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POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (In Philippine Peso)

1. GENERAL INFORMATION

The need for reforms in the entire power industry became evident when the power crisis started in 1989 and continued well into the 1990s. Series of laws were then enacted that instituted reforms in the industry. The latest law, and one that embodies the most extensive reforms, was Republic Act No. 9136, known as the Electric Power Industry Reform Act of 2001 or “EPIRA”, enacted on 26 June 2001. The major aspects of the reforms embodied in the EPIRA include: 1) restructuring of the entire power industry to introduce competition in the generation sector; 2) change from government to private ownership; and 3) introduction of a stable regulatory framework for the electricity sector.

Restructuring of the Electric Power Industry The EPIRA restructured the power industry by organizing it into four (4) sectors: generation, transmission, distribution and supply. The structural reforms resulted in the following: a) Two government-owned and controlled corporations (GOCCs), the Power Sector

Assets and Liabilities Management Corporation (PSALM) and the National Transmission Corporation (TRANSCO) were created. PSALM takes over the generation and other disposable assets of the National Power Corporation (NPC) and manages its financial obligations, while TransCo takes over the transmission functions of NPC;

b) NPC was retained as a GOCC performing the missionary electrification function through the Small Power Utility Group (SPUG);

c) The distribution and supply sectors were separated to promote retail competition and open access was introduced;

d) The sale of sub-transmission assets to distribution utilities (DUs) was mandated; e) A wholesale trading market for electricity was established; f) The end-user rates and retail distribution rates were unbundled according to

specific electricity services provided by industry participants; g) A universal charge was imposed as part of electricity tariffs; h) The Department of Energy (DOE) was given the added role of supervising the

restructuring of the electricity industry; i) The Energy Regulatory Board (ERB) was abolished and the Energy Regulatory

Commission (ERC) was created instead; j) The National Electrification Administration (NEA) was given the additional

mandate of preparing electric cooperatives to operate and compete under a deregulated electricity market;

k) Electric cooperatives (ECs) were given the option to convert into either a stock cooperative under the Cooperatives Development Act or a stock corporation under the Corporation Code; and

l) The Joint Congressional Power Commission (JCPC) was created to monitor and ensure the proper implementation of the EPIRA, determine inherent weaknesses

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in the law and recommend necessary remedial legislation or executive measures.

PSALM was created under the EPIRA to take ownership of all the existing generation assets, independent power producer (IPP) contracts, real estate and all other disposable assets, and to assume all liabilities and obligations of the NPC. The principal purpose of PSALM is to manage the orderly sale, disposition and privatization of NPC’s assets with the objective of liquidating in an optimal manner all of NPC’s financial obligations and stranded contract costs. To strengthen the financial viability of electric cooperatives, PSALM was also tasked to assume all outstanding financial obligations of electric cooperatives with the National Electric Administration (NEA) and other government agencies incurred for the purpose of financing the Rural Electrification Program (REP).

PSALM shall exist for a period of twenty-five (25) years from the effectivity of the EPIRA, unless otherwise provided by law, and all assets and liabilities of the Corporation outstanding upon the expiration of its term of existence shall revert to and be assumed by the National Government. Included in PSALM’s mandate are the collection, administration and application of NPC’s portion of the universal charge (UC). The universal charge refers to the charge, if any, imposed on all electricity end-users for the following purposes: a) Recovery of the stranded debts and stranded contract costs of NPC as well as

the qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry. The stranded debts of NPC refer to any unpaid obligations that have not been liquidated by the proceeds from the sales and privatization of its assets. Stranded contract costs of NPC or distribution utility refer to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of such contracts in the market. Such contracts should have been approved by the Energy Regulatory Board as of 31 December 2000;

b) Missionary electrification, which refers to the provision by NPC-SPUG of power

generation and its associated power delivery systems in areas that are not connected to the transmission system;

c) Equalization of taxes and royalties applied to indigenous or renewable sources of

energy vis-à-vis imported energy fuels; and

d) Rehabilitation and management of watershed areas. An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh) sales to be used solely for this purpose which shall accrue to an environmental fund to be managed by NPC.

The UC is a non-bypassable charge which is passed on and collected from all end-users on a monthly basis by the distribution utilities. The collections by the distribution utilities and TransCo in any given month shall be remitted to PSALM on or before the fifteenth (15th) of the succeeding month. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding UC directly to TransCo.

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NPC Assets/Debts transferred to PSALM As of 31 December 2008, the following NPC assets and liabilities were transferred to PSALM:

Assets transferred to PSALM

Electric plants under capital lease, net 456,777,856,390 Current assets 101,008,390,595 Utility plants, net 77,103,244,049 Investment and other assets 64,081,241,964 Deferred charges 16,350,152,971 Net assets transferred to TRANSCO 115,693,280,923 Total assets 831,014,166,892

Liabilities assumed by PSALM BOT lease obligation 487,876,887,631 Long-term debts 326,031,895,265 Other current liabilities 69,590,238,676 Deferred credits 21,356,158,403 Total liabilities 904,855,179,975 Capital from asset-debt transfer (73,841,013,083)

The generation assets transferred by NPC to PSALM included the following: Lands

Angat HEPP Botocan HEPP (CBK-IMPSA)

Mak-Ban GPP Ilijan Gas Pipeline

Mak-Ban GPP Ormat Naga CTPP 1 (Cebu CTPP)

Tiwi GPP Power Barge 117 (Nasipit) -

Masinloc CFTPP Upper Agno HEPP

Batangas CFTPP Pantabangan-Masiway HEPP

Panay DPP Barit-Cauayan HEPP

Bohol DPP Loboc HEPP

Agus HEPP 1,2,4,5,6 &7 Talomo HEPP

Pulangui HEPP 4 Agusan HEPP

Sual CFTPP Manila TPP 1 & 2

Bauang First Private Power Corp. Sucat TPP 1,2,3 & 4

San Roque Power Corp. Bataan TPP 1 & 2

Luzon HEPP (Bakun 1) Bataan GT

ABB Bataan Combined Cycle 1 & 2 Malaya GT

Malaya TPP 1 - Land Talavera DPP (Cebu DPP 2)

Kalayaan HEPP (CBK-IMPSA) Aplaya DPP

Caliraya HEPP (CBK-IMPSA) Gen. Santos DPP

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Generation Plants

Operating

Angat HEPP Panay DPP 1

Amlan HEPP Panay DPP 3

Mak-Ban GPP 1,2,3,4,5,6, Ormat, 7,8,9,10 Bohol DPP

Tiwi GPP 1,2,3,4,5,6 Power Barge 101

Bac-Man GPP 1 Power Barge 102

Bac-Man GPP 2 (Cauayan) Power Barge 103

Bac-Man GPP 2 (Botong) Power Barge 104

Tongonan (Leyte) GPP Agus HEPP 1,2,4,5,6,7

Palinpinon GPP 1 Pulangui HEPP 4

Palinpinon GPP 2 (Nasuji) Iligan DPP 1

Palinpinon GPP 2 (Okoy) Talomo HEPP

Palinpinon GPP 2 (Sogongon) Agusan HEPP

Batangas CFTPP 1 Upper Agno HEPP

Batangas CFTPP 2 Masinloc CFTPP

Decommissioned

Manila TPP 1 & 2 Aplaya DPP

Sucat TPP 1,2,3,4 Gen. Santos DPP

Sucat GT LB Iligan DPP 2

Bataan TPP 1 & 2 Navotas GT 1 (Energy) U1, U2, U3

Bataan GT Navotas GT 2 (Tileman)

Malaya GT Naga GT LB 1

Cebu DPP 2 Naga GT LB 2

Independent Power Producers (IPPs)

Bataan CC DPP 1 & 2 Naga DPP 1

Malaya TPP 1 & 2 Naga CFTPP 1 & 2

Kalayaan HEPP Power Barge 117

Caliraya HEPP Power Barge 118

Botocan HEPP

Liabilities assumed by PSALM include the following:

a. BOT Lease Obligations

Independent Power Producer Power Plant Amount

Team Energy Corp.

Pagbilao Power 1 73,974,440,000

Pagbilao Power 2 73,864,971,808

Team Sual Corporation Sual Coal Plant I 68,351,625,443 Sual Coal Plant 2 69,076,173,279

KEPCO Ilijan Corp. Ilijan Natural Gas 67,139,210,724

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b. Long-term debts

Bonds/loans transferred by NPC to PSALM in 2008 on a per bank/creditor basis are summarized as follows:

Name of Bank/Creditor Amount Deutsche Bank 71,227,500,000 Bank of New York/JP Morgan Chase Manhattan 54,082,775,000 Citibank 39,504,700,000 Bureau of Treasury 38,613,000,000 Department of Energy 28,297,252,592 Land Bank of the Phils./Development Bank of the Phils. 20,000,000,000 International Bank for Reconstruction and Development 14,089,134,555 Eximbank of Japan 12,896,683,445 US Bank 11,305,952,376 Bank of Tokyo-Mitsubishi UFJ 10,859,680,000 Asian Development Bank 10,499,244,261 Kreditanstalt fur Wiederafbau 8,169,007,897 Overseas Economic Cooperation Fund 4,244,439,155 Japan Bank for International Cooperation 3,816,088,342 National Government 3,322,310,817 Instituto de Credito Oficial 1,244,024,282 Caliraya-Botocan-Kalayaan Power Corporation 1,210,707,950 Natixis/Credit National 1,144,865,889 Artigiancassa MCA 707,348,640 Nordic Investment/Development Fund 625,780,896 Banco de Oro/Development Bank of Phils. 350,000,000 Eximbank of Korea 305,550,909 Erste Bank Osterreischischen 262,324,906 US Agency for International Development 48,088,129 Total 336,826,460,041 Less: bond discount 10,794,564,776 Net 326,031,895,265

Operation and Maintenance Agreement (OMA) Pursuant to the Implementing Rules and Regulations (IRR) of the EPIRA, PSALM has the power to operate the generation assets, directly or through NPC, prior to privatization of such assets.

Bauang Private Power Corp. Bauang Diesel PP 59,040,076,630 Luzon Hydro Corp. Bakun Plant Unit I 17,220,523,078 Bakun Plant Unit II 16,721,247,938 Steag State Power Inc. Mindanao Coal Fired 1 11,108,008,722 Mindanao Coal Fired 2 11,121,120,943 CBK Power Co. Ltd. Kalayaan 2 Unit 3 9,407,576,712 Kalayaan 2 Unit 4 9,551,725,614 San Roque Power Corp. San Roque Hydro Electric PP 1,300,186,740

487,876,887,631

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The Operation and Maintenance Agreement signed on 17 February 2009 between PSALM and NPC provides for the continued orderly operation and maintenance of the transferred generation and other disposable assets and the provision of necessary corporate services from transfer date until the turnover of such assets to buyers. NPC shall also provide preservation services to all decommissioned plants and mothballed plants in accordance with the agreed performance standards to prevent the deterioration of serviceable equipment and systems prior to disposal. Furthermore, NPC shall continue to discharge its duties and contractual obligations under existing IPP contracts such as the supply of fuel, payment of capacity, energy and other fees, purchase of power generated, etc. NPC shall turn over the IPP plants under IPP contracts to PSALM after the termination/expiration of the IPP contracts, with PSALM having the option to include these plants in the OMA. NPC shall prepare the budget it needs annually to perform its obligations under the OMA and submit the Operations and Maintenance (O&M) Budget to PSALM for review and approval. Upon approval, PSALM shall release the funding in accordance with the O&M Budget subject to existing accounting and auditing rules and regulations. NPC shall regularly submit to PSALM reports on the performance of the generation and other assets and the use of the funds. Using the privatization proceeds and income from the operation of the generation and other assets, PSALM shall be responsible in servicing outstanding financial obligations of NPC arising from: (1) loans, issuances of bonds, securities and other instruments of indebtedness; and (2) IPP contracts. Operation and Maintenance Service Contract (OMSC) Pursuant to its privatization mandate, PSALM schedules the selling of the plants thru open and competitive bidding on dates such that the date of turnover to the winning bidder/new owner would correspond with the termination of the plants’ operation and maintenance agreements with third parties. In some instances, the biddings would not proceed as planned due to various constraints, delaying the turnover of the plants to the new owners. Pending these plants’ privatization and to still continue the operation of the plants, prevent their deterioration, and service the power requirements of the public, an OMSC contract was entered into with the winning bidders. IPP Administrator (IPPA) PSALM was mandated under the EPIRA to competitively select and appoint qualified independent entities called Independent Power Producer Administrators (IPPAs) to administer and manage the contracted energy output of NPC/PSALM IPP contracts. The IPPAs are qualified private sector independent entities with whom PSALM will enter into “back to back” contracts referred to as “Administration Agreements”, with NPC as a concurring party and the respective IPPs as counterparties. These Administration Agreements mirror applicable provisions of the Energy Conversion Agreements (ECAs)/Power Purchase Agreements (PPAs) that NPC entered into with the IPPs, in effect transferring the rights and obligations of NPC under these contracts to the IPPAs. The IPPAs will be appointed through public biddings to be conducted by PSALM.

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A major responsibility that has been transferred to the IPPA under the Sual and Pagbilao Administration Agreements is the management of fuel (coal) procurement. A number of risks associated with the ECAs of these plants were also transferred under the Administration Agreements but PSALM will continue to bear risks that the IPPA cannot manage, such as government, force majeure and extended outage risks. In return, the IPPA will have the unfettered opportunity to manage and trade the contracted capacities of these plants in the Wholesale Electricity Spot Market (WESM) and through bilateral contracts. For thermal plants, revenues for the first few years are guaranteed to the IPPA through the assignment of Transition Supply Contracts (TSCs). The IPPA process gives successful bidders a way to enter the WESM for a very low capital outlay. The Sual and Pagbilao structure, for example, enables bidders to pay the fixed monthly fees and the by-pass through energy fees of the IPPs out of cash flows. Thus, no upfront financing is required. This is a unique way to enter the WESM. The assets are relatively new, high quality plants that were built and are well maintained by some of the best IPP developers in the world. The IPPAs will have most of the benefits of being owners of generating stations, such as controlling the fuel and its dispatch, trading, and contracting of the plant, but without maintenance cost or capital upgrades. Also, many of the risks of owning a plant are explicitly managed through the contract. If there is an extended outage, for example, there is up to a 90 per cent discount on the monthly fees.

Wholesale Electricity Spot Market (WESM)

The commercial operation of the WESM (26 June 2006) is one of the pre-conditions to retail competition and open access. Other conditions as required in the Implementing Rules and Regulations (IRR) of the EPIRA are the: (i) approval of the unbundling of the transmission and distribution charges; (ii) initial implementation of the Cross Subsidy Removal System; (iii) privatization of 70 per cent of the total capacity of NPC plants in Luzon and the Visayas; and (iv) transfer of the management and control of at least 70 per cent of the total energy output of power plants under contract with IPPs. The WESM is initially a market for energy. Eventually, with the approval of the ERC, there will be a market for ancillary services for regulation, contingency reserve and dispatchable reserves. Electricity is offered and traded in a 24-hour by 7-days market. There are hourly prices published and used as basis for settlements. Prices in the spot market are volatile ranging from zero prices during off peak hours to as high as twelve pesos during peak hours. Distribution Utilities (DUs), Electric Cooperatives (ECs) and Suppliers/Aggregators can source their electricity requirements from the spot market or through Transition Supply Contracts (TSCs) with NPC. There is a provision in the EPIRA where DUs must source at least 10 per cent of their requirements from the spot market. In parallel to the spot market, DUs, ECs and Suppliers can enter into Transition Supply Contracts (TSCs) with NPC. These contracts can have predetermined rates such as the NPC Grid Rate or Time of Use (TOU) rates (plus other charges as

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approved by the ERC) that eliminate the volatility if one will source from the spot market. On the demand side of the spot market, MERALCO is the biggest customer of the WESM. There are electric cooperatives such as the Camarines Sur Electric Cooperative (CASURECO) and the Ilocos Norte Electric Cooperative (INEC) which have registered as market participants in the WESM. Since 2006, when the WESM commenced its operations, PSALM has been effectively acting as the interim IPPA by bidding the NPC/PSALM IPPs’ energy output into the WESM on a day-to-day basis. Finally, on 26 December 2012, the ERC declared the commencement of the retail competition and open access. Initial commercial operations later followed on 26 June 2013, in accordance with the first year timeline. With the commencement of the open access, qualified persons are now allowed by the system to use the transmission, and/or Distribution System and associated facilities upon payment of transmission and/or distribution retail rates duly approved by the ERC. Also in 2013, the Interim Mindanao Electricity Market (IMEM) was established in order to address the power situation in Mindanao. This is considered as a measure to meet power supply deficiency in Mindanao by mandating generators with excess capacities to offer these via a trading platform. The IMEM started commercial operations on 26 September.

National Transmission Corporation (TRANSCO) TRANSCO started operations as a functional unit in charge of the transmission functions of NPC. It started independent operations in March 2003, although its operations continued to be carried in NPC’s books of accounts. On 31 December 2008, its books were separated from the books of NPC and it ceased as one of NPC’s functional units. The creation of TransCo under the EPIRA as a GOCC that will assume the transmission function of NPC and the responsibility for the planning, construction and centralized operation and maintenance of the high voltage transmission facilities (the Grid), including grid interconnections and ancillary services, was meant to separate the power transmission system from the power generation system. TRANSCO was also mandated to privatize sub-transmission assets transferred from NPC by selling these assets to qualified distribution utilities. As provided in the EPIRA, TRANSCO is wholly owned by PSALM and its transmission function is also subject to privatization. Based on the government’s Privatization Plan, PSALM privatized the transmission assets by way of an award of a Concession to a qualified bidder in an open and competitive bidding process. The concession contract was awarded to the consortium of Monte Oro Grid Corporation, Inc., the winning bidder in the fourth round of bidding for the TRANSCO concession contract held on 12 December 2007. The consortium, composed of Monte Oro Grid Resources Corp., Calaca High Power Corp. and State Grid Corp. of China, won with

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its bid price of US$3.950 billion. The consortium established the National Grid Corporation of the Philippines (NGCP) as the “Concessionaire.” On 28 February 2008, the Concession Agreement became effective. Republic Act No. 9511 (The TRANSCO Franchise Law) was enacted on 01 December 2008 and became effective on 20 December 2008. The operation and management of the transmission business by NGCP commenced on 15 January 2009; upon PSALM’s receipt of the 25 per cent of the concession fee as upfront payment (Commencement Fee). The balance of the concession fee will be paid by the Concessionaire with interest in semi-annual installments for 20 years.

