SMC GLOBAL POWER - PDS Group

25 June 2019

ii ~

SMC GLOBAL POWER

Philippine Dealing & Exchange Corp. 37th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas Makati City

Attention: Atty. Joseph B. Evangelista Head - Issuer Compliance and Disclosure Department

Gentlemen:

Further to the disclosure of SMC Global Power Holdings Corp. (the "Corporation") dated 25 April 2019, on the issuance of the US$500,000,000.00 Senior Perpetual Capital Securities (the "Original Securities"), we advise that the Board of Directors of the Corporation, on 25 June 2019, authorized the issuance by the Corporation of additional senior perpetual capital securities, in an aggregate principal amount of at least US$200,000,000.00 (the "Additional Securities"), to be consolidated and form a single series with the Original Securities. A copy of the preliminary offering circular for the offer of the Additional Securities is attached herewith as Annex "A".

The Additional Securities will be identical in all respects with the Original Securities, other than with respect to the date of issuance and issue price. The net proceeds from the issuance of the Additional Securities will be used and applied by the Corporation for general corporate purposes, investments in power-related assets and repayment of indebtedness. The Additional Securities will be constituted by a Supplemental Trust Deed, which shall supplement the trust deed of the Original Securities, and listed in the Singapore Stock Exchange (SGX-ST).

Thank you.

Very truly yours,

SMC GLOBAL POWER HOLDINGS CORP.

By:~

EL,ENITA D. GO Cdrporate Information Officer

IMPORTANT NOTICE

NOT FOR DISTRIBUTION TO ANY PERSON OR ADDRESS IN THE UNITED STATES.

Important: You must read the following before continuing. The following applies to the preliminary offeringcircular following this page (the “Offering Circular”), and you are therefore advised to read this carefullybefore reading, accessing or making any other use of this Offering Circular. In accessing the Offering Circular,you agree to be bound by the following terms and conditions, including any modifications to them any time youreceive any information from us as a result of such access.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FORSALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO.THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THEU.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIESLAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION, AND THE SECURITIESMAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, EXCEPT PURSUANT TO ANEXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATIONREQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIESLAWS.

THIS OFFERING CIRCULAR MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHERPERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND INPARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. ADDRESS. ANY FORWARDING,DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART ISUNAUTHORIZED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OFTHE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. ANY INVESTMENTDECISION SHOULD BE MADE ON THE BASIS OF THE FINAL TERMS AND CONDITIONS OF THESECURITIES AND THE INFORMATION CONTAINED IN A FINAL OFFERING CIRCULAR THAT WILLBE DISTRIBUTED TO YOU ON OR PRIOR TO THE CLOSING DATE AND NOT ON THE BASIS OF THEATTACHED OFFERING CIRCULAR. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSIONCONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORIZED AND WILLNOT BE ABLE TO PURCHASE ANY OF THE SECURITIES DESCRIBED THEREIN.

Confirmation of the Representation: In order to be eligible to view this Offering Circular or make aninvestment decision with respect to the securities, investors must not be located in the United States. ThisOffering Circular is being sent at your request and, by accepting the electronic mail and accessing this OfferingCircular, you shall be deemed to have represented to us that the electronic mail address that you gave us and towhich this electronic mail has been delivered is not located in the United States and that you consent to deliveryof such Offering Circular by electronic transmission.

You are reminded that this Offering Circular has been delivered to you on the basis that you are a person intowhose possession this Offering Circular may be lawfully delivered in accordance with the laws of jurisdiction inwhich you are located and you may not, nor are you authorized to, deliver this Offering Circular to any otherperson.

The materials relating to any offering of securities to which this Offering Circular relates do not constitute, andmay not be used in connection with, an offer or solicitation in any place where offers or solicitations are notpermitted by law. If a jurisdiction requires that such offering be made by a licensed broker or dealer and theunderwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, such offeringshall be deemed to be made by the underwriters or such affiliate on behalf of the Issuer (as defined in theOffering Circular) in such jurisdiction.

This Offering Circular has been sent to you in electronic format. You are reminded that documents transmittedvia this medium may be altered or changed during the process of electronic transmission and consequentlyneither Issuer, the Joint Lead Managers (each as defined in the Offering Circular) nor any person who controlsthe Issuer, a Joint Lead Manager or any director, officer, employee or agent of any of the Issuer, the Joint LeadManagers or affiliate of any such person accepts any liability or responsibility whatsoever in respect of anydifference between this Offering Circular distributed to you in electronic format and the hard copy versionavailable to you on request from the Joint Lead Managers.

You are responsible for protecting against viruses and other destructive items. Your use of this electronic mail isat your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and otheritems of a destructive nature.

ANNEX "A"

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Subject to completionPreliminary Offering Circular dated June 25, 2019

CONFIDENTIAL

(incorporated with limited liability in the Republic of the Philippines)

U.S.$[Š] Senior Perpetual Capital Securities(to be consolidated into and form a single series with the

U.S.$500,000,000 Senior Perpetual Capital Securities issued on April 25, 2019)

Issue Price: [Š]% plus an amount corresponding to accrued distributions from (and including)April 25, 2019 to (but excluding) [Š], 2019

The U.S.$[Š] senior perpetual capital securities (the “Additional Securities”) are issued by SMC Global Power Holdings Corp. (“SMC Global Power”, the“Issuer” or the “Company”). The Additional Securities will be issued under a supplemental trust deed dated on or about [Š], 2019 (the “Supplemental TrustDeed”) by and between the Company and Trustee (as defined herein), which shall supplement the trust deed, dated as of April 25, 2019 (the “Original TrustDeed” and, as supplemented by the Supplemental Trust Deed, the “Trust Deed”), by and between the Company and the Trustee, pursuant to which the Companyissued U.S.$500,000,0000 aggregate principal amount of senior perpetual capital securities on April 25, 2019 (the “Original Securities”). The AdditionalSecurities will be consolidated and form a single series with the Original Securities. The Additional Securities are identical in all respects with the OriginalSecurities, other than with respect to the date of issuance and issue price. The Additional Securities will vote on any matter submitted to holders with holders ofthe Original Securities. The Additional Securities will share the ISIN and the Common Code and be fungible with the Original Securities. The Original Securitiesand the Additional Securities are referred to collectively as the “Securities.” Upon issuance of the Additional Securities, the aggregate principal amount of theoutstanding Securities will be U.S.$[Š].

The Securities confer a right to receive distributions (each, a “Distribution”) at the applicable rate described below for the period from and including April 25,2019 or from and including the most recent Distribution Payment Date (as defined below) to, but excluding, the next Distribution Payment Date or anyredemption date. Subject to Condition 4.5 (Optional Deferral of Distributions) of the terms and conditions of the Securities (the “Conditions”), Distributions arepayable semi-annually in arrear on the Distribution Payment Dates in each year. “Distribution Payment Dates” are defined as April 25 and October 25 of eachyear, commencing on October 25, 2019. Unless previously redeemed in accordance with the Conditions and subject to Condition 4.4 (Increase in Rate ofDistribution), Distributions (i) from and including April 25, 2019 to, but excluding, April 25, 2024 (the “Step Up Date”) shall accrue on the outstanding principalamount of the Securities at 6.50% per annum (the “Initial Rate of Distribution”) and (ii) from and including each Reset Date (as defined in the Conditions)(including the Step Up Date) to, but excluding, the immediately following Reset Date, shall accrue on the outstanding principal amount of the Securities at therelevant Reset Rate of Distribution (as defined in the Conditions).

The Issuer may, in its sole and absolute discretion, on any day which is not less than five Business Days (as defined in the Conditions) prior to any DistributionPayment Date, resolve to defer payment of any or all of the Distribution which would otherwise be payable on that Distribution Payment Date unless, during thesix months ending on that scheduled Distribution Payment Date (i) a discretionary dividend, distribution, interest or other payment has been paid or declared on orin respect of any Junior Securities or (except on a pro rata basis) Parity Securities (each as defined in the Conditions) of the Issuer, other than a dividend,distribution or other payment in respect of an employee benefit plan or similar arrangement with or for the benefit of employees, officers, directors andconsultants of the Issuer or (ii) at the discretion of the Issuer, any Junior Securities or (except on a pro rata basis) Parity Securities have been redeemed,repurchased or otherwise acquired by the Issuer or any of its subsidiaries, other than a redemption, repurchase or other acquisition in respect of an employeebenefit plan or similar arrangement with or for the benefit of employees, officers, directors and consultants of the Issuer. Any such deferred Distribution willconstitute “Arrears of Distribution” and will not be due and payable until the relevant Payment Reference Date (as defined in the Conditions). Distributions willaccrue on each Arrears of Distribution for so long as such Arrears of Distribution remains outstanding at the same Rate of Distribution (as defined in theConditions) as the Principal Amount of the Securities bears at such time and will be added to such Arrears of Distribution (and thereafter bear Distributionsaccordingly) on each Distribution Payment Date.

The Securities are undated securities in respect of which there is no fixed redemption date. Subject to applicable law, the Issuer may redeem the Securities (inwhole but not in part) on the Step Up Date or any subsequent Distribution Payment Date falling after the Step Up Date at the Redemption Price (as defined in theConditions), on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to the Securityholders in accordance withCondition 12.1 (Notices to Securityholders). The Securities may also be redeemed (in whole but not in part) at the option of the Issuer at the Redemption Priceupon the occurrence of certain changes in Philippine tax law requiring the payment of Additional Amounts (as defined in the Conditions). In addition, theSecurities may be redeemed (in whole but not in part) at the option of the Issuer (A) upon the occurrence of a Change of Control Event (as defined in theConditions) (i) at any time prior to (but excluding) the Step Up Date at the Special Redemption Price (as defined in the Conditions) or (ii) on or at any time afterthe Step Up Date at the Redemption Price, (B) upon the occurrence and continuation of a Reference Indebtedness Default Event (as defined in the Conditions) atany time at the Redemption Price, (C) upon the occurrence and continuation of an Accounting Event (as defined in the Conditions) (i) at any time prior to (butexcluding) the Step Up Date at the Special Redemption Price or (ii) on or at any time after the Step Up Date at the Redemption Price or (D) in the event that theaggregate principal amount of the Securities originally issued that remains outstanding is equal to or less than 25% (i) at any time prior to (but excluding) the StepUp Date at the Special Redemption Price or (ii) on or at any time after the Step Up Date at the Redemption Price, in each case on the giving of not less than 30and not more than 60 calendar days’ irrevocable notice of redemption to the Securityholders in accordance with Condition 12.1 (Notices to Securityholders).

Investing in the Additional Securities involves certain risks. See “Risk Factors” beginning on page 19.THE ADDITIONAL SECURITIES BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN, AND WILL NOT BE, REGISTERED WITH THEPHILIPPINE SECURITIES AND EXCHANGE COMMISSION UNDER THE PHILIPPINE SECURITIES REGULATION CODE (“PHILIPPINESRC”). ANY FUTURE OFFER OR SALE OF THE ADDITIONAL SECURITIES IS SUBJECT TO THE REGISTRATION REQUIREMENTSUNDER THE PHILIPPINE SRC UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE PHILIPPINESRC.

The Additional Securities are being offered only outside the United States in offshore transactions in compliance with Regulation S under the U.S. Securities Actof 1933, as amended (the “Securities Act”). The Additional Securities have not been, and will not be, registered under the Securities Act or the securities laws ofany other jurisdiction. Unless they are so registered, the Additional Securities may be offered only in transactions that are exempt from or not subject toregistration under the Securities Act or the securities laws of any other jurisdiction. For further details, see “Subscription and Sale.”

The Original Securities are listed on the Singapore Exchange Securities Trading Limited (the “SGX-ST”). Application will be made to the SGX-ST for the listingand quotation of the Additional Securities on the SGX-ST.

The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained in this Offering Circular. Admission ofthe Additional Securities to the Official List of the SGX-ST is not to be taken as an indication of the merits of the Securities or SMC Global Power or itssubsidiaries. Investors are advised to read and understand the contents of this Offering Circular before investing. If in doubt, investors should consult theiradvisers.

The Additional Securities will be evidenced by a global certificate (the “Global Certificate”) in registered form, which will be registered in the name of anominee of, and deposited with a common depositary for, Euroclear Bank SA/NV (“Euroclear”) and Clearstream Banking, S.A. (“Clearstream, Luxembourg”).Beneficial interests in the Global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear andClearstream, Luxembourg and their respective accountholders. Except in the limited circumstances set out herein, definitive certificates for the Securities will notbe issued in exchange for beneficial interests in the Global Certificate. See “The Global Certificate.” It is expected that delivery of the Global Certificate will bemade on or about [Š], 2019.

Joint Lead Managers(in alphabetical order)

BofA Merrill Lynch Credit Suisse UBSOffering Circular dated [Š], 2019.

I SMC GLOBAL POWER

A SUBSIOIARY OF SAN MIGUEl CORPORATION

TABLE OF CONTENTS

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

TERMS AND CONDITIONS OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

THE GLOBAL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

EXCHANGE RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

SELECTED FINANCIAL INFORMATION AND OTHER DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS . . . . . . . . . . . . . 71

INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

REGULATION AND ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

PRINCIPAL SHAREHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

CLEARANCE AND SETTLEMENT OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

SUBSCRIPTION AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

GLOSSARY OF SELECTED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

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In this Offering Circular, references to “SMC Global Power”, the “Company” and the “Issuer” are to SMCGlobal Power Holdings Corp. or SMC Global Power Holdings Corp. and its subsidiaries, as the context requires.For avoidance of doubt, references to the Company as the independent power producer administrator (“IPPA”)are references to the relevant consolidated subsidiary of the Company which executed the relevant IPPAAgreement for the administration of each of the Sual Power Plant, Ilijan Power Plant and San Roque Power Plant(collectively, the “IPPA Power Plants”) and references to the administration by, or ownership of, the Companyof any other power plant or power generation facility in this Offering Circular should be understood to refer tothe administration or ownership of such plant or facility by the relevant consolidated subsidiary of the Company.References to the “combined installed capacity” in this Offering Circular are to the aggregate of the installedgeneration capacity of (i) the IPPA Power Plants administered by the Company as the IPPA, (ii) the LimayGreenfield Power Plant, (iii) the Davao Greenfield Power Plant, (iv) the Masinloc Power Plant, (v) the Masinlocbattery energy storage system and (vi) the Angat Hydroelectric Power Plant (“AHEPP”), in which the Companyhas a 60.0% ownership interest. References to the total installed generating capacity based on ERC ResolutionNo. 04, Series of 2018 issued in February 2018 (“ERC Resolution on Grid Market Share Limitation”) havebeen adjusted to include (i) 150 MW generating capacity from the commencement of commercial operations ofLimay Greenfield Power Plant Unit 3 and (ii) 14 MW additional generating capacity from the retrofit ofMasinloc Power Plant Unit 2 completed in May 2018.

