Document of The World Bank FOR OFFICIAL USE ONLY Report No: 32348-PH PROJECT APPRAISAL DOCUMENT ON THE PURCHASE OF EMISSION REDUCTIONS PROPOSED BY THE NETHERLANDS CLEAN DEVELOPMENT FACILITY IN THE AMOUNT OF USD 2.5 MILLION TO THE PHILIPPINE NATIONAL OIL CORPORATION ­ ENERGY DEVELOPMENT CORPORATION FOR A NASULO GEOTHERMAL POWER PROJECT June 2, 2005 Energy and Mining Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective May 19, 2005) Currency Unit = Philippine Peso (P) P1 = US$0.0183 US$1 = P54.635 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CDM Clean Development Mechanism CERs Certified Emission Reductions DBP Development Bank of the Philippines DOE Department of Energy EPIRA Electric Power Industry Reform Act ERPA Emission Reductions Purchase Agreement GHG greenhouse gas GOP Government of the Philippines MP Monitoring Plan NCDMF Netherlands Clean Development Mechanism Facility NEA National Electrification Administration NPC National Power Corporation PNOC-EDC Philippine National Oil Corporation-Energy Development Corporation tCO2e tons of carbon dioxide equivalent UNFCCC UN Framework Convention on Climate Change Vice President: Jemal-ud-din Kassum Country Director: Joachim von Amsberg Sector Director: Christian Delvoie Sector Manager: Junhui Wu Task Team Leader: Selina Shum CONTENTS Page No. A. STRATEGIC CONTEXT AND RATIONALE ........................................................................ 3 1. Country and sector issues ................................................................................................... 3 2. Rationale for Carbon Finance (CF) involvement................................................................ 4 3. Higher level objectives to which the project contributes.................................................... 4 B. PROJECT DESCRIPTION ....................................................................................................... 5 1. Instrument ........................................................................................................................... 5 2. Project development objective and key indicators.............................................................. 5 3. Project components............................................................................................................. 5 4. Lessons learned and reflected in the project design............................................................ 6 5. Alternatives considered and reasons for rejection .............................................................. 6 C. IMPLEMENTATION ............................................................................................................... 6 1. Institutional and implementation arrangements................................................................. 6 2. Monitoring and evaluation of outcomes/results.................................................................. 7 3. Sustainability ...................................................................................................................... 8 4. Critical risks and possible controversial aspects................................................................. 9 5. Loan/credit conditions and covenants............................................................................... 10 D. APPRAISAL SUMMARY...................................................................................................... 10 1. Economic and financial analyses ...................................................................................... 10 2. Technical........................................................................................................................... 12 3. Social and Environment.................................................................................................... 13 Annex 1. Power Sector Background .......................................................................................... 15 Annex 2. Major Related Projects Financed By the Bank and/or Other Agencies ..................... 19 Annex 3. Results Framework and Monitoring........................................................................... 20 Annex 4. Detailed Project Description ...................................................................................... 21 Annex 5. Project Costs............................................................................................................... 25 Annex 6. Implementation Arrangements ................................................................................... 26 Annex 7. Financial Management and Disbursement Arrangements.......................................... 27 Annex 8. Procurement .............................................................................................................. 28 Annex 9. Economic and Financial Analyses ............................................................................. 29 Annex 10. Environmental and Social Safeguard Policy Issues ................................................... 37 Annex 11. Project Processing ...................................................................................................... 45 Annex 12. Documents in the Project File .................................................................................... 46 Annex 13. Baseline and Additionality Analysis .......................................................................... 47 Annex 14. Statement of loans and credits.................................................................................... 50 Annex 15 Country at a glance..................................................................................................... 52 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Philippines Nasulo Geothermal Power Project PROJECT APPRAISAL DOCUMENT East Asia and Pacific Region Energy and Mining Sector Unit Netherlands Clean Development Mechanism Facility (NCDMF) Date: June 2, 2005 Team Leader: Selina Shum Country Director: Joachim von Amsberg Sectors: Renewable energy Sector Manager: Junhui Wu Themes: Infrastructure services for private Project ID: P089576 sector development, Rural services and Instrument: Emission Reductions Purchase infrastructure, environmental policies and institutions Project Financing Data [ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [x] Other: Carbon Finance For Loans/Credits/Others Total Project Cost (US$m.): 35.4 Cofinancing: 35.4 Total Bank Financing (US$m.): $0 Proposed terms: yearly payments until 2012 Financing Plan (US$m.) Source Local Foreign Total PNOC-EDC 10.7 10.7 IBRD/IDA Others Development Bank of the Philippines 24.8 24.8 (DBP) Borrower: Not applicable Responsible Agency: Philippine National Oil Corporation ­ Energy Development Corporation (PNOC-EDC) Estimated disbursements (Bank FY/US$m): N/A FY Annual Cumulative Project implementation period: 2005-2012 Expected effectiveness date: October 2005 Expected closing date: December 2013 Does the project depart from the CAS in content or other significant Yes X No respects? Ref. PAD A.3 Does the project require any exceptions from Bank policies? N/A Yes : No Have these been approved by Bank management? N/A Yes No Is approval for any policy exception sought from the Board? Yes X No -1- Does the project include any critical risks rated "substantial" or X Yes No "high"? Ref. PAD C.5 Does the project meet the Regional criteria for readiness for Yes No implementation? N/A Project development objective Ref. PAD B.2. The overarching objective of the proposed Project is to help mitigate global climate change by facilitating the use of market-based mechanisms sanctioned under the Kyoto Protocol through support to clean energy projects in the Philippines. The Project will assist the Philippines in stimulating and accelerating the commercialization of renewable energy applications and markets at the grid-connected level in order to reduce greenhouse gas (GHG) and other emissions, while responding to increasing energy demand and the need for energy diversification. Specifically, the proposed Project will obviate the need for equivalent capacity of fossil fuel-based generation to meet the projected power shortfall in the Visayas region, thus mitigating greenhouse gas emissions. Project description Ref. PAD B.3. The Project comprises: (1) development of a 20 MW geothermal field, including the drilling of one production well (already completed) and the construction of the corresponding fluid collection and re-injection system (FCRS); (2) the construction, installation and commissioning of a 20 MW geothermal power plant, with gas abatement facility; and (3) the construction of a switching station at Nasulo to interconnect with Transco's 138 kV transmission lines. The NCDMF will purchase CERs, targeted annually at 88,000 tons of Carbon Dioxide equivalent(tCO2e), from project commissioning (scheduled for end-2007) to 2012, at a price of about US$5.6tCO2e, totalling approximately $2.5 million. Which safeguard policies are triggered, if any? Ref. PAD D.3, Technical Annex 10 O.P. 4.01 ­ Environmental Assessment Significant, non-standard conditions, if any, for: Board presentation: Not applicable Loan/credit effectiveness: Not applicable Covenants applicable to project implementation: Not applicable -2- A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Dependence on imported and polluting fossil fuels The primary energy mix of the Philippines is characterized by a heavy dependence on largely imported fossil fuels which accounted for some 52 percent of the total energy supply in 2002. According to the Philippine Energy Plan (2004-2013), the share of fossil fuels is expected to increase, accounting for about 62% of the total energy supply in 2013. As a corollary for projected economic growth, demand for electricity is expected to increase from 48,467 GWh in 2002 to 111,210 GWh in 2013. Energy consumption for power generation is projected to increase from about 58 million barrels of fuel oil equivalent (MMBFOE) in 2002 to 70 MMBFOE in 2013. Coal- fired plants remain the dominant type of power generation in the country, accounting for 27% of total power generation, while oil-based power generation accounted for some 14% of the total in 2003. Energy security and environmental concerns In the wake of recent global oil and coal price hikes, the country's heavy dependence on imported oil and coal has become a top priority concern for the Government of the Philippines (GOP). Moreover, coal and oil-fired power plants are major sources of environmental concerns at both the local and global levels. Energy supply accounts for over 26% of the country's total greenhouse gas (GHG) emissions. Due to the projected increase in electricity demand, GHG emissions from the power sector is expected to increase from 14 million tons of carbon dioxide equivalent (tCO2e) in 1996 to about 60 million tCO2e in 2010 and 133 million tCO2e in 2020 (under a business-as-usual scenario). The rural power sector contributes a disproportionately large amount of these emissions. This could be attributed to a number of factors, including (a) inefficiencies of many electric cooperatives and their lack of creditworthiness to tap investment financing to reduce high system loss; and (b) Philippines is a large archipelago comprising some 7,000 islands and, in remote islands and off-grid areas, electrification is characterized by a high dependence on diesel or bunker fuel for power generation, resulting in a higher carbon intensity than the Philippine energy sector as a whole. Given the GOP's current goal to increase barangay (village) electrification from the current level of about 90% to 100% by 2008, and the fact that all the unelectrified barangays are in rural areas, emissions of GHGs are likely to increase at a rapid pace under the status quo scenario. Government Policy Response · The Clean Air Act of 1999 aims to provide a comprehensive air pollution control policy for the country. The challenge, however, is in implementation. · GOP ratified the UN Framework Convention on Climate Change (UNFCCC) in August 1994, and more recently, the Kyoto Protocol in October 2003. Its Climate Change Action Plan endorses a shift from the current fossil-dominated energy mix to one that involves greater use of renewable energy resources. The United Nations Development Programme/Asian Development Bank/Global Environment Facility (UNDP/ADB/GEF) Asia Least-Cost GHG Abatement -3- Strategy (ALGAS) report highlighted the crucial role of the energy sector in reducing GHG emissions and have identified the promotion of renewable energy (RE) as a strategic priority. · Electric Power Industry Reform Act (EPIRA) of 2001 cited the State policy to promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy. · GOP's commitment to policy and institutional reforms necessary to remove barriers for rural electrification and RE development has been articulated in its Letter of Sector Development Program (dated March 2003) under the Bank/GEF-financed Rural Power Project. · In 2004 energy independence has been declared as one of the five major reform agenda of the President of the Philippines. Towards this end, the action plan of the Department of Energy (DOE) includes, among others, (a) diversification of the energy mix to increase the reliability and security of energy supply, notably through aggressive development of RE; and (b) promotion of energy conservation, including through the recent introduction of a time-of-use power tariff. · The RE Policy Framework issued by DOE sets ambitious targets to double the current level of renewable-energy-based power generation capacity by 2013 and to become the number one wind energy producer in Southeast Asia. This high scenario is based on the following key assumptions: (a) enhancement of existing policies and programs to establish a market-driven RE industry that is conducive to private sector investment and participation and encourages technology transfer and research and development; and (b) availability of international financing schemes (e.g., Clean Development Mechanism or CDM). 