Financial Benefits to Host Communities Energy Regulations No. 1-94 The Generation Facilities and/or energy resource development facilities are required to provide the financial benefits under Energy Regulations No. 1-94 (E.R. 1-94) of the DOE. Direct benefits shall be provided to the host Local Government Units (LGUs), especially the community and people affected while equitable preferential benefits shall be provided to the host region. The Generation Company and/or energy resource developer shall set aside one centavo per kilowatt-hour (P 0.01/kWh) of the total electricity sales as financial benefit of the host communities of such Generation Facility, where applicable. Share in National Wealth Beginning 2010, PSALM has already taken over the responsibility of computing the Share in National Wealth (SNW) Tax of Local Government Units (LGUs) from NPC. LGUs’ SNW is computed as 1% of the net utility revenue for the preceding year of the plant that made use of the natural resources (i.e., hydroelectric power plants), and distributed to each recipient unit of local government following the allocation as stated in Sec. 291 of the Local Government Code (LGC) of the Philippines. KEY UNDERTAKINGS The major activities and endeavors of PSALM in 2014 are summarized below:

I. Financial Management Improved Financial Performance The company yielded positive results that reflected an astounding improvement from a net loss of ₱0.008 billion in 2013 to a net income of ₱16.60 billion in 2014. This improvement is primarily due to the effect of the movement in foreign exchange rates, income derived from the sale/disposal of assets, and the universal charge for stranded contract cost (UC-SCC). Overall income slightly dropped by 3% as income from Power Generation, IPPA and dividend from TRANSCO simultaneously fell generally due to the following reasons:

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Results of operation decreased as sales went down by 16%;

Income from IPPA also decreased as PSALM began to recognize VAT for monthly payments collected within the year; and

Dividend income decreased as it covered only four quarters’ worth of TRANSCO income compared to the six quarters’ worth of TRANSCO income recognized in 2013.

The foregoing effects were cushioned, however, by the income derived from the sale/disposal of assets. All things considered, the combined effects of the foregoing resulted to an astounding improvement by 196,774% compared to the year-ago net loss of ₱0.008 billion. Managing Cash Flow Cash balance in 2014 reflected a decrease which corresponds to the deficit for the year. From ₱84.14 billion in 2013, the cash balance had declined to ₱56.47 billion at the end of the 2014. This signified a decrease of ₱27.67 billion in 2014. On the other hand, the year’s deficit shows a decrease of ₱67.01 billion (a 175% decrease) from 2013’s surplus of ₱38.39 billion. The decrease redounded from a range of various transactions undertaken by the company that affected cash flow, and was reinforced by the remittance to BIR for the 2013 VAT Assessment on IPPA Transactions amounting to ₱6.28 billion, prepayment of principal debt of ₱12.42 billion and the decrease in collection of concession fee (CF) due to the prepayment made by National Grid Corporation of the Philippines (NGCP) in 2013. Some of the more notable transactions affecting cash flow include but are not limited to the sale of Naga Complex Power Plant amounting to ₱1.14 billion, of which ₱0.68 billion pertains to option price and rental income, sale of Angat HEPP amounting to ₱19.66 billion and the increase in monthly IPPA receivable (which is structured in an increasing manner). A condensed version of the Statement of Cash Flow is presented below:

(In Million Pesos)

2014 2013

Cash flow from operations

Proceeds from privatization* 85,656.2 69,579.1 Operations (23,042.9) (16,690.5)

Operations before prepayment of CF 62,613.3 52,888.6 Prepayment of concession fee 0.0 57,883.1

Cash inflow from operating activities** 62,613.3 110,771.7

Cash flow from financing

Debt service - principal & interest*** (47,242.6) (43,741.0) BOT lease obligation (31,828.3) (27,739.2)

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Cash outflow from financing activities (79,070.9) (71,480.2)

Capex and foreign exchange effect (733.4) (88.6)

Surplus (deficit) before prepayment (17,191.0) 39,202.9 Prepayment of principal debt (11,424.4) (809.9)

Surplus (deficit) after prepayment (28,615.4) 38,393.0

Add: Other sources:

Other receipts 945.5 30.1 Cash, beginning balance 84,142.5 45,719.4

Total other sources 85,088.0 45,749.5

Cash balance, end 56,472.6 84,142.5

* includes proceeds from concession of transmission asset, collections from IPPAs

and sale of generation assets ** net of NG advances for Casecnan amounting to ₱2.246 billion for 2014 and ₱2.798 billion

for 2013.

*** includes all loan related expenses

Other sources of funds for 2014 were the advances from the National Government for debt service of ₱0.015 billion, receipt of terminated collateral deposit of ₱0.930 billion, and the remaining cash balance as of 31 December 2013 of ₱84.143 billion. Handling Financial Obligations

From the total financial obligations of ₱646.777 billion at the end of 2013, PSALM

was able to make payments of long-term debts amounting to ₱29.553 billion and

payments to IPP BOT proponents of ₱31.828 billion. Taking into consideration adjustments/restatements arising from forex impact of ₱4.132 billion, the total financial obligations stood at ₱582.204 billion as of 31 December 2014. PSALM’s outstanding financial obligations (FO), composed of long-term debts and

IPP lease obligation, trimmed down by ₱64.6 billion or 10 percent from the ₱646.8

billion level in 2013 to ₱582.2 billion in 2014 as shown below:

In Billion Pesos

Outstanding FO 2014

Outstanding FO 2013

Increase (Decrease)

Long-term debts 324.0 357.1 (33.1) IPP lease obligation 258.2 289.7 (31.5)

Total 582.2 646.8 (64.6)

Long-term debts

Long-term debts decreased by ₱33.12 billion or 9 percent from the ₱357.1 billion

level in 2013 to ₱324.0 billion in 2014. The decrease can be attributed to the

₱17.1 billion regular debt service of maturing loans and the prepayment of ₱12.4 billion or US$0.3 billion debts which will mature as far as 2026. Among those

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prepaid long-term debts are the US$28.4 million ADB SPIA, US$68.0 million

1992 Bond Conversion, US$39.0 million IBRD loans, €63.6 million and ₱1.6

billion KFW loans, €7.3 million Credit National loans and ¥3.9 billion JBIC loans. The long-term debts is further decreased by the 13% appreciation of the peso to

¥ exchange rates at year-end (₱0.4239/¥ in December 2013 vs. ₱0.3706/¥ in December 2014). IPP lease obligation

Lease obligation decreased by ₱31.5 billion or 11 percent from the ₱289.7 billion

level in 2013 to ₱258.2 billion in 2014. The decline was on account of the debt

service of lease maturities in 2014 (₱31.8 billion), which was offset by the effect of the depreciation of the peso to US$ exchange rates at year-end of 2014

(₱1.018 billion). Approval of Deferred Accounting Adjustment (DAA) for GRAM and ICERA On 26 March 2012, ERC approved PSALM’S petition for the recovery/refund of the

₱44.7 billion Deferred Accounting Adjustments (DAA) representing recovery of incremental fuel and IPP costs under the 10th to 17th GRAM and incremental costs on foreign currency exchange rate fluctuations under the 15th to 16th ICERA for the Luzon, Visayas and Mindanao Grids, effective March 26, 2012 to April 25, 2012 billing period until the end of the corresponding recovery periods or until such time that the full amount shall have been recovered/refunded, whichever comes earlier. Recovery/refund rate and period are shown below:

Generation Rate Adjustment Mechanism (GRAM)

Grid

Rate

(₱/kWh)

Recovery Period (Months)

Luzon 0.3267 120 Visayas 0.4847 126 Mindanao 0.0536 54

Incremental Currency Exchange Rate Adjustment (ICERA)

Grid

Rate

(₱/kWh)

Recovery Period (Months)

Luzon 0.3637 96 Visayas 0.1213 60 Mindanao (0.0094) 36

PSALM was able to bill and collect ₱6.9 billion for the year; leaving a balance of

₱21.4 billion as of 31 December 2014. Debt Service Coverage Ratio Debt service coverage ratio (DSCR) for 2014 was computed at 0.67:1, lower than the 1.49:1 DSCR in 2013. This was due to the prepayment for principal debt and the remittance to BIR for the 2013 VAT Assessment on IPPA Transactions for generation payments, monthly payments and sale of generation assets. Whereas in 2013, the significant reason for high DSCR rate was the prepayment of concession fee by NGCP.

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Weighted Average Maturity The Weighted Average Maturity (WAM) of the Corporation now stands at 6.88 years. This means that on the average, PSALM's loan will mature before its corporate life ends in 2026. Though the WAM is 6.88 years, it should be noted that PSALM still has FO payable until year 2028. PHP Share in the Foreign Obligations (FO) Portfolio Of the ₱582.20 billion outstanding obligations as of 31 December 2014, 23% is denominated in PHP. The increase in PHP component is attributed to the implementation of PSALM's policy to reduce risk exposure on the foreign exchange fluctuations through prepayment of some of the foreign currency denominated debts. Collection Efficiency

Collection efficiency for current sales is 95.66% which is equivalent to around ₱35.89

billion from the current power sales of ₱37.52 billion. Meanwhile, collection efficiency for overdue power accounts stood at 5.99 percent. Prepayment Program PSALM prepaid its outstanding balance to Credit National, Japan Bank for International Cooperation, Eximbank of Korea, IBRD, ADB and KFW amounting to US$333 million. In addition, PSALM purchased its Global bond due 2024 and 2019 worth US$4 million on 26 November and 10 December 2014, respectively. II. Asset Management Implementation of PSALM’s Privatization Program As of 31 December 2014, a total of twenty-seven (27) generating plants with a total of 4,473.43 MW of PSALM-owned capacities have been successfully bid out and transferred to private owners.

Name of Plant Rated

Capacity in (MW)

Location Winning Bidder Bid Date Turnover

Date

Talomo Hydroelectric Power Plant

3.5 Davao Hydro Electric Development Corporation

25-Mar-04 19-Jan-05

Agusan Hydroelectric Power Plant

1.6 Agusan First Generation Holdings

04-Jun-04 25-Mar-05

Barit Hydroelectric Power Plant

1.8 Camarines

Sur Atty. Ramon I. Constancio

25-Jun-04 25-Jan-05

Cawayan Hydroelectric Power Plant

0.4 Sorsogon Sorsogon II Electric Cooperative, Inc

30-Sep-04 30-Jun-05

Loboc Hydroelectric Power Plant

1.2 Bohol Sta. Clara International

10-Nov-04 30-Jun-05

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Corporation

Pantabangan-Masiway Hydroelectric Power Plant

112 Nueva Ecija First Gen Hydropower Corporation

06-Sep-06 17-Nov-06

Magat Hydroelectric Power Plant

360 Isabela SN Aboitiz Power Corporation

14-Dec-06 25-Apr-07

Masinloc Coal-Fired Thermal Power Plant

600 Zambales Masinloc-Power Partners Co. Ltd.

26-Jul-07 17-Apr-08

Ambuklao-Binga Hydroelectric Power Complex

175 Benguet SN Aboitiz Power Hydro Inc.

28-Nov-07 10-Jul-08

Tiwi-MakBan Geothermal Power Plants

747.53 Albay,

Laguna/Batangas

AP Renewables Inc.

30-Jul-08 25-May-09

Panay and Bohol Diesel Power Plants

168.5 Iloilo, Bohol SPC Power Corporation

12-Nov-08 25-Mar-09

Amlan Hydroelectric Power Plant

0.8 Negros Oriental

ICS Renewables Inc.

10-Dec-08 24-Jun-09

Batangas (Calaca) Coal-Fired Thermal Power Plant

600 Batangas DMCI Holdings, Inc.

08-Jul-09 03-Dec-09

Power Barge 117 100 Agusan del

Norte Therma Mobile Inc.

31-Jul-09 01-Mar-10

Power Barge 118 100 Compostela

Valley Therma Marine Inc.

31-Jul-09 06-Feb-10

Limay Combined-Cycle Power Plant

620 Bataan San Miguel Energy Corporation

26-Aug-09 18-Jan-10

Palinpinon-Tongonan Geothermal Power Plants

305 Negros Oriental,

Leyte

Green Core Geothermal Inc

02-Sep-09 23-Oct-09

Naga Land-Based Gas Turbine Power Plant

55 Cebu SPC Power Corporation

16-Oct-09 29-Jan-10

Angat Hydro Electric Power Plant

218 Bulacan

Korea Water Resources Development Corp.

28-Apr-10 31-Oct-14

BacMan Geothermal Power Plants

150 Albay,

Sorsogon Bac-Man Geothermal Inc.

05-May-10 03-Sep-10

Naga Power Plant Complex

153.1 Cebu SPC Power Corporation

31-Mar-14 25-Sep-14

Privatization of Naga Power Plant Complex On 31 March 2014, PSALM conducted the bidding for the Naga Power Plant and declared Therma Power Visayas, Inc. as the highest bidder. However SPC Power Corporation (SPC), the second highest bidder, has the “right to top” the price of the winning bidder by 5% as provided under the Land Lease Agreement executed between PSALM and SPC in 2009 for the Naga Land-based Gas Turbine. SPC exercised its right to top the winning bidder prior to the deadline. On 30 July 2014, PSALM issued the Notice of Award and Certificate of Effectivity to SPC. PSALM turned over the Naga Power Plant to SPC on 25 September 2014. The Naga Power Plant, situated in Colon, Naga City, Cebu, consists of two (2) thermal power plants and one (1) diesel-fired power plant that use a combination of

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coal, bunker C oil, and diesel as fuel. These are the 52.5-MW Cebu 1 and 56.8-MW Cebu 2 coal-fired thermal power plants, and the 43.8-MW Cebu Diesel Power Plant 1 composed of six (6) 7.3-MW bunker-C fed power units. Privatization of the Power Barges On 30 October 2013, SPC Island Power Corporation (SIPC) has emerged as the highest bidder for Power Barges (PBs) 101-103 or Package 1, while the bidding for PB 104 or Package 2 was declared a failure. PSALM declared the bidding for Package 2 or the Davao-based PB 104 a failure since none of the bidders met the Reserve Price for the asset package. SIPC, in its letter dated 13 March 2014, requested termination of the Asset Purchase Agreement (APA) because of the material change in condition of PB 103 brought about by super typhoon Yolanda and, likewise requested the return of its performance bond. In a letter dated 22 May 2014, Trans-Asia Oil and Energy Development Corporation (Trans-Asia), the second highest bidder for PBs 101-103, offered to purchase the barges on a negotiated basis, subject to conditions. And on 02 July 2014, the Office of the Government Corporate Counsel (OGCC) issued an opinion that PSALM can conduct negotiation subject to the guidelines of the Commission on Audit (COA). On 06 November 2014, Trans-Asia confirmed its acceptance of PSALM’s conditions and expressed its intention to close the transaction. And on 23 December 2014, the Memorandum of Agreement became effective which will form part of the APA between PSALM and Trans-Asia. The turnover of the barges is within 60 days from the signing of the MOA. PBs are nominal 32-megawatt (MW) barge-mounted bunker-fired diesel generating power stations that consist of four (4) identical Hitachi-Sulzer diesel generator units rated at eight (8) MW each. PBs 101-102 are currently stationed at Bo. Obrero in Iloilo City and were commissioned in 1981. PBs 103 and 104 - moored in Botongon, Estancia, Iloilo and at the Holcim Compound, Ilang, Davao City, respectively - began operating in 1985. Privatization of the Angat Hydro Electric Power Plant While PSALM had successfully conducted the bidding for the Angat HEPP last 28 April 2010, the Supreme Court (SC) halted the asset sale on 24 May 2010 through a status quo ante order after a complaint filed by petitioners Initiatives for Dialogue and Empowerment Through Alternative Legal Services (IDEALS), Inc., et al questioned the legality of PSALM’s conduct of the bidding for the Angat HEPP. However, on 09 October 2012, the SC upheld the legality and validity of the conduct of the said bidding process and the subsequent issuance of a Notice of Award to K-Water. Despite a Motion for Partial Reconsideration lodged by IDEALS Inc. on the decision, the SC en banc upheld its decision and resolved to deny the said motion “with finality” on 13 November 2012. PSALM reiterated its statement that only the power plant component of the Angat Dam was privatized, and that the privatization of the Angat HEPP will not affect the water supply from the Angat reservoir. The Angat Dam, which supplies more than 90 per cent of the water requirements of Metro

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Manila and neighboring provinces, remains the property of the Philippine government. On 02 September 2013 PSALM issued the Certificate of Effectivity (CoE) of the Asset Purchase Agreement (APA) to winning bidder Korea Water Resources Development Corp. (K-Water). K-Water completed the submission of documents to the Bangko Sentral ng Pilipinas (BSP) for the registration of its loan for the payment of the Angat HEPP. On 21 July 2014, K-Water obtained the BSP approval of its loan registration. PSALM turned over the Angat HEPP to K-Water on 31 October 2014. Located in San Lorenzo, Norzagaray in Bulacan, the Angat HEPP consists of four main units, each with a 50-MW capacity. The units were commissioned between 1967 and 1968. To augment its operation, the plant uses five (5) auxiliary units with a total capacity of 46 MW. The 18-MW Auxiliary Units 1, 2 & 3 are part of the sale, while the 28-MW Auxiliary Units 4 & 5, which are owned by MWSS, were not part of the bidding. IPP and IPPA Contracts As of 31 December 2014, the existing IPP contracts of PSALM are the following:

Plant Name Contract Type End of Agreement NPC-owned Caliraya HEPP BROT-PPA February 2026 Botocan HEPP BROT-PPA February 2026 Kalayaan HEPP 1 & 2 BROT-PPA February 2026 IPP-owned

Zamboanga DPP BOO-ECA December 2015 General Santos DPP BOO-ECA March 2016 Ampohaw BOO-PPA January 2018 Unified Leyte GPP A & B BOO-PPA A-July 2022 & B-July 2021 Casecnan HEPP BOO-PPA April 2022 Mt. Apo GPP 1 & 2 BOO-PPA 1-March 2022 & 2-June 2024 Bakun HEPP (NMHC) BOO-PPA January 2026 Kalayaan HEPP 3 & 4 BROT-PPA February 2026 Mindanao Coal 1 & 2 BOT March 2034

As of 31 December 2014, PSALM has successfully bid out and transferred a total of 3,569.24 MW of contracted capacities of the seven (7) IPPs to IPPAs.

