First Gen Corporation 2008 Annual Report RESPON …...2009/03/15 · Responsible Generation : First Gen Corporation 2008 Annual Report 2 - 3 Geothermal Energy Steam produced by heat

The Energy to Dare, The Power to Care

First Gen Corporation 2008 Annual Report

RESPONSIBLEGENERATION

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 PROVIDER

We 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 EMPLOYER

We 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 com-

petitive benefits and compensation packages as well as professional development.

TO BE THE PREFERRED INVESTMENT

We 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 DEVELOPER

We 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.

WHAT’S INSIDE Consolidated Financial Highlights At A Glance Chairman’s Message President’s Report Highlights of Operations 14 Natural Gas 18 Geothermal 22 Hydroelectric 24 Oil 28 Prospects, Technologies and Marketing Environmentalism in Business Corporate Governance Board of Directors Management Committee Financial Review Financial Statements Glossary Corporate Structure Corporate Directory

EDC’s 232-MW Malitbog power plant in Leyte, the world’s largest geothermal plant under one roof

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2 - 1Responsible Generation : First Gen Corporation 2008 Annual Report

FINANCIALHIGHLIGHTSFIRST GEN CORPORATION (CONSOLIDATED) IN US DOLLARS THOUSANDS

2008 2007 2006

Gross Revenues * 1,746,216 1,071,311 1,004,309

EBITDA ** 588,208 312,350 273,901

Net Income 93,468 181,831 147,079

Net Income Attributable to Equity Holders of the Parent 14,474 104,655 91,839

Recurring Net Income 204,625 170,664 147,541

Current Assets 655,541 767,083 723,788

Noncurrent Assets 3,032,336 3,359,948 1,017,711

Total Assets 3,697,877 4,127,031 1,741,499

Current Liabilities 996,508 869,245 319,214

Noncurrent Liabilities 1,682,958 1,908,205 707,092

Equity Attributable to Equity Holders of the Parent 458,660 660,861 546,570

Minority Interest 559,751 688,720 168,623

Earnings Per Share for Net Income Attributable to the Equity Holders of the Parent - Basic $0.017 $0.130 $0.117

1,746.2

588.2

1,071.3

312.4

1,004.3

273.9

204.6

93.5

14.5

170.7181.8

104.7

147.5147.1

91.8

* Excluding mark-to-market gain on derivatives, interest income on cash and cash equivalents and foreign exchange gains.** EBITDA was calculated based on income before income tax plus interest and financing charges, depreciation and amortization, foreign exchange losses and othercharges. Interest income on cash and cash equivalents and mark-to-market gain on derivatives were deducted from gross revenues.

2008 COMPARISON OF FINANCIAL HIGHLIGHTS FOR FIRST GEN AND ITS OPERATING COMPANIES (IN USD MILLIONS)

GROSS REVENUES**

0.931.5

486.0486.0

409.9

811.1

EBITDA

169.3

295.9

100.6

0.524.0

NET INCOME

61.2

54.4

28.4

0.32.1

EBITDAGROSS REVENUES

2008 2007 2006 2008 2007 2006

FG Bukidnon*

FG Hydro*

EDC*

FGP

FGPC

* Figures for the full year 2008. Translated to US dollars using the Php47.52:$1 exchange rate for B/S items and Php43.97:$1 exchange rate for the I/S items.** Excluding mark-to-market gain on derivatives, interest income on cash and cash equivalents and foreign exchange gains.

NET INCOMERECURRING NET INCOME

NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

FG Bukidnon*

FG Hydro*

EDC*

FGP

FGPC

FG Bukidnon*

FG Hydro*

EDC*

FGP

FGPC61.2

54.4

Natural Gas

Considered as among the cleanest of fossil fuels.

Hydroelectric

Energy from flowing water. It has no combustion emissions

OPERATING COMPANIES

FIRST GAS POWER CORPORATION

FGP CORP.

Location Batangas Batangas

Installed Capacity 1,000 MW 500 MW

Main Customer/s Meralco Meralco

2008 Revenues (in millions)

$811.1 $ 409.9

2008 Net Income Attributableto First Gen(in millions)

$32.6 $36.8

OPERATING COMPANIES

FIRST GENHYDRO POWER CORPORATION

FG BUkIDNON POWER CORPORATION

Location Pantabangan Agusan

Installed Capacity 112 MW 1.6 MW

Main Customer/s Various DUs in Central Luzon, WESM

Cepalco

2008 Revenues (in millions)

Php 1,383.5 Php 40.6


Php 447.1 (1) Php11.7

AT A GLANCE


Geothermal Energy

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

OPERATING COMPANY ENERGY DEVELOPMENT CORPORATION (EDC) (2)

Location Sale of Electricity(3) Sale of Steam(4) Other Services(5)

Leyte / North Cotabato / Negros Occidental

Leyte / Negros Oriental / Sorsogon & Albay

Papua New Guinea (for drilling services)

Installed Capacity Leyte: 592 MWNorth Cotabato: 106 MWNegros Occidental: 49 MW

-- --

Main Customer/s NPC / ILECO NPC Lihir Gold Ltd.

2008 Revenues (in millions) Php 19,143.4

2008 Net Income Attributable to First Gen (in millions)

Php 2,832.6 (6)

(1) Following First Gen’s divestment of its 60 per cent equity stake in FG Hydro effective on November 17, 2008, income attributable to First Gen is equivalent to 100 per cent of FG Hydro’s net income as of November 2008 plus an effective 64 per cent of FG Hydro’s net income for the month of December 2008 (excluding the effect of unrealized foreign exchange losses of Php388.7 million).

(2) First Gen owns 40 per cent economic interest with 60 per cent controlling stake in EDC effective November 2007.

(3) EDC has existing power purchase agreements in the following contract areas:

Unified Leyte Mindanao 1* Mindanao 2* NorthernNegros

Location Leyte North Cotabato

North Cotabato

Negros Occidental

Installedcapacity

592 MW 52 MW 54 MW 49 MW

(4) EDC has existing steam sales agreements in the following contract areas:

LGPF (Tongonan & Unified Leyte)

SNGPF(Palinpinon 1 & 2)

BGPF(Bacman 1 & 2)

Location Leyte Negros Oriental Sorsogon & Albay

Reservation Area(hectares)

107,625 133,000 25,000

Commissioning Date 1983,1996,1997 1983 & 1995 1990 & 1997

Areas Served Leyte-Samar, Leyte-Cebu,Leyte-Luzon

Negros Island, Panay, Cebu

Luzon

(5) Includes EDC’s construction revenue and revenue from drilling services.

(6) Pertains to EDC’s parent company net income and excludes the effect of the unrealized foreign exchange losses from translation of foreign debts to yearend exchange rates amounting to Php5.38 billion, net of tax, multiplied by First Gen’s economic interest.

A quick glance at our businesses: power generation, steam production,

petroleum transport and drilling operations.

*EDC to assume 100 per cent ownership of plant by June 2009


Oil

One of the most common types of fossil fuel used in power

generation.

Petroleum Transport

The safest and most economical mode for bulk oil movement.

OPERATING COMPANIESBAUANG PRIVATE POWER CORPORATION

Location La Union

Installed Capacity 225 MW

Main Customers NPC

2008 Revenues (in millions) $26.98


$9.45

OPERATING COMPANYFIRST 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

2008 Gross Revenues (in millions)

Php616.0

2008 Net Income (in millions) Php203.0

AT A GLANCE


CHAIRMAN’SMESSAGE

FELLOW SHAREHOLDERS,

n 2008, First Gen Corporation faced formidable

challenges that threatened to derail our growth

and expansion plans. However, I am happy to

report to all of you that, notwithstanding the

difficulties, we remained on track to pursue our goal of

becoming a global leader in clean and renewable energy.

Last year’s business environment was so tough that even

established global financial institutions tumbled. Economic

woes hammered stock markets around the world, dried up

funding sources, and induced a spike in interest rates. To

aggravate the situation, global crude prices reached an all-

time high of US$146 per barrel in 2008. The weight of all

these developments eventually dragged major economies

of the world, including the United States, into a recession.


Aftershocks from the overseas

economic turmoil complicated the

concerns affecting the Philippine

economy. As an offshoot of soaring

gas and food prices, Philippine

inflation reached a 17-year high of

12.5 per cent in August 2008.

Last year’s record surge in oil

prices also affected the cost of

electricity from the natural gas-

fired plants of subsidiaries First

Gas Power Corporation (FGPC)

and FGP Corp. (FGP). The price of

the natural gas we buy from the

Malampaya consortium is partially

indexed against prices of oil in

the world market. But we don’t

earn extra money from collecting

from our customer the cost of the

fuel we buy from the Malampaya

consortium, because the fuel

expenses represent pass-through

charges. It is also worth noting

that about 55 per cent of the fuel

cost of electricity we generate from

our natural gas-fired plants goes

to government coffers in the form

of the royalty tax. These royalties

increased in step with the surge

in fuel prices last year. On the

other hand, the capacity fees being

collected by FGPC and FGP hardly

changed at all, except for the minor

adjustments made to reflect the

higher inflation rate. As a rule, high

power prices do not benefit First

Gas; they only serve to depress the

demand for electricity.

The Philippine Chamber of

Commerce and Industry and the

Semiconductor and Electronics

Industries in the Philippines, Inc.

have advocated the reduction of

royalties on indigenous fuel sources,

particularly natural gas, in order

to bring down the cost of doing

business for their members. This will

have a definitive effect on spurring

the economy and boosting demand

for power, especially during these

challenging times. It is in this light

that we support the call of major

industry groups for a review of taxes

levied on indigenous natural gas.

Although we continue to stand out

as the country’s leading clean and

renewable energy firm, we cannot

avoid the side effects from the

difficult business environment last

year. Thus, net income attributable

to First Gen went down by 86.2

per cent to US$14.5 million in

2008 from the year-ago level

of US$104.6 million. A host of

factors, many of them related to

the adverse business environment,

lurked behind our lower earnings.

These factors included higher

interest and financing expenses for

loans; increased expenses for tax

obligations; and foreign exchange

losses. With the expiration of

the income tax holiday for the

1000-megawatt Sta. Rita power

plant last May 2007, income tax

payments of FGPC amounted to

Php1.30 billion.

Notwithstanding the lower income,

our Board remains optimistic

about our long-term growth

prospects. And the results of our

operations last year, along with our

preparations for future expansion,

reinforce our sense of optimism.

The market for electricity continued

to grow last year, and this became

evident when our consolidated

revenues went up by 61.3 per cent

to US$1.8 billion in 2008 from

US$1.1 billion a year earlier. First

Gen’s acquisition of the controlling

stake of Energy Development

Corporation (EDC) also expanded

First Gen’s revenue base.

As I earlier pointed out, we

managed to keep on track our

programs and projects despite the

prevalence of the global financial

turmoil in 2008. These programs

and projects included a refinancing

deal for a US$544-million term

loan facility provided by nine foreign


banks in November. Clinching this

loan facility was no mean feat

because the completion of the

deal, along with other refinancing

schemes was done in the middle

of a severe global economic crisis.

The transaction, by the way, was

voted “Asia Pacific Refinancing Deal

of the Year” by ProjectFinance

(Euromoney) in March 2009. The

banks shared our optimism by

supporting such a refinancing deal

amidst a very difficult financial

environment. The successful

outcome of the loan negotiations,

therefore, reflects the high level

of trust and confidence that the

banking community continues

to bestow on First Gen as a

corporation with a solid past and

bright future.

Operating subsidiaries, led by EDC,

will support your Company’s growth

by undertaking their own programs

and projects, most of them focused

on the renewable energy business.

As the main platform for future

expansion, EDC will pursue various

projects like the development

of new geothermal fields and

construction of power plants, as

well as the possible acquisition of

National Power Corporation (NPC)

plants that are up for bidding in

2009. EDC is eyeing the Tongonan,

the Palinpinon and the Bacon-

Manito plants in the Visayas and

Bicol region. With a total of 455.5

MW, such additional capacity

should boost our pursuit of global

leadership in renewable energy.

EDC, being the country’s biggest

geothermal company and

world leader in wet steam field

technology, will also serve as

your Company’s vehicle to identify

overseas geothermal prospects,

especially those in Indonesia. In

2008, EDC completed a geo-

scientific assessment of the

Tatapani Project in India and

ranked the 256 geothermal sites

in Sumatra, Sulawesi and Java

in Indonesia. Just recently, EDC

opened a representative branch

office in geothermal-rich Indonesia,

where the company expects to

strengthen its presence. Initially,

EDC will do preliminary surveys of

possible geothermal sites.

To strengthen EDC’s renewable

energy base, the board of First

Gen approved the sale of 60 per

cent equity stake in First Gen

Hydro Power Corporation (FG

Hydro) to EDC in October 2008.

FG Hydro is the operating company

of the 112-MW Pantabangan-

Masiway hydroelectric power

complex. There are ongoing

enhancements and refurbishments

for the Pantabangan plant. Once

completed, Pantabangan’s capacity

will increase to about 120 MW or

by an additional 20 MW.

Other industry developments, like

the passage of the Renewable

Energy (RE) Law, also offer

attractive long-term prospects.

We have been preparing for the

passage of the RE Law, which is a

crucial tool to spur the development

of much-needed alternative sources

of energy, which in turn will allay

I am confident the favourable outcome of our refinancing program, coupled with the passage of the RE Law, will help First Gen build a stronger business platform that supports a more diverse, and a larger array of renewable energy projects.

global concerns about greenhouse

gas emissions and dwindling fossil

fuel reserves.

I am confident the favorable

outcome of our refinancing

program, coupled with the passage

of the RE Law, will help First Gen

build a stronger business platform

that supports a more diverse, and

a larger array of renewable energy

projects beneficial not only to our

stockholders and customers but

also to the environment.

I am also proud of First Gen’s

consistency in developing and using

clean, renewable and indigenous

energy sources. This emphasis

highlights our concern for the

environment and for the country.

As of 2008, over 90 per cent

of our Company’s 2,582.4-MW

total installed capacity uses clean,

renewable and indigenous energy

sources. The operations of our

Company’s clean and environment-

friendly power plants kept the

average carbon dioxide intensity of

its plants in the Luzon, Visayas and

Mindanao grids below the average

carbon dioxide intensity for each of

these three grids. As more of our

environment-friendly plants go into

operation, the combined carbon

dioxide intensity of First Gen will

further go down.

In line with our commitment to

remain as the country’s leading

clean and renewable energy firm,

First Gen has integrated greening

activities into its business plans

and programs. We don’t consider

the move as a token action to

create photo opportunities, because

our environmental activities form

an integral part of the need to

sustain resources, such as water,

that are vital in operating our

geothermal and hydroelectric

plants. Last year, EDC launched

a major environmental project,

called “Binhi: The Greening

Legacy.” “Binhi” represents our

most comprehensive and most

integrated greening program as it

aims to plant prime endangered

Philippine tree species like tindalo

in 1,000 hectares annually for the

next 10 years.

My report provides you with just

a glimpse into all the strides we

took last year, and the plans and

programs we will undertake to

assure our continued viability.

But it does not really capture the

outstanding performance of the

First Gen employees, especially the

members of our top management

group, who showed grace under

pressure, executing brilliant

moves to address a wide array

of challenges under an extremely

difficult business environment.

For this, I congratulate Federico

R. Lopez, our Company president

and chief executive, and all the

members of our top management

team. They certainly deserve our

continued support.

Lastly, this year’s theme,

“Responsible Generation,”

emphasizes our intention to

pursue our goal of not just being a

world-class Filipino company, but

a company that nurtures and truly

cares for the environment, its

country and communities where it

operates in. Only by accomplishing

this can we truly claim to have

real success.

Thank you for your continued

support.

Oscar M. Lopez

Chairman of the Board


DEAR SHAREHOLDERS

AND STAkEHOLDERS,

Last year, we talked about the strategic rationale behind

our shaping of First Gen’s growth platform. I talked about

why we believe it is crucial for us to control our fuel

sources if we are to offer superior value propositions to

our customers. I also talked about aligning our corporate

objectives with that of the country as we focus our efforts

and resources towards developing power supplies that are

primarily indigenous and low-carbon. The end-result will

give us a distinct set of energy assets that will not be easy

to duplicate, would deliver great value to consumers, yet

still be environmentally sustainable.

In the last two years, we built this platform being quite

reliant on short-term debt at the parent company level

PRESIDENT’SMESSAGE


1571 MW*62%

FIRST GEN (BY PLANT) CLEAN AND RENEWABLES: PER CENT SHARE OF FIRST GEN TO RP

Total HydroFirst Gen

Total Bunker FuelBalance RP

Total Geothermal

Total Natural Gas

5,018 MW65%

2,669 MW35%

such that last year I cautioned that

the year would see us focused on

“normalizing” First Gen’s finances.

Of course, everyone is aware that

2008 will go down in history as a

year of crisis, infamy and the global

credit crunch --a most challenging

time for a company like ours to be

“normalizing” its post-acquisition

finances. In addition to the debt

markets freezing up, we saw the

equity markets also on a downward

spiral. Our stock price was not

spared as investors expressed

scepticism over our ability to close

any form of financing during this

turbulent period. How did we fare

amidst all the chaos?

Without a doubt, I can unabashedly

say we performed admirably! Our

management team was unwavering,

determined and focused, keeping the

ship on even keel and on course to

emerge stronger after the storm.

During this tumultuous period many

times we proved doubters and

sceptics wrong by achieving what

many said was impossible. We

closed a 5-year US$260-million

Convertible Bond at the onset of

the credit crisis. We also closed a

US$544-million refinancing of our

Sta. Rita power plant as well as

another Php5.4-billion refinancing of

Unified Holdings Corp. (San Lorenzo

power plant) a few months later

with the former being awarded the

“Asia-Pacific Refinancing Deal of the

Year” by ProjectFinance Magazine

of Euromoney last March 2009.

Aside from debt refinancing, we also

completed the sale of a 60 per cent

equity stake in our Pantabangan-

Masiway hydroelectric complex to

Energy Development Corp. (EDC)

for US$105 million on October 15,

2008. This sale was necessary to

further reduce debt levels at First

Gen yet keep this strategic asset

within our control.

What this series of moves

accomplished was it pared down and

termed out maturing obligations at

First Gen pushing the debt closer

to our operating companies which

have both substantial cash flows

and borrowing capacity. Today, we

have reduced parent company debt

down to US$362.9 million from

US$562.4 million in December

759 MW26%

225 MW8%

114 MW4%

*Enhancement Programs

During this tumultuous period many times we proved doubters and sceptics wrong by achieving what many said was impossible. We closed a 5-year US$260-million Convertible Bond at the onset of the credit crisis.


2007 and paid down the staple

financing at Red Vulcan from

Php29.2 billion to Php13.860 billion.

As this report goes to press, we

are currently in the midst of terming

out this remaining amount on the

staple financing and should shortly

complete that with a medium-term

refinancing deal as well. With that

last piece, we will have completed

the normalization of First Gen’s debts

and what remains to be done will

be a re-injection of equity into our

balance sheets which will rebalance

our capital structure, strengthen our

cash flows and get us onto a healthy

growth trajectory once again.

Of course, in the midst of all this

financial activity, we have never

wavered in pursuit of excellence in

the operation of our assets. The

Sta. Rita and San Lorenzo natural

gas plants continue to attain superb

availability levels of 96.4 per cent

and 96.55 per cent, respectively.

Both substantially surpassed our

internal target of 90 per cent.

For reliability, both plants again

surpassed our internal targets of

94 per cent at 99.68 per cent for

Sta. Rita and 99.51 per cent for

San Lorenzo. Our Net Dependable

Capacities for both plants continue to

be between 7-8 per cent better than

guarantee as we continue reaping

the benefits of our investments in

evaporative coolers and compressor

mass flow upgrades. Their fuel

efficiencies (heat rates) are 3-4

per cent better than guaranteed as

well. As a result of all these, both

natural gas plants continue to be

the two highest dispatched plants

in the country demonstrating our

commitment to providing quality

service for our electricity consumers.

Our commitment to operational

excellence and safety at Sta. Rita

was demonstrated yet again last

November when the Department of

Labor and Employment-Bureau of

Working Standards chose to bestow

us with the “Ten Safe Years No Lost

Time Incident” Award. The DOLE

began presenting this award in 2006

and we were the first to be conferred

with this significant “No Lost Time

Incident” milestone.

In January 2008, we also signed

a US$44.7-million contract to

rehabilitate and upgrade the

Pantabangan plant over the next 3

years. The upgrades will practically

eliminate the obsolescence risk

attendant with our 32-year old plant,

especially in its control systems. It

will boost the plant’s capacity by an

additional 20 MW and increase the

plant’s efficiency by 3 per cent.

However, it wasn’t all good news on

the operational side. Our 215-MW

Bauang diesel plant experienced a

catastrophic failure incident when

one of its transformers caught

fire last October 25, 2008. The

incident prompted a total plant

shutdown. The Bauang plant was

partially restored to the grid by mid-

November. However, its nominated

capacity was temporarily reduced

to 150 MW during the December

10th testing date. Our nominated

capacity was finally brought back

to its full 215 MW by February

4, 2009 after the damaged

transformer was replaced with a

spare and idle unit from National

Power Corp.’s Limay plant.

Although the transformer incident

reduced our availability factor to

85.48 per cent from 95.27 per cent

last year, it did not have a major

impact on BPPC’s financials since

downtime allowance was used to

avoid any penalties. Any reduction in

revenues was also covered by both

machinery breakdown and business

interruption coverage from our

insurers. Following this experience

with the transformer failure and

armed with the knowledge that

replacement lead-times exceed 14

months, we have now embarked on a

thorough analysis of all our plants to

develop a company-wide transformer

spares and reliability strategy.

Moving beyond operations, you

may recall that many times during

the year our First Gas contracts

were subjected to vicious attacks in

congress and media. Allegations of

“ghost deliveries” and “overpricing”

were common. Although these

accusations hogged national

headlines for several weeks, they

never held water and were merely

rehashed charges we already

answered in Senate hearings and

full-page ads years ago. Much of

the controversy was deplorably part

of orchestrated efforts by hostile

quarters wanting to wrest control of

the Manila Electric Co. (Meralco).

Such attacks come with the territory

in the Philippine power industry but

sometimes, also present a fleeting

opportunity to draw attention to key

issues that need to be fixed and put

right. One such issue was that of

the excessive taxes and royalties

levied by government on the power

sector, either on indigenous fuels

used in power generation like natural

gas or the Value Added Tax on

distribution utility power rates for

end consumers. For a country with

one of the highest power rates in

Asia and not as much indigenous

energy resources, these sizeable

government levies are simply

dysfunctional. They are the single

biggest component contributing to

high Philippine power rates today

and simply have no logical place in

our country’s energy policy most

especially if we desire to create more

local jobs and make our economy

more competitive. In retrospect, a

crisis like that did momentarily put

us in the limelight and give us the

opportunity to advocate an otherwise

dull and uninteresting issue such as

the removal of government levies. I

am still optimistic that one day it will

find traction with our policy makers.

The year 2008 has been an arduous

journey through uncharted terrain

for us but throughout, our vision has

remained clear and we continue to

navigate with unwavering resolve

towards our strategic goals. For

2009, with “normalization” soon

behind us, we will be more intently

focused on driving the businesses,

reaping more efficiencies from our

acquisitions and strengthening our

cash flows from EDC.

With our acquisition of EDC in

November 2007, we inherited

a great company with first-rate

talent that represents a vast

store of the best experience

on exploring, harnessing and

maintaining geothermal energy

resources. However, we must

remember that EDC is coming

from decades of being under

the public sector and we are in

the process of instituting many

improvements in governance and

management that will ensure

EDC emerges within the next two

years as a world-class leader in

the geothermal and renewable

energy space.

Despite the tremendous headwinds

we have faced in 2008, we have

never been diverted from our

principal mission of building an

energy platform that will position

First Gen decisively for the future.

We will continue to focus on

platforms that develop more

indigenous sources of energy. As

a country, we lag with the rest of

our Asian neighbors in energy self-

reliance, and for us, this has been

a major reason why our power

rates remain uncompetitive. As a

leading Filipino power developer,


we would like to align our strategic

goals primarily with what our

country needs.

As we inch closer towards becoming

a more carbon-constrained world,

our choice of clean, low-carbon

power sources will allow the

country to pursue twin goals of

economic growth and environmental

sustainability without much dilemma.

Our choices also reflect the fact that

environmental stewardship is built

into our business model. Today, we

still see nature thriving alongside our

power plants: migratory birds from

mainland Asia are regular visitors

to our Sta. Rita mangroves, Olive

Ridley turtles are safely nesting and

hatching on the beach by our jetties

and thousands of fruit bats from nine

species, including the world’s largest

flying fox live in bat sanctuaries within

our Bac-Man geothermal steamfield

in Sorsogon. Our geothermal and

hydro plants operate in the country’s

most environmentally sensitive areas

so winning public trust is important if

we are to continue doing this.

Our presence in many of these

areas is not only benign but, more

importantly, protective. Safeguarding

the watershed is crucial to keeping

the geothermal reservoirs healthy,

thus active protection of the forest

through our community forest guards

and the provision of alternative

livelihood for small illegal loggers is

a key feature of our stewardship of

the thousands of hectares under our

concession areas.

More than mere protection, EDC’s

presence has in fact, enhanced the

forest cover in many of the areas

we operate. Consider the fact that

we have planted 7.5 million trees

in 9,915 hectares over the last

18-20 years. Our recently launched

“Binhi” reforestation program will

plant 6.25 million trees in 10,000

hectares over the next 10 years and

we are establishing nurseries for

many of these rare endemic species

that will be replanted throughout

the thousands of hectares of

concession areas under our watch.

For us, protecting and enhancing

the natural environment is not just

philanthropy; it’s at the heart of our

business model.

As we build our First Gen energy

platform we are constantly

mindful of the fact that our growth

domestically will soon reach

legally constrained limits (Electric

Power Industry Reform Act limits

generation capacity of a related

group to less than 25 per cent of

the national installed capacity).

Thus, we are always conscious of

the fact that what we build within

these EPIRA-prescribed limits must

be a platform that can credibly

launch us with unique capabilities

into the global arena as our

domestic limits are reached.

These are the dreams that we are

putting into place today which will be

a powerful source of growth for First

Gen tomorrow. Much work remains

to be done and we thank all of you,

our shareholders and stakeholders

for the trust and faith you have

placed in us even in tough times. It’s

what keeps us filling that “unforgiving

minute with sixty seconds worth of

distance run” everyday we’re at work.

FEDERICO R. LOPEZ

President and Chief Executive Officer

NATURAL GAS

HIGHLIGHTS OF OPERATIONS


NATURAL GAS irst Gas Power

Corporation (FGPC) and

FGP Corp. (FGP) are

the country’s pioneers in the use

of indigenous, clean natural gas

for power generation. Through the

1,000-megawatt Sta. Rita and

500-MW San Lorenzo combined-

cycle power plants in Batangas,

indigenous natural gas from the

Camago-Malampaya field in offshore

northwest Palawan is now being

used as fuel for power generation.

The Sta. Rita and San Lorenzo power

plants went into full commercial

operations on August 17, 2000 and

October 1, 2002, respectively.

In 2008, FGPC and FGP generated

and sold more electricity to its

customer -- the Manila Electric

Co. (Meralco), the country’s

largest distributor of electricity.

Gross revenues of FGPC went up

by 21.49 per cent to US$811.1

million in 2008 from US$667.7

million in 2007, primarily due to

increased sales to Meralco. Total

cost and expenses of FGPC reached

US$710.9 million or 27.81 per

cent higher than the previous year’s

US$556.2 million. Net income after

tax attributable to First Gen, which is

equivalent to 60 per cent of FGPC’s

net income amounted to US$32.6

million in 2008 or 46.20 per cent

lower than 2007’s attributable net

income of US$60.6 million.

FGP’s revenues, likewise, increased

by 22.69 per cent to US$409.9

million in 2008 from US$334.1

million in 2007. FGP’s total cost

and operating expenses reached

US$344.8 million or 28.18 per

cent higher than the previous year’s

US$269.0 million. Net income after

tax attributable to First Gen, also

equivalent to 60 per cent of FGP’s

net income, amounted to US$36.8

million or 10.24 per cent lower year-

on-year compared with US$41.0

million in 2007.

The Sta. Rita power plant of FGPC

generated 7,462 gigawatt-hours

(GWh) of electricity in 2008, or

3.06 per cent higher than the

7,192 GWh produced in 2007. The

plant’s availability reached 96.40

per cent or 7.1 per cent better than

the 90 per cent target, while its

level of reliability at 99.68 per cent

surpassed by 6.04 per cent the

internal target of 94.0 per cent. Sta.

Rita attained an average net capacity

factor of 82.18 per cent in 2008.

FGP’s San Lorenzo plant produced

3,813 GWh of electricity in 2008

ASIA PACIFIC REFINANCING DEAL OF THE YEARFirst Gas Power Corporation (FGPC) was recognized for its US$544-million refinancing loan, the longest tenor uncovered dollar tranche for a project financing in the Philippines and the largest private Political Risk Insurance (PRI) syndicate in Asia in 2008. The transaction was awarded the “Asia Pacific Refinancing Deal of the Year” for 2008 by ProjectFinance Magazine of Euromoney.

At ceremonies held at the Conrad Hotel in Hong Kong on March 19, 2009, ProjectFinance presented the award to Nestor Vasay and Emmanuel Singson (both of FGPC), Joel Daduya (BG Philippines) and the representatives of the Mandated Lead Arrangers. The deal was a landmark transaction, because it was among the very few deals in 2008 completed amidst the backdrop of a negative and changing global economy.

The refinancing loan was provided by a consortium of eight large foreign banks — Bank of Tokyo Mitsubishi, Calyon, KfW-IPEX Bank, ING, UniCredit, Mayban, Societe Generale and Standard Chartered Bank — along with Kreditanstalt Fur Wiederaufbau, a foreign bank with an existing loan to FGPC.

ProjectFinance, an authoritative business magazine of Euromoney Institutional Investors, conducts the annual awarding ceremony to recognize companies that show innovation and outstanding achievement in the global finance market.

or 6.72 per cent more than the

previous year’s 3,573 GWh output.

The San Lorenzo plant’s availability

hit 96.55 per cent or 7.27 per

cent above the 90 per cent target,

and its reliability reached 99.51

per cent or 5.86 per cent better

than the 94 per cent industry

benchmark. San Lorenzo achieved

an average net capacity factor of

82.12 per cent in 2008.

High availability and reliability mean

more electricity is readily available

from the power stations when

offered to be dispatched. For 2008,

the combined dispatch rate of FGPC

and FGP reached 80.63 per cent.

The capacities of the Sta. Rita and

San Lorenzo plants increased in

2008 after evaporative coolers and

compressor mass flow upgrades

were installed in all their units in

2007. The improved capacities were

validated by the latest results of

the net dependable capacity (NDC)

tests that both plants undergo twice

a year.

The NDC test for Sta. Rita conducted

in July 2008 at 1039.916 MW

confirmed that the plant’s declared

capacity has exceeded by 8.84

per cent its guaranteed output of

955.426 MW, while the plant’s

declared heat rate reached 6,613.79

British thermal unit (Btu)/kwh Higher

Heating Value (HHV) or 4.22 per

cent better than its guaranteed heat

rate measurement of 6,905.75

Btu/kwh HHV. A similar test for the

San Lorenzo plant in October 2008

showed that the plant’s declared

capacity of 523,992 MW was 7.75

per cent better than its guaranteed

output of 486.287 MW, while its

actual heat rate of 6,617.70 Btu/kwh

NATURAL GAS TRIVIAThe Malampaya offshore field is estimated to contain 2.6 trillion cubic feet of natural gas. Such fuel will be enough to drive 1.6 million cars over a 250-kilometer distance every week for 25 years; or for 50,000 buses to each hold 2 daily round-trip runs between Manila and Batangas for 6 days a week also for 25 years; or for a power plant with a capacity of up to 3,000 megawatts (MW) for 25 years. Malampaya now provides fuel for three power plants in Batangas, two of which are controlled by First Gas – the 1,000-MW Sta. Rita and the 500-MW San Lorenzo combined cycle gas turbine plants. The 504-kilometer pipeline that links the Malampaya field to the three power plants is among the longest deep-water pipelines in the world, with half of its length submerged in water that is more than 600 feet deep.


HHV was 2.83 per cent better

than its 6,810.75 Btu/kwh HHV

guaranteed heat rate level. Better

heat rates mean higher efficiency

because less fuel is consumed

for the same amount of energy

generated. Hence, the NDC tests

serve as additional proof of the

plants’ world-class efficiency in

generating electricity.

The capability of Santa Rita and San

Lorenzo to run on dual fuel was again

tested on two occasions in 2008

when Shell Philippines Exploration

B.V. (SPEX), the Gas Seller, was

unable to deliver the amount of

gas required by the plants. During

those times when gas supply was

not available, the Sta. Rita and San

Lorenzo plants shifted their units to

liquid fuel operation in order to meet

dispatch requirements.

TEN SAFE YEARS OF OPERATIONSFirst Gas Power Corp. (First Gas) and FGP Corporation (FGP), two subsidiaries of First Gen Corporation, bagged the “Ten Years No Lost Time Incident” Award for having ten safe years of operations. Both firms earned the recognition from the Department of Labor and Employment’s Bureau of Working Standards (DOLE-BWC) after they logged 1.5 million “safe man-hours/no loss time incident” from October 25, 1998 to October 25, 2008. First Gas operates the 1,000-megawatt Sta. Rita combined cycle power plant, while FGP operates the 500-megawatt San Lorenzo combined cycle plant. Maria Brenda L. Villafuerte (left), director of the BWC-DOLE for Region IV, handed the plaque for the award to Richard B. Tantoco (center), First Gen executive vice president and COO. Witnessing the event is Ramon J. Araneta, vice president for plant administration.

GEOTHERMALHIGHLIGHTS OF OPERATIONS


s the Philippines’ leading

clean and renewable

energy firm, First Gen

counts among its subsidiaries

the country’s leading producer

of geothermal energy, Energy

Development Corporation

(EDC). Geothermal is an almost

inexhaustible form of energy. EDC

stands out as the country’s biggest

producer of geothermal energy with

an installed capacity of 1,199 MW

and the world leader in wet steam

field technology. The Philippines

is the world’s second largest

geothermal producer.

EDC reported a Php1.3-billion net

income on its 2008 operations,

down by 85 per cent from the

Php8.6 billion reported in 2007.

Revenues of Php19.1 billion were

reported in 2008 from Php18.8

billion in 2007.

Financial results were adversely

affected by Php8.9 billion in losses

from the revaluation of EDC’s

foreign currency-denominated

loans, following the volatility

experienced by the Japanese

yen. EDC has JPY12 billion in

loans maturing in June 2009.

The effect of foreign exchange

losses was partially mitigated by

a one-time Php2 billion income

from the arbitration award

granted to the company over long-

standing contract implementation

issues with the National Power

Corporation (NPC). Stripping out

these non-recurring items, EDC’s

recurring net income (RNI) on its

2008 operations would have been

Php5.5 billion.

EDC generated 5,331 GWh

and 3,096 GWh of electricity

and steam sales, respectively.

Although not all EDC plants met

their contracted minimum energy

quantity (MEQ), the Palinpinon 2

and Mindanao 2 plants exceeded

GEOTHERMAL TRIVIAArchaeological evidence shows that the first human use of geothermal resources in North America occurred more than 10,000 years

ago with the settlement of Paleo-Indians at hot springs. The springs served as a source of warmth and cleansing, and their minerals

became a source of healing.

Geothermal is an almost inexhaustible form of energy. EDC stands out as the country’s biggest and the world’s second largest producer of geothermal energy with an installed capacity of 1,199 MW.

GEOTHERMAL

their MEQ, resulting in a surplus

generation from both plants.

Mahanagdong completed the major

overhaul of Unit 3 generator and

Malitbog attained a 99.66 per cent

availability factor, its highest on

record, thus far. Average capacity

factor reached 90 per cent, resulting

in additional revenues of Php175

million. As the power plant improved

its steam rate and capacity, it

delivered 3 MW more electricity

with the same amount of steam.

Malitbog also conducted a successful

blackstart simulation testing, making

it the default blackstart plant for the

Leyte-Samar island grid in the event

of a total blackout.

The Unified Leyte power plant

achieved a 99.95 per cent

reliability and 98.37 per cent

availability factors for its 230-

kilovolt transmission lines and

switchyards. It also maintained

zero lost time accident (LTA) and

achieved 651,875 safe man-hours

since Calenergy turned over the

plants in 2006.

Due to declining steam supply,

Northern Negros was placed under

a nine-month shutdown while the

plant’s piping system and vessels

were preserved using dry air. To

make the plant viable for the long

term and meaningfully improve

steam production, EDC obtained

permission from the Provincial

Board to enter the Mount Kanlaon

buffer zone in July 2009. Under

the steam recovery program

for Northern Negros, gas lifting

operations began in December

together with the installation of the

calcite inhibition system. Existing

production wells subsequently

underwent rehabilitation with

re-commissioning expected within

2009. EDC gained widespread

public support and acceptability

for the project. This program was

showcased as among the “best

practices” during the Lopez Group

Business Excellence Summit with

Heat from the Earth’s core played a crucial role in man’s evolution by helping him survive and overcome a hostile natural environment. Energy Development Corporation, a First Gen subsidiary, taps this same heat from steam fields in its service contract areas to meet the energy needs of consumers in the modern world.

GEOTHERMAL TRIVIAThere are two main methods of utilizing geothermal energy: direct heat usage and electricity generation. Direct heat usage is the simplest and most

commonly used form. In direct heat usage, people consume the energy by drilling wells deep into the earth with water pipelines. The hot water from

the pipelines is then used for many purposes like melting ice on the road, greenhouse warming, drying clothes, or maintaining the heating system

in residential areas. Generating electricity with geothermal energy is similar to the direct use method. The only difference is that the temperature

requirement is a lot higher (greater than 150 degrees Celsius) so that the steam can push the turbine to produce electricity.


its campaign cited for exemplary

communications by the Public

Relations Society of the Philippines

and the International Association

for Business Communicators.

EDC’s drilling services remain in

demand in Lihir Island, Papua New

Guinea as it signed a one-year

extension of its contract with Lihir

Gold Ltd. for US$16.11 million.

To qualify for more drilling projects

overseas, EDC purchased a brand-

new drilling rig.

Under First Gen, EDC acts as the

main platform for the former’s

GEOTHERMAL TRIVIAThe first industrial use of heat coming from the Earth began near Pisa, Italy in the late 18th century, when steam from natural vents

and drilled holes was used in the extraction of boric acid from the hot pools that are now known as the Larderello fields. In 1904, Prince

Piero Conti, owner of the fields, decided to end his long-standing dispute with the local electric utility by attaching a generator to a

natural-steam-driven engine. The success of this experiment led to the installation, in 1913, of the first geothermal power plant, with a

capacity of 250 kilowatts. By 1975, the Larderello fields were capable of producing 405 megawatts of power.

various expansion projects in the

renewable energy business both

in the Philippines and abroad.

EDC’s expansion plans include

the development of two new

geothermal fields -- the 20-MW

Nasulo and 50-MW Tanawon

projects in Bicol; and an 86-MW

wind energy project in Northern

Luzon; the construction of new

power plants; as well as the

possible acquisition of NPC

plants that are up for bidding in

2009. EDC is also continuing its

evaluation of various geothermal

prospects overseas. In 2008,

EDC completed geo-scientific

Under First Gen, EDC acts as the main platform for the former’s various expansion projects in the renewable energy business both in the Philippines and abroad.

assessment of the Tatapani project

in India and a team ranked the

256 geothermal sites in Sumatra,

Sulawesi and Java in Indonesia.

In October 2008, the board of

First Gen approved the sale of 60

per cent of FG Hydro to EDC as

an initial step in their joint efforts

to promote renewable energy in

the Philipines.

SNGPF’s fluid collection and recycling system

HYDROELECTRICHIGHLIGHTS OF OPERATIONS


s part of its portfolio of

assets, First Gen owns

power plants that use an

abundant natural resource -- water.

Water is the fuel used to operate

the 112-MW Pantabangan-Masiway

hydroelectric complex (PMHC) of

First Gen Hydro Power Corporation

(FG Hydro), as well as the 1.6-

MW Agusan mini-hydro plant of

FG Bukidnon Power Corporation

(FG Bukidnon) under First Gen

Renewables, Inc. (FGRI).

FG Hydro generates electricity

at PMHC from water released

for irrigation purposes. Wet

weather conditions in 2008 led to

a decreased release of irrigation

water and as a result, the

generation of PMHC fell by 14.7

per cent to 354.15 gigawatt-hour

in 2008 from the previous year’s

415.1 gigawatt-hour.

With lower electricity generation,

resulting in lower sales to the

Wholesale Electricity Spot Market

(WESM) and lower Spot Market

Prices, gross revenues of FG Hydro

fell by 32.2 per cent to Php1.38

billion in 2008 from Php2.04 billion

in 2007.