2. Rationale for Carbon Finance (CF) involvement It is proposed that the Carbon Finance Business purchase partial or entire emission reduction (ER) assets to be created by the proposed Project based on the following considerations: (a) the least cost alternative would be a polluting coal-fired power plant rather than the proposed environmentally friendly geothermal power plant; (b) this is the first time that the project sponsor, the Philippines National Oil Corporation- Energy Development Corporation (PNOC-EDC), is going to own and operate both the steam production and a power plant, rather than limiting its activities to the former; and (c) the main creditor, Development Bank of the Philippines (DBP), has required PNOC-EDC to endeavor to secure carbon credits as part of the loan conditions, as carbon credits will enhance the project cash flows. Other barriers to investment have been identified such as lack of availability of concessional financing for this type of plants after privatization of the sector, negative impact of peso devaluation in existing financing and barriers to investment in the energy sector in the Visayas for the past years, among others. The Carbon Finance Business (ENVCF) has already signed a letter of interest to purchase the certified emission reductions (CERs) under the project. The exact amount of CERs eligible for purchase will be subject to a Baseline Study that has been commissioned by ENVCF and to independent verification of energy output each year after plant commissioning. The purchase amount and price will be defined in an Emission Reduction Purchase Agreement (ERPA) to be reached through negotiation between the Bank and PNOC-EDC. A summary of the baseline and additionality analysis is in Annex 13. -4- 3. Higher level objectives to which the project contributes The overarching objective of the proposed Project is to help mitigate global climate change by facilitating the use of market-based mechanisms sanctioned under the Kyoto Protocol through support to clean energy projects in the Philippines. The Project will assist the Philippines in stimulating and accelerating the commercialization of renewable energy applications and markets at the grid-connected level in order to reduce GHG and other emissions, while responding to increasing energy demand and the need for energy diversification. Specifically, the proposed Project will obviate the need for equivalent capacity of fossil fuel-based generation to meet the projected power shortfall in the Visayas region, thus mitigating greenhouse gas emissions. The power plant is scheduled to commence operation in late 2007. Upon its full-year commercial operation starting in 2008, the plant is expected to sell about 150 GWh of power and mitigate about 88,000 tons of CO2 annually. This private sector-sponsored project is fully consistent with the Country Assistance Strategy (CAS, dated April 19, 2005, document number: 32141-PH) that includes improving rural infrastructure services for economic growth, strengthening private sector participation in infrastructure and enhancing environmentally sustainable development. This Project has been endorsed by the government for carbon financing, as it will contribute to the energy sector's goal of expanding the use of indigenous energy resources and reducing the country's heavy reliance on imported fossil fuels. B. PROJECT DESCRIPTION 1. Instrument It is proposed that the Carbon Finance Business purchase partial or entire emission reduction (ER) assets to be created by the geothermal power project upon the operation of this Project starting from late 2007 until 2012. The Emission Reductions Purchase Agreement (ERPA) between PNOC-EDC and the Bank, acting as trustee for the Netherlands Clean Mechanism Development Facility (NCDMF), provides for a price of about $5.6 per tCO2e and target annual CER purchase of about 88,000 tCO2e. As noted above, the exact amount of CERs eligible for purchase is determined by a Baseline Study and by independent verification of actual energy output each year after plant commissioning. 2. Project development objective and key indicators The project development objective is to create and trade GHG emission reduction credits under the CDM through the avoidance of thermal power generation. The key Project performance indicators will include (a) the quantity and cost of electricity generation/sales; and (b) actual CERs. 3. Project components The Project is located in the Palinpinon-2 [correct name? if not, change throughout document] geothermal production fields in the Southern part of Negros Island, central Philippines. The Palinpinon-2 field already supports existing power plants (totaling 80 MW) owned and operated by the National Power Corporation (NPC). The Project will "optimize" reservoir utilization within -5- Palinpinon-2 by tapping excess steam for additional power generation capacity amounting to 20 MW1. The new power plant, to be owned and operated by PNOC-EDC, would contribute to meeting the growth in energy demand in the Visayas Grid over the medium and longer term. The Project comprises: (1) development of a 20 MW geothermal field, including the drilling of 1 production well (already completed) and 2 re-injection wells, as well as the construction of the corresponding fluid collection and re-injection system (FCRS); (2) construction, installation and commissioning of a 1 x 20 Geothermal Power Plant with H2S gas abatement facility; and (3) construction of a switching station in Nasuji to connect to NPC's 138 kV transmission line. Once the power plant is operational, power sales are estimated at about 150 GWh annually. 4. Lessons learned and reflected in the project design The project design reflects decades-long experience of PNOC-EDC in geothermal reservoir management that enables extraction of an additional 20 MW of power generation capacity from the almost fully utilized Palinpinon-2 steamfield, without risk of affecting the output of the adjacent Palinpinon-1 field. This is ensured by PNOC-EDC through its conducting a very thorough resource assessment study that made long-term measurements of reservoir pressure prior to designing the power plant. The project design also reflects a conscious strategy to significantly reduce capital and operating costs by locating the power plant adjacent to existing facilities. This strategy would lower the cost of piping, civil works and interconnection to the transmission lines of the National Transmission Corporation (Transco). Operating and maintenance cost would also be reduced, since the same manning complement that operates and maintains the existing facilities could also be made responsible for maintaining the facilities of the new plant. Lessons learned from earlier CF projects have been incorporated in the Bank's due diligence work, as well, including: a) the need to pay special attention to the implications of overall power sector restructuring and renewable energy policy on the Project, and b) the need to carefully assess the market and price risks involved in the proposed plan to sell power from the merchant plant to the Wholesale Electricity Spot Market (WESM). 5. Alternatives considered and reasons for rejection The alternative to this Project is to maintain the status quo of power supply addition from fossil fueled generating systems (mainly diesel). This alternative has been rejected because the shift from fossil fueled power generation to renewable forms of energy is a key strategy of the GOP to increase energy security of the country while minimizing the environmental impact of power generation. 1 Although the steam field for the proposed plant is also in the Nasuji Sector, the new plant would be called "Nasulo geothermal power plant (GPP)" to avoid confusion with the existing 20 MW Nasuji GPP. Nasulo is the name of the nearby fault. -6- C. IMPLEMENTATION 1. Institutional and Implementation arrangements The Project will be implemented in accordance with the ERPA to be concluded between PNOC- EDC and the Bank, as trustee of the NCDMF. A Monitoring Plan (MP) will be agreed between parties to the ERPA. The ERPA and MP will define the quantity, price and other delivery conditions for CERs to be purchased by NCDMF as well as monitoring and verification systems and methods. Eligibility of C?ERs for purchase by NCDMF will be verified by an independent third party. Verification and certification of CERs generated annually by the Project will be coordinated by the NCDMF which will ultimately purchase the CERs. As per the requirement of the Kyoto Protocol, GOP will operate a registry to manage the transfer of CERs generated by the Project. PNOC-EDC, the Project sponsor, will be responsible for implementation of the Project, including the following provisions under the ERPA: · Maintain and operate the Project in accordance with sound business practices, proper due diligence and high efficiency; · Undertake all reasonable efforts, including project documentation, to ensure eligibility of ERs under Art.12 of the Kyoto Protocol; · Undertake, satisfactory to the Bank, actions agreed in the Environmental Management Plan (EMP) to comply with the Bank's safeguard policies; and · Notify the Bank of anything that may have an impact on the project or its capacity to deliver ERs, including delays, material adverse changes and force majeure. Specifically, in relation to CERs, PNOC-EDC will: · Monitor the emissions and other relevant parameters; · Organize periodic auditing of the project and verification that emission reductions have been achieved in compliance with relevant project criteria, including the preparation of required reports; · Prepare a brief annual or biannual report that should include: information on overall project performance; emission reductions generated, verified and compared with targets; observations regarding MP baseline scenario indicators; information on adjustment of key MP assumptions, and calculation methods and other amendments of the MP; and · Ensure certification of verified emission reductions. Payment and flow of funds. After the ERPA becomes effective, NCDMF will only disburse against delivery of CERs. The involvement of the NCDMF with the Project will expire once CERs up to the total contract amount, as well as any Option CERs over which the option is exercised, -7- have been delivered. In the event that the project sponsor fails to deliver the quantity of CERs for any given calendar year as set forth in the ERPA, it will be required to make-up the shortfall over the course of the following calendar year or other period agreed upon [FYI - there are other remedies including termination, which you may not need to mention here, but I wanted to bring to your attention in case you would like for this statement to be made complete]. 2. Monitoring and evaluation of outcomes/results Carbon Finance projects are initially evaluated on the basis of an ex-ante analysis of the emissions baseline (conventional generation and emissions that would have occurred in the absence of the project) and determination of project additionality. Project performance - and payment for CERs ­ is then monitored in accordance with the requirements of the MP incorporated in the ERPA by inclusion as a schedule to the ERPA and evaluated on the basis of achieving the expected CERs. Monitoring and evaluation of CERs are implicit in the project as a function of electricity generation as it occurs, with payment based on Megawatt hours (MWh) of generation as invoiced to the customer purchasing the electricity. To increase the likelihood that CERs acquired under the ERPA will satisfy the requirements of the UNFCCC and the Kyoto Protocol, Carbon Finance Business will retain the services of internationally-recognized, fully independent third parties to: a) provide validation of the sector- wide Baseline; and b) provide validation of the project design, the project specific Baseline Study (test of additionality against the sector-wide baseline), and the MP. This independent third party will also undertake periodic verification and certification of the ERs generated by each project and issue a Verification and Certification Report that includes: · A statement of the amount of verified CERs the projects have generated in the relevant period, · Other matters as may be required by the UNFCCC or Kyoto Protocol, and · Verification of compliance with Bank Safeguard Policies. The validator will present a PDD, along with a description of the methodology chosen to measure the CERs and to demonstrate additionality, to the Executive Board of CDM, for its approval and registry under international rules. This approach ensures the creation of an environmental commodity that is recognized under existing laws of the Philippines and conforms in due course to the relevant international agreements. It is understood that these international guidelines may change, according to decisions by the Conference of the Parties to the UNFCCC and Kyoto Protocol. The project will be reviewed by the Bank during the construction phase of the Project [the word project is sometimes capitalized and sometimes not; may want to make uniform] to address areas of implementation weaknesses, especially concerning the EMP, accommodate changes in priorities, and ensure compliance with relevant Bank policies and procedures. 3. Sustainability The project entity, PNOC-EDC, was established on March 5, 1976 and has since then achieved remarkable success in geothermal exploration and development. Due to its decades-long experience in this specialized field, it has a track record demonstrating its technical competence in -8- implementation of the proposed project. Indeed, PNOC-EDC is the beneficiary of earlier Bank loans which are closed, and its performance was rated highly satisfactory in the Implementation Completion Report (ICR) for the last two Bank-financed geothermal projects. Although it is just beginning to be involved in the task of operating the power plants themselves, sustained operation of the power plant itself is not expected to be a problem, given the extensive training to be provided by the power plant contractors which shall build the plant on a turnkey basis. The 20 MW Nasulo power plant will utilize excess steam from the Palinpinon-2 field (optimization). The adequacy of the excess resource to fuel the commercial operation of the proposed plant for 25 years is supported by a thorough resource assessment study conducted by PNOC-EDC experts in 2002, and revalidated in 2005. The most crucial indicator is the reservoir pressure trend that has been shown to have stabilized starting in 2002. Along with thermal studies, the results show that the field could support the additional fluid extraction needed for a power plant of up to 40 MW. A specially designed fluid collection and re-injection system, and the planned drilling of makeover production wells at 5 year intervals during plant operation, assure technical sustainability of the project for 25 years. These results were reviewed by an independent expert commissioned by the Bank and found fully satisfactory. The finances of both the project and the project entity are expected to be satisfactory, as elaborated in the financial analysis below, including the results of sensitivity analysis which indicated that there is a substantial margin to cover the downside risks. 4. Critical risks and possible controversial aspects There are no controversial aspects foreseen in the project. Critical risks are described below: Risks Risk Mitigation Measures Risk Rating with Mitigation To project development objective Baseline risk Baseline and monitoring methodologies used in M the current projects have been approved by the CDM Executive Board. To component results Technical risk Geothermal field development and geothermal M power generation are mature technologies on which there is considerable local experience. Geothermal resource risk PNOC-EDC conducted thorough resource M assessment study prior to plant design. Reservoir pressure trend from 1990 to 2005 confirms that field can support additional fluid drawdown for plant of up to 40 MW. Makeover production wells will be drilled periodically during plant operation. -9- Risks related to PNOC-EDC's lack of Bids for power plant will be required to include S experience in power plant operation comprehensive training of PNOC-EDC staff prior to and after plant commissioning. Key specialists, e.g. turbine/generator spcialist, will be hired to augment training during operation. Moreover, PNOC-EDC is expected to be partially privatized by end-2005 by selling 40% of its shares to a strategic investor which is expected to augment the company's technical and operational expertise. DBP already approved a loan of P1.4 billion Risks of project financing gap M (US$24.8 million, at assumed exchange rate of P56.5 to US$1) to PNOC-EDC, with the requirement that the Project sponsor will endeavor to secure carbon credits under this Project. No problem is expected for PNOC-EDC to finance the balance of the project costs, about US$10.7 million, from its internal cash generation (in addition to financing the sunk costs of about US$1.1 million for steamfield development). Nevertheless, PNOC-EDC's ability to self-finance investments will be included in the Bank's due diligence work in assessing its financial viability. Commercial risks During project appraisal, special attention will be M paid to the assessment of the market and price risks involved in the proposed strategy to sell power from the project to WESM. Based on NPC's current power tariff, PNOC-EDC's preliminary estimate of the project financial rate of return (FRR) is about 13%, which is well above the Company's weighted average cost of capital (WACC) of about 9.6%, thus allowing a significant margin to cover potential downside risks. The Project sponsor, PNOC-EDC, is expected to remain profitable and its finances are expected to improve with the planned 60% privatization of the Company. Overall risk rating M 