Financial Highlights - First Gen · Metro Pacific Investments Corporation (MPIC) to sell a sizeable portion of Manila Electric Co. (Meralco) shares meant a fresh new direction for

OUR VISIONFirst Gen desires to enhance its position as the leading world-class Filipino energy company. First Gen aims to deliver cost-effective and reliable energy services to customers. First Gen will rise to the challenges of world-class competition.

OUR MISSIONTO BE THE PREFERRED PROVIDERWe are committed to be the preferred provider of energy services.In performing our role as the preferred provider, we will acquire, develop, finance, operate, and maintain our investments with the single-minded focus on delivering superior services to our customers.

TO BE THE PREFERRED EMPLOYERWe are a company of talented, dynamic, highly motivated, and fun-loving individuals. We provide a work environment that encourages innovative and entrepreneurial employees to build our business. We retain and attract talent by offering competitive benefits and compensation packages as well as professional development.

TO BE THE PREFERRED INVESTMENTWe strive to grow the business and enhance shareholder value by proactively pursuing opportunities and subjecting these to a diligent analysis of risks and rewards. We remain focused on our core power generation business while developing and seeking other viable energy-related business opportunities. We value our relationships with our investors, creditors and partners, and demonstrate this through good governance, transparency and professionalism.

TO BE THE PREFERRED DEVELOPERWe aim to be the preferred partner in nation-building and community development. We are committed to the fulfillment of our social, ethical, environmental and economic responsibilities.

1 Consolidated Financial Highlights 2 At A Glance 5 Chairman’s Message 8 President’s Report 13 CFO’s Report 16 Highlights of Operations 16 Natural Gas 20 Hydroelectric 24 Geothermal 28 Oil 32 Prospects, Marketing and Technologies 34 Environmentalism in Business 39 Corporate Governance 42 Board of Directors 44 Management Committee 46 Financial Statements 177 Glossary 178 Corporate Structure 179 Corporate Directory 180 Shareholder Information

Table of Contents

�First Gen 2009 Annual Report

Financial Highlights

First Gen Corporation (Consolidated) Amounts in U.S. Dollars Thousands2009 2008 2007

Gross revenues * 1,015,174 1,217,118 991,401

EBITDA ** 297,721 272,299 287,033

Net Income 95,007 93,468 181,831

Net Income attributable to Equity holders of the Parent Company 16,754 14,474 104,655

Recurring net income attributable to the Parent Company 34,205 18,674 89,268

Current Assets 346,515 665,541 767,083

Noncurrent Assets 1,814,508 3,032,336 3,359,948

Total Assets 2,161,023 3,697,877 4,127,031

Current Liabilities 282,566 996,508 869,245

Noncurrent Liabilities 1,071,420 1,682,958 1,908,205

Equity attributable to Equity holders of the Parent Company 663,034 458,660 660,861

Minority Interests 144,003 559,751 688,720

Earnings Per Share for Net Income attributable to the Equity holders of the Parent Company - Basic

US$0.013 US$0.012 US$0.086

* Excluding mark-to-market gain on derivatives, interest income, and foreign exchange gains. ** EBITDA was calculated based on income from continuing operations before income tax plus interest expense & financing charges, depreciation & amortization, foreign exchange losses, mark-to-market loss on derivatives, and other charges. Mark-to-market gain on derivatives, interest income, and foreign exchange gains were deducted from gross revenues.

2007 2008 20090

200

400

600

800

1,000

1,400

Gross RevenuesEBITDA

1,200

2007 2008 20090.0

20.0

40.0

60.0

80.0

100.0

200.0

Recurring net incomeConsolidated net income

120.0

140.0

160.0

180.0

Net income attributable to equity holders of the Parent Company

1,01

5.2

297.

7

272.

31,

217.

1

991.

428

7.0

89.3

181.

810

4.7

18.7

93.5

14.5

34.2

95.0

16.8

2

At a Glance

Considered among the cleanest of fossil fuels.

Operating Companies First Gas Power Corporation

FGP Corp.

Location Batangas Batangas

Installed Capacity 1,000 MW 500 MW

Main Customer MERALCO MERALCO

2009 Revenues from sale of electricity (in millions)

US$674.14 US$334.94

2009 Net Income Attributableto First Gen (in millions)

US$42.72 US$31.35

Energy from flowing water. Has no combustion emissions.

Operating Companies

First Gen Hydro Power Corporation

FG Bukidnon PowerCorporation

Location Nueva Ecija Agusan

Installed Capacity 122 MW 1.6 MW

Main Customer/s Various distribution utilities (DUs) in CentralLuzon, WESM

CEPALCO


Php1,247.18 Php40.0

2009 Net Income Attributableto First Gen (in millions)

Php45.63 (1) Php13.4

Natural Gas

Hydroelectric


Steam produced by heat and water from the Earth’s core. It is almost an inexhaustible form of energy.

Operating Company Energy Development Corporation (2)

Sale of Electricity Sale of Steam Other Services

Location Leyte/ North Cotabato/ Negros Occidental

Sorsogon & Albay Papua New Guinea(for drilling services)

Installed Capacity Leyte: 700.9 MWN. Cotabato: 106 MWNegros Occ.: 49 MWNegros Or. 192.5 MW

__ __

Main Customer/s NPC, Iloilo Electric Cooperative Inc. (ILECO1) and various DUs, industrial/commercial customers through Green Core Geothermal Inc.

National Power Corporation (NPC)

Lihir Gold Ltd.

2009 Revenues from sale of electricity(in millions)

Php20,819.70 (3)

2009 Net Income Attributable toFirst Gen (in millions)

Php1,301.69

(1) This amount represents First Gen’s 40 percent direct economic interest in FG Hydro.(2) First Gen, through Prime Terracota Holdings Corp., has an effective 40 percent economic interest and a 27 percent voting interest in EDC effective May 2009.(3) This amount includes EDC’s revenue from sale of steam, interest income on service concessions, construction revenue and revenue from drilling services,

excluding FG Hydro’s revenue from sale of electricity as this is presented separately.

Geothermal

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One of the most common types of fossil fuels used in power generation.

Operating Companies Bauang Private Power Corporation

Location La Union

Installed Capacity 225 MW (4)

Main Customer NPC


US$20.37

2009 Net Income Attributable to First Gen(in millions)

US$4.69

The safest and most economical mode for bulk oil movement

Operating Company First Philippine Industrial Corporation

Nature of First Gen Engagement Operational Supervision

Commissioning Date 1969

Area Served Batangas-Manila area

Main Asset Largest commercial petroleum pipeline in the country

2009 Gross Revenues (in millions)

Php662.5

2009 Net Income (in millions) Php228.6

Petroleum TransportOil

At a Glance

(4) Nominated capacity is 215 MW.


Chairman’s Message

“The shift towards power generation with a focus on renewable energy comes at a very opportune time. Slowly, but surely, people are now becoming aware of the hazards and dangers of global warming brought about by a wanton abuse of the environment and resources.”

Oscar M. LopezChairman

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Chairman’s Message

The year 2009 saw the winds of change blowing, ushering in new beginnings for the Lopez Group and First Gen.

Last year, First Philippine Holdings Corporation’s (FPHC) decision to enter into an investment and cooperation agreement with the group of Mr. Manuel V. Pangilinan of Metro Pacific Investments Corporation (MPIC) to sell a sizeable portion of Manila Electric Co. (Meralco) shares meant a fresh new direction for the Group.

In July 2009, a 20 percent stake in Meralco was sold to MPIC for Php20.07 billion. In November 2009, FPHC also agreed to grant MPIC or its assignee a call option on another 6.6 percent Meralco stake worth Php22.41 billion. These transactions would eventually reduce FPHC’s stake in Meralco to 6.6 percent.

This momentous decision signified the shift from power distribution, which has been the core business of FPHC for decades, towards more solid investments in power generation with a distinct focus on renewable energy.

The shift towards power generation with a focus on renewable energy comes at a very opportune time. Slowly, but surely, people are now becoming aware of the hazards and dangers of global warming brought about by a wanton abuse of the environment and resources. The devastating typhoons that slammed into our country last year, like “Ondoy” and “Pepeng,” as well as the drought that is scorching many parts of the country now, serve as grim reminders for all of us that the issue of

global warming is not theoretical. It is real and it affects all of us.

It is thus fortunate and timely that the Renewable Energy (RE) Law was passed in December 2008. This RE Law is a boost for consumers in the short and long term and it also augurs well for those interested in investing in renewable energy projects.

The reduction in the income tax of RE projects to 10 percent from 30 percent, the feed-in-tariff which is currently being ironed out by the National Renewable Energy Board (NREB) — that will ensure the long-term viability of renewable energy projects — as well as other fiscal incentives under the Law will definitely help attract these much-needed investments.

Even before the passage of the RE Law, it is quite interesting to note that we have maintained our leadership in power generation through the years without compromising our commitment to investing in clean, renewable and indigenous energy.

First Gen, through its assets — First Gas and Energy Development Corporation (EDC) — is the leader and pioneer in the use of clean, indigenous fuels such as natural gas, hydro and geothermal energy.

First Gas, through its 1,000-megawatt (MW) Santa Rita and 500-MW San Lorenzo power plants, has developed the expertise and track record of running gas-fired plants to the most exacting global standards of efficiency and reliability.


Likewise, EDC is the world’s second largest producer of geothermal energy. Through some forty years of harnessing geothermal energy for electricity generation, EDC has amassed a treasure trove of knowledge, experience and expertise in geothermal steam development and generation. Combined with First Gen’s track record in power asset management, our aspiration to become a global company can become a reality. EDC, thus, will be the main platform for us to enter into the global power generation business.

First Gen’s track record in asset management allowed the company to achieve financial breakthroughs. After raising more than US$900 million at the height of the global financial crisis in 2008, First Gen completed two crucial refinancing deals. In May 2009, First Gen affiliate Red Vulcan Holdings Corp. succeeded in extending for another five years – or until May 2014 – the maturity of Php13.86 billion in bank loans. Earlier in March, First Gen’s wholly owned subsidiary Unified Holdings Corporation also signed with a consortium of local banks an agreement for a 3-year Corporate Note Facility worth up to Php5.6 billion. And just recently, First Gen was able to conclude a Php15-billion rights offering that was even oversubscribed. First Gen had its share of winning some assets under the government’s privatization program. In September 2009, First Gen affiliate Green Core Geothermal Inc. won the Power Sector Assets and Liabilities Management Corp. (PSALM) bidding for the 192.5-MW Palinpinon and 112.5-MW Tongonan geothermal power plants

for US$220 million. And on October 23, Green Core formally acquired these two plants.

Of course, challenges will again confront us, as they do most endeavors. But your company’s Board believes that overall business conditions here and abroad will improve once global economies recover from the slump. We look forward to these new beginnings and new opportunities in the renewable energy space. Indeed, Disraeli’s quote rings true even in business – “change is a constant and change will be inevitable.” And, no doubt, these changes will be for the best.

I am very confident that members of our management team, led by our President and CEO Federico R. Lopez, have the skills, the experience, the enthusiasm and the able staff to tackle the challenges. Our management team made the year 2009 look like a walk in the park but in fact they had to overcome a lot of daunting obstacles along the way. Definitely, they deserve our commendation and continued support.

Therefore, I am taking this opportunity to thank our management team, along with its staff, our stockholders and other members of the Board for their continued support for the company.

Oscar M. LopezChairman

“We look forward to these new beginnings and new opportunities in the renewable energy space. Indeed, Disraeli’s quote rings true even in business – ‘change is a constant and change will be inevitable.’ And, no doubt, these changes will be for the best. “

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President’s Report

“We harmonize our corporate goals with that of the country’s in developing more indigenous sources of energy that, through our efforts, will not only be benign but protective of the environment as well.”

Federico R. LopezPresident & CEO

9First Gen 2009 Annual Report

This year we chose the theme “more with less” for our cover to emphasize the strategic direction we deliberately embarked on in 2007. Then and even more so today, there is mounting recognition that the mindless pursuit of growth for its own sake no longer has a place in a resource-and carbon-constrained world already reaching its limits.

Along with a growing number of enlightened businesses worldwide, we are in the process of incorporating sustainability into our business models. This is all the more challenging because of the very nature of the power and energy business. However, at First Gen, we can see many elements of a sustainable energy company’s business model coming into place: we harmonize our corporate goals with that of the country’s in developing more indigenous sources of energy that, through our efforts, will not only be benign but protective of the environment as well.

At the time, it was quite clear to us that we did not want to be caught up in a blind frenzy of simply adding and acquiring more megawatts. We foresaw that once we reached our Electric Power Industry Reform Act (EPIRA)-prescribed limits of 25 percent of national installed capacity, we would have to turn towards the global arena if we desired to grow further. Yet what would our chances of international success be if we looked just like any other small power company with global aspirations?

The last few years, our power sector has seen thousands of megawatts change hands from government to the private sector because of the privatization of the National Power Corp. (NPC) and Energy Development Corporation (EDC). Admittedly, we have been one of the most active bidders in the government’s privatization efforts. However, I believe that over this period, it is a source of pride that we have built a portfolio of power and energy assets that are second to none in the country. All the assets under our belt, to varying degrees, fit our criteria of not just being strategic but quality megawatts as well. They are indigenous, have low carbon emissions, are complementary as a portfolio, enhance and augment capabilities that will position us uniquely as we expand globally in the years to come.

The journey, however, has not been easy. Since our acquisition of EDC in November 2007, we have been intently focused on normalizing First Gen’s finances: pushing down to subsidiary-level and terming out parent company obligations from the acquisition. Despite the global credit crunch and a politically hostile attempt to take over Meralco, we were successful at all these efforts in 2008. We continued to replicate this approach in March 2009 with Unified Holdings Corp., a wholly owned subsidiary of First Gen signing a three-year Php5.6-billion facility with a consortium of local banks. In May 2009, Red Vulcan Holdings Corp. (Red

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Vulcan), then a subsidiary of First Gen signed an Amended and Restated Omnibus Loan and Security Agreement that extended the original 18-month loan to a tenor of five years and an outstanding balance of about Php14 billion from the original amount of Php29 billion. The task of normalizing First Gen’s finances culminated in our successful Php15-billion rights offering that closed in early 2010.The issue was 99 percent taken up and 11 percent oversubscribed. This infusion effectively strengthened our debt to equity ratios and enabled us to pay down obligations further. To date, the outstanding Php14-billion loan has been trimmed down to Php8 billion as part of the proceeds from the rights offer.

With First Gen’s finances normalized and on sound footing, we lost no time revving up and optimizing the assets we now have in our platform. Across all of EDC’s geothermal steam fields, we are setting new internal records for drilling performance, raising the efficiency of our extraction and use of steam as well as protecting the geothermal reservoirs so that they can truly be called renewable resources that will continue to be productive well into the future.

Very important for us last year was EDC winning both the Palinpinon and Tongonan geothermal power plants of NPC in September. Just as critical was its assuming control over the Mindanao 1 &

First Gen Intensity, tCO2 eq/MWh

2004 2005 2006 2007 2008 20090.00

0.10

0.15

0.20

0.25

0.30

0.40

AHEPP Acquisition

0.35

PMHEPP Acquisition

EDC Acquisition

BDPP’s Standby Status +Acquisition of PGPP and

TGPP under EDC

AHEPP: Agusan Hydroelectric Power Plant

PMHEPP: Pantabangan/ Masiway Hydroelectric Power Plant

BDPP: Bauang Diesel Power Plant

PGPP: Palinpinon Geothermal Power Plant

TGPP: Tongonan Geothermal Power Plant


2 geothermal power plants from Marubeni at the end of their Build-Operate-Transfer contract in June. This further integrated our geothermal steam fields with the power plants they already serve allowing us to more tightly manage operations and have direct dealings with our electricity customers. Consequently, this will allow us to design more competitive offerings for our customers as well as capture more of the economic value downstream. With the prospect of Retail Open Access just around the corner this year, we will be ready to meet consumer needs even more. As I write this, we will be bidding for the last geothermal plant in NPC’s hands—the 150 Megawatt Bacon-Manito or “Bac-Man”. Should we win this, we will have completed the full integration of all EDC’s steam fields and the power plants they serve.

On another front, our hydropower asset – Pantabangan-Masiway – had a slightly higher capacity factor of 34.15 percent last year due to increased irrigation requirements. Reliability was superb at 99.57 percent. However, availability was lower at 76.87 percent from 82.54 percent the previous year since Unit 1 of the plant had been undergoing a rehabilitation and upgrade in the last five months of the year. We have now successfully brought up the total capacity of the complex to 122 MW and have upgraded the unit’s performance and efficiency quite notably.

Our 1,500-MW Natural Gas-fired Santa Rita and San Lorenzo plants have continued to operate excellently. Santa Rita chalked up a reliability rating of 97.65 percent and availability of 94.45 percent in 2009. San Lorenzo, on the other hand, attained reliability of 99.51 percent and availability of 96.53 percent in the same year. All these figures are notably above contractual requirements. They are indeed proving to be two of the most reliable plants in the Luzon grid today.

As we shape First Gen in the coming years, we are constantly mindful of the fact that we forge a portfolio of assets that will withstand intense competition and can operate sustainably in a carbon-constrained world. Today, I believe we have a platform that is not only diverse, competitive and possibly the largest in the country but which also has the lowest carbon intensity among sizeable power companies in the Philippines. Our carbon intensity in 2004 stood at 0.38 carbon dioxide tons per megawatt-hour (CO2/MWH). Today, that same figure is 34 percent lower at 0.25 CO2 tons/MWH; despite the fact that we’ve grown by 1,174.62 megawatts in that period. On a per grid basis, First Gen’s carbon intensity is still much lower at 0.35 for Luzon, 0.03 for Visayas and 0.02 for Mindanao, respectively. The Luzon grid, on the other hand, has a carbon intensity of 0.47, 0.27 in Visayas and 0.28 for Mindanao.

“All the assets under our belt, to varying degrees, fit our criteria of not just being strategic but quality megawatts as well.”

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Another striking feature of our assets is that they exist side by side with a natural environment that thrives and flourishes because of our relatively minimal impact as well as our stewardship and protection. EDC not only protects more than 250,000 hectares of forested concession areas around the country but, when it launched its Binhi Program in 2008, has committed to reforest 10,000 hectares over ten years. Last year, we already reforested a total of 1,018 hectares as committed under the program. Massive reforestation along this scale is integral to EDC’s business to keep the geothermal reservoirs recharged and healthy.

In Batangas, First Gas, in partnership with the Archdiocese of Lipa has committed to providing 20,000 seedlings a year for the next five years for the church’s reforestation programs. First Gas has also committed to supporting the logistics requirements for three of the most critical Bantay-Dagat (Sea-Watch) volunteer teams that protect coastal reefs and marine resources in Batangas. This is in line with our protection of the Verde Island Passage considered the “Center of the Center” of marine biodiversity worldwide. And since charity and good intent must begin at home, First Gas is extremely proud of the 9.9-hectare mangrove we rehabilitated over the last ten years right on our plant site. From what was practically barren land this mangrove now stands

healthy and home to more than 79 bird species that now call it their home permanently or itinerantly. Another yearly occurrence at the Santa Rita plant is the nesting of Olive Ridley turtles. Our coordination with the Department of Environment and Natural Resources (DENR) on this has also raised the hatching rates of these eggs to as high as 90 percent in some cases.

In a world reaching its limits, business-as-usual and the pursuit of growth for its own sake are no longer sustainable. What matters more is the quality of that growth and our ability to respect, protect and sustain life as we know it. Resolving this dilemma between growth and sustainability will be the key to ours and any company’s success in this new, enlightened world. As we grow, First Gen will show that it is possible to transform and become more than what we are today with less. To be so much more but with so much less.

Federico R. LopezPresident & CEO

��First Gen 2009 Annual Report

CFO’s Report

“With the successful refinancing of the FGPC loans, which pushed down and termed out the short-term debt at the parent level to the subsidiary level, First Gen continued to replicate this formula in 2009.”

Francis Giles B. PunoChief Financial Officer

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First Gen Corporation (First Gen) set out to accomplish even greater tasks in 2009 with the success of its fundraising and refinancing activities that were undertaken amid the global financial crisis that started in 2008.

Financial ReviewFirst Gen group’s financial result for 2009 is a testament to the Company’s commitment to normalizing its financials and continuing exceptional operating performance. First Gen group’s net income attributable to parent of US$17 million is 16 percent higher than the previous year with Energy Development Corporation (EDC) delivering higher earnings from increased revenues generated from the recently acquired 192.5-megawatt (MW) Palinpinon Geothermal Power Plant and the 112.5-MW Tongonan Geothermal Power Plant, foreign exchange gains, lower provisioning for income taxes, and the scoping out of IFRIC 12 effective October 23, 2009. The higher contribution from EDC was supplemented by lower interest expenses and financing charges at the parent level that resulted from the Company’s debt reduction program.

The 41 percent rise to US$31 million in EDC’s contribution to net income attributable to parent bodes well for the Company. The positive contribution of the Palinpinon-Tongonan power plants from the sale of electricity for two months following the acquisition solidifies our belief that EDC purchased these assets at great value. The decrease in provision for income tax is a result of EDC’s reduced corporate income tax rate to 10 percent from 30 percent under the newly implemented R.A. 9513 or the Renewable Energy Act of 2008 (RE Law). However, these benefits were partly offset by a one-time writedown of EDC’s deferred tax assets following the implementation of the RE Law.

First Gen’s interest expense and financing charges decreased by 8 percent to US$112 million, as the Company continued to pay down debt at the parent level. This was partly offset by higher interest expense of First Gas Power Corporation (FGPC), owner of the 1,000-MW Santa Rita Natural Gas-Fired Power Plant, after its loan refinancing in November 2008.

Consolidated revenues in 2009 decreased by 19 percent to US$1,022 million mainly due to lower fuel costs as oil prices in the world market declined during the year. The combined fuel price of the natural gas-fired plants averaged US$8.6/giga-joules (GJ) in 2009, compared with US$11.6/GJ in 2008. Since fuel charges are passed on to Meralco, it was the Filipino consumers that ultimately benefited from this price variance.

Financial StratagemsWith the successful refinancing of the FGPC loans, which pushed down and termed out the short-term debt at the parent level to the subsidiary level, First Gen continued to replicate this formula in 2009. In March 2009, Unified Holdings Corporation, a wholly owned subsidiary of First Gen that has a 60 percent stake in the 500-MW San Lorenzo Natural Gas-Fired Power Plant, signed a three-year Php5.6-billion Facility Agreement with a consortium of local banks, namely, Banco de Oro Unibank, Inc., Philippine National Bank, Rizal Commercial Banking Corporation, and Robinsons Savings Bank. The facility was used to refinance First Gen’s Local Bridge Loan Facility that was granted in November 2007 in connection with the purchase of a controlling stake in EDC by Red Vulcan Holdings Corporation (Red Vulcan), then a subsidiary of First Gen.

Red Vulcan signed an Amended and Restated Omnibus Loan and Security Agreement in May 2009, which

CFO’s Report

“First Gen group’s net income attributable to parent of US$17 million is 16 percent higher than the previous year with Energy Development Corporation (EDC) delivering higher earnings.”


essentially extended the original 18-month collateralized loan used to purchase the controlling stake in EDC. Upon signing of the restated agreement, the Red Vulcan loan had an extended tenor of five years and an outstanding balance of about Php14 billion, down by 52 percent from the original amount of Php29 billion. To date, this loan has been paid down to Php8 billion as part of the proceeds from the rights offer that First Gen closed in early 2010.

EDC also raised a total of Php25 billion in fresh funds last year with the Php4-billion International Finance Corporation loan (with maturities up to 2033), Php9-billion fixed rate corporate notes (with maturities up to 2016) and Php12-billion retail bonds (with maturities in 2015 and 2016). These funds were utilized for the JPY12-billion Miyazawa 1 loan repayment in mid-2009, and the Palinpinon-Tongonan power plants’ acquisition. Moreover, this pre-funded part of the JPY22-billion Miyazawa 2 loan maturity that is scheduled for June 2010. These new loans allowed EDC to shift the currency mix of its loan portfolio from being Japanese yen-heavy to predominantly Philippine peso-denominated, which is in line with EDC’s Philippine peso-denominated revenue sources. These new loans also spread out EDC’s loan maturities going forward.

It is worth mentioning that in May 2009, the Lopez Inc. Retirement Fund (LIRF) and Quialex Realty Corporation (QRC) invested in the voting preferred shares of Prime Terracota Holdings Corporation (Prime Terracota), the company that owns Red Vulcan. As a result of this transaction, First Gen’s voting interest in Prime Terracota was reduced to 45 percent from 100 percent. This equity transaction resulted in the deconsolidation of the Prime Terracota group (composed of Prime Terracota itself, Red Vulcan, EDC and First Gen Hydro Power Corporation) from First Gen. With the reduced voting

interest in Prime Terracota, First Gen’s effective 40 percent economic interest in EDC is now accurately reflected in its consolidated financial statements. Nonetheless, the structure still allows First Gen to receive all the dividends due Red Vulcan from EDC.

As a result of the deconsolidation, First Gen’s total assets as of December 31, 2009 decreased to US$2,161 million from US$3,698 million at end-2008. Total liabilities likewise decreased to US$1,354 million as of December 31, 2009 from US$2,679 million at end-2008. More importantly, the Company’s debt-to-equity ratio now stands at a respectable 1.4x from 2.2x in December 2008. Debt-to-EBITDA is at a manageable 4.5x compared with 8.9x in the previous year.

Finally, to cap off the year, First Gen undertook a Php15-billion Rights Offer in December 2009 as the Company saw the need to strengthen its equity position. The Rights Offer was offered to existing common shareholders at a price of Php7.00 per share and was 99 percent taken-up and 11 percent oversubscribed, thereby increasing First Gen’s market capitalization by 30 percent. Proceeds from the Rights Offer have been and will be used for the repayment of First Gen group’s debt.

First Gen has done and can do more… with less. We have a bigger power portfolio supported by significantly improved equity and, more importantly, less debt. With another fruitful year behind us, First Gen can eagerly look forward to new milestones in 2010.

Francis Giles B. PunoChief Finance Officer

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Business Review: Natural Gas


Natural gas – the cleanest of all fossil fuels and considered as a “bridge fuel” before the full commercialization of renewable energy – is harnessed for power generation by the two First Gas power plants in Batangas with a combined capacity of 1,500 megawatts (MW).

In 2009, First Gas Power Corporation (FGPC) and FGP Corp. (FGP) delivered steady operational results. FGPC’s 1,000-MW Santa Rita and FGP’s 500-MW San Lorenzo natural gas-fired plants offered high reliability and availability levels, even surpassing their targets set for the year. In addition, both plants enjoyed relatively high dispatch rates as seen through their respective Net Capacity Factors.

FGPC’s net income rose to US$71.2 million in 2009 from US$54.4 million in 2008 mainly due to the twin benefits of a deferred income tax and higher interest income earned during the period.

However, FGPC registered gross revenues of US$689.5 million in 2009, 15 percent lower than the US$811.2 million posted the previous year. The decrease in revenues was mainly because of lower fuel charges due to a decline in average gas prices; and lower

FGPC’s net income rose to US$71.2 million in 2009 from US$54.4 million in 2008 mainly due to the twin benefits of a deferred income tax and higher interest income earned during the period.

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net dependable capacity levels from 1,043.3 MW in 2008 to 1,036.9 MW in 2009 arising from the plant’s normal degradation. FGPC’s Santa Rita plant went on commercial operations in 2000. Nonetheless, the decrease in revenues was offset by the higher average plant dispatch level of 83.2 percent in 2009 compared with 81.4 percent in 2008.

Meanwhile, FGP’s net income amounted to US$52.3 million in 2009, 14.7 percent lower than the US$61.3 million it posted in 2008. This was mainly due to the expiration of its income tax holiday in February 2009.

FGP registered total revenues of US$335.2 million in 2009, 18.2 percent lower than the US$410.0 million posted in 2008. The drop is a result of lower fuel costs with the decline in average gas prices, lower plant dispatch of 80.2 percent from 81.9 percent in 2008; and lower net dependable capacity levels of 525.5 MW in 2009 from 530.0 MW in 2008 due to normal plant degradation. FGP’s San Lorenzo plant went on commercial operations in 2002.

In 2009, FGPC’s Santa Rita power plant generated 7,560 gigawatt-hours (GWh) of electricity, 1.3 percent higher than the 7,462 GWh produced in 2008.

Business Review: Natural Gas

Both the Santa Rita and San Lorenzo power plants use indigenous, clean natural gas from the Malampaya Gas Field in offshore northwest Palawan.

�9First Gen 2009 Annual Report

Likewise, plant availability was at 94.45 percent compared with the internal target of 90.0 percent while the level of reliability was at 97.65 percent versus the internal target of 94.0 percent. The plant achieved an average net capacity factor of 83.23 percent, up from 82.18 percent in 2008.

FGP’s San Lorenzo plant generated 3,691 GWh of electricity in 2009, 3.2 percent lower than the 3,813 GWh produced in 2008 due to lower dispatch by Meralco in January and February 2009, as well as the scheduled inspections in the third quarter last year. Plant availability reached 96.53 percent, better than the internal target of 90 percent, while the level of reliability hit a high 99.51 percent, versus the internal target of 94.0 percent. The plant attained an average net capacity factor of 80.16 percent compared with 82.12 percent in 2008. High availability and reliability levels mean more electricity is readily available from the power plants when offered to be dispatched.

Both the Santa Rita and San Lorenzo power plants use indigenous, clean natural gas from the Malampaya Gas Field in offshore northwest Palawan. As the pioneers in the use of natural gas for power generation in the Philippines, they continue to set the standard for efficiency and world-class operations.

Trivia

Electricity vampire refers to the electric power being

consumed by electronic appliances even when

they are switched off or on standby mode. The

electricity vampire often lurks inside appliances that

have clock displays, indicators and remote controls.

These appliances don’t really switch off unless you

unplug them.

The standby power consumption of electronic

appliances on standby power may be minimal; but

if you keep many of these appliances at home, they

can force you to spend 10 (some say, 20) percent

more for your monthly electric bills.

You can, therefore, reduce your electricity bills by

unplugging appliances or switching devices off at

the power point they are connected to when not in

use. It’s good for your wallet and for our planet.

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20

Business Review: Hydroelectric

2�First Gen 2009 Annual Report

Water – an abundant renewable resource – is efficiently harnessed by First Gen Hydro Power Corporation (FG Hydro) and FG Bukidnon Power Corporation (FG Bukidnon) to produce electricity.

FG Hydro, which owns and operates the 112-megawatt (MW) Pantabangan-Masiway hydroelectric plants (PAMAHEP) in Nueva Ecija, generated 319.94 gigawatt-hours (GWh) of electricity in 2009. This was 9.7 percent lower than the 354.15 GWh generated in 2008 due to the implementation of the first phase of the US$45-million rehabilitation program for the Pantabangan plant. Once completed by the end of 2010, this major enhancement program will increase the plants’ net dependable capacity by 20 MW. Refurbishment of the first unit started in July 2009. Commissioning, which began in December 2009, was successfully completed in early 2010, boosting the Pantabangan plant’s capacity by an additional 10 MW. This increased PAMAHEP’s total generating capacity to 122 MW.

Meanwhile, PAMAHEP’s net generation for 2009 exceeded by 28.8 percent the 248.48-GWh energy consumed by its contracted customers. As a result, 71.46 GWh was sold to the Wholesale Electricity Spot Market (WESM). This was 17.96 percent higher than the 60.58 GWh sold in 2008.

PAMAHEP’s net generation for 2009 exceeded by 28.8 percent the 248.48-GWh energy consumed by its contracted customers.

22

In 2009, FG Hydro posted a net income of Php114.1 million, 22.5 percent better than the Php93.1 million in 2008. However, its gross revenues registered at Php1.25 billion in 2009, down by 9.9 percent from the previous year’s Php1.38 billion. The decrease in revenues was due to the combined effects of lower dispatch due to reduced irrigation requirements, the rehabilitation of Pantabangan Unit 1 and lower spot prices in the WESM. Nonetheless, the drop was tempered by the appreciation of the Philippine peso which resulted in foreign exchange gains of Php109.2 million for the year compared with the Php388.7- million foreign exchange losses in 2008.

Even with the ongoing rehabilitation works at Pantabangan, the thrust for operational excellence continued with FG Hydro implementing an Integrated Management System in July 2009, thereby achieving ISO Certificates of Registration for its Quality Management System (ISO 9001:2008), Environmental Management System (ISO 14001:2004) and Occupational Health and Safety Management System (OHSAS 18001:2007).

FG BukidnonMeanwhile, FG Bukidnon – owner and operator of the 1.6-MW Agusan mini-hydro plant in Bukidnon

Business Review: Hydroelectric

Even with the ongoing rehabilitation works at Pantabangan, the thrust for operational excellence continued with FG Hydro implementing an Integrated Management System in July 2009...


– generated 11,659.30 MWh of electricity in 2009, 9.6 percent lower than the 12,898.27 MWh in 2008. This was mainly due to the relatively lower average water inflow in 2009.

Total revenues generated by FG Bukidnon in 2009 amounted to Php40.78 million, slightly lower than the Php41.13 million in 2008. Nonetheless, FG Bukidnon’s net income stood at Php13.4 million, up by 14.7 percent from the Php11.7 million registered in 2008. This was mainly due to lower provision for current income tax with the effectivity of the Renewable Energy (RE) Law on January 31, 2009. Under the RE Law, the new income tax rate for renewable energy projects dropped to 10 percent from 30 percent.

FG Bukidnon, through First Gen Renewables, Inc. (FGRI), sells all electricity output from its mini-hydro plant to Cagayan Electric Power and Light Company, Inc. (CEPALCO). FG Bukidnon is a wholly owned subsidiary of First Gen.

In 2009, FG Bukidnon outlined and commenced implementation of a three-year major maintenance plan to minimize the risk of a major forced plant outage until the end of its Cooperation period in 2025.

Trivia

Scientist Albert Einstein won the Nobel Prize in

Physics in 1921 for his innovative experiments with

solar power and photovoltaics. The Romans were

among the first to use geothermal energy to heat

houses.

The greenhouse effect was discovered by French

physicist and mathematician Joseph Fourier in

1824. Swedish scientist Svante August Arrhenius

was the first person to suggest, way back in 1896,

climate change due to human activities. American

geophysicist Roger Randall Dougan Revelle, on the

other hand, is credited for making the first high-

level global warming predictions in 1965.

A solar-powered aircraft set a world record in 1990

when it flew across the USA in 21 stages, using no

fuel at all.

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2�

Business Review: Geothermal


As an affiliate of First Gen, Energy Development Corporation (EDC) continues to live up to expectations as a main platform for growth and expansion in the renewable energy business.

In 2009, EDC’s consolidated net income jumped by 150.4 percent to Php3.37 billion from the year-ago level of Php1.34 billion primarily due to a Php2.73-billion increase in consolidated revenues from the sale of electricity. EDC’s complete turnaround from registering a Php9.4-billion foreign exchange loss in 2008 to posting a Php1.3-billion foreign exchange gain in 2009 also boosted its profits.

EDC’s recurring net income grew by 26.5 percent to Php7.38 billion in 2009 from Php5.83 billion in 2008, due to several favorable factors, including the Php1.54-billion increase in total consolidated revenues and the Php2.09-billion decrease in its provision for income tax. EDC’s provision for income tax went down as it benefited from the Renewable Energy Law, which reduced the income tax rate of renewable energy companies to 10 percent from 30 percent.

EDC’s consolidated revenues in 2009 grew by 7.5 percent to Php22.07 billion from Php20.53 billion the previous year while operating expenses on a consolidated level also expanded by 35.7 percent to Php12.68 billion from Php9.34 billion in 2008. The increased operating expenses were due to the rise in general and administrative expenses, including expenses for steam augmentation activities, purchased services, utilities, depreciation and amortization. But the higher electricity sales, along with the foreign exchange gain mentioned earlier, helped offset the increase in operating expenses.

EDC’s recurring net income grew by 26.5 percent to Php7.38 billion in 2009 from Php5.83 billion in 2008.

2�

In September 2009, Green Core Geothermal Inc. (Green Core), EDC’s wholly owned subsidiary through First Luzon Geothermal Energy Corporation, offered a winning bid of US$220 million for the acquisition of two geothermal power plants from state-owned disposition entity Power Sector Assets and Liabilities Management Corporation (PSALM). These are the 192.5-megawatt (MW) Palinpinon geothermal power plant in the Southern Negros Geothermal Production Field and the 112.5-MW Tongonan geothermal power plant in the Leyte Geothermal Production Field. In October 2009, Green Core successfully completed all conditions required for the turnover of both geothermal power plants from PSALM. Green Core was awarded 12 transition power supply contracts under its Asset Purchase Agreement with PSALM.

Also in June 2009, EDC assumed full ownership of the 52-MW Mindanao 1 and 54-MW Mindanao 2 geothermal power plants in the Mindanao Geothermal Production Field, located in Kidapawan City, North Cotabato, from the Mindanao 1 Geothermal Partnership, a consortium between Oxbow Power Corporation and Marubeni Corporation. The Mindanao plants are the last of the Build-Operate-Transfer plants turned over to EDC.

The acquisition of the Tongonan and Palinpinon power plants resulted in a drop in the volume of steam being produced by EDC as both plants shifted reporting their sales from steam to electricity sales. Thus, EDC’s steam production fell 18.6 percent to 2,520.8 gigawatt-hours (GWh) in 2009 from 3,095.9 GWh in 2008. Meanwhile, electricity generated by EDC reached 5,693.3 GWh, 11.9 percent higher than 2008’s 5,330.8 GWh.

FULL INTEGRATIONThe turnover of the Mindanao power plants, along with the acquisition of the Palinpinon and Tongonan plants, likewise paved the way for the full integration – from steam production to power generation – of the value chain of EDC’s geothermal business in four of its five geothermal production fields. The fourth integrated geothermal business of EDC is the 49-MW Northern Negros Geothermal Production Field.

The government-owned 150-MW Bacon-Manito geothermal power plant within EDC’s Bacon-Manito (Bac-Man) Geothermal Production Field in Albay is up for bidding in 2010. EDC will participate in this auction to achieve full integration in all five of its geothermal production fields.

Business Review: Geothermal

Also in June 2009, EDC assumed full ownership of the 52-MW Mindanao 1 and 54-MW Mindanao 2 geothermal power plants in the Mindanao Geothermal Production Field.


EDC now stands as the world’s second-largest geothermal energy producer. In the next three to five years, it plans to increase its geothermal capacity by up to 300 MW to make it the world’s largest geothermal energy producer.

As part of a planned expansion of its geothermal operations abroad, EDC continues to explore various options in Indonesia, including the conduct of a preliminary survey of four geothermal sites. The Indonesian government welcomes foreign geothermal companies willing to develop its vast geothermal resources.

In 2009, EDC also signed a new drilling contract, worth US$15 million, with Lihir Gold Ltd. (LGL) of Papua New Guinea, a leading gold producer in the Asia-Pacific. The contract, which is until the end of 2010, includes the drilling of wells and the supply of drilling services such as mud engineering, well cementing and directional drilling.

Since 1999, EDC has been providing drilling services to LGL, which sources its power requirements for its gold mine and processing facility from its 56-MW geothermal power plant on Lihir Island.

EDC started exporting its drilling services in 1997 for an oil- and gas-drilling contract in Indonesia. It has also sent rigs and deployed drilling consultants and rig maintenance specialists to Indonesia, Papua New Guinea and Bangladesh.

EDC revenues from third party drilling services went up to Php847.88 million in 2009 from Php726.14 million in 2008.

Bond OfferingEDC raised Php25.1 billion through the issuance of fixed rate corporate notes and Philippine peso bonds in 2009. EDC’s Php12-billion fixed rate bonds, which were issued on December 4, 2009, made it to the country’s record books by becoming the first maiden bond offering to be listed on issue date. The bond offering earned from Philippine Rating Services Corporation a credit rating of PRS Aaa, the highest possible corporate credit rating. EDC used a portion of the Php25.1-billion proceeds from the issuance of the fixed rate corporate notes and Philippine peso bonds to prepay the 7-year staple financing with PSALM for the acquisition of the Tongonan I and Palinpinon plants, purchase of a state-of-the-art drilling rig and settlement of its JPY12-billion Miyazawa 1 loan.

Trivia

Each of the following activities adds 1 kilogram of CO2 to

your personal carbon footprint:

Travel by public transportation (train or bus) a

distance of 10 to 12 km (6.5 to 7 miles)

Drive with your car a distance of 6 km or 3.75 miles

(assuming 7.3 liters in gasoline consumption per 100

km or 39 miles per gallon)

Fly with a plane a distance of 2.2 km or 1.375 miles

Operate your computer for 32 hours (60-watt

consumption assumed)

Production of 5 plastic bags

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from www.timeforchange.net

2�

Business Review: Oil


Oil – the most common fuel resource is efficiently used for power generation by the first Filipino Build-Operate-Transfer (BOT) Project Agreement – the 215-megawatt (MW) Bauang Power Plant operated by Bauang Private Power Corporation (BPPC).

BPPC registered revenues of US$20.37 million, lower than the previous year’s US$27.18 million primarily due to the lower Nominated Capacity of 150 MW from January to February 4, 2009. Operating expenses were higher at US$11.504 million compared with US$11.05 million in 2008 because of additional expenses attributed to the restoration of the damaged transformer. Nonetheless, net income improved to US$12.58 million from the previous year’s US$11.09 million with the booking of insurance claims and lower income tax.

The Bauang power plant was generally on standby in 2009, which accounts for its minimal generation of 15.58 gigawatt-hours (GWh) or 0.86 percent capacity factor. Nominated capacity declined due to a transformer fire incident in October 2008. The transformer was subsequently restored in February 2009. Availability gradually improved, averaging at 91.36 percent. Net heat rate for the year was within guaranteed limits at an average of 8,705.13 British thermal unit/kilowatt-hour (Btu/kWh).

Net income improved to US$12.58 million from the previous year’s US$11.09 million with the booking of insurance claims and lower income tax.

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Business Review: Oil

Petroleum Transport First Philippine Industrial Corp. (FPIC), owner and operator of the petroleum pipeline from Batangas to Manila, achieved record revenues of Php662.5 million in 2009, up by 8 percent from the Php615.7 million the previous year. This resulted in a net income of Php228.6 million, an increase of 13 percent in 2009 from Php202.7 million registered in 2008. Much of the increase was due to the higher volume of oil products transported through the pipeline.

In 2009, FPIC redefined its broad fuel industry market; and its goal to be a world-class provider of transport and storage services. FPIC is now focused on the downstream petroleum industry.

At present, FPIC is talking to several oil companies for jet fuel storage at the Ninoy Aquino International Airport (NAIA). The jet fuel will be transported through FPIC’s pipeline direct to a new storage facility at NAIA.

FPIC is committed to operational excellence and safety through compliance with international pipeline operations, maintenance and design engineering standards. In fact, talks are ongoing with five international testing companies based in the United States, Europe and Asia for the in-line pipeline inspection being conducted every five years. The next scheduled inspection of the pipeline is in 2010.

Aside from being the most energy-efficient mode of transporting petroleum products, FPIC is also committed

Real Property Taxes In February 2009, the one-year redemption period from the 2008 auction of the Bauang Plant by the Provincial Government of La Union (PGLU) expired despite continuous efforts by National Power Corporation (NPC) and PGLU to arrive at an agreement. Consequently, the PGLU consolidated the ownership of the identified plant structures with the issuance of new tax declarations under its name. As such, the PGLU is offering the Bauang Plant to prospective buyers.

BPPC operates the Bauang Plant under a BOT Agreement with NPC, which will expire in July 2010 and expects to transfer the Bauang Plant to NPC accordingly.

Safety record BPPC continues to maintain strict compliance to safety and security measures with zero lost time incident accident as of December 31, 2009 at 4,283,495 man-hours. This accomplishment translates to more than 11 years of operations without accident. For its outstanding safety record, the company was awarded the Safety Milestone Achievement Award by the Department of Labor and Employment-Bureau of Working Conditions in November 2009 and the Achievement Award from the Safety and Health Association of the Philippine Energy Sector and the Department of Energy in December 2009.


to the communities around it through corporate social responsibility activities such as community training on environment, safety and health matters. FPIC continues to have a remarkable Customer Satisfaction Index of 4.996.

In 2009, the company was conferred the Investors in People (IiP) Gold Level status, the first company in the Philippines and Asia to receive such an award. It is also the 43rd company among 60,000 IiP-certified companies in the world to achieve the highest level, a remarkable feat considering FPIC achieved the status by leapfrogging from Standard to Gold level without passing through the Bronze and Silver stages.

The company has maintained the certification of its management systems to five other international standards, namely: ISO 9001 (quality management), ISO 14001 (environmental management), ISO 27001 (information security), OHSAS 18001 (occupational health and safety) and SA 8000 (social accountability). FPIC emerged one of the five finalists in the Employer of the Year program of the People Management Association of the Philippines (PMAP), joining other prominent companies that are much larger in size. The company shared its best practices in more than a dozen conferences hosted by academic, professional and business organizations in 2009 in line with its commitment as a recipient of the Recognition for Proficiency in Quality Management from the Philippine Quality Awards in 2008.

FPIC is committed to operational excellence and safety through compliance with international pipeline operations, maintenance and design engineering standards.

Trivia

Since 1751, roughly 315 billion tons of carbon

have been released to the atmosphere from the

consumption of fossil fuels and from cement

production. Half of these emissions have occurred

since the mid-1970s. In 2005 alone, worldwide

carbon dioxide emissions were estimated to have

exceeded 24 billion tons.

Between 30 and 40 percent of total world energy

use is in buildings - for heating, cooling, lighting,

cooking and ventilation – according to 2007 UN

Environment Program estimates.

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from www.carbonpositive.net

�2

First Gen continues to pursue the development of other renewable energy projects such as those powered by wind, solar and hydro, to further diversify its array of clean and renewable energy projects.

In October 2009, wholly owned subsidiary First Gen Mindanao Hydro Power Corporation (FGMHPC) signed five Renewable Energy Service Contracts with the Department of Energy for the development of five run-of-river projects in the provinces of Agusan del Norte and Bukidnon in Mindanao. Under the signed contracts, FGMHPC will hold the exclusive right to develop these areas for the next two to three years.

FGRIIn December 2009, First Gen Renewables Inc. (FGRI) installed in Mercedes, Camarines Norte a 50-meter wind mast, which will help FGRI conduct a wind measurement study in the next two to three years. The results of the study will determine the area’s potential as a site for a viable wind farm. FGRI is also exploring five other sites in other parts of Luzon and Visayas as possible sites for wind farms.

FGRI has also started discussions with several potential partners for the development of a photovoltaic (PV) plant that will be integrated into a power grid. The development of this solar-powered plant will come on top of FGRI’s business of supplying PV panels to various rural electrification projects of the government.

WIND PROJECTS In September 2009, the Department of Energy awarded to Energy Development Corporation (EDC) a 25-year Renewable Energy (RE) Service Contract for the 86-MW wind project in Burgos, Ilocos Norte. The RE Service Contract will allow EDC to avail from the government fiscal incentives provided for by the Renewable Energy Law in undertaking the wind project. EDC also intends to register the wind project with the Clean Development Mechanism (CDM) under the Kyoto Protocol of the United Nations Framework Convention on Climate Change. With the CDM registration of the Burgos project, EDC can earn carbon credits, which can be converted into cash through emissions trading. EDC is targeting to issue a notice to proceed with the wind project within 2010.

Business Review:Prospects, marketing and technologies

In October 2009, wholly owned subsidiary First Gen Mindanao Hydro Power Corporation (FGMHPC) signed five Renewable Energy Service Contracts with the Department of Energy for the development of five run-of-river projects in the provinces of Agusan del Norte and Bukidnon in Mindanao.


NEGAWATTS As part of preparations for the opening of the electricity market to retail competition, First Gen organized in 2006 subsidiary First Gen Energy Solutions, Inc. (FGES), an Energy Regulatory Commission (ERC)-licensed retail electricity supplier (RES) and aggregator.

In October 2009, FGES and Iloilo Electric Cooperative 1 (ILECO 1) forged a memorandum of agreement (MOA) to start negotiations for a power supply agreement. As part of the MOA, ILECO 1 and FGES have agreed to collaborate and develop initiatives that will benefit ILECO 1 customers by improving the cooperative’s already high service levels. The initiatives are in line with FGES’s approach in delivering customer value “beyond the meter.”

FGES is working closely with its present and prospective clients in identifying and implementing energy efficiency initiatives in line with its corporate strategy of delivering both megawatts and negawatts through efficiency improvements when possible; and providing greater value while reducing its environmental impact. A negawatt is a measure of energy efficiency or a unit in watts of energy saved.FGES developed a number of simple yet smart software

programs that produced consistent systems loss figures while allocating individual customers to specific transmission lines. These user-friendly tools were exceptionally effective in helping reduce systems losses.

As part of its technical assistance to customers, FGES offers a thermal imaging service which is capable of identifying hot spots in the distribution systems of FGES customers. Detecting these hot spots helps the distribution utilities reduce systems loss while increasing their systems’ reliability. This technology allows these distribution utilities to undertake fast and preemptive repairs of affected spots. In recognition of these efforts to reduce systems loss, the National Electrification Administration gave one of FGES’s customers an award for recording the second-best record in reducing its systems loss.

FGES has also completed pilot-testing a smart meter, a gadget that helps a power consumer minimize energy wastage by tracking real-time basis electricity consumption in major sections of a consumer’s operations. The smart meter is currently being offered as a value-added service of FGES. It is continually being developed for added features based on customers’ feedback.

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Environmentalism in Business

Making a Difference


Intrinsic to First Gen’s business is its environmental stewardship. Not only does First Gen mainly use indigenous, clean fuels for its power generation business, it has embraced sustainability and environmental protection as an integral part of its day-to-day operations.

The year 2009 saw First Gen’s efforts in sustainability and environmental protection bearing much fruit as its various projects in different parts of the country started to show a significant impact on its environment and communities around them.

First Gas MangrovesOne can’t help but be amazed at the number of bird species, fauna and flora that are thriving in the First Gas compound in Batangas. After nine years of nurturing its adjacent areas, it has become home to 79 bird species as well as a destination site for migratory birds, 28 mangrove species and, recently, a nesting place for Olive Ridley turtles.