The term “Joint Lead Managers” refers to Credit Suisse (Hong Kong) Limited, Merrill Lynch (Singapore) Pte.Ltd. and UBS AG Singapore Branch. All references in this Offering Circular to the “Philippines” are to theRepublic of the Philippines. Certain acronyms, technical terms and other abbreviations used are defined in the“Glossary of Selected Terms” of this Offering Circular.

Prospective investors should rely only on the information contained in this Offering Circular. The Issuerand the Joint Lead Managers have not authorized anyone to provide prospective investors withinformation that is different. The information in this document may only be accurate on the date of thisOffering Circular. Nothing in this Offering Circular should be relied upon as a promise or representationas to future results or events, and neither the delivery of this Offering Circular nor any offering or sale ofthe Additional Securities shall under any circumstances imply that there has been no change in the affairsof the Issuer or that the information herein is correct as of any date subsequent to the date hereof.

This Offering Circular is being furnished by the Issuer in connection with an offering exempt from theregistration requirements under the U.S. Securities Act of 1933, as amended (the “Securities Act”) solely for thepurpose of enabling a prospective investor to consider whether to purchase the Additional Securities. Theinformation contained herein has been provided by the Issuer and other sources identified herein. None of theJoint Lead Managers, DB Trustees (Hong Kong) Limited (the “Trustee”) or the Agents (as defined in the termsand conditions of the Securities, the “Conditions”) has independently verified the information contained herein.No representation or warranty, express or implied, is made by the Joint Lead Managers, the Trustee or the Agentsas to the accuracy or completeness of such information, and nothing contained herein is, or may be relied uponas, a promise or representation by the Joint Lead Managers, the Trustee or the Agents as to the past or the future.To the fullest extent permitted by law, none of the Joint Lead Managers, the Trustee or the Agents accepts anyliability in relation to the information contained in this Offering Circular or any other information provided bythe Issuer, or for any other statement made or purported to be made by the Joint Lead Managers, the Trustee orthe Agents or on any of their behalf in connection with the Issuer or in connection with the offering of theAdditional Securities. The Joint Lead Managers, the Trustee and the Agents accordingly disclaim all and anyliability whether arising in tort or contract or otherwise that any of them might otherwise have in respect of thisOffering Circular or any such statement.

The distribution of this Offering Circular and the offering and sale of the Additional Securities in certainjurisdictions may be restricted by law. Persons into whose possession this Offering Circular comes must informthemselves about and observe any such restrictions. There are restrictions on the distribution of this OfferingCircular and the offer and sale of the Additional Securities in certain jurisdictions, including the United States,the United Kingdom, Singapore, Hong Kong, Japan, the European Economic Area (“EEA”) and the Philippines.This Offering Circular does not constitute, and may not be used for or in connection with, an offer or solicitationby anyone in any jurisdiction in any circumstance in which such offer or solicitation is not authorized or to anyperson to whom it is unlawful to make such offer or solicitation.

i

Each person investing in the Additional Securities shall be deemed to acknowledge that:

• it has been afforded an opportunity to request from the Issuer and to review, and has received, alladditional information considered by such person to be necessary to verify the accuracy of, or tosupplement, the information contained herein;

• it has had the opportunity to review all of the documents described herein;

• it has not relied on the Joint Lead Managers, the Trustee, the Agents or any person affiliated with the JointLead Managers, the Trustee or the Agents in connection with its investigation of the accuracy of theinformation contained in the Offering Circular or its investment decision; and

• no person has been authorized to give any information or to make any representation concerning theAdditional Securities other than those contained in this Offering Circular and, if given or made, such otherinformation or representation should not be relied upon as having been authorized by the Issuer, the JointLead Managers, the Trustee or the Agents.

Prospective investors should not construe the contents of this Offering Circular as investment, legal or tax adviceand should consult with their own counsel, accountant and other advisors as to legal, tax, business, financial andrelated aspects of receiving the Additional Securities.

In making an investment decision, prospective investors must rely on their own examination of the Issuer and theterms of the Additional Securities, including, without limitation, the merits and risks involved. None of theIssuer, the Joint Lead Managers, the Trustee or the Agents is making any representation to any prospectiveinvestor regarding the legality of an investment in the Additional Securities by such investor under any legalinvestment or similar laws or regulations. The offering of the Additional Securities is being made on the basis ofthis Offering Circular. Any decision to invest in the Additional Securities must be based on the informationcontained in this Offering Circular. Each purchaser of the Additional Securities must comply with all applicablelaws and regulations in force in each jurisdiction in which it purchases, offers or sells such Additional Securitiesor possesses or distributes this Offering Circular and must obtain any consent, approval or permission requiredby it for the purchase, offer or sale by it of such Additional Securities under the laws and regulations in force inany jurisdictions to which it is subject or in which it makes such purchases, offers or sales, and none of theIssuer, the Joint Lead Managers, the Trustee or the Agents shall have any responsibility therefor.

Each person receiving this Offering Circular is advised to read and understand the contents of this OfferingCircular before investing in the Additional Securities. If in doubt, such person should consult his or her advisors.This Offering Circular has been prepared on the basis that all offers of the Additional Securities will be madepursuant to an exemption under the Prospectus Directive (Directive 2003/71/EC, as amended), as implemented inthe member states of the EEA, from the requirement to produce a prospectus for offers of the AdditionalSecurities. Accordingly, any person making or intending to make any offer within the EEA of the AdditionalSecurities which are the subject of the placement contemplated in this Offering Circular should only do so incircumstances in which no obligation arises for the Issuer or any of the Joint Lead Managers to produce aprospectus for the offer. Neither the Issuer nor the Joint Lead Managers have authorized, nor do they authorizethe making of any offer of the Additional Securities through any financial intermediary, other than offers madeby the Joint Lead Managers which constitute the final placement of the Additional Securities contemplated in thisOffering Circular.

PROHIBITION OF SALES TO EEA RETAIL INVESTORS — The Additional Securities are not intended tobe offered, sold or otherwise made available to and should not be offered, sold or otherwise made available toany retail investor in the EEA. For these purposes, a “retail investor” means a person who is one (or more) of:(i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or(ii) a customer within the meaning of Directive 2002/92/EC (as amended, the “Insurance MediationDirective”), where that customer would not qualify as a professional client as defined in point (10) of Article4(1) of MiFID II. Consequently no key information document required by Regulation (EU) No 1286/2014 (asamended, the “PRIIPs Regulation”) for offering or selling the Additional Securities or otherwise making themavailable to retail investors in the EEA has been prepared and therefore offering or selling the AdditionalSecurities or otherwise making them available to any retail investor in the EEA may be unlawful under thePRIIPs Regulation.

ii

This Offering Circular is only being distributed to and is only directed at (i) persons who are outside theUnited Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services andMarkets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth companies, and otherpersons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all suchpersons together being referred to as “relevant persons”). The Additional Securities are only available to, andany invitation, offer or agreement to subscribe, purchase or otherwise acquire such Additional Securities will beengaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on thisOffering Circular or any of its contents.

Notification under Section 309B(1)(c) of the Securities and Futures Act, Chapter 289 of Singapore (the“Securities and Futures Act”) — SMC Global Power has determined, and hereby notifies all relevant persons(as defined in Section 309A(1) of the Securities and Futures Act), that the Additional Securities are prescribedcapital markets products (as defined in the Securities and Futures (Capital Markets Products) Regulations 2018of Singapore) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale ofInvestment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).

The Issuer reserves the right to withdraw this offering of the Additional Securities at any time. The Issuer and theJoint Lead Managers also reserve the right to reject any offer to purchase the Additional Securities in whole or inpart for any reason and to allocate to any prospective investor less than the full amount of Additional Securitiessought by such investor. This Offering Circular does not constitute an offer to sell, or a solicitation of an offer tobuy, any Additional Securities offered hereby in any circumstances in which such offer is unlawful.

The Additional Securities have not been approved or disapproved by the U.S. Securities and ExchangeCommission, any state securities commission in the United States or any other United States, Philippine or otherregulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offeringof the Additional Securities or the accuracy or adequacy of this Offering Circular. Any representation to thecontrary is a criminal offense in the United States.

The Additional Securities are subject to restrictions on transferability and resale and may not be transferred orresold except as permitted under the Securities Act and other applicable state, Philippine or other securities lawspursuant to registration thereunder or exemption therefrom. See “Subscription and Sale.” Prospective investorsshould thus be aware that they may be required to bear the financial risks of this investment for an indefiniteperiod of time.

FORWARD-LOOKING STATEMENTS

This Offering Circular contains forward-looking statements that are, by their nature, subject to significant risksand uncertainties. These forward-looking statements include, without limitation, statements relating to:

• known and unknown risks;

• uncertainties and other factors that may cause the actual results, performance or achievements of SMCGlobal Power to be materially different from any future results; and

• performance or achievements expressed or implied by forward-looking statements.

Such forward-looking statements are based on numerous assumptions regarding the present and future businessstrategies of SMC Global Power and the environment in which SMC Global Power will operate in the future.Important factors that may cause some or all of the assumptions not to occur or cause actual results, performanceor achievements to differ materially from those in the forward-looking statements include, among other things:

• the ability of SMC Global Power to successfully implement its strategies;

• the ability of SMC Global Power to anticipate and respond to market trends;

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• changes in availability and prices of fuel used in the power plants of SMC Global Power;

• unexpected shutdowns of (i) the IPPA Power Plants for which SMC Global Power acts as the IPPA and(ii) the Masinloc Power Plant, the Davao Greenfield Power Plant, the Limay Greenfield Power Plant andthe AHEPP;

• adverse weather patterns and natural disasters;

• the ability of SMC Global Power to successfully manage its growth;

• the ability of SMC Global Power to successfully implement and manage its power portfolio;

• the condition of and changes in, the Philippine, Asian or global economies;

• any political instability in the Philippines;

• the ability of SMC Global Power to secure additional financing;

• changes in interest rates, inflation rates and the value of the Peso against the U.S. dollar and othercurrencies;

• price volatility in the wholesale energy spot market;

• other risks relating to the Philippines, including changes in laws, rules and regulations, including tax lawsand licensing requirements;

• changes in power supply and demand dynamics in the Philippines;

• competition in the Philippine power industry; and

• risks relating to the Securities.

Additional factors that could cause the actual results, performance or achievements of SMC Global Power todiffer materially from forward-looking statements include, but are not limited to, those disclosed under“Risk Factors” and elsewhere in this Offering Circular. These forward-looking statements speak only as of thedate of this Offering Circular. SMC Global Power, the Joint Lead Managers, the Trustee and the Agent expresslydisclaim any obligation or undertaking to release, publicly or otherwise, any updates or revisions to any forward-looking statement contained herein to reflect events or circumstances, or to reflect any change in the expectationsof SMC Global Power with regard thereto or any change in events, conditions, assumptions or circumstances onwhich any statement is based or to reflect that SMC Global Power became aware of any such events orcircumstances, that occur after the date of this Offering Circular. The Issuer, the Joint Lead Managers, theTrustee and the Agents assume no obligation to update any of the forward-looking statements after the date ofthis Offering Circular to conform those statements to actual results, subject to compliance with all applicablelaws.

This Offering Circular includes statements regarding the expectations and projections of the Company for futureoperating performance and business prospects. The words “believe,” “plan,” “expect,” “anticipate,” “estimate,”“project,” “intend,” “will,” “shall,” “should,” “may,” “would” and similar words identify forward-lookingstatements. In addition, all statements other than statements of historical facts included in this Offering Circularare forward-looking statements. Statements in the Offering Circular as to the opinions, beliefs and intentions ofSMC Global Power accurately reflect in all material respects the opinions, beliefs and intentions of itsmanagement as to such matters as of the date of this Offering Circular, although SMC Global Power gives no

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assurance that such opinions or beliefs will prove to be correct or that such intentions will not change. ThisOffering Circular discloses, under the section “Risk Factors” and elsewhere, important factors that could causeactual results to differ materially from expectations of the Company. All subsequent written and oral forward-looking statements attributable to SMC Global Power or persons acting on behalf of SMC Global Power areexpressly qualified in their entirety by the above cautionary statements.

Should one or more of such risks and uncertainties materialize, or should any underlying assumptions proveincorrect, actual outcomes may vary materially from those indicated in the applicable forward-lookingstatements. Any forward-looking statement or information contained in this Offering Circular speaks only as ofthe date the statement was made.

All of the forward-looking statements of SMC Global Power made herein and elsewhere are qualified in theirentirety by the risk factors discussed in “Risk Factors” and “Industry Overview”. These risk factors andstatements describe circumstances that could cause actual results to differ materially from those contained in anyforward-looking statement in this Offering Circular.

INDUSTRY AND MARKET DATA

Market data and certain industry forecasts used throughout this Offering Circular were obtained from internalsurveys, market research, publicly available information and industry publications. Industry publicationsgenerally state that the information they contain has been obtained from sources believed to be reliable but thatthe accuracy and completeness of that information are not guaranteed. Similarly, internal surveys, industryforecasts and market research, while believed to be reliable, have not been independently verified, and none ofthe Issuer, the Joint Lead Managers, the Trustee nor the Agents makes any representation as to the accuracy orcompleteness of that information.

Information relating to or obtained from the Business Monitor, Department of Energy (“DOE”), EconomistIntelligence Unit, Energy Regulatory Commission (“ERC”), Manila Electric Company (“Meralco”), NationalGrid Corporation of the Philippines (“NGCP”), National Power Corporation (“NPC”), Philippine StatisticsAuthority, Philippine Electricity Market Corporation (“PEMC”), Power Sector Assets and LiabilitiesManagement Corporation (“PSALM”), National Transmission Corporation (“TransCo”) and WholesaleElectricity Spot Market (“WESM”) set forth in this Offering Circular was obtained from publicly availablesources that are believed to be reliable but such information has not been independently verified. Neither theIssuer nor the Joint Lead Managers makes any representation as to the accuracy of such information regardingthe Business Monitor, DOE, Economist Intelligence Unit, ERC, Meralco, NGCP, NPC, the Philippine StatisticsAuthority, PEMC, PSALM, TransCo or WESM.

STANDARDS FOR OPERATING STATISTICS

The power plant operating statistics included in this Offering Circular are based on the power plant operatingdata that have been provided by the independent power producer of the relevant power plant and grid systemoperators. SMC Global Power believes these have been measured in accordance with internationally recognizedpower plant operation standards set by the American Society of Mechanical Engineers, Power Test Code,Institute of Electrical and Electronics Engineering, Energy Power Research Institute or equivalentinternationally-accepted standards, as applicable. SMC Global Power has not independently verified the powerplant operating data provided by the independent power producers and grid system operators. Neither SMCGlobal Power nor any of the Joint Lead Managers makes any representation as to the accuracy of suchinformation provided by the independent power producers and grid system operators.

PRESENTATION OF FINANCIAL INFORMATION

The consolidated financial statements of SMC Global Power are reported in Pesos and are prepared based on itsaccounting policies, which are in accordance with the Philippine Financial Reporting Standards (“PFRS”) issuedby the Financial Reporting Standards Council of the Philippines (“FRSC”). PFRS include statements namedPFRS and Philippine Accounting Standards, and Philippine Interpretations from International FinancialReporting Interpretations Committee.