In 2008, FG Hydro sold electricity

both through the WESM and via

seven bilateral contracts. One of

the bilateral contracts lapsed at the

end of 2008. As such, six contracts

remain in force in 2009.

In January 2008, FG Hydro signed a

US$44.7-million contract to refurbish

the Pantabangan plant over the

next three years. The bulk of the

project design was completed during

the year, while manufacturing for a

number of key and long lead-time

items commenced. A turbine model

test for the new design was also

successfully performed during the

year. In addition, the new protection

panels were installed in an interim

configuration, to replace the old

electrical protection relays.

Physical refurbishment of the first

unit will commence in July 2009, with

return to service scheduled for the

end of December 2009. The plant

common service equipment will also

be replaced in 2009. The second

unit will be refurbished between

July and December 2010. Once FG

Hydro completes the refurbishment

in 2010, capacity of the Pantabangan

plant will exceed 120 MW, an

increase of about 20 MW.

Meanwhile, the FG Bukidnon

Agusan mini-hydro plant in

Mindanao generated 12,898

megawatt-hour of electricity in

2008, which is the highest level

of energy produced since it took

over the plant in 2005. This

was due to high water inflows

during the year, combined with

FG Bukidnon’s ongoing efforts to

maintain the high availability and

reliability of the mini-hydro facility.

The availability and reliability of

FG Bukidnon’s mini-hydro plant

reached 98.99 per cent and

99.90 per cent, respectively.

FG Bukidnon and Cagayan Electric

Power and Light Company (CEPALCO)

signed a Power Supply Agreement

in January 2008. This PSA is still

subject for a review by the Energy

Regulatory Commission (ERC). Once

approved by the ERC, the PSA will be

valid until March 28, 2025.

HYDROELECTRIC

OILHIGHLIGHTS OF OPERATIONS


auang Private Power

Corporation (BPPC)

heralded the reentry of

the group to power generation

when it won the bid to Build-Own-

Operate (BOT) a 215 - megawatt

bunker-fired diesel power plant in

Bauang, La Union and executed

a 15-year BOT Agreement with

the National Power Corporation

(NPC) in 1993. The contract

will end in July 2010 with the

turnover of the power plant

facility to NPC.

BPPC’s cash remained consistent

over the years including 2008

despite a drop in reported

revenues and net income

following the adoption of new

accounting standards, set forth

by the International Financial

Reporting Interpretations

Committee (IFRIC). Recognized

as the interpretative body of

the International Accounting

Standards Board (IASB), IFRIC

earlier came out with a new

interpretation of accounting

standards for service

concessions, known as IFRIC 12.

This new interpretation, which

was made effective and adopted

by BPPC in January 2008,

requires companies under a BOT

arrangement to recognize plant

facilities as financial instead

of fixed asset. The asset is

amortized over the life of the

contract by the collection of

capacity fees from NPC. Thus,

only a small portion of the total

fees billed to NPC is recognized

as revenue.

Gross revenues for 2008

amounted to US$27.19 million,

lower than forecasts and the

previous year’s level of US$55.28

million due to the implementation

of the IFRIC 12. Net income after

tax reached US$11.09 million,

lower than the previous year’s

US$27.19 million. Notably,

lower reported earnings do not

reflect actual decline in financial

performance as BPPC declared

US$28 million in dividends in

2008, close to the US$29 million

2007 dividends.

Plant dispatch in 2008 was

minimal at 125.69 gigawatt-hour

energy delivered, resulting in a

6.74 per cent capacity utilization

versus 20.04 per cent in 2007,

the year the plant was utilized

OIL

extraordinarily high because of

constraints in the availability of

coal supply that year. Since the

late 1990s, the plant has been

used as a standby facility most of

the year, switching to a peaking

plant during the summer months.

The Bauang plant’s availability

declined to 85.48 per cent in

2008 from 95.27 per cent in

2007, primarily due to the failure

in October 2008 of one of its

three main transformers, known

as Sector 1 transformer (OAT1)

and the consequent preventive

maintenance and diagnostic

work performed on the other

two transformers. The damage

on OAT1 reduced the plant’s

nominated capacity starting

December 10, 2008 from 215

MW to 150 MW. With repairs

or replacement of damaged OAT1

estimated to take time, BPPC

immediately sought measures

to minimize downtime of the

generating units connected to

the damaged transformer. The

measures included the lease

of an available transformer

as a temporary replacement.

Following the reconditioning

and installation of the leased

equipment, the Bauang Plant’s

nominated capacity was

reinstated to 215 MW in

February 2009. The damage

on OAT1 and the consequent

reduction in nominated capacity

will not have a major impact on

the company’s financials since

there is an insurance coverage

on both machinery breakdown

and revenue reduction.

The long-standing dispute

between NPC and the local

government on the real property

tax of the Bauang Plant took a

major turn in 2008 when the

local government, despite a

valid injunction auctioned the

plant assets in February. The

province eventually forfeited the

assets due to the absence of any

bidder. The one-year redemption

period from the auction lapsed

in February 2009, which paved

the way for discussions between

NPC and the local government for

a settlement. Both parties are

currently negotiating the terms

and conditions of the agreement.


PETROLEUM TRANSPORT

irst Philippine Industrial

Corporation (FPIC),

operator of the petroleum

pipeline from Batangas to Manila,

registered revenues of Php616

million in 2008, or 4.17 per cent

higher than the previous year’s

Php591.4 million. This resulted in

a net income of Php203 million, up

by 7.53 per cent year-on-year at

Php188.8 million. FPIC ended the

year with total assets of Php1.9

billion, or 58 per cent higher than

the end-2007 level, due largely to

the increase in the sound value of

Property & Equipment based on the

latest appraisal.

During the year, FPIC received the

Commitment to Excellence Award

of the Oscar M. Lopez Award

for Performance Excellence, and

the Recognition for Proficiency

in Quality Management of the

Philippine Quality Award program

of the government. The company

maintained the certification of

its management systems to six

international standards after audits

conducted by global certifying

bodies. FPIC will be on its 40th

year of operation by June 2009.

Its Customer Satisfaction Index

of 5.00 (on a 5-point scale)

which is rated monthly by its

shippers, the favorable perception

by its communities of its social

responsibility programs based

on biannual surveys, and the high

employee engagement scores

vis-à-vis Philippine and Asia-Pacific

norms are proof of FPIC’s superior

pipeline transport service through

the years.

FPIC is committed to preserving the environment through compliance with international pipeline operations, maintenance and design engineering standards.

As a further contribution to nation

building, the company is looking

at opportunities to transport

jet fuel directly to Ninoy Aquino

International Airport and clean

fuel (natural gas) to Metro Manila.

FPIC is committed to preserving

the environment through

compliance with international

pipeline operations, maintenance

and design engineering standards,

through corporate social

responsibility activities that

promote sustainability including

continuing community training

on ESH (environment, safety and

health) matters and by being the

most energy-efficient mode of

transporting petroleum.

PROSPECTSTECHNOLOGIESMARkETING

HIGHLIGHTS OF OPERATIONS


n line with First Gen’s

goal of further reducing

its carbon footprint,

subsidiary FGRI is looking into

other renewable energy projects

such as wind and solar.

In February 2008, the Department

of Energy (DOE) reserved for

FGRI 24 sites in Luzon for wind

power development assessment.

FGRI is also waiting for DOE’s

decision regarding FGRI’s proposal

to conduct similar wind power

development assessments in at

least 70 other sites. FGRI will

prioritize and install wind masts

in the identified top priority sites.

If site-specific wind resource

assessments confirm the viability

of the selected sites, construction

of wind farms at these sites can

commence in the early part of the

next decade.

In tandem with the efforts of FGRI,

EDC also has an 86-megawatt wind

energy project on the drawing board

in Burgos, Ilocos Norte. EDC has sent

out formal invitations for proposals

for the supply of wind turbines.

Retail

First Gen sees a bright future

for First Gen Energy Solutions,

Inc. (FGES), which the Company

organized in 2006 in preparation

for the opening of the electricity

market to retail competition.

Early in 2008, the ERC approved

the application of FGES to act

as a retail electricity supplier

(RES). FGES, which also holds a

separate license as an aggregator,

can enter into supply contracts

with electric cooperatives once

the transition supply contracts

of these cooperatives expire.

FGES can also forge supply

contracts with large industrial and

commercial customers once open

access is declared.

While waiting for the start of

open access, FGES is lining up

a growing list of value-added

services to meet the future needs

of prospective clients. An example

of this is a smart power monitoring

project completed by FGES for a

major semiconductor firm. The

system helps minimize energy

waste by providing the customer

with real-time information on

tracking electricity use in each

major section of the customer’s

operations. A similar system is

also being installed in an electric

cooperative’s site to monitor

electricity consumption. The

real-time information serves as a

useful tool to reduce systems loss,

thereby improving the customer’s

financial performance.

First Gen’s experience and market

expertise allow FGES to structure

innovative power supply contracts

that maximize customer benefits

through an optimum trading

strategy. The supply options

of FGES are backed by First

Gen’s portfolio of major power

generating assets.

This smart meter for load monitoring, ideal for industrial and commercial customers, helps a power consumer minimize energy wastage by tracking on real-time basis electricity consumption in major sections of a consumer’s operations. The meter was developed by subsidiary First Gen Energy Solutions, Inc. (FGES), as part of a program to provide its customers value-added services.

PROSPECTSTECHNOLOGIESMARkETING


2008 Annual Report Special Feature Story

ENVIRONMENTALISMIN BUSINESS“We know the country that harnesses the power of clean, renewable energy will lead the

21st century” - US President Barack Obama

“Low carbon growth is the only growth option.”- Lord Nicholas Stern, former World Bank

chief economist and author of the “Stern Review on the Economics of Climate Change”

“We have not generated real wealth, and we are destroying a livable climate…Real

wealth is something you can pass on in a way that others can enjoy.”- Joseph Romm,

physicist and climate expert, blog.climateprogress.org

These quotes capture the essence of what First Gen’s business model aims to achieve

and why there is an urgent need to take care of the environment. This new business

philosophy-environmentalism in business- undoubtedly, is the way to go. It is the future.


As such, at First Gen,

environmentalism is not just

a buzz word or a part of its

corporate social responsibility.

Environmentalism is a vital and

intrinsic part of its business model.

From the fuels that it uses for its

power generation to its conduct

of businesses – purchasing of

materials to operations at its

various sites and offices – caring

and nurturing the environment is an

essential element in its decisions.

When First Gas started operating

the country’s first natural gas-

fired plants — the 1,000-MW

Sta. Rita and the 500-MW San

Lorenzo plants in Batangas in

2000 and 2002, respectively,

it blazed the trail for the use of

indigenous natural gas for power

generation, signalling the start of

the development of the country’s

natural gas industry.

Conscious of the fact that natural

gas is the cleanest form of

fossil fuel, First Gas developed

an environmental program that

ensures that the environment

within its compound and adjacent

to it is also protected and

preserved, if not further enhanced.

One of its major projects is the

protection and preservation of

the mangrove area inside its

compound. Mangroves are not

only important nursery habitats for

fish and crustaceans, it is also a

biological filter for estuarine waters

and acts as a carbon sink that

captures and stores carbon dioxide

and other pollutants. From a mere

patch of a mangrove in 2001, with

only three recorded species, this

mangrove has now become home

to at least 28 species, making it

a habitat where fish fingerlings

hatch and thrive to maturity; as

well as a good hatching place for

crabs that are released to the

adjacent river, helping the marginal

fishing community increase its

harvest. This project was given an

award by BG plc.- 2nd place BG

Chairman’s Award for protecting

the environment in 2004.

With the continuous monitoring of

the seawater and regular cleanup

of its beach area behind the First

Gas power plant, the beach has

now become a rare nesting site for

some Olive Ridley turtles, proof of

the healthy condition of the beach

area. Hopefully, after years and

years of wandering in the vast

oceans, these turtles will come

back to nest in the same area

where they were hatched. The First

Gas compound has also been home

to several species of migratory

birds such as the Chinese egrets

and intermediate egrets during

their annual flight.

Mangroves thrive inside the buffer zone of the 1,000-MW Sta. Rita, and 500-MW San Lorenzo, natural gas-fired power plants of First Gas in Batangas City. As the country’s leading clean and renewable energy firm, First Gen and subsidiaries like First Gas support various environmental projects as part of their commitment to protect our fragile ecosystem and save our resources for future generations.

Baby Olive Ridley turtles


Verde Island Passage

Aside from First Gas’s compound

and adjacent area, First Gen along

with First Philippine Conservation,

Inc. and Conservation International

also initiated a program in 2006

to protect the Verde Island

Passage off the coastal waters

of Batangas, Oriental Mindoro,

Occidental Mindoro, Marinduque

and Romblon. The program

involves conservation work in

partnership with local communities

along the area. The Verde

Island Passage hosts a fragile

ecosystem that is so significant

that a marine scientist, Dr. Kent

Carpenter, from the International

Union for Conservation of Nature

called it the “Center of the

Center” in marine biodiversity.

Today, the conservation of Verde

Island Passage has attracted

the support of a number of

organizations and corporations

convinced with Verde Island

Passage’s importance in the

preservation of the world’s

marine biodiversity.

Greening Legacy

It has always been the dream of

the Lopez Group and First Gen

chairman Oscar M. Lopez to help

reforest the country, conscious

and alarmed at the continued

degradation of the country’s

forests. As such, when First Gen

purchased a controlling stake in

PNOC-Energy Development Corp. in

November 2007, Mr. Lopez knew

his dream of reforesting and saving

those that can still be saved from

denudation would finally be realized.

After all, EDC is a geothermal

company. Geothermal energy–

steam and heat coming from the

earth – is dependent on having

water underneath the rocks.

And the only way to have this

continuously is by having a healthy

watershed. Trees suck in water

whenever it rains. A healthy

forest cover is vital to sustaining

the underground reservoir that

provides geothermal energy.

From the fuels that it uses for its power generation to its conduct of businesses...caring and nurturing the environment is an essential element in its decisions.

business partners,” Mr. Lopez said.

“Binhi” targets to establish 1,000

hectares of forests annually over a

period of ten years. What makes

Binhi different from the usual

tree planting is that EDC will use

prime endangered Philippine tree

species like the tindalo, kalantas,

mayapis, mangkano in its activities.

Thus, “Binhi” is not only a broad-

scale reforestation, it is also a

biodiversity restoration project.

The Binhi project has four modules

designed to meet man’s specific

needs. Thus, EDC came up with

four modules: Tree for Food, Tree

for Life, Tree for Leisure and Tree

for the Future.

The “Tree for Food” module intends

to accelerate the revegetation of

denuded forestland and establish

tree plantations and agro-forests

that would provide a significant

source of livelihood under

sustained yield management for

forest settlers living within EDC’s

geothermal reservations. A total

of 5,000 hectares of plantation

are targeted for this module over a

ten-year period.

The “Tree for Life” involves

bridging of forest gaps between

mountain systems to address

the fragmentation of habitats of

these valuable ecosystems. By

doing so, trees can continue to

provide ecological services like

water storage, carbon dioxide

sequestration, oxygen release, etc.

The “Tree for Leisure” involves

planting more trees to preserve

the natural beauty and ambience

of the forest areas in EDC’s

geothermal project sites to make

it an eco-tourism destination.

Currently, its Bacon-Manito

geothermal reservation area is

already known as an eco-tourism

destination in Sorsogon.

The fourth module is the “Tree

for the Future” which is the core

of the “greening legacy.” EDC

will plant seeds of these rare

endangered tree species in areas

where these trees can have the

utmost protection such as in

school grounds, municipal parks

and historical shrines. This module

ensures there will be “mother

trees” as sources of seeds for

future reforestation requirements.

Other First Gen subsidiaries

such as FPPC, FGRI and First

Gen-managed FPIC have their

own individual environmental

and community projects that

are in cooperation with the local

communities such as mangrove

protection and rehabilitation

as well as tree planting. These

projects allow these communities

to enjoy the benefits of a healthier

environment while at the same

time achieve better crop yields and

increased fishing harvests.

Energy Efficiency Program

In 2007, FGES, a unit of First

Gen, conducted an energy review

As such, First Gen through EDC

launched in December 2008 a

major reforestation project dubbed

“Binhi: A Greening Legacy.”

“The modern Lopez Group has

become one of the trailblazers

of the corporate green

movement, hence the rooting of

“environmentalism in Philippine

business” philosophy among the

various Lopez companies and

This Philippine brown deer calls BGPF its home

The Botong Twin Falls inside EDC’s Bacon-Manito Geothermal Production Field (BGPF).


or study of the energy usage of

its head office in Pasig City. Using

the results as its baseline data to

monitor the success of its planned

initiatives, FGES started its energy

efficiency program by installing an

energy-saving device in 2008. So

far, the installation reduced lighting

consumption by 24 per cent. This

initiative is also being rolled out to

the other site offices.

Externally, FGES also assisted a

major semiconductor company

in installing an energy monitoring

system that helps manage their

energy costs. Results, so far,

have been encouraging. FGES, in

collaboration with its customers,

has also developed a text-based

remote meter. This, along with

smarter system loss monitoring

techniques, has helped an electric

cooperative lower its system loss

by a substantial 19 per cent.

In 2008, First Gen’s collective

carbon dioxide intensity stood

at 0.26 CO2 tonnes/MWh, a

25.71 per cent reduction from

the previous year’s 0.35 CO2

tonnes/MWh. Much of the

reduction in First Gen’s combined

emissions was due to the

acquisition of geothermal company

EDC. The inclusion of EDC into

First Gen’s portfolio of assets

greatly increased the company’s

generation output without

significantly increasing carbon

dioxide emissions.

With this positive development,

First Gen is bent on further

reducing its carbon dioxide

intensity while at the same time

delivering value services to its

clients and improving profitability

for its shareholders. With its

distinct set of assets that are

clean and renewable; and a

competent, experienced and

dedicated workforce, First Gen’s

goal of becoming a global leader in

clean and renewable energy is not

far from the horizon.

THE BATS OF BAC-MANMany people may not be aware of this bit of wildlife trivia, but the uniqueness of some mammals in some parts of the Philippines can actually rival those in much more famous spots such as the Galapagos Islands and Madagascar.

A study by UP Los Baños Professor Philip Aviola shows that 111 species of mammalian fauna in the Philippines are found nowhere else in the world.

Among these uniquely Philippine mammals, 25 fall under the category of bat species. Of this number, at least nine are found in the Bacon-Manito Geothermal Production Field (BGPF or Bac-Man) of First Gen subsidiary EDC. These flying mammalian wonders of Bac-Man include the golden-crowned flying fox, the mottled-winged flying fox, the Philippine pygmy fruit bat, the musky fruit bat, and the Philippine forest horseshoe bat. Bac-Man also serves as home for the large flying fox, the world’s largest bat.

These bats come in different sizes. The large flying fox has the widest wingspan, reaching at more than 1.7 meters. On the other hand, the Philippine pygmy fruit bat weighs just 18 grams and its wingspan measures just 30 millimeters.

But while these bats come in different sizes, they all face a common problem: loss of habitat. First Gen’s EDC is cognizant of the need to protect endangered Philippine flora and fauna, including these bats, because they play a crucial role in maintaining the ecological balance. EDC shows this concern by protecting and preserving the bats’ forest habitats in its geothermal production fields, like Bac-Man.

FIRST GEN INTENSITY, TCO2/MWH

0.40

0.35

0.30

0.25

0.202004 2005 2006 2007 2008

AHEPP Acquistion

PMHEPP Acquistion

EDC Acquistion

First Gen Consolidated Carbon Intensity (Equity Based)

First Gen Consolidated Carbon Intensity (Operational Basis)

CORPORATEGOVERNANCE

First Gen has adopted a Manual

on Corporate Governance to

institutionalize its adherence to

the principles of good governance.

First Gen recognizes the duty

and responsibility of its Board of

Directors in promoting the long-

term success of the Company and

in sustaining its competitiveness

in a manner consistent with the

Board’s fiduciary responsibility. To

ensure the best interests of the

Company and its stakeholders,

members of First Gen’s board

discharge their duties, functions

and responsibilities with utmost

honesty, integrity and responsibility

in accordance with best corporate

governance practices.

INDEPENDENT

DIRECTORS

Two out of the nine members of

First Gen’s Board of Directors

have been elected as independent

directors. The two -- Mr. Tony

Tan Caktiong and Mr. Cezar P.

Consing -- have neither interest

nor relationship with First Gen that

may hinder their independence

from the Company or its

management, or that may interfere

with the exercise of independent

judgment in carrying out the

responsibilities of a director.

NOMINATION COMMITTEE

The Board of Directors acts as

the Nomination Committee, which

ensures, through a managed

and effective system consistent

with the Company’s by-laws, that

every Board election shall result

in a mix of proficient directors,

each of whom is able to add value

and bring prudent judgment to

the Board.

COMPENSATION AND

REMUNERATION

COMMITTEE

The Compensation and

Remuneration Committee is

composed of the Chairman of

the Board and two directors,

one of whom is an independent

director. The Compensation and

Remuneration Committee has

powers and functions over the

compensation and remuneration of

the corporate officers other than

the Chairman.

AUDIT COMMITTEE

The Audit Committee is

composed of three members

of the Board, two of whom are

independent directors (with

the chairman of the committee

required to be an independent

director). The Audit Committee’s

duties and responsibilities,

include, but are not limited to,

the following:

check all financial reports •

of the Company against

its compliance with both

the internal financial

management handbook and

with pertinent accounting

standards, including

regulatory requirements;

review with management •

annually, or more often

as may be necessary,

corporate performance

in the areas of managing


CORPORATEGOVERNANCE

credit, market, liquidity,

operations, legal and other

risks of the Company, and

crisis management;

perform interface functions •

with the internal and

external auditors;

elevate to international •

standards the

accounting and auditing

processes, practices and

methodologies; and

ensure the establishment •

of a transparent financial

management controls

system that aims to ensure

the integrity of the system.

COMPLIANCE OFFICER

A 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 on Corporate

Governance. The compliance

officer is also tasked to

establish an evaluation system

for determining and measuring

compliance with the Manual

on Corporate Governance. The

compliance officer likewise

reports to the Chairman of the

Board on the Company’s level of

compliance with the Manual on

Corporate Governance for the

preceding year. The compliance

officer identifies, monitors

and controls compliance with

corporate governance matters.

RISk MANAGEMENT

To maintain its high standards

of corporate governance, First

Gen continues to implement its

enterprise risk management (ERM)

system in all departments, as well

as in all levels and in all phases of

First Gen’s business activities.

The ERM system aims to establish

a corporate risk management

system that provides the Board

of Directors, management and all

employees a clear roadmap for

identifying risks, avoiding pitfalls,

and seizing opportunities to grow

stakeholder value.

With the ERM system, risk

management in the First Gen

group would evolve from being

individual-based to a system that

is more reliant on formal and

well-defined policies, processes,

and standards being implemented

on an enterprise-wide basis.

BOARD OFDIRECTORS

Oscar M. Lopez Federico R. Lopez Richard B. Tantoco

Francis Giles B. Puno Peter D. Garrucho Jr. Elpidio L. Ibañez

Fiorello R. Estuar Tony Tan Caktiong Cezar P. Consing


Oscar M. LopezChairman

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 (EDC) and First Philippine Holdings Corporation (FPHC), and a member of the board of directors of ABS-CBN Broadcasting Corporation (ABS-CBN). In addition, he is Chairman of Benpres Holdings Corporation, Lopez, Inc., First Balfour, Inc., First Phil. Electric Corp., First Philippine Industrial Corp., First Philippine Industrial Park, Inc., First Sumiden Circuits, Inc., First Philec Solar Corp., and all member-companies of the First Gen and First Gas groups of companies. 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). Mr. Lopez also earned his Bachelor of Arts degree (cum laude) from Harvard University (1951).

Federico R. LopezPresident and Chief Executive Officer

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

Richard B. TantocoDirector and Chief Operating Officer

Richard B. Tantoco, born October 2, 1966, Filipino, is Executive Vice President (EVP) and Chief Operating Officer (COO) of the Corporation. He is a member of the board of EDC, where he also serves as Deputy President and COO. He is Senior Vice President (SVP) of FPHC, and President and CEO of First Gas Pipeline Corp. Mr. Tantoco is director, EVP and COO of FG Bukidnon, FG Hydro, FGES, Red Vulcan, Prime Terracota, FGHC, FGPC, FGP Corp., Unified Holdings, First NatGas, 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. PunoDirector and Chief Finance Officer

Francis Giles B. Puno, born September 1, 1964, Filipino, is EVP and Chief Financial Officer (CFO) of the Corporation. He is a member of the board of EDC, as well as SVP and CFO of FPHC. He is likewise director, EVP and CFO of FG Bukidnon, FG Hydro, FGES, Red Vulcan, Prime Terracota, FGHC, FGPC, FGP Corp., Unified Holdings, and First Gas Pipeline Corp. He is also a member of the boards of First Gen Renewables, Inc. (FGRI), FPPC, and BPPC. 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.Director

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, EDC, FPPC, FG Bukidnon, FG Hydro, FGES, Red Vulcan, Prime Terracota, FGHC, FGPC, FGP Corp., Unified Holdings, and First Gas Pipeline Corp. Mr. Garrucho served as Secretary of Tourism and Secretary of Trade & Industry during the administration of President Corazon C. Aquino. He was also Executive Secretary and Presidential Adviser on Energy Affairs under then 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).

Elpidio L. IbañezDirector

Elpidio L. Ibañez, born September 30, 1950, Filipino, is President and COO of FPHC. He is a member of the boards of FGRI, FG Bukidnon, BPPC, FPPC, FGHC, FGPC, FGP Corp., Unified Holdings, 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).

Fiorello R. EstuarDirector

Fiorello R. Estuar, born July 27, 1938, Filipino, is Vice-Chairman and CEO of First Balfour, Inc., and head of the Infrastructure Business Development Group of FPHC. He was President of Maynilad Water Services from 2004 to 2007, and First Philippine Balfour Beatty, Inc., from 2001 to 2004. He held the positions of Presidential Adviser in the Office of the President and Secretary of the Department of Public Works and Highways from 1987 to 1991; President of the Philippine National Construction Company from 1984 to 1987; and Administrator of the National Irrigation Administration from 1980 to 1983. Mr. Estuar obtained his Bachelor of Science degree in Civil Engineering at the University of the Philippines (1959) and Ph.D. in Civil Engineering at Lehigh University in Pennsylvania (1965).

Tony Tan CaktiongDirector

Tony Tan Caktiong, born January 5, 1953, Filipino, is the Chairman and CEO of retail giant Jollibee Foods Corp. He is at the helm of Chowking, Greenwich, Delifrance, Red Ribbon Bakeshop, and Yonghe King. He is a member of the boards of trustees of the Asian Institute of Management, St. Luke’s Medical Hospital, and the Philippine Academy of Sakya, and is an independent director of Sun Life Prosperity Dollar Abundance Fund, Inc., and Sun Life Prosperity Dollar Advantage Fund, Inc. He has received numerous awards including the World Entrepreneur of the Year award in 2004. Mr. Caktiong has a Bachelor of Science degree in Chemical Engineering from the University of Santo Tomas (1975) and has management tutoring certifications from Harvard University, Asian Institute of Management, University of Michigan Business School, and Harvard Business School.

Cezar P. ConsingDirector

Cezar P. Consing, born October 20, 1959, Filipino, is a Partner of the Rohatyn Group, a New York-headquartered independent investment management company that focuses on emerging markets. He has over twenty years’ experience in international finance. Mr. Consing is also an independent director of Bumiputra Commerce Holdings Berhad, CIMB Group Sdn. Berhad, and CIMB-GK Pte Ltd. He is director and chairman of the executive committee of Premiere Bank, and board member of the Asian Youth Orchestra and FILGIFTS.com. He was a board director of Bank of the Philippine Islands from 1995-2000 and 2004-2006. Prior to joining the Rohatyn Group, Mr. Consing held several senior management positions at JP Morgan & Co. and JP Morgan Securities (Asia Pacific) Limited. 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 Corporation or any of its subsidiaries.

BOARD OFDIRECTORS

MANAGEMENTCOMMITTEE

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

Federico R. Lopez* Ernesto B. Pantangco* Victor B. Santos Jr.

Emmanuel P. Singson Richard B. Tantoco* Daniel H. Valeriano


MANAGEMENTCOMMITTEE

Steven W. Goers Dennis P. Gonzales Leonides U. Garde

Francis Giles B. Puno* Jonathan C. Russell* Aloysius L. Santos

Nestor H. Vasay Vincent Martin C. Villegas * Executive Committee


INCOME STATEMENT

First Gen Group’s consolidated

revenues for 2008 reached US$1.8

billion, which is US$683.8 million or

61.3 per cent higher than last year’s

US$1.1 billion. The hefty increase

in revenues resulted mainly from

the full-year consolidation of Energy

Development Corporation (EDC)’s

revenues amounting to US$437.1

million versus the one-month’s worth

of additional revenues in 2007, and

the high dispatch regime experienced

by the First Gas’ gas-fired plants.

Despite the jump in revenues

however, the Group posted a lower

consolidated net income of US$93.5

million -- down by US$88.3 million

or 48.6 per cent compared with

last year’s consolidated net income

of US$181.8 million. Debt service

requirements which increased

by US$112.7 million combined

with unrealized foreign exchange

losses totaling US$178 million

exacted a heavy toll on the Group’s

consolidated bottom line. Added

to these is the full year income tax

payment made by First Gas Power

Corporation (FGPC) with the expiry

of its six-year income tax holiday. A

lower generation output from the

112MW Pantabangan & Masiway

hydroelectric power plants brought

about by the reduced irrigation

requirements also contributed to the

reduction in the Group’s net income.

For the year ended December 31,

2008, First Gen’s equity share in net

earnings amounted to US$14.5

million, which is US$90.2 million

or 86.2 per cent lower than the

US$104.6 million equity share in

2007. Setting aside the effects

of unrealized foreign exchange

differentials, the mark-to-market gain

on derivatives and other one-time

income (charges), First Gen Group’s

recurring net income for 2008

would have been US$204.6 million,

an increase of US$33.9 million or

19.9 per cent, as compared to the

recurring net income of US$170.7

million in 2007. For 2008, EBITDA

would have improved by US$275.9

FINANCIALREVIEW

million to US$588.2 million with

the full years’ consolidation of EDC’s

earnings.

Against the backdrop of the current

global financial crisis, First Gen

initiated and successfully completed

a number of fundraising activities

aimed at normalizing the Group’s

finances. The Group’s fundraising

program included the successful

issuance last February 2008, of

a US$260.0 million of Convertible

Bonds bearing a coupon rate of

2.50 per cent due on February

11, 2013. Last November 2008,

its subsidiary FGPC also tapped

the international debt market and

availed of a US$544.0 million long-

term debt facility from nine foreign

banks. Along with the completion

of other fundraising activities, First

Gen’s success in carrying out its

financing program helped in covering

current maturing obligations that

are directly associated with the

Group’s acquisition of a 60 percent

stake in EDC.


BALANCE SHEET

First Gen Group’s total consolidated

assets as of end-2008 decreased

by US$429.1 million to US$3.7

billion. Among the factors

that affected the Group’s total

consolidated assets include:

• aUS$240.0millionreductionin

combined short term and long

term receivables primarily due

to the lower trade receivables

from Meralco, which is equivalent

to one-month level in 2008 as

compared to the two-month level

of trade receivables in 2007,

and the quarterly payments of

receivables pertaining to Annual

deficiency. The decrease in

this account also reflects the

payments received from NPC

relating to the concession

receivables of EDC and the effect

of the peso depreciation against

the U.S. Dollar;

• decreaseinAvailable-for-sale

financial assets by US$14.2

million primarily due to the pre-

termination of EDC’s ROP bonds,

the proceeds of which were used

to fund the company’s working

capital requirements;

• decreaseofUS$14.2millionin

liquid fuel inventories of the gas-

fired plants;

• reductioninProperty,plantand

equipment account by US$54.0

million representing current

year’s depreciation;

• decreaseinInvestmentinan

associate by US$12.1 million

representing the receipt of cash

dividends amounting to US$15.6

million partially offset by the

US$3.5 million equity share in

net earnings of BPPC; and

• decreaseinGoodwillby

US$140.7 million resulting from

the translation of the Philippine

peso-denominated Goodwill

relating to the acquisition of

EDC in to U.S. dollars, being

First Gen’s functional currency.

The year-end Philippine peso

exchange rate versus the

U.S. dollar depreciated from

Php41.411:$1 in 2007 to

Php47.52:$1 in 2008.

FINANCIALREVIEW

Total consolidated liabilities

decreased by US$0.1 billion to

US$2.7 billion in 2008 as compared

to US$2.8 billion in 2007. During

the year, First Gen was successful

in its plan to bring down the loan

balance at the parent company level

(which decreased from US$562.4

million in 2007 to US$482.4 million

in 2008) and relevering the debt of

its operating subsidiaries through

the availment of a US$544.0 million

long-term debt facility for FGPC

and short-term loans for EDC and

Prime Terracota.

Total equity likewise dropped by

24.5 per cent to US$1.0 billion

in 2008 as compared to US$1.3

billion (as restated) in 2007. The

decrease was mainly due to the

lower earnings in 2008 combined

with the significant movement in the

cumulative translation adjustments

account, which is affected by the

foreign exchange fluctuations as

the functional currency of some of

First Gen’s subsidiaries remain in

Philippine peso.

FINANCIAL STATEMENTS


March 30,2009

SECURITIES AND EXCHANGE COMMISSlON

SEC Building, EDSA Greenhills

Mandaluyong 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, 2008 and 2007 and for each of the three years in the period ended December 31, 2008. 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; and

(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. LOPEZ FEDERICO R. LOPEZChairman of the Board President and Chief Executive Officer

FRANCIS GILES B. PUNOExecutive Vice President and Chief Financial Officer

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

INDEPENDENT AUDITORS’ REPORT 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 balance sheets as at December 31, 2008 and 2007, and the consolidated statements of 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, 2008, 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, 2008 and 2007, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2008 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Betty C. Siy-Yap Partner CPA Certificate No. 57794 SEC Accreditation No. 0098-AR-1 Tax Identification No. 102-100-627 PTR No. 1566469, January 5, 2009, Makati City March 30, 2009

SyCip Gorres Velayo & Co.6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

A member firm of Ernst & Young Global Limited

INDEPENDENT AUDITORS’ REPORT


FIRST GEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in U.S. Dollars and in Thousands) December 31

2008

2007(As restated -Notes 2 and 6)

ASSETS Current Assets Cash and cash equivalents (Notes 7, 22, 34 and 35) $229,647 $218,172 Receivables - net (Notes 8, 13, 29, 34, 35 and 36) 176,815 245,710 Current portion of long-term receivables (Notes 4, 6, 13, 23, 34, 35 and 36) 68,181 90,790 Available-for-sale (AFS) financial assets (Notes 9, 34 and 35) 14,194 28,437 Inventories (Note 10) 76,206 90,440 Derivative asset (Notes 34 and 35) 12,923 – Noncurrent assets held for sale (Note 12) 38,067 40,388 Other current assets (Notes 11, 22, 34, 35 and 36) 49,508 53,146 Total Current Assets 665,541 767,083 Noncurrent Assets Long-term receivables - net of current portion (Notes 4, 6, 13, 23, 34, 35 and 36) 652,831 801,308 Investment in an associate (Notes 2, 4 and 14) 20,958 33,087 Property, plant and equipment - net (Notes 6, 15, 22 and 36) 736,262 790,291 Goodwill (Notes 6 and 16) 962,854 1,103,555 Intangible assets - net (Notes 4, 6 and 17) 338,797 397,457 Deferred tax assets (Note 32) 71,794 73,738 Other noncurrent assets (Notes 9, 11,18, 22, 23, 34, 35, 36 and 37) 248,840 160,512 Total Noncurrent Assets 3,032,336 3,359,948 $3,697,877 $4,127,031

LIABILITIES AND EQUITY Current Liabilities Loans payable (Notes 6, 19, 34, 35 and 38) $200,461 $442,944 Accounts payable and accrued expenses (Notes 20, 34 and 35) 183,755 228,233 Income tax payable 1,836 13,365 Due to stockholders and affiliates (Notes 29, 34 and 35) 7,056 7,956 Current portion of: Long-term debt (Notes 6, 11, 15, 22, 34 and 35) 518,101 111,071 Obligations to Gas Sellers (Notes 23, 30, 34, 35 and 36) 36,696 40,201 Royalty fees payable (Notes 24, 34, 35 and 36) 35,528 10,582 Deferred payment facility with Power Sector Assets and Liabilities Management (PSALM)

(Notes 6, 34 and 35) 9,579 8,525 Obligations to power plant contractors (Notes 25, 34 and 35) 2,354 6,368 Derivative liabilities (Notes 22, 34 and 35) 1,142 – Total Current Liabilities 996,508 869,245 Noncurrent Liabilities Bonds payable (Notes 21, 34 and 35) 362,978 119,502 Long-term debt - net of current portion (Notes 6, 11, 15, 22, 34 and 35) 1,073,285 1,528,669 Derivative liabilities - net of current portion (Notes 22, 34 and 35) 59,861 1,315 Deferred payment facility with PSALM - net of current portion (Notes 6, 34 and 35) 51,709 61,288 Retirement and other post-retirement liability (Note 31) 24,899 27,084 Deferred tax liabilities (Note 32) 30,036 34,383 Obligations to Gas Sellers - net of current portion (Notes 23, 30, 34, 35 and 36) – 26,134 Royalty fees payable - net of current portion (Notes 24, 34, 35 and 36) – 33,925 Obligations to power plant contractors - net of current portion (Notes 25, 34 and 35) – 2,213 Other noncurrent liabilities (Notes 23 and 26) 80,190 73,692 Total Noncurrent Liabilities 1,682,958 1,908,205 Equity Attributable to Equity Holders of the Parent (Notes 27 and 28) Redeemable preferred stock 9,572 9,572 Common stock 20,624 20,623 Additional paid-in capital 319,530 319,487 Equity reserves (Note 6) (28,383) – Cumulative translation adjustments (Note 35) (136,645) 51,884 Accumulated unrealized gain on AFS financial assets (Note 9) 382 189 Retained earnings (Notes 4 and 14) 354,137 339,663 Cost of preferred and common stock held in treasury (80,557) (80,557) 458,660 660,861 Minority Interests 559,751 688,720 Total Equity 1,018,411 1,349,581 $3,697,877 $4,127,031 See accompanying Notes to Consolidated Financial Statements.