5. Loan/credit conditions and covenants Not applicable [may want page break here] D. APPRAISAL SUMMARY 1. Economic and financial analyses (see Annex 9) a) Project Returns The key variables that significantly impact the project economics and finances include the following: - 10 - · Power sales ­ assumed to be about 150 GWh annually. Although the Project will be a merchant plant prior to the conclusion of bilateral contracts for the power sales, the risk of substantially lower market share is low, in light of DOE's projected power demand for the Visayas grid and the lower cost of geothermal power as compared with such alternatives as diesel-fuelled power at the margin. · Power Price ­ based on NPC's current power tariff for the Visayas grid at P3.2646/kWh. The results of sensitivity analysis indicated that the break-even tariff is about P2.4/kWh, thus allowing for a 26% margin to cover the downside risk of power price. · Project cost ­ PNOC-EDC's cost estimates were based on prices in contracts recently placed by the Company [inconsistent capitalization for the word company throughout document]for similar works and estimates by its feasibility study consultants. For prudence, the base case for project returns are based on cost estimates higher than those of PNOC-EDC, as recommended by the Bank's independent consultant, including higher unit cost of well drilling ($1.5 million per well) and two new re-injection wells. Details of the project cost are in Annex 5. · Operating and maintenance costs ­ Power plant O & M costs have been assumed to be $35/kW/yr in PNOC-EDC's feasibility study, along with steam field maintenance costs budgeted at around $300,000 per year, and these estimates are considered by the Bank's geothermal consultant to be appropriate. In addition, allowance has been made for the drilling of one new production well every ten years. · Project financing ­ The Development Bank of the Philippines (DBP) already approved a 15-year loan of P1.4 billion (US$24.8 million, at assumed exchange rate of P56.5 to US$1) to PNOC-EDC, with the requirement that the Project sponsor will endeavor to secure carbon credits under this Project. No problem is expected for PNOC-EDC to finance the balance of the project costs, estimated at about US$10.7 million, from its internal cash generation (in addition to financing the sunk costs of about US$1.1 million for steamfield development). The Project is expected to start operation in December 2007. The costs and benefits estimated for the calculation of both economic and financial rates of return are assumed to be the same, except for the exclusion of taxes in the case of the economic rate of return (ERR). The main project benefits will be derived from sales of power, while carbon credits will contribute to additional revenues at the margin. The value of power generated from the Project is approximated by the current NPC generation tariff for the Visayas grid. It is a conservative assumption to use the existing tariff as a proxy for the consumers' willingness to pay, as this does not take into account any consumer surplus of additional power deliveries to the grid. Both the economic rate of return (ERR) and financial rate of return (FRR) are satisfactory, estimated at about 15% and 13.1% (in real terms), respectively. The results of sensitivity analysis indicated that even under the scenario of 15% lower net operating cash flows (as a result of lower revenues and/or higher operating costs), the FRR of 10.2% remains slightly above the weighted cost of capital of the project entity, estimated at about 9.7% (with its debt financing cost of about 9.5% p.a. before tax; and cost of equity assumed to be 10%). The carbon credits, estimated at about $492,800 per year, totaling about $2.5 million during the 5-year period of 2008-2012, are not expected to have a significant impact on the project returns (improving the FRR by 0.5%), although they facilitate the project sponsor's access to credit for this Project, as noted above. - 11 - b) Project Entity Recent Finances. PNOC-EDC has remained consistently profitable. However, since 1997, PNOC- EDC has experienced a liquidity squeeze, mainly due to the substantial mismatch between the terms of its power purchase and sales agreements. Specifically, its power purchase agreements, under five build-operate-transfer (BOT) contracts with private independent power producers (IPPs), are only 10 years, while its sale of electricity to NPC is covered by a much longer term, 25-year power sales agreements. Consequently, PNOC-EDC has to seek external financing in order to pay part of the BOT obligations to the IPPs. In addition, in 2004, PNOC-EDC reported a negative net worth for the first time in the Company's history due to changes in Philippine accounting standards for foreign currency transactions and immediate recognition (rather than deferral) of foreign exchange losses. As a result, in recent years, PNOC-EDC has not complied with the minimum financial performance covenants under earlier Bank-financed projects, summarized as follows: Financial Covenants 2002 2003 2004 Actual Actual Estimated Current Ratio (1.0 minimum) 0.63 0.83 0.92 Debt Equity Ratio (70% maximum) 76% 75% 119% Debt Service Ratio (1.25 minimum) 1.01 0.92 0.87 Future Finances. PNOC-EDC has planned to implement a number of measures to improve its future finances, including the following: (a) review its plans and programs for operating budget and capital expenditures to identify controllable expenses for possible deferral and reduction; (b) continues to undertake profitable projects to improve its cash flow position over the medium and longer term; and (c) revive its plan to privatize 60% of its shares, with 40% targeted for sales to strategic operators and 20% through IPO in the Philippine stock exchange. If successful, PNOC- EDC's future finances are expected to improve considerably, as indicated in the projected financial ratios below. Detailed assumptions, along with its projected income statements, cash flows and balance sheets over period 2005-2009 are in Annex 9. However, the projected improvements would not be sufficient to allow the Company to comply with the existing financial covenants for debt/equity ratio and debt service coverage ratio. Accordingly, PNOC-EDC has planned to request the Bank to consider amendment of the above financial covenants, viz to waive the above two financial covenants for 2005 and 2006, and to reduce the minimum debt service coverage ratio to 1 time, starting from 2007. In light of PNOC-EDC's action plan to strengthen its finances, which is satisfactory, the Bank is expected to respond positively to this request. Projected Financial Ratios 2005 2006 2007 2008 2009 Current Ratio (1.0 minimum) 1.52 1.78 1.80 1.43 1.12 Debt Equity Ratio (70% maximum) 86% 76% 66% 55% 39% Debt Service Ratio (1.25 minimum) 0.88 0.93 1.11 1.05 1.04 - 12 - 2. Technical The Philippines remains the world's second largest user of geothermal energy for power generation with 1,931 megawatts (MW) of installed capacity. The total potential in the country is estimated to be 4,790 MW, of which 2,047 are proven reserves. Development of this indigenous energy resource is a key part of the Government's policy for security of fuel supply. The Philippine Energy Plan for 2003-2013 schedules 860 MW of indicative geothermal capacity addition within the ten-year planning period to address the forecast additional capacity requirement, largely in Luzon. PNOC-EDC is one of only two companies that have been developing geothermal fields in the Philippines from the inception of the geothermal energy program. Thus, it has acquired decades- long experience in steamfield development and "optimization" and is well positioned to develop and operate the proposed Project. Although it is just beginning to be involved in the task of operating the power plants themselves, this is not expected to be a problem, given the extensive training to be provided by the power plant contractors. More crucial in the case of this Project, which will utilize excess steam from an existing, almost fully-used field, is PNOC-EDCs expertise in technical assessment of the resource and in designing a strategy for its optimal use. It would be important to ensure that the proposed 20 MW Nasulo power plant could be supported for 25 years by the geothermal resources and that the operation of this Project will not adversely impact the operation of other power plants already operating in both Palinpinon-1 and Palinpinon-2 fields. For this purpose, PNOC-EDC conducted in 2002 a thorough resource assessment study that included estimation of volumetric stored heat to ensure adequate thermal capacity, decline curve analysis using lumped parameter modeling to assess pressure drawdown of the new plant, and reservoir pressure trend analysis for the Palinpinon-2 field. Periodic reservoir pressure measurements in several wells were in fact initiated in 1990, and continued well after the pressure had stabilized in 2002 and plans for the power plant had been drawn up. Measurements made in 2005 showed stable reservoir pressure and provided full confirmation that, with appropriate fluid re-injections, the field can support the additional fluid extraction needed for commercial operation for 25 years of a new geothermal power plant of even up to 40 MW. An independent review by a geothermal expert commissioned by the Bank concluded that the resource assessment study done by PNOC-EDC is fully satisfactory and that the design of the power plant and the fluid collection and re-injection system is consistent with international standards. 3. Social and Environmental (see Annex 10) a) Environmental Category and Safeguard Policies Triggered The Project is assigned Environmental Category B based on the following considerations: (i) the Project is an add-on to existing operations; (ii) the design includes re-injection of spent geothermal fluid back to the geothermal reservoir which avoids discharge of brine into rivers and water channels while providing continuous recharge to the geothermal reservoir; and, (iii) the project proponent has a proven track record of good performance in environmental and social safeguards. - 13 - Safeguard Policy Applicable? If Applicable, How Might It Apply? [x ] Environmental Assessment (OP/BP 4.01) [] Natural Habitats (OP/BP 4.04) [] Pest Management (OP 4.09) [] Involuntary Resettlement (OP/BP 4.12) [] Indigenous Peoples (OD 4.20) [] Forests (OP/BP 4.36) [] Safety of Dams (OP/BP 4.37) [] Cultural Property (draft OP 4.11 - OPN 11.03) [] Projects in Disputed Areas (OP/BP/GP 7.60)* [] Projects on International Waterways (OP/BP/GP 7.50) The Environmental Assessment (EA) Policy is triggered due to project activities that may have environmental impacts, such as: land clearing and civil works associated with the preparation of the 1-ha power plant site, the 0.5-km access road and the 1.0-ha new re-injection well pad [not sure what this word is?]; the repair/drilling of old/new wells; and management of additional liquid wastes and air emissions associated with the operation of the 20MW geothermal power generating capacity. b) Social Issues There are no significant social issues associated with the project. The project will not cause involuntary resettlement or displacement of livelihood as there will be no land acquisitions involved and all land developments are confined within the existing geothermal field. The other social issues usually associated with development projects in the Philippines such as the potential presence of indigenous population and community acceptance are also not a concern. The Southern Negros Geothermal reservation is not known to be an ancestral home of indigenous cultural minorities. The local population consists of Cebuanos who are the dominant mainstream ethnolinguistic group in the Visayas and Mindanao. The project is also welcome by local residents as it will provide them additional benefits in terms of subsidized power rates, livelihood support, environmental, health and other social development interventions. In terms of gender issues, the project is not expected to significantly alter gender equity patterns in employment but it is expected to positively contribute gender equity among local agricultural populations through the additional social forestry programs and other community development efforts. c) Environmental Issues Since the project is basically an optimization of the existing geothermal production field, the scale of activities and new processes involved is expected to be small compared to a full blown geothermal power development. The likely environmental issues include: increased sedimentation from the civil work activities; the handling and disposal of wastes, which include drilling wastes, spent geothermal fluids or brine, cooling tower blow down and sludge; and, the air quality impact of the additional air emissions from the new plant, particularly hydrogen sulfide (H2S). The EA report - 14 - provided comprehensive assessments of the project's environmental impacts. The Environmental Management Plan (EMP) contained in the EA report is also comprehensive and have adequately addressed all issues of concern. In terms of air quality impacts, the EA predicts that the expected ambient H2S concentrations with the new plant fully operating will still be below the 0.07ppm government standard for residential areas. Impacts on water quality will be negligible and will likely be only in the form of increased sedimentation from civil works as all liquid wastes will be re-injected back to the geothermal reservoir through a Zero Discharge Scheme (ZDS). The provision of steel casing of the wells to up to 1,000 m also ensures that the groundwater aquifer is not contaminated by geothermal brine. Finally, the project will not adversely affect the forest and natural habitat as the 4.1 ha total area to be opened up consist mainly of built-up lands and logged- over grasslands, all within the existing geothermal production field. d) Public disclosure Although the project is not required by the government to undergo a consultation process since it is exempted from the Philippine environmental impact statement system, PNOC-EDC conducted consultations with local residents and government officials. It has secured endorsements of the project from the Negros Oriental Provincial Development Council and the Central Visayas Regional Development Council. Copies of the full EA report were provided to the municipal and the provincial governments while an EA summary was published at the company's website. The same EA report was disclosed in the World Bank's Infoshop. e) Potential Legacy Issues The Bank's due diligence work was expanded to include existing projects or activities of PNOC- EDC within the geothermal field that are not part of the Project but may have legacy or outstanding issues which could be linked to the Project or which may pose reputational risks to the Bank. The Task Team's site inspection and review of documents on environmental and social performance have not found any outstanding issues associated with these projects. Palinpinon I and II have been in compliance with the national ambient air and water quality standards and were strictly following government regulations in the handling of hazardous wastes. In terms of social programs, these earlier projects have continued to provide development support for the surrounding communities. The only potential source of issues, if any, is the ongoing resettlement program, which PNOC-EDC is implementing in collaboration with the Municipality of Valencia as part of the earlier Palinpinon I and II projects (not part of this Project). Nevertheless, given the excellent track-record of PNOC- EDC, no problems are anticipated. The program has so far conformed to the Bank-prescribed processes. Its implementation will be monitored as part of the compliance monitoring for the Nasulo project. f) Management Measures and Institutional Arrangements The EMP submitted by PNOC-EDC has adequately addressed all issues of concern. As required in the ERPA, PNOC-EDC will be responsible for carrying out all the social and environmental management measures that it has committed to undertake. The third party CER auditor will be tasked to monitor the implementation of social and environmental management plans of PNOC- EDC while the Bank will also undertake regular supervision of safeguard implementation and - 15 - compliance. For the purpose of compliance monitoring, the Bank and the PNOC-EDC shall agree to focus on a smaller subset of issues critical to the project. A tentative list of issues and their corresponding management measures and indicators is provided in Annex 10, Table 1. To facilitate compliance monitoring and audit, the PNOC-EDC will be required to submit semi-annual safeguard compliance report to the Bank. 4. Policy Exceptions and Readiness No policy exceptions are being requested. - 16 - TECHNICAL ANNEX 1: POWER SECTOR BACKGROUND Capacity fuel mix Coal-fired plants remain Installed and Dependable Capacity by Source, 2003 to be the dominant type in MW of power generation in 4,500 the country. As of end- 2003, installed capacity 4,000 2 6 . 