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Unless otherwise stated, all financial information relating to SMC Global Power contained herein is stated inaccordance with PFRS.

Figures in this Offering Circular have been subject to rounding adjustments. Accordingly, figures shown in thesame item of information may vary, and figures which are totals may not be an arithmetic aggregate of theircomponents.

References to “U.S.$” and “U.S. dollars” in this Offering Circular are to United States dollars, the lawfulcurrency of the United States of America, references to “P”, “Philippine Peso” and “Peso” are to the lawfulcurrency of the Philippines. The Issuer publishes its financial statements in Philippine Pesos. This OfferingCircular contains translations of certain amounts into U.S. Dollars at specified rates solely for the convenience ofthe reader. These translations should not be construed as representations that the Philippine Peso amountsrepresent such U.S. dollar amounts or could be, or could have been, converted into U.S. dollars at the ratesindicated or at all. Unless otherwise indicated, all translations from Philippine Pesos to U.S. dollars have beenmade at a rate of P52.50 = U.S.$1.00, being the closing rate on March 29, 2019 (the last date in March 2019 thatsuch rate was published) for the purchase of U.S. dollars with Philippine Pesos under the Bankers’ Association ofthe Philippines (“BAP”). On June 21, 2019, the closing spot rate quoted on the BAP was P51.56 = U.S.$1.00.See “Exchange Rates” for further information regarding the rates of exchange between the Philippine Peso andthe U.S. dollar.

The financial information included in this Offering Circular has been derived from the consolidated financialstatements of SMC Global Power and its subsidiaries. Unless otherwise indicated, the description of the businessactivities of the Issuer in this Offering Circular is presented on a consolidated basis.

NON-PFRS FINANCIAL MEASURES

This Offering Circular contains references to EBITDA. EBITDA is a supplemental measure of the performanceand liquidity of the Company that is not required by, or presented in accordance with, PFRS. Further, EBITDA isnot a measurement of the financial performance or liquidity of the Company under PFRS and should not beconsidered as an alternative to net income, gross revenues or any other performance measure derived inaccordance with PFRS or as an alternative to cash flow from operations or as a measure of the liquidity of theCompany. The Company calculates EBITDA as the sum of net income (excluding items between any or all of theCompany and its subsidiaries), income tax expense (benefit), finance cost (less interest income) and depreciation,in each case excluding amounts attributable to ring-fenced subsidiaries, less foreign exchange gain (loss), gain onsale of investment, and aggregate fixed payments made to PSALM. The calculation of EBITDA by SMC GlobalPower may be different from the calculations used by other companies, and, as a result, the EBITDA of SMCGlobal Power may not be comparable to other similarly titled measures of other companies.

The Company believes that EBITDA facilitates operating performance comparisons from period to period andfrom company to company by eliminating potential differences caused by variations in capital structures, taxpositions and the age and book depreciation of tangible assets. The Company presents EBITDA because itbelieves it is frequently used by securities analysts and investors in the evaluation of companies in its industry.

ENFORCEABILITY OF CIVIL LIABILITIES

SMC Global Power is established in the Philippines and all or a substantial portion of its operating assets arelocated in the Philippines. Substantially all of its directors and senior management reside in the Philippines. TheCompany has been advised by its Philippine legal counsel, Picazo Buyco Tan Fider & Santos, that a final andconclusive judgment on the merits rendered against the Company and these persons by courts outside thePhilippines obtained in an action predicated upon the civil liability provisions of laws other than Philippine lawswould be recognized and enforced by the courts in the Philippines through an independent action filed to enforcesuch judgment, and without re-trial or re-examination of the issues, provided the following conditions aresatisfied, namely: (i) the court rendering such judgment had jurisdiction in accordance with its jurisdictionalrules, (ii) such persons had notice of the proceedings, (iii) such judgment was not obtained by collusion or fraudor based on a clear mistake of law or fact and (iv) such judgment was not contrary to public policy, law, moralsor good customs in the Philippines.

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SUMMARY

The following summary is qualified in its entirety by, and is subject to, the more detailed information and theconsolidated financial statements of SMC Global Power that appear elsewhere in this Offering Circular. Themeaning of terms not defined in this summary can be found elsewhere in this Offering Circular.

OVERVIEW

SMC Global Power, together with its subsidiaries, associates and joint ventures, is one of the largest powercompanies in the Philippines, controlling 4,197 MW of combined capacity as of March 31, 2019 and benefitsfrom a portfolio of diversified fuel sources, including natural gas, coal, hydroelectric power and more recently,battery energy storage systems. Based on the total installed generating capacities reported in ERC ResolutionNo. 04, Series of 2018 (the “ERC Resolution on Grid Market Share Limitation”), the Company believes thatits combined installed capacity comprises approximately 19% of the National Grid, 25% of the Luzon Grid and9% of the Mindanao Grid, in each case as of March 31, 2019.

San Miguel Corporation entered the power industry in 2009 following the acquisition of rights to administer theoutput produced by IPPs in privatization auctions conducted by the Government through PSALM. The followingcompanies under the San Miguel Corporation group became the IPPA of the following plants: (1) San MiguelEnergy Corporation (“SMEC”) became the IPPA for the Sual Power Plant, a coal-fired thermal power plantlocated in Sual, Pangasinan, in November 2009; (2) Strategic Power Devt. Corp. (“SPDC”) became the IPPA forthe San Roque Power Plant, a hydroelectric power plant located in San Manuel, Pangasinan in January 2010; and(3) South Premiere Power Corp. (“SPPC”) became the IPPA for the Ilijan Power Plant, a natural gas-firedcombined cycle power plant located in Ilijan, Batangas in June 2010 (the Ilijan Power Plant, Sual Power Plantand San Roque Power Plant are collectively referred to as the IPPA Power Plants).

An IPPA under the relevant IPPA agreement has the right to sell electricity generated by the power plants ownedand operated by the relevant IPPs without having to bear any of the large upfront capital expenditures for powerplant construction or maintenance. As an IPPA, each of SMEC, SPDC and SPPC also has the ability to manageboth market and price risks by entering into bilateral contracts with offtakers while capturing potential upsidefrom the sale of excess capacity through the WESM.

In September 2010, San Miguel Corporation consolidated its power generation business through the transfer ofits equity interests in SMEC, SPDC and SPPC to SMC Global Power. SMC Global Power also became a wholly-owned subsidiary of San Miguel Corporation. Since then, SMC Global Power has controlled the 2,545 MWcombined contracted capacity of the IPPA Power Plants through the IPPA agreements executed by SMEC, SPDCand SPPC, respectively.

Building on its experience as an IPPA since San Miguel Corporation’s transfer of interests in SMEC, SPDC andSPPC, SMC Global Power embarked on the development of its own greenfield power projects. In 2013, SMCGlobal Power initiated two greenfield power projects, namely, the construction of the 2 x 150 MW DavaoGreenfield Power Plant which is owned by San Miguel Consolidated Power Corporation (“SMCPC”), itswholly-owned subsidiary, and the 4 x 150 MW Limay Greenfield Power Plant which is owned by SMCConsolidated Power Corporation (“SCPC”), another wholly-owned subsidiary. Units 1, 2 and 3 of the LimayGreenfield Power Plant commenced commercial operations in May 2017, September 2017 and March 2018,respectively, while Unit 4 has completed testing and commissioning and is expected to commence commercialoperations in the third quarter of 2019 once the ERC issues the certificate of compliance. Units 1 and 2 of theDavao Greenfield Power Plant commenced commercial operations in July 2017 and February 2018, respectively.

SMC Global Power also pursued strategic acquisitions to increase its energy portfolio. In November 2014, SMCGlobal Power, through its subsidiary PowerOne Ventures Energy Inc. (“PVEI”), acquired a 60% stake in AngatHydropower Corporation (“AHC”), the owner and operator of the 218 MW Angat Hydroelectric Power Plant(the “AHEPP”). More recently, on March 20, 2018, SMC Global Power acquired 51% and 49% of the equityinterests in SMCGP Masin Pte. Ltd. (“SMCGP Masin”, formerly Masin-AES Pte. Ltd) from AES Phil

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Investment Pte. Ltd. (“AES Phil”) and Gen Plus B.V., respectively. SMCGP Masin indirectly owns, through itssubsidiaries, Masinloc Power Partners Co. Ltd. (“MPPCL”) and SMCGP Philippines Energy Storage Co. Ltd(“SMCGP Philippines Energy”, formerly, AES Philippine Energy Storage Co. Ltd.). On September 19, 2018,Prime Electric Generation Corporation (“PEGC”), a wholly-owned subsidiary of SMC Global Power, andOceantech Power Generation Corporation (“OPGC”) purchased the entire partnership interests in SMCGPPhilippines Energy from subsidiaries of SMCGP Masin. MPPCL owns, operates and maintains the 1 x 330 MW(Unit 1), 1 x 344 MW (Unit 2) coal-fired power plant and 335 MW (Unit 3) expansion project under construction(together, the “Masinloc Power Plant”), and the 10 MW battery energy storage system project (the “MasinlocBESS”), all located in Masinloc, Zambales, while SMCGP Philippines Energy has commenced pre-constructionof a 20 MW battery energy storage system facility in Kabankalan, Negros Occidental (the “KabankalanBESS”).

As part of the purchase relating to the Masinloc power assets, SMC Global Power also acquired SMCGPTranspower Pte. Ltd. (“SMCGP Transpower”, formerly, AES Transpower Private Ltd.), and SMCGPPhilippines Inc. (“SPHI”, formerly, AES Philippines Inc.). SMCGP Transpower was a subsidiary of The AESCorporation, which provides corporate support services to MPPCL through its Philippine regional operatingheadquarters, while SPHI was a wholly-owned subsidiary of AES Phil and provides energy marketing services toMPPCL.

In July 2018, PEGC acquired the entire equity interest of ALCO Steam Energy Corporation in Alpha WaterRealty & Services Corp. (“Alpha Water”), representing 60% of the outstanding capital stock of Alpha Water. Asa result, SMC Global Power now effectively owns 100% of Alpha Water through its subsidiaries, PEGC andMPPCL. Alpha Water is the owner of the land on which the current site of the Masinloc Power Plant in ZambalesProvince is located.

In September 2018, PEGC and OPGC, another wholly-owned subsidiary of SMC Global Power, purchased theentire partnership interests in SMCGP Philippines Energy from subsidiaries of SMCGP Masin.

SMC Global Power, through its subsidiaries SMEC, SPDC, SPPC, AHC, SCPC, SMCPC, SMELC and MPPCL,sells power through offtake agreements directly to customers, including Meralco and other distribution utilities,electric cooperatives and industrial customers, or through the WESM. The majority of the consolidated sales ofSMC Global Power are through long-term take-or-pay offtake contracts most of which have provisions forpassing on fuel costs, foreign exchange differentials and certain other fixed costs.

SMC Global Power is also engaged in distribution and retail electricity services. In 2013, SMC Global Powerentered into a concession agreement for the operation and maintenance of Albay Electric Cooperative, Inc.(“ALECO”), which is the franchise holder for the distribution of electricity in the province of Albay in Luzon.SMC Global Power has also expanded its sale of power to a broader range of customers, including retailcustomers. The three retail electricity supplier (“RES”) licenses issued to SMC Global Power, through SanMiguel Electric Corp. (“SMELC”), SCPC and MPPCL, allowed it to enter into contracts with contestablecustomers and expand its customer base.

SMC Global Power, through SMEC and its subsidiaries, Bonanza Energy, Daguma Agro and Sultan Energy, alsoowns coal exploration, production and development rights over approximately 17,000 hectares of land inMindanao. While the Company does not intend to develop these sites imminently, depending on prevailingglobal coal prices and the related logistical costs, it may consider eventually tapping these sites to serve as asignificant additional source of coal fuel for its planned and existing greenfield coal-fired power plants.

SMC Global Power is a wholly-owned subsidiary of San Miguel Corporation, one of the largest and mostdiversified conglomerates in the Philippines, founded in 1890 that is listed in the Philippine Stock Exchange, Inc.(the “PSE”). San Miguel Corporation has market-leading businesses in various sectors, including beverages,food, packaging, fuel and oil, energy, infrastructure and property, and investments in car distributorship andbanking services. The Company believes that its relationship with San Miguel Corporation allows it to draw onthe extensive business networks, local business knowledge, relationships and expertise of San MiguelCorporation and its key executive officers.

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For the years ended December 31, 2016, 2017 and 2018 and the three months ended March 31, 2018 and 2019,SMC Global Power sold 15,758 GWh, 15,707 GWh, 20,273 GWh, 4,330 GWh and 6,098 GWh of powerpursuant to bilateral offtake agreements and 1,588 GWh, 1,520 GWh, 3,590 GWh, 462 GWh and 727 GWh ofpower through the WESM, respectively. For the years ended December 31, 2016, 2017 and 2018 and the threemonths ended March 31, 2018 and 2019, SMC Global Power purchased 767 GWh, 684 GWh, 1,144 GWh,213 GWh and 279 GWh of power from the WESM, respectively.

For the year ended December 31, 2018, the total consolidated revenue, net income and EBITDA of SMC GlobalPower was P120,102.8 million (U.S.$2,287.7million), P8,300.1 million (U.S.$158.1 million) andP10,716.9 million (U.S.$204.1 million), respectively. For the three months ended March 31, 2019, the totalconsolidated revenue, net income and EBITDA of SMC Global Power was P34,675.9 million(U.S.$660.5 million), P3,578.5 million (U.S.$68.2 million) and P3,036.8 million (U.S.$57.8 million),respectively. As of March 31, 2019, SMC Global Power had total consolidated assets of P499,288.8 million(U.S.$9,510.3 million).

STRENGTHS

SMC Global Power believes it has the following competitive strengths:

• Industry leader with a strong growth platform.

• Well-positioned to capture future demand growth.

• Stable and predictable cash flows.

• Flexible and diversified power portfolio.

• Established relationships with world class partners.

• A member of the San Miguel Corporation group of companies.

• Experienced and highly competent management team.

• Strong commitment to stringent environmental policies and pollution controls.

STRATEGIES

The principal business strategies of SMC Global Power are set out below:

• Optimize the installed capacity of its power portfolio and strategically contract capacity to enhancemargins.

• Continue to grow its power portfolio through the development of greenfield power projects and acquisitionof power generation capacity in line with regulatory and infrastructure developments.

• Vertically integrate complementary businesses in order to diversify its energy portfolio.

• Continue to pursue and develop measures to reduce gas emissions and operate power plants within andbelow applicable environmental compliance standards.

• Leverage operational synergies with San Miguel Corporation group of companies.

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RECENT DEVELOPMENTS

On January 25, 2019, the Company subscribed to 18,314,898 common shares of MPGC, increasing its ownershipfrom 49% to 73.58% of the total issued and outstanding capital stock of MPGC. The subscription was a result ofthe waiver by MPGC’s other shareholders of their right to contribute additional equity pursuant to the capital callapproved by MPGC. On the same date, the Company subscribed to an additional 28,929,347 common shares tobe issued out of the proposed increase in the authorized capital stock of MPGC, which is subject to the SEC’sapproval. As of March 31, 2019, MPGC’s application for the increase in authorized capital stock is pending.