FIRST GEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(AMOUNTS IN U.S. DOLLARS AND IN THOUSANDS)

FIRST GEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in U.S. Dollars and in Thousands, Except per Share Data) Years Ended December 31 2008 2007 2006

REVENUE Sale of electricity (Note 36) $1,494,416 $1,042,897 $990,984 Sale of steam (Note 36) 104,168 8,728 – Interest income on service concessions (Notes 24 and 36) 58,295 4,318 – Mark-to-market gain on derivatives - net (Note 35) 30,601 108 – Interest (Notes 7, 23 and 30) 22,675 32,835 51,017 Construction revenue 20,996 210 – Revenue from drilling services 16,282 1,206 – Equity in net earnings of an associate (Note 14) 3,530 7,671 8,191 Others (Notes 29 and 37) 48,529 17,662 5,134 1,799,492 1,115,635 1,055,326

COSTS AND EXPENSES Fuel cost (Notes 10 and 36) (863,874) (641,603) (659,364)Interest expense and financing charges

(Notes 19, 21, 22, 23, 24, 25 and 30) (203,687) (90,996) (98,251)Foreign exchange loss - net (178,716) – (38)Power plant operations and maintenance (Note 36) (115,112) (50,598) (30,656)Other administrative expenses (Notes 29 and 30) (111,466) (54,767) (32,405)Depreciation and amortization (Notes 15, 17 and 30) (91,907) (57,218) (59,520)Staff costs (Notes 28, 30 and 31) (67,556) (11,993) (7,983)Other charges (320) (5,122) (424)

INCOME BEFORE INCOME TAX 166,854 203,338 166,685

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 32) Current 74,896 32,891 4,871 Deferred (1,510) (11,384) 14,735 73,386 21,507 19,606

NET INCOME $93,468 $181,831 $147,079

Attributable to Equity holders of the Parent $14,474 $104,655 $91,839 Minority interests 78,994 77,176 55,240 $93,468 $181,831 $147,079

Earnings per Share for Net Income Attributable to the Equity Holders of the Parent (Note 33)

Basic $0.017 $0.130 $0.117 Diluted 0.014 0.129 0.116 See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED STATEMENTS OF INCOME(AMOUNTS IN U.S. DOLLARS AND IN THOUSANDS, EXCEPT PER SHARE DATA)


FIR

ST G

EN C

OR

POR

ATI

ON

AN

D S

UB

SID

IAR

IES

CO

NSO

LID

ATE

D S

TATE

MEN

TS O

F C

HA

NG

ES IN

EQ

UIT

Y

FOR

TH

E YE

AR

S EN

DED

DEC

EMB

ER 3

1, 2

008,

200

7 A

ND

200

6 (A

mou

nts

in U

.S. D

olla

rs a

nd in

Tho

usan

ds, E

xcep

t per

Sha

re A

mou

nt)

Eq

uity

Attr

ibut

able

to E

quity

Hol

ders

of t

he P

aren

t (No

tes 2

7 and

28)

Mino

rity

Inte

rest

s To

tal E

quity

Ca

pita

l Sto

ck

Cum

ulat

ive

Accu

mul

ated

Un

reali

zed

Co

st o

f Sto

ck

Rede

emab

le

Addi

tiona

l Eq

uity

Tr

ansla

tion

Gain

on

AFS

Reta

ined

He

ld in

Tre

asur

y

Pr

efer

red

Stoc

k Co

mm

onSt

ock

Paid

-InCa

pita

l Pa

id-In

(Note

6)Ad

just

men

ts(N

ote 35

)In

vest

men

ts

(Note

9)

(Note

s 4an

d 14)

Pref

erre

dSt

ock

Com

mon

Stoc

k To

tal

Balan

ce at

Janu

ary 1

, 200

8 $9

,572

$2

0,62

3 $3

19,4

87

$–

$2,1

16

$189

$3

39,6

63

($27

,570

)($

52,9

87)

$611

,093

$6

63,1

96

$1,2

74,2

89

Effec

t of P

urch

ase P

rice A

lloca

tion t

hrou

gh B

usine

ss

Comb

inatio

n (PF

RS 3)

(Note

6)

– –

– –

49,7

68

– –

– –

49,7

68

25,5

24

75,2

92

Balan

ce at

Janu

ary 1

, 200

8 9,

572

20,6

23

319,

487

– 51

,884

1

89

339,

663

(27,

570)

(52,

987)

660,

861

688,

720

1,34

9,58

1 Ne

t loss

es on

cash

flow

hedg

e defe

rred i

n equ

ity

(Note

35)

– –

– –

(24,

989)

– –

– –

(24,

989)

(16,

659)

(41,

648)

Ne

t gain

s on c

ash f

low he

dge r

emov

ed fr

om

cumu

lative

tran

slatio

n adju

stmen

ts an

d tak

en in

to inc

ome (

Note

35)

– –

– –

187

– –

– –

187

125

312

Unre

alize

d gain

on A

FS fin

ancia

l ass

ets re

cogn

ized

in eq

uity (

Note

9)

– –

– –

– 20

3 –

– –

203

303

506

Unre

alize

d gain

on A

FS in

vestm

ent r

emov

ed fr

om

equit

y and

take

n into

inco

me (N

ote 9)

–

– –

– –

(10)

–

– –

(10)

(15)

(25)

Fo

reign

curre

ncy t

rans

lation

s –

– –

– (1

63,7

27)

– –

– –

(163

,727

)(9

1,72

6)(2

55,4

53)

Total

inco

me an

d exp

ense

for t

he ye

ar re

cogn

ized

direc

tly in

equit

y –

– –

– (1

88,5

29)

193

–

– –

(188

,336

)(1

07,9

72)

(296

,308

) Ne

t inco

me fo

r the

year

–

– –

– –

– 14

,474

–

– 14

,474

78

,994

93

,468

To

tal in

come

and e

xpen

se fo

r the

year

–

– –

– (1

88,5

29)

193

14

,474

–

– (1

73,8

62)

(28,

978)

(202

,840

) Ex

ercis

e of s

tock o

ption

s (No

tes 27

and 2

8)

– 1

8 –

– –

– –

– 9

– 9

Shar

e-ba

sed p

ayme

nts (N

ote 28

) –

– 35

–

– –

– –

– 35

–

35

Impa

ct of

sale

of Fir

st Ge

n Hyd

ro P

ower

Cor

pora

tion

(Note

6)

– –

– (2

8,38

3)–

– –

– –

(28,

383)

28,3

83

– Di

viden

ds of

subs

idiar

ies

– –

– –

– –

– –

– –

(128

,374

)(1

28,3

74)

Balan

ce at

Dec

embe

r 31,

2008

$9

,572

$2

0,62

4 $3

19,5

30

($28

,383

)($

136,

645)

$382

$3

54,1

37

($27

,570

)($

52,9

87)

$458

,660

$5

59,7

51

$1,0

18,4

11

Balan

ce at

Janu

ary 1

, 200

7 $9

,572

$2

0,46

9 $3

17,4

93

$–

($22

0)$–

$2

79,2

91

($27

,570

)($

52,4

65)

$546

,570

$1

68,6

23

$715

,193

Ne

t loss

es on

cash

flow

hedg

e defe

rred i

n equ

ity

(Note

35)

– –

– –

(563

)–

– –

– (5

63)

(375

)(9

38)

Net g

ains o

n cas

h flow

hedg

e rem

oved

from

cu

mulat

ive tr

ansla

tion a

djustm

ents

and t

aken

into

incom

e (No

te 35

) –

– –

– 6

– –

– –

6 4

10

Unre

alize

d gain

on A

FS fin

ancia

l ass

ets re

cogn

ized

in eq

uity (

Note

9)

– –

– –

– 18

9 –

– –

189

284

473

Fore

ign cu

rrenc

y tra

nslat

ions

– –

– –

52,6

61

– –

– –

52,6

61

(2,5

24)

50,1

37

Total

inco

me an

d exp

ense

for t

he ye

ar re

cogn

ized

direc

tly in

equit

y –

– –

– 52

,104

18

9 –

– –

52,2

93

(2,6

11)

49,6

82

Net in

come

for t

he ye

ar

– –

– –

– –

104,

655

– –

104,

655

77,1

76

181,

831

Total

inco

me fo

r the

year

–

– –

– 52

,104

18

9 10

4,65

5 –

– 15

6,94

8 74

,565

23

1,51

3 ED

C mi

nority

inter

ests

as re

stated

(Note

6)

– –

– –

– –

– –

– –

502,

628

502,

628

Rede

mptio

ns of

comm

on sh

ares

(Note

27)

– –

– –

– –

– –

(522

)(5

22)

– (5

22)

Exer

cise o

f stoc

k opti

ons (

Notes

27 an

d 28)

–

154

1,87

3 –

– –

– –

– 2,

027

– 2,

027

Shar

e-ba

sed p

ayme

nts (N

ote 28

) –

– 12

1 –

– –

– –

– 12

1 –

121

Cash

divid

ends

- co

mmon

stoc

k ($0

.05 a

shar

e)

– –

– –

– –

(44,

283)

– –

(44,

283)

– (4

4,28

3)

Divid

ends

of su

bsidi

aries

–

– –

– –

– –

– –

– (5

7,09

6)(5

7,09

6)

Balan

ce at

Dec

embe

r 31,

2007

$9

,572

$2

0,62

3 $3

19,4

87

$–

$51,

884

$189

$3

39,6

63

($27

,570

)($

52,9

87)

$660

,861

$6

88,7

20

$1,3

49,5

81

FIR

ST G

EN C

OR

POR

ATIO

N A

ND

SU

BSI

DIA

RIE

S

CON

SOLI

DATE

D S

TATE

MEN

TS O

F CH

ANGE

S IN

EQU

ITY

(AM

OU

NTS

IN U

.S. D

OLL

AR

S A

ND

IN T

HO

USA

ND

S, E

XCEP

T PE

R S

HA

RE

AM

OU

NT)

Eq

uity A

ttribu

table

to Eq

uity H

older

s of th

e Par

ent (

Notes

27 an

d 28)

Mino

rityInt

eres

ts To

tal

Equit

y

Capit

al St

ock

Cu

mulat

ive

Retai

ned

Cost

of St

ock

Rede

emab

le

Addit

ional

Tran

slatio

n Ea

rning

s He

ld in

Trea

sury

Pr

eferre

dSt

ock

Comm

onSt

ock

Paid-

InCa

pital

Adjus

tmen

ts (N

ote 35

) (N

otes 4

and 1

4)Pr

eferre

dSt

ock

Comm

onSt

ock

Total

Ba

lance

at Ja

nuar

y 1, 2

006

$9,5

72

$20,

406

$186

,767

($

875)

$2

14,3

63

($27

,570

)($

88,8

36)

$313

,827

$1

53,0

61

$466

,888

Ne

t gain

s on c

ash f

low he

dge d

eferre

d in e

quity

–

– –

514

– –

– 51

4 34

3 85

7 Ne

t loss

es on

cash

flow

hedg

e rem

oved

from

cumu

lative

tran

slatio

n adju

stmen

ts an

d tak

en in

to inc

ome

– –

– (1

64)

– –

– (1

64)

(109

)(2

73)

Fore

ign cu

rrenc

y tra

nslat

ions

– –

– 30

5 –

– –

305

32

337

Total

inco

me fo

r the

year

reco

gnize

d dire

ctly i

n equ

ity

– –

– 65

5 –

– –

655

2

66

921

Ne

t inco

me fo

r the

year

–

– –

– 91

,839

–

– 91

,839

55

,240

14

7,07

9 To

tal in

come

for t

he ye

ar

– –

– 6

55

91,8

39

– –

92,4

94

55,5

06

148,

000

Re-is

suan

ces o

f com

mon s

tock h

eld in

trea

sury

as pa

rt of

the In

itial P

ublic

Offe

ring

(Note

27)

– –

136,

694

– –

– 36

,371

17

3,06

5 –

173,

065

Exer

cise o

f stoc

k opti

ons (

Notes

27 an

d 28)

–

63

762

– –

– –

825

– 82

5 Tr

ansa

ction

costs

(Note

27)

– –

(6,9

36)

– –

– –

(6,9

36)

– (6

,936

) Sh

are-

base

d pay

ments

(Note

28)

– –

206

– –

– –

206

– 20

6 Ca

sh di

viden

ds -

comm

on st

ock (

$0.03

a sh

are)

(2

6,91

1)–

– (2

6,91

1)–

(26,

911)

Di

viden

ds of

subs

idiar

ies

– –

– –

– –

– –

(39,

944)

(39,

944)

Ba

lance

at D

ecem

ber 3

1, 20

06

$9,5

72

$20,

469

$317

,493

($

220)

$2

79,2

91

($27

,570

)($

52,4

65)

$546

,570

$1

68,6

23

$715

,193

See

acc

ompa

nyin

g N

otes

to C

onso

lidat

ed F

inan

cial

Sta

tem

ents

.

FIR

ST G

EN C

OR

POR

ATIO

N A

ND

SU

BSI

DIA

RIE

S

CON

SOLI

DATE

D S

TATE

MEN

TS O

F CH

ANGE

S IN

EQU

ITY

(AM

OU

NTS

IN U

.S. D

OLL

AR

S A

ND

IN T

HO

USA

ND

S, E

XCEP

T PE

R S

HA

RE

AM

OU

NT)

CON

TIN

UED


Eq

uity A

ttribu

table

to Eq

uity H

older

s of th

e Par

ent (

Notes

27 an

d 28)

Mino

rityInt

eres

ts To

tal

Equit

y

Capit

al St

ock

Cu

mulat

ive

Retai

ned

Cost

of St

ock

Rede

emab

le

Addit

ional

Tran

slatio

n Ea

rning

s He

ld in

Trea

sury

Pr

eferre

dSt

ock

Comm

onSt

ock

Paid-

InCa

pital

Adjus

tmen

ts (N

ote 35

) (N

otes 4

and 1

4)Pr

eferre

dSt

ock

Comm

onSt

ock

Total

Ba

lance

at Ja

nuar

y 1, 2

006

$9,5

72

$20,

406

$186

,767

($

875)

$2

14,3

63

($27

,570

)($

88,8

36)

$313

,827

$1

53,0

61

$466

,888

Ne

t gain

s on c

ash f

low he

dge d

eferre

d in e

quity

–

– –

514

– –

– 51

4 34

3 85

7 Ne

t loss

es on

cash

flow

hedg

e rem

oved

from

cumu

lative

tran

slatio

n adju

stmen

ts an

d tak

en in

to inc

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FIRST GEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in U.S. Dollars and in Thousands) Years Ended December 31

2008

2007 (As restated - Notes 2 and 6) 2006

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $166,854 $203,338 $166,685 Adjustments for: Interest expense and financing charges (Note 30) 203,687 90,996 98,251 Net unrealized foreign exchange losses 157,980 12,018 2,473 Depreciation and amortization (Note 30) 91,907 57,218 59,520 Mark-to-market gain on derivatives - net (Note 35) (30,601) (108) – Interest income (Note 30) (22,675) (32,835) (51,017) Equity in net earnings of an associate (Note 14) (3,530) (7,671) (8,191) Write-off of input value added tax – 4,728 – Income before working capital changes 563,622 327,684 267,721 Decrease (increase) in: Receivables 70,621 17,366 (47,270) Concession receivables 76,510 42,505 – Other long-term receivables - net (15,456) – – Inventories 13,471 (57,349) 12,643 Other current assets (12,479) 13,501 30,261 Increase (decrease) in: Accounts payable and accrued expenses (114,675) (12,551) 13,734 Royalty fee payable (8,979) 4,930 – Retirement and other post-retirement liability (2,185) 5,427 30 Cash generated from operations 570,450 341,513 277,119 Interest received 20,794 32,835 50,929 Income taxes paid (86,408) (30,071) (282)Net cash provided by operating activities 504,836 344,277 327,766 CASH FLOWS FROM INVESTING ACTIVITIES Advances to a minority shareholder (99,017) – – Collection of receivables from Meralco on Annual Deficiency 48,495 30,982 59,422 Decrease (increase) in: Other noncurrent assets (39,410) (119,121) (21,082) AFS financial assets 14,243 (1,006) – Exploration and evaluation of assets – (892) – Short-term cash investments – – 2,899 Additions to property, plant and equipment (Note 15) (27,295) (29,529) (4,269)Additions to intangible assets (Note 17) (19,618) – – Dividends received from an associate 15,665 9,295 4,476 Proceeds from disposal of property and equipment 30 13 64 Acquisition of a business - net of cash acquired (Note 6) – (1,299,488) (51,600)Return of investment in an associate (Note 14) – 4,217 – Additional investments in subsidiaries – (227) – Net cash used in investing activities (106,907) (1,405,756) (10,090)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Issuance of long-term debt (Note 22) 485,135 705,127 – Availment of loans 295,298 439,296 – Issuance of convertible bonds - net of debt issuance costs 256,074 – – Exercise of stock options 9 2,027 825 Re-issuances of treasury shares - net of transaction costs (Note 27) – – 166,129 Payments of: Long-term debt (598,389) (143,818) (108,374) Loans payable (530,715) – – Dividends to minority shareholders of subsidiaries (128,374) (57,096) (39,944) Interest expense and financing charges (120,202) (51,765) (88,784) Obligations to Gas Sellers on Annual Deficiency (Note 23) (30,082) (27,662) (50,138) Deferred payment facility with PSALM (Note 6) (8,525) (7,587) – Cash dividends – (44,283) (41,948)Increase (decrease) in: Obligations to power plant contractors (6,226) 559 – Amounts due to stockholders and affiliates (1,066) 85 (186) Other noncurrent liabilities (1,153) 118 – Redemptions of common shares (Note 27) – (522) (670)Net cash provided by (used in) financing activities (388,216) 814,479 (163,090)EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH

EQUIVALENTS 1,762 5,970 2,425 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,475 (241,030) 157,011 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 218,172 459,202 302,191 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7) $229,647 $218,172 $459,202 See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS(AMOUNTS IN U.S. DOLLARS AND IN THOUSANDS)

FIRST GEN CORPORATION AND SUBSIDIARIES NOTES 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) was incorporated in the Philippines and registered 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 involved in the power generation business. All subsidiaries (see Note 2) are incorporated in the Philippines.

The total proceeds from the Offering amounted to P=9,090.4 million ($173.1 million). The common shares of the Parent Company are currently listed and traded on the First Board of the Philippine Stock Exchange, Inc. (PSE). First Gen is considered a public company under Section 17.2 of the Securities Regulation Code (SRC). As of March 30, 2009, FPHC directly and indirectly owns 66.22% of the common shares of First Gen and 100% of First Gen’s voting preferred shares. As a result, FPHC’s voting interest in First Gen is equivalent to 68.6%. FPHC is the ultimate parent company of First Gen.

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

The accompanying consolidated financial statements of First Gen Group were reviewed and recommended for approval by the Audit Committee on March 30, 2009 and approved and authorized for issue by the Board of Directors (BOD) on the same date.

2. Summary of Significant Accounting Policies

Basis of Preparation The accompanying consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale (AFS) financial assets that have been measured at fair value. The consolidated financial statements are presented in United States (U.S.) Dollar, which is the Parent Company’s functional and presentation currency. U.S. Dollar amounts are rounded to the nearest thousand, except when otherwise indicated.

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

Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following new Philippine Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) which became effective beginning January 1, 2008 and amendments to existing standards that became effective beginning July 1, 2008:

Philippine Interpretation IFRIC 11, “PFRS 2 - Group and Treasury Share Transactions” Philippine Interpretation IFRIC 14, “Philippine Accounting Standards (PAS) 19 - The Limit on a Defined Benefit

Asset, Minimum Funding Requirements and their Interaction” Amendments to PAS 39, “Financial Instruments: Recognition and Measurement” and PFRS 7, “Financial

Instruments: Disclosures - Reclassification of Financial Assets”

The principal effects of these changes are as follows:

Philippine Interpretation IFRIC 11, “PFRS 2 - Group and Treasury Share Transactions”

This interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholders of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent company. The Parent Company has extended equity instruments in the form of stock options and stock purchase plans to the officers and employees of its subsidiaries and an associate. The effect of adopting this interpretation resulted


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN U.S. DOLLARS AND IN THOUSANDS, UNLESS OTHERWISE STATED)


in a decrease in receivables from affiliates (shown as part of the “Receivables” account in the consolidated balance sheet) and an increase in the “Investment in an associate” account by $0.22 million and $0.20 million as of January 1, 2008 and 2007, respectively (see Note 14).

Philippine Interpretation IFRIC 14, “PAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”

This interpretation provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognized as an asset under PAS 19, “Employee Benefits.” This interpretation has no impact on the consolidated financial statements as all defined benefit plans are currently in deficit.

Amendments to PAS 39, “Financial Instruments: Recognition and Measurement,” and PFRS 7, “Financial Instruments: Disclosures - Reclassification of Financial Assets”

These amendments permit First Gen Group to reclassify nonderivative financial assets [other than those designated at fair value through profit or loss (FVPL) by First Gen Group upon initial recognition] out of the FVPL category in particular circumstances. The amendments also allow First Gen Group to transfer from the AFS category to the loans and receivables category a financial asset that would have met the definition of loans and receivable (if the financial assets had not been designated as AFS) if First Gen Group has the intention and ability to hold these financial assets for the foreseeable future. These amendments have no impact on First Gen Group’s consolidated financial statements, as the AFS financial assets are not of the nature allowed for reclassification under the amendments.

Basis of Consolidation The accompanying consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries as of December 31 of each year. Control is normally evidenced when the Parent Company owns, either directly or indirectly, more than 50% of the voting rights of the entity’s capital stock.

The following are the wholly owned and majority owned subsidiaries of the Parent Company:

Percentage of Ownership 2008 2007 2006First 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 –Red Vulcan Holdings Corporation (Red Vulcan)1 100 100 –Prime Terracota Holdings Corp. (Prime Terracota) 100 100 –First Gen Prime Energy Corporation (FG Prime) 100 100 –First Gen Visayas Energy, Inc. (FG Visayas Energy) 100 100 –FG Bukidnon Power Corp. (FG Bukidnon)2 100 100 100First Gas Holdings Corporation (FGHC) 60 60 60FGP Corp. (FGP)3 60 60 60First NatGas Power Corporation (FNPC)4 60 60 60First Gas Power Corporation (FGPC)5 60 60 60First NatGas Supply Corporation (FNSC)5 60 60 60First Gas Pipeline Corporation (FG Pipeline)5 60 60 60FGLand Corporation (FG Land)5 60 60 60Energy Development (EDC) Corporation 6 40 40 –First Gen Hydro Power Corporation (FG Hydro) 7 40 100 100

1 Through Prime Terracota 2 Through FGRI 3 Through Unified 4 Through AlliedGen 5 Through FGHC 6 Through Red Vulcan, which owns common shares, representing 40% economic benefits, and voting and non-participating preferred shares of EDC. The combined common and preferred shares represent 60% voting interest in EDC.

7Through EDC, by sale of the 60% ownership of the Parent Company on November 17, 2008. Effective economic ownership of the Parent Company in FG Hydro is 64% as of December 31, 2008.

All of the foregoing subsidiaries are incorporated in the Philippines.

FIRST GEN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN U.S. DOLLARS AND IN THOUSANDS, UNLESS OTHERWISE STATED)

As of December 31, 2008, AlliedGen, FNPC, FNSC, FG Luzon, FG Visayas, FG Mindanao, FG Geothermal, FGNEC, FG Premier, FG Prime and FG Visayas Energy have not started commercial operations.

The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies for like transactions and other events with similar circumstances. All significant intra-group balances, transactions, income and expenses and profits and 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 Gen Group or Parent Company. Control is achieved when First Gen Group has the power to govern 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. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate.

Minority Interests Minority interests represent the portion of profit or loss and net assets in FGHC and Subsidiaries, FGP, FNPC, EDC and FG Hydro (in 2008, see Note 6) not held by First Gen Group and are presented separately in the consolidated statement of income and within equity in the consolidated balance sheet, separate from equity attributable to equity holders of First Gen. Acquisitions of minority interests are accounted for using the entity concept method, whereby the difference between the consideration and the book value of the share in the net assets acquired is recognized as an equity transaction.

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

Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over First Gen Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in 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 that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of First Gen Group are assigned to those units or groups of units. Each unit or group of units to which goodwill is allocated represents the lowest level within First Gen Group at which goodwill is monitored for internal management purposes.

Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation in determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative 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 basis by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or if the cost of the combination can be determined only provisionally, First Gen Group accounts for the combination using those provisional values. First Gen Group recognizes any adjustment to those provisional values as a result of completing the initial accounting within 12 months of and from the acquisition date. The following adjustments are thus made:

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

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


c) Comparative information presented for the periods before the initial accounting for the combination is completed shall be presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortization or other profit 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 plus cumulative translation adjustments and goodwill is recognized in the consolidated statement of income.

The goodwill from investments in subsidiaries is included as a noncurrent asset item in the consolidated balance sheet. The goodwill on investment in an associate is included in the carrying amount of the related investment.

Investment in an Associate First Gen Group’s 40% investment in FPPC and a subsidiary is classified as an investment in an associate and accounted for under the equity method. An 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.

Under the equity method, the investment in an associate is carried in the consolidated balance sheet at cost plus post acquisition changes in First Gen Group’s share of net assets of the associate. First Gen Group’s share of its associate’s post-acquisition profits or losses is recognized in the consolidated statement of income, and its share of post-acquisition movements in the associate’s equity reserves is recognized directly in the consolidated statement of changes in equity. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When First Gen Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, First Gen Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.

An assessment of the carrying value of First Gen Group’s investment is performed when there is an indication that the investment in an associate has been impaired. If this is the case, First Gen Group calculates the amount of impairment as the difference between the fair value of the associate and the carrying value of investments and recognizes the amount in the consolidated statement of income.

Unrealized intercompany profits or losses arising from the transactions with the associate are eliminated to the extent of First Gen Group’s interest in the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized or separately tested for impairment.

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

Foreign Currency Transactions and Translations The consolidated financial statements are presented in U.S. Dollar, which is the Parent Company’s functional and presentation currency. Each entity in First Gen Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded using the functional currency rate prevailing at transaction date. Monetary assets and liabilities denominated in foreign currencies are restated using the functional currency rate of exchange at balance sheet date. All differences are taken to the consolidated statement of income. Nonmonetary items that are measured at historical cost in a foreign currency are translated using the exchange rates as at the date of the transaction. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates as at the date when the fair value was determined.

The functional currency of all the subsidiaries, except Unified, FGP, FGHC and FGPC, is the Philippine peso. As at balance sheet date, the assets and liabilities of these subsidiaries are translated into the presentation currency of the Parent Company (the U.S. Dollar) at the closing rate of exchange ruling at balance sheet date and, their statements of income are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity as part of “Cumulative translation adjustments” account. Upon disposal of any of these subsidiaries, the deferred cumulative amount recognized in equity relating to that particular subsidiary will be recognized in the consolidated statement of income.

Financial Instruments

Date of Recognition. Financial instruments within the scope of PAS 39 are recognized in the consolidated balance sheet when First Gen Group becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized using trade date accounting. Derivatives are also recognized on a trade date basis.

Initial Recognition of Financial Instruments. All financial instruments are initially recognized at fair value. The initial measurement of financial instruments includes transaction costs, except for financial assets categorized at FVPL.


First Gen Group classifies its financial assets in the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, loans and receivables and AFS financial assets. Financial liabilities are classified as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its instruments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every balance sheet date.

Determination of Fair Value. The fair value for financial instruments traded in active markets at balance sheet date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

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

Financial Assets or Liabilities at FVPL. Financial assets and liabilities at FVPL include financial assets and liabilities held for trading purposes and financial assets and liabilities designated upon initial recognition as at FVPL.

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

Derivatives are also classified under financial asset or liabilities at FVPL, unless they are designated as hedging instruments in an effective hedge.

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

The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

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

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

Financial assets and liabilities at FVPL are recorded in the consolidated balance sheet at fair value. Subsequent changes in fair value are recognized in the consolidated statement 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 receive payment has been established.

Classified under financial assets at FVPL are the range bonus forward contracts entered by EDC in 2008 and the embedded foreign currency options on the contract with Andritz Hydro, GmbH (formerly VA TECH HYDRO, GmbH), FG Hydro’s contractor for the Pantabangan Refurbishment and Upgrade Project (PRUP) (see Notes 18, 35 and 36l) as of December 31, 2008.

Classified under financial liabilities at FVPL are the embedded derivatives on the Parent Company’s convertible bonds and EDC’s foreign currency forward contracts (see Note 35) as of December 31, 2008.

These derivatives were not designated by First Gen Group as hedging instruments in an effective hedge.

First Gen Group has no financial assets or liabilities at FVPL as of December 31, 2007.


HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which First Gen Group’s management has the positive intention and ability to hold to maturity. Where First Gen Group sells other than an insignificant amount of HTM investments, the entire category is deemed tainted and reclassified as AFS financial assets. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral parts of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when the HTM investments are derecognized and impaired, as well as through the amortization process. The effects of restatement on foreign currency-denominated HTM investments are also recognized in the consolidated statement of income.

First Gen Group has no HTM investments as of December 31, 2008 and 2007.

Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments and fixed maturities and that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified or designated as AFS financial assets or financial assets at FVPL. Loans and receivables are classified as current assets if maturity is within 12 months from balance sheet date. Otherwise, these are classified as noncurrent assets.

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

Classified under loans and receivables are cash and cash equivalents, receivables, long-term receivables, advances to minority shareholder, royalty fees chargeable to National Power Corporation (NPC) and restricted cash deposits as of December 31, 2008 and 2007 (see Notes 6, 7, 8, 11, 13, 18, 34 and 35).

AFS Financial Assets. AFS financial assets are those nonderivative financial assets which are designated as such or do not qualify to be classified in any of the three preceding categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. AFS financial assets are classified as current assets if management intends to sell these financial assets within 12 months from balance sheet date. Otherwise, these are classified as noncurrent assets.

After initial measurement, AFS financial assets are measured at fair value, with gains and losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is recognized in the consolidated statement of income. First Gen Group uses the specific identification method in determining the cost of securities sold. Accounting for the movement in equity is presented in the consolidated statement of changes in equity.

Classified under AFS financial assets are quoted and unquoted equity investments, government debt securities and investments in proprietary membership shares as of December 31, 2008 and 2007 (see Notes 9, 18, 34 and 35).

Other Financial Liabilities. Financial liabilities are classified in this category if these are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings.

Other financial liabilities are initially recognized at fair value of the consideration received, less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any related issue costs, discount or premium. Gains and losses are recognized in the consolidated statement of income when the liabilities are derecognized, as well as through the amortization process.

Classified under other financial liabilities are loans payable, accounts payable and accrued expenses, due to stockholders and affiliates, bonds payable, long-term debt, obligations to Gas Sellers, royalty fees payable, deferred payment facility with PSALM and obligations to power plant contractors, as of December 31, 2008 and 2007 (see Notes 6, 19, 20, 21, 22, 23, 24, 25, 34 and 35).

Derivative Financial Instruments First 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 the risks that are associated with First Gen Group’s borrowing activities or as required by the lenders in certain cases. Such derivative financial instruments (including bifurcated embedded derivatives) are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.


Any gain or loss arising from changes in fair value on derivatives that do not qualify for hedge accounting is taken directly to the consolidated statement of income for the current year under “Mark-to-market gain on derivatives - net” account.

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

First Gen Group accounts for its interest rate swap agreements as cash flow hedges of the floating rate exposure of its long-term debt (see Note 35).

As of December 31, 2008 and 2007, there are no derivatives that are designated as fair value hedges.

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

Cash Flow Hedges. Cash flow hedges are hedges of the exposure to variability in cash flows that are attributable to a particular risk associated with a recognized asset, liability or a highly probable forecast transaction and could affect the consolidated statement of income. The effective portion of the gain or loss on the hedging instrument is recognized directly in equity under the cumulative translation adjustments while the ineffective portion is recognized under “Mark-to-market gain on derivatives - net” account in the consolidated statement of income.

Amounts taken to equity are transferred to the consolidated statement of income when the hedged transaction affects profit or loss, such as when hedged financial income or expense is recognized or when a forecast sale or purchase occurs. Where the hedged item is the cost of a nonfinancial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the nonfinancial asset or liability.

If the forecast transaction is no longer expected to occur, amounts previously recognized in equity are transferred to the consolidated statement of income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is recognized in the consolidated statement of income.

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

First Gen Group assesses whether embedded derivatives are required to be separated from the host contracts when First Gen Group first becomes a party to the contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

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

Derecognition of Financial Assets and Liabilities

Financial Asset. A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized when:

the rights to receive cash flows from the asset expire;

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

First Gen Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset: or (b) has neither transferred nor retained the risks and rewards of the asset but has transferred the control of the asset.


Where First Gen Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of First Gen Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that First Gen Group could be required to repay.

Financial Liability. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income.

Impairment of Financial Assets First Gen Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has or have occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Loans and Receivables. For loans and receivables carried at amortized cost, First Gen Group first assesses whether an objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If First Gen Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment.

If there is an objective evidence that an impairment loss has been incurred, the amount of loss is measured as the difference between the asset’s carrying value and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate which is the effective interest rate computed at initial recognition. The carrying value of the asset is reduced through the use of an allowance account and the amount of loss is charged to the consolidated statement of income. If in case the receivable has proven to have no realistic prospect of future recovery, any allowance provided for such receivable is written off against the carrying value of the impaired receivable. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at reversal date.

AFS Financial Assets. For AFS financial assets, First Gen Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity investments classified as AFS, impairment indicators would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income, is removed from equity and recognized in the consolidated statement of income. Impairment losses on equity investments are reversed through the consolidated statement of income. Increases in fair value after impairment are recognized directly in the consolidated statement of changes in equity.

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


Offsetting Financial Instruments Financial assets and liabilities are offset with the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle 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 balance sheet.

Revenue Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction 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 Electricity. Revenue from sale of electricity (in the case FGP and FGPC) is based on the respective Power Purchase Agreements (PPA) of FGP and FGPC. The PPAs qualify as leases on the basis that FGP and FGPC sell all of its output to Manila Electric Company (Meralco), an associate of FPHC. These agreements call for a take-or-pay arrangement where payment is made principally on the basis of the availability of the power plants and not on actual deliveries of electricity generated. These arrangements are determined to be operating leases since a significant portion 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 operating and maintenance fees, fuel, wheeling and pipeline charges, and supplemental fees. The portion related to the fixed capacity fees and fixed operating and maintenance fees is considered as operating lease component and such fees are recognized on a straight-line basis, based on the actual net dependable capacity tested or proven, 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 actual energy delivered.

Revenue from sale of electricity covered with service concession arrangements (see Note 4) is consummated whenever the electricity generated is transmitted to the transmission line of the buyer for a consideration. Sale of electricity is based on base price per kilowatt hour (kWh) of electricity delivered, subject to inflation adjustments and net of the portion representing collection of concession receivables and related interest income.

Revenue from Sale of Steam. Sale of steam is recognized when steam generated or its by-product passes to the flow meters installed at the interface point for conversion by the buyer into electricity. Sale of steam is based on base price per kWh of gross or net generation and guaranteed take-or-pay at certain percentage plant factor, subject to inflation adjustments and net of the portion representing collection of concession receivables and related interest income.

Interest Income. Interest income is recognized as interest accrues, using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.

Construction Revenue. Construction revenue is recognized by reference to the stage of completion of the contract activity as at balance sheet date. Stage of completion is measured by reference to the actual cost incurred in relation to the total estimated cost of the project. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.

Revenue from Services. Revenue is recognized as services are rendered.

Equity in Net Earnings of an Associate. First Gen Group recognizes its share in the net income of an associate proportionate to the equity in the voting shares of such associate, in accordance with the equity method of accounting for investments.

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

Inventories Inventories are carried at the lower of cost and net realizable value. The net realizable value for fuel inventories of FGP and FGPC is the fuel cost charged to Meralco, under the respective PPAs of FGP and FGPC with Meralco (see Note 36a), which is based on weighted average cost of actual fuel consumed. Costs of fuel inventories are determined using the weighted average cost method, while the costs for spare parts and supplies are determined using the moving average method. Net realizable value for spare parts and supplies is the current replacement cost.


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

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

Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally charged to the consolidated statement of income in the year the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, 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 of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

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

Asset Type Number of Years Buildings and other structures 5–25 Machinery and equipment 2–25 Transportation equipment 5 Furniture and fixtures 3–10 Leasehold improvements 5 or lease term with no renewal options, whichever is shorter

The useful lives and depreciation and amortization method are reviewed at each financial reporting date to ensure that the periods and method of depreciation are consistent with 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 future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition of the assets (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized.

Construction in-progress is stated at cost and is not depreciated until such time that the assets are substantially completed and/or put into operational use.

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

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

Investment Properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred, if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and any impairment loss.

An investment property is derecognized when either it has been disposed of or when such is permanently 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 the consolidated statement of income in the year of retirement or disposal.

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


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

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

Infrastructures within the scope of this interpretation are not recognized as property, plant and equipment of First Gen Group. Under the terms of contractual arrangements within the scope of Philippine Interpretation IFRIC 12, First Gen Group acts as a service provider. First Gen Group constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time.

First Gen Group recognizes and measures revenue in accordance with PAS 11, “Construction Contracts,” and PAS 18, “Revenues,” for the services it performs. If First Gen Group performs more than one service (i.e., construction or upgrade services and operation services) under a single contract or arrangement, consideration received or receivable is allocated by reference to the relative fair values of the services delivered, when the amounts are separately identifiable.

When First Gen Group provides construction or upgrade services, the consideration received or receivable by First Gen Group is recognized at its fair value. First Gen Group accounts for revenue 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 each contract. First Gen Group accounts for revenue and costs relating to operation services in accordance with PAS 18.

First Gen Group recognizes a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. First Gen Group recognizes an intangible asset to the extent that it receives a 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) to maintain the infrastructure to a specified level of serviceability or (b) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service concession arrangement, it recognizes and measures these contractual obligations in accordance with PAS 37, “Provisions, Contingent Liabilities and Contingent Assets,” at the best estimate of the expenditure that would be required to settle the present obligation at balance sheet date.

In accordance with PAS 23, “Borrowing Costs,” borrowing costs attributable to the arrangement are recognized as an expense in the period in which they are incurred unless First Gen Group has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case, borrowing costs attributable to the arrangement are capitalized during the construction phase of the arrangement in accordance with the allowed alternative treatment under that standard.

Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible 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 in connection with the service concession and related arrangements is recognized initially at the fair value of the construction services. The intangible assets arising from the business combination are recognized initially at fair values. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditures are reflected in 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 assets with finite lives are amortized using the straight-line method over the estimated useful economic life, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and method for an intangible asset with a finite useful life are reviewed at least each balance sheet year. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the said intangible asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of income in the expense category consistent with the function of the intangible asset.


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

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

Prepaid Gas Prepaid gas (included in “Other noncurrent assets” account in the consolidated balance sheet) consists of payments to Gas Sellers for unconsumed gas, net of adjustment. Prepaid gas is recoverable in the form of future gas deliveries in the order that it arose and can be consumed within a ten-year period. Prepaid gas arising from the respective Settlement Agreements (SA) and Payment Deferral Agreements (PDA) of FGP and FGPC can be recovered until December 2014 (see Note 23). If it should be determined at some future date that the likelihood of any amount of gas usage or delivery is remote, then the relevant amount deemed no longer realizable will be written off from the consolidated balance sheet and a loss will be recognized in the consolidated statement of income.

Exploration and Evaluation Assets All 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; salaries and other expenses of geologists, geophysical crews, or others conducting those studies are charged to expense in the year such are incurred.

If the results of initial geological and geophysical activities reveal the presence of geothermal resource that will require further exploration and drilling, subsequent exploration and drilling costs are accumulated and deferred under the “Exploration and evaluation assets” account (included in “Other noncurrent assets” account in the consolidated balance sheet).

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; and, c. 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 the drilling of exploratory wells.

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

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

Research and Development Costs Research costs are expensed as incurred. Development expenditures incurred on an individual project 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 the related project. Otherwise, development costs are expensed as incurred.

The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, or more frequently when an indication of impairment arises during the reporting year.

Debt Issuance Costs Expenditures incurred in connection with availments of long-term debt and issuances of bonds are deferred and amortized using effective interest method over the term of the loans and bonds. Debt issuance costs are netted against the related long-term debt and bonds payable allocated correspondingly to the current and noncurrent portions.

Borrowing Costs Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including exchange differences arising from foreign currency borrowings used 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 generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of qualifying assets until such time that the assets are substantially ready for their intended use or sale, which necessarily takes a substantial period of time. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of income.

Unearned Revenue Unearned revenue (included in “Other noncurrent liabilities” account in the consolidated balance sheet) represents payments by Meralco for unconsumed gas in connection with the respective SAs and PDAs of FGP and FGPC (see Note 23), which may be availed until December 2014 in case the actual gas consumed by the power plants in generating electricity to Meralco exceed their respective take-or-pay quantities (TOPQ) at any given year.

Impairment of Nonfinancial Assets

Property, Plant and Equipment, Intangible Assets, Prepaid Gas and Prepaid Major Spare Parts. At each balance sheet date, First Gen Group assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, First Gen Group makes a formal estimate of an asset’s recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset (or cash-generating unit). An impairment loss is charged to the consolidated statement of income in the year in which it arises.

An assessment is made at each balance sheet date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. In such instance, the carrying amount of the asset is increased to its recoverable amount. However, that increased amount cannot exceed the carrying amount that would have been determined, net of any depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income. After such reversal, any depreciation and amortization charges are adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

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

Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated, an impairment loss is recognized immediately in the consolidated statement of income. Impairment loss relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future years. First Gen Group performs its annual impairment test of goodwill as of December 31 of each year.

Goodwill recognized from the Parent Company’s investments in PAHEP/MAHEP power plant facilities and EDC are translated into the functional and presentation currency of the Parent Company using the closing rate of exchange ruling at balance sheet date. The exchange differences arising on the translation are taken directly to a separate component of equity as part of the “Cumulative translation adjustments” account.

Investment in an Associate. First Gen Group determines whether it is necessary to recognize an impairment loss on its investment in an associate. First Gen Group determines at each balance sheet date whether there is any objective evidence that the investment in an associate is impaired. If this is the case, First Gen Group calculates the amount of impairment as being the difference between the fair value of the associate and the acquisition cost and recognizes the amount in the consolidated statement of income.

Provisions Provisions are recognized when First Gen Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where First Gen Group expects some or all of


the provision will be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is recognized in the consolidated statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to passage of time is recognized as an accretion included 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 constructive obligations associated with the cost of dismantling and removing an item of property, plant and equipment and restoring the site where it is located. The obligation of FGP, FGPC and FG Bukidnon occurs either when the asset is acquired or as a consequence of using the asset for the purpose of generating electricity during a particular year. A corresponding asset is recognized as property, plant and equipment. Dismantling costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the dismantling liability. The unwinding of the discount is expensed as incurred and recognized in the consolidated statement of income as an accretion included under “Interest expense and financing charges” account in the consolidated statement of income. The estimated future costs of dismantling are reviewed annually and adjusted, as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.

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

Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after 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; or d. There is a substantial change to the asset.

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

Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. In cases where a company acts as a lessee, operating lease payments are recognized as expense in the consolidated statement of income on a straight-line basis over the lease terms. However, in cases where a company acts as a lessor, the initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the year in which they are earned.