Name of Plant Rated

Capacity in (MW)

Location Winning Bidder Bid Date Turnover

Date

Sual Coal-Fired Power Plant

1000 Pangasinan San Miguel Energy Corporation

28-Aug-09 06-Nov-09

Pagbilao Coal-Fired Power Plant

700 Quezon Province

Therma Luzon Inc.

28-Aug-09 01-Oct-09

San Roque Multipurpose Hydro

345 Pangasinan Strategic Power Devt. Corp.

15-Dec-09 26-Jan-10

Bakun-Benguet hydro plants

70 Benguet Amlan Power Holdings

15-Dec-09 26-Feb-10

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Corporation

Ilijan Combined Cycle Power Plant

1200 Batangas San Miguel Corporation

16-Apr-10 26-Jun-10

Unified Leyte Geothermal Power Plant (Strips of Energy)

40 Leyte Aboitiz Energy Solutions, Inc.

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

40 Leyte FDC Utilities, Inc.

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

40 Leyte

Trans-Asia Oil and Energy Development Corporation

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

40 Leyte Unified Leye Geothermal Energy Inc.

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

20 Leyte

Good Friend Hydro Resources Corporation

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

17 Leyte Vivant Energy Corporation

07-Nov-13 26-Dec-14

Unified Leyte Geothermal Power Plant (Strips of Energy)

3 Leyte Waterfront Mactan Casino Hotel Inc.

07-Nov-13 26-Dec-14

Mindanao I and II (Mt. Apo 1 and 2) Geothermal Power Plants.

54.24 Kidapawan

City

FDC Misamis Power Corporation

24-Sep-13 26-Dec-14

Appointment of IPP Administrator for the Mt. Apo 1 & 2 Geothermal Power Plants The Corporation has concluded its selection and appointment of Independent Power Producer Administrator (IPPA) for the Output of the Mindanao I and II (Mt. Apo 1 and 2) Geothermal Power Plants. On 24 September 2014, FDC Misamis Power Corporation emerged as the highest bidder for the selection and appointment of the Independent Power Producer Administrator (IPPA) for the output of the Mindanao I and II (Mt. Apo 1 and 2) Geothermal Power Plants. The effective date and turnover of the contracted energy was on 26 December 2014. PSALM officially launched the Mt. Apo IPPA auction on 14 May 2014 through an Invitation to Bid published in local newspapers. The Mt. Apo 1 and Mt. Apo 2 geothermal plants, each with a rated capacity of 54.24 megawatts, are located in Kidapawan City, North Cotabato. Owned and operated by the Energy Development Corporation, the power plants were commissioned on 15 February 1997 (Mt. Apo 1) and 17 June 1999 (Mt. Apo 2) under a build, operate, and own contract scheme. The cooperation period for both plants is 25 years, and the same will expire on 15 February 2022 and 17 June 2024, respectively, for Mt. Apo 1 & 2.

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Appointment of IPP Administrator for Unified Leyte Geothermal Power Plant The selection and appointment of Independent Power Producer Administrators (IPPAs) for the Strips of Energy and Bulk Energy of the contacted capacities in the Unified Leyte Geothermal Power Plant (ULGPP) on 07 November 2013 and 08 November 2013, respectively, have been successful. Unfortunately, on 8 November 2013, super Typhoon Yolanda struck the Visayas, and ULGPP was not spared from the devastation, causing massive destruction on the power plants and stem lines. Subsequently, Unified Leyte Geothermal Energy, Inc. (ULGEI), the winning bidder for the Bulk Energy wrote PSALM in its letter dated 20 November 2013 stating that the bids it submitted were based on prevailing conditions before typhoon Yolanda struck. ULGEI further stated that the economic conditions have, however, been severely altered rendering the Bidders previous due diligence irrelevant. Also, according to ULGEI, even if the electrical facilities are rebuilt, the market demand for electricity is expected to decline sharply over a period of time. As such, ULGEI refused to accept the award with respect to the Bulk Energy of ULGPP and likewise requested that its bid securities be released. On 29 January 2014, the PSALM Board approved the issuance of the NOA to the winning bidders for the Strips of Energy and the acceptance of the withdrawal of ULGEI from the bidding process for the Bulk Energy. The Final IPP Administrator Administration Agreements (IPPA AAs) for the Strips of Energy were executed on 20 October 2014. And on 19 December 2014, PSALM issued to the seven (7) winning bidders the Certificate of Effectivity with the effective date and turnover of the strips of energy set on 26 December 2014. The ULGPP is composed of the 125-MW Upper Mahiao, 232.5-MW Malitbog, and 180-MW Mahanagdong power plants, and the 51-MW optimization plants. Located in Tongonan, Leyte Province, the ULGPP is covered by power purchase agreements between the National Power Corporation (NPC) and the Energy Development Corporation. Appointment of IPP Administrator for Mindanao Coal-Fired Thermal Power Plant On 18 November 2014, the PSALM Board approved the commencement of the bidding activities for the selection and appointment of IPPA for the Mindanao Coal-Fired Thermal Power Plant. Upon approval by the PSALM PBAC, the issuance of the Invitation to BID (ITB) and finalization of the Bidding Procedures are targeted by the 1st quarter of 2015. Privatization of the Remaining Excluded Assets Below are the indicative schedules of disposal of the remaining excluded assets in the following plants:

Asset Date

Aplaya Diesel Power Plant April 2015

Bohol Diesel Plant March 2015

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Cebu Diesel Power Plant March 2015

Palinpinon Geothermal Power Plant March 2015

Privatization of Decommissioned Plants As of 31 December 2014, the table below lists the three (3) decommissioned plants successfully bid out by PSALM:

Name of Plant Location Winning Bidder Bid Date Turnover

Date

Manila Thermal Power Plant Manila Gagasan Steel Inc 25-Apr-08 20-Feb-09

Cebu Diesel Power Plant II Cebu Taifu Metal Exchange Corporation

22-Jan-09 25-May-09

Aplaya-General Santos Diesel Power Plant

Misamis Oriental-

South Cotabato

TEC Industries, Inc. 25-May-09 02-Oct-09

Privatization of the Sucat Thermal Power Plant On 31 March 2014, PSALM conducted the rebidding of Sucat Thermal Power Plant (STPP) and declared Genetron International Marketing (GIM) as the highest bidder. However, on 05 May 2014 the Performance Bond issued by GIM was found to have materially deviated from PSALM’s standard form thus terminating the Asset Purchase Agreement (APA). On 23 June 2014, the PSALM Board approved the termination of the APA. Located in Sucat, Muntinlupa City, the Sucat plant is an oil-fired power plant that was previously owned by the Manila Electric Co., and later acquired by the National Power Corporation in November 1978. It consists of Unit 1, which has a rated capacity of 150 MW; Units 2 and 3, each with 200 MW; and Unit 4, which is rated at 300 MW. Formerly known as the Gardner Snyder Thermal Plant, the Sucat plant officially commenced commercial operations on 01 August 1968 after the completion of Unit 1. Units 2-4 followed operations after their construction in 1970, 1971, and 1972, respectively. In January 2000, Units 1 and 4 were decommissioned and placed under preservation. Units 2 and 3 followed later in January 2002. Privatization of Transmission Assets The transmission assets were privatized by way of the award of a Concession Contract to the National Grid Corporation of the Philippines (NGCP). The Concession commenced on 15 January 2009, upon payment of US$987.5 million or 25 percent of the Concession Fee of US$3.95 billion as Commencement Fee. The balance of US$2.96 billion of the Concession Fee will be paid by the Concessionaire with interest in semi-annual installments falling on the 15th day of January and July of each year for 20 years.

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In CY 2013, upon board approval, Concession Fee was adjusted from US$3.95 billion to US$3.8 billion based on Project Under Construction (PUC) and Initial Working Capital (IWC). In addition, the board also allowed the prepayment of the 21 semi-annual installments of the Concession Fee totaling ₱57.9 billion starting from January 2014 up to January 2024. Total collection for 2013 amounted to ₱68.0 billion due to prepayments, adjustments and deferred payments (7th and 8th).

Operation and Maintenance Service Contract (OMSC) of Malaya Thermal Power Plant On 30 September 2014, PSALM issued the notice awarding the one-year Operation and Maintenance Service Contract (OMSC) for the 650-megawatt (MW) Malaya Thermal Power Plant (TPP) to Korean firm STX Marine Service Co. Ltd. The OMSC will run from 25 October 2014 to 25 October 2015.

Malaya TPP is located in Pililla, Rizal Province, and is being managed by PSALM through an OMSC. It consists of a 300-MW unit with a once-through type boiler and a 350-MW unit fitted with a conventional boiler. It was rehabilitated in 1995 by the Korea Electric Power Corporation under a 15-year rehabilitate-operate-manage-maintain agreement. Management of Privatization Proceeds PSALM started receiving privatization proceeds from the sale of NPC generating plants in January 2005. As of 31 December 2014, actual privatization proceeds collected amounted to US$3.5 billion and ₱266.6 billion. On 20 June 2007, the joint Boards of PSALM and NPC, under Board Resolution No. 07-29, approved the utilization of the privatization proceeds to liquidate principal and interest obligations of NPC as they fall due. This was amended on 04 October 2007 by Board Resolution No. 07-61, which granted authority to PSALM Management to utilize the privatization proceeds to:

• Prepay NPC’s principal obligations;

• Settle NPC’s principal and interest obligations as they become due only after NPC shows deficit in its cash flow after utilization of its own internally generated cash;

• Manage NPC’s liabilities with the objectives of reducing interest cost and liquidity risk in 2009-2012 and hedging foreign exchange risks at terms and conditions advantageous to the government; and

• Pay other financial obligations of NPC. From 22 August 2007 to 31 December 2014, a total of US$4.1 billion dollar proceeds and ₱197.3 billion peso proceeds were utilized to cover mostly the financial obligations of NPC such as the maturing obligations, IPP obligations and the prepayment of the more expensive Yen-denominated and Euro-denominated obligations of NPC, as well as other privatization-related expenditures. As of 31 December 2014, the balance of dollar proceeds is US$22.4 million, while the balance of the peso proceeds amounts to ₱41.8.5 billion.

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III. Universal Charge (UC) Administration Pursuant to Section 51 of the EPIRA, the Corporation, among its powers, shall calculate the amount of the Stranded Debts and Stranded Contract Costs of NPC, which amount shall form part of the Universal Charge to be determined, fixed, and approved by the ERC.

“Stranded Contract Costs of NPC” refer to the excess of the contracted cost of electricity under eligible contracts of NPC over the actual selling price of the contracted energy output of such contracts in the market. Such contracts shall have been approved by the ERB as of 31 December 2000; and “Stranded Debts of NPC” or “Stranded Debts” refer to any unpaid financial obligations of NPC which have not been liquidated by the proceeds from the sales and Privatization of NPC assets: Provided, however, That such obligations include any of such obligations refinanced by PSALM: Provided, further, That such refinancing of such unpaid obligations shall not result in increasing the Universal Charge burden.

UC-Stranded Contract Costs On 28 January 2013 the Energy Regulatory Commission (ERC) rendered its decision on ERC Case No. 2011-091 RC specifically the PSALM’s petition for the recovery of the National Power Corporation (NPC) Stranded Contract Costs (SCC) of the Universal Charge (UC) filed on 28 June 2011. Accordingly, PSALM was granted authority to recover the following UC-SCC for Luzon, Visayas and Mindanao Grids starting March 2013 billing covering period of 26 February 2013 to 25 March 2013. (Note 28)

Total Stranded Contract Cost UC-SCC Rate

₱53.851 billion ₱0.1938/kWh* *Based on 4 years sales of 277,875GWh from the DOE Philippine Development Plan

UC-Stranded Debts

On 28 January 2013 PSALM’s petition amounting to ₱66 billion, with a proposed recovery period from 2011-2026, for the recovery of the National Power Corporation (NPC) Stranded Debts (SD) of the Universal Charge (UC) under ERC Case No. 2011-092 RC filed on 28 June 2011was disapproved by the Energy Regulatory Commission. Accordingly, the recoverable SD is set to zero (0) since the allowable SD for CY 2011 can be fully covered and paid from the proceeds of NPC’s operation. This, however, is without prejudice to the filing of its annual true-up adjustments for the recovery of succeeding SD.

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2. BASIS OF PREPARATION Statement of Compliance The financial statements of the Corporation have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes statements named PFRS and Philippine Accounting Standards (PAS) and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC), issued by the Financial Reporting Standards Council (FRSC). Basis of Measurement The financial statements of PSALM are prepared on a historical cost basis and transactions are recorded using the accrual basis of accounting. The assets transferred from NPC were recorded at their carrying amounts (balances as reflected in NPC books) as of the transfer date of 31 December 2008. Functional and Presentation Currency The financial statements are presented in Philippine Peso, which is the Corporation’s functional currency. Use of Estimates The preparation of the financial statements in accordance with PFRS require the Corporation to make estimates and assumptions that affect the reported amounts of resources, liabilities, income and expenses and the disclosures of contingent resources and liabilities. Future events may occur which can cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably probable. Estimates and judgments are continually evaluated and are based on historical experiences and other factors including expectations of future events that are believed to be reasonable under the circumstances.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents Cash and cash equivalents are defined as cash on hand, demand deposits, and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

In compliance to IAS 7 Statement of Cash Flows, any amount of significant cash and cash equivalent balances that are not available for use by the group shall be disclosed, together with a commentary by management, signifying words to that effect.

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Receivables and Allowance for Bad Debts Receivables are initially measured at face value and subsequently at amortized cost. Impairment loss is recognized using an allowance account. For CY 2014, PSALM adopted a revised accounting policy to adequately provide allowance for doubtful accounts as follows: (1) For regular accounts, an initial 10% impairment allowance is recognized for accounts that are outstanding for more than one (1) year thereafter a 10% percent increase is provided for every year past due. (2) For accounts with dispute, a 15% allowance for impairment is provided, unless a more specific amount is agreed upon by both parties in its initial proceedings. On other hand dormant as well as closed accounts are provided 100% impairment allowance. Power receivables are classified as current assets as they are expected to be collected within twelve months after the financial reporting date, except the disputed and restructured accounts which are classified as noncurrent assets. Inventories Inventories are valued at cost using the moving-average method.

Assets Held for Sale Assets held for sale consist of generation plants in service and decommissioned plants that are scheduled for privatization in 2013. These also include those plants that have been previously bid out but whose sale was not consummated by end of 2012, either because the bidding was declared a failure or because the winning bidder failed to close the sale. Under Philippine Financial Reporting Standards (PFRS) 5, “Non-current Assets Held for Sale”, a non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale that should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell, the carrying amount being the amount reflected in the NPC books at the date of transfer. Build-Operate-Transfer (BOT) Plants During the asset-debt account transfer in 2008, one of the accounts turned over by NPC to PSALM is the BOT lease obligations, stated in nominal amounts, representing obligations to Independent Power Producers (IPP). Arising from the government’s efforts to mitigate the growing problem in the supply of electricity in the late 1980s to 1990s, these BOT lease obligations are due to private entities designated then by the government to build additional facilities to ensure a long-term and stable source of electricity that would reach more end-users. These facilities were operated and maintained by the private entities for a certain period before turning them over to the government. The arrangement resembled a finance lease

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wherein the paying entity (in this case, the government), has the option to acquire ownership of the property after the private sector partners recover most of the asset’s costs. Hence, the commissioned capacities were classified as BOT (build-operate-transfer) lease obligations. In the books, total capacity fees for the duration of the cooperation period are capitalized and recognized as asset under BOT Electric Plants under Capital Lease account. A liability corresponding to the unpaid portion of the capital recovery fees is set up under BOT Lease Obligation. Kalayaan 3 & 4 and Mindanao Coal are the remaining BOT assets which are amortized over 40 years and 25 years, respectively. Upon turnover of the privatized BOT plant to the appointed IPPA, the asset is derecognized from the books of PSALM in conformity with IAS/PAS 17 (Leases). However, the corresponding BOT lease obligations are not derecognized because they are not transferred to the appointed IPPA.

IPPA Receivable As structured, the contract (Administration Agreement) between the IPPA and PSALM can be classified as a finance lease because it substantially transfers the risks and rewards incidental to ownership to the IPPA. Based on IAS/PAS 17, the contract between the IPPA and PSALM may be classified as a finance lease because, in substance, the contract contains the following indicators of a finance lease: a) the lease transfers ownership of the asset to the lessee by the end of the lease

term;

b) the lease term is for the major part of the economic life of the asset even if title is not transferred; and

c) the leased assets are of such a specialized nature that only the lessee can use

them without major modifications. The IPPA structure provides that: a) full ownership of the generating plant and the right to use the land transfers to

the IPPA at the end of the contract period;

b) the contract is for a period of fifteen (15) years, which is for the most part of the economic life of the asset given that, on the average, the estimated economic life of the transferred generating plants is thirty (30) to forty (40) years, based on their last revaluation in 1996; and

c) the leased generating plant is of a specialized nature and size that operating this

asset and managing its output require highly technical expertise and considerable financial capability that only qualified entities such as the IPPAs can bid for administration of their contracted capacity and eventually own and operate them.

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The IPP asset under a finance lease is presented as a lease receivable from the IPPA in the amount equal to the aggregate of the monthly payments to be made by the winning bidder throughout the contract period. The schedule of monthly payments was part of the Financial Bid of the IPPA and is made part of the Administration Agreement as Annex 1 to Schedule I. IPPA receivables are classified as current assets if it expects to realize the asset within twelve months after the financial reporting date. Otherwise, these are classified as non-current assets.