On March 28, 2019, the Company priced three series of Philippine Peso fixed-rate bonds in an aggregate amountof P25 billion with an oversubscription option of up to P5 billion. The Philippine Peso fixed-rate bonds in theaggregate amount of P30 billion were issued and listed on the Philippine Dealing and Exchange Corp onApril 24, 2019.

On April 25, 2019, the Company issued the Original Securities, which were listed on the SGX-ST on April 26,2019.

CORPORATE INFORMATION

SMC Global Power is incorporated under the laws of the Philippines. The registered office and principal place ofbusiness of SMC Global Power is located at SMC Global Power Holdings Corp., 155 EDSA, Wack-Wack,Mandaluyong City, Philippines. The telephone number of SMC Global Power is +632-702-4500.

The investor relations officer of SMC Global Power is Reyna-Beth De Guzman, who can be reached [email protected].

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SUMMARY FINANCIAL INFORMATION AND OTHER DATA

The summary historical consolidated statement of financial position data as of December 31, 2016,December 31, 2017 and December 31, 2018, and summary historical consolidated statement of income and cashflow data for the years ended December 31, 2016, December 31, 2017 and December 31, 2018 set forth below,have been derived from, and should be read in conjunction with, the audited consolidated financial statements ofSMC Global Power, including the notes thereto, included elsewhere in this Offering Circular. The summaryhistorical consolidated statement of financial position data as of March 31, 2019 and summary historicalconsolidated statement of income and cash flow data for the three months ended March 31, 2018 and March 31,2019, respectively set forth below, have been derived from, and should be read in conjunction with, the unauditedinterim condensed consolidated financial statements of SMC Global Power, including the notes thereto, includedelsewhere in this Offering Circular.

The consolidated financial statements of SMC Global Power as of and for the years ended December 31, 2016,2017 and 2018 were audited by KPMG. The consolidated financial statements of SMC Global Power as of andfor the three months ended March 31, 2018 and 2019 were reviewed by KPMG.

Unless otherwise stated, SMC Global Power has presented its consolidated financial results under PFRS.

Potential investors should read the following data together with the more detailed information contained in“Management’s Discussion and Analysis of Results of Operations” and the consolidated financial statementsand related notes included elsewhere in this Offering Circular. The following data is qualified in its entirety byreference to all of that information.

Translations from Philippine Pesos to U.S. dollars for the convenience of the reader have been made at the BAPclosing rate on March 29, 2019 of p52.50 to U.S.$1.00.

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CONSOLIDATED STATEMENT OF INCOME DATA

For the years endedDecember 31,

For the three months endedMarch 31,

2016 2017 2018 2018 2019

(Audited) (Unaudited)(in millions)

Q Q Q U.S.$ Q Q U.S.$Revenues . . . . . . . . . . . . . . . . . . . . . . 77,972.4 82,790.6 120,102.8 2,287.7 24,660.5 34,675.9 660.5

Costs and ExpensesCost of power sold:Energy fees . . . . . . . . . . . . . . . . . . . . . 20,477.9 23,726.5 25,423.5 484.3 5,562.8 7,252.7 138.1Coal, fuel oil and other

consumables . . . . . . . . . . . . . . . . . . 10,046.7 13,039.1 32,563.7 620.3 5,256.6 8,902.6 169.6Power purchases . . . . . . . . . . . . . . . . . 7,836.6 10,725.5 11,181.2 213.0 2,579.1 3,707.0 70.6Depreciation and amortization . . . . . . 6,164.9 5,842.4 9,108.9 173.5 1,765.3 2,392.4 45.6Plant operations and maintenance

fees . . . . . . . . . . . . . . . . . . . . . . . . . 637.0 491.8 2,541.0 48.4 333.4 668.8 12.7Selling and administrative

expenses . . . . . . . . . . . . . . . . . . . . . 6,079.0 4,689.0 6,110.2 116.4 1,172.2 1,911.8 36.4

51,242.1 58,514.3 86,928.5 1,655.8 16,669.4 24,835.3 473.1

Income from operations . . . . . . . . . . 26,730.3 24,276.3 33,174.3 631.9 7,991.1 9,840.6 187.4Interest income . . . . . . . . . . . . . . . . . 200.5 460.9 661.2 12.6 155.5 145.6 2.8Gain on sale of property, plant and

equipment . . . . . . . . . . . . . . . . . . . 116.4 — — — — — —Equity in net earnings (losses) of

associates and joint ventures —net . . . . . . . . . . . . . . . . . . . . . . . . . . (294.8) (40.4) (471.2) (9.0) (17.6) 163.1 3.1

Interest expense and otherfinancing charges . . . . . . . . . . . . . (12,354.2) (13,244.6) (17,616.1) (335.5) (3,415.0) (4,874.1) (92.8)

Other income (charges) — net . . . . (6,881.8) 2,944.2 (3,546.6) (67.6) (3,002.1) 127.7 2.4

Income before income tax . . . . . . . . 7,516.4 14,396.4 12,201.6 232.4 1,711.9 5,402.9 102.9Income tax expense — net . . . . . . . . 3,365.7 6,179.5 3,901.5 74.3 365.0 1,824.4 34.8

Net income . . . . . . . . . . . . . . . . . . . . . 4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2

Attributable to:Equity holders of the Parent

Company . . . . . . . . . . . . . . . . . . . . 4,150.7 8,216.9 8,281.8 157.7 1,346.6 3,588.9 68.4Non-controlling interest . . . . . . . . . . . — — 18.3 0.3 0.3 (10.4) (0.2)

4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2

Earnings per common shareattributable to equity holders of theParent Company(Basic/Diluted) . . . . . . . . . . . . . . . . P 0.97 P 4.11 P 2.67 U.S.$ 0.05 P 0.37 P 1.81 U.S.$ 0.03

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA

As of December 31, As of March 31,

2016 2017 2018 2018 2019


P P P U.S.$ P P U.S.$ASSETSCurrent AssetsCash and cash equivalents . . . . . . . . . . . . . . . 21,491.4 28,655.4 28,511.9 543.1 32,465.7 23,144.2 440.8Trade and other receivables — net . . . . . . . . . 22,342.9 20,435.1 33,046.7 629.5 26,906.3 37,000.0 704.8Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,272.3 3,147.7 5,294.6 100.8 5,383.4 4,801.7 91.4Prepaid expenses and other current assets . . . 17,683.0 17,791.8 21,761.7 414.5 20,377.3 21,843.1 416.1Assets held for sale . . . . . . . . . . . . . . . . . . . . . 184.3 — — — — — —

Total Current Assets . . . . . . . . . . . . . . . . . . . 63,973.9 70,030.0 88,614.9 1,687.9 85,132.7 86,789.0 1,653.1

Noncurrent AssetsInvestments and advances — net . . . . . . . . . . 16,245.4 16,621.1 12,149.0 231.4 16,884.2 11,375.7 216.7Property, plant and equipment — net . . . . . . . 246,488.0 250,961.3 312,315.4 5,948.9 312,707.2 144,602.0 2,754.3Right-of-use assets —net . . . . . . . . . . . . . . . . — — — — — 168,375.2 3,207.1Deferred exploration and development

costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693.4 699.0 705.5 13.4 700.0 706.5 13.5Intangible assets and goodwill — net . . . . . . . 2,572.1 2,594.2 72,613.4 1,383.1 72,587.1 72,617.1 1,383.2Deferred tax assets . . . . . . . . . . . . . . . . . . . . . 2,955.6 1,316.9 1,137.6 21.7 1,633.8 1,156.5 22.0Other noncurrent assets — net . . . . . . . . . . . . 1,020.8 7,950.5 6,314.4 120.3 10,277.0 13,666.8 260.3

Total Noncurrent Assets . . . . . . . . . . . . . . . . 269,975.3 280,143.0 405,235.3 7,718.8 414,789.3 412,499.8 7,857.1

333,949.2 350,173.0 493,850.2 9,406.7 499,922.0 499,288.8 9,510.3

LIABILITIES AND EQUITYCurrent LiabilitiesLoans payable . . . . . . . . . . . . . . . . . . . . . . . . . — 5,930.0 8,675.7 165.2 8,277.2 8,662.5 165.0Accounts payable and accrued . . . . . . . . . . . . 37,729.4 31,074.8 31,109.9 592.6 41,192.4 33,830.7 644.4Finance lease liabilities — current portion . . . 16,344.3 16,844.4 19,659.6 374.5 17,824.4 20,898.1 398.1Income tax payable . . . . . . . . . . . . . . . . . . . . . 127.2 151.9 310.9 5.9 525.4 637.8 12.1Current maturities of long term debt — net of

debt issue costs . . . . . . . . . . . . . . . . . . . . . . 1,040.7 1,139.6 4,939.5 94.1 3,121.7 4,976.9 94.8

Total Current Liabilities . . . . . . . . . . . . . . . 55,241.6 55,140.7 64,695.6 1,232.3 70,941.1 69,006.0 1,314.4

Noncurrent LiabilitiesLong-term debt — net of current maturities

and debt issue costs . . . . . . . . . . . . . . . . . . . 65,283.0 89,589.1 202,025.8 3,848.1 182,851.2 203,244.9 3,871.3Deferred tax liabilities . . . . . . . . . . . . . . . . . . 4,785.2 7,324.1 8,180.1 155.8 7,468.6 9,233.1 175.9Finance lease liabilities — net of current

portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,745.3 137,949.3 122,347.4 2,330.4 136,568.8 117,679.1 2,241.5Other noncurrent liabilities — net of current

portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223.5 404.3 843.6 16.1 8,451.1 821.6 15.6

Total Noncurrent Liabilities . . . . . . . . . . . . 224,037.0 235,266.8 333,396.9 6,350.4 335,339.7 330,978.7 6,304.4

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . 279,278.6 290,407.5 398,092.5 7,582.7 406,280.8 399,984.8 7,618.8

EquityCapital stock . . . . . . . . . . . . . . . . . . . . . . . . . . 1,062.5 1,062.5 1,062.5 20.2 1,062.5 1,062.5 20.2Additional paid-in capital . . . . . . . . . . . . . . . . 2,490.0 2,490.0 2,490.0 47.4 2,490.0 2,490.0 47.4Redeemable perpetual securities . . . . . . . . . . . — — 32,751.6 623.8 33,127.7 32,751.6 623.8Undated subordinated capital securities . . . . . 26,933.6 26,933.6 26,933.6 513.0 26,933.6 26,933.6 513.0Equity reserves . . . . . . . . . . . . . . . . . . . . . . . . 758.9 761.6 618.3 11.8 796.1 595.1 11.3Retained earnings . . . . . . . . . . . . . . . . . . . . . . 23,425.6 28,517.8 31,901.7 607.7 29,033.0 34,493.8 657.0

54,670.6 59,765.5 95,757.7 1,824.0 93,442.9 98,326.6 1,872.9Non-controlling interest . . . . . . . . . . . . . . . . . — — — — 198.4 977.4 18.6

Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . 54,670.6 59,765.5 95,757.7 1,824.0 93,641.2 99,304.0 1,891.5

333,949.2 350,173.0 493,850.2 9,406.7 499,922.0 499,288.8 9,510.3

7

CONSOLIDATED STATEMENT OF CASH FLOWS DATA



2016 2017 2018 2018 2019


Q Q Q U.S.$ Q Q U.S.$

Net cash flows provided byoperating activities . . . . . . . . . 30,479.6 21,845.3 15,259.2 290.7 11,008.2 7,166.3 136.5

Net cash flows provided by(used in) investingactivities . . . . . . . . . . . . . . . . . (6,017.4) (16,279.3) (102,034.8) (1,943.5) (97,756.7) (7,861.7) (149.7)

Net cash flows provided by(used in) financingactivities . . . . . . . . . . . . . . . . . (25,233.8) 1,526.7 86,529.3 1,648.2 90,116.1 (4,729.4) (90.1)

Effect of exchange rate changeson cash and cashequivalents . . . . . . . . . . . . . . . 21.6 71.3 102.8 2.0 442.7 57.1 1.1

Net increase (decrease) in cashand cash equivalents . . . . . . . . (750.0) 7,164.0 (143.5) (2.6) 3,810.3 (5,367.7) (102.2)

Cash and cash equivalents atbeginning of period . . . . . . . . 22,241.4 21,491.4 28,655.4 545.8 28,655.4 28,511.9 543.1

Cash and cash equivalents at endof period . . . . . . . . . . . . . . . . . 21,491.4 28,655.4 28,511.9 543.2 32,465.7 23,144.2 440.8

ADDITIONAL FINANCIAL AND OPERATING DATA

The table below provides summary additional financial and operating data for the periods indicated:



2016 2017 2018 2018 2019

(Audited) (Unaudited)(in millions unless indicated otherwise)


Net income . . . . . . . . . . . . . . . 4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2EBITDA(1) . . . . . . . . . . . . . . . . 10,475.4 7,654.4 10,716.9 204.1 3,092.7 3,036.8 57.8Electricity sold (GWh) . . . . . . 17,346.5 17,226.9 23,863.6 4,791.9 6,825.6

of which: bilateral offtakeagreements . . . . . . . . . . 15,758.1 15,706.9 20,273.3 4,330.0 6,098.4

of which: WESM sales . . 1,588.4 1,520.0 3,590.3 461.9 727.2Electricity bought on WESM

(GWh) . . . . . . . . . . . . . . . . . 767.2 683.8 1,144.1 213.2 279.1Average realized/paid

electricity prices (P/MWh)For electricity sold under

bilateral offtakeagreements . . . . . . . . . . 4,636.4 4,926.4 5,388.5 102.6 5,290.8 5,160.9 98.3

For electricity sold onWESM . . . . . . . . . . . . . 2,615.2 2,939.1 3,024.8 57.6 3,791.4 4,404.3 83.9

For electricity purchasedfrom WESM . . . . . . . . 4,278.1 4,753.0 4,342.7 82.7 3,817.4 6,057.4 115.4

Net debt(2) . . . . . . . . . . . . . . . . 198,846.7 187,173.3 269,349.0 5,130.5 277,747.0 272,617.2 5,192.7Net debt to Consolidated total

equity(3) . . . . . . . . . . . . . . . . N/A 2.97 2.80 2.80 2.87 2.77 2.77

8

Notes:

(1) Calculated as (a) net income (excluding items between any or all of the Company and its subsidiaries) plus (b) income tax expense(benefit), finance cost (less interest income) and depreciation, in each case excluding amounts attributable to ring-fenced subsidiariesless (c) foreign exchange gain (loss), gain on sale of investment and aggregate fixed payments made to PSALM. EBITDA should not beviewed in isolation or as an alternative to financial measures calculated in accordance with PFRS. See “Presentation of FinancialInformation” and “Non-PFRS Financial Measures.”