Getting to where it is now was not easy. First Gas treated the project not just as a compliance matter but as a commitment to environmentalism as an integral part of its business. In coordination with the Department of Environment and Natural Resources (DENR) and the Multi-partite Monitoring Team (MMT), they had to seriously map out a plan to revive a 9.9-hectare area inside the compound that was already considered “non-forest grassland with a small patch of mangrove.” The initial assessment of the area showed that what was left of the mangrove area was “unlikely to proliferate or grow due to the lack of seed dispersing species.”

Undaunted by this assessment, First Gas, DENR and MMT mapped out a four-phase Mangrove Management Plan. The four-phase program started with the evaluation of the mangrove area for suitability to plantation establishment and the identification of the species appropriate for the area. The second phase was the Information, Education and Training (IEC) of those involved in the project and its partners. The third

One can’t help but be amazed at the number of bird species, fauna and flora that are thriving in the First Gas compound in Batangas. After nine years of nurturing its adjacent areas, it has become home to 79 bird species as well as a destination site for migratory birds, 28 mangrove species and recently, a nesting place for Olive Ridley turtles.

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and fourth phases involved the actual planting of the mangrove saplings, monitoring and maintenance of the mangrove program.

Today, there are 28 recorded mangrove species from only three mangrove species in 2000. The tree density per 100 square meters almost doubled to 31 trees per 100 square meters in 2009 from 14 in 2000.

According to a report by the SYNERGIA Environmental Training & Research Co., the significant increase in the number of trees and mangroves in the area resulted in the increased sequestration of carbon dioxide. From 119.88 tons in 2007, carbon absorbed has gone up to 121.19 tons per hectare in the adjacent and surrounding areas where the First Gas plants are located.

Aside from the increased carbon sequestration, noticeable is the increase in the biodiversity of the area – its flora and fauna.

The increase in the tree density led to the re-establishment of the avi-fauna with the First Gas compound becoming home to different bird species such as kingfishers, starlings, warblers, pygmy

...the significant increase in the number of trees and mangroves in the area resulted in the increased sequestration of carbon dioxide.


woodpeckers, yellow bitterns, shrikes, sunbirds and a favorite destination site for migratory birds like the Chinese egrets.

With the continued monitoring of the seawater (First Gas conducts a semi-annual Aquatic Biota Monitoring); and monthly cleanups of its coastline, it has become a nesting site for some Olive Ridley turtles. The aquatic biota environment at the jetty area was also transformed into an area conducive for fishes and other marine organisms to flourish.

For two years in a row, the First Gas jetty area became a nesting site for Olive Ridley turtles. In 2008, there were about 37 turtle hatchlings that were able to imprint their way to the sea. In 2009, about 92 turtle hatchlings were released and left their imprint at the beach area of First Gas. Hopefully, after years of wandering in the seas, they will come back and lay their eggs in the same place where they left their “imprints.”

The marine community in the jetty area of First Gas is composed of an assortment of epiphytic flora and fauna. The corals and fish community among the pier pilings have flourished into a diverse marine community. The supporting pier columns of the jetty became their

habitat. The concrete columns also provided a stable substrate for epibiotic colonization, thereby enhancing the structural complexity of the habitats. This has created a greater niche and resource diversity in the pier piles.

BinhiThe Binhi Greening Legacy launched in December 2007 is the main reforestation project of the Energy Development Corporation (EDC), the world’s second-largest producer of geothermal energy.

EDC recognizes the need for trees and a healthy watershed in order to keep its business sustainable. Geothermal energy is heat and steam coming from the earth. Thus, a healthy forest cover is vital to sustaining the underground reservoir that provides geothermal energy.

Binhi’s goal is to plant 6.25 million trees in 10,000 hectares over ten years. To ensure enough seedlings for the rare endemic species that will be planted under the program, nurseries are being established to provide seedlings for the rare endemic species that will be replanted in the thousands of hectares within EDC’s concession areas.

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Mangrove Species

2000 2003 2005 2007 20090

5

10

15

20

25

30

35

Carbon Stock/unit area (ton CO2)

2007 2009119

119.5

120

120.5

121

121.5

Tree Density (per 100m2)

2000 2003 2005 2007 20090

5

10

15

20

25

30

35

In 2009, about 842,767 seedlings were planted in 1,018 hectares across the different geothermal sites of EDC nationwide. This is on top of the 7.5 million trees in 9,915 hectares that EDC has planted over the past 18- 20 years.

EDC is currently preparing a master plan for the different modules of the project based on the data culled and experiences during the initial stage of the Binhi progam. This master plan will serve as the blueprint for the rest of the duration of the project.

Game fishingThe Pantabangan-Masiway hydroelectric plants in Nueva Ecija have become a good site for bird watchers. The man-made lake surrounding the area has become a favorite destination for game fishing enthusiasts.

VolunteerismOther First Gen subsidiaries such as Bauang Private Power Corp, First Gen Renewables, Inc. and First Gen-managed First Philippine Industrial Corp. have their own individual environmental and community projects that are in cooperation with the local communities. Volunteerism among the employees is an essential part in the various corporate social responsibility (CSR) projects of the Company.

Carbon intensityOverall, First Gen’s carbon intensity has gone down through the years. From 0.37 ton/megawatt-hour (MWh) in 2003, it is now at 0.25 ton/MWh. Much of this can be traced to First Gen’s commitment to using clean, indigenous fuels that are not only a boon to the environment but a means for the country to attain energy self-sufficiency.

Hand-in-hand with its various stakeholders, First Gen aims not only to grow its business in the renewable energy space but also to contribute to a better life for the people and the communities where they are located.

First Gas Compound and Adjacent Areas in Batangas

�9First Gen 2009 Annual Report

Corporate Governance

The corporate governance structures of First Gen are managed and driven by its Board of Directors, composed of individuals of proven competence and integrity. Fully aware of their duties and obligations as directors of a publicly listed company, the directors make every effort to ensure that the Company is able to respond to the needs of its officers, employees, customers and partners, as well as the government and the public in general. Having set forth the Company’s goals, the Board is responsible for guiding the Company in fulfilling its economic targets and governance aspirations.

INDEPENDENT DIRECTORSThe Board of Directors of First Gen consists of nine members, including two independent directors, all of whom are elected by the Company’s qualified stockholders during the annual stockholders’ meeting held every 2nd Wednesday of May of each year. Independent Directors Tony Tan Caktiong and Cezar P. Consing have neither interest nor relationship with First Gen that may hinder their independence from the Company or its management, or interfere with the exercise of independent judgment in carrying out their responsibilities.

STANDING COMMITTEESTo ensure the Company’s compliance with the principles of good corporate governance, the Board members have been selected as members of the standing committees constituted pursuant to the Manual on Corporate Governance. These are the Nomination Committee, Audit Committee, and Compensation and Remuneration Committee. In its regular meeting held on March 8, 2010, the Board of Directors approved the creation of a 4th committee, the Risk Management Committee, and the appointments of Director Peter D. Garrucho Jr. as chairman, and Directors Elpidio L. Ibañez and Francis Giles B. Puno as members thereof.

Nomination CommitteeThe Company’s Nomination Committee judiciously passes upon the qualifications of nominees to the Board. The Nomination Committee makes sure that each Board election will result in a mix of proficient directors, each of whom will be able to add value and bring prudent judgment to the

Board of Directors. The Nomination Committee is presently composed of all the members of the Board of Directors, and is chaired by the Chairman of the Company.

Audit CommitteeThe Audit Committee is headed by an independent director and has two members, one of whom shall be an independent director. Pursuant to the Company’s revised Manual on Corporate Governance, the members of the Audit Committee should preferably have accounting and finance backgrounds. The Audit Committee is tasked to perform the following duties:

• assist the Board in the performance of its oversight responsibility for the financial reporting process, system of internal control, audit process, and monitoring of compliance with applicable laws, rules and regulations;

• provide oversight over management’s activities in managing credit, market, liquidity, operational, legal and other risks of the Company;

• review the annual internal audit plan to ensure its conformity with the objectives of the Company;

• prior to the commencement of the audit, discuss with the external auditor the nature, scope and expenses of the audit, and ensure proper coordination if more than one audit firm is involved in the activity to secure proper coverage and minimize duplication of efforts;

• organize an internal audit department and consider the appointment of an independent internal auditor and the terms and conditions of its engagement and removal;

• monitor and evaluate the adequacy and effectiveness of the Company’s internal control system, including financial reporting control and information technology security;

• review the reports submitted by the internal and external auditors;

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• review the quarterly, half-year and annual financial statements before their submission to the Board, with particular focus on: [i] any change/s in accounting policies and practices; [ii] major judgmental areas; [iii] significant adjustments resulting from the audit; [iv] going concern assumptions; [v] compliance with accounting standards; and [vi] compliance with tax, legal and regulatory requirements;

• evaluate and determine the non-audit work, if any, of the external auditor, and review periodically the non-audit fees paid to the external auditor;

• establish and identify the reporting line of the internal auditor to enable him to properly fulfill his duties and responsibilities;

• check all financial reports of the Company against its compliance with both the internal financial management handbook and pertinent accounting standards, including regulatory requirements;

• perform interface functions with the internal and external auditors; and

• ensure the establishment of a transparent financial management controls system that aims to ensure the integrity of the system.

The Audit Committee may request information, data and clarification from the officers of the Company in the performance of their duties and responsibilities.

Compensation and Remuneration CommitteeThe Compensation and Remuneration Committee is composed of the Chairman of the Board and two directors, one of whom shall be an independent director. The Committee has powers and functions over the compensation and remuneration of the corporate officers other than the Chairman.

Risk Management CommitteeThe newly created Risk Management Committee (RMC), which is composed of at least three members, has the following powers and functions:

• overseeing the formulation, establishment and implementation of an enterprise risk management (ERM) system;

• reviewing and assessing the Company’s ERM policy, processes, strategies, methods and activities and recommending revisions thereto for approval by the Board;

• understanding and setting clear directions for the management of the Company’s strategic and critical risks; and providing management with the support and resources necessary to manage the risks to the Company.

AMENDED MANUALON CORPORATE GOVERNANCEIn compliance with Securities and Exchange Commission (SEC or Commission) Memorandum Circular No. 6 (Series of 2009) or the Revised Code of Corporate Governance, the Company submitted to the SEC on April 8, 2010 an amended Manual on Corporate Governance for the Commission’s evaluation and approval. The amendments being introduced in the amended Manual on Corporate Governance include the constitution of a Nomination and Governance Committee to take the place of the present Nomination Committee.

NOMINATION AND GOVERNANCE COMMITTEEThe Nomination and Governance Committee (NGC) will be composed of at least three members, one of whom shall be an independent director. The NGC will be responsible for the following:

• reviewing and evaluating the qualifications of all persons nominated to the Board and other appointments that require Board approval;

• ensuring, through a managed and effective system consistent with the Company’s By-laws, that each Board election will result in a mix of proficient directors, each of whom will be able to add value and bring prudent judgment to the Board;

• assessing the effectiveness of the Board’s processes and procedures in the election or replacement of directors;

Corporate Governance


• reviewing the recommendations of the Compliance Officer in relation to the Manual on Corporate Governance as well as other corporate governance rules and regulations and endorsing the same to the Board for its approval;

• reviewing, as may be necessary, the charters of all Board committees and recommending any change to the Board for its approval; and

• performing such other tasks or duties as may be requested or delegated by the Board.

NEW CORPORATE GOVERNANCE PROVISIONSIN COMPANY’S BY-LAWSFirst Gen, through its Board of Directors and senior management, continually searches for ways and means to improve its corporate governance, because it firmly believes that corporate governance is a necessary component of sound business management. Thus, the Company regularly reviews its existing policies and programs with the end-view of elevating the level of accountability of the Company’s directors, officers, and employees.

Efforts to enhance and develop the Company’s corporate governance structures have resulted also in amendments to the Company’s By-laws. Accordingly, the Board of Directors and stockholders, in separate meetings held in March and May 2009, respectively, approved amendments to the Company’s By-laws.

Aside from providing for the general responsibility of the Board of Directors and for the election and qualification of independent directors, the amendments also prescribe additional qualifications and disqualifications of directors. Under the same amendments, a director can be disqualified on the following grounds:

• violation of the Securities Regulation Code, the Corporation Code, and rules being administered by the Bangko Sentral ng Pilipinas and the SEC;

• insolvency;

• commission of other acts deemed prejudicial, inimical, or causing undue injury to the Company, its subsidiaries or affiliates;

• gross negligence or bad faith committed as an officer or director of another company; and

• analogous acts committed in another jurisdiction;

The amendments also provide that the Board of Directors shall be governed by the Manual on Corporate Governance.

The amendments were approved by the SEC on August 24, 2009, and now form part of the Company’s By-laws.

COMPLIANCE OFFICERA Compliance Officer, who reports directly to the chairman of the Board of Directors, has been appointed to ensure that directors and officers comply and act in accordance with the principles embodied in the Manual of Corporate Governance. The Compliance Officer will be responsible for the following:

• monitoring compliance by the Company with the Manual on Corporate Governance and the rules and regulations of regulatory agencies, including reporting the occurrence of any violation;

• reporting such violation to the Board;

• recommending the imposition of appropriate disciplinary actions on the responsible parties, and adopting measures to prevent a repetition of the violation;

• appearing before the SEC when summoned on matters relating to the Manual on Corporate Governance;

• issuing a certification in January of each year on the extent of the Company’s compliance with the Manual on Corporate Governance for the preceding year; and, if any deviation is found, explaining the reasons for such deviation; and

• recommending to the Board the review of the Manual on Corporate Governance.

�2

Oscar M. Lopez, born April 19, 1930, Filipino, has been Chairman of the Corporation since its incorporation in 1998. He is also the Chairman of Energy Development Corporation and First Philippine Holdings Corporation (FPHC), and a member of the board of directors of ABS-CBN Broadcasting Corporation. He is Chairman of FG Bukidnon Power Corp., First Gen Hydro Power Corp., First Gen Energy Solutions, Inc., Red Vulcan Holdings Corporation, Prime Terracota Holdings Corp., First Gas Holdings Corp., First Gas Power Corp., FGP Corp., Unified Holdings Corp., First NatGas Power Corp., and First Gas Pipeline Corp. Mr. Lopez has led FPHC’s efforts in other businesses aside from energy and power, including toll road construction, industrial park and real estate development, and electronics manufacturing. Mr. Lopez has a Master’s degree in Public Administration from the Littauer School of Public Administration, Harvard University (1955). He earned his Bachelor of Arts degree (cum laude) from Harvard University (1951).

Federico R. Lopez, born August 5, 1961, Filipino, is President and Chief Executive Officer of the Corporation. He is a director in FPHC, Energy Development Corporation, ABS-CBN Broadcasting Corporation, First Private Power Corp., and Bauang Private Power Corp. He also serves as director, President and CEO of FG Bukidnon Power Corp., First Gen Hydro Power Corp., First Gen Energy Solutions, Inc., Red Vulcan Holdings Corporation, Prime Terracota Holdings Corp., First Gas Holdings Corp., First Gas Power Corp., FGP Corp., Unified Hold-ings Corp., First NatGas Power Corp., and First Gas Pipeline Corp. Mr. Lopez is also President of First Philippine Conservation, Inc. He is a graduate of the University of Pennsylvania with a Bachelor of Arts degree in Economics and International Relations (cum laude, 1983).

Richard B. Tantoco, born October 2, 1966, Filipino, is Executive Vice President and Chief Operating Officer of the Corporation. He is a member of the board of Energy Development Corporation, where he serves as President and Chief Operating Officer. He is also Senior Vice President of FPHC, and President and CEO of First Gas Pipeline Corp. Mr. Tantoco is director, Executive Vice President and Chief Operating Officer of FG Bukidnon Power Corp., First Gen Hydro Power Corp., First Gen Energy Solutions, Inc., Red Vulcan Holdings Corporation, First Gas Holdings Corp., First Gas Power Corp., FGP Corp., Unified Holdings Corp., First NatGas Power Corp., and FGLand Corp. Prior to joining the Corporation, Mr. Tantoco worked with management consulting firm Booz, Allen and Hamilton, Inc. in New York and London. Mr. Tantoco has an MBA in Finance from the Wharton School of Business of the University of Pennsylvania (1993) and a Bachelor of Science degree in Business Management from Ateneo de Manila University where he graduated with honors (1988).

Francis Giles B. Puno, born September 1, 1964, Filipino, is Executive Vice President and Chief Financial Officer of the Corporation. He is a member of the board of Energy Development Corporation, and Senior Vice President and Chief Financial Officer of FPHC. He is director, Executive Vice President and Chief Financial Officer of FG Bukidnon Power Corp., First Gen Hydro Power Corp., First Gen Energy Solutions, Inc., Red Vulcan Holdings Corporation, First Gas Holdings Corp., First Gas Power Corp., FGP Corp., Unified Holdings Corp., and First Gas Pipeline Corp. He is also a member of the board of First Gen Renewables, Inc., First Private Power Corp., and Bauang Private Power Corp. Prior to joining the Corporation, Mr. Puno worked as Vice President with the Global Power and Environmental Group of The Chase Manhattan Bank based in Singapore. Mr. Puno has a Master of Management degree from the Kellogg Graduate School of Management of Northwestern University (1990) and a Bachelor of Science degree in Business Management from Ateneo de Manila University (1985).

Peter D. Garrucho Jr., born May 4, 1944, Filipino, served as the Corporation’s Vice Chairman and CEO from 1998 to 2008, and as FPHC Managing Director from 1994 to 2008. He is Vice Chairman of Franklin Baker Corp., and sits in the boards of FPHC, Energy Development Corporation, First Private Power Corp., FG Bukidnon Power Corp, First Gen Hydro Power Corp., First Gen Energy Solutions, Inc., Red Vulcan Holdings Corporation, First Gas Hold-ings Corp., First Gas Power Corp., FGP Corp., Unified Holdings Corp., and First Gas Pipeline Corp. Mr. Garrucho served as Secretary of Tourism and Secretary for Trade & Industry during the administration of President Corazon C. Aquino. He was also Executive Secretary and Presidential Adviser on Energy Affairs under President Fidel V. Ramos. Mr. Garrucho has an AB-BSBA degree from De La Salle University (1966) and a Master of Business Administration degree from Stanford University (1971).

Board of Directors


Elpidio L. Ibañez, born September 30, 1950, Filipino, is President and Chief Operating Officer of FPHC. He is a member of the boards of First Gen Renewables Inc., FG Bukidnon Power Corp., Bauang Private Power Corp., First Private Power Corp., First Gas Holdings Corp., First Gas Power Corp., FGP Corp., Unified Holdings Corp., and First Gas Pipeline Corp. He is Chairman of the board of First Batangas Hotel Corp. and President of First Philippine Utilities Corp. He is also a director of various FPHC subsidiaries and affiliates such as First Balfour, Inc., First Philippine Electric Corp., First Philippine Industrial Corp., First Philippine Industrial Park, Philippine Electric Corp., and Securities Transfer Services, Inc. Mr. Ibañez obtained a Master’s degree in Business Administration from the University of the Philippines (1975) and a Bachelor of Arts degree major in Economics from Ateneo de Manila University (1972).

Eugenio L. Lopez III, born August 13, 1952, Filipino, was elected director of the Company in September 2009 following the resignation of Mr. Fiorello R. Estuar. Mr. Lopez is the Chairman and Chief Executive Officer of ABS-CBN Broadcasting Corporation, and is a member of the board of directors of FPHC. He is a recipient of various Philippine broadcasting industry awards. Mr. Lopez graduated with a Bachelor of Arts degree in Political Science from Bowdoin College (1974) and has a Master’s degree in Business Administration from Harvard Business School (1980).

Tony Tan Caktiong, born January 5, 1953, Filipino, is the Chairman and CEO of retail giant Jollibee Foods Corporation. He is a director of the Philippine Long Distance Telephone Company, and is at the helm of Chowking, Greenwich, Delifrance, Red Ribbon Bakeshop, and Yonghe King. He is a member of the board of trustees of the Asian Institute of Management, St. Luke’s Medical Hospital, Philippine Business for Education, and the Temasek Foundation of Singapore. He is an Agora Awardee for Outstanding Marketing Achievement, Triple A Alumni Awardee of the Asian Institute of Management, TOYM Awardee for Entrepreneurship, and recipient of the World Entrepreneur of the Year Award. Mr. Caktiong has a Bachelor of Science degree in Chemical Engineering from the University of Santo Tomas (1975) and has attended various management programs such as the Top Management Program of the Asian Institute of Management and Harvard University’s Owner/President Management Program. He holds an honorary Doctor of Humanities degree from Southwestern University and St. Paul University, and an honorary Doctor of Science degree in Business Management from the Far Eastern University in the Philippines.

Cezar P. Consing, born October 20, 1959, Filipino, is a partner of The Rohatyn Group, a global investment management company that focuses on the emerging markets. He has over 25 years’ experience in international finance. Mr. Consing is an independent board director of Bank of the Philippine Islands, CIMB Group Holdings Berhad, CIMB Group Sdn. Berhad and CIMB-GK Pte Ltd. He is a board director and chairman of the executive committee of Premiere Development Bank, and non-executive chairman and board director of FILGIFTS.com. Mr. Consing was an investment banker with J.P. Morgan & Co. from 1985 to 2004, based in Hong Kong and Singapore. From 1999 to 2004, he was President of J.P. Morgan Securities (Asia Pacific) and, as a senior Managing Director, co-headed or headed the firm’s in-vestment banking group in the Asia-Pacific region. Mr. Consing has a Bachelor of Arts degree in Economics (magna cum laude) from De La Salle University (1979) and a Master’s degree in Applied Economics from the University of Michigan (1980). Mr. Consing is based in Hong Kong. The Rohatyn Group has never rendered professional advisory services to the Corpora-tion or any of its subsidiaries.

��

Management Committee

Erwin O. Avante Jerome H. Cainglet Ana Regina B. Go

Dennis P. Gonzales Leonides U. Garde Victor B. Santos

Aloysius L. Santos Emmanuel P. Singson Daniel H. Valeriano Jr.

Nestor H. Vasay Vincent C. Villegas Anthony M. Mabasa


Dominador M. Camu Jr. Ramon J. Araneta Steven W. Goers

Michael C. Young Federico R. Lopez* Ernesto B. Pantangco*

Francis Giles B. Puno* Richard B. Tantoco* Jonathan C. Russell*

*Executive Committee

��

FinancialStatements


March 19, 2010

SECURITIES AND EXCHANGE COMMISSIONSEC Building, EDSA GreenhillsMandaluyong City, Metro Manila

The management of First Gen Corporation (the Company) is responsible for all information and representations contained in the consolidated financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009. The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the Company’s audit committee and to its external auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process, and report financial data; (ii) material weaknesses in the internal controls; (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of the Company.

SyCip, Gorres, Velayo & Co., the independent auditors appointed by the stockholders, have examined the consolidated financial statements of the Company in accordance with Philippine Standards on Auditing and have expressed their opinion on the fairness of presentation upon completion of such examination, in their report to the Stockholders and the Board of Directors.

Signed under oath by the following:

Oscar M. LopezChairman of the Board

Federico R. LopezPresident and Chief Executive Officer

Francis Giles B. PunoExecutive Vice President and Chief Financial Officer

Statement of Management’s Responsiblityfor the Financial Statements

��

The Stockholders and the Board of Directors

First Gen Corporation

We have audited the accompanying financial statements of First Gen Corporation and Subsidiaries, which comprise the

consolidated statements of financial position as at December 31, 2009 and 2008, and the consolidated statements of income,

consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements

of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting

policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine

Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant

to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud

or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the

circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in

accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan

and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of

the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control

relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal

control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of First Gen

Corporation and Subsidiaries as of December 31, 2009 and 2008, and their financial performance and their cash flows for each

of the three years in the period ended December 31, 2009 in accordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Martin C. Guantes

Partner

CPA Certificate No. 88494

SEC Accreditation No. 0325-AR-1

Tax Identification No. 152-884-272

PTR No. 2087540, January 4, 2010, Makati City

March 19, 2010

Independent Auditor’s Report


*SGVMC212303*

FIRST GEN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Amounts in U.S. Dollars and in Thousands)

December 312009 2008

ASSETSCurrent AssetsCash and cash equivalents (Notes 7, 21, 32 and 33) $125,531 $229,647Receivables (Notes 4, 6, 8, 13, 22, 26, 32, 33 and 34) 121,334 244,996Inventories (Note 10) 65,072 76,206Available-for-sale (AFS) financial assets (Notes 9, 32 and 33) – 14,194Derivative asset (Notes 32 and 33) – 12,923Other current assets (Notes 11, 21, 32, 33 and 34) 34,578 49,508

346,515 627,474Noncurrent assets held for sale (Note 12) – 38,067Total Current Assets 346,515 665,541

Noncurrent AssetsInvestments in associates (Notes 4, 5 and 14) 1,020,722 20,958Property, plant and equipment (Notes 6, 15, 21 and 34) 562,238 736,262Intangible assets (Notes 6 and 16) 17,972 1,301,651Deferred income tax assets (Note 30) 10 71,794Long-term receivables - net of current portion

(Notes 6, 13, 22, 32, 33 and 34) – 652,831Other noncurrent assets (Notes 9, 11,17, 21, 22, 32, 33 and 34) 213,566 248,840Total Noncurrent Assets 1,814,508 3,032,336

TOTAL ASSETS $2,161,023 $3,697,877

LIABILITIES AND EQUITYCurrent LiabilitiesLoans payable (Notes 6, 18, 32, 33 and 34) $– $200,461Accounts payable and accrued expenses (Notes 6, 19, 32, 33 and 34) 104,451 231,216Income tax payable 7,543 1,836Due to related parties (Notes 26, 32 and 33) 6,711 7,056Obligations to Gas Sellers on Annual Deficiency

(Notes 22, 28, 32, 33 and 34) 9,378 36,696Current portion of:

Bonds payable (Notes 20, 32 and 33) 107,984 –Long-term debt (Notes 6, 11, 15, 21, 32 and 33) 46,499 518,101

Derivative liabilities (Notes 21, 32 and 33) – 1,142Total Current Liabilities 282,566 996,508

Noncurrent LiabilitiesBonds payable - net of current portion (Notes 20, 32 and 33) 277,353 362,978Long-term debt - net of current portion (Notes 6, 11, 15, 21, 32 and 33) 700,324 1,073,285Derivative liabilities (Notes 21, 32 and 33) 25,335 59,861Retirement and other post-retirement liability (Note 29) 167 24,899Deferred income tax liabilities - net (Note 30) 18,609 30,036Other noncurrent liabilities (Notes 22 and 23) 49,632 131,899Total Noncurrent Liabilities 1,071,420 1,682,958Total Liabilities 1,353,986 2,679,466

(Forward)

First Gen Corporation and Subsidiaries

Consolidated Statements of Financial Position(Amounts in U.S. Dollars and in Thousands)

50

*SGVMC212303*

- 2 -

December 312009 2008

Equity Attributable to Equity Holders of the Parent Company(Notes 24 and 25)

Redeemable preferred stock $13,561 $9,572Common stock 45,917 20,624Additional paid-in capital 320,453 319,530Deposits for future stock subscriptions (Note 24) 93,318 –Accumulated share in other comprehensive losses of associates

(Notes 4 and 14) (78,516) –Cumulative translation adjustments (Note 33) (9,642) (136,645)Accumulated unrealized gain on AFS financial assets (Note 9) – 382Equity reserve (Note 2) – (28,383)Retained earnings (Note 14) 330,930 354,137Cost of capital stock held in treasury

Redeemable preferred stock – (27,570)Common stock (52,987) (52,987)

663,034 458,660Minority Interests 144,003 559,751Total Equity 807,037 1,018,411

TOTAL LIABILITIES AND EQUITY $2,161,023 $3,697,877

See accompanying Notes to Consolidated Financial Statements.


*SGVMC212303*

FIRST GEN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Amounts in U.S. Dollars and in Thousands, Except Per Share Data)

Years Ended December 31

2009

2008(Restated,

Note 4)

2007(Restated,

Note 4)REVENUESale of electricity (Note 34) $1,009,918 $1,212,016 $977,449Interest (Notes 7 and 27) 6,942 9,079 31,060Equity in net earnings of associates (Note 14) 1,167 3,530 7,671Mark-to-market gain on derivatives - net (Note 33) – 12,190 –Foreign exchange gains - net – 24,011 –Others (Note 26) 4,089 1,572 6,281

1,022,116 1,262,398 1,022,461COSTS AND EXPENSESFuel cost (Notes 10 and 34) (669,832) (863,874) (641,603)Depreciation and amortization (Notes 15, 16 and 28) (53,932) (54,026) (50,431)Power plant operations and maintenance (Note 34) (37,624) (37,320) (35,194)Staff costs (Notes 25, 28 and 29) (10,625) (12,027) (10,865)Other administrative expenses (Notes 26 and 28) (37,244) (49,263) (43,792)Interest expense and financing charges

(Notes 18, 20, 21, 22, 23, 28 and 33) (112,089) (121,417) (70,247)Foreign exchange loss - net (8,691) – (9,547)Mark-to-market loss on derivatives - net (Note 33) (922) – –Others – (320) (4,728)INCOME FROM CONTINUING OPERATIONS

BEFORE INCOME TAX 91,157 124,151 156,054PROVISION FOR (BENEFIT FROM) INCOME TAX

(Note 30)Current 45,492 31,448 23,419Deferred (7,381) 18,472 (15,829)

38,111 49,920 7,590NET INCOME FROM CONTINUING OPERATIONS 53,046 74,231 148,464NET INCOME FROM DISCONTINUED

OPERATIONS (Note 4) 41,961 19,237 33,367NET INCOME $95,007 $93,468 $181,831

Net income attributable to:Equity holders of the Parent Company $16,754 $14,474 $104,655Minority interests 78,253 78,994 77,176

$95,007 $93,468 $181,831

Basic/Diluted Earnings Per Share for Net IncomeAttributable to Equity Holders of the ParentCompany (Note 31) $0.013 $0.012 $0.086

Basic/Diluted Earnings Per Share for Net Income fromContinuing Operations Attributable to EquityHolders of the Parent Company (Note 31) $0.003 $0.023 $0.067

Basic/Diluted Earnings (Loss) Per Share for NetIncome from Discontinued OperationsAttributable to Equity Holders of the ParentCompany (Note 31) $0.010 ($0.011) $0.019



Consolidated Statements of Income(Amounts in U.S. Dollars and in Thousands, Except Per Share Data)

52

*SGVMC212303*

FIRST GEN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in U.S. Dollars and in Thousands)

Years Ended December 312009 2008 2007

NET INCOME $95,007 $93,468 $181,831OTHER COMPREHENSIVE INCOME (LOSS)Share in other comprehensive income of

associates (Note 14) 64,273 – –Exchange gains (losses) on foreign currency

translation (60,022) (255,453) 50,137Net gains (losses) on cash flow hedge - net of tax

(Note 33) 24,813 (41,336) (928)Unrealized gain on AFS financial assets - net of tax 1,081 481 473

30,145 (296,308) 49,682TOTAL COMPREHENSIVE INCOME (LOSS) $125,152 ($202,840) $231,513

Total comprehensive income (loss) attributable to:Equity holders of the Parent Company $64,859 ($173,862) $156,948Minority interests 60,293 (28,978) 74,565

$125,152 ($202,840) $231,513



Consolidated Statements of Comprehensive Income(Amounts in U.S. Dollars and in Thousands)


*SGVMC212303*

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*SGVMC212303*

FIRST GEN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in U.S. Dollars and in Thousands)


2009

2008(Restated,

Note 4)

2007(Restated,

Note 4)

CASH FLOWS FROM OPERATING ACTIVITIESIncome from continuing operations before income tax $91,157 $124,151 $156,054Income from discontinued operations before income tax

(Note 4) 61,500 42,703 47,284Income before income tax 152,657 166,854 203,338Adjustments for:

Equity in net earnings of associates (Note 14) (1,167) (3,530) (7,671)Interest expense and financing charges (Note 28)

Continuing operations 112,089 121,417 70,247Discontinued operations 26,173 82,270 20,749

Net unrealized foreign exchange losses (gains)Continuing operations 5,928 (20,314) 12,018Discontinued operations (26,904) 178,294 –

Depreciation and amortization (Note 28)Continuing operations 53,932 54,026 50,431Discontinued operations 10,731 37,881 6,787

Mark-to-market loss (gain) onderivatives - net (Note 33)Continuing operations 922 (12,190) –Discontinued operations 5,162 (18,411) (108)

Interest income (Note 27)Continuing operations (6,942) (9,079) (31,060)Discontinued operations (9,895) (13,596) (1,775)

Write-off of input value-added tax – – 4,728Income before working capital changes 322,686 563,622 327,684Decrease (increase) in:

Receivables (40,642) 70,621 17,366Concession receivables (18,144) 76,510 42,505Other long-term receivables - net 10,655 (15,456) –Inventories (19,225) 13,471 (57,349)Other current assets 1,920 (12,479) 13,501

Increase (decrease) in:Royalty fee payable (7,914) (8,979) 4,930Accounts payable and accrued expenses 22,457 (114,675) (12,551)Retirement and other post-retirement liability (340) (2,185) 5,427

Cash generated from operations 271,453 570,450 341,513Interest received 16,942 20,794 32,835Income taxes paid (40,228) (86,408) (30,071)Net cash provided by operating activities 248,167 504,836 344,277

CASH FLOWS FROM INVESTING ACTIVITIESCollections from (advances to) minority shareholder

(Notes 11 and 17) 10,297 (99,017) –Collection of receivables from Meralco

on Annual Deficiency (Note 13) 19,119 48,495 30,982

(Forward)


Consolidated Statements of Cash Flows(Amounts in U.S. Dollars and in Thousands)

56

*SGVMC212303*

- 2 -


2009

2008(Restated,

Note 4)

2007(Restated,

Note 4)Cash outflow from discontinued operations (Note 4) ($164,817) $– $–Additions to:

Deposits for future stock subscriptions(Note 14) (119,278) – (227)

Property, plant and equipment (Note 15) (9,621) (27,295) (29,529)Intangible assets (Note 16) (5,930) (19,618) –Other noncurrent assets (Note 17) (45,527) (39,410) (119,121)

Proceeds from sale of (additional investments in) AFSfinancial assets (Note 9) (986) 14,243 (1,006)

Dividends received from an associate (Note 14) 5,691 15,665 9,295Proceeds from disposal of property and equipment 77 30 13Additions to exploration and evaluation assets – – (892)Acquisition of a subsidiary - net of cash acquired (Note 6) – – (1,299,488)Return of investment in an associate (Note 14) 3,261 – 4,217Net cash used in investing activities (307,714) (106,907) (1,405,756)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from:

Issuance of long-term debt (Note 21) 195,185 485,135 705,127Deposits for future stock subscriptions (Note 24) 110,091 – –Availment of loans 18,949 295,298 439,296Exercise of stock options (Note 25) 1,041 9 2,027Issuance of convertible bonds - net of debt

issuance costs (Note 20) – 256,074 –Payments of:

Loans payable (Note 18) (121,167) (530,715) –Long-term debt (Note 21) (74,020) (598,389) (143,818)Dividends to minority shareholder of subsidiaries (53,849) (128,374) (57,096)Interest expense and financing charges (90,427) (120,202) (51,765)Obligations to Gas Sellers on Annual Deficiency

(Note 22) (27,064) (30,082) (27,662)Obligations to power plant contractors (1,635) (6,226) 559Deferred payment facility with PSALM (Note 6) – (8,525) (7,587)Cash dividends – – (44,283)

Advances from (payments to) related parties (1,107) (1,066) 85Proceeds from (payments of) other noncurrent liabilities (953) (1,153) 118Redemptions of common stocks (Note 24) – – (522)Net cash provided by (used in) financing activities (44,956) (388,216) 814,479

EFFECT OF FOREIGN EXCHANGE RATECHANGES ON CASH AND CASHEQUIVALENTS 387 1,762 5,970

NET INCREASE (DECREASE) IN CASHAND CASH EQUIVALENTS (104,116) 11,475 (241,030)

CASH AND CASH EQUIVALENTSAT BEGINNING OF YEAR 229,647 218,172 459,202

CASH AND CASH EQUIVALENTSAT END OF YEAR (Note 7) $125,531 $229,647 $218,172



*SGVMC212303*

FIRST GEN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in U.S. Dollars and in Thousands, Unless Otherwise Stated)

1. Corporate Information

First Gen Corporation (the Parent Company or First Gen) is incorporated in the Philippines andregistered with the Philippine Securities and Exchange Commission (SEC) on December 22, 1998.The Parent Company and its subsidiaries (collectively referred to as First Gen Group) are involvedin the power generation business. All subsidiaries (see Note 2) are incorporated in the Philippines.

The common stocks of the Parent Company are currently listed and traded on the First Board ofthe Philippine Stock Exchange, Inc. (PSE). First Gen is considered a public company underSection 17.2 of the Securities Regulation Code (SRC). On January 22, 2010, the Parent Companyhas successfully completed the Stock Rights Offering (the Rights Offering) of 2,142,472,791rights shares in the Philippines at the proportion of 1.756 rights shares for every one existingcommon stock held as of the record date December 29, 2009 at the offer price of P=7.00 per rightsshare. The total proceeds from the Rights Offering amounted to P=15.0 billion ($319.1 million).As of March 19, 2010, First Philippine Holdings Corporation (FPHC) directly and indirectly owns66.2% of the common stocks of First Gen and 100% of First Gen’s voting preferred stocks. FPHCis the ultimate parent company of First Gen.

The registered office address of the Parent Company is 3rd Floor, Benpres Building, ExchangeRoad corner Meralco Avenue, Pasig City.

The consolidated financial statements of First Gen Group were reviewed, approved and authorizedfor issuance by the Board of Directors (BOD) on March 19, 2010.

2. Summary of Significant Accounting and Financial Reporting Policies

Basis of PreparationThe consolidated financial statements have been prepared on a historical cost basis, except forderivative financial instruments and available-for-sale (AFS) financial assets that have beenmeasured at fair value. The consolidated financial statements are presented in United States (U.S.)dollar, which is the Parent Company’s functional currency and are rounded to the nearestthousand, except when otherwise indicated.

Statement of ComplianceThe consolidated financial statements of First Gen Group have been prepared in compliance withPhilippine Financial Reporting Standards (PFRS) as issued by the Philippine Financial ReportingStandards Council and adopted by the Philippine SEC.

Significant Accounting and Financial Reporting PoliciesThe accounting policies adopted are consistent with those of the previous financial year, except forthe adoption of the following new, amended and improved PFRS and Philippine Interpretationseffective beginning January 1, 2009:

Amendments to PFRS 7, Financial Instruments: DisclosuresThis amended standard requires additional disclosures about fair value measurement andliquidity risk. Fair value measurements are to be disclosed by source of inputs using a three-level hierarchy for each class of financial instrument. Fair value measurement under Level 1


Notes to Consolidated Financial Statements (Amounts in U.S. Dollars and in Thousands, Unless Otherwise Stated)

58

- 2 -

*SGVMC212303*

is based on quoted prices in active markets for identical financial assets or financial liabilities;Level 2 is based on inputs other than quoted prices included within Level 1 that are observablefor the financial asset or financial liability, either directly or indirectly; and Level 3 is based oninputs for the financial asset or financial liability that are not based on observable market data.In addition, a reconciliation between the beginning and ending balance for Level 3 fair valuemeasurements is now required as well as significant transfers between Level 1 and Level 2 fairvalue measurements. The amendments also clarify the requirements for liquidity riskdisclosures with respect to derivative transactions and assets used for liquidity management.The fair value measurement and liquidity risk disclosures are presented in Notes 32 and 33 tothe consolidated financial statements.

PFRS 8, Operating SegmentsPFRS 8 replaced PAS 14, Segment Reporting, upon its effective date. First Gen Groupconcluded that the operating segments determined in accordance with PFRS 8 are the same asthe business segments previously identified under PAS 14. PFRS 8 disclosures are shown inNote 5, including the related revised comparative information.

Amendments to PAS 1, Presentation of Financial StatementsThis amended standard separates owner and non-owner changes in equity. The consolidatedstatement of changes in equity includes only details of transactions with owners, withnon-owner changes in equity presented as a single line. In addition, the standard introducesthe consolidated statement of comprehensive income. It presents all items of recognizedincome and expenses, either in one consolidated single statement (a consolidated statement ofcomprehensive income), or in two linked consolidated statements (a separate consolidatedstatement of income and a consolidated statement of comprehensive income). First GenGroup has elected to present two statements, a consolidated statement of income and aconsolidated statement of comprehensive income. First Gen Group also elected to change thetitle of the consolidated balance sheet to “consolidated statement of financial position.” Theconsolidated financial statements have been prepared under the revised disclosurerequirements.

Adoption of the following changes in PFRS and Philippine Interpretations did not have anysignificant impact on First Gen Group’s consolidated financial statements except where additionaldisclosures are required:

Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards -Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

Amendments to PFRS 2, Share-based Payment - Vesting Condition and Cancellations Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an

Investment in a Subsidiary, Jointly Controlled Entity or Associate Revised PAS 23, Borrowing Costs Amendment to PAS 32, Financial Instruments: Presentation, and PAS 1, Presentation of

Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation Appendix to PAS 18, Revenue - Determining Whether an Entity is Acting as a Principal or as

an Agent Philippine Interpretation IFRIC 13, Customer Loyalty Programmes Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation Philippine Interpretation IFRIC 18, Transfers of Assets from Customers

Improvements to PFRS PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations PAS 1, Presentation of Financial Statements PAS 16, Property, Plant and Equipment


- 3 -

*SGVMC212303*

PAS 19, Employee Benefits PAS 20, Accounting for Government Grants and Disclosures of Government Assistance PAS 23, Borrowing Costs PAS 28, Investments in Associates PAS 29, Financial Reporting in Hyperinflationary Economies PAS 31, Interest in Joint Ventures PAS 36, Impairment of Assets PAS 38, Intangible Assets PAS 39, Financial Instruments: Recognition and Measurement PAS 40, Investment Property PAS 41, Agriculture

First Gen Group has elected to early adopt the Amendment to PAS 32, Classification of RightsIssues, as of January 1, 2009. In October 2009, the International Accounting Standards Board(IASB) has issued an amendment to PAS 32 on the classification of rights issues, options orwarrants denominated in a foreign currency. The amendment alters the definition of a financialliability in PAS 32 to classify rights issues and certain options or warrants as equity instruments.This is applicable if the rights are given pro-rata to all of the existing owners of the same class ofan entity’s non-derivative equity instruments, in order to acquire a fixed number of the entity’sown equity instruments for a fixed amount in any currency. As a result of the adoption, FirstGen’s stock rights issuance are no longer considered as derivatives with fair value changesrecorded in the consolidated statement of income. Future stock rights issuances qualifying underthe amendment will now be classified as equity instruments.

Basis of ConsolidationThe consolidated financial statements comprise the financial statements of the Parent Companyand its subsidiaries. Control is normally evidenced when the Parent Company owns, eitherdirectly or indirectly, more than 50% of the voting rights of the entity’s capital stock.

The following is a list of the companies on which the Parent Company has control:

Percentage of Voting Interest2009 2008 2007

First Gen Renewables, Inc. (FGRI) 100 100 100Unified Holdings Corporation (Unified) 100 100 100AlliedGen Power Corporation (AlliedGen) 100 100 100First Gen Luzon Power Corp. (FG Luzon) 100 100 100First Gen Visayas Hydro Power Corporation (FG Visayas) 100 100 100First Gen Mindanao Hydro Power Corporation (FG Mindanao) 100 100 100First Gen Geothermal Power Corporation (FG Geothermal) 100 100 100First Gen Northern Energy Corp. (FGNEC) 100 100 100First Gen Energy Solutions Inc. (FG Energy) 100 100 100First Gen Premier Energy Corp. (FG Premier) 100 100 100First Gen Prime Energy Corporation (FG Prime) 100 100 100First Gen Visayas Energy, Inc. (FG Visayas Energy) 100 100 100FG Bukidnon Power Corp. (FG Bukidnon)1 100 100 100First Gas Holdings Corporation (FGHC) 60 60 60FGP Corp. (FGP)2 60 60 601Through FGRI2Through Unified

(Forward)

60



- 4 -

*SGVMC212303*


First NatGas Power Corporation (FNPC)3 60 60 60First Gas Power Corporation (FGPC)4 60 60 60First Gas Pipeline Corporation (FG Pipeline)4 60 60 60FGLand Corporation (FG Land)4 60 60 60Prime Terracota Holdings Corp. (Prime Terracota)5 – 100 100Red Vulcan Holdings Corporation (Red Vulcan)6 – 100 100Energy Development (EDC) Corporation7 – 60 60First Gen Hydro Power Corporation (FG Hydro)8 – 76 1003Through AlliedGen4Through FGHC5On May 12, 2009, Prime Terracota issued Class “B” voting preferred stocks to Quialex Realty Corp. (QRC)

and Lopez Inc. Retirement Fund (LIRF). With the issuance of the voting preferred stocks, the ParentCompany’s voting interest in Prime Terracota has been reduced to 45%.

6Through Prime Terracota7Through Red Vulcan which owns common stocks representing 40% economic benefit, and voting and non-

participating preferred stocks of EDC. The combined common and preferred stocks represent 60% votinginterest in EDC.

8Direct voting and indirect voting interest by the Parent Company in FG Hydro is 40% and 36%, respectively,while its effective economic interest is 64% as of December 31, 2008.

All of the foregoing subsidiaries are incorporated in the Philippines.

In 2009, the investments in Prime Terracota Group (the parent company of Red Vulcan), includingFG Hydro, were deconsolidated resulting from equity transactions of the subsidiary that reducedFirst Gen Group’s voting interest to 45% (see Note 4).

As of December 31, 2009, AlliedGen, FNPC, FG Luzon, FG Visayas, FG Mindanao,FG Geothermal, FGNEC, FG Premier, FG Prime and FG Visayas Energy have not startedcommercial operations.

Divestment of First Gen’s 60% Equity Stake in FG Hydro On October 16, 2008 (the “First Closing Date”), First Gen (as “Seller”), EDC (as “Buyer”)

and FG Hydro (collectively referred to as “Parties”), executed a Share Purchase andInvestment Agreement (SPIA) for the divestment of First Gen’s 60% equity stake in FGHydro. FG Hydro owns and operates the 112 Megawatt (MW) Pantabangan-Masiway Hydro-Electric Power Plant (PAHEP/MAHEP) in Pantabangan, Nueva Ecija. PAHEP/MAHEP wasacquired by FG Hydro on September 8, 2006 as a part of National Power Corporation’s (NPC)asset privatization.

Pursuant to the terms and conditions of the SPIA, the following transactions constituted thedivestment:

a. EDC subscribed to 101,281,942 newly issued common stocks of FG Hydro on the FirstClosing Date;

b. First Gen sold 249,287,223 common stocks of its holdings in FG Hydro to EDC onNovember 17, 2008 (the “Second Closing Date”); and

c. First Gen shall subscribe to 500,000 preferred stocks of FG Hydro.

Consistent with the SPIA, the acquisition by EDC was through a combination of primaryissuance by FG Hydro of up to 17% interest and sale of secondary stocks by First Gen of up to43% interest in FG Hydro. Further, FG Hydro returned to First Gen the deposits for futurestock subscriptions amounting to $13.0 million (P=648.0 million).


- 5 -

*SGVMC212303*

On October 20, 2008, the Parties executed a First Supplement to the SPIA whereby theissuance of the preferred stocks to First Gen shall be deferred pending finalization of thefeatures of the preferred stocks. As of March 19, 2010, the Parties have not agreed on thefeatures of the preferred stocks.

On the Second Closing Date, First Gen completed the divestment of its 60% equity stake inFG Hydro in favor of EDC for a total consideration of $85.2 million (P=4.3 billion).

As a result of the divestment, First Gen’s direct and indirect voting interest in FG Hydro was40% and 36%, respectively, and its effective economic interest was 64%. The ParentCompany recognized a $28.4 million equity reserve which was recorded in the “EquityReserve” account in the equity section of the 2008 consolidated statement of financialposition.

FG Hydro was subsequently deconsolidated on May 12, 2009 upon First Gen’s disposal of itscontrolling interest over Prime Terracota.

The financial statements of the subsidiaries are prepared for the same reporting year as the ParentCompany, using consistent accounting policies for like transactions and other events with similarcircumstances. All significant intra-group balances, transactions, income and expenses and profitsand losses resulting from intra-group transactions are eliminated in full on consolidation.

Subsidiaries are fully consolidated from the date on which control is transferred to First GenGroup or the Parent Company. Control is achieved when First Gen Group has the power togovern the financial and operating policies of an entity so as to obtain benefits from its activities.

Consolidation of subsidiaries ceases when control is transferred out of First Gen Group. Theresults of subsidiaries acquired or disposed of during the year are included in the consolidatedstatement of income from the date of acquisition or up to the date of disposal, as appropriate.

Minority InterestsMinority interests represent the portion of profit or loss and net assets not held by First GenGroup. For 2008, the minority interests arise from the profits or losses and net assets not held byFirst Gen Group in FGHC and Subsidiaries, FGP, FNPC, Prime Terracota, EDC and FG Hydro.For 2009, the minority interests arise from the profits or losses and net assets not held by First GenGroup in FGHC and Subsidiaries, FGP and FNPC. Minority interests are presented separately inthe consolidated statement of income and within equity in the consolidated statement of financialposition, separate from equity attributable to equity holders of First Gen. Acquisitions of minorityinterests are accounted for using the entity concept method, whereby the difference between theconsideration paid and the book value of the share in the net assets acquired is recognized as anequity transaction in the consolidated statement of changes in equity.

Business Combination and GoodwillBusiness combinations are accounted for using the purchase method of accounting. The cost of anacquisition is measured as the fair value of the assets given, equity instruments issued andliabilities incurred or assumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired (including previously unrecognized intangible assets) andliabilities assumed (including contingent liabilities but excluding future restructuring) in abusiness combination are measured initially at fair values at the date of acquisition, irrespective ofthe extent of any minority interest.

62



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*SGVMC212303*

Goodwill acquired in a business combination is initially measured at cost, being the excess of thecost of the business combination over First Gen Group’s interest in the net fair value of theacquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of acquisition is lessthan the fair value of the net assets of the subsidiary acquired, the difference is recognized directlyin the consolidated statement of income.