Property, Plant and Equipment and Depreciation NPC-transferred assets Property, plant, and equipment transferred from NPC include electrification, power and energy structures and referred to as utility plants. The last external revaluation of these plants was of the 1996 asset prices. These structures are recognized in PSALM’s books at their carrying amounts as stated in NPC books as of the transfer date of 31 December 2008. While these assets were carried in NPC books, regular annual maintenance, repairs and minor replacements were charged to expense as they were incurred, whereas major maintenance, which was done on periodic three-to five-year intervals, was deferred, amortized and charged to operations over the number of year’s interval. Rehabilitation expenditures that would result in improvement of the plant’s efficiency beyond five years were capitalized and transferred to plant cost upon completion of work orders. Depreciation was charged from the date of acquisition of the fixed assets or after the completion of work orders and computed on a straight-line basis. Depreciating the asset based on the sound value over its remaining useful life will result in amortizing the remaining cost of the asset reflective of its true physical state. The average remaining useful life was determined by subtracting the age of the asset from the estimated standard economic life. Depletion, which shows the periodic provision for the depletion of extractable natural resources such as steam, natural gas, etc., was also computed on a straight-line basis. The same NPC depreciation policies were adopted by PSALM on the transferred assets, including the estimated standard economic life as ascertained by the last independent appraiser of NPC, as follows:

Type of Plant

Economic Life

1. Thermal Production a. Oil-fired b. Coal-fired

35 years

2. Hydraulic Production 40 years 3. Geothermal Production 30 years 4. Other Production a. Combined-cycle b. Diesel Plants and Barges c. Gas Turbine

20 years

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PSALM-acquired assets Property and equipment consisting of computers, office furniture and fixtures, vehicles and communication equipment are stated at cost less accumulated depreciation and any impairment in value. The stated cost comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Generally, tangible assets that are expected to be used for more than one year are considered as capital assets. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed on a straight-line basis over the useful lives of the assets as follows:

Furniture, fixtures and equipment 5 – 10 years Transportation equipment 7 years Computers and accessories 5 years

Residual value equivalent to 10 per cent of the acquisition cost is deducted before dividing the same by the estimated useful life. The carrying values of property and equipment are reviewed for impairment when changes in circumstances indicate that the carrying value may not be recoverable or may have diminished. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount and impairment losses are recognized in profit or loss. On 09 January 2009, PSALM filed with the ERC its petition for the adoption of proposed asset valuation guidelines using an indexation method to revalue NPC’s assets to its current cost level in lieu of the conduct of an appraisal by an external appraiser. The public consultation on the petition was held on 23 February 2009, whereupon ERC directed PSALM to revise the Asset Valuation Guidelines based on comments from interested parties. Taxes

Taxes for current and prior periods are, to the extent unpaid, recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess payment is recognized as an asset. Unlike the NPC who’s Charter provides that NPC shall be exempt from direct and indirect taxes, the EPIRA (the law that created PSALM) does not contain a provision that exempts PSALM, as an entity, from taxation. While PSALM as an entity is not per se tax-free, there are certain transactions of PSALM, which are exempt from taxation. The tax treatment of PSALM’s transactions is set forth and further clarified in BIR Revenue Memorandum Circular (RMC) No. 11-2012 dated 22 March 2012, which supersedes previous BIR Ruling No. 020-02 dated 13 May 2002, the pertinent provisions of which are summarized as follows:

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I. On the Sale of the NPC Generation Assets and other Real Properties in view

of the Privatization

a. No income and withholding taxes are due from the sale of the NPC generation assets and other real properties to winning bidders;

PSALM, the principal purpose of which is to manage the orderly sale, disposition, and privatization of NPC generation assets and other real properties, with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner, will not derive gain from the said sale of the NPC generation assets and other real properties. Accordingly, no income tax and consequently withholding tax is due from PSALM on its sale of the NPC generation assets and other real properties.

b. The sale by PSALM of the NPC generation assets and other real

properties to winning bidders, is subject to Value-added Tax (VAT);

c. In 2005, Republic Act No. 9337 or the R-VAT law was enacted. RA 9337 imposed 12 per cent Value-added tax (VAT) on the sale of electricity, except for the sale of electricity sourced from renewable resources such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy resources, which is subject to zero percent rate VAT. Thus, the sale by PSALM of generated power shall be subject to VAT at 12 per cent or zero percent rate as may be applicable.

d. Moreover, BIR Revenue Regulations (RR) No. 16-2005 was

accordingly amended by BIR RR 04-2007 and subjected the sale of real properties not primarily held for sale or for lease, but used in business.

II. The sale by PSALM of the NPC generation assets and other real properties

is subject to Documentary Stamp Tax (DST). Pursuant to Section 196 of the Tax Code of 1997, the sale of real properties by PSALM will be subject to DST at the rate of ₱15 for every ₱1,000 based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) thereof, whichever is higher. When one of the contracting parties is the Government, the tax to be imposed shall be based on the actual consideration subject to the proviso that, where one party to the transaction is exempt, the other party shall pay the tax. (Section 173 of the Tax Code of 1997)

Accordingly, the sale of the NPC generation assets and other real properties by PSALM pursuant to the privatization will be subject to DST based on the fair market value or the actual consideration that PSALM will receive, whichever is higher.

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The rental income of PSALM from the NPC generation assets and other real properties, prior to its sale to winning bidders, is subject to income tax and VAT. After the transfer of the NPC generation assets and other real properties to PSALM but prior to the privatization, PSALM enters into contracts of lease with private entities where the subject of the lease are the NPC generation assets and other real properties transferred to PSALM. The income received by PSALM from the lease is subject to corporate income tax provided under Section 27(A) of the Tax Code of 1997. Thus, while no income tax is due on PSALM on its mandate to sell the NPC generation assets and other real properties to winning bidders, revenues derived by PSALM from its leasing activities are nevertheless subject to income tax. Moreover, gross receipts of PSALM from the lease of NPC transferred assets and other assets are deemed in the ordinary course of trade or business, hence, subject to VAT under the Tax Code of 1997.

III. On the Operation of the Generation Facilities

a. Income and Withholding Tax

Currently, government-owned and/or controlled corporations (GOCCs) are now subject to income tax pursuant to Section 27 (C) of the Tax Code except for the four (4) government corporations specifically enumerated therein. PSALM is not one of the exempt GOCCs under the said provision of the Tax Code of 1997.The operation by PSALM of the NPC assets transferred to it is not its principal purpose but only incidental to its mandate to privatize the generating plants of NPC in order to avoid a massive interruption in the supply of electricity. In this regard, any income derived therefrom is subject to income tax imposed under Section 27(A) and (E) of the Tax Code of 1997.

b. Value-added Tax

Since the sale of the electricity and sale of service by PSALM are deemed made in the course of its business, the same is subject to VAT under Section 108 of the Tax Code of 1997 (as amended by RA 9337).

IV. Miscellaneous Activities

Other income/receipts derived by PSALM from miscellaneous activities such as forfeiture of performance bonds, interest income from persons other than the winning bidders, and from other activities not related with its mandate are subject to all applicable taxes under the Tax Code of 1997.

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V. Real Property Tax The amount due as Real Property Tax (RPT) is determined based on the plants’ category, whether it is classified as an owned and/or operated or an IPP plant. After determining this, PSALM refers to relevant provisions of the LGCP for owned and/or operated plants, while it refers to Executive Order No. 27 s. 2011 (EO 27) for IPP plants. There is a particular treatment for IPP plants. Following the Supreme Court ruling that the taxable entity is the IPP, the RPT billings were directly forwarded to the IPP by the concerned LGUs using a maximum of 80 per cent assessment level for all machineries and equipment pursuant to the Local Government Code of the Philippines (LGCP). However, based on the Purchase Power Agreement entered into by and between NPC and the IPP, the entity responsible for the payment of RPT is NPC. As such, PSALM, as the entity created by law to assume the assets and liabilities of NPC, settled the RPT liabilities of the IPPs upon the instruction of the PSALM Board that RPT covering power generation facilities of IPPs under Build-Operate-Transfer contracts must be settled within the parameters of Executive Order No. 27 s. 2011 (EO 27), i.e., the tax due shall be computed based on an assessment level of fifteen per cent of the fair market value of the property, machinery and equipment depreciated at the rate of 2 percent per annum, less any amounts paid, while all fines, penalties and interest on deficient RPT shall be condoned. Hence, settlements of all IPP-related RPT was made under the framework of EO 27, with the IPP remitting in advance the RPT payment to the LGUs and correspondingly reimbursed by PSALM pursuant to the terms and conditions set forth in the Reimbursement Agreement entered into by and between PSALM and the IPP. On the other hand, the RPT payments remitted to the respective LGUs for owned and/or operated plants were based on the provisions of Section 218 (d) and Section 234 (c) and (e) of the LGCP, which categorically provided that the assessment level for GOCCs engaged in the generation and transmission of electric power is at 10 per cent, and that machineries and equipment that are actually, directly, and exclusively used in the generation and transmission of electric power, and those used for pollution control and environmental protection must be exempted, respectively.

Bonds Payable Bonds payable are presented net of unamortized discount and are revalued at year-end to reflect Philippine peso exchange rate prevailing as of the end of reporting date.

Revenue Recognition Revenue/gain from sale of the generation plants is recognized in full upon receipt of cash payment. The sale price is payable in cash or on installment. Normal terms for installment is 40% cash upfront and the 60 per cent balance payable in 14 equal

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semi-annual payments at an agreed interest. The 60 per cent deferred payment is recorded as Asset Sale Receivable. Gain from the privatization of IPPs is recorded as Other Deferred Credits – Unearned Finance Income. The earned portion will subsequently be recorded as Finance Income over the life of the Administration Agreement. Other revenues are recognized when it is probable that future economic benefits will be received and such future benefits can be measured reliably.

Foreign Currency Transactions The accounting records of the Corporation are maintained in Philippine pesos. Transactions denominated in foreign currencies are translated into Philippine pesos at exchange rates prevailing on the transaction dates in accordance with PAS 21, “The Effects of Changes in Foreign Exchange Rates”, which requires that a foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of transaction. The Corporation translates its foreign currency-denominated deposits and loans at year-end rates in accordance with PAS 21, which requires foreign currency monetary items to be translated at end of reporting date using the closing rate. The resulting gains and losses from the exchange differences are recognized in profit or loss. Year-end foreign currency exchange rates are as follow:

2014 2013

Philippine Peso (P) : US Dollar ($) 44.6170 44.4140

Philippine Peso (P) : Japanese Yen (Y) 0.3706 0.4239

Philippine Peso (P) : Korean Won (KRW) 0.0406 0.0419

Philippine Peso (P) : Euro (EUR) 54.3390 60.8161

Subsidiary As a wholly owned subsidiary of PSALM, TransCo remits its income for the period to the former thru declaration of dividend. PSALM, upon knowledge of its right over those dividends been established, recognizes dividend income in its Statement of Comprehensive Income for the period.

Assumption and Condonation of Rural Electric Cooperatives’ (REC) Loans In line with the EPIRA, a Memorandum of Agreement was entered into by and between the National Electrification Administration (NEA) and PSALM on 03 October 2003 to implement the assumption and condonation by PSALM of duly audited REC loans. The basis in recording the amount of REC loans to be assumed by PSALM Corporation is the initial amount recorded by the NEA, confirmed by the REC and validated by the Commission on Audit (COA). This amount is subsequently credited with the actual amount audited condoned and paid by PSALM to NEA. This condonation will benefit the consumers in terms of reduced electricity rates and

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improved services by the electric cooperatives as well as NPC/PSALM in terms of making current settlement of electricity bills with the electric cooperatives.

Administration of the Universal Charge PSALM administers the Special Trust Funds created in accordance with the Guidelines on the Remittance and Disbursements duly promulgated by PSALM Corp., concurred by the Department of Finance (DOF) and approved by the Energy Regulatory Board as provided for in the EPIRA. PSALM maintains separate books of accounts for these Special Trust Funds and records.

Government Grants (Subsidy from National Government) An unconditional government grant is recognized in Statement of Comprehensive Income as other income when the grant becomes receivable. A conditional government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies:

(a) there is a change in contractual terms, other than a renewal or extension of the arrangement;

(b) a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

(c) there is a change in the determination of whether fulfillment is dependent

on a specific asset; or

(d) there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gives rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b).

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Rate-Regulated Activities Rate regulation is the setting by regulatory bodies or governments of prices that can be charged to customers for services or products through regulations, often where an entity has a monopoly or dominant market position that gives it significant market power. In the case of PSALM, this was applied to the treatment of the Universal Charge for Stranded Contract Cost. IFRS 14, Regulatory Deferral Accounts, permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required. The objective of IFRS 14 is to specify the financial reporting requirements for 'regulatory deferral account balances' that arise when an entity provides good or services to customers at a price or rate that is subject to rate regulation. IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and has recognized amounts in its previous GAAP financial statements that meet the definition of 'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory liabilities').

Regulatory Assets (Current) - Carrying amount as of the balance sheet date of capitalized costs of regulated entities that are expected to be recovered through revenue sources within one year or the normal operating cycle, if longer. Such costs are capitalized if they meet both of the following criteria: a. It is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for ratemaking purposes. b. Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of similar future costs. If the revenue will be provided through an automatic rate-adjustment clause, this criterion requires that the regulator's intent clearly be to permit recovery of the previously incurred cost.

Regulatory Assets (Non-Current) - Carrying amount as of the balance sheet date of capitalized costs of regulated entities that are not expected to be recovered through revenue sources within one year or the normal operating cycle if longer.

Regulatory Liabilities (Current) - Carrying amount as of the balance sheet date of capitalized costs of regulated entities that are expected to be incurred within one year or the normal operating cycle, if longer.

Regulatory Liabilities (Non-Current) - Carrying amount as of the balance sheet date of capitalized costs of regulated entities that are not expected to be incurred through within one year or the normal operating cycle if longer.

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IFRS 14 provides an exemption from paragraph 11 of PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when an entity determines its accounting policies for regulatory deferral account balances. Paragraph 11 of PAS 8 requires an entity to consider the requirements of IFRSs dealing with similar matters and the requirements of the Conceptual Framework when setting its accounting policies. The effect of the exemption is that eligible entities can continue to apply the accounting policies used for regulatory deferral account balances under the basis of accounting used immediately before adopting IFRS ('previous GAAP') when applying IFRSs, subject to the presentation requirements of IFRS 14. Entities are permitted to change their accounting policies for regulatory deferral account balances in accordance with PAS 8, but only if the change makes the financial statements more relevant and no less reliable, or more reliable and not less relevant, to the economic decision-making needs of users of the entity's financial statements. However, an entity is not permitted to change accounting policies to start to recognize regulatory deferral account balances. Improvements to Philippine Financial Reporting Standards (PFRS)/Financial Reporting Standards Council (FRSC)

The adoption of the following amendments resulted in changes to accounting policies but did not have significant impact on the financial position and performance of the Corporation.

PAS 1, Presentation of Financial Statements, clarifies that an entity may

present an analysis of each component of other comprehensive income maybe either in the statement of changes in equity or in the notes to the financial statements.

PFRS 7, Financial Instruments - Disclosures, intends to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context.

PFRS 12, Disclosure of Interests in Other Entities, contains the

disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e., joint operations or joint ventures), associates and/or unconsolidated structured entities, aiming to provide information to enable users to evaluate the nature of, and risks associated with, an entity’s interests in other entities; and the effects of those interests on the entity’s financial position, financial performance and cash flows.

Presentation of Items of Other Comprehensive Income (Amendments to PAS

1, Presentation of Financial Statements). The amendments: (a) require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss; (b) do not change the existing option to present profit or loss and other comprehensive income in two statements; and (c) change the title of the

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statement of comprehensive income to statement of profit or loss and other comprehensive income. However, an entity is still allowed to use other titles. The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other PFRS continue to apply in this regard.

PFRS 13, Fair Value Measurement, replaces the fair value measurement

guidance contained in individual PFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other PFRS. It does not introduce new requirements to measure assets or liabilities at fair value nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards.

The Corporation will adopt the following new or revised standards, amendments to standards and interpretations on the respective effective dates or as applicable:

PFRS 10, Consolidated Financial Statements, introduces a new

approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. An investor controls an investee when: (a) it is exposed or has rights to variable returns from its involvement with that investee; (b) it has the ability to affect those returns through its power over that investee; and (c) there is a link between power and returns. Control is reassessed as facts and circumstances change. PFRS 10 supersedes PAS 27, Consolidated and Separate Financial Statements (2008). The new standard is effective for annual periods beginning on or after 01 January 2013.

PAS 19, Employee Benefits (amended 2011), includes the following

requirements: (a) actuarial gains and losses are recognized immediately in other comprehensive income; this change will remove the corridor method and eliminate the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which is currently allowed under PAS 19; and (b) expected return on plan assets recognized in profit or loss is calculated based on the rate used to discount the defined benefit obligation. The adoption of the amended or revised standard is required for annual periods beginning on or after 01 January 2013.

PFRS 9 , Financial Instruments (2009) is the first standard issued as part of

a wider project to replace PAS 39. PFRS 9 (2009) retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The guidance in PAS 39 on impairment of financial assets and hedge accounting continues to apply. Prior periods need not be restated if an entity adopts the standard for reporting periods beginning before 01 January 2012. PFRS 9 (2010) adds the requirements related to the classification and measurement of financial liabilities, and derecognition of financial assets and liabilities to the

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version issued in November 2009. It also includes those paragraphs of PAS 39 dealing with how to measure fair value and accounting for derivatives embedded in a contract that contains a host that is not a financial asset, as well as the requirements of Philippine Interpretation - IFRIC 9, Reassessment of Embedded Derivatives. The adoption of the new standard is required for annual periods beginning on or after 01 January 2015.

IFRS 14, Regulatory Deferral Accounts was issued on 30 January 2014, and is effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2016.

4. CASH AND CASH EQUIVALENTS

This account consists of the following:

2014 2013

Cash-Collecting Officer 978,780 0

Cash-Disbursing Officers 0 137,353

Cash in Bank-Local Currency, CA 2,739,575,853 3,685,562,452

Cash in Bank-Local Currency, TD 51,963,079,883 77,885,580,114

Cash in Bank-Foreign Currency, SA 1,141,243,328 703,136,572

Cash in Bank-Foreign Currency, TD 617,376,194 1,857,828,340

Cash-Bangko Sentral ng Pilipinas 10,325,347 10,278,368 56,472,579,385 84,142,523,199

Cash-Bangko Sentral ng Pilipinas pertains to the proceeds from PSALM’s bond exchange in 2009 deposited with the bank in compliance with BSP Monetary Board Resolution No. 1720 dated 01 December 2009 and pursuant to Section 113 of Republic Act (RA) No. 7653, (The New Central Bank Act), dated 14 June 1993, which states:

“The Bangko Sentral shall be the official depository of the Government, its political subdivisions and instrumentalities as well as of government-owned or controlled corporations and, as a general policy, their cash balances should be deposited with the Bangko Sentral, with only minimum working balances to be held by government-owned banks and such other banks incorporated in the Philippines as the Monetary Board may designate, subject to such rules and regulations as the Board may prescribe: Provided, That such banks may hold deposits of the political subdivisions and instrumentalities of the Government beyond their minimum working balances whenever such subdivisions or instrumentalities have outstanding loans with said banks.”

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5. POWER RECEIVABLES

Power receivables consist of trade collectibles for the power generation charges, including ancillary service charges and restructured power receivables, net of refunds to power customers as a result of ERC decisions. It pertains to the outstanding balances of power customers transferred by NPC to PSALM, which is subject to on-going validation and confirmation. Its main composition includes regular power accounts, restructured power accounts, deferred accounting adjustments (DAA), and accounts under dispute/delinquent. The basic power generation rate is based on a return-on-rate-base (“RORB”) method with time-of-use pricing. The RORB method takes a ratio (calculated as a percentage of investment in facilities and working capital necessary for day-to-day operations, or “rate base”) of rate base to determine the return on rate base that will be considered together with the operating costs in determining the generation charge. This account is composed of receivables from the following entities:

2014 2013

Utilities 66,072,454,707 66,509,394,828 Cooperatives 15,872,678,674 15,388,870,291 Industries 6,917,856,797 7,330,392,376 Government 64,799,268 78,268,871 Others 0 815,676,588

Total 88,927,789,446 90,122,602,954 Less: Allowance for bad debts 37,329,752,442 35,919,121,540 Power Receivables, net of allowance 51,598,037,004 54,203,481,414 Add: Recovery/(Refunds) 21,386,078,727 28,424,147,866

Output tax receivable 5,994,179,225 6,812,822,989 78,978,294,956 89,440,452,269

Current portion: Power Receivables 40,847,086,107 43,193,791,367 Less: Allowance for bad debts* (9,629,320,955) (8,285,072,278)

31,217,765,152 34,908,719,089 Recovery/Refunds 21,386,078,727 28,424,147,866 Output tax receivable 5,994,179,225 6,812,822,989 58,598,023,104 70,145,689,944

No allowance for bad debts provided for Recovery/(Refunds) and Output tax receivable.

Non-current portion: Disputed Accounts 43,879,796,578 43,774,590,963 Less: Allowance for bad debts* (27,700,431,487) (27,634,049,262)

16,179,365,091 16,140,541,701 Add: Restructured Accounts 4,200,906,761 3,154,220,624

20,380,271,852 19,294,762,325

.

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As of the end of 2014, Power receivables, net of allowance for bad debts, decreased by ₱2.6 billion or 5 percent from ₱54.2 billion in 2013 to ₱51.6 billion (refer to the table below for easy comparison).

In Billion Pesos

2014 2013 Inc (Dec) %

Current 31.2 34.9 (3.7) -11% Non-Current 20.4 19.3 1.1 -6% Total 51.6 54.2 (2.6) -5%

For the year, collection efficiency for current sales is 95.66%, which is equivalent to around ₱35.89 billion from the current power sales of ₱37.52 billion. On the other hand, collection efficiency for non-current power sales is 5.99% which is equivalent to around ₱1.99 billion out of ₱33.26 billion outstanding power receivables. Also, PSALM was able to bill and collect DAA amounting to ₱6.91 billion, leaving a balance of ₱21.38 billion as of 31 December 2014.

For the year 2014, total restructured power accounts amounted to ₱2.04 billion representing five (5) delinquent customers. This brings the total restructured accounts to ₱13.40 billion in 2014 from ₱11.36 billion in 2013. Total collections made on the restructured accounts as of the year 2014 amounted to ₱1.31 billion. As of 31 December 2014, balance of the restructured accounts amounted to ₱7.58 billion. Since the implementation in 2010 of the Department of Energy Circular Nos. 2010-05-0006 and 2010-08-0010, PSALM has restructured a total of sixty-seven (67) overdue accounts amounting to ₱13.4 billion with a corresponding interest of ₱2.2 billion. Of the sixty-seven (67) delinquent customers, forty-one (41) have already fully settled their restructured power accounts.

Aside from the restructured accounts, sixty-five (65) delinquent customers have settled their outstanding obligation to PSALM amounting to ₱1.58 billion via cash payment and/or credit memoranda as of 31 December 2014. For year 2014, thirteen (13) delinquent customers have settled their outstanding obligation amounting to ₱1.085 billion. Of this amount, the total adjustments was ₱0.79 billion, as a result of reconciliation and/or court order on the liquidation of assets. MERALCO Receivable under Dispute A portion of the non-current consists of power receivables from MERALCO that are under dispute amounting to ₱41.7 billion (including interest). In a ruling dated 13 December 2013, the Supreme Court (SC) expressed its agreement with an earlier decision of the Court of Appeals denying the petition of the Office of the Solicitor General (OSG) for review of the 2003 settlement agreement between MERALCO and NPC. By the said settlement agreement, MERALCO’s electricity dues to NPC from 2002 to 2004 was reduced to ₱14.3 billion. The SC cited that, “the Pasig Regional Trial Court did not commit a grave abuse of discretion when it waived the Office of the Solicitor General’s participation”. “The waiver appears to have been caused by the deliberate refusal of the counsel to participate in the proceedings.”

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Now, MERALCO and NPC are awaiting ERC’s decision as to their joint application for the approval of the settlement provision to allow the pass-through to MERALCO customers the settlement amount payable to NPC.

6. RECEIVABLE FROM IPPAs

Pursuant to Section 51 of the EPIRA, PSALM Corporation shall take title to and possession of the NPC IPP contracts and to appoint, by means of a public bidding, qualified independent entities who shall act as the IPP Administrators (IPPAs) to administer, conserve, and manage the contracted energy output of NPC/PSALM IPP contracts. As of 2010, PSALM has five (5) existing IPPA Agreements with the following Administrators for the following plants:

IPPA Power Plant

Cooperation Period

San Miguel Energy Corporation (SMEC) Sual 01 Oct 2009 – 01 Oct 2024

Therma Luzon, Inc. (TLI) Pagbilao 01 Oct 2009 – 01 Aug 2025

Strategic Power Dev. Corp. (SPDC) San Roque 26 Jan 2010 – 26 Apr 2028

Amlan Hydro Power, Inc. (AHPI) Bakun 26 Jan 2010 – 26 Jan 2026

South Premiere Power Corp. (SPPC) Ilijan 26 Jun 2010 – 26 Jun 2022

From the privatization of these BOT IPP plants, PSALM receives Monthly Payments scheduled in accordance with the agreed Monthly Amortization Schedule. This represents the amount paid for the administration of the plant. In addition, PSALM also receives Generation Payments that cover the actual monthly generation of a particular power plant. As of 31 December 2014, PSALM has receivable from the above-listed IPPAs

totaling ₱361.63 billion, arising from both Monthly Payments and Generation

Payments. Of this amount, ₱310.10 billion is non-current, while the remaining ₱51.54 billion is current, as shown below:

2014 2013

IPPA receivable 361,634,663,617 380,606,058,514

Less: Non-current portion 310,098,939,526 337,883,897,045

Total IPPA receivable - current 51,535,724,091 42,722,161,469

The composition of the ₱310.10 billion non-current portion of the Total IPPA receivable is as follows:

IPPA Power Plant Amount

San Miguel Energy Corporation (SMEC) Sual 102,301,301,001

Therma Luzon, Inc. (TLI) Pagbilao 77,646,448,744

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Strategic Power Dev. Corp. (SPDC) San Roque 59,676,951,383

South Premiere Power Corp. (SPPC) Ilijan 51,263,097,460

Amlan Hydro Power, Inc. (AHPI) Bakun 19,211,140,938

Total Non-Current 310,098,939,526

On the other hand, the ₱51.54 billion current portion of Total IPPA receivable is composed of the following:

IPPA Monthly Payments Generation Payments Total

SMEC 9,040,417,838 288,750,106 9,329,167,944 TLI 6,390,802,830 540,339,047 6,931,141,877 SPDC 4,505,705,836 136,386,604 4,642,092,440 SPPC 6,590,783,072 22,181,167,032 28,771,950,104 AHPI 1,845,333,588 16,038,138 1,861,371,726

Total Current 28,373,043,164 23,162,680,927 51,535,724,091

The above Generation Payments comprise 45% of the current Total IPPA receivable. Of which amount the bulk is due from SPPC with the following details:

Unpaid billings for the period June 2010 to October 2014, including disputed amount of ₱5.66 billion ₱ 13,465,689,274

Billings for the period November to December 2014 due in 2015 3,616,561,196

Subtotal 17,082,250,470 Add: Other charges 5,098,916,562

Total ₱ 22,181,167,032

7. UNIVERSAL CHARGE – SCC RECEIVABLE This account represents the approved amount of Stranded Contract Cost (SCC) that will be recovered through the Universal Charge (UC). Its approval in 2013 brought about the creation of two (2) new accounts— the Universal Charge–SCC Receivables, representing the approved amount of SCC to be recovered through UC, and the Deferred Income from UC-SCC. During the year, this account decreased by 25% due to collections totaling ₱11.7 billion. Below is the breakdown of the account:

2014 2013

Total Universal Charge –SCC Rec. 53,851,000,000 53,851,000,000

Less: Collected in 2013 7,743,886,000 7,743,886,000

Collected in 2014 11,700,828,000 0

Uncollected UC-SCC 34,406,286,000 46,107,114,000

Less: Current Portion 18,699,744,333 16,937,822,333

Non – Current Portion 15,706,541,667 29,169,291,667

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8. DUE FROM GOCCs AND NGAs

The non-moving accounts were reclassified to Capital From Asset-Debt Transfer Bureau of Internal Revenue (BIR) This account pertains mostly to deferred taxes and duties corresponding to taxes paid under protest in the amount of P10.867 billion, and input taxes of P38.5 billion.

San Roque Multi-Purpose Project

The ₱13 billion advanced by NPC as of 31 December 2014 to the San Roque Multi-Purpose Project (SRMP) arose from a Memorandum of Agreement (MOA) in 1998

2014 2013

Due from NGAs Bureau of Internal Revenue (BIR) 50,419,707,259 59,295,623,030 Dept. of Finance/Bureau of Treasury

(San Roque Multi-purpose Project/Advances for BNPP) 12,963,274,560 19,662,419,928

Dept. of Budget and Management 1,115,347,953 1,146,104,025 Department of Energy 1,988,732 27,897 Bureau of Customs 0 1,554,825,393 Department of National Defense 0 22,712,634 Court of First Instance 0 13,602,054 Metropolitan Manila Dev. Authority 0 4,245,469 Dept. of Public Works & Highways 0 600,000

Phil. Nuclear Research Institute 0 309,735 Supreme Court of the Philippines 0 64,011 Commission on Audit 0 14,324 Nat’l. Comm. on Indigenous People 0 9,658

64,500,318,504 81,700,558,158

Due from GOCCs

Metropolitan Waterworks and Sewerage System (MWSS)

5,198,293,631

5,198,293,631

National Transmission Corporation 4,761,564,618 4,804,540,336 NPC – for reconciliation 0 2,642,500,788 Advances to Phil. Geothermal Inc. 0 58,425,588 PHIVIDEC Industrial Authority 0 38,037,650 Government Service Insurance System (GSIS) 0 34,987,903 Clark Development Corporation 0 2,422,084 National Electrification Admin. 0 451,586 Others 0 3,242,634

9,959,858,249 12,782,902,200

Due from LGUs 0 4,815,103

74,460,176,753 94,488,275,461

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by and between the Department of Finance (DOF), Department of Budget and Management (DBM), Department of Environment and Natural Resources (DENR), Department of Public Works and Highways (DPWH), National Irrigation Administration (NIA), and NPC. As compared to 2013, this shows a reduction of ₱6.7 billion, mostly arising from the partial payment of said advances to SRMP. The SRMP is a power project of NPC approved by the National Economic Development Authority (NEDA) as one of the projects for development by the Government. San Roque is located in San Manuel, at the lower Agno River in Pangasinan. The project was bid out by NPC on a Build-Operate-Transfer (BOT) basis, which gave rise to a Power Purchase Agreement (PPA) between NPC and the Consortium (Marubeni Corporation, Sithe Philippine Holdings, Ltd., and Italian Thai Development Public Company, Limited). As signatory to this PPA, NPC becomes responsible for the disbursement of the cost of the non-power component of the project estimated at $400 million. SRMP is the non-power component of the project. It is a project serving several purposes: (i) annual generation of 1000 GWh energy; (ii) irrigation of about 87,000 hectares service areas in Pangasinan; (iii) flood forecasting and control; and (iv) water quality and environmental protection. As the project encompasses several functional areas, its implementation was a multi-agency effort with NPC tasked to lead in the project development. To ensure that the agencies meet their obligations in the implementation of the project and the terms of the PPA, the agencies entered into a MOA. The MOA provided, among others, that:

1. DOF shall (i) secure the financing of the $400 million for disbursement to the

Consortium through NPC, (ii) ensure the timely transfer of the $400 million fund to NPC, and (iii) ensure that the advances to be made by NPC for the project’s non-power component shall not be offset against any receivables of the Government from NPC;

2. NIA, DENR, DPWH shall (i) include SRMP as a priority project in their programs, (ii) cause the inclusion in their annual budget, over and above its ceiling, their share in the $400 million non-power cost, (iii) give authority to DBM and BTr to remit funds directly to NPC’s account; (iv) coordinate with NPC and the Consortium in the implementation of project matters under their jurisdiction;

3. DBM shall ensure the inclusion of each agency’s contribution to SRMP, as

defined in the MOA, in the agencies’ respective annual budgets from 1999 to 2000; and

4. NPC shall, among others, disburse to the Consortium the $400 million non-

power component funding in accordance with the schedule.

On September 1998, the following amendments were made to the above MOA:

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1. NPC to borrow for the $400 million non-power component of the project, with repayments to NPC made over the same debt service period as the said loan;

2. DOF shall secure the full government guarantee for the NPC financing of the $400 million non-power component of SRMP; and

3. Longer spread of the agency’s budget allocation for the contribution to the $400 million non-power component (from years 1999 to 2000 to years 1999 to 2014).

Metropolitan Waterworks and Sewerage System (MWSS) The amount represents energy and capacity losses incurred by the Angat Hydroelectric Power Plant (AHEPP) due to the implementation of MWSS Angat Water Supply Optimization Project (AWSOP). The Memorandum of Understanding between NPC and MWSS on 09 February 1990 provides that MWSS shall compensate NPC the energy and capacity losses, if any, which the latter may incur as a result of the operation of the former’s Auxiliary Unit No. 5.

9. OTHER RECEIVABLES

The following comprise this account:

2014 2013

Bond swap receivable 572,221,787 449,978,425 Interest receivable 105,847,611 113,916,690 Due from officers & employees 882,970 1,178,322 Lease receivable 0 16,361,519 Other receivables 5,411,760,609 4,688,110,038

6,090,712,977 5,269,544,994 Allowance for bad debts (1,650,066,116) (825,033,058)

4,440,646,861 4,444,511,936

Interest receivable represents interest income accruing on short-term placements/time deposits with authorized government depository banks.

Other receivables pertain to transferred accounts of NPC from various private corporations, government agencies, suppliers and persons. The account is subject to validation upon submission of supporting documents/further details by NPC.

10. ASSETS HELD FOR SALE This account represents assets to be disposed and taken out from the property, plant and equipment account, which are identified based on the Corporation’s work plan for the year. However, given the extensive time that it takes to privatize certain assets, particularly power plants, these assets are constantly subjected to wear and tear as it continues operations while awaiting privatization. Hence, until turnover of

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plants could reasonably be ascertained, assets marked for disposal and/or sale will be kept in Property, Plant and Equipment (PPE) to enable appropriate recognition of depreciation. As a result, no amount was recorded under assets held for sale because there was no successful bidding recently conducted for remaining plants.

11. OTHER CURRENT ASSETS

This account consists of the following:

2014 2013

Assets in trust with NPC 5,428,990,359 5,370,368,384 Inventory and prepaid expenses 2,820,280,178 2,851,842,591 Universal Charge 2,072,251,550 1,501,369,911 Advances to contractors 193,475,897 48,386,161 Guaranty deposits 22,606,952 953,287,690 Other advances 11,122,063 18,162,150 10,548,726,999 10,743,416,887

Assets in trust with NPC represents the current assets held by NPC as part of its working capital as “Operator” under the Operations and Management Agreement with PSALM.

Inventory and prepaid expenses consists of the following:

2014 2013

Inventory

Fuel/Bunker Stock 2,707,473,486 2,481,886,828

Office Supplies 2,962,873 2,853,816 Prepaid expenses

Real Property Tax* 102,168,077 121,192,986 Insurance 4,399,981 241,897,214 Rent 1,789,296 4,011,747 Security deposit 1,486,465 0

2,820,280,178 2,851,842,591

*Real property taxes paid in advance for CY 2015 as imposed by various local government units. Guaranty deposits include the marginal and guaranty deposits for Letters of Credit and for the Nomura bonds issuance. Universal Charge (UC) refers to the charge imposed on all electricity end-users for various purposes. As of end of 2014, three (3) UC components are being collected by the collecting entities from electricity end-users, namely: (1) UC for Missionary Electrification (UC-ME); (2) UC for Environmental Charge (UC-EC), pursuant to the approval made by the Energy Regulatory Commission starting on 20 December 2002 and 02 April 2003, respectively; (3) UC for Stranded Contract Cost (UC-SCC),

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pursuant to the approval made by the Energy Regulatory Commission on 28 January 2013; and (4) UC for Renewable Energy Developer’s Cash Incentive (REDCI).