(2) Net debt represents the consolidated debt of the Company and its subsidiaries — net of debt issue costs less cash and cash equivalentsand including PSALM finance lease liabilities, in each case, excluding amounts attributable to ring-fenced subsidiaries’ projectfinance debt. The ring-fenced subsidiaries are SCPC, SMCPC and PVEI.

(3) The Company maintains a Net debt to Consolidated total equity ratio of not more than 3.25x. The Net debt to Consolidated total equityratio is computed by dividing Net debt over Consolidated total equity. Consolidated total equity is Equity as adjusted to excludeRetained earnings (deficit) of ring-fenced subsidiaries.

CALCULATION OF EBITDA

The following table presents a reconciliation of EBITDA(1) to net income for each of the periods indicated.



2016 2017 2018 2018 2019


P P P U.S.$ Q Q U.S.$

Net income(1) . . . . . . . . . . . . . . . . . . . . . . . 5,390.7 9,215.1 5,094.5 97.0 1,295.1 2,363.8 45.0Add:

Income tax expense . . . . . . . . . . . . . 3,677.9 5,352.4 4,638.2 88.3 355.0 1,829.5 34.8Finance cost . . . . . . . . . . . . . . . . . . . 12,342.3 11,747.7 14,919.7 284.2 3,074.3 3,917.8 74.6Interest income . . . . . . . . . . . . . . . . . (196.6) (368.5) (463.5) (8.8) (104.5) (105.8) (2.0)Depreciation . . . . . . . . . . . . . . . . . . . 6,338.7 5,607.7 6,898.6 131.4 1,565.7 1,743.2 33.2

Less:Foreign exchange gains (loss) . . . . . (6,910.1) (975.0) (5,345.0) (101.8) (3,226.1) 27.3 0.5Aggregate fixed payments made to

PSALM(2) . . . . . . . . . . . . . . . . . . . 23,873.3 24,875.0 25,715.6 489.8 6,319.0 6,684.4 127.3Gain on Sale of Investment . . . . . . . 114.4 — — — — — —

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . 10,475.4 7,654.4 10,716.9 204.1 3,092.7 3,036.8 57.8

Notes:

(1) Amounts exclude items attributable to ring-fenced subsidiaries. Subsidiaries with project debts were nominated as ring-fencedsubsidiaries. If the amounts from the ring-fenced subsidiaries were to be included, the EBITDA would amount to p10,099.4 million,p9,013.8 million and p18,108.2 million (U.S.$344.9 million) for the years ended December 31, 2016, December 31, 2017 andDecember 31, 2018, and p3,912.2 million and p5,861.0 million (U.S.$111.6 million) for the three months ended March 31, 2018 andMarch 31, 2019, respectively.

(2) Aggregate fixed payments made to PSALM is reflected in the Statement of Cash Flows as Payments of Finance Lease Liabilities.

9

SUMMARY OF THE OFFERING

The following is a brief summary of the offering. For a more complete description of the terms of the Securities,see “Terms and Conditions of the Securities.” Capitalized terms not otherwise defined herein shall have themeanings set forth under “Terms and Conditions of the Securities.”

Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power Holdings Corp., a company incorporated withlimited liability under the laws of the Republic of the Philippines.

Securities Offered . . . . . . . . . . . . . . . . . . U.S.$[Š] senior perpetual capital securities (“Additional Securities”)to be consolidated into and form a single series with theU.S.$500,000,000 senior perpetual capital securities issued by theIssuer on April 25, 2019 (the “Original Securities”, and togetherwith the Additional Securities, the “Securities”).

Status of the Securities . . . . . . . . . . . . . . The Securities constitute direct, unconditional, unsecured andunsubordinated obligations of the Issuer and will at all times rank paripassu without any preference among themselves and at least paripassu with all other present and future unconditional, unsecured andunsubordinated obligations of the Issuer (including the OriginalSecurities), but, in the event of insolvency, only to the extentpermitted by applicable laws relating to creditors’ rights.

The claims of the holders, in respect of the Securities, including inrespect of any claim to Arrears in Distribution, will, in the event ofthe Winding-Up of the Issuer (subject to and to the extent permittedby applicable law), rank at least pari passu with each other and withall other present and future unconditional, unsecured andunsubordinated obligations of the Issuer.

No Set-off . . . . . . . . . . . . . . . . . . . . . . . . To the extent and in the manner permitted by applicable law, noSecurityholder may exercise, claim or plead any right of set-off,counterclaim, compensation or retention in respect of any amountowed to it by the Issuer in respect of, or arising from, the Securitiesand each Securityholder will, by virtue of his holding of any Security,be deemed to have waived all such rights of set-off, counterclaim,compensation or retention.

Initial Rate of Distribution . . . . . . . . . . . 6.50% per annum plus any increase pursuant to Condition 4.4(Increase in Rate of Distribution).

Issue Price . . . . . . . . . . . . . . . . . . . . . . . . The Additional Securities will be issued at [Š]% of their principalamount, plus an amount corresponding to accrued Distributions from,and including, April 25, 2019 to, but excluding, [Š], 2019.

Form and Denomination . . . . . . . . . . . . . The Additional Securities are issued in registered form indenominations of U.S.$200,000 and integral multiples of U.S.$1,000in excess thereof.

Distributions . . . . . . . . . . . . . . . . . . . . . . Subject to Condition 4.4 (Increase in Rate of Distribution) andCondition 4.5 (Optional Deferral of Distributions), the Securities willconfer a right to receive distributions (“Distributions”):

(a) from the period commencing on (and including) the Issue Dateto (but excluding) April 25, 2024 (the “Step Up Date”), at theInitial Rate of Distribution; and

10

(b) from (and including) each Reset Date (including the Step UpDate) to (but excluding) the immediately following Reset Date,at the relevant Reset Rate of Distribution (determined by theCalculation Agent on the relevant Reset Determination Date andnotified to the Holders, the Principal Paying Agent and theRegistrar),

payable semi-annually in arrears on April 25 and October 25 of eachyear (each a “Distribution Payment Date”) commencing onOctober 25, 2019.

An amount corresponding to the accrued Distributions on theaggregate principal amount of the Additional Securities from, andincluding, April 25, 2019 to, but excluding, [Š], 2019, will be payableto the Issuer upon the issue of the Additional Securities to adjust forthe excess payment by the Issuer to the additional Securityholdersduring the first Distribution Date of the Additional Securities.

“Reset Date” means the Step Up Date and any subsequent date whichis the fifth anniversary of any Reset Date.

Increase in Rate of Distribution . . . . . . . 2.50% per annum.

Optional Deferral of Distributions . . . . . The Issuer may, in its sole and absolute discretion, on any day whichis not less than five Business Days prior to any Distribution PaymentDate, resolve to defer payment of any or all of the Distribution whichwould otherwise be payable on that Distribution Payment Dateunless, during the six months ending on that scheduled DistributionPayment Date, a Compulsory Distribution Payment Event hasoccurred (the “Deferral Election Event”). Any such deferredDistribution will constitute “Arrears of Distribution” and will not bedue and payable until the relevant Payment Reference Date.Distributions will accrue on each Arrears of Distribution for so longas such Arrears of Distribution remains outstanding at the same Rateof Distribution as the Principal Amount of the Securities bears at suchtime and will be added to such Arrears of Distribution (and thereafterbear Distributions accordingly) on each Distribution Payment Date.

The Issuer is not subject to any limit as to the number of timesDistributions and Arrears of Distributions may be deferred pursuantto the provisions of Condition 4.5(a).

The Issuer will notify the Securityholders (in accordance withCondition 12.1 (Notices to Securityholders)), the Trustee and thePrincipal Paying Agent of any deferral of Distribution not less thanfive Business Days prior to the relevant Distribution Payment Date(the “Deferral Election Notice”). Deferral of a Distribution pursuantto Condition 4.5(a) (Optional Deferral of Distributions) will notconstitute a default by the Issuer or any other breach of its obligationsunder the Securities or the Trust Deed or for any other purpose.

“Compulsory Distribution Payment Event” means (a) adiscretionary dividend, distribution, interest or other payment hasbeen paid or declared on or in respect of any Junior Securities or

11

(except on a pro rata basis) Parity Securities of the Issuer, other than adividend, distribution or other payment in respect of an employeebenefit plan or similar arrangement with or for the benefit ofemployees, officers, directors and consultants of the Issuer; or (b) atthe discretion of the Issuer, any Junior Securities or (except on a prorata basis) Parity Securities of the Issuer have been redeemed,repurchased or otherwise acquired by the Issuer or any of itsSubsidiaries.

Restrictions in the case of Deferral . . . . . If on any Distribution Payment Date, payment of all Distributionsscheduled to be made on such date is not made in full by reason of theIssuer deferring such Distributions in accordance with the terms ofthe Securities, the Issuer shall not, and shall procure that none of itsSubsidiaries will:

(a) declare or pay any discretionary dividends, distributions ormake any other discretionary payment on, and will procure thatno discretionary dividend, distribution or other payment is madeon any class of Junior Securities or (except on a pro rata basis)Parity Securities of the Issuer, other than a dividend,distribution or other payment in respect of an employee benefitplan or similar arrangement with or for the benefit ofemployees, officers, directors and consultants of the Issuer; or

(b) redeem, reduce, cancel, buy-back or acquire for anyconsideration (b) any of the Junior Securities or (except on apro rata basis) Parity Securities of the Issuer, other than aredemption, reduction, cancellation, buy-back or acquisition inrespect of an employee benefit plan or similar arrangement withor for the benefit of employees, officers, directors andconsultants of the Issuer,

unless and until (i) the Issuer has satisfied in full all outstandingArrears of Distribution; or (ii) the Issuer is permitted to do so with theconsent of the Securityholders of at least a majority in aggregateprincipal amount of the Securities then outstanding. For the avoidanceof doubt, nothing in Condition 4.6 (Restrictions in the case ofDeferral) shall restrict the ability of any Subsidiary of the Issuer todeclare and pay dividends, advance loans or otherwise makepayments to the Issuer.

Payments of Arrears of Distribution . . . . The Issuer may elect to pay Arrears of Distribution (in whole or inpart) at any time on the giving of at least five Business Days’ priornotice to Securityholders (in accordance with Condition 12.1 (Noticesto Securityholders)), the Trustee and the Principal Paying Agent. IfArrears of Distribution have not been paid in full earlier, alloutstanding Arrears of Distribution will become due and payable, andthe Issuer must pay such outstanding Arrears of Distribution(including any amount of Distribution accrued thereon in accordancewith Condition 4.5(a)), on the relevant Payment Reference Date (inaccordance with Condition 6). Any partial payment of outstandingArrears of Distribution by the Issuer shall be made on a pro rata basisbetween the Securityholders.

12

“Payment Reference Date” means the date which is the earliest of:

(a) the date on which the Securities are redeemed in accordancewith Condition 5;

(b) the date on which an order is made for the Winding-Up of theIssuer; and

(c) the date on which the Issuer is in violation of Condition 4.6 oron the occurrence of a Compulsory Distribution Payment Event.

Expected Closing Date . . . . . . . . . . . . . . [Š], 2019

Redemption . . . . . . . . . . . . . . . . . . . . . . . The Securities have no fixed redemption date. Unless previouslyredeemed or purchased and cancelled in accordance with theprovisions of Condition 5 (without prejudice to Condition 10), theSecurities will have no maturity date, unless the Issuer elects to retaina fixed corporate term under its articles of incorporation. If the Issuerelects to have a fixed corporate term under its articles ofincorporation, the term of the Securities will mature on the date onwhich the corporate term of the Issuer expires in accordance with itsarticles of incorporation.

Redemption at the Option of theIssuer . . . . . . . . . . . . . . . . . . . . . . . . . . Subject to applicable law, the Issuer may redeem the Securities (in

whole but not in part) on:

(a) the Step Up Date; or

(b) any Distribution Payment Date falling after the Step Up Date,

in each case, at the Redemption Price, on the giving of not less than30 and not more than 60 calendar days’ irrevocable notice ofredemption to the Securityholders in accordance with Condition 12.1(Notices to Securityholders).

Early Redemption due to a Gross-upEvent . . . . . . . . . . . . . . . . . . . . . . . . . . If a Gross-up Event occurs, the Issuer may redeem the Securities (in

whole but not in part) at the Redemption Price, on the giving of notless than 30 and not more than 60 calendar days’ irrevocable notice ofredemption to the Securityholders in accordance with Condition 12.1(Notices to Securityholders).

No such notice of redemption may be given earlier than 45 calendardays prior to the earliest calendar day on which the Issuer would befor the first time obliged to pay the Additional Amounts in questionon payments due in respect of the Securities.

Prior to the giving of any such notice of redemption, the Issuer willdeliver or procure that there is delivered to the Trustee:

(a) a certificate signed by any two executive officers of the Issuerstating that the Issuer is entitled to effect such redemption and

13

setting out a statement of facts showing that a Gross-up Eventhas occurred and that the obligation to pay Additional Amountscannot be avoided by the Issuer taking reasonable measuresavailable to it; and

(b) an opinion of an independent legal or tax adviser of recognizedstanding to the effect that the Issuer has or will become obligedto pay the Additional Amounts in question as a result of aGross-up Event,

and the Trustee shall be entitled to accept the above certificate andopinion as sufficient evidence of the satisfaction of the conditionsprecedent set out above, in which event it shall be conclusive andbinding on the Securityholders.

For the avoidance of doubt, a change of jurisdiction or domicile of theIssuer shall not be considered a reasonable measure.

“Gross-up Event” means that as a result of any change in, oramendment to, the laws or regulations or rulings promulgatedthereunder of the Relevant Jurisdiction, or any change in oramendment to any official interpretation or application of those lawsor regulations or rulings promulgated thereunder, which change oramendment becomes effective on or after April 25, 2019, the Issuerhas or will become obliged to pay Additional Amounts; provided thatthe payment obligation cannot be avoided by the Issuer takingreasonable measures available to it; provided further that where anyAdditional Amounts due in accordance with Condition 7 are inconsequence of any change in the laws or regulations or rulingspromulgated thereunder of the Relevant Jurisdiction, or any change inor amendment to any official interpretation or application of thoselaws or regulations or rulings promulgated thereunder after April 25,2019, a Gross-Up Event shall have occurred only in the event that therate of withholding or deduction required by such law, regulation orrulings promulgated thereunder, or such official interpretation orapplication thereof, is in excess of 30%.

Early Redemption due to a Change ofControl Event . . . . . . . . . . . . . . . . . . . If a Change of Control Event occurs, the Issuer may redeem the

Securities (in whole but not in part) (i) at any time prior to butexcluding the Step Up Date at the Special Redemption Price or (ii) onor at any time after the Step Up Date at the Redemption Price, in eachcase on the giving of not less than 30 and not more than 60 calendardays’ irrevocable notice of redemption to the Securityholders inaccordance with Condition 12.1 (Notices to Securityholders).

A “Change of Control Event” means Permitted Holders ceasing to,whether directly or indirectly, have control in respect of more than50% of the outstanding Voting Stock of the Issuer.