Retirement and Other Post-retirement Benefits The Parent Company and certain of its subsidiaries have distinct, funded, noncontributory, defined benefit retirement plans. EDC also provides post-retirement medical and life insurance benefits to its permanent employees, which are unfunded. The plans cover all permanent employees, each administered by its respective retirement committee.

The cost of providing benefits under the defined benefit retirement plans is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits obligation in the future with respect to services rendered in the current year. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged in the consolidated statement of income when the net cumulative unrecognized actuarial gains and losses at the end of previous year exceed 10% of the higher of 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 the employees participating in the plans.

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


The defined benefit asset or liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service costs not yet recognized and the fair value of plan assets on which the obligations are to be settled directly. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement obligation. If such aggregate is negative, the value of the asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plans or reductions in the future contributions to the plans.

Treasury Shares Acquired treasury shares are accounted for at weighted average cost and shown as a deduction in the equity section of the consolidated balance sheet. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issue or cancellation of the Parent Company’s own equity instruments. Upon reissuance of treasury shares, the “Cost of preferred and common stock held in treasury” account is credited at cost. The excess of proceeds from reissuance over the cost of treasury shares is credited to the “Additional paid-in capital” account. However, if proceeds from reissuance exceed the cost of treasury shares, such excess is debited to the “Additional paid-in capital” account but only to the extent of previously set-up additional paid-in capital for the same class of stock. Otherwise, this is debited against the “Retained earnings” account.

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

Equity-Settled Transactions. The cost of equity-settled transactions with employees is measured by reference to the fair value of the stock options at grant date. The fair value is determined using the Black Scholes Merton model, further details of which are provided in Note 28 - Share-based Payment Plans. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Parent Company (“market conditions”), if applicable.

The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the 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 balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Parent Company’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit for a year represents the movement in cumulative expense recognized as of the beginning and end of that year.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the 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 recognized as if the terms had not been modified. An expense is recognized for any increase in the value of the transactions as a result of the modification, as measured on the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, 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 replacement award on the date that it is granted, the cancelled and new awards are treated as if they were modifications of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share attributable to the equity holders of the Parent Company (see Note 33).

Income Tax

Current Income Tax. Current income tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authority. The tax rates and tax laws used to compute the amount are those that have been enacted or substantively enacted as at balance sheet date.

Deferred Income Tax. Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from the excess of


minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT), and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient future taxable income will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred income tax, however, is not recognized on temporary differences arising 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 nor taxable income.

Deferred income tax liabilities are not provided on nontaxable temporary differences associated with investments in domestic subsidiaries and an associate.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that sufficient future taxable income will allow the deferred income tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are applicable to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as at balance sheet date.

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

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

Dividends on Preferred and Common Shares First Gen Group may pay dividends in cash, by distribution of property or by the issue of shares of stock. Dividends paid in cash are subject to the approval of the BOD. Dividends paid in the form of additional shares are subject to approval by both the BOD and at least two-thirds of the outstanding capital stock of the shareholders at a shareholders’ meeting called for such purpose. First Gen Group may declare dividends only out of its unrestricted retained earnings.

Cash and property dividends on preferred and common shares are recognized as liability and deducted from equity. Stock dividends are treated as transfers from retained earnings to additional paid-in capital.

Earnings per Share (EPS) Attributable to the Equity Holders of the Parent Basic EPS is computed by dividing net income (less preferred dividends, if any) for the year attributable to common shareholders by the weighted average number of common shares outstanding during the year, with retroactive adjustments for any stock dividends declared and stock split.

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

Where the EPS effect of the shares to be issued to executives and employees under the Parent Company’s ESOP and ESPP would be anti-dilutive, basic and diluted EPS are stated at the same amount.

Segment Reporting For purposes of financial reporting, First Gen Group’s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products. Since the acquisition of EDC in November 2007, the reportable segment has been classified into three major business segments. Financial information on business segment is presented in Note 5 - Business Segment Information. First Gen Group has one geographical segment and derives principally all of its revenue from domestic operations.

Events after Balance Sheet Date Any event after balance sheet date that provides additional information about First Gen Group’s financial position at balance sheet date (adjusting event) is reflected in the consolidated financial statements. Events after balance sheet date that are not adjusting events, if any, are disclosed, in the notes to consolidated financial statements, when material.


Future Changes in Accounting Policies First Gen Group will adopt the following standards and interpretations when these become effective and as these are applicable. Except as otherwise indicated, First Gen Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its consolidated financial statements.

Effective in 2009

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

The amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS financial statements) as one of the following amounts: (a) cost determined in accordance with PAS 27; (b) at the fair value of the investment at the date of transition to PFRS, determined in accordance with PAS 39; or (c) previous carrying amount (as determined under generally accepted accounting principles) of the investment at the date of transition to PFRS.

PFRS 2, “Share-based Payment - Vesting Condition and Cancellations”

PFRS 2 has been revised to clarify the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. It defines a vesting condition as a condition that includes an explicit or implicit requirement to provide services. It further requires non-vesting conditions to be treated in a similar fashion to market conditions. Failure to satisfy a non-vesting condition that is within the control of either the entity or the counterparty is accounted for as cancellation. However, failure to satisfy a non-vesting condition that is beyond the control of either party does not give rise to a cancellation.

PFRS 8, “Operating Segments”

PFRS 8 will replace PAS 14, “Segment Reporting,” and adopts a full management approach to identifying, measuring and disclosing the results of an entity’s operating segments. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the consolidated balance sheet and consolidated statement of income and First Gen Group will provide explanations and reconciliations of the differences. This standard is only applicable to an entity that has debt or equity instruments that are traded in a public market or that files (or is in the process of filing) its financial statements with a securities commission or similar party. First Gen Group will adopt the change prospectively.

Amendment to PAS 1, “Presentation of Financial Statements”

PAS 1 introduces a new statement of comprehensive income that combines all items of income and expenses recognized in the profit or loss together with “other comprehensive income.” First Gen Group may choose to present all items in one statement, or to present two linked statements, a separate consolidated statement of income and a consolidated statement of comprehensive income. This amendment also requires additional requirements in the presentation of the consolidated balance sheet and consolidated statemement of changes in equity as well as additional disclosures to be included in the notes to consolidated financial statements. First Gen Group will assess the impact of this amendment and will adopt the change prospectively.

Amendment to PAS 23, “Borrowing Costs”

PAS 23 has been revised to require capitalization of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the standard, First Gen Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalized on qualifying assets with a commencement date after January 1, 2009. No changes will be made for borrowing costs incurred to this date that have been expensed.

Amendments to PAS 27, “Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate”

Amendments to PAS 27 require changes in respect of the holding companies separate financial statements including: (a) the deletion of ‘cost method’, making the distinction between pre- and post-acquisition profits no longer required; and (b) in cases of reorganizations where a new parent is inserted above an existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. All dividends will be recognized in the consolidated statement of income. However, the payment of such dividends requires the entity to consider


whether there is an indicator of impairment. First Gen Group expects significant changes in its accounting policies when it adopts the foregoing accounting changes.

Amendments to PAS 32, “Financial Instruments: Presentation,” and PAS 1, “Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation”

These amendments specify, among others, that puttable financial instruments will be classified as equity if they have all of the following specified features: (a) the instrument entitles the holder to require the entity to repurchase or redeem the instrument (either on an ongoing basis or on liquidation) for a pro rata share of the entity’s net assets, (b) the instrument is in the most subordinate class of instruments, with no priority over other claims to the assets of the entity on liquidation, (c) all instruments in the subordinate class have identical features (d) the instrument does not include any contractual obligation to pay cash or financial assets other than the holder’s right to a pro rata share of the entity’s net assets, and (e) the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, a change in recognized net assets, or a change in the fair value of the recognized and unrecognized net assets of the entity over the life of the instrument.

Philippine Interpretation IFRIC 13, “Customer Loyalty Programmes”

Philippine Interpretation IFRIC 13 requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and realized in income over the period that the award credits are redeemed or expire.

Philippine Interpretation IFRIC 16, “Hedges of a Net Investment in a Foreign Operation”

Philippine Interpretation IFRIC 16 provides guidance on identifying foreign currency risks that qualify for hedge accounting in the hedge of net investment; where within the group the hedging instrument can be held in the hedge of a net investment; and how an entity should determine the amount of foreign currency gains or losses, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment.

Improvements to PFRS. In May 2008, the International Accounting Standards Board issued its first omnibus of amendments to certain standards, primarily with a view of removing inconsistencies and clarifying wording. These improvements will be effective for annual periods beginning on or after January 1, 2009 except for the improvement to PFRS 5, “Noncurent Assets Held for Sale and Discontinued Operations,” which will be effective for annual periods beginning on or after July 1, 2009. There are separate transitional provisions for each standard as follows:

PFRS 5, “Noncurrent Assets Held for Sale and Discontinued Operations”

When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for sale under PFRS 5, even when the entity retains a noncontrolling interest in the subsidiary after the sale.

PAS 1, “Presentation of Financial Statements”

Assets and liabilities classified as held for trading are not automatically classified as current in the consolidated balance sheet.

PAS 16, “Property, Plant and Equipment”

The amendment replaces the term “net selling price” with “fair value less costs to sell,” to be consistent with PFRS 5 and PAS 36, “Impairment of Assets.”

Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventory when rental ceases and they are held for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on initial recognition of such items, the cash receipts from rents and subsequent sales are all shown as cash flows from operating activities.

PAS 19, “Employee Benefits”

The amendment to PAS 19 revises the definition of “past service costs” to include reductions in benefits related to past services “negative past service costs” and to exclude reductions in benefits related to future services that arise from plan amendments. Amendments to plans that result in a reduction in benefits related to future services are accounted for as a curtailment.


It also revises the definition of “return on plan assets” to exclude plan administration costs if they have already been included in the actuarial assumptions used to measure the defined benefit obligation.

The definition of “short-term” and “other long-term” employee benefits has been revised to focus on the point in time at which the liability is due to be settled.

Reference to the recognition of contingent liabilities to ensure consistency with PAS 37 is deleted.

PAS 20, “Accounting for Government Grants and Disclosures of Government Assistance”

Loans granted with no or low interest rates will not be exempt from the requirement to impute interest. The difference between the amount received and the discounted amount is accounted for as a government grant.

PAS 23, “Borrowing Costs”

The amendment to PAS 23 revises the definition of borrowing costs to consolidate the types of items that are considered components of “borrowing costs”, i.e., components of the interest expense calculated using the effective interest method.

PAS 28, “Investments in Associates”

If an associate is accounted for at fair value in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extent of any significant restrictions on the ability of the associate to transfer funds to the entity in the form of cash or repayment of loans applies.

An investment in an associate is a single asset for the purpose of conducting the impairment test. Therefore, any impairment test is not separately allocated to the goodwill included in the investment balance.

PAS 29, “Financial Reporting in Hyperinflationary Economies”

The amendment to PAS 29 revises the reference to the exception that assets and liabilities should be measured at historical cost, such that it notes property, plant and equipment as being an example, rather than implying that it is a definitive list.

PAS 31, “Interests in Joint Ventures”

If a joint venture is accounted for at fair value, in accordance with PAS 39, only the requirements of PAS 31 to disclose the commitments of the venturer and the joint venture, as well as summary financial information about the assets, liabilities, income and expense will apply.

PAS 36, “Impairment of Assets”

When discounted cash flows are used to estimate “fair value less cost to sell” additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate “value in use.”

PAS 38, “Intangible Assets”

An expenditure on advertising and promotional activities is recognized as an expense when First Gen Group either has the right to access the goods or has received the services. Advertising and promotional activities now specifically include mail order catalogues.

References to “there being rarely, if ever, persuasive evidence to support an amortization method for finite life intangible assets that results in a lower amount of accumulated amortization than under the straight-line method” has been deleted, thereby, effectively allowing the use of the unit-of-production method.

PAS 39, “Financial Instruments: Recognition and Measurement”

Changes in circumstances relating to derivatives, specifically derivatives designated or de-designated as hedging instruments after initial recognition, are not reclassifications.

When financial assets are reclassified as a result of an insurance company changing its accounting policy in accordance with paragraph 45 of PFRS 4, “Insurance Contracts”, this is a change in circumstance, not a reclassification.


Reference to a “segment” when determining whether an instrument qualifies as a hedge has been removed. It also requires the use of the revised effective interest rate (rather than the original effective interest rate) when re-measuring a debt instrument on the cessation of fair value hedge accounting.

PAS 40, “Investment Properties”

The amendment to PAS 40 revises the scope (and the scope of PAS 16) to include property that is being constructed or developed for future use as an investment property. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete.

PAS 41, “Agriculture”

The improvement to PAS 41 removes:

a. the reference to the use of a pre-tax discount rate to determine fair value, thereby allowing use of either a pre-tax or post-tax discount rate depending on the valuation methodology used; and

b. the prohibition to take into account cash flows resulting from any additional transformations when estimating fair value. Instead, cash flows that are expected to be generated in the “most relevant market” are taken into account.

Effective in 2010

Revised PFRS 3, “Business Combinations” and PAS 27, “Consolidated and Separate Financial Statements”

The revised PFRS 3 (effective on July 1, 2009) introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognized, the reported results in the period that an acquisition 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) will be accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling and noncontrolling interests (previously referred to as “minority interests”); even if the losses exceed the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a subsidiary, any retained interest will be remeasured to fair value and this will impact the gain or loss recognized on disposal. First Gen Group will apply the changes introduced by the revised PFRS 3 prospectively and will affect future acquisitions and transactions with noncontrolling interests, while the revised PAS 27 will be applied retrospectively subject to certain exceptions.

Amendment to PAS 39, “Financial Instruments: Recognition and Measurement - Eligible Hedged Items”

The amendment to PAS 39 (effective on July 1, 2009) addresses only the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item.

Effective in 2012

Philippine Interpretation IFRIC 15, “Agreement for Construction of Real Estate”

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

3. Significant Accounting Judgments and Estimates

The preparation of the consolidated financial statements in accordance with PFRS requires First Gen Group to make estimates and assumptions 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 to change. The effects of any change in estimates are reflected in the consolidated financial statements, as they become reasonably determinable.

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

First Gen Group believes the following represents a summary of these significant judgments and estimates and the related impact on and associated risk to the consolidated financial statements:

Judgments

a. Functional Currency

The Parent Company, Unified, FGP, FGPC, FGHC and an associate, FPPC, have determined that their functional currency is the U.S. Dollar. The U.S. Dollar is the currency of the primary economic environment in which the Parent Company and foregoing subsidiaries operate. It is also the currency that mainly influences the sale of services and the costs of providing such services. All other subsidiaries have determined the Philippine peso to 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 Leases

The respective PPAs of FGP and FGPC qualify as leases on the basis that FGP and FGPC sell all of their output to Meralco. These agreements call for a take-or-pay arrangement where payment is made principally on the basis of the availability of the power plants and not on actual deliveries of electricity generated. These arrangements are determined to be operating leases where a significant portion of the risks and benefits of ownership of the assets are retained by FGP and FGPC. Accordingly, the power plant assets are recorded as part of the cost of property, plant and equipment and the fixed capacity fees and fixed operating and maintenance fees billed to Meralco are recorded as operating revenue on a straight-line basis over the applicable terms of the PPAs.

c. Service Concession Arrangements

In applying Philippine Interpretation IFRIC 12, First Gen Group has made a judgment that the Geothermal Service Contracts (GSC) of EDC with the Philippine Government through the Department of Energy (DOE) in the following contract areas: Tongonan, Leyte; Palinpinon, Negros Oriental; Bacon-Manito (BacMan) in Albay and Sorsogon; and Mt. Apo, North Cotabato qualify under the financial asset model; while its GSC for the Northern Negros Geothermal Project (NNGP) and the expansion development of Tanawon project in the BacMan service contract area qualifies under the intangible asset model. The Project Agreement of BPPC with NPC qualifies under the financial asset model (see Note 4).

d. Deferred Revenue on Stored Energy

Under EDC’s addendum agreements with the NPC, EDC has a commitment to NPC for certain volume of stored energy that NPC may lift for a specified period, provided that EDC is able to generate such energy over and above the nominated energy for each given year in accordance with the related PPAs. EDC has made a judgment based on historical information that the probability of future liftings by NPC from the stored energy is remote and accordingly has not deferred any portion of the collected revenue. The stored energy commitments are disclosed in the notes to consolidated financial statements under the discussion on Contingencies and Commitments (see Note 36b).

e. Classification of Financial Instruments

First Gen Group exercises judgment in classifying a financial instrument, or its component parts, on initial recognition as either a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definition of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet.

In addition, First Gen Group classifies financial assets by evaluating among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arm’s-length basis.


Estimates

a. Impairment Losses on Receivables

First Gen Group reviews its receivables at each balance sheet date to assess whether an allowance for impairment losses should be recognized in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions on a number of factors and actual results may differ, resulting in future changes in the allowance.

First Gen Group maintains an allowance for impairment losses at a level that management considers adequate to provide for potential uncollectibility of its trade and other receivables, certain advances and its receivables arising from service concession arrangements. First Gen Group evaluates specific balances where management has information that certain amounts may not be collectible. In these cases, First Gen Group uses judgment, based on available facts and circumstances, and on a review of the factors that affect the collectibility of the accounts including, but not limited to, the age and status of the receivables, collection experience, past loss experience and, in the case of receivables arising from service concession arrangements, the expected net cash inflows from the concession. The review is made by management on a continuing basis to identify accounts to be provided with allowance. These specific reserves are re-evaluated and adjusted as additional information received affects the amount estimated.

In addition to specific allowance against individually significant receivables, First Gen Group also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. Collective assessment of impairment is made on a portfolio or group basis after performing a regular review of age and status of the portfolio or group of accounts relative to historical collections, changes in payment terms, and other factors that may affect ability to collect payments.

Receivables are carried at $1,001.9 million and $1,137.8 million as of December 31, 2008 and 2007, respectively (see Notes 8, 11, 13 and 18). The total allowance for impairment losses recognized in 2008 and 2007 amounted to $41.3 million and $79.3 million respectively (see Notes 8 and 13).

b. Construction Revenue Recognition

First Gen Group’s revenue from construction services relate to EDC’s service concession arrangements which are recognized based on the percentage-of-completion, measured by reference to the percentage of costs incurred to date to estimated total costs for each contract.

An authority for expenditure is issued to cover the work program for the development of the concession area. When the costs incurred to date exceed the authorized amount, an assessment is conducted to determine the cause of the cost overrun. Cost overruns arising from uncontrollable factors such as oil price, wage increases and changes in technical work programs due to unforeseen geological conditions are capitalized while all other cost overruns are treated as period costs.

The carrying amounts of receivable arising from service concession arrangements are $674.5 million and $816.0 million, respectively, as of December 31, 2008 and 2007.

c. Impairment of AFS Financial Assets

First Gen Group considers AFS financial assets as impaired when there has been a significant or prolonged decline in the fair value of such investments below their cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. First Gen Group treats “significant” generally as 20% or more and “prolonged” as greater than six months. In addition, First Gen Group evaluates other factors, including normal volatility in share price for quoted equities and future cash flows and discount factors for unquoted equities in determining the amount to be impaired.

No impairment on AFS financial assets was recognized for each of the three years in the period ended December 31, 2008. AFS financial assets are carried at $15.0 million and $29.3 million as of December 31, 2008 and 2007, respectively (see Notes 9 and 18).

d. Recognition of Deferred Income Tax Assets

The carrying amounts of deferred income tax assets at each balance sheet date are reviewed and reduced to the extent that there is no longer sufficient future taxable income available to allow all or part of the deferred income tax assets to be utilized. First Gen Group’s assessment on the recognition of deferred income tax assets on


deductible temporary differences, carryforward benefits of MCIT and NOLCO is based on the forecasted taxable income of the following reporting year. This forecast is based on First Gen Group’s past results and future expectations on revenue and expenses.

As of December 31, 2008 and 2007, the amount of deferred income tax assets recognized in the consolidated balance sheet amounted to $71.8 million and $73.7 million, respectively. Unrecognized deferred tax assets as of December 31, 2008 and 2007 amounted to $62.9 million and $32.7 million, respectively (see Note 32).

e. Present Value of Defined Benefit Obligation

The cost of defined benefit retirement plans is determined using the projected unit credit method of actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases and medical trend rates. In accordance with PAS 19, past service costs, experience adjustments and effects of changes in actuarial assumptions are deemed to be amortized over the average remaining working lives of employees. While the assumptions are reasonable and appropriate, significant differences in First Gen Group’s actual experience or significant changes in the assumptions may materially affect the retirement benefit obligation. Due to the long-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 the fund assets. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as at balance sheet date. The details of assumptions used in the calculation of the Company’s retirement benefits is presented in Note 31 - Retirement and Other Post-retirement Benefits.

As of December 31, 2008 and 2007, the present value of defined benefit obligation of First Gen Group amounted to $70.5 million and $72.4 million, respectively (see Note 31). Unrecognized cumulative actuarial losses as of December 31, 2008 and 2007 amounted to $3.1 million and $2.5 million, respectively (see Note 31).

f. Impairment of Nonfinancial Assets

Property, Plant and Equipment, Intangible Assets, Prepaid Gas and Prepaid Major Spare Parts. First Gen Group assesses impairment on these nonfinancial assets whenever events or changes 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 impairment review include the following:

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

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

significant negative industry or economic trends.

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

No impairment loss was recognized in the consolidated financial statements for each of the three years in the period ended December 31, 2008. The aggregate carrying values of the nonfinancial assets subjected to impairment testing amounted to $1,190.9 million and $1,279.1 million as of December 31, 2008 and 2007, respectively (see Notes 15, 17 and 18).

Goodwill. First Gen Group performs impairment review on goodwill, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating units to which goodwill is allocated. Estimating the value in use requires First Gen Group to make an estimate of the expected future cash flows from the cash-generating units and discounts such cash flows using weighted average cost of capital to calculate the present value of those future cash flows (see Note 16).

No impairment loss on goodwill was recognized in the consolidated financial statements for each of the three years in the period ended December 31, 2008. The carrying values of goodwill as of December 31, 2008 and 2007 amounted to $962.9 million and $1,103.6 million (as adjusted), respectively (see Notes 6 and 16).

Investment in an Associate. Impairment review of investment in an associate is performed when events or changes in circumstances indicate that the carrying value exceeds its fair value. Management has determined


that there are no events or changes in circumstances in 2008 and 2007 that may indicate that the carrying value of investment in an associate may not be recoverable. The carrying values of First Gen Group’s investment in an associate amounted to $21.0 million and $33.1 million as of December 31, 2008 and 2007, respectively (see Note 14).

g. Estimating Useful Lives of Property, Plant and Equipment and Intangible Assets

First Gen Group estimated the useful lives of property, plant and equipment and intangible assets based on the periods over which the assets are expected to be available for use and on the collective assessment of industry practices, internal technical evaluation and experience with similar arrangements. The estimated useful lives of property, plant and equipment and intangible assets are reviewed at each financial year-end and updated, if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits in the use of these assets. However, it is possible that future financial performance could be materially affected by changes in the estimates brought about by changes in the factors mentioned above. The amounts and timing of recording the depreciation and amortization of property, plant and equipment and intangible assets for any year would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property, plant and equipment and intangible assets would increase the recorded depreciation and amortization and decrease the noncurrent assets. For purposes of determining the estimated useful life of the intangible asset arising from service concession arrangements, EDC, in particular, included the renewal period on the basis of the constitutional and contractual provisions and its historical experience of obtaining approvals of such renewals at no significant cost. In the case of the intangible assets pertaining to the water rights, the pipeline rights and the concession rights pertaining to the identified contracts arising from the acquisition of EDC, the carrying value is amortized over the remaining term of the contracts.

There is no change in the estimated useful lives of property, plant and equipment and intangible assets during the year. The carrying values of property, plant and equipment as of December 31, 2008 and 2007 amounted to $736.3 million and $790.3 million, respectively (see Note 15). The carrying values of intangible assets as of December 31, 2008 and 2007 amounted to $338.8 million and $397.5 million, respectively (see Note 17).

h. Exploration and Evaluation Assets

Exploration and evaluation costs are capitalized in accordance with PFRS 6, “Exploration for and Evaluation of Mineral Resources.” Capitalization of these costs is based, to a certain extent, on management’s judgment of the degree to which the expenditure may be associated with finding specific geothermal reserve. First Gen Group determines impairment of projects based on the technical assessment of its resident scientists in various disciplines or based on management’s decision not to pursue any further commercial development of its exploration projects. As of December 31, 2008 and 2007, the carrying value of exploration and evaluation assets amounted to $21.0 million and $28.3 million, respectively (see Note 18).

i. Asset Retirement Obligations

Under their respective Environmental Compliance Certificate (ECC) issued by the Department of Environmental and Natural Resources (DENR), FGP and FGPC have legal obligations to dismantle their power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has a contractual obligation under the lease agreement with PSALM to dismantle its power plant assets at the end of the useful lives. EDC has made an assessment that the costs in relation to dismantlement, removal and restoration of its infrastructure and sites are not significant. The asset retirement obligations recognized represent the best estimate of the expenditures required to dismantle the power plants at the end of their useful lives. Such cost estimates are discounted using a pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the liability. Each year, the asset retirement obligations are increased to reflect the accretion of discount and to accrue an estimate for the effects of inflation, with the charges being recognized under “Interest expense and financing charges” account in the consolidated statement of income. While it is believed that the assumptions used in the estimation of such costs are reasonable, significant changes in these assumptions may materially affect the recorded expense or obligations in future years.

Asset retirement obligations amounted to $0.9 million as of December 31, 2008 and 2007 (see Note 26).

j. Fair Values of Financial Instruments

First Gen Group carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. While significant components of fair value measurement were determined using verifiable objective evidence (i.e. foreign exchange rates, interest rates, volatility rates), the amount of changes in fair value would differ if First Gen Group utilized different valuation methodologies and assumptions. Any changes in fair value of these financial assets and liabilities would affect the consolidated statement of income and equity.


Where the fair values of certain financial assets and financial liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using internal valuation techniques using generally accepted market valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. Judgments include considerations of liquidity and model inputs such as correlation and volatility for longer dated derivatives.

The fair values of First Gen Group’s financial instruments are presented in Note 35 - Financial Instruments.

k. Legal Contingencies and Regulatory Assessments

First Gen Group is involved in various legal proceedings and regulatory assessments as discussed in Note 36 - Commitments and Contingencies. First Gen Group’s estimate of probable costs for the assessments and resolution of these claims and cases have been developed in consultation with external counsels handling the defense in these claims and cases and is based upon thorough analysis of potential outcome.

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

First Gen Group recognized provisions for probable losses arising from regulatory assessments (included under “Accounts payable and accrued expenses” account in the consolidated balance sheet) amounting to $14.3 million and $33.0 million as of December 31, 2008 and 2007, respectively (see Note 20).

4. Service Concession and Related Agreements

EDC Pursuant to Presidential Decree (PD) No. 1442, “An Act to Promote the Exploration and Development of Geothermal Resources,” which governs the exploration, development and exploitation of all geothermal resources in public and/or private land in the Philippines.

EDC has entered into the following service contracts with the Philippine Government (represented by the Ministry/Department of Energy) for the exploration, development and production of geothermal fluid for commercial utilization:

a. Tongonan, Leyte, dated May 14, 1981 b. Southern Negros, dated October 16, 1981 c. Bacman, Sorsogon, dated October 16, 1981 d. Mt. Apo, Kidapawan, Cotabato, dated March 24, 1992 e. Mt. Labo, Camarines Norte and Sur, dated March 19, 1994 f. Northern Negros, dated March 24, 1994 g. 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, financial and other work commitments and obligations and has provided a work program for the extension period acceptable to the Philippine Government. Where geothermal resource in commercial quantity is discovered during the exploration period, the service contracts shall remain in force for the remainder of the exploration period or any extension thereof and for an additional period of 25 years thereafter, provided that, if EDC has not been in default in its obligations under the contracts, the Philippine Government may grant an additional extension of 15 to 20 years.

EDC shall acquire for the geothermal operations materials, equipment, plants and other installations as are required and necessary to carry out the geothermal operations. All materials, equipment, plants and other installations erected or placed on the contract areas of a movable nature by EDC shall remain the property of EDC unless not removed therefrom within one year after the expiration and/or termination of the related service contract in which case, ownership shall be vested in the Philippine Government.

The service contracts provide that, among other privileges, EDC shall have the right to enter into agreements for the disposition of the geothermal resources produced from the contract areas, subject to the approval of the Philippine Government.

Pursuant to such right, EDC has entered into agreements for the sale of the geothermal resources produced from the service contract areas principally with the NPC, a government-owned and controlled corporation. These agreements are for 25 years and may be renegotiated 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 the development, construction and operation of a geothermal power plant by EDC in its GSC areas and the sale to NPC of the electrical energy generated from such geothermal power plants. These agreements are for 25 years of commercial operations and may be extended upon the request of EDC by notice of not less than 12 months prior to the end of the contract period, 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 the service contract areas and the sale of the electrical energy generated from the geothermal power plants contain certain provisions relating to pricing control in the form of a cap in EDC’s internal rate of return for specific contracts; as well as for payment by NPC of minimum guaranteed monthly remuneration and nominated capacity.

For the Northern Negros service contract, EDC does not have agreements with NPC for the sale of the geothermal resources and electrical energy produced from the service contract area. EDC instead enters into contracts with distribution utilities, electric cooperatives and other third party buyers of electricity for the sale of the electrical energy generated from the service contract.

EDC has made a judgment that these service concessions and related arrangements qualify for accounting under Philippine Interpretation IFRIC 12. Accordingly, EDC has recognized the consideration received or receivable in exchange for its infrastructure construction services or its acquisition of infrastructure to be used in the arrangements as either a financial asset to the extent that EDC has an unconditional contractual right to receive cash 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 during the year is included under “Long-term receivables” account in the consolidated balance sheet.

BPPC BPPC entered into a Fast Track Build Operate and Transfer (BOT) Project (Project Agreement) with NPC, for the design, financing, construction, operation and maintenance of 225 Megawatt (MW) Bunker-Fired Diesel Generator Power Plant (see Note 36e). BPPC is entitled to payment of fixed capacity and operations and maintenance fees based on the nominated capacity of 225 MW, as well as energy fees from the delivery of electric power to NPC. The fixed capacity and operations and maintenance fees will be paid by NPC whether or not the energy is delivered by BPPC.

Based on the assessment, all the GSCs of EDC, except for the GSC for NNGP, and the Project Agreement of BPPC are within the scope of Philippine Interpretation IFRIC 12 and qualify under the financial asset model. The GSC for Northern Negros Project qualifies under the intangible asset model. Accordingly, First Gen Group has recognized the consideration received or receivable in exchange for its infrastructure construction services or its acquisition of infrastructure to be used in the arrangements as either a financial asset (concession receivables) to the extent that First Gen Group has an unconditional contractual right to receive cash or other financial asset for its construction services from or at the direction of the grantor, or an intangible asset (concession rights) for the right to charge users of the public service.

The identifiable assets and liabilities of EDC acquired by First Gen through business combination already include the impact of Philippine Interpretation IFRIC 12 (see Note 6).

5. Business Segment Information

With the acquisition of EDC in November 2007, First Gen Group’s operating businesses are organized and now managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Prior to the acquisition, First Gen Group is involved solely in the power generation business.

The electricity segment refers to the revenue from sale of electricity generated by its power plants. Revenue of this segment is covered by long-term PPAs. The steam segment pertains to the revenue from sale of steam which is covered by the Steam Sales Agreements (SSA). The others segment comprises construction services, drilling operations and corporate support groups.

First Gen Group operates and generates revenue principally in the Philippines. Consequently, geographical business information is not applicable.


Financial information of the business segments are summarized as follows:

2008

Electricity Steam Others Eliminating

Entries Total Revenue from external customers $1,494,416 $104,168 $126,467 $– $1,725,051 Intra-segment revenue – – 65,264 (65,264) – Segment revenue 1,494,416 104,168 191,731 (65,264) 1,725,051 Segment expenses (1,121,459) (59,731) (230,126) – (1,411,316)Segment results 372,957 44,437 (38,395) (65,264) 313,735 Mark-to-market gain on derivatives 18,411 – 12,190 – 30,601 Interest income 22,675 – – – 22,675 Interest expense and financing charges (52,470) – (151,217) – (203,687)Equity in net earnings of an associate 3,530 – – – 3,530 Provision for income tax (73,339) – (47) – (73,386)Net income $291,764 $44,437 ($177,469) ($65,264) $93,468

2008 Electricity Steam Others Total Other information: Segment assets $2,534,662 $43,550 $23,224 $2,601,436 Goodwill – – 962,854 962,854 Deferred income tax assets 71,794 – – 71,794 Investment in an associate – – 20,958 20,958 Unallocated corporate assets – – 40,835 40,835 Total assets $2,606,456 $43,550 $1,047,871 $3,697,877

Segment liabilities $622,234 $270,838 $471 $893,543 Deferred income tax liabilities 15,610 – 14,426 30,036 Unallocated corporate liabilities – – 1,755,887 1,755,887 Total liabilities $637,844 $270,838 $1,770,784 $2,679,466

Capital expenditures $46,913 $– $– $46,913 Depreciation and amortization 10,952 997 79,958 91,907 Other non-cash expenses 178,716 – – 178,716

2007 (As restated - see Note 6) Electricity Steam Others Total Segment revenue $1,042,897 $8,728 $23,896 $1,075,521 Segment expenses (799,307) (2,608) (19,886) (821,801)Segment results 243,590 6,120 4,010 253,720 Interest income 32,835 – – 32,835 Equity in net earnings of an associate 7,671 – – 7,671 Mark-to-market gain on derivative liability 108 – – 108 Interest expense and financing charges (47,340) – (43,656) (90,996)Provision for income tax (13,474) – (8,033) (21,507)Net income $223,390 $6,120 ($47,679) $181,831

Other information: Segment assets $2,608,249 $22,609 $14,695 $2,645,553 Goodwill – – 1,103,555 1,103,555 Deferred income tax assets 73,738 – – 73,738 Investment in an associate – – 33,087 33,087 Unallocated corporate assets – – 271,098 271,098 Total assets $2,681,987 $22,609 $1,422,435 $4,127,031

Segment liabilities $1,120,904 $268,040 $2,086 $1,391,030 Deferred income tax liabilities 34,383 – – 34,383 Unallocated corporate liabilities – – 1,352,037 1,352,037 Total liabilities $1,155,287 $268,040 $1,354,123 $2,777,450

Capital expenditures $10,096 $– $– $10,096 Depreciation and amortization 52,747 – 4,471 57,218 Other non-cash expenses 55,977 – – 55,977


2006 Electricity Others Total Revenue $990,984 $5,134 $996,118 Segment expenses (780,648) (9,742) (790,390)Segment results 210,336 (4,608) 205,728 Interest income 51,017 – 51,017 Equity in net earnings of an associate 8,191 – 8,191 Interest expense and financing charges (87,029) (11,222) (98,251)Provision for income tax (19,540) (66) (19,606)Net income $162,975 ($15,896) $147,079

Other information: Segment assets $1,432,416 $– $1,432,416 Deferred tax assets 8 – 8 Unallocated corporate assets – 309,075 309,075 Total assets $1,432,424 $309,075 $1,741,499

Segment liabilities $905,325 $– $905,325 Deferred tax liabilities 30,426 – 30,426 Unallocated corporate liabilities – 90,555 90,555 Total liabilities $935,751 $90,555 $1,026,306

Capital expenditures $4,269 $– $4,269 Depreciation and amortization 57,633 1,887 59,520 Other non-cash expenses 11,940 – 11,940

6. Business Combination

Acquisition of EDC On November 22, 2007, Red Vulcan, a wholly owned subsidiary of First Gen, was declared the winning bidder for Philippine National Oil Company (PNOC) and EDC Retirement Fund’s remaining interests in EDC, which consisted of 6.0 billion common shares and 7.5 billion preferred shares. Such common shares represent 40% economic interest in EDC while the combined common shares and preferred shares represent 60% of the voting rights in EDC. Total consideration paid in November 29, 2007 was $1.4 billion (P=58.5 billion).

Details of purchase price are as follows:

Common shares, at fair value $1,366,314 Preferred shares, at fair value 1,819 1,368,133 Cost directly attributable to the combination 6,464 Total consideration $1,374,597

Cash outflow on acquisition: Cash paid (including transactions costs of $6.5 million) $1,374,597 Less cash acquired from subsidiary (75,109) Net cash outflow $1,299,488

To fund the acquisition, the Parent Company raised $287.5 million bridge loans, $100.0 million U.S. Dollar-denominated short-term loans and P=2.3 billion ($55.4 million) Philippine Peso-denominated short-term loans (see Note 19) on November 26 to 28, 2007, from a consortium of local and foreign banks. In addition, Red Vulcan availed of staple financing amounting to P=29.2 billion ($705.1 million) arranged by the seller’s advisors to EDC for the transaction (see Note 22).

Separately, the First Gen Group purchased common shares of EDC totaling $19.3 million, representing approximately one percent equity interest in EDC, from the stock market.

EDC is the Philippines’ largest producer of geothermal energy. The aggregate installed capacity of EDC’s geothermal energy projects is approximately 1,198.8 Megawatt (MW) of steam, of which 743.8 MW is fed to EDC- or BOT Contractor-operated power plants and the remaining 455.0 MW supplies steam to NPC-owned power plants.

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 identifiable tangible 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 of acquisition.

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

Fair Values Provisional

Values Adjustments

(In Thousands)

Cash and cash equivalents $75,109 $75,109 $– Inventories 33,203 27,158 6,045 Other current assets 223,659 224,711 (1,052)Property, plant and equipment 43,539 24,719 18,820 Intangible assets 321,994 204,923 117,071 Deferred 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 tax liabilities (18,237) – (18,237)Other liabilities (182,525) (176,839) (5,686)Net assets 803,730 762,529 41,201 Percentage share of net assets acquired 40% 40% 40%Net assets acquired 321,492 305,012 16,480 Acquired voting preferred shares 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 2008 consolidated financial statements. However, the effect of the amortization of the excess of the fair values over the book values of the net assets acquired were charged to the 2008 consolidated statement of income due to immateriality of amounts.

EDC contributed $54.2 million and $16.7 million to the consolidated net income of First Gen Group for the periods ended December 31, 2008 and 2007.

Acquisition of Pantabangan-Masiway Hydro-Power Plant On September 8, 2006, FG Hydro participated and won the bid for the 112 MW Pantabangan-Masiway Hydro-Electric Power Plant (PAHEP/MAHEP or Purchased Assets) conducted by PSALM in connection with the privatization of NPC assets.

On October 5, 2006, following the successful bidding, FG Hydro entered into an Asset Purchase Agreement (APA) with PSALM for the purchase of the PAHEP/MAHEP for a total consideration of $129.0 million. On November 15, 2006 (the “Closing Date”), all the closing conditions for the execution of the APA were satisfied and the purchase was completed. Following the completion of the conditions precedent 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 on November 18, 2006.

Pursuant to the provisions of the APA, from the Closing Date, FG Hydro directly assumes and agrees to discharge all the rights, liabilities and obligations pertaining to the Purchased Assets, including but not limited to the following, among others:

all rights, obligations and liabilities of PSALM arising from Operating Contracts which remain effective on or after the Closing Date, though with limitations;

all rights, obligations and liabilities of PSALM arising from contracts which remain effective on or after the Closing Date, though with limitations also; and

all the rights and obligations of PSALM and/or NPC under the existing Power Supply Contracts, subject to their respective terms and conditions indicated in these contracts.


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

Cash outflow on acquisition: Total consideration $129,000 Deferred payment facility (77,400) Net cash outflow $51,600

Details of the deferred payment facility with PSALM are as follows:

2008 2007 Balance at beginning of year $69,813 $77,400 Less payments during the year 8,525 7,587 Balance at end of year 61,288 69,813 Less current portion 9,579 8,525 $51,709 $61,288

To guarantee full, prompt, faithful and complete performance of FG Hydro’s obligations in the APA, FG Hydro has complied with the requirement to issue a Deferred Payment Security in the form 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 maturing obligation of FG Hydro within the next six-month period. In addition, FG Hydro has also submitted a Performance Bond amounting to $1.3 million (equivalent to 2% of the total outstanding deferred payment facility balance) in the form of an irrevocable standby letter of credit. The Performance Bond will be reduced every year to an amount equivalent to two percent of the aggregate amount of the unpaid Deferred Payment Facility with PSALM.

At the date of acquisition, First Gen Group recognized a provisional goodwill of $36.0 million based on the preliminary results of the valuation as the fair values to be assigned to the identifiable assets and liabilities have not yet been obtained.

In 2007, FG Hydro completed the valuation work for the water rights, which it had identified as the acquired 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 the foregoing was identified at the date of acquisition.

The fair values of the identifiable assets of PAHEP/MAHEP were revised as follows:

Fair Values Provisional

Values Adjustments Property, plant and equipment (see Note 15) $75,023 $93,040 ($18,017)Water rights (see Note 17) 48,109 48,109 Goodwill arising on acquisition (see Note 16) 5,868 35,960 (30,092)Total consideration $129,000 $129,000 $

The effect of the foregoing adjustments was accounted for retrospectively. However, the effects on the depreciation of property, plant and equipment and amortization of intangible asset (Water rights) were charged to the 2007 consolidated statement of income due to the immateriality of the amount.

Water rights pertain to FG Hydro’s right to use water from the Pantabangan reservoir for the generation 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 on March 15, 1977. In addition, FG Hydro and the National Irrigation Administration (NIA) entered into an Operation and Maintenance Agreement (the NIA Agreement) as an ancillary to the APA, wherein FG Hydro will derive benefit from the operation and maintenance of the Pantabangan and Masiway dams and other non-power facilities, including the water sourced from the Pantabangan reservoir. The term of the NIA Agreement is for a period of 25 years commencing on the Closing Date.

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 and Investment Agreement (SPIA) for the divestment of First Gen’s 60% equity stake in FG Hydro. FG Hydro owns and operates the 112 MW PAHEP/MAHEP in Pantabangan, Nueva Ecija. PAHEP/MAHEP was acquired by FG Hydro on September 8, 2006 as a part of NPC’s asset privatization.


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

1) EDC subscribed 101,281,942 newly issued common shares of FG Hydro on the first closing date; 2) First Gen sold to EDC 249,287,223 common shares of its holdings in FG Hydro on Second Closing Date; and 3) First Gen shall subscribe to 500,000 preferred shares of EDC.

Consistent with the SPIA, the acquisition by EDC was through a combination of primary issuance by FG Hydro of up to 17% interest and sale of secondary shares by First Gen of up to 43% interest in FG Hydro. Further, FG Hydro returned to First Gen the deposits for future stock subscriptions amounting to $13.0 million (P=648.0 million).

On October 20, 2008, the Parties executed a First Supplement to the SPIA whereby the issuance of the preferred shares to First Gen shall be deferred pending finalization of the features of the preferred shares. As of March 30, 2009, the Parties have not agreed on the features of the preferred shares.

On November 17, 2008 (the “Second Closing Date”), First Gen completed the divestment of its 60% equity stake in FG Hydro in favor of EDC for a total consideration of $85.2 million (P=4.3 billion).

FG Hydro and EDC are entities under the common control of First Gen. As a result of the divestment, First Gen’s effective voting and economic interests in FG Hydro after the transaction are 76% and 64%, respectively. The Parent Company recognized a loss in dilution of $28.4 million, which was recorded as equity reserve in the equity section of the 2008 consolidated balance sheet.

7. Cash and Cash Equivalents

This account consists of:

2008 2007 Cash on hand and in banks (see Note 22) $46,988 $14,549 Short-term deposits (see Note 22) 182,659 203,623 $229,647 $218,172

Cash in banks earn interest at the respective bank deposit rates. Short-term deposits are made for varying periods of up to three months depending on the immediate cash requirements of First Gen Group, and earn interest at the respective short-term deposits rate.

Total interest earned amounted to $19.6 million in 2008, $26.0 million in 2007 and $23.7 million in 2006 (see Note 30).

8. Receivables


2008 2007 Trade (see Notes 13, 36a and 36d) $161,540 $236,462 Others (see Note 29) 15,321 18,357 176,861 254,819 Less allowance for impairment losses 46 9,109 $176,815 $245,710

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

The allowance for impairment losses pertains to trade receivables of EDC from NPC.


The rollforward analysis for allowance for impairment losses on receivables as of December 31, 2008 and 2007 is as follows:

2008 2007 Balance at beginning of year $9,109 $ Recoveries (see Note 37a) (9,109) Provision for the year 50 – Balance acquired through business combination

(see Note 6) 9,109 Foreign exchange adjustments (4) Balance at end of year $46 $9,109

The allowance for impairment losses on the foregoing trade and other receivables is established based on the aging analysis and the regular review of the accounts with regard to historical collections, 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 (see Note 37a), the allowance for impairment losses covers the full amount of the outstanding balances that are over one 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 decision that was arrived at in March 2008 by a third-party arbiter, details of which are disclosed in Note 37a.

Provision during the year are included in the “Other administrative expenses” account in the consolidated statement of income.

9. AFS Financial Assets


2008 2007 Current AFS financial assets - Quoted government debt securities $14,194 $28,437

Noncurrent AFS financial assets: Quoted equity securities $284 $394 Investments in proprietary membership shares 508 445 Unquoted equity securities 2 2 $794 $841

The current AFS financial assets consist of government debt securities, specifically Republic of the Philippines (ROP) bonds with maturities between 2013 to 2016 and 2009 to 2024 in 2008 and 2007, respectively. Such bonds were acquired at a discount and bear interest between 7.25% to 9.00% in 2008 and 2007, respectively.

Quoted and unquoted equity and proprietary membership shares investments amounting to $0.8 million as of December 31, 2008 and 2007 are included under “Other noncurrent assets” account in the consolidated balance sheet (see Note 18).

Unrealized gain on AFS financial assets is recognized as a separate component of equity. As of December 31, 2008 and 2007, unrealized gain on AFS financial assets amounted to $0.4 million and $0.2 million, respectively, with details as follows:

2008 2007 Net accumulated unrealized gain on AFS financial assets

at beginning of year $189 $ Changes in fair value recognized in equity 203 189 Net unrealized gain removed from equity and taken into

income (10) Net accumulated unrealized gain on AFS investments at

end of year $382 $189

Changes in equity refer to unrealized gains and losses recognized during the year brought about by the temporary increase or decrease in the fair value of the equity instruments. The net gain derecognized in equity and recognized in the consolidated statement of income pertains to the disposal of equity securities during the year.


First Gen Group records unrealized gains or loss on AFS financial assets directly in equity. However, if there is a sale or an impairment loss, the cumulative loss or gains that have been recognized in equity shall be removed from equity and recognized the consolidated statement of income.

10. Inventories


2008

2007(As restated -

see Note 6)At cost: Fuel inventories $43,901 $55,964 Spare parts and supplies 28,714 32,652 72,615 88,616 In transit 3,591 1,824 $76,206 $90,440

The amounts of fuel inventories recognized as expense are $12.4 million in 2008, $5.5 million in 2007 and $65.5 million in 2006, which are recognized as part of “Fuel cost” account in the consolidated statement of income.

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

11. Other Current Assets


2008

2007(As restated -

see Note 6)Prepaid taxes $20,619 $38,871 Prepaid expenses 15,428 13,579 Advances to contractors 5,654 557 Current portion of advances to a minority shareholder

(see Note 22) 5,013 – Royalty fees chargeable to NPC (see Note 36c) 2,568 – Restricted cash deposits (see Note 22) 74 – Others 152 139 $49,508 $53,146

Prepaid taxes consist mainly of tax credits that may be used by the operating subsidiaries of First Gen Group in the future. Tax credits represent unapplied or unsold certificates for claims from input value added tax credits received from Bureau of Internal Revenue (BIR) and Bureau of Customs. Such tax credits may be used for payment of internal revenue taxes or customs duties, or sold to a third party.

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

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

Royalty fees chargeable to NPC are royalty fees of EDC due to the DOE and the Local Government Units (LGUs) related to its Palinpinon I project. The royalty fees paid shall be reimbursed by NPC upon the presentation by EDC of official receipts evidencing actual payments. This arrangement is effective until the privatization of NPC’s Palinpinon power plants scheduled in 2009.

Restricted cash deposits represent cash amounting to $0.07 million on Principal Collateralized Interest Reduction (PCIR) bonds was pledged and deposited with the Bangko Sentral ng Pilipinas as collateral to secure EDC’s outstanding International Bank of Japan (IBJ) Loans which was 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 peso equivalent of the collateral as of December 31, 2008 and 2007 was P=3.52 million and P=3.07 million, respectively.

12. Noncurrent Assets Held for Sale


2008 2007 Land $35,134 $40,388 Building, improvements and equipment 2,933 – $38,067 $40,388

Land consists of the 29,291 square meter property where the current office building of EDC is located. 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, connection with its privatization on November 29, 2009 (see Note 4).

On the basis of such resolution, the properties were classified as noncurrent assets held for sale. The management of EDC expects the sale transaction to be concluded in 2009 upon issuance by the Office of the Government Corporate Counsel of an opinion covering the land swap among EDC, DOE and the Bases Conversion Development Authority.

There are no liabilities directly associated with the noncurrent assets held for sale. 13. Long-term Receivables


2008

2007(As restated -

see Note 6)Current portion of: Concession receivables (see Notes 4, 6 and 36c) $38,893 $45,765 Receivables from Meralco on Annual Deficiency

(see Notes 23 and 36g) 29,288 45,025 68,181 90,790 Noncurrent portion of: Concession receivables 635,578 770,241 Receivables from Meralco on Annual Deficiency – 29,270 Other long-term receivables - net 17,253 1,797 652,831 801,308 $721,012 $892,098

Details of other long-term receivables recognized by EDC are as follows:

2008 2007 Claims from BIR $39,872 $45,754 NPC accounts and other receivables 18,648 26,250 58,520 72,004 Less allowance for impairment losses (41,267) (70,207) $17,253 $1,797

Claims from BIR pertain to EDC’s claims for the refund on input value-added taxes on fees paid to BOT contractors (BOT fees), which were initially denied by the Regional District Office (RDO) of the BIR on July 2, 2002. Subsequently, on September 2, 2002, EDC submitted a letter for reconsideration and the RDO 50 endorsed the request for reconsideration to the Legal Department of the Head Office of the BIR. As of March 30, 2009, the review of the claims is ongoing.

As discussed in Note 37a, on April 24, 2008 (the “Award Date”), an arbitral settlement award was concluded with NPC liable to EDC for $60.9 million (P=2,894.9 million) covering the long-standing issue related to the SSA and PPA of EDC with NPC. A payment schedule was agreed upon among the parties call for NPC’s settlement of the arbitral award over three years at zero interest. Consistent with the provisions of PAS 39, the net amount of receivables was presented at fair value, discounted using 7.99% to 8.11%. As of the Award Date, 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 recognized in 2008. Subsequent to the initial recognition, the receivable is accreted to its maturity value based on its effective interest rate. The accretion recognized in 2008 amounted to $2.5 million (P=108.1 million) and is included under “Interest income” in the 2008 consolidated statement of income.

Movements of the NPC receivables covered by the arbitration are as follows:

Arbitration settlement award $60,920 Collections during the year (21,044) 39,876 “Day 1” loss recognized (3,994)Accretion 2,459 Foreign exchange adjustments (184) (1,719)Balance as of December 31, 2008 38,157 Current portion of receivables (see Note 8) 20,904 Noncurrent portion of other long-term receivables $17,253

The rollforward analysis of allowance for impairment losses pertaining to EDC’s long-term receivables is presented below:

2008 2007 Balance at beginning of year $70,207 $ Recoveries (see Note 37a) (17,943) – Write-off of uncollectible accounts (4,803) – Provision 87 64 Balance acquired through business combination

(see Note 6) – 67,928 Foreign exchange adjustments (6,281) 2,215 Balance at end of year $41,267 $70,207

Details of the foregoing rollforward of the allowance for impairment losses on EDC’s long-term receivables for 2008 are as follows:

2008 NPC VAT Refund Others Total Balance at beginning of year $22,944 $45,754 $1,509 $70,207 Recoveries (17,943) – – (17,943)Write-off of uncollectible accounts (4,803) – – (4,803)Provision for the year 79 – 8 87 Foreign 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 $– $39,945 Collective impairment – – 1,322 1,322 Total $73 $39,872 $1,322 $41,267

2007 NPC VAT Refund Others Total Balance at beginning of year $– $– $– $– Balance acquired through business

combination (Note 6) 22,221 44,312 1,395 67,928 Provision for the year – – 64 64 Foreign exchange adjustments 723 1,442 50 2,215 Balance at end of year $22,944 $45,754 $1,509 $70,207

Specific impairment $22,944 $45,754 $– $68,698 Collective impairment – – 1,509 1,509 Total $22,944 $45,754 $1,509 $70,207

For the foregoing long-term receivables of EDC, it was established that accounts outstanding less than one year are fully recoverable while accounts outstanding over one year shall be provided with 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 after performing the regular review of the age and status of the individual accounts and


portfolio/group of accounts relative to historical collections, changes in payment terms and other factors that may affect collectibility.

The recoveries and write-off in 2008 resulted from the arbitral decision abided by EDC and NPC as discussed in detail in Note 37a.

Provision for impairment losses recognized during the year is included in “Other administrative expenses” account in the consolidated statement of income.

14. Investment in an Associate

Details of the account are as follows:

2008

2007(As restated -

see Note 2)Acquisition cost: Balance at the beginning of the year,

as previously reported $19,733 $23,950 Effect of adoption of Philippine Interpretation IFRIC 11

(see Notes 2 and 28) 223 203 Balance at beginning of year, as restated 19,956 24,153 Share-based payments (see Notes 2 and 28) 6 20 Return of investment – (4,217) Balance at end of year 19,962 19,956 Accumulated equity in net earnings: Balance at beginning of year 13,131 11,055 Equity in net earnings for the year 3,530 7,671 Cash dividends (15,665) (5,595) Balance at end of year 996 13,131 $20,958 $33,087

On June 4, 2007, the BOD of FPPC approved the decrease of its authorized capital stock from P=1,875.0 million ($68.6 million), divided into 20 million shares with par value per share of P=93.75, to P=1,406.3 million ($51.45 million), divided into 15 million shares with the same par value a share. The outstanding capital stock of FPPC was then reduced from 16 million shares with an aggregate par value of P=1,500.0 million ($54.9 million) to 11 million shares with an aggregate par value of P=1,031.2 million ($37.7 million). The capital restructuring was approved by the Philippine SEC on September 25, 2007 and a return of investment amounting to $4.2 million was recognized as share of First Gen Group in the said capital restructuring.

The carrying value of the investment in FPPC and a subsidiary exceeded the Parent Company’s equity in net assets by $1.3 million as of December 31, 2008 and 2007.

a. Undistributed earnings of an associate

The retained earnings include undistributed earnings of an associate amounting to $1.0 million and $13.1 million as of December 31, 2008 and 2007, respectively. These retained earnings are not available for dividend distribution until such time that the Parent Company receives the dividends from the associate.

b. Following is the condensed consolidated financial information of FPPC and its subsidiary:

2008 2007 Current assets $58,285 $69,352 Noncurrent assets 69,103 102,474 Current liabilities 8,734 9,647 Noncurrent liabilities 54,677 65,283 Revenue 27,185 35,432 Net income 8,824 19,178


15. Property, Plant and Equipment

Movements of the account are as follows:

2008

Land and Land

Improve- ments

Buildingsand Other

Structures

Machineryand

Equipment

Transport-ation

Equipment

Furnitureand

Fixtures

Leasehold Improve-

ments

SurplusAssets

Available-for-Sale Total

Cost Balance at beginning of year,

as previously reported $26,892 $413,346 $641,847 $2,202 $5,437 $938 $45 $1,090,707Adjustments for EDC (see Note 6) 8,615 276 10,797 47 (302) – – 19,433Balance at beginning of year,

as restated 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)Adjustments 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

Amortization Balance 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

2007 (As restated - see Note 6)

Land and Land

Improvements

Buildingsand OtherStructures

Machineryand

Equipment

Transport-ation

Equipment

Furnitureand

Fixtures

Leasehold Improve-

ments

SurplusAssets

Available-for-Sale Total

Cost Balance at beginning of year $18,949 $405,041 $557,948 $1,270 $3,237 $923 $– $987,368Additions – 622 7,770 772 929 3 – 10,096Acquisition through business

combination (see Note 6) 16,017 3,276 22,394 259 881 – 74 42,901Reclassification of prepaid major

spare parts (see Note 36i) – – 50,833 – – – – 50,833Disposals – – – (77) (2) – – (79)Adjustments 5 46 1,629 4 22 – (32) 1,674Foreign exchange adjustments 536 4,637 12,070 21 68 12 3 17,347Balance at end of year 35,507 413,622 652,644 2,249 5,135 938 45 1,110,140Accumulated Depreciation and

Amortization Balance at beginning of year – 80,940 180,382 677 2,618 614 – 265,231Depreciation and amortization – 11,079 42,014 268 432 190 – 53,983Disposals – – – (65) (1) – – (66)Foreign exchange adjustments – 200 463 11 18 9 – 701Balance at end of year – 92,219 222,859 891 3,067 813 – 319,849Net Book Value $35,507 $321,403 $429,785 $1,358 $2,068 $125 $45 $790,291

No borrowing costs were capitalized in 2008 and 2007.

Property, plant and equipment with net book values of $603.7 million and $652.3 million as of December 31, 2008 and 2007, respectively, have been pledged as security for long-term debt (see Note 22).

16. Goodwill


2008

2007(As restated -

see Note 6)Balance at beginning of year $1,103,555 $14,954 Acquisition through business combination (see Note 6) – 1,051,211 Foreign exchange adjustments (140,701) 37,390 Balance at end of year $962,854 $1,103,555


Goodwill is attributable to three of First Gen Group’s cash-generating units, namely EDC, Santa Rita and PAHEP/MAHEP power plant facilities.

Impairment Testing of Goodwill The recoverable amount has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The pre-tax discount rates applied cash flow projections range from 5.03% to 12.99% and the cash flows beyond the remaining term of the existing agreements are extrapolated using growth rates of 4.18% for FGPC and 5.3% for both EDC and PAHEP/MAHEP power plant facilities.

Key assumptions with respect to the calculation of value in use of the cash-generating units as of December 31, 2008 and 2007 on which management had based its cash flow projections to undertake impairment testing of goodwill are as follows:

Budgeted Gross Margins

The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budgeted year, increased for expected efficiency improvements.

Bond Rates

The average yield on a five-year government bond rate at beginning of budgeted year is utilized.

No impairment loss was recognized in the consolidated financial statements for each of the three years in the period ended December 31, 2008.

17. Intangible Assets


2008

Water Rights Pipeline

Rights

ConcessionRights forContractsAcquired

Concession Rights Total

Cost Balance at beginning of year,

as previously reported $58,071 $13,253 $– $211,358 $282,682 Adjustments for EDC (see Note 6) – – 201,318 (80,200) 121,118 Balance at beginning of year, as restated 58,071 13,253 201,318 131,158 403,800 Additions – – – 19,618 19,618 Foreign exchange adjustments (7,465) – (25,881) (16,861) (50,207)Balance at end of year 50,606 13,253 175,437 133,915 373,211 Accumulated Amortization Balance at beginning of year 2,613 3,163 – 567 6,343 Amortization 2,188 602 24,170 3,771 30,731 Foreign exchange adjustments (499) – (1,806) (355) (2,660)Balance at end of year 4,302 3,765 22,364 3,983 34,414 $46,304 $9,488 $153,073 $129,932 $338,797

2007 (As restated - see Note 6)

Water Rights Pipeline

Rights

ConcessionRights forContractsAcquired

Concession Rights Total

Cost Balance at beginning of year $48,109 $13,253 $– $– $61,362 Acquisition through business combination

(see Note 6) – – 194,971 127,023 321,994 Foreign exchange adjustments 9,962 – 6,347 4,135 20,444 Balance at end of year 58,071 13,253 201,318 131,158 403,800 Accumulated Amortization Balance at beginning of year – 2,561 – – 2,561 Amortization 2,314 602 – 317 3,233 Adjustments – – – 236 236 Foreign exchange adjustments 299 – – 14 313 Balance at end of year 2,613 3,163 – 567 6,343 $55,458 $10,090 $201,318 $130,591 $397,457


Water Rights Water rights are amortized using the straight-line method over 25 years, which is the term of the Agreement with the NIA. The remaining amortization period of water rights is 22.9 years as of December 31, 2008.

Pipeline Rights Pipeline rights represent the construction cost of the natural gas pipeline facility connecting the natural gas supplier’s refinery to FGP’s power plant including incidental transfer costs incurred in connection with the transfer of ownership of the pipeline facility to the natural gas supplier. The cost of pipeline rights is amortized using the straight-line method over 22 years, which is the term of the Gas Sale and Purchase Agreements (GSPA). The remaining amortization period of pipeline rights is 15.75 years as of December 31, 2008.

Concession Rights for Contracts Acquired As a result of the purchase price allocation, an intangible asset was recognized pertaining to concession rights originating from contracts amounting to $195.0 million (P=8.4 billion) (see Note 6). Such intangible asset pertains to the SSAs and PPAs of EDC. The identified intangible asset is amortized using the straight-line method over the remaining term of the existing contracts ranging from one to 17 years. The concession rights for contracts have been valued based on the expected future cash flows using the Multiple Excess Earnings Method (MEEM) as of 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 is estimated as the sum of the discounted future excess earnings attributable to the asset over the remaining project period. The average remaining amortization period of the intangible asset pertaining to the concession rights originating from contracts is 12 years as of December 31, 2008.

Concession Rights Concession rights pertain to EDC’s service concession for NNGP which adopts the intangible asset model. The intangible asset model considers the right of the Concessionaire to charge users of the public service. For NNGP, EDC does not have any existing agreement with NPC for the geothermal resources and electrical energy produced from the service contract area. The intangible asset pertaining to concession rights for NNGP is being amortized using the straight-line method over the remaining amortization period of 30 years, the term of the related GSC for NNGP and includes the renewal period on the basis of the constitutional and contractual provisions and its historical experience of obtaining such renewals. As a result of the purchase price allocation, the concession rights for NNGP have been revalued based on the expected future cash flows using the MEEM approach as of the date of acquisition. The asset value is estimated as the sum of the discounted future excess earnings attributable to the asset over the project period.

Additions to intangible assets during 2008 pertain to the construction of the Tanawon Geothermal Project and the start of the steam field development of NNGP’s buffer zone. The reckoning date shall be reckoned from the project completion up to 2031 consistent with the terms of the final extension of the service contract for BacMan area.

The recoverable amount of NNGP, which is a separate cash generating unit, has been determined based on a value-in-use calculation using the expected cash flow projections. EDC uses the Perpetuity Growth Model to determine the terminal value, which accounts for the value of free cash flows that continue in perpetuity beyond the five-year-period projection, growing at an assumed constant rate.

The projected cash flows beyond five years have been determined using the perpetuity growth model at a growth rate of 5% not exceeding the average real gross domestic growth rate of 5.66% and the average annual demand growth of 6% for the Visayas power industry market where the unit operates. A pre-tax rate of 9.90% is used in discounting the net cash flow of the project.

NNGP, which is on temporary shutdown since June 2008, is expected to resume operations by the second quarter of 2009.

Management believes that based on the assessment performed, the intangible assets are not impaired.


18. Other Noncurrent Assets


2008

2007(As restated -

see Note 6)Advances to a minority shareholder - net of current portion

(see Note 22) $99,017 $– Prepaid gas (see Notes 23 and 36g) 72,696 71,710 Prepaid major spare parts (see Note 36i) 43,167 19,667 Exploration and evaluation assets 21,039 28,300 Input value added taxes 8,798 11,552 AFS financial assets (see Note 9) 794 841 Restricted cash deposits 782 962 Derivative assets (see Note 35) 734 – Prepaid expenses 471 15,538 Royalty fees chargeable to NPC - net of current portion

(see Notes 11 and 36c) – 11,217 Others 1,342 725 $248,840 $160,512

Exploration and evaluation assets represent expenditures that were capitalized based, on certain instances, on EDC management’s judgment of the degree to which the expenditure can be associated with finding specific geothermal reserves in the project areas. As of December 31, 2008 and 2007, the exploration and evaluation assets pertain to the following project areas:

2008 2007 Cabalian, Southern Leyte $11,949 $13,484 Mindanao 5,821 1,837 Ilocos Norte 1,346 1,169 Dauin, Southern Negros 1,024 – BacMan-Rangas/Kayabon 749 – BacMan-Tanawon – 901 Northern Negros – 10,767 Other areas 150 142 $21,039 $28,300

In 2008, the exploration projects in Northern Negros and BacMan-Tanawon projects are carried at zero balance since the accumulated costs have been transferred and reclassified to the “Intangible assets” account (see Note 17) in the consolidated balance sheet, consistent with First Gen Group’s accounting policy for development projects.

Prepaid expenses as of December 31, 2007 pertain mainly to the 25% advance payments made by EDC to Kanematsu Corporation for the construction of power plant for NNGP.

As of December 31, 2008, the restricted cash deposits include the special deposits and funds consisting of the $0.3 million sinking fund required by the Department of Finance (DOF) to cover the long-term loans payment and $0.1 million escrow account in favor of terminated Leyte “A” Geothermal Plant Employees Union members/employees.

19. Loans Payable

Details of this account are as follows:

2008 2007 Short-term loans (see Notes 6 and 38) $200,461 $155,444 Bridge loans (see Note 6) – 287,500 $200,461 $442,944


Short-term Loan Details of the short-term loans are as follows:

2008 2007 First Gen $119,442 $155,444 EDC 42,088 – Prime Terracota 38,931 – $200,461 $155,444

The Parent Company’s short-term loans consist of unsecured, short-term, U.S. dollar-denominated loans amounting to $80.6 million and peso-denominated loans amounting to $38.9 million (P=1.8 billion) as of December 31, 2008 and U.S. dollar-denominated loans amounting $100.0 million and peso-denominated loans amounting to $55.4 million (P=2.3 billion) as of December 31, 2007 which were obtained from local banks. These loans bear annual interest ranging from 4.04% to 7.69% in 2008 and 6.10% to 7.05% in 2007.

On September 22, 2008, Prime Terracota also availed of unsecured short-term peso-denominated loans 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 the EDC acquisition. The loans will mature 180 days from the date of the agreement. The interest rate is based on Philippine Dealing and Exchange Corporation (PDEX) plus an agreed margin. The accrued interest is payable on the maturity date of the loans. As of March 30, 2009, the loans availed by Prime Terracota has been extended to another 90 days.

EDC availed the $42.1 million (P=2.0 billion) short-term loan obtained from a local bank for its working capital requirements. Interest rate is based on 3-month Philippine Dealing System Treasury Reference Rate 2 plus spread of 6.75%.

Bridge Loans On November 22, 2007, the Parent Company signed the Facility Agreement (the “Bridge Loan Agreement”) between Calyon S.A. Corporate and Investment Bank (Calyon), (the “Facility Agent”), Standard Chartered Bank (SCB) and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BOTM) (collectively referred to as the “Bridge Loan Lenders”), for an aggregate amount of $287.5 million. The availed facility on the Bridge Loan (the “Bridge Loan”) was used to fund the Parent Company’s fees, costs and expenses incurred in connection with the acquisition of a controlling stake in EDC. The Availability Period of the Bridge Loan commenced from the date of the Bridge Loan Agreement until May 31, 2008 (the “Availability Period”). The Bridge Loan will mature 364 days from the date of Agreement. The rate of interest on the loan is based on London Interbank Offered Rate (LIBOR) plus an agreed margin. The Parent Company may select an interest period of one, two, three or six months. The Parent Company is required to pay to the Facility Agent (for the account of each lender) a commitment fee computed at the rate of 0.50% per annum based on each Bridge Loan Lender’s available commitment for the Availability Period. The commitment fee accrues starting from the date that is 31 days from the execution of the Agreement. The loan was fully drawn on November 26, 2007. No commitment fees were paid.

In 2007, the details of the Bridge Loan commitments are as follows:

Name of Lender Amount Calyon $100,000 SCB 100,000 BOTM 87,500 $287,500

As set forth in the Bridge Loan, the Parent Company is obligated to comply with certain financial covenants with respect to, among others: maintenance of a specified debt-to-equity and interest coverage ratios; maintenance of property; compliance with laws, rules and regulations, orders or writs to which it may be subject; negative pledges; and payment of taxes. In addition, the Parent Company is restricted to declare or pay dividends during a Default or an Event of Default (as defined in the Agreement) or if such payment would result in Default or an Event of Default. The Bridge Loan was fully paid on November 14, 2008.


20. Accounts Payable and Accrued Expenses


2008 2007 Trade $144,629 $174,078 Accrued interest and financing costs 23,254 19,003 Accrued premium on range bonus forwards (see Note 35) 3,685 – Others 12,187 35,152 $183,755 $228,233

Trade payables are noninterest-bearing and are normally settled on 30 to 60-day payment terms.

Such trade payables include EDC’s recognition of DOE’s initial revalidation of its assessment amounting to $20.9 million, which represents royalty fees for the period 1996 to 1998 relative to EDC’s GSC for the Southern Negros Geothermal Production Field.

Accrued interest and financing costs includes unsettled guarantee fees on long-term loans of EDC based on the requirements set by DOF prior to EDC’s privatization. Accrued interest and financing costs are normally settled semi-annually throughout the financial year.

The accrued premium on range bonus forwards of P=3.7 million (P=175.1 million) represents the total premium costs due to the counterparty every time the spot rate of the Japanese Yen was traded outside the predetermined ranges in the two range bonus forward contracts that cover the Japanese Yen-U.S. Dollar foreign exchange risk of the JPY8.0 billion out of the JPY12.0 billion Miyazawa 1 loan (see Note 35).

21. Bonds Payable

Details of bonds payable are as follows:

2008 2007 Convertible Bonds $258,440 $– Philippine Peso-denominated Bonds 104,538 119,502 $362,978 $119,502

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 CBs are listed on the Singapore Exchange Securities Trading Limited. The CBs are traded in a minimum board lot size of $0.5 million. The CBs constitute the direct, unsubordinated and unsecured obligations of the Parent Company, ranking pari passu in right of payment with all other 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 stock of the Parent Company at an initial conversion price of P=63.72 a share with a fixed exchange rate of US$1.00 to P=40.55, subject to adjustments under circumstances described in the Terms and Conditions of the CBs. The conversion right attached to the CBs may be exercised, at the option of the holder, at any time on and after March 22, 2008 up to 3:00 pm on January 31, 2013. The CBs and the shares to be issued upon conversion of the CBs have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and subject to certain exceptions, may not be offered or sold within U.S. The Parent Company may also redeem the CBs on or after February 11, 2010, in whole but not in part, at the early redemption amount, if the closing price of the shares for any 20 trading days out of the 30 consecutive trading days prior to the date upon which the notice of such redemption is given, was at least 130% of the conversion price in effect of such trading period, or at any time prior to maturity, in whole but not in part, at the early redemption amount, if less than 10% of the aggregate principal amount of the CBs originally issued are then outstanding. The Bondholders are also given a right to require the Parent Company to redeem the CBs at the early redemption amount 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 option features of the CB are identified as embedded derivatives and are separated from the host contract (see Note 35). The aggregate fair value of the outstanding embedded derivatives is $0.8 million as of December 31, 2008.


At inception, the host contract is recorded net of debt issuance cost amounting to $3.9 million and bifurcated embedded derivatives of $13.0 million. As of December 31, 2008, the carrying amount of the host contract amounts to $258.4 million. The movement of the account is as follows:

Carrying amount at inception date $243,075 Accretion during the year charged to “Interest expense and financing charges”

account (see Note 30) 15,365 $258,440

In 2008, movements of debt issuance costs pertaining to the CBs are as follows:

Balance at inception date $3,925 Accretion during the year charged to “Interest expense and financing charges”

account (see Note 30) (962)Balance at end of year $2,963

Philippine Peso-denominated Bonds On 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, 2010 with a coupon rate of 11.55%. The effective interest rate of the Peso Bonds is 12.03%. Interest is payable semi-annually. The Peso Bonds constitute the direct, unconditional, unsecured and general obligations of the Parent Company. The proceeds from the Peso Bonds were used for general corporate purposes, including working capital and investments. The Peso Bonds may be redeemed at the option of the Parent Company after three years from issue date or if payments under the Peso Bonds become subject to additional or increased taxes as a result of certain changes in law.

As set forth in the Trust Agreement in connection with the issuance of the Peso Bonds, the Parent Company 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 of all 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 if such payment would result in an Event of Default without the prior written consent of Bondholders representing at least 51% of the aggregate outstanding principal amount of the Peso Bonds. As of December 31, 2008, the Parent Company is in compliance with the foregoing covenants.

As of December 31, 2008 and 2007, the unamortized debt issuance costs incurred in connection with the issuance of the Peso Bonds amounted to $0.7 million and $1.2 million, respectively, and are deducted against the Peso Bonds payable.

Movements of debt issuance costs pertaining to the Peso Bonds are as follows:

2008 2007 Balance at beginning of year $1,239 $1,454 Accretion during the year charged to “Interest expense

and financing charges” account (see Note 30) (431) (375)Foreign exchange adjustments (127) 160 Balance at end of year $681 $1,239

22. Long-term Debt

This account consists of long-term debt of:

2008

2007(As restated -

see Note 6)EDC $612,897 $553,213 FGPC 522,743 192,582 Red Vulcan (see Note 6) 291,666 705,127 FGP 164,080 188,818 1,591,386 1,639,740 Less current portion 518,101 111,071 $1,073,285 $1,528,669


EDC Details of EDC’s long-term debt are as follows:

2008 2007

Creditor/Project Maturities Interest Rates

PhilippinePeso

Balances

Equivalent U.S. Dollar

Balances

Philippine Peso

Balances

EquivalentU.S. Dollar

BalancesInternational Bank for

Reconstruction and Development (IBRD)

2969 PH BacMan Geothermal Power Plant - $41 million

1994 to 2008

½ of 1% over cost of qualified borrowings P=– $– P=213,917 $5,166

3164 PH Energy Sector Loan - $118 million

1995 to 2010

½ of 1% over cost ofqualified borrowings 1,012,591 21,309 1,327,866 32,065

3702 PH Geothermal Exploration Project

- $64 million

1999 to 2013

½ of 1% over cost ofqualified borrowings 1,261,095 26,538 1,194,375 28,842

3747 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

30,512 24,783

1,353,630 971,507

32,68823,460

Overseas 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%

225,310133,245

4,741 2,804

266,555 121,209

6,4372,927

9th Yen Palinpinon I Geothermal Power Plant

- ¥10.8 billion

1991 to 2011

3.0% 548,799 11,549 544,478 13,14815th Yen Palinpinon I

Geothermal Power Plant - ¥4.0 billion

1999 to 2019

5.7% 941,164 19,806 758,941 18,32718th Yen Palinpinon II Geothermal

Power Plant - ¥77.4 million

2003 to 2023

5.5% 32,096 675 25,499 61619th Yen Mt. Labo Geothermal

Project - ¥10.8 billion

2004 to 2024

4.9%

144,261 3,036 112,948 2,72821st Yen Northern Negros

Geothermal Project - ¥14.5 billion, of which ¥5.9

billion was drawn in 2007

2007 to 2027

2.7%/2.3% 4,778,828 100,564 3,457,059 83,482National Government PCIR - $328 thousand

1992 to 2017

Year 1– 4 ¼%2– 5 ¼%3– 5 ¾%

4-5–6 ¼%6-25–6 ½% – – 13,840 334

Miyazawa I - ¥5.2 billion

Tranche A=3.78% 2,724,242 57,328 1,968,892 47,545

- ¥6.8 billion June 1, 2009 Tranche B=1.60% + LIBOR 3,551,414 74,735 2,491,968 60,176

Miyazawa II - ¥22.0 billion

June 26, 2010

2.37% 11,144,235 234,517 7,708,012 186,134

Land Bank - P=1.5 Billion

June 29, 2008

Average 91-day

T-Bill + 2% – – 378,409 9,138Total 29,124,866 612,897 22,909,105 553,213Less current portion 8,244,934 173,505 2,203,496 53,211 P=20,879,932 $439,392 P=20,705,609 $500,002

The PCIR Bonds represent converted outstanding IBJ Loans equivalent to $0.3 million ROP bonds in an EDC MOA dated November 16, 1992. The ROP Bonds bear an interest rate of 6.5% per annum, payable semi-annually with bullet principal payment in 2017. A cash collateral amounting to $0.07 million was deposited with the BSP as part of the agreement and will be returned to EDC without interest upon full settlement of the PCIR Bonds (see Note 11).


FGPC and FGP Long-term debt of FGPC and FGP consist of U.S. Dollar-denominated borrowings availed from various lenders to partly finance the construction and operations of their power plant complexes.

FGPC

Outstanding Balance Nature Repayment Schedule

Facility Amount 2008 2007

Covered foreign currency-denominated loans payable to foreign financing institutions with annual interest at six months LIBOR plus 3.25% margin and political risk insurance premium

Repayment to be made in various semi-annual installments from 2009 up to 2021

$312,000 $302,831 $–

Uncovered foreign currency-denominated loans payable to foreign financing institutions with annual interest at six months LIBOR plus margin of 3.50% on the 1st to 5th year, 3.75% on the 6th to 7th year and 3.90% on the succeeding years.


$188,000 $182,506 $–

Foreign currency-denominated loans payable to foreign financing institutions at various interest rates ranging from 2.69% to 8.79%

Back-ended and annuity style repayment to be made in various semi-annual installments from 2001 up to 2012

360,000 37,406 107,578

U.S. Private Placements with annual interest based on the applicable Treasury Yield plus 2.5%


160,000 – 85,004

Total 522,743 192,582Less current portion 28,009 33,122 $494,734 $159,460

On November 14, 2008 (the “Refinancing Date”), FGPC has entered into a Bank Facility Agreement covering a US$544.0 million term loan facility with nine foreign banks namely: The Bank of Tokyo-Mitsubishi UFJ, Ltd., Calyon, KfW IPEX Bank GMBH, ING Bank N.V. (Singapore Branch), Bayerische Hypo-Und Vereinsbank AG (Hong Kong Branch), Malayan Banking Berhad, Standard Chartered Bank, Société Générale (Singapore Branch) and Kreditanstalt Für Wiederaufbau (KfW) to refinance the Santa Rita project. The term loan is broken down into three separate facilities namely: (i) a $312.0 million Covered Facility with political risk insurance and with a tenor of 12½ 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 FGPC amounting to $132.0 million and the remaining balance was upstreamed to FGPC’s shareholders as advances which are interest bearing. As of December 31, 2008, total advances including accrued interest forwarded to the consolidated balance sheet amounted to $104.0 million which is presented under “Advances to a minority shareholder” account (see Notes 11 and 18).

With respect to the Covered Facility, the interest rate is computed semi-annually, every May and November, using LIBOR plus 325 basis points. This facility is covered by a Political Risk Insurance (PRI) and premiums payable on the PRI are in addition to the margins payable by FGPC. The Covered Facility will mature on May 10, 2021.

As to the Uncovered Facility, the interest rate is also computed semi-annually, every May and November, 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 of the Refinancing Date, and (iii) 3.90% per annum from the 8th anniversary of the Refinancing Date until the final maturity date, which is on November 10, 2018.


FGP

Outstanding Balance Nature Repayment Schedule

Facility Amount 2008 2007

HERMES Covered Facility Agreement with annual interest at commercial interest reference rate of 7.48%

Repayment to be made in 24 equal semi-annual installments from 2003 up to 2014

$133,297 $63,779 $73,986

Commercial Loan Credit (ECGD) Facility Agreement with interest at three month to six month LIBOR plus 2.15%


115,000 56,270 65,458

GKA-Covered Facility Agreement with annual interest at six month LIBOR plus 1.4% with option to convert into fixed interest rate loan


77,000 44,031 49,374

Total 164,080 188,818 Less current portion 24,921 24,738 $139,159 $164,080

FGP has available undrawn committed credit facility amounting to $50.0 million from its Revolving Credit/Working Capital (RC/WC) Facility which was available until March 2007. Upon the expiration of availability period of the undrawn facility, the deferred debt issuance costs amounting to $0.9 million for FGP has been written-off against the consolidated statement of income in 2007. All conditions precedent to these borrowings had been met.

A guarantee fee to a certain facility is also required to be paid to the guarantors at the rate of 1.5% a year on the outstanding principal amount payable semi-annually on each interest payment dates.

As of December 31, 2008 and 2007, the unamortized debt issuance costs incurred in connection with FGPC and FGP’s long-term debt amounting to $22.1 million and $10.4 million, respectively, were deducted against the long-term debt.

Movements of debt issuance costs are as follows:

2008 2007 Balance at beginning of year $10,397 $14,852 Debt issuance costs related to the new loans availed 14,865 – Accretion charged to “Interest expense and financing

charges” account (see Note 30) (3,194) (4,455)Balance at end of year $22,068 $10,397

The common terms related to the existing FGPC and FGP financing facility agreements (Common Terms Agreement or CTA) contain covenants concerning restrictions with respect to, among others: maintenance of specified debt service coverage ratio; acquisition or disposition of major assets; pledging present and future assets; change in ownership; any acts that would result in a material adverse effect on the operations of the power plants; and maintenance of good, legal and valid title to the site free from all liens and encumbrances other than permitted liens. As of December 31, 2008, FGPC and FGP are in compliance with the terms of the said agreements.

FGPC and FGP also have entered into separate agreements in connection with their existing financing facilities as follows:

Mortgage, Assignment and Pledge Agreements whereby a first priority lien on most of FGPC’s and FGP’s real and other properties, including revenues from the operations of the power plants, have been executed in favor of the lenders. In addition, the shares of stock of FGPC 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 the terms and conditions of the TRA, FGPC and FGP have each established various security 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 or transfer moneys from these security accounts, subject to and in accordance with the terms and conditions of their respective TRAs.