Following initial recognition, goodwill is measured at cost less any accumulated impairment loss.For impairment testing, goodwill acquired in a business combination is, from the acquisition date,allocated to each of First Gen Group’s cash-generating units or group of cash-generating units thatare expected to benefit from the synergies of the combination, irrespective of whether other assetsor liabilities of First Gen Group are assigned to those units or groups of units. Each unit or groupof units to which goodwill is allocated represents the lowest level within First Gen Group at whichgoodwill is monitored for internal management purposes.

Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and partof the operation within that unit is disposed of, the goodwill associated with the operationdisposed of is included in the carrying amount of the operation in determining the gain or loss ondisposal of the operation. Goodwill disposed of in this circumstance is measured based on therelative values of the operation disposed and the portion of the cash-generating unit retained.

If the initial accounting for a business combination can only be determined on a provisional basisby the end of the period in which the combination is effected because either the fair values to beassigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or if the cost of thecombination can be determined only provisionally, First Gen Group accounts for the combinationusing those provisional values. First Gen Group recognizes any adjustment to those provisionalvalues as a result of completing the initial accounting within 12 months of and from theacquisition date. The following adjustments are thus made:

The carrying amount of an identifiable asset, liability or contingent liability that is recognizedor adjusted as a result of completing the initial accounting shall be calculated as if its fairvalue at the acquisition date had been recognized from that date.

Goodwill or any gain recognized shall be adjusted from the acquisition date by an amountequal to the adjustment to the fair value at the acquisition date of the identifiable asset,liability or contingent liability being recognized or adjusted.

Comparative information presented for the periods before the initial accounting for thecombination is completed shall be presented as if the initial accounting had been completedfrom the acquisition date. This includes any additional depreciation, amortization or otherprofit or loss effect recognized as a result of completing the initial accounting.

When subsidiaries are sold, the difference between the selling price and the net assets pluscumulative translation adjustments and goodwill is recognized in the consolidated statement ofincome.

The goodwill from investments in subsidiaries is included as a noncurrent asset item in theconsolidated statement of financial position. The goodwill on investment in associates is includedin the carrying amount of the related investment.

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquidinvestments that are readily convertible with original maturities of three months or less and thatare subject to an insignificant risk of change in value.


- 7 -

*SGVMC212303*

Financial InstrumentsDate of recognitionFinancial instruments within the scope of PAS 39 are recognized in the consolidated statement offinancial position when First Gen Group becomes a party to the contractual provisions of theinstrument. Purchases or sales of financial assets that require delivery of assets within the timeframe established by regulation or convention in the marketplace are recognized using trade dateaccounting. Derivatives are also recognized on a trade date basis.

Initial recognition of financial instrumentsAll financial instruments are initially recognized at fair value. The initial measurement offinancial instruments includes transaction costs, except for financial instruments at fair valuethrough profit or loss (FVPL). First Gen Group classifies its financial assets in the followingcategories: financial assets at FVPL, held-to-maturity (HTM) investments, AFS financial assets,and loans and receivables. Financial liabilities are classified as either financial liabilities at FVPLor loans and borrowings. The classification depends on the purpose for which the investmentswere acquired and whether they are quoted in an active market. Management determines theclassification of its instruments at initial recognition and, where allowed and appropriate,re-evaluates such designation at every financial reporting date.

Determination of fair valueThe fair value for financial instruments traded in active markets at financial reporting date is basedon their quoted market price or dealer price quotations (bid price for long positions and ask pricefor short positions), without any deduction for transaction costs. When current bid and ask pricesare not available, the price of the most recent transaction provides evidence of the current fairvalue as long as there has not been a significant change in economic circumstances since the timeof the transaction. For all other financial instruments not traded in an active market, the fair valueis determined by using appropriate valuation techniques.

“Day 1” differenceWhere the transaction price in a non-active market is different from the fair value of otherobservable current market transactions in the same instrument or based on a valuation techniquewhose variables include only data from observable market, First Gen Group recognizes thedifference between the transaction price and fair value (a “Day 1” difference) in the consolidatedstatement of income, unless it qualifies for recognition as some other type of asset. In cases wheredata which is not observable are used, the difference between the transaction price and modelvalue is only recognized in the consolidated statement of income when the inputs becomeobservable or when the instrument is derecognized. For each transaction, First Gen Groupdetermines the appropriate method of recognizing the “Day 1” difference amount.

Financial assets or liabilities at FVPLFinancial assets and liabilities at FVPL include financial assets and liabilities held for tradingpurposes and financial assets and liabilities designated upon initial recognition as at FVPL.

Financial assets and liabilities are classified as held for trading if these are acquired for thepurposes of selling and repurchasing in the near term.

Derivatives, including any separated embedded derivatives, are also classified under financialassets or liabilities at FVPL, unless these are designated as hedging instruments in an effectivehedge.

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Financial assets or liabilities may be designated by management on initial recognition as at FVPLwhen any of the following criteria are met:

the designation eliminates or significantly reduces the inconsistent treatment that wouldotherwise arise from measuring the assets or liabilities or recognizing gains or losses on themon a different basis;

the assets and liabilities are part of a group of financial assets, liabilities or both which aremanaged and their performance evaluated on a fair value basis, in accordance with adocumented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded derivativedoes not significantly modify the cash flows or it is clear, with little or no analysis, that itwould not be separately recorded.

Financial assets and liabilities at FVPL are recorded in the consolidated statement of financialposition at fair value. Subsequent changes in fair value are recognized in the consolidatedstatement of income. Interest earned or incurred is recorded as interest income or expense,respectively, while dividend income is recorded as other income when the right to receivepayment has been established.

As of December 31, 2008, the range bonus forward contracts entered by EDC and the embeddedforeign currency options on FG Hydro’s Pantabangan Refurbishment and Upgrade Project (PRUP)Contract with Andritz Hydro, GmbH (formerly VA TECH HYDRO, GmbH), were classifiedunder financial assets at FVPL (see Notes 17, 33 and 35).

Classified under financial liabilities at FVPL are the embedded derivatives on the ParentCompany’s convertible bonds as of December 31, 2009 and 2008 and EDC’s foreign currencyforward contracts (see Note 33) as of December 31, 2008.

These derivatives were not designated as hedging instruments by First Gen Group and do notqualify as effective accounting hedges.

HTM investmentsHTM investments are quoted non-derivative financial assets with fixed or determinable paymentsand fixed maturities for which First Gen Group’s management has the positive intention andability to hold to maturity. Where First Gen Group sells other than an insignificant amount ofHTM investments, the entire category would be tainted and reclassified as AFS financial assets.After initial measurement, these investments are subsequently measured at amortized cost usingthe effective interest method, less any impairment in value. Amortized cost is calculated by takinginto account any discount or premium on acquisition and fees that are integral parts of theeffective interest rate. Gains and losses are recognized in the consolidated statement of incomewhen the HTM investments are derecognized and impaired, as well as through the amortizationprocess. The effects of restatement on foreign currency-denominated HTM investments are alsorecognized in the consolidated statement of income.

First Gen Group has no HTM investments as of December 31, 2009 and 2008.


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Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments andfixed maturities that are not quoted in an active market. They are not entered into with theintention of immediate or short-term resale and are not classified or designated as AFS financialassets or financial assets at FVPL. Loans and receivables are classified as current assets ifmaturity is within 12 months from financial reporting date. Otherwise, these are classified asnoncurrent assets.

After initial measurement, loans and receivables are subsequently measured at amortized costusing the effective interest method, less allowance for impairment. Amortized cost is calculatedby taking into account any discount or premium on acquisition and fees that are an integral part ofthe effective interest rate. Gains and losses are recognized in the consolidated statement of incomewhen the loans and receivables are derecognized and impaired, as well as through the amortizationprocess.

Classified under loans and receivables are cash and cash equivalents, receivables, long-termreceivables, and advances to minority shareholder, as of December 31, 2009 and 2008 (seeNotes 6, 7, 8, 13, 17, 32 and 33). Also classified under loans and receivables as ofDecember 31, 2008 are royalty fees chargeable to NPC and restricted cash deposits (included in“Other current assets” account in the consolidated statements of financial position) (see Notes 11,32 and 33).

AFS financial assetsAFS financial assets are those non-derivative financial assets which are designated as such or donot qualify to be classified in any of the three preceding categories. These are purchased and heldindefinitely, and may be sold in response to liquidity requirements or changes in marketconditions. AFS financial assets are classified as current assets if management intends to sellthese financial assets within 12 months from financial reporting date. Otherwise, these areclassified as noncurrent assets.

After initial measurement, AFS financial assets are subsequently measured at fair value, withunrealized gains and losses being recognized as other comprehensive income (losses) until theinvestment is derecognized or until the investment is determined to be impaired, at which time thecumulative gain or loss previously reported as other comprehensive income (loss) is recognized inthe consolidated statement of income. First Gen Group uses the specific identification method indetermining the cost of securities sold. Unquoted equity securities and investment in proprietarymembership shares are carried at cost, net of impairment. Accounting for the movement in equityis presented in the consolidated statement of changes in equity.

Classified under AFS financial assets are investments in proprietary membership shares as ofDecember 31, 2009 (see Notes 9, 17 and 32). Classified under AFS financial assets are quotedand unquoted equity investments, government debt securities and investments in proprietarymembership shares as of December 31, 2008 (see Notes 9, 17 and 32).

Loans and borrowingsFinancial liabilities are classified in this category if these are not held for trading or not designatedas at FVPL upon the inception of the liability. These include liabilities arising from operations orborrowings.

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Loans and borrowings are initially recognized at fair value of the consideration received, lessdirectly attributable transaction costs. After initial recognition, such loans and borrowings aresubsequently measured at amortized cost using the effective interest method. Amortized cost iscalculated by taking into account any related issue costs, discount or premium. Gains and lossesare recognized in the consolidated statement of income when the liabilities are derecognized, aswell as through the amortization process.

Classified under loans and borrowings are loans payable, accounts payable and accrued expenses,due to related parties, bonds payable, long-term debt and obligations to Gas Sellers on AnnualDeficiency as of December 31, 2009 (see Notes 6, 18, 19, 20, 21, 22, 32 and 33). Classified underloans and borrowings are loans payable, accounts payable and accrued expenses, due to relatedparties, bonds payable, long-term debt, obligations to Gas Sellers on Annual Deficiency andDeferred payment facility with PSALM (included in the “Other noncurrent liabilities” account inthe consolidated statement of financial position) as of December 31, 2008 (see Notes 6, 18, 19, 20,21, 22, 23, 32 and 33).

Derivative Financial Instruments and Hedge AccountingFirst Gen Group enters into derivative and hedging transactions, primarily interest rate swaps,currency forwards and range bonus forwards, as needed, for the sole purpose of managing therisks that are associated with First Gen Group’s borrowing activities or as required by the lendersin certain cases.

Derivative financial instruments (including bifurcated embedded derivatives) are initiallyrecognized at fair value on the date on which a derivative contract is entered into and aresubsequently remeasured at fair value. Derivatives are carried as assets when the fair value ispositive and as liabilities when the fair value is negative. Any gain or loss arising from changes infair value on derivatives that do not qualify for hedge accounting is taken directly to theconsolidated statement of income for the current year under “Mark-to-market gain (loss) onderivatives - net” account.

For purposes of hedge accounting, derivatives can be designated either as cash flow hedges or fairvalue hedges depending on the type of risk exposure it hedges.

At the inception of a hedge relationship, First Gen Group formally designates and documents thehedge relationship to which First Gen Group opts to apply hedge accounting and the riskmanagement objective and strategy for undertaking the hedge. The documentation includesidentification of the hedging instrument, the hedged item or transaction, the nature of the riskbeing hedged and how the entity will assess the hedging instrument’s effectiveness in offsettingthe exposure to changes in the hedged item’s fair value or cash flows attributable to the hedgedrisk. Such hedges are expected to be highly effective in achieving offsetting changes in fair valueor cash flows and are assessed on an ongoing basis that they actually have been highly effectivethroughout the financial reporting periods for which they were designated.

First Gen Group accounts for its interest rate swap agreements as cash flow hedges of the floatingrate exposure of its long-term debt (see Note 33).

First Gen Group has no derivatives that are designated as fair value hedges as ofDecember 31, 2009 and 2008.

Cash flow hedgesCash flow hedges are hedges of the exposure to variability in cash flows that are attributable to aparticular risk associated with a recognized asset, liability or a highly probable forecast transaction


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and could affect the consolidated statement of income. The effective portion of the gain or loss onthe hedging instrument is recognized as other comprehensive income (loss) in the “Cumulativetranslation adjustments” account in the consolidated statement of financial position while theineffective portion is recognized as “Mark-to-market gain (loss) on derivatives - net” account inthe consolidated statement of income.

Amounts taken to other comprehensive income (loss) are transferred to the consolidated statementof income when the hedged transaction affects profit or loss, such as when hedged financialincome or expense is recognized or when a forecast sale or purchase occurs. Where the hedgeditem is the cost of a non-financial asset or liability, the amounts taken to other comprehensiveincome (loss) are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction is no longer expected to occur, amounts previously recognized in othercomprehensive income (loss) are transferred to the consolidated statement of income. If thehedging instrument expires or is sold, terminated or exercised without replacement or rollover, orif its designation as a hedge is revoked, amounts previously recognized in other comprehensiveincome (loss) remain in equity until the forecast transaction occurs. If the related transaction isnot expected to occur, the amount is recognized in the consolidated statement of income.

Embedded derivativesEmbedded derivatives are bifurcated from their host contracts, when the following conditions aremet: (a) the entire hybrid contracts (composed of both the host contract and the embeddedderivative) are not accounted for as financial assets at FVPL; (b) when their economic risks andcharacteristics are not closely related to those of their respective host contracts; and (c) a separateinstrument with the same terms as the embedded derivative would meet the definition of aderivative.

First Gen Group assesses whether embedded derivatives are required to be separated from the hostcontracts when First Gen Group first becomes a party to the contract. Reassessment only occurs ifthere is a change in the terms of the contract that significantly modifies the cash flows that wouldotherwise be required.

Embedded derivatives that are bifurcated from the host contracts are accounted for either asfinancial assets or financial liabilities at FVPL. Changes in fair values are included in theconsolidated statement of income.

Derecognition of Financial Assets and LiabilitiesFinancial assetsA financial asset (or, where applicable, a part of a financial asset or part of a group of financialassets) is derecognized when:

the right to receive cash flows from the asset has expired;

First Gen Group retains the right to receive cash flows from the asset, but has assumed anobligation to pay them in full without material delay to a third party under a “pass-through”arrangement; or

First Gen Group has transferred its right to receive cash flows from the asset and either (a) hastransferred substantially all the risks and rewards of the asset, or (b) has neither transferred norretained the risks and rewards of the asset but has transferred the control of the asset.

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Where First Gen Group has transferred its right to receive cash flows from an asset or has enteredinto a “pass-through” arrangement, and has neither transferred nor retained substantially all therisks and rewards of the asset nor transferred control of the asset, the asset is recognized to theextent of First Gen Group’s continuing involvement in the asset. Continuing involvement thattakes the form of a guarantee over the transferred asset is measured at the lower of the originalcarrying amount of the asset and the maximum amount of consideration that First Gen Groupcould be required to repay.

Financial liabilitiesA financial liability is derecognized when the obligation under the liability is discharged orcancelled or has expired. Where an existing financial liability is replaced by another from thesame lender on substantially different terms, or the terms of an existing liability are substantiallymodified, such exchange or modification is treated as a derecognition of the original liability andthe recognition of a new liability, and the difference in the respective carrying amounts isrecognized in the consolidated statement of income.

Impairment of Financial AssetsFirst Gen Group assesses at each financial reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financialassets is deemed to be impaired if, and only if, there is objective evidence of impairment as aresult of one or more events that has or have occurred after the initial recognition of the asset (anincurred “loss event”) and that loss event has an impact on the estimated future cash flows of thefinancial asset or the group of financial assets that can be reliably estimated. Objective evidenceof impairment may include indications that the borrower or a group of borrowers is experiencingsignificant financial difficulty, default or delinquency in interest or principal payments, theprobability that they will enter bankruptcy or other financial reorganization and where observabledata indicate that there is measurable decrease in the estimated future cash flows, such as changesin arrears or economic conditions that correlate with defaults.

For loans and receivables, First Gen Group first assesses whether an objective evidence ofimpairment (such as the probability of insolvency or significant financial difficulties of the debtor)exists individually for financial assets that are individually significant, or collectively for financialassets that are not individually significant. If there is an objective evidence that an impairmentloss has been incurred, the amount of loss is measured as the difference between the asset’scarrying value and the present value of the estimated future cash flows (excluding future creditlosses that have not been incurred). If First Gen Group determines that no objective evidence ofimpairment exists for an individually assessed financial asset, whether significant or not, itincludes the asset in a group of financial assets with similar credit risk characteristics andcollectively assesses for impairment. Those characteristics are relevant to the estimation of futurecash flows for groups of such assets by being indicative of the debtors’ ability to pay all amountsdue according to the contractual terms of the assets being evaluated. Assets that are individuallyassessed for impairment and for which an impairment loss is, or continues to be, recognized arenot included in a collective assessment for impairment.

The carrying value of the asset is reduced through the use of an allowance account and the amountof loss is charged to the consolidated statement of income. If in case the receivable has proven tohave no realistic prospect of future recovery, any allowance provided for such receivable is writtenoff against the carrying value of the impaired receivable. Interest income continues to berecognized based on the original effective interest rate of the asset. If, in a subsequent year, theamount of the estimated impairment loss decreases because of an event occurring after theimpairment was recognized, the previously recognized impairment loss is reduced by adjusting the


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allowance account. Any subsequent reversal of an impairment loss is recognized in theconsolidated statement of income, to the extent that the carrying value of the asset does not exceedits amortized cost at reversal date.

AFS financial assetsFor AFS financial assets, First Gen Group assesses at each financial reporting date whether thereis objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity investments classified as AFS, a significant or prolonged decline in the fairvalue of the investments below its cost is considered an objective evidence of impairment. Wherethere is evidence of impairment, the cumulative loss, measured as the difference between theacquisition cost and the current fair value, less any impairment loss on that financial assetpreviously recognized in other comprehensive income (loss), is removed from othercomprehensive income (loss) and recognized in the consolidated statement of income.Impairment losses on equity investments are not reversed through the consolidated statement ofincome. Increases in fair value after impairment are recognized directly in other comprehensiveincome (loss).

In the case of debt instruments classified as AFS, impairment is assessed based on the samecriteria as financial assets carried at amortized cost. Future interest income is based on thereduced carrying amount and is accrued based on the rate of interest used to discount future cashflows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interestincome” in the consolidated statement of income. If, in a subsequent year, the fair value of a debtinstrument increases and that increase can be objectively related to an event occurring after theimpairment loss was recognized in the consolidated statement of income, the impairment loss isreversed through the consolidated statement of income.

Offsetting Financial InstrumentsFinancial assets and liabilities are offset with the net amount reported in the consolidatedstatement of financial position if, and only if, there is a currently enforceable legal right to offsetthe recognized amounts and there is an intention to settle on a net basis, or to realize the asset andsettle the liability simultaneously. This is not generally the case with master netting agreements,and the related assets and liabilities are presented at gross amounts in the consolidated statementof financial position.

Service Concession ArrangementsPublic-to-private service concession arrangements where: (a) the grantor controls or regulateswhat services First Gen Group must provide with the infrastructure, to whom it must providethem, and at what price; and (b) the grantor controls, through ownership, beneficial entitlement orotherwise, any significant residual interest in the infrastructure at the end of the term of thearrangement, are accounted for under the provisions of Philippine Interpretation IFRIC 12, ServiceConcession Arrangements. Infrastructures used in a public-to-private service concessionarrangement for its entire useful life (whole-of-life assets) are within the scope of thisinterpretation if the conditions in (a) are met.

This interpretation applies to both: (a) infrastructure that First Gen Group constructs or acquiresfrom a third party for the purpose of the service arrangement; and (b) existing infrastructure towhich the grantor gives First Gen Group access for the purpose of the service concessionarrangement.

Infrastructures within the scope of this interpretation are not recognized as property, plant andequipment of First Gen Group. Under the terms of contractual arrangements within the scope of

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Philippine Interpretation IFRIC 12, First Gen Group acts as a service provider. First Gen Groupconstructs or upgrades infrastructure (construction or upgrade services) used to provide a publicservice and operates and maintains that infrastructure (operation services) for a specified period oftime.

When First Gen Group provides construction or upgrade services, the consideration received orreceivable by First Gen Group is recognized at its fair value. First Gen Group accounts forrevenue and costs relating to construction or upgrade services in accordance with PAS 11.Revenue from construction contract is recognized based on the percentage of completion method,measured by reference to the percentage of costs incurred to date to estimated total costs for eachcontract. First Gen Group accounts for revenue and costs relating to operation services inaccordance with PAS 18. If First Gen Group performs more than one service (i.e., construction orupgrade services and operation services) under a single contract or arrangement, considerationreceived or receivable is allocated by reference to the relative fair values of the services delivered,when the amounts are separately identifiable.

First Gen Group recognizes a financial asset to the extent that it has an unconditional contractualright to receive cash or another financial asset from or at the direction of the grantor for theconstruction services. First Gen Group recognizes an intangible asset to the extent that it receivesa right (a license) to charge users of the public service.

When First Gen Group has contractual obligations it must fulfill as a condition of its license (a) tomaintain the infrastructure to a specified level of serviceability or (b) to restore the infrastructureto a specified condition before it is handed over to the grantor at the end of the service concessionarrangement, it recognizes and measures these contractual obligations in accordance with PAS 37,Provisions, Contingent Liabilities and Contingent Assets, at the best estimate of the expenditurethat would be required to settle the present obligation at financial reporting date.

In accordance with PAS 23, borrowing costs attributable to the arrangement are recognized as anexpense in the period in which they are incurred unless First Gen Group has a contractual right toreceive an intangible asset (a right to charge users of the public service). In this case, borrowingcosts attributable to the arrangement are capitalized during the construction phase of thearrangement.

InventoriesInventories are carried at the lower of cost and net realizable value (NRV). The NRV for fuelinventories of FGP and FGPC is the fuel cost charged to Manila Electric Company (Meralco),under the respective Power Purchase Agreements (PPA) of FGP and FGPC with Meralco[see Note 34(a)], which is based on weighted average cost of actual fuel consumed.

Cost of fuel inventories is determined using the weighted average cost method, while the costs forspare parts and supplies are determined using the moving average method. NRV for spare partsand supplies is the current replacement cost.

Prepaid TaxesPrepaid taxes (included in “Other current assets” account in the consolidated statement of financialposition) are carried at cost less any impairment in value. Prepaid taxes consist mainly of taxcredits that can be used by First Gen Group in the future. Tax credits represent unapplied orunsold certificates for claims from input VAT credits received from the Bureau of InternalRevenue (BIR) and the Bureau of Customs (BOC). Such tax credits may be used for payment ofinternal revenue taxes or customs duties, or sold to third parties.


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Noncurrent Assets Held for SaleAssets are classified as noncurrent assets held for sale if their carrying amounts will be recoveredprincipally through a sale transaction rather than through continuing use. This condition isregarded as met only when the sale is highly probable and the assets are available for immediatesale in its present condition. Management must be committed to the sale that should be expectedto qualify for recognition as a completed sale within one year from date of classification, exceptwhen there is a delay of the sale caused by events or circumstances beyond First Gen Group’scontrol.

Noncurrent assets held for sale are measured at the lower of carrying value and fair value lesscosts to sell on such assets.

Investments in AssociatesAn associate is an entity over which First Gen Group has significant influence but not control,generally accompanying a shareholding of between 20% and 50% of the voting rights.

The following is a list of the companies on which the Parent Company has significant influence:


First Private Power Corporation (FPPC)1 40 40 40Prime Terracota2 45 – –FG Hydro3 40 – –1FPPC has 93.25% voting and economic interest in Bauang Private Power Corporation.2In May 2009, investments in Prime Terracota and FG Hydro were deconsolidated resulting from

equity transactions of Prime Terracota that reduced First Gen Group’s voting interest to 45%.As of December 31, 2009, Prime Terracota’s subsidiaries include the following companies:

Percentage of OwnershipRed Vulcan 100EDC 60FG Hydro 60EDC Drillco Corporation 60First Luzon Geothermal Energy Corporation (FL Geothermal) 60Green Core Geothermal Inc. (GCGI) 60

3Direct voting and indirect voting interest by the Parent Company in FG Hydro is 40% and 36%,respectively, while its effective economic interest is 64% as of December 31, 2008.

Under the equity method, such investments in associates are carried in the consolidated statementof financial position at cost plus post-acquisition changes in First Gen Group’s share in net assetsof the associate. First Gen Group’s share in its associates’ post-acquisition profits or losses isrecognized in the consolidated statement of income, and its share in post-acquisition movementsin the associates’ other comprehensive income (loss) and equity items is recognized directly in theconsolidated statement of comprehensive income. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. When First Gen Group’s share inlosses of an associate equals or exceeds its interest in the associate, including any other unsecuredreceivables, First Gen Group does not recognize further losses, unless it has incurred obligationsor made payments on behalf of the associates.

Unrealized intercompany profits or losses arising from the transactions with the associates areeliminated to the extent of First Gen Group’s interest in the associates. Goodwill relating toassociates are included in the carrying amount of the investment and is not amortized or separatelytested for impairment.

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The reporting dates of the associates and First Gen Group are identical and the associates’accounting policies conform to those used by First Gen Group for like transactions and events insimilar circumstances.

Property, Plant and EquipmentProperty, plant and equipment, except land, are stated at cost less accumulated depreciation,amortization and impairment in value, if any. Land is stated at cost less any impairment in value.

The initial cost of property, plant and equipment consists of the purchase price including importduties, borrowing costs (during the construction period) and other costs directly attributable tobring the asset to its working condition and location for its intended use. Cost also includes thecost of replacing part of such property, plant and equipment when the recognition criteria are metand the estimated present value of the cost of dismantling and removing the asset and restoring thesite.

Expenditures incurred after the property, plant and equipment have been put into operation, suchas repairs and maintenance, are normally charged to the consolidated statement of income in theyear the costs are incurred. In situations where it can be clearly demonstrated that theexpenditures have resulted in an increase in the future economic benefits expected to be obtainedfrom the use of an item of property, plant and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as additional costs of property, plant and equipment.

First Gen Group divided the power plant assets into significant parts. Each part of an item ofproperty, plant and equipment with a cost that is significant in relation to the total cost of the itemis depreciated and amortized separately.

Depreciation and amortization are computed using the straight-line method over the followingestimated useful lives of the assets:

Asset Type Number of YearsBuildings and other structures 5-25Machinery and equipment 2-25Transportation equipment 5Furniture, fixtures and office equipment 3-10Leasehold improvements 5 or lease term with no renewal option,

whichever is shorter

The useful lives and depreciation and amortization method are reviewed at each financialreporting date to ensure that the years and method of depreciation and amortization are consistentwith the expected pattern of economic benefits from items of property, plant and equipment.

An item of property, plant and equipment is derecognized upon disposal or when no futureeconomic benefits are expected from its use. Any gain or loss arising from derecognition of theassets (calculated as the difference between the net disposal proceeds and carrying amount of theasset) is credited to or charged against current operations.

Investment PropertiesInvestment properties are measured initially at cost, including transaction costs. The carryingamount includes the cost of replacing part of an existing investment property at the time that costis incurred, if the recognition criteria are met; and excludes the costs of day to day servicing of aninvestment property. Subsequent to initial recognition, investment properties are stated at cost lessaccumulated depreciation and any impairment loss.


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An investment property is derecognized when either it has been disposed of or when such ispermanently withdrawn from use and no future economic benefit is expected from its disposal.Any gain or loss on the retirement or disposal of an investment property is recognized in theconsolidated statement of income in the year of retirement or disposal.

No assets held under operating lease have been classified as investment properties.

Prepaid GasPrepaid gas (included in “Other noncurrent assets” account in the consolidated statement offinancial position) consists of payments to Gas Sellers for unconsumed gas, net of adjustment.The prepaid gas is recoverable in the form of future gas deliveries in the order that it arose and canbe consumed within a ten-year period. Prepaid gas arising from the respective SettlementAgreements (SA) and Payment Deferral Agreements (PDA) of FGP and FGPC can be recovereduntil December 2014 (see Note 22). If it should be determined at some future date that thelikelihood of any amount of gas usage or delivery is remote, then the relevant amount deemed nolonger realizable will be written off from the consolidated statement of income.

Impairment of Non-financial AssetsProperty, plant and equipment, intangible assets, prepaid gas and prepaid major spare partsAt each financial reporting date, First Gen Group assesses whether there is any indication that itsnon-financial assets may be impaired. When an indicator of impairment exists, First Gen Groupmakes a formal estimate of an asset’s recoverable amount. The recoverable amount is the higherof an asset’s fair value less costs to sell and its value in use. Recoverable amount is determinedfor an individual asset, unless the asset does not generate cash inflows that are largely independentfrom other assets or groups of assets, in which case the recoverable amount is assessed as part ofthe cash-generating unit to which it belongs. Where the carrying amount of an asset (orcash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) isconsidered impaired and is written down to its recoverable amount. In assessing value in use, theestimated future cash flows are discounted to their present value using a pre-tax discount rate thatreflects current market assessment of the time value of money and the risks specific to the asset (orcash-generating unit). An impairment loss is recognized in the consolidated statement of incomein the year in which it arises.

An assessment is made at each financial reporting date as to whether there is any indication thatpreviously recognized impairment losses may no longer exist or may have decreased. If suchindication exists, First Gen Group estimates the asset’s or cash-generating unit’s recoverableamount. A previously recognized impairment loss is reversed only if there has been a change inthe assumptions used to determine the asset’s recoverable amount since the last impairment losswas recognized. The reversal is limited so that the carrying amount of the asset does not exceedits recoverable amount, nor exceed the carrying amount that would have been determined, net ofdepreciation, had no impairment loss been recognized for the asset in prior years. Such reversal isrecognized in the consolidated statement of income.

GoodwillGoodwill is reviewed for impairment, annually or more frequently, if events or changes incircumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of the cash-generatingunit (or group of cash-generating units) to which the goodwill relates. Where the recoverableamount of the cash-generating unit (or group of cash-generating units) is less than the carryingamount of the cash-generating unit (or group of cash-generating units) to which goodwill has beenallocated, an impairment loss is recognized immediately in the consolidated statement of income.

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Impairment loss relating to goodwill cannot be reversed for subsequent increases in its recoverableamount in future years. First Gen Group performs its annual impairment test of goodwill as ofDecember 31 of each year.

Goodwill recognized from the Parent Company’s investments in PAHEP/MAHEP power plantfacilities and EDC are translated into the functional and presentation currency of the ParentCompany using the closing rate of exchange ruling at financial reporting date. The exchangedifferences arising on the translation are taken directly to a separate component of equity as part ofthe “Cumulative translation adjustments” account. The goodwill from PAHEP/MAHEP and EDCpower plants and its cumulative translation adjustments were deconsolidated as of April 30, 2009.

Investments in associatesFirst Gen Group determines whether it is necessary to recognize an impairment loss on itsinvestments in associates. First Gen Group determines at each financial reporting date whetherthere is any objective evidence that the investments in associates are impaired. If this is the case,First Gen Group calculates the amount of impairment as being the difference between therecoverable value of the associate and the carrying amount of investment and recognizes theamount of loss in the consolidated statement of income.

Exploration and Evaluation AssetsAll costs incurred in the geological and geophysical activities such as costs of topographical,geological and geophysical studies; rights of access to properties to conduct those studies; salariesand other expenses of geologists, geophysical crews, or others conducting those studies arecharged to expense in the year such are incurred.

If the results of initial geological and geophysical activities reveal the presence of geothermalresource that will require further exploration and drilling, subsequent exploration and drilling costsare accumulated and deferred under the “Exploration and evaluation assets” account (included in“Other noncurrent assets” account in the consolidated statement of financial position).

These costs include the following:

a. costs associated with the construction of temporary facilities;b. costs of drilling exploratory and exploratory-type stratigraphic test wells, pending

determination of whether the wells can produce proved reserves; andc. costs of local administration, finance, general and security services, surface facilities and other

local costs in preparing for and supporting the drilling activities, etc. incurred during thedrilling of exploratory wells.

If tests conducted on the drilled exploratory wells reveal that these wells cannot produce provedreserves, the capitalized costs are charged to expense, except when management decides to use theunproductive wells, for recycling or waste disposal.

Once the technical feasibility and commercial viability of the project to produce proved reservesare established, the exploration and evaluation assets shall be reclassified to either intangible assetor concession receivable at its fair value at the date of reclassification.

Research and Development CostsResearch costs are expensed as incurred. Development expenditures incurred on an individualproject are carried forward when its future recoverability can reasonably be regarded as assured.Any expenditure carried forward is amortized in line with the expected future revenue from therelated project. Otherwise, development costs are expensed as incurred.


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The carrying value of development costs is reviewed for impairment annually when the asset isnot yet in use or more frequently when an indication of impairment arises during the reportingyear.

Intangible AssetsIntangible assets acquired separately are measured on initial recognition at cost. The cost ofintangible assets acquired in a business combination is the fair value as of the date of acquisition.The intangible asset pertaining to the right of EDC to charge users of the public service inconnection with the service concession and related arrangements is recognized initially at the fairvalue of the construction services. The intangible assets arising from the business combination arerecognized initially at fair values. Following initial recognition, intangible assets are carried atcost less accumulated amortization and any impairment losses. Internally generated intangibleassets, excluding capitalized development costs, are not capitalized and expenditures are reflectedin the consolidated statement of income in the year the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assetswith finite lives are amortized using the straight-line method over the estimated useful economiclife, and assessed for impairment whenever there is an indication that the intangible asset may beimpaired. The amortization period and method for an intangible asset with a finite useful life arereviewed at least each financial reporting date. Changes in the expected useful life or the expectedpattern of consumption of future economic benefits embodied in the said intangible asset isaccounted for by changing the amortization period or method, as appropriate, and are treated aschanges in accounting estimates. The amortization expense on intangible assets with finite lives isrecognized in the consolidated statement of income in the expense category consistent with thefunction of the intangible asset. The following are the useful lives of First Gen Group’s intangibleassets which have finite useful lives:

Asset Type Number of YearsWater rights 25Concession rights for contracts acquired 1-17Concession rights 30Pipeline rights 22

Intangible assets with indefinite useful lives are tested for impairment annually, either individuallyor at the cash generating unit level. Such intangibles are not amortized. The useful life of anintangible asset with an indefinite life is reviewed annually to determine whether the indefinite lifeassessment continues to be supportable. If not, the change in the useful life assessment fromindefinite to finite is made prospectively.

Gains or losses arising from derecognition of an intangible asset are measured as the differencebetween the net disposal proceeds, if any, and the carrying amount of the asset and are recognizedin the consolidated statement of income in the year the asset is derecognized.

Debt Issuance CostsExpenditures incurred in connection with availments of long-term debt and issuances of bonds aredeferred and amortized using effective interest method over the term of the loans and bonds. Debtissuance costs are included in the measurement of the related long-term debt and bonds payableand are allocated accordingly to the respective current and noncurrent portions.

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Unearned RevenueUnearned revenue (included in “Other noncurrent liabilities” account in the consolidated statementof financial position) represents payments of Meralco for unconsumed gas in connection with therespective SAs and PDAs of FGP and FGPC (see Note 22), which may be availed untilDecember 2014 in case the actual gas consumed by the power plants in generating electricity toMeralco exceed their respective Take-or-Pay Quantities (TOPQ) at any given year.

ProvisionsProvisions are recognized when First Gen Group has a present obligation (legal or constructive) asa result of a past event, it is probable that an outflow of resources embodying economic benefitswill be required to settle the obligation and a reliable estimate can be made of the amount of theobligation. Where First Gen Group expects some or all of the provision will be reimbursed, forexample, under an insurance contract, the reimbursement is recognized as a separate asset but onlywhen the reimbursement is virtually certain. The expense relating to any provision is recognizedin the consolidated statement of income, net of any reimbursement. If the effect of the time valueof money is material, provisions are determined by discounting the expected future cash flows at apre-tax rate that reflects current market assessment of the time value of money and, whereappropriate, the risks specific to the liability. Where discounting is used, the increase in theprovision due to passage of time is recognized under “Interest expense and financing charges”account in the consolidated statement of income.

FGP, FGPC and FG Bukidnon recognized provisions arising from legal and/or constructiveobligations associated with the cost of dismantling and removing an item of property, plant andequipment and restoring the site where it is located. The obligation of FGP, FGPC and FGBukidnon occurs either when the asset is acquired or as a consequence of using the asset for thepurpose of generating electricity during a particular year. A corresponding asset is recognized asproperty, plant and equipment. Dismantling costs are provided at the present value of expectedcosts to settle the obligation using estimated cash flows. The cash flows are discounted at acurrent pre-tax rate that reflects the risks specific to the dismantling liability. The unwinding ofthe discount is expensed as incurred and recognized in the consolidated statement of income as anaccretion under “Interest expense and financing charges” account in the consolidated statement ofincome. The estimated future costs of dismantling are reviewed annually and adjusted, asappropriate. Changes in the estimated future costs or in the discount rate applied are added to ordeducted from the cost of the asset.

ContingenciesContingent liabilities are not recognized in the consolidated financial statements but are disclosedin the notes to consolidated financial statements unless the possibility of an outflow of resourcesembodying economic benefits is remote. Contingent assets are not recognized but are disclosed inthe notes to consolidated financial statements when an inflow of economic benefits is probable.

Retirement and Other Post-Retirement BenefitsThe Parent Company and certain of its subsidiaries have distinct, funded, noncontributory, definedbenefit retirement plans. EDC also provides post-retirement medical and life insurance benefits toits permanent employees, which are unfunded. The plans cover all permanent employees, eachadministered by its respective retirement committee.

The cost of providing benefits under the defined benefit retirement plans is determined using theprojected unit credit method. Under this method, the current service cost is the present value ofretirement benefits obligation in the future with respect to services rendered in the current year.


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Actuarial gains and losses arising from experience adjustments and changes in actuarialassumptions are credited to or charged against the consolidated statement of income when the netcumulative unrecognized actuarial gains and losses at the end of previous year exceeded 10% ofthe higher between the defined benefit obligation and the fair value of plan assets at that date.These gains or losses are recognized over the expected average remaining working lives of theemployees participating in the plans.

Past service costs are recognized immediately as an expense in the consolidated statement ofincome, unless the changes to the retirement plans are conditional on the employees remaining inservice for a specified period of time (the vesting period). In this case, the past service costs areamortized on a straight-line basis over the vesting period.

The defined benefit or liability is the aggregate of the present value of the defined benefitobligation and actuarial gains and losses not recognized, reduced by past service costs not yetrecognized and the fair value of plan assets on which the obligations are to be settled directly. Thepresent value of the defined benefit obligation is determined by discounting the estimated futurecash outflows using interest rate on government bonds that have terms that will approximate theterms of the related retirement obligation upon maturity. The value of any asset is restricted to thesum of any past service cost not yet recognized and the present value of any economic benefitsavailable in the form of refunds from the plans or reductions in the future contributions to theplans.

Share-based Payment TransactionsCertain employees (including senior executives) of First Gen Group, FPHC and an associate of theParent Company receive remuneration in the form of share-based payment transactions, wherebyemployees render services in exchange for shares or rights over shares (“equity-settledtransactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair valueof the stock options at grant date. The fair value is determined using the Black-Scholes-Mertonmodel, further details of which are provided in Note 25 to the consolidated financial statements.In valuing equity-settled transactions, no account is taken to any performance conditions, otherthan conditions linked to the price of the stocks of the Parent Company (“market conditions”), ifapplicable.

The cost of equity-settled transactions is recognized, together with a corresponding increase inequity, over the period in which the performance and/or service conditions are fulfilled, ending onthe date on which the relevant employees become fully entitled to the award (the “vesting date”).The cumulative expense recognized for equity-settled transactions at each financial reporting dateuntil the vesting date reflects the extent to which the vesting period has expired and the ParentCompany’s best estimate of the number of equity instruments that will ultimately vest. Thecharge or credit for a year represents the movement in cumulative expense recognized as of thebeginning and end of that year.

No expense is recognized for awards that do not ultimately vest, except for awards where vestingis conditional upon a market condition, which are treated as vesting irrespective of whether or notthe market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, an expense, as a minimum, is recognizedas if the terms had not been modified. An expense is recognized for any increase in the value ofthe transactions as a result of the modification, as measured on the date of modification.

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Where an equity-settled award is cancelled, it is treated as if it had vested on the date ofcancellation, and any expense not yet recognized for the award is recognized immediately.However, if a new award is substituted for the cancelled award, and designated as a replacementaward on the date that it is granted, the cancelled and new awards are treated as if they weremodifications of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in thecomputation of earnings per share attributable to the equity holders of the Parent Company(see Note 31).

Income TaxCurrent income taxCurrent income tax assets and liabilities for the current and prior years are measured at the amountexpected to be recovered from or paid to the tax authority. The tax rates and tax laws used tocompute the amount are those that have been enacted or substantively enacted as at financialreporting date.

Deferred income taxDeferred income tax is provided, using the balance sheet liability method, on all temporarydifferences at financial reporting date between the tax bases of assets and liabilities and theircarrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences. Deferredincome tax assets are recognized for all deductible temporary differences, carryforward benefits ofunused tax credits from the excess of minimum corporate income tax (MCIT) over the regularcorporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent thatit is probable that sufficient future taxable income will be available against which the deductibletemporary differences and carryforward benefits of unused tax credits from MCIT and unusedNOLCO can be utilized. Deferred income tax, however, is not recognized on temporarydifferences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nortaxable income. First Gen Group does not recognize deferred income tax assets and deferredincome tax liabilities that will reverse during the income tax holiday (ITH) period.

The carrying amount of deferred income tax assets is reviewed at each financial reporting date andreduced to the extent that it is no longer probable that sufficient future taxable income will becomeavailable to allow all or part of the deferred income tax asset to be utilized. Unrecognizeddeferred income tax assets are reassessed at each financial reporting date and are recognized to theextent that it has become probable that sufficient future taxable income will allow the deferredincome tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the income tax rates that are applicableto the year when the asset is realized or the liability is settled, based on tax rates and tax laws thathave been enacted or substantively enacted as at financial reporting date.

Deferred income tax liabilities are not provided on nontaxable temporary differences associatedwith investments in domestic subsidiaries and associates.

Current and deferred income tax relating to items recognized directly in equity is also recognizedin the consolidated statement of equity and not in the consolidated statement of income.


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Deferred income tax assets and liabilities are offset, if a legally enforceable right exists to offsetcurrent income tax assets against current income tax liabilities and deferred income taxes relate tothe same taxable entity and the same tax authority.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance ofthe arrangement and requires an assessment of whether the fulfillment of the arrangement isdependent on the use of a specific asset or assets and the arrangement conveys a right to use theasset. A reassessment is made after inception of the lease only if one of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of the arrangement;b. a renewal option is exercised or extension granted, unless that term of the renewal or

extension was initially included in the lease term;c. there is a change in the determination of whether fulfillment is dependent on a specified

asset; ord. there is a substantial change to the asset.

Where a reassessment is made, lease accounting will commence or cease from the date when thechange in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the dateof renewal or extension period for scenario b.

Leases where the lessor retains substantially all the risks and benefits of ownership of the assetsare classified as operating leases. Operating lease payments are recognized as expense in theconsolidated statement of income on a straight-line basis over the lease terms.

Capital Stock, Stock Rights and Additional Paid-in CapitalCapital stock is measured at par value and is classified as equity for all stocks issued. When FirstGen Group issues more than one class of stock, a separate account is maintained for each class ofstock and the number of stocks issued.

Stock rights that are given pro-rata to all of the existing owners of the same class of First Gen’snon-derivative equity instruments in order to acquire a fixed number of its own equity instrumentsfor a fixed amount in any currency are classified as equity instrument.

When the stocks are sold at premium, the difference between the proceeds and the par value iscredited to the “Additional paid-in capital” account. When stocks are issued for a considerationother than cash, the proceeds are measured by the fair value of the consideration received. In casethe stocks are issued to extinguish or settle the liability of First Gen Group, the stocks shall bemeasured either at the fair value of the stocks issued or fair value of the liability settled, whicheveris more reliably determinable.

Direct costs incurred related to the issuance of new capital stock, such as underwriting, accountingand legal fees, printing costs and taxes are shown in equity as deduction, net of tax, from theproceeds, when the stocks are sold at premium, otherwise such are expensed as incurred.

Deposits for Future Stock SubscriptionsDeposits for future stock subscriptions represent the amount received that will be applied aspayment in exchange for a fixed number of the Parent Company’s own equity instruments, andpresented in the equity section of the consolidated statement of financial position.

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Treasury StocksAcquired treasury stocks are accounted for at weighted average cost and shown as a deduction inthe equity section of the consolidated statement of financial position. No gain or loss isrecognized in the consolidated statement of income on the purchase, sale, issue or cancellation ofthe Parent Company’s own equity instruments. Upon reissuance of treasury stocks, the “Cost ofpreferred and common stocks held in treasury” account is credited at cost. The excess of proceedsfrom reissuance over the cost of treasury stocks is credited to the “Additional paid-in capital”account. However, if the cost of treasury stocks exceeds the proceeds from reissuance, suchexcess is debited to the “Additional paid-in capital” account but only to the extent of previouslyset-up additional paid-in capital for the same class of stock. Otherwise, this is debited against the“Retained earnings” account.

Retained EarningsThe amount included in retained earnings includes profit attributable to First Gen Group’s equityholders and reduced by dividends on capital stock. Dividends on capital stock are recognized as aliability and deducted from equity when they are declared by First Gen Group’s BOD. Dividendsfor the year that are approved after the financial reporting date are dealt with as an event after thefinancial reporting date.

Retained earnings may also include the effect of changes in accounting policies as may berequired by the standards’ transitional provisions.

Revenue RecognitionRevenue is recognized when it is probable that the economic benefits associated with thetransaction will flow to First Gen Group and the amount of the revenue can be measured reliably.

The following specific recognition criteria must also be met before revenue is recognized:

Revenue from sale of electricityRevenue from sale of electricity (in the case FGP and FGPC) is based on the respective PPAs ofFGP and FGPC. The PPAs qualify as leases on the basis that FGP and FGPC sell all of its outputto Meralco. This agreement calls for a take-or-pay arrangement where payment is madeprincipally on the basis of the availability of the power plant and not on actual deliveries ofelectricity generated. This arrangement is determined to be operating leases where a significantportion of the risks and benefits of ownership of the assets are retained by FGP and FGPC.

Revenue from sale of electricity is composed of fixed capacity fees, fixed and variable operatingand maintenance fees, fuel, wheeling and pipeline charges, and supplemental fees. The portionrelated to the fixed capacity fees is considered as operating lease component and the same fees arerecognized on a straight-line basis, based on the actual Net Dependable Capacity (NDC) tested orproven, over the terms of the respective PPAs. Variable operating and maintenance fees, fuel,wheeling and pipeline charges and supplemental fees are recognized monthly based on the actualenergy delivered.

Interest incomeInterest income is recognized as interest accrues.

Revenue from servicesRevenue is recognized as services are rendered.


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Equity in net earnings (losses) of associatesFirst Gen Group recognizes its share in the net income (losses) of associates proportionate to theequity in the economic shares of such associate, in accordance with the equity method ofaccounting for investments. If an associate has outstanding cumulative preferred stocks that areheld by parties other than the investor and classified as equity, First Gen Group computes its sharein profits or losses after adjusting for the dividends on such shares, whether or not the dividendshave been declared.

Expense RecognitionExpenses are decreases in economic benefits during the accounting period in the form of outflowsor decrease of assets or incurrence of liabilities that result in decreases in equity, other than thoserelating to distributions to equity participants, and are recognized when these are incurred.

Borrowing CostsBorrowing costs include interest charges and other costs incurred in connection with theborrowing of funds, including exchange differences arising from foreign currency borrowingsused to finance the project to the extent that they are regarded as an adjustment to interest costs,net of interest income earned on any investment of such funds.

Borrowing costs are capitalized if they are directly attributable to the acquisition, construction orproduction of qualifying assets until such time that the assets are substantially ready for theirintended use or sale, which necessarily takes a substantial period of time. Capitalization ofborrowing costs commences when the activities to prepare the asset are in progress andexpenditures and borrowing costs are being incurred. Borrowing costs are capitalized until theasset is substantially ready for its intended use. If the resulting carrying amount of the assetexceeds its recoverable amount, an impairment loss is recognized in the consolidated statement ofincome. All other borrowing costs are expensed in the year they occur.

Foreign Currency TransactionsThe consolidated financial statements are presented in U.S. dollar, which is the Parent Company’sfunctional and presentation currency. Each entity in First Gen Group determines its ownfunctional currency and items included in the financial statements of each entity are measuredusing that functional currency. Transactions in foreign currencies are initially recorded using theweighted average functional currency rate prevailing at transaction date. Monetary assets andliabilities denominated in foreign currencies are restated using the functional currency rate ofexchange at financial reporting date. All differences are taken to the consolidated statement ofincome. Nonmonetary items that are measured at historical cost in a foreign currency aretranslated using the exchange rates as at the dates of the transaction. Nonmonetary itemsmeasured at fair value in a foreign currency are translated using the weighted average exchangerates as at the date when the fair value was determined.

The functional currency of all the subsidiaries, except Unified, FGP, FGHC and FGPC, is thePhilippine peso. As at financial reporting date, the assets and liabilities of these subsidiaries aretranslated into the presentation currency of the Parent Company (the U.S. dollar) at the closingrate of exchange ruling at financial reporting date and, their statements of income are translated atthe monthly weighted average exchange rates for the year. The exchange differences arising onthe translation are taken to other comprehensive income (loss) as a separate component of equityas part of “Cumulative translation adjustments” account. Upon disposal of any of thesesubsidiaries, the deferred cumulative amount recognized in equity relating to that particularsubsidiary will be recognized in the consolidated statement of income proportionate to the equityinterest disposed.

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Dividends on Preferred and Common StocksFirst Gen Group may pay dividends in cash or by the issuance of shares of stock. Dividends paidin cash are subject to the approval of the BOD, while stock and property dividends are subject toapproval by the BOD, at least two-thirds of the outstanding capital stock of the shareholders at ashareholders’ meeting called for such purpose, and by the Philippine SEC. First Gen Group maydeclare dividends only out of its unrestricted retained earnings.

Cash and property dividends on preferred and common stocks are recognized as liability anddeducted from equity when declared. Stock dividends are treated as transfers from retainedearnings to additional paid-in capital.

Earnings Per Share (EPS) Attributable to the Equity Holders of the ParentBasic EPS is computed by dividing net income (less cumulative preferred dividends, if any,whether declared or not) for the year attributable to common shareholders by the weighted averagenumber of common stocks outstanding during the year, with retroactive adjustments for any stockdividends declared and stock split.

Diluted EPS is calculated in the same manner, adjusted for the effects of: (a) conversion ofconvertible bonds; and (b) stocks to be issued to executives (officers and senior managers) andemployees under the Parent Company’s Executive Stock Option Plan (ESOP) and EmployeeStock Purchase Plan (ESPP), respectively, which are assumed to be exercised at the date of grant.

Where the EPS effect of the stocks to be issued to executives and employees under the ParentCompany’s ESOP and ESPP, and the possible conversion of convertible bonds would beanti-dilutive, the basic and diluted EPS are stated at the same amount.

Segment ReportingFor purposes of management reporting, First Gen Group’s operating businesses are organized andmanaged separately on a per company basis, with each company representing a strategic businesssegment. First Gen’s identified operating segments, which are consistent with the segmentsreported to the BOD which is First Gen’s Chief Operating Decision Maker (CODM). Financialinformation on the operating segment is presented in Note 5.

Events After the Financial Reporting DateAny event after the financial reporting date that provides additional information about First GenGroup’s position at financial reporting date (adjusting event) is reflected in the consolidatedfinancial statements. Events after financial reporting date that are not adjusting events, if any, aredisclosed, in the notes to consolidated financial statements, when material.

Future Changes in Accounting PoliciesFirst Gen Group will adopt the following standards and interpretations, when these becomeeffective, and as these are applicable. Except as otherwise indicated, First Gen Group does notexpect the adoption of these new and amended PFRS and Philippine Interpretations to havesignificant impact on its consolidated financial statements.

Effective in 2010

Amendments to PFRS 2, Share-based Payments - Group Cash-settled Share-based PaymentTransactions, clarify the scope and the accounting for group cash-settled share-based paymenttransactions effective for annual periods beginning on or after January 1, 2010.

Revised PFRS 3, Business Combinations, and PAS 27, Consolidated and Separate FinancialStatements, introduce a number of changes in the accounting for business combinations that


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will impact the amount of goodwill recognized, the reported results in the period that anacquisition occurs, and future reported results. The revised PAS 27 requires, among others,that (a) change in ownership interests of a subsidiary (that do not result in loss of control) willbe accounted for as an equity transaction and will have no impact on goodwill nor will it giverise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between thecontrolling and noncontrolling interests (previously referred to as “minority interests”); even ifthe losses exceed the noncontrolling equity investment in the subsidiary; and (c) on loss ofcontrol of a subsidiary, any retained interest will be remeasured to fair value and this willimpact the gain or loss recognized on disposal. The changes introduced by the revisedPFRS 3 must be applied prospectively and the revised PAS 27 must be applied retrospectivelysubject to certain exceptions.

Amendment to PAS 39, Financial Instruments: Recognition and Measurement - EligibleHedged Items, addresses only the designation of a one-sided risk in a hedged item, and thedesignation of inflation as a hedged risk or portion in particular situations. The amendmentclarifies that an entity is permitted to designate a portion of the fair value changes or cash flowvariability of a financial instrument as a hedged item.

Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners, providesguidance on how to account for non-cash distributions to owners. The interpretation clarifieswhen to recognize a liability, how to measure it and the associated assets, and when toderecognize the asset and liability.

Improvement to PFRS Effective 2010The omnibus amendments to PFRSs issued in 2009 were issued primarily with a view of removinginconsistencies and clarifying wording. The amendments are effective for annual periodsbeginning on or after January 1, 2010, unless otherwise stated. The Parent Company has not yetadopted the following amendments and anticipates that these changes will have no material effecton the financial statements.

PFRS 2, Share-based Payments, clarifies that the contribution of a business on formation of ajoint venture and combinations under common control are not within the scope of PFRS 2even though they are out of scope of PFRS 3 (Revised). The amendment is effective forfinancial years beginning on or after July 1, 2009.

PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, clarifies that thedisclosures required with respect to noncurrent assets and disposal groups classified as heldfor sale or discontinued operations are only those set out in PFRS 5. The disclosurerequirements of other PFRS only apply if specifically required for such noncurrent assets ordiscontinued operations.

PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only bereported when those assets and liabilities are included in measures that are used by the chiefoperating decision maker (CODM).

PAS 1, Presentation of Financial Statements, clarifies that the terms of a liability that couldresult, at anytime, in its settlement by the issuance of equity instruments at the option of thecounterparty do not affect its classification.

PAS 7, Statement of Cash Flows, explicitly states that only expenditure that results in arecognized asset can be classified as a cash flow from investing activities.

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PAS 17, Leases, removes the specific guidance on classifying land as a lease. Prior to theamendment, leases of land were classified as operating leases. The amendment now requiresthat leases of land are classified as either “finance” or “operating” in accordance with thegeneral principles of PAS 17. The amendments will be applied retrospectively.

PAS 36, Impairment of Assets, clarifies that the largest unit permitted for allocating goodwill,acquired in a business combination, is the operating segment as defined in PFRS 8 beforeaggregation for reporting purposes.

PAS 38, Intangible Assets, clarifies that if an intangible asset acquired in a businesscombination is identifiable only with another intangible asset, the acquirer may recognize thegroup of intangible assets as a single asset provided the individual assets have similar usefullives. Also clarifies that the valuation techniques presented for determining the fair value ofintangible assets acquired in a business combination that are not traded in active markets areonly examples and are not restrictive on the methods that can be used.

PAS 39, Financial Instruments: Recognition and Measurement, clarifies that a prepaymentoption is considered closely related to the host contract when the exercise price of aprepayment option reimburses the lender up to the approximate present value of lost interestfor the remaining term of the host contract; the scope exemption for contracts between anacquirer and a vendor in a business combination to buy or sell an acquiree at a future dateapplies only to binding forward contracts, and not derivative contracts where further actionsby either party are still to be taken; and gains or losses on cash flow hedges of a forecasttransaction that subsequently results in the recognition of a financial instrument or on cashflow hedges of recognized financial instruments should be reclassified in the period that thehedged forecast cash flows affect comprehensive income.

Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, clarifies that itdoes not apply to possible reassessment at the date of acquisition, to embedded derivatives incontracts acquired in a business combination between entities or businesses under commoncontrol or the formation of joint venture.

Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation, statesthat, in a hedge of a net investment in a foreign operation, qualifying hedging instruments maybe held by any entity or entities within the group, including the foreign operation itself, aslong as the designation, documentation and effectiveness requirements of PAS 39 that relate toa net investment hedge are satisfied.

Effective in 2012

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, coversaccounting for revenue and associated expenses by entities that undertake the construction ofreal estate directly or through subcontractors. This interpretation requires that revenue onconstruction of real estate be recognized only upon completion, except when such contractqualifies as construction contract to be accounted for under PAS 11, Construction Contracts,or involves rendering of services in which case revenue is recognized based on stage ofcompletion. Contracts involving provision of services with the construction materials andwhere the risks and reward of ownership are transferred to the buyer on a continuous basis,will also be accounted for based on stage of completion.


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3. Significant Accounting Judgments and Estimates

The preparation of the consolidated financial statements in accordance with PFRS requires FirstGen Group to make judgments and estimates that affect the reported amounts of assets, liabilities,income and expenses and disclosure of contingent assets and contingent liabilities. However,future events may occur which will cause the assumptions used in arriving at the estimates tochange. The effects of any change in estimates are reflected in the consolidated financialstatements as they become reasonably determinable.

Judgments and estimates are continually evaluated and are based on historical experience andother factors, including expectations of future events that are believed to be reasonable under thecircumstances.

In the process of applying First Gen Group’s accounting policies, management has made thefollowing judgments and estimates which have the most significant effect on the amountsrecognized in the consolidated financial statements:

Judgmentsa. Determining functional currency

The Parent Company, Unified, FGP, FGPC, FGHC and an associate, FPPC and its subsidiary,BPPC, have determined that their functional currency is the U.S. dollar. The U.S. dollar is thecurrency of the primary economic environment in which the Parent Company and foregoingsubsidiaries and associate operate. It is the currency that mainly influences the sale of servicesand the costs of providing services. All other subsidiaries have determined the Philippine pesoto be their functional currency. Thus, the accounts of such subsidiaries were translated to U.S.dollar for the purposes of consolidation to First Gen Group.

b. Operating leasesThe respective PPAs of FGP and FGPC qualify as leases on the basis that FGP and FGPC sellall of their output to Meralco and these agreements call for a take-or-pay arrangement wherepayment is made principally on the basis of the availability of the power plants and not onactual deliveries of electricity generated. These arrangements are determined to be operatingleases where a significant portion of the risks and benefits of ownership of the assets areretained by FGP and FGPC. Accordingly, the power plant assets are recorded as part of thecost of property, plant and equipment and the fixed capacity fees billed to Meralco arerecorded as operating revenue on a straight-line basis over the applicable terms of the PPAs.

c. Discontinued operationsOn May 12, 2009, the BOD of Prime Terracota approved and issued voting preferred stocks toQRC and LIRF. Due to the said equity transaction, First Gen is deemed to have lost controlover Prime Terracota since First Gen’s voting interest in Prime Terracota has been reduced toapproximately 45% and has lost control over the BOD of Prime Terracota. In addition, theloss of control is treated as a deemed sale transaction in accordance with the AmendedPFRS 5 (see Note 4).

d. Classification of financial instrumentsFirst Gen Group exercises judgment in classifying a financial instrument, or its componentparts, on initial recognition as either a financial asset, a financial liability or an equityinstrument in accordance with the substance of the contractual arrangement and the definitionof a financial asset, a financial liability or an equity instrument. The substance of a financialinstrument, rather than its legal form, governs its classification in the consolidated statementof financial position.

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e. Service concession arrangementsIn applying Philippine Interpretation IFRIC 12 up to October 22, 2009, EDC had made ajudgment that its Geothermal Service Contract (GSCs) were within the scope of PhilippineInterpretation IFRIC 12 primarily because the grantor controls the significant residual interestover the steam field, power plants and related facilities at the end of the concession period.EDC also made a judgment that the GSCs for Tongonan, Leyte; Palinpinon, Negros Oriental;Bacon-Manito in Albay and Sorsogon; and Mt. Apo in North Cotabato qualified under thefinancial asset model; meanwhile, its GSCs for Northern Negros and the expansiondevelopment of Tanawon project in Bacon-Manito service contract area qualified under theintangible asset model. Under the financial asset model, EDC had recognized theconsideration received or receivable in exchange for its infrastructure construction services orits acquisition of infrastructure to be used in the arrangements as a financial asset to the extentthat EDC has an unconditional contractual right to receive cash or other financial asset for itsconstruction services from or at the direction of the grantor. Under the intangible asset model,EDC had recognized an intangible asset for the right to charge users of the public service.

Prior to October 23, 2009, EDC recognized the consideration received or receivable inexchange for its infrastructure construction services or its acquisition of infrastructure to beused in the arrangements as either a financial asset (financial asset model) to the extent thatEDC has an unconditional right to receive cash or other financial asset for its constructionservices from or at the direction of the grantor, or an intangible asset (intangible asset model)for the right to charge users of the public service; recognized interest income on serviceconcession under the financial asset model; recognized construction revenue and constructionexpenses in accordance with PAS 11; amortized intangible assets arising from the serviceconcession over the concession period under the intangible asset model; recognized revenuefrom sale of electricity and steam, net of the portion of the billings representing collection ofconcession receivables and related interest charges; and expensed subsequent capitalexpenditures as incurred under the financial asset model and intangible asset model, unlessproven that the upgrades will be able to generate revenues by charging the users of the publicservice.

Starting October 23, 2009, with EDC’s conversion of its GSCs to Geothermal RenewableEnergy Service Contract (GRESCs) (see Note 35), EDC has made a judgment that itsGRESCs are no longer within the scope of Philippine Interpretation IFRIC 12 since theyalready has control over any significant residual interest over the steam field, power plants andrelated facilities throughout the concession period and even after the concession period.

The concession receivables and intangible assets arising from service concessions of EDCwere deconsolidated as of April 30, 2009.

Estimatesa. Impairment losses on receivables

First Gen Group reviews its receivables at each financial reporting date to assess whether anallowance for impairment should be recognized in the consolidated statement of income. Inparticular, judgment by management is required in the estimation of the amount and timing offuture cash flows when determining the level of allowance required. Such estimates are basedon assumptions on a number of factors and actual results may differ, resulting in futurechanges to the allowance.


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First Gen Group maintains an allowance for impairment losses at a level that managementconsiders adequate to provide for potential uncollectability of its trade and other receivables,certain advances and its receivables arising from service concession arrangements. First GenGroup evaluates specific balances where management has information that certain amountsmay not be collectible. In these cases, First Gen Group uses judgment, based on availablefacts and circumstances, and on a review of the factors that affect the collectability of theaccounts including, but not limited to, the age and status of the receivables, collectionexperience, past loss experience and, in the case of receivables arising from service concessionarrangements, the expected net cash inflows from the concession. The review is made bymanagement on a continuing basis to identify accounts to be provided with allowance. Thesespecific reserves are re-evaluated and adjusted as additional information received affects theamount estimated.

In addition to specific allowance against individually significant receivables, First Gen Groupalso makes a collective impairment allowance against exposures which, although notspecifically identified as requiring a specific allowance, have a greater risk of default thanwhen originally granted. Collective assessment of impairment is made on a portfolio or groupbasis after performing a regular review of age and status of the portfolio or group of accountsrelative to historical collections, changes in payment terms, and other factors that may affectability to collect payments.

Receivables are carried at $221.1 million and $1,001.9 million as of December 31, 2009 and2008, respectively (see Notes 4, 8, 11, 13 and 17). The total allowance for impairment lossesrecognized in 2008 amounted to $41.3 million (see Notes 4, 8 and 13).

b. Impairment of AFS financial assetsFirst Gen Group considers AFS financial assets as impaired when there has been a significantor prolonged decline in the fair value of such investments below their cost or where otherobjective evidence of impairment exists. The determination of what is “significant” or“prolonged” requires judgment. First Gen Group treats “significant” generally as 20% ormore and “prolonged” as greater than twelve months. In addition, First Gen Group evaluatesother factors, including normal volatility in stock price for quoted equities and future cashflows and discount factors for unquoted equities in determining the amount to be impaired.

No impairment loss on AFS financial assets was recognized for each of the three years in theperiod ended December 31, 2009. AFS financial assets are carried at $0.5 million and$15.0 million as of December 31, 2009 and 2008, respectively (see Notes 9 and 17).

c. Recognition of deferred income tax assetsThe carrying amounts of deferred income tax assets at each financial reporting date arereviewed and are reduced to the extent that there is no longer sufficient future taxable incomeavailable to allow all or part of the deferred income tax assets to be utilized. First GenGroup’s assessment on the recognition of deferred income tax assets on deductible temporarydifferences, carryforward benefits of MCIT and NOLCO is based on the forecasted taxableincome of the following reporting year. This forecast is based on First Gen Group’s pastresults and future expectations on revenue and expenses.

As of December 31, 2009 and 2008, the amount of deferred income tax assets recognized inthe consolidated statements of financial position amounted to $11.8 million and$190.6 million, respectively. First Gen Group also has deductible temporary differences,carryforward benefit of unused NOLCO and excess MCIT totaling $228.1 million and$210.0 million as of December 31, 2009 and 2008, respectively, for which no deferred incometax asset was recognized (see Note 30).

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d. Present value of defined benefit obligationThe cost of defined benefit retirement plans is determined using the projected unit creditmethod of actuarial valuation. An actuarial valuation involves making assumptions. Theseinclude the determination of the discount rates, expected rates of return on assets, future salaryincreases and medical trend rates. In accordance with PAS 19, past service costs, experienceadjustments and effects of changes in actuarial assumptions are deemed to be amortized overthe average remaining working lives of employees. While the assumptions are reasonable andappropriate, significant differences in First Gen Group’s actual experience or significantchanges in the assumptions may materially affect the retirement benefit obligation. Due to thelong-term nature of these plans, such estimates are subject to significant uncertainty.

The expected rate of return on plan assets was based on the average historical premium of thefund assets. The assumed discount rates were determined using the market yields onPhilippine government bonds with terms consistent with the expected employee benefit payoutas at financial reporting date. The details of assumptions used in the calculation of First GenGroup’s retirement benefits are presented in Note 29.

As of December 31, 2009 and 2008, the present value of defined benefit obligation of FirstGen Group amounted to $4.7 million and $70.5 million, respectively (see Note 29).Unrecognized cumulative actuarial gains (losses) as of December 31, 2009 and 2008amounted to ($2.6 million) and $2.6 million, respectively (see Note 29).

e. Impairment of non-financial assetsProperty, plant and equipment, intangible assets (excluding goodwill), prepaid gas andprepaid major spare partsFirst Gen Group assesses impairment on these non-financial assets whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable.The factors that First Gen Group considers important which could trigger an impairmentreview include the following:

significant under-performance relative to expected historical or projected future operatingresults;

significant changes in the manner of use of the acquired assets or the strategy for overallbusiness; and

significant negative industry or economic trends.

First Gen Group recognizes an impairment loss whenever the carrying amount of an assetexceeds its recoverable amount. The recoverable amount is computed using the value in useapproach. Recoverable amount is estimated for an individual asset or, if it is not possible, forthe cash-generating unit to which the asset belongs.

No impairment loss was recognized in the consolidated statements of income for each of thethree years in the period ended December 31, 2009. The aggregate carrying values of thenon-financial assets subjected to impairment testing amounted to $686.4 million and$1,190.9 million as of December 31, 2009 and 2008, respectively (see Notes 4, 15, 16 and 17).

GoodwillFirst Gen Group performs impairment review on goodwill, annually or more frequently, ifevents or changes in circumstances indicate that the carrying value may be impaired. Thisrequires an estimation of the value in use of the cash-generating units to which goodwill isallocated. Estimating the value in use requires First Gen Group to make an estimate of the


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expected future cash flows from the cash-generating units and discounts such cash flows usingweighted average cost of capital to calculate the present value of those future cash flows (seeNote 16).

No impairment loss on goodwill was recognized in the consolidated statements of income foreach of the three years in the period ended December 31, 2009. The carrying values ofgoodwill as of December 31, 2009 and 2008 amounted to $9.1 million and $962.9 million,respectively (see Notes 4, 6 and 16).

Investments in associatesImpairment review of investment in associates is performed when events or changes incircumstances indicate that the carrying value exceeds its fair value. Management hasdetermined that there are no events or changes in circumstances in 2009 and 2008 that mayindicate that the carrying value of investments in associates may not be recoverable. Thecarrying values of First Gen Group’s investments in associates amounted to $1,020.7 millionand $21.0 million as of December 31, 2009 and 2008, respectively (see Notes 4 and 14).

f. Estimation of useful lives of property, plant and equipment and intangible assetsFirst Gen Group estimated the useful lives of property, plant and equipment and intangibleassets based on the years over which the assets are expected to be available for use and on thecollective assessment of industry practices, internal technical evaluation and experience withsimilar assets. The estimated useful lives of property, plant and equipment and intangibleassets are reviewed at each financial reporting date and updated, if expectations differ fromprevious estimates due to physical wear and tear, technical or commercial obsolescence andlegal or other limits in the use of these assets. However, it is possible that future financialperformance could be materially affected by changes in the estimates brought about bychanges in the factors mentioned above. The amounts and timing of recording thedepreciation and amortization of property, plant and equipment and intangible assets for anyyear would be affected by changes in these factors and circumstances. A reduction in theestimated useful lives of the property, plant and equipment and intangible assets wouldincrease the recorded depreciation and amortization and decrease the noncurrent assets. Forpurposes of determining the estimated useful life of the intangible asset arising from serviceconcession arrangements, EDC, in particular, included the renewal period on the basis of theconstitutional and contractual provisions and its historical experience of obtaining approvalsof such renewals at no significant cost. In the case of the intangible assets pertaining to thewater rights, the pipeline rights and the concession rights pertaining to the identified contractsarising from the acquisition of EDC, the carrying value is amortized over the remaining termof the contracts.

There is no change in the estimated useful lives of property, plant and equipment andintangible assets during the year. The aggregate carrying values of property, plant andequipment as of December 31, 2009 and 2008 amounted to $562.2 million and $736.3 million,respectively (see Notes 4 and 15). The carrying values of intangible assets, except forgoodwill, as of December 31, 2009 and 2008 amounted to $8.9 million and $338.8 million,respectively (see Notes 4 and 16).

g. Estimation of asset retirement obligationsUnder their respective Environmental Compliance Certificate (ECC) issued by the Departmentof Environmental and Natural Resources (DENR), FGP and FGPC have legal obligations todismantle their power plant assets at the end of their useful lives. FG Bukidnon, on the otherhand, has a contractual obligation under the lease agreement with PSALM to dismantle itspower plant assets at the end of the useful lives. EDC has made an assessment that the costs in

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relation to dismantlement, removal and restoration of its infrastructure and sites are notsignificant. The asset retirement obligations recognized represent the best estimate of theexpenditures required to dismantle the power plants at the end of their useful lives. Such costestimates are discounted using a pre-tax rate that reflects the current market assessment of thetime value of money and the risks specific to the liability. Each year, the asset retirementobligations are increased to reflect the accretion of discount and to accrue an estimate for theeffects of inflation, with the charges being recognized under “Interest expense and financingcharges” account in the consolidated statement of income. While it is believed that theassumptions used in the estimation of such costs are reasonable, significant changes in theseassumptions may materially affect the recorded expense or obligations in future years.

Asset retirement obligations amounted to $1.0 million and $0.9 million as ofDecember 31, 2009 and 2008, respectively (see Note 23).

h. Fair values of financial instrumentsFirst Gen Group carries certain financial assets and liabilities at fair value, which requiresextensive use of accounting estimates and judgment. While significant components of fairvalue measurement were determined using verifiable objective evidence (i.e. foreign exchangerates, interest rates, volatility rates), the amount of changes in fair value would differ if FirstGen Group utilized different valuation methodologies and assumptions. Any changes in fairvalue of these financial assets and liabilities would affect the consolidated statement of incomeand equity.

Where the fair values of certain financial assets and financial liabilities recorded in theconsolidated statement of financial position cannot be derived from active markets, they aredetermined using internal valuation techniques using generally accepted market valuationmodels. The inputs to these models are taken from observable markets where possible, butwhere this is not feasible, estimates are used in establishing fair values. Judgments includeconsiderations of liquidity and model inputs such as correlation and volatility for longer datedderivatives.

The fair values of First Gen Group’s financial instruments are presented in Note 33 to theconsolidated financial statements.

i. Legal contingencies and regulatory assessmentsFirst Gen Group is involved in various legal proceedings and regulatory assessments asdiscussed in Note 34 to the consolidated financial statements. First Gen Group’s estimate ofprobable costs for the assessments and resolution of these claims and cases have beendeveloped in consultation with external counsels handling the defense in these claims andcases and is based upon thorough analysis of potential results.

First Gen Group, in consultation with its external counsels, does not believe that theseproceedings will have a material adverse effect on the consolidated financial statements. It ispossible, however, that future financial performance could be materially affected by changesin the estimates or the effectiveness of management’s strategies relating to these proceedings.

EDC, in particular, recognized provisions for probable losses arising from regulatoryassessments (included under “Accounts payable and accrued expenses” account in theconsolidated statements of financial position) amounting to $14.3 million as ofDecember 31, 2008 (see Note 19).

Provisions for probable losses of EDC from regulatory assessment were deconsolidated as ofApril 30, 2009.


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j. Exploration and evaluation assetsExploration and evaluation costs are capitalized in accordance with PFRS 6, Exploration forand Evaluation of Mineral Resources. Capitalization of these costs is based, to a certainextent, on management’s judgment of the degree to which the expenditure may be associatedwith finding specific geothermal reserve. First Gen Group determines impairment of projectsbased on the technical assessment of its resident scientists in various disciplines or based onmanagement’s decision not to pursue any further commercial development of its explorationprojects.

As of December 31, 2008, the carrying value of exploration and evaluation assets amounted to$21.0 million (see Notes 4 and 17). Exploration and evaluation assets of EDC weredeconsolidated as of April 30, 2009.

4. Discontinued Operations

On May 12, 2009, the BOD of Prime Terracota approved and issued 16,000,000 Class “B”preferred stocks with a par value of one peso (P=1.00) per share to QRC and 44,000,000 Class “B”preferred stocks with a par value of one peso (P=1.00) per share to LIRF, which stocks shall beentitled to cumulative dividends of P=0.10 per share per annum, payable at the end of each quarterfrom the time of their issuance or at such times as may be determined by the BOD of PrimeTerracota, subject to the availability of unrestricted retained earnings.

Based on the above transactions, First Gen is deemed to have lost control over Prime Terracotasince First Gen’s voting interest in Prime Terracota has been reduced to approximately 45% andhas lost control over the BOD of Prime Terracota. In addition, the loss of control is treated as adeemed sale transaction in accordance with the Amended PFRS 5.

The results of operations of Prime Terracota and subsidiaries (major subsidiaries include RedVulcan and EDC) for the four-month period ended April 30, 2009 and for the years endedDecember 31, 2008 and 2007 are summarized below.

2009(Four Months)

2008(One Year)

2007(One Year)

Revenue $163,721 $525,059 $81,686Costs and expenses:

Power plant operations and maintenance (56,246) (77,792) (15,404)Depreciation and amortization (10,731) (37,881) (6,787)Staff costs (17,689) (55,529) (1,128)Other administrative expenses (14,035) (62,203) (10,975)Interest expense and financing charges (26,173) (82,270) (20,749)Foreign exchange gains (losses) - net 27,815 (185,092) 20,927Mark-to-market gains (losses) on derivatives (5,162) 18,411 108Others – – (394)

Income before income tax 61,500 42,703 47,284Provision for income tax (19,539) (23,466) (13,917)Net income from discontinued operations $41,961 $19,237 $33,367

Attributable to:Equity holders of the Parent Company $12,474 ($14,114) $23,346Minority interests 29,487 33,351 10,021

$41,961 $19,237 $33,367

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The net cash provided by Prime Terracota and its subsidiaries for the four-month period endedApril 30, 2009 and for the years ended December 31, 2008 and 2007 are as follows:

2009(Four Months)

2008(One Year)

2007(One Year)

Net cash provided by operating activities $158,029 $320,084 $71,702Net cash provided by (used in) investing activities (80,921) 62,535 (691,165)Net cash provided by (used in) financing

activities 67,542 (442,655) 695,046EFFECT OF FOREIGN EXCHANGE RATE

CHANGES ON CASH AND CASHEQUIVALENTS 20 517 –

NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS 144,670 (59,519) 75,583

CASH AND CASH EQUIVALENTSAT BEGINNING OF PERIOD 20,147 79,666 4,083

CASH AND CASH EQUIVALENTSAT END OF PERIOD $164,817 $20,147 $79,666

5. Operating Segment InformationOperating segments are components of First Gen Group that engage in business activities fromwhich they may earn revenues and incur expenses, whose operating results are regularly reviewedby First Gen Group’s CODM to make decisions about how resources are to be allocated to thesegment and assess their performances, and for which discrete financial information is available.For purposes of management reporting, First Gen Group’s operating businesses are organized andmanaged separately on a per company basis, with each company representing a strategic businesssegment. First Gen’s identified operating segments, which are consistent with the segmentsreported to the BOD, which is the CODM of First Gen, are as follows:

FGPC, which operates the 1,000 MW combined cycle, natural gas-fired Santa Rita powerplant, and where the Parent Company has a 60% equity interest through FGHC;

FGP, which operates the 500 MW combined cycle, natural gas-fired San Lorenzo power plant,and where the Parent Company has a 60% equity interest through Unified;

EDC, which owns and operates the seven integrated geothermal steamfield and powerprojects, with a combined capacity of 744 MW and the steamfield operations of EDC that sellsteam to NPC for use at NPC-owned geothermal power plants with a combined capacity of455 MW. The Parent Company has a 40% economic and 27% effective voting interest inEDC through Prime Terracota; and,

FG Hydro, which operates the 112 MW PAHEP/MAHEP, and where the Parent Company hasa 40% direct economic interest.

Management monitors the operating results of its business units separately for the purpose ofmaking decisions about resource allocation and performance assessment. Segment revenue andsegment expenses are measured in accordance with PFRS. The presentation and classification ofsegment revenue and segment expenses are consistent with the consolidated statement of income.Interest expense and financing charges, depreciation and amortization expense and income taxesare managed on a per company basis and are not allocated to operating segments.

First Gen has only one geographical segment as all of its assets are located in the Philippines.First Gen Group operates and derives principally all of its revenue from domestic operations.Thus, geographical business information is not required.


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Revenue is recognized to the extent that it is probable that economic benefits will flow to FirstGen Group and that the revenue can be reliably measured. Substantially all of the segmentrevenues of FGP and FGPC are derived from Meralco, the sole customer of FGP and FGPC; while85% of EDC’s segment revenues are derived from NPC.

Financial information on the business segments are summarized as follows:

Year Ended December 31, 2009

FGPC FGP EDC FG Hydro OthersDiscontinuedOperations1

EliminatingEntries2 Total

Segment revenue $689,685 $335,200 $468,514 $28,492 $37,476 ($191,536) ($345,715) $1,022,116Segment expenses (507,803) (240,407) (250,541) (6,715) (37,196) 93,132 184,592 (764,938)Segment results 181,882 94,793 217,973 21,777 280 (98,404) (161,123) 257,178Interest expense and

financing charges (49,861) (11,815) (50,429) (7,326) (87,978) 26,173 69,147 (112,089)Depreciation and

amortization (33,531) (20,043) (23,638) (11,949) (358) 10,731 24,856 (53,932)Income from continuing

operations beforeincome tax 98,490 62,935 143,906 2,502 (88,056) (61,500) (67,120) 91,157

Net income fromdiscontinuedoperations – – – – – 41,961 – 41,961

Provision for income tax (27,297) (10,684) (67,955) (136) (782) 19,539 49,204 (38,111)Net income (loss) $71,193 $52,251 $75,951 $2,366 ($88,838) $– ($17,916) $95,007


FGPC FGP EDC FG Hydro OthersDiscontinued

Operations1Eliminating

Entries TotalSegment revenue $811,156 $409,955 $510,946 $32,524 $41,287 ($543,470) $– $1,262,398Segment expenses (633,283) (309,291) (363,515) (16,074) (21,256) 380,615 – (962,804)Segment results 177,873 100,664 147,431 16,450 20,031 (162,855) – 299,594Interest expense and

financing charges (44,009) (15,506) (37,970) (8,088) (98,114) 82,270 – (121,417)Depreciation and amortization (33,591) (20,018) (31,220) (6,661) (418) 37,882 – (54,026)Income from continuing

operations beforeincome tax 100,273 65,140 78,241 1,701 (78,501) (42,703) – 124,151

Income from discontinuedoperations – – – – – 19,237 – 19,237

Provision for income tax (45,861) (3,871) (23,994) 527 (187) 23,466 – (49,920)Net income (loss) $54,412 $61,269 $54,247 $2,228 ($78,688) $– $– $93,468




Entries TotalSegment revenue $667,681 $335,585 $45,043 $57,570 $19,303 ($102,721) $– $1,022,461Segment expenses (493,011) (233,047) (16,782) (7,603) (23,187) 27,901 – (745,729)Segment results 174,670 102,538 28,261 49,967 (3,884) (74,820) – 276,732Interest expense and

financing charges (29,861) (20,615) (3,025) (9,049) (28,446) 20,749 – (70,247)Depreciation and

amortization (33,366) (16,716) (502) (6,285) (349) 6,787 – (50,431)Income from continuing

operations beforeincome tax 111,443 65,207 24,734 34,633 (32,679) (47,284) – 156,054

Net income fromdiscontinued operations – – – – – 33,367 – 33,367

Provision for income tax (10,489) 3,179 (8,033) (5,884) (280) 13,917 – (7,590)Net income (loss) $100,954 $68,386 $16,701 $28,749 ($32,959) $– $– $181,8311Pertains to revenue and expenses of Prime Terracota, Red Vulcan, EDC and FG Hydro for the four-month period ended April 30, 2009 and for the yearsended December 31, 2008 and 2007.2Pertains to revenue and expenses of Prime Terracota, Red Vulcan, EDC and FG Hydro for the period May 1, 2009 to December 31, 2009.

Other financial information of the business segments are as follows:

As of December 31, 2009



Entries2 TotalCurrent assets $182,064 $117,052 $438,498 $10,224 $184,797 ($448,722) ($137,398) $346,515Noncurrent assets 658,197 265,299 1,112,140 151,388 1,412,792 (1,263,529) (521,779) 1,814,508Total assets $840,261 $382,351 $1,550,638 $161,612 $1,597,589 ($1,712,251) ($659,177) $2,161,023

(Forward)

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Entries2 TotalCurrent liabilities $93,121 $78,588 $397,596 $30,459 $402,643 ($428,054) ($291,787) $282,566Noncurrent liabilities 551,552 129,363 479,608 46,736 390,506 (526,345) – 1,071,420Total liabilities $644,673 $207,951 $877,204 $77,195 $793,149 ($954,399) ($291,787) $1,353,986



OperationsEliminating

Entries2 TotalCurrent assets $242,348 $131,178 $278,567 $7,643 $41,047 $– ($35,242) $665,541Noncurrent assets 696,494 280,311 1,203,135 140,382 2,122,772 – (1,410,758) 3,032,336Total assets $938,842 $411,489 $1,481,702 $148,025 $2,163,819 $– ($1,446,000) $3,697,877

Current liabilities $133,008 $71,621 $315,032 $17,998 $652,171 $– ($193,322) $996,508Noncurrent liabilities 614,707 167,459 484,332 51,947 364,513 – – 1,682,958Total liabilities $747,715 $239,080 $799,364 $69,945 $1,016,684 $– ($193,322) $2,679,4661Pertains to assets and liabilities of Prime Terracota, Red Vulcan, EDC and FG Hydro as of December 31, 2009.2Pertains to intercompany assets and liabilities eliminated upon consolidation.

6. Business Combinations

Acquisition of EDCOn November 22, 2007, Red Vulcan, a wholly owned subsidiary of First Gen then, was declaredthe winning bidder for Philippine National Oil Company (PNOC) and EDC Retirement Fund’sremaining interests in EDC, which consisted of 6.0 billion common stocks and 7.5 billionpreferred stocks. Such common stocks represent 40% economic interest in EDC while thecombined common stocks and preferred stocks represent 60% of the voting rights in EDC. Totalconsideration paid on November 29, 2007 was $1.4 billion (P=58.5 billion).

Details of purchase price are as follows:

Common stocks, at fair value $1,366,314Preferred stocks, at fair value 1,819

1,368,133Cost directly attributable to the combination 6,464Total consideration $1,374,597Cash outflow on acquisition:

Cash paid (including transaction costsof $6.5 million) $1,374,597

Less cash acquired from subsidiary 75,109Net cash outflow $1,299,488

To fund the acquisition, First Gen raised $287.5 million bridge loans, $100.0 millionU.S. dollar-denominated short-term loans and P=2.3 billion ($55.4 million) Philippine peso-denominated short-term loans (see Note 18) on November 26 to 28, 2007, from a consortium oflocal and foreign banks. In addition, Red Vulcan availed of staple financing amounting toP=29.2 billion ($705.1 million) arranged by the seller’s advisors to EDC for the transaction(see Note 21).

The transaction has been accounted for as a business combination using the purchase method.

In 2008, Red Vulcan, as the parent company of EDC, completed the valuation work of identifiabletangible and intangible assets acquired and liabilities assumed at the time of acquisition.Accordingly, the purchase price was re-allocated as if these were identified at the date ofacquisition.


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The fair values of the identified assets and liabilities of EDC were adjusted as follows:

Fair ValuesProvisional

Values AdjustmentsCash and cash equivalents $75,109 $75,109 $–Inventories 33,203 27,158 6,045Other current assets 223,659 224,711 (1,052)Property, plant and equipment 43,539 24,719 18,820Intangible assets 321,994 204,923 117,071Deferred income tax assets 77,958 77,958 –Other noncurrent assets 814,036 888,215 (74,179)Long-term debt (585,006) (583,425) (1,581)Deferred income tax liabilities (18,237) – (18,237)Other liabilities (182,525) (176,839) (5,686)Net assets 803,730 762,529 41,201Percentage share of net assets acquired 40% 40% 40%Net assets acquired 321,492 305,012 16,480Acquired voting preferred stocks 1,894 1,894 –Goodwill arising on acquisition (see Note 16) 1,051,211 1,067,691 (16,480)Total consideration $1,374,597 $1,374,597 $–

The effect of the foregoing adjustments was accounted for retrospectively in the 2007 consolidatedfinancial statements. However, the effect of the amortization of the excess of the fair values overthe book values of the net assets acquired were charged to the 2008 consolidated statement ofincome due to immateriality of amounts.

Acquisition of Pantabangan-Masiway Hydro-Power PlantOn October 5, 2006, FG Hydro entered into an Asset Purchase Agreement (APA) with PSALMfor the purchase of the 112 MW PAHEP/MAHEP for a total consideration of $129.0 million. OnNovember 15, 2006 (the “Closing Date”), all the closing conditions for the execution of the APAwere satisfied and the purchase was completed. Following the completion of the conditionsprecedent and the execution of the respective Certificates of Closing of FG Hydro and PSALM,the operations and maintenance of PAHEP/MAHEP were successfully transferred to FG Hydro onNovember 18, 2006.

The total cost of the business combination was $129.0 million. Under the APA, 40% of the totalconsideration ($51.6 million) was paid as an Up-Front Payment to PSALM on November 17, 2006and the remaining 60% (the deferred payment facility) will be paid in 14 semi-annual installmentsincluding 12% interest per annum compounded semi-annually. FG Hydro has the option to prepaythe deferred payment facility.

Details of the deferred payment facility with PSALM as of December 31, 2008 are as follows:

Balance at beginning of year $69,813Less payments during the year 8,525Balance at end of year 61,288Less current portion 9,579Noncurrent portion $51,709

To guarantee full, prompt, faithful and complete performance of FG Hydro’s obligations in theAPA, FG Hydro has complied with the requirement to issue a Deferred Payment Security in theform of an irrevocable standby letter of credit. The Deferred Payment Security amounting to$8.3 million, is replaced after each Semi-Annual Payment date and is equivalent to the maturingobligation of FG Hydro within the next six-month period. In addition, FG Hydro has also

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submitted a Performance Bond amounting to $1.1 million (equivalent to 2% of the totaloutstanding deferred payment facility balance) in the form of an irrevocable standby letter ofcredit. The Performance Bond will be reduced every year to an amount equivalent to two percentof the aggregate amount of the unpaid deferred payment facility with PSALM.

FG Hydro completed the valuation work for the water rights, which it had identified as theacquired intangible asset of PAHEP/MAHEP and determined goodwill amounting to$5.9 million at the date of acquisition. Accordingly, the purchase price was re-allocated as if theforegoing was identified at the date of acquisition.

7. Cash and Cash Equivalents

This account consists of:

2009 2008Cash on hand and in banks (see Note 21) $25,098 $46,988Short-term deposits (see Note 21) 100,433 182,659

$125,531 $229,647

Cash in banks earn interest at the respective bank deposit rates ranging from 0.12% to 3.50% and0.12% to 6.00% as of December 31, 2009 and 2008, respectively. Short-term deposits are madefor varying periods of up to three months depending on the immediate cash requirements of FirstGen Group, and earn interest at the respective short-term deposits rates.

For the years ended December 31, 2009, 2008 and 2007, total interest income earned amounted to$0.7 million, $5.2 million and $24.2 million, respectively (see Note 27).

The cash and cash equivalents of Prime Terracota and its subsidiaries were deconsolidated as ofApril 30, 2009 (see Note 4).

8. Receivables


2009 2008Trade [see Notes 13, 34(a) and 34(d)] $89,486 $161,540Due from related parties (see Note 26) 20,151 1,005Current portion of long-term receivables

(see Notes 6 and 13) 10,503 68,181Others (see Note 26) 1,194 14,316Total 121,334 245,042Less allowance for impairment losses – 46

$121,334 $244,996

Trade receivables are noninterest-bearing and are generally on 30-day credit term, while otherreceivables are comprised mainly of receivables from employees, contractors and suppliers, whichare collectible upon demand.


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The allowance for impairment losses as of December 31, 2008 below pertain to EDC’s tradereceivables. The rollforward analysis of the allowance for impairment losses on these receivablesis as follows:

Balance at beginning of year $9,109Recoveries (9,109)Provision 50Foreign exchange adjustments (4)Balance at end of year $46

The allowance for impairment losses on the foregoing trade and other receivables is establishedbased on the aging analysis and the regular review of the accounts with regard to historicalcollections, changes in customer payment terms and other factors that may affect collectibility.Except for the accounts covered by special agreements with NPC in the case of EDC, theallowance for impairment losses covers the full amount of the outstanding balances that are overone year and the accounts that are subject to contractual interpretation-dispute.

The recoveries shown in the table above came from the implementation of the arbitral decisionthat was arrived at in March 2008 by a third-party arbiter, details of which are disclosed inNote 35(e) in the consolidated financial statements.

The trade and other receivables of EDC (including the allowance for impairment losses) weredeconsolidated as of April 30, 2009 (see Note 4).

No allowance for impairment losses was recorded as of December 31, 2009.

9. AFS Financial Assets

AFS financial assets consist of:

2009 2008Current AFS financial assets -

Quoted government debt securities $– $14,194Noncurrent AFS financial assets:

Investments in proprietary membership shares $526 $508Quoted equity securities – 284Unquoted equity securities – 2

$526 $794

Quoted and unquoted equity and proprietary membership shares investments amounting to$0.5 million and $0.8 million as of December 31, 2009 and 2008, respectively, are included under“Other noncurrent assets” account in the consolidated statements of financial position(see Note 17). As of December 31, 2009 and 2008, proprietary membership shares are carried atcost in the consolidated statements of financial position.

The quoted government debt securities, quoted equity securities and unquoted equity securities ofEDC were deconsolidated as of April 30, 2009 (see Note 4).

The current AFS financial assets in 2008 consist of government debt securities, specificallyRepublic of the Philippines (ROP) bonds with maturities between 2013 to 2016 that were acquiredby EDC. Such bonds were acquired at a discount and bear interest of 7.25% in 2008.

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Unrealized gain on AFS financial assets is recognized as other comprehensive income (loss) in the“Accumulated unrealized gain on AFS financial assets” account in the consolidated statements offinancial position. As of December 31, 2008, the unrealized gain on AFS financial assetsamounted to $1.0 million, with details as follows:

Net accumulated unrealized gain on AFS financialassets at beginning of year $473

Changes in fair value recognized in othercomprehensive income (loss) 508

Net realized gain removed from othercomprehensive income (loss) and taken intoprofit or loss (25)

Net accumulated unrealized gain on AFS financialassets at end of year $956

Changes in equity refer to unrealized gains and losses recognized in 2008 brought about by thetemporary increase or decrease in the fair value of the equity instruments. The net gainderecognized in other comprehensive income (loss) and recognized in the consolidated statementof income pertains to the disposal of equity securities in 2008.

First Gen Group records unrealized gains or loss on AFS financial assets directly in othercomprehensive income (loss). However, if there is a sale or an impairment loss, the cumulativeloss or gains that have been recognized as other comprehensive income (loss) in the “Cumulativetranslation adjustment” account shall be removed and will be recognized in the consolidatedstatement of income.

10. Inventories


2009 2008On hand:

Fuel inventories $65,028 $43,901Spare parts and supplies 44 28,714

65,072 72,615In transit – 3,591

$65,072 $76,206

The amounts of fuel inventories recognized as expense are $22.5 million in 2009, $12.4 million in2008 and $5.5 million in 2007, which are recognized as part of “Fuel cost” account in theconsolidated statements of income.

Inventories in transit include items not yet received but ownership or title to the goods havealready passed to First Gen Group.

The spare parts and supplies of EDC and FG Hydro were deconsolidated as of April 30, 2009(see Note 4).


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11. Other Current Assets


2009 2008Prepaid taxes $15,779 $20,619Prepaid expenses 15,493 15,428Current portion of advances to minority shareholder

(see Note 21) 3,162 5,013Advances to contractors – 5,654Royalty fees chargeable to NPC (see Note 34) – 2,568Restricted cash deposits (see Notes 17 and 21) – 74Others 144 152

$34,578 $49,508

Prepaid taxes consist mainly of tax credits that may be used by the operating subsidiaries of FirstGen Group in the future.

Prepaid expenses consist mainly of prepaid insurance and creditable withholding tax certificates.

The advances to contractors, royalty fees chargeable to NPC and restricted cash deposits of EDCwere deconsolidated as of April 30, 2009 (see Note 4).

In 2008, advances to contractors include the 20% advance payment of EDC amounting to$4.2 million (P=198.0 million) for the purchase of a new drilling rig that was delivered to EDC inNovember 2009.

Royalty fees chargeable to NPC are royalty fees of EDC due to the DOE and the LocalGovernment Units (LGUs) related to its Palinpinon I project. The royalty fees paid shall bereimbursed by NPC upon the presentation by EDC of official receipts evidencing actual payments.This arrangement has been in effect until the privatization of NPC’s Palinpinon power plants,which was privatized in September 2009.

Restricted cash deposits represent cash amounting to $0.07 million on Principal CollateralizedInterest Reduction (PCIR) bonds that was pledged and deposited with the Bangko Sentral ngPilipinas as collateral to secure EDC’s outstanding International Bank of Japan (IBJ) Loans whichwas converted into ROP bonds based on a Memorandum of Agreement dated November 16, 1992.As of December 31, 2008, this account was reclassified from “Other noncurrent assets” account to“Other current assets” account upon full settlement of the related ROP bonds. The Philippine pesoequivalent of the collateral was P=3.5 million in 2008.

12. Noncurrent Assets Held for Sale

Noncurrent assets held for sale as of December 31, 2008 consist of:

Land $35,134Building, improvements and equipment 2,933

$38,067

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Land consists of the 29,291 square meter property where the current office building of EDC islocated. The account also includes the building, improvements and immovable equipment on it,which EDC has committed to sell to PNOC, pursuant to a resolution of the BOD of EDC, inconnection with its privatization on November 29, 2007.

On the basis of such resolution, the properties were classified as noncurrent assets held for sale.The 19,785 and 9,506 square meters of land and buildings, together with the improvements andimmovable equipment, were sold through a deed of absolute sale dated May 29, 2009 andDecember 16, 2009, respectively.

As of April 30, 2009, noncurrent assets held for sale of EDC were deconsolidated (see Note 4).

13. Long-term Receivables


2009 2008Current portion of:

Receivables from Meralco on AnnualDeficiency [(see Notes 22 and 34(f)] $10,503 $29,288

Concession receivables [(see Notes 4,6 and 34(c)] – 38,893

10,503 68,181Noncurrent portion of:

Concession receivables [(see Notes 4, 6and 34(c)] – 635,578

Other long-term receivables - net – 17,253– 652,831

$10,503 $721,012

The concession receivables and other long-term receivables of EDC were deconsolidated as ofApril 30, 2009 (see Note 4).

Details of other long-term receivables recognized by EDC as of December 31, 2008 are asfollows:

Claims from BIR $39,872NPC accounts and other receivables 18,648

58,520Less allowance for impairment losses 41,267

$17,253

Claims from BIR pertain to EDC’s claims for the refund on input VAT on fees paid to BOTcontractors (BOT fees), which were initially denied by the Revenue District Office (RDO) 50 ofthe BIR on July 2, 2002. Subsequently, on September 2, 2002, EDC submitted a letter forreconsideration and the RDO 50 endorsed the request for reconsideration to the Legal Departmentof the Head Office of the BIR.


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As discussed in Note 35(e), on April 24, 2008 (the “Award Date”), an arbitral settlement awardwas concluded with NPC liable to EDC for $60.9 million (P=2,894.9 million) covering thelong-standing issue related to the Steam Sales Agreement (SSA) and PPA of EDC with NPC. Apayment schedule was agreed upon among the parties call for NPC’s settlement of the arbitralaward over three years at zero interest. Consistent with the provisions of PAS 39, the net amountof receivables was presented at fair value, discounted using 7.99% to 8.11%. As of the AwardDate, the difference between the nominal value and fair value of $3.99 million (P=189.79 million)was recognized as a “Day 1” loss. Such “Day 1” loss was deducted from the income recognizedin 2008. Subsequent to the initial recognition, the receivable is accreted to its maturity valuebased on its effective interest rate.

Details of the foregoing rollforward of the allowance for impairment losses on EDC’s long-termreceivables as of December 31, 2008 are as follows:

NPC VAT Refund Others TotalBalance at beginning of year $22,944 $45,754 $1,509 $70,207Recoveries (see Note 35) (17,943) – – (17,943)Write-off of uncollectible accounts (4,803) – – (4,803)Provision for the year 79 – 8 87Foreign exchange adjustments (204) (5,882) (195) (6,281)Balance at end of year $73 $39,872 $1,322 $41,267

Specific impairment $73 $39,872 $– $39,945Collective impairment – – 1,322 1,322Total $73 $39,872 $1,322 $41,267

For the foregoing long-term receivables of EDC, it was established that accounts outstanding lessthan one year are fully recoverable while accounts outstanding over one year shall be providedwith 100% provision based on the EDC’s assessment of individually significant balances.Provision for individually non-significant balances was made on a portfolio or group basis afterperforming the regular review of the age and status of the individual accounts and portfolio/groupof accounts relative to historical collections, changes in payment terms and other factors that mayaffect collectibility.

The recoveries and write-off resulted from the arbitral decision abided by EDC and NPC asdiscussed in detail in Note 35(e).

14. Investments in Associates

Investments in associates consist of:

2009 2008Shares of stock - at equity

Prime Terracota $43,985 $–FG Hydro 19,929 –FPPC 16,701 20,958

80,615 20,958Deposits for future stock subscriptions 940,107 –

$1,020,722 $20,958

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Further information relating to the investments in shares of stock are summarized below:

2009 2008Acquisition costs:

Balance at beginning of year $19,962 $19,956Deconsolidation of discontinued operations

(see Note 4) 219,399 –Return of investments (3,261) –Share-based payments – 6Balance at end of year 236,100 19,962

Accumulated equity in net earnings (losses):Balance at beginning of year 996 13,131Deconsolidation of discontinued operations

(see Note 4) (8,177) –Equity in net earnings for the year 1,167 3,530Cash dividends (5,691) (15,665)Balance at end of year (11,705) 996

Equity reserve in Prime Terracota (65,264) –Share in other comprehensive losses of associates:

Deconsolidation of discontinued operations(see Note 4) (142,789) –

Share in other comprehensive income ofassociates for the year 64,273 –

Balance at end of year (78,516) –$80,615 $20,958

Movements of deposits for future stock subscriptions as of December 31, 2009 are as follows:

Balance at beginning of year $–Deconsolidation of discontinued operations

(see Note 4) 820,829Additions for the year 119,278Balance at end of year $940,107

a. Undistributed net earnings of associates

As of December 31, 2009 and 2008, the undistributed net earnings of FG Hydro amounted to$1.2 million and nil, respectively. As of December 31, 2009 and 2008, the undistributed netearnings of FPPC amounted to nil and $1.0 million, respectively. Such undistributed netearnings of FG Hydro and FPPC, which were included in the retained earnings, are notcurrently available for dividend distribution unless declared by the investees.

Following are the consolidated financial information of First Gen Group’s associates as ofDecember 31, 2009 and 2008:

PrimeTerracota FG Hydro FPPC

As of December 31, 2009:Current assets $440,865 $8,135 $59,093Noncurrent assets 2,551,326 156,705 49,165

(Forward)


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PrimeTerracota FG Hydro FPPC

Current liabilities $460,909 $40,762 $5,952Noncurrent liabilities 1,099,983 41,322 47,711Equity 1,431,299 82,756 54,595Deposits for future stock

subscriptions 940,097 10 –

For the year ended December 31, 2009:Revenue 524,746 28,491 20,369Net income 56,348 2,365 12,587

For the year ended December 31, 2009, the net income attributable to the equity holders ofPrime Terracota amounted to $8.1 million. For the period May 1 through December 31, 2009,net loss attributable to equity holders of Prime Terracota and net loss of FG Hydro amountedto $2.1 million and $3.3 million, respectively.

FPPC

As of December 31, 2008:Current assets $58,285Noncurrent assets 69,103Current liabilities 8,734Noncurrent liabilities 54,677Equity 63,977

For the year ended December 31, 2008:Revenue 27,185Net income 8,824

15. Property, Plant and Equipment

Movements in the account are as follows:

2009

Land

Buildingsand OtherStructures

Machineryand

EquipmentTransportation

Equipment

Furniture,Fixtures and

OfficeEquipment

LeaseholdImprovements

SurplusAssets

Available-for-Sale Total

CostBalance at beginning of year $33,462 $423,314 $649,559 $2,695 $5,814 $957 $20 $1,115,821Additions – 525 8,497 359 240 – – 9,621Disposals – – – (240) (29) – – (269)Deconsolidation of

discontinued operations(see Note 4) (14,264) (37,944) (84,847) (628) (1,874) – (20) (139,577)

Foreign exchange adjustments (246) (577) (1,534) (10) (29) 2 – (2,394)Balance at end of year 18,952 385,318 571,675 2,176 4,122 959 – 983,202Accumulated Depreciation

and AmortizationBalance at beginning of year – 103,876 269,643 1,244 3,859 937 – 379,559Depreciation and amortization – 11,166 43,515 386 455 – – 55,522Disposals – – – (163) (29) – – (192)Deconsolidation of

discontinued operations(see Note 4) – (2,700) (10,165) (243) (632) – – (13,740)

Foreign exchange adjustments – (34) (165) 20 (8) 2 – (185)Balance at end of year – 112,308 302,828 1,244 3,645 939 – 420,964Net Book Value $18,952 $273,010 $268,847 $932 $477 $20 $– $562,238

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2008

Land

Buildingsand OtherStructures

Machineryand

EquipmentTransportation

Equipment

Furniture,Fixtures and

OfficeEquipment

LeaseholdImprovements

SurplusAssets

Available-for-Sale Total

CostBalance at beginning of year $35,507 $413,622 $652,644 $2,249 $5,135 $938 $45 $1,110,140Additions 36 1,139 24,610 663 818 29 – 27,295Disposals (3) (4) (1) (134) (16) – (1) (159)Reclassifications 61 (2,301) (1,205) – 92 – (18) (3,371)Foreign exchange adjustments (2,139) 10,858 (26,489) (83) (215) (10) (6) (18,084)Balance at end of year 33,462 423,314 649,559 2,695 5,814 957 20 1,115,821Accumulated Depreciation

and AmortizationBalance at beginning of year – 92,219 222,859 891 3,067 813 – 319,849Depreciation and amortization – 11,964 47,704 499 876 133 – 61,176Disposals – – – (118) (11) – – (129)Foreign exchange adjustments – (307) (920) (28) (73) (9) – (1,337)Balance at end of year – 103,876 269,643 1,244 3,859 937 – 379,559Net Book Value $33,462 $319,438 $379,916 $1,451 $1,955 $20 $20 $736,262

No borrowing costs were capitalized for the years ended December 31, 2009 and 2008.

Property, plant and equipment with net book values of $557.3 million and $603.7 million as ofDecember 31, 2009 and 2008, respectively, have been pledged as security for long-term debt(see Note 21).

The property, plant and equipment of EDC and FG Hydro were deconsolidated as ofApril 30, 2009 (see Note 4).

16. Intangible Assets

Movements in the account are as follows:

December 31, 2009

GoodwillPipeline

Rights

ConcessionRights forContractsAcquired

ConcessionRights Water Rights Total

CostBalance at beginning of year $962,854 $13,253 $175,437 $133,915 $50,606 $1,336,065Additions – – – 5,930 – 5,930Deconsolidation of

discontinued operations(see Note 4) (1,002,659) – (172,425) (140,003) (49,737) (1,364,824)

Foreign exchange adjustments 48,891 – (3,012) 158 (869) 45,168Balance at end of year 9,086 13,253 – – – 22,339Accumulated AmortizationBalance at beginning of year – 3,765 22,364 3,983 4,302 34,414Amortization – 602 6,651 1,218 670 9,141Deconsolidation of

discontinued operations(see Note 4) – – (28,559) (8,032) (4,891) (41,482)

Foreign exchange adjustments – – (456) 2,831 (81) 2,294Balance at end of year – 4,367 – – – 4,367

$9,086 $8,886 $– $– $– $17,972


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December 31, 2008

GoodwillPipeline

Rights

ConcessionRights forContractsAcquired

ConcessionRights Water Rights Total

CostBalance at beginning of year $1,103,555 $13,253 $201,318 $131,158 $58,071 $1,507,355Additions – – – 19,618 – 19,618Foreign exchange adjustments (140,701) – (25,881) (16,861) (7,465) (190,908)Balance at end of year 962,854 13,253 175,437 133,915 50,606 1,336,065Accumulated AmortizationBalance at beginning of year – 3,163 – 567 2,613 6,343Amortization – 602 24,170 3,771 2,188 30,731Foreign exchange adjustments – – (1,806) (355) (499) (2,660)Balance at end of year – 3,765 22,364 3,983 4,302 34,414

$962,854 $9,488 $153,073 $129,932 $46,304 $1,301,651

The goodwill attributable to EDC and PAHEP/MAHEP cash generating units, water rights of FGHydro and concession rights for contracts of EDC were deconsolidated as ofApril 30, 2009 (see Note 4).

Pipeline RightsPipeline rights represent the construction cost of the natural gas pipeline facility connecting thenatural gas supplier’s refinery to FGP’s power plant including incidental transfer costs incurred inconnection with the transfer of ownership of the pipeline facility to the natural gas supplier. Thecost of pipeline rights is amortized using the straight-line method over 22 years, which is the termof the Gas Sale and Purchase Agreements (GSPA). The remaining amortization period of pipelinerights is 14.75 years as of December 31, 2009.

GoodwillAs of December 31, 2008, goodwill is attributable to three of First Gen Group’s cash-generatingunits, namely Santa Rita, EDC and PAHEP/MAHEP power plant facilities. EffectiveMay 1, 2009, the goodwill attributable to EDC and PAHEP/MAHEP cash generating units weredeconsolidated from the consolidated statement of financial position of First Gen Group (seeNote 4). As of December 31, 2009, the outstanding balance of goodwill is attributable only toFGHC.

The recoverable amounts have been determined based on a value in use calculation using cashflow projections based on financial budgets approved by senior management covering a five-yearperiod. The pre-tax discount rates applied cash flow projections range from 5.03% to 12.99% andthe cash flows beyond the remaining term of the existing agreements are extrapolated usinggrowth rates of 2.61% and 4.18% for the years ended December 31, 2009 and 2008, respectively,for FGPC and 5.30% for both EDC and PAHEP/MAHEP for the year ended December 31, 2008.

Key assumptions with respect to the calculation of value in use of the cash-generating units as ofDecember 31, 2009 and 2008 on which management had based its cash flow projections toundertake impairment testing of goodwill are as follows:

Budgeted Gross MarginsThe basis used to determine the value assigned to the budgeted gross margins is the averagegross margins achieved in the year immediately before the budgeted year, increased forexpected efficiency improvements.

Bond RatesThe average yield on a five-year government bond rate at beginning of budgeted year isutilized ranging from 2.79% to 6.37% and 2.20% to 7.90% in 2009 and 2008, respectively.

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No impairment loss was recognized in the consolidated statements of income for each of the threeyears in the period ended December 31, 2009.

Water RightsWater rights pertain to FG Hydro’s right to use water from the Pantabangan reservoir for thegeneration of electricity. NPC, through a Certification issued to FG Hydro dated July 27, 2006,has given its consent to the transfer to FG Hydro, as the winning bidder of the PAHEP/MAHEP,the water permit for Pantabangan river issued by the National Water Resources Council onMarch 15, 1977.

Water rights are amortized using the straight-line method over 25 years, which is the term ofFG Hydro’s agreement with the NIA.

Concession Rights for Contracts AcquiredAs a result of the purchase price allocation of Red Vulcan, an intangible asset was recognizedpertaining to concession rights originating from contracts amounting to $195.0 million(P=8.4 billion). Such intangible asset pertains to the SSAs and PPAs of EDC. The identifiedintangible asset is amortized using the straight-line method over the remaining term of the existingcontracts ranging from one to 17 years. The concession rights for contracts have been valuedbased on the expected future cash flows using the Multiple Excess Earnings Method (MEEM) asof the date of acquisition. MEEM is the most commonly used approach in valuing customer-related assets, although it may be used to value other intangible assets as well. The asset value isestimated as the sum of the discounted future excess earnings attributable to the asset over theremaining project period.

Concession RightsConcession rights pertain to EDC’s service concession for Northern Negros GeothermalProduction Field (NNGPF) which adopts the intangible asset model. The intangible asset modelconsiders the right of the concessionaire to charge users of the public service. For NNGPF, EDCdoes not have any existing agreement with NPC for the geothermal resources and electrical energyproduced from the service contract area. The intangible asset pertaining to concession rights forNNGPF is being amortized using the straight-line method over the remaining amortization periodof 30 years, the term of the related GSC for NNGPF and includes the renewal period on the basisof the constitutional and contractual provisions and its historical experience of obtaining suchrenewals. As a result of the purchase price allocation, the concession rights for NNGPF have beenrevalued based on the expected future cash flows using the MEEM approach as of the date ofacquisition. The asset value is estimated as the sum of the discounted future excess earningsattributable to the asset over the project period.

Additions to intangible assets for the four-month period ended April 30, 2009 and for the yearended December 31, 2008 pertains to the construction of the Tanawon Geothermal Project and thestart of the steam field development of NNGPF’s buffer zone. The reckoning date shall bereckoned from the project completion up to 2031 consistent with the terms of the final extensionof the service contract for Bacon-Manito (BacMan) area.

The recoverable amount of NNGPF as of December 31, 2008, which is a separate cash generatingunit, has been determined based on a value-in-use calculation using the expected cash flowprojections. EDC uses the Perpetuity Growth Model to determine the terminal value, whichaccounts for the value of free cash flows that continue in perpetuity beyond the five-year-periodprojection, growing at an assumed constant rate. The projected cash flows beyond five years havebeen determined using the perpetuity growth model at a growth rate of 5% not exceeding theaverage real gross domestic growth rate of 5.66% and the average annual demand growth of


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6% for the Visayas power industry market where the unit operates. A pre-tax rate of 9.90% wasused in discounting the net cash flow of the project.

17. Other Noncurrent Assets


2009 2008Advances to minority shareholder - net of current

portion (see Notes 11 and 21) $96,557 $99,017Prepaid major spare parts [see Note 34(i)] 66,667 43,167Prepaid gas [see Notes 22 and 34(g)] 48,647 72,696Retirement asset (see Note 29) 594 –AFS financial assets (see Note 9) 526 794Exploration and evaluation assets – 21,039Input VAT – 8,798Restricted cash deposits – 782Derivative assets (see Note 33) – 734Prepaid expenses – 471Others 575 1,342

$213,566 $248,840

The AFS financial assets, exploration and evaluation assets, input VAT, restricted cash deposits,derivative assets, prepaid expenses and other noncurrent assets of EDC were deconsolidated as ofApril 30, 2009 (see Note 4).

Exploration and evaluation assets represent expenditures that were capitalized based, on certaininstances, on EDC management’s judgment of the degree to which the expenditure can beassociated with finding specific geothermal reserves in the project areas. As ofDecember 31, 2008, the exploration and evaluation assets pertain to the following project areas:

Cabalian, Southern Leyte $11,949Mindanao 5,821Ilocos Norte 1,346Dauin, Southern Negros 1,024BacMan-Rangas/Kayabon 749Other areas 150

$21,039

As of December 31, 2008, the restricted cash deposits include the special deposits and fundsconsisting of the $0.3 million sinking fund required by the Department of Finance (DOF) to coverthe long-term loans payment and $0.1 million escrow account in favor of terminated Leyte “A”Geothermal Plant Employees Union members/employees.

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18. Loans Payable

Loans payable as of December 31, 2008 consist of:

First Gen $119,442EDC 42,088Prime Terracota 38,931

$200,461

The Parent Company’s short-term loans consist of unsecured, short-term, U.S. dollar-denominatedloans amounting to $80.6 million and Philippine peso-denominated loans amounting to$38.9 million (P=1.8 billion) as of December 31, 2008. These loans bear annual interest rangingfrom 2.91% to 4.50% and 4.04% to 7.69% in 2009 and 2008, respectively. These short-term loanswere fully paid on March 26, 2009.

On September 22, 2008, Prime Terracota also availed of unsecured short-term peso-denominatedloans amounting to $38.9 million (P=1.9 billion) from Philippine Commercial Capital Inc. (PCCI).The availed loans were used to pay down debt incurred by Red Vulcan in connection with theEDC acquisition. The loans will mature 180 days from the date of the agreement and the interestrate is based on Philippine Dealing and Exchange Corporation (PDEX) plus an agreed margin. OnFebruary 19, March 6 and March 9, 2009, Prime Terracota obtained additional unsecuredshort-term loans for a total amount of P=900.0 million from PCCI. The loans are payable after 90days from drawdown date at an interest rate of 6.75% per annum. The accrued interest is payableon the maturity date of the loans.

EDC availed of the $42.1 million (P=2.0 billion) short-term loan obtained from a local bank for itsworking capital requirements. Interest rate is based on the three-month Philippine Dealing SystemTreasury Reference Rate 2 plus spread of 6.75%. The loan was fully settled in 2009.

The outstanding balance of loans availed by Prime Terracota and EDC were deconsolidated as ofApril 30, 2009 (see Note 4).

19. Accounts Payable and Accrued Expenses


2009 2008Trade $60,140 $118,874Accrued interest and financing costs 15,740 23,254Output VAT 12,460 16,060Deferred output VAT 10,878 9,695Royalty fees payable – 35,528Current portion of Deferred payment facility with

PSALM (see Note 6) – 9,579Accrued premium on range bonus forwards

(see Note 33) – 3,685Obligations to power plant contractors – 2,354Others 5,233 12,187

$104,451 $231,216

Trade payables are noninterest-bearing and are normally settled on 30 to 60-day payment terms.


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The trade payables, accrued interest and financing costs, royalty fees payable and obligations topower plant contractors of EDC and current portion of deferred payment facility with PSALMwere deconsolidated as of April 30, 2009 (see Notes 4 and 6).

Royalty Fees PayableAs discussed in Note 34(c) by virtue of Presidential Decree (P.D.) No. 1442, “An Act to Promotethe Exploration and Development of Geothermal Resources,” which governs the exploration,development and exploitation of all geothermal resources in public and/or private land in thePhilippines, EDC entered into seven service contracts with the Philippine Government through theDepartment Of Energy (DOE), which grants EDC the right to explore, develop, and utilize thecountry’s geothermal resources subject to sharing of net proceeds with the Philippine Government.In turn, EDC will pay royalty fees to the DOE and LGUs under the terms of the GSC. As ofDecember 31, 2008, royalty fees payable to DOE and LGUs amounted to $33.2 million and$2.4 million, respectively.

Obligations to Power Plant ContractorsThis account pertains to the balance of EDC’s obligations in 2008 to its BOT Contractor,Marubeni-Oxbow amounting to $2.4 million, in connection with the construction of thegeothermal power plants in Mindanao, which were transferred to EDC on June 18, 2009.

20. Bonds Payable

Details of bonds payable are as follows:

2009 2008Convertible bonds $277,353 $258,440Philippine Peso-denominated bonds 107,984 104,538Total 385,337 362,978Less current portion 107,984 –Noncurrent portion $277,353 $362,978

Convertible Bonds (CBs)On February 11, 2008 (the inception date), the Parent Company issued $260.0 million,U.S. Dollar-denominated CBs due on February 11, 2013 with a coupon rate of 2.50%. The CBsare listed on the Singapore Exchange Securities Trading Limited. The CBs are traded in aminimum board lot size of $0.5 million. The CBs constitute the direct, unsubordinated andunsecured obligations of the Parent Company, ranking pari passu in right of payment with allother unsecured and unsubordinated debt of the Parent Company.

Each bond will be convertible, at the option of the holder, into fully-paid shares of common stockof the Parent Company at an initial conversion price of P=63.72 a share with a fixed exchange rateof US$1.00 to P=40.55, subject to adjustments under circumstances described in the Terms andConditions of the CBs. The conversion right attached to the CBs may be exercised, at the optionof the holder, at any time on and after March 22, 2008 up to 3:00 pm on January 31, 2013. TheCBs and the stocks to be issued upon conversion of the CBs have not been and will not beregistered under the U.S. Securities Act of 1933, as amended, and subject to certain exceptions,may not be offered or sold within U.S. In addition, such conversion right is subject to a cashsettlement option whereby the Parent Company may elect to make a cash settlement payment inrespect of all or any portion of a holder’s bonds deposited for conversion. The Parent Companymay also redeem the CBs on or after February 11, 2010, in whole but not in part, at the earlyredemption amount, if the closing price of the stocks for any 20 trading days out of the30 consecutive trading days prior to the date upon which the notice of such redemption is given,

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was at least 130% of the conversion price in effect of such trading period, or at any time prior tomaturity, in whole but not in part, at the early redemption amount, if less than 10% of theaggregate principal amount of the CBs originally issued are then outstanding. The Bondholdersare also given a right to require the Parent Company to redeem the CBs at the early redemptionamount on February 11, 2011. Early redemption amount is determined so that it represents 7.25%gross yield to the Bondholder on a semi-annual basis. The equity conversion, call and put optionfeatures of the CB are identified as embedded derivatives and are separated from the host contract(see Note 33). As of December 31, 2009 and 2008, the Parent Company is in compliance with theforegoing covenants.

As of March 19, 2010, the Parent Company has redeemed CBs with face value of $17.0 millionfor a total settlement amount of $18.6 million inclusive of a premium amounting to $1.6 million.

The aggregate fair value of the outstanding embedded derivatives is $1.7 million and $0.8 millionas of December 31, 2009 and 2008, respectively (see Note 33).

At inception, the host contract is recorded net of debt issuance costs amounting to $3.9 million andbifurcated embedded derivatives of $13.0 million. As of December 31, 2009 and 2008, thecarrying amount of the host contract amounts to $277.4 million and $258.4 million, respectively.

The movements in the account are as follows:

2009 2008Balance at beginning of year $258,440 $–Carrying amount at inception date – 243,075Accretion for the year charged to “Interest expense

and financing charges” account(see Note 28) 18,913 15,365

Balance at end of year $277,353 $258,440

As of December 31, 2009 and 2008, movements of debt issuance costs pertaining to the CBs areas follows:

2009 2008Balance at beginning of year $2,963 $–Balance at inception date – 3,925Accretion for the year charged to “Interest expense

and financing charges” account (1,274) (962)Balance at end of year $1,689 $2,963

Philippine Peso-denominated BondsOn June 24, 2005, the Parent Company issued P=5.0 billion (equivalent amount in U.S. dollar of$92.6 million) Philippine peso-denominated Fixed-rate Bonds (Peso Bonds) due on July 30, 2010with a coupon rate of 11.55%. The effective interest rate of the Peso Bonds is 12.03%. Interest ispayable semi-annually. The Peso Bonds constitute the direct, unconditional, unsecured andgeneral obligations of the Parent Company. The proceeds from the Peso Bonds were used forgeneral corporate purposes, including working capital and investments. The Peso Bonds may beredeemed at the option of the Parent Company after three years from issue date or if paymentsunder the Peso Bonds become subject to additional or increased taxes as a result of certain changesin law.


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As set forth in the Trust Agreement in connection with the issuance of the Peso Bonds, the ParentCompany is obligated to comply with certain covenants with respect to, among others:maintenance of specified debt-to-equity and minimum debt-service-coverage ratios; disposition ofall or substantially all of its assets; maintenance of ownership/management control; encumbrances;and payment of taxes. In addition, the Parent Company is restricted to declare or pay dividends(other than stock dividend) during an Event of Default (as defined in the Trust Agreement) or ifsuch payment would result in an Event of Default without the prior written consent ofBondholders representing at least 51% of the aggregate outstanding principal amount of the PesoBonds. As of December 31, 2009 and 2008, the Parent Company is in compliance with theforegoing covenants.

As of December 31, 2009 and 2008, the unamortized debt issuance costs incurred in connectionwith the issuance of the Peso Bonds amounted to $0.2 million and $0.7 million, respectively, andare deducted against the Peso Bonds payable.

Movements of debt issuance costs pertaining to the Peso Bonds are as follows:

2009 2008Balance at beginning of year $681 $1,239Accretion for the year charged to “Interest expense

and financing charges” account (see Note 28) (445) (431)Foreign exchange adjustments 5 (127)Balance at end of year $241 $681

21. Long-term Debt

This account consists of long-term debts of:

2009 2008FGPC $494,734 $522,743FGP 139,159 164,080Unified 112,930 –EDC – 612,897Red Vulcan (see Note 6) – 291,666

746,823 1,591,386Less current portion 46,499 518,101Noncurrent portion $700,324 $1,073,285

FGPC and FGPLong-term debts of FGPC and FGP consist of U.S. dollar-denominated borrowings availed fromvarious lenders to partly finance the construction and operations of their power plant complexes.

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FGPC

Outstanding Balance

Nature Repayment ScheduleFacilityAmount 2009 2008

Covered foreign currency-denominatedloans payable to foreign financinginstitutions with annual interest at sixmonths London Inter-Bank Oferred Rate(LIBOR) plus 3.25% margin and politicalrisk insurance premium

Repayment to be made invarious semi-annualinstallments from 2009 upto 2021

$312,000 $293,202 $302,831

Uncovered foreign currency-denominatedloans payable to foreign financinginstitutions with annual interest at sixmonths LIBOR plus margin of 3.50% onthe 1st to 5th year, 3.75% on the 6th to 7th

year and 3.90% on the succeeding years

Repayment to be made invarious semi-annualinstallments from 2009 upto 2018

188,000 173,206 182,506

Foreign currency-denominated loanspayable to foreign financing institutions atvarious interest rates ranging from 2.69%to 8.79%

Back-ended and annuitystyle repayment to be madein various semi-annualinstallments from 2001 upto 2012

360,000 28,326 37,406

Total 494,734 522,743Less current portion 19,571 28,009Noncurrent portion $475,163 $494,734

On November 14, 2008 (the “Refinancing Date”), FGPC has entered into a Bank FacilityAgreement covering a $544.0 million term loan facility with nine foreign banks namely: The Bankof Tokyo-Mitsubishi UFJ, Ltd., Calyon, KfW IPEX Bank GMBH, ING Bank N.V. (SingaporeBranch), Bayerische Hypo-Und Vereinsbank AG (Hong Kong Branch), Malayan Banking Berhad,Standard Chartered Bank, Société Générale (Singapore Branch) and Kreditanstalt FürWiederaufbau (KfW) to refinance the Santa Rita project. The term loan is broken down into threeseparate facilities namely: (i) a $312.0 million Covered Facility with political risk insurance andwith a tenor of 12.5 years, (ii) a $188.0 million Uncovered Facility with a ten-year tenor, and(iii) the existing $44.0 million term loan provided by KfW with a term until November 2012.A portion of the proceeds of the term loan was used to repay outstanding loans of FGPCamounting to $132.0 million and the remaining balance was upstreamed to FGPC’sshareholders as advances which are interest-bearing. Such advances are subject to interest rate of175 basis points over the average of the rate for the six months U.S. dollar deposits quoted bythree reputable reference banks in the Philippines, provided however, that such interest rate shallin no case exceed 5.8%. As of December 31, 2009 and 2008, total advances including accruedinterest forwarded to the consolidated statements of financial position amounted to $99.7 millionand $104.0 million, respectively, which are presented under “Advances to minority shareholder”account (see Notes 11 and 17).

With respect to the Covered Facility, the interest rate is computed semi-annually, every May andNovember, using LIBOR plus 325 basis points. This facility is covered by a Political RiskInsurance (PRI) and premiums payable on the PRI are in addition to the margins payable byFGPC. The Covered Facility will mature on May 10, 2021.

As to the Uncovered Facility, the interest rate is also computed semi-annually, every May andNovember, using LIBOR plus: (i) 3.50% per annum from the financial close until the 5th

anniversary of the Refinancing Date, (ii) 3.75% per annum from the 6th until the 7th anniversary ofthe Refinancing Date, and (iii) 3.90% per annum from the 8th anniversary of the Refinancing Dateuntil the final maturity date, which is on November 10, 2018.


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FGPOutstanding Balance

Nature Repayment ScheduleFacilityAmount 2009 2008

HERMES Covered FacilityAgreement with annual interestat commercial interest reference rateof 7.48%

Repayment to be made in 24equal semi-annual installmentsfrom 2003 up to 2014

$133,297 $53,467 $63,779

Commercial Loan Credit ExportCredit Guarantee Department(ECGD) Facility Agreement withinterest at three months to six monthsLIBOR plus 2.15%

Repayment to be made in24 equal semi-annualinstallments from 2003 up to2014

115,000 47,032 56,270

GKA-Covered Facility Agreementwith annual interest at six monthsLIBOR plus 1.4% with option toconvert into fixed interest rate loan

Repayment to be made in27 equal semi-annualinstallments from 2003 up to2016

77,000 38,660 44,031

Total 139,159 164,080Less current portion 25,115 24,921Noncurrent portion $114,044 $139,159

As of December 31, 2009 and 2008, the unamortized debt issuance costs incurred in connectionwith FGPC’s and FGP’s long-term debts amounting to $18.3 million and $22.1 million,respectively, were deducted against the long-term debts.

Movements of debt issuance costs are as follows:

2009 2008Balance at beginning of year $22,068 $10,397Debt issuance costs related to the new loans availed – 14,865Accretion for the year charged to “Interest expense

and financing charges” account (see Note 28) (3,736) (3,194)Balance at end of year $18,332 $22,068

The common terms related to the existing FGPC and FGP financing facility agreements (CommonTerms Agreement or CTA) contain covenants concerning restrictions with respect to, amongothers: maintenance of specified debt service coverage ratio; acquisition or disposition of majorassets; pledging present and future assets; change in ownership; any acts that would result in amaterial adverse effect on the operations of the power plants; and maintenance of good, legal andvalid title to the site free from all liens and encumbrances other than permitted liens. As ofDecember 31, 2009 and 2008, FGPC and FGP are in compliance with the terms of the saidagreements.

FGPC and FGP also have entered into separate agreements in connection with their existingfinancing facilities as follows:

Mortgage, Assignment and Pledge Agreements whereby a first priority lien on most ofFGPC’s and FGP’s real and other properties, including revenues from the operations of thepower plants, have been executed in favor of the lenders. In addition, the shares of stock ofFGPC and FGP were pledged as part of security to the lenders.

Inter-Creditor Agreements, which describe the administration of the loans.

Trust and Retention Agreement (TRA) with the lenders’ designated trustees. Pursuant to theterms and conditions of the TRA, FGPC and FGP have each established various security

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accounts with designated account banks, where inflows and outflows of proceeds from loans,equity contributions and project revenues are monitored. FGPC and FGP may withdraw ortransfer moneys from these security accounts, subject to and in accordance with the terms andconditions of their respective TRAs.

The balance of FGPC’s and FGP’s unrestricted security accounts, included as part of “Cash andcash equivalents” account in the consolidated statements of financial position as ofDecember 31, 2009 and 2008, amounted to $72.6 million and $186.0 million, respectively(see Note 7).

UnifiedOn March 9, 2009, Unified signed an agreement for a three-year Corporate Note Facility(Note Facility) of up to P=5.6 billion (Facility Amount) issued by a consortium of local banks,namely BDO Unibank, Inc. (BDO), Philippine National Bank (PNB), Rizal Commercial BankingCorporation (RCBC), BDO Trust and Investment Group (BDO Trust) and Robinsons SavingsBank (RSB), collectively referred to as “Lenders”. The Note Facility was evidenced by a series ofNotes, with a minimum principal amount of P=100.0 million, bearing an annual interest rate of9.3769% and will mature on March 9, 2012. The proceeds of the loan were advanced to theParent Company, which in turn retired its existing short-term loans (see Note 18). Such Noteswere offered pursuant to an exempt transaction under Section 10.1 of the SRC and thus have notbeen registered with the Philippine SEC. Any future offer or sale of the Notes is subject to theregistration requirements under the SRC, unless such offer or sale qualifies as an exempttransaction or the note qualifies as an exempt security.

Details of Unified’s long-term debt as of December 31, 2009 are as follows:

Name of LendersAmount in

Philippine Peso

EquivalentAmount inU.S.Dollar

PNB P=2,042,741 $44,215BDO 1,930,500 41,786RCBC 815,964 17,661BDO Trust 346,500 7,500RSB 198,000 4,286

5,333,705 115,448Less debt issuance cost 116,331 2,518Total 5,217,374 112,930Less current portion 83,763 1,813Noncurrent portion P=5,133,611 $111,117

At inception, the Note Facility was recorded net of debt issuance costs amounting to $3.2 million(P=155.2 million). As of December 31, 2009, the unamortized debt issuance costs incurredamounted to $2.5 million detailed as follows:

Amount inPhilippine Peso

EquivalentAmount in

U.S. DollarDebt issuance cost at inception date P=155,199 $3,249Accretion for the year charged to “Interest expense

and financing charges” account(see Note 28) (38,868) (815)

Foreign exchange difference – 84P=116,331 $2,518


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The outstanding balances of the long-term debts of EDC and Red Vulcan were deconsolidated asof April 30, 2009 (see Note 4).

EDCDetails of EDC’s long-term debt as of December 31, 2008 are as follows:

Creditor/Project Maturities Interest Rates

PhilippinePeso

Balances

EquivalentU.S. Dollar

BalancesInternational Bank for

Reconstruction andDevelopment (IBRD)

3164 PH Energy Sector Loan- $118 million 1995 to 2010 ½ of 1% over cost of

qualified borrowings P=1,012,591 $21,3093702 PH Geothermal Exploration

Project- $64 million 1999 to 2013 ½ of 1% over cost of

qualified borrowings 1,261,095 26,5383747 PH Geothermal Exploration

Project- $114 million- ¥12.4 billion

1999 to 20141999 to 2014

½ of 1% over cost ofqualified

borrowings/3.5%

1,449,9181,177,668

30,51224,783

4,901,272 103,142Overseas Economic Cooperation

Fund (OECF)8th Yen Tongonan I Geothermal

Power Plant (share in OECF-NPC loan)

- ¥5.8 billion- ¥1.5 billion (Restructured)

1990 to 2010 3.0%3.2%

223,345131,647

4,7412,804

9th Yen Palinpinon I GeothermalPower Plant

- ¥10.8 billion 1991 to 2011 3.0% 542,687 11,54915th Yen Palinpinon I

Geothermal Power Plant- ¥4.0 billion 1999 to 2019 5.7% 851,549 19,80618th Yen Palinpinon II Geothermal

Power Plant- ¥77.4 million 2003 to 2023 5.5% 28,598 67519th Yen Mt. Labo Geothermal

Project- ¥10.8 billion 2004 to 2024 4.9% 130,541 3,03621st Yen Northern Negros

Geothermal Project- ¥14.5 billion, of which ¥5.9

billion was drawn in 2007 2007 to 2027 2.7%/2.3% 4,916,324 100,5646,824,691 143,175

Miyazawa I- ¥5.2 billion Tranche A=3.78% 2,714,273 57,328- ¥6.8 billion June 1, 2009 Tranche B=1.60% +

LIBOR3,549,771 74,735

6,264,044 132,063

Miyazawa II- ¥22.0 billion June 26, 2010 2.37% 11,327,044 234,517Total 29,317,051 612,897Less current portion 8,244,934 173,505Noncurrent portion P=21,072,117 $439,392

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Red VulcanOn November 26, 2007 (the “Drawdown Date”), Red Vulcan availed of a Philippine Peso-denominated staple financing amounting to $705.1 million (P=29.2 billion) (the “SecuredIndebtedness”) that was arranged by the Philippine Government’s financial advisors for the EDCstake sale under an Omnibus Loan and Security Agreement (the “Staple Financing Agreement”).The staple financing was made available by a group of local lenders: namely, Development Bankof the Philippines (DBP), Banco de Oro-EPCI, Inc. (BDO Unibank, Inc.), and Land Bank of thePhilippines (Land Bank) (collectively referred to as the “Staple Financing Lenders”) in relation tothe sale of 60% of EDC’s issued and outstanding capital stock. The interest rate of the SecuredIndebtedness is computed either monthly, quarterly or semi-annually, at Red Vulcan’s option,using the Philippine Dealing System Treasury Fixing (PDST F) benchmark rate plus theapplicable interest margin or the BSP overnight rate, whichever is higher. The staple financing isfor a maximum term of 18 months from Drawdown Date.

As set forth in the Staple Financing Agreement, Red Vulcan is obligated to perform certaincovenants with respect to, among others: maintenance of a specified debt-to-equity ratio; not makeor permit any material change in the character of its or EDC’s business nor engage or allow EDCto engage in any business operation or activity other than those for which it is presently authorizedby law; disposition of all or substantially all of its and EDC’s assets and material changes in thecorporate structure or in the composition of its top-level management. In addition, Red Vulcan isrestricted to declare or pay dividends (other than stock dividend) to its stockholders or partnerswithout the consent of all Staple Financing Lenders. Red Vulcan is also restricted, except forpermitted borrowings, to incur any long-term debt, increase its borrowings, or re-avail existingfacilities with other banks or financial institutions. As of December 31, 2008, Red Vulcan was incompliance with the foregoing covenants.

In addition, the shares of stock held by Red Vulcan in EDC, representing 60% of EDC’s issuedand outstanding capital stock, consisting of 6.0 billion common stocks presently in scripless formand lodged with the Philippine Depository and Trust Corporation, and 7.5 billion preferred stocks(collectively, the “Pledged Shares”), were pledged as primary security for the due and promptpayment of the Secured Indebtedness.

On November 28, 2008, DBP and Land Bank assigned via a Deed of Assignment to BDOUnibank, Inc.-Trust and Investments Group (BDO Trust) their corresponding portions of thestaple financing loan amounting to $111.7 million (P=5.3 billion).

As of December 31, 2008, Red Vulcan made prepayments on the loan amounting to$322.0 million (P=15.3 billion).

Details of Red Vulcan’s long-term debt as of December 31, 2008 are as follows:

Name of Lender

Amount inPhilippine Peso

Equivalent Amount inU.S. Dollar

(Amounts in Millions)BDO Unibank, Inc. P=8,550.0 $179.9BDO Trust 5,310.0 111.7

P=13,860.0 $291.6


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22. Obligations to Gas Sellers on Annual Deficiency

Details of obligations to Gas Sellers on Annual Deficiency recognized pursuant to the SAs and thePDAs, including accrued interest, are as follows:

2009 2008FGPC:

Balance at beginning of year $28,260 $51,831Principal payments (22,380) (23,944)Interest incurred (see Note 28) 264 2,558Interest payments (711) (2,185)Balance at end of year 5,433 28,260

FGP:Balance at beginning of year 8,436 14,504Principal payments (4,404) (6,138)Interest incurred (see Note 28) 34 556Interest payments (121) (486)Balance at end of year 3,945 8,436

Total $9,378 $36,696

FGPC and FGP each executed on March 22, 2006 its respective SA and PDA with Gas Sellers toamicably settle their long-standing disputes under the GSPA for Contract Years 2002 to 2004.The disputes relate to the Gas Sellers’ claim for Annual Deficiency payments totaling$163.4 million and $68.0 million from FGPC and FGP, respectively, covering the unconsumedgas volumes during these Contract Years.

Under the terms of their respective SAs and the PDAs, the Gas Sellers’ claims from FGPC andFGP have been reduced to $115.3 million and $32.7 million, respectively. Mandatoryprepayments of $8.0 million and $2.1 million and pre-settlement interest of $11.0 million and$2.9 million for FGPC and FGP, respectively, were paid on June 7, 2006. Additional reductionsof Annual Deficiency amounting to $9.5 million for FGPC and $3.8 million for FGP wererecognized in 2006 to credit FGPC and FGP for gas consumption in excess of their respectiveTOPQ for 2005.

The respective SAs and PDAs allow FGPC and FGP to prepay all or part of the outstandingbalances and to “make up” the volume of gas up to the extent of the principal repayments madeunder the PDA for a longer period of time instead of the 10-Contract Year recovery periodallowed under their respective GSPAs. On May 31, 2006, all the conditions precedent set out inthe respective SAs and PDAs of FGPC and FGP were completely satisfied. Such conditionsprecedent included an acknowledgment and consent by Meralco. As of December 31, 2009, theobligations under the SAs and PDAs were fully settled and the outstanding Obligations to GasSellers pertain only to the Annual Deficiency for Contract Year 2006 [see Note 34(f)].

Under the terms of the PPA with Meralco, all fuel and fuel-related payments are passed-through.The obligations of FGPC and FGP under their respective SAs, the PDAs and the GSPAs arepassed on to Meralco on a “back-to-back” and full pass-through basis. The correspondingreceivables from Meralco, including accrued interest and output VAT, are presented as part of“Long-term receivables” account in the consolidated statements of financial position(see Note 13).

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Upon payment of the principal amount, a debit to “Prepaid gas” account (included under “Othernoncurrent assets” account in the consolidated statements of financial position) is recognized tocover the principal portion paid to the Gas Sellers and a corresponding credit to “Unearnedrevenue” account (included under “Other noncurrent liabilities” account in the consolidatedstatements of financial position) is recognized for the principal portion that was already paid byMeralco. As of December 31, 2009, the remaining prepaid gas arising from the SAs and PDAsand the corresponding unearned revenue amounted to $48.6 million (see Notes 17 and 23). Theprepaid gas and the corresponding unearned revenue balances as of December 31, 2009 are net ofrecoveries of Annual Deficiency recognized by Gas Sellers for gas consumed above the TOPQ, ascalculated by Gas Sellers, for the Contract Years 2009, 2008 and 2007, which totaled$95.8 million.

23. Other Noncurrent Liabilities


2009 2008Unearned revenue (see Note 22) $48,647 $72,696Asset retirement obligations 985 910Deferred payment facility with PSALM - net of

current portion (see Note 6) – 51,709Others – 6,584

$49,632 $131,899

Asset Retirement ObligationsUnder their respective ECCs, FGP and FGPC have legal obligations to dismantle their respectivepower plant assets at the end of its useful lives. FG Bukidnon, on the other hand, has contractualobligation under the lease agreement with PSALM to dismantle its power plant asset at the end ofits useful life. FGP, FGPC and FG Bukidnon established their respective provisions to recognizetheir estimated liability for the dismantlement of the power plant assets.

Movements of asset retirement obligations follow:

2009 2008Balance at beginning of year $910 $860Accretion for the year charged to “Interest expense

and financing charges” account (see Note 28) 71 67Foreign exchange adjustments 4 (17)Balance at end of year $985 $910

The “Other noncurrent liabilities - Others” account consists of accrued vacation and sick leaveentitlement of EDC employees which were deconsolidated as of April 30, 2009 (see Note 4).


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24. Equity

a. Capital Stock

Details and movements of the Parent Company’s capital stock are as follows:

Number of Shares2009 2008 2007

Redeemable preferred stock (Series “B”)- P=0.50 par valueAuthorized 1,000,000,000 1,000,000,000 1,000,000,000Issued 1,000,000,000 1,000,000,000 1,000,000,000

Redeemable preferred stock (Series “E”)- P=0.50 par valueAuthorized 1,500,000,000 – –Issued:

Balance at beginning of year – – –Issuance as stock dividend to Preferred

Stock Series “B” 375,000,000 – –Balance at end of year 375,000,000 – –

Common stock - P=1 par valueAuthorized:

Balance at beginning of year 1,150,000,000 1,150,000,000 1,150,000,000Addition (August 24) 1,620,000,000 – –Addition (December 7) 3,230,000,000 – –Balance at end of year 6,000,000,000 1,150,000,000 1,150,000,000

Issued:Balance at beginning of year 1,089,072,926 1,089,046,426 1,081,917,004Conversion of deposits for future stock

subscriptions 807,500,000 – –50% stock dividends 405,000,000 – –Stocks issued under the stock option plan

(see Note 25) 5,543,007 26,500 7,129,422Balance at end of year 2,307,115,933 1,089,072,926 1,089,046,426

As of December 31, 2009, the Parent Company’s redeemable preferred stocks consist ofSeries “B” and Series “E” stocks. The Series “B” redeemable preferred stocks have votingrights, entitled to cumulative dividends of two centavos (P=0.02) per share and redeemable atthe option of the Parent Company and redeemable at issue price. The Series “E” preferredstocks have voting rights, entitled to receive dividends at a dividend rate and at such times asmay be determined by the BOD, and redeemable at the option of the Parent Company.Preferred stocks, regardless of series, are non-participating and non-convertible to commonstocks.

As discussed in Note 1, on January 22, 2010, the Parent Company has successfully completedthe Rights Offering of 2,142,472,791 common stocks in the Philippines. The proceeds of theRights Offering amounting to P=14.8 billion ($315.3 million), net of transaction costsamounting to $3.8 million, were deducted against additional paid-in capital.

On August 15, 2007, the BOD of the Parent Company approved the share buy-back programfor a period of two years commencing on October 1, 2007 until September 30, 2009, subject toan extension as may be determined by the Executive Committee of the Parent Company. TheParent Company will undertake a buy-back transaction only if and to the extent that the priceper share is deemed to be extremely undervalued, or share prices are considered highly

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volatile, or in any other instance where the Parent Company believes that a buy-back willresult in enhancing shareholder value. The Parent Company is authorized to buy-back up toP=2.0 billion worth of the Parent Company’s common stocks, which amount may be increasedby the BOD from time to time as the circumstances warrant. In November 2007, a total of400,000 common stocks of the Parent Company were purchased under the program. As ofDecember 31, 2009, the share buy-back program expired and there are no further stockspurchased under the program.

On March 30, 2009, the BOD of the Parent Company approved the amendment to ArticleSeventh of the Parent Company’s Amended Articles of Incorporation to increase theauthorized capital stock from P=1,650.0 million to P=3,270.0 million. The proposed increase inauthorized capital stock shall be comprised of 1,620,000,000 common stocks with a par valueof P=1.00 a share. On May 13, 2009, the proposed increase in capital stock was approved bythe stockholders.

On August 24, 2009, the Philippine SEC approved the increase in authorized capital stock ofthe Parent Company from P=1,650.0 million to P=3,270.0 million divided into 2,770,000,000common stocks with a par value of P=1.00 a share and 1,000,000,000 redeemable preferredstocks with par value of P=0.50 a share. Of the P=1,620.0 million increase in authorized capitalstock, consisting of 1,620,000,000 common stocks with a par value of P=1.00 a share and1,000,000,000 preferred stocks with a par value of P=0.50 a share, the amount ofP=405.0 million representing at least twenty-five percent (25%) of such increase, has beensubscribed and paid in full by way of a fifty percent (50%) stock dividend taken from theunrestricted retained earnings of the Parent Company.

On the same date, the Philippine SEC also approved the Parent Company’s Amended Articlesof Incorporation and Amended By-Laws. The Amended Articles of Incorporation contain theamendment to the Article Seventh to reflect the foregoing increase in authorized capital stockas mentioned above.

On October 5, 2009, the BOD of the Parent Company approved the followingamendments/matters to Article Seventh of the Parent Company’s Amended Articles ofIncorporation:

to increase the authorized capital stock from P=3,270.0 million to P=7,250.0 millionconsisting of 6,000,000,000 common stocks with a par value of P=1.00 a share, and2,500,000,000 preferred stocks with a par value of P=0.50 a share;

to undertake a stock rights offering amounting to approximately P=15.0 billion under whichexisting eligible shareholders of the Parent Company will have the opportunity tosubscribe their pro-rata shareholding and will not be subject to dilution;

to authorize the declaration of stock dividends for one class or series of preferred stocksfrom a different class or series of preferred stocks;

to create new Series “E” preferred stocks which will be redeemable at the option of theParent Company; and,

to revise the dividend rate of Series “A” to “D” preferred stocks from P=0.05 toP=0.02 per share.

The above amendments/matters were submitted and approved by the stockholders during aspecial stockholders meeting held on November 20, 2009.


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On December 7, 2009, the Philippine SEC approved the increase in authorized capital stock ofthe Parent Company from P=3,270.0 million to P=7,250.0 million consisting an increase in thenumber common stocks authorized for issuance by 3,230,000,000 shares with a par value ofP=1.00 a share and an increase in the number of preferred stocks (Series “E”) authorized forissuance by 1,500,000,000 shares with a par value of P=0.50 a share.

On March 8, 2010, the BOD of the Parent Company has approved the proposedreclassification of P=1.0 billion authorized common stocks consisting of 1,000,000,000common stocks to P=1.0 billion authorized Series “F” preferred stocks consisting of100,000,000 Series “F” preferred stocks and the corresponding amendment to Article Seventhof the Amended Articles of Incorporation. The proposed creation of new Series “F” preferredstocks with a par value of P=10.00 a share shall be cumulative, non-voting except in the casesprovided by law, non-participating, redeemable at the option of the Parent Company, amongothers.

As of March 19, 2010, the Parent Company has yet to obtain the necessary stockholders’ andPhilippine SEC approval for the proposed reclassification of a portion of its authorizedcommon stocks to preferred stocks and the proposed creation of new Series “F” preferredstocks.

b. Deposits for Future Stock SubscriptionsOn August 13, 2009, the Parent Company received from FPHC the amount of $110.1 million(P=5.3 billion) as deposits for future stock subscriptions. On December 7, 2009, $16.8 million(P=807.5 million) of the deposits were converted to 807,500,000 common stocks. As ofMarch 19, 2010, the remaining balance of the deposits for future stock subscriptions totaling$93.3 million (P=4.5 billion) have been fully utilized to subscribe to the common stocks issuedduring the Rights Offering.

c. Retained EarningsOn March 30, 2009, the BOD of the Parent Company approved the declaration of 50% stockdividends on the Parent Company’s common stocks to be taken from unissued common stocksand the declaration of 50% property dividends on the Parent Company’s preferred stocks to betaken from treasury preferred stocks.

On August 27, 2009, the Philippine SEC approved the issuance of $8.4 million(P=405.0 million) common stocks consisting of 405,000,000 of the Parent Company’s commonstocks with a par value of P=1.00 a share, to cover the stock dividends declared by the BOD onMarch 30, 2009 and has been ratified by the Parent Company’s stockholders representing atleast two-thirds (2/3) of the outstanding capital stock on May 13, 2009 and the issuance ofsuch common shares of stock to stockholders of record as of September 11, 2009. The stockdividends were paid on October 7, 2009. The Philippine SEC’s approval was pursuant to theAmended Rules Governing Pre-emptive and other Subscription Rights and Declaration ofStock or Cash Dividends of Corporations whose securities are registered under the SRC orlisted in the PSE.

On September 23, 2009, the Philippine SEC approved the Parent Company’s declaration of50% property dividends consisting of 177,619,000 preferred stocks, to be taken from treasurypreferred stocks, amounting to $7.6 million (P=680.3 million) to the Parent Company’spreferred stockholders of record as of May 13, 2009.

On October 5, 2009, the BOD of the Parent Company approved the declaration of a propertydividend on the Parent Company’s preferred stocks to be taken from the remaining467,143,000 treasury preferred stocks and the declaration of a stock dividend on the

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375,000,000 million Series “E” preferred stocks to be taken from the Parent Company’sunrestricted retained earnings. The above matter was approved by the stockholders during thespecial stockholders meeting held on November 20, 2009.

On November 26, 2009, the Philippine SEC approved the Parent Company’s propertydividend declaration taken from the remaining 467,143,000 preferred stocks held in treasuryamounting to $20.0 million (P=1,787.1 million) to the Parent Company’s preferred stockholdersof record as of November 20, 2009.

On December 7, 2009, the Philippine SEC approved the Parent Company’s declaration of25% stock dividends, consisting of 375,000,000 Series “E” preferred stocks amounting to$4.0 million (P=187.5 million) to the Parent Company’s preferred stockholders of record as ofDecember 7, 2009.

On March 8, 2010, the BOD of the Parent Company has approved the declaration of a stockdividend on Series “E” preferred stocks consisting of 93,553,892 shares to be taken from theParent Company’s unrestricted retained earnings. As of March 19, 2010, the Parent Companyhas yet to obtain the necessary stockholders’ and Philippine SEC approval for the declarationof a stock dividend on Series “E” preferred stocks.

The retained earnings balance is restricted to the extent of: (a) acquisition price of the treasurystocks amounting to $53.0 million and $80.6 million as of December 31, 2009 and 2008,respectively; and (b) the undistributed net earnings of investee companies (includingconsolidated subsidiaries) amounting to $31.9 million and $30.2 million as ofDecember 31, 2009 and 2008, respectively. Undistributed earnings of the investee companiesare not available for dividend distribution until such time that the Parent Company receivesthe dividends from these investee companies.

d. Treasury Stocks

Movements in the number of treasury stocks are as follows:

2009 2008 2007Preferred Stocks (Series “B”) Held in

Treasury:Balance at beginning of year 644,762,000 644,762,000 644,762,000Re-issuance (September 30) (177,619,000) – –Re-issuance (November 26) (467,143,000) – –Balance at end of year – 644,762,000 644,762,000

Common Stocks Held in Treasury:Balance at beginning of year 279,406,700 279,406,700 279,006,700Redemptions of common stocks – – 400,000Balance at end of year 279,406,700 279,406,700 279,406,700

25. Share-based Payment Plans

Executive Stock Option PlanThe Parent Company has an Executive Stock Option Plan (ESOP), which entitles the optiongrantees to acquire common stocks of the Parent Company, which stocks shall not at any grantdate, exceed four percent of the total issued and outstanding common stocks of the ParentCompany.


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Options under the ESOP vest within a five-year period. Awards granted prior to the Initial PublicOffering (the Offering) were pegged at a fixed exercise price in accordance with the ESOP,subject to adjustments in certain cases. Any option granted after the Offering is subject to apurchase price determined at the option grant date based on the average closing price of the ParentCompany’s common stocks at the stock exchange for 20 market days prior to the grant, subject toa discount, but in no case shall the purchase price be less than the par value. The terms of theESOP include, among others, a one-year holding period from the date of award of an option, alimit as to the number of stocks an executive and employee may purchase and settle by payment incash or check the full amount of the price of the stocks over which the option is exercised. Thecontractual life of options granted is ten years, with no cash settlement alternative.

On July 1, 2003, a total of 452,285 common stocks of the Parent Company’s unissued commonstocks have been reserved for the grantees. By virtue of the common stock split and commonstock dividends declared and approved by the Parent Company’s BOD and stockholders onApril 4, 2005, the number of options and price per share granted to all executives and employeeshave been adjusted automatically in accordance with the terms of the ESOP. Accordingly, (i) thenumber of common stocks reserved for the grantees has been adjusted from 452,285 commonstocks to 18,091,400 common stocks; (ii) the total number of common stocks that have beenawarded to be granted over a five-year period under the ESOP has been adjusted from 409,756common stocks to 15,856,800 common stocks; and (iii) the exercise price of P=528.00 a share hasbeen reduced to P=13.20 a share. The exercise price was further adjusted from P=13.20 per share toP=8.80 per share following the issuance of 50% stock dividends as approved by the SEC onAugust 27, 2009.

Movements in the number of stock options granted under ESOP are as follows:

Number of Shares2009 2008 2007

Balance at beginning of year 4,676,846 4,768,626 12,222,96050% stock dividends 2,338,423 – –Exercised during the year (5,543,007) (26,500) (7,129,422)Forfeited during the year – (65,280) (324,912)Balance at end of year 1,472,262 4,676,846 4,768,626

Exercisable at end of year 1,472,262 4,676,846 252,450

The weighted average stock prices at the dates of options exercise were P=17.86 a share, P=29.88 ashare, and P=60.52 a share in 2009, 2008 and 2007, respectively. The weighted average fair valueof options granted was P=5.45 a share.

The weighted average remaining contractual life of the outstanding stock options as ofDecember 31, 2009 is four years.

The fair value of the stock options was estimated as at grant date (July 2003) using the BlackScholes-Merton model, taking into account the terms and conditions upon which the options weregranted. The following lists the inputs to the model used to value the stock options at grant date:

Dividend yield 25.68%Expected volatility 47.55%Risk-free interest rate 8.56% to 11.0%Expected life of option (years) 2.5 to 5Weighted average stock price* P=1,147* Before adjustment resulting from common stock split and common stock dividends

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The share-based payment transactions, including transactions with employees of FPHC and anassociate of the Parent Company, amounted to $0.04 million in 2008 and $0.12 million in 2007.Of the total, $0.03 million in 2008 and $0.10 million in 2007 were recognized as expense foremployee services received by First Gen Group. There were no share-based payment transactionsin 2009.

The expected life of the options is based on historical data and is not necessarily indicative ofexercise patterns that may occur. The expected volatility assumes that the historical volatility isindicative of future trends, which likewise, may not necessarily be the actual outcome.

No other features of options grant were incorporated into the measurement of the fair value of theoption.

Employee Stock Purchase PlanThe Parent Company has an Employee Stock Purchase Plan (ESPP), which entitles the eligibleemployees to acquire the common stocks of the Parent Company, provided that such stocks shallnot at any grant date exceed one percent of the total issued and outstanding common stocks of theParent Company. The stocks may be acquired under the ESPP at fair market price equal to theaverage of the closing price of the common stocks on the exchange for the 20 market daysimmediately preceding the grant date. A grantee under the ESPP shall have five years to completepayments on the common stocks acquired pursuant to the plan, with a right to prepay after twoyears.

As of December 31, 2009 and 2008, no award or sale of stocks under the ESPP has been grantedto any employee.

26. Related Party Transactions

In addition to the respective PPAs of FGP and FGPC with Meralco as discussed in Note 34(a) andcertain advances to minority shareholder as discussed in Note 21, the following are the significanttransactions with related parties:

a. Due to related parties represent noninterest-bearing U.S. dollar and Philippinepeso-denominated emergency loans to meet working capital and investment requirements ofFirst Gen Group.

b. Management services are rendered by the Parent Company to BPPC under certain terms andconditions of a Management Contract. The consideration for the payment of management feesis fixed at $0.5 million per year effective January 1, 2006. On March 13, 2006, the ParentCompany and BPPC renewed the Management Contract effective from January 1, 2006 untilthe end of the 15-year Cooperation Period of the Project Agreement of BPPC, which willexpire in July 2010. Management fees amounting to $0.5 million in 2009, 2008 and 2007 isincluded in “Others” account in the consolidated statements of income.

c. Lease of premises, on which First Gen Group corporate offices are located, from FirstPhilippine Realty Corporation (FPRC), a subsidiary of FPHC [(see Note 34(n)]. Total rentexpense amounted to $0.4 million in 2009 and $0.3 million in each of the years 2008 and 2007(see Note 28).

d. Maintenance services are rendered by Meralco Industrial Engineering Services Corporation(MIESCOR), a subsidiary of Meralco, on the 230 kilovolts (kV) transmission line from theSanta Rita plant to the Calaca Substation in Batangas under the Transmission LineMaintenance Agreement. This involves the monthly payment of $0.02 million (P=0.9 million)


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as retainer fee and $0.1 million (P=3.7 million) for every six-month period as service fee, withboth fees subject to periodic adjustment as set forth in the agreement. The amount ofcompensation for additional services requested by FGPC outside the scope of the agreement issubject to mutual agreement between FGPC and MIESCOR. Total operations andmaintenance expense (shown as part of “Power plant operations and maintenance” account inthe consolidated statements of income) amounted to $0.8 million in 2009 and $0.5 million in2008 and 2007.

e. Management services are rendered by the Parent Company to First Philippine IndustrialCorporation (FPIC), a subsidiary of FPHC engaged in the fuel-supply business. The ParentCompany does not receive a fee for the services it provides to FPIC.

f. The Parent Company is engaged as EDC’s consultant to render services pertaining tofinancial, business development and other matters under a consultancy agreement beginningSeptember 1, 2008. Such agreement is for a period of three years up to August 31, 2011. OnOctober 12, 2009, the Parent Company and EDC agreed to adjust the monthly fee from$0.2 million (P=8.7 million net of withholding taxes plus VAT) to $0.3 million (P=11.8 millionnet of withholding taxes plus VAT) effective September 2009 to cover the cost of additionalofficers and staff assigned to EDC. Consultancy fees amounted to $3.0 million and$0.7 million for the years ended December 31, 2009 and 2008, respectively, is included in“Others” account in the consolidated statements of income.

g. Compensation of key management personnel are as follows:

2009 2008 2007Other short-term employee benefits $5,581 $5,502 $5,229Share-based payments (see Note 25) – 29 101Retirement and other post-retirement

benefits (see Note 29) 315 680 249$5,896 $6,211 $5,579

Terms and Conditions of Transactions with Related Parties. Except for certain advances tominority shareholder (see Note 21), outstanding balances at year end are unsecured and interest-free and settlement occurs in cash. There have been no guarantees provided or received for anyrelated party receivables or payables.

Advances to minority shareholder (BG Plc), included in “Other current assets” and “Othernoncurrent assets” accounts in the consolidated statements of financial position amounted to$99.7 million and $104.0 million as of December 31, 2009 and 2008, respectively (see Notes 11and 17).

Details of amounts due from related parties (included in “Receivables” account in the consolidatedstatements of financial position, see Note 8) are as follows:

2009 2008FG Hydro $11,042 $–Red Vulcan 7,356 –Others 1,753 1,005

$20,151 $1,005

No impairment loss was recognized on these receivables for the years ended December 31, 2009and 2008. This assessment is undertaken each financial year through review of the financialposition of the related party and the market in which the related party operates.

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Details of amounts due to related parties are as follows:

2009 2008BG Plc. $6,348 $6,348FGHC International Ltd. 145 145Others 218 563

$6,711 $7,056

BG Plc. is a stockholder of FGHC, while FGHC International Ltd. is a subsidiary of FPHC and astockholder of the Parent Company.

27. Interest Income

2009 2008 2007Cash and cash equivalents (see Note 7) $658 $5,183 $24,193Receivables from Meralco on Annual

Deficiency (see Note 22) 298 3,114 6,867Advances to minority shareholder (see

Notes 11 and 17) 5,986 782 –$6,942 $9,079 $31,060

28. Costs and Expenses

Depreciation and Amortization

2009 2008 2007Property, plant and equipment

(see Note 15) $53,330 $53,424 $49,829Intangible assets (see Note 16) 602 602 602

$53,932 $54,026 $50,431

Staff Costs

2009 2008 2007Salaries and wages $9,927 $10,007 $9,300Retirement benefits (see Note 29) 698 1,991 1,464Share-based payments (see Note 25) – 29 101

$10,625 $12,027 $10,865

Other Administrative Expenses

2009 2008 2007Taxes and licenses $12,970 $20,570 $19,575Professional fees 12,473 17,581 12,405Insurance 7,154 5,301 7,128Others (see Notes 8, 13, 26 and 35) 4,647 5,811 4,684

$37,244 $49,263 $43,792


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Interest Expense and Financing Charges

2009 2008 2007Interest on:

Loans and bonds (see Notes 18, 20 and 21) $93,752 $112,599 $57,614

Swap fees (see Note 33) 11,698 1,050 –Obligations to Gas Sellers on Annual

Deficiency (see Note 22) 298 3,114 6,867Accretion on:

Debt issuance costs (see Notes 20and 21) 6,270 4,587 4,830

Asset retirement obligations(see Note 23) 71 67 61

Write-off of deferred debt issuance costson undrawn facility (see Note 21) – – 875

$112,089 $121,417 $70,247

29. Retirement Benefits

The following tables summarize the funded status and amounts recognized in the consolidatedstatements of financial position for the retirement plans and the components of net retirementbenefit expense recognized in the consolidated statements of income:

The net retirement and other post-retirement assets (liabilities) are presented in the consolidatedstatements of financial position as follows:

2009 2008Net retirement assets $594 $–Net retirement liabilities (167) (24,899)Net retirement asset (liability) $427 ($24,899)

Net retirement assets are included in the “Other noncurrent assets” account while the retirementliabilities are presented as “Retirement and other post-retirement liability” account on the face ofthe consolidated statements of financial position.

The amounts recognized in the consolidated statements of financial position are as follows:

2009 2008Present value of funded obligation $4,743 $70,527Fair value of plan assets (6,731) (41,773)

(1,988) 28,754Unrecognized past service cost (455) (474)Unrecognized actuarial losses (gains) 2,614 (2,622)Foreign exchange adjustments (598) (759)Retirement and other post-retirement liability (asset) ($427) $24,899

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The amounts recognized in the consolidated statements of income are as follows:

2009 2008 2007Current service cost $512 $1,260 $974Interest on obligation 488 720 463Expected return on plan assets (249) (128) (123)Net actuarial losses (gains) recognized (76) 107 116Amortization of past service cost 23 32 34Retirement benefits expense $698 $1,991 $1,464

Movements in the present value of the defined benefit obligation are as follows:

2009 2008Balance at beginning of year $70,527 $72,374Current service cost 512 1,260Interest cost 488 720Benefits paid (20) (32)Deconsolidation of discontinued operations

(see Note 4) (66,901) 1,874Actuarial gains – (4,949)Foreign exchange adjustments 137 (720)Balance at end of year $4,743 $70,527

Movements in the fair value of plan assets are as follows:

2009 2008Balance at beginning of year $41,773 $40,962Expected return on plan assets 249 128Actuarial gains (losses) 180 (82)Contributions paid 2,076 2,763Benefits paid (20) (32)Discontinued operations (see Note 4) (37,727) (1,541)Foreign exchange adjustments 200 (425)Balance at end of year $6,731 $41,773

Actual return on plan assets $429 $46

The Parent Company and its subsidiaries, namely FGHC, FGPC and FGP (collectively, the “FirstGas Group”) have initially funded the retirement plans in December 2005. First Gen Groupexpects to contribute $2.1 million to its defined benefit retirement plans in 2010.

The major categories of plan assets as a percentage of the fair value of total plan assets are asfollows:

2009 2008Investments in government securities 75% 52%Deposits in banks 11 35Investments in shares of stock 12 9Others 2 4

100% 100%


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The overall expected rate of return on assets is determined based on the market prices prevailingon that date, applicable to the period over which the obligations are to be settled.

The principal actuarial assumptions used in determining retirement benefit obligations for FirstGen Group, except EDC, as of January 1, 2009 and 2008 are as follows:

2009 2008Discount rate (average) 14% 10%Future salary increase rate 10-14 10-14%Expected rate of return on plan assets (average) 7 7%

The principal actuarial assumptions used in determining retirement and post-retirement medicaland life insurance benefit obligations of EDC as of December 31, 2008 are as follows:

Discount rate 9.8%Future salary increase rate 10.0%Expected rate of return on plan assets 7.0%Medical trend rate 7.0%

Amounts for the current and previous years are as follows:

2009 2008 2007 2006 2005Present value of defined

benefit obligation $4,743 $70,527 $72,374 $4,969 $2,334Fair value of plan assets (6,731) (41,773) (40,962) (1,352) (721)Deficit (Surplus) ($1,988) $28,754 $31,412 $3,617 $1,613

There were no experience adjustments on the present value of defined benefit obligation and fairvalue of plan assets in 2009 and 2007.

The experience adjustments on the present value of defined benefit obligation amounted to$0.9 million, $1.0 million and $0.2 million in 2008, 2006 and 2005, respectively. The experienceadjustments on the fair value of plan assets amounted to $0.4 million and $0.1 million in 2008 and2006, respectively.

A one percentage point change in the assumed rate of increase in medical costs would have thefollowing effects in 2008:

Increase DecreaseEffect on the aggregate current service cost

and interest cost 23.35% 18.70%Effect on the present value of defined benefit

obligation 20.67% 16.90%

30. Income Tax

a. The deferred income tax assets (liabilities) of First Gen Group are presented in theconsolidated statements of financial position as follows:

2009 2008Deferred income tax assets $10 $71,794Deferred income tax liabilities (18,609) (30,036)

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The components of these deferred income tax assets (liabilities) as of December 31, 2009 and2008 are as follows:

2009 2008Changes recognized in the consolidated statements of

income:Deferred income tax assets on:

Excess amortization of debt issuance costs undereffective interest method over straight-linemethod $2,543 $2,549

NOLCO 1,738 682Asset retirement obligations 255 237Unamortized portion of preoperating expenses

and project development costs 199 345Foreign exchange losses on BOT power plants – 84,256Unrealized foreign exchange losses – 51,730Allowance for impairment losses on receivables – 12,391Concession receivables and rights – 10,471Embedded derivatives – 6,026Accrued real property, transfer and business taxes – 4,196

4,735 172,883Deferred income tax liabilities on:

Difference between the carrying amounts ofnonmonetary assets and their related tax base (20,059) (27,045)

Prepaid major spare parts (4,267) (8,051)Unrealized foreign exchange gains (4,046) –Capitalized costs and losses during

commissioning period of the power plants (636) (631)Derivative assets – (3,534)Deductible expenses per PD No. 1442 – (77,470)Difference between fair values and book values

resulting from business combination – (14,427)Appraisal increase of assets applied as

deemed costs – (11,388)Others (1,407) (6,294)

(30,415) (148,840)(25,680) 24,043

Changes recognized directly in other comprehensiveincome (loss) -Deferred income tax asset on derivative liability 7,081 17,715

($18,599) $41,758

b. Certain deferred income tax assets of the Parent Company and certain subsidiaries have notbeen recognized since management believes that it is not probable that sufficient futuretaxable income will be available against which they can be utilized. The deductible temporarydifferences of certain consolidated statement of financial position items and carryforwardbenefits of NOLCO and MCIT of certain subsidiaries for which no deferred income tax assethas been recognized consist of the following:

2009 2008NOLCO $201,738 $166,049Foreign exchange differentials on unrealized losses 24,326 41,478

(Forward)


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2009 2008Accrual for retirement benefits $701 $639Derivative liability 520 243MCIT 344 334Unamortized portion of preoperating expenses and

project development costs 101 237Others 369 247

As of December 31, 2009 and 2008, the temporary taxable differences representing the excessof the carrying amount of the investments in subsidiaries and associates over the tax baseamounted to $104.5 million and $141.9 million, respectively. The deferred income taxliability has not been recognized as First Gen Group is able to control the timing of thereversal of the temporary difference and it is probable that the temporary taxable differencemay not reverse in the foreseeable future.

c. Details of provision for current income tax are as follows:

2009 2008 2007Current $45,492 $31,448 $24,048Application of MCIT – – (629)

$45,492 $31,448 $23,419

Provision for current income tax in 2009 and 2008 includes the RCIT of FG Bukidnon, FGP,and FGPC. Provision for current income tax in 2007 includes the RCIT of FG Bukidnon andFGP. For the year ended December 31, 2009, FGP and FG Bukidnon computed their currentincome tax using the Optional Standard Deduction (OSD) method. The combined tax benefitsfrom availment of the OSD in 2009 amounted to $3.3 million (P=156.2 million).

d. The balance of NOLCO as of December 31, 2009 may be used by the Parent Company andcertain subsidiaries as additional deductions against their respective future taxable income.Similarly, the MCIT balance as of December 31, 2009 may be applied as credit against futureincome tax liabilities of the Parent Company and certain subsidiaries. The balances ofNOLCO and MCIT, with their corresponding years of expiration, are as follows:

Incurred for theYear EndedDecember 31

Available UntilDecember 31 NOLCO MCIT

(In U.SDollar)

(In PhilippinePeso)

(In U.S.Dollar)

(In PhilippinePeso)

2007 2010 $75,809 P=3,502,390 $218 P=10,0592008 2011 78,641 3,633,189 49 2,2722009 2012 53,082 2,452,391 77 3,579

$207,532 P=9,587,970 $344 P=15,910

e. A reconciliation between the statutory income tax rates and effective income tax rates follows:

2009 2008 2007Statutory income tax rates 30.00% 35.00% 35.00%Income tax effect of:

Unrealized foreign exchange loss 2.86 (6.77) 2.14ITH incentives (2.70) (22.70) (16.19)Effect of change in income tax rate – (4.17) –

(Forward)

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2009 2008 2007Equity in net earnings of associates (0.38%) (1.00%) (1.72%)Others 12.03 39.84 (14.37)

Effective income tax rates 41.81% 40.20% 4.86%

f. In accordance with Republic Act (R.A.) No. 9337, starting January 1, 2009, the statutoryincome tax rate was reduced from 35% to 30% and nondeductible interest expense ratedecreased from 42% to 33%.

g. The BIR issued Revenue Regulation (RR) No. 16-2008 which implemented the provisions ofRepublic Act 9504, or R.A. 9504 on OSD. This regulation allowed both individual andcorporate tax payers to use OSD in computing their taxable income. For corporations, theymay elect a standard deduction in an amount equivalent to 40% of gross income, as providedby law, in lieu of the itemized allowed deductions. The provisions of R.A. 9504 andRR No. 16-2008 became effective on July 1, 2008.

h. Registrations with the Board of Investments (BOI)FGP and FGPC are registered with the BOI under the Omnibus Investments Code of 1987.Under the terms of registrations, these subsidiaries, among others, should maintain a baseequity of at least 25%.

As registered enterprises, these subsidiaries are entitled to certain tax and nontax incentiveswhich include, among others, ITH. Total incentives availed by these subsidiaries amounted to$2.5 million (P=117.6 million) in 2009, $28.2 million (P=1,239.41 million) in 2008 and$25.3 million (P=1,181.1 million) in 2007. Income from non-registered operations of thesesubsidiaries is not covered by ITH incentives.

On October 31, 2007, the BOI approved FGP’s application for a one-year extension (theBonus Year) of FGP’s ITH incentive. The approved Bonus Year of FGP commenced onMarch 1, 2008 and ended on February 28, 2009. As such, FGP’s income after the expiration ofITH incentives became subject to RCIT.

In October 2006, the BOI approved FGPC’s application for a one-year extension (the BonusYear) of FGPC’s ITH incentive. The approved Bonus Year of FGPC commenced onJune 1, 2006 and ended on May 31, 2007. As such, FGPC’s income after the expiration ofITH incentives became subject to RCIT.

31. Earnings (Loss) Per Share Calculations

2009

2008(Restated,

Note 4)

2007(Restated,

Note 4(a) Net income attributable to equity holders

of the Parent Company $16,754 $14,474 $104,655Less dividends on preferred stocks 419 374 390

(b) Net income (loss) available to commonstock 16,335 14,100 104,265

From Continuing operations 3,861 28,214 80,919From Discontinued operations 12,474 (14,114) 23,346

(Forward)


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2009

2008(Restated,

Note 4)

2007(Restated,

Note 4Add interest expense and accretion on

debt issuance costs on CBs $26,785 $22,342 $–(c) Net income available to common stocks

adjusted for the effect of conversionof stock options and CBs 43,120 36,442 104,265

From Continuing operations 30,646 50,556 80,919From Discontinued operations 12,474 (14,114) 23,346

(d) Weighted average number of commonstocks for basic earnings (loss) pershare 1,214,952,596 1,214,496,027 1,207,698,995

Effect of conversion of:Stock options 746,847 3,916,554 296,081Convertible bonds 248,187,382 248,187,382 –

(e) Weighted average number of commonstocks for diluted earnings (loss) pershare 1,463,886,825 1,466,599,963 1,207,995,076

Basic/Diluted Earnings (Loss) Per Share*(b/d) $0.013 $0.012 $0.086

From Continuing operations 0.003 0.023 0.067From Discontinued operations 0.010 (0.011) 0.019

*Earnings (loss) per share for December 31, 2008 and 2007 included the effect of the 50% stock dividends in 2009.

For the years ended December 31, 2009 and 2008, the conversion of the CBs have an anti-dilutiveeffect, while the conversion of stock options did not have any impact on the diluted earnings (loss)per share calculation; thus, the diluted earnings (loss) per share is the same as the basic earnings(loss) per share.

32. Financial Risk Management Objectives and Policies

First Gen Group’s principal financial liabilities comprise trade payables, bonds payable, loanspayable and long-term debt, among others. The main purpose of these financial liabilities is toraise financing for First Gen Group’s growth and operations. First Gen Group has other variousfinancial assets and liabilities such as cash and cash equivalents, trade and concession receivablesand accounts payable and accrued expenses, which arise directly from its operations.

As a matter of policy, First Gen Group does not trade its financial instruments. However, FirstGen Group enters into derivative and hedging transactions, primarily interest rate swaps, currencyforwards, and range bonus forwards, as needed, for the sole purpose of managing the relevantfinancial risks that are associated with First Gen Group’s borrowing activities and as required bythe lenders in certain cases.

First Gen Group has an Enterprise-Wide Risk Management Program which is aimed to identifyrisks based on the likelihood of occurrence and impact to the business, formulate risk managementstrategies, assess risk management capabilities and continuously monitor the risk managementefforts.

The main risks arising from First Gen Group’s financial instruments are interest rate risk, foreigncurrency risk, credit risk, credit concentration risk and liquidity risk. The BOD reviews andapproves policies for managing each of these risks as summarized below. First Gen Group’saccounting policies in relation to derivative financial instruments are set out in Note 2 to theconsolidated financial statements.

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Interest Rate RiskFirst Gen Group’s exposure to the risk of changes in market interest rate relates primarily to FirstGen Group’s long-term debt, obligations to Gas Sellers on Annual Deficiency, receivables fromMeralco on Annual Deficiency and advances to minority shareholder that are subject to floatinginterest rates.

First Gen Group believes that prudent management of its interest cost will entail a balanced mix offixed and variable rate debt. On a regular basis, the Finance team of First Gen Group monitors theinterest rate exposure and presents it to management by way of a compliance report. To managethe exposure to floating interest rates in a cost-efficient manner, First Gen Group may considerprepayment, refinancing or entering into derivative instruments as deemed necessary.

In May 2002, FGP in particular, entered into an interest rate swap agreement involving half of itsborrowings under the ECGD Facility. FGP agreed to exchange, at specified intervals, thedifference between fixed and variable rate interest amounts calculated by reference to the agreed-upon notional principal amount. Also, in November 2008, FGPC entered into interest rate swapagreements to cover the interest payments for up to 90% of its combined debt under the Coveredand Uncovered Facilities (see Note 21). Under the swap agreements, FGPC agreed to exchange,at specific intervals, the difference between fixed and variable rate interest amounts calculated byreference to the agreed-upon notional principal amounts.

As of December 31, 2009 and 2008, approximately 90.8% and 82.4%, respectively, of First GenGroup’s borrowings are subject to fixed interest rate after considering the effect of its interest rateswap agreement. In the case of EDC, the interest rates of some of its long-term debt are fixed atthe inception of the loan agreement.

The following table demonstrates the sensitivity to a reasonably possible change in interest ratesfor the years ended December 31, 2009 and 2008, with all other variables held constant, of FirstGen Group’s income before income tax and equity (through the impact of floating rateborrowings, mark-to-market valuation of AFS financial assets, and derivative assets andliabilities):

Changein Basis Points

Increase (Decrease)in Income Before

Income TaxIncrease (Decrease)

in Equity2009U.S. Dollar +100 ($1.63 million) $16.88 million

-100 3.51 million (18.11 million)Philippine Peso +100 (P=3.49 million) P=–

-100 3.49 million –

2008U.S. Dollar +100 ($7.22 million) $20.87 million

-100 6.86 million (22.59 million)Philippine Peso +100 (P=260.29 million) P=–

-100 261.67 million –Japanese Yen +100 (¥78.77 million) ¥–

-100 73.69 million –European Euro +100 (€0.08 million) €–

-100 0.16 million –


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The effect of changes in interest rates in equity pertains to derivatives accounted for under cashflows hedges and AFS financial assets and is exclusive of the impact of changes affecting FirstGen Group’s consolidated statements of income.

Interest Rate Risk TableThe following table sets out the carrying amount, by maturity, of First Gen Group’s financialinstruments that are exposed to interest rate risk (amounts in millions):

December 31, 2009

InterestRates

Within1 Year

2–3Years

4–5Years

Morethan

5 Years TotalFixed RateLong-term debt:

Covered Facility* 7.65% $5.72 $24.61 $31.14 $240.07 $301.54Uncovered Facility* 7.56 - 7.96% 4.65 17.74 30.51 80.57 133.47KfW Facility 7.20% 9.78 19.56 – – 29.34ECGD Facility* 7.48% 4.79 9.58 9.58 – 23.95Hermes-Covered Facility 7.48% 11.11 22.22 22.22 – 55.55

Bonds payablePeso denominated Bonds 11.55% 108.23 – – – 108.23Convertible Bonds 2.50% – 300.59 – – 300.59

Corporate Note Facility 9.38% 2.92 112.53 – – 115.45

Floating RateLong-term debt:

Uncovered Facility 4.02% 1.55 5.91 10.17 26.86 44.49ECGD Facility* 2.62% 4.79 9.58 9.58 – 23.95GKA-Covered Facility 1.87% 5.70 11.41 11.41 11.41 39.93

Advances to minority shareholder** 5.8% 2.46 9.97 14.83 71.76 99.02

* Including the effect of interest rate swap** Excluding accrued interest

December 31, 2008Interest

RatesWithin1 Year 2–3 Years 4–5 Years

More than5 Years Total

Fixed RateLong-term debt:

Covered Facility* 7.65% $10.46 $18.02 $28.04 $255.48 $312.00Uncovered Facility* 7.56- 7.96% 7.53 13.47 22.80 97.20 141.00KfW Facility 7.20% 9.78 19.55 9.78 – 39.11ECGD Facility* 7.48% 4.79 9.58 9.58 4.80 28.75Hermes-Covered Facility 7.48% 11.1 22.2 22.2 11.1 66.6

OECF 2.70%–5.70% 16.22 25.22 15.46 86.28 143.18

Miyazawa IA & II 2.37%–3.78% 294.28 – – – 294.28

Bonds payablePeso denominated Bonds 11.55% – 105.22 – – 105.22Convertible Bonds 2.50% – 300.59 – – 300.59

Deferred payment facility withPSALM 12.00% 9.58 22.86 28.85 – 61.29

* Including the effect of interest rate swap

(Forward)

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December 31, 2008Interest

RatesWithin1 Year 2–3 Years 4–5 Years

More than5 Years Total

Floating RateLoans payable

Local bridge (U.S. Dollar) 4.04%–5.54% $80.55 $– $– $– $80.55

Local bridge (Philippine Peso) 7.69% 30.47 – – – 30.47PCCI loans 6.25%–

6.75% 38.93 – – – 38.93BDO loans 9.25% 8.42 – – – 8.42

Staple Financing 9.02% 291.67 – – – 291.67Long-term debt:

Uncovered Facility 6.02% 2.51 4.49 7.60 32.40 47.00ECGD Facility* 4.75% 4.79 9.58 9.58 4.80 28.75GKA-Covered Facility 4.35% 5.70 11.41 11.41 17.11 45.63

IBRD loans 7.07% 5.13 3.34 – – 8.47

Miyazawa IB2.62%–3.78% 74.74 – – – 74.74

Obligations to Gas Sellers on AnnualDeficiency 5.97% 36.70 – – – 36.70

Receivables from Meralco on AnnualDeficiency** 5.97% 26.15 – – – 26.15

Advances to minority shareholder*** 5.8% 4.23 7.43 12.07 79.52 103.25

* Including the effect of interest rate swap** Excluding output VAT*** Excluding accrued interest

Interest on financial instruments classified as floating rate is repriced semi-annually on eachinterest payment date. Interest on financial instruments classified as fixed rate is fixed until thematurity of the instrument. The other financial instruments of First Gen Group that are notincluded in the foregoing tables are noninterest-bearing and are therefore not subject to cash flowinterest rate risk.

Foreign Currency RiskFirst Gen Group’s exposure to foreign currency risk arises as the functional currency of the ParentCompany and certain subsidiaries, the U.S. dollar, is not the local currency in its country ofoperations. Certain financial assets and liabilities as well as some costs and operating expenses,are denominated in Philippine peso or in Japanese yen in the case of EDC. To manage the foreigncurrency risk, First Gen Group may consider entering into derivative transactions, as necessary.As of December 31, 2009 and 2008, the Parent Company has not entered into any derivativetransactions to cover the foreign exchange fluctuations. Moreover, the Parent Company has anatural hedge with regard to its Philippine peso bonds since it receives cash dividends from EDCand FG Hydro in Philippine peso.

In the case of EDC, its foreign currency risk primarily arises from future payments of foreignloans, BOT obligations, other commercial transactions and its investment in ROP bonds. Itsexposure to foreign currency risk, to some degree, is mitigated by some provisions indicated inEDC’s GSCs (now GRESCs), SSAs and PPAs. The GSCs allow full cost recovery while the SSAinclude billing adjustments covering the movements in Philippine peso and the U.S. dollar rates,U.S. Price and Consumer indices, and other inflation factors.

In 2008, EDC entered into derivative contracts, namely range bonus forward and foreign currencyforward contracts, with various counterparties to minimize its foreign currency risks arising fromits Miyazawa 1 loans (see Note 33).


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The following table sets out the Philippine peso-denominated financial assets and liabilities as ofDecember 31, 2009 and 2008 and the Japanese yen-denominated financial asset and liabilities asof December 31, 2008 that may affect the consolidated financial statements of First Gen Group(amounts in millions):

2009 2008Philippine

Peso-denominated

Balances


Balances

JapaneseYen

Balances

PhilippinePeso-

denominatedBalances


BalancesFinancial AssetsLoans and receivables:

Cash and cash equivalents P=1,384.2 $30.0 ¥0.4 P=726.1 $15.3Receivables 395.7 8.6 – 5,385.2 113.3Long-term receivables, including

current portion – – – 32,870.7 691.7Restricted cash deposits – – – 40.7 0.9

1,779.9 38.6 0.4 39,022.7 821.2AFS financial assets 24.3 0.5 – 712.2 15.0

Total financial assets 1,804.2 39.1 0.4 39,734.9 836.2

Financial LiabilitiesLoans and borrowings:

Loans payable – – – 5,698.2 119.9Accounts payable and accrued

expenses 1,496.2 32.4 390.4 5,742.2 125.1Due to related parties 16.8 0.4 335.3 7.1Long-term debt including current

portion 5,333.7 115.5 48,833.2 13,860.0 848.0Royalty fees payable, including

current portion – – – 1,688.2 35.5Bonds payable 5,000.0 108.2 – 5,000.0 105.2

Total financial liabilities 11,846.7 256.5 49,223.6 32,323.9 1,240.8Net financial liabilities (assets) P=10,042.5 $217.4 ¥49,223.2 (P=7,411.0) $404.6

In translating these foreign currency-denominated monetary assets and liabilities into U.S. dollar,the exchange rates used were ¥90.942 to $1.00, the Japanese yen-U.S. dollar exchange rate as ofDecember 31, 2008, while P=46.20 to $1.00 and P=47.520 to $1.00 were the Philippinepeso-U.S. dollar exchange rates as of December 31, 2009 and 2008, respectively.

The following table sets out, for the years ended December 31, 2009 and 2008, the impact of therange of reasonably possible movement in the U.S. dollar, Japanese yen, European euro andPhilippine peso exchange rates with all other variables held constant, First Gen Group’s incomebefore income tax and equity (due to changes in the fair value of monetary assets and liabilities):

2009 2008

Change inExchange Rate

(in Philippine Pesoagainst U.S. Dollar)


(in European Euroagainst U.S.

Dollar)


(in Japanese Yenagainst U.S. Dollar)


(in Philippine Pesoagainst U.S. Dollar)

10% (10%) 10% (10%) 10% 10% (10%) 10%(Amounts in Millions)

Increase (decrease) in income beforeincome tax ($19.9) $24.3 ($0.6) $1.4 $32.6 ($52.7) $17.7 ($14.5)

Increase (decrease) in equity (5.5) 0.1 – – – – 35.0 (28.6)

The effect of changes in European rate against U.S. dollar in 2008 arises from the fair valuemovements of the embedded currency option of FG Hydro (see Note 33).

The effect of changes in foreign currency rates in equity is exclusive of the impact of changesaffecting First Gen Group’s consolidated statements of income.

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Equity Price RiskEquity price risk is the risk that the fair value of traded equity instruments decrease as the result ofthe changes in the levels of equity indices and the value of the individual stocks.

As of December 31, 2009 and 2008, First Gen Group’s exposure to equity price risk is minimal.

Credit RiskFirst Gen Group trades only with recognized, reputable and creditworthy third parties and/ortransacts only with institutions and/or banks which have demonstrated financial soundness. It isFirst Gen Group’s policy that all customers who wish to trade on credit terms are subject to creditverification procedures. In addition, receivable balances are monitored on an ongoing basis andthe level of the allowance account is reviewed on an ongoing basis to ensure that First GenGroup’s exposure to doubtful accounts is not significant.

With respect to credit risk arising from the other financial assets of First Gen Group, whichcomprise of cash and cash equivalents, nontrade and other receivables, royalty fees chargeable toNPC and restricted cash deposits, First Gen Group’s exposure to credit risk arises from a possibledefault of the counterparties with a maximum exposure equal to the carrying amount of theseinstruments.

Credit Risk ExposureThe table below shows the gross maximum exposure to credit risk of First Gen Group as ofDecember 31, 2009 and 2008, without considering the effects of collaterals and other credit riskmitigation techniques:

2009 2008Financial assets at FVPL

Derivative assets $– $13,657Loans and receivables

Cash and cash equivalents 125,529 229,561Receivables:

Trade 89,486 161,494Due from related parties 20,151 1,005Receivables from Meralco on Annual Deficiency 10,503 29,288Others 1,194 14,316

Long-term receivables:Concession receivables – 674,471Other long-term receivables - net – 17,253

Advances to minority shareholder 99,719 104,030Royalty fees chargeable to NPC – 2,568Restricted cash deposits – 856Other current assets 144 152Total loans and receivables 346,726 1,234,994

AFS financial assetsInvestments in proprietary membership shares 526 508Investments in quoted government debt securities – 14,194Investments in quoted equity instruments – 284Investments in unquoted equity instruments – 2Total AFS financial assets 526 14,988

$347,252 $1,263,639

Aging Analysis of Financial AssetsAs of December 31, 2009, First Gen Group’s total financial assets amounted to $347.3 million.These financial assets are neither past due nor impaired.


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The table below shows the aging analysis of First Gen Group’s financial assets as ofDecember 31, 2008:

2008Neither Past Due but not Impaired

Past Duenor

ImpairedLess than

30 Days31 Days

to 1 Year

Over1 Year upto 3 Years

Over3 Years

Past Dueand

Impaired Total(Amounts in Millions)

Cash and cash equivalents $229.65 $– $– $– $– $– $229.65Receivables:

Trade 161.08 – 0.42 – – 0.04 161.54Others 14.83 0.22 0.24 0.02 0.01 – 15.32

Long-term receivables:Concession receivables 674.47 – – – – – 674.47Receivables from Meralco

on Annual Deficiency 29.29 – – – – – 29.29Other long-term receivables 9.89 0.03 6.26 1.07 – 41.27 58.52

Advances to minorityshareholder 104.03 – – – – – 104.03

AFS financial assets -Investments in government

debt securities and equityinstruments 14.99 – – – – – 14.99

Royalty fees chargeable to NPC 2.57 – – – – – 2.57Restricted cash deposits 0.86 – – – – – 0.86Other current assets 0.15 – – – – – 0.15Financial asset at FVPL:

Range Bonus Forwards 12.92 – – – – – 12.92Foreign currency options 0.74 – – – – – 0.74

Total $1,255.47 $0.25 $6.92 $1.09 $0.01 $41.31 $1,305.05

As of December 31, 2008, the allowance for impairment losses pertaining to the past due andimpaired receivables of EDC amounted to $41.3 million (see Notes 8 and 13).

Credit Quality of Financial AssetsThe evaluation of the credit quality of First Gen Group’s financial assets considers the paymenthistory of the counterparties.

Financial assets are classified as ‘high grade’ if the counterparties are not expected to default insettling their obligations, thus, credit risk exposure is minimal. These counterparties normallyinclude banks, related parties and customers who pay on or before due date. Financial assets areclassified as ‘standard grade’ if the counterparties settle their obligations to First Gen Group withtolerable delays.

As of December 31, 2009, financial assets categorized as neither past due nor impaired andviewed by management as ‘high grade’ considering the collectability of the receivables and thecredit history of the counterparties.

Credit Concentration RiskThe Parent Company, through its operating subsidiaries FGP and FGPC, earns substantially all ofits revenue from Meralco. Meralco is committed to pay for the capacity and energy generated bythe San Lorenzo and Santa Rita power plants under the existing long-term PPAs which are due toexpire in September 2027 and August 2025, respectively. While the PPAs provide for themechanisms by which certain costs and obligations including fuel costs, among others, are pass-through to Meralco or are otherwise recoverable from Meralco, it is the intention of the ParentCompany, FGP and FGPC to ensure that the pass-through mechanisms, as provided for in theirrespective PPAs, are followed.

140


Notes to Consolidated Financial Statements (Amounts in U.S. Dollars and in Thousands, Unless Otherwise Stated)- 84 -

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For the geothermal and power generation business, EDC trades with only one major customer,which is NPC. Any failure on the part of NPC to pay its obligations to EDC would significantlyaffect EDC’s business operations. As a matter of practice, EDC monitors closely its collectionwith NPC and charges interest on delayed payments following the provision in the respectiveSSAs and PPAs.

Under the current regulatory regime, the generation rates charged by FGP and FGPC to Meralcoare not subject to regulations and are complete pass-through charges to Meralco’s customers.

First Gen Group’s exposure to credit risk arises from default of the counterparties, with amaximum exposure equal to the carrying amounts of the receivables from Meralco, in the case ofFGP and FGPC, and receivables from NPC, in the case of EDC.

The table below shows the risk exposure in respect to credit concentration of First Gen Group asof December 31, 2009 and 2008:

2009 2008Trade receivables from:

Meralco $89,405 $60,765NPC – 97,864

89,405 158,629Long-term receivables:

Receivables from Meralco on AnnualDeficiency 10,503 29,288

Concession receivables – 674,471Other long-term receivables – 17,253

10,503 721,012Royalty fees chargeable to NPC – 2,568Total credit concentration risk $99,908 $882,209Receivables $110,831 $176,815Long-term receivables 10,503 723,580

Total receivables $121,334 $900,395Credit concentration percentage 82.3% 98.0%

Liquidity RiskFirst Gen Group’s exposure to liquidity risk refers to the lack of funding needed to finance itsgrowth and capital expenditures, service its maturing loan obligations in a timely fashion, andmeet its working capital requirements. To manage this exposure, First Gen Group maintains itsinternally generated funds and prudently manages the proceeds obtained from fund raisingactivities through the debt and equity markets. On a regular basis, First Gen Group’s TreasuryDepartment monitors the available cash balances by preparing cash position reports. First GenGroup maintains a level of cash and cash equivalents deemed sufficient to finance the operations.

In addition, First Gen Group has short-term deposits and has available credit lines with certainbanking institutions. FGP and FGPC, in particular, maintain a Debt Service Reserve Account tosustain the debt service requirements for the next payment period. As part of its liquidity riskmanagement, First Gen Group regularly evaluates its projected and actual cash flows. It alsocontinuously assesses the financial market conditions for opportunities to pursue fund raisingactivities.

As of December 31, 2009, 17.4% of First Gen Group’s debt will mature in less than a year basedon the carrying value of borrowings reflected in the consolidated financial statements.


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As of December 31, 2009, the contractual undiscounted cash flows from cash and cash equivalentsand trade receivables used for liquidity purposes amounted to $125.5 million and $89.5 million,respectively (see Notes 7 and 8).

The tables below summarize the maturity profile of First Gen Group’s financial liabilities as ofDecember 31, 2009 and 2008 based on the contractual undiscounted payments:

2009On

DemandLess than3 Months

3 to 12Months

Over 1 Yearup to 5 Years

Over5 Years Total

Accounts payable andaccrued expenses* $42,524 $24,034 $– $– $– $66,558

Due to related parties 6,711 – – – – 6,711Bonds payable – 6,389 121,010 303,836 – 431,235Long-term debt – – 101,134 651,274 574,582 1,326,990Obligations to Gas Sellers on Annual

Deficiency – – 9,378 – – 9,378Total loans and borrowings 49,235 30,423 231,522 955,110 574,582 1,840,872Derivative contract receipts – – (1,857) (114,737) (92,386) (208,980)Derivative contract payments – – 3,449 100,535 57,194 161,178Total financial liability accounted for as

cash flow hedges – – 1,592 (14,202) (35,192) (47,802)$49,235 $30,423 $233,114 $940,908 $539,390 $1,793,070

2008On

DemandLess than3 Months

3 to 12Months

Over 1 Yearup to 5 Years

Over5 Years Total

Loans payable $– $41,970 $164,326 $– $– $206,296Accounts payable and

accrued expenses* 67,473 81,096 – – – 148,569Due to related parties 7,056 – – – 7,056Bonds payable – 9,461 9,360 425,345 444,166Long-term debt – 16,971 583,424 808,518 579,190 1,988,103Obligations to Gas Sellers on Annual

Deficiency – 20,837 16,207 – – 37,044Royalty fees payable – 35,528 – – – 35,528Deferred payment facility with PSALM – – 16,654 66,617 – 83,271Obligations to power plant contractors – 1,284 1,139 – – 2,423Total loans and borrowings 74,529 207,147 791,110 1,300,480 579,190 2,952,456Derivatives at FVPL -

Foreign currency forward – – 1,142 – – 1,142Derivative contract receipts – – (8,359) (28,972) (25,969) (63,300)Derivative contract payments – – 16,024 67,140 47,103 130,267Total financial liability accounted for as

cash flow hedges – – 7,665 38,168 21,134 66,967$74,529 $207,147 $799,917 $1,338,648 $600,324 $3,020,565

*Excluding output VAT, local and other taxes and payables to government agencies.

Fair Value Hierarchy of Financial Assets and LiabilitiesThe table below summarizes the fair value hierarchy of First Gen Group’s financial assets andliabilities that are recorded at fair value. The hierarchy of these assets and liabilities are based onthe inputs used to derive the fair value of such financial assets and liabilities and are categorized asfollows:

a) Level 1 category includes financial assets and liabilities whose fair value is based on quotedmarket price in active markets for identical assets and liabilities;

b) Level 2 category includes financial assets and liabilities whose fair value uses inputs otherthan quoted prices included in Level 1 that are observable for the asset or liability, eitherdirectly (as prices) or indirectly (derived from prices); and

c) Level 3 category includes those financial assets and liabilities whose fair value is derivedusing inputs that are not based on observable market data.

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December 31, 2009Fair Value Level 1 Level 2 Level 3

Financial liabilities accountedfor at FVPL -Derivative liabilities $1,732 $– $– $1,732

Financial liabilities accountedfor as cash flow hedges -Derivative liabilities 23,603 – 23,603 –

December 31, 2008Fair Value Level 1 Level 2 Level 3

Financial assetsFinancial assets at FVPL -

Derivative asset $13,657 $– $13,657 $–AFS:

Debt investment 14,194 14,194 – –Equity investment 284 284 – –

Financial liabilities accountedfor as at FVPL -Derivative liabilities 1,952 – 1,142 810

Financial liabilities accountedfor as cash flow hedges -Derivative liabilities 59,051 – 59,051 –

For the years ended December 31, 2009 and 2008, there were no transfers between Level 1 andLevel 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

The financial instrument classified under Level 3 pertains to the derivative liability fromembedded derivatives on CBs. This was classified as such because of the credit spread used asinput to the fair value calculation of the embedded derivatives which was assessed by First GenGroup as having a significant impact to its fair value.

The fair value changes of the embedded derivatives on CBs are shown in Note 33 to theconsolidated financial statements of First Gen Group.

To assess the impact of the credit spreads used, First Gen Group performed a sensitivity analysisusing an assumed increase/(decrease) in the credit spread, the results of which are shown below:

Increase/(Decrease)in credit spread

Change in fair value ofembedded derivatives

2009 100 bps ($2,959)(100) bps 3,006

2008 100 bps ($1,577)(100) bps 1,609

Capital ManagementThe primary objective of First Gen Group’s capital management is to ensure that it maintains astrong credit rating and healthy capital ratios in order to support its business, and maximizeshareholder value.

First Gen Group manages its capital structure and makes adjustments to it, in light of changes inbusiness and economic conditions. To maintain or adjust the capital structure, First Gen Groupmay adjust the dividend payment to shareholders, return capital to shareholders or issue newstocks (see Note 24). No changes were made in the objectives, policies or processes for the yearsended December 31, 2009, 2008 and 2007.


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First Gen Group monitors capital using a debt-to-equity ratio which is total long term-debt (net ofdebt issue costs) divided by total long-term debt plus total equity. First Gen Group’s practice is tokeep the debt-to-equity ratio lower than 75:25.

2009 2008Loans payable $– $200,461Accounts payable and other liabilities* 168,504 297,736Bonds payable 385,337 362,978Long-term debt 746,823 1,591,386Obligations to Gas Sellers on Annual Deficiency 9,378 36,696Royalty fees payable – 35,528Deferred payment facility with PSALM – 61,288Obligations to power plant contractors – 2,354Total debt $1,310,042 $2,588,427Equity attributable to the equity holders of the

Parent Company $663,034 $458,660Minority interests 144,003 559,751

Total equity $807,037 $1,018,411Total debt and equity $2,117,079 $3,606,838Debt-to-equity ratio 62:38 72:28* Excluding deferred income tax liabilities and derivative liabilities

First Gen Group’s subsidiaries are obligated to perform certain covenants with respect tomaintaining specified debt-to-equity and minimum debt-service-coverage ratios, as set forth intheir respective agreements with the creditors. As of December 31, 2009 and 2008, First GenGroup is in compliance with those covenants.

33. Financial Instruments

Set out below is a comparison by category of the carrying values and fair values of First GenGroup’s financial instruments as at December 31, 2009 and 2008 that are carried in theconsolidated financial statements:

2009 2008Carrying

Value FairValueCarrying

Value Fair ValueFinancial AssetsFinancial assets at FVPL -

Derivative assets* $– $– $13,657 $13,657Loans and receivables:

Cash and cash equivalents 125,531 125,531 229,647 229,647Receivables:

Trade 89,486 89,486 161,494 161,494Others 21,345 21,345 15,321 15,321

Long-term receivables:Concession receivables – – 674,471 651,565Receivables from Meralco

on Annual Deficiency 10,503 9,997 29,288 29,009Other long-term receivables – – 17,253 17,253

Advances to minority shareholder 99,719 92,615 104,030 101,446

(Forward)

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2009 2008Carrying

Value Fair ValueCarrying

Value Fair ValueRoyalty fees chargeable to NPC $– $– $2,568 $2,568

Restricted cash deposits – – 856 856Other current assets 144 144 152 152

Total loans and receivables 346,728 339,118 1,235,080 1,209,311AFS financial assets:

Investments in proprietarymembership shares 526 526 508 508

Investments in quoted governmentdebt securities – – 14,194 14,194

Investments in quoted equityinstruments – – 284 284

Investments in unquoted equityinstruments – – 2 2Total AFS financial assets 526 526 14,988 14,988

$347,254 $339,644 $1,263,725 $1,237,956

Financial LiabilitiesFinancial liabilities at FVPL -

Derivative liabilities $1,732 $1,732 $1,952 $1,952Loans and borrowings:

Loans payable – – 200,461 200,461Accounts payable and accrued

expenses** 79,733 79,733 148,569 148,569Due to related parties 6,711 6,711 7,056 7,056Bonds payable 385,337 397,150 362,978 218,556Long-term debt 746,823 751,891 1,591,386 1,659,007Obligations to Gas Sellers on

Annual Deficiency 9,378 9,378 36,696 36,696Deferred payment facility with

PSALM – – 61,288 70,659Royalty fees payable – – 35,528 35,528Obligations to power plant

contractors – – 2,354 2,354Total loans and borrowings 1,227,982 1,244,863 2,446,316 2,378,886

Financial liability accounted for ascash flow hedges -Derivative liabilities 23,603 23,603 59,051 59,051

$1,253,317 $1,270,198 $2,507,319 $2,439,889** Includes derivative asset included in “Other noncurrent assets” account amounting to $0.7 million** Excluding output VAT, local and other taxes and payables to government agencies

Fair Value and Categories of Financial InstrumentsThe fair values of cash and cash equivalents, current portion of receivables, restricted cashdeposits, other current assets, loans payable, accounts payable and accrued expenses, due torelated parties and obligations to power plant contractors approximate the carrying values atfinancial reporting date, due to the short-term maturities of the transactions.

Concession receivablesThe fair value of concession receivables was determined by discounting the expected free cashflows using the applicable rates as of December 31, 2008 ranging from 5.26% to 15.03%.


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Advances to minority shareholderThe fair value of advances to minority shareholder was determined by discounting future cashflows using the prevailing LIBOR interest rates as of December 31, 2009 and 2008 ranging from0.2900% and 4.5577% and 1.5562% to 2.7150%, respectively.

AFS financial assetsThe fair values of AFS financial assets are based on quoted market prices as at financial reportingdate. For equity instruments that are not quoted, the investments are carried at cost less allowancefor impairment losses due to the unpredictable nature of future cash flows and the lack of suitablemethods of arriving at a reliable fair value.

Loans payable, long-term debt, obligations to Gas Sellers on Annual Deficiency and royalty feespayableThe fair values of loans payable, long-term debt, obligations to Gas Sellers on Annual Deficiencyand royalty fees payable were computed by discounting the instruments’ expected future cashflows using the prevailing credit adjusted LIBOR interest rates ranging from 0.4365% to 2.76% asof December 31, 2008.

Deferred payment facility with PSALMThe fair value of deferred payment facility with PSALM was computed by discounting thefacility’s expected future cash flows using the prevailing credit adjusted Philippine GovernmentZero Coupon Yield interest rates ranging from 5.82% to 6.71% as of December 31, 2008.

Peso bonds payableThe fair value of the Peso Bonds payable was computed by discounting the bonds’ expected futurecash flows using the prevailing credit adjusted PDEx interest rates for the Peso Bonds as ofDecember 31, 2009 and 2008 ranging from 4.07% to 4.79% and 5.38% to 6.5920%, respectively.

The fair value of the CBs was computed using the U.S. Zero-rate government bond for theConvertible Bond ranging from 0.051% to 1.160% and 0.0476% to 1.565% on December 31, 2009and 2008, respectively.

The fair value of freestanding derivative assets and liabilities are based on counterparty valuation.The fair value of embedded derivatives are based on valuation technique which makes use ofmarket observable inputs except for the credit spread using 8.75% and 61.66% in 2009 and 2008,respectively, in the valuation of the embedded derivatives on CBs.

Derivative Financial InstrumentsFirst Gen Group enters into derivative transactions such as interest rate swaps and currencyforwards to hedge its interest rate and foreign exchange risks arising from its floating rateborrowings or foreign denominated borrowings. These derivatives (including embeddedderivatives) are accounted for either as Derivatives not designated as accounting hedges orDerivatives designated as accounting hedges.

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The table below shows the fair value of First Gen Group’s outstanding derivative financialinstruments, reported as assets or liabilities, together with their notional amounts as ofDecember 31, 2009 and 2008 (amounts in millions). The notional amount is the basis upon whichchanges in the value of derivatives are measured.

2009 2008DerivativeLiabilities

NotionalAmount

DerivativesAssets

DerivativeLiabilities

NotionalAmount

Derivatives not Designated asAccounting Hedges

Freestanding derivatives:Range bonus forwards $– $– $12.9 $– ¥8,000.0Currency forwards – – – 1.1 $100.0

Embedded derivatives:Embedded derivatives on CBs 1.7 260.0 – 0.8 $260.0Currency options – – 0.7 – €22.0

Derivatives Designated asAccounting Hedges

Freestanding derivatives -Interest rate swaps 23.6 459.0 – 59.1 $481.8

Total derivatives $25.3 $13.6 $61.0Presented as:

Current $– $12.9 $1.1Noncurrent 25.3 0.7 59.9

Total derivatives $25.3 $13.6 $61.0

Derivatives not Designated as Accounting HedgesFirst Gen Group’s derivatives not designated as accounting hedges include embedded derivativesin host financial and non-financial contracts and freestanding derivatives used to economicallyhedge certain exposures but were not designated by Management as accounting hedges. Suchderivatives are classified as at FVPL with changes in fair value directly taken to consolidatedstatements of income.

EDC’s and FG Hydro’s derivatives that are not designated as accounting hedges weredeconsolidated as of April 30, 2009.

Embedded Derivatives in CBsAs discussed in Note 20, at inception, multiple embedded derivatives in the CBs were bifurcated.The fair value of the embedded equity conversion, call and put options in the CBs issued by theParent Company was computed using the indirect method of valuing multiple embeddedderivatives. This valuation method compares the fair value of the option-free bond against the fairvalue of the bond as quoted in the market. The difference in the fair values is assigned as the fairvalue of the embedded derivatives. As of December 31, 2009 and 2008, the fair value of theembedded derivatives amounted to a loss of $1.7 million and $0.8 million, respectively, usingcredit adjusted U.S. dollar risk-free rates ranging from 0.051% to 2.220% and 0.0489% to1.5650%, respectively.

The table below summarizes the net movements in the fair values of the multiple embeddedderivatives as of December 31, 2009 and 2008:

2009 2008Fair value at inception/beginning of year $810 $13,000Net changes in fair value during the year 922 (12,190)Balance at end of year $1,732 $810


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The net changes in fair value during the year were taken to “Mark-to-market gain on derivatives -net” account in the consolidated statements of income.

Embedded Currency Options. As of December 31, 2008, FG Hydro has embedded currencyoptions in its PRUP Contract with Andritz Hydro GmbH (Contractor) (see Note 35). Under thePRUP Contract, FG Hydro has the option to pay the Contractor in European Euro (Euro) or inU.S. dollar at a strike rate of €1.4691 to $1.00 for the original contract and €1.5549 to $1.00 forthe contract options availed during the year. The fair value of the outstanding embedded currencyoptions on the remaining unpaid contract price of €22.0 million as of December 31, 2008amounted to a gain of $0.7 million (P=34.9 million). The embedded currency options will matureon various dates until December 2010 or upon full payment and completion of the related hostcontract. As of December 31, 2009, the embedded currency options has a nil value due to theeffects of deconsolidation (see Note 4).

The fair value of derivative asset pertaining to the embedded currency options in the PRUPContract of FG Hydro with Andritz Hydro GmbH was computed using Garman-Kohlhagen model.This valuation model takes into account the spot price and risk free interest rates of bothcurrencies prevailing at valuation period and historical volatility rates. As of April 30, 2009 andDecember 31, 2008, the spot prices used were $1.3265 to €1.00 and $1.3951 to €1.00,respectively. The prevailing USD risk-free rates used as of April 30, 2009 andDecember 31, 2008 range from 0.8520% to 1.3890% and 0.0489% to 0.7736%, respectively, andthe Euro risk-free interest rates range from 1.7035% to 1.7630% as of December 31, 2008.

The table below summarizes the net movements in the fair values of the embedded currencyoptions as of December 31, 2009 and 2008:

2009 2008Fair value at the beginning of the year $734 $–Net changes in fair value during the year (426) 803Settled during the year – (117)Foreign exchange differences 2 48Effects of deconsolidation (310) –Balance at end of year $– $734

The net changes in fair value of the derivative asset pertaining to the embedded currency optionsof FG Hydro for the four-month period ended April 30, 2009 and for the year endedDecember 31, 2008 were taken to the net income from discontinued operations, presented in theconsolidated statements of income, due to the deconsolidation (see Note 5).

Freestanding DerivativesIn 2008, EDC entered into derivative transactions to match the foreign currency exposure arisingfrom its Miyazawa 1 loan. As of December 31, 2008, EDC has positions in the following types offreestanding derivatives, namely: (i) Range Bonus Forward Contracts and (ii) Foreign CurrencyForward Contracts, to protect itself against foreign currency risk arising from the fluctuations inthe exchange rate of the Philippine peso in relation to the foreign currency.

Range Bonus Forward ContractsA range bonus forward contract is an agreement that provides protection against unfavorableexchange rate movement by setting an agreed rate at which a company can exchange one currencyfor another. At the same time, it provides that for each day during the fixing period that the spotrate is outside the predetermined range, a company will accrue a premium based on a specifiedformula, which is payable at maturity.

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On April 30, 2008 and May 2, 2008, EDC entered into two range bonus forward contractscovering ¥5.0 billion and ¥3.0 billion of its Miyazawa 1 loans, respectively. The terms of thecontracts allow EDC to purchase from the counterparty at maturity date, ¥8.0 billion in exchangeof $72.7 million based on the agreed forward rate of ¥110. At the same time, it provides that EDCshall pay a premium equal to 13.4% x $47.8 million x n/N (for the ¥5.0 billion) and13.06% x $28.6 million x n/N (for the ¥3.0 billion), where n is equal to the number of businessdays that the spot rate is outside the range and N is equal to the total number of Tokyo businessdays, for each day that the spot rate is outside the ¥96-¥106 and ¥97-¥107 predetermined ranges,respectively.

As of December 31, 2008, the aggregate fair value of the range bonus forward contracts amountsto a gain of $12.9 million. The total accrued premium payable for the said ¥5.0 billion and¥3.0 billion range bonus forward contracts totaled to $2.4 million and $1.2 million, respectively.These premiums were based on a total number of days of 99 days (for the ¥5.0 billion) and86 days (¥3.0 billion), that the spot rate is outside the predetermined ranges. The said amounts areincluded under “Accounts payable and accrued expenses” account in the 2008 consolidatedstatements of financial position.

The Range Bonus Forward Contracts matured on May 28, 2009.

Foreign Currency Forward ContractsForeign currency forward contracts are contractual agreements to buy or sell a foreign currency atan agreed rate on a future date. These are contracts that are customized and transacted with a bankor a financial institution.

In 2008, EDC also entered into nine deliverables buy U.S. dollar and sell Philippine peso ForeignCurrency Forward Contracts with various counterparty banks. As of December 31, 2008, theforeign currency forward contracts of EDC have an aggregate notional amount of $100.0 million.The weighted average forward rate of the outstanding forward contracts is P=48.71 to $1.00. As ofDecember 31, 2008, the mark-to-market loss recognized from these contracts amounted to$1.1 million. These forward contracts matured on May 28, 2009.

The net movements in fair value changes of EDC’s freestanding derivative transactions as ofDecember 31, 2009 and 2008 are as follows:

2009 2008Fair value at beginning of year $11,781 $–Net changes in fair value during the year (3,165) 21,591Foreign exchange differences (168) (9,810)Deconsolidation of discontinued operations (8,448) –Balance at end of year $– $11,781Presented as:

Derivative asset $– $12,923Derivative liability – (1,142)

$– $11,781

The net changes in the fair value of EDC’s derivative instruments during the years 2009 and 2008were taken into “Net income from discontinued operations” account in the consolidated statementsof income, net of accrual of premium on the range bonus forwards amounting to $4.0 million forthe year ended December 31, 2008.


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Derivatives Designated as Accounting HedgesFirst Gen Group has interest rate swaps accounted for as cash flow hedges for its floating rateloans. Under a cash flow hedge, the effective portion of changes in fair value of the hedginginstrument is recognized as cumulative translation adjustments in other comprehensive income(loss) until the hedged item affects earnings.

Cash Flow Hedge - FGPCOn November 14, 2008, FGPC entered into eight interest rate swap agreements with the hedgeproviders namely: Société Générale (Singapore Branch), Bayerische Hypo-und Vereinsbank AG(Hong Kong Branch), Calyon and Standard Chartered Bank. On the same date, FGPC designatedthe interest rate swaps as effective hedging instruments to hedge the interest cashflow variabilityin the Covered and Uncovered Facilities, attributable to the movements in the six-month LIBORinterest rates (see Note 21).

Under the four interest rate swap agreements that hedge 100% of the Covered Facility, FGPC paysa fixed rate of 4.4025% and receives a floating rate based on 6-month U.S. LIBOR flat on theaggregate amortizing notional amount of $312.0 million, simultaneous with the interest paymentsevery May and November on the hedged loan. The notional amounts of the interest rate swaps areamortizing based on the repayment schedule of the hedged loan. The interest rate swapagreements have a term of 12 ½ years and will mature on May 10, 2021 (coinciding with thematurity of the hedged loan).

Under the four interest rate swap agreements that hedge 75% of the Uncovered Facility, FGPCpays a fixed rate of 4.0625% and receives a floating rate of based on 6-month U.S. LIBOR flat onthe aggregate amortizing notional amount of US$141.0 million, simultaneous with the interestpayments every May and November on the hedged loan. The notional amounts of the interest rateswaps are amortizing based on the repayment schedule of the hedged loan. The interest rate swapshave a term of 8 ½ years and will mature on May 10, 2017 (coinciding with the maturity of thehedged loan).

As of December 31, 2009 and 2008, the aggregate fair value of the interest rate swaps that wasdeferred to cumulative translation adjustments amounted to $15.1 million (net of related deferredtax effect of $16.5 million) and $39.3 million (net of related deferred tax effect of $16.8 million),respectively.

Cash Flow Hedge - FGPIn 2002, FGP entered into an interest rate swap agreement with ABN AMRO Bank NV to hedgehalf of its floating rate exposure on its ECGD Facility Agreement (see Note 21). Under theinterest rate swap agreement, FGP pays a fixed rate of 7.475% and receives a floating rate of U.S.LIBOR plus spread of 215 basis points, on a semi-annual basis, simultaneous with the interestpayments every June and December on the hedged loan. The notional amount of interest rateswap is amortizing based on the repayment schedule of hedged loan. The interest rate swapagreement will mature in December 2014 (coinciding with the maturity of the hedged loan).

As of December 31, 2009 and 2008, the fair value of the interest rate swap that was deferred tocumulative translation adjustments amounted to $1.4 million (net of related deferred income taxeffect of $0.1 million) and $2.1 million (net of related deferred income tax effect of $0.9 million),respectively.

There was no ineffectiveness recognized in the consolidated statements of income for the yearsended December 31, 2009 and 2008.

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The outstanding aggregate notional amount and the related mark-to-market losses of the interestrate swaps designated as cash flow hedges as of December 31, 2009 and 2008 are as follows:

2009 2008Notional amount $458,975 $481,750Mark-to-market losses 23,603 59,051

The net movements in the fair value of derivative transactions are as follows:

2009 2008Fair value at beginning of year ($59,051) ($1,315)Fair value change taken into other comprehensive

income (loss) during the year 22,812 (58,182)Fair value change realized during the year 12,636 446Fair value at end of year (23,603) (59,051)Deferred income tax effect on cash flow hedges 7,081 17,715Fair value deferred into equity ($16,522) ($41,336)

Fair value changes during the year are recorded in the consolidated statement of comprehensiveincome, net of deferred income tax under the “Cumulative translation adjustments” account in theconsolidated statements of financial position. The fair value change realized during the year wastaken into “Interest expense and financing charges” account in the consolidated statements ofincome. This pertains to the net difference between the fixed interest paid/accrued and the floatinginterest received/accrued on the interest rate swap agreements as at financial reporting date.

Reconciliation of Net Fair Value Changes on DerivativesThe table below summarizes the mark to market gain (loss) on First Gen Group’s derivativeinstruments recognized in the consolidated statements of income:

2009 2008Freestanding derivatives*:

Range bonus forwards $– $22,825Foreign currency forwards – (1,234)

– 21,591Embedded derivatives:

Currency options* – 803Multiple derivatives on CBs** (922) 12,190

(922) 12,993Total* ($922) $34,584* Presented in the consolidated statements of income as part of “Net income from discontinued operations”

account, net of accrual of premium as of December 31, 2008 on the range bonus forwards amounting to$4.0 million.

** Presented in the consolidated statements of income as mark-to-market gain (loss) on derivatives - net.


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34. Significant Contracts, Franchise, Commitments and Contingencies

a. Power Purchase Agreements

FGP and FGPCFGP and FGPC each have an existing PPA with Meralco, the largest power distributioncompany operating in the island of Luzon and the Philippines and the sole customer of bothcompanies. Under the PPA, Meralco will purchase in each Contract Year from the start ofcommercial operations, a minimum number of kWh of the net electrical output of FGP andFGPC for a period of 25 years. Billings to Meralco under the PPA are substantially in U.S.dollar and a small portion is billed in Philippine peso.

On January 7, 2004, Meralco, FGP and FGPC signed the Amendment to their respectivePPAs. The negotiations resulted in a package of concessions including the assumption of FGPand FGPC of community taxes at current tax rate, while conditional concessions includeincreasing the discounts on excess generation, payment of higher penalties for non-performance up to a capped amount, recovery of accumulated deemed delivered energy until2011 resulting in the non-charging of Meralco of excess generation charge for such energydelivered beyond the contracted amount but within a 90% capacity quota. The amended termsunder the respective PPAs of FGP and FGPC were approved by the Energy RegulatoryCommission (ERC) on May 31, 2006.

Under the respective PPAs of FGP and FGPC, the fixed capacity fees and fixed operating andmaintenance fees are recognized monthly based on the actual NDC tested and proven, whichis usually conducted on a semi-annual basis. Total fixed capacity fees and fixed operating andmaintenance fees amounted to $286.2 million in 2009, $288.8 million in 2008 and$276.6 million in 2007. Total value of power sold to Meralco by FGP and FGPC (whichalready includes the fixed capacity fees and fixed operating and maintenance fees mentionedabove) amounted to $1,009.1 million in 2009, $1,211.1 million in 2008 and $976.8 million in2007.

FG BukidnonOn January 9, 2008, FG Bukidnon and Cagayan Electric Power and Light Co., Inc.(CEPALCO), an electric distribution utility operating in the City of Cagayan de Oro, signed aPower Supply Agreement (PSA) for the FG Bukidnon plant. Under the PSA, FG Bukidnonshall generate and deliver to CEPALCO and CEPALCO shall take, or pay for if not taken, theAvailable Energy for a period commencing on the commercial operations date untilMarch 28, 2025. The terms and conditions of the PSA are still subject to the review by theERC and the effectivity and commercial operations date of the PSA will coincide with the dateof ERC approval of the agreement. The sale to CEPALCO of the plant’s output sinceMarch 29, 2005 has been governed by a MOA signed by both parties in 2005.

On February 15, 2010, FG Bukidnon received the decision from ERC datedNovember 16, 2009 which modified some of the terms of the PSA. On March 2, 2010, FGBukidnon filed a Motion for Reconsideration (MR) with the ERC. As of March 19, 2010, FGBukidnon is still awaiting the ERC’s reply to the MR, thus the sale of the plant’s output toCEPALCO continues to be governed by the MOA.

FG HydroFG Hydro has existing contracts, which were transferred by NPC to FG Hydro as part of theacquisition of PAHEP/MAHEP for the supply of electric energy with several customers withinthe vicinity of Nueva Ecija. FG Hydro shall generate and deliver to these customers the

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contracted energy on a monthly basis. FG Hydro is bound to service these customers of theremainder of the stipulated terms, the range of which falls between June 2007 and 2010.

These contracts may be renewable upon renegotiation with the customers and due process asstipulated by the ERC. As of December 31, 2009, there are five remaining power supplycontracts being serviced by FG Hydro.

Details of the existing contracts of FG Hydro are as follows:

Related Contracts Expiry Date Other Developments

Nueva Ecija II Electric Cooperative,Inc., Area 2 (NEECO II-Area 2)

June 25, 2008 FG Hydro and NEECO II - Area 2 have executeda new power supply agreement that is nowpending consideration by the ERC. Until theissuance of a provisional authority for saidagreement or final resolution of the applicationfor the approval thereof, the ERC approved theextension of the TPSC on a month-to-month oron a per billing period basis.

Pantabangan Municipal ElectricSystem (PAMES)

December 25, 2008 There is no new agreement between FG Hydroand PAMES yet. In the meantime, FG Hydrohas continued to supply electricity to PAMES ona month-to-month basis.

Nueva Ecija I Electric Cooperative,Inc. (NEECO I)

December 25, 2012 A new agreement was signed by FG Hydro andNEECO 1 in December 2007 for the supply ofpower in the succeeding five years. The ERChas provisionally approved this agreementpending final resolution of the application for theapproval thereof.

Edong Cold Storage and Ice Plant December 25, 2010 None

NIA-Upper Pampanga RiverIntegrated Irrigation System

December 25, 2010 None

EDCEDC has existing PPAs with NPC for the development, construction and operation of ageothermal power plant by EDC in the service contract areas and the sale to NPC of theelectrical energy generated from such geothermal power plants. The PPA provides, amongothers, that NPC pays EDC a base price per kWh of electricity delivered subject to inflationadjustments. The PPAs are for a period of 25 years of commercial operations and may beextended upon the request of EDC by notice of not less than 12 months prior to the end ofcontract period, the terms and conditions of any such extension to be agreed upon by theparties.

Details of the existing PPAs are as follows:

Contract Area Contracted Annual Energy End of ContractLeyte-CebuLeyte-Luzon

1,370 gigawatt-hour (GWh)3,000 GWh

July 2021July 2022

47 MW Mindanao I 330 GWh for the 1st year and 390 GWh forthe succeeding years

March 2022

48.25 MW Mindanao II 398 GWh June 2024

The PPA for Leyte-Cebu-Luzon service contract stipulates a nominated energy of not lowerthan 90% of the contracted annual energy.


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On November 12, 1999, NPC agreed to accept from EDC a combined average annualnominated energy of 4,455 GWh for the period July 25, 1999 to July 25, 2000 for Leyte-Cebuand Leyte-Luzon PPA. However, the combined annual nominated energy startingJuly 25, 2000 is currently under negotiation with NPC. The contracts are for a period of25 years commencing in July 1996 for Leyte-Cebu and July 1997 for Leyte-Luzon.

Green Core Geothermal Inc. (GCGI)With GCGI’s takeover of Palinpinon and Tongonan power plants effective October 23, 2009,Schedule X of the Asset Purchase Agreement (APA) provides for the extension to GCGI ofPower Supply Contracts of NPC with the following assigned customers:

Customers Contract ExpirationPalinpinon

V.M.C. Rural Electric Service Cooperative, Inc. (VRESCO) December 25, 2010Central Negros Electric Cooperative, Inc. (CENECO) December 25, 2010Dynasty Management Development Corp. (DMDC) March 15, 2016Aklan Electric Cooperative, Inc. (AKELCO) December 25, 2009 a

Guimaras Electric Cooperative, Inc. (GUIMELCO) December 25, 2012Iloilo I Electric Cooperative, Inc. (ILECO I) December 25, 2009 b

Philippine Foremost Milling Corp. (PFMC) March 25, 2016Iloilo Provincial Government (IPG) December 25, 2011

TongonanDon Orestes Romualdez Electric Cooperative, Inc.

(DORELCO)September 25, 2010

Leyte II Electric Cooperative, Inc. (LEYECO II) December 25, 2009 c

Philippine Phosphate Fertilizer Corp. (PHILPHOS) December 25, 2011Philippine Associated Smelting and Refining Corp. (PASAR) December 25, 2012 d

a GCGI won in the public bidding conducted by AKELCO and is now in the process of negotiating for the power supplyagreement for the period March 26, 2010 to December 25, 2020. Until the agreement is finalized and submitted to the ERC,AKELCO on December 7, 2009 has requested from the ERC the approval of the Contract for the Supply of Electric Energy(CSEE) assigned by NPC to GCGI from December 26, 2009 to March 25, 2010.b GCGI has continued to supply electricity to ILECO I in accordance with the contracted energy provisions of the CSEEsubject to adjustment retroactive to December 26, 2009 upon approval by the ERC of the new PSA.c GCGI has continued to supply electricity to LEYECO II in accordance with the contracted energy provisions of the CSEEsubject to adjustment retroactive to December 26, 2009 upon approval by the ERC of the new PSA.d A new contract was signed between GCGI and PASAR on November 24, 2009 for the supply of electric energy untilDecember 25, 2012.

GCGI is currently working towards tapping new customers in Panay, Negros and Leyte gridsfor the supply of electrical energy generated by Palinpinon and Tongonan power plants andtowards renewal of contracts with existing customers for optimal power plant operation.

b. Stored Energy Commitment of EDC

On various dates, EDC entered into Addendum Agreements to the PPA for Unified LeyteProject and Geothermal Resources Sales Contact (GRSC) for BacMan 2 projects, where anyexcess generation above the nominated energy or take-or-pay volume will be credited againstpayments made by NPC for the periods it was not able to take electricity or steam, whereapplicable.

As of December 31, 2009, the commitment for stored energy follows (in GWh):

Contract Area Stored EnergyUnified Leyte 4,326.6BacMan 2 - Cawayan 583.2

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c. Geothermal Service Contracts/Renewable Energy Service Contracts of EDC

By virtue of P.D. No. 1442, EDC entered into seven GSCs with the Philippine Governmentthrough the DOE granting EDC the right to explore, develop, and utilize the country’sgeothermal resource subject to sharing of net proceeds with the Philippine Government. Thenet proceeds is what remains after deducting from the gross proceeds the allowablerecoverable costs, which include development, production and operating costs. The allowablerecoverable costs shall not exceed 90% of the gross proceeds. EDC pays 60% of the netproceeds as share of the Philippine Government and retains the 40%.

The 60% share of the Philippine Government comprises royalty fees and income taxes. Theroyalty fees are shared by the Philippine Government through the DOE (60%) and the LGU(40%).

EDC secured an approval from the DOE to defer remittance of the royalty portion of the shareof the Philippine Government at P=180.0 million per year. A portion of the said payment wasapplied to the amortization of deferred royalty fees as of December 31, 1999 and 1998, andthe balance is or will be applied to future obligations. On March 23, 2004, EDC and DOEagreed to increase the royalty payment plan from P=180.0 million per year to P=200.0 millionper year starting 2004. A portion of the revised payment was applied to the amortization ofthe deferred royalty fees as of December 31, 2004 and 2003 and the balance will be applied tofuture obligations for existing EDC operating projects. However, remittances to the LGU ofits share in royalty fees are made as they fall due pursuant to the Local Government Code(LGC). Total royalty fees due to DOE and LGU as of December 31, 2008 are shown inNote 19.

R.A. 9513, “An Act Promoting the Development, Utilization and Commercialization ofRenewable Energy Resources and for Other Purposes,” otherwise known as the “RenewableEnergy Act of 2008” or the “RE Act”, mandates the conversion of existing service contractsunder P.D. 1442 into RE Service Contracts to avail of the incentives under the RE Law. EDCsubmitted its letter of intent to register with the DOE as an RE Developer on May 20, 2009and the conversion contracts negotiation with the DOE started in August 2009.

On September 10, 2009, EDC was granted the Provisional Certificate of Registration as an REDeveloper for the following existing projects: (1) GSC No. 01 0 - Tongonan, Leyte, (2) GSCNo. 02 - Palinpinon, Negros Oriental, (3) GSC No. 03 - Bacon-Manito, Sorsogon/Albay,(4) GSC No. 04 - Mt. Apo, North Cotabato, and (5) GSC No. 06 - Northern Negros.

With the receipt of the certificates of provisional registration as geothermal RE Developer, thefiscal incentives of the RE Act was implemented by EDC retroactive from the effective date ofthe RE Act. Thus, the incentives provided by P.D. 1442 are effective until January 2009.The GSCs were fully converted to GRESCs upon signing of the parties on October 23, 2009;thereby EDC is now the holder of five (5) GRESCs and the corresponding DOE Certificate ofRegistration for the following geothermal production fields: (1) GRESC 2009-10-001 forTongonan, Leyte; (2) GRESC 2009-10-002 for Palinpinon, Negros Oriental; (3) GRESC2009-10-003 for Bacon-Manito, Sorsogon/Albay; (4) GRESC 2009-10-004 for Kidapawan,North Cotabato; and (5) GRESC 2009-10-005 for Northern Negros.

Under the GRESCs, EDC pays the Philippine Government an amount equivalent to 1.5% ofthe gross income from the sale of geothermal steam produced and such other incomeincidental to and arising from generation, transmission, and sale of electric power generatedfrom geothermal energy within the contract areas. Under the GRESCs, gross income derivedfrom business is an amount equal to gross sales less sales returns, discounts and allowances,


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and cost of goods sold. Cost of goods sold includes all business expenses directly incurred toproduce the steam used to generate power under a GRESC.

The Philippine Government is entitled to receive 60.0% of the 1.5% government share in thegross income of EDC, and the remaining 40.0% is allocated to the local government within theapplicable contract area.

The DOE approved the application of EDC for the 20-year extension of the Tongonan,Palinpinon and Bacon-Manito GSCs. The extension is embodied in the fourth amendment tothe GSCs dated October 30, 2003. The amendment extended the Tongonan GSC fromMay 15, 2011 to May 16, 2031, while the Palinpinon and Bacon-Manito GSCs are extendedfrom October 16, 2011 to October 17, 2031.

d. Steam Sales Agreements and Geothermal Resource Sales Contracts (GRSCs) of EDC

EDC has existing SSAs for the supply of the geothermal energy currently produced by itsgeothermal projects to BOT-contractors and the power plants owned and operated by NPC.Under the SSA, NPC agrees to pay EDC a base price per kWh of gross generation for all theservice contract areas, except for Tongonan I Project, subject to inflation adjustments, andbased on a guaranteed TOP rate at certain percentage plant factor. NPC pays EDC a baseprice per kWh of net generation for Tongonan I Project. The SSA is for a period of 20 to 25years.

Details of the existing SSAs are as follows:

Contract Area Guaranteed TOP End of ContractTongonan I 75% plant factor June 2009Palinpinon I 75% plant factor June 2009Palinpinon II (covers four

modular plants)50% for the 1st year, 65% for the2nd year, 75% for the 3rd

and subsequent years

December 2018 -March 2020

BacMan I 75% plant factor November 2013BacMan II (covers two 20 MW

modular plants)50% for the 1st year, 65% for the2nd year, 75% for the 3rd

and subsequent years

March 2019 andDecember 2022

SSAs of Tongonan I, Palinpinon I and Palinpinon II remained effective until the turnover ofthe power plants to GCGI on October 23, 2009 [see Note 35(b)], at which time their respectiveGRSC became effective. Under the GRSCs which will terminate in 2031, GCGI agrees to payEDC remuneration for actual net electricity generation of the plant with steam prices inU.S. dollars per kilowatt hour tied to coal indices.

e. Build-Operate-Transfer (BOT) Agreements

BPPCBPPC has an existing Project Agreement with NPC. Under the Project Agreement, NPCsupplies all the fuel required to generate electricity, with all electricity generated purchased byNPC. BPPC is entitled to payment of fixed capacity and operations and maintenance feesbased on the nominated capacity as well as energy fees from the delivery of electric power toNPC. The Project Agreement is for a period of 15 years which runs up to July 2010 (Co-operation period). Upon expiration of the 15-year period, BPPC shall transfer to NPC all ofits rights, titles and interests in the power plant complex, free from liens created by BPPC andwithout any compensation.

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In line with the Electric Power Industry Reform Act (EPIRA)-mandated Independent PowerProducers (IPP) contracts review, PSALM, NPC and BPPC executed and signed in 2005 aGeneral Framework Agreement (GFA) that embodied the renegotiated terms and conditions ofthe BOT Agreement. The GFA caps at 215 MW the Bauang plant’s nominated capacity andobligates BPPC to make the P=0.01/kWh contribution to an environment fund from theeffective date of the GFA up to the end of Co-operation Period. Conversely, this paves wayfor allowing the heat run of the Bauang plant at 8.5 MW for one hour daily, except onweekends and holidays, during extended economic shutdown and the carryover of 50% of theplant’s unutilized downtime allowance up to three years. The GFA likewise permits thepursuit of bilateral contracts for ancillary services and the excess 10 MW capacity withNational Transmission Corporation (TransCo) and power purchasers, respectively, under anincome sharing arrangement subject to certain limitations and restrictions. The NationalEconomic Development Authority (NEDA) approved the GFA on July 11, 2007.

Energy Conversion Agreements (ECAs) of EDCEDC entered into ECA with various international geothermal power producers (BOTContractors) for the construction and operation of power plants in Leyte and Mindanao toconvert the geothermal steam to be supplied by EDC to electricity. Under the ECA, the BOTContractor delivers electricity to NPC on behalf of EDC.

LeyteUnder the ECA with the BOT Contractors, namely: California Energy International Ltd. for(a) 125 MW Power Plant - Upper Mahiao Agreement; (b) 231 MW Power Plant - MalitbogAgreement; and (c) 180 MW Power Plant - Mahanagdong Agreement, and with Ormat Inc. forthe Leyte Optimization Project BOT Agreement, EDC pays the BOT Contractors monthlyenergy fees computed based on actual energy delivered and capacity fees. Capacity fees,which include capital and fixed operating cost recovery fees and service fees, are computed onper kilowatt (kW) nominated capacity basis. The fees, except for the capital cost recoveryfees, are subject to inflation adjustments.

The ECAs are for a period of 10 years. The ownership of the Upper Mahiao Power Plant wastransferred to EDC on June 25, 2006; Malitbog and Mahanagdong Power Plants weretransferred on July 25, 2007; and the Optimization Power Plant on September 25, 2007.

MindanaoUnder the ECA with Oxbow Power Corporation and Marubeni Corporation (Marubeni), EDCpays the BOT Contractors monthly energy efficiency fees and capacity fees and excess energyfees. Capacity fees, which include capital and fixed operating cost recovery fees and servicefees, are computed on per kW nominated capacity basis. Excess energy fees are payment toBOT Contractors for energy generated on top of the nominated capacity. The fees, except forenergy efficiency fees and capital cost recovery fees, are subject to inflation adjustments.

The contract is for a period of ten years until March 2007 for Mindanao I (47 MW) and June2009 for Mindanao II (48.25 MW). An amendment to the Mindanao I ECA was signed onNovember 17, 2006, extending the contract period to June 2009 with the correspondingrestructuring of the BOT fees.

The fair value of these ECAs are included in determining the fair value of the constructionservices accounted for under Philippine Interpretation IFRIC 12, as discussed in Note 3.

On June 18, 2009, Marubeni turned over the Mindanao I and II power plants to EDC. Theseare the power plants built under the BOT scheme under the ECA between EDC and Marubeni.


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f. Gas Sale and Purchase Agreements

FGP and FGPC each have an existing GSPA with the consortium of Shell PhilippinesExploration B.V., Shell Philippines LLC, Chevron Malampaya, LLC and PNOC ExplorationCorporation (collectively referred to as Gas Sellers), for the supply of natural gas inconnection with the operations of the power plants. The GSPA, now on its eighth ContractYear, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to $207.6 million in 2009, $272.1 million in2008 and $208.3 million in 2007 for FGP, and $405.1 million in 2009, $543.4 million in 2008and $422.6 million in 2007 for FGPC.

Under the GSPA, FGP and FGPC are obligated to consume (or pay for, if not consumed)a minimum quantity of gas for each Contract Year (which runs from December 26 of aparticular year up to December 25 of the immediately succeeding year), called theTake-Or-Pay Quantity (TOPQ). Thus, if the TOPQ is not consumed within a particularContract Year, FGP and FGPC incur an “Annual Deficiency” for that Contract Yearequivalent to the total volume of unused gas (i.e., the TOPQ less the actual quantity of gasconsumed). FGP and FGPC are required to make payments to the Gas Sellers for suchAnnual Deficiency after the end of the Contract Year. After paying for Annual Deficiencygas, FGP and FGPC can, subject to the terms of the GSPA, “make-up” such AnnualDeficiency by consuming the unused-but-paid-for gas (without further charge) within10-Contract Year after the Contract Year for which the Annual Deficiency was incurred, in theorder that it arose.

For Contract Year 2006, the Gas Sellers issued the Annual Reconciliation Statements (ARS)of FGP and FGPC on December 29, 2006. The Gas Sellers are claiming Annual Deficiencypayments for Contract Year 2006 amounting to $3.9 million for FGP and $5.4 million forFGPC. Both FGP and FGPC disagree that such Annual Deficiency payments are due andeach claimed for among others, relief due to events of force majeure (EFM) that affected theSan Lorenzo and Santa Rita plants, respectively. FGP’s and FGPC’s position is that thepower plants actually consumed more than their respective TOPQs and are entitled to make-upits Outstanding Balance of Annual Deficiency.

Pursuant to the terms of the GSPA, the dispute on the above matter is now under arbitration inHong Kong, SAR under the International Chamber of Commerce (ICC) Rules of Arbitration.The arbitral tribunal (“Tribunal”) rendered a Partial Final Award on August 11, 2009 whichwas received by FGP and FGPC on August 18, 2009. The Tribunal determined that thetransmission related events claimed by FGP and FGPC constitute EFM under the GSPAs, andthat, therefore, the companies can claim relief for those events that have actually occurredsubject to adjustments stipulated in the GSPAs. The Tribunal was not persuaded, however,that the government related events claimed by FGP and FGPC for Contract Year 2006constitute EFM under the GSPAs based on the evidence presented.

The calculation of adjustments to the ARS for Contract Year 2006 based on the Partial FinalAward of the Tribunal, as well as entitlement to and the amount of costs, damages, andinterest, are yet to be agreed by the parties. This will be decided upon by the Tribunal shouldthe parties fail to reach agreement on the quantum.

The alleged Annual Deficiency for contract year 2006 is presented as part of “Obligations toGas Sellers on Annual Deficiency” account in the consolidated statements of financialposition and the corresponding receivables from Meralco is presented as part of “Long-termreceivables” account in the consolidated statements of financial position (see Note 13).

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g. Wind Energy Service Contract of EDC

On September 14, 2009, EDC has entered into a Wind Energy Service Contract (WESC) withthe DOE granting EDC the right to explore and develop the Burgos wind project for a periodof 25 years from effective date. The pre-development stage under the WESC shall be twoyears which can be extended for another one year if EDC has not been in default in itsexploration or work commitments and has provided a work program for the extension periodupon confirmation by the DOE. The WESC also provides that upon submission of thedeclaration of commercial viability, as confirmed by the DOE, the WESC shall remain inforce during the remaining life of the 25-year of the WESC for the development/commercialstage. The DOE shall approve the extension of the WESC for another 25 years under the sameterms and conditions, provided that EDC is not in default in any material obligations under theWESC, and has submitted a written notice to the DOE for the extension of the contract notlater than one (1) year prior to the expiration of the 25-year period. The WESC provides thatall materials, equipment, plants and other installations erected or placed on the contract areaby EDC shall remain the property of EDC throughout the term of the contract and after itstermination.

h. Lubricating Oil Supply Agreement

BPPC entered into a supply contract with Pilipinas Shell Petroleum Corporation, whereby thelatter will supply lubricating oil for a period of 15 years until 2010 at the agreed priceindicated in the contract. The price is subject to adjustments twice a year based on variousconditions, such as changes in the cost or rates of the product, among others.

i. Operating and Maintenance (O&M) Agreements - FGP and FGPC

FGP and FGPC have separate O&M Agreements with Siemens Power Operations, Inc. (SPO)mainly for the operation, maintenance, management and repair services of their respectivepower plants. As stated in the respective O&M Agreements of FGP and FGPC, SPO isresponsible for maintaining adequate inventory of spare parts, accessories and consumables.SPO is also responsible for replacing and repairing the necessary parts and equipment of thepower plants to ensure the proper operation and maintenance of the power plants to meet thecontractual commitments of FGP and FGPC under their respective PPAs and in accordancewith the Good Utility Practice. Total O&M costs charged to the consolidated statements ofincome amounted to $36.3 million in 2009, $36.8 million in 2008 and $34.1 million in 2007.As of December 31, 2009 and 2008, certain O&M fees amounting to $66.7 million and$43.2 million, respectively, which relate to major spare parts that will be replaced during thescheduled maintenance outage, were presented as part of “Other noncurrent assets” account inthe consolidated statements of financial position (see Note 17).

Based on the current operating regime of both plants, it is estimated that the Santa Rita andSan Lorenzo O&M Agreements will expire around the second quarter of 2010. FGP andFGPC are currently considering the options for the plants’ operation and maintenance afterexpiry of their respective O&M agreements with SPO.

j. Substation Interconnection Agreement

FGPC has an agreement with Meralco and NPC for: (a) the construction of substationupgrades at the NPC substation in Calaca and the donation of such substation upgrades toNPC; (b) the construction of a 35-kilometer transmission line from the power plant to the NPCsubstation in Calaca and subsequent donation of such transmission line to NPC; (c) the


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interconnection of the power plant to the NPC Grid System; and (d) the receipt and delivery ofenergy and capacity from the power plant to Meralco’s point of receipt.

As of December 31, 2009, FGPC is still in the process of transferring the substation upgradesin Calaca, as well as the 230 kV Santa Rita to Calaca transmission line, to NPC.

k. Interim Interconnection Agreement

FGP has an agreement with NPC and Meralco whereby NPC will be responsible for thedelivery and transmission of all energy and capacity from FGP’s power plant to Meralco’spoint of receipt.

l. Franchise

The Parent Company, through FGHC, has a franchise granted by the 11th Congress of thePhilippines through R.A. No. 8997 to construct, install, own, operate and maintain a naturalgas pipeline system for the transportation and distribution of the natural gas throughout theisland of Luzon (the “Franchise”). The Franchise is for a term of 25 years untilFebruary 25, 2026. FGHC must commence the exercise of any privileges granted under theFranchise within five years (until February 25, 2006) from its effectivity, otherwise, theFranchise shall be deemed revoked. As of March 19, 2010, FGHC, through its subsidiary FGPipeline, has secured ECCs on two pipeline projects, namely the Calabarzon Pipeline and theBatangas Natural Gas Distribution Pipeline. The ECCs were obtained on May 14, 2004 andAugust 1, 2005, respectively, and has undertaken substantial pre-engineering works anddesign and commenced preparatory works for the right-of-way acquisition activities. TheECCs are valid for a period of five years.

m. Tax Contingencies

FGPCFGPC was assessed by the BIR on July 19, 2004 for deficiency income tax for taxable years2001 and 2000. FGPC filed its Protest Letter to the BIR on October 5, 2004. On account ofthe BIR’s failure to act on FGPC’s Protest within the prescribed period, FGPC filed with theCourt of Tax Appeals (CTA) on June 30, 2005 a Petition against the Final Assessment Noticesand Formal Letters of Demand issued by the BIR. On February 20, 2008, the CTA grantedFGPC’s Motion for Suspension of Collection of Tax until the case is resolved with finality. Asof March 19, 2010, the court proceedings are still on-going with the CTA. Managementbelieves that the resolution of this assessment will not materially affect First Gen Group’sconsolidated financial statements.

On June 25, 2003, FGPC received various Notices of Assessment and Tax Bills dated April 15and 21, 2003 from the Provincial Government of Batangas, through the Office of theProvincial Assessor, imposing an annual real property tax (RPT) on steel towers,cable/transmission lines and accessories (the T-Line) amounting to $0.2 million (P=12 million)per year. FGPC, claiming exemption from said RPT, appealed the assessment to theProvincial Local Board of Assessment Appeals (LBAA) and filed a Petition onAugust 13, 2003, praying for the following: (1) that the Notices of Assessment and Tax Billsissued by the Provincial Assessor be recalled and revoked; and (2) that the Provincial Assessordrop from the Assessment Roll the 230 KV transmission lines from Sta. Rita to Calaca inaccordance with Section 206 of the LGC. FGPC argued that the T-Line does not constitutereal property for RPT purposes, and even assuming that the T-Line is regarded as realproperty, FGPC is still not liable for RPT as it is NPC/TransCo, a government-owned andcontrolled corporation (GOCC) engaged in the generation and/or transmission of electric

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power, which has actual, direct and exclusive use of the T-Line. Pursuant to Section 234 (c)of the LGC, a GOCC engaged in the generation and/or transmission of electric power andwhich has actual, direct and exclusive use thereof, is exempt from RPT.

FGPC sought for, and was granted, a preliminary injunction by the Regional Trial Court(Branch 7) of Batangas City to enjoin the Provincial Treasurer of Batangas City fromcollecting the RPT pending the decision of the LBAA. Despite the injunction, the LBAAissued an Order dated September 22, 2005 requiring FGPC to pay the RPT within 15 daysfrom receipt of the Order. On October 22, 2005, FGPC filed an appeal before the CentralBoard of Assessment Appeals (CBAA) assailing the validity of the LBAA order. In aResolution rendered on December 12, 2006, the CBAA set aside the LBAA Order andremanded the case to the LBAA. The LBAA was directed to proceed with the case on themerits without requiring FGPC to first pay the RPT on the questioned assessment. As ofMarch 19, 2010, the LBAA case remains pending.

On May 23, 2007, the Province filed with the Court of Appeals (“CA”) a Petition for Reviewof the CBAA Resolution. The CA dismissed the petition on June 12, 2007; however, it issuedanother Resolution dated August 14, 2007 reinstating the petition filed by the Province. In adecision dated March 8, 2010, the CA dismissed the petition for lack of jurisdiction.

In connection with the prohibition case pending before the Regional Trial Court (Branch 7) ofBatangas City which previously issued the preliminary injunction, the Province filed onMarch 17, 2006 an Urgent Manifestation and Motion requesting the court to order the partiesto submit memoranda on whether or not the Petition for Prohibition pending before the courtis proper considering the availability of the remedy of appeal to the CBAA. The RegionalTrial Court denied the Urgent Manifestation and Motion, and is presently awaiting the finalityof the issues on the validity of the RPT assessment on the T-Line. As of March 19, 2010, theinjunction issued by the Regional Trial Court is still valid.

BPPCThere are ongoing cases involving the assessment of real property tax (RPT) and franchise taxby the local government. BPPC believes that under its BOT Agreement with NPC, any RPTand franchise tax that may be found due is for the sole account of NPC.

i) The Bauang Plant equipment were originally classified as tax-exempt under the individualtax declarations until the Province of La Union (the “LGU”) revoked exemption andissued real property tax assessments in 1998. This marked the inception of the first case.With NPC responsible for the payment of property taxes under the BOT Agreement, theyfiled with the LBAA a petition to declare exempt the equipment and machinery at theBauang Plant but was ruled unfavorably. The matter was brought up to the CBAA whereBPPC intervened. The CBAA affirmed the LBAA’s decision. Consequently, NPC andBPPC elevated their respective cases to the Court of Tax Appeals (CTA). When bothappeals were denied by the CTA in February 2006, NPC appealed the decision directly tothe Supreme Court (SC) while BPPC filed a Motion for Reconsideration with the CTA.The CTA ultimately denied the motion resulting in BPPC’s filing with the SC onSeptember 11, 2006 a Petition for Review on Certiorari reiterating NPC’s exemption fromRPT.

The Petition with the SC filed by BPPC was denied in November 2006. BPPC thereafterfiled succeeding motions that were similarly denied in April 2007 and July 2007 while theNPC case remains pending with the SC at that time. This paved way for the filing by theLGU in August 2007 of a motion for an SC dismissal of the NPC-filed case.


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To protect the plant assets from any untoward action by local government, BPPC andNPC obtained in May 2001 a Writ of Preliminary Injunction against the collection of RPTby the LGU until the SC rules on the NPC Petition.

In total disregard of a valid injunction premised on a final SC decision in July 2007, theLGU issued in December 2007 a Final Notice of Delinquency and a subsequent Warrantof Levy for the unpaid RPT on the Bauang Plant equipment. Similarly, the LGUattempted to collect the arrears on the RPT on buildings and improvements, which NPCstopped paying since 2003, and included these assets in the levy. The inability of NPC tosettle the amounts due within the grace period resulted to the public auction of the assetson February 1, 2008.

In the absence of a bidder at auction proper, the alleged tax-delinquent assets wereforfeited and deemed sold to the LGU. Nevertheless, Section 263 of RA No. 7160 alsoknown as the Local Government Code of 1991, accords the taxpayer the right to redeemthe property within one (1) year from date of sale/forfeiture (the “Redemption Period”).

Since auction date, NPC and BPPC pursued in parallel legal and extra-judicial actions.BPPC filed on January 17, 2008, supplemented on February 15, 2008, a petition citing theProvince in contempt for disregarding a valid injunction for proceeding with tax collectionpending final resolution of both NPC and BPPC cases in the Supreme Court. InDecember 2008, the court required both parties to file their respective memoranda. BPPCcomplied with the order on January 5, 2009. The Court has not issued a decision as ofMarch 19, 2010.

In parallel, the Solicitor General (SolGen) filed with the SC in July 2008 a SupplementalPetition to elevate all NPC RPT cases for en-banc decision and seek nullification of theBauang Plant auction. In the absence of any action from the SC, the SolGen and NPCfiled in November 2008 an urgent motion for the issuance of a Temporary RestrainingOrder (TRO) against any action by the LGU to take ownership and possession of theplant. On January 30, 2009, the2nd Division of the SC issued a resolution finding the NPCnot exempt from RPT. NPC filed a Motion for Reconsideration in February 2009 but thesame was denied with finality in the SC minute resolution dated April 20, 2009.

For failure to redeem the plant at expiry of redemption period, the LGU onFebruary 10, 2009 consolidated title to and ownership of the plant assets by issuing newtax declarations in its name. Subsequently, NPC offered a settlement package for theP=1.87 billion real property tax arrears which the LGU accepted. However, theMemorandum of Agreement (MOA) was not finalized because negotiations were abortedin April 2009 in the absence of a clean direction to NPC from the Department of Financeand the Department of Budget and Management. As of March 19, 2010, a MOA iscurrently being prepared in this regard. The custody and operation of the Bauang planthas remained with BPPC since February 1, 2009. BPPC will turn over the plant to NPCon July 25, 2010 pursuant to BOT Agreement.

ii) The second case was filed by NPC, for itself and on behalf of BPPC, following issuanceof a revised assessment of RPT on BPPC’s machinery and equipment on July 15, 2003 bythe Municipal Assessor of the Municipality of Bauang, La Union. Under the said revisedAssessment, the maximum tax liability for the period 1995 to 2003 is about $16.3 million(P=775.1 million), based on the maximum 80% assessment level imposable onprivately-owned entities and a tax rate of 2%. In addition, interest on the unpaid amounts(2% per month not exceeding 36 months) has reached a total amount of $10.3 million

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(P=489.0 million). As of March 19, 2010, the case remains pending with the LBAA of theProvince of La Union.

In any event, BPPC believes that NPC shall be directly responsible for the payment of allRPT that may be assessed on machinery and equipment at Bauang Plant, pursuant to theterms of the Project Agreement which specifically provides that NPC shall pay all taxesand assessments in respect of the site, machinery and equipment and improvementsthereon.

As of March 19, 2010, the potential maximum tax liability on BPPC’s machinery andequipment for the period from 1995 to 2009 is about $25.9 million (P=1.2 billion), based onthe maximum 80% assessment level imposable on privately-owned entities and at a taxrate of 2%. In addition, maximum interest on the tax liability (2% per month notexceeding 36 months) amounts to $17.8 million (P=824.3 million).

While BPPC maintains its position that, pursuant to the terms of the BOT Agreement, it isNPC that is ultimately responsible for the payment of all RPT related to the power plant,and that BPPC has the right of recourse against NPC for whatever amount of RPT it maybe required to pay, BPPC recognized as of December 31, 2009 a “Provision for realproperty taxes” amounting to $45.0 million (including buildings and improvements andinterest) in accordance with PAS 37. Correspondingly, BPPC also recognized a“Receivable from NPC” for the same amount representing its claim for reimbursement forreal property taxes. The combined effect of the provision and the claim forreimbursement is presented on a net basis in BPPC’s statements of comprehensiveincome.

Movements of provision for real property taxes are as follows:

2009 2008(Amounts in Millions)

Balance at beginning of year $41.7 $44.4Provision during the year 2.2 3.0Foreign exchange loss (gain) 1.1 (5.7)Balance at end of year $45.0 $41.7

iii) The third case was filed on October 19, 2005 by NPC, for itself and on behalf of BPPC,following receipt of Statement of Account from the Municipal Treasurer datedAugust 5, 2005 for RPT on BPPC’s buildings and improvements from 2003 toAugust 2005 amounting to $0.09 million (P=4.2 million). The case is pending with theLBAA of the Province of La Union. NPC paid all RPT on buildings and improvementsdirectly to the local government from 1995 until 2003, when it stopped payment of the taxand claimed an exemption under the Local Government Code.

Despite the pendency of the case at the LBAA, these properties were included in theFebruary 1, 2008 auction by the LGU.

As of March 19, 2010, the potential maximum tax liability on BPPC’s buildings andimprovements for the year ended December 31, 2009 is about $1.3 million(P=58.0 million), including interest up to 2009 and alleged back-taxes dating back from1995 to 2002.


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iv) BPPC also filed a Petition for Certiorari and Prohibition in September 2004, to contest anassessment for franchise tax for the period 2000 to 2003 amounting to $0.7 million(P=33.0 million), including surcharges and penalties, on the ground that BPPC is not apublic utility which is required by law to obtain a legislative franchise before operating,thus is not subject to franchise taxes. As of March 19, 2010, the case remains pendingbefore the RTC of Bauang, La Union.

Both NPC and BPPC believe that they are not subject to pay franchise tax to the localgovernment. In any case, BPPC believes that the Project Agreement with NPC allowsBPPC to claim indemnity from NPC for any new imposition, including franchise tax,incurred by BPPC that was not originally contemplated when it entered into said ProjectAgreement.

As of December 31, 2009 and 2008, there are no provisions for probable losses arisingfrom legal contingencies recognized in the consolidated financial statements.

n. Lease Commitments

First Gen Group has a non-cancelable lease agreement with FPRC on its occupied officespace. The term of the lease is for a period of five years retroactive to August 1, 2003 or uponoccupancy of the leased premises, whichever is earlier, and automatically expires onJuly 31, 2007. The lease agreement includes a clause to enable upward revision of the rentalcharged at a rate agreed-upon by First Gen Group and FPRC at the end of each year. Thelease agreement with FPRC was renewed for one year from August 1, 2009 to July 31, 2010.

FGPC has a non-cancelable annual offshore lease agreement with the DENR for the lease of aparcel of land in Sta. Rita, Batangas where the power plant complex is located. The term ofthe lease is for a period of 25 years starting May 26, 1999 for a yearly rental of $0.05 million(P=3.0 million) and renewable for another 25 years at the end of the term. The land will beappraised every ten years and the annual rental after every appraisal shall not be less than 3%of the appraised value of the land plus 1% of the value of the improvements, provided thatsuch annual rental cannot be less than $0.05 million (P=3.0 million).

FG Bukidnon has a non-cancelable lease agreement with PSALM on the land occupied by itspower plant. The term of the lease is for a period of 20 years commencing onMarch 29, 2005, renewable for another period of 10 years or the remaining corporate life ofPSALM, whichever is shorter. The rental paid in advance by FG Bukidnon for the entire termis $0.02 million (P=1.12 million).

As of December 31, 2009 and 2008, future minimum rental payments under thenon-cancelable operating leases with FPRC and the DENR are as follows:

2009 2008Within one year $262 $298After one year but not more than five years 231 266After five years 521 734

$1,014 $1,298

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EDC as a Lessee. Future minimum lease payments under the operating leases as ofDecember 31, 2008 are as follows:

Within one year $216After one year but not more than five years 21After five years –

$237

EDC’s lease commitments pertain to drilling rig and various office and warehouse rentals.

Under the terms and conditions governing the rig lease agreement with PNOC ExplorationCorporation (PNOC EC), EDC shall use the Kremco 750T drilling rig for the Lihir IslandDrilling Project with an operating rental rate of $2,352/day, inclusive of 12% VAT. Theagreement took effect last March 1, 2008 and was amended to extend the period from January1, 2010 to December 31, 2010 under the same rates and terms.

EDC as a Lessor. EDC has an existing Contract of Lease for the use of the office buildings atFort Bonifacio with PNOC EC with a rental rate of $0.09 million per month (P=4.2 million),inclusive of VAT. The Contract of Lease covers the use of office space of Building 2,Building 3, Building 4A/4B, Computer Center, Laboratory, Wellness Center/PEGEA Office,and Motorpool/Storage, with a total area of 11,824.24 sq.m. This contract commenced onJune 1, 2009 and will expire on November 30, 2011, subject to pre-termination as provided inSection 17 or renewal at the option of the Lessor as provided in Section 3 of the Contract ofLease.

35. Other Matters

A. EDC

a. Renewable Energy (RE) Law of 2008 (the “Act”)

On January 30, 2009, R.A. No. 9513 became effective as disclosed in Note 34(c). OnMay 25, 2009, DOE Circular No. DC2009-05-0008, otherwise known as the “ImplementingRules and Regulations (IRR) of Republic Act No. 9513,” was issued and became effective onJune 12, 2009. The RE Act aims to accelerate the exploration and development of REresources, increase the utilization of renewable energy resources, increase the utilization ofrenewable energy, encourage the development and utilization of renewable energy resourcesas tools to effectively prevent or reduce harmful emissions, and establish the necessaryinfrastructure and mechanism to carry out mandates specified in the RE Act.

The RE Act also provides various fiscal and non-fiscal incentives to RE developers andmanufacturers, fabricators, and suppliers of locally-produced RE equipment and components.The incentives to RE developers include, among others, ITH for the first 7 years of the REdevelopers’ commercial operations or, if there’s failure to receive ITH, accelerateddepreciation; duty free importation of RE machinery, equipment and materials; special realtytax rates on civil works, equipment, machinery, and other improvements not to exceed 1.5%of the original cost less accumulated normal depreciation or net book value; NOLCO duringthe first 3 years from the start of commercial operations to be carried over as a deduction fromgross income for the next 7 consecutive taxable years; 10% corporate income tax after ITH;0% percent VAT tax rate on sale of power and purchase of local supply of goods, properties,and services; cash incentive for missionary electrification; tax exemption of proceeds from thesale of carbon emission credits; and tax credit on domestic capital equipment and services.


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On August 10, 2009, the DOE issued the “Guidelines Governing a Transparent andCompetitive System of Awarding Renewable Energy Service/Operating Contracts andProviding for the Registration Process of Renewable Energy Developers” (DOE Circular No.DC2009-07-0011), and the “Guidelines for the Accreditation of Manufactures, Fabricators andSuppliers of Locally-Produced Renewable Energy Development Equipment and Components(DOE Circular No. DC2009-07-0010). The DOE had since then began executing variousservice/operating contracts with Renewable Energy developers.

b. Acquisition of Palinpinon and Tongonan Geothermal Power Plants (PTGPP)

On September 16, 2009, PSALM issued the Notice of Award and Certificate of Effectivity toGCGI, a wholly-owned subsidiary of FL Geothermal. FL Geothermal is a wholly-ownedsubsidiary of EDC. The Notice of Award officially declares GCGI as the winning bidder ofthe 192.5 MW Palinpinon Geothermal Power Plant located in Dumaguete, Negros Occidentaland 112.5 MW Tongonan Geothermal Power Plant located in Leyte.

The APA for the PTGPP between PSALM and GCGI became effective onSeptember 16, 2009. Under the terms of the APA, GCGI is required to deliver 40% of thepurchase price of $206 million as up-front payment payable on or before the closing date. Thebalance of 60% may be paid in fourteen (14) semi-annual payments with an interest of 10%per annum compounded semi-annually. On October 23, 2009, GCGI paid PSALM$88.0 million (P=3.8 billion) representing the 40% upfront payment for PTGPP and$7.0 million for payment of purchase orders, rental, option price, performance security depositon land lease and insurance premiums for industrial all risks and comprehensive generalliability insurance policies. On the same date, the closing date was achieved and at which datePSALM turned over to GCGI the PTGPP on the condition it will operate, maintain, andrehabilitate the geothermal power plants in the ordinary and usual course of business.

On December 15, 2009, GCGI fully paid PSALM for the balance of 60% of $124.0 million(P=5.8 billion).

c. Waivers and Temporary Amendment of IFC Loan Agreement

As of December 31, 2009, the International Finance Corporation’s (IFC) has approved EDC’srequests for waivers and temporary amendments to the provisions of the Loan Agreementwhich prohibit EDC from issuing any guarantees and for EDC to maintain at all times on anUnconsolidated Basis, a Financial Debt to EBITDA Ratio of not more than 3.6, suchtemporary waiver to be effective for the period from September 30, 2009 to earlier of (a)December 31, 2010 or (b) the date falling at the end of any quarter ending prior toDecember 31, 2010 on which EDC has submitted evidence satisfactory to IFC that EDC’sFinancial Debt to EBITDA on a unconsolidated basis for such quarter is not more than 3.6(“Temporary Waiver Period”).

The temporary waivers and amendments to the Loan Agreement are granted subject to thefollowing conditions:

i. EDC’s issuance of a guarantee to the lenders of FG Hydro Loan for up to US$72 millionshall cover only:

The punctual and complete payment when due and payable of scheduled paymentsunder the FG Hydro Loan and specifically exclude coverage of all payments under theFG Hydro Loan due upon prepayment.

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The FG Hydro Loan will have a tenor of 10 years with a 2-year grace period forprincipal repayments and the repayments of principal shall occur in equal semi-annualinstallments and payments of interest shall be made semi-annually.

ii. The Financial Debt to EBITDA ratio was changed to not more than 6.5 effectiveSeptember 30, 2009 and until the expiration of the Temporary Waiver Period; and thedefinition Spread under the Loan Agreement was changed to three point thirty-fivepercent (3.35%) per annum.

iii. A waiver processing fee of twenty thousand US dollars ($20,000), payable no later thanNovember 9, 2009. Failure to pay the waiver processing fee for a period of thirty (30)days after the date on which IFC notified the Borrower of such failure, shall constitute anevent of default under the Loan Agreement.

d. Service Concession Arrangements

EDC operates 12 geothermal projects in five geothermal service contract areas, namely LeyteGeothermal Production Field (LGPF), Southern Negros Geothermal Production Field(SNGPF), BacMan Geothermal Production Field (BGPF), Mindanao Geothermal ProductionField (MGPF) and Northern Negros Geothermal Production Field (NNGPF) under the GSCs[(see Note 34 (c)] entered into with DOE pursuant to the provisions of P.D. 1442. TheseGSCs were replaced by GRESCs on October 23, 2009. Geothermal steam produced is sold tothe NPC or are fed to EDC’s BOT contractors’ power plants to produce electricity. EDC sellssteam and power to NPC under the SSAs and PPAs, respectively.

EDC has entered into the following service contracts with the Philippine Government(represented by the Ministry/Department of Energy) for the exploration, development andproduction of geothermal fluid for commercial utilization:

a. Tongonan, Leyte, dated May 14, 1981 b. Southern Negros, dated October 16, 1981c. Bacman, Sorsogon, dated October 16, 1981d. Mt. Apo, Kidapawan, Cotabato, dated March 24, 1992e. Mt. Labo, Camarines Norte and Sur, dated March 19, 1994f. Northern Negros, dated March 24, 1994g. Mt. Cabalian, Southern Leyte, dated January 13, 1997

The exploration period under the service contracts shall be five years from the effective date,renewable for another two years, if EDC has not been in default in its exploration, financialand other work commitments and obligations and has provided a work program for theextension period acceptable to the Philippine Government. Where geothermal resource incommercial quantity is discovered during the exploration period, the service contracts shallremain in force for the remainder of the exploration period or any extension thereof and for anadditional period of 25 years thereafter, provided that, if EDC has not been in default in itsobligations under the contracts, the Philippine Government may grant an additional extensionof 15 to 20 years.

EDC shall acquire for the geothermal operations materials, equipment, plants and otherinstallations as are required and necessary to carry out the geothermal operations. Allmaterials, equipment, plants and other installations erected or placed on the contract areas of amovable nature by EDC shall remain the property of EDC unless not removed therefromwithin one year after the expiration and/or termination of the related service contract in whichcase, ownership shall be vested in the Philippine Government.


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The service contracts provide that, among other privileges, EDC shall have the right to enterinto agreements for the disposition of the geothermal resources produced from the contractareas, subject to the approval of the Philippine Government.

Pursuant to such right, EDC has entered into agreements for the sale of the geothermalresources produced from the service contract areas principally with the NPC, a government-owned and controlled corporation. These agreements are for 25 years and may berenegotiated by either party after five years from the date of commercial operations.

Pursuant to such right also, EDC has also entered into agreements with NPC for thedevelopment, construction and operation of a geothermal power plant by EDC in its GSCareas and the sale to NPC of the electrical energy generated from such geothermal powerplants. These agreements are for 25 years of commercial operations and may be extendedupon the request of EDC by notice of not less than 12 months prior to the end of the contractperiod, the terms and conditions of any such extension to be agreed upon by the parties.

EDC’s agreements with NPC for the sale of the geothermal resources produced from theservice contract areas and the sale of the electrical energy generated from the geothermalpower plants contain certain provisions relating to pricing control in the form of a cap inEDC’s internal rate of return for specific contracts; as well as for payment by NPC ofminimum guaranteed monthly remuneration and nominated capacity.

For the Northern Negros service contract, EDC does not have agreements with NPC for thesale of the geothermal resources and electrical energy produced from the service contract area.EDC instead enters into contracts with distribution utilities, electric cooperatives and otherthird party buyers of electricity for the sale of the electrical energy generated from the servicecontract.

In 2008, EDC has made a judgment that these service concessions and related arrangementsqualify for accounting under Philippine Interpretation IFRIC 12. Accordingly, EDC hasrecognized the consideration received or receivable in exchange for its infrastructureconstruction services or its acquisition of infrastructure to be used in the arrangements aseither a financial asset to the extent that EDC has an unconditional contractual right to receivecash or other financial asset for its construction services from or at the direction of the grantor,or an intangible asset for the right to charge users of the public service.

Concession receivables recognized in 2008 is included under “Long-term receivables” accountin the consolidated statements of financial position.

On October 23, 2009, the GSCs for the following contract areas were replaced by GRESCspursuant to R.A. 9513 as discussed in Note 34(c): Leyte, Southern Negros, Bacman,Mindanao, and Northern Negros. Aside from the tax incentives arising from the conversion toGRESCs as discussed in Note 35(a) to the consolidated financial statements, the significantterms of the service concessions under the GRESCs are similar to the GSCs except for EDChaving control over any significant residual interest over the steam field, power plants andrelated facilities throughout the concession period and even after the concession period. As aresult of abovementioned changes in the service concession arrangements, EDC has made ajudgment that its service concession contracts are no longer within the scope of PhilippineInterpretation IFRIC 12 starting October 23, 2009.

The DOE conducted bidding on the geothermal energy resources located in Labo, CamarinesNorte and the contract area was won by EDC. The certificate of registration as RE Developerfor this contract area was granted by the DOE on February 19, 2010.

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The remaining service contract of EDC that is still covered by P.D. 1442 as ofDecember 31, 2009 is the Mt. Cabalian in Southern Leyte, which has a term of 25 years fromthe effective date of the contract, January 31, 1997, and for an additional period of 25 years ifEDC has not been in default in its obligations under the GSC.

e. Arbitration Award of EDC

On April 24, 2008, EDC and NPC signed a Joint Manifestation and Undertaking (JMU) toabide by the arbitral decision on March 25, 2008. The arbitral decision covered the longstanding issue related to the SSAs and PPAs of EDC and NPC.

In the execution of the arbitral decision, both EDC and NPC agreed that the amount ofP=2,894.93 million shall be paid by NPC to EDC, without further interest, in accordance withthe following schedule:

Tranche Settlement Amount Payment Term Actual Date of SettlementFirst P=500.00 million 30 days from submission of JMU

to the Office of the VoluntaryArbitrator

July 15, 2008

Second 500.00 million 60 days from submission ofJMU to the Office of theVoluntary Arbitrator

July 15, 2008

Third 1,000.00 million January 2009 February 2, 2009Fourth 894.93 million January 2010 Pending collection

Full payment of the amounts indicated above shall result in a full and complete settlement ofall the claims each party has against the other, in connection with all the issues covered by theNovember 5, 2007 arbitration agreement.

B. FG Hydro

a. O&M Agreement

FG Hydro entered into an O&M Agreement with the NIA, with the conformity of NPC.Under the O&M Agreement, NIA will manage, operate, maintain and rehabilitate the Non-Power Components of the PAHEP/MAHEP in consideration for a service fee based on actualcubic meter of water used by FG Hydro for power generation.

In addition, FG Hydro will provide for a Trust Fund amounting to $2.2 million(P=100.0 million) within the first two years of the O&M Agreement. The amortization for theTrust Fund is payable in 24 monthly payments starting November 2006 and is billed by NIAin addition to the monthly service fee. The Trust Fund has been fully funded as ofOctober 2008.

The O&M Agreement is effective for a period of 25 years commencing onNovember 18, 2006 and renewable for another 25 years under the terms and conditions as maybe mutually agreed upon by both parties.

b. PRUP Contract

On January 24, 2008, FG Hydro signed the Letter of Acceptance (LA) for the PRUP withAndritz Hydro GmbH, an Austrian company.


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The contract provides that the Contractor will undertake the engineering, procurement,installation, testing and commissioning of the PRUP. The technical scope of the PRUP agreedupon by FG Hydro and the Contractor includes the following:

i. Refurbishment and upgrade of Pantabangan main and auxiliary plant which includes:

– Turbine and wicket gate replacement; headcover modification– Draft tube repair and modification– Generator rewind and refurbishment– Replacement of key auxiliary systems

ii. Power increase from 50 MW to 59.4 MW per unit

The total updated contract price of the PRUP amounts to €30.3 million ($44.7 million),including the Contract Options (CO) that will be exercised by FG Hydro. The contractprovides that payments to the Contractor are made in accordance with the Milestone Scheduleas provided in the PRUP Contract.

FG Hydro has the option to make any payments to the Contractor in U.S. dollar, at anexchange rate fixed by reference to the European Central Bank fixing rate for converting Euroto U.S. dollar as at the date of the LA, plus a premium of $0.0028 per Euro. Similarly, withrespect to the CO’s, FG Hydro also has the option to make any payments to the Contractor inU.S. dollar, at an exchange rate fixed by reference to the European Central Bank fixing ratefor converting Euro to U.S. dollar as at the date of the relevant option notice, plus a premiumof $0.0028 per Euro.

The commissioning of the first unit commenced in December 2009 and was successfullycompleted in early 2010. Consequently, the final takeover of the refurbished and upgradedplant and equipment was achieved on January 29, 2010. The power generation capacity of theupgraded and refurbished unit was increased by 10 MW.

The upgrading and refurbishment of the second unit is scheduled to commence in July 2010.Final takeover of the upgraded and refurbished unit is scheduled to take place inDecember 2010.

C. FG Bukidnon

On October 23, 2009, FG Bukidnon entered into a Hydropower Renewable Energy ServiceContract (HRESC) with the DOE, which grants FG Bukidnon the exclusive right to explore,develop, and utilize the hydropower resources within the Agusan mini-hydro contract area.Pursuant to the RE Law, the National Government and Local Government Units shall receivethe Government’s share equal to 1.0% of FG Bukidnon’s preceding fiscal year’s gross incomefor the utilization of hydropower resources within the Agusan mini-hydro contract area.

D. FG Mindanao

On October 23, 2009, FG Mindanao also signed five HRESCs with the DOE in connectionwith the following projects: 30 MW Puyo River in Jabonga, Agusan del Norte; 14 MWCabadbaran River in Cabadbaran, Agusan del Norte; 8 MW Bubunawan River in Baungonand Libona, Bukidnon; 8 MW Tumalaong River in Baungon, Bukidnon; and 20 MWTagoloan River in Impasugong and Sumilao, Bukidnon. The HRESCs give FG Mindanao theexclusive right to explore, develop, and utilize renewable energy resources within theirrespective contract areas, and will enable FG Mindanao to avail itself of both fiscal and

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non-fiscal incentives pursuant to the Act. The pre-development stage under each of theHRESCs is two years from the time of execution of said contracts (the “Effective Date”) andcan be extended for another one year if FG Mindanao has not been in default of its explorationor work commitments and has provided a work program for the extension period uponconfirmation by the DOE. Each of the HRESCs also provides that upon submission ofdeclaration of commercial viability, as confirmed by the DOE, it is to remain in force duringthe remaining life of the of 25-year period from the Effective Date. Subject to the approval ofthe DOE, FG Mindanao can request for an extension for another 25 years under the sameterms and conditions, provided that FG Mindanao is not in default in any material obligationsunder the contract and has submitted a written notice to the DOE for the extension of thecontract not later than one (1) year prior to the expiration of the 25-year period.

E. FG Northern Energy

On March 17, 2010, FGNEC executed a Subscription Agreement with Metro PacificInvestments Corporation (MPIC) and Ayala Corporation (AC) to sell 500,000 common stocksat P=1.00 per share. On the same day, MPIC and AC paid the total subscription price ofP=500,000 in full and FGNEC issued 250,000 shares each to MPIC and AC.

F. BPPC

a. Service Concession Agreement

BPPC entered into a Fast Track BOT Agreement with NPC, for the design, financing,construction, operation and maintenance of 225 MW Bunker-Fired Diesel Generator PowerPlant [see Note 34(e)]. BPPC is entitled to payment of fixed capacity and operations andmaintenance fees based on the nominated capacity of 225 MW, as well as energy fees from thedelivery of electric power to NPC. The fixed capacity and operations and maintenance feeswill be paid by NPC whether or not the energy is delivered by BPPC.

b. Transfer of Bauang Plant to NPC

The Bauang Plant commenced full commercial operations on July 25, 1995 and is committedto sell all of the power generated to NPC within a 15-year cooperation period or untilJuly 25, 2010 as provided in the BOT Agreement. The BOT Agreement likewise provides thatBPPC shall transfer the Bauang plant to NPC at the end of the cooperation period, free of liensand without the payment of any compensation by NPC. Accordingly, BPPC expects to transferthe Bauang plant to NPC in July 2010.

G. Electric Power Industry Reform Act

a. Reforms

RA No. 9136, otherwise known as the EPIRA, and the covering Implementing Rules andRegulations (IRR) provide for significant changes in the power sector, which include amongothers: the functional unbundling of the generation, transmission, distribution and supplysectors; the privatization of the generating plants and other disposable assets of the NPC,including its contracts with Independent Power Producers (IPP); the unbundling of electricityrates; the creation of a Wholesale Electricity Spot Market (WESM); and the implementation ofopen and nondiscriminatory access to transmission and distribution systems.

The EPIRA declares that the generation sector shall be competitive and open. Any entityengaged in the generation and supply of electricity is not required to secure a national


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franchise. However, the public listing of not less than 15% of common stocks of a generationcompany is required within five years from the effectivity date of the law. First Gen hascomplied with this requirement.

Cross ownership between transmission and generation companies and between transmissionand distribution companies is prohibited. As between distribution and generation, adistribution utility is not allowed to source from an associated generation company more than50% of its demand, a limitation that nonetheless does not apply with respect to contractsentered into prior to the effectivity of the law. First Gen, through its subsidiaries FGPC andFGP, has entered into PPAs with an affiliate distribution utility, Meralco, prior to theeffectivity of the EPIRA. These agreements represent only 40% of the current demand levelof Meralco.

No company or related group can own, operate or control more than 30% of the installedcapacity of a grid and/or 25% of the national installed generating capacity. Under ResolutionNo. 26, Series 2005 of the ERC, installed generating capacity is attributed to the entitycontrolling the terms and conditions of the prices or quantities of the output sold in the market.Accordingly, as of this date, the total installed capacity attributable to First Gen is2,025.79 MW, which comprises 14.43% of the national installed generating capacityamounting to 14,039.12 MW. In the Luzon, Visayas and Mindanao grids, 1,683.04 MW or15.78% of 10,664.23 MW, 341.15 MW or 20.73% of 1,645.32 MW, and 1.6 MW or 0.09% of1,729.58 MW can be attributed to First Gen, respectively.

The EPIRA further provides that the President of the Republic of the Philippines shall reducethe royalties, returns and taxes collected for the exploitation of all indigenous sources ofenergy, including natural gas, so as to effect parity of tax treatment with existing rates forimported fuels. When implemented, this provision will lower the cost of energy produced bythe Santa Rita and San Lorenzo natural gas plants of FGPC and FGP, respectively.

b. Implementation

Over the last two years, the implementation of reforms in the power industry mandated by theEPIRA attained significant momentum.

As of September 2009, PSALM has so far privatized 18 NPC generation assets in Luzon,Visayas, and Mindanao, with an aggregate installed capacity of around 3,952.33 MW.PSALM also had success with the privatization of 4 NPC-IPP Contracts in Luzon with anaggregate installed capacity of around 2,145.75 MW.

With the recently concluded bidding of the Palinpinon-Tongonan 305 MW geothermal powerplants and Naga 55 MW LBGT, NPC has privatized approximately 89% of its total installedgenerating capacity in Luzon and Visayas. With regard to the privatization of NPC IPPcontracts, PSALM has commenced bidding out agreements for IPP administration in 2009.After its completion of the bidding on the 1,000 MW Sual, 700 MW Pagbilao, 345 MW SanRoque, and 100.75 MW Bakun-Benguet, PSALM has privatized 39% of the NPC IPPcontracts.

In the privatization of NPC’s geothermal power plants, the EPIRA requires that the sameshould be combined with the appurtenant steamfield assets in one sale package. Consideringthe ownership by other entities of the steamfield assets and the intrinsic characteristic ofsteamfield operations, the Joint Congressional Power Commission issued Resolution No.2006-01 requiring PSALM to privatize NPC’s geothermal power plants that are supplied withsteam by EDC packaged with long-term steam sales agreements with EDC. Accordingly,

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PSALM and EDC executed GRESCs for NPC’s Palinpinon I, Palinpinon II and Tongonangeothermal power plants with a term of 22 years.

The 25-year concession agreement for the TransCo, which was previously spun-off fromNPC, has been awarded to the National Grid Corporation of the Philippines, a privatecompany.

On June 26, 2006, the commercial operation of the WESM in the Luzon Grid commenced.During the first year of operation, total registered peak demand reached 6,552 MW with totalregistered capacity at 11,396 MW. To date, the monthly transaction volumes for both the spotand bilateral quantities recorded a high of 3,725.54 GWh. The WESM has now 46 directparticipants, 12 indirect participants, and five (5) intending participants. The WESM TrialOperations Program in the Visayas Grid is on-going, with the commercial launch awaiting theapproval of the DOE.

Retail competition and open access have yet to be implemented since the preconditions ofprivatizing at least 70% of NPC’s generating assets and at least 70% of NPC IPP contractshave not been met so far.

In the meantime, ERC approved on December 5, 2008 a transitional (interim) and voluntaryform of open access known as the Power Supply Option Program (PSOP).

On January 25, 2010, the PSOP Rules subsequently received ERC approval. The programallows qualified generation companies and registered electricity suppliers to contract for thesupply of electricity directly with eligible end-users. However, there are implementationaspects that have not been touched upon by the PSOP rules. These include accounting,settlement of energy imbalances and line rentals, the rules regarding which shall be proposedby the entities which petitioned for the adoption of the PSOP in coordination with thePhilippine Electricity Market Corporation. As of this writing, these additional rules have yet tobe issued and, consequently, the implementation of the PSOP has not commenced. Should theRetail Competition and Open Access mandated under the EPIRA be implemented ahead, thePSOP rules will cease to be operational.

The ERC has continued to issue regulations implementing the EPIRA, among which are theRules for Setting Distribution Wheeling Rates for Privately-Owned Distribution UtilitiesEntering Performance-Based Regulation, Competition Rules, Rules for Registration ofWholesale Aggregators, Guidelines for the Issuance of Licenses to Retail Electricity Suppliersand Distribution Service and Open Access Rules.

c. Proposed Amendments to the EPIRA

Following are the proposed amendments to the EPIRA that, if enacted, may have materialadverse effect on First Gen Group’s electricity generation business, financial condition andresults of operations.

In the Philippine Senate, the Committee on Energy (CoE) sponsored the approval on secondreading of Senate Bill No. 2121, which include, among others:

Lowering the privatization level precondition to retail open access from 70% to 50% forboth the NPC generating assets and NPC IPP contracts, while allowing ERC to declareretail open access even before the 50% level is met with participation being limited togeneration companies that comply with the 30%-25% installed generating capacity limits.This proposed amendment would allow NPC and PSALM to retain control of a sizeable


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generating capacity sufficient to dominate the market at the time of implementation.While this market dominance of NPC and PSALM will not, by large, adversely affectFirst Gen Group considering that most of the generation output of First Gen’s operatingsubsidiaries is already contracted with NPC and other entities on a long-term basis, anyuncontracted capacity that First Gen may have in the future, as for instance in the event ofexpansion, may be subject to uneven competitive pressures from NPC and PSALM.Nonetheless, the market control of NPC and PSALM is expected to wane over time as theprivatization program progresses.

Recognizing the regulatory authority of the Philippine Economic Zone Authority (PEZA)over distribution utilities in PEZA-administered economic zones. In so far as it may beinterpreted to allow PEZA to declare retail open access regardless of NPC privatizationlevel, this amendment may similarly affect First Gen Group’s competitiveness vis-à-visNPC and PSALM as outlined above.

Prescribing additional limitation on bilateral contracts between related parties in that suchcontracts shall not exceed 20% of the installed generating capacity of a grid. Should FirstGen Group expand in the Luzon Grid, this proposed restriction may limit potentialoff-take by Meralco from First Gen Group given Meralco’s existing off-take agreementswith FGPC and FGP.

Subjecting the reduction of royalties for the exploitation of indigenous energy sources thatthe President shall order to the qualification, “whenever the interest of the general publicso requires.” Insofar as the reduction becomes discretionary rather than mandatory, theimplementation of the reduction of royalties on natural gas, which would enhance theprice-competitiveness of generation by FGPC and FGP on a post-tax/post-royalty basisvis-à-vis generation using imported fuels, may be accelerated or delayed depending on thetiming of the presidential action.

The Senate approved the bill on third reading on April 27, 2009.

In the House of Representatives, the counterpart bill, House Bill No. 3124, proposes thefollowing amendments to the EPIRA, among others:

Accelerating the implementation of retail competition and open access by lowering thepre-requisite level of privatization of NPC’s generating assets and IPP contracts from 70%to 50%, and recognizing the authority of PEZA to immediately declare retail open accessin economic zones. As in the Senate proposal, this could adversely affect First GenGroup’s competitiveness vis-à-vis NPC and PSALM as described earlier.

Granting PEZA the authority to immediately declare retail competition and open access inthe PEZA-administered economic zones, with similar possible effect as the counterpartproposal in the Senate.

Removing the power from the ERC to issue ex-parte provisional authority in rate increaseapplications of distribution utilities. This may affect Meralco’s cashflow or ability totimely charge its distribution rate (but not the pass-through of generation cost). Thoughnot directly affecting First Gen Group, the resulting difficulty on Meralco may hamperMeralco’s ability to make payments to FGPC and FGP.

The bill had been sponsored for plenary consideration on December 12, 2007 and still have toundergo the requisite subsequent approval processes by the House of Representatives.

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Should House Bill No. 3124 be passed on third reading, the Senate and the House ofRepresentatives will consider the same along with Senate Bill No. 2121 to resolve anydifferences in view of approving a reconciled bill. When the term of the present (14th)Congress expires on June 30, 2010 without a reconciled bill approved, the consideration ofHouse Bill No. 3124 and Senate Bill No. 2121 is deemed terminated. If any amendment to theEPIRA will be proposed, it will have to go through the legislative process anew for theconsideration of the subsequent (15th) Congress.

First Gen Group cannot provide any assurance whether any or all of these proposedamendments will be enacted in their current form, or at all, or when any amendment to theEPIRA will be enacted. Proposed amendments to the EPIRA, including those discussedabove, as well as other legislation or regulation could have material adverse impact on theFirst Gen Group’s business, financial position and financial performance.

Certificates of ComplianceFGP, FGPC, FG Hydro and FG Bukidnon have been granted Certificates of Compliance(COCs) by the ERC for the operation of their respective power plants on September 14, 2005,November 6, 2008, June 3, 2008 and February 16, 2005, respectively. The COCs, which arevalid for a period of 5 years, signify that the companies in relation to their respectivegeneration facilities have complied with all the requirements under relevant ERC guidelines,the Philippine Grid Code, the Philippine Distribution Code, the WESM rules, and related laws,rules and regulations.

FG Energy has been granted the Wholesale Aggregator’s Certificate of Registration onMay 17, 2007, effective for a period of 5 years, and the Retail Electricity Supplier’s Licenseon February 27, 2008, effective for a period of three years.

In the case of BPPC, it has submitted to the ERC its full Compliance to the Order onMay 24, 2006. Based on the assessment of the BPPC, it has complied with the applicableprovisions of the EPIRA and its IRR.

Pursuant to the provisions of Section 36 of the EPIRA, Electric Power Industry Participantsprepare and submit for approval of the ERC their respective Business Separation andUnbundling Plan (BSUP) which requires them to maintain separate accounts for, or otherwisestructurally and functionally unbundle, their business activities.

Since each of FGP, FGPC, FG Bukidnon and FG Hydro is engaged solely in the business ofpower generation, to the exclusion of the other business segments of transmission,distribution, supply and other related business activities, compliance with the BSUPrequirement on maintaining separate accounts is not reasonably practicable. Based onassessments of FGP, FGPC, FG Bukidnon, FG Hydro and FG Energy, they are in the processof complying with the provisions of the EPIRA and its IRR.

H. Clean Air Act

On November 25, 2000, the IRR of the Philippine Clean Air Act (PCAA) took effect. TheIRR contain provisions that have an impact on the industry as a whole, and on FGP, FGPCand BPPC in particular, that need to be complied with within 44 months (or July 2004) fromthe effectivity date, subject to approval by the DENR. The power plants of FGP and FGPCuse natural gas as fuel and have emissions that are way below the limits set in the NationalEmission Standards for Sources Specific Air Pollution and Ambient Air Quality Standards.Based on FGP’s and FGPC’s initial assessments of the power plants’ existing facilities, the


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*SGVMC212303*

companies believe that both are in full compliance with the applicable provisions of the IRRof the PCAA.

On the other hand, BPPC believes that the Project Agreement specifically provides that it isnot contractually obligated to bear the financial cost of complying with the new law. Pursuantthereto, compliance of the Bauang Plant with RA 8749 shall be subject to the final agreementbetween the DOE, NPC and DENR, specifically on the manner of compliance by all NPC-IPPs, including BPPC. In this connection, the DENR has issued a Memorandum onSeptember 19, 2006 directing all regional directors to hold in abeyance the implementation ofthe Continuous Emission Monitoring System (CEMS) which is required under the PCAA,until such time that a set of guidelines has been approved. On July 31, 2007, the DENRissued Dept. Admin. Order 2007-22 which effectively superseded the September 19, 2006memorandum. The new pronouncement prescribes a more detailed set of guidelines forcompliance to the Continuous Opacity Monitoring System (COMS)/CEMS installationrequired under the PCAA, and likewise provides for a two-year window from issuance datefor affected facilities to comply.

BPPC has been conducting Ambient Air Emission Monitoring every quarter and SourceEmission Monitoring once a year in lieu of the installation of the CEMS. Results aresubmitted to the Environmental Monitoring Bureau (EMB) and the DENR-Region 1 Office.

I. BIR Revenue Regulation No. 16-2008

On December 18, 2008, the BIR issued RR No. 16-2008 which implemented the provisions ofSection 34(L) of the Tax Code of 1997, as amended by Section 3 of RA No. 9504, dealing onthe OSD allowed to individuals and corporations in computing their taxable income.

Based on RR No. 16-2008, it allowed individuals and corporations to claim OSD in lieu of theitemized deductions (i.e., items of ordinary and necessary expenses allowed under Sections 34(A) to (J) and (M), Section 37, other special laws, if applicable). In case of corporatetaxpayers subject to tax under Sections 27(A) and 28(A) (1) of the National Internal RevenueCode (NIRC), as amended, the OSD allowed shall be in an amount not exceeding 40% of theirgross income. The items of gross income under Section 32(A) of the Tax Code, as amended,which are required to be declared in the Income Tax Return (ITR) of the taxpayer for thetaxable year, are part of the gross income against which the OSD may be deducted in arrivingat taxable income. Passive income which has been subjected to a final tax at source shall notform part of the gross income for purposes of computing the 40% OSD.

For other corporate taxpayers allowed by law to report their income and deductions under adifferent method of accounting (e.g., percentage of completion basis, etc.) other than cash andaccrual method of accounting, the gross income pursuant to the RR No. 16-2008 shall bedetermined in accordance with said acceptable method of accounting.

A corporate taxpayer who elected to avail of the OSD shall signify in its return such intention;otherwise it shall be considered as having availed of the itemized deductions allowed underSection 34 of the NIRC. Once the election to avail the OSD is signified in the return, it shallbe irrevocable for the taxable year for which the return is made. In the filing of the quarterlyITR, the taxpayer may opt to use either the itemized deduction or OSD. However, in filing thefinal ITR, the taxpayer must make a choice as to what method of deduction it shall employ forthe purpose of determining its taxable net income for the entire year. The taxpayer is, thus,not allowed to use a hybrid method of claiming its deduction for one taxable year.

176



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*SGVMC212303*

For the taxable period 2008 which is the initial year of the implementation of the 40% OSD,the 40% maximum deduction shall only cover the period beginning July 6, 2008, which is theeffective date of the said RR No. 16-2008. However, in order to simplify and provide ease ofadministration during the transition period, July 1, 2008 shall be considered as the start of theperiod when the 40% OSD may be allowed.

In 2009, except for FGP and FG Bukidnon, First Gen Group computed its income tax basedon itemized deductions.


END of fs

Glossary of Selected Terms

Affiliate In relation to the Company, BPPC or any other company which, directly or indirectly, through one or more interme-diaries, is controlled by the Company or is under common control by the Company with another person; excluding subsidiaries. For purposes of this definition, “control” shall mean the power to direct or cause the direction of the management policies of this company by contract, agency or otherwise

Availability A measure (expressed as a percentage) of the available generation of a plant over a defined period of time compared with the maximum possible available generation of the plant over the same period

Bac-Man GSC Bac-Man Geothermal Service Contract dated 16 October 1981

BIR Bureau of Internal Revenue

Bondholders Registered holders of the Bonds

Bonds The Company’s P5-billion peso-denominated fixed-rate bonds due 2010

BOT Agreement Build-Operate-Transfer Agreement dated January 11, 1993 between FPPC and NPC, as amended

Combined Cycle The combination of the gas turbine thermodynamic cycle with the steam turbine thermodynamic cycle by utilizing the waste heat energy from the gas turbine to generate steam for use in a steam turbine

DOE Department of Energy

EPIRA Republic Act No. (RA) 9136, otherwise known as the “Electric Power Industry Reform Act of 2001”

EDC Energy Development Corporation, formerly PNOC Energy Development Corporation

Gas Sellers Consortium comprised of Shell Philippines Exploration B.V., Shell Philippines LLC, Chevron Malampaya LLC and PNOC Exploration Corporation

Grid The Philippines’ high-voltage backbone system of interconnected transmission lines, substations and related facilities

GRESC Geothermal Renewable Energy Service Contract

GRSC Geothermal Resource Sales Contract

GW Gigawatt, or one million kilowatts

GWh Gigawatt-hour, or one million kilowatt-hours, is typically used as a measure for the annual energy production of large power plants

IFRIC International Financial Reporting Interpretation Committee

IPP Administrators As defined in the EPIRA, qualified independent entities appointed by PSALM who shall administer, conserve and man-age the contracted energy output of NPC IPP contracts

kW Kilowatt, or one thousand watts

kWh Kilowatt-hour, the standard unit of energy used in the electric power industry. One kilowatt-hour is the amount of energy that would be produced by a generator producing one thousand watts for one hour

Meralco Manila Electric Company

MMBFOE Million Barrels of Fuel Oil Equivalent

MW Megawatt, or one million watts. The installed capacity of power plants is generally expressed in terms of MW

NDC Net Dependable Capacity, or the net dependable generating capacity of the plant (net of unit energy utilized to drive the station’s service or auxiliaries), expressed in kW or MW

Net Electrical Output/Energy Generation

Net energy delivered by a seller to the agreed delivery point and expressed in kWh

Open Access As defined in the implementing rules of the EPIRA, the system of allowing any qualified person the use of electric power transmission, and/or distribution systems, and associated facilities subject to the payment of transmission and/or distribution retail wheeling rates duly approved by the Energy Regulatory Commission (ERC)

RE Law RA 9513, otherwise known as the “Renewable Energy Act of 2008”

Reliability A measure of the ability of the electric system to supply the aggregate electric demand and energy requirements of the customers at all times

Retail Competition As defined in the implementing rules of the EPIRA, the provision of electricity to a Contestable Market by persons authorized by the ERC to engage in the business of supply to electricity end-users through Open Access

San Lorenzo O&M Agreement

Operation and Maintenance Agreement between Siemens Power Operations, Inc. (SPOI) and FGP dated15 April 1999

Santa Rita O&M Agreement

Amended and Restated Operation and Maintenance Agreement between SPOI and FGPC dated 11 April 2000

Stranded Costs As defined in the EPIRA, the excess of the contracted costs of electricity under eligible contracts over the actual selling price of the contracted energy output under such contracts. Eligible contracts are those approved by the ERB from December 31, 2000 onwards

��

Corporate Structure

Energy Solutions

Agusan

E: 54.8%V: 68.6%

E: 45.2%V: 31.4%

100% 60%

60%

40%

100%

100%

40% 60%

E: 100%V: 45%

100%

100%

100%

93%

Bauang

Santa Rita

San Lorenzo

Red Vulcan EDC

Hydro PowerPantabangan-Masiway

Prime Terracota

PUBLIC

E - Economic

V - Voting

E: 40%V: 60%

��9First Gen 2009 Annual Report

First Gen Corporation3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Trunkline No. (632) 449-6400Fax No. (632) 910-4846 (632) 635-2322www.firstgen.com.ph

First Gas Power CorporationCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6286Fax No. (632) 910-4846

(632) 635-2322

Plant SiteSta. Rita, Batangas CityBatangas, Philippines 4200Telephone No. (6343) 723-9526 to 28Fax No. (6343) 723-7792

(6343) 723-9048

FGP CorpCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6286Fax No. (632) 910-0253 (632) 914-5146

Plant SiteSta. Rita, Batangas CityBatangas, Philippines 4200Telephone No. (6343) 723-9526 to 28Fax No. (6343) 723-7792 (6343) 723-9048

First Gen Hydro Power Corporation3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6400Fax No. (632) 910-4846

Plant SiteBarangay West PoblacionPantabangan Nueva EcijaPhilippines 3124TeleFax No.: (632) 449-6521

First Private Power Corporation3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6400Fax No. (632) 637-1969

(632) 637-1967

Bauang Private Power CorporationCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6400Fax No. (632) 637-1969

(632) 637-1967

Plant SiteKm. 255, Bo. Payocpoc SurBauang, La Union, PhilippinesTelephone No. (6372) 705-2077/ (632) 449-6501Fax No. (6372) 705-2084

First Gen Renewables Inc.3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6458Fax No. (632) 631-3103

FG Bukidnon Power CorporationCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone No. (632) 449-6458Fax No. (632) 631-3103

Plant SiteDamilag Manolo Fortich BukidnonPhilippines 8705TeleFax No. (6388) 223-3295

EDC Facilities and DirectoryEDC Head OfficesMerritt Road, Fort BonifacioTaguig City, PhilippinesTelephone No. (632) 667-7332Fax No. (632) 840-1575www.energy.com.ph

Energy Research And Development CenterCommonwealth Ave., Diliman, Quezon CityPhilippinesTelephone No. (632) 929-7611Fax No. (632) 929-3412

Bacon-Manito Geothermal Production FieldPalayang Bayan, ManitoAlbay, PhilippinesTelephone No. (632) 667-7332 loc.

2405 (632) 252530

Telefax: (632) 812-3841

Leyte Geothermal Production FieldTongonan, KanangaLeyte, PhilippinesTelephone No. (632) 667-7332 loc.

2400/2401/2402/ (632) 252531

Telefax: (632) 812-4803

Southern Negros GeothermalProduction FieldTicala, Valencia, Negros Oriental, PhilippinesTelephone No. (632) 667-7332 loc.

2403 / 252528Telefax: (632) 812-9810

Mindanao Geothermal Production FieldIlomavis, Kidapawan CityNorth Cotabato, PhilippinesTelephone No. (632) 667-7332 loc.

2404 (632) 252529Telefax: (632) 812-3129

Northern Negros Geothermal ProjectBago CityNegros Occidental, PhilippinesTelephone No. (632) 893-6001 loc.

2406 (632) 252532Telefax: (632) 812-8685

Northern Luzon Wind Power ProjectBrgy. Saoit, BurgosIlocos Norte, PhilippinesTelephone No. (6377) 676-1091

Corporate Directory

��0

FIRST GEN CORPORATION3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Trunkline No. (632) 449-6400Fax No. (632) 910-4846 (632) 635-2322www.firstgen.com.ph

INDEPENDENT PUBLIC ACCOUNTANTSSyCip, Gorres, Velayo & Co.SGV Building6760 Ayala AvenueMakati City, Philippines 1226Telephone No. (632) 891-0307Fax No. (632) 818-1377

STOCK TRANSFER AGENTSecurities Transfer Services, Inc.Ground Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Telephone Nos. (632) 490-0060Fax Nos. (632) 631-7148

Shareholder Information

This First Gen Corporation 2009 Annual Report cover is printed on FSC®-certified Mohawk Options 100% PC, which is made of 100% process chlorine-free post-consumer recycled fiber with the balance comprised of elemental chlorine-free virgin fiber. This paper is made carbon neutral with Mohawk’s production processes by offsetting thermal manufacturing emissions with Verified Emission Reduction Credits (VERs), and by purchasing enough Green-e certified Renewable Energy Certificates (RECs) to match 100% of the electricity used in our operations. This paper is certified by Green Seal.

The main sections of this report are printed on Limited Edition Sinar Woodfree 100% R. White PCW 100 gsm 100% recycled, which is 100% recycled uncoated paper made from post-consumer collected waste.

The Financial Statements of this report are printed on Econobond, which is 100% recycleduncoated paper made from post-consumer collected waste.

Concept and Design: K2 Interactive (Asia), IncPortraiture: Cesar CainaOperational: George Tapan Mel Cortez Badi Samaniego Larry Medenilla

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