“Permitted Holders” mean any or all of the following: (a) SanMiguel Corporation, (b) San Miguel Corporation Retirement Plan orany similar or successor employee retirement plan of San MiguelCorporation, and (c) any Person the Voting Stock of which at least amajority is beneficially owned, directly or indirectly, by a Personspecified in clauses (a) and (b) above.

14

Early Redemption due to a ReferenceIndebtedness Default Event . . . . . . . . . If a Reference Indebtedness Default Event occurs and is continuing,

the Issuer may redeem the Securities (in whole but not in part) at anytime at the Redemption Price, on the giving of not less than 30 andnot more than 60 calendar days’ irrevocable notice of redemption toSecurityholders in accordance with Condition 12.1 (Notices toSecurityholders).

“Reference Indebtedness Default Event” means an event of defaultoccurs pursuant to Section 9.1(b) (Events of Default) of the trustagreement in respect of the Issuer’s outstanding P3,609,020,0006.625% PHP-denominated 10-year Series F Bonds due 2027 (ISIN:PHY806B2AJ53) (the “Initial Reference Notes”), or any debtsecurity in exchange for, or the net proceeds of which are used torefinance or refund, replace, exchange, renew, repay, defease ordischarge the Initial Reference Notes prior to their maturity (the“Refinancing Securities”), as a result of the Issuer’s default in,non-compliance with or non-performance of the Initial ReferenceNotes or of the Refinancing Securities, as the case may be, as suchInitial Reference Notes or Refinancing Securities are amended fromtime to time in accordance with the terms and conditions of the InitialReference Notes or of the Refinancing Securities, as the case may be.

Early Redemption due to an AccountingEvent . . . . . . . . . . . . . . . . . . . . . . . . . . If an Accounting Event occurs and is continuing, the Issuer may

redeem the Securities (in whole but not in part) (i) at any time prior tobut excluding the Step Up Date at the Special Redemption Price or(ii) on or at any time after the Step Up Date at the Redemption Price,in each case on the giving of not less than 30 and not more than 60calendar days’ irrevocable notice of redemption to theSecurityholders in accordance with Condition 12.1 (Notices toSecurityholders).

An “Accounting Event” means that an opinion of a recognizedaccountancy firm of international standing has been delivered to theIssuer and the Trustee, stating the Securities may no longer berecorded as equity in the audited consolidated financial statements ofthe Issuer prepared in accordance with PFRS or other recognizedaccounting standards that the Issuer has adopted from time to time forthe preparation of its audited consolidated financial statements andsuch event cannot be avoided by the Issuer taking reasonablemeasures available to it.

Redemption of Securities in the case ofMinimal Outstanding Amounts . . . . . . In the event that the Issuer and/or any of its Subsidiaries has,

individually or in aggregate, purchased (and not resold) or redeemedSecurities equal to or in excess of 75% of the aggregate PrincipalAmount of the Securities issued on the Issue Date, the Issuer mayredeem the remaining Securities (in whole but not in part):

(a) at any time prior to the Step Up Date, at the Special RedemptionPrice; or

(b) on or at any time after the Step Up Date, at the RedemptionPrice, on the giving of not less than 30 and not more than 60

15

calendar days’ irrevocable notice of redemption to theSecurityholders in accordance with Condition 12.1 (Notices toSecurityholders).

Taxation and Additional Amounts . . . . . All payments in respect of the Securities by or on behalf of the Issuerwill be made without withholding or deduction for, or on account of,any present or future taxes, duties, assessments or governmentalcharges of whatever nature (“Taxes”) imposed or levied by or onbehalf of the Relevant Jurisdiction, unless the withholding ordeduction of the Taxes is required by law. In the event where suchwithholding or deduction is made by the Issuer, the Issuer shall paysuch additional amount (“Additional Amounts”) as will result inreceipt by the Securityholders of such amounts as would have beenreceived by them had no such withholding or deduction beenrequired, except in certain circumstances. See Condition 7 (Taxationand Gross-up).

Limited Rights to InstituteProceedings . . . . . . . . . . . . . . . . . . . . . Notwithstanding any of the provisions in Condition 10

(Non-Payment), the right to institute Winding-Up proceedings islimited to circumstances where payment has become due. In the caseof any Distributions, such Distributions will not be due if the Issuerhas elected to defer Distributions in accordance with Condition 4.5(Optional Deferral of Distributions). In addition, nothing inCondition 10 (Non-Payment), including any restriction oncommencing proceedings, shall in any way restrict or limit any rightsof the Trustee or any of its directors, officers, employees or agents toclaim from or to otherwise take any action against the Issuer, inrespect of any actual, reasonable and documented costs, charges, fees,expenses or liabilities incurred by such party pursuant to or inconnection with the Trust Deed or the Securities.

Proceedings for Winding-Up . . . . . . . . . If (a) an order is made or an effective resolution is passed for theWinding-Up of the Issuer or (b) the Issuer fails to make payment inrespect of the Securities for a period of 10 days or more after the dateon which such payment is due, the Issuer shall be deemed to be indefault under the Trust Deed and the Securities and the Trustee may,subject to the provisions of Condition 10.4 (Entitlement of Trustee)and, subject to and to the extent permitted by applicable law, instituteproceedings for the Winding-Up of the Issuer, and/or prove in theWinding-Up of the Issuer, and/or claim in the liquidation of theIssuer, for such payment.

Substitution or Modification . . . . . . . . . . The Trustee may, without the consent of the Securityholders, agreewith the Issuer to:

(a) the substitution in place of the Issuer (or of any previoussubstitute under Condition 13 (Substitution or Modification toRemedy Gross-Up Event or Accounting Event)) as the principaldebtor under the Securities and the Trust Deed of any othercompany being a wholly owned or indirect Subsidiary of theIssuer; or

(b) the modification of the Conditions to the extent reasonablynecessary,

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in order to remedy a pending or existing Gross-Up Event orAccounting Event provided that:

(i) the Securities are unconditionally and irrevocably guaranteedby the Issuer;

(ii) the Issuer procures, at its own cost, the delivery of a legalopinion(s) as to English and any other relevant law, addressedto the Trustee, dated the date of such substitution of the Issueror modification of these Conditions, as the case may be, and ina form acceptable to the Trustee from legal advisers acceptableto the Trustee; and

(iii) the Trustee is satisfied that the interests of the Securityholderswill not be materially prejudiced by the substitution ormodification.

Further Issues . . . . . . . . . . . . . . . . . . . . . The Issuer is at liberty from time to time without the consent of theSecurityholders to create and issue further Securities or bonds either(a) ranking pari passu in all respects (or in all respects save for thefirst payment of Distributions thereon) and so that the same will beconsolidated and form a single series with the Securities (which willbe constituted by a deed supplemental to the Trust Deed) or (b) uponsuch terms as to ranking, distributions, conversion, redemption andotherwise as the Issuer may determine at the time of the issue.

Listing and Trading . . . . . . . . . . . . . . . . . The Original Securities are listed on the SGX-ST. Application will bemade to the SGX-ST for the listing of, and permission to deal in, theAdditional Securities by way of debt issues to professional investorsonly. The Additional Securities will be traded on the SGX-ST in aminimum board lot size of U.S.$200,000 for so long as the AdditionalSecurities are listed on the SGX-ST and the rules of the SGX-ST sorequire.

So long as the Securities are listed on the SGX-ST and the rules of theSGX-ST so require, the Issuer shall appoint and maintain a payingagent in Singapore, where the Securities may be presented orsurrendered for payment or redemption, in the event that the GlobalCertificate representing the Securities is exchanged for definitivecertificates. In addition, an announcement of such exchange shall bemade by or on behalf of the Issuer through the SGX-ST and suchannouncement will include all material information with respect tothe delivery of the definitive certificates, including details of thepaying agent in Singapore.

Use of Proceeds . . . . . . . . . . . . . . . . . . . . The net proceeds from the issue of the Additional Securities, whichwill be approximately U.S.$[Š] million (after the deduction ofcommissions), will be applied by the Company for general corporatepurposes, investments in power related assets, and repayment ofindebtedness.

Selling Restrictions . . . . . . . . . . . . . . . . . The Additional Securities have not been and will not be registeredunder the Securities Act and, subject to certain exceptions, may not beoffered or sold within the United States. The Additional Securities

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may be sold in other jurisdictions (including the United Kingdom,Singapore, Hong Kong, Japan and the Philippines) only incompliance with applicable laws and regulations. See “Subscriptionand Sale.”

ISIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XS1896598908

Common Code . . . . . . . . . . . . . . . . . . . . . 189659890

Governing Law . . . . . . . . . . . . . . . . . . . . English law.

Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . DB Trustees (Hong Kong) Limited.

Principal Paying Agent, CalculationAgent and Transfer Agent . . . . . . . . . . Deutsche Bank AG, Hong Kong Branch.

Registrar . . . . . . . . . . . . . . . . . . . . . . . . . Deutsche Bank AG, Hong Kong Branch.

Clearing Systems . . . . . . . . . . . . . . . . . . . Euroclear and Clearstream, Luxembourg.

On [Š], 2019, the Additional Securities will be consolidated into andform a single series with the Original Securities and the whole seriesof Securities will be cleared by Euroclear and Clearstream under theISIN XS1896598908 and Common Code 189659890.

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RISK FACTORS

An investment in the Additional Securities involves a number of risks. The price of securities can and doesfluctuate, and any individual security may experience upward or downward movements and may even becomevalueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying andselling securities. Past performance is not a guide to future performance. There may be a large differencebetween the buying price and the selling price of these securities. Investors deal with a range of investments,each of which may carry a different level of risk. This section entitled “Risk Factors” does not purport todisclose all of the risks and other significant aspects of investing in these securities. Investors should undertakeindependent research and study the trading of securities before commencing any trading activity. Investors may,at their own cost, request publicly available information on SMC Global Power from the SEC. Each Investorshould seek professional advice if he or she is uncertain of, or has not understood any aspect of, the securities tobe invested in or the nature of risks involved in the trading of securities.

Prospective investors should carefully consider the risks described below, in addition to the other informationcontained in this Offering Circular, including the audited financial statements of SMC Global Power and notesrelating thereto included in this Offering Circular, before making any investment decision relating to theAdditional Securities. The occurrence of any of the events discussed below and any additional risks anduncertainties not currently known to SMC Global Power or that are currently considered immaterial could havea material adverse effect on the business, results of operations, financial condition and prospects of SMC GlobalPower and prospective investors may lose all or part of their investment.

RISKS RELATING TO SMC GLOBAL POWER

Increased competition in the Philippine power industry.

The Government has sought to implement measures designed to enhance the competitive landscape of the powermarket, particularly for the unregulated sectors of the industry. These measures include the privatization of NPCowned and controlled power generation assets, the establishment of the WESM, the start of the RetailCompetition and Open Access (“RCOA”) and implementation of mandatory competitive selection process fordistribution utilities, and the implementation of the green energy option, which allows contestable customers todirectly contract with a renewable energy supplier. Further, Republic Act No. 10667 or the PhilippineCompetition Act was enacted to enhance economic efficiency and promote free and fair competition in trade,industry and all commercial economic activities, prevent economic concentration which will manipulate orconstrict the discipline of free markets, and penalize all forms of anti-competitive agreements, abuse of dominantposition and anti-competitive mergers and acquisitions, with the objective of protecting consumer welfare andadvancing domestic and international trade and economic development.

The move towards a more competitive environment could result in the emergence of new and numerouscompetitors. These competitors may have greater financial resources, and may have more extensive experiencethan SMC Global Power, giving them the ability to respond to operational, technological, financial and otherchallenges more quickly than SMC Global Power. These competitors may therefore be more successful thanSMC Global Power in acquiring existing power generation facilities or in obtaining financing for and theconstruction of new power generation facilities. The type of fuel that competitors use for their generationfacilities may also allow them to produce electricity at a lower cost and to sell electricity at a lower price. SMCGlobal Power may therefore be unable to meet the competitive challenges it will face.

As a result of increased competition, SMC Global Power could also come under pressure to review or renegotiatethe terms of existing offtake agreements with customers, which may lead to a downward adjustment of tariffs,and could adversely affect the business, financial performance and results of operations of SMC Global Power.To the extent that distribution utilities or industrial offtakers agree to purchase from other generation companiesinstead of purchasing from SMC Global Power, the ability of SMC Global Power to increase its sales and selladditional electricity to distribution utilities or industrial offtakers through its generation facilities would beadversely affected.

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Suspension of issuance and renewal of RES licenses.

In June 2015, the DOE through its Department Circular DC2015-06-0010 enjoined the ERC to immediately issuethe supporting guidelines including the revised rules for issuance of RES licenses. In compliance with thedepartment circular, the ERC issued the following resolutions to govern the issuance of new RES licenses andrenewal of existing RES licenses and the registration of retail customers:

• Resolution No. 5, Series of 2016, entitled “A Resolution Adopting the 2016 Rules Governing the Issuancesof the Licenses to Retail Electricity Suppliers and Prescribing the Requirements and Conditions Therefore”(the “RES License Guidelines”)

• Resolution No. 10, Series of 2016, entitled “Adopting the Revised Rules for Contestability”

• Resolution No. 11, Series of 2016, entitled “Imposing Restrictions on the Operations of DistributionUtilities and Retail Electricity Suppliers in the Competitive Retail Electricity Market”

• Resolution No. 28, Series of 2016, entitled “Revised Timeframe for Mandatory Contestability”

However, in February 2017, the Philippine Supreme Court, acting on a petition filed by certain entities, issued atemporary restraining order on the implementation of the foregoing ERC resolutions. To date, the temporaryrestraining order has not been lifted as of the date hereof. In response to the temporary restraining order, and toprovide guidance to relevant power industry players, the DOE issued DC2017-12-0013 and DC2017-12-0014encouraging eligible contestable customers to voluntarily participate in RCOA.

While certain subsidiaries of SMC Global Power have valid and existing RES licenses expiring in 2021, theability of SMC Global Power to directly contract with contestable customers may be limited if prior to the expiryof such RES licenses (a) the temporary restraining order on the RES License Guidelines is not lifted or (b) analternative regulatory framework governing the retail sale of electricity is not put in place. Such limitation on theability of SMC Global Power to directly contract with contestable customers could have a material adverse effecton the business, financial condition and results of operations of SMC Global Power.

Disruptions in fuel supply.

The operations of the Sual Power Plant, Ilijan Power Plant, Masinloc Power Plant, Limay Greenfield Power Plantand Davao Greenfield Power Plant depend on the availability of fuel, in particular coal and natural gas. SMCGlobal Power, through its subsidiaries, is responsible, at the cost of the latter, for supplying the fuel requirementof the Sual Power Plant, Masinloc Power Plant, Limay Greenfield Power Plant and Davao Greenfield PowerPlant. SMC Global Power, through its subsidiaries, has entered into fuel supply agreements for its power plantsand, subject to regulatory approval, is able to pass on the fuel cost to its customers (particularly for distributionutilities and electric cooperatives).