The balance of FGPC’s and FGP’s security accounts included as part of “Cash and cash equivalents” account in the consolidated balance sheets as of December 31, 2008 and 2007 amounted to $186.0 million and $66.1 million, respectively.

On February 28, 2007, given the resolution of the dispute between FGPC and Siemens AG, Siemens Power Generation and Siemens, Inc. (collectively, “Siemens”) (see Note 36f) and as required under the TRA Supplement and the CTA of FGPC, an aggregate amount of $87.6 million of security accounts was used to prepay the Secured Indebtedness and all indebtedness (inclusive of principal, interest and other fees) under the EIB Finance Contracts of FGPC on a pro-rata basis.

Red Vulcan On 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 “Secured Indebtedness”) that was arranged by the Philippine Government’s financial advisors for the EDC stake 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 Bank of the Philippines (DBP), Banco de Oro-EPCI, Inc. (BDO Unibank, Inc.), and Land Bank of the Philippines (Land Bank) (collectively referred to as the “Staple Financing Lenders”) in relation to the sale of 60% of EDC’s issued and outstanding capital stock. The interest rate of the Secured Indebtedness 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 the applicable interest margin or the BSP overnight rate, whichever is higher. The staple financing is for a maximum term of 18 months from Drawdown Date.

As set forth in the Staple Financing Agreement, Red Vulcan is obligated to perform certain covenants with respect to, among others: maintenance of a specified debt-to-equity ratio; not make or permit any material change in the character of its or EDC’s business nor engage or allow EDC to engage in any business operation or activity other than those for which it is presently authorized by law; disposition of all or substantially all of its and EDC’s assets and material changes in the corporate structure or in the composition of its top-level management. In addition, Red Vulcan is restricted to declare or pay dividends (other than stock dividend) to its stockholders or partners without the consent of all Staple Financing Lenders. Red Vulcan is also restricted, except for permitted borrowings, to incur any long-term debt, increase its borrowings, or re-avail existing facilities with other banks or financial institutions. As of December 31, 2008, Red Vulcan is in compliance with the foregoing covenants.

In addition, the shares of stock held by Red Vulcan in EDC, representing 60% of EDC’s issued and outstanding capital stock, consisting of 6.0 billion common shares presently in scripless form and lodged with the Philippine Depository and Trust Corporation, and 7.5 billion preferred shares (collectively, the “Pledged Shares”), were pledged as primary security for the due and prompt payment of the Secured Indebtedness.

Aside from the properties pledged and as indicated in the Staple Financing Agreement, the Security Trustee shall make a valuation of the pledged EDC common shares on March 28, 2008, June 28, 2008 and August 29, 2008 (as amended) (each a “Valuation Date”) based on the weighted average closing prices at the PSE for the 30 trading days immediately prior to the Valuation Date (the “Top-Up Provision”). The Pledged Shares shall be equivalent to at least 200% of the total amounts outstanding under the Staple Financing Agreement.

On November 28, 2008, BDO Unibank, Inc., DBP and Land Bank assigned via a Deed of Assignment to BDO Unibank, Inc. - Trust and Investments Group (BDO Trust) their corresponding portions of the staple 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 and 2007 are as follows:

2008 2007

Name of Lender In Philippine

Peso In Equivalent

U.S. Dollar In Philippine

Peso In Equivalent

U.S. Dollar

(Amounts in Millions)

BDO Unibank, Inc. P=8,550.00 $179.93 P=9,733.33 $235.04 BDO Trust 5,310.00 111.74 – – DBP – – 9,733.34 235.04 Land Bank – – 9,733.33 235.04 P=13,860.00 $291.67 P=29,200.00 $705.12


23. Obligations to Gas Sellers

Details of obligations to Gas Sellers on Annual Deficiency recognized pursuant to the SAs and the PDAs, including accrued interest, are as follows:

2008 2007 FGPC: Balance at beginning of year 51,831 71,340 Principal payments (23,944) (19,478) Interest incurred (see Note 30) 2,558 5,421 Interest payments (2,185) (5,452) 28,260 51,831 FGP: Balance at beginning of year $14,504 $22,701 Principal payments (6,138) (8,184) Interest incurred (see Note 30) 556 1,446 Interest payments (486) (1,459) 8,436 14,504 Total 36,696 66,335 Less current portion 36,696 40,201 $– $26,134

FGPC and FGP each executed on March 22, 2006 its respective SA and PDA with Gas Sellers to amicably 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 unconsumed gas volumes during these Contract Years.

Under the terms of their respective SAs and the PDAs, the Gas Sellers’ claims from FGPC and FGP have been reduced to $115.3 million and $32.7 million, respectively. Mandatory prepayments 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 reductions of Annual Deficiency amounting to $9.5 million for FGPC and $3.8 million for FGP were recognized in 2006 to credit FGPC and FGP for gas consumption in excess of their respective TOPQ for 2005.

The remaining liabilities will be paid through quarterly principal payments until December 26, 2009 with interest at LIBOR plus agreed margin. The respective SAs and PDAs allow FGPC and FGP to prepay all or part of the outstanding balances and to “make up” the volume of gas up to the extent of the principal repayments made under the PDA for a longer period of time instead of the ten-Contract Year recovery period allowed under their respective GSPAs. On May 31, 2006, all the conditions precedent set out in the respective SAs and PDAs of FGPC and FGP were completely satisfied. Such conditions precedent included an acknowledgment and consent by Meralco.

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 are passed on to Meralco on a “back-to-back” and full pass-through basis. The corresponding receivables from Meralco, including accrued interest and output value added tax, are presented as part of “Long-term receivables” account in the consolidated balance sheet (see Note 13).

Upon payment of the principal amount, a debit to “Prepaid gas” account (included under “Other Noncurrent Assets” account in the consolidated balance sheet) is recognized to cover the principal portion paid to the Gas Sellers and a corresponding credit to “Unearned revenue” account (included under “Other Noncurrent Liabilities” account in the consolidated balance sheet is recognized for the principal portion that was already paid by Meralco. As of December 31, 2008, the remaining prepaid gas arising from the SAs and PDAs and the corresponding unearned revenue amounted to $72.7 million (see Note 26). The prepaid gas and the corresponding unearned revenue balances as of December 31, 2008 are net of recoveries of Annual Deficiency recognized by Gas Sellers for gas consumed above the TOPQ, as calculated by Gas Sellers, for the Contract Years 2008 and 2007, which totaled $61.3 million.


24. Royalty Fees Payable


2008 2007 Due to: DOE (see Note 36c) $33,154 $40,468 LGUs (see Note 36c) 2,374 4,039 35,528 44,507 Less current portion 35,528 10,582 $– $33,925

As discussed in Notes 4 and 36c by virtue of PD No. 1442, EDC entered into seven service contracts with the Philippine Government through the DOE, which grants EDC the right to explore, develop, and utilize the country’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.

The effective interest rates on royalty fee payable ranged from 12.38% to 12.72% for 2007. Accretion expense charged under “Interest expense and financing charges” account in the consolidated statement of income during the year ended December 31, 2007 amounted to $0.4 million. There was no accretion recognized for the year ended December 31, 2008.

25. Obligations to Power Plant Contractors


2008 2007 Amounts payable under BOT Contracts $2,354 $8,581 Less current portion 2,354 6,368 $– $2,213

This account pertains to the balance of EDC’s obligations to its BOT Contractor, Marubeni-Oxbow, in connection with the construction of the geothermal power plants in Mindanao, which are due for transfer to EDC in June 2009.

26. Other Noncurrent Liabilities


2008 2007 Unearned revenue (see Note 23) $72,696 $61,910 Asset retirement obligations 910 860 Deferred output value-added taxes on Annual Deficiency – 3,136 Others 6,584 7,786 $80,190 $73,692

Asset Retirement Obligations Under their respective ECCs, FGP and FGPC have legal obligations to dismantle their respective power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has contractual obligation under the lease agreement with PSALM to dismantle its power plant asset at the end of its useful life. FGP, FGPC and FG Bukidnon established their respective provisions to recognize their estimated liability for the dismantlement of the power plant assets.

Movements of asset retirement obligations follow:

2008 2007 Balance at beginning of year $860 $781 Accretion charged to “Interest expense and financing

charges” account (see Note 30) 67 61 Foreign exchange adjustments (17) 18 Balance at end of year $910 $860


The “Other noncurrent liabilities - Others” account consists of accrued vacation and sick leave entitlement of EDC employees.

27. Equity

a. Capital Stock

Details and movements of the Parent Company’s capital stock are as follows:

Number of Shares 2008 2007 2006Redeemable preferred stock - P=0.50 par value Authorized - Balance at beginning and end of year 1,000,000,000 1,000,000,000 1,000,000,000 Issued - Balance at beginning and end of year 1,000,000,000 1,000,000,000 1,000,000,000Common stock - P=1 par value Authorized - Balance at beginning and end of year 1,150,000,000 1,150,000,000 1,150,000,000 Issued: Balance at beginning of year 1,089,046,426 1,081,917,004 1,078,712,700 Shares issued under the stock option plan

(see Note 28) 26,500 7,129,422 3,204,304 Balance at end of year 1,089,072,926 1,089,046,426 1,081,917,004

As discussed in Note 1, the Parent Company has successfully completed the Offering of 193,412,600 common shares, including the exercised greenshoe options of 12,501,700 common shares, in the Philippines. The proceeds from the Offering amounted to P=8,724.7 million ($166.1 million), net of transaction costs amounting to $6.9 million which were deducted against additional paid-in capital.

On August 15, 2007, the BOD of the Parent Company approved the share buy-back program for a period of two years commencing on October 1, 2007 until September 30, 2009, subject to an extension as may be determined by the Executive Committee of the Parent Company. The Parent Company will undertake a buy-back transaction only if and to the extent that the price per share is deemed to be extremely undervalued, or share prices are considered highly volatile, or in any other instance where the Parent Company believes that a buy-back will result in enhancing shareholder value. The Parent Company is authorized to buy-back up to P=2.0 billion worth of the Parent Company’s common shares, which amount may be increased by the BOD from time to time as the circumstances warrant. In November 2007, a total of 400,000 common shares of the Parent Company were purchased under the program.

As of March 30, 2009, there are no further shares purchased under the program.

On March 30, 2009, the BOD of the Parent Company approved the amendment to Article Seventh of the Parent Company’s Amended Articles of Incorporation to increase the authorized capital stock from P=1,650.0 million to P=3,270.0 million. The proposed increase in authorized capital stock shall be comprised of 1,620.0 million common shares with a par value of P=1.00 a share. The proposed amendment will be submitted for the approval of the stockholders and the Philippine SEC.

As of March 30, 2009, the Parent Company has not filed any application with the Philippine SEC on the proposed capital restructuring.

b. Retained Earnings

On March 30, 2009, the BOD of the Parent Company approved the declaration of 50% stock dividends on the Parent Company’s common shares to be taken from unissued common shares and the declaration of 50% property dividends on the Parent Company’s preferred shares to be taken from treasury preferred shares. Such dividend declarations will be submitted for the approval of the stockholders and the Philippine SEC.

The retained earnings balance is restricted to the extent of: (a) acquisition price of the treasury shares amounting to $80.6 million as of December 31, 2008 and 2007; and (b) the undistributed net earnings of investee companies (including consolidated subsidiaries) amounting to $30.2 million and $114.2 million as of December 31, 2008 and 2007, respectively. Undistributed earnings of the investee companies are not available for dividend distribution until such time that the Parent Company receives the dividends from these investee companies.


c. Treasury Shares

Movements in the number of treasury shares are as follows:

2008 2007 2006 Preferred Shares Held in Treasury: Balance at beginning and end of year (644,762,000) (644,762,000) (644,762,000)

Common Shares Held in Treasury: Balance at beginning of year (279,406,700) (279,006,700) (472,419,300) Redemptions of common shares – (400,000) – Re-issuances of treasury shares in

relation to the Offering – – 193,412,600 Balance at end of year (279,406,700) (279,406,700) (279,006,700)

28. Share-based Payment Plans

Executive Stock Option Plan The Parent Company has an Executive Stock Option Plan (ESOP), which entitles the option grantees to acquire common shares of the Parent Company, which shares shall not at any grant date, exceed four percent of the total issued and outstanding common shares of the Parent Company.

Options under the ESOP vest within a five-year period. Awards granted prior to 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 a purchase price determined at the option grant date based on the average closing price of the Parent Company’s common shares at the stock exchange for 20 market days prior to the grant, subject to a discount, but in no case shall the purchase price be less than the par value. The terms of the ESOP include, among others, a one-year holding period from the date of award of an option, a limit as to the number of shares an executive and employee may purchase and settle by payment in cash or check the full amount of the price of the shares over which the option is exercised. The contractual life of options granted is ten years, with no cash settlement alternative.

On July 1, 2003, a total of 452,285 common shares of the Parent Company’s unissued common shares have been reserved for the grantees. By virtue of the common stock split and common stock dividends declared and approved by the Parent Company’s BOD and stockholders on April 4, 2005, the number of options and price per share granted to all executives and employees have been adjusted automatically in accordance with the terms of the ESOP. Accordingly, (i) the number of common shares reserved for the grantees has been adjusted from 452,285 common shares to 18,091,400 common shares; (ii) the total number of common shares that have been awarded to be granted over a five-year period under the ESOP has been adjusted from 409,756 common shares to 15,856,800 common shares; and (iii) the exercise price of P=528.00 a share has been reduced to P=13.20 a share.

Movements in the number of stock options granted under ESOP are as follows:

Number of Shares 2008 2007 2006 Balance at beginning of year 4,768,626 12,222,960 15,699,984 Exercised during the year (26,500) (7,129,422) (3,204,304)Forfeited during the year (65,280) (324,912) (272,720)Balance at end of year 4,676,846 4,768,626 12,222,960

Exercisable at end of year 4,676,846 252,450 2,865,696

The weighted average share price at the dates of options exercise in 2008 was P=29.88 a share. The weighted average share price at the dates of options exercise in 2007 was P=47.46 a share. The weighted average fair value of options granted was P=5.45 a share.

The weighted average remaining contractual life of the outstanding share options as of December 31, 2008 is five years.


The fair value of the stock options was estimated as at grant date (July 2003) using the Black Scholes Merton model, taking into account the terms and conditions upon which the options were granted. The following table 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 5 Weighted average share price* P=1,147

* Before adjustment resulting from common stock split and common stock dividends

The share-based payment transactions, including transactions with employees of FPHC and an associate of the Parent Company, amounted to $0.04 million in 2008, $0.12 million in 2007 and $0.21 million in 2006. Of the total, $0.03 million in 2008, $0.10 million in 2007 and $0.17 million in 2006 were recognized as expense for employee services received by First Gen Group.

The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility assumes that the historical volatility is indicative 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 the option.

Employee Stock Purchase Plan The Parent Company has an Employee Stock Purchase Plan (ESPP), which entitles the eligible employees to acquire the common shares of the Parent Company, provided that such shares shall not at any grant date exceed one percent of the total issued and outstanding common shares of the Parent Company. The shares may be acquired under the ESPP at fair market price equal to the average of the closing price of the common shares on the exchange for the 20 market days immediately preceding the grant date. A grantee under the ESPP shall have five years to complete payments on the common shares acquired pursuant to the plan, with a right to prepay after two years.

As of December 31, 2008, no award or sale of shares under the ESPP has been granted to any employee. 29. Related Party Transactions

In addition to the respective PPAs of FGP and FGPC with Meralco as discussed in Note 36a and certain advances to a minority shareholder as discussed in Note 22, the following are the significant transactions with related parties:

a. Advances from stockholders and affiliates represent noninterest-bearing U.S. dollar and peso-denominated emergency loans to meet working capital and investment requirements of First Gen Group.

b. Management services are rendered by the Parent Company to BPPC under certain terms and conditions of a Management Contract. The consideration for the payment of management fees is fixed at $0.5 million per year effective January 1, 2006. On March 13, 2006, the Parent Company and BPPC renewed the Management Contract effective from January 1, 2006 until the end of the 15-year Cooperation Period of the Project Agreement of BPPC, which will expire in July 2010. Management fees amounting to $0.5 million in 2008, 2007 and 2006 is included in “Others” account in the consolidated statement of income.

c. Lease of premises on which First Gen Group corporate offices are located from First Philippine Realty Corporation (FPRC), a subsidiary of FPHC (see Note 36o). Total rent expense amounted to $0.3 million in 2008, 2007 and 2006 (see Note 30).

d. Maintenance services are rendered by Meralco Industrial Engineering Services Corporation (MIESCOR), a subsidiary of Meralco, on the 230 kV transmission line from the Santa Rita plant to the Calaca Substation in Batangas under the Transmission Line Maintenance Agreement. This involves the monthly payment of $0.02 million (P=0.6 million) as retainer fee and $0.1 million (P=2.3 million) for every six-month period as service fee, with both fees subject to periodic adjustment as set forth in the agreement. The amount of compensation for additional services requested by FGPC outside the scope of the agreement is subject to mutual agreement between FGPC and MIESCOR. Total operations and maintenance expense (shown as part of “Power plant operations and maintenance” account in the consolidated statement of income) amounted to $0.5 million in 2008 and 2007 and $0.4 million in 2006.

e. Management services are rendered by the Parent Company to First Philippine Industrial Corporation (FPIC), a subsidiary of FPHC engaged in the fuel-supply business. The Parent Company does not receive a fee for the services it provides to FPIC.


f. Compensation of key management personnel are as follows:

2008 2007 2006 Other short-term employee benefits $5,502 $5,229 $3,764 Share-based payments (see Note 28) 29 101 146 Retirement and other post-retirement benefits

(see Note 31) 680 249 137 $6,211 $5,579 $4,047

Terms and Conditions of Transactions with Related Parties. Except for certain advances to a minority shareholder (see Note 22), outstanding balances at year end are unsecured and interest-free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables.

Details of amounts due to stockholders and affiliates are as follows:

2008 2007 BG Plc. $6,348 $7,388 FGHC International Ltd. 145 152 Others 563 416 $7,056 $7,956

BG Plc. is a stockholder of FGHC, while FGHC International Ltd. is a subsidiary of FPHC and a stockholder of the Parent Company.

As of December 31, 2008 and 2007, receivables from affiliates (included in “Receivables” account in the consolidated balance sheet) amounted to $1.0 million and $1.3 million, respectively (see Note 8). No impairment loss was recognized on these receivables for t he years ended December 31, 2008 and 2007. This assessment is undertaken each financial year through review of the financial position of the related party and the market in which the related party operates.

30. Interest Income/Expenses

Interest Income

2008 2007 2006 Cash and cash equivalents (see Note 7) $19,561 $25,968 $23,724 Receivable from Meralco on Annual

Deficiency (see Note 23) 3,114 6,867 27,293 $22,675 $32,835 $51,017

Depreciation and Amortization

2008 2007 2006 Property, plant and equipment (see Note 15) $61,176 $53,983 $58,917 Intangible assets (see Note 17) 30,731 3,233 603 Investment properties (included under “Other

noncurrent assets” account in the consolidated balance sheet) – 2 –

$91,907 $57,218 $59,520

Staff Costs

2008 2007 2006 Salaries and wages $60,311 $10,062 $7,122 Retirement benefits (see Note 31) 7,216 1,830 690 Share-based payments (see Note 28) 29 101 171 $67,556 $11,993 $7,983


Other Administrative Expenses

2008 2007 2006 Insurance $47,764 $8,629 $7,560 Professional fees 30,039 13,978 8,870 Taxes and licenses 22,021 23,544 11,601 Others (see Notes 8, 13, 29 and 37) 11,642 8,616 4,374 $111,466 $54,767 $32,405

Interest Expense and Financing Charges

2008 2007 2006 Interest on: Loans and bonds

(see Notes 19, 21 and 22) $195,920 $77,955 $62,810 Obligations to Gas Sellers on Annual

Deficiency (see Note 23) 3,114 6,867 27,293 Accretion on: Debt issuance costs

(see Notes 21 and 22) 4,587 4,830 4,230 Asset retirement obligations

(see Note 26) 67 61 56 Royalty fees payable (see Note 24) – 408 –

Write-off of deferred debt issuance costs on undrawn facility (see Note 22) – 875 3,862

$203,688 $90,996 $98,251 31. Retirement and Other Post-Retirement Benefits

The following tables summarize the components of net benefit expense recognized in the consolidated statement of income and the funded status and amounts recognized in the consolidated balance sheet for the plans:

The amounts recognized in the consolidated balance sheets are as follows:

2008

2007(As restated -

see Note 6)Present value of funded obligation $70,527 $72,374 Fair value of plan assets (41,773) (40,962)Present value of unfunded obligation 28,754 31,412 Unrecognized past service cost (474) (506)Unrecognized actuarial losses (2,622) (2,501)Foreign exchange adjustments (759) (1,321)Retirement and other post-retirement liability $24,899 $27,084

The amounts recognized in the consolidated statements of income are as follows:

2008 2007 2006 Current service cost $5,030 $1,240 $407 Interest on obligation 5,005 761 292 Expected return on plan assets (2,716) (321) (61)Net actuarial losses (gains)

recognized (135) 116 21 Amortization of past service cost 32 34 31 Retirement benefits expense $7,216 $1,830 $690


Movements in the present value of the defined benefit obligation are as follows:

2008 2007 Balance at beginning of year $72,374 $4,969 Current service cost 5,030 1,240 Interest cost 5,005 761 Actuarial losses (gains) (1,200) 464 Benefits paid (777) (34)Additions due to EDC acquisition – 61,938 Foreign exchange adjustments (9,905) 3,036 Balance at end of year $70,527 $72,374

Movements in the fair value of plan assets are as follows:

2008 2007 Balance at beginning of year $40,962 $1,352 Expected return on plan assets 2,716 321 Actuarial losses (1,186) (143)Contributions paid 5,814 34 Benefits paid (777) (34)Additions due to EDC acquisition – 37,940 Foreign exchange adjustments (5,756) 1,492 Balance at end of year $41,773 $40,962

Actual return on plan assets $1,530 $178

The Parent Company and its subsidiaries namely FGHC, FGPC and FGP (collectively, the “First Gas Group”) have initially funded the retirement plans in December 2005. First Gen Group expects to contribute $5.1 million to its defined benefit retirement plans in 2009.

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2008 2007 Investments in government securities 52% 18% Deposits in banks 35 8 Investments in shares of stock 9 73 Others 4 1 100% 100%

The overall expected rate of return on assets is determined based on the market prices prevailing on 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 First Gen Group, except EDC, as of January 1, 2008 and 2007 are as follows:

2008 2007 Discount rate (average) 10% 8% Future salary increase rate 10–14% 14% Expected rate of return on plan assets 7% 10%

The principal actuarial assumptions used in determining retirement and post-retirement medical and life insurance benefit obligations of EDC are as follows:

2008 2007 Discount rate 9.8% 7.0% Future salary increase rate 10.0% 6.0% Expected rate of return on plan assets 7.0% 7.0% Medical trend rate 7.0% 3.0%


Amounts for the current and previous years are as follows:

December 31,

2008 December 31,

2007 December 31,

2006 December 31,

2005 December 31,

2004 Defined benefit obligation $70,527 $72,374 $4,969 $2,334 $512 Plan assets (41,773) (40,962) (1,352) (721) – Deficit $28,754 $31,412 $3,617 $1,613 $512

The experience adjustments on the present value of obligation and plan assets amounted to $0.9 million and $0.4 million in 2008, respectively. There were no experience adjustments on the present value of obligation and plan assets in 2007.

A one percentage point change in the assumed rate of increase in medical costs would have the following effects:

Increase Decrease 2008: Effect on the aggregate current service cost

and interest cost 23.35% 18.70% Effect on the defined benefit obligation 20.67% 16.90% 2007: Effect on the aggregate current service cost

and interest cost 15.91% 13.47 % Effect on the defined benefit obligation 13.22% 11.47 %

32. Income Tax

Deferred income tax assets and liabilities that are expected to reverse beyond the income tax holiday (ITH) periods of FGP, FGPC and FG Hydro are recognized.

The components of the deferred income tax assets (liabilities) as of December 31, 2008 and 2007 are as follows:

2008

2007(As restated -

see Note 6)Foreign exchange differentials: Foreign exchange losses on BOT power plants $84,256 $104,961 Unrealized losses (gains) 51,730 (10,604) Excess of the carrying amounts of nonmonetary

assets over the tax base (27,045) (2,546)Deductible expenses per PD No. 1442 (77,470) (88,363)Difference between fair values and book values resulting

from business combination (14,427) (18,830)Derivative liabilities 13,938 338 Allowance for impairment losses on loans and receivables 12,391 27,757 Appraisal increase of assets applied as deemed costs (11,388) (935)Concession receivables and rights 10,471 10,537 Prepaid major spare parts (8,051) (11,163)Embedded derivatives 6,026 3,806 Accrued real property, transfer and business taxes 4,196 11,535 Excess amortization of debt issuance costs under effective

interest method over straight-line method 2,549 3,742 NOLCO 925 9,330 Capitalized costs and losses during commissioning period

of power plants (631) (745)Unamortized portion of preoperating expenses and project

development costs 345 553 Asset retirement obligations 237 235 Others (6,294) (253) $41,758 $39,355


The deferred income tax assets (liabilities) are presented in the consolidated balance sheet as follows:

2008 2007 Deferred tax assets $71,794 $73,738 Deferred tax liabilities (30,036) (34,383) $41,758 $39,355

Certain deferred income tax assets of the Parent Company and certain subsidiaries have not been recognized since management believes that it is not probable that sufficient future taxable income will be available against which they can be utilized.

The deductible temporary differences of certain balance sheet items and carryforward benefits of NOLCO and MCIT of certain subsidiaries for which no deferred tax asset has been recognized consist of the following:

2008 2007 NOLCO $166,049 $88,628 Foreign exchange differentials: Unrealized losses 41,478 – Excess of the tax base over the carrying amounts of

nonmonetary assets – 112 Accrual for retirement benefits 639 369 MCIT 334 386 Unamortized portion of preoperating expenses and project

development costs 237 432 Allowance for possible losses on input value added tax – 306 Others 247 2,418 $208,984 $92,651

As of December 31, 2008 and 2007, the temporary differences representing the excess of the carrying amount of the investments in subsidiaries and an associate over the tax base amounted to $141.9 million and $29.1 million, respectively. The deferred income tax liability has not been recognized as First Gen Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference may not reverse in the foreseeable future.

Details of provision for current income tax are as follows:

2008 2007 2006 Current $74,896 $33,520 $4,871 Application of MCIT – (629) – $74,896 $32,891 $4,871

Provision for current income tax in 2008 includes the RCIT of FG Bukidnon, FGP, FGPC, EDC and FG Hydro. Provision for current income tax in 2007 includes the RCIT of FG Bukidnon, FGP, EDC and FG Hydro. Provision for current income tax in 2006 includes the RCIT of FG Bukidnon, FGP and FG Hydro.

NOLCO amounting to $5.3 million (P=220.2 million) and $3.9 million (P=162.4 million) incurred in 2005 and 2004, respectively, were applied against taxable income in 2006. MCIT amounting to $0.6 million (P=26.1 million) was applied against the income tax liability in 2007.

The balance of NOLCO as of December 31, 2008 may be used by the Parent Company and certain subsidiaries as additional deductions against their respective future taxable income. Similarly, the MCIT balance as of December 31, 2008 may be applied as credit against future income tax liabilities of the Parent Company and certain subsidiaries. The balances of NOLCO and MCIT, with their respective expiry dates, are as follows:

Year Incurred Expiry Date NOLCO MCIT

(In U.S. Dollar) (In Philippine Peso) (In U.S. Dollar) (In Philippine Peso)

2006 2009 $18,974 P=901,640 $75 P=3,5522007 2010 73,704 3,502,390 211 10,0592008 2011 76,456 3,633,189 48 2,272 $169,134 P=8,037,219 $334 P=15,883


A reconciliation between the statutory income tax rates and effective income tax rates follows:

2008 2007 2006 Statutory income tax rate 35.00% 35.00% 35.00% Income tax effect of: Unrealized foreign exchange loss 33.14 2.07 0.52 ITH incentives (19.12) (15.20) (21.04) Effect of change in income tax rate (4.17) .0– .0– Equity in net earnings of an associate (0.74) (1.32) (1.71) Others (0.13) (9.97) (1.01) Effective income tax rates 43.98% 10.58% 11.76%

Under Republic Act (R.A.) No. 9337, which amended certain provisions of the Tax Return Act of 1997, the RCIT rate shall be 30% effective January 1, 2009.

Registrations with the Board of Investments (BOI) FGP, FGPC and FG Hydro are registered with the BOI under the Omnibus Investments Code of 1987. Under the terms of registrations, these subsidiaries, among others, should maintain a base equity of at least 25%.

As registered enterprises, these subsidiaries are entitled to certain tax and nontax incentives which include, among others, ITH. Total incentives availed of by these subsidiaries amounted to $31.9 million (P=1,403.6 million) in 2008, $30.9 million (P=1,445.5 million) in 2007 and $35.1 million (P=1,810.5 million) in 2006.

On October 31, 2007, the BOI approved FGP’s application for a one-year extension (the Bonus Year) of FGP’s ITH incentive. The approved Bonus Year of FGP is from March 1, 2008 to February 28, 2009.

On April 13, 2007, the BOI approved FG Hydro’s application for its ITH incentive as the new operator of the 112 MW PAHEP/MAHEP on a pioneer status. The approved ITH incentive is for a period of six years from date of registration and the ITH incentive is limited only to the revenue generated from sale of electricity.

In October 2006, the BOI approved FGPC’s application for a one-year extension (the Bonus Year) of FGPC’s ITH incentive. The approved Bonus Year commenced on June 1, 2006 and ended on May 31, 2007.

33. EPS Calculation

2008 2007 2006 (a) Net income attributable to equity holders of the Parent $14,474 $104,655 $91,839 Less dividends on preferred shares (374) (390) – (b) Net income available to common shares $14,100 $104,265 $91,839

(c) Weighted average number of common shares outstanding - basic 810,064,018 805,132,664 784,197,816

Effect of dilution on share options and CBs 168,532,922 4,326,795 9,141,416 (d) Weighted average number of common shares

outstanding - diluted 978,596,940 809,459,459 793,339,232

Basic EPS (b/c) $0.017 $0.130 $0.117

Diluted EPS (b/d) $0.014 $0.129 $0.116 34. Financial Risk Management Objectives and Policies

First Gen Group’s principal financial liabilities comprise trade payables, bonds payable, loans payable and long-term debt, among others. The main purpose of these financial liabilities is to raise financing for First Gen Group’s growth and operations. First Gen Group has other various financial assets and liabilities such as cash and cash equivalents, trade and concession receivables and 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, First 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 the risks that are associated with First Gen Group’s borrowing activities and as required by the lenders in certain cases.

First Gen Group has an Enterprise Wide Risk Management Program which is aimed to identify risks based on the likelihood of occurrence and impact to the business, formulate risk management strategies, assess risk management capabilities and continuously monitor the risk management efforts.

The main risks arising from First Gen Group’s financial instruments are interest rate risk, foreign currency risk, credit risk, credit concentration risk and liquidity risk. The BOD reviews and approves policies for managing each of these risks as summarized below.

Interest Rate Risk First Gen Group’s exposure to the risk of changes in market interest rate relates primarily to First Gen Group’s long-term debt, obligations to Gas Sellers, receivables from Meralco on Annual Deficiency and advances to a minority shareholder that are subject to floating interest rates.

First Gen Group believes that prudent management of its interest cost will entail a balanced mix of fixed and variable rate debt. On a regular basis, the Finance team of First Gen Group monitors the interest rate exposure and presents it to management by way of a compliance report. To manage the exposure to floating interest rates in a cost-efficient manner, First Gen Group may consider prepayment, refinancing or entering into derivative instruments as deemed necessary and feasible.

In May 2002, FGP in particular, entered into an interest rate swap agreement involving half of its borrowings under the ECGD Facility. FGP agreed to exchange, at specified intervals, the difference 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 swap agreements to cover the interest payments for up to 90% of its combined debt under the Covered and Uncovered Facilities (see Note 22). Under the swap agreements, FGPC agreed to exchange, at specific intervals, the difference between fixed and variable rate interest amounts calculated by reference to the agreed-upon notional principal amounts.

As of December 31, 2008 and 2007, approximately 82.4% and 20.4%, respectively, of First Gen Group’s borrowings are subject to fixed interest rate after considering the effect of its interest rate swap agreement. The interest rates of some of EDC’s long-term debt are fixed at the inception of the loan agreement.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates for the year ended December 31, 2008, with all other variables held constant, of First Gen Group’s income before income tax and equity (through the impact of floating rate borrowings, mark-to-market valuation of AFS financial assets and derivative assets and liabilities):

Increase (Decrease)

in Basis Points

Increase (Decrease)on Income Before

Income Tax Increase (Decrease)

on Equity 2008 U.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 – 2007 U.S. Dollar +100 ($2.49 million) ($0.11 million) -100 2.49 million 0.08 million

The effect of changes in interest rates in equity pertains to derivatives accounted for under cash flows hedges and AFS financial assets and is exclusive of the impact of changes affecting First Gen Group’s consolidated statement of income.


Interest Rate Risk Table The following table sets out the carrying amount, by maturity, of First Gen Group’s financial instruments that are exposed to interest rate risk (amounts in millions):

Interest

RatesWithin1 Year 2–3 Years 4–5 Years

More than 5 Years Total

2008 Fixed Rate Long-term debt: Covered Facility* 5.77% $10.46 $18.02 $28.04 $255.48 $312.00 Uncovered Facility* 6.02% 7.53 13.47 22.80 97.20 141.00 KfW Facility 7.20% 9.78 19.55 9.78 – 39.11 ECGD Facility* 2.37% 4.79 9.58 9.58 4.80 28.75 Hermes-Covered Facility 7.48% 11.1 22.2 22.2 11.1 66.6OECF 2.7%–5.7% 16.22 25.22 15.46 86.28 143.18Miyazawa IA & II 2.37%–3.78% 294.28 – – – 294.28Bonds payable Peso denominated Bonds 11.55% – 105.22 – – 105.22 Convertible Bonds 2.50% – 300.59 – – 300.59Deferred payment facility with PSALM 12.00% 9.58 22.86 28.85 – 61.29

2008 Floating Rate Loans payable Local bridge (U.S. Dollar) 4.04%–5.54% $80.55 $– $– $– $80.55 Local bridge (Philippine Peso) 7.69% 30.47 – – – 30.47 Short-term loan 9.25% 8.42 – – – 8.42 PCCI loans 6.25%–6.75% 38.93 – – – 38.93 BDO loans 9.25% 8.42 – – – 8.42Staple Financing 9.02% 291.67 – – – 291.67Long-term debt: Uncovered Facility 6.02% 2.51 4.49 7.60 32.40 47.00 ECGD Facility* 2.37% 4.79 9.58 9.58 4.80 28.75 GKA-Covered Facility 4.35% 5.70 11.41 11.41 17.11 45.63IBRD loans 7.07% 5.13 3.34 – – 8.47Miyazawa IB 2.62%–3.78% 74.74 – – – 74.74Obligations to Gas Sellers on Annual Deficiency 5.97% 36.70 – – – 36.70Receivables from Meralco on Annual Deficiency** 5.97% 26.15 – – – 26.15Advances to a minority shareholder 5.8% 4.23 7.43 12.07 79.52 103.25

2007 Fixed Rate Long-term debt: KfW Facility 7.20% $9.78 $19.56 $19.55 $– $48.89 U.S.-Private Placements 8.11% 8.87 26.01 50.26 – 85.14 EIB Facility 5.31-7.12% 5.21 11.70 13.65 – 30.56 ECGD Facility* 3.53% 4.79 9.58 9.58 9.58 33.53 Hermes-Covered Facility 7.48% 11.11 22.22 22.22 22.22 77.77OECF 3.00-5.70% 16.91 29.46 18.11 63.18 127.66PCIR Bonds 4.25–6.50% – – – 0.33 0.33Miyazawa IA & II 2.37%–3.78% – 233.68 – – 233.68Peso denominated Bonds 11.55% – 120.74 – – 120.74Deferred payment facility with PSALM 12.00% 8.52 20.34 25.68 15.27 69.81

2007 Floating Rate Loans payable Foreign bridge 6.12% $287.50 $– $– $– $287.50 Local bridge (US Dollar) 7.05% 100.00 – – – 100.00 Local bridge (Philippine Peso) 6.92% 41.90 – – – 41.90 Short-term loan 7.00% 13.54 – – – 13.54Staple Financing 6.39% – 705.13 – – 705.13Long-term debt: Mexim/Mecib Facility 6.04% 6.85 12.25 – – 19.10 Mexim Facility 7.10% 3.46 8.47 – – 11.93 ECGD Facility 3.53% 4.79 9.58 9.58 9.58 33.53 GKA-Covered Facility 6.30% 5.70 11.41 11.41 22.81 51.33IBRD loans 6.820% 27.12 32.06 – 63.04 122.22PCIR Bonds 4.25–6.50% – – – 0.33 0.33Miyazawa IB 2.63% – 186.13 – – 186.13Land Bank 5.672% 9.14 – – – 9.14Obligations to Gas Sellers on Annual Deficiency 8.83–9.33% 40.20 26.14 – – 66.34Receivables from Meralco on Annual Deficiency** 8.83–9.33% 40.20 26.14 – – 66.34

** Including effect of interest rate swap ** Excluding output value added tax


Interest on financial instruments classified as floating rate is repriced semi-annually on each interest payment date. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of First Gen Group that are not included in the foregoing tables are noninterest-bearing and are therefore not subject to cash flow interest rate risk.

Foreign Currency Risk First Gen Group’s exposure to foreign currency risk arises as the functional currency of the Parent Company and certain subsidiaries, the U.S. Dollar, is not the local currency in its country of operations. Certain financial assets and liabilities as well as some costs and expenses are denominated in Philippine Peso or in Japanese Yen in the case of EDC. To manage the foreign currency risk, First Gen Group may consider entering into derivative transactions, as necessary. The Parent Company has not entered into any derivative transactions to cover the foreign exchange fluctuations. Moreover, the Parent Company has a natural hedge with regard to its Philippine Peso bonds since it receives cash dividends from EDC and FG Hydro in Philippine Peso.

In the case of EDC, its foreign currency risk primarily arises from future payments of foreign loans, BOT obligations, other commercial transactions and its investment in ROP bonds. Its exposure to foreign currency risk, to some degree, is mitigated by some provisions indicated in EDC’s, GSCs, SSAs and PPAs. The GSCs allow full cost recovery while the SSA include 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 currency forward contracts, with various counterparties to minimize its foreign currency risks arising from its Miyazawa 1 loans (see Note 35).

The following table sets out the Japanese Yen-denominated and Philippine Peso-denominated financial assets and liabilities as of December 31, 2008 and 2007 that may affect the consolidated financial statements of First Gen Groups (amounts in millions):

2008 2007 Original Currency Original Currency

JapaneseYen

Balances

PhilippinePeso-

denominatedBalances


Balance

JapaneseYen

Balances

Philippine Peso-

denominated Balances


BalancesFinancial Assets Loans and receivable: Cash and cash equivalents ¥0.4 P=726.1 $15.3 ¥6.5 P=5,026.9 $121.4 Receivables – 5,385.2 113.3 – 5,277.5 127.4 Long-term receivables,

including current portion – 32,870.7 691.7 – 33,866.0 817.8 Restricted cash deposits – 40.7 0.9 – 39.8 1.0 0.4 39,022.7 821.2 6.5 44,210.2 1,067.6AFS financial assets – 712.2 15.0 – 34.8 0.8 Total financial assets 0.4 39,734.9 836.2 6.5 44,245.0 1,068.4Financial Liabilities Liabilities at amortized cost: Loans payable – 5,698.2 119.9 – 2,296.0 55.5 Accounts payable and accrued

expenses 390.4 5,742.2 125.1 – 4,985.6 120.4 Due to stockholders and

affiliates – 335.3 7.1 – 220.8 5.3 Long-term debt including

current portion 48,833.2 13,860.0 848.0 50,588.9 29,578.4 1,159.2 Royalty fees payable, including

current portion – 1,688.2 35.5 – 1,843.1 44.5 Bonds payable – 5,000.0 105.2 – 5,000.0 120.7 Total financial liabilities 49,223.6 32,323.9 1,240.8 50,588.9 43,923.9 1,505.6Net financial liabilities (assets) ¥49,223.2 (P=7,411.0) $404.6 ¥50,582.4 (P=321.1) $437.2

In translating these foreign currency-denominated monetary assets and liabilities into U.S. Dollar, the exchange rates used were ¥90.942 to $1.00 and ¥113.688 to $1.00, the Japanese Yen-U.S. Dollar exchange rate as of December 31, 2008 and 2007, respectively, while P=47.520 to $1.00 and P=41.411 to $1.00 were the Philippine Peso-U.S. Dollar exchange rates as of December 31, 2008 and 2007, respectively.


The following table sets out, for the years ended December 31, 2008 and 2007, the impact of the range of reasonably possible movement in the U.S. Dollar, Japanese Yen, European Euro and Philippine Peso exchange rates with all other variables held constant, First Gen Group’s income before income tax and equity (due to changes in the fair value of monetary assets and liabilities):

2008 2007

Change in Exchange Rate

(in European Euro against U.S. Dollar)


(in Japanese Yenagainst U.S. Dollar)


(in Philippine Pesoagainst U.S. Dollar)


(in Japanese Yen against U.S. Dollar)


(in Philippine Pesoagainst U.S. Dollar)

(10%) 10% (10%) 10% (10%) 10% (5%) 5% (5%) 5%


Increase (decrease) on income before income tax ($0.6) $1.4 $32.6 ($52.7) $17.7 ($14.5) $23.4 ($21.2) $10.1 ($9.1)

Increase (decrease) on equity – – – – 35.0 (28.6) – – 10.5 (9.5)

The effect of changes in European rate against U.S. Dollar arises from the fair value movements of the embedded currency option of FG Hydro (see Note 35).

The effect of changes in foreign currency rates in equity is exclusive of the impact of changes affecting First Gen Group’s consolidated statement of income.

Equity Price Risk Equity price risk is the risk that the fair value of traded equity instruments decrease as the result of the changes in the levels of equity indices and the value of the individual stocks.

As of December 31, 2008 and 2007, First Gen Group’s exposure to equity price risk is minimal.

Credit Risk First Gen Group trades only with recognized, reputable and creditworthy third parties and/or transacts only with institutions and/or banks which have demonstrated financial soundness. It is First Gen Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the level of the allowance account is reviewed on an ongoing basis to ensure that First Gen Group’s exposure to doubtful accounts is not significant.

With respect to credit risk arising from the other financial assets of First Gen Group, which comprise of cash and cash equivalents, nontrade and other receivables, royalty fees chargeable to NPC and restricted cash deposits, First Gen Group’s exposure to credit risk arises from a possible default of the counterparties with a maximum exposure equal to the carrying amount of these instruments.

Credit Risk Exposure. The table below shows the gross maximum exposure to credit risk of First Gen Group as of December 31, 2008 and 2007, without considering the effects of collaterals and other credit risk mitigation techniques:

2008 2007 Financial Assets at FVPL Derivative assets $13,657 $– Loans and Receivables Cash and cash equivalents 229,647 218,172 Receivables: Trade 161,494 227,353 Others 15,321 18,357 Long-term receivables: Concession receivables 674,471 816,006 Receivables from Meralco on Annual Deficiency 29,288 74,295 Other long-term receivables - net 17,253 1,797 Advances to a minority shareholder 104,030 – Royalty fees chargeable to NPC 2,568 11,217 Restricted cash deposits 856 962 Other current assets 152 139 Total loans and receivables 1,235,080 1,368,298


2008 2007 AFS Financial Assets Investments in government debt securities $14,194 $28,437 Investments in equity instruments 284 394 Investments in proprietary shares 508 445 Investments in unquoted equity instruments 2 2 Total financial assets 14,988 29,278 $1,263,725 $1,397,576

Aging Analysis of Financial Assets. The table below shows the aging analysis of First Gen Group’s financial assets as of December 31, 2008:

2008 Neither Past Due but not Impaired

Past Duenor

ImpairedLess than

30 Days31 Days

to 1 Year

Over1 Year up

to 3 YearsOver

3 Years

Past Due and

Impaired Total

(Amounts in Millions) Cash and cash equivalents $229.65 $– $– $– $– $– $229.65Receivables: Trade 161.08 – 0.42 – – 0.04 161.54 Others 14.83 0.22 0.24 0.02 0.01 – 15.32Long-term receivables: Concession receivables 674.47 – – – – – 674.47 Receivables from Meralco

on Annual Deficiency 29.29 – – – – – 29.29 Other long-term receivables 9.89 0.03 6.26 1.07 – 41.27 58.52Advances to a minority shareholder 104.03 – – – – – 104.03AFS financial assets - Investments in a government debt

securities and equity instruments 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 – – – – – 12.92 Foreign currency options 0.74 – – – – – 0.74Total $1,255.47 $0.25 $6.92 $1.09 $0.01 $41.31 $1,305.05 2007 Neither Past Due but not Impaired

Past Duenor

ImpairedLess than

30 Days31 Days

to 1 Year

Over 1 Year upto 3 Years

Over 3 Years

Past Due and

Impaired Total

(Amounts in Millions) Cash and cash equivalents $218.17 $– $– $– $– $– $218.17Receivables: Trade 217.09 – 10.58 – – 8.79 236.46 Others 17.82 – 0.22 – – 0.32 18.36Long-term receivables: Concession receivables 816.01 – – – – – 816.01 Receivables from Meralco

on Annual Deficiency 74.29 – – – – 74.29 Other long-term receivables – – 1.8 – – 70.21 72.01AFS financial assets - Investments in government debt

securities and equity investments 29.28 – – – – – 29.28

Royalty fees chargeable to NPC 11.2 – – – – – 11.2Restricted cash deposits 0.96 – – – – – 0.96Other current assets 0.14 – – – – – 0.14Total $1,384.96 $– $12.60 $– $– $79.32 $1,476.88

As of December 31, 2008 and 2007, allowance for impairment losses pertaining to the past due and impaired receivables of EDC amounted to $41.3 million and $79.3 million, respectively (see Notes 8 and 13).

Credit Quality of Neither Past Due Nor Impaired Financial Assets. The evaluation of the credit quality of First Gen Group’s financial assets considers the ability of the counterparty to settle their obligation and payment history of the counterparties.


Financial assets are classified as high grade if the counterparties are not expected to default in settling their obligations, thus, credit risk exposure is minimal. These counterparties normally include banks, related parties and customers who pay on or before due date. Financial assets are classified as standard grade if the counterparties settle their obligations to First Gen Group with tolerable delays.

As of December 31, 2008, financial assets categorized as neither past due nor impaired are viewed by management as high grade considering the collectibility of the receivables and the credit history of the counterparties.

Credit Concentration Risk The Parent Company, through its operating subsidiaries FGP and FGPC, earns substantially all of its revenue from Meralco. Meralco is committed to pay for the capacity and energy generated by the San Lorenzo and Santa Rita power plants under the existing long-term PPAs which are due to expire in September 2027 and August 2025, respectively. While the PPAs provide for the mechanisms 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 Parent Company, FGP and FGPC to ensure that the pass-through mechanisms, as provided for in their respective PPAs, are followed.

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 significantly affect EDC’s business operations. As a matter of practice, EDC monitors closely its collection with NPC and charges interest on delayed payments following the provision in the respective SSAs and PPAs.

Under the current regulatory regime, the generation rates charged by FGP and FGPC to Meralco are 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 a maximum exposure equal to the carrying amounts of the receivables from Meralco, in the case of FGP 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 as of December 31, 2008 and 2007:

2008 2007 Trade receivables from: Meralco $60,765 $118,687 NPC 97,864 96,279 158,629 214,966 Long-term receivables: Concession receivables 674,471 816,006 Receivables from Meralco on Annual Deficiency 29,288 74,295 Other long-term receivables 17,253 – 721,012 890,301 Royalty fees chargeable to NPC 2,568 11,217 Total credit concentration risk $882,209 $1,116,484

Receivables $176,815 $245,710 Long-term receivables 723,580 903,315 Total receivables $900,395 $1,149,025

Credit concentration percentage 98.0% 97.2%

Liquidity Risk First Gen Group’s exposure to liquidity risk refers to the lack of funding needed to finance its growth and capital expenditures, service its maturing loan obligations in a timely fashion, and meet its working capital requirements. To manage this exposure, First Gen Group maintains its internally generated funds and prudently manages the proceeds obtained from fund raising in the debt and equity markets. On a regular basis, First Gen Group’s Treasury Department monitors the available cash balances by preparing cash position reports. First Gen Group 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 certain banking institutions. FGP and FGPC, in particular, maintain a Debt Service Reserve Account to sustain the debt service requirements for the next payment period. As part of its liquidity risk management, First Gen Group regularly evaluates its projected and actual cash flows. It also continuously assesses the financial market conditions for opportunities to pursue fund raising activities.


As of December 31, 2008, 35.1% of First Gen Group’s debt will mature in less than a year based on the carrying value of borrowings reflected in the consolidated financial statements.

The tables below summarize the maturity profile of First Gen Group’s financial liabilities as of December 31, 2008 and 2007 based on the contractual undiscounted payments:

2008

On

DemandLess than3 Months

3 to 12Months 1 to 5 Years 5 Years Total

Loans payable $– $41,970 $164,326 $– $– $206,296 Accounts payable and accrued expenses* 67,473 81,096 – – – 148,569Due to stockholders and affiliates 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 – 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 – – 2,423 Total liabilities carried at amortized cost 74,529 207,147 791,110 1,300,480 579,190 2,952,456Liabilities 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 47,103 130,267 Total 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

2007

On

DemandLess than3 Months

3 to 12Months 1 to 5 Years 5 Years Total

Loans payable $– $106,649 $358,432 $– $– $465,081Accounts payable and accrued expenses* 126,550 52,116 16,849 – – 195,515Due to stockholders and affiliates 7,956 – – – – 7,956Bonds payable – 7,128 7,050 147,625 – 161,803Long-term debt – 201,506 253,437 1,291,254 115,718 1,861,915Obligations to Gas Sellers – 11,494 32,775 26,728 – 70,997Royalty fees payable – 7,396 3,622 36,301 – 47,319Deferred payment facility with PSALM – – 16,654 83,271 – 99,925Obligations to power plant contractors – 1,604 4,813 2,423 – 8,840 Total liabilities carried at amortized cost 134,506 387,893 693,632 1,587,602 115,718 2,919,351Derivative contract receipts – – (2,214) (5,824) – (8,038)Derivative contract payments – – 2,458 7,083 – 9,541 Total financial liability accounted for as

cash flow hedges – – 244 1,259 – 1,503 $134,506 $387,893 $693,876 $1,588,861 $115,718 $2,920,854*Excluding output VAT, local and other taxes and payables to government agencies

Capital Management The primary objective of First Gen Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business, comply with its financial loan covenants and maximize shareholder value.

First Gen Group manages its capital structure and makes adjustments to it, in light of changes in business and economic conditions. To maintain or adjust the capital structure, First Gen Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares (see Note 27). No changes were made in the objectives, policies or processes during the years ended December 31, 2008, 2007 and 2006.


First Gen Group monitors capital using a debt-to-equity ratio, which is total debt divided by total debt plus total equity. Total equity includes the equity attributable to the equity holders of the parent and minority interests. First Gen Group’s practice is to keep the debt-to-equity ratio lower than 75:25.

2008 2007 Loans payable $200,461 $442,944 Accounts payable and other liabilities* 297,736 350,330 Bonds payable 362,978 119,502 Long-term debt 1,591,386 1,639,740 Obligations to Gas Sellers 36,696 66,335 Royalty fees payable 35,528 44,507 Deferred payment facility with PSALM 61,288 69,813 Obligations to power plant contractors 2,354 8,581 Total debt $2,588,427 $2,741,752 * Excluding deferred tax liabilities and derivative liabilities

2008 2007 Equity attributable to the equity holders of the Parent $458,660 $660,861 Minority interests 559,751 688,720 Total equity $1,018,411 $1,349,581

Total debt and equity $3,606,838 $4,091,333

Debt-to-equity ratio 72:28 67:33

Certain of First Gen Group’s subsidiaries are obligated to perform certain covenants with respect to maintaining specified debt-to-equity and minimum debt-service-coverage ratios, as set forth in their respective agreements with the creditors. As of December 31, 2008 and 2007, First Gen Group is in compliance with those covenants.

35. Financial Instruments

Set out below is a comparison by category of the carrying values and fair values of First Gen Group’s financial instruments as at December 31, 2008 and 2007 that are carried in the consolidated financial statements:

2008 2007 Carrying Value Fair Value Carrying Value Fair ValueFinancial Assets Financial assets at FVPL - Derivative assets* $13,657 $13,657 $– $–Loans and receivables: Cash and cash equivalents 229,647 229,647 $218,172 $218,172 Receivables: Trade 161,494 161,494 227,353 227,353 Others 15,321 15,321 18,357 18,357 Long-term receivables: Concession receivables 674,471 651,565 816,006 839,242 Receivables from Meralco on Annual Deficiency 29,288 29,009 74,295 74,582 Other long-term receivables 17,253 17,253 1,797 1,797 Advances to a minority shareholder 104,030 101,446 – – Royalty fees chargeable to NPC 2,568 2,568 11,217 11,217 Restricted cash deposits 856 856 962 962 Other current assets 152 152 139 139 Total loans and receivables 1,235,080 1,209,311 1,368,298 1,391,821AFS financial assets: Investments in government debt securities 14,194 14,194 28,437 28,437 Investments in quoted equity instruments 284 284 394 394 Investments in proprietary membership shares 508 508 445 445 Investments in unquoted equity instruments 2 2 2 2 Total AFS financial assets 14,988 14,988 29,278 29,278 $1,263,725 $1,237,956 $1,397,576 $1,421,099


2008 2007 Carrying Value Fair Value Carrying Value Fair ValueFinancial Liabilities Financial liabilities at FVPL - Derivative liabilities $1,952 $1,952 $– $–Financial liabilities carried at amortized cost: Loans payable 200,461 200,461 442,944 442,944 Accounts payable and accrued expenses** 148,569 148,569 195,515 195,515 Due to stockholders and affiliates 7,056 7,056 7,956 7,956 Bonds payable 362,978 218,556 119,502 140,120 Long-term debt 1,591,386 1,659,007 1,639,740 1,644,857 Obligation to Gas Sellers 36,696 36,996 66,335 66,988 Deferred payment facility with PSALM 61,288 70,659 69,813 90,222 Royalty fees payable 35,528 35,528 44,507 50,306 Obligations to power plant contractors 2,354 2,354 8,581 8,581 Total financial liabilities at amortized cost 2,446,316 2,379,186 2,594,893 2,647,489Financial liability accounted for as cash flow hedges - Derivative liabilities 59,051 59,051 1,315 1,315 $2,507,319 $2,440,189 $2,596,208 $2,648,804** 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

The fair values of cash and cash equivalents, current portion of receivables, restricted cash deposits, other current assets, loans payable, accounts payable and accrued expenses, due to stockholders and affiliates and obligations to power plant contractors approximate the carrying values at balance sheet date, due to the short-term maturities of the transactions.

The fair value of concession receivables was determined by discounting future cash flows using the prevailing peso risk free interest rates as of December 31, 2008 and 2007 ranging from 5.6260% to 11.1950% and 4.2200% to 8.4270%, respectively.

The fair value of advances to a minority shareholder was determined by discounting future cash flows using the prevailing LIBOR interest rates as of December 31, 2008 ranging from 1.5562% to 2.7150%.

The fair values of AFS financial assets are based on quoted market prices as at balance sheet date. For equity instruments that are not quoted, the investments are carried at cost less allowance for impairment losses due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value.

The fair values of loans payable, long-term debt, obligations to Gas Sellers and royalty fees payable were computed by discounting the instruments’ expected future cash flows using the prevailing credit adjusted LIBOR interest rates, ranging from 0.4365 to 2.76% and 2.9023 to 3.59235% on December 31, 2008 and 2007, respectively.

The fair value of deferred payment facility with PSALM was computed by discounting the facility’s expected future cash flows using the prevailing credit adjusted Philippine Government Zero Coupon Yield interest rates on December 31, 2008 and 2007 ranging from 5.82% to 6.71% and 4.51% to 7.40%, respectively.

The fair value of the Peso Bonds payable was computed by discounting the bonds’ expected future cash flows using the prevailing credit adjusted PDEx interest rates for the Peso Bonds on December 31, 2008 and 2007 ranging from 5.38% to 6.5920% and 4.51% to 7.40%, respectively. The fair value of the CBs are computed using the U.S. Zero-rate government bond for the Convertible Bond ranging from 0.0476% to 1.565% in 2008.

The fair value of freestanding derivative assets and liabilities are based on counterparty valuation. The fair value of embedded derivatives are based no valuation technique which makes use of market observable inputs.


Derivative Financial Instruments The table below shows the fair value of First Gen Group’s outstanding derivative financial instruments, reported as assets or liabilities, together with their notional amounts as of December 31, 2008 and 2007 (amounts in millions). The notional amount is the basis upon which changes in the value of derivatives are measured.

2008 2007

Derivative

AssetsDerivativeLiabilities

Notional Amount

Derivative Liabilities

NotionalAmount

Derivatives Designated as Accounting Hedges Freestanding derivatives - Interest rate swaps $– $59.1 $481.8 $1.3 $33.5Derivatives not Designated as Accounting

Hedges Freestanding derivatives: Range bonus forwards 12.9 – ¥8,000.0 – – Currency forwards – 1.1 $100.0 – –Embedded derivatives: Multiple derivatives on CBs – 0.8 $260.0 – – Currency options* 0.7 – €22.0 – –Total derivatives $13.6 $61.0 $1.3

Presented as: Current $12.9 $1.1 $– Noncurrent 0.7 59.9 1.3 * Included under “Other noncurrent assets” in the consolidated balance sheet

Embedded Derivatives. The Company has financial and nonfinancial contracts with derivatives embedded in them. These embedded derivatives have the effect that some of the cash flows of the financial and nonfinancial contracts vary in a similar way to a freestanding derivative.

Embedded Currency Options. As of December 31, 2008, FG Hydro has embedded currency options in its PRUP Contract with Andritz Hydro GmbH (Contractor) (see Note 36l). Under the PRUP Contract, FG Hydro has the option to pay the Contractor in European Euro (Euro) or in U.S. Dollar at a strike rate of €1.4691 to $1.00 for the original contract and €1.5599 to $1.00 for the contract options availed during the year. The fair value of the outstanding embedded currency option on the remaining unpaid contract price of €22.0 million as of December 31, 2008 amounted to a gain of $0.7 million (P=34.9 million). The embedded currency option will mature on various dates until December 2010 or upon full payment and completion of the related host contract.

The fair value of derivative asset pertaining to the embedded currency options in the PRUP Contract 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 both currencies prevailing at valuation period and historical volatility rates. As of December 31, 2008, the spot price used is $1.3951 to €1.00. The prevailing USD risk free rates used range from 0.0489% to 0.7736% and the Euro risk free interest rates range from 1.7035% to 1.7630%.

The table below summarizes the net movements in the fair values of the embedded currency options as of December 31, 2008:

Net changes in fair value during the year $803 Settled during the year (117)Foreign exchange differences 48 Balance at end of year $734

The net changes in fair value during the year were taken into “Mark-to-market gain on derivatives - net” account in the consolidated statement of income.

Embedded Derivative on CBs. As discussed in Note 21, at inception, multiple embedded derivatives in the CBs were bifurcated. The fair value of the embedded equity conversion, call and put option of the CBs issued by the Parent Company was computed using the indirect method of valuing multiple embedded derivatives. This valuation method compares the fair value of the option-free bond against the fair value of the bond as quoted in the market. The difference of the fair values is assigned as the value of the embedded derivatives. As of December 31, 2008, the mark-to-market value of the embedded derivative amounted to a loss of $0.8 million, which was arrived at after computing for the fair value of the option-free bond using credit adjusted U.S. Dollar risk-fee rates ranging from 0.0489% to 1.5650% and comparing it with the current fair value of the bonds.


The table below summarizes the net movements in the fair values of the embedded derivatives as of December 31, 2008:

Amount Fair value at inception ($13,000)Net changes in fair value during the year 12,190 Balance at end of year ($810)

The net changes in fair value during the year were taken to “Mark-to-market gain on derivatives - net” account in the consolidated statement of income.

Prepayment Options. Embedded prepayment (call) option of EDC was bifurcated from its $75.0 million Standard Chartered term loan which was scheduled to mature in August 2009. In 2007, the embedded prepayment option on the $75.0 million Standard Chartered loan was exercised by EDC. The amount of mark-to-market movement charged to the consolidated statement of income amounted to $0.1 million for the year ended December 31, 2007.

Freestanding Derivatives. EDC entered into derivative transactions to match the foreign currency exposure arising from its foreign currency-denominated loan contracts, particularly the maturing Miyazawa 1 loan. As of December 31, 2008, EDC has positions in the following types of freestanding derivatives, namely: (i) Range Bonus Forward Contracts and (ii) Foreign Currency Forward Contracts, to protect itself against foreign currency risk arising from the changes in the exchange rate of the Philippine peso in relation to the foreign currency.

Range Bonus Forward Contracts. A range bonus forward contract is an agreement that provides protection against unfavorable exchange rate movement by setting an agreed rate at which the Company can exchange one currency for another. At the same time, it provides that for each day during the fixing period that the spot rate is outside the predetermined range, the Company will accrue a premium based on a specified formula, which is payable at maturity.

On April 30, 2008 and May 2, 2008, EDC entered into two range bonus forward contracts covering ¥5.0 billion and ¥3.0 billion of its Miyazawa 1 loans, respectively. The terms of the contracts allow EDC to purchase from the counterparty at maturity date, ¥8.0 billion in exchange of $72.7 million based on the agreed forward rate of ¥110. At the same time, it provides that EDC shall pay a premium equal to 13.4% x $47.8 million x n/N (for the ¥5.0 billion) and 13.06% x $28.6 million x n/N (for the ¥3.0 billion), where n is equal to the number of business days that the spot rate is outside the range and N is equal to the total number of Tokyo business days, for each day that the spot rate is outside the ¥96-¥106 and ¥97-¥107 predetermined ranges, respectively. The Range Bonus Forward Contracts will mature on May 28, 2009.

As of December 31, 2008, the aggregate mark-to-market value of the range bonus forward contracts amounts to a gain of $12.9 million. The total accrued premium payable for the said ¥5.0 billion and ¥3.0 billion Miyazawa 1 loans under the 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) and 86 days (¥3.0 billion), that the spot rate is outside the predetermined ranges. The said amounts are included under “Accounts payable and accrued expenses” account in the 2008 consolidated balance sheet.

Foreign Currency Forward Contracts. Foreign currency forward contracts are contractual agreements to buy or sell a foreign currency at an agreed rate on a future date. These are contracts that are customized and transacted with a bank or financial institution.

During the year, EDC also entered into nine Foreign Currency Forward Contracts with various counterparty banks. EDC has outstanding deliverable buy U.S. Dollar and sell Philippine Peso forward contracts. As of December 31, 2008, the foreign currency forward contracts of EDC have an aggregate notional amount of $100.0 million. The weighted average forward rate of the outstanding forward exchange contracts is P=48.71 to $1.00. These forward contracts will mature on May 28, 2009. As of December 31, 2008, the mark-to-market loss recognized from these contracts amounted to $1.1 million.

The net movement in fair value changes of EDC’s freestanding derivative transactions follows:

Net changes in fair value during the year $21,591 Foreign exchange differences (9,810)Balance at end of year $11,781

Presented as: Derivative asset $12,923 Derivative liability 1,142


The settlement date for the range bonus forwards and foreign currency forwards will coincide on May 28, 2009.

The net changes in the fair value of EDC’s derivative instruments during the year were taken into “Mark-to-market gain on derivatives - net” account in the consolidated statement of income, net of accrual of premium on the range bonus forwards amounting to $4.0 million.

Derivatives under Cash Flow Hedge First Gen Group has interest rate swaps accounted for as cash flow hedges. Under a cash flow hedge, the effective portion of changes in fair value of the hedging instrument is recognized as cumulative translation adjustments in equity until the hedged item affects earnings.

Cash Flow Hedge - FGPC. On November 14, 2008, FGPC has interest rate swap agreements with the hedge providers namely: Société Générale (Singapore Branch), Bayerische Hypo-und Vereinsbank AG (Hong Kong Branch), Calyon and Standard Chartered Bank, to hedge the variability of interest payments for up to 91% of the combined Covered and Uncovered Facilities of FGPC. Under the 12½-year interest rate swap agreement for the Covered Facility, FGPC pays a fixed rate of 4.4025% and receives a floating rate of U.S. LIBOR flat on notional amount of $312.0 million simultaneous with interest payments on the loan, which is every May and November. The original term loan was priced against the benchmark six-month LIBOR plus 325 basis points. The notional amount of the interest rate swap is amortizing based on the loan repayment schedule. The interest rate swap agreement will mature on May 10, 2021.

As to the Uncovered Facility, FGPC has an 8½-year interest rate swap agreement and pays a fixed rate of 4.0625% and receives a floating rate of U.S. LIBOR flat on the 75% of the notional amount of US$188.0 million simultaneous with interest payments on the loan, which is every May and November. The original term loan was priced against the benchmark six-month LIBOR plus spread ranging from 350 basis points (for 1st to 5th year), 375 basis points (for 6th to 7 th year) and 390 basis points (for 8th to 10th year). The notional amount of the interest rate swap is amortizing based on the loan repayment schedule. The interest rate swap agreement will mature on May 10, 2017.

On the same date, FGPC designated the interest rate swaps as hedging instruments to hedge the variability in the cash flows involving the Covered and Uncovered Facilities, which is attributable to the movements of interest rates. As of December 31, 2008, the fair value of the interest rate swap that was deferred to cumulative translation adjustments amounted to $39.3 million.

Cash Flow Hedge - FGP. As of December 31, 2008 and 2007, FGP has an interest rate swap agreement with ABN AMRO Bank NV to hedge half of its floating rate exposure on its ECGD Facility Agreement. Under the interest 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 interest payments on the loan, which is every June and December. The original term loan was priced against the benchmark three to six month LIBOR plus 215 basis points. The notional amount of interest rate swap is amortizing based on the loan repayment schedule. The interest rate swap agreement will mature in December 2014.

FGP designated the interest rate swap as a hedging instrument to hedge the variability in the cash flows involving half of the floating rate loan from the ECGD Facility Agreement, which is attributable to the movements of interest rates. As of December 31, 2008 and 2007, the fair value of the interest rate swap that was deferred to cumulative translation adjustments amounted to $2.05 million and $1.3 million, respectively.

There was no ineffective portion recognized in the consolidated statement of income during the year.

The outstanding aggregate notional amount of the interest rate swaps designated as hedges and the related mark-to-market losses as of December 31, 2008 and 2007 are as follows:

2008 2007 Notional amount $481,750 $33,541 Mark-to-market losses 59,051 1,315

The net movements in fair value changes of derivative transactions are as follows:

2008 2007 Fair value at beginning of year ($1,315) ($387)Fair value change taken into equity during the year (58,182) (938)Fair value change realized during the year 446 10 Fair value at end of year (59,051) (1,315)Deferred tax effect on cash flow hedges 17,715 – Fair value deferred into equity ($41,336) ($1,315)


Fair value changes during the year are recorded in equity, net of deferred income tax under the “Cumulative translation adjustments” account in the consolidated balance sheet. The fair value change realized during the year was taken into “Other income” account in the consolidated statement of income. This pertains to the net difference between the fixed interest paid/accrued and the floating interest received/accrued by First Gen Group on the interest rate swap agreements as at balance sheet date.

Reconciliation of Net Fair Value Changes on Derivatives The table below summarizes the mark to market gain (loss) on First Gen Group’s derivative instruments recognized in the consolidated statement of income:

2008 2007 Freestanding derivatives: Range bonus forwards $22,825 $– Foreign currency forwards (1,234) – 21,591 – Embedded derivatives: Currency options 803 – Multiple derivatives on CBs 12,190 – Prepayment option – 108 12,993 108 Total* $34,584 $108 * Presented in the income statement as mark to market gain on derivatives, net of the realized loss

on the range bonus forwards amounting to $3,983 36. Commitments and Contingencies

a. Power Purchase Agreements

FGP and FGPC FGP and FGPC each have an existing PPA with Meralco, the largest power distribution company operating in the island of Luzon and in the Philippines and the sole customer of both projects. Under the PPA, Meralco will purchase in each contract year from the start of commercial operations, a minimum number of kWh of the net electrical output of FGP and FGPC 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 respective PPAs. The negotiations resulted in a package of concessions including the assumption of FGP and FGPC of community taxes at current tax rate, while conditional concessions include increasing the discounts on excess generation, payment of higher penalties for non-performance up to a capped amount, recovery of accumulated deemed delivered energy until 2011 resulting in the non-charging of Meralco of excess generation charge for such energy delivered beyond the contracted amount but within a 90% capacity quota. The amended terms under the respective PPAs of FGP and FGPC were approved by the Energy Regulatory Commission (ERC) on May 31, 2006.

Under the respective PPAs of FGP and FGPC, the fixed capacity fees and fixed operating and maintenance fees are recognized monthly based on the actual Net Dependable Capacity (NDC) tested and proven, which is usually conducted on a semi-annual basis. Total fixed capacity fees and fixed operating and maintenance fees amounted to $288.8 million in 2008, $276.6 million in 2007 and $268.2 million in 2006. Total value of power sold to Meralco by FGP and FGPC (which already includes the fixed capacity fees and fixed operating and maintenance fees mentioned above) amounted to $1,211.1 million in 2008, $976.8 million in 2007 and $977.2 million in 2006.

FG Bukidnon On 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 a Power Supply Agreement (PSA) for the FG Bukidnon plant. Under the PSA, FG Bukidnon shall generate and deliver to CEPALCO and CEPALCO shall take, or pay for if not taken, the Available Energy for a period commencing on the commercial operations date until March 28, 2025. The terms and conditions of the PSA are still subject to the review by the ERC and the effectivity and commercial operations date of the PSA will coincide with the date of ERC approval of the agreement. The sale to CEPALCO of the plant’s output since March 29, 2005 has been governed by a MOA signed by both parties in 2005.


FG Hydro FG Hydro has existing contracts, which were transferred by NPC to FG Hydro as part of the acquisition of PAHEP/MAHEP for the supply of electric energy with several customers within the vicinity of Nueva Ecija. FG Hydro shall generate and deliver to these customers the contracted energy on a monthly basis. FG Hydro is bound to service these customers of the remainder 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 as stipulated by the ERC.

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 executed a new power supply agreement that is now pending consideration by the ERC. Until the issuance of a provisional authority for said agreement or final resolution of the application for the approval thereof, the ERC approved the extension of the TPSC on a month-to-month or on a per billing period basis.

San Jose Electric Cooperative December 25, 2008 Extended for two billing periods (or until February 25, 2009) but was no longer renewed.

Pantabangan Municipal Electric System (PAMES)

December 25, 2008 FG Hydro is presently evaluating whether it can continue to supply electricity to PAMES. In the meantime, while there is no new agreement executed between the parties yet, FG Hydro has continued to supply electricity to PAMES on a billing period-to-billing period basis.

Nueva Ecija I Electric Cooperative, Inc. (NEECO I)

December 25, 2007 A new agreement was signed by FG Hydro and NEECO 1 in December 2007 for the supply of power in the succeeding five years. The ERC has provisionally approved this agreement pending final resolution of the application for the approval thereof.

Cabanatuan Electric Corporation June 25, 2007 Not renewed

Aurora Electric Cooperative December 25, 2008 Not renewed

EDC EDC has existing PPAs with NPC for the development, construction and operation of a geothermal power plant by EDC in the service contract areas and the sale to NPC of the electrical energy generated from such geothermal power plants. The PPA provides, among others, that NPC pays EDC a base price per kWh of electricity delivered subject to inflation adjustments. The PPAs are for a period of 25 years of commercial operations and may be extended upon the request of EDC by notice of not less than 12 months prior to the end of contract period, the terms and conditions of any such extension to be agreed upon by the parties.

Details of the existing PPAs are as follows:

Contract Area Contracted Annual Energy End of Contract

Leyte-Cebu Leyte-Luzon

1,370 gigawatt-hour (GWh) 3,000 GWh

July 2021 July 2022

47 MW Mindanao I 330 GWh for the 1st year and 390 GWh for the 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 lower than 90% of the contracted annual energy.

On November 12, 1999, NPC agreed to accept from EDC a combined average annual nominated energy of 4,455 GWh for the period July 25, 1999 to July 25, 2000 for Leyte-Cebu and Leyte-Luzon PPA. However, the


combined annual nominated energy starting July 25, 2000 is currently under negotiation with NPC. The contracts are for a period of 25 years commencing in July 1996 for Leyte-Cebu and July 1997 for Leyte-Luzon.

b. Stored Energy Commitment of EDC

On various dates, EDC entered into Addendum Agreements to the PPA for Unified Leyte Project and Geothermal Resources Sales Contact (GRSC) for BacMan 2 projects with NPC where EDC agreed to credit payments made by NPC based on the minimum take-or-pay arrangements for contracted energy, against the stored energy, which represents contracted energy that NPC already paid but was not able to take. Deliveries of the stored energy are to be taken from delivery above the nominated energy for the agreed “lifting period.”

As of December 31, 2008, the commitment for stored energy follows (in GWh):

Contract Area Stored Energy Unified Leyte 4,326.6 BacMan 2 - Cawayan 437.9

c. Geothermal Service Contracts of EDC

As discussed in Note 4, by virtue of PD No. 1442, EDC entered into seven GSCs with the Philippine Government through the DOE granting EDC the right to explore, develop, and utilize the Philippines’ geothermal resource subject to sharing of net proceeds with the Philippine Government. The net proceeds is what remains after deducting from the gross proceeds the allowable recoverable costs, which include development, production and operating costs. The allowable recoverable costs shall not exceed 90% of the gross proceeds. EDC pays 60% of the net proceeds as share of the Philippine Government and retains the 40%.

The 60% share of the Philippine Government comprise royalty fees and income taxes. The royalty 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 share of the Philippine Government at P=180.0 million per year. A portion of the said payment was applied to the amortization of deferred royalty fees as of December 31, 1999 and 1998, and the balance is or will be applied to future obligations. On March 23, 2004, EDC and DOE agreed to increase the royalty payment plan from P=180.0 million per year to P=200.0 million per year starting 2004. A portion of the revised payment was applied to the amortization of the deferred royalty fees as of December 31, 2004 and 2003 and the balance will be applied to future obligations for existing EDC operating projects. However, remittances to the LGU of its 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 are shown in Note 24.

d. Steam Sales Agreements of EDC

EDC has existing SSAs for the supply of the geothermal energy currently produced by its geothermal 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 the service contract areas, except for Tongonan I Project, subject to inflation adjustments, and based on a guaranteed TOP rate at certain percentage plant factor. NPC pays EDC a base price per kWh of net generation for Tongonan I Project. The SSA is for a period of 20 to 25 years.

Details of the existing SSAs are as follows:

Contract Area Guaranteed TOP End of Contract

Tongonan I 75% plant factor June 2009

Palinpinon I 75% plant factor June 2009

Palinpinon II (covers four modular plants)

50% for the 1st year, 65% for the 2nd year, 75% for the 3rd and subsequent years

December 2018–March 2020

BacMan I 75% plant factor November 2013

BacMan II (covers two 20 MW modular plants)

50% for the 1st year, 65% for the 2nd year, 75% for the 3rd and subsequent years

March 2019 and December 2022


e. Build-Operate-Transfer (BOT) Agreements

BPPC BPPC has an existing Project Agreement with NPC. Under the Project Agreement, NPC supplies all the fuel required to generate electricity, with all electricity generated purchased by NPC. BPPC is entitled to payment of fixed capacity and operations and maintenance fees based on the nominated capacity as well as energy fees from the delivery of electric power to NPC. The Project Agreement is for a period of 15 years which runs up to July 2010 (Cooperation period). Upon expiration of the 15-year period, BPPC shall transfer to NPC all of its rights, titles and interests in the power plant complex, free from liens created by BPPC and without any compensation.

In line with the Electric Power Industry Reform Act (EPIRA)-mandated Independent Power Producers (IPP) contracts review, PSALM, NPC and BPPC executed and signed in 2005 a General Framework Agreement (GFA) that embodied the renegotiated terms and conditions of the BOT Agreement. The GFA caps at 215 MW the Bauang plant’s nominated capacity and obligates BPPC to make the P=0.01/kWh contribution to an environment fund from the effective date of the GFA up to the end of Cooperation Period. Conversely, this paves way for allowing the heat run of the Bauang plant at 8.5 MW for one hour daily, except on weekends and holidays, during extended economic shutdown and the carryover of 50% of the plant’s unutilized downtime allowance up to three years. The GFA likewise permits the pursuit of bilateral contracts for ancillary services and the excess 10MW capacity with National Transmission Corporation (TransCo) and power purchasers, respectively, under an income sharing arrangement subject to certain limitations and restrictions. The National Economic Development Authority (NEDA) approved the GFA on July 11, 2007.

Energy Conversion Agreements (ECAs) of EDC EDC entered into ECA with various international geothermal power producers (BOT Contractors) for the construction and operation of power plants in Leyte and Mindanao to convert the geothermal steam to be supplied by EDC to electricity. Under the ECA, the BOT Contractor delivers electricity to NPC on behalf of EDC.

Leyte Under 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 - Malitbog Agreement; and (c) 180 MW Power Plant - Mahanagdong Agreement, and with Ormat Inc. for the Leyte Optimization Project BOT Agreement, EDC pays the BOT Contractors monthly energy 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 on per kilowatt nominated capacity basis. The fees, except for the capital cost recovery fees, are subject to inflation adjustments.

The ECAs are for a period of ten years. The ownership of the Upper Mahiao Power Plant was transferred to EDC on June 25, 2006; Malitbog and Mahanagdong Power Plants were transferred on July 25, 2007; and the Optimization Power Plant on September 25, 2007.

Mindanao Under the ECA with Oxbow Power Corporation and Marubeni Corporation, EDC pays the BOT Contractors monthly energy efficiency fees and capacity fees and excess energy fees. Capacity fees, which include capital and fixed operating cost recovery fees and service fees, are computed on per kW nominated capacity basis. Excess energy fees are payment to BOT Contractors for energy generated on top of the nominated capacity. The fees, except for energy 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 June 2009 for Mindanao II (48.25 MW). An amendment to the Mindanao I ECA was signed on November 17, 2006, extending the contract period to June 2009 with the corresponding restructuring of the BOT fees.

The fair value of these ECAs are included in determining the fair value of the construction services accounted for under Philippine Interpretation IFRIC 12, as discussed in Note 4.

f. Engineering, Procurement and Construction (EPC) Contract

FGPC entered into a Turnkey EPC Contract (EPC Contract) with Siemens AG, Siemens Power Generation and Siemens, Inc. (collectively, “Siemens”) for the construction of the 1,000 MW Combined Cycle Power Plant (the “Santa Rita Power Plant” or “Project”).

A dispute has arisen between FGPC and Siemens in connection with its construction of FGPC’s power plant in accordance with the EPC Contract with Siemens for the construction of the Santa Rita power plant. The dispute stemmed from the delays incurred by Siemens and its subcontractors in the timely completion of the Project.


On December 12, 2006, the Arbitral Tribunal issued its Final Award, which is final and binding, incorporating all previous awards and the agreement of the parties to settle all outstanding matters between them. The issuance of the Final Award finally resolved all outstanding matters in the arbitration, and formally concluded the dispute between FGPC and Siemens.

g. Gas Sale and Purchase Agreements

FGP and FGPC each have an existing GSPA with the consortium of Shell Philippines Exploration B.V., Shell Philippines LLC, Chevron Malampaya, LLC and PNOC Exploration Corporation (collectively referred to as Gas Sellers), for the supply of natural gas in connection with the operations of the power plants. The GSPA, now on its seventh Contract Year, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to $272.1 million in 2008, $208.3 million in 2007, and $196.7 million in 2006 for FGP and $543.4 million in 2008, $422.6 million in 2007 and $397.2 million in 2006 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 a particular year up to December 25 of the immediately succeeding year), called the Take-Or-Pay Quantity (TOPQ). Thus, if the TOPQ is not consumed within a particular Contract Year, FGP and FGPC incur an “Annual Deficiency” for that Contract Year equivalent to the total volume of unused gas (i.e., the TOPQ less the actual quantity of gas consumed). FGP and FGPC are required to make payments to the Gas Sellers for such Annual Deficiency after the end of the Contract Year. After paying for Annual Deficiency gas, FGP and FGPC can, subject to the terms of the GSPA, “make-up” such Annual Deficiency by consuming the unused-but-paid-for gas (without further charge) within ten-Contract Year after the Contract Year for which the Annual Deficiency was incurred, in the order that it arose.

FGP paid certain fees to the Gas Sellers, in lieu of incurring certain Annual Deficiency payment obligations for the first Contract Year (2002) as a result of the failure to commence commercial operations of the power plant at the Start Date (July 2, 2002) in accordance with the GSPA. These fees amounted to $9.8 million and have been booked as prepaid gas, net of adjustment, in the same manner as if the fees were paid for Annual Deficiency incurred in Contract Year 2002 (see Note 18). In 2008, FGP was able to realize the full amount of prepaid gas.

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 Deficiency payments for Contract Year 2006 amounting to $3.9 million for FGP and $5.4 million for FGPC. Both FGP and FGPC disagree that such Annual Deficiency payments are due and each claimed for among others, relief due to force majeure events that affected the San Lorenzo and Santa Rita plants, respectively. FGP’s and FGPC’s position is that the power plants actually consumed more than their respective TOPQs and are entitled to make-up its Outstanding Balance of Annual Deficiency. The matter is now in arbitration under the International Chamber of Commerce Rules of Arbitration pursuant to the terms of the GSPA. The arbitral tribunal is expected to render its decision on the disputes within 2009.

The alleged Annual Deficiency for contract year 2006 is presented as part of “Obligations to Gas Sellers” account in the consolidated balance sheet and the corresponding receivables from Meralco is presented as part of “Long-term receivables” account in the consolidated balance sheet.

h. Lubricating Oil Supply Agreement

BPPC entered into a supply contract with Pilipinas Shell Petroleum Corporation, whereby the latter will supply lubricating oil for a period of 15 years until 2010 at the agreed price indicated in the contract. The price is subject to adjustments twice a year based on various conditions, 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 respective power plants. As stated in the respective O&M Agreements of FGP and FGPC, SPO is responsible for maintaining adequate inventory of spare parts, accessories and consumables. SPO is also responsible for replacing and repairing the necessary parts and equipment of the power plants to ensure the proper operation and maintenance of the power plants to meet the contractual commitments of FGP and FGPC under their respective PPAs and in accordance with the Good Utility Practice. Total operations and maintenance costs charged to the consolidated statement of income amounted to $36.8 million in 2008, $34.1 million in 2007 and $29.3 million in 2006. In 2007, prepaid major spare parts amounting to $50.8 million were reclassified to “Property, plant and equipment” account as a result of the scheduled maintenance outage of Santa Rita and San Lorenzo power plants. As of December 31, 2008 and


2007, certain O&M fees amounting to $43.2 million and $19.7 million, respectively, which relate to major spare parts that will be replaced during the scheduled maintenance outage, were presented as part of “Other noncurrent assets” account in the consolidated balance sheet (see Note 18).

Based on the current operating regime of both plants, it is estimated that the Santa Rita and San Lorenzo O&M Agreements will expire around second quarter of 2010. FGP and FGPC are currently considering the options for the plants’ operation and maintenance after expiry of their respective O&M agreements with SPO.

FG Hydro 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 actual cubic 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 the Trust Fund is payable in 24 monthly payments starting November 2006 and is billed by NIA in addition to the monthly service fee. The Trust Fund has been fully funded as of October 2008.

The O&M Agreement is effective for a period of 25 years commencing on November 18, 2006 and renewable for another 25 years under the terms and conditions as may be mutually agreed upon by both parties.

Total service fees incurred, including the Trust Fund amortization, amounted to $2.6 million (P=113.3 million) and $3.1 million (P=146.1 million) in 2008 and 2007, respectively, and are included under “Power plant operations and maintenance” account in the consolidated statement of income.

j. Substation Interconnection Agreement

FGPC has an agreement with Meralco and NPC for: (a) the construction of substation upgrades at the NPC substation in Calaca and the donation of such substation upgrades to NPC; (b) the construction of a 35-kilometer transmission line from the power plant to the NPC substation in Calaca and subsequent donation of such transmission line to NPC; (c) the interconnection of the power plant to the NPC Grid System; and (d) the receipt and delivery of energy and capacity from the power plant to Meralco’s point of receipt.

As of December 31, 2008, FGPC is still in the process of transferring the substation upgrades in Calaca, as well as the 230 kilovolts (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 the delivery and transmission of all energy and capacity from FGP’s power plant to Meralco’s point of receipt.

l. PRUP Contract

On January 24, 2008, FG Hydro signed the Letter of Acceptance (LA) for the PRUP with Andritz Hydro GmbH, an Austrian company.

The contract provides that the Contractor will undertake the engineering, procurement, installation, testing and commissioning of the PRUP. The technical scope of the PRUP agreed upon 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 contract provides that payments to the Contractor are made in accordance with the Milestone Schedule as provided in the Contract.


FG Hydro has the option to make any payments to the Contractor in U.S. Dollar, at an exchange rate fixed by reference to the European Central Bank fixing rate for converting Euro to U.S. Dollar as at the date of the LA, plus a premium of $0.0028 per Euro. Similarly, with respect to the CO’s, FG Hydro also has the option to make any payments to the Contractor in U.S. Dollar, at an exchange rate fixed by reference to the European Central Bank fixing rate for converting Euro to U.S. Dollar as at the date of the relevant option notice, plus a premium of $0.0028 per Euro.

Takeover of the refurbished and upgraded plant machinery and equipment is scheduled to take place in December 2009 for the first unit and in December 2010 for the second unit.

m. Franchise

The Parent Company, through FGHC, has a franchise granted by the 11th Congress of the Philippines through Republic Act (RA) No. 8997 to construct, install, own, operate and maintain a natural gas pipeline system for the transportation and distribution of the natural gas throughout the island of Luzon (the “Franchise”). The Franchise is for a term of 25 years until February 25, 2026. FGHC must commence the exercise of any privileges granted under the Franchise within five years (until February 25, 2006) from its effectivity, otherwise, the Franchise shall be deemed revoked. As of March 30, 2009, FGHC, among others, has secured ECCs on two pipeline projects, namely the Calabarzon Pipeline and the Batangas Natural Gas Distribution Pipeline. The ECCs were obtained on May 14, 2004 and August 1, 2005, respectively, and FGHC, through its subsidiary FG Pipeline, has undertaken substantial pre-engineering works and design and commenced preparatory works for the right-of-way acquisition activities. The ECCs are valid for a period of five years.

n. Contingencies

FGPC FGPC was assessed by the BIR on July 19, 2004 for deficiency income tax for taxable years 2001 and 2000. FGPC filed its Protest Letter to the BIR on October 5, 2004. On account of the BIR’s failure to act on FGPC’s Protest within the prescribed period, FGPC filed with the Court of Tax Appeals (CTA) on June 30, 2005 a Petition against the Final Assessment Notices and Formal Letters of Demand issued by the BIR. On February 20, 2008, the CTA granted FGPC’s Motion for Suspension of Collection of Tax until the case is resolved with finality. As of March 30, 2009, the court proceedings are still on-going with the CTA. Management believes that the resolution of this assessment will not materially affect First Gen Group’s consolidated financial statements.

On June 25, 2003, FGPC received various Notices of Assessment and Tax Bills dated April 15 and 21, 2003 from the Provincial Government of Batangas, through the Office of the Provincial 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 the Provincial Local Board of Assessment Appeals (LBAA) and filed a Petition on August 13, 2003, praying for the following: (1) that the Notices of Assessment and Tax Bills issued by the Provincial Assessor be recalled and revoked; and (2) that the Provincial Assessor drop from the Assessment Roll the 230 KV transmission lines from Sta. Rita to Calaca in accordance with Section 206 of the LGC. FGPC argued that the T-Line does not constitute real property for RPT purposes, and even assuming that the T-Line is regarded as real property, FGPC is still not liable for RPT as it is NPC/TransCo, a government-owned and -controlled corporation (GOCC) engaged in the generation and/or transmission of electric 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 and which 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 from collecting the RPT pending the decision of the LBAA. Despite the injunction, the LBAA issued an Order dated September 22, 2005 requiring FGPC to pay the RPT within 15 days from receipt of the Order. On October 22, 2005, FGPC filed an appeal before the Central Board of Assessment Appeals (CBAA) assailing the validity of the LBAA order. In a Resolution rendered on December 12, 2006, the CBAA set aside the LBAA Order and remanded the case to the LBAA. The LBAA was directed to proceed with the case on the merits without requiring FGPC to first pay the RPT on the questioned assessment.

On May 23, 2007, the Province filed with the Court of Appeals (“CA”) a Petition for Review of the CBAA Resolution. The CA dismissed the petition on June 12, 2007; however, it issued another Resolution dated August 14, 2007 reinstating the petition filed by the Province. On November 23, 2007, the CA ordered the parties to file simultaneous Memoranda. FGPC filed its Memorandum on January 15, 2008. As of March 30, 2009, the LBAA case is still pending and the injunction issued by the RTC is valid.

In connection with the prohibition case pending before the Regional Trial Court (Branch 7) of Batangas City which previously issued the preliminary injunction, the Province filed on March 17, 2006 an Urgent Manifestation and


Motion requesting the court to order the parties to submit memoranda on whether or not the Petition for Prohibition pending before the court is proper considering the availability of the remedy of appeal to the CBAA. The Court denied the Urgent Manifestation and Motion, and is presently awaiting the finality of the issues on the validity of the RPT assessment on the T-Line.

BPPC There are ongoing cases involving the assessment of Real Property Tax (RPT) and franchise tax by the local government. BPPC believes that under its BOT Agreement with NPC, any RPT and 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 individual tax declarations until the Province of La Union (the “LGU”) revoked exemption and issued 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, they filed with the LBAA a petition to declare exempt the equipment and machinery at the Bauang Plant but was ruled unfavorably. The matter was brought up to the CBAA where BPPC intervened. The CBAA affirmed the LBAA’s decision. Consequently, NPC and BPPC elevated their respective cases to the Court of Tax Appeals (CTA). When both appeals were denied by the CTA in February 2006, NPC appealed the decision directly to the 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 on September 11, 2006 a Petition for Review on Certiorari reiterating NPC’s exemption from RPT.

The Petition with the SC filed by BPPC was denied in November 2006. BPPC thereafter filed succeeding motions that were similarly denied in April 2007 and July 2007 while the NPC case remains pending with the SC. This paved way for the filing by the LGU in August 2007 of a motion for an SC dismissal of the NPC-filed case.

To protect the plant assets from any untoward action by local government, BPPC and NPC obtained in May 2001 a Writ of Preliminary Injunction against the collection of real property taxes by 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, the LGU issued in December 2007 a Final Notice of Delinquency and a subsequent Warrant of Levy for the unpaid RPT on the Bauang Plant equipment. Similarly, the LGU attempted to collect the arrears on the RPT on buildings and improvements, which NPC stopped paying since 2003, and included these assets in the levy. The inability of NPC to settle the amounts due within the grace period resulted to the public auction of the assets on February 1, 2008.

In the absence of a bidder at auction proper, the alleged tax-delinquent assets were forfeited and deemed sold to the LGU. Nevertheless, Section 263 of RA 7160 also known as the Local Government Code of 1991, accords the taxpayer the right to redeem the 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 the Province in contempt for disregarding a valid injunction for proceeding with tax collection pending final resolution of both NPC and BPPC cases in the Supreme Court. The contempt case remains pending at the Bauang Regional Trial Court. In December 2008, the court required both parties to file their respective memoranda. BPPC complied with the order on January 5, 2009. The Court has not issued a decision as of March 27, 2009.

In parallel, the Solicitor General (SolGen) filed with the SC in July 2008 a Supplemental Petition to elevate all NPC real property tax cases for en-banc decision and seek nullification of the Bauang Plant auction. In the absence of any action from the SC, the SolGen and NPC filed in November 2008 an urgent motion for the issuance of a Temporary Restraining Order (TRO) against any action by the LGU to take ownership and possession of the plant. On January 30, 2009, the SC promulgated its decision to the NPC-filed case upholding the taxability of the machinery and equipment of the Bauang Plant.

For failure to redeem the plant at expiry of redemption period, the LGU on February 10, 2009 consolidated title to and ownership of the plant assets by issuing new tax declarations in its name. Subsequently, NPC offered a settlement package for the P=1.87 billion real property tax arrears which the LGU accepted. A Memorandum of Agreement (MOA) is currently prepared in this regard.

ii) The second case was filed by NPC, for itself and on behalf of BPPC, following issuance of a revised assessment of RPT on BPPC’s machinery and equipment on July 15, 2003 by the Municipal Assessor of the Municipality of Bauang, La Union. Under the said revised Assessment, 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 on privately-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 (P=489.0 million). The case remains pending with the LBAA of the Province of La Union.

In any event, BPPC believes that NPC shall be directly responsible for the payment of all RPT that may be assessed on machinery and equipment at Bauang Plant, pursuant to the terms of the Project Agreement which specifically provides that NPC shall pay all taxes and assessments in respect of the site, machinery and equipment and improvements thereon.

To date, the potential maximum tax liability on BPPC’s machinery and equipment for the period from 1995 to 2008 is about $24.1 million (P=1.1 billion), based on the maximum 80% assessment level imposable on privately-owned entities and at a tax rate of 2%. In addition, maximum interest on the tax liability (2% per month not exceeding 36 months) amounts to $16.5 million (P=782.5 million).

While BPPC maintains its position that, pursuant to the terms of the BOT Agreement, it is NPC that is ultimately responsible for the payment of all real property taxes related to the power plant, and that BPPC has the right of recourse against NPC for whatever amount of RPT it may be required to pay, BPPC recognized as of December 31, 2008 a “Provision for real property taxes” amounting to $41.7 million (including interest) in accordance with PAS 37, “Provisions, Contingent Liabilities and Contingent Assets.” Correspondingly, BPPC also recognized a “Receivable from NPC” for the same amount representing its claim for reimbursement for real property taxes. The combined effect of the provision and the claim for reimbursement is presented on a net basis in BPPC’s statement of income.

Movements of provision for real property taxes:

2008 2007


Balance at beginning of year $44.36 $34.64 Provision during the year 3.02 3.33 Translation adjustment (5.70) 6.39 Balance at end of year $41.68 $44.36

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 dated August 5, 2005 for RPT on BPPC’s buildings and improvements from 2003 to August 2005 amounting to $0.09 million (P=4.2 million). The case is pending with the LBAA of the Province of La Union. NPC paid all RPT on buildings and improvements directly to the local government from 1995 until 2003, when it stopped payment of the tax and claimed an exemption under the Local Government Code.

Despite the pendency of the case at the LBAA, these properties were included in the February 1, 2008 auction by the LGU.

To date, the potential maximum tax liability on BPPC’s buildings and improvements for the year ended December 31, 2008 is about $1.2 million (P=54.7 million), including interest and alleged back-taxes dating back from 1995 to 2002.

iv) BPPC also filed a Petition for Certiorari and Prohibition in September 2004, to contest an assessment 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 a public utility which is required by law to obtain a legislative franchise before operating, thus is not subject to franchise taxes. The case remains pending before the RTC of Bauang, La Union.

Both NPC and BPPC believe that they are not subject to pay franchise tax to the local government. In any case, BPPC believes that the Project Agreement with NPC allows BPPC 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 Project Agreement.

As of December 31, 2008 and 2007, there are no provisions for probable losses arising from legal contingencies recognized in the consolidated financial statements.

o. Lease Commitments

First Gen Group has a noncancelable lease agreement with FPRC on its occupied office space. The term of the lease is for a period of five years retroactive to August 1, 2003 or upon occupancy of the leased premises,


whichever is earlier, and automatically expires on July 31, 2007. The lease agreement includes a clause to enable upward revision of the rental charged at a rate agreed-upon by First Gen Group and FPRC at the end of each year. The lease agreement with FPRC was renewed for one year from August 1, 2008 to July 31, 2009.

FGPC has a noncancelable annual offshore lease agreement with the DENR for the lease of a parcel of land in Sta. Rita, Batangas where the power plant complex is located. The term of the 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 be appraised 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 that such annual rental cannot be less than $0.05 million (P=3.0 million).

FG Bukidnon has a noncancelable lease agreement with PSALM on the land occupied by its power plant. The term of the lease is for a period of 20 years commencing on March 29, 2005, renewable for another period of 10 years or the remaining corporate life of PSALM, whichever is shorter. The rental paid in advance by FG Bukidnon for the entire term is $0.02 million (P=1.12 million).

Future minimum rental payments under the noncancelable operating leases with FPRC and the DENR are as follows:

Amount Within one year $298 After one year but not more than five years 266 After five years 734 $1,298

EDC as a Lessee. Future minimum lease payments under the operating leases are as follows:

Amount Within one year $216 After one year but not more than five years 21 After five years – Total $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 Exploration Corporation (PNOC EC), EDC shall use the Kremco 750T drilling rig for the Lihir Island Drilling Project with an operating rental rate of $1,680/day. The agreement took effect last March 1, 2008 and shall be terminated on the rig release time of the last well.

EDC as a Lessor. EDC leases to PNOC EC the lot occupied by Buildings 1 & 2 as well as the office spaces of Building 2 located at Energy Center, Merritt Road, Fort Bonifacio, Taguig City at a total annual rental of $0.06 million (P=2.7 million). The contract is renewable annually.

37. Other Matters

a. Arbitration Award of EDC

On April 24, 2008, EDC and NPC signed a Joint Manifestation and Undertaking (JMU) to abide by the arbitral decision on March 25, 2008. The arbitral decision covered the long standing 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 of P=2,894.93 million shall be paid by NPC to EDC, without further interest, in accordance with the following schedule:

Tranche Settlement

Amount Payment Term Actual Date of

Settlement

First P=500.00 million 30 days from submission of JMU to the Office of the Voluntary Arbitrator

July 15, 2008

Second 500.00 million 60 days from submission of JMU to the Office of the Voluntary Arbitrator

July 15, 2008


Tranche Settlement

Amount Payment Term Actual Date of

Settlement

Third 1,000.00 million January 2009 February 2, 2009

Fourth 894.93 million January 2010 Not applicable

Full payment of the amounts indicated above shall result in a full and complete settlement of all the claims each party has against the other, in connection with all the issues covered by the November 5, 2007 arbitration agreement.

As a result of the foregoing transaction, EDC recognized an increase in pre-tax income by P=2,894.93 million ($65.8 million) broken into miscellaneous income, (shown as part of “Others” in the revenue section of the consolidated statement of income) of P=2,067.34 million and a reduction in allowance for doubtful accounts of $20.1 million (P=827.6 million) (see Notes 8 and 13). EDC also reduced its allowance for doubtful accounts by $6.6 million (P=288.6 million) following the resolution of some of the issues covered by the arbitration (see Notes 8 and 13). The reduction of the allowance for doubtful accounts resulted to the recognition of the credit adjustments on allowance for doubtful accounts classified under “Others” in other administrative expenses (see Note 30).

EDC recognized a “day 1” loss of $4.0 million (P=189.8 million) representing the difference between the present value of the third and fourth tranches of the scheduled collections of the arbitration award and the maturity values. This amount was deducted from the miscellaneous income that was recognized in the consolidated statement of income.

b. Electric Power Industry Reform Act

Reforms Republic Act No. 9136, otherwise known as the EPIRA, and the covering Implementing Rules and Regulations (IRR) provide for significant changes in the power sector, which include among others: the functional unbundling of the generation, transmission, distribution and supply sectors; the privatization of the generating plants and other disposable assets of the NPC, including its contracts with Independent Power Producers (IPP); the unbundling of electricity rates; the creation of a Wholesale Electricity Spot Market (WESM); and the implementation of open and nondiscriminatory access to transmission and distribution systems.

The EPIRA declares that the generation sector shall be competitive and open. Any entity engaged in the generation and supply of electricity is not required to secure a national franchise. However, the public listing of not less than 15% of common shares of a generation company is required within five years from the effectivity date of the law. First Gen has complied with this requirement.

Cross ownership between transmission and generation companies and between transmission and distribution companies is prohibited. As between distribution and generation, a distribution utility is not allowed to source from an associated generation company more than 50% of its demand, a limitation that nonetheless does not apply with respect to contracts entered into prior to the effectivity of the law. First Gen, through its subsidiaries FGPC and FGP, has entered into PPAs with an affiliate distribution utility, Meralco, prior to the effectivity of the EPIRA. These agreements represent only 40% of the current demand level of Meralco.

No company or related group can own, operate or control more than 30% of the installed capacity of a grid and/or 25% of the national installed generating capacity. Under Resolution No. 26, Series 2005 of the ERC, installed generating capacity is attributed to the entity controlling 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 is 1,659.5 MW, which comprises 12.38% of the national installed generating capacity amounting to 13,401MW. In the Luzon, Visayas and Mindanao grids, 1,608.50 MW or 16% of 10,061 MW, 49.37MW or 3% of 1,637MW, and 1.6MW or 0.09% of 1,703MW can be attributed to First Gen, respectively.

The EPIRA further provides that the President of the Republic of the Philippines shall reduce the royalties, returns and taxes collected for the exploitation of all indigenous sources of energy, including natural gas, so as to effect parity of tax treatment with existing rates for imported fuels. When implemented, this provision will lower the cost of energy produced by the Santa Rita and San Lorenzo natural gas plants of FGPC and FGP, respectively.

Implementation Over the last two years, the implementation of reforms in the power industry mandated by the EPIRA attained significant momentum.


The privatization of the NPC generating assets has accelerated with the sale of its hydro power and coal-fired facilities. However, no IPP contract of NPC has been privatized through IPP Administrators yet. PSALM has begun the first wave of tendering activities covering the contracted capacities of 1,000 MW Sual and 700 MW Pagbilao coal-fired thermal power plants which is targeted to conclude in May 2009.

In the privatization of NPC’s geothermal power plants, the EPIRA requires that the same should be combined with the appurtenant steamfield assets in one sale package. Considering the ownership by other entities of the steamfield assets and the intrinsic characteristic of steamfield operations, the Joint Congressional Power Commission issued Resolution No. 2006-01 requiring PSALM to privatize NPC’s geothermal power plants that are supplied with steam by EDC packaged with long-term steam sales agreements with EDC. Accordingly, PSALM and EDC executed GRSC for NPC’s Palinpinon I, Palinpinon II and Tongonan geothermal power plants with a term of 22 years. EDC is an operating subsidiary of First Gen through Red Vulcan.

The 25-year concession agreement for the TransCo, which was previously spun-off from NPC, has been awarded to the National Grid Corporation of the Philippines, a private company.

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 total registered capacity at 11,396 MW. To date, the monthly transaction volumes for both the spot and bilateral quantities recorded a high of 3,725.54 GWh. The WESM has now 23 direct participants, 14 indirect participants, 9 applicants and 2 intending participants. The WESM Trial Operations Program in the Visayas Grid is on-going, with the commercial launch awaiting the approval of the DOE.

Retail competition and open access have yet to be implemented since the preconditions of privatizing at least 70% of NPC’s generating assets and at least 70% of NPC IPP contracts have not been met so far.

In the meantime, several industry participants petitioned the ERC to allow a transitional (interim) and voluntary form of open access. Among the petitioners are Meralco, Visayas Electric Co. and the Philippine Independent Power Producers Association (PIPPA). If approved by the ERC under the conditions applied for by said industry participants, the interim open access regime will allow qualified generation companies and registered electricity suppliers to contract directly with eligible end-users for the supply of electricity. It will provide another market in the Visayas Grid for any uncontracted capacity that may become available from the generating assets of First Gen’s operating subsidiaries including EDC’s NNGP.

The ERC has continued to issue regulations implementing the EPIRA, among which are the Rules for Setting Distribution Wheeling Rates for Privately-Owned Distribution Utilities Entering Performance-Based Regulation, Competition Rules, Rules for Registration of Wholesale Aggregators, Guidelines for the Issuance of Licenses to Retail Electricity Suppliers and Distribution Service and Open Access Rules.

Proposed Amendments to the EPIRA Following are the proposed amendments to the EPIRA that, if enacted, may have material adverse effect on First Gen Group’s electricity generation business, financial condition and results of operations.

In the Philippine Senate, the Committee on Energy (CoE) sponsored the approval on second reading of Senate Bill No. 2121, which include, among others:

Lowering the privatization level precondition to retail open access from 70% to 50% for both the NPC generating assets and NPC IPP contracts, while allowing ERC to declare retail open access even before the 50% level is met with participation being limited to generation 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 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 affect First Gen Group considering that most of the generation output of First Gen’s operating subsidiaries is already contracted with NPC and other entities on a long-term basis, any uncontracted capacity that First Gen may have in the future, as for instance in the event of expansion, 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 the privatization 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 be interpreted to allow PEZA to declare retail open access regardless of NPC privatization level, this amendment may similarly affect First Gen Group’s competitiveness vis-à-vis NPC and PSALM as outlined above.

Prescribing additional limitation on bilateral contracts between related parties in that such contracts shall not exceed 20% of the installed generating capacity of a grid. Should First Gen Group expand in the Luzon Grid,


this proposed restriction may limit potential off-take by Meralco from First Gen Group given Meralco’s existing off-take agreements with FGPC and FGP.

Subjecting the reduction of royalties for the exploitation of indigenous energy sources that the President shall order to the qualification, “whenever the interest of the general public so requires.” Insofar as the reduction becomes discretionary rather than mandatory, the implementation of the reduction of royalties on natural gas, which would enhance the price-competitiveness of generation by FGPC and FGP on a post-tax/post-royalty basis vis-à-vis generation using imported fuels, may be accelerated or delayed depending on the timing of the presidential action.

In the House of Representatives, the CoE has submitted for plenary approval House Bill No. 3124 proposing the following amendments to the EPIRA, among others:

Accelerating the implementation of retail competition and open access by lowering the pre-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 access in economic zones. As in the Senate proposal, this could adversely affect First Gen Group’s competitiveness vis-à-vis NPC and PSALM as described earlier.

Granting PEZA the authority to immediately declare retail competition and open access in the PEZA-administered economic zones, with similar possible effect as the counterpart proposal in the Senate.

Removing the power from the ERC to issue ex-parte provisional authority in rate increase applications of distribution utilities. This may affect Meralco’s cashflow or ability to timely charge its distribution rate (but not the pass-through of generation cost). Though not directly affecting First Gen Group, the resulting difficulty on Meralco may hamper Meralco’s ability to make payments to FGPC and FGP.

First Gen Group cannot provide any assurance whether any or all of these proposed amendments will be enacted in their current form or at all or when any amendment to the EPIRA will be enacted. Proposed amendments to the EPIRA, including those discussed above, as well as other legislation or regulation could have material adverse impact on the First Gen Group’s business, financial position and financial performance.

Certificates of Compliance FGP, 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 are valid for a period of 5 years, signify that the companies in relation to their respective generation 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 on May 17, 2007, effective for a period of 5 years, and the Retail Electricity Supplier’s License on 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 on May 24, 2006. Based on the assessment of the BPPC, it has complied with the applicable provisions of the EPIRA and its IRR.

Pursuant to the provisions of Section 36 of the EPIRA, Electric Power Industry Participants prepare and submit for approval of the ERC their respective Business Separation and Unbundling Plan (BSUP) which requires them to maintain separate accounts for, or otherwise structurally and functionally unbundle, their business activities.

Since each of FGP, FGPC, FG Bukidnon and FG Hydro is engaged solely in the business of power generation, to the exclusion of the other business segments of transmission, distribution, supply and other related business activities, compliance with the BSUP requirement on maintaining separate accounts is not reasonably practicable. Based on assessments of FGP, FGPC, FG Bukidnon, FG Hydro and FG Energy, they are in the process of complying with the provisions of the EPIRA and its IRR.

c. Clean Air Act

On November 25, 2000, the IRR of the Philippine Clean Air Act (PCAA) took effect. The IRR contain provisions that have an impact on the industry as a whole, and on FGP, FGPC and BPPC in particular, that need to be complied with within 44 months (or July 2004) from the effectivity date, subject to approval by the DENR. The power plants of FGP and FGPC use natural gas as fuel and have emissions that are way below the limits set in the National Emission 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 companies believe that both are in full compliance with the applicable provisions of the IRR of the PCAA.


On the other hand, BPPC believes that the Project Agreement specifically provides that it is not contractually obligated to bear the financial cost of complying with the new law. Pursuant thereto, compliance of the Bauang Plant with RA 8749 shall be subject to the final agreement between the Department of Energy, NPC and DENR, specifically on the manner of compliance by all NPC-IPPs, including BPPC. In this connection, the DENR has issued a Memorandum on September 19, 2006 directing all regional directors to hold in abeyance the implementation of the 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 DENR issued Dept. Admin. Order 2007-22 which effectively superseded the September 19, 2006 memorandum. The new pronouncement prescribes a more detailed set of guidelines for compliance to the Continuous Opacity Monitoring System (COMS)/CEMS installation required under the PCAA, and likewise provides for a two-year window from issuance date for affected facilities to comply.

BPPC has been conducting Ambient Air Emission Monitoring every quarter and Source Emission Monitoring once a year in lieu of the installation of the CEMS. Results are submitted to the Environmental Monitoring Bureau (EMB) and the DENR-Region 1 Office.

d. Supplementary Disclosures regarding Geothermal Reserves

In September 2008, EDC has contracted GeothermEX to provide an independent review of the updated geothermal energy reserves estimation made by EDC’s Reservoir Engineering Department for five geothermal fields: BacMan, Mindanao, Palinpinon, Greater Tongonan and Northern Negros.

Five available methods of estimating geothermal reserves were considered as regards their applicability to EDC’s fields: empirical methods, volumetric reserve estimation, decline curve analysis, lumped-parameter modeling and numerical simulation of the reservoir. It was concluded that, of these methods, only volumetric estimation and numerical simulation are generally useful to EDC in estimating reserves. EDC has conducted numerical simulation to most of its fields. A detailed review of one such simulation study, for Mindanao field, showed it to be reasonable. It is pointed out that while numerical simulation is more sophisticated than volumetric reserve estimation, the latter can be readily conducted in a probabilistic way, while the former cannot.

GeothermEX, in their report released in October 2008, used the same volumetric reserve estimation method used by EDC for the various geothermal fields patterned after the U.S. Geological Survey but differ only in the heat recovery factor. GeothermEX concluded that EDC’s estimation is conservative due to the low heat recovery factor values of 0.20 to 0.30. On the other hand, GeothermEX estimates of reserves in these field locations are60% higher than those of EDC.

Proved geothermal reserves refer to reserves which can be produced with known certainty and delineated in known production limits as confirmed by drilling and production history.

Probable reserves refer to those that could be proven by normal step-out drilling as well as those that could be extracted by improved recovery techniques like acidizing.

Possible reserves refer to those reserves that are currently unextractable because of resource and technology problems but may be found to be commercial in the future.

The following table shows a comparison of estimated geothermal energy reserves from EDC and GeothermEX:

Estimated Geothermal Energy Reserves

Field

Mean ReservesCompanyEstimates

(MWe)

Mean ReservesGeothermEX

Estimates(MWe)

Greater Tongonan (Leyte) 686 772 Palinpinon (Negros Oriental) 217 411 Bacon-Manito (Luzon) 270 415 Mindanao 154 456 Northern Negros 47 103 Total 1,374 2,157 Source: GeothermEX Report, October 2008


e. Republic Act No. 9513 (RA 9513)

On January 30, 2009, RA 9513, An Act Promoting the Development, Utilization and Commercialization of Renewable Energy Resources and for Other Purposes, which shall be known as the “Renewable Energy Act of 2008” (the Act), became effective.

RA 9513 aims to accelerate the exploration and development of renewable energy resources as well as to increase the utilization of renewable energy by institutionalizing the development of national and local capabilities in the use of renewable energy systems, and promoting its efficient and cost-effective commercial application by providing fiscal and non-fiscal incentives.

The law also encourages the development and utilization of renewable energy resources as effective tools to prevent or reduce harmful emissions and thereby balancing the goals of economic growth and development with the protection of health and the environment. The Act also intends to establish the necessary infrastructure to carry out the mandates specified in the law and other relevant existing laws.

The Act provides a seven-year ITH and tax exemptions for the carbon credits generated from renewable energy sources. A 10% corporate income tax, as against the regular 30%, is also provided once the ITHexpires; energy self-sufficiency to 60% by 2010 from 56.6% in 2005, by tapping resources like solar, wind, hydropower, ocean and biomass energy; renewable energy facilities will also be given a 1.5% realty tax cap on original cost of equipment and facilities to produce renewable energy.

The law also prioritizes the purchase, grid connection and transmission of electricity generated by companies from renewable energy sources and power generated from renewable energy sources will be VAT-exempt.

Within six (6) months from the effectivity of the Act, the DOE shall, in consultation with the Senate and House of Representatives CoE, relevant government agencies and renewable energy stakeholders, promulgate the IRR of the Act.

First Gen Group is evaluating the significant impact that the Act may have on First Gen Group’s future operations and financial results.

f. BIR Revenue Regulation No. 16-2008

On December 18, 2008, the BIR issued Revenue Regulations (RR) No. 16-2008 which implemented the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of Republic Act No. 9504, dealing on the Optional Standard Deduction (OSD) allowed to individuals and corporations in computing their taxable income.

Based on the RR, it allowed individuals and corporations to claim OSD in lieu of the itemized 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 corporate taxpayers subject to tax under Sections 27(A) and 28(A) (1) of the National Internal Revenue Code (NIRC), as amended, the OSD allowed shall be in an amount not exceeding 40% of their gross 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 the taxable year, are part of the gross income against which the OSD may be deducted in arriving at taxable income. Passive income which have been subjected to a final tax at source shall not form 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 a different method of accounting (e.g., percentage of completion basis, etc.) other than cash and accrual method of accounting, the gross income pursuant to the RR shall be determined 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 under Section 34 of the NIRC. Once the election to avail the OSD is signified in the return, it shall be irrevocable for the taxable year for which the return is made. In the filing of the quarterly ITR, the taxpayer may opt to use either the itemized deduction or OSD. However, in filing the final ITR, the taxpayer must make a choice as to what method of deduction it shall employ for the 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.

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 the effective date of the said Act. However, in order to simplify and provide ease of administration during the transition period, July 1, 2008 shall be considered as the start of the period when the 40% OSD may be allowed.


In 2008, First Gen Group computed its income tax based on itemized deductions. 38. Events after Balance Sheet Date

Loans Payable of Prime Terracota On February 19, March 6 and 9, 2009, Prime Terracota obtained unsecured, short-term and peso-denominated loans for a total amount of P=900.0 million from PCCI. The loans are payable after 90 days from drawdown date at an interest rate of 6.75% per annum.

Notes Payable of Unified On 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”) arranged by a consortium of local banks led by BDO Capital and Investment Corporation, Philippine National Bank and Rizal Commercial Banking Corporation (as Lead Arrangers). The Note Facility will be evidenced by a series of Notes, with a minimum principal amount of P=100.0 million, bearing an annual interest rate of 9.3769% and will mature on March 9, 2012. The proceeds of the loan were advanced to First Gen, which in turn will retire its existing short-term loans (see Note 19). Such Notes are offered pursuant to an exempt transaction under Section 10.1 of the SRC and thus have not been registered with the Philippine SEC. Any future offer or sale of the Notes is subject to the registration requirements under the SRC, unless such offer or sale qualifies as an exempt transaction or the note qualifies as an exempt security.

The repayment schedule of the outstanding principal amounts follows:

Repayment dates: Percentage of

Facility Amount July 9, 2009 1.0% January 9, 2010 1.0% July 9, 2010 1.5% January 9, 2011 1.5% July 9, 2011 1.5% January 9, 2012 1.5% March 9, 2012 92.0%

Proceeds of Loan from International Finance Corporation (IFC) EDC entered into a loan agreement with the International Finance Corporation (IFC), a shareholder of EDC, on November 27, 2008 for US$100.0 million or its peso equivalent. On January 7, 2009, EDC received the proceeds of the loan amounting to P=4,048.8 million, net of P=51.3 million front-end fees. The loan is payable in 24 equal semi-annual installments after a three-year grace period at an interest rate of 7.4% per annum for the first five years subject to re-pricing for another 5 to 10 years.

Amendment of the Share Buy-back Program of EDC On January 23, 2009, the BODs of EDC approved an amendment to EDC’s share buy-back program, to include, not only the previously stated objective of acquiring shares to implement the proposed executive/employee stock ownership plan, but also for the purpose of enhancing shareholder value whenever the stock is trading at a price discount to its true valuation.

The share buy-back program will be implemented through grants, options, purchases or other equivalent methods.

The maximum amount approved for the buy-back program remains at P4.0 billion, which may be carried out over a two-year period from March 26, 2008 to March 25, 2010 at the discretion of EDC’s management.

Executive/Employee Stock Ownership Plan of EDC On January 23, 2009, the BOD of EDC approved the Executive/Employee Stock Ownership Plan and the related rules.

GLOSSARY OF TERMSAffiliate In relation to the Company, BPPC or any other company which, directly or indirectly, through one or more

intermediaries, 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

BacMan GSC BacMan 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 BOT 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

EDC Energy Development Corporation, formerly Philippine National Oil Company - 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

IFRIC International Financial Reporting Interpretation Committee

IPP Administrators As defined in the EPIRA, qualified independent entities appointed by PSALM who shall administer, conserve and manage 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 ERC

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 Operations and Maintenance Agreement between Siemens Operations and FGP dated 15 April 1999

Santa Rita O&M Agreement Amended and Restated Operation and Maintenance Agreement between Siemens Operations 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%

E:40%V: 60%

100% 60%

60%

40%

100%

100%

40% 60%

100% 100%

100%

100% 60%

93%

Baungan BOT

Santa Rita

San Lorenzo

Red Vulcan EDC

Hydro PowerPantabangan-Mawisay

Prime Terracota

PUBLIC

CORPORATEDIRECTORYFIRST GEN CORPORATION3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6400Fax: (632) 910-4846/ 638-4706/914-5146

FIRST GAS POWER CORPORATIONCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6286Fax: (632) 635-2322/914-5146

PLANT SITESta. Rita, Batangas CityBatangas, Philippines 4200Tel: (6343) 723-9526 to 28Fax: (6343) 723-7792/723-9048

FGP CORP.Corporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6286Fax: (632) 910-0253/914-5146

PLANT SITESta. Rita, Batangas CityBatangas, Philippines 4200Tel: (6343) 723-9526 to 28Fax: (6343) 723-7792/723-9048

FIRST GEN HYDRO POWER CORPORATION3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6400Fax: (632) 910-4846

PLANT SITEBarangay West PoblacionPantabangan Nueva EcijaPhilippines 3124Telefax: (632) 449-6521

FIRST PRIVATE POWER CORPORATION3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6400Fax: (632) 637-1969/637-1967

BAUANG PRIVATE POWER CORPORATIONCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6400Fax No. (632) 637-1969/637-1967

PLANT SITEKm. 255, Bo. Payocpoc SurBauang, La UnionTel: (6372) 705-2077/ (632) 449-6501Fax: 6372) 705-2084

FIRST GEN RENEWABLES, INC.3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City, Philippines 1600Tel: (632) 449-6458Fax: (632) 631-3103

FG BUkIDNON POWER CORPORATIONCorporate Office3rd Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 449-6458Fax: (632) 631-3103

PLANT SITEDamilag Manolo Fortich BukidnonPhilippines 8705Telefax: (6388) 223-3295

EDC FACILITIES AND DIRECTORYEDC HEAD OFFICESMerritt Road, Fort Bonifacio, Taguig CityTel: (632) 893-6001 to 47 (632) 893-1320 to 64Fax: (632) 840-1575www.energy.com.ph

ENERGY RESEARCH AND DEVELOPMENT CENTERCommonwealth Ave., Diliman, Quezon CityTel: (632) 929-7611Fax: (632) 929-3412

BACON-MANITO GEOTHERMAL PRODUCTION FIELDPalayang Bayan, Manito, AlbayTel: (632) 893-6001 loc. 2405Telefax: (632) 812-3841

LEYTE GEOTHERMAL PRODUCTION FIELDTongonan, Kananga, LeyteTel: (632) 893-6001 loc. 2400/ 2401/2402Telefax: (632) 812-4803

SOUTHERN NEGROS GEOTHERMAL PRODUCTION FIELDTicala, Valencia, Negros OrientalTel: (632) 893-6001 loc. 2403Telefax: (632) 812-9810

MINDANAO GEOTHERMAL PRODUCTION FIELDIlomavis, Kidapawan City, North CotabatoTel: (632) 893-6001 loc. 2404Telefax: (632) 812-3129

NORTHERN NEGROS GEOTHERMAL PROJECTBago City, Negros OccidentalTel: (632) 893-6001 loc. 2406Telefax: (632) 812-8685

NORTHERN LUzON WIND POWER PROJECTBrgy. Saoit, Burgos, Ilocos NorteTel: (63919) 5401863Telefax: (63919) 5470576

INDEPENDENT PUBLIC ACCOUNTANTSSycip, Gorres, Velayo & Co.SGV Building6760 Ayala AvenueMakati City, Philippines 1226Tel: (632) 891-0307Fax No. (632) 819-0872

STOCk TRANSFER AGENTSecurities Transfer Services, Inc.Ground Floor Benpres BuildingExchange Road corner Meralco AvenuePasig City Philippines 1600Tel: (632) 490-0060Fax: (632) 631-7148


CONCEPT, DESIGN AND LAYOUTK2 Interactive

PHOTOGRAPHYPortraiture: Erik LiongorenOperations: Mel Cortez Jonathan Russell Dr. Sammy AngModels: Ricardo Nicolo O. Tantoco Jezmin Ann P. Cainglet

FIRST GEN CORPORATION3rd Floor Benpres Building

Exchange Road corner Meralco AvenuePasig City, Philippines 1600

www.firstgen.com.ph

Documents

First Gen Corporation 2008 Annual Report RESPON …...2009/03/15 · Responsible Generation : First Gen Corporation 2008 Annual Report 2 - 3 Geothermal Energy Steam produced by heat