KfW 760 36 4
- IFC 672 32 3
= OECF 1,172 56 5
Other Borrowings 186 9 1

Applicationsof Funds 20,752 988 100

ConstructionExpenditurest
- World Bank Project 2,056 98 10
- Other Works 7,555 360 36
Debt Service 8,415 400 41
Repayment of Notes Payable 730 35 4
Dividends 1,996 95 9

The proposed project represents222 of MERALCO's investmentprogram for the

period. The proposedLoan accounts for about 72 of its financingrequirement
for the period. During 1988, IFC approveda loan to MERALCO of US$32 million
equivalent (P 672 million equivalent). MERALCO expects that this loan will be
disbursed fully during 1989-91. In addition, IFC has indicatedthat it might
be interestedin taking a lead role in placing with other investorsfuture
MERALCO issues of common stock or equivalentpermanentequity instruments.

5.14 During this period, MERALCO expects internalcash generationto meet

about 69? of its aggregate financing requirement. Most of this internally
generated cash will be used to meet debt service requirements;as a result
MERALCO is expectingto self-financeonly about 32Z of its investmentprogram.
The Company expects to meet more than 90? of its foreign exchange requirements
for capital expendituresvith loans, the bulk of which it expects to raise by
 - 36 -

borrowing from the Bank, KfW, IFC and OECF (providing7Z, 42, 32 and 52
respectively,of MERALCO's financing requirementfor the period). MERALCO is
expecting to meet 42 of its total financingrequirementwith equity, including
about P 850 million from new sales of common stock (or the equivalent)while
retiring about P 80 million of redeemablepreferred stock. The remaining 72
of its financingneeds would be raised from bonds or other local instruments.
To use the tariff'scurrency exchange rate adjustmentto best advantage,
HERALCO is planning to expense interestduring construction.

F. Future FinancialPerformance

5.15 Financialprojectionsfor 1988-95 are presented In Annex 5.01. A

summary of key financial indicatorsis given in Table 5.3.

Table S.8: MERALCOS KEY FINAL IICATORS - 1987-95

Financial Year Ended 1988 1989 199 1991 1992 199J 1994 199S
December 31 ---------------------------------------- (Projections)--------------------------------------------

Energy Sales (OWh) 10.313 11.504 12.860 13.310 14.340 15,420 16,530 17.690
Avere Revenue (Ctv./k) 160 163 le 173 160 187 190 193
Capital ixp en. (P Ion) 747 1,835 2.254 2.198 1,954 1,930 1.992 2.341
Operating Revenue
(P Hi II Ion) 16.459 18.779 20.542 23,020 2S.812 28,6835 81.407 84.142
Operating Incose
(P HiII ion) "5 1.100 1.,22 1,S8W 2,020 2.642 2.824 2.997
Not In o.*/(1.a) (P Hl li on) 694 712 993 1,520 1,780 2,528 2,776 3.014
Rate b s (P IIlion) 12,209 14.186 16.731 19.434 22 112 24 ,744 27,895 80 155
Tote at (P Milliln) 14,643 l6,632 19.339 21.670 24.1t8 27.460 3.480 860026
Retained Earning. (P Nil lIon) 2,426 3,248 4,853 6,070 8 145 11.102 14.463 18,202

Financial Ratio.:
Current ratio 0.96 1.1s 0.96 1.21 1.42 2.09 2.69 8.20
Debt/rotal Cspiual
W/ Reval. Surplus 301 26S 2S3 22m 193 174 14t 12S
W/o Raval. Surplus 4611 Se9n 341 82 271 24S 19i 1511
quick ratio 0.87 1.01 0.85 1.06 1.24 1.85 2.48 2.94
Nat profit argin 4S 4t 5i 7S 71 91 9S 91
Interest coverage 1.58 1.60 2.05 2.82 8.90 7 62 11.40 17 65
Return en rate bass 9.683 7.786 9.483 10.8311 10.013 11.1911 10.65t 10.163i
Debt service eoverage ratio 2.81 1.82 1.87 1.85 2.72 3.47 6.46 8.46
Self-financln? ratio 157i II O3 323 67S 1313i *70 1663
Operating rat o 92S 92S 921 891S 871 853 q5 651
Accounts r eeivable - month- 1.64 1.55 1.54 1.48 1.43 1.86 1.85 1.82
Accounts payable - months 0.80 0.71 0.74 0.72 0.69 0.68 0.66 0.65

These projectionsare based on t;.cfollowings

(a) The Company has not yet succeeded,despite substantialeffort, in

refinancingits outstandingforeign loans; therefore,the projections
presume that those loans will not be refinanced;

(b) MERALCO generallyapplies to ERB for increases in its distribution

charges once every two to three years. Therefore,to ensure that the
Company'scharges are adequate to meet its financialperformance
targets in years when it does not apply for increases,the increases
themselvesare projected to be large enough to yield financial
performancethat exceeds the agreed targets in the years when they
are granted;and
 - 37 -

(c) Under the IndentureTrust that MERALCO uses as security for its
borrowings (para. 3.30), the Company is requiredto meet financial
performancetargets different from those that will sought in
conjunctionwith the proposed loan. Those different targets include
interestcoverage, divided limitationand various operatingand
liquidityratios. Through 1993, the projectionsin general as well
as the increases in the distributioncharge are designedto meet the
targets contained in the indenture trust as well as those to which
agreementwas reached at negotiations(para. 5.17 and 5.18).

5.16 These results indicatethat MERALCO is facing several years of

adjustmenton its road to financialrecovery. During 1989-91, it expects to
face tight cash flow while (i) completingthe projectsneeded to restore its
system; (ii) taking the steps needed to improve its operationaland financial
efficiency;and (iii) repaying its outstandingrestructuredloans to both the
Bank of Montreal syndicateand NPC. The cash flow stringencyis expected to
be especiallysevere in 1989-90. In those years, MERALCO's self-financing
ratio is expected to be zero and its debt service coverage ratio is expected
to be slightly above 1.0. MERALCO has already secured most of the external
financingneeded and is in advanced stages of developingthe remaining
adjustmentsor external finance needed to meet its 1989-90 cash requirements.
Assuming the Company performs in 1989-91 as expected, the projectionsfor the
post-1991 period indicatea properly capitalized,profitablecompany with
ample scope to finance an appropriateinvestmentprogram.

5.17 During the projectionperiod, MERALCO expects to follow a policy of

seeking rate increases aimed at meeting the 122 rate of return allowed under
its charter. Based on NPC's rates remainingconsistentwith current levels,
continuingthis policy implies that MERALCO's distributioncharge per kWh
would increaseat a compoundannual rate of about 62, somewhat less than
inflationprojected for the period, to about 502 above current levels. To
encourage this policy while acknowledgingthe inevitabilityof delays in
matching cost increaseswith tariff increases,at negotiations,MERALCO agreed
that it will maintain its annual operatingrevenues at levels sufficientto
realize,after meeting operating costs (includingdepreciation)and taxes, an
82 rate of return on revaluednet fixed assets in operation. After 1993, this
rate of return implies that MERALCO would accumulatelevels of cash that ERB
could considerexcessive. As a result, an undertakingwas provided that,
after January 1, 1993, MERALCO could request that DBP, MERALCO and the Bank
conduct a joint review of the continuingappropriatenessof the rate of return
target, with the prospect that the target itself could be adjustedaccording
to the consensus reached during that review.

5.18 The projectionsalso assume that MERALCO will collect its receivables
effectivelyand pay its bills on time. Still, MERALCO is expecting to
generate cash sufficientto enable an average self-financingratio of only
about 102 during the period 1989-91, and more than 802 thereafter;during
1989-91, debt service coverage is expectedto average about 1.3, rising to
much more substantiallevels thereafter. To raise new equity capital, the
Company will reed to resume the timely payment of dividends;however, the
extent of these payments is limitedby MERALCO's IndentureTrust. To
encourageefficient cash and debt managementas well as sound dividendpolicy,
 - 38 -

at negotiations,MERALCO agreed that it may incur additionaldebt only if a

reasonableforecastof its net revenuesafter expendituresfor each year
during the term of the debt to be incurredshall be at least 1.0 times its
projected debt service requirementin 1989-91,and 1.3 times its projected
debt service requirementthereafter. These targets,which are somewhatbelow
MERALCO's expectationsprovide some cushion in the event that (i) tariff
increasesare either lower or approvedlater than expected, or (ii) MERALCO
encounterscash flow distortionsas a result of succeedingin its efforts to
refinance its existing foreigr.loans.

VI. PROJECT JUSTIFICATION ANDRISKS

A. Design Optimization

6.1 Planning for MERALCO's InvestmentProgram has been done in the

context of a ten-year time horizon. Expansionof the transmissionand
distributionfacilitiesis based on a methodogicallysound load forecastand
the franchisearea's industrialdevelopmentprogram. The upgrade and
rehabilitationcomponentsaim at reducingtransmissionand distributionlosses
while enhancing system reliability. The performanceindices used to establish
the need for these projects are: (a) line loading should be less than 752 on
an interconnectedsystem, or less than 85Z on an isolatedsystem; (b) the
allowable voltage drop should be less than 1O on industrialand commercial
circuits; (c) the interruptionfrequencyrate should be less than 30 times per
circuit per year, with less than 30 hours total cumulativeinterruptiontime
per year; (d) circuit kilometerexposure should be less than 50 km on all
circuits; (e) there should be no unserved demand during the outage of a power
transformeron priority industrialand commercialcircuits; and (f) technical
losses should be less than 82 throughoutthe distributionsystem.

6.2 Capacity optimizationsimulationsfor Metro Manila's complex

transmissionand distributionnetworkswere run on a Feeder Routing
OptimizationProgram, using several alternatives. A load forecastingprogram
was then used to simulate the ten-yearperiod. This iterativemethod was
repeated until the optimum combinationwas reached,which ensured the least-
cost alternativefor the Metro Manila system expansion.

6.3 Voltage drop calculationsfor the high load density areas of Manila
were made utilizingCAPCAD software,while the approximatemethod of voltage
calculationfor the low density areas was programmedusing more elementary
software. Where the voltage drop was found to exceed the limit, new
substationsor feeder facilitieswere added. However, where the voltage drop
exceeded the permissible limit even while system capacity remainedadequate
for the load, the less costly solutionof installingcapacitorsand voltage
regulatorswas chosen.

6.4 The method used to analyze the flexibilityof the system was to
simulate individualline and power transformerbank outages in the system and
then compute the unserved demand arising from the outages of that component.
Since there should be no unserveddemand on priority industrialand commercial
 - 39 -

circuits due to the outage of a power transformer,distributionfeedershave

been appropriatelysectionalizedto allow maximum load transferduring faults
in one section without excessive overloadingof the sectionsremaining in
service.

6.5 MERALCO's technical loss target for 1992 is 82. The strategyof
raising distributionvoltages and locating substationsnear the load centers
is designed to achieve a substantialreductionin the level of technical
losses as these projectsget implemented. Quantifyingtechnical losses for
the Metro Manila area was done utilizing the CAPCAD program,while
calculationsfor the low load density areas were done using a simple formula
programmedon PCs. The loss reductionwas calculatedby comparingthe
technical losses with and without the project. The resultingdifference
between the two scenariosyielded the technicalloss reductionbenefit derived
for the proposed project.

6.6 Apart from the transmissionand distributioninvestment,the project

has other components,includingimprovementof system operationmonitoringand
control and provisionof maintenancefacilities,which are needed for
improvingMERALCO's operationaland institutionalefficiencies. Thus, the
proposed project constitutesan integratedapproach to strengtheningthe
transmissionand distributionfacilities;rehabilitatingand upgradingsome of
the old facilities;and improvingthe technical,commercialand financial
performanceof MERALCO's transmissionand distributionsystem.

B. Economic Rate of Return

6.7 The proposedproject consists of a number of componentswhich form an

integral part of MERALCO's total investmentprogram, coveringits entire
franchise area. Most major transmissionand distributioninvestmentsin the
MERALCO area are interrelated,and yield joint benefits of loss reductionand
incrementalsupply to consumers. For this reason, the MERALCO investment
program for 1989-93 is evaluated as a whole, rather than attemptingto isolate
individualcomponentsartificially.

6.8 Investmentcosts during the 5-year time slice of MERALCO's program

are valued in border prices or their equivalents,applyinga standard
conversionfactor and shadow wage rates as appropriate. Operating and
maintenance costs are based on MERALCO's records and amount to about 2Z of new
asset value. The cost of power supply to the MERALCO system is the long-run
marginal cost of NPC supply in the Luzon grid, adjustedfor the demand pattern
in the MERALCO franchisearea. Recent preliminaryNPC estimates indicatea
LRMC of about P 0.97/kWh at high-voltagesupply points to MERALCO. System
losses, including technicaland non-technicallosses, are assumed to decline
gradually to 142 in 1993.

6.9 Tariff revenues,projectedto reflect the restructuringby mid-1989,

are used as proxy for the benefitsaccruing to consumers from incremental
electricityconsumption. In MERALCO's urban setting,with a long-established
supply system in place, and a stock of consumerswell conditionedto the
availabilityof reliableelectricitysupply, this approach is adequateto
establish a close approximationof consumers'valuation of supply. However,
 - 40 -

an element of consumers'surplus exists which would increase the benefit per

kWh sold. The strong demand growth makes advisablelimitingbenefits to
incrementalsales, as any loss reduction savings yielded by specific
investmentsare absorbedby the net growth.

6.10 The internal rate of return (IRR) of the 1989-93 investmentprogram,

yielding incrementalsales benefitswith a one-year time lag, is about 322;
this reflectsthe high economic priorityof transmissionand distribution
system strengtheAng under circumstancesof strong demand pressure. The IRR
is very sensitiveto changes in the LRMC of power supply and in the value of
sales, but not to variations in the investmentcost. Because the level of its
charges are already so close to LRMC, NPC's supply price is not likely to
change by more than 10? in real terms; however, the final bulk supply LRMC
rate structureis still quite uncertain. On the benefits side, although
energy demand was severelyaffected by the decline in GDP recordedduring
1984-86, current economicprojectionsindicatehealthy GDP growth in the
medium term, and the risk of sustaineddemand growth reduction is very small.
Any reductionin demand growth for the period would not likely be so severe as
to depress benefitsby more than 10Z. An increasein the LRMC by 10? reduces
the IRR to 22?, a similar decreaasein sales would bring a reductionto 18X.
If both deviationsoccurredsimultaneouslyand were sustainedfor a long
period, the IRR would fall to 5?, well below the opportunitycost of capital
(Annex 6.01). However, such a scenario is very unlikely.

C. Benefitsand Risks

6.11 The benefitsof the project, as an integralcomponentof the

optimizedMERALCO investmentprogram, are primarily (i) the enhancementof the
reliabilityof supply to existing consumers; (ii) the decreaseof system
losses to achieve greater efficiencyin transmissionand distribution;and
(iii) the provisionof additionaldistributioncapacity to satisfy strongly
growing demand. While the reliabilityincreaseaffects consumers'quality of
supply and diminisheseconomic losses from outages or voltage fluctuations,
the loss reductionand capacity additionsenable increasesin electricity
sales at least cost.

6.12 The project faces no substantialphysical risk in implementation.

Acquisition of land and rights-of-wayfor substationsand transmissionlines
is not expected to cause any serious problems, as most of the transmission
lines are either second circuits of existing systems or new lines
supplementingexisting distributionnetworks. However,as a result of its
liquidity constraints,MERALCO could have difficultyrealizingcounterpart
funds and, thereby,keeping to the project implementationschedule. The
restructuringthat MERALCO has agreed to implement (and is assumed in the
financial convenants)is a major step toward minimizing these risks.
 - 41 -

VII. AGREEMENTSAND RECOMMENDATION

7.1 Agreements regardingthe following items were reached during

negotiationst

(a) By December 1 of each year, MERALCO would (i) conduct jointly with
the Bank and DBP a review of its investmentprogram for the next five
years ane2its investmentaccomplishmentsfor the previous two years,
and (ii) adopt the mutually acceptablerecommendationsfrom those
reviews (para. 1.11).

(b) DBP will furnish to the Bank, by June 30 of each year, its annual
financial statements,certifiedby an auditor acceptableto the Bank
(para. 3.26).

(c) MERALCO will furnish to the Bank, by June 30 of each year, audited
financial statementsfor the previousyear, togetherwith the
certificationand related report preparedby an acceptableauditor
(para. 4.16).

(d) MERALCO will continue implementingan action program, acceptableto

the Governmentand to the Bank, to (a) reduce losses; (b) maintain
accounts receivableat existingor improved levels; and (c) remain
current in meeting its obligationsto suppliersand lenders
(para. 5.8).

(e) MERALCO will maintain its annual operating revenuesat levels

sufficientto realize,after meeting operatingcosts (including
depreciation)and taxes, a 8X rate of return on revaluednet fixed
assets in operation (para. 5.17).

(f) MERALCO would incur additionaldebt only if a reasonableforecastof

its net revenuesafter expendituresfor each year during the term of
the debt to be incurred shall be at least 1.0 times its projected
debt service requirementin 1989-91,and 1.3 times its projecteddebt
service requirementthereafter(para. 5.18).

7.2 The followingundertakingswere includedas sectionsin the minutes

of negotiations:

(a) The Governmentwarranted that, in future regulatoryreviews of tariff

proposals,MERALCO's financial requirementswill continuebeing
considered (para. 5.11);

(b) After January 1, 1993, MERALCO could request that DBP, MERALCO, and
the Bank conduct a joint review of the continuingappropriatenessof
the rate of return target (para. 7.1 (e)),with the prospect that the
target itself could be adjustedaccording to the consensus reached
during that review (para. 5.17).
 - 42 -

7.3 The executionof a SubsidiaryLoan Agreement between DBP and MERALCO

that shall have been reviewedand found satisfactoryby the Bank, is a
condition of effectivenessof the proposed loan (para. 2.12).

7.4 On the basis of the aforementionedagreements,the project

constitutesa suitablebasis for a Bank loan of US$65.5 million equivalentto
be lent to DBP. This loan would have a term of 20 years, includingfive years
of grace on repaymentof principal,and carry the standardvariable interest
rate.
 - 43 - ANNEX1.01

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

Load Forecast for the Luzon Grid

Sales
level Generation level Assumptions
Energy Energy Demand factor Losses /a
(GWh) (GWh) (HW) (2) (7)

Actual
1980 12,164 13,115 2,074 72.2 7.25
1981 12,687 13,666 2,225 70.1 7.16
1982 13,121 14,398 2,364 69.5 8.87

1983 13,908 15,294 2,478 70.5 9.06

1984 13,245 14.655 2,374 70.5 9.62
1985 13,135 14,449 2,311 71.4 9.09
1986 13,461 14,756 2,435 69.2 8.78
1987 14,967 16,281 2,592 71.7 8.07

Z growth rate
(1983-87) 2.67 2.49 1.86 - -

Forecast
1988 16,015 17,580 2,799 71.7 8.90
1989 17,136 18,810 3,023 71.0 8.90
1990 18.336 20,127 '3,265 70.4 8.90

2 growth rate
(1988-90) 7.00 7.32 8.00 - -

1991 19,711 21,637 3,510 70.4 8.90

1992 21,189 23,259 3,773 70.4 8.90
1993 22,778 25,003 4,056 70.4 8.90
1994 24,486 26,878 4,360 70.4 8.90
1995 26,322 28,894 4,687 70.4 8.90

Z growth rate
(1991-95) 7.50 7.50 7.50 - -

1996 28,296 31,060 5,039 70.4 8.90

1997 30,418 33,390 5,417 70.4 8.90
1998 32,699 35,894 5,823 70.4 8.90
1999 35.151 38.585 6,260 70.4 8.90
2000 37,787 41,479 8,730 70.4 8.90
2001 40,621 44.589 7.235 70.4 8.90
2002 43,668 47,934 7,778 70.4 8.90

2 growth rate
(1996-2002) 7.50 7.50 7.50 - -
(1988-2002) 7.38 7.46 7.62 -

00-^04" ,iq 4raqnmisqjon lnss and pumping loss.

 Lod Fo...ca. for Uh. ihi_ ,ac,- *0-7

tt s*1a4 Pe" LOW gr,

m.a I1 inpt 1oad fantwo I_

M.t.. of '-'s '°"°'
U £ la1I S OWNar" S Tal s (WS) s (I) C
Ra.l I Cam'l 9 Zad' I Others S t.i s a'S Coa'I

2.7t 2.0 as 6.967 11.367 1.9, 67.6 20.a

1967 1.529 I9 4 a 1.696 3,046

10.5 15.9 1.6 1122 10.6 s. 4.2 (1.0

Crowth rote (a) 5.5 7.0 6.6 31.S 5.7 7.9

a 7.6 1.765 S 3 3.282 7.8 3.39 14.1 3.305 15.6 87 4.6 10.072 12.3 12,266 7.2 2.094 6.9 66.4 17.0
so9" 1.611 5.4 166 4.0 4 6.5
3.53S 7.7 3.616 12.3 3.72 13.6 9 4. 11,202 11.2 13,001 6 7 2.249 7.4 e.o 0 s1.
1969 1,692 5.0 171 3.0 4 4.7 4 5.0 1.671 4.6
3,769 7.2 4. 17 9.7 4.162 10.6 96 5.1 12,233 9.2 13.954 7.3 2.420 6.0 65.6 L2.0
199o 1.773 4.S 176 3.3 B 4.2 4 5.2 L.O6W 4.7
7.6 4.591 9.6 4.602 10.6 0oo 4.8 1.369 9.3 14.909 6.6 2.6 7.3 65.3 10.0
1991 1.6" 4.6 l1s 5.6 5 4.4 4 5.3 2.046 4.5 4.076
5.4 2,137 4 4 4,376 7.4 4.978 6.4 5,027 9.2 104 4.7 14.466 84 15.975 7.2 2.M 6.3 5.6 9.0
1992 1.936 4.5 190 5.9 5 4.6 4

Growth rate (3) 7.6 (0-S) (15.4

.5.7 7.6 10.6 11.9 4.8 10.1 7.0
199211967 4.9 3.6 4.9 5.r

5.401 6.5 5,497 9.4 109 4 5 15,704 8.4 17.316 8 4 2.99s 6.1 ".0 90
1993 2,019 4.2 196 3.4 5 4.0 4 4.5 2.226 4.1 4.697 7.8
2.312 3.9 5,02t 7.0 5.64 a8.3 s .077 .6 114 4.3 11.970 8.1 16,712 6.0 3.207 7.1 6U. 9.0
1994 2 100 4.0 202 3.0 5 3.5 a 3.6
6.6 6CM6 S.2 6.476 6.8 1I1 4.1 18.293 7.6 20.169 7 a 3.442 7.3 6.9 9.0
1995 2.1S0 3.6 207 2.6 6 3.0 5 3.3 2.96 3.7 6.370
6.5 6.*,6 6.0 6.992 7.9 123 4.0 19.671 7.6 21.666 7.5 3.s4 7.0 67.2 9.0
1996 2.268 3.6 212 2.3 6 2.6 5 2.9 2.461 3.5 5.721
6.2 7?.57 7.6 7.50D 7.5 1tt 3.6 21.06l 7.2 2s.242 7.2 3,931 6.7 57.5 9.0
1997 2.335 3.4 216 1.9 6 2.2 5 2.6 2.662 3.8 6.076

Greowt rat. (U) 0.5 0.0

6.6 6.1 6.4 4.1 7.8 7.6 7.2
1997/I1M9 3.a 2.6 3.1 3.4 S.7
9.5 10.2 4.5 6.9 7.4 7.4 0.0 (.0o
1997/1967 4.3 3.1 4.0 4.6 4.2 7.2

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
 ANNE 2 01
-45 - Pos 1 of 2
PPILIPPINE

iMXILA POWV DISTRIWTION P hSA

Detai led Description of the Proiect

Eat. qnual
*oduction
; n l ol-
NXMw Content Objectivo 1fh PO0O0

.Subtranaalaa;on Linac and Subatationa

A. NV Transgassion Lines.
tlS kV

1. Construction of the Construct 3.2 km eingl-eircuit Relieve lln overloading. iUpr,vo 246 251
Salint-aekleg of line on steel poles (SC-SP) to reliabillty, reduce losses.
Marikine-Novalichee- replace present 1-500 "CM ACSR
Salintemak line conductor by 1-795iKCFACSRcon-
ductor

2. Construction of NOC- Construct 7 km, single circuit on Rainforce exieting lin- to pro- 5,026 5,127
Parang line, end steel poles (SC-SP) with 1-795 vide aIternative feed and improve
expansion of HOC *ubat- HOI ACSR, *nd awitching bays at reliability.
tion, Pereng substation the tereinal aubstations.

3. Rebuilding of Arsn-ta- Replace 1.6 km of 2-336.4 MMCF Relieve line overloading. 936 955
St. mea" line ACSR by 2-105 HCM ACSR por phase. strengthen 5uoport for the lines,
Revpie* woodpol-e (VP) with reduce lose".
steel poles (SP).

4. Construction of xardner-
KCRPt lfine,nd
expan-ion of arJdnerand
W-CRRPIeubstations
Construct 15 kh of SC-SP with Reinforce existingline to pro- 6.649 6.06f
2-795 MMCF ACVj per phe, and vide additional power outlet from
awitching boys at the terminal Sucat and Celeac Unit 2 (when
substations. completed), improve reliability,
reduce oases.

5. Rebuilding of C rdner- Replace 11.9 km of SC-VP with Relieve line overloading, 640 658
Psaplona line. 1-795 M1C ACSR on SP. strengthen support for the lines,
reduce losses.

6. Construction of ginan- Construct 5.1 km of SC-SP. 1-795 Reinforce xiating line, relieve I,m 1,860
Salibego line, and MOr ACSRper phase. and smitching overloading, reduce Iosaas.
expansion of Sinan and bays at the terainal substations.
Ssl ibago ubstations

S. Subgtation Proiecta (15)

W-CCRRPI, C lalun, Taysbas,
Ou;guinto, Parang, Araneta,
Ortega-. Salintwak
Switchboard espansion, San
Miguel, Los Ssnos, Sante
Crux. Ayals-Albang, Lgapui
VMilage/SR-Peranequo. and
Kayb;ig.
Conatruct substationo with Meet power upply requireanta in 65,000 66,500
transformere, switching bysy, the ares, relieve ovorloading.
switchgeors, *asociated cables provide alternate sources of
and controls, connecting lines power, ;mprove reliability, and
includingreconductoring; increase operational flexibility;
installing capacitorswhere reduce distribution locaes.
necesa ry, and wmtering
facilitias.
 - 46 - P3g 2 of 2

at. *annual
reductlon

Re" Content Objective tWb Plow

IL U-erodingof Otributlon

Priority projects for strengthen- Provide cegacity for load growth, 6,399 0.719
Ina the dit.sibution system in improve system reliability,
year. 1990-93tncludting reduce losses.

- converslon to higher ,lttage;

- reconductoring of lines;
- new powereourcew;
- power fector improvewt:
- reconfiguration of feeders end
eectionuliaing; end
- rehabilitation of lines.
- iprovent of metering
faciIities.

III. R1dio.4t*lti;rea Eseilitiea Rebabtiltetlon and expansion of Iprove mystes operstion and
exietingcoaunication control.
facilitie7,Including:
- S3 sets radio-multiplex
equipment;
- voice frequency telegraph
System.
- aontoring systes for remote
subatention-;
- ante tao, cables. and
acceeor i so.

IV. MaintenancaeEuipment and Purchseb of esentiol spares and Revitalize esintenarce

I.hjeMla mecbmnizedvehicle comprising: capabilities.
- Power transformers;
- cepeItors'
- owi tchor;
- circuit breaker.'
- crene
- Basket truc.s and Derrick
trucke;
- Wrecker.
 47- ANNEX 2.02
Page 1 of 2

PHILIPPINES

MANILA POWER DISTRIBUTIONPROJECT

Detailed Project Cost

(US$ million)

Item Local Foreign Total

I. SubtransmissionLines and Substations

A. High-VoltageTransmissionLines, 115 kV
line
Upgrade Marikina-Novaliches-Balintawak 0.65 0.54 1.19
StrengthenNGC-Parang line 1.91 1.57 3.48
Rebuild Araneta-SantaMesa line 0.36 0.29 0.65
StrengthenGardner-MCCRRP1line 3.52 3.68 7.20
Rebuild Gardner-Pamplona 2.77 2.18 4.95
StrengthenBinan-Balibagoline 1.18 1.05 2.23

Subtotal 10.39 9.31 19.70

B. SubstationProiects
ICCRRP1 subtransmissionand distribution 1.56 1.80 3.36
Calauan 200 MVA, 2301115 kV substation 0.91 1.33 2.24
Tayabas 100 MVA, 230/115 k' substationand
distribution 1.40 1.65 3.05
Guiguinto 230/115 kV substaionand distribu-
tion 4.86 4.60 9.45
Parang subtransmissionand distribution 2.32 2.14 4.46
Araneta 2501115 kV substation 0.92 2.41 3.33
Ortigas subtransmissionand distribution 2.24 1.95 4.19
Balintawak 230/115 kV substation 1.83 1.32 3.15
San Miguel subtransmissionand distribution 0.37 0.27 0.64
Los Baffossubtransmissionand distribution 0.33 0.26 0.59
Santa Cruz subtransmissionand distribution 0.35 0.27 0.62
Ayala-Alabangsubtransmissionand distribution 1.03 1.01 2.04
Legaspi Village/ForbesPark subtransmission
and distribution 2.70 2.09 4.79
Sucat BF Paranaque subtransmissionand distri-
bution 2.42 2.23 4.65
Kaybiga subtransmissionand distribution 0.67 0.73 1.40

Subtotal 23.91 24.06 47.97

Total Base Cost 34.30 33.37 67.67

Physical contingencies 3.34 3.34 6.77

Price contingencies 2.73 2.88 5.61

Total SubproiectCost 40.46 39.59 80.05

 - 48 - ANNEX 2.02
Page 2 of 2

Item Local Foreign Total

II. Upgrading of Distribution System

Expansion of the execondary distri-
bution systems (1990-93 annual plans) 15.12 9.69 24.81

Total Base Cost 15.12 9.69 24.81

Physical contingencies 1.51 0.97 2.48

Price contingencies 1.20 0.83 2.03

Total Subproject Cost 17.83 11.49 29.32

III. Radio System Monitoring and Control

Expansionldevelopment of radio-multiplex
system 0.93 1.96 2.89

Total Base Cost 0.93 1.96 2.89

Physical contingencies 0.09 0.02 0.29

Price contingencies 0.07 0.17 0.24

Total Subproject Cost 1.09 2.33 3.42

IV. Maintenance Equipment and Vehicles

Maintenance spares 0.53 2.13 2.66
Construction and Maintenence vehicles 0.84 2.58 3.42

Total Base Cost 1.37 4.71 6.08

Physical contingencies 0.14 0.47 0.61

Price contingencies 0.11 0.41 0.52

Total Subprolect Cost 1.62 5.59 7.21

V. Total Project Cost

Total base costs 51.72 49.73 101.45
Total Physical contingencies 5.17 4.98 10.15
Total Price contingencies 4.11 !.2.9 8.40

Total Project Cost 61.00 59.00 120.00

Interest during construction

IDC on Bank loan - 6.50 -
IDC on other loans 3.50 - -

Total Financing Requirement 64.50 65.50 130.00

 PHIUPPINES
POWER
MANILA DISMIDUMON PROJECT
11SIMSubftransmiuonUnes

NOW c 18 1O 1991 192 1993 194 K A IDES

_ PROR con t1~~~~~~~~~M
A4 I -SIO-D sM AI A 1.0 -M J IOD 10-D TIA41
Mllo S 104Dt1A,141 1 SMI AJI i-s 1- SIs- I s
LEGOF
BAUNIAWAX 6/89
11I

I.IN
NGC-PARANG Ns I 1.1/92 II 2/92

2. 2.4/92 2.5/92

AsocIad S stos I I* I3II I I1I I I I

4.10/I939410/93II040

1./9141
3. MESA
ARANEIA-SANT4ALIK a2oil 2.4/91 I-
3.11/91i _
4.6/92 0 U) s-

LINE
GARD)NER-MCCRRP - - - -
6Illt E_ ___ _____| …- - - ---- 2_I/90
42 2 5/90
-2 CI
4.
R
4 12(91 4. 12/91
~
~~~~~~~~~~~~~~~~~~~~~~~~~~3.1
3 4/911 N
SubE3ation:
Assockated 5 see IIs Is U
(Gardne MOCRRPI) '

1.11/92 0
5. LREw
GAACW-PANPLONA 2.4/92
UUU*m 3.~~~~~~~~~~~a111/92,
tEGE: PHS
ENGINEERNS~III
, KE- 711
1./9SDIVWIN° 1.2/90.
~~~~~~~~~~~~~~~~~~~4.
12/93

LINE
8tNANBAUIAGO *3U . * m *1.11/92 1. 2/92

6.
AssoclatedSubstatlons
- - - - - I - - - - - - - - -
2.4/92 2.5/92
3 11/92 3.4/93
/93 4.6/93~~~~~~~~~~4
4.6/93 .619

LEGEND: - EGINERINGPHASE XEYDATES: I. BIDINVITATION

BDDINGCYCLE 2. COTRC AWARD
CONTRAClNGPROCESS COMPLETION
3. PIROCUREMVENT
I5l81lIl1 CYCLE
PROCLIREMENT 4. INSERVIC
SSIONING
CONSI'McONKX)IVI.3 PHASE W)IIdBOI*-43944:5
 PHIUPPINES
MANILAPOWER PROJECT
DISTRIBUTION
Subdaton Component

l 1 I -i-'-'9 1991 1992 i 1993 199 m

mca_asSon 1.6/89 .i6/89

2.9/89 2.9/89
1. ~~~~~~~~~~~~~~~~~~~~~~~~~~~
3.4/90
AMOCkOod
4 Urms ~~~~~~~~~~~~~~~~~~~4.12/90
412/Z90
(115W & 34.5Wk)

SILUS M
CALAU.AN I m mmi 1.6/89 1.6/89
2. 9/89 2.9/99

2. |14/90 3.8/90

AssockAt3d UL . ; 4.12/90 4 12/90

(230 W &1 15W

|AYABAS SUBSTATTON mEX 1.6/89 11.6/89

2. 9/89 2.9/89
3. 3.8/90 3.4/90
4 12/90 4. 12/90
(230W &Unes
Assockded 34.5 W)

GUlGUIN1OSUBSSPAl
'1.,2/90 1.Z/90
- -,4.kV - -- - -- - - __l -
-
4. 2.8/90
2.5/90~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
4, &~~~~~~~~~~~~~~~~~~~~~~~~~
3.12/90
Asuckted LInes
(230W. 145W. 34.5W. 13.8k)
r" a4,12/911 4 112/911

SUBSDkTION
PARANG W ml III 1111111 0 2/91 1.1i/91i
1~~~~~~~~~~~~1.
2.5/91 2.4/911
6. ~~~~~~~~~~~~~~~~~~~~~~~~~~
3,11/911
AssockatedLIneI 4.10/92 4 10/92
(415W. 34.5W)

SUBSTATION
ARANETA mlmlwelolI W129 i.i9
2.5/90 2.4/91 0

6. 34.5 kV)d1.515/92 4.5/92

WOtIdBO*--43944:2
 PCOWER
MANILA PROJECT
DISTRIWTION
SubfttlkonComponent

1989 1990 1991 1992 1993 1994 DAWE

KEY
FrCTCOMO- w -E - - - -
JM AJ I J6 10.0 AJ J.
i-S JIM AJ .1410.0D. A.J .1 10.0 AJ i- .1400 J.M A-JI .1-sI- S/S W'JE

VJSLJSATIN
OmTIGAS M 1.6/89 1.6189
- --- _ - _ _ _- _ - _ _ _ _ _ - _ 2.9/89 2 _7/89
(5 V 5 - --
7 _ 3.8/90 1.4/90
I 4~~~~~~~~~~~~~~~~t11/90
411/90
Associated Lines
(115W & 34.5 W)

a
AssociatedLines
LVh13hz l l |t Igo,li I I , [ T 2.5/90
92.5/90
34/91 3.12/90
(230 WV& I4SkYI 411/91
Ai

-SAN MIGUELSUBSTATION a
-A -oe so al -1-2-90 -i - 2 9a

2.5/90 2.5/90
3.4(91 3.12/90
Associated Unes ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~
4. I1/91

LOS BANOS SUBSTATION less Imlll I.5

IM W~~~~~~~~A
1.2/90 i. i/91
2-4/91
AsMkFtedLWM owl~~~~~~~
oil goaal 2.
25/90
4.2/92 4,2/92

SANTA
CRUZSU 3N3mil
_s-tit
CRUZ
SUBSUAIlON ~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1. 1/92
(115 kV & 34.5 WV) 2-5/9i 2.4/92
111. 3.4/92 3.11/92
AssociatedLines me333 4-4/93 4.4/93
(69kV & 113.8W)

AYALA-ALABANG
SUMMAION I 1.2/190
i12/90
2-5/90
2.5/90
12.
12.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
3 112/90
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
468/91
A:soclafedLines US i
(115WV& 34.5W)

SuBSTATiON
LEGASFI A3 1 2/91 11i/91
2 5/91 2 4/91 D
13 ~ ~~~~~~~~~~~~~~~
4/92 3'11/91 ~~~~~~~~~~3
>X
4 12/92 4 12/92
AssociatedLirnes p8 gain = m0
(11 I.V& 34.5kV)

W41dSOflk-43944:3
 PHIUPPINES
MANILAPOWER DISIRIBUtONPROJECT
Subsation,Dtdbuton Sytem, RadioMuMplexand Mantenance EquWient and VehklebsComponent

PROIC COKVOWO 199 199 1991 .9 1093 1994 KEFDAES

_________~~~~J A 116 W JJ- 0 AJ O
" J 4i AJ 06 S/S UNES

SUBSTATION
BFM4RANAQUE - 11ll2/91 1 1/92
2.5/91 2 4(92
4. 364/92s.
4.8/93
3 11(92
4 8/93
AssIoite unes m
(145kV & 34.5 kV)

KAYDIGA
SUBSOAIION mm 1 2_90 1.1/91
2 5190 2 4/91
3 4/9`1 3.11/91
4.4(92 4.4/92
Assockited Lines M.Bsel Ln
(145W St 34.5 kcV)

OF DISTRWI0UIN....
UPGRADI~NG
SYSTEM - / i / // Sz'7$/ S// i OngoingPtocess

RADIOMULTIPLEX - 2.8(89
3.5/90
4.12/90

MAITENANCE EQUIPMENT of AU oiiiss Ongoing Posess SI

I ~~~~~~~ ~~~~~~~~~~~
MANNANCE VEICE I l I12.10/89 I Tl I Ho

WBSwu*-43944: 4
 - 53 - ANNEX 2.04
Page 1 of'4

PHILIPPINES
MANILAPOWER
DISTRIBUTIONPROJECT

Major ProjectProcurementPackages and Scheduleof Delivery

Procurement Descriptionof Qusntity required Total Mode of

Packages Equipment/Msterials per year quantity Procuremant
190O 199 192 1993

(a) Power Transformer ICD

200 MVA, 230 kVY-115 kVY-13.8 kVD 1 1 - - 2
100 MVA, 280 kVY-115kVY-13.8kVD 1 - - - 1
100 MVA, 116 kVY-84.SkVY-13.0kVD 2 - 1 - 8
83 MVA, 116 kVY-34.6kVY-18.8kVD 1 2 4 - 7
20 MVA, 116 kVY-13.8kVD - 1 - - 1
20 MVA, 84.5kVY-13.8kVD - - 1 - 1
20 WVA, 84.6kVY-6.24kVY-2.4kVD - 2 - 1 8
12.6 MVA, 69 kVD-13.8kVY - 2 1 - 8
'2.5MVA, 34.5 kVY-13.8kVD - - - 1 1
12.6 MVA,34.5 kVY-13.8kVD - - - 1 1
12.6 MVA,84.6kVY-6.2kVY-2.4KVD - - 1 - 1
6.26 MVA, 84.6kVY-13.2kVY - - - 1 1
6.26 UVA,84.5kVY-4.8 kVD 1 - - 1 2
6.25UVA,13.8 kVD-4.8 kVY-O.8kVY 1 - - - 1

(b) Mobile Transformer ICB

50 MVA,115 kVY-34.6kVY-13.0kVD - 1 - - 1
20 MVA, 84.6kVY-6.24kVY-2.4kVY - - 1 - 1

(c) M tel-CladSwitchgear ICD/LCB

34.6 kV MCSWGR with 6 PCBs - 1 1 - 2
34.6 kV MCSWOR with 6 PCBs - 2 1 - 8
84.5kV MCSWOR with 8 PCBs 1 - - - 1
84.5 kV MCSWGR with 1 PCB 1 1
8.7 kV MCSWOR with 2 PCBs 1 - 1 - 2
6.24 kV MCSWOR with 6 PCBs - - - 1 1
4.8 kV MCSWOR with 2 PCBs 1 - - 1 2

(d) Oa* InsulatedSwitch ear ICB

(wth associae disconnect
switches,PTs, CTs, etc.)
116 kV IS with 8 OCs - - 1 - 1
116 kV GIS with 4 GCBs 1 - 1 - 2
116 kV OIS with 8 aCBs - 1 - - 1
116 kV GIS with I GCB 1 - - - 1
U4.5 kV GIS with 8 GCBs 2 - - - 2

(e) Power CircuitBreakor ICa

230 kV,2,000 A, 8,000 MVA (SF6) 6 8 - - 14
116 kV, 2,000 A, 8,000 MVA (SF6) 6 15 8 6 85
69 kV, 600A, 1,600MVA (oll/SFO) - 2 1 - 8
34.6 kV, 1,200 A, 1,600 MVA (oll/SF6) 16 4 6 5 80
6.24kV, 1,200 A, 860 MVA (VCO) - 6 - - 6

(f) DisconnectSwitch (8 each per set) iCe

230 kV,2,OOOA 10 1S - - 25
ll5 kV, 2,000 A 6 26 13 12 s6
69 kV, 2,000 A - 2 1 - 8
84.5 kV, 1,200 A 18 12 21 8 54
 -54 -
5NNEX 2.04
Feig 2 ofr4

Procurement Descriptionof Quantlty required Total Mode of

Package. Equipment/Materlsl- per year Quantity Procurement
1990 1991 19M 1993

(g) Station-TZED CaeacItor Bank ICB

U4.S kV, 7.2 MVAR 6 2 7 1 15
18.8 kV, a.eVVAR - 2 1 - 8

(h) TransformerCoolingFen ICB/LIB

1/4 W , 16Oin., zao VAG so Be so - lee

(I) Underground Power Cable (kmn) ice

500 MCM, a5 kV, CU 8.8 8.1 8.8 1.0 16.2
600 MCM, 15 kV, Cu 0.4 1.8 0.7 0.2 8.1
1000 MCM, 16 kV,Cu - - - 0.5 0.6
1000 MCM, 8 kV, Cu 0.4 0.9 - 0.2 1.5
SOOMCM, 8 kV, Cu - - - 1.1 1.1

(j) Wtro (km) ice

795 MN Bnar ACSR 269 112 219 86 676
386.4 MCM Bare ACSR 229 84 68 69 880
8/0 Bare ACSR 182 84 8a 72 274
1/0 Bare ACSR 72 28 66 41 197
716 Bare ACSR 128 82 72 49 281

(k) StoregeBatteryand Battery Charger ICe

60 Cell, load-acid, 5OO amp-hr. 1 1 - - 2
60 Cell, lead-acid,240 amp-hr. 2 2 4 - 8
60 Cell, lead-acid,160 amp-hr. - 2 1 1 4
b0 amp., 129-140VOC, Battery Charger 1 1 - - 2
26 amp., 129-140VDC, BatteryCharger 2 4 6 1 12

(1) Fume Cutout ICB/LCB

34.5 kV 265 246 862 818 1,188
7.8 kV 19 el - - to

(i) Distributlon Transformer ICB

20 kY, 120/240V, 1W kVA le 17 4 7 48
20 kV, 120/240V, 15 kVA 89 48 48 87 167
20 kV, 120/240V, 25 kVA 65 47 47 84 188
20 kV, 120/240V, 87.5 kVA 11 19 81 85 96
20 kV, 120/240V, 50 kVA 29 28 61 44 147
20 kV, 120/240V, 76 kVA 18 16 40 86 11l
20 kV, 120/240V, 100 kVA 26 18 40 89 122
20 kV, 189/277V, 167 kVA 18 18 19 7 62
20 kV, 189/277 V, 260 kVA 9 - - - 9
20 kV, 189/277V, 888 kVA 1 8 6 4 14
20 kV, 120/240V, 189/277V, 87.5 kVA 6 10 16 16 60
20 kV, 120/240V, 189/277V, 60 kVA 15 11 26 22 78
20 kV, 120/240V, 189/277V, 76 kVA 9 9 20 17 6C
20 kV, 120/240V, 189/277V, 100 kVA 18 9 20 19 el
7.6 kV, 120/240 V, 10 kVA 14 - - - 14
7.6 kV, 120/240 V, 16 kVA 2 80 - - 82
7.6 kV, 120/240 V, 26 kVA 8 19 - - 22
7.6 kV, 120/240 V, 87.6 kV - 12 - - 12
 - 55 - ANNEX 2.04
pae a o4

Procurement Descriptionof Quantityrequired Total mod. of

Packages Equipment/Materials per year quantity Procurement
1990 1091 1992 1998

(n) Potentialand CurrentTransformer ICB

230 kV PT 6 15 - - 21
230 kV PT, meteringclose 6 a - - 9
116 kV PT 6 6 9 - 21
69 kV PT, meteringclose - 6 8 - 9
34.6 kV PT 2 2 6 - 9
230 kV CT 6 a - - 9
69 kV CT (3each) - 6 8 - 9

(o) Radio Multiplex(lot) 1 - - - 1 IC8

(p) Oil/VacuumCircuitRecloser ICB

31.5 kV, 560 A, 8-phase 6 6 6 6 24
20 kV,6SA, 1-phase 6 6 5 6 20
16.6 kV, 400 A, 8-phase 6 6 5 6 20

(q) VoltageRoaulstor Ice

ZO kV, 200A, 400 kVA, I-phase 6 6 9 9 80
1J 8 kV, 200 A, 276 kVA, I-phase 6 6 9 9 8O
6 kV, 200 A, 100 kVA, 1-phaose 6 9 9 sO

(r) RegulstorBypess DisconnectSwitch IC6

38 kV, 400 A O e 9 9 so
16.6 kV, 400 A 12 12 16 18 60

(s) Line Capacitorand Accessories ICe

1,800kVAR, 84.5 kV 6 5 9 9 29
100 kVAR, 7.96 kV 1S 15 18 18 6e
100 kVAR, 4.6 kV 15 15 16 19 66
VoltageSensor 90 90 120 120 420
86 kV Capacitoroll/switch 6 5 9 9 28
14.4 kV Capacitoroil switch 60 60 76 76 270

(t) Load Break Switch and Line DisconnectSwitch ICB/LCB

84.5 kV, 1,200 A 81 81 86 70 327
13.8 kV, 600 A 6 6 10 10 80
Primary line switch 86 12 6 - 54

(u) Tranemissionand DistributionOn Line Pole ice

Steel Pol-
45 feetWbttom 14 - - 14
80 test top 418 115 829 - 882
80 fest middles 465 126 864 - 957
80 feet bottom 567 166 475 - 1,228
Wood Pole
gO feet 1 20 - - 21
60 feet 195 112 146 128 678
66 feet 469 278 869 807 1,480
60 feet 783 487 589 492 2,801
45 feet 469 278 869 807 1,488
40 fest 659 101 21 270 1,061
go feet 106 87 40 65 287
 ANNEX2.04
56 -
- P*g-O
4 ot 4

Procurement Descriptlonof Quantlty required Total Mod Of

Package Equlpment/Materials per y r Quantity Procurement
1990 1991 1992 1998

(v) LiohtninaArrestor ICB

UV 'IV - 6 a -9
so kV 46 24 51 15 185
27 kV 284 270 989 a80 1,802
16 kV 21 67 25 a8 146

(w) Insulator ICe

11SkV horizontal
(single) 482 227 882 - 1,071
116 kV horizontal(double) 809 46 270 - 624
Suspension 2e,095 10,991 19,949 8,991 67,916
84.5 kV pin 5,986 4,182 4,658 4,832 19,602
18.8 kV pin 1,180 294 46 564 2,078

(x) Time of Day Moter ICe

It8r"ter 5 6 10 10 s0

(y) Maintenance
Vehiclos 1 - - - 1 ICB/LCB
DerrickTruck 1 5 - - e
Boaket Truck (Heavy) 6 6 - - 11
Basket Truck(Medium) 5 2 - - 7
Crane 8 2 - - 5
Wrecker 1 - - - 1

(z) Switchboard
materials(lot) IC0/LCB
Staggered deliveries - - - - 1

(so) Miscellaneous
Hardware 1 - - - 1 LCB
andAccessories
(lot)
(sb) CivilWorks to be bid according
to ICe
implementationschedule.
 ANNEX 2.05
- 57 -

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

Disbursement Schedule
(US$ million)

Asia Regional
Disbursements Profile (Power)
Fiscal year Semester Semester Cumulative Cumulative 2

1990 I - -
II 0.5 0.5 0.6 1

1991 I 2.2 2.7 3.3 5

II 3.7 6.4 6.5 10

1992 I 3.8 10.2 11.2 17

II 9.0 19.2 19.6 30

1993 I 9.0 28.2 29.5 45

II 8.0 36.2 34.7 56

1994 I 7.4 43.6 43.2 66

II 6.6 50.2 49.1 75

1995 I 5.8 56.0 53.7 82

II 9.5 65.5 58.3 89

1996 I - - 62.2 95
II - - 65.5 100
 - 58 - Annex 3.01
Page 1 of 7
PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

DEVELOPMENTBANK OF THE PHILIPPINES

Balance Sheets 1984-85
(Pesos Million)

1Ti4 1985

ASSETS
Cash and due from banks P 2,477.6 P 2,459.0
Investments in securities 11,557.1 9,537.4
Loans 35,827.6 24,757.9
Contract mortgage receivable 2,974.7 2,693.0
Miscellaneous investments 2,627.6 2,648.9
Other properties owned 5,312.2 8,165.8
Bank premises, furniture & fixtures (net) 154.7 157.3
Other resources 4,528.2 21,623.8

Total Assets K5.459.6 P72,043.0

LIABILITIES AND SHAREHOLDER'S EQUITY

Short-term borrowings
-Foreign P 2,850.2 P 2,704.6
-Domestic 2,870.8 6,769.4
Current maturities of long-term
borrowings 3,021.4 3,343.0
Time and savings deposits 978.3 1,519.1
Interest and other payables 5,477.1 4,728.0
Long-term borrowings, net of current
maturities
-Foreign 28,853.2 32,295.9
-Domestic 14,954.6 12,704.6
Deferred credits 1,282.6 1,373.7
Special funds 87.8 134.0

Total Liabilities P60,376.0 P65,572.2

Special Funds-National Government P 2,000.0 P 2,000.0

SHAREHOLDER'S EQUITY
Capital stock - par value P1,000; authorized
50 million shares P 9,935.1 P18,208.1
Surplus/Deficit (6,851.5) (13,737.3)

Total Shareholder's Equity 3j083.6 4,470.8

Total Liabilities & Shareholder's Equity P65,459.6 P72,043.0

Contingent Liabilities P20,032.3 P18,254.0

Trust Funds P 1,533.6 P 1,922.6
Conversion Rates P19.76 to $1.00 P19.03 to $1.00
 _ 5, _ Annex 3.01
Page 2 of 7
PHILIPPINES

MANILAPOWERDISTRIBUTION PROJECT

DEVELOPMENT BANKOF THE PHILIPPINES

Income Statements 1984-85
(Pesos Million)

1984 1985

OPERATINGINCOME
Interest - Agriculturalloans 199.6 188.6
- Industrial loans 414.6 435.1
- Miscellaneous loans 517.2 672.9
Miscellaneousbank fees 196.8 147.1
Earnings on funds and securitif 355.6 531.9
Income from other propertiesowned 67.9 99.7
Other income 917.9 1,064.8

TOTAL OPERATING INCOME 2,669.5 3,140.2

OPERATING EXPENSES
Interestand other financial
expenses 7,995.2 8,006.6
Salariesand other personnel
expenses 290.4 321.3
other administrativeexpenses 321.9 448.8

TOTAL OPERATINGZXYDNSES 8,607.5 8,776.7

Net operating income (loss) (5,938.0) (5,636.5)

Profit (loss) on assets sold, net (1,841.1) (1,235.4)

Operating loss before income tax (7,779.1) (6,871.9)
Provision for income t-.x
-Deferred ( 27.3) ( 27.3)
-Current 35.4 41.3

NET INCOME (LOSS) (7,787.1) (6,885.9)

Funded by National Government 5,400.0 7,445.4

Net Income after Government
Contribution(los) (2,387.1) 559.5

NET INCOME - TRUSTS PUND8 185.4 195.7

 PHILIPPINES - 60 -
MANILA POWER DISTRIBUTIONPROJECT Annex 3.01
Page 3 ot 7
DEVELOPMENTBANKOF THE PHILIPPINES
Statementsof Changes in FinancialPosition 1984-85
(PesosMillion)
1984 1985
FINANCIALRESOURCESWERE PROVIDED BYs
From portfolio sales & repayment3
Sale of loans, equities &
acquired assets P 1,304.1 P 1,559.4
Loan & guarantee repayments 1,636.8 1,266.5
Collectionson contractmortgage
receivable 197.3 190.1
Bond redemptions 2.8 3.2
From other sources
Transfer of MKIC accountsto new
companies - 9,587.3
Increase in paid-in capital 5,635.5 8,273.0
Assumption of guaranteedobligations 1,615.6 6,444.9
Revaluation& other adjustmentson
loans, equities & contract
mortgage receivable ^ 1,524.6
Revaluation& other adjustments
on borrowings 10,727.9 491.3
Domesticborrowings 2,543.5 312.1
Foreign borrowings 457.4 141.9
Decrease in contract mortgage
receivable - 96.0
Increase in deferred credits 181.2 38.2
Increase in liability reserves
and special funds 40.0 33.5
Total FinancialResources Provided 24,342.2 29,962.0
FINANCIALRESGURCESWERE USED FOR:
Net loss from operations P 5,976.5 P 5,665.6
Non-cash charges includedin net loss
Amortizationof deferred charges ( .8) ( 695.4)
Provision for doubtful accounts
& investment ( 78.0) t 78.0)
Depreciation ( 22.8) ( 30.9)
Deferred income tax 10.7 17.3
Financial resourcesused for operations 5,885.7 4,878.6
Portfolio investments
Loan & guaranteedisbursements 3,291.8 3,263.8
Equity & long-termbond investments 671.5 249.5
Payment of long-termdebt maturities
Roll over from long-term to short-term 1,786.2 1,528.7
Domestic borrowing 2,362.0 1,184.4
Foreign borrowings 299.1 1,566.0
Others
Increase in other resources,net 731.1 15,963.3
Increase in other propertiesowned 3,603.7 2,855.0
Revaluation& other adjustmenton
loans, equities & CMR 4,494.4 -
Increase in bank premises 11.1 24.8
Increase in miscellaneousinvestments 349.6 5.2
Increase in contractmortgage receivable 745.1 _
Total FinancialResources Used 24,231.3 31,519.3
Changes in working capital 110.9 (1,557.3)
TOTAL P24,342.2 929,962.0
 - 61 -

Annex 3.01
Page 4 of 7
PHILIPPINES

MANILAPOWERDISTRIBUTIONPROJECT

DEVELOPMENT BANKOF THE PHILIPPINES

Balance Sheets 1986-87
(Pesos 'illion)

1986 1987

ASSETS

Cash and due from banks P 1,169.4 1 558.2

Loans and advances 5,271.1 4,394.5
investmentsin bonds and other
governmentsecurities 1,498.5 4,459.7
Equity investments 687.7 396.5
Real and other property owned or acquired 293.6 118.5
Bank premises, furniture,fixturesLnd
equipment 165.2 213.7
Other resources,net of allowance for
probable losses 418.0 90.4

Total Assets P 9,503.6 10,531.6

LIABILITIESAND STOCKHOLDER'SEQUITY

Liabilities
Short-term borrowings P585.3 0727.5
Deposit liabilities
Time 243.9 259.6
Savings 317.6 272.0
Interest and other payables 1,198.6 2,184.3
Longtermborrowings 2,025.7 1,340.0
Unearned income and other deferred credits 307.7 341.0
Special Funds NationalGovernment 2,000.0 1,800.0
Other funds 146.5 146.3

Total Liabilities 6,825.3 7,070.8

Stockholder'sEquity
Paid-in Capital 2,500.0 2,500.0
RetainedEarnings 178.2 960.8

Total Stockholder'sEquity 2,678.2 3,460.8

Total Liabilitiesand Stockholder'sEquity 19,503.6 310,531.6

 - 62 - Annex 3.01
Page 5 of 7

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

DEVELOPMENTBANK OF THE PHILIPPINES

Income Statements 1986-87
(Pesos Million)

Years Ended December 31

1986 1987

INCOME
Interest on loans and advances 1 723.8 1 586.6
Earnings on securities and investments 562.7 687.6
Other income 852.1 502.9

TOTAL OPERATING INCONE 2,138.5 1,777.2

EXPENSES
Interest and other financial charges on
borrowings and deposits 4,095.0 252.8
Provision for probable losses 3,049.8 135.0
Compensation and fringe benefits 352.5 265.3
Taxes and licenses 50.3 8.7
Rent 8.3 5.4
Other administrative expenses 220.6 298.3

TOTAL OPERATING EXPENSES 7,776.4 965.5

Income (loss) from operations (note 11) (5,637.9) 811.7

Share in Net Income (loss) of equity investment ( .9) 1.0

INCOME AFTER DISPOSITION OF ASSETS (5,638.8) 812.7

Provision for Income Tax (30.2)

NET INCOME (LOSS) FOR THE PERIOD P(5,638.8) I 782.6

 - oj -

Annex 3.01
PHILIPPINES Page 6 of 7

tANILA POWERDISTRIBUTIONPROJECT

DEVELOPMENT BANK OF THE PHILIPPINES

Statements of Changes in Financial Position1986-87
(Pesos Million)

1986 1987

SOURCES OF FUNDS
Operations
Net income (loss) for the period P(5,638.8) P 782.6
Charges not requiring outlay of funds
Provision for probable losses 3,049.8 135.0
Depreciationand amortization 19.9 23.6
Funds providedby (used for) operations (2,569.1) 941.1
Increasein surplus as a result of
bank rehabilitationprogram 19,680.2 -
Increase in:
Interest and other payables - 985.7
Unearned income and other
deferred credits - 33.3
Special funds 12.5 -
Decrease in:
Cash and due from banks 1,289.6 311.2
Loans and advances 21,778.9 741.6
Investmentsin bonds and other
governmentsecurities 1,668.3 -
Equity investments 5,682.8 291.2
Real and other property
owned or acquired 7,872.2 175.2
Other resources 21,079.4 327.5

Total 76,494.9 3,806.8

APPLICATIONOF FUNDS
Decrease in capital stock as a result
of bank rehabilitationprogram 15,708.1 -
Increaseint
Bank premises, furniture,fixtures
and equipment 27.9 72.1
Investmentin bonds and other
governmentsecurities - 2,961.2
Decrease in:
Short-termborrowings 9,474.0 539.3
Deposit liabilities 957.6 29.8
Interestand other payables 3,535.2 -
Long-termborrowings 45,732.4 4.1
Unearned income and other
deferredcredits 1,059.6 -
Special Funds - 200.2

Total P76,494.9 P 3,806.8

 - 64 -

Annex 3.01
Page 7 ot 7

Notes to FinancialStatements

1. DBP rehabilitationprogram: Since January 1984, funding responsibility

for DBP's non-performingaccounts (NPAs) was assumed by the National
Governmentby way of equity contributionsat year end equal to the total
losses on NPAs over the preceedingyear. These amounts are given in the
income statementsunder the item labelled "Fundedby the National Government"
(in effect, tbese are extraordinaryadjustmentsto the 1984 and 1985 accounts,
taken after the computationof net income). Total yearly governmentequity
contributionsappear in the Statementsof Changes in FinancialPosition under
the item "Increasein Paid-In Capital."

2. Reserve for possible losses on accountsand investments: reserves

provided and charged against operationsare based on possible losses computed
as follows: (a) excess of total recordedbank exposure (includingoutstanding
guaranteesand preferred shares) over the loan value of the collateral
appraised value; (b) excess of acquisitioncost of equity investmentsover
realizablevalue.

3. Reserves for possible losses on equity, loans and acquiredassets:

these reservesare small and do not reflect the size of DBP's portfolio
problems. Since possible losses on these accountswere covered by Government
equity contributionsunder the rehabilitationprogram, they did not need to be
provided for through charges against DBP's income.
 - 65 - ANNEX3.02
Page 1 of 10

PHILIPPINES
MANILA POWER DISTRIBUTION PROJECT

DEVELOPMENTBANK OF THE PHILIPPINES

PROJECTED BALANCE SHEET
1989 - 1994
(MILLION PESOS)

ACTUAL BUDGET ----------P R O J E C T I O N S----------

1988 1989 1990 1991 1992 1993 1994

ASSETS

Deposits with & Due from Banks 1,195 321 317 386 452 421 493

Investment in Bonds & Securities

Securities 4,289 2,189 1,889 1,889 2,189 2,389 2,389
Commerclil Papers 0 0 0 0 0 0 0

Wholesale-Relendlng to PFIs 0 3,851 12,602 17,470 23,412 30,713 39.413

-Receivable from RDBs 0 0 628 558 488 418 348

Retail-Loan PortfolLo - PAs (Outstanding)

Window 1 1,187 1,745 1,968 2,433 2,864 3,257 3,616
Window 2 3,444 5,069 5,593 7,293 8,870 10,292 11,513
Window 3 74 559 838 1,075 1,283 1,572 1,942

MERALCO Loan From KFW & WB 0 127 503 784 706 635 572

Loan Portfollo - NPAs (Old) 1,449 0 0 0 0 0 0

- NPAs (New) 139 349 596 708 813 909

Equity & Bond Investments-PAs 409 385 320 266 214 170 133
NPAs (Old) 37 0 0 0 0 0 0
NPAs (New) 20 7 6 5 4 4
RDBs 0 0 70 70 70 70 70

CMR & Other Investments-PAs 765 704 384 308 237 180 135
NPAs (Old) 533 0 0 0 0 0 C
NPAs (Nev) 37 30 19 16 13 10

Other Properties Owned-PAs 74 70 11 9 7 6 5

NPAs (Old) 856 350 175 0 0 0 0
NPAs (New) 4 4 2 1 1 1

Allow. for Doubtful Accounts-PAs (303) (399) (414) (515) (610) (695) (770)
NPAs (2,704) (440) (312) (499) (583) (664) (739)
Window 3 0 (84) (126) (161) (192) (236) (291)

Premises 242 411 310 279 250 227 209

Other Assets 187 337 174 174 174 174 174

TOTAL ASSETS 11,734 15,396 25,320 32,441 40,559 49,760 60,135

 ANNEX 3.02
- 66 - Page 2 of 10

ACTUAL BUDGET ----------P R O J E C T I O N S----------

1988 1989 1990 1991 1992 1993 1994

LIABILITIES & STOCKHOLDER'S EQUITY

Purchased Funds
Deposits - Private 480 893 717 867 1,017 1,167 1,317
NG 1,681 331 247 272 297 322 347

Borrowings
Existlng-WB/ADB (Long term) 1! 431 285 221 184 149 114 79
Countryside Blls 11 477 327 190 85 0 0 0
Others 21 1 1 1 1 1 1 1

New - Domestic Borrowlngs 0 0 300 800 800 500 700

ODAs/Multi/Bilateral Funds
APEX 21 0 571 550 529 508 487 466
IGLF 31 557 3,276 4,598 6,184 6,710 6,610
AJDF 0 3,121 7,944 7,944 7.944 7,944 7,944
IR U 223 1,486 3,145 6,277 6,277 6,277
DLBS 0 0 0 0 2,504 3,756
Kreditanstalt fur WeLderaufbau(MERALCO) 127 515 847 847 847 847
WORLD BANK (MERALCO) 0 0 0 0 0
SWISS LINE 892 892 892 892 892 892
AdditLonal Financing 0 0 0 2,370 4,779 9,597 17,109

Interest & Other Payables 1,556 1,526 1,748 1,913 1,818 2,037 2,244

Deferred Credits 581 581 397 397 397 397 397

Special Funds 19 19 19 19 19 19 19

Special Funds - NG 1,400 0 0 0 0 0 0

Stockholder's Equity
Paid-in Capital 2,500 2,500 2,500 2,500 2,500 2,500 2,500
Retained Earnings 2,608 3,443 4,316 5,077 6,129 7,444 8,629

TOTAL LIABILITIES & EQUITY 11,734 15,396 25,319 32,441 40,559 49,759 60,134
0 0 0 0 1 1 1

1/ Already borrowed
2/ APEX - Transferred portfollo during 1989.
31 Includes IGLF portfollo transferred in 1990

. .~~~~~~~~~~~~~~~~~~~~~~~
 - 67 -
ANNEX3.02
Page 3 of 10
PHILIPPINES
MANILA POWER DISTRIBUTION PROJECT

DEVELOPMENT BANR OF TEE PHILIPPINES

PROJECTED INCOME STATEMENT
1989 - 1994
(MILLION PESOS)

ACTUAL BUDGET ---------P R o J E C T I ON S --------

1988 1989 1990 1991 1992 1993 1994

OPERATING INCOME
Interest on loans 716 1,234 2,643 3,882 5,000 6,228 7.072
Earnings on funds end securities 470 147 204 189 204 229 239
Miscellaneous bank fees 57 23 67 71 74 78 82
Profit from sale of assets 101 32 49 45 10 8 7
Other lncome 394 715 295 328 371 408 397
TOTAL 1,738 2,151 3,259 4.515 5,659 6,950 7,796
OPERATINGEXPENSES
Interest & other fin. expenses 214 369 1,160 1,930 2,601 3,335 4,165
Salaries & other personnel expenses 292 409 343 360 378 397 417
Other Administrative expenses 255 209 186 195 205 215 226
Gross receipts taxes 45 60 114 158 198 243 273
Prov. for doubtful accounts-PAs 0 96 15 102 94 86 75
-NPAs 0 (0) 32 498 583 664 739
-Windov 3 0 84 42 36 31 43 55
Depreciation 34 53 88 65 59 53 48
TOTAL 840 1,279 1,979 3,345 4,149 5,037 5,998
NET INCOME BEFORE TAX 898 872 1,280 1,170 1,510 1,914 1,799

PROVISION FOR INCOME TAX 37 37 323 294 326 421 390

NET INCOME FOR THE YEAR 861 835 957 876 1,183 1,492 1,409
 ANNEX3.02
- 68 - Page 4 of 10
PHILIPPINES
MANILA POWERDISTRIBUTIONPROJECT

DEVELOPMENTBANK OF THE PHILIPPINES

PROJECTEDCASH FLOW STATEMENT
1989 - 1994
(MILLION PESOS)
ACTUAL BUDGET ---------
P R O J E C T IO N S --------
1988 1989 1990 1991 1992 1993 1994
BEGINNINGCASH 882 1,19S 321 317 386 452 421
RECEIPTS:
PrincipalCollections|
On loans-PAs-Windov 1 ) 367 213 215 267 306 343
Windov 2 ) 1,065 596 643 822 973 1,111
Window 3 ) 1,162 23 56 78 94 105 126
MERALCO 0 13 50 78 71 64
-NPAs (Old) ) 58
-NPAs (Nev) 28 70 119 142 163
-Releadingto PFIs 83 154 584 1,284 1,8 9 2,552
-Rec'ble from RDBs 0 70 70 70 70 70
C1R & Other Inv - PAs ) 24 106 58 55 44 36
NPAs (Old) ) 8
NPAs (Nev) 7 6 4 3 3
Repaymentsof C '.l Papers Loans 930 0 0 0 0 0 0
Interest Income-PAs-Window 1 ) 250 334 396 477 551 293
Window 2 ) 650 803 960 1,160 1,455 1,725 1,252
Wlndov 3 ) 92 84 115 141 171 785
MERALCO 4 21 44 51 46 41
MR & Other Inv 54 97 87 55 44 33 25
-NPAs (Old) 90 18
-1PAs (New) 47 81 108 125 67
-Relendingto PFIs 36 1,069 1,955 2,657 3,518 4,558
-Rec'blefron RDBs 0 41 77 68 59 50
SalelRedemption of Assets
Equity In. -PAs- Book Value ) 4 58 48 47 39 33
Profit ) 1 12 10 9 8 7
-NPAP-Book Value ) 0 4 1 1 1 1
Proflt )0 1 0 0 0 0
-RDBs 0 105
Other Prop Owned-PAs-BookValue ) 143 0 11 2 1 1 1
Profit ) 699 0 2 0 0 0 0
-NPAs-BookValue) 225 175 1/ 175 1/ 0 0 0
Proflt ) 45 35 35 0 0 0
Monetizationof Securities 217 2,100 300
Sale of SecuritizedAssets 500 500
Earningson Funds & Securities 390 147 204 189 204 229 239
Other Income
Fees & ServLce Charges 57 64 67 71 74 78 82
On Loans 171 100 149 177 217 253 240
Dividends 23 11 35 29 24 .9 15
DivLdends-RDBs 0 4 8 8 8 8
Deps vith Banks 58 40 16 18 21 22 23
Forelgn ExchangeGains 40 29
Miscellaneous Income 105 264 91 96 101 106 111
Incremental Deposits-Private ) 413 150 15U 150 150 150
NG ) 1,467 25 25 25 25 25
Borrowings

DomesticSources 153 300 500 700

ODAM/Multi/BilateralSources
IGLF (Retail in 1989) * 557 919 1,.22 1.686 626
AJDF (Wholesale) 3,121 4,824
I R U (Wholesale) 223 1,263 1,659 3,132
DLBS (Wholesale) 2,504 1,252
Kreditantalt fur WeLderaufbau(MERALCO) 127 388 332
WOULD BANK (MERALCO)
SWISS LINE (Retail) 892
AdditionalFinancingGap 2,370 2,409 4,818 7.512
AddltlonalPayables 328 312 280
TOTAL RECEIPTS 6,409 12,120 13,834 13,253 15,904 18,658 21,933
TOTAL AVAILABLEFUNDS 7,291 13,315 14,155 13,570 16,290 19,110 22,354
 ANNEX 3.02
- 69 - Page 5 of 10

ACTUAL BUDGET -P R O J E C T I O RS --------

1988 1989 1990 1991 1992 1993 1994

DISBURSEMENTS:
Releases-Rlending to PFIs 3,344 7,006 5,451 7,227 9,130 11,252
Window 1 ) 966 773 811 852 873 895
Window 2 ) 2,551 3.284 2,627 2,759 2,896 2,969 2,969
Window 3 (301 of Net Inc.)) 489 306 287 263 355 448
Window 3 (On Collections) 23 56 78 94 105 124
MERALCO 127 388 332 0 0 0
Repayment of New Domestic Borrow. 0 300 500
Capital Expenses-Premises 58 222 53 35 30 30 30
Cash Operating Expenses 522 618 529 555 583 612 643
Repayments-Borrowings
Long term(WBIADB) ) 146 64 37 35 35 35
CountrysideBills ) 1,002 150 137 105 85 0 0
APEX (on transferredliability) 21 21 21 21 21 21
IOLF (on transferredliability) 100 100 100 100 100
Purchase of SecurLties 300 200
Cash Dlvidendsto NG 83 115 131 177 224
Special Funds-NG 400 1,400
Payment of Time Deposits-SG 146 300
-Others 1,050
FinancialCharges 232 364 962 1,738 2,433 3,151 3,957
Taxes-GrossReceipts 86 147 101 147 188 232 265
Inc,er 37 66 251 302 318 397 398

Other Payables 1,062 278 328 312 280 0

TOTAL DISBURSEMENTS 6,096 12,994 13,786 13,184 15,838 18,689 21,861
ENDING CASH 1,195 321 317 386 452 421 493
 - 70 -

Annex 3.02
Page 6 of 10

List of Acronyms Used In Financial ProJections

ADB m Asian Development Bank

AJDF 8 Asian Japan Development Fund
IGLF a Industrial Guarantee and Loan Fund
NG = National Government
NPA Non Performing Account
PA - Performing Account
PFI - Participating Financial Institution
RDB - Regional Development Bank
Window 1 loan 8 Loan with maturity not exceeding 12 months
Window 2 loan - Loan with maturity exceeding 12 months
Window 3 loan - Loan that does not completely satisfy conmercial
banking risk or collateral criteria; limited to a
maximum of 30S of DBP's previous year's after tax
net income. See para 3.15.
 - 71 - ANEX 3.02
Page 7 of 10
ASSUMPTIONS

1.) Projected Releases (In Million P)

ACTUAL
1988 1989 1990 1991 1992 1993 1994

Retail:

Window I 966 773 811 852 873 895

Window II 3,284 2,627 2,759 2,896 2,969 2,969
Window III 512 362 365 357 460 572

Sub-total 2,551 4,762 3,762 3,935 4,105 4,302 4,436

Wholesale - 3,344 7,006 5,451 7,227 9,130 11,252

MERALCO - 127 388 332 - - -

TOTAL 2,551 8,233 11,156 9,718 11,332 13,432 15,688

2.) Collections

a. Existingperformingaccounts(PAs)as of 12-31-88assumedcollected at the

rate of 15% p.a.; average interestrate of 18% p.a.

b. Existingnon-performingaccounts (NPAs) as of 12-31-88assumedphased out

by 1989; 20% collected;80% written off. Average interest rate of 16%.

c. New Releases

Retail (Wl & W2) - assumed collected at the rate of 10% p.a., average
interest rate of 18% p.a.

Retail (W3) - assumedcollectedat the rate of 10% p.a., average interest

rate of 12% p.a. (Inflationof 10% + 2%)

Wholesale - assumedcollectedat the rate of 10% p.a., with two years grace
period; average interestrate of 13% p.a.

3. Status of Accounts/Provisions
for DoubtfulAccounts

a. 2% of performing(PA) equity investmentsto turn into non-performing

(NPA) annually; 5% for loans and all other investments.

b. NPAs assumed phased out in the year followingtheir set-up as such;

20% collected;80% written-off

c. 5% allowance for doubtfulaccounts for Windows 1 and 2 PAs; 15% for

Window 3 PAs; 80% for NPAs.
 - 72 - ANNEX 3.02
Page 8 of 10

4. Deposits

a. Incrementaldepositsassumed at P 413 MM in 1989; all private. In

1990 onwards, private deposits to increase p150 MM annually and
interest-bearinggovernmentdeposits to increase P25 MM annually;
to cost average rate of 10%.

b. Reserve requirementsestimatedas follows:

Private - 14% in cash, to earn 4% p.a.

Government - 14% in cash, to earn 4% p.a.
61% in GovernmentSecurities,to earn 15% p.a.
or
an average rate of 5%.

5.) Funding Sources

a. Source ProjectedAvailments

1989 1990 1991 1992 1993 1994

IGLF $25.0 $40.0 $60.0 $ 70.0 $ 25.0 $ -

AJDF 140.0 210.0 - - - -
IRU 10.0 55.0 70.0 130.0 - -
DLBS - - - - 100.0 50.0
KFW 5.7 16.9 14.0 - - -
SWISS LINE 40.0 - - - - -
ADD'L. FIN.
GAP - 100.0 100.0 200.0 300.0

$220.7 $321.9 $244.0 $300.0 $325.0 $350.0

DOMESTIC - P300.0 0500.0 - - P700.0

b. Funding Cost To Relending Rate to

Sources DBP PFIs

IGLF, 10% 13%

AJDF 10% 13%
WB/Multilateral 10% 13%
Domestic Sources 15% 3-year maturity

c. All sourcesassumedto carry 5-yeargrace period;only interestto be paid.

 ANNEX 3.02
- 73 - Page 9 of 10

d. Repayment of existing ADB/IBRD and countryside bills to follow actual

maturity schedule as follows:

1989 1990 1991 1992 1993 1994

CSB 150 137 105 85 - -

IBRD/ADB 146 64 37 35 35 35

296 201 142 120 35 35

6. Branch Privatization

a. All five (5) RDBs to be set up in 1989; 25% of total equity to be

sold in cash end 1989 and 45% in 1990.

b. The retainedequity holdings, in common stocks,assumed to earn 12%

p.a. in dividends.
c. Outstandingbills payable to DBP of RDBs to be paid over 10 years
at 13% interestp.a.

d. Projectedbalances sheet for 1989 assumed to include RDBs. DBP is

still the majority shareholder.

7. Fixed Assets (Premises/Others)

Acquisitions (ITN/COSMOS) 1989 - 9 222 MM

1990 - 53 MM
Provision for Annual ) 1991 - 30 MM
) 1992 - 30 MM
Capital Assets ) 1993 - 30 MM
) 1994 - 30 MM
Depreciation - over 5 years

8. Foreign Exchange Rates

1989 - 9 22.29 : $1 1992 - 9 24.09 : $1

1Q90 - 9 22.97 : $1 1993 - 9 25.04 : $1
1991 - P 23.70 : $1 1994 -9 25.04 : $1

SOURCE: 1989-1992- CRC "EconomicBriefing to DBP" in

Oct. 1988
1993-1994- Assumed 4% inflationrate
 - 74 - ANNEX 3.02
Page 10 of 10

9. Operating Expenses

Projected expenses are on accrual basis. Accrued interest and other

financial charges during the quarter shall be paid the next quarter.

Operatingexpenses (interest,personneland otheradministrativeexpenses)

of the RDBs are excludedbeginningin 1990 when DBP's equity shareholdings
are assumed to be down to 30%. A reductionof nearly 700 employeeswill
result from the branch privatization,which will cause the reduction in
salaries and other personnel expenses in 1990. Thereafter,a 5% growth
in all administrativeexpensesis assumed.

10. APEX and IGLF ExistingPortfolio

APEX existingportfolio (PAs only) of P 592 MM assumed to be transferred

during 1989. Transferredliabilitiesassumed to be equal to transferred
portfolio. Repaymentsamount to P 21 IDMper annum.

IGLF existing portfolio of P 1.90 B assumed to be transferred in 1990.

Transferredliabilitesequal transferredportfolio. Repaymentsamount to
P- 100 MM per annum.

11. Cash Dividends to National Government

Cash dividends to be paid to the National Government is assumed to be in

the following rates:

Year

1990 10% of PreviousYears Net Income

1991 12%
1992 15%
1993 15%
1994 15%
 _ _
-5 ANNEX3.03

Iff~ ~~ilit S EI
|}~11. 1iiE
Luljjj

~~~~~~L 16
 -76 -

ANNEX3.04
PAGE 1 OF 6

PHILIPPINES

MANILAPOWERDISTRIBUTIONPROJECT

DEVELOPMENT
BANKOF THE PHILIPPINES

POLICY STATEMENT

Objectives

1.01 The DevelopmentBank of the Philippines (DBP) has substantially completed

its rehabilitationand financial strengtheningprogram which aimed at
making it a viable and self-sustainingfinancial institution. The
principalobjectiveof DBP is now to providemedium and long-termfinancing
to the private sector. The DBP hopes to attain this objectiveby evolving
into primarily a wholesale bank, i.e., an institutionchannellingfunds
to other financial institutions for on-lending to private business
enterprises. As a wholesale bank, DBP shall help fill a major gap in the
financialsystem of the country:the provisionof long-termcredit to the
private sector.

1.02 More specifically,DBP will:

a. bring togetherprovidersand users of medium and long- term capital;

b. help develop the capitalmarkets by promotingmedium and long-term

capital market instruments(e.g. bonds) to which institutionaland
individualinvestorscan subscribe;

c. relend the funds it mobilizes primarily to accredited financial

institutionswhich will act as lending conduits for on-lendingto
enterprises;

d. act as a major conduit for, and manage, official development

assistancefunds which the private sector will use;

e. manage industrial sector credit programs funded by multilateral

developmentfinancial institutions;and

f. undertakeall other activitieswhich are conduciveto achievingits

broad aims and objectives.

1.03 DBP will gradually expand its wholesale lending activities in line with
the objectivesstated above; the gradual reductionof its retail lending
in relativetermswill be undertakenin an orderlymanner. Over time, DBP
plans to leave most retail development lending to other financial
institutions such that DBP's outstanding portfolio will have a
predominantlywholesale configurationby the end of 1993.
 ANNEX 3.04
PAuG Z OF 6
- 77 -

General Operational Principles

1.04 As a development bank, DBP has to submit to the test of financial

viability. Thus, it will pursue policies that wtll ensure a sound capital
structure and the generation of sufficient earnings to cover costs, earn
a profit margin, build up appropriatereserves and protect its equity base
from erosion.

1.05 The wider social consequencesfrom the developmentalrole the DBP must play
dictate that while it has to pass standard market tests, it also has to
assess its operational and financial results in terms of their economic
and developmentalimpact.

1.06 DBP will operate on an equal market footing with its private sector
counterparts. These two fundamental principles of ensuring financial
viability within a competitivemarket frameworkand of continuing to play
a developmeat role Jointly define the place DBP will occupy within the
financial system. As a financial institutionwith a development mission
and as a development institution with financing responsibility and
viability, DBP is a developmentbank with the usual functions and duties
of banks under the thrift category.

1.07 DBP shall increasinglyconcentrateon wholesale lending activitiesin close

partnership with private financial institutions duly accredited by the
Central Bank according to pre-agreed criteria from. The accreditation
criteria shall includes (a) a track record of profitable operations and
sound capitalization; (b) an ability to maintain a sound and healthy
portfolio as shown by the institution's level of arrearages; (c) a
qualified management team of good reputationand (d) adequacy of trained
staff, established systems and procedures to be an efficient and reliable
purveyor of retail credits. DBP shall be active in syndication with
private banks and shall work closely with them to efficiently on-lend
development funds to the private sector. DBP will premise its
participationin the syndicate on the need to ensure that program lending
is fully carried out and to cover gaps that private banks may not be able
to fill.

1.09 Except when specificallyallowed under Monetary Board (MB) regulationsor

by virtue of agreements that the Government and DBP will enter into with
multilateral or bilateral institutions, DBP will not enjoy special
privileges. Thus,

a. Its obligationswill not enjoy government guarantees;

b. It will have no preferentialaccess to the funds of the Central Bank;

c. It will not benefit from special tax privileges;

d. It will not enjoy undue preferential treatment for deposits of the

Philippine government and of Philippine bovernment corporations;
 ANNEX 3.04
- 78 -

e. It will not receive additional government equity to cover losses

that DBP might incur in the future.

This would not preclude DBP however, from akranging for equity increases
from the National Governmentwhich may become necessary to maintain a sound
capital structure as its development lending activities increase.

1.09 DBP will have a private sector orientation with autonomy in its
decision-makingwithin the regular regulatory framework and significant
private sector representationin its Board of Directors.

1.10 DBP will avoid lending to the public sector.

RehabilitationPeriod

1.11 Although its rehabilitation has been substantially completed, DBP

reiterates its commitment to carry out the remaining elements of its
rehabilitation plan. DBP will scale down the number of wholly-owned
branches, agencies and offices it will maintain from the current level of
70 to 15. The pooling of its remaining branch network into five regional
developmentbanks for privatizationis to be given top priority. Through
the process of privatizationof these regionaldevelopmentbanks, DBP shall
gradually give way to increasing private sector participation through
equity holdings. A target for such private sector participation is set
at 25Z of the total equity base of the five (5) regional developmentbanks
combined in 1989 and 45Z in 1990. By the end of 1992, DBP shall have
reduced to minority position its holdings in each of the five regional
developmentbanks.

xnvvetment Policies

1.12 DBP shall adopt a lending policy that would achieve a balanced regional,
sectoraland industrialdistributionof its funds consistentwith national
development priorities. DBP shall gear its financial help towards the
promotion of economic development of the country. This will relate tot

a. provision of its funds for investmentand working capital purposes;

and

b. establishment of new enterprises and expansion/rationalizationof

existing enterprises.

1.13 In its lending activities,DBP shall adopt an interestrate and fees policy
that:

a. ensures full recoveryof all its directand indirectcosts, including

provisions as required, plus an adequate profit margint and

b. is consistent with prevailingmarket rates for loans of

similar maturity and risk.

1.14 For its retail lending, DBP shall base its investmentdecisions on its own
analysis of the viability of the project and the enterprise. Towards this
 APPEX 3.04
- 79 - PAGE 4 OF 6

end, DBP will apply specific lending criteria that include lending only
to projects with (a) proponents of good credit standing5 (b) sound
management; (c) satisfactory financingand marketing plans; (d) adequate
financial rates of return; (e) technical soundness. DBP shall maintain
a Risk Asset Management Manual(RAMH) that sets out credit policies and
procedures embodying these lending criteria.

1.15 For its wholesale lending operations, DBP shall lend only to duly
accredited institutions. It will develop and apply uniform guidelines,
policies and procedures for each loan program to ensure a consistent
approach in dealing with accredited institutions. DBP will rely on the
credit judgmentof the accreditedinstitutionsand not pass upon individual
loan applications, except for large projects involving amounts beyond a
threshold loan amount of not less than 85 million pesos.

1.16 DBP will carry out adequate monitoring of borrowers and will require these
borrowers to keep proper records of accounts and furnish operationaland
financial data to DBP as it may reasonably request.

Pinanclal Prudence Limits

1.17 Within the broader limits provided for by law and4by the DBP Charter
(ExecutiveOrder No. 81), DBP establishes the foliowing exposure limits
in order to maintain a prudent and diversified 'Loanportfolios

Except as otherwise agreed by the Monetary Board,

a. DBP shall limit its total exposure to a osngle client or group of

companies, retail or wholesale, inclumlve of loans, guarantees and
equity investment, to 15 per cent of DIP's unp aitred capital and
surplus.

b. DBP shall limit its total equity innestments in a single enterprise

to no more than 15X of DBP's own total equity and shall not seek
majority ownership or management control of any entity except in
cases where its exposure in the enterprise is In jeopardy. DIP's
lnvestrment In its operating subsidiaries will be exempt from these
limits.'
c. Rules fully consLstent with prudent banking traneactLons shall govern
Lisuance of guarantees or similar comitmnts.

1.18 DBP agrees to the transfer to it of the IGLF and Apex Loan programs which
the Central Bank is now managing. After the transfer of the IGLF and Apex
loan programs, DIP shall manage the acquired portfolioson an agency basis
and undertake for lts own account new lending under the programs, applying
its normal investmentpolicies and lending criteria, including protection
against foreign exchange risk.

Operations on An Agency Basis

1.19 DBP may undertake specific lending operations at the request of the
Governmentin supportof governmentprograms/projects.Such operationswill
be undertaken only if (i) the Government earmarks funds for such projects;
 - 80- ANNEX3.04
PAGE 5 OF 6

(ii) the Go-ernment pays the DBP an appropriate fee for undertaking that
function and (iii) such lending does not entail any financial risk for
DBP's own account and the resultant loans are kept off DBP books.

Socio-EconomicProiects

1.20 DBP may constitute each year a portion not exceeding 30Z of its net income
after te- for the previous year into a special fund for loan, equity and
quasi-equity financing of projects of great socio-economic benefit but
which do not fully meet the financial return criteria of DBP's regular
loans. This is clasified as Window III lending. DIP may add back to the
special fund any loan or investmentexclusive of earnings, previouslymade
from the fund and subsequentlyrepaid. DBP will charge an interest rate
for projects in this category that will cover the overhead cost and the
projected inflation rate for the year to preserve the real value of the
fund.

1.21 Within the framework of Window III lending and consistent with its
developmentmission,DBP seeks to establishlong-termrelationships,mainly
by lending medium and long-termfunds to entrepreneursengaged in projects
with high developmentalimpact, but subjected to market discipline. Some
of these projects may be in newer fields and with higher risks such that
private financial institutions may be less willing to commit their
resources into such projects over the medium and long haul.

Retail Operations

1.22 Subject to the predominantlywholesale nature of its operations,DBP shall

continue to engage in direct lendingoperationswhere it shall simply serve
as a catalyst, especiallyin the strategicsectorswhere the private sector
may still be hesitant to enter iully. But it must ensure that it does not
erode its equity base and that it gradually withdraws from tse economic
areas which the private sector can take over.

Financial Policies

1.25 DBP will ensure a prudent interest rate and maturity match between its
assets and liabilities.

1.24 To ensure high standards of financial management, DBP will maintain a

planning and budgeting system, an effective and efficient system of asset
and liability management, and a liquiditymanagement system.

1.25 To finance its operations, DBP shall mobilize private sector funds and
funds from other government financial institutions such as SSS and GSIS
on market terms.

1.26 To diversify fund sources by investor type and maturitv, the bank shall
introduce appropriate term instruments.

Capital Structure

1.27 The debt-equity ratio for DBP consolidatedwith that of its subsidiaries
 - 81 - ANNEXPI1EX30
3,04

and taking into account contingentliabilities,shall not exceed 51.

1.28 The Bank shall not expose itself to uncovered foreign exchange risks.

Organizationand Staff Developwrnt

1.29 tBP will have an effective system of controls, a sensitiveand responsive

monitoring mechanism, and a decision-making process that assigns
accountabilitiesand respGnsibilities.

1.30 It will also develop technicallyqualified staff, taking into account the
special skills required for effective fulfillmentof its functions. It
will provide a compensationpackage commensuratewith responsibilities
dischargedand competitivewith private sector remunerationto attract and
retain competent staff members.

1.31 DBP shallmaintainits credit committeeto undertakeevaluationof all loan

proposalswhich require the approvalof the Chairmanor the Board, before
submissionto either of the latter, without in any manner affecting the
prerogativesof the Chairman or the Board;

Accounts and Audit

1.32 The Bank shall use generallyacceptedaccountingprinciples in recording

its transactions,consistentwith Central Bank regulations. It will have
a private external audit conducted annually.

Modificationto the Policy Statement

1.33 The DBP will not change this Policy Statementwithout prior consultation
with, and approvalof, the proper relevantauthorities.

1.34 This Policy Statementand any modificationthereof,and its implementation

shall be subject to Philippinelaws and the rules and regulationsof the
appropriateregulatorygovernmententities.
 - 82 - ANNEX4.01

PHIUPPINES
MANILAPOWER DISTRIBUTION
PROJECr
OrganhiotfonChart of MERAICO

BOARD OF DREaDRS|
ICORPORATE SEC.ETAaY

EXECUTiVE
COMMITEE

PRE DENT

AL
COUNS SERVICS
MEDICAL [ U vY
ECONOMICS
srAff

[ DIV
MANAGERiALPAYROUL

rLEGAL
1
SERVICES
DEPARTMENT [ INSPECTONDM9SION

PATROL
DIVISI0N| PUWJCINFORMATIONDIVl

| COMMUNITYRELATIONS
DIV

| CORPORATEAUDITSDIV

TECHNICALSERVI CUSTOMERSERVICES ADMINISMTIVE MANAGEMENT FINANCIAL

GREMNUP GROCEP SERVICEGSOEUP CSEND GROP SESVICES
GROUP

SYSTEM GROSER
CONTQOL __ASSURANCE
CENTER STAFF

MAEIALS - CUYOE5 ;; MANAGEMiENTI MANPOWER PLANIN

MANAGEMENT
I SeiERVICES SERVICES| SERVICES |H AND
PLANNING CONTROLI
|DEPARTMENT PLANNINGSTAFF PLANG SrAF|AFF FF l ZAND |||DEPARlrMENT|

ENGINEERING CENTRAL | GENERAL STAFF

DESIGN COLLECTIONS SERVICES TESR
DEPARTMENT DVISION DEPARTMENT DEPARMEW
I M wT CUSTOMER | | | §EMPLOYEE COMPUTER

PLANNING SERVICES
QUAUITY AN EVBDEPARTMENTEPRrE
DEPLANNINT | |ASSURANCE
SAF DEPARTMENT
PERSONNEL
NORTHSPECtAL
BIWNG ~~~~~~MANAGEMENT
DiSTRifBuTiON ANALYSISSTAFF ARAGMEIM
DEP
DEPAMMEW~~~~~~~~~~~~~~~EARMN

SOUTH NORTH-EAST
DISTRiBUTION |B ERANCHES |
DEPARTMENT DEPARTMENT

EAST |SOUTH-WEST
DSTMSTION | q gANCHES |
DEPARTMENT DEPARTMENT

OPERATIONS | SALESSEW1CES|
DEPATMENT DEPARTMENT
Idd oI *-43944 1
 ANNEX 4.02
- 83 -

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

MERALCO - Staffing Profile (as of September 30, 1988)

Organizational grouping Number of staff Percent

Office of the Chairman of the Board 20

Office of the President 582 8

Technical Services Group Z,972 42

Customer Services Group 2,002 29

Administrative Services Group 557 8

Management Manpower Services Group 267 4

Financial Services Group 298 4

* Seconded Staff 83 1

Manpower Pool 11 -

Probationary Staff 180 3

Temporary Staff 62 1
 ANNEX 5.01
- 84 - Page 1 of 15

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

MANILA ELECTRIC COMPANY

Annual Financial Statements and Proiections 1984-95

Table of Contents

Page No.

Key Financial Indicators .... 2

Income Statement.................................................... 3

Cash Flow Statements .... 4

Balance Sheet....................................................... 5

Common Stock Summary .... 6

Share Valuation Ratios .... 7

Restructuring Agreement Requirements .... 8

Principal Assumptions ... .... 9

.
Assumptions to Financial Projections ............................... 13
 AMlIM 5.01
f'1hL.PPINES
PROJEET
KELRRPOEPDISTRISUTI2I Palo 2
cEP
2.11L ELECIRIC ot 1!
INDIEATIS
196439"5 VEYFIOMt4C62

Financial Ter E*Mdec. 'I 199 2q6 :96 2967 919 1989 2990 1991 1M 1M l994 1993
**------ Aktual
- - -- ----- --- --- __ f t --

6 42.d I 679.5 7 93s. AM61.0 14 313.2 1t 54.0 12 340.0 s 310. 14 340.0 15 420.0 16 530.0 Ir 690.0
"ERSI SMIS IBM,) 719.60 193.00
SOU ffE ICtvs./IlN) itO.66 179.I1 169.49 165.33 159.59 163.24 166.20 In.95 117.00
2,341.3
EWITALEIPENITUIES 562.0 420.0 636.0 702.0 746.7 1.135.2 2.54.2 2,139.0 1,95.9 1,930.3 1,992.5
2U fE15 12,o29.0 14.1l5.0 13,455.0 14,943.0 16 4se.s 9.'I7.9 20.'A2.3 23,019.6 25.112.0 23,15.4 Slt407.0 34,141.7
WIIITIS 23,19.3 26,193.6 23,6. 31,14.
P501I11E59261 10.679.0 1335.1.0 12.M0.0 1'.663.0 15.43. 27,679.2 19,220.6 21,6.
IPATIE O1 05l.ki
t14.0 12 0.0 I'160. 1 964.*1.07997 1,321.7 1 .1 2,019.7 2,41.9 2,323.9 2 6
NET 151 f (LOSS) 2231.0) 170.01 244.0 0.0 693.9 712.2 99.4 1,19.6 ,7 .7 2,2. 2760 3,1.3
P1A NE 7e3t71-. 9,229. 10,504.3 11,419.7 122209.2 24.136.5 16,730.6 19,433.9 22,111 24,744.0 2 ,4. 30,1.
11111
TOTAL 9,101.0 11.A3'. 13.526.2 13.716.0 14,643.4 16,:631.5 19.33.6 21,670.5 24,17. 2746. 31476 36,063
1511115
REIIIIED 119.0 223.0 775.0 1,411.'. 2,422.6 3,242.6 4,352.9 6,069.6 6,14. 10:1.5 14,42. 1121.6

FItl^AL 211710: 3.20

Current Ratio 0.52 ,,.47 0.63 0.77 0.6 1.13s 0.6 1.21 1.42 2.0 2.69
0t"ITot.Cap. Ii No Renl. Surplus 423 243 m7 403 So0 261 2 2n 19t In 143 123
2) U00Rual. sogl,' 633 542 t6%
672 462 S6 3 323 m 241 191 5t
hick stiao 0.46 0.42 0.57 0.69 0.B7 1.01 0.E5 2.06 1.24 1.65 2.43 2.94
ht Profit hriogt -23 et 22 3n 42 43 53 n n 92 n29
ltweet CEorage -1.36 -0.06 1.26 1.61 1.5E 2.60 2.05 2.82 3.90 7.62 11.40 17.65
Return0 Rate Base 4.762 P.62o 9s.4% 10.'I 9.63 7.M12 9.132 10.832 10.013 11.192 10.652 10.16
DethtS'v,tk Eoveap Aat,e 0.06 4.06 11.62 0.98 2.31 2.32 1.37 2.65 2.72 3.47 6.46 6.46
SelfftununligRatio -Itt? s:z 2801 -99s 157 1 2 322 6an ISI2 1703 266i
wiwatin Ratio 972 9422 902 92 922 9n2 92 672
n1 o5n en
kcmnts RKeulvable- Ibnths V.19 2.0? 2.06 1.87 1.64 1.55 1.54 1.48 1.43 1.38 2.35 l.2
AccountsPayable- Kutbs 1.0.! 1.52 2.59 0.92 0.90 0.71 0.74 0.12 0.69 0.69 0.66 (.6!
rns::s:::::tS tr:=:a::B:::::s:t:t£g:tt:t'*5m:s:==tStl_0=5st , £,Wtttrt77==tS0t's...........
fltfltctttt:sU=sflSnttlhl.s:,-lt.ttt::t:
 FPIIL3PPIUES -1I 3.01
L mIo
PUWPR
DISTRIIJTIUN
-asuc wmv PRECT his I 1o
35
3994-1995ONULZimam
ITATEIEWS

Fiold Yewaehd Dec.St 3964 1995 906 13997 1993 1m 1990 1991 3992 1993 1999 19
?sflCtflttflflt lCst?ftts fltt.fl:rst:,..,.:.Bt=ttSS=:=ttB
---
ta--------------
lS S w l*stllD1swl1l_ X Wttg t*SS
------------- - - ---------- ------ ---- ------- -- --------- -------- --------
rjte- --- ------------
31831 EWEWI 33.029 34,365 33.55 14,343 .16.459 19,779 20,542 23,020_ 25,932 20,935 3,401 14,142
VIUT1WIEUPESEE
PvrtasgPour 9.4114 11,914 10.116 11,372 12,619 14,55 1556 16,7531 19,060 39,42 20,313 22,279
guciatim 273 3 470 551 670 9 930 A 1,Ot 1 'M
Taxes
mthwthlanne'a t.
Prenuesirori
Inw tcn T_i
2:9
0 _
233§_ 1,112
340
_29
149
319
-w
m416
4s 4nW
624
5I5
1-,t39
:
I,69
I1,901 ?013
2,163
total Owatlf Epiotus 10,9 13,351 2,25 33,663 15.474 17,679 19,221 21,167 23,792 26,3 U,3 3l,345

W TlIt lawE 353 914 950 I,190 95 1,100 1,322 1, 2,020 2,642 2,24 2,9?
AidledKti
Cerraq REchoqe iitt AdgUstust 59 19 199 144 129 0 0 0 0
FORER Losst Interest (331 399 3393 3233 39) 0 0 0 0
FOESLossan bowrtiation (a) (39) 11501 31211 3123) 0 0 0
Total
Icome SI34 9 19----0 5 1,,100o 1.322 3.953 2,020 242 2,24 2,997

OTWEhEm I MKITIONS
Interest a Lq-Tern Iebt *47 307 219 249 534 564 5t5 579 44 369 294 244
Iti tSt
on ort 1l. Dbt 2 637 563 459 Ito 117 152 150 SO 22 2 0
ther Inteet Expone '5 le 22 26 3.5 30 I3 16 19 It 19 I9
lnternst locoa 0 1. 0 0 3593 3303 3123 3393 (24) (33) 3343 3373
hertuzation ofDbt Espens 4 9 7 9 1s 35 19 39 t9 )7 39 14 OD
Isterost Charge to Construction M'P 't63 342) 3123 3221 (35) 3306i (91) 179) '74) 11773 30
UsKe3ll so. IncOs. '203 Ei) 363) (50) 3203 324) M23 132' (36) 340) 3443 (4n,
E;itv in t Enrings of Sbs,d,ar,tn 6131 340) 3401 403 340) t(O4 340) (401
Provis,onforlnoui ~zTai~ ~ ~ ~ ~ ~ ~~ ~~~~~~......
Fnwhtontor~ -- -- -----
...... -------- -! ------- --------32413--------3249)------- 3256 ------- MUI 3194 ----- 13263
-tttl-- 393
- --- id)
Total
De*t,timos-Wt S9. 994 706 690 29t 397 329 334 240 139 49 (1)

NETItCOIIE BEFORE
(LuSS) EITIUERDIMARV
ITEN t:2li (70) 244 50( 694 ?12 993 1,520 1.780 2,523 2.776 3.034
Estrarwdaist Item - Saon
a Sale o F.A.. 0 0
g 0 0 0

WET
E I t OWEtM t.. 4 X9!
50': 712 q' 1.520 13780 2,523 2,776 3,014
tttSC:ttfltflzUutflsts:ttt.n:s::..t...........e............n........,....:.n.,.....

RETAINtED
EAPKIWES

oeomnolilace 617 IN7 223 775 1,411 2.426 3,243 4,353 6070 9,145 11.102 14.463
tdd: Wt IntesI(Loss) 32S' 70) 244 5We 695 712 99 1,520 13790 2.523 2,776 3.014
RealiztdRelltluton srlus 104 152 236 7,2 395 4 521 61l '25 B49 997 1.133
ProlrYewAd)sstmnt of Intoe tax Prc. 199 0 0 0 0 0 0 0
Total 49i 261 703 1,577 2,699 3.571 4,757 6,493 8.575 11,517 14,964 i9,615
tnLs:
Ca Dividends- Cosmn
- Preferred 105
ISO
71,
A
1I9
0
5
214
0
2_1
0
299
0
,01
0
317
0
326
0
5
0
- Preferred 16? 13 57 58 58 3 42 26 26
PreferredlO 3J2 35 I3 47 71 57 60 62 65 51 vY 52
DiVitns
StoKt 0 175 0
Total .12 393 166 264 329 405 419 430 415 403 413
closing alm" li9 223 775 1.411 2,426 3,243 4,353 6,070 9.145 33,102 14.463 13,202
3805C5
U558A
C2ft3tlsttS22tf;lItDDnn2A7t|ltlttStCf=sslf|lft|lCSlg8t3 2 %lt-e fgtlCXA
ttX-
 A111 5.01
PFtLIPPINES Pw 4
Pow1 DISTRIWI0O
PO T rI
W11 A musiECTPICCIP6NT
1984-I"S
tQ5 SH
TW
CANFLC
W A l S
In4r,tll" Fncs)
11B9 19W( 1991 1992 1993 I9 1993
FirinulaV Ewd wt. 51 1S4 1915
------ ktud
----
-----------
1986
-----
9197
------
------
1988
---------- ------- ------ rlt tn--------------- ~~~~- ~

Provided
CMas lyt
)brtdiu.s - 1.230 13246 1.125 1I3M 1,U 2,01 2,601 2,U7 3,044
372 832 9V4 1,32 1,240 1,4 1,S 1,78e
aewatin?I OtherIncm 273 3sn 70 557 U7 79e 93
52 15
ewrec^|tom I
1.154 1.300' 5 III (321 316 24 55
612) t174
Increase(Oweaselin Ibrku Ctit 4,4 4,64
2,58 417 2.433 2,090 2,247 3,282 3,54 4,t172
TotalCasProvidedblv rati 33 1,38
121 24 24 24 24 (1713 24 24
- oft 18 M93 77 (63) 0 O 0 0
Pref d ty ln 450 i5
Ce_mm E4dt!r Is325
B 531 444 3512 311 263
Lwq-T arrmi- Worldant 302 350 650 450 450 650 0 0
lss.n ° 0 0 0 0 0 0
LoW-Terorromgi- bnd 0 0 0
NEWLOAN a 33
-E F IC 5 420 35
-It F 0 300 572
- FC 0 53 120 421 2n0
-O CtF - rSed 104 1O0 123 132 154
- EC F Rural 4 34 24 24 I9
-8 8 P (9821 140 50 11301 1570) (2201 0 O
Slrt-twru Brrowing .174 204 (1.6251 362
Additioal Shwrt-tru brromon (Pavunts) 8an
RentrfcturedPCOned. PayaIs ----
Total Sources ~ ~~~~--
~ ~ of Cash - --- --------
1,494 1,342
-
1,815
-
2,m
----------
3,438 4,577 4,795 3.4 6,432 4,643 5,024
TotalSeurc l Ego t1,725

c
CaetService 19 0
Shwt-awaLaoas 4 34 24 24
PrinCipal- Existiq - Local Xe I Pi 52 107 140 133 66 (1) (32) (37)
284 637 560 459
Isternst
tLosar toreLm 1 0 0 0 0 I I I
189 38 0 32
iecip I - Ei1stin I' 518 7I9 745 743
- onRt uredLoans 0 0 0 0 0 a 0 0
eEWlwo 267 267 267
- Retructured P Pastles 0 250 :!3 5I
371 49S 31 219
- 8ondIsusn 0 14
-t H 34 67 67 67 67
IfC to
-E F I E 2 It
-lerd 8ntk 534 54 585 579 411 369 24 2U
547 355 219 249
Intmunt 1 23 34 St
Louiet Coeratvm fIromPC 35 30 13 16 1U 19 U9 i9
le 19 25 26
Init rst on EntustwDwesits __…...
.……… _ _ ... ... . ......_ . _ -__ __ _

943 1,174 1,75 1.834 2,177 1,414 1,237 701 55

TotalkIt Srut:, 83 e97 802
747 1,087 1.172 1,045 2*7 88 I,1 2,144
562 420 3 702 m 7 0 0
CaetructiomEpwdatarn - Electric 0 248 283 324
a 0
etrcto E - 06PIHom-eloctnc
andtUres 0 0 65 536 ale 3
Contrurtio Exsdatures- wtrld akhProjcts 47 t0o 165 216 217
CmstraKti edtorts - wnsed 13; 1229 I 3i 197
CoUtructi Ea wiu - Pral 0 214 287 2" 3 3? 326 336
i 0 0 0 00
vivideadi- Cot 119 5 a 0 0
2
*PrefrredII 13 57 5 58 5a 42 26
- Preerd 16 71 57 b0 62 is 57 4 52
132 38 47
- Prefrrd 201 _--- - - _ . .. _
. . __
. …….….
. _-
. . _…
_
1,811 2,09 S,416 4.4903 C.M 3,'9S s,5" 3,09 3,30
1.710 1.455 1,434
Totallie Of Cab
55 213 21 84 62 56 149 1,547 1,714
RIASE
tl ASHIIcm 15 39 9
 RAUfLA
ELECTRIC
CUPUI of15
19904-299
OWI SlUICEMMET

FisanialYee,Ended
Dec.3kI 1984 1915 1986 1987 299 19319 2990 991 199 1993 194 1995
---- ktat -------------------

UItmiityPlontto Sawvice/21,dgr
Construction 9.533 12.M9 14,442 17,094 20,421 24.559 29,072 33,560 30,201 43,175 43,603 54.829
KiIltL PlIt not to kSwi:o 374 :14 3174 374 374 374 374 374 374 374 374 374
Ins ukmaltgd Deweciation 2,q74 5.045 1,004 7,500 9,815 22,422z 14,431 16,815 19,32 22,169 25,454 29,171
hbtIltilat, Plant 6.93 8,311 ?9,10 9,948 10,910 22,311 14.8114 27,119 29,252 21,361 23,524 4b.033

Perausoo
layetgsts 47 so 282 195 250 299 290 290 290 290 2 290
Ewrrtntkuts
Ca,4 112 151 55 I10 323 335 420 4182 538 1,38? 2,934 4,6481
Shscialposztn 1IE 28 14 47 0 2 5 7 9 12 14 24
AccautsEhcivahle- Net 2,012' 2,438 3.336 2,3-14 2,252 2,425 2,638 2,879 3,069 3,306 3,528 3,753
OtberRKcOVARtle I249 I!) 274 153 124 124 134 145 153 146 176 187
oub~rlptionRecevable v. 225 75 0 0 0 0 0
N2aterialsI Sopolins 213 312 21 304 298 369 444 514 S78 641 706 781
Prepapuets i 21 25 10 129 129 131 132 133 135 136 131
TotalCvreatksses 2.65 3.080 2.949 2,938 3,204 3,610 31,84? 4,118 4,483 5,447 7,494 9.52
OtherAssets 44 81 149 89 115 124 134 143 153 143 172 182
OtherDhfsrrd Debits 24 27, 436 524 445 296 253 0 0 iOa)le
Totalkssets adi OtherDebits 9,701 22.803 13,524 13,716 24,843 24,632 29,339 21,470 24,2711 27,460 31,480 Writ2

Frogi
9 staryCqital C
meterd
Stock 520 427 503 440 541i 55 609 433 457 481 505 299
ComonStock 234 -34 254 254 429 459 499 509 509 59 s0o 509
SubscribedPregwrgd StKck 2! 25 It 50 238 238 59 59 59 19 59 5
S%bscribedri'rn. StWc C :25 75 0 0 0 0 0
Prism on Saleof CuamStock 51 51 51 51 51 346 756 821 B21 821 321 Mt1
A rulsl Sutrplus 1,397 2.5811 3.436 3,33
Z ,716 4,110 4,463 ,203 5,Al7 6,413 7,170 7,83
knteead farnhas 279 223 775 1,421 2,426 3,243 4.1153 6,0170 8.145 11,202 14.443 28,202
TotalProprietaryCupital 2,424 3,5b2 5.230 5.546 7,421 9.20 11,014 13,,295 16,008 19,430 2352 23,004

Loaq-Irs Debt- Rit of furrmntRaturities 1.245 1.143 :.O.,: :,86 3.209 3.161l 3.239 3,819 3,318 4.054 3,65? 3,648
CarrostUsbilities
krceutsPaabit 894 .,ot8 2.696 1,052 2,033 2.353, 2,919 1,274 1,374 1.4sf 1.579 1.690
Ntotspai Ie 2.7149 ;,9315 I.31.. i1.6' 690 934 924 "74 204 (21, (40) %40)
AccruedIstwrot Payable ;Gb 335 265 I"1 192 186 102 161 li l8t 181
Cutup Donsts 4 4 4 4 12 ?2 28 34 40 45
kccrud laxns 484 1,93 205 118 22 146 159 172
IncemelaxesPayable qb 84
C.~~~~~~~~~~~~~9204 154 335 425 483 541
mlibab pAvable
CurrentWaturitiesal i.2q;-Tera
Oth,
17
1,059
6
i,543
1)
723
~ ~~
29 ~ ~~~~~~~~~~
1.276
36 36 37 38 32 24 26i
III m8e 1,415 821 833 401 329 327
OtkwrCurrantL.abil;t:v, 28 :I 83 32 24 25 27 28 29 3I 32 33
TotalCarreotLiabilities 5,1118 4,593 4.612 S.62Q 3,232 3,2M 3,994 3,423 3,153 2,704 2,798 2,976

OtherLiabilities 414 504 591 488 991 1,036 2.090 1,'4 1,29 2,253 1,307 1.36
Total
Liabilittus
sd Other
Crtdits 9,701 22,803 13,524 12,716 14,843 16,e32 29,339 21,670 24,178 27,460 31,480 76,026
 PNtLPPINES ll 5 .01
rAII.MDEDISIU1IUTION
PIOJET PapO
WNILA CW1
ELECIRlt of 15
194-lnr5 tn ST= ISARY
(ir Nillien Pess
fiunacial VOarEO Det. ti 595 1986
184 198? 1908 1989 1990 9 1m9 199 19 1995
---- ---- ctual--- ----------------
--------- - Pr-a--hjgctiMS
------ ----------------------------------
nStflflUCtfl U .... tt.fl
......... m?tstC.fl... Rw9x8"*M..Sr

ComoStock, iaw I 254 254 254 254 254 429 45 4 9 5so 509 S0
StolkDoi9Po (kStWr 1) 0 0 17e
Comn StockEqity at Par '0 ( 0 0 so to 0 0 0 0
CotseStocl,
Iecue*r 31 254 254 254 254 429 459 49 0 s 50
w 590

towutatis of bhised Cis%

lo iengs
2 I criat In Camor"
Stock 0.00Q o.on t.OOt 0.00 68.901 6.9 9.72 2.001 D.00M 0.00L 0.00, 0.001
koupaUlCashividus4s 250 250 250 250 20 m 210
vtsseCtnbDividends 267 237 2" m0e I 321 3S

SUar of itwstvIssue (Osrktt1

total Earolop er Sture- Prior ear lPesosi 24.01 23.71 29.16 40.74 47.95 4i5.i 00.9%
[s"e Price- S Tien Prior artEPSIPesosI 125.00 150.00 145.79 203.69 239.77 325.67 364.30
Vilu of Eott Ists. lfNliloi FPeso) 0 0 250 S0o 0 0 0 0 0
Ito of Sare sswd(million? 0.00 0.00 2.00 2.00 O.Q 0.00 0.00 0.00 0.00
Can StockEritY At P r 0 0 20 20 0 0 0 0 0
Pritls snComeStack 0 0 230 280 0 0 e 0 0

Sas eo Eattt hIsst

s 'eplce
TotalEarninpwr Share- Prior Year iPem) 2411 23.71 29.t6 40,74 47.95 95.1s n.9
Issw Prce - 4 Ties PriOrTeair
ES ;Peos, 100.00 100.00 I00.00 162.95 191.82 260.53 291.0
V1lst Equity lss iNlillionPewso 0 0 s 150 n o 0 0 0
Ut. of SharesIssoeo Isilior.1 0.00 0.00 0.o7. 1.0 0.75 0.00 0.00 0.00 0.00
StackEquitya' Par
CaOMMr 0 0 10 20 to 0 0 0 0
Prmehrin
s Corie StotA
n,tntthf.mnty#eSn_ .=::±sts:nt=t:.ns..fl.:nns.:n:.:::,
e
r.n.fl.ss=-:-:.t=sns-stennnnnnB
.h.sc.
0
es.s.
130
tWC,f
65
sssan.sa
0
s. cm.Snn...s
0
esf.
0 0
 AM= 5.01
PROJECT
PM1E92SlPI1TIOl
lUNILU Pap
tLi
PUILUELECtRIC 04 Is
2984-19S5SW MO RATIoS
TILUATNP
(Ir NlUI:unPsan,s
uasial lowvEsddOK. 31 1984 192 2986 1967 1998 I9S9 1290 l9 I992 MI93 I994 2995

_i OF
P 3 VAUEPEASWi OFCOM STOEt,
TotalPrapresntrCoital 2t424 .256U 5.226 5,54S 1,421 9,206 11,014 134295 1o006 19,416 23.53 23,04
Less: PrefurradStKb Equit% 431 505 52
Prefrred StaKh 520 427 503 440 5s1 5so 609 633 67
SiaKribedPreferredStKu 2! 5 It 59 238 233 59 SS9 59 3 59
D niueds on PreferredStwo 87 87 i7 e87 4 57 f 62 i5 57 4S 52
StacKEsiaty
Prefsr?ed 60 539 U02 516 849 Bet 729 755 72I 5u7 114 64

lashVsl f Cof Stask 1.794 .02; 4.6S9 4.962 6.572 .325 10.216 12540 13,W 185,2 22,914 27,3M

perof rSaS
tSarf aimaOutstaidang
Isssued 8 8 25 .4 44 48 16 51 51 51 51

Bu WILI oER Of :tOn

SeME 7T1D :2:.sS9 !56.93 54.93 195.39 192.47 127.54 214.77 246.85 2".20 370.43 450.23 57.U

Appralul Surplus I.I97 2.581 3,136 .3 :,lt 4,10 4.663 5,203 5,617 6.47 t7,1O 7,.114
80DtValuelIt ef Rea1utioao3 397 £41 993 1,t29 2.851 4.215 5.623 7.33, 9,410 12,374 15,743 19,480

2ETOFfEVALi!TA!ON
SNARE
80 VAIIEPER 46.t9 5i.0' 121.1 6U.15 83.65 94.96 117.41 145.61 184.91 243.15 30.34 782.76
.. fl.....2....~~-- --- -
==fn;,t....:

CEIIIJTTIOIFE3II548PER
StARE STOCi:
OFCONMM
bt Incos far the Year Q2:! 06) 244 509 694 712 993 1.52f) 1,73( ;.523 2,t76 3.914
Lnst Dvidends onPreie1d StccI e7 87 87 4S7
9 ' e c5 57 4S S2

Stock
But14cs Ovaiablefat ommon '318) 4157' 257 41 644 655 934 1.457 1,715 2,466 2,n7 2.96

Surplus
Ralized evalution Ir'4 152 236 i2 S85 4 521 616 r75 t49 937 1,153

Ie_ of Coma ShasnIsied andOutstanding z i5 25 25 4 46 50 5t 51 51 St 51

PER
E4332439 9WIEAVAIABLE. 2.1'1tEE
FOP'ASH -12.5. -6.19 6.1S 16.26 tS.02 11.27 16.71 28.64 33.7? 49.45 53.58 58.21
T-z --- szc.:e.t:et .. M- ts...s......., ns:n.cn.
... . .:. sn
a... .. :;sts.n tt,..:n ... c...e...

PER
SPWLUS
REVALUATION
GOh:SALlAEO SHAFE 4.09 5.S. 9.29 11.89 1.8 .44 10.45 12.10 t4.25 16.68 19.39 22.36
nns .nn.s.....,...s.t.; .*.n-..---- U.......::ttt t. . .. ....
... StZt...fl.Stt:Slt.Z.Sttfllffftft..S.. .. ta.ftnn...n

TOALEAtNISPER CFC(2I0SOC
SHARE -8.42 -0.20 I5.49 29.15 .1
21.4. 23.72 .2 40.74 47.9n 65.13 72n96 80.57
r ~~ ~ ~ fltsGGwsSw=:::s:::S=:S=:=:: :::flt==:=stn..a - t..t.t=s=fw::==S S*:* sh.nr.:*s.=safnn::nnnnn:wlsS2 a SeG Sts=ss.n nn Gase.nnSSSt ns tan.= .s.ss=.g*tSr.
 PHfILI90INES * m 50
ILA P5R DISTRIBUTTION
FRUltT lap0
11A11ELECTRICCOFUt If15
6EST TUP1IU
AUREEUI R6EIIDETS
(isIhblsoPuce
FlsaiL st r Esd Pc. 31 19F4 I9
1915 97 isee 1919 IO9 Isn9m i9 IN4 195
ctul-_tl----------------------
-------------

Oeartlag loco s 351 14 950

" 1,190 955 1.100 1,322 1.3 2.020 2,642 2,624 2,99

Total 371 532 1,011 1.230 1,003 1.133 1,30.2 1,192 2,079 2,j2 2,91 3,011
an.. Isn ussua issr=sin .m m Wsussan .SfbtSt wsSfSSf SsSaf s .n¢g DD_sBa insf _

otaint ud Fiucalal Chargn

laturnt cmLool-tarekIt 347 303 219 249 534 50.4 V 579 464 30.9 294 244
lutrnt an W rt-taro Dibt 285 037 501 459 110 1I? ..2 1500 22 2
Othar IntwrestECpe.t 15 to 22 26 35 50 i3 10 19 1t 19 19
Internt E rwpto onslructton (49) (l5) (42) (12) (221 (35) (10.) (911 (791 (74) (71) 103
kt Iotrant EIauLs 591 693 7tO 722 t57 074 45 5 514 30 23 It1
Ai: Amrtizatio0 ofDebt Erponu 4 7 8 15 35 19 19 IQ 19 17 la
total 602 92 7s67 '30 671 711 664 674 ¶24 35 254 Ir5
StS.sm ... . .. s..... =- f. . .. n ......
1 z.X. ttst..fltltta =-n. fh. nh..tf ttattn ==*nt.

INltE5t COVERAE
RATIO I1.6l 92.21 13.1? U 66.St 158.53 1'9.52 2t1.01 32.412 36. 70.2.1t 110.11 170.4.1

IIIIIII REIRMEITPEF
FES%!UCTURIR6
ASPEEKEIT O0.01 l0t).tl 1C0.Ot 100.01 100.01 IC0.0 lOV.('2 100.01 100.'42 I 0".0 103.02 1;.0*
,n. .....
. . .== ... - - -- - - tt

COIIIATION
OF PITLIZIT"APA':L3!
140t4 I
Fr#erred51cc' 5:. 4K; 30 440 561 5'. SO9 633 05 4fE 505 529
CoumStott 254 254 54 254 429 459 49 5- 5uq 509 X59 SO
Subscribed
PreterredStari 525 1' '9 235 26 59 59 59 59 59 59
PremiumanSale of Cono. St,ik Si 21 51 !I 51 340 -50 921 621 321 321 921
RtainedEarnapgs . !9 ".5 1.4,! 2,42. 3,243 4,353 6,0_ 8.145 114102 14,4c 16,202
TotalEou:it i.027 9O 1.595 2.215 3,705 4,6?1 6.276 6,092. 10,192 12,972 16,257 20,120

Logl-ter
DebtI1urrent1kn-Current: 1,70. ,I151 3,033 '.0.1 4.365 4.041 4.*,4 4,t39 4,651 4,454 4,1t3 4,011
Uar^luteaI
Lass: FORE!
L.s (OtherOfd. t*tsi 14 272 436 5226 46! 290 25- 0 0 0 (o)0
Det
Admtd Loo-ters
-- ---
1,746
- .. .. _....
87
.. --- --
2,590
-- ---------
3,135
--
3.920
------ ---
3,705
-- - -- -
4,402
-- - --- --
4.639
-- ---.-...-
4,051
_-__-__
4,454
_
4,130 4,011
_ _

HatesPaqal6 2,'49 -,955 1.310 1,673 690 834 914 774 204 (2) (40) (40)
'iotal
Ceottal 5,524 4,793 5.501 7.022 5.314 9,471 11,52 13,55 15,00 17,405 20,503 24,091

RATIO
CtITALIZAtIk 1U.U .20.4? 29.0? 31.51 44.6U 51.41 54.12 59.9n t7.7; 74.51 79.0t 53.5?

M1INIM PER
RED. RESTRCtURWI
06REENIENT 20.02 20.02 20.02 20.01 20.01 25.0t 25.0t 25.01
w:n=B:*Dsgs:S::_:D::::::::::=::::e: s =X:::s::::S=:::s:::::=::::::|:s:s::t::t:gawBssswn-a:X:r asD :tasssm#X::7DS..........sss5#
 £ S.O1
P331LIWIUtES-
UILAPME DIISTRIDIDTION
P ECT losp,
11114
ELECTRIC
CUPAU of 1
3984-1995
PRCIPFLASSWIItNtS
tin Cilliso Peo)
Fifatciai lear ERm Dec.'1 1M5 15 193 13 193 19SI9 190 1991 1992 19 1994 1915
---ktol ----------- - ---- ProKctiM -------------------------
1. GroftlaRatein Sales (KW1' -3.02? -6.51S 0.75? 1.%% 15.01 11.55S 17.441 7.69 7. 7.55 7.20i '.021
2. E Sales imillmiol B.42E 7,979 7,93 59,967 10.1'3 11,54 12,30 il,310 14,30 15,420 10,560 17,69
I. Icrems ianG r Exuen 3I.32 12.3? 23. 19.72 26.61 3.7n 14.31 3.0? U.n 17.3t 17.21 17.01
4. Inflation Rate 0.01 7.51 9.01 9.01 3.O0 L.01 L. L.es LK
5. Cqital Eoandatrn fin Rilito resosi 562 420 636 702 1?7 I,5 2,254 2,13 3,95 ,9 I,92 2,341
e. Itstrnt 0 Eo s Ihrepl
) Loe -terst Forav7.00% 13.00? 9.31 9.061 121 12? U2S 12t 121 l2t 12m 12
- Morala t1n- yace/I ir. r utl 5 .IS ;oan III III IL% IIS III
- VFt Loan1 5 ,rs. gate, 15srs. '-N utnated 01173.2531 3.81
111 . t 6.311 6.11 s .3?
0 E tF Loau I0 irs. race. 20 irs. repavstl *10 5.01 5.0S 5.011 3.0 5. 5.0 5.02
- EPFI C Loan 5yrs. grace 5Yrs repabmt I 4.71 3.58 3.5? 3.5 3.1 3.51 3.51 3.5
I' 51art-tare
1) Loal 31? 4n 211 142 in in In In in In In In
7. bte Iea (tio llion Pasn)
0.00 ctvs. Rate InKreas elf. 0 0 0 0 0 0 0
S.00 ctvs. Rate Intreanto. I0-1-SO 275 1,938 1291 1,4b l 1,592
14.00 ett. RAte Intreat ef. '-1-92 1,004 2,159 2,'t14 2,477
6.00 ctvs. Rate Increase off. 7-1-4 49 1,063
L. CMIIto coer F debt service above P1FitSsI
9. berae Exca Ratn/tS/ItSO. 16.9 39." 20.30 20.90 21.00 21.50 21.50 21.50 21.50 21.50 21.50 2X50
10. IE LOU ntmpg
- $101.0 flillion is the
balsce of Rntructured Loan. payable
su-an llv in five yes strting 12/89.
It. Rentrtured et NC OverduePyabesn
P750 Null lie able malty mcthe
th, 5th 6th years - 181 interest 800
12. Asst AMAsMl -Jan.J 1999 327
-Jan. . 1990 1.0?4
- Jan. 1. I19I ,155
Jan. 1. IW. 1.360
- Jan. 1. IM 1,510
- Jan. 1. 1994 1.679
1995 - Jan. It 1,0
23. lnsace of omaStudt. ':a0wi:1amPesos) 15 150 75 0 0 0 0
250 300
14. Cas dividen on cmn to antrease by S n r near.
13. Isane of 5-er bnds payable rterlv 50 650 450 450 650 0 0
fer 4 years t 22 above lKal rate.
16. IFt loan - 13 years Kinldi 1 mers 300 n2
arms. .S75M bnternt Rate - ?l98q1
17. Isuae of 15-314? 5-var redeeale refureds 200 0 0
20-*r-11t
fl.flnnnhn.mln,:,fl.flfltnflsta=ct. NSsS9St WtaSS£XSa Ntlt wa %
 AUD 5.01
lap 10

19g 1 1M9O 191 12 1093 9Q4 1995

1wciKi lwr ESi Wt. S3

II 1111SASIS.. ~~
StEDIILE ~~~~~~~~~~~~~~~~~
~~~~~ .____ .___ ~.. . .

Soaadutual ~~~~~~
3.342 ~~~~~~
3,629
3.919 ~~~~~~~~~3.319
4,325
4.174 4,593
4524 4,4
4,896 5,1i1
5,n4 5,474
5 701 5,559
*.17
Cainrctall 5,125
3,548 I3,94 3.724 4.051 4,422 4. 4 1,
Imdstrlal '0 0 13 1A 14 15 17 1t
Sllelrnole 86 94 125 3 143 156 170 172
Strut Lig,ts
10.313 11,504 12,30 13,310 14,389 15,420 16,53 17,6W
lotal *=%$. atz=== =sm." *B a =*" anw*m =_88

15.01 1 i.55S 107.441 107.691 1017lM 107.531 107.20t 107.02S

uONsv micIBM
Untiusttal ~~~~~~ 702 ~ ~~~~
~~~ O5N 912 ~ ~~1.199
~~~ 966 1,025 1,09 1,164
1,066 1,58 1695 1,957 1,9 2,150 2,317 2,450
tomwr.la 1,469 1,434 1560 1702 1,996 1,999 2,127
lobatria 934 0
0 0 0 0 0 0 0
saleMnals 17 0 0 0 0 0 0 0
Strut Liq9ts
3,217 31,77 ,9 ,0 ,5 ,2 ,9 7
titil
23132 133133333133333 31
KOM11IF CUNFCrElIlEE 9911AIIS1O -MA*)
E~~~~~~~~~~~~~~~~~~3333
1f211 3333333

_ . ... ___... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

29.401 29.401 29,40
2B.401 29.401 29.401 p0.99 29.402

79 Is 1" 206 211 23 24 263

hstiid tai so 456 499 529 573 619 "I1 714
Cosuita 31 436 420 457 493 50 592 623
MaMtrlid 0 0 0 0 0 0 0
kelsnt ---- -- 0
246 1,050 1,102 1,192 1,290 1,391 1,9I,66
Total
 AM= 3.01
.~~~~~~~~~~~~~~~~~~~~~~1 "is,

F a l TVrW
EuaddOc. 31 i93 lop 199 3991 9 399 I"4 399
P
-------- - ------ FroJct i - - - ----
- - … - - -- - -------- …

AIIItlV. DATAG PICf D P0R 94.423 91.16? 62.30? 33.01, 33.511 63.11 64.3 54.0n2
Xtu LOsS 16.763 16.261 15.8 5.U 14.3? 14.31 1LK 3L?
a 'cbamw 12211 133001 35001 10021 IT7171 1 333 1993 20311
fwt Cast, Stu CostA fP91I AdjustbtsAl (002A463(0.03i) (0.03157)(0o.0 (0.0315)10M.I) (0.05)
5 40.0i1515
ra. Cost tEst Aj. I FUI aut 1303 15021
2 i(5791 619) (2) 4109) 117511 (301)
bsic
Elart CfirgeRlill Por^&S 1.059 1.05W 1 1.0511 L.01 3.091 10 I.0s
hscEu,t~a vis/KU2Purtas
aic Eawrl VD Franhis Tax
8:4fiH8;4?i S:?i 8S:3 4? 8:4ti o 4?S 8:4?i 84N
ll1,1i2 31,99 13,730 14,664 15,717 13,0 17,9" 19,124
hofFranchiseTax
Ol huratud 1111aul Statil) 0 0 0 0 0 0 0 0
kcrual (luldirq n Franctse Ta)
f.l CMnt ij. St.. Cost Mi. I R E ount
l (381 1512) I591) (631) 671 (724) 4771) l(3)
bsic Esp Chvrp 11,410 12,143 14,036 134,93 10,03 17,19 3,2m 1,5314
Poyul
Fat Cst dj. StH Cost dj. I FR1EI4401
nt 502) (5l4) 127) (0723 1720) M7D7) 3153l
bas Enwp E;rp I1.53 12,0F2 13,90 14,334 15,948 17.075 13,201 19,413

bdc Ea Chr 12 m 7
13763 3580 13695 o 179 19460 20 736 22 1'9
Cij., Sa
Fwl Cast EastIi. I FUEIbuut 1314; 1502) 1579) 16139 1662i 17091 1116 l30)
Prcohasd Por
ntlat 12,619 13,261 15,307 16,341 17,515 13,751 1998 21,312

Su-kbujle 2
LKClU ilF GENIERIATINlE iEOUIUEN
totl kcrul 9.03 11,631 13,425 14.332 15,362 16.44 17,524 10.692
burial
Total bural 9.259 11.409 13,276 14.257 15,Z76 6,35 27,434 16,595
lht kcrualih sal 4*35 11 150 76 b 90 9 97

tWTIMTI OF OEMiTION OSEC

REVEIIE
KEIaTIPOCHiE 30,76 2,I*469 13;77 14.257 15,2?6 16,35 17,474 10.55
=3-,:.l: :na.
tD0 .acgDtaa naaCSCS nahc.c0 anU Sala:a anDA8tt:3
t a0D
 AmnN S.O1

0a415

1939 1990 1991 19%: 1993 1994 IS

FVloital 1VW E0etd Dir. It -frojechtons--------------

OFAlTIU
SCIEDILE REVENK
',217 3,772 3,998 4,309 4,657 5,021 5,32 5,771
5sit Rnme 9S2
"i 1,094 1,179 1,269 1,33 1463 1,56
Rate Iucrea/CeA 11,6 13.276 14.251 1MM7 16.:55 17434 18,59
leouatian Charge0.6 990 1064 1,452 2,462 3 657 4,560 068 ell51
Rate luruaul 0.0i' 0.10 1,192 1,29A) 1.391 1,45 1,60
t E R^ 0.09 0.14 0.06 24U 1.00 1,102
53 36 36 36 6 36 36
iscollams lntou 435 1U 150 i6 86 s 0 97
kcr"lRmursal - Senratioe
Cbarp -- -- ... _... . - .... - ..
-- -- -- -- -- -- -- -- ----..-- _-.....

16,459 18,545 21,098 23,509 26,270 29,119 31,77 34,476

Total Uperat1s Rayrun
20542 23020 29112 2U35 31407 34142
1.55S 1.1.U? 1.7070 1.763 1.8U20 1.O4 1.225 I.9
I LI TSRECEIVABLE
SCIEOULE
2,314 2,251 2,425 2,431 2.839 3,069 3,306 I,53
Supniair Ilace 10,767 11.469 13,276 14,257 15;2J6 163.M 17.434 19,59
kcraal of Somation Chrp 0 0 0 0 0 0 0 0
kctrual ofdAtoIntreae 5,692 7,075 7,822 9,252 50.994 12.764 14,345 15.551
Ruculavble IrmaCuvuntWals 18.772 20 79 23,523 26.147 29,109 321I 35,0 318,04
Total k6cats Rictivable 1 ,125 14,175 15,195 16.205 17,344 1e,49
ruiadof muatns arp 10.369 11.411
0 0 0 0 0 0 0 0
k'tizatioe of Rte lrtnass
allcti0M Of tachIVAb11 0 0
0 0
0 0 0 0 0 0
6.152 6.96O 7,760 9.133 50,849 12,616 14,213 153.n1
le,521 lB,SI 20,--5 2S
33- 26,00 28.U2 31,557 30,251
Total Cu1uttion
2,251 2.425 2,638 2,839 3.06S 3,30 3,523 3.753
twill dalac

li .UOr CCNs PATAILE

1.051 1 03S I,! ,1' 1,276 1.'4 1.477 1,579
kcmes Payable omung 12.614 26!
1;, 5537 56.341 17,515 18,751 I9s O 21.3S2
Pow fr beNott
1haud 720 72.3 720 72n 720 720 720 720
bterlas VA Splin I Oti 0 0 0 0 0 0 a
~~~~~~.__.... .... --- -. --... ......... ... .... ... -------.. .... .. ....
TT 14,390 15.014 11,e00 19.511 20,M35 22,177
18,251 23.011
12.603 12,156 14,032 14 s9t 16,056 17.516 58.315 19.536
Purom Psr paiddring thevemr 0 1,052 1.105 1,216 1,S32 1,40 1,563 1,65
atVwt PrhadPew r 0 0 0 0 0 0 0 0
Intretuid Ordo Ptyabne to EC 720 720 720 n 20 720 720 720
Last am" fateiralsad SuppliesIIotrs 720
0 0 0

34 34 34 0 0 0 0 0
tdof tp tLons
136 1 16,975 18.S37 19,36 20,598 21,921
L5,
I,033l,0 1.1-- t,27 1,374 1,47 1.579 1,690
kcdrutsPayable,End SJat2211 1 1355 S2351 hhSSUd B551*1 28151: 552tt * SSC
 AMII5 3.01

rimcl&l Ym Ewidcd
kc. 'I 1i99 I"9 I0 IS91 1992 :Im 299 215
a,msfnn.::.f:..sdhs.fhl.sn.:a::
~-~---- -
sa:sna*snhmnf:::nnnnzfltt:ss
--- -------------- Prou---
etions ---- ------ ---------------- _-
nsgnnnrnufllRfSinsflhfltflflfluflsuminnsni
SOEDIE UTILITY PLANT
Dhilitp Plaot,beginin t7,094 20,421 24, '9,072 3,560
tippaiial 1.201 43175 41.603
2,643 2.819 2, 10 2,326 2,66 3,056 3,454 S3I,O
CuuIVitr Ux 6usd 539 970 1,684
hru is trwrn 1,589 1,447 1,426 1,472 1,741
;31 I 676 641 596 579 598 702
Capita1EIpsitwus Lw froW U UK 0 0 0 O 0
tCital apeitwrn Leo frowK 1N 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
tlifersets (411 (511 (57) (67) (77)
566t Aijus t, __ .44_ (362 (962 11061
0
kility Plant td 20,421 24,559 29,072 33,560 58,202 43,175 46,603 34,629

t tiuut bm Depreciation- Prvmt Value 670 7% 930 2,O92 1.20 1,406 1,586 1.707
3t wKacitiwn 670 7t 930 I,062 1.240 1.406 2,53 I
2

P KINIATEDWEIAT(P
OFEN
Zcnldw

CItrtiro
Otbwerdsteents
36sthI
s
hsrucltuu.
Irt fpanin
ileted kothlv AwKistion
7I5CO
2,95 I,99
~~~~670
2412:
796
9985

(51)
12,622
1,136
930
(57'
14.631
1,170
1,062
(67)
16,215
I1,345
1,240
t77
19,323
1,54
1,404
(61
22,219
1,775
1,596
(96
25,454
2,036
2 797
1106I
%
(t19.1 0
_---- ... ..
kci lated preci1ati. EN 9S,
swse:ses
=aS:
12,622
:"stls
41,631
statussst:
1-,9- 5
*
IS,323 22,1 s 25,454 29,11-
Imn. Ialln:2=3 cm=mmmnw 8xz=smx

lEWlt er eCWITL
E1h)TURES

Cb Gbtlan 747 0 0 0 905

J Oc 970 1.O 1,436
22 35 106 91 79 74 77 103
Total Caittal Ezp ditturs 769 35 106 91 t#4 1,044 1,34' 1, i
*=ss=mIVn S9mcZcss Gmw.9=nSa 2ws 21323w
e 10=2022 131w2s232: 222*
19-u2 2.-SO
t122 Ot Ox et f52 692 9Ol lot
619 747

IlowAR (XEMA) tiN 1312 1 WPIT

_... .. _.__...... . ... . .......... ...

Uthwr sats - 11almoe 3,019 3.536 3.735 3,79l3 4,061 41,345 4.65 4,991
lKrnute 0 519t I"
biralm 4E 271 234 269 294
94 0 0 0 0 0 0 0
Othr Liabilitien - Balance 2,620 3.0St 3,025 3,156 3,50S 3.771 4,000 4.245
IKcroW 433 475 0 132 352 263 229 245
i7 uaw 0 0 70 0 0 0 0
.t4 (cram. 0 (41) t4
(269)
364hireas 74 (21 (401 (39)
533 0 0 0 0 0 0 0
Iurtih tim ofdbtt b n 1(1i (35 (19) !I9) (19)
Provisio for lepreciat l (193 (171 114)
0 24S 256
~~----
_ _ ___ . ... .....
251
_. - ----
I94
........
126
-- ---
99
_ -----
60
S9rceI(o,licati) 5319 171 32) 316 249 05 32 i5
3322122 2238* I322S fl2 1812* 32N 333231 3se 283ss 332122
sss 3e
*2223
 - 97 - ANNEX 5.01
Page 14 of 15

PHILIPPINES

MANILA POWER DISTRIBUTIONPROJECT

MERALCO - Assumptionsto FinancialProjections

A. Income Statement

1. Operating Revenue - based on derivationsof energy sales, basic reve-

nues, foreign exchange adjustments,purchased power and generation
revenue (presentedin pages 10 and 11, and summarizedon page 12 of
this annex).

2. System Losses - assumed to declitnegraduallyfrom current levels to

16.52 by 1995 (page 11 of this annex).

3. Purchased Power - derived on page 11 of this annex.

4. Operation and Maintenance- projected to increaseby amounts approxi-

mating 182 per year.

5. Depreciation- 3.33Z of revaluedfixed assets in service at the begin-

ning of the year (page 13 of this annex).

6. Taxes other than Income Tax - primarily the franchise tax, assessed at
22 of gross revenues a-8 real estate taxes. The aggregateof these is
projected at about 2.75Z of operating revenue.

7. Income Tax - assumed at 351 of net income.

8. Interest on Long-Term Debt - assumed at 11 for borrowingsfrom IBRD,

112 on borrowingsfrom KfW, and at 122 on other foreign debt (page 9
of this annex).

9. Interest on Short-TermDebt - assumed at 152 (page 9 of this annex).

B. Cash Flow Statement

1. Changes in Working Capital - projectednet of changes in cash (page 13

of this annex).

2. PreferredEquity Issues (Net) - reflectsamounts presented on page 9

of this annex less retirementsestimated on the basis of financial
requirements.
 ANNEX 5.01
- 98 - Page 15 of 15

3. Common Equity Issues - presentedon page 9 of this annex.

4. Long-Term Borrowing - is based on the expenditurescheduleof expendi-

tures to implementMERALCO's InvestmentProgram.

5. Notes Payable and Other HarketableDebt - the plug figure of these

projections. Because of other sources of funds that have been projec-
ted, this differentJalcan be met from revolvingcredits or over-
drafts.

6. RestructuredNPC Payables - amounts to be repaid to NPC between 1989

and 1991.

7. ConstructionExpenditures- assumed on the basis of 1052 of deprecia-

tion plus the annual proceeds of the World Bank and FkW financings.

8. Dividends on Common Stock - based on former level of payments of P 10

per share, increasingby 3Z per year up to limits allowed by the
MERALCO indentureor by the proposedproject's debt service covenant.

9. Dividend on PreferredStock - payable at coupon rates, rangingbetween

10-182, carried on the particularpreferred stock issue.

C. Balance Sheet

1. Utility Plant in Service - includesFixed Assets in operat:.on

and Work
in Progress. Fixed Assets in service are assumed to be retaluedon
July 1, 1988 and July 1, 1991 (page 13 of this annex).

2. Accounts Receivable- are projected on page 12 of this annex.

3. Inventories- are assumed at 32 of net utility plant in service.

4. Other Deferred Debits - adjustmentsfor foreign exchange fluctuations

applicableto MERALCO outstandinglong-termdebt.

5. Appraisal Surplus - same as revaluationreserve.

6. Accounts Payable - are projectedon page 12 of this annex.

 - 99 - ~~~~ANNEX
5.02
Page I of 9

PHILIPPINES

MANILA POWER DISTRIBUTIONPROJECT

Manila Electric Company

Action Program to Reduce System Losses, Receivablesand Payables

Introduction

1. Since August 1987, in connectionwith the appraisal of the Bacon

Manito Geothermal Power Project (Loans 2969-PH).MERALCO has begun vigorous
implementationof a coordinatedaction program to reduce system losses,
accounts receivable and accounts payable. Section I hereunder outlines the
program to reduce system losses. Action on all steps have already begun.
Significant improvement,however, will only be recordedwhen implementationof
the program is well advanced. Section II describes the accounts receivable
situation. In effect, any problem related to private-sectorreceivables
results from accountingpracticeswhich, while generally recognizedas
appropriatethroughout the Philippines,give a somewhat misleading picture of
what is actually collectible. With the Government'shelp, the problems
associatedwith receivablesfron agencies of the National Governmenthas been
eliminated. Receivablesfrom agencies of Local Government remains a problem;
HERALCO is taking some steps to improve these but will need help from the
Natior.nlGovernment to realize significantimprovement. The accounts payable
problem has been limited to arrears owing to NPC. Under the restructuring
arrangementwit1 i NPC, this problem has been eliminated;the guaranteesgiven
by HERALCO to NPC effectivelypreclude a recurrenceof the problem.

I. SYSTEM LOSSES

A. Coord.natingTask Force

2. On August 17, 1987, a Task Force on System Loss Reduction was created
with the followingmemberships

Atty. Pastor S. del Rosario - Chairman

Mr. Jesus P. PFancisco - Hember
Mr. Magsikap B. Mole - Member
Hr. Virgilio C. Flordeliza - Member
Mr. Delfin S. Brigino - Member
Hr. Orlando S. Valenzuela - Member
Mr. Rodolfo N. Quetua - Member
Management Services Division - Secretariat

This group is responsiblefor monitoring, analyzing and prescribing solutions

to system loss problems on a corporate-widebasis. The task force is still
operational; it meets regularly to ensure that top management'shigh priority
on loss reduction is shared throughout the Company, and to direct and monitor
the Company's loss reduction efforts.
 - 100 - ANNEX 5.02
Page 2 of 9

B. Constraintsto the Implementationof the System Loss

ReductionProgram

3. The Company's capacity to implementits program to reduce system

losses is limited by the amount of finance available to undertake the develop-
ment of physical facilitiesneeded to reduce technical losses. In fact, one
of the reasons for the rise in losses in the 1980s is the overextendedand
critically loaded power transformersand lines due to the Company's inability
to construct substationsand lines in the 19709. Physical facilitieswere
built only to the extent permittedby available funds, and then only to meet
the load requirement. And even this would not have been met adequatelyhad
the load not dropped drasticallyin 1983 as a result of the economic crisis.

4. Solutions to the nontechnicallosses require millions of Pesos of

capital expenditures. Initial appropriationis estimatedat P 8 million ir
1987 and an annual budget of P 3 million neaded to sustain the program. To
date, more than 700 Company personnelare directly involved in the system '.-se
reductionprogram. However, the equipmentneeded to implementthe program
fully is still to be acquired.

S. The other constraintsto the system loss reductionprogram are nonfi-

nancial in nature. These ares

(a) Legal procedureshave hampered the prosecutionof cases involving

theft of e-ergy. Moreover, there are inherentweaknesses in the
existing !...s coveringenergy pilferage. Like other classes of
theft, pilferageof energy is consideredonly as a misdemeanor;as
such, the correspondingpenalty is relativelylight and does not
serve as deterrent. Also, trial courts tend to be lenientwith
defendantsin energy pilferage cases, a reflectionperhaps of the
culture which views the consumersas the "underdogsin Lourt cases in
contrast to MERALCO's image as a bullying giant.

(b) The inabilityof the Company in prosecutingsuccessfullycases of

energy pilferagehas acted to encouragepilferage,as this implies
low risk to the pilferers. The general attitude of avoiding
involvementin suits is often encounteredby Company lawyers. The
Company has experiencedsevere difficulty in getting witnesses in
cases involvingthird parties.

(c) Organized theft often involvingCompany employees is difficultto

detect because data which would reveal such theft has been altered.
Some such cases have been detectedand the Company is vigorously
pursuing other leads.

(d) Pockets of slum areas in the Company's franchisearea cannot be

served by the Company,mainly because of legal requirements. These
communitiesoften are found to have makeshift connectionsdirectlyto
MERALCO lines, of course without meters.
 ANNEX 5.02
- 101 Page 3 of 5

C. Improve Hethodologyfor Assessing System Losses

6. At present, technicallosses are determinedby calculation. Nontech-

nical losses are derived by subtractingthe technical loss (as calculated)
from total system losses.

7. Currently,a project is on-stream to improve the calculationof tech-

nical losses thtough the following:

(a) Minimize resortingto estimatingenergy by installingkWh meters and

standardizationof locationof meters at substations. For instance,
subtransmissionline losses can be directlyobtained from meters at
primariesof substationpower transformers. Those losses would then
represent the differencebetween the in-ut to the 115 kV system (from
NPC) and the kWh of substationmeters.

(b) Installationof meters on all primary lines to obtain power trans-

former losses and primary line losses.

(c) Installationof meters on all substationservice transformers.

(d) Research on current methodology for calcuilating

system losses.

(e) Improve the TransformerLoad Monitoring system for distribution

transformers.

(f) Use ot ,CADAsystem to obtain simultaneousreading of deliveryand

substationmeters.

D. Technical Losses

8. Causes for the rise in technical losses during the 1980ss

(a) overextendeddistributionlines;

(b) underratedprimary and secondarydistributionlines;

(c) overloaded/critically
loaded transformers;

(d) extensiveuse of repairedtransformers;

(e) use of multiple distributiontransformationvoltages;

(f) acquisitionof new franchiseareas;

(g) reduced generationof Metro Manila plants; and

(h) insufficientnumber of NPC deliverypoints.

 - 102 - ANNEX 5.02
Page 4 of 9

9. Actions taken:

(a) conversionto higher primary distributionvoltage;

(b) reconductoringof lines to larger sizes;

(c) relieve overloaded/critically

loaded transformersand lines;

(d) phase out multiple distributiontransformationvoltages; and

(e) installationof new substationsand lines.

10. Planned actions:

(a) use of computer-aidedplanning;

(b) use of more efficient transformers;

(c) creation of new strategicdelivery points; and

(d) increasegenerationof Metro Manila plants.

11. To reduce technical losses (specificprojects are shown in the report

submittedby MERALCO entitled "MERALCOProject Formulationfor World Bank"):

(a) On subtranmissionlines:

(i) Installationof additionaldeliverypoints, where load concen-

trationsare identified.

(ii) Constructionof additionallines to meet single-linecontingency

(indirectly).

(iii) Use of larger conductors (as determinedby economic studies).

(b) On distributionlosses:

(i) Relieve overloadedlcritically

loaded power transformers

- Constructionof additionalsubstationsat strategiclocations

- Redistributionof loads between adjacent substations.

(ii) Shorten overextendedlines as a result of Item A.

(iii) Serve industrialilargecommercialloads at higher distribution

voltage.

(iv) Maintain high power factor at all distributionvoltage levels

(95Z at primaries)
 - 103 - ANNEX 5.02
Page 5 of 9

(c) by continuingtechnical/economic
studies to:

(i) Optimize power and distributiontransformerand conductorcombi-

nation

(ii) Enhance accuracy of TransformerLoad MonitoringSystem (TLMS)

(iii) Program replacementof secondarywires in new acquired areas

(iv) Computerizemapping system which will enhance accuracy of TLMS

area-loadingestimate.

E. NontechnicalLosses

12. Ways of pilfering electricity:

(a) Direct connection

(b) Use of jumper

(c) Meter substitution

(d) Destroyingthe me3ter

(e) Removable tamperingdevice

(f) Substitutionof recordingdemand chart

(g) Use of reversingtransformer.

13. Immediatemeasures to be taken by MERALCOs

(a) Declarationof amnesty

(b) Investigationof erring employees

(c! Increasemanpower complementdirectly involved in detection,appre-

hension and settlementof cases

(d) Intensifiedsurveillanceof service installation

(e) Securingservice installationsin metal cabinets

(f) Seek assignmentof special prosecutors

(g) Research on practices of neighboringAsian utilities.

14. Needed Governmentassistance:

(a) Issue stern warning to the business communitythat theft of electri-

city is economic sabotageand will not be tolerated.
 ANNEX 5.02
-104 - Page 6 of 9

(b) Send strong request to the judiciaryto enforce the full force of the
law.

(c) Send strong signals to the legislatureto review existing statutes

concerningelectricpilferage.

(d) If necessary,give mandate to civil authoritiesand law enforcement

agencies to assist the utilities.

15. Reduce nontechnicallosses over the next five years:

(a' Continueduse of Hexguard, securing ring and similar devices to

include all GP customers eventually (adoptedin 1982).

(b) Installationof enclosingmetal boxes, with key-less padlocks and

seal on all CT installatiors.

(c) Continued removal of potential link of single-phasemeters (adopted

in 1985).

(d) Continued researchon seals to obtain a better tamper-freedesign

such as Tyden ball-type seal (startedin 1986).

(e) Replacementof active/reactivemetering cabinet (ARMC)with new

design (adoptedin 1986).

(f) Complete installationof kWh meters on all primary feeders for moni-
toring of losses.

(g) Continuewith the "Found Connected'campaignby meter readers.

(h) Conduct periodicaudit of meters.

(i) Intensificationof saturationdrive on inspectionof metering instal-

lation.

(i) Increasedfrequencyof inspectionon all General Power customers to

at least once every quarter and all other customersonce every 2.5
years.

(k) Xeeping alert against organizedpilferage (resortingto covert opera-

tion when necessary)and monitoringof recidivistpilferers.

(1) Conductingof researcheson methods of pilferage and develop counter

measures.

(m) Increasemanpower and mobility of InspectionDivision as necessary.

(n) Research on type of meters that will be difficultto tamper with,

such as the GE digital meter for possible conversionof meters of
customersprone to pilfering.
 - 105 - ANNEX 5.02
Page 7 of 9

(o) Associationwith utilities of neighboringcountries,such as those in

Pakistan and Indonesiaon counter measures being institutedor
planned against pilfering of energy.

(p) Lobbying in Congress to revise statute of theft of electricenergy.

(q) Lobbying in Congress for enactment of the proposed law to rationalize

electric rates and to place all utilities under a common regulatory
body.

(r) Maintenanceof the Task Force Commitlee on System Loss.

(s) M'.nimizationof contributionof administrativeloss (a subcomponent

of nontechnicalloss due to lapses in administrativefunctions,such
as absence of bills of consumers,computererrors, error in calculat-
ing Company use, etc.).

F. Annual Target for System Losses

16. Based on the action plans intendedto reduce system losses in the
next five years, the followingare the estimates of the losses in percent
annually:

1988 1989 1990 1991 1992

Technical loss 11 10.5 10 9.5 9

Nontechnicalloss 9 8.5 8 7.5 7

Total System Loss 20 19.0 18 17.0 16

II. ACCOUNTSRECEIVABLE

17. Generally,MERALCO has accounts receivableoutstandingfrom three

separateconsumer segments: (i) private-sectorindividualsand establish-
ments; (ii) NationalGovernmentagencies;and (iii) Local Governmentagencies.
The measures being undertakento realize collectionsfrom each of these seg-
ments is describedhere below:

(a) Receivablesfrom the Private Sector. As of September 30, 1987, the

Company had outstandingreceivablesfrom the private sector amounting
to about P 1.68 billion; of these, about P 1.26 billion, or about
752, are current. About P 0.15 billion, or about 9Z, represents
accounts that are under discussionand that will probably be resolved
in the next few months. Another P 0.27 billion,or about 162, are
more than 120 days past due. The Company considersthat most of the
 ANNEX 5.02
- 106 - Page 8 of 9

arrears are uncollectible,even though these have not yet been writ-
ten off the books of accounts. The Company's proceduresfor account-
ing for these arrears has followedaccountingpractices that are
generallyaccepted in the Philippines. During 1988, the Company will
take the followingmeasureswith regard to these arrears.

(i) The arrears will be examined case by case to determinethe exact

status of the consumer. Any still receivingelectricitywill be
disconnectedunless payment in full is received. The Company
will use all reasonablemeans to pucrsueconsumers that have been
disconnectedbut who can be located. The Company will prepare a
summary of consumerswho have been disconnectedand known to be
bankrupt, or who cannot be located.

(ii) The Company will examine the legal, as well as the accounting,
implicationsof writing off all of these arrears as an extraor-
dinary loss.

(iii) If not explicitlyprescribed,the Company will take the afore-

mentioned extraordinarywrite-off in 1988.

(b) Receivablesfrom National GovernmentAgencies. As of September 30,

1987, the Com,any had outstandingreceivablesfrom Government-sector
consumers amounting to about P 0.53 billion; of these, only about
P 0.11 billion,or aF)ut 21X, were current and another P 0.07
billion, or about 13X, was less than 30 days late. Of the arrears,
about 30? were incurredfor the account of agenciesof the National
Governmentand the remainderfor agencies of Local Governments.
Since early 1987, the Company has been able to make use of proce-
dures, establishedunder the UtilitiesAccounts Committee,to have
the national agencies in questioncertify their receivables;once
certified,these receivablesare remittedto NPC which, in turn,
arranges for their settlementthrough the Treasury and corresponding
adjustmentsto HERALCO's accountwith NPC. The Company has been
availing itself of this mechanismwith good results and hopes to
reduce arrears from this class of customersto less than 102 by the
end of 1989.

(c) Receivablesfrom Agencies of Local Government. Although the same

methodology is available for MERALCO to settle some bills from agen-
cies of Local Governments,those agenciesare not requiredto certify
their bills in the same way as agenciesof the NationalGovernment.
As a result, improvementin these accountshas been realizedonly
very slowly. The Company has only limited leveragewith these cus-
tomers. In the future, it will continuetrying to use the Utility
Accounts Committee'sprocedureswith these customerswhile also
pressing the NationalGovernmentfor help in persuadingLocal Govern-
ments to make use of this mechanism. The Company hopes it can reduce
agenciesof Local Governmentarrears from present levels by about 52
per year over the next ten years.
 ANNEX 5.02
- 107 - Page 9 of 9

III. ACCOUNTSPAYABLE

18. Although MERALCO has had sizable accounts payable in recent years, it
has kept current with all creditors except its lead supplier,NPC. On Octo-
ber 22, 1987, the Company entered into an agreementwith NPC that had the
effect of restructuringits arrears, amountingto P 1,715 billion, retroactive
to August 31, 9187. Under this agreement,MERALCO made three front-end
payments, amounting to P 915 million in the aggregate.according to the
following schedule:

July 31 P 400 million

September30 P 100 million
October 31 P 415 million

19. MERALCO will issue first mortgage bonds to NPC in payment of the
remainingP 800 million in arrears. Those bonds will carry a 172 interest
rate and will be repayablein six equal semiannualinstallmentsbeginning
March 31, 1991. Upon the occurrenceof any of the followingconditions,and
after a written notificationthereof,MERALCO shall be in default:

(a) failure to make the front-endpayments;

(b) failure to pay any principalor interest on the due date;

(c) failure to deliver the bonds az of December 31, 1987; and

(d) failure to pay/settleall bills ;rom NPC within ten working days of
the due date.

In that eventuality,NPC could begin proceedingsto liquidateMERALCO's assets

to force payment of the remainingbalance of the bonds. With this agreement,
MERALCO is current with all creditorsexcept where a question regardinga bill
may be under discussion.
 ANNEX 6.01
-108 - Page 1 of 3

PHILIPPINES

MANILA POWER DISTRIBUTIONPROJECT

Economic Rate of Return

Assumptions

1. Demand Growth. Based on the MERALCO Economic and PlanningDepartment's

medium-term forecast 1988-97. Average growth rate of electricitycon-
sumptionfor 1988-92 is 102 p.a., and 8Z for the period 1992-97. Commer-
cial and industrialconsumer categoriesshow fastest growth.

2. System Losses. From a 1987 high of about 20?, MERALCO's losses in 1988
are estimated to have been reduced to about 172 in 1988. Although the
target for 1993 is 8-92, it is realisticto assume that current efforts
at loss reductionwill result in a gradual decrease to about 14X by 1993.

3. InvestmentCosts. Where available,investmentexpendituresare valued in

CIF terms. Local materials and services,where no border prices are
available,are convetted to border terms by using the standardconversion
factor (SCF). The skilledportion of the labor component is valued at
full market price, the unskillec,portion at 502 of market price. All
labor costs are adjusted by the SCF.

4. O&M Cost. Two percent of cumulativeassets in the previousyear,

reflectingthe incrementalexpenditureon new transmissionand distribu-
tion equipment.

5. Shadow Prices. SCF = 0.86. Shadow wage rate for urban unskilledlabor
about 50? of market price.

6. Exchange Rate. $1 = P 21.

7. Cost of High-VoltagePower. At the margin, MERALCO obtains power supply

from NPC at high voltage, to be distributedin its system. The NPC price
to MERALCO at the end of 1988 was P 0.98/kWh,having steadilydeclined
from more than P 1.00. A recent Energy Sector Study (7269-PH)calculated
long-runmarginal costs of power supply in the Luzon Grid that would
result in an LRMC-basedcost of MERALCO supply of about P 1.00/kWh. NPC
is in the process of completingLRMC calculationsfor all their grids,
and preliminaryresults indicatea cost of P 0.97/kWh for MERALCO. This
analysis uses the latter figure as the cost of power enteringthe MERALCO
Grid.

8. Retail Tariffs. A major restructuringof tariff levels in different

consumer categorieswill be completedby 1990. Average projected reve-
nues per kWh in 1989 reflect the new structure,and are used to value the
benefits of power supply to consumers. This representsa proxy for the
 -10O9 - - 109 ANN~~~MIIEX
Page 26.01
of 3

lower bound of consumers'valuation of power supply, as consuaers'sur-

plus is not taken into account. The SCF is applied to all bfnefits.

9. Program Approach. As the proposedproject constitutesan integralpart

of MERALCO's investmentprogram, a rate of return calculationfor the
project alone is not suitable. MERALCO's five-year investmentprogram
consists of many interrelatedcomponents,and thereforeis evaluatedas a
whole. Transmissionand distributioninvestmentsare assumed to yield
benefits of loss reductionand incrementalsales with a one-year time
lag.

10. Sensitivity. The program rate of return is highly sensitiveto changes

in the LRMC of power, and in the benefits from incrementalsales. Rates
of return are thereforepresented for scenarioswith an increase in LRMC,
and a decrease in incrementalsales. NPC's tariff is already generating
revenues at levels that are consistentwith LRMC pricing. Although NPC's
long-runmarginal cost-basedtariff structuresis in the process of being
refined, it is unlikely that the level will rise by more than a few
percentagepoints for MERALCO. In the most extreme instance,NPC might
increaseits rates by 10? in real terms. Benefit fluctuationswould
arise mainly from a lower than projected demand growth. In the past
(1984-86),energy demand was severelyaffectedby the absolutedecline in
GDP. Projectionsindicatea healthy GDP growth in the medium term,
consistentwith MERALCO's forecastingassumptions. The maximum likely
reduction in demand growth should not depress benefits by more than 102.

Results
IRR NPV (MillionPesos)
(i2 10? 13? 15?

Base case 32 8,603 6,045 4,762

LRMC plus 102 22 4,277 2,591 1,755
Sales minus 10? 18 2,808 1,420 737
LRMC plus 10? and
sales minus 102 5 -1,518 -2,033 -2,270
 ANNEX 6.01
- 110 - Page 3 of 3

MERALCO'S INVESTMENT PROGRAM, 1989-93: COSTS AND BENEFITS

(Million Pesos, 1989 constant prices)

1989 1990 1991 1992 1993 1994-2009

Investment
Foreign exchange 457 809 689 615 697 -
Local materials/services 355 628 535 477 541 -
Labor 79 141 120 107 122 -

Total Investment 891 1,578 1,344 1,199 1,360 -

Incremental operating cost (22) - 18 49 76 100 127

Purchase from NPC (GWh) - 1,243 2,580 3,864 5,235 6,707
Marginal cost (P million) - 1,206 2,502 3,748 5,078 6,506

Total Cost 891 2,802 3,895 5,023 6,538 6,633

Incremental Sales (GWh)

Residential - 256 543 844 1,164 1,495
Commercial - 371 775 1,162 1,585 2,032
Industrial - 401 840 1,265 1,735 2,218
Other - 4 9 13 18 23

Total - 1,032 2,167 3,284 4,502 5,768

Incremental Sales (P million)

Residential - 337 716 1,114 1,536 1,973
Commercial - 638 1,333 1,999 2,726 3,495
Industrial - 589 1,234 1,860 2,550 3,260
Other - 2 5 8 11 14

Total - 1,566 3,288 4,981 6,823 8,742

I
 - 111 -
ANNEX 6.02

PHILIPPINES

MANILA POWER DISTRIBUTIONPROJECT

SelectedDocuments and Data Available in the Project File

A.l The Philippines: Selected Issues in Public&ResourceManagement;July

1987; World Bank.

A.2 Staff Appraisal Report: Bacon-ManitoGeothermalPower Project;May

1988.

A.3 The Philippines: Issues and Options in the Energy Sector; September
1988.

A.4 The Philippines: Issues and Options in the FinancialSector; August

1988.

A.5 EnvironmentalImpact AssessmentHandbook;Ministry of Human Settlements,

National EnvironmentalProtectionCouncil.

B.1 MERALCO - Annual Reports; 1984-87.

B.2 MERALCO DistributionSystem - TechnicalConsiderations.

B.3 MERALCO - Executive Summary of ElectricSystem RehabilitationProjects;

1987-91.

B.4 MERALCO CorporateCharter; December 31, 1986.

B.5 MERALCO Bylaws; December 31, 1986.

B.6 MERALCO Training and DevelopmentManual.

B.7 Trust Indentureof MERALCO.

B.8 MERALCO - FeasibilityStudy for ProjectsComplementaryto NAPOCOR

Planned General Additions.

B.9 Project Support Data for MERALCO Projecs.

B.10 ComputerizedFinancialModels:

- MERFINC - IntegratedModel Assuming RestructuredLoans are Refinanced

- MERFIND - Integrated Model Assuming Restructured Loans are Not

Refinanced

B.ll MERALCO projectionsand InvestmentPlan.

120- 1i2
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