There is no assurance that there will not be any interruption or disruption in, or change in terms of, the fuelsupplies to these power plants, or that there will be sufficient fuel in the open market at competitive prices orsufficient transportation capacity available to ensure that these power plants receive sufficient fuel suppliesrequired for their operations on a timely basis or at all. There is also no assurance that the Company, through itssubsidiaries, will be able to purchase all of its required fuel supplies from its regular suppliers that produce fuelof acceptable and known quality. Consequently, SMC Global Power could experience difficulties ensuring aconsistent quality of fuel, which could negatively affect the stability and performance of these power plants.

For example, the Ilijan Power Plant sources natural gas for its operations from the Malampaya gas facility inPalawan (“Malampaya”). According to the DOE, Malampaya’s natural gas output is estimated to declinesubstantially by 2022 as the Malampaya gas supply is depleted. SMC Global Power is currently exploringalternative sources of fuel, such as floating storage regassification units containing liquefied natural gas (“LNG”)or a full-size LNG terminal, together with the other stakeholders of Malampaya. Alternatively, the Ilijan Power

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Plant may also be reconfigured to be a diesel or an LNG-type facility in the future. Reduced supply of high-gradecoal may also cause disruptions in the Company’s fuel supply. SMC Global Power has invested in circulatingfluidized bed (“CFB”) or supercritical power plants (for the Limay Greenfield Power Plant and Davao GreenfieldPower Plant) that can use low-grade coal and has retrofitted its existing pulverized coal (“PC”) power plants(Masinloc Units 1 and 2) to use low-grade coal, which is also less expensive and relatively more abundantcompared to high-grade coal (i.e. coal of 6,000 kcal upwards). There can be no assurance that the Company willbe able to obtain the quality of coal in such quantities that it requires for its operations.

Such factors, which may include events which are beyond the control of SMC Global Power, could affect thenormal operation of these power plants or incur significant costs to source replacement power or to reconfigureits plants, which could have material adverse effect on the business, financial condition and results of operationsof SMC Global Power.

Reliance on Independent Power Producers for the operation and maintenance of the IPPA Power Plants.

Power generation involves the use of highly complex machinery and processes and the success of SMC GlobalPower depends on the effective maintenance of equipment for its power generation assets. IPPs associated withthe respective IPPA Power Plants are responsible for the operation and maintenance of their respective IPPAPower Plants.

Although the energy conversion agreement (“ECA”) for Sual, the Ilijan ECA and the San Roque ECA containbonus and penalty provisions, and the Company monitors the IPPs’ adherence to the minimum operatingprotocols specified in the IPPA and ECAs, there is still a risk that the IPPs will fail to satisfactorily perform theirrespective operations and maintenance obligations. Any failure on the part of such IPPs to properly operate and/or adequately maintain their respective power plants could have a material adverse effect on the business,financial condition and results of operations of SMC Global Power.

In addition, if SMC Global Power, through its subsidiaries, fails to generate or deliver electricity beyondcontractually agreed periods due to the failure of the IPPs to operate and maintain the power facilities, thecounterparties of SMC Global Power in its power supply contracts (“PSCs”) may have a right to terminate thosecontracts for outages beyond applicable outage allowances in the PSCs, and replacement contracts may not beentered into on comparable terms or at all. Any of the foregoing could have a material adverse effect on thefinancial and operating performance of SMC Global Power.

Market limitations under the Electric Power Industry Reform Act of 2001 (“EPIRA”).

Based on the total installed generating capacities reported in ERC Resolution on Grid Market Share Limitation,the Company believes that its combined installed capacity comprises approximately 19% market share of theNational Grid, 25% of the Luzon Grid and 9% of the Mindanao Grid, in each case as of March 31, 2019. TheEPIRA limits the market share of a participant to 30% per grid and 25% of the National Grid by installedcapacity. While SMC Global Power is currently within its market share cap even taking into account thegreenfield power plants under construction, it may not receive permission to increase its capacity and marketshare further if this would result in exceeding the permitted capacity or market share prescribed by the EPIRA.Such inability to expand and grow the power business could materially and adversely affect the businessprospects of SMC Global Power.

Development of greenfield power projects.

The development of greenfield power projects involves substantial risks that could give rise to delays, costoverruns or unsatisfactory construction or development in the projects. Such risks include the inability to secureadequate financing, inability to negotiate acceptable offtake agreements, and unforeseen engineering andenvironmental problems, among others. Any such delays, cost overruns, unsatisfactory construction ordevelopment could have a material adverse effect on the business, financial condition, results of operation andfuture growth prospects of SMC Global Power.

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Adverse effect of WESM price fluctuations.

From the time the WESM for Luzon began operating in June 2006, market prices for electric power havefluctuated substantially. Unlike many other commodities, electric power can only be stored on a very limitedbasis and generally must be produced concurrently with its use. As a result, power prices are subject tosignificant volatility from supply and demand imbalances. Long-term and short-term power prices may alsofluctuate substantially due to other factors outside of the control of SMC Global Power, including:

• increases and decreases in generation capacity in the markets, including the addition of new supplies ofpower from existing competitors or new market entrants as a result of the development of new generationpower plants or expansion of existing power plants or additional transmission capacity;

• changes in power transmission or fuel transportation capacity constraints or inefficiencies;

• electric supply disruptions, including power plant outages and transmission disruptions;

• changes in the demand for power or in patterns of power usage, including the potential development ofdemand-side management tools and practices;

• the authority of the ERC to review and, if warranted under applicable circumstances, adjust the prices onthe WESM;

• climate, weather conditions, natural disasters, wars, embargoes, terrorist attacks and other catastrophicevents;

• availability of competitively priced alternative power sources;

• development of new fuels and new technologies for the production of power; and

• changes in the power market and environmental regulations and legislation.

These factors could have a material adverse effect on the business, financial condition and results of operationsof SMC Global Power.

On March 3, 2014, the ERC issued an order (the “ERC Order”) declaring the prices in the WESM for theNovember and December 2013 billing months, as null and void, and ordered the PEMC, the operator of theWESM, to calculate and issue adjustment bills using recalculated prices. SMEC, SPPC, SPDC, and SPI filed arequest with the ERC for the reconsideration of the ERC Order. Other generators also requested the SupremeCourt to stop the implementation of the ERC Order. On June 26, 2014, SMEC, SPPC, SPDC, and SPI filed withthe Court of Appeals a Petition for Review of these orders.

The Court of Appeals, in its decision dated November 7, 2017, granted the Petition for Review filed by SMEC,SPPC, SPDC and SPI, declaring the ERC Order null and void and set aside the orders of the ERC dated March 3,2014, March 27, 2014, May 9, 2014 and October 15, 2014 in ERC Case No. 2014-021 MC and accordinglyreinstated and declared as valid the WESM prices for Luzon for the supply months of November to December2013.

Motions for Reconsideration of the decision dated November 7, 2017 and Motions for Intervention and Motionsto Admit Motions for Reconsideration were filed by various intervenors.

In a Resolution dated March 22, 2018, the Court of Appeals denied the aforesaid Motions. In June 2018, theintervenors filed their respective Motions for Reconsideration of the said Resolution of the Court of Appeals

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dated March 22, 2018. On July 27, 2018, SMEC and SPPC filed their Consolidated Opposition to said Motionsfor Reconsideration. In the event that the prices initially set by the WESM are upheld, then the relevantsubsidiaries of the Company may file a claim for refund with PEMC for an amount of up to P2.626 billion, plusinterest.

Non-renewal of or non-compliance with offtake agreements.

SMC Global Power, through its subsidiaries, has offtake agreements with various distribution utilities, electriccooperatives and large industrial and commercial users. Some offtake agreements will expire before thetermination of the applicable IPPA Agreement, although they may be renewed by mutual agreement of theparties. The IPPA Agreements provide that the amounts of payment obligations of SMC Global Power willincrease over time. While SMC Global Power intends to renew the offtake agreements upon expiration to providestable and predictable revenue streams, there is no assurance that SMC Global Power will be able to renew orenter into new offtake agreements for similar volumes or at similar prices, or that SMC Global Power will beable to enter into new offtake agreements. If SMC Global Power is unable to enter into new offtake agreements,SMC Global Power will be further exposed to fluctuations in electricity prices in the WESM, which couldmaterially and adversely affect the profitability of SMC Global Power.

In particular, sales to Meralco under the relevant power supply agreement (“PSA”) in relation to the Ilijan PowerPlant, Sual Power Plant and Masinloc Power Plant comprised approximately 47% of the Company’s totalrevenue for the three months ended March 31, 2019. The Ilijan-Meralco PSA will expire in December 2019 andcan be extended up to the end of the IPPA period in 2022, while the Sual-Meralco PSA will expire in December2019 and can be extended up to the end of the IPPA period in 2024, in each case upon mutual agreement of theparties. The MPPCL-Meralco PSA, which is set to expire in 2019, has been extended up to 2022, subject to ERCapproval. The PSA of Meralco (RES) with Masinloc Power Plant and Sual Power Plant will expire in 2024 andcan be extended up to 48 billing periods, upon mutual agreement of the parties. When the current offtakeagreements with Meralco expire or are otherwise renegotiated, they may be renewed for lower electricityvolumes than in the past or on different terms, including under different pricing terms.

In addition, there can be no assurance that Meralco and other offtakers will be able to meet their future paymentobligations under their agreements with SMC Global Power.

The business, cash flows, earnings, results of operations and financial condition of SMC Global Power could bematerially and adversely affected if Meralco does not renew its bilateral offtake agreements with subsidiaries ofSMC Global Power under favorable terms or at all or if Meralco and other offtakers are unable to meet theirpayment obligations under existing agreements, and SMC Global Power is unable to find new customers toreplace Meralco and other offtakers.

Operating capacities of its power portfolio.

The administration of the output of the power generation plants involves significant risks, including:

• breakdown or failure of power generation equipment, transmission lines, pipelines or other equipment orprocesses, leading to unplanned outages and operational issues;

• flaws in the equipment design or in power plant construction;

• issues with the quality or interruptions in the supply of key inputs, including fuel or water;

• material changes in legal, regulatory or licensing requirements;

• operator error;

• performance below expected levels of output or efficiency;

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• industrial actions affecting power generation assets owned or managed by the subsidiaries of SMC GlobalPower or its contractual counterparties;

• pollution or environmental contamination affecting the operation of power generation assets;

• planned and unplanned power outages due to maintenance, expansion and refurbishment;

• inability to obtain or the cancellation of required regulatory, permits and approvals;

• opposition from local communities and special interest groups; and

• force majeure and catastrophic events including fires, explosions, earthquakes, volcanic eruptions, floodsand terrorist acts that could cause forced outages, suspension of operations, loss of life, severe damage andplant destruction.

There is no assurance that any event similar or dissimilar to those listed above will not occur or will notsignificantly increase costs or decrease or eliminate sales derived by SMC Global Power from its powergeneration assets. While the IPPA Agreements of the Company provide certain reliefs in the event the IPPAPower Plants cannot produce or dispatch electricity, if any of the power generation assets of the Company isunable to generate or deliver electricity to customers for an extended period of time which may be due to theaforementioned risks, its customers may be exempt from making certain payments so long as any such eventscontinue. In addition, if the subsidiaries of SMC Global Power fail to generate or deliver electricity beyond thecontractually agreed outage periods, its counterparts in its PSCs may have a right to terminate those contracts,and replacement contracts may not have been entered into on comparable terms. Any of the foregoing could havea material adverse effect on the financial and operating performance of SMC Global Power.

Operating and other risks leading to network failures, equipment breakdowns, planned or unplannedoutages.

Power generation is vulnerable to human error in operation, equipment failure, catastrophic events, naturaldisasters, sabotage, terrorist attacks or other events which can cause service interruptions, network failures,breakdowns or unplanned outages. There is no assurance that accidents will not occur with the Company’s powerplants or that the preventative measures taken by the Company will be fully effective in all cases, particularly inrelation to external events that are not within its control. Moreover, any loss from such events may not berecoverable under the Company’s insurance policies. The Company’s income and cash flows will be adverselyaffected by any disruption of operations of its plants due to any of the foregoing risks. Any unplanned plantshutdowns for an extended period of time will have a material adverse effect on the Company’s ability to sellpower and the Company’s results of operations could suffer. For example, in 2017 the Sual Power Plant Unit 2experienced an outage for 158 days due to transformer failure. In the event of a service disruption, the Companywould typically seek to purchase replacement power, which may be at a significantly greater cost than powergenerated by it or than it is able to recover. SMC Global Power is also entitled to reduction in the IPPA paymentsto PSALM for fixed and generation fees of the plant that will compensate it for any loss in margins fromprolonged outages. Any of these factors may be beyond the Company’s control, and their occurrences could havea material adverse effect on the Company’s business, financial condition or results of operations.

Insurance coverage for generation plants.

The IPPs of the IPPA Power Plants are responsible for maintaining insurance for all of the facilities, equipmentand infrastructure for those power plants, with the exception of the dam and spillway of the San Roque PowerPlant, for which NPC is obligated to maintain insurance coverage. The IPPA of these IPPA Power Plants, namelySMEC, SPDC and SPPC, however, are not beneficiaries of any of these insurance policies. These IPPA have nobusiness interruption insurance coverage and are therefore uninsured for liabilities or any direct or indirect costsand losses which may be incurred, as a result of any business interruption that their respective IPPA Power Plantmay experience. SMC Global Power believes that there is no business interruption insurance available for theIPPA business model under which its IPPA- subsidiaries are currently operating. Accordingly, any uninsuredliabilities or direct or indirect losses, including any third-party claims that result from an interruption to thebusiness of these IPPAs could have a material adverse effect on its financial condition and results of operations.

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For the power plants of SMC Global Power, SCPC, SMCPC and MPPCL have secured necessary insurance fortheir respective power plants, which cover physical material loss or damage caused by natural disasters,breakdowns or other events that could affect the facilities and processes used by its businesses. The existingbusiness interruption insurance policies of these entities however do not cover any declines in production oradverse publicity that SCPC, SMCPC, or MPPCL may suffer as well as any significant resource that SCPC,SMCPC, or MPPCL may invest to address such losses. Any unexpected losses caused by such events againstwhich these subsidiaries are not fully insured could have a material adverse effect on their businesses, financialcondition and results of operations.

Any unexpected losses caused by such events against which these subsidiaries are not fully insured could have amaterial adverse effect on their businesses, financial condition and results of operations.

No direct contractual and operational relationship.

SMC Global Power is dependent on the operators of the IPPA Power Plants to generate power from the IPPAPower Plants, and for the IPPs to comply with their contractual obligations to NPC under their IPP Agreements.SMC Global Power does not have a direct contractual relationship with the IPPs and cannot directly enforce theIPP Agreements against the IPPs. Failure by an IPP to comply with its obligations under its IPP Agreement maysignificantly reduce or eliminate power generation volumes or increase costs, thereby decreasing or eliminatingrevenues that the IPPA subsidiaries of SMC Global Power can derive from selling the power generated by theIPPA Power Plants. Any claims for damages for breach, or other entitlement, benefit or relief under the IPPAAgreement arising from the breach, by the IPP, of its IPP Agreement obligations must be claimed by SMCGlobal Power against PSALM through specified claim mechanisms. The IPPA Agreements do not permit set-offof claims, and the IPPA subsidiaries of SMC Global Power are only entitled to payment of their claim afterPSALM has received payment from the IPP of its corresponding claim. Accordingly, the IPPA subsidiaries ofSMC Global Power bear the risks associated with the lack of direct recourse against the IPPs, delays in theenforcement of their claims and other risks related to pursuing claims or legal proceedings against a state-ownedentity such as PSALM. Any of these factors could have a material adverse effect on the business, financialcondition and results of operations of SMC Global Power.