2 % 2 7. 5 % Installed Dependable 2 3.8 % of coal-fired power plants 3,500 2 3.7% accounted for 26% of the 19 . 0 % 3,000 18 . 3 % total generating capacities 2 0 .2 % in the country or 3,958 2,500 16 . 9 % MW. Most of these coal- 2,000 12 .8 % fired power plants are 11. 7 % located in Luzon, 1,500 accounting for 32% of the 1,000 total installed capacity in Coal Oil-based Hydro NatGas Geo Luzon. Oil-based power plants comprise 24% of the capacity mix. Hydroelectric power has the highest contribution among indigenous resources, with a share of 19% to total capacity. In Mindanao grid, hydroelectric power facilities represent almost 60% of the capacity mix. Since the commissioning of natural gas in 2002, its share to the capacity mix increased to 18% (2,763 MW) and even higher at 23% among the Luzon-based power generating facilities. Geothermal, which is dominant in the Visayas, contributes about 13% or 1,932 MW of the capacity mix. Power generation fuel mix The country's total electricity generation Power Generation, 2003 in the main grids in 2003 is estimated at Hydro 52,863 GWh, indicating 9.1% increase 15% Coal 27% compared to its 2002 level of 48,647 Geothermal GWh. Coal remained as the highest 19% contributor of electricity and posted a generation of 14,517 GWh or 28% of the Oil-based total, although its volume was reduced Natural Gas 14% 25% by 10% compared to its 2002 level of Total Generation = 52,863 GWh 16,125 GWh. This can be attributed to several factors: more diversified utilization of existing generating facilities in Luzon with the full commercialization of natural gas for power and more production of oil-based plants in Visayas particularly in Cebu with the operational problems of coal-fired power plants. - 15 - Visayas Power Generation Mix Power generation in Visayas rose from its 2002 level of 6,098 GWh to 8,764.5 GWh in 2003, an increase of 44%. While coal generation is predominant in Luzon, geothermal is the largest electricity contributor in Visayas and accounts for 72.6% (6,361 GWh) of the total mix in the region. Oil-based plants contributed 2,205 GWh or 20.8% of the total mix, about 33.5% higher than its previous 2002 level of 1,652 GWh or 27% of total. The remaining portions were contributed by coal and hydro resources, which only registered meager shares of 166 GWh (1.9%) and 32 GWh (0.4%), respectively. Visayas Power Grid Supply and Demand The projected demand for the region is forecast to grow from its estimated value in 2005 of 1,113 MW to 1,383 MW by 2009 and 1,849 MW by the end of the planning period. This indicates an average annual growth rate of 5.7%. To ensure a more credible supply expansion plan, DOE's 2004 Power Development Plan considers both the interdependence and transmission constraints among sub-systems of the Visayas region. One of the identified long-term approach for Visayas power development is to ensure optimization and sharing of indigenous resources among the sub- grids through strengthening and upgrading of the various transmission lines connecting the five individual island grids. Projects which are already being undertaken with firm financial backing are considered as committed plants. About 250 MW of the total requirements have been committed for the next 4 years. Among the committed power plants are the NPC's transfer of 110 MW Pinamucan Diesel plant to Panay in 2005 and the proposed 20 MW Nasulo Geothermal Power Project (also known as Palinpinon Optimization Project) to be commissioned in 2007. SUPPLY DEMAND PROFILE Visayas, 2005 ­ 2014 Transfer of Pinamucan DPP(110 MW), Guimaras DPP (3.4 MW), Mirant DPPs (37.5) MW 2400 N. Negros Geo, Palinpinon Geo (60MW), Talisay (30 MW, net 24 MW) Bais Bioenergy (25 MW, net 20 MW) 2000 Additional Capacity Needed 1600 1200 Retirement 800 Cebu LBGT ­ 55 MW (2011) 400 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Req'd Cap. Add. 0 0 0 100 0 0 150 100 100 150 Committed Cap. 151 0 84 20 0 0 0 0 0 0 Existing 1435 1435 1410 1410 1410 1410 1366 1366 1366 1366 Peak 1113 1170 1238 1308 1383 1463 1550 1644 1742 1849 - 16 - Renewable Energy Policy Framework This policy framework embodies the DOE's objectives, goals, policies and strategies as well as programs and projects to further develop the RE sector within the perspective of the sector's supply and demand prospects and current stage of development given its critical role in the country's energy future. It is the government's policy to facilitate the energy sector's transition to a sustainable system with RE as an increasingly prominent, viable and competitive fuel option. The shift from fossil fuel sources to renewable forms of energy is a key strategy in ensuring the success of this transition. Moreover, current initiatives in the pursuit of this policy are directed towards creating a market-based environment that is conducive to private sector investment and participation and encourages technology transfer and research and development. Thus, current fiscal incentives provide for a preferential bias to RE technologies and projects which are environmentally sound. Energy Sector Objectives, RE Goals, Policies and Strategies Energy Sector Objectives RE Goals RE Policies and Strategies Ensure sufficient, stable, Increase RE-based capacity by Diversify energy mix in favor of secure, accessible and 100% by 2013 indigenous RE resources reasonably-priced energy supply Be the number one Promote wide-scale use of RE as geothermal energy alternative fuels and technologies Pursue cleaner and efficient producer in the world energy utilization and clean Transform Negros island as a model technologies adoption Be the number one of RE development and utilization wind energy producer Cultivate strong partnership in Southeast Asia Make the Philippines a and collaboration with key manufacturing hub for PV cells to partners and stakeholders Double hydro facilitate development of local capacity by 2013 manufacturing industry for RE Empower and protect welfare equipment and components of various energy publics Expand contribution of biomass, solar and Encourage greater private sector ocean energy by 131 investments and participation in RE MW development through market-based incentives Increase non-power contribution of RE to the Establish responsive market energy mix by 10 MMBFOE in mechanisms for RE-generated the next ten years power Formulate an effective management program for fuelwood utilization with the view of reducing environmental impact - 17 - Geothermal Power Generation The Philippines remains the world's second largest user of geothermal energy for power generation with 1,931 megawatts (MW) of installed capacity. In 2003, geothermal power plants generated a total of 9,419 gigawatt-hours (GWH) of electricity, accounting for 19% of the country's total electricity requirement. Geothermal Potentials. With only 1,931 MW installed out of 2,047 MW proven geothermal reserves and 4,790 MW potential reserves, there are obviously plenty of opportunities for expansion and private sector involvement. The primary emphasis will necessarily be to complete on-going geothermal projects such as the expansion and/or further development of major known geothermal fields ­ expansion project in fields Bacon-Manito in Albay/Sorsogon, optimization projects including this Project in Negros Oriental and in Mt. Apo in Davao, and the development of Cabalian project in Southern Leyte. Private sector investment in said projects, which are located in areas covered by service contracts between the DOE and PNOC-EDC, could be realized through venture arrangements with PNOC-EDC and participation in the recently launched First Philippine Geothermal Contracting Round. Private companies may also consider investing in nonpower utilization of geothermal energy. - 18 - TECHNICAL ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES The most directly related project is the Bank-GEF financed Rural Power Project, the first phase of an Adaptable Program Loan (APL) aimed at supporting reforms and priority investments in the rural power sector, and removal of barriers for renewable energy development. The electrification investments are for: (1) grid-connected electric cooperative (EC) subprojects; and, (2) decentralized electrification. The first type of subprojects will improve power supply systems ' safety, reliability, efficiency and power service quality for existing customers, through rehabilitation and capacity upgrades of the existing supply system; remove supply system constraints, encourage institutional development of ECs, and, improve employee productivity, safety, and, efficiency of customer service provision. The second type of investments will be in small power generation, decentralized grids, and stand-alone renewable energy technologies (RET) systems, most notably photovoltaic (PV) systems. The Partial Credit Guarantee Fund component will help establish, and provide grant funds to partially cover loan losses incurred in the provision of loans to RET purchasers, and suppliers. This component is funded by a United Nations Development Program (UNDP)-Global Environment Facility (GEF) grant. Finally, the third component will support the DOE, Energy Regulatory Commission, the Development Bank of the Philippines, participating financial intermediaries, and participating enterprises in reducing market barriers for the commercialization of RETs, by building capacity of concerned public, and private sector entities. Investment risks would be reduced through strong project development, appraisal, procurement, and supervision of RET subprojects, and, by supporting implementation policies on energy tariffs and subsidies, and on regulation, and planning. This component is funded by a Bank- GEF grant. Other related completed, ongoing or planned electrification projects are shown in the following table: Sector Issue Project Latest Supervision (PSR) Ratings Implementation Development Progress (IP) Objective (DO) Implement Phase 1 of APL with overall Bank/GEF financed Rural S S aim of supporting reforms and priority Power Project investments in rural power sector and to remove barriers for renewable energy development Implementation of a partial credit GEF-financed Electric S S guarantee program and related capacity Cooperative System Loss building activities for selected electric Reduction Project cooperatives to promote energy efficiency and system loss reduction --------------------------------------------------- S = Satisfactory - 19 - TECHNICAL ANNEX 3: RESULTS FRAMEWORK AND MONITORING A detailed results and monitoring framework is presented in the Project Design Document. - 20 - TECHNICAL ANNEX 4: DETAILED PROJECT DESCRIPTION Overview. The Southern Negros Geothermal Production Field (SNGPF) is located in Negros Island in central Philippines, and consists of the Palinpinon and Dauin geothermal fields. The Palinpinon Field is divided into 2 geographical areas, namely, the operating fields of Palinpinon 1 and Palinpinon 2. The SNGPF at present has a total combined capacity generation of 192.5 MW. The combined electrical power produced from the 112.5 MW capacity Palinpinon I power plant and 80 MW (aggregate) Palinpinon II power plants supply the island of Negros, Panay and Cebu. Palinpinon I started commercial operations in 1983 and twelve years later, Palinpinon II went into commercial operation starting with the 20 MW Nasuji Power plant, followed by the 2x20 MW Sogongon and 20 MW Okoy-5. The proposed Project will "optimize" steam utilization at the Nasuji area within the Palinpinon-2 steamfield in Southern Negros by tapping excess steam for additional power generation capacity amounting to 20 MW1. The additional capacity will significantly contribute to meeting the growth in energy demand in the Visayas Grid in the immediate term. Resource Assesment. Output measurements made of the production wells in the Palinpinon 2 geothermal field, up to 2001, indicated excess available steam supply equivalent to around 21 MW with the largest excess steam of approximately 10 MW coming from the Balasbalas area. PNOC-EDC management commissioned in early 2002 an assessment of the excess steam available to support the proposed project, an additional 20 MW power plant in the Palinpinon 2 sector. The components of the resource assessment study included estimation of volumetric stored heat to ensure adequate thermal capacity, decline curve analysis using lumped parameter modeling to assess pressure drawdown of the new plant, and reservoir pressure trend analysis for the Palinpinon-2 field. Reservoir pressure measured in the Palinpinon-2 field in 1990 started at about 11 Mpag that then stabilized in early 2002 at 6 Mpag2. The study thus confirmed that the field can support the additional fluid extraction needed for commercial operation for 25 years of a new geothermal power plant of up to 40 MW. Development Strategy. The essence of PNOC-EDC's strategy in the development of the additional 20 MW power plant is to lower construction and operating costs by locating the power plant adjacent to existing facilities. This strategy would lower the cost of piping, civil works and interconnection to Transco's transmission lines. Operating and maintenance cost would also be reduced, since the same manning complement that operates and maintains the existing facilities could also be made responsible for maintaining the facilities of the new plant. 1 Although the steam field for the proposed plant is also in the Nasuji Sector, the new plant will be called "Nasulo GPP" to avoid confusion with the existing 20 MW Nasuji GPP. Nasulo is the name of the nearby fault. 2 Measurements made since then up to 2005 showed the pressure remaining stable at about 6 MPag. This supports the decision to allow a further 1 MPa drop due to the addition of the Nasulo PP, without risk of affecting the output of Palinpinon-1. - 21 - Figure 1 1 x 20 MW Nasulo Geothermal Project DEVELOPMENT PLAN NA SUJI CO T ROL N NORTH PAD E C NTER D- 6 S U M 1 121 95 7 P P- 4 1 10 7 85 2 1 ,02 6, 3 N - 6 ND KOY PO O L T ERMA O TH 00 S U M P MIDDLE PAD W ER T O O G LI N CO N PC TO EXISTIN G 20 MWe EE D K CR OA NASUJI POWER PLANT L O N T U L ( E = ±1090m) 1 ,02 6, 1 N A D D IT IO N A L 2 0 M We NP C PPE I L 00 I E N P O WE R P LA N T MIDDLE PAD ADDITION AL WELL 1 ,02 5, 9 N 00 S OUTH PAD - 22 - Project Components-. The project includes the following components: (1) development of a 20 MW geothermal field including the drilling of 1 production well (already completed) and 2 reinjection wells, as well as the construction of the corresponding fluid collection and reinjection system; (2) construction, installation and commissioning of a 1 x 20 Geothermal Power Plant with H2S gas abatement facility; and (3) construction of a switching station in Nasuji to connect to Transco's 138 kV transmission line. Fluid Collection and Reinjection System. The FCRS comprises mainly of a piping system with pressure relieving and reinjection functions. The two-phase fluid from the geothermal production wells will be collected and directed to the separator vessel. The two-phase fluid shall then go through separation process where the steam vapor and liquid are separated. The separated steam is channeled to a piping system for power plant steam requirement. Separated water (brine) is re- injected back to the reservoir. The investment cost of the FCRS includes the cost of tapping to the existing two-phase branch line and shorter length two-phase header, the fabrication of a 20 MW capacity separator, rock muffler, and silencer, the protection devices, the piping system for both steam and water line and the control system. The development cost includes the cost of drilling one production well to be hooked-up to the south production pad, to sustain the over-all steam requirements of both the existing 20 MW Nasuji GPP owned by NPC and the proposed 20MW Nasulo GPP. Power Plant. The power plant component includes the civil works, turbine, generator, condenser, cooling system and gas extraction system and a Hydrogen Sulfide (H2S) abatement facility (gas abatement system). Once operational, the plant is expected to generate about 150 GWh and mitigate about 123,000 tCO2 annually. The schematic diagram of the plant is shown below: - 23 - Project Implementation. PNOC-EDC is responsible for the implementation of the Project. PNOC-EDC drilling rigs and personnel shall be used to drill the required wells assisted by Drilling Technical Service Contracts. The engineering design of the fluid collection and reinjection system has been done by PNOC-EDC but actual construction of the system shall be bidded out. The power plant and sub-transmission system shall be constructed under two separate turnkey contracts. By the end of the 2nd quarter of 2005, PNOC-EDC will commence the bidding process for the construction of the fluid collection and reinjection system, the power plant and the transmission line. Construction of the FCDS is expected to start 4th quarter of 2005 while construction of the power plant and sub-transmission system are expected to start in December 2005. Commercial operation is targeted for December 2007. PNOC-EDC will drill the additional required production well in Nasuji after the commissioning of the power plant to further augment the steam supply from existing wells. Make-up production wells will be drilled at approximately 10 year intervals during the commercial operation of the plant. Power Plant Operation. The power plant will be operated by qualified PNOC-EDC staff who have undergone comprehensive training in the various aspects of plant operation and maintenance. Provision of training to PNOC-EDC staff prior to and during plant commissioning will be a required part of all bids for the power plant contract. Electricity Sales. The electricity output will be sold initially to the Wholesale Electricity Spot Market (WESM). It is uncertain at this point as to if and when bilateral contracts could be concluded for some or all of the power produced. - 24 - TECHNICAL ANNEX 5: PROJECT COSTS Cost Estimates. The base project cost (in September 2002 prices) is estimated at P1,616.37 million (US$31.08 Million); the total cost (including physical and price contingencies), is P1,742.76 million (US$33.51 million), with a foreign component of US$26.44 million. Physical contingencies represent 6.5% of the base cost while price contingencies for the local and foreign components was estimated at 4.3% and 1.1%, respectively. The steamfield portion of the project is exempt from taxes. For other project components, VAT is assumed at the current rate of 12%. Table 4.1 summarizes the cost estimates for the project. Table 4.1 Project Cost Summary Foreign Local Total (Million Component Component Project Component Philippine (Million US (Million Pesos) Dollars) Philippine Steamfield Dev't Costs - 105.12 105.12 Consultants Services - - - Fluid Collection and Reinjection System 1.64 101.54 194.40 Power Plant 28.24 24.30 1,619.97 Switchyard and Transmission Lines - - - Land Acquisition - - - Administration - 24.04 24.04 Total Project Cost 29.89 255.00 1,943.53 Price Contigencies 0.27 4.08 19.32 Physical Contigencies 1.58 17.23 106.30 TOTAL 31.73 276.31 2,069.16 Exchange Rate, PHP:US$ 56.50 - 25 - TECHNICAL ANNEX 6: IMPLEMENTATION ARRANGEMENTS The detailed implementation arrangements will be presented in the Netherlands Clean Development Facility (NCDF) Emission Reductions Purchase Agreement (ERPA) to be signed between PNOC-EDC and International Bank for Reconstruction and Development, as trustee of the NCDMF. - 26 - TECHNICAL ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS This annex is not required for CF projects. - 27 - TECHNICAL ANNEX 8: PROCUREMENT This annex is not required for CF projects. - 28 - TECHNICAL ANNEX 9: ECONOMIC AND FINANCIAL ANALYSES Project evaluation was conducted by the Bank largely based on the desk review of the available data and information as well as field visits and meetings with PNOC-EDC. Assumptions: Power sales ­ assumed to be about 150 GWh annually. Although the Project will be a merchant plant prior to the conclusion of bilateral contracts for the power sales, the risk of substantially lower market share is low, in light of DOE's projected power demand for the Visayas grid and the lower cost of geothermal power as compared with such alternatives as diesel-fuelled power at the margin. Power Price ­ based on NPC's current power tariff for the Visayas grid at P3.2646/kWh. The results of sensitivity analysis indicated that the break-even tariff is about P2.4/kWh, thus allowing for a 26% margin to cover the downside risk of power price. Project cost ­PNOC-EDC's cost estimates were based on prices in contracts recently placed by the Company for similar works and estimates by its feasibility study consultants. For prudence, the base case for project returns are based on cost estimates higher than those of PNOC-EDC, as recommended by the Bank's independent consultant, including higher unit cost of well drilling ($1.5 million per well) and two new reinjection wells. Details of the project cost are in Annex 5. Operating and maintenance costs ­ Power plant O & M costs have been assumed to be $35/kW/yr in feasibility study, along with steam field maintenance costs budgeted at around $300,000 per year, and these estimates are considered by the Bank's geothermal consultant to be appropriate. In addition, allowance has been made for the drilling of one new production well every ten years at a cost of about $1.5 million. Project financing ­ The Development Bank of the Philippines (DBP) already approved a 15-year loan of P1.4 billion (US$24.8 million, at assumed exchange rate of P56.5 to US$1) to PNOC-EDC, with the requirement that the Project sponsor will endeavor to secure carbon credits under this Project. The interest rate of the above DBP loan will be 8% per annum for the first ten years, and increased to 9.5% per annum for years 11 to 15. Additional financing charges include front-end fee of 1%, commitment fees of 0.75% and gross receipts tax of 5%. Grace period is 5 years, and repayment will start in year 6. No problem is expected for PNOC-EDC to finance the balance of the project costs, about US$10.7 million, from its internal cash generation (in addition to financing the sunk costs of about US$1.1 million for steamfield development). Emission Reductions credits -- The Emission Reductions Purchase Agreement (ERPA), to be negotiated between PNOC-EDC and the Bank (acting as trustee for NCDF), provides for a price of about $5.6 per tCO2e and target annual CERs of 88,000 tCO2e for full-year of power plant operation until the year 2012. The exact amount of ERs eligible for purchase is determined by a Baseline Study and by independent verification of actual energy output each year after plant commissioning. Project economic life ­ 25 years Transmission loss -- 3.5 % Depreciation -- straight-line method based on the following estimated useful lives of the properties: (i) investments in producing properties: 30 years; (ii) buildings: 5 ­ 30 years; - 29 - (iii) exploration, machinery and equipment: 2 ­ 10 years; (iv) furniture, fixtures and equipment: 3 ­ 10 years; (v) transportation equipment: 5 years; and (v) laboratory equipment: 5 ­ 10 years. Royalty/Income tax -- PNOC-EDC entered into seven geothermal service contracts with the DOE, granting the Company the right to explore, develop and utilize the geothermal resources, subject to sharing of net proceeds with the government. The net proceeds is what remains after deducting the gross proceeds the allowable recoverable costs, which include development costs, production and operating costs. PNOC-EDC remits 60% of the net proceeds to the government, comprising royalty fees and income taxes. Economic Analysis The costs and benefits estimated for the calculation of both economic and financial rates of return are assumed to be the same, except for the exclusion of taxes in the case of the economic rate of return (ERR). The main project benefits will be derived from sales of power, while carbon credits will contribute to additional revenues at the margin. The main project cost is related to the up-front capital cost, while the operating and maintenance costs include, among others, replacement wells. The ERR, estimated at about 15 % (in real terms), which is satisfactory. Economic Rate of Return (In Million Pesos) Investment Costs Operating Costs Energy Total Net Year Steamfield Power Plant Power Sales, Benefits Costs Benefits Local Forex Local Forex Subtotal Steamfield Plant Subtotal GwH 2005 152.66 92.43 2.28 179.51 426.89 - - - 426.89 - - (426.89) 2006 166.66 121.14 11.86 906.97 1,206.63 - - - 1,206.63 - - (1,206.63) 2007 24.22 - 9.50 725.66 759.37 3.43 7.91 11.34 770.71 30.67 100.13 (670.58) 2008 45.39 39.55 84.94 84.94 147.31 480.91 395.97 2009 28.99 39.55 68.54 68.54 153.36 528.50 459.96 2010 130.14 39.55 169.69 169.69 149.95 517.38 347.69 2011 17.14 39.55 56.69 56.69 140.83 487.60 430.91 2012 57.24 39.55 96.79 96.79 153.36 528.50 431.71 2013 17.14 39.55 56.69 56.69 149.95 517.38 460.69 2014 45.39 39.55 84.94 84.94 140.83 459.75 374.81 2015 113.74 39.55 153.29 153.29 153.36 500.66 347.37 2016 45.39 39.55 84.94 84.94 149.95 489.53 404.59 2017 17.14 39.55 56.69 56.69 140.83 459.75 403.06 2018 57.24 39.55 96.79 96.79 153.36 500.66 403.87 2019 17.14 39.55 56.69 56.69 149.95 489.53 432.84 2020 130.14 39.55 169.69 169.69 140.83 459.75 290.06 2021 28.99 39.55 68.54 68.54 153.36 500.66 432.12 2022 45.39 39.55 84.94 84.94 149.95 489.53 404.59 2023 17.14 39.55 56.69 56.69 153.36 459.75 403.06 2024 57.24 39.55 96.79 96.79 153.36 500.66 403.87 2025 101.89 39.55 141.44 141.44 149.95 489.53 348.09 2026 45.39 39.55 84.94 84.94 140.83 459.75 374.81 2027 28.99 39.55 68.54 68.54 153.36 500.66 432.12 2028 45.39 39.55 84.94 84.94 149.95 489.53 404.59 2029 17.14 39.55 56.69 56.69 140.83 459.75 403.06 2030 141.99 39.55 181.54 181.54 153.36 500.66 319.12 2031 17.14 39.55 56.69 56.69 149.95 489.53 432.84 2032 17.14 39.55 56.69 56.69 146.61 478.63 421.94 ERR 15.0% - 30 - Financial Analysis (a) Project Returns The financial rate of return (FRR), without sunk costs, is estimated at about 13.1% (in real terms), which is satisfactory. With the inclusion of sunk costs, the FRR would be reduced slightly to 12.5%. The results of sensitivity analysis indicated that even under the low scenario of 15% lower net cash flows from operation, the FRR of 10.2% remains slightly above the project entity's weighted cost of capital of about 9.7%. The carbon credits, estimated at about $492,800 per year, totaling about $2.5 million during the 5-year period of 2008-2012, are not expected to have a significant impact on the project returns (improving the FRR by 0.5%), although they facilitate the project sponsor's access to credit for this Project. Financial Rate of Return (in Million Pesos) - 31 - Steamfield Power Total CER Total w/ Calendar GWH Cash Plant Net Benefits Cashflow Year Sales Flow Cashflow CashFlow w/ CER 2003 0.00 (40.23) 0.00 (40.23) - (40.23) 2004 0.00 (25.87) 0.00 (25.87) - (25.87) 2005 0.00 (163.59) (170.10) (333.68) - (333.68) 2006 0.00 (267.61) (859.78) (1,127.39) - (1,127.39) 2007 30.67 (4.58) (627.90) (632.48) (632.48) 2008 147.31 65.39 288.19 353.58 353.58 2009 153.36 86.34 301.66 388.00 27.84 415.84 2010 149.95 (17.38) 294.12 276.74 27.84 304.58 2011 140.83 88.76 273.80 362.56 27.84 390.41 2012 153.36 58.09 301.71 359.79 27.84 387.64 2013 149.95 95.62 267.72 363.35 27.84 391.19 2014 140.83 60.51 226.82 287.34 287.34 2015 153.36 1.59 241.55 243.13 243.13 2016 149.95 67.37 232.16 299.53 299.53 2017 140.83 61.85 214.09 275.94 275.94 2018 153.36 26.18 228.81 254.99 254.99 2019 149.95 41.13 222.09 263.21 263.21 2020 140.83 (24.24) 208.27 184.03 184.03 2021 153.36 54.72 227.25 281.97 281.97 2022 149.95 29.83 222.12 251.95 251.95 2023 140.83 38.21 208.30 246.51 246.51 2024 153.36 26.18 227.28 253.46 253.46 2025 149.95 7.23 222.15 229.38 229.38 2026 140.83 26.91 208.33 235.24 235.24 2027 153.36 37.48 227.31 264.79 264.79 2028 149.95 29.83 222.18 252.01 252.01 2029 140.83 38.21 208.37 246.58 246.58 2030 153.36 (26.66) 227.35 200.68 200.68 2031 149.95 60.07 222.18 282.25 282.25 2032 146.61 40.06 212.76 252.82 252.82 FRR with sunk costs 6.2% 13.7% 12.0% 12.5% FRR without sunk costs 8.1% 13.7% 12.6% 13.1% (b) Project Entity, PNOC-EDC Recent Finances. PNOC-EDC has remained consistently profitable. During the period 2002 to 2004, its gross revenues increased steadily by 2% - 4% p.a. During the same period, its year-to- year net income has been volatile. Its net income decreased by 82% in 2003 mainly due to a 47% increase in royalty/income tax and, to a lesser extent, an 11% increase in general and - 32 - administrative (G & A) costs. On the other hand, its net income increased sharply by 26 times, mainly due to a considerable reduction (28%) of its operating costs and royalty/income tax (38%). A summary of its income statements is presented below. PNOC-EDC Income Statements (2002-2004) 2002 2003 2004 Actual Actual Estimated Revenues 19,630 20,370 20,760 Less: Operating Costs 12,069 12,230 8,780 Gross Income 7,561 8,140 11,980 Less: G & A Costs 2,266 2,524 2,054 Operating Income 5,295 5,616 9,926 Less: Non-Operating Charges 3,631 4,234 4,712 Income before Other Charges 1,664 1,382 5,214 Less: Extraordinary Charges 0 0 507 Income Before Royalty/Tax 1,664 1,382 4,707 Less: Royalty/Income Tax 838 1,234 770 Net Income 826 148 3,937 Since 1997, PNOC-EDC has experienced a liquidity squeeze, mainly due to the substantial mismatch between the terms of its power purchase and sales agreements. Specifically, its power purchase agreements, under five build-operate-transfer (BOT) contracts with private IPPs, are only 10 years, whereas its electricity sales to NPC are covered by a much longer term, 25-year power sales agreements. Consequently, PNOC-EDC has to seek external financing in order to pay part of the BOT obligations. In addition, in 2004, the Company reported a negative networth for the first time due to changes in Philippine accounting standards for foreign currency transactions that no longer allow the Company to report deferred recognition of foreign exchange gains or losses, except for such conditions as a severe devaluation of a currency. As a result of the write-off against retained earnings of the earlier capitalized foreign exchange loss, amounting to P31.2 billion, its debt/equity ratio deteriorated substantially in 2004. Indeed, in recent years, PNOC-EDC has not complied with the minimum financial performance covenants under earlier Bank-financed projects, as follows: Financial Covenants 2002 2003 2004 Actual Actual Estimated Current Ratio (1.0 minimum) 0.63 0.83 0.92 Debt Equity Ratio (70% maximum) 76% 75% 119% Debt Service Ratio (1.25 minimum) 1.01 0.92 0.87 Future Finances. PNOC-EDC has planned to implement a number of measures to improve its future finances, including the following: (a) review its plans and programs for operating budget and capital expenditures to identify controllable expenses for possible deferral and reduction; (b) continues to undertake profitable projects to improve its cashflow position over the medium and longer term; and (c) revive its plan to privatize 60% of its shares, with 40% targeted for sales to strategic operators and 20% through IPO in the Philippine stock exchange. If successful, PNOC- - 33 - EDC's future finances are expected to improve considerably, as indicated in the projected financial ratios below, along with its projected income statements, cash flows and balance sheets over period 2005-2009. However, the projected improvements would not be sufficient to allow the Company to comply with the existing financial covenants for debt/equity ratio and debt service coverage ratio. Accordingly, PNOC-EDC has planned to request the Bank to consider amendment of the above financial covenants, viz to waive the above two financial covenants for 2005 and 2006, and to reduce the minimum debt service coverage ratio to 1 time, starting from 2007. In light of PNOC-EDC's action plan to strengthen its finances, which is satisfactory, the Bank is expected to respond positively to this request. Projected Financial Ratios 2005 2006 2007 2008 2009 Current Ratio (1.0 minimum) 1.52 1.78 1.80 1.43 1.12 Debt Equity Ratio (70% maximum) 86% 76% 66% 55% 39% Debt Service Ratio (1.25 minimum) 0.88 0.93 1.11 1.05 1.04 PNOC-EDC Projected Income Statements (2005-2009) 2005 2006 2007 2008 2009 Revenues 21,951 22,838 24,517 25,925 26,516 Less: Operating Costs 9,568 9,313 8,230 7,952 8,334 Gross Income 12,383 13,525 16,287 17,973 18,182 Less: G & A Costs 2,162 2,458 2,753 3,295 3,601 Operating Income 10,221 11,067 13,534 14,678 14,581 Less: Non-Operating Charges 3,972 2,973 3,054 2,184 1,333 Income before Other Charges 6,249 8,094 10,480 12,494 13,248 Less: Extraordinary Charges 0 0 0 0 0 Income Before Royalty/Tax 6,249 8,094 10,480 12,494 13,248 Less: Royalty/Income Tax 713 855 3,020 4,588 5,146 Net Income 5,536 7,239 7,460 7,906 8,102 - 34 - PNOC-EDC Projected Cash Flows (2005-2009) 2005 2006 2007 2008 2009 CASH, BEGINNING 6,907 16,526 14,369 14,826 14,215 INFLOW Internal Cash Generation 8,739 10,256 10,902 11,094 11,217 (Inc)/Dec - Working Capital 197 (542) (324) 85 (47) Foreign Loan Drawdowns 2,823 5,530 1,581 1,878 20 Increase in Equity 12,500 0 0 0 0 FCDU Loan Proceeds 0 0 0 0 0 Other Long-term Liabilities 356 356 356 178 178 Deferred Royalty Fee due to DOE 375 328 376 446 564 Total Inflow 24,990 15,928 12,891 13,681 11,932 OUTFLOW Explo. & Dev't. Costs 1,363 1,207 303 404 278 Investment in Oil/Gas Activities 0 0 0 0 0 Capital Expenditures 2,920 6,228 2,323 2,332 144 Deferred Interest 176 285 35 56 15 Principal Payment - BOT CCR Fees 6,472 5,984 3,318 228 72 Royalty Payments to DOE 200 200 211 257 271 Payment of PNOC Advances 0 0 0 0 0 Loan Repayments 3,739 4,943 4,614 8,011 10,905 Payment of FCDU Loans 500 0 0 0 0 Cash Dividends 0 0 0 746 791 Other Assets 1 (762) 1,630 2,258 (260) Total Outflow 15,371 18,085 12,434 14,292 12,216 NET INFLOW (OUTFLOW) 9,619 (2,157) 457 (611) (284) CASH, ENDING 16,526 14,369 14,826 14,215 13,931 - 35 - PNOC-EDC Projected Balance Sheets (2005-2009) 2005 2006 2007 2008 2009 ASSETS Cash & Temporary Placements 16,525 14,368 14,826 14,214 13,930 Trade & Other Receivables 4,133 4,282 4,594 4,857 4,964 Materials and Supplies 723 723 723 723 723 Due from Affiliates 3 3 3 3 3 Other Current Assets 2,919 2,919 2,919 2,919 2,919 Total Current Assets 24,303 22,295 23,065 22,716 22,539 Property & Equipment 10,198 15,973 17,673 19,303 18,603 BOT Power Plant 20,837 19,824 18,596 17,595 16,310 Investment in Oil/Gas Activities 153 153 153 153 153 Investment in Prod. Properties 13,189 13,280 17,776 17,602 18,075 Exploration & Dev't. Cost 5,217 6,315 1,810 1,898 1,096 Other Assets 2,460 1,597 3,126 5,283 4,922 Total Assets 76,357 79,437 82,199 84,550 81,698 LIABILITIES AND EQUITY Accounts Payable 4,181 3,701 3,110 3,031 2,938 Short-term Loans 334 334 334 334 334 Income Taxes Payable 71 115 645 1,017 1,107 Royalty Payable 329 371 420 473 538 Due to Affiliates 177 177 177 177 177 Current Portion - BOT Lease Obligation 5,984 3,318 228 72 0 Current Portion ­LTD 4,864 4,541 7,884 10,830 14,971 Total Current Liabilities 15,940 12,557 12,798 15,934 20,065 Long-Term Debt BOT Lease Obligation 3,194 199 300 298 0 Long-Term Foreign Loans 43,925 45,660 40,098 31,788 17,322 Deferred Royalty Due to DOE 1,470 1,598 1,763 1,952 2,244 Other Long-term Liabilities 1,711 2,067 2,423 2,601 2,779 Deferred Credits 1,424 1,424 1,424 1,424 1,424 Total Long-Term Debt 51,724 50,948 46,008 38,063 23,769 Stockholders' Equity Capital Stock 15,000 15,000 15,000 15,000 15,000 Paid-in Capital in Excess of Par 7,500 7,500 7,500 7,500 7,500 Donated Capital 423 423 423 423 423 Retained Earnings (14,230) (6,991) 470 7,630 14,941 Total Stockholders' Equity 8,693 15,932 23,393 30,553 37,864 Total Liabilities & Equities 76,357 79,437 82,199 84,550 81,698 - 36 - TECHNICAL ANNEX 10: ENVIRONMENTAL AND SOCIAL SAFEGUARDS POLICY ISSUES Background The proposed Project is part of the long term development of the Southern Negros Geothermal Production Field (SNGPF) which is already host to the 112.5MW Palinpinon I and the 80MW Palinpinon II geothermal projects. The Nasulo will add 20MW to the present power generating capacity. It will utilize some of the existing facilities (e.g., roads, well pads, offices, staging areas, etc.) and build on the existing management systems (including existing environmental and social programs) of SNGPF. The Bank's due-diligence work started, in March 2004, with the examination of Project Identification Note (PIN). In June 2004, the Task Team met with PNOC-EDC's Planning and Field Operations groups and visited the project site. Subsequent meetings with PNOC-EDC's Environmental Management Division (EMD) and the Bank's Social and Environmental Specialists were held between July and August, 2004, and the Safeguards Team reviewed the following documents: 1. 1983-Environmental Impact Assessment for the Development of Southern Negros Geothermal Field 2. 1986-Environmental Compliance Certificate (ECC) Exemption for Pal I 3. Executive Order, vesting PNOC-EDC the administrative jurisdiction to the watershed areas of the 133,000-ha Southern Negros Geothermal Reservation 4. 1991 Environmental Impact Assessment for 80MW Palinpinon II 5. Confirmation the ECC Exemption for Palinpinon II 6. Environmental Impact Matrix for Nasulo Project which PNOC-EDC submitted to Development Bank of the Philippines (DBP) 7. 2001 SNGPF Preliminary Resettlement Plan 8. Update on the Resettlement Program In August 20, 2004, a formal request for the preparation of the EA and other specific information were forwarded to the proponent. The full EA report along with other documents was submitted to the Bank's Manila Office on December 17, 2004. The EA report contains comprehensive discussions on the baseline environment, impact assessment, environmental management plan (EMP). Also contained in the EA report are the following documents: 1. Watershed Management Plan 2. Emergency Response Plan 3. Environmental Risk Assessment (ERA) Report 4. Abandonment Plan 5. Project Endorsements from Provincial and the Regional Development Councils 6. Corporate Environmental Policy Additional documents on the environmental and social performance of existing projects were requested to provide information on potential legacy issues. The documents were received on May 16, 2005. - 37 - Environmental Category The project is assigned Environmental Category B based on the following considerations: (i) the Project is an add-on to existing operations; (ii) the project design includes re- injection of spent geothermal fluid back to the geothermal reservoir which avoids discharge of brine into rivers and water channels while providing continuous recharge to the geothermal reservoir; and, (iii) the project entity has a proven track record of good performance in environmental and social safeguards, as shown in various environmental awards it gets from both government and non-government entities. Safeguards Policies Triggered Of the 10 Bank Safeguards Policies, only the policy on Environmental Assessment (OP/BP 4.01) is triggered. The entire Southern Negros Geothermal Production Field (SNGPF) is covered by an Environmental Impact Assessment conducted in 1983 which precedes the Philippine Environmental Impact Statement (EIS) Law. As such, all development activities within the SNGPF (i.e., Palinpinon I, II and this project) are exempted from the present Philippine EIS process. A certificate of exemption to the Environmental Compliance Certificate (ECC) was secured from the National Environmental Protection Council (NEPC) on April 29, 1986. However despite the exemption, PNOC-EDC for its own purpose conducted a separate Environmental Impact Assessment for the Palinpinon II project in December 1991. For this present project, PNOC-EDC submitted a comprehensive EA report to comply with the Bank Safeguards requirements. The project is also subject to the Bank's policy on Public Disclosure (BP 17.50). Social Issues There are no significant social issues associated with the project. The project will not cause involuntary resettlement or displacement of livelihood as there will be no land acquisitions involved and all land developments are confined within the geothermal field. The rests of potential social issues usually associated with geothermal development in the Philippines are discussed below: Indigenous Peoples ­ Southern Negros is not a known habitat of indigenous people or cultural minorities. The present residents in the project area are relatively new settlers from the lowland areas who belong to the Cebuano ethno-linguistic stock, the largest mainstream group in the Visayas and Mindanao area. There is also no evidence that the area had been occupied by any indigenous people. Public Disclosure ­ Although the project is not required by the government to undergo a consultation process since it is exempted from the EIS system, PNOC-EDC conducted consultations with local residents and government officials. It has secured endorsements of the project from the Negros Oriental Provincial Development Council and the Central Visayas Regional Development Council. Copies of the EA report were provided to the - 38 - municipal and the provincial governments while a summary was published in the PNOC- EDC's website.. Also, PNOC-EDC has been engaging the barangays, people's organizations, and settlers within the geothermal reservation during the past 10 years on various issues, concerns, developments, and opportunities related to the geothermal field. The Geothermal Field has an active Multisectoral Monitoring Team (MSMT), composed of community representatives, LGUs, NGOs and PNOC-EDC. The MSMT holds regular meetings to review environmental performance of the project. They are also regularly apprised of the activities in the SNGPF. Community Acceptance ­The project is received well by the local communities as it is viewed as an addition to the existing geothermal operations which is providing them benefits. The key stakeholders of the project are the National Government of the Philippines, the host Local Government Units and residents of Barangay Puhagan, Municipality of Valencia and Province of Negros Oriental. The local governments and residents will benefit from increased royalty receipts and other law-mandated funds from the project. At present, local residents are already benefiting from the royalties and other law-mandated funds from existing Palinpinon I and II projects in the form of subsidized power rates (up to 100% of monthly household consumptions in host barangays), livelihood support, environmental, health and other social development interventions. Apart from these law-mandated benefits, PNOC-EDC has been organizing local communities and providing them with alternative livelihood under its Watershed Management Program. PNOC-EDC has developed very positive and close relationship with the surrounding communities within and outside the geothermal reservation. This was validated by the Bank's Safeguards Team during the field visit and consultation with the barangay leaders and representatives from the Puhagan Farmers' Association in July 27-28, 2004. Gender Issues ­ The Project is not expected to significantly alter existing gender equity patterns. The employment profile in the project will generally reflect the differentiated roles of men and women in the Philippine society, i.e. construction and drilling works will generate more jobs for men while office works will generate jobs for women. It is expected that field-based hiring will be skewed toward male workers. At present, women account for only 3% of personnel in SNGPF but a much higher percentage (20%) at PNOC-EDC's Manila Office. The positive contribution to gender equity would likely be coming from the company's community development efforts. Women had been involved in the company's social forestry and livelihood projects. At present they account for about half (45%) of the 745 members in the 17 farmers' associations. They also tend to be more active in the associations' activities, taking on policy and decision making roles. They already account for more than 60% of the associations' officers. This Project promises to increase community development efforts of the company as indicated in its watershed management plan. Environmental Issues Since the project is basically an optimization of the existing geothermal production field, the scale of activities and new processes involved is expected to be small compared to a - 39 - full blown geothermal power development. Only minimal incremental environmental impacts are anticipated. The environmentally critical activities are: land clearing and civil works involved in the preparation of the 1-ha power plant site, the 0.5-km access road and the 1.0-ha new re-injection well pad; the repair/drilling of old/new wells; and the operation of the 20MW additional generating capacity. The likely environmental issues include: increased sedimentation from the civil work activities; the handling and disposal of wastes, which include drilling wastes, spent geothermal fluids or brine, cooling tower blow down and sludge; and, the air quality impact of the additional air emissions from the new plant, particularly hydrogen sulfide. The EA report provided very comprehensive assessments of the environmental impacts (e.g., geology, hydrology, water quality, aquatic and terrestrial ecology, air quality and socioeconomics). It has identified and addressed both minor actual impacts as well as low probability potential impacts. The following are assessments of the critical environmental issues: Air Quality- The major air pollutant emitted by geothermal power plants is hydrogen sulfide (H2S). The air quality monitoring which PNOC-EDC installed for existing power plants, showed that the average ambient level of H2S is 0.017 ppm which is well below the 0.070 ppm government standard for residential area. (Note that the current government occupational standard for H2S is 10 ppm while the WHO 24-hr guideline value is 0.105ppm). Under the new Philippine Clean Air Law, the SNGPF is designated as a "geothermal airshed". The airshed concept of the Clean Air Law provides that geothermal projects within the airshed have to comply only with the ambient standards rather than the emission standards. The air quality study using AERMOD predicts that emissions from the new power plant will result to a ground level concentration of between 0.008 to 0.042 ppm. Hence, given the background concentration of 0.017 ppm, the expected ambient H2S concentrations with the new plant fully operating will still be well below the 0.07ppm residential area standard. Water Quality -The impacts on water quality will be negligible and will likely be only in the form of increased sedimentation from civil works. Contamination of the surface water with geothermal brine is highly unlikely as PNOC-EDC has long adopted the zero discharge scheme (ZDS) in all its geothermal power plants. Under ZDS, liquid wastes from geothermal power generation consisting of (a) drilling wastes, geothermal brine and cooling tower blowdown are injected into designated re-injection wells. The whole system consists of a network of pipes, sumps, thermal ponds and re-injection wells. The geothermal brine and cooling tower blowdown are channeled into the thermal ponds for cooling before they are conveyed by gravity or pumped into the re-injection wells. Drilling wastes are temporarily stored in sumps to allow solid particles to settle before they are conveyed to the re-injection wells. The thermal ponds and sumps also serve as temporary holding ponds in case of re-injection failure. Contamination of groundwater is also unlikely as the sumps and thermal ponds are lined with impervious materials while the wells are cemented and steel-cased up to a depth of 1,600 meters, effectively preventing contact between the geothermal fluid and the potable water aquifer. The reinjection system of the project will be integrated into the existing reinjection system of Palinpinon II. - 40 - Land Use and Forest- The Project will not adversely affect the forest, as all development activities will be confined within the existing development block which is mostly built-up or grassland with isolated tree species. A tree inventory of the new areas to be opened (i.e. the 1.0-ha reinjection wellpad and 500-meter access road) has counted a total of only 29 trees. All except two of these trees are pioneer tree species or the kind of trees that grow on a logged-over or fallowed area. On the contrary, the continued implementation of the company's watershed management program is expected to preserve or enhance the forest cover of the geothermal reservation. Natural Habitat and Protected Areas- The associated infrastructure and civil works activities are not expected to affect critical natural habitats. The 4.1 hectares of land to be opened up is a logged-over or fallowed area. Project documents provided also indicate that the project site does not fall within a protected area. The nearest protected area is the Balinsasayao Twin Lakes which is roughly 3 km from the site. Potential Legacy Issues from Palinpinon I and II An expanded scope of due diligence was adopted by the Task Team in order to include existing projects (Palinpinon I and II) or activities of PNOC- EDC within the geothermal field that are not part of this Project but may have legacy or outstanding issues which can be linked to this Project or which may pose reputational risks to the Bank. The Task Team's site visit and the review of documents on environmental and social program performance have found no outstanding environmental and social issues associated with these earlier projects. Environmental reports submitted by PNOC-EDC to the Department of Environment and Natural Resources (DENR) indicate that the SNGPF projects have been in compliance with the national ambient air and water quality standards and were strictly following government regulations in the handling of a small volume of hazardous wastes generated. An excellent performance on social development programs is also noted. The Integrated Social Forestry (ISF) Program of Palinpinon I and II have reforested a total 3,777 ha denuded areas since 1990 and has benefited more than farming 700 households in terms of livelihood projects. The only potential source of issues, if any, is the ongoing resettlement program which PNOC-EDC is implementing in collaboration with the Municipality of Valencia as part of the earlier Palinpinon I and II projects. Nevertheless, given the excellent track-record of PNOC-EDC, no problems are anticipated and the Task Team will continue to monitor the progress of implementation, as elaborated below. Palinpinon Resettlement Program - Settlements in the area have increased since development activities started in 1976. Settlers were attracted to the economic opportunities and improved accessibility of the area. Many of these settlers had built informal dwellings on the roadsides, on landslide prone slopes and within the vicinities of the project facilities. The resettlement program aims to transfer the whole village into a new community which will be developed as part of the program. This will ensure their safety while at the same time secure geothermal facilities. The program is being implemented in collaboration with the Municipality of Valencia which is sharing the program cost and the Gawad Kalinga of Couples for Christ who also reportedly offered to - 41 - provide additional assistance. The Municipality of Valencia supports the program, as the resettlement of residents in one compact area would facilitate delivery of basic services. So far the program have generally conformed to the Bank-prescribed processes. PNOC- EDC had already drafted a resettlement policy framework. A survey of the affected area counted 194 households and consultation with these affected households regarding the relocation site and the compensation package to be provided is ongoing. The implementation of the resettlement program will be monitored as part of the compliance monitoring of the Project. Institutional Capability of the Proponent The project entity is a government-owned and controlled corporation which has a mandate to develop the country's geothermal resources. It has extensive experience in geothermal power development and has developed and currently operates 5 geothermal sites in the Philippines with a total generating capacity of more than 1,000 MW. Its Environmental Management Division (EMD) has more than 20 years of experience in conducting environmental impact assessments and in formulating and implementing social and environmental management programs for geothermal projects. Staffed by more than 20 office-based and close to 150 field-based personnel, EMD is responsible for planning, formulating and implementing social and environmental management programs for the company's energy projects. As the administrator of the geothermal reservation, the company has been implementing a comprehensive watershed management program to ensure continued viability of the watershed. The program includes: (1) forest protection or enforcement of forest laws, (2) reforestation or rehabilitation of denuded areas, and (3) provision of extension services to the forest occupants. The company hires its own forest guards to conduct frequent patrols within the reservation and prosecute violators of Philippine forestry laws. Its Integrated Social Forestry (ISF) provides alternative livelihood to the people who are dependent on the cultivation of public forest lands. As of 2003, the company has organized and supported more than 70 farmers associations within its geothermal reservations. Institutional Arrangements The EMP contained in the EA report is comprehensive. The proponent will be responsible for carrying out the social and environmental management measures that it has committed to undertake in the EMP. For the purpose of compliance monitoring, the Bank and the proponent shall agree on a smaller subset of issues critical to the project. Table 1 below provides a tentative list of the significant issues and the proposed actions needed to address them. The third party CER auditor will be tasked to monitor implementation of these social and environmental measures while the Bank will also undertake regular supervision of safeguard implementation and compliance. To facilitate compliance monitoring and audit, the proponent will be required to submit semi-annual safeguard compliance report to the Bank. - 42 - Table 1-Social and environmental issues and proposed management actions Potential Adverse Description Management Measures/Action Verifiable Schedule Impact Indicator A. Civil Works (Vegetation Clearing, Excavation, Slope Cutting) Conversion of a The tree inventory Secure a Special Land Use Permit SLUP; Tree Before the total of 2-ha counted a total of 29 and Tree Cutting Permit from Cutting Permit; start of shrubland/fallowed trees. DENR New reforestation construction swidden farms into Replacement reforestation project; and a new well pad and elsewhere within the area through Livelihood project. access road; contract reforestation with existing removal of some Farmer' Association. tree stands. Implementation of the Watershed Management Plan as contained in the EA Report. Soil erosion and Sediments will mostly Slope stabilization through Presence of During possible come from the opening of mechanical (i.e., wattling, stabilized slopes construction sedimentation of 500-m access road and riprapping) and biological (i.e. erosion control roads and water channels 1.0-ha reinjection seeding or revegetation of exposed measures and, wellpads wellpad. slopes with fast growing cover Spoil Disposal crops) Area. Sediment/erosion control measures such checkdams, ripraps, gabions, silt traps and drainage canals. Proper disposal of earth spoils; Cut- and-fill method and hauling/disposal of excess earth to the designated spoil disposal area. Possible increase This impact is not Adoption of a local hiring policy Local hiring policy During in migrant worker expected to be significant Coordination with local government document; construction population as the area was officials and contractors on local Number of locally previously host to bigger hiring policy hired workers. Pal I and Pal II projects. Possible increase The 500-m new access Coordination with local government MOA with LGU During and of settlements and road may attract new officials in the implementation and or other evidences after encroachments in informal settlers and enforcement of forestry laws of coordination construction newly opened up swidden farmers. Continued implementation of forest with LGU and areas patrols with the involvement of local communities local communities on forest protection. B. Well Drilling and Testing Deterioration of air Vertical well testing is 30 Ducting of non-condensible gas to NCG ducts During well quality due to minutes long while improve air dispersion installed; drilling and release of horizontal well testing Levels of testing Hydrogen Sulfide will last for about 3 hydrogen sulfide months. Possible tempo- The production wellpad Proper positioning of silencer Silencer properly During well rary, localized where well testing will during 90-day horizontal discharge positioned; drilling and defoliation of occur is already a away from critical areas Absence of testing vegetation around developed area. damage/defoliation the production of surrounding well pad area due vegetation. to release of hot steam during well testing Possible migration Any disturbance will be Limit duration of vertical testing to Silencer and rock During well of faunal species felt only within the 30 minutes. mufflers installed. drilling and due to increase in existing production Installation of silencer and/or rock testing noise level at the wellpad which is located mufflers during horizontal testing. wellpad in a relatively developed area. Possible The existing production Use of sumps with impervious Sumps with During well contamination of wellpad is equipped with linings. impervious linings, drilling and surface water from sumps to temporarily Provision of storm drainage, oil adequate drainage testing liquid wastes (i.e. contain drilling wastes traps, ring drains and levees. and oil traps are geothermal brine and geothermal brine provided at and drilling during testing. The new wellpads; Water - 43 - Potential Adverse Description Management Measures/Action Verifiable Schedule Impact Indicator wastes). reinjection wellpad will quality monitoring also be provided with report. sumps. C. Steam Generation, Power Plant Operation, Transmission Possible The project will adopt a In case of ZDS failure, regulated Incident reports; During ZDS contamination of zero discharge system discharge and continuous water Water quality failure water channels (ZDS) where liquid quality monitoring should be done monitoring report from liquid wastes wastes will be reinjected. to ensure that receiving water and DENR report. (i.e., geothermal The handling of project's channels will remain within water brine and cooling liquid wastes will be quality standards. tower blowdown) integrated into the existing Pal II ZDS. Possible Sludge handling system Cement fixing of cooling tower Sludge cellar pit After every contamination of already in place for Pal I sludge before entombment into the installed. PMS environment and and II. The amount of cellar pit. groundwater from sludge to be generated by cooling tower the project is only 1 drum sludge per year. Possible The air dispersion study Management of geothermal airshed Air quality Operations deterioration of air indicates that the ambient such that ambient standard is not monitoring report Phase quality due to the H2S standard will not be exceeded. to DENR; NCG release of exceeded, given Regular ambient H2S monitoring ducting installed at Hydrogen Sulfide background levels and Ducting of non-condensible gas at cooling towers stack height. cooling towers to improve dispersion Sudden decrease in There are existing Provide livelihood support through Livelihood Operations employment and associations of local existing cooperatives and projects of phase livelihood residents organized under associations farmers' associa- opportunities as the company's Corporate Phase in new livelihood through tions (FAs); construction Social Responsibility local government using DOE funds Evidence of activities stops. (CSR) program that and royalty PNOC-EDC and receives livelihood DOE funds support. support to FAs. D. Ongoing Palinpinon Resettlement Program Resettlement of The resettlement is joint Provide an updated Resettlement Updated Before about 200 undertaking of the local Action Plan Resettlement ERPA households government, PNOC-EDC Conduct of monitoring and Action Plan; M&E signing and and the local community, evaluation; Submit to the bank Reports on every six using the law-mandated M&E reports every six months Resettlement; months development funds that during the first three years. Developed thereafter. the community receives resettlement from Pal I & II. community. - 44 - TECHNICAL ANNEX 11: PROJECT PROCESSING Project Preparation Timeline Project Schedule Planned Actual PCN review 4/2005 Appraisal 6/2005 Negotiation 6/2005 Board/RVP approval N.A. Planned date for effectiveness 10/2005 Planned closing date 12/31/2013 Bank Staff who worked on the project include: Name Title Unit Selina Shum Task Team Leader, Lead EASEG Financial Analyst Francisco Fernandez-Asin Sr Financial Specialist ENVCF Ernesto Terrado Consultant, Renewable Energy LCSFR Specialist Frans Vandewydeven Consultant, Goethermal Specialist Josefo Tuyor Environmental Specialist EASEN Heather Batzel Counsel LEGCF Jose T. Nicolas Social Development Specialist EASSD Jonas Bautista Consultant, Environmental Specialist Carla Teresa Sarmiento Program Assistant EASEG - 45 - TECHNICAL ANNEX 12: DOCUMENTS IN THE PROJECT FILE 1. Project Idea Note (PIN) 2. Project Concept Note (PCN) 3. Project Design Document (PDD) 4. Letter of Intention 5. Letter of Approval 6. Feasibility Study 7. Environmental Impact Assessment (EIA) 8. Renewable Energy Policy Framework (DOE) 9. Philippine Energy Plan (DOE) - 46 - TECHNICAL ANNEX 13: Baseline and Additionality Analysis 1. Additionality The Visayas sub-grid suffers from a deficit in electricity supply that is currently met by barge-mounted diesel plants. Using an indigenous and renewable energy source the proposed 20 MW project will obviate the need for equivalent capacity of fossil fuel-based generation to meet the projected power shortfall in Visayas by 2006, thus mitigating GHG emissions. Prohibitive barriers that the Project faces are clearly identified in a transparent and conservative manner using the "tool for the demonstration and assessment of additionality". Documented evidence is provided to support the argument that the Project is not Business As Usual due to investment barriers. Other barriers in the form of technology and prevailing practices also increase risk and further demonstrate that the Projects successful implementation is depended on CDM assistance. Main identified barriers are: 1. Cheaper cost of thermal energy had an impact in geothermal power developments after privatization Geothermal plants in the Philippines face stiff competition from cheaper thermal technologies. Since privatization process was initiated by EPIRA (2001) no other geothermal project has been developed in the Philippines. Geothermal technology is not the least cost technology in the market. The arrival of the Natural Gas Pipeline to Southern Luzon has marked the beginning of the development of large Natural Gas-fired power plants. Since the year 2001, three natural gas plants (Santa Rita, Ilijan and San Lorenzo) have been constructed and put in operation by Independent Power Producers (totalling a generation capacity of 2,700 MW). The last geothermal plant built in the Philippines was Mindanao II which started operations in 1999 (that is before the EPIRA). 2. Concessional financing no longer available Concessional financing is not longer available for geothermal developments after EPIRA. For PNOC-EDC, Nasulo is the first geothermal project that is being financed by a local bank. This loan has a higher rate and shorter tenor than the usual ODA loan that were available before EPIRA (interest rates are Peso-denominated, at 8%-9.5% versus 1%-5% for former geothermal plants; tenors of 15 years versus 25-33 years for former geothermal plants). Furthermore, PNOC-EDC has made public its intention to be privatized (March 2005) which will make this type of financing permanently unavailable. - 47 - 3. Barriers to investment in the Visayas The Visayas Islands are not the preferred choice for investors. The last plant built in that grid was in 1996. So for the last 7 years no other power plant has been built in that part of the country. The current electricity shortages in the islands are now being mitigated by transferring diesel power barges from Luzon. 4. Devaluation impact in financing creates a financing gap Local financing has been achieved in form of a peso-denominated loan and the recent devaluation of the local currency has created a financing gap that poses a serious problem for project implementation. Project sponsor is turning to carbon finance to cover such financing gap in the short run. 5. Barriers of Financing: Bank covenants linked to CDM income The Bank has made the financing contingent to the project to attain CDM status. Without CDM the project will not be financed. Loan agreements will be made available to the Designated Operational Entity. 2. Baseline methodology The consolidated baseline methodology for zero-emissions grid-connected electricity generation from renewable sources (ACM0002) is applicable to the Project. The baseline emission rate is the combined margin CEF for the grid, where: the operating margin is defined as the generation-weighted average of all generating sources excluding low-cost / must-run plants, where such plants must constitute less than 50% of grid generation, and the build margin is defined as the generation-weighted average emission factor of either the 5 most recent or the most recent 20% of plants built or under construction, whichever group's average annual generation is greater. The project is meets all the following conditions that are stated in the Baseline Methodology: The project supplies electricity capacity addition (20 MW) from a geothermal source; The project is not an activity that involves switching from fossil fuels to renewable energy at the project site; The electricity grid is clearly identified (as Visayas grid) and information is available on the characteristics of the grid; - 48 - The operating margin for the Project is the generation-weighted average of all generating sources, excluding hydropower and geothermal power plants for the three most recent years in which grid data is available. The 3-year average is based on the most recent statistics available at the time of PDD submission. The BM is defined in the Baseline Methodology as the generation-weighted average emission factor (tCO2/MWh) of a sample of power plants. The build margin is calculated based on the 5 most recent or most recent 20% (of the system generation) of power plants built. The BM emission factor will be calculated ex ante and be based on the most recent information available at the time of PDD submission (Option 1 in the Baseline Methodologies). The baseline emission factor is the weighted average of the OM emission factor and the BM emission factor. The default weight of the OM and BM emission factors (50%: 50%) is to be used. The baseline emissions calculated for the project represent the approach "emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment" as stipulated in the Baseline Methodology. The combined margin CEF is estimated as 0.59 tCO2/MWh, being the average of the operating margin (0.82 tCO2/MWh) and build margin (0.36 tCO2/MWh) CEFs. Neither project emissions nor leakage arise from the Project. 3. Monitoring plan In accordance with the consolidated methodology, the activity level, grid baseline emission rates and barriers will be monitored. For the grid baseline, the operating margin emission rate must be monitored and updated yearly if there is not enough data to collect a 3-year average, based on the most recent statistics available at the time of PDD submission. The Philippine Energy Plan (PEP) 2003-2014 provides 2001 and 2002 historical data for national fuel consumption by generation type, but not for the individual grids. However, if the 2001 ­ 2003 data for the Visayas grid can be obtained from PDOE prior to validation, monitoring of the operating margin emission rate will not be necessary for the Project. As the Project is less than 60MW, monitoring of the build margin emission rate is not required. The methodology requires that barriers and common practice be monitored for assessment of project additionality at the time of renewal. - 49 - TECHNICAL ANNEX 14: STATEMENT OF LOANS AND CREDITS Philippines (April 30, 2005) Active Projects Difference Between Expected and Actual Original Amount in US$ Millions Disbursements a/ Project ID FY Project Name IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd P079628 2005 PH - 2nd Women's Health & Safe Motherhood 16.00 0.00 0.00 0.00 16.00 0.00 0.00 P066076 2004 PH - Judicial Reform Support Project 21.90 0.00 0.00 0.00 20.68 -1.22 0.00 P070899 2004 PH - Laguna de Bay Institutional Strenghening 5.00 0.00 0.00 0.00 4.95 -0.05 0.00 P066532 2004 PH - GEF-Electric Cooprtv System Loss Redu 0.00 0.00 12.00 0.00 6.82 -5.18 0.00 P072096 2004 PH - GEF-Rural Power Project 0.00 0.00 9.00 0.00 8.67 0.43 0.00 P066397 2004 PH - Rural Power Project 10.00 0.00 0.00 0.00 10.19 -0.60 0.00 P075184 2004 PH - Diversified Farm Income & Mkt. Devt 60.00 0.00 0.00 0.00 59.17 2.50 0.00 P073488 2003 PH - ARMM Social Fund 33.60 0.00 0.00 0.00 29.75 13.97 0.00 P077012 2003 PH - Kalahi-CIDSS Project 100.00 0.00 0.00 0.00 85.15 26.50 0.00 P071007 2003 PH - Second Agrarian Reform Communities Dev 50.00 0.00 0.00 0.00 44.92 18.27 0.00 P069916 2002 PH - 2nd Social Expenditure Management 100.00 0.00 0.00 0.00 40.14 2.81 0.00 P069491 2002 PH - LGU Urban Water APL2 30.00 0.00 0.00 0.00 33.04 17.13 0.00 P066509 2001 PH - GEF-MMURTRIP-Bicycle Nwk 0.00 0.00 1.30 0.00 0.83 0.33 0.00 P057731 2001 PH - MMURTRIP 60.00 0.00 0.00 0.00 48.73 40.16 0.00 P059933 2000 PH - Coastal Marine 0.00 0.00 1.25 0.00 0.58 0.94 0.29 P039019 2000 PH - First Nat'l Rds Improve. 150.00 0.00 0.00 0.00 68.31 68.31 0.00 P048588 1999 PH - LGU FINANCE & DEV. 100.00 0.00 0.00 40.00 39.52 67.72 22.42 P057598 1999 PH - Rural Finance III 150.00 0.00 0.00 0.00 32.31 32.31 0.00 P004595 1998 PH - Community Based RESO 50.00 0.00 0.00 12.00 12.78 24.78 12.78 P004566 1998 PH - Early Child Development 19.00 0.00 0.00 0.00 1.86 1.86 -0.10 P004576 1998 PH - Water Districts Development 38.60 0.00 0.00 10.73 12.33 41.27 6.06 P004613 1997 PH - Water Resources Development 58.00 0.00 0.00 16.27 2.11 18.38 1.54 P004602 1997 PH - Third Elementary Education 113.40 0.00 0.00 20.10 19.80 39.90 19.80 P004611 1996 PH - Manila Sewerage II 57.00 0.00 0.00 20.90 6.49 27.39 0.94 P004406 1995 PH - ODS Investment Project 0.00 0.00 30.00 0.00 16.51 1.56 -6.23 Total 1222.5 0.00 53.55 120.00 621.63 439.48 57.50 - 50 - Philippines STATEMENT OF IFC's Held and Disbursed Portfolio April 30, 2005 (In US Dollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 AEI 1.00 0.00 0.00 0.00 0.75 0.00 0.00 0.00 2002 APW Trade 0.00 0.00 0.65 0.00 0.00 0.00 0.65 0.00 Alaska Milk 0.00 0.62 0.00 0.00 0.00 0.62 0.00 0.00 2000 Asian Hospital 2.80 0.00 1.00 0.00 2.80 0.00 1.00 0.00 2002 Banco de Oro 20.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 1998 Drysdale Food 7.97 0.00 0.00 4.40 7.97 0.00 0.00 4.40 2002 Eastwood 17.22 0.00 0.00 0.00 17.22 0.00 0.00 0.00 2001 Filinvest 19.87 0.00 0.00 0.00 13.87 0.00 0.00 0.00 2004 Globe Telecom 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 H&Q PV III 0.00 0.98 0.00 0.00 0.00 0.98 0.00 0.00 1989 H&QPV-I 0.00 0.18 0.00 0.00 0.00 0.18 0.00 0.00 1993 H&QPV-II 0.00 0.09 0.00 0.00 0.00 0.09 0.00 0.00 1992 Holcim Phil 0.00 1.97 0.00 0.00 0.00 1.97 0.00 0.00 2004 LARES 22.00 2.70 0.00 0.00 0.00 0.00 0.00 0.00 2000 MFI MEP 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.00 2001 MNTC 45.08 0.00 0.00 0.00 41.45 0.00 0.00 0.00 2003/04 MWC 30.00 14.96 0.00 0.00 0.00 14.96 0.00 0.00 2000 Mariwasa 11.84 0.00 3.20 0.00 11.84 0.00 3.20 0.00 Megaworld Corp 0.00 1.18 0.00 0.00 0.00 1.18 0.00 0.00 1993 Mindanao Power 0.00 3.41 0.00 0.00 0.00 3.41 0.00 0.00 1993 Mirant Pagbilao 12.00 10.00 0.00 0.00 12.00 10.00 0.00 0.00 2001 PEDF 1.50 0.00 0.00 0.00 0.75 0.00 0.00 0.00 1992 Pilipinas Shell 0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.00 2000 PlantersBank 0.00 0.00 4.65 0.00 0.00 0.00 4.65 0.00 1998 Pryce Gases 15.04 0.00 0.00 5.82 15.04 0.00 0.00 5.82 2000 STRADCOM 11.53 0.00 4.00 0.00 9.13 0.00 4.00 0.00 2003 SVI 0.00 4.00 0.00 0.00 0.00 2.00 0.00 0.00 1995 Sual Power 21.72 17.50 0.00 54.52 21.72 17.50 0.00 54.52 1994 Walden Mgmt 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1994 Walden Ventures 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00 Total Portfolio: 259.57 59.59 33.50 64.74 154.54 54.89 33.50 64.74 Approvals Pending Commitment Loan Equity Quasi Partic 2005 Cagayan Electric 15.00 0.00 0.00 0.00 2002 Eastwood 0.00 3.00 0.00 0.00 2005 NHMFC Asset Sale 30.68 2.68 0.00 0.00 2001 PEDF 4.50 0.00 0.00 0.00 2005 PLGIC 0.00 0.00 1.50 0.00 Total Pending Commitment: 50.18 5.68 1.50 0.00 - 51 - TECHNICAL ANNEX 15: COUNTRY AT A GLANCE East Lower- POVERTY and SOCIAL Asia & middle- Philippines Pacific income Development diamond* 2003 Population, mid-year (millions) 81.5 1,855 2,655 Life expectancy GNI per capita (Atlas method, US$) 1,080 1,080 1,480 GNI (Atlas method, US$ billions) 88.0 2,011 3,934 Average annual growth, 1997-03 Population (%) 2.2 1.0 0.9 GNI Gross Labor force (%) 2.8 1.1 1.2 per primary Most recent estimate (latest year available, 1997-03) capita enrollment Poverty (% of population below national poverty line) 37 .. .. Urban population (% of total population) 61 40 50 Life expectancy at birth (years) 70 69 69 Infant mortality (per 1,000 live births) 28 32 32 Child malnutrition (% of children under 5) 32 15 11 Access to improved water source Access to an improved water source (% of population) 86 76 81 Illiteracy (% of population age 15+) 7 10 10 Gross primary enrollment (% of school-age population) 112 111 112 Philippines Male 113 112 113 Lower-middle-income group Female 111 111 111 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios* GDP (US$ billions) 33.3 54.4 78.0 80.6 Gross domestic investment/GDP 29.6 24.0 19.3 18.7 Trade Exports of goods and services/GDP 21.6 31.4 48.9 48.3 Gross domestic savings/GDP 23.1 15.5 18.8 16.2 Gross national savings/GDP .. 18.6 26.1 26.8 Current account balance/GDP -8.3 -5.5 5.4 2.5 Domestic Interest payments/GDP 2.8 3.3 3.6 .. Investment savings Total debt/GDP 72.8 66.5 76.1 .. Total debt service/exports 36.4 25.6 20.2 .. Present value of debt/GDP .. .. 78.6 .. Present value of debt/exports .. .. 134.6 .. Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annual growth) GDP 2.1 3.9 4.4 4.5 4.2 Philippines GDP per capita -0.3 1.6 2.3 2.5 2.2 Lower-middle-income group Exports of goods and services 6.0 4.8 3.6 3.3 5.9 STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of investment and GDP (%) (% of GDP) 20 Agriculture 22.4 21.6 14.7 14.5 10 Industry 39.2 32.7 32.5 32.3 Manufacturing 24.2 23.7 22.8 22.9 0 Services 38.4 45.7 52.8 53.2 -10 98 99 00 01 02 03 Private consumption 68.6 74.4 69.1 72.3 -20 General government consumption 8.3 10.1 12.1 11.4 GDI GDP Imports of goods and services 28.1 39.8 49.4 50.7 1983-93 1993-03 2002 2003 Growth of exports and imports (%) (average annual growth) 20 Agriculture 1.8 2.3 3.3 3.9 Industry 1.0 3.8 3.7 3.0 10 Manufacturing 1.9 3.5 3.5 4.2 0 Services 3.4 4.7 5.4 5.9 -10 98 99 00 01 02 03 Private consumption 3.4 4.0 7.9 9.5 -20 General government consumption 2.9 2.6 2.4 -2.8 -30 Gross domestic investment 2.8 3.4 -3.5 4.8 Exports Imports Imports of goods and services 9.1 4.4 4.7 10.3 Note: 2003 data are preliminary estimates. This table was produced from the Development Economics central database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 52 - Philippines PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (%) Domestic prices 15 (% change) Consumer prices .. 7.6 3.1 1.9 10 Implicit GDP deflator 14.2 6.8 4.9 3.7 5 Government finance (% of GDP, includes current grants) 0 Current revenue .. 17.7 14.1 14.0 98 99 00 01 02 03 Current budget balance .. 2.3 -5.2 -1.3 GDP deflator CPI Overall surplus/deficit .. .. -5.2 -4.6 TRADE 1983 1993 2002 2003 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) .. 11,375 34,383 35,414 40,000 Electronics/Telecom .. 3,551 18,583 19,053 Garments .. 2,272 2,391 2,348 30,000 Manufactures .. 8,729 31,181 1,252 20,000 Total imports (cif) .. 17,597 33,975 36,972 Food .. 714 1,384 2,378 10,000 Fuel and energy .. 2,016 3,273 3,899 Capital goods .. 5,610 13,532 12,889 0 97 98 99 00 01 02 03 Export price index (1995=100) .. .. .. .. Import price index (1995=100) .. .. .. .. Exports Imports Terms of trade (1995=100) .. .. .. .. BALANCE of PAYMENTS 1983 1993 2002 2003 Current account balance to GDP (%) (US$ millions) Exports of goods and services 6,813 16,048 37,439 41,604 15 Imports of goods and services 9,197 20,700 38,295 43,659 10 Resource balance -2,384 -4,652 -856 -2,055 Net income -859 937 4,550 1,660 5 Net current transfers 472 699 503 2,445 0 Current account balance -2,771 -3,016 4,197 2,050 97 98 99 00 01 02 03 -5 Financing items (net) -725 2,850 -4,857 -1,601 Changes in net reserves 3,496 166 660 -449 -10 Memo: Reserves including gold (US$ millions) .. 5,922 16,180 16,115 Conversion rate (DEC, local/US$) 11.1 27.1 51.6 54.1 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 24,211 36,135 59,343 .. A: 3,325 IBRD 2,048 4,598 3,325 .. G: 5,558 B: 208 IDA 61 167 208 .. C: 1,686 Total debt service 3,028 4,920 9,192 .. D: 3,412 IBRD 205 669 480 .. IDA 1 3 7 .. Composition of net resource flows E: 12,364 Official grants 83 270 178 .. Official creditors 1,015 964 -32 .. Private creditors 769 584 2,027 .. Foreign direct investment 105 1,238 1,111 .. F: 32,790 Portfolio equity 0 0 410 .. World Bank program Commitments 369 428 200 .. A - IBRD E - Bilateral Disbursements 613 673 178 .. B - IDA D - Other multilateral F - Private Principal repayments 72 340 327 .. C - IMF G - Short-term Net flows 541 333 -149 .. Interest payments 133 332 159 .. Net transfers 407 1 -308 .. Note: This table was produced from the Development Economics central database. 9/16/04 - 53 -