As at year-end, the UC consists of the following:

2014 2013

Special Trust Fund (STF) 1,084,792,142 812,254,534

Receivables 987,459,408 689,115,377

2,072,251,550 1,501,369,911

Special Trust Fund pertains to remittances made by the collecting entities covering UC-ME, UC-EC, and UC-SCC. Bulk of the STF balance corresponds to UC-EC, which has been held in abeyance pending approval by the ERC of the petition filed by NPC. Receivables, on the other hand, pertain to collections made by the collecting entities other than UC-SCC that are due for remittance to PSALM as administrator the following month.

Transactions affecting the UC are as follows (cumulative) since March 2003:

2014 2013

Remittances by collecting entities (CEs):

For missionary electrification 40,897,587,254 32,827,953,000

Stranded Contract Cost 19,486,639,165 7,772,533,509

For watershed rehabilitation 1,482,471,823 1,329,389,857

Others 226,080 226,081

61,866,924,322 41,930,102,447 Interest earnings 201,621,286 197,951,742

62,068,545,608 42,128,054,189 Releases to NPC (60,983,753,466) (41,315,799,655)

STF balance 1,084,792,142 812,254,534

Receivables from CEs 986,937,765 688,905,644

Interest receivable 521,643 209,733

2,072,251,550 1,501,369,911

12. PROPERTY, PLANT AND EQUIPMENT This consists of PSALM-acquired and NPC-transferred property, plant and equipment, as follows:

PSALM - acquired Furniture, Fixtures/

Equipment Transportation

Equipment

Total

Cost

01 January 2014 189,365,224 22,948,718 212,313,942 Additions/Adjustments 20,336,081 2,875,000 23,211,081

Balance, 31 December 2014 209,701,305 25,823,718 235,525,023

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Accumulated Depreciation

01 January 2014 137,952,450 14,206,093 152,158,543 Provision/ Adjustment 6,759,869 1,749,605 8,509,474

Balance, 31 December 2014 144,712,319 15,955,698 160,668,017

Carrying amount, 31 December 2014 64,988,986 9,868,020 74,857,006

Cost 189,365,224 22,948,718 212,313,942 Accumulated Depreciation 137,952,450 14,206,093 152,158,543

Carrying amount, 31 December 2013 51,412,774 8,742,625 60,155,399

NPC-transferred asset:

PARTICULARS Utility Plants

Non - Utility Plants

Electric Plants Leased to

Others

Privatized IPP Administration

Excluded Assets from Privatized

Plants

Other Utility Plants

Total

Cost 01 January 2014 79,163,161,036 0 13,842,183,328 0 0 2,007,340,983 95,012,685,347 Additions/Adjustments 11,538,851,453 28,600,859,998 3,018,253,281 5,486,008,133 0 48,643,972,865

31 December 2014 90,702,012,489 28,600,859,998 13,842,183,328 3,018,253,281 5,486,008,133 2,007,340,983 143,656,658,212

Accumulated Depreciation 01 January 2014 51,748,020,536 0 13,205,617,007 0 0 425,953,162 65,379,590,705 Provision/Adjustment 11,191,703,648 22,707,013,195 - 455,620,939 3,358,172,651 - 37,712,510,433

31 December 2014 62,939,724,184 22,707,013,195 13,205,617,007 455,620,939 3,358,172,651 425,953,162 103,092,101,138

Carrying Amount – 31 December 2014 27,762,288,305 5,893,846,803 636,566,321 2,562,632,342 2,127,835,482 1,581,387,820 40,564,557,074

Cost 79,163,161,036 0 13,842,183,328 0 0 2,007,340,983 95,012,685,346 Accumulated Depreciation 51,748,020,536 0 13,205,617,007 0 0 425,953,162 65,379,590,705

Carrying Amount – 31 December 2013 27,415,140,500 0 636,566,321 0 0 1,581,387,820 29,633,094,641

In addition to the foregoing items, PSALM included an amount representing Construction Work-In-Progress (CWIP) amounting to ₱504.150 million for the on-going uprating project of Agus 6 Units 1 and 2. This will form part of the NPC-transferred property, plant and equipment once the project is completed and unitized.

In summary the total property, plant and equipment, net of accumulated depreciation, is as follows:

2014 2013

Carrying amounts:

PSALM -acquired 74,857,006 60,155,399

NPC – transferred asset 40,564,557,074 29,633,094,641

Construction Work-In-Progress 504,150,483 0

41,143,564,563 29,693,250,040

13. BOT ELECTRIC PLANTS UNDER CAPITAL LEASE

This account represents the total computed capacity fees of remaining Build-Operate-Transfer (BOT) projects for the duration of the cooperation period, net of accumulated amortization, as follows:

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Plant Total Capacity Fee Accumulated Amortization Net

Kalayaan 2 Unit 3 17,387,881,744 4,817,892,233 12,569,989,511 Kalayaan 2 Unit 4 17,387,881,743 4,817,892,233 12,569,989,510 Mindanao Coal Fired I 13,738,656,531 4,533,852,846 9,204,803,685 Mindanao Coal Fired 2 13,660,516,257 4,417,387,398 9,243,128,859

31 December 2014 62,174,936,275 18,587,024,710 43,587,911,565

31 December 2013 62,174,936,275 16,627,917,855 45,547,018,420

14. INVESTMENT IN TRANSCO

This account represents the cost or fair value of investments in TransCo acquired pursuant to EPIRA. It is a reciprocal account adjusted appropriately in the books for draw downs and payments for loans incurred to finance TransCo’s projects, other loan-related transactions such as recognition of interest and gain/(loss) on forex due to revaluation, adjustments and corrections of TransCo’s account balances prior to the asset-debt accounts transfer, and TransCo’s appraisal capital and any movement thereof.

15. RESTRICTED FUND WITH THE BUREAU OF TREASURY This refers to the Fund Management Agreement between PSALM and the Bureau of Treasury dated 06 April 2010. The proceeds of which shall cover the maturing 5-year (Series A) PSAL0515D017 fixed rate retail bond issued on 22 April 2010. As of the end of 2014, this account’s balance has increased by 98% mainly due to additional deposits/placements of ₱6.86 billion plus interest earned of ₱0.09 billion. The entire amount placed into this account was sourced from the collection from NIA/DA/DENR of the advances for the non-power component of San Roque Multi-Purpose Project (SRMP).

16. OTHER NON-CURRENT ASSETS

This account consists of the following:

2014 2013

Stored energy- Leyte A & B 0 5,241,828,596

Others 990,246,200 1,531,282,313

990,246,200 6,773,110,909

Stored energy-Leyte A & B was reclassified to Capital from Asset-Debt Transfer for proper presentation. Others represent accrual guarantee fee and amortization of bond issue cost.

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17. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Below is the breakdown of the account:

2014 2013

Accounts payable: Check vouchers payable 4,249,953,802 4,686,918,458 Accounts payable – others 6,539,940,601 5,900,057,726 Fuel, oil and other oil products 428,050,982 1,114,345,132 Materials, supplies and equipment 422,755 58,163,451 Current portion – fixed O&M payable: Sual 1,559,001,952 1,667,287,289 Pagbilao 1,528,339,417 1,649,885,344 Ilijan 1,207,114,974 1,270,901,998 San Roque 445,762,682 485,496,327 Bakun 48,797,291 49,593,476 Performance/bidders bonds 910,404,621 849,636,506 Interest payable 4,160,668,189 7,420,498,533 Due to officers & employees 55,141,692 46,510,147 Guaranty deposits payable 429,132,915 337,240,549 Trust Liability Other payables:

3,312,455 2,870,455

UC-Renewable Energy Developer’s

Cash Incentive (REDCI) 92,688,984 0

Financial assistance/benefits 0 99,144,505

Suppliers and contractors 1,830,861,156 3,235,853,806

Various 1,159,949 1,543,018

23,490,754,417 28,875,946,720

18. BOT LEASE OBLIGATION

This account pertains to the outstanding balances of the liability set up for capital cost recovery fees of the BOT power plants during the cooperation period indicated in the BOT contracts.

2014 2013

Total lease obligation 258,207,169,213 289,658,397,547

Less non-current portion 228,968,953,797 254,865,465,868

Total BOT Lease Obligation- current 29,238,215,416 34,792,931,679

The following are the details: Name of IPP Power Plant Non- current Current

Team Energy Corp. Pagbilao 78,001,670,250 9,135,330,750 Team Sual Corp. Sual 74,943,536,298 9,249,221,888 KEPCO Ilijan Corp. Ilijan Natural Gas 29,904,429,317 5,048,799,755 San Roque Power Corp. San Roque 15,494,145,590 3,307,829,811 Steag State Power Inc. Mindanao Coal Fired 14,283,734,156 1,034,847,994

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Luzon Hydro Corp. Bakun 9,330,530,125 946,760,031 CBK Power Co. Ltd. Kalayaan 7,010,908,061 515,425,187

228,968,953,797 29,238,215,416

19. LONG-TERM LIABILITIES

This account pertains to outstanding financial obligations, which consist mainly of domestic and foreign borrowings. The details of the account:

2014 2013

Bonds payable 223,324,307,585 231,761,090,950

Loans payable 76,336,885,158 91,097,656,166

Other long-term liabilities 25,318,381,565 35,337,689,699

324,979,574,308 358,196,436,815 Add bond premium 10,060,855 11,670,412 Less bond discount 992,499,200 1,089,588,228

Net 323,997,135,963 357,118,518,999 Less: current portion 22,473,954,861 20,342,593,636

Non-current portion 301,523,181,102 336,775,925,363

On a per bank/creditor basis, the amounts are summarized as follows:

2014 2013

LBP Syndicated Loan 72,262,500,000 73,125,000,000 Bureau of Treasury 63,506,951,806 75,076,023,680 DBP/Morgan Stanley and UBS AG 53,451,166,000 53,296,800,000 HSBC/Deutsche/Morgan 44,527,766,000 44,414,000,000 Bank of New York/JP Morgan Chase

Manhattan 43,408,370,000 46,606,265,000

Deutsche Bank 22,308,500,000 22,207,000,000 ROP Relent US$500M Onshore Dollar

Bonds

14,612,067,500 18,542,845,000 Citibank 4,447,200,000 5,086,800,000 US Bank 4,249,238,085 5,287,380,950 Asian Development Bank 1,157,264,448 1,242,587,958 Instituto de Credito Oficial 479,904,811 530,801,469 Int’l Bank for Reconst. and Development 264,960,622 3,003,564,411 Nordic Investment/Development Fund 181,980,918 238,784,598 Department of Energy 118,381,565 118,381,564 USAID 3,322,553 9,776,442 Kreditanstalt fur Wiederafbau 0 5,660,466,857 Eximbank of Japan 0 1,728,030,266 Japan Bank for International Coop. 0 1,393,658,105 Natixis/Credit National 0 469,851,685 Artigiancassa MCA - Eximbank of Korea 0 158,418,830

324,979,574,308 358,196,436,815

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Add bond premium 10,060,855 11,670,412 Less bond discount 992,499,200 1,089,588,228

Net 323,997,135,963 357,118,518,999

Further details of the account follow:

CREDITOR / PROJECT MATURITIES INTEREST RATES CURR ORIGINAL

CURRENCY PESO

Asian Development Bank

Electricity Market & Transmission Development Project

2009 to 2022 LIBOR + 0.60% USD 25,937,747 1,157,264,448

Int'l Bank for Reconstruction and Development

Bataan Thermal 2 1982 to 2022 Service Charge at 0.75% USD 2,253,584 100,548,158

Transmission Grid Reinforcement Project

2001 to 2016 Cost of Qualified

Borrowings + 0.50% JPY 443,638,597 164,412,464

Instituto de Credito Oficial

200MW Mindanao Barge 2003 to 2023 FIXED at 1.25% USD 10,756,098 479,904,811

Nordic Investment/Development Fund

Leyte-Cebu HV Interconnection Project

2005 to 2034 Service Charge at 0.75% EUR 3,348,993 181,980,918

Bureau of Treasury

Extra High Voltage T/Line Project 1&2

1989 to 2004 FIXED at 3.50% JPY 5,361,445,783 1,986,951,806

ROP Relent USD$500M Onshore Dollar Bonds

General Funding Requirements 2013 to 2023 FIXED at 3.35% USD 327,500,000 14,612,067,500

Deutsche Bank

General Funding Requirements 2016 FIXED at 6.875% USD 500,000,000 22,308,500,000

Citibank

General Funding Requirements 2015 FIXED at 4.65% JPY 12,000,000,000 4,447,200,000

Bank of New York/JP Morgan Chase Manhattan

General Funding Requirements 2016 FIXED at 8.40% USD 160,000,000 7,138,720,000

General Funding Requirements 2028 FIXED at 9.625% USD 300,000,000 13,385,100,000

General Funding Requirements 2020 FIXED at 3.22% JPY 24,750,000,000 9,172,350,000

General Funding Requirements 2022 FIXED at 3.55% JPY 37,000,000,000 13,712,200,000

US Bank

General Funding Requirements 2008 to 2018 FIXED at 5.40% USD 95,238,095 4,249,238,085

Bureau of Treasury

General Funding Requirements 2016 FIXED at 5.875% PhP 6,320,000,000 6,320,000,000

General Funding (Liability management Program)

2015 FIXED at 6.875% PhP 11,322,000,000 11,322,000,000

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General Funding Requirements 2017 FIXED at 7.750% PhP 18,678,000,000 18,678,000,000

General Funding Requirements 2022 FIXED at 6.058% PhP 28,700,000,000 25,200,000,000

USAID

Tiwi Geothermal 1&2 1985 to 2015 FIXED at 3.0% USD 74,468 3,322,553

LBP Syndicated Loan

General Funding Requirements 2011 to 2021 PDST-F + .5% PhP 72,487,500,000 72,262,500,000

Department of Energy

Gas Sale and Purchase Agreement PhP 118,381,565 118,381,565

HSBC/DEUTSCHE/MORGAN

General Funding Requirements 2019 FIXED AT 7.25% USD 998,000,000 44,527,766,000

DBP/Morgan Stanley and UBS AG

General Funding Requirements 2024 FIXED at 7.39% USD 598,000,000 26,680,966,000

General Funding Requirements 2019 FIXED at 7.25% USD 20,986,000 936,332,362

General Funding Requirements 2024 FIXED at 7.39% USD 579,014,000 25,833,867,638

Total 324,979,574,308 Less: Bond Discount 992,499,200 Add: Bond Premium 10,060,855

Total Outstanding Loan, net 323,997,135,963

20. DEFERRED INCOME FROM UC-SCC

Below is the breakdown of the account:

Total Universal Charge – SCC Receivable 53,851,000,000 Less: Earned Portion in 2013 11,218,958,333 Less: Earned Portion in 2014 13,462,750,000

Unearned Portion as of 31 December 2014 29,169,291,667 Less: Current Portion 13,462,750,000

Non – Current Portion 15,706,541,667

On 28 January 2013, the Energy Regulatory Commission (ERC) has arrived at a decision docketed as ERC Case No. 2011-091 RC for the recovery of the National Power Corporation (NPC) Stranded Contract Costs (SCC) of the Universal Charge (UC) filed on 28 June 2011 by PSALM for the year ending 31 December 2010, including stranded cost for the period CYs 2007, 2008, and 2009. (Note 28).

21. ASSUMED RURAL ELECTRIFICATION PROGRAM (REP) LOANS

Section 60 of the EPIRA provides that all outstanding financial obligations of the electric cooperatives (ECs) to National Electrification Administration (NEA) and other government agencies incurred for the purpose of financing the REP shall be assumed by PSALM in accordance with the program approved by the President of the

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Philippines within one (1) year from the effectivity of the Act which shall be implemented and completed within three (3) years from the effectivity of the Act. Section 2, Rule 31 of the Implementing Rules and Regulations (IRR) of the EPIRA states that the assumption covers all outstanding REP-related financial obligations of the ECs as of 26 June 2001. The Act also provides that ERC shall ensure a reduction in the rates of ECs commensurate with the resulting savings due to the removal of the amortization payments of their loans. However, any EC that shall transfer ownership or control of its assets, franchise or operations within five years shall repay PSALM the total debts including accrued interests thereon. To carry out the aforementioned objective and that of Executive Order (EO) No. 119, Restructuring Program for Electric Cooperatives, PSALM and NEA entered into a Memorandum of Agreement (MOA) on 03 October 2003 to lay down the operational legal framework upon which the financial obligations of ECs to NEA shall be lawfully assumed by PSALM. Article IV of the MOA provides that repayment by PSALM to NEA of the assumed loans shall be for the period of 10 years in accordance with the amortization schedule as may be mutually agreed by the parties. The condonation was subject to compliance with certain conditions required under Executive Order (EO) No. 119. On 02 September 2006, EO 460 was issued amending EO 119 by giving retroactive effect to the effectivity of the assumption by PSALM of the rural electrification loan obligations of the ECs to NEA and other government agencies. For the year 2014, PSALM has paid a total of ₱45.6 million out of the ₱18.1 billion assumed rural electrification loans of electric cooperatives (ECs) from the National Electrification Administration (NEA), other government agencies (OGAs) and Local Government Units (LGUs). This brings the total EC loans paid by PSALM to ₱16.2 billion leaving a total outstanding balance of ₱1.805 billion as of 31 December 2014.

2014 2013

Current portion 1,805,161,525 1,850,767,475

22. DUE TO TRANSCO

This account corresponds to the payments received by PSALM from NGCP concerning the concession fees on the TransCo transmission business. The initial amount set up represents the payments received from NGCP for the years 2009-2012. This account will be offset by: (i) any remittances made by PSALM to TransCo; (ii) the receipt of dividends from TransCo; and (iii) the reduction in value of TransCo assets, represented by the amount of depreciation. Movements to this account are accounted as follows:

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2014 2013

Concession fee Principal 113,565,137,625 113,565,137,625 Interest 51,717,680,835 47,112,070,580 Dividend from TransCo (63,775,737,344) (57,677,780,225) Funding for TransCo (50,000,000) (50,000,000)

101,457,081,116 102,949,427,980

23. DUE TO GOCCs AND NGAs

This account consists of the following:

2014 2013

Due to GOCCs Due to NPC 1,979,562,566 1,501,369,911 Due to Philhealth 2,312,854 2,265,979 Due to Pag-ibig 1,075,760 1,074,973 Due to GSIS 144,303 2,293,260 Due to NIA 0 1,034,769 Due to Other GOCCs 0 1,093,919,094

Sub-total 1,983,095,483 2,601,957,986

Due to NGAs Due to the Bureau of Treasury 29,331,786,374 25,516,909,820 Due to BIR 15,112,711,845 25,249,278,077

Sub-total 44,444,498,219 50,766,187,897

Total 46,427,593,702 53,368,145,883

Due to NPC pertains to UC collections for remittance to NPC beneficiaries for (1) UC for Missionary Electrification (UC-ME) and (2) UC for Environmental Charge (UC-EC).

Due to Other GOCCs pertains mostly to transferred accounts from NPC (₱.36 billion)

and Priva Proceeds (₱.73 billion). Due to the Bureau of Treasury corresponds to the advances made by the National Government in payment of the purchased power from NIA-Casecnan, advances for NPC debt servicing including guarantee fee.

24. OTHER LONG-TERM LIABILITIES This account consists of the following:

2014 2013

Liability for the fixed Operation &Maintenance: Pagbilao 13,604,674,121 14,946,898,516 Sual 12,640,061,859 14,013,870,388 Ilijan 7,196,059,808 8,283,644,075

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San Roque 4,971,906,899 5,375,034,485 Bakun 417,418,431 456,809,150 Deferred credits 1,453,987,572 870,801,381

40,284,108,690 43,947,057,995

Liability for the Fixed O&M pertains to the obligation of PSALM to the IPPs for the fixed operating and maintenance expenses of the plants under IPP Administration Agreements. Deferred credits refer mostly to the unearned portion of the rent income from lease of land pertaining to sold plants.

25. ADJUSTMENTS-CAPITAL FROM ASSET- DEBT TRANSFER

The details of the movement to this account are accounted as follows:

2014 2013

Investment in TransCo (2,122,468,756) (745,574,593) Cleaning of Accounts – Power Rec. (80,111,921) (23,086,888,528) Cleaning of Accounts – Others (33,307,657) 0 Trust Accounts 0 2,494,967,992 Cleaning of Accounts - Accts. Payable 0 (198,813,121) Others (12,933,875,076) 0

(15,169,763,410) (21,536,308,250)

The above accounts are subject to further reconciliation and these will be back in the proper accounts once reconciled.

Investment in TransCo pertains to various adjustments related to appraisal

capital, construction work in progress (CWIP), and electric plant in Service (EPIS).

Cleaning of Accounts – Power Receivables refers to unreconciled and undocumented receivables from various power customers which are subjected to reconciliation.

Cleaning of Accounts – Others refers to the net effect of the decrease in receivable from NEA for the Paribas loan and decrease in payable to DOE for financial assistance, respectively.

Others pertain to the transferred accounts from NPC which are non-moving

assets and liabilities and subject to reconciliation in compliance with the COA AOM Nos. 2014-06-13 and 2014-09-2013. The details of the adjustment are as follows:

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Non-Moving Asset Account

Power Accounts 1,679,173,912

Due from GOCCs

Due from NPC - for reconciliation 2,666,005,863

Advances to Phi. Geothermal Inc. 58,425,588

PHIVIDEC Industrial Authority 38,037,650

Government Service Insurance System 34,987,903

Clark Development Corp. 2,422,084

National Electrification Administration 451,586

Others 3,242,634 2,803,573,308

Due from National Gov’t. Agencies (NGAs) Due from BIR 1,645,580,140

Due from BOC 1,554,825,393

Department of Budget and Management 31,891,751

Department of National Defense 22,712,634

Court of First Instance 13,602,055

Metropolitan Manila Development Authority 4,245,469

DPWH-Region 600,000

Due from DOF/BTr 415,364

Philippine Nuclear Research Institute 309,735

Supreme Court 64,011

Department of Energy 20,000

Commission on Audit 14,324

National Commission on Indigenous people 9,658 3,274,290,534

Due from LGUs 4,815,103 Other Receivables 841,397,930

Other Current Assets

Court and Other Deposits 247,770,368

Cash Advances to Contractors 34,732,944

Other Advances 9,527,442

Prepaid Rent 2,191,912 294,222,666

Other Non-Current Assets

Stored Energy 5,241,828,596

Other Investments and Marketable Securities 2,204,300

Non-Current Receivables (8,913,205)

Allowance for Bad Debts - Other Non-current Receivables

(73,548,366)

5,161,571,325

Sub-total Non-Moving Asset Accounts 14,059,044,778

Less: Non-Moving Liabilities Accounts

Due to Other GOCCs 1,093,919,095

Due to Government Agencies

Department of Finance 30,215,838

National Irrigation Administration 1,034,769 31,250,607

Sub-total Non-Moving Liabilities Accounts 1,125,169,702

Total Others 12,933,875,076

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26. PRIOR YEAR’S ADJUSTMENTS This account consists of the following:

2014 2013

Loan related expenses 1,423,118,488 238,501,484 Cleaning of accounts – Power Receivables 1,363,143,473 Cleaning of accounts – Trust Accounts 527,952,326 (1,143,944,282) Recognition of excluded assets previously

turned over to LGU 0 8,484,000 Real property taxes for IPP plants 0 (78,050,152) Adjustment on closed DAA payable to SCPC 0 (167,191,368) Personnel related expenses (128,955) (8,761,925) Cleaning of accounts – Accounts Payable (902,688) 525,903,751 BOT lease obligations (11,027,735) 343,607,481 Operating expenses (23,111,737) (135,068,693) Adjustments related to plant operation (1,016,706,873) (6,417,796,925) VAT deficiency (7,282,049,993) (8,134,690,380)

(5,019,713,694) (14,969,007,009)

27. DIVIDEND INCOME The account pertains to TRANSCO’s remittance of profit as a wholly owned subsidiary of PSALM pursuant to Section 8 of the EPIRA. Remittances for CY 2014 and 2013 amounted ₱6.098 billion and ₱14.484 billion, respectively. Dividend income for 2014 consisted of four quarters (4th quarter of 2013 through 3rd quarter of 2014) of TRANSCO’s net profits while 2013 consisted of six quarters (2nd quarter of 2012 and 3rd quarter of 2013).

28. UNIVERSAL CHARGE - SCC

On 28 January 2013, the Energy Regulatory Commission (ERC) has arrived at a decision docketed as ERC Case No. 2011-091 RC for the recovery of the National Power Corporation (NPC) Stranded Contract Costs (SCC) of the Universal Charge (UC) filed on 28 June 2011 by PSALM for the year ending 31 December 2010, including stranded cost for the period CYs 2007, 2008, and 2009. In view of that, PSALM was granted authority to recover the following UC-SCC for Luzon, Visayas and Mindanao Grids starting March 2013 billing covering period of 26 February 2013 to 25 March 2013.

ERC made a calculation on the SCC which amounted to ₱53.851 billion using the four (4) years of electricity sales based on the Department of Energy (DOE) Sales under the Philippine Development Plan (PDP), to wit:

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In Billion CY 2007-2010

Gross Annual Contract Cost 178.236 Less: Revenue from Sale of Contracted Capacity 119.403 Less: Privatization of Eligible IPPs 4.982

Stranded Contract Cost 53.851

Stranded Contract Cost (₱/kWh)* 0.1938 *Based on 4 year sales: 277,875 GWh

Accordingly, PSALM collected ₱11.701 billion and ₱7.744 billion in 2014 and 2013, respectively.

29. POWER GENERATION This account consists of the following:

2014 2013

Net utility revenue 42,245,213,848 50,172,965,966 Less operating expenses: Variable cost:

Fuel oil 10,771,406,733 10,264,269,250 Coal 261,635,655 315,654,683 Other power supply 3,280,039,187 4,530,684,983 OMSC 113,411,640 120,662,542 Energy purchased from PEMC

To meet TSC 136,997,870 357,597,718 Station use 104,838,134 114,961,462 Pumping Cost 4,345,371,716 4,491,138,016

19,013,700,935 20,194,968,654 Fixed costs:

Depreciation 2,888,375,512

2,186,405,663

Opex Plant 2,141,886,853 1,768,407,003 HO allocated 765,880,376 689,746,581 Fixed O & M fees 19,906,221,829 18,539,513,613 OMSC 589,922,964 597,665,181 Amortization of leased plant 1,959,106,854 1,959,106,854

28,251,394,388 25,740,844,895 Total Operating Expenses 47,265,095,323 45,935,813,549

Net operating income (loss) (5,019,881,475) 4,237,152,417 Add: Recovery for MRU 0 342,927,067 Other income, net 864,306,476 651,415,672 Power Generation Income (Loss) (4,155,574,999) 5,231,495,156

Results of operation in 2014 fell short of last year’s performance. From an income of ₱5.23 billion in 2013, the year’s power generation resulted to a loss of ₱4.16 billion. The difference was a staggering reduction of 179%, driven by lower net utility revenue (NUR) and higher operating expenses during the year.

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Of the total net utility revenue, TSC revenue was down by 9.5% or ₱3.06 billion due to lower TSC sales and TSC rates . TSC sales was primarily affected by several factors, among which is the significant reduction noted in both the energy generation and sales of Angat Hydroelectric Power Plant (HEPP), Unified Leyte Geothermal Power Plant and the Mindanao Coal I & II. Angat HEPP’s generation dropped by 293.9 GWh or 61.8% due to critical water levels during the year. With insufficient water levels accompanied by technical difficulties arising from a problem with the turbine runner spacer, more units were forced to go under intermittent deactivated and reserved shutdown. In effect, the plant’s average dependable capacity immensely fell from 157.048 MW in 2013 to 92.748 MW in 2014; thereby, reducing TSC revenue by ₱0.18 billion. For Unified Leyte Geothermal Power Plant, its gross generation reflected sustained diminution in generated output as an aftermath of the typhoon Yolanda in November 2013. Compared to the aggregate generation in 2012, which represents a full year’s generation before typhoon Yolanda struck, gross generation in 2014 decreased by 482.81 GWh or 14.2%. Compared to 2013, gross generation in 2014 further dropped by 114.59 GWh or 3.8%; ultimately, decreasing TSC revenue by ₱1.32 billion or 15.1% compared to a year ago. On the other hand, Mindanao Coal I & II Power Plants’ generation were lower by 328.9 GWh or 19.9%. Both units underwent repairs and maintenance starting 27 February 2014 after sustaining damages brought by the Mindanao-wide power outage that happened on the same date. Unit 1 was synchronized to the Mindanao grid on 30 May 2014 while Unit 2 went on line on 7 May 2014. This reduced TSC revenues by ₱0.83 billion. The turnover of Naga Complex Power Plant to SPC Power Corporation on 26 September 2014 trimmed down its TSC revenue by ₱0.68 billion. Aside from the reduction in TSC revenue, spot revenue also went down by 27.1%. Spot sales grew from 2,758.9 GWh to 2,918 GWh. However, spot rate greatly decreased from ₱6.4988 per kWh to ₱4.4775 per kWh, which translated to a considerable cut in spot revenue by ₱4.86 billion. Among the trading plants, Kalayaan HEPP revealed the largest reduction amounting to ₱2.5 billion, followed by Angat HEPP with a reduction in spot revenue of ₱1.95 billion. While revenues lessen, operating expenses grew by ₱1.33 billion or 2.9%; therefore, turning the net operating income of ₱4.24 billion in 2013 to a loss of ₱5.02 billion in 2014. The escalation of expenses mainly stemmed from fuel costs and depreciation expenses. Fuel costs rose by 4.3% or ₱0.45 billion from last year's ₱10.58 billion. Despite the turn-over of Naga fuel to SPC Power Corp. on 26 September 2014 that decreased the fuel and coal consumptions for Naga Complex Power Plant by 32.9% or ₱1.15 billion, said reduction in fuel and coal was wiped out by the cost of generating more outputs for Malaya, SPPC Gen San and WMPC Zamboanga. Since Malaya generated an additional 136.9 GWh in 2014, this caused an increase of 71.1% or

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₱0.96 billion on its fuel cost. Similarly, gross generation of SPPC Gen San and WMPC Zamboanga brought an increase of ₱0.72 billion in fuel cost. During the year, PSALM also resumed recognition of depreciation expense for plants that were once classified as held-for-sale and have yet to be or have only recently been privatized. Since the company had long since ceased recognition of depreciation expense for these plants, namely the Angat, Naga Complex, and all Power Barges, it became necessary to resume recognition of depreciation in order to reflect these plants’ true value. The effect of this is an increase in depreciation expense by 32% or ₱0.70 billion. Altogether, the net operating income of owned and operated plants declined by 43.3% (from ₱7.62 billion in 2013 to ₱4.32 billion in 2014). Similarly, the net operating loss of IPP plants climbed by 176.1% (from ₱3.38 billion in 2013 to ₱9.34 billion in 2014).

30. INCOME FROM IPPAs

The account pertains to payments by IPPAs upon the successful turnover of the management of IPP contracts to the winning bidders.

This account consists of the following:

2014 2013

Revenues Generation payments 35,833,674,056 32,247,052,800 Amortization of deferred finance income 2,600,573,721 2,600,573,721 Fixed related adjustments (1,590,175,839) (1,825,468,327) Interest on late payments 9,526,615 11,443,010

36,853,598,553 33,033,601,204

Less: Expenses Natural gas 28,726,198,692 26,248,971,812 Taxes 2,803,710,246 198,432,512 Energy fees 1,974,937,577 962,344,192 Financial assistance 191,223,216 180,690,947 Administrative 32,405,688 12,231,778 Share in National Wealth 12,132,335 13,213,605 Diesel 3,696,399 1,746,876,970

33,744,304,153 29,362,761,816

IPPA, net 3,109,294,400 3,670,839,388

In general, IPPA plants generated more output for the year as plants experienced decreased downtime for maintenance, among others. Moreover, notable changes were seen in the financial performance of the following plants: (1) Ilijan Natural Gas Plant; (2) Pagbilao Coal Fired Plant; and (3) San Roque Hydro Plant. The generation revenue of Ilijan Natural Gas Plant increased by 7% or ₱2.31 billion primarily due to the change in market prices and the increase in generated output by as much as 727 GWh or 9%. External factors such as those determined by WESM

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played an important role in determining said prices. For the year, prices averaged ₱4.06 per kWh; higher than the average price in 2013 of ₱3.71 per kWh. And compared to 2013, when Ilijan Natural Gas Plant’s Block 2 underwent planned maintenance outage from 09 November to 14 December 2013, Ilijan only sustained shorter periods of outages during the year. It should also be noted that there were no Liquid Events (LE) in 2014. LE arises when PSALM is unable to provide gas for a certain period due to various reasons. In 2013, LE transpired when Ilijan had to rely on diesel because of the Malampaya shutdown. At that time, the average price was at ₱9.44 per kWh. In a similar way, Pagbilao Coal Fired Plant enjoyed less downtime in 2014 that redounded to increased generated output and greater revenue. Generation increased by 614 GWh or 16%, and aggregate collection during the year was not greatly reduced for “Non Delivering Days”. By nature, adjustment for Non Delivering Days is a reduction directly proportional to the scheduled monthly payments, and is made when a plant was unable to or failed to generate and/or deliver energy for more than three (3) days in a month. Since the monthly payments collected from the IPP Administrator of Pagbilao can be reduced for “Non Delivering Days”, the aggregate collection during the year was not greatly reduced by intermittent, shorter outages. On the contrary, San Roque Hydro Plant was shut down for prolonged periods throughout the year due to inspection and maintenance. As a result, said plant’s loss for the year grew from ₱0.38 billion to ₱0.51 billion. In terms of expenses, Value Added Tax (VAT) was recognized in order to achieve consonance with Revenue Memorandum Circular No. 11-2012 that clarifies the rationale for subjecting all privatization activities of PSALM to VAT. In 2014, VAT totaling ₱2.59 billion for received monthly payments during the year served as a reduction from the aggregate IPPA revenues. Moreover, a substantial difference could be seen in the cost of Diesel. The reason for this is also the 30-day shutdown of the Malampaya Natural-Gas Facility from 11 November to 10 December 2013, which caused the Ilijan Natural Gas Plant to shift from natural gas to costlier diesel in order to continue operations at that time.

31. SALE/DISPOSAL OF ASSETS

Early in the year, PSALM conducted the bidding for the Naga Power Plant and declared Therma Power Visayas, Inc. as the highest bidder. However SPC Power Corporation (SPC), the second highest bidder, has the “right to top” the price of the winning bidder by 5% as provided under the Land Lease Agreement executed between PSALM and SPC in 2009 for the Naga Land-based Gas Turbine. SPC exercised its right to top the winning bidder prior to the deadline by paying ₱1,143,240,000.00 for the said asset. On 30 July 2014, PSALM issued the Notice of Award and Certificate of Effectivity to SPC. PSALM turned over the Naga Power Plant to SPC on 25 September 2014.

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Late in the year, PSALM finally closed the highly anticipated sale of the 218-megawatt (MW) Angat Hydroelectric Power Plant (HEPP) more than four (4) years after Korea Water Resources Corporation (K-Water) won the bidding in 28 April 2010. K-Water completed payment for the privatized facility amounting to US$441

million or ₱19,662,235,910.The actual turnover of operations of the Bulacan-based hydro plant to its new owner commenced at 31 October 2014. During the year the Corporation disposed as well 11.9 million liters of oil and 26,849

metric tons of coal stored at Naga Power Plant. It also hauled in ₱130 million from other privatization related fees.

32. PERSONAL SERVICES (PS)

In the midst of year-long challenges, PSALM has again undertaken consolidated efforts in securing and fulfilling its mandate by which its Personal Services reflected a

slight increase of ₱14 million or 9 percent to ₱165 million in 2014 from ₱151 million in 2013. Personal Services accounts 0.5 percent of the total revenues in 2014 and 0.4 percent in 2013.

33. MAINTENANCE AND OTHER OPERATING EXPENSES (MOOE)

The Corporation’s total MOOE incurred grossly increased by ₱2.5 billion or 509% mainly due to the recognition of additional bad debts for power receivables. However, without the additional bad debts of ₱2.5 billion, MOOE relatively stood the same with that of last year’s. All Real Property Taxes were reclassified to Power Generation and Income from IPPAs, respectively, from MOOE for proper matching and presentation of expenses.

34. OTHER INCOME (LOSS)

Subsidy from National Government

The Corporation has been awarded government grant in the amount of ₱7.3 billion to cover VAT deficiencies assessed by the BIR for CY 2010 and 2012 from sale of generation asset, collections/revenues from IPPA monthly and generation payments, and other receipts.

Gain (Loss) on Foreign Exchange

As the Corporation translates its foreign currency transactions/monetary items in accordance with PAS 21, the resulting gains and losses from the exchange differences are recognized in profit or loss, as follows:

2014 2013

Realized forex gain (loss) on foreign currency-related transactions 229,724,852 (623,042,084)

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Unrealized forex gain (loss) on translation

3,165,228,581

(17,454,514,655)

3,394,953,433 (18,077,556,739)

This account pertains to foreign exchange adjustments realized on repayment of loans and unrealized on restatement of outstanding balances of foreign currency-denominated loans, trade and other payables, short-term placements and cash in banks. Following are the exchange rates used to restate outstanding balances at financial reporting date:

2014 2013 Gain (Loss)

PhP : US Dollar ($) 44.6170 44.4140 (0.2030)

PhP: Japanese Yen (Y) 0.3706 0.4239 0.0533

PhP: Korean Won (KRW) 0.0406 0.0419 0.0013

PhP: Euro (EUR) 54.3390 60.8161 6.4771

In general, the Peso performed better against other currencies and remained stable throughout the year; which in turn, permitted the Corporation to recognize a forex gain of ₱3.34 billion. This is a huge improvement compared to a year ago, when the company recognized a forex loss of ₱18.08 billion. Interest Income Interest income pertains mainly to the interest earned, net of taxes, on the placements and regular deposits.

Miscellaneous Income Miscellaneous income came primarily from the amortization of deferred credits on advance lease payments for the various sold plants. It also includes various income from sale of bid documents, participation fees and others. Details follow:

2014 2013

Amortization of deferred credits-lease rental

Tiwi-Makban 19,681,378 19,681,378 Naga 14,200,878 6,883,848 Calaca 4,526,529 4,526,529 Maibarara Geothermal 3,920,000 3,920,000 Limay 1,503,257 1,503,257 Masinloc 1,245,536 3,400,354 Panay-Bohol 384,192 384,192 5 Mini Hydros 340,071 340,071 GT Land Based 121,532 121,532 Pantabangan 35,852 34,993 Palinpinon-Tongonan 18,834 18,834 Others 1,310,566 98,644,889

47,288,625 139,459,877

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35. CLEANING OF NPC ACCOUNTS RETAINED AT NPC/TRANSFERRED TO PSALM AND TRANSCO Under the supervision of the Department of Finance, the Joint PSALM-NPC-TransCo Task Force (JPNTTF) was created to primarily validate and reconcile the remaining accounts in the temporary account registry of NPC, PSALM, and TransCo, and to eventually prepare the appropriate adjustments. The annual output would be recommendations addressing COA audit observations and a report reflecting progress made on the cleaning of the books.

As of 31 December 2014, the JPNTTF have completed the target for the year with regards the adjustments on the following accounts: (1) Accounts retained at NPC’s temporary registry amounting to ₱3.58 billion and (2) Assets in Trust with NPC/Trust Liability to PSALM totaling to ₱0.09 billion.

36. SUPPLEMENTARY INFORMATION REQUIRED IN TAXES, DUTIES AND LICENSE FEES UNDER REVENUE REGULATION NO. 15-2010 In compliance with the requirements set forth by Bureau of Internal Revenue (BIR) through Revenue Regulations (RR) No. 15-2010, below are the information on taxes, duties, and license fees paid or accrued during the taxable year 2014.

Value added tax (VAT)

RMC 71-2012 dated 15 November 2012, which superseded RMC 62-2012 and RMC 61-2005, clarified the implementation of the VAT provisions of RA No. 9337 applicable to the power industry.

Details of the Corporation’s net sales/receipts and output VAT for the taxable year are as follows:

Net Sales/Receipts Output VAT

Vatable Sales 106,057,569,638 12,726,908,357 Sales to government 9,079,029 1,089,483 Zero-rated Sales 38,378,654,417 0 Exempt Sales 0 0

144,445,303,084 12,727,997,840

The amount of VAT input taxes claimed for the taxable year 2014:

Balance at 01 January 2014 37,396,999,090 Add: Current year’s domestic purchases/payments for:

Purchase of Capital Goods not exceeding P1 million 101,592 Purchase of Capital Goods exceeding P1 million 42,097,953 Domestic Purchases of Goods Other than Capital

Goods 1,653,180,648

Domestic Purchases of Services 4,495,172,427 Services rendered by Non-residents 10,830,059 6,201,382,679

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Total 43,598,381,769 Less:

Deferred Input Tax on Purchases of Capital Goods 32,469,275 Services rendered by Non-residents 374,666,164

Total Allowable Input for CY 2014 43,191,246,330

The amounts of withholding taxes paid/accrued for the year are as follows:

Withholding Taxes on Compensation Income 28,112,641 Creditable Income Taxes Withheld Expanded 1,870,614,483 VAT/Other Percentage Taxes Withheld 2,619,448,841 Final Withholding Taxes 1,623,901,405 Other Taxes (BIR Form 0605) 8,326,586,469

Tax Proceedings Involving PSALM

PSALM is involved in various tax proceedings, in the normal course of business, with the Court of Tax Appeal (CTA) and formal assessment notices from the Large Taxpayer’s Office of the BIR, among others are taxes paid in protest, value added taxes, income taxes and withholding taxes. Because of the nature of these proceedings and assessments are difficult to predict, hence, PSALM will record the provision for a loss when it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated.

37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES Objectives and Policies The Corporation has significant exposure to the following financial risks primarily from its use of financial instruments:

a. Credit Risk b. Foreign Currency Risk c. Interest Rate Risk d. Liquidity Risk

This note presents information about the Corporation’s exposure to each of the foregoing risks.

Credit Risk Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporation’s receivables. The Corporation manages its credit risk mainly through the application of transaction limits and close risk monitoring. The Corporation has regular internal control reviews to monitor the granting of credit and management of credit exposures.

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Foreign Currency Risk The Corporation’s exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect its foreign currency-denominated transactions The Corporation’s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity.

Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Corporation’s exposure to changes in interest rates relates primarily to the Corporation’s long-term borrowings and investments. Liquidity Risk Liquidity risk pertains to the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. PSALM’s liability management program includes: (i) refinancing to ensure that the Corporation will meet all its outstanding debts and contractual obligations; (ii) hedging to mitigate foreign currency and interest risks; (iii) tariff rate application to update the cost of electricity generation to its current level and to implement the Universal Charge pursuant to the EPIRA; and (iv) monetization to guard against liquidity risks and match privatization cash flows with maturing debts.

38. ORGANIZATIONAL DEVELOPMENT AND EFFICIENCY

Maintenance of Existing Certification of International Organization for Standardization (ISO) 9001:2008 Quality Management System (QMS) On 25 November 2014, TÜV Rheinland Philippines, an independent third-party certifying body for quality management systems, confirmed the Maintenance of PSALM’s ISO 9001:2008 Certification. ISO 9001 is internationally recognized as providing a framework for a quality management system that can be easily interpreted for all areas of industry and commerce. This is a further testament that PSALM fully exhibits its commitment to quality and customer satisfactions, as well as continuously improving its operations to achieve word-class service.

Top Traded Corporate Bond Issue of the Year Award

On 27 February 2014, the Philippine Dealing System Holdings Corp. & Subsidiaries (PDS Group) awarded PSALM as the Top Traded Corporate Bond Issue of the Year

under the “Corporate Securities Awards” category for its ₱18.7-billion Fixed Rate Retail Bonds due in 2017 during the awards night held at the Makati Shangri-La. Once again, this proves that the PSALM bonds gained the trust of the investors as

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the number one option for money placement in corporate investment category. PSALM being a government entity compared to other corporations, provides additional incentive as a safe haven to place their investments. Additionally, last year’s Credit Rating upgrade for the Government includes upgrade for PSALM Corporation as well, which signals the investors’ interest to a low-risk investment in PSALM Bonds. International Organization for Standardization (ISO) 27001:2005 Information Security Management System (ISMS)

On 23 January 2014, AJA Registrars, Inc. (AJA), an independent third-party registrar (certification body), certified PSALM’s processes of Privatization of Power Generation Assets, Liability Management and Provision of Support Services (Human Resources, Administration and General Services, Information Systems and Information Technology Services) for ISO 27001:2005.ISO 27001 provides safeguards and controls to ensure that the integrity, confidentiality and availability of information are preserved. It provides the foundation for an Information Security Management System (ISMS) and applies to all sizes of organization in all business sectors. This proves again that PSALM expresses to its customers, suppliers and other government organizations the commitment in information security management.

39. CONTINGENCIES

Case filed by NPC Drivers and Mechanics Association (DAMA) The NPC Drivers and Mechanics Association (DAMA) were successful in obtaining a judgment obligation against NPC under G.R. No. 156208 (DAMA vs NPC). The judgment included back wages, wage adjustments, and other benefits accruing from 31 January 2003 to the date of their reinstatement or payment of separation pay. In all, these benefits amount to approximately P37 billion. Although PSALM was not originally a party to the case, the Supreme Court (SC) declared in the Resolution dated 2 December 2009 that the properties acquired by PSALM from NPC “may be used to satisfy the Supreme Court judgment.” On 9 September 2014, the SC issued a Resolution, the dispositive portion of which reads, xxx “(i) Direct Sheriffs of Quezon City to (a) DEFER the implementation of the Decision of the Court of 26 September 2006 and the Resolutions of 17 September 2008, 2 December 2009 and 30 June 2014 pending consideration of the present submissions and until further notice from this Court, and (b) LIFT, under the same terms, Notice of Garnishment of 14 August 2014; xxx

On 25 November 2014, PSALM thru OGCC filed its Compliance to the SC Resolution dated 9 September 2014 directing PSALM to submit relevant and respective list of NPC employees as of 31 January 2002.

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Availment of the CYs 2011-2012 UC-SCC On 31 July 2013, PSALM filed a Petition for the True-up Adjustments for NPC’s SCC Portion of the UC for CYs 2011 and 2012 docketed under ERC Case No. 2013-160 RC seeking for the approval of the calculated aggregate UC-SCC for the years 2011-2012 amounting to ₱17,685 Million equivalent to a rate of ₱0.1274/kWh covering a two (2) year recovery period. The ERC conducted the Jurisdictional Hearing, Expository Hearing and Pre-Trial Conference on 11 November 2013, 18 November 2013 and 7 January 2014, respectively. Direct and cross examinations for the first and second witnesses were conducted on 06 February 2014, 26 August 2014 and 4 September 2014. As of 31 December 2014, PSALM is waiting for an ERC Order if additional hearing is necessary or if PSALM will already be required to submit its formal offer of evidence for the conclusion of the case.

Availment of the CY 2013 UC-SCC On 30 July 2014, PSALM filed a Petition for the Availment of the NPC’s SCC Portion of the UC for CY 2013 and True-up Adjustments for the UC-SCC for CYs 2007-2010 docketed under ERC Case No. 2014-111 RC. In said Petition, PSALM is seeking for the approval of the calculated UC-SCC for CY 2013 amounting to ₱4.078 billion equivalent to a rate of ₱0.0531/kWh covering a one (1) year recovery period. The Jurisdictional and Expository Hearings for the said case were conducted on 16 September 2014 with a supplemental Expository Presentation conducted on 2 October 2014. The Pre-Trial Conference was conducted on 16 October 2014 and was continued on 10 November 2014 followed by Evidentiary Hearing and cross examination of PSALM’s first witness on the same date. As of 31 December 2014, PSALM is waiting for the ERC Order on the next hearing date. True-Up Adjustments of the NPC’s Stranded Debts Portion of the UC for CYs 2011 and 2012

On 30 September 2013, PSALM filed a petition for True-Up Adjustments of the NPC’s Stranded Debts (SD) Portion of the UC for CYs 2011 and 2012 docketed under ERC Case No. 2013-195 RC. In the said Petition, PSALM seeks the ERC’s approval to collect ₱41.139 billion over a 12.5-year recovery period, which translates to a UC-SD charge of ₱0.0382/kWh. Series of hearings were conducted starting with the Jurisdictional Hearing and Expository Presentation on 19 March 2014 and the Evidentiary Hearing which was concluded on 20 May 2014. On 25 July 2014, PSALM filed its Formal Offer of Evidence and submitted the case for resolution. As of 31 December 2014, the ERC has yet to issue its decision on the case.

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Power Barge 103 Oil Spill On 08 November 2013, super typhoon “Yolanda”, considered the most powerful storm to make landfall in recorded history, slammed Eastern Visayas. During its onslaught, the Municipality of Estancia in the Province of Iloilo was among the localities heavily hit the typhoon. Power Barge 103 of PSALM, then situated in Barangay Botongan, Estancia, was damaged by the super typhoon and consequently caused an oil spill in the coastline. PSALM has an insurance policy contract with the Government Service Insurance System (GSIS) for the Protection and Indemnity covering the losses in case of accident or occurrence arising of one event such as oil spill. As of date, the total indemnification for the victims affected by PB 103 oil spill incident which are for reimbursement from GSIS amounts to ₱69 million. PSALM’s Claim against Lehman Brothers Special Financing Inc. (LBSF)

On 01 August 2013, Mediator Jack Esher finally issued his settlement recommendation amounting to US$9 million payable to LBSF. However, on 22 April 2014 PSALM maintained its zero or walk-away settlement offer to the Mediator and LBSF. Consequently, LBSF decided to commence a proceeding against NPC and PSALM in the English Courts or in the United Kingdom. On the hand, PSALM filed a complaint against LBSF for Sum of Money with Damages in the Makati Regional Trial Court on 17 October 2014. Other Legal Proceedings Involving PSALM

In addition to the tax proceedings and formal assessments, PSALM is involved in various legal and administrative proceedings, including litigation and proceedings related to electricity charges and challenges to certain provisions of the EPIRA. Because of the nature of these proceedings are difficult to predict, hence, PSALM will record the provision for a loss when it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated.

40. OTHER SUBSEQUENT EVENTS

PSALM, NPC sign new O&M Agreement

On 10 March 2015, PSALM has renewed its Operation and Maintenance Agreement (OMA) with the National Power Corporation (NPC). Under the new OMA, NPC will operate, maintain, and manage PSALM's remaining power plants and appurtenant assets, other assets and other facilities. NPC is tasked to maximize plant availability and performance, minimize outages and operations and maintenance costs, minimize long-term deterioration of equipment, and prepare the assets for sale and transfer. The OMA will cover the following remaining generating assets of PSALM: Power Barges 101, 102, 103 and 104; as well as the Agus and Pulangui hydroelectric

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power plants. In addition, NPC shall provide personnel for supervision and preservation of PSALM's decommissioned plants and other facilities to prevent the deterioration of serviceable equipment and systems prior to disposal or privatization. PSALM's remaining decommissioned or retired power facilities include the Sucat Thermal Power Plant located in Muntinlupa City, Metro Manila; and the Bataan Thermal Power Plant in Limay, Bataan. Likewise, NPC shall also provide personnel for the excluded assets from sold plants identified by PSALM, and continue to discharge its duties and obligations under existing IPP contracts, prosecute and defend cases related to assets covered by the OMA, and undertake titling for PSALM's real estate assets.

Dividend Remittance under R.A. No. 7656 (Dividend Law) Based on Section 4 of the Dividend Law, exemption is granted to GOCCs created or organized by law to administer real or personal properties or funds held in trust for the use and the benefit of its members. This includes, but is not limited to, the Government Service Insurance System, the Home Development Mutual Fund, the Employees Compensation Commission, the Overseas Workers Welfare Administration, and the Philippine Medical Care Commission. Since the law was approved on 09 November 1993, before the creation of PSALM Corporation, no exemption was granted to this Agency despite being an administrator of the Universal Charge (UC) and all assets of the National Power Corporation (NPC) for the purpose of liquidating the latter’s financial obligations. The said law furthermore provides that its provision for remitting dividends is only effective so long as it does not impair a GOCC’s viability or the purposes for which it was established. In the case of PSALM, remitting dividends would be detrimental to the company as it acts merely as the liquidator of all NPC obligations, including financial charges, and therefore generally does not generate income. PSALM’s undertaking under Section 50, Chapter VI of the EPIRA, the principal purpose for which PSALM was created is provided, to wit:

“Sec. 50. Purpose and Objective, Domicile and Term of Existence. –The principal purpose of the PSALM Corp. is to manage the orderly sale, disposition, and privatization of NPC generation assets, real estate and other disposable assets, and IPP contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner… The PSALM Corp. shall exist for a period of twenty five (25) years from effectivity of this Act… and all assets held by it, all moneys and properties belonging to it, and all liabilities outstanding upon the expiration of its term of existence shall revert to and be assumed by the National Government.”

In addition, Section 60 of EPIRA mandated PSALM to assume “xxx all outstanding financial obligations of electric cooperatives for NEA and other government agencies

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incurred for the purpose of financing the rural electrification program xxx”, without any funding. It is also worth noting that the EPIRA provided for “Universal Charge” (UC), which refers to the charge, if any, imposed for the recovery of the stranded debts in excess of the amount assumed by the National Government, among others. With its limited term of existence, PSALM seeks pardon from the remittance of dividends to maximize its financial resources. In this manner, it could direct the utilization of its funds to minimize, if not eliminate, its financial obligations. Eventually, all benefits would ultimately redound to the National Government. Hence, on 08 May 2015, PSALM once more made an urgent request from the Department of Finance for its favorable endorsement to His Excellency President Benigno S. Aquino, III that PSALM be rated zero in its dividends on incomes derived from activities for CY 2014 and prior years.

41. RESTATEMENT OF ACCOUNTS The presentation of figures in CY 2014 financial statements has made it necessary, for comparative purposes, to restate relevant figures in CY 2013.

42. AUTHORIZATION FOR ISSUANCE OF THE FINANCIAL STATEMENTS The financial statements of the Corporation for the year ended 31 December 2014 were authorized for issue by the Board of Directors on 27 April 2015.