Foreign exchange risk.

While most of the offtake agreements of SMC Global Power allow adjustments for foreign exchange ratefluctuations, SMC Global Power remains subject to foreign exchange risk. A substantial amount of revenue fromsales of power by SMC Global Power is denominated in Philippine Pesos, while a portion of its expenses andobligations are denominated in U.S. dollars. The scheduled payment obligations to PSALM pursuant to the IPPAAgreements of the IPPA subsidiaries with PSALM are denominated in both U.S. dollars and Pesos. Theproportion of U.S. dollars to Pesos payable under the IPPA Agreements is approximately 50% at the exchangerates prevailing as of the dates of the respective IPPA Agreements. SMC Global Power, through its subsidiaries,also purchases coal as fuel for the Sual Power Plant and its greenfield power projects using U.S. dollars. Inaddition, a significant portion of the capital expenditures required for its greenfield power projects aredenominated in U.S. dollars.

In March 2018, SMC Global Power obtained U.S.$1,200 million term facilities from various foreign financialinstitutions for the acquisition of the Masinloc Power Plant, of which U.S.$850 million remains outstanding as ofMarch 31, 2019. In addition, the Company obtained a U.S.$120 million short-term loan from a local financialinstitution for general corporate purposes in December 2018.

In May 2014 and August 2015, SMC Global Power issued undated subordinated capital securities amounting toU.S.$600 million. In addition, the Company issued redeemable perpetual securities amounting toU.S.$650 million for the acquisition of the Masinloc Power Plant in March 2018. On April 25, 2019, theCompany issued the Original Securities.

A depreciation of the Peso, particularly with respect to the U.S. dollar, increases the Peso equivalent value of theforeign currency-denominated costs and obligations of SMC Global Power. This could adversely affect theresults of operations of SMC Global Power and its ability to service its foreign currency-denominated liabilities.

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SMC Global Power actively evaluates combinations of natural hedges, such as holding U.S. dollar-denominatedassets and liabilities and foreign exchange adjustments in the pricing for certain offtake contracts and derivativeinstruments to manage its exchange rate risk exposure. The Company also considers redenomination of U.S.dollar-denominated obligations to Philippine Peso to minimize exposure to foreign exchange fluctuations.Nonetheless, there can be no assurance that the Peso will not depreciate significantly against the U.S. dollar orother currencies in the future or that such depreciation will not have an adverse effect on the growth of thePhilippine economy or the financial condition of SMC Global Power.

Variations in hydrological conditions and irrigation requirements.

Hydroelectric generation is dependent on the amount and location of rainfall and river flows, which vary widelyfrom quarter to quarter and from year to year. NPC owns and operates the dam and the dam-related facilities ofthe San Roque Power Plant and has obtained a water permit allowing it to use the water flow from the AgnoRiver to generate power from the San Roque Power Plant with an allowable volume dictated by downstreamirrigation requirements set by the National Irrigation Administration (“NIA”).

The facilities of AHEPP are located within the Angat Watershed Reservation, which is managed by and is underthe jurisdiction of NPC. NPC issued a water permit dated November 28, 1979 by then National Water ResourcesCouncil pursuant to which NPC has authority to extract water from the Angat River for power generationpurposes. In a resolution dated April 4, 2016, National Water Resources Board (“NWRB”) granted KWPPHoldings Corporation’s petition for the transfer of the said water permit to itself and authorized its lease to AHC.The water discharged by the AHEPP is used for the following purposes: (i) the water outflow of the threeAuxiliary Units of 6 MW capacity each (each an “Auxiliary Unit” or collectively, “Auxiliary Units”) flows tothe Ipo Dam and is conveyed by Metropolitan Waterworks and Sewerage System (“MWSS”) to Metro Manilafor domestic use; and (ii) the water outflow of the four Main Units of 50 MW capacity each (each a “Main Unit”or collectively, “Main Units”) flows to the Bustos Dam and is conveyed by NIA to the province of Bulacan forirrigation purposes.

The levels of hydroelectric production can therefore vary from period to period depending on the water levels inthe reservoir and downstream irrigation and water supply requirements. In years of less favorable hydrologicalconditions, such as periods of drought or when the El Niño weather phenomenon occurs, the reservoir has lowwater levels, which reduces the amount of power that the San Roque Power Plant and the AHEPP are able togenerate. This could reduce the revenues from the sale of power from the San Roque Power Plant and theAHEPP, which could have a material adverse effect on SMC Global Power’s business, financial condition andresults of operations. Conversely, if too much rainfall occurs at any one time, such as during a typhoon, watermay flow too quickly and at volumes in excess of the water intake capacity of the San Roque Power Plant andAHEPP, which may cause release of water using the spillway.

Challenges in successfully implementing its growth strategy.

Implementing the growth strategy of SMC Global Power involves: (i) substantial investments in new powergeneration facilities; (ii) acquisitions of existing power generation capacity; and (iii) entering into alliances withstrategic partners. The success in implementing the strategy of the Company will depend on, among other things,its ability to identify and assess investment and acquisition opportunities as well as potential partners, its abilityto successfully finance, close and integrate investments, acquisitions and relevant technologies for the productionof power, its ability to manage construction of planned greenfield power projects within technical, cost andtiming specifications, its ability to control costs and maintain sufficient operational, financial and internalcontrols, the strength of the Philippine economy (including overall growth and income levels) and the overalllevels of business activity in the Philippines.

SMC Global Power is also contemplating several additional potential investments and acquisitions, but has notentered into any definitive commitment or agreement for any such contemplated investment or acquisition. Ifgeneral economic and regulatory conditions or market and competitive conditions change, or if operations do notgenerate sufficient funds or other unexpected events occur, SMC Global Power may decide to delay, modify orforego some of its planned or contemplated projects or alter aspects of its growth strategy, and its future growthprospects could be materially and adversely affected.

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The growth strategy of SMC Global Power will also place significant demands on its management, financial andother resources. In particular, continued expansion will increase the challenges for financial and technicalmanagement, recruitment, training and retention of sufficient skilled technical and management personnel anddeveloping and improving its internal administrative infrastructure. Any inability to meet these challenges coulddisrupt the business of SMC Global Power, reduce its profitability and adversely affect its results of operationsand financial condition.

Interest rate risk.

While SMC Global Power intends, whenever appropriate, to enter into hedging transactions which may mitigateits interest rate exposure, any such hedging policy may not adequately cover its exposure to interest ratefluctuations and such fluctuations may result in a high interest expense and an adverse effect on its business,financial condition and results of operations.

Availability of financing and significant long-term debt.

SMC Global Power expects to fund its expansion and growth plans through a combination of internally generatedfunds and external financing. The continued access to debt and equity financing of the Company is subject tofactors, many of which are outside of the control of SMC Global Power. Political instability, economic downturn,social unrest, or changes in the Philippine regulatory environment could increase the cost of borrowing, decreasethe price of its securities, or restrict the ability of SMC Global Power to obtain debt or equity financing. Inaddition, recent disruptions in global capital and credit markets may continue indefinitely or intensify. Otherfactors affecting the ability of SMC Global Power to borrow include (i) Philippine regulations limiting bankexposure (including single borrower limits) to a single borrower or related group of borrowers; (ii) complianceby the Company with existing debt covenants, which include leverage ratio covenants; and (iii) the ability ofSMC Global Power to service new debt. The inability of SMC Global Power to obtain financing from banks andother financial institutions or from capital markets would adversely affect its ability to execute its expansion andgrowth strategies and have a material adverse effect on the business, financial condition, and results of operationsof SMC Global Power.

In addition, SMC Global Power has significant finance lease obligations and long-term debt.

As of March 31, 2019, the long-term debt of SMC Global Power consists of the following: P50.0 billion(U.S.$952.4 million) fixed rate bonds listed on The Philippine Dealing & Exchange Corp., P14.9 billion(U.S.$282.4 million) fixed rate 7-year term loan facility, U.S.$150 million 5-year credit facility (originallyU.S.$500 million), U.S.$700 million term loan, P42.7 billion (U.S.$813.1 million) term loan of SCPC andP20.0 billion (U.S.$381.2 million) term loan of SMCPC under a 12-year Omnibus Loan and SecurityAgreement, U.S.$299.4 million loan of MPPCL under an Omnibus Refinancing Agreement, andU.S.$442.0 million loan of MPPCL under an Omnibus Expansion Financing Agreement.

As of March 31, 2019, the noncurrent liabilities of the of SMC Global Power included finance lease liabilities(net of current portion) of P117.7 billion (U.S.$2.2 billion) and long-term debt (net of current maturities and debtissue costs) of P203.2 billion (U.S.$3.9 billion). As of March 31, 2019, the current liabilities of SMC GlobalPower included accounts payable of P33.8 billion (U.S.$644.4 million) and finance lease liabilities (currentportion) of P20.9 billion (U.S.$398.1 million).

In May 2014 and August 2015, SMC Global Power issued undated subordinated capital securities amounting toU.S.$600 million. In addition, the Company issued redeemable perpetual securities amounting toU.S.$650 million for the acquisition of the Masinloc Power Plant in March 2018. On March 28, 2019, theCompany priced three series of Philippine Peso fixed-rate bonds in an aggregate amount of P25 billion with anoversubscription option of up to P5 billion. The Philippine Peso fixed-rate bonds in the aggregate amount ofP30 billion were issued and listed on the Philippine Dealing and Exchange Corp. on April 24, 2019.On April 25, 2019, the Company issued the Original Securities.

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There is no assurance that the Company will be able to obtain additional financing when needed on commerciallyacceptable terms or at all. Any additional debt financing may place restrictions on the Company, which may,among others:

• increase vulnerability to general adverse economic and industry conditions;

• limit ability to pursue growth plans;

• limit ability to raise additional financing and access credit or equity markets to satisfy its repaymentobligations as they become due on favorable terms, or at all;

• require the Company to dedicate a substantial portion of cash flow from operations to payments on debtand capital securities, thereby reducing the availability of its cash flow to fund capital expenditure,working capital requirements and other general corporate purposes; and/or

• limit its flexibility in planning for, or reacting to, changes in its business and its industry, either through theimposition of restrictive financial or operational covenants or otherwise.

Dependence on the existence of transmission infrastructure.

The transmission infrastructure in the Philippines continues to experience constraints on the amount of electricitythat can be delivered from power plants to customers, as well as limited interconnectivity between theLuzon-Visayas grid and the lack of any interconnectivity between the Visayas-Mindanao grid.

The Company and its subsidiaries are in constant consultation and communication with NGCP and other relevantGovernment institutions to address the transmission infrastructure requirements of the Company and itssubsidiaries. The DOE is mandated by law to prepare a Transmission Development Plan to be implemented byNGCP which aims to address projected infrastructure limitations and interconnectivity of sub-grids.

If these transmission constraints continue, the ability of SMC Global Power to supply electricity from the IPPAPower Plants of its subsidiaries and its planned and contemplated greenfield power projects, as well as the abilityof SMC Global Power to increase its geographical reach, will be adversely affected. This could have a materialadverse effect on the business and revenue growth of the Company from the sale of power.

Certain tax exemptions and tax incentives.

As of March 31, 2019, certain subsidiaries of SMC Global Power, namely, SCPC for the Limay GreenfieldPower Plant, SMCPC for the Davao Greenfield Power Plant and MPPCL for the Masinloc Power Plant, MasinlocBESS and SMCGP Philippines Energy for the Kabankalan BESS were registered with the Board of Investments(“BOI”) as new operators with pioneer status and non-pioneer status for its greenfield projects. BOI-registeredentities are granted certain tax exemptions and tax incentives, deductions from taxable income subject to certaincapital requirements and duty-free importation of capital equipment, spare parts and accessories.

For the plants currently availing of these incentives, if these tax exemptions or tax incentives expire, are revoked,or are repealed, the income from these sources will be subject to the corporate income tax rate, which is currently30.0% of net taxable income as of March 31, 2019. As a result, the tax expense of SMC Global Power wouldincrease and its profitability would decrease. The expiration, non-renewal, revocation or repeal of these taxexemptions and tax incentives, and any associated impact on SMC Global Power, could have a material adverseeffect on the business, financial condition and results of operations of SMC Global Power.

Regulatory Risks.

The business of SMC Global Power is subject to extensive government regulation, particularly for its greenfieldpower plants and retail supply business. To conduct its business, SMC Global Power and its subsidiaries must

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obtain various licenses, permits and approvals. Even when SMC Global Power and its subsidiaries obtain therequired licenses, permits and approvals, their operations are subject to continued review under the applicableregulations, and the interpretation or implementation of such regulations is subject to change.

For example, the operations of its greenfield power plants are subject to a number of national and local laws andregulations, including safety, health and environmental laws and regulations. These laws and regulations imposecontrols on air and water discharges, on the storage, handling, discharge and disposal of waste, location offacilities, employee exposure to hazardous substances, site clean-up, groundwater quality and availability, plantand wildlife protection, and other aspects of the operations of the business of SMC Global Power and itssubsidiaries. Failure to comply with relevant laws and regulations may result in monetary penalties oradministrative or legal proceedings against SMC Global Power or its subsidiaries, which may cause or result inthe termination or suspension of the licenses or operation of their facilities.

SMC Global Power and its subsidiaries have incurred, and expect to continue to incur, operating costs to complywith such laws and regulations. In addition, SMC Global Power and its subsidiaries have made, and expect tocontinue to make, capital expenditures on an ongoing basis to comply with safety, health, and environmentallaws and regulations.

While the Company believes that it has, at all relevant times, materially complied with all applicable laws, rulesand regulations, there can be no assurance that SMC Global Power and its subsidiaries will be able to remain incompliance with applicable laws and regulations or will not become involved in future litigation or otherproceedings or be held liable in any future litigation or proceedings relating to safety, health, mining andenvironmental matters, the costs of which could be material. In addition, safety, health, mining andenvironmental laws and regulations in the Philippines have become increasingly stringent. There can be noassurance that the adoption of new safety, health, mining and environmental laws and regulations, newinterpretations of existing laws, increased governmental scrutiny of safety, health, mining and environmentallaws or other developments in the future will not result in SMC Global Power and its subsidiaries from beingsubject to fines and penalties or having to incur additional capital expenditures or operating expenses to upgrade,supplement or relocate its facilities. Moreover, in the event that future laws are enacted imposing restrictions onoperations and refinancing, particularly in relation to power plants utilizing fossil fuels, then certain capitalexpenditures or expenses may not be recovered.

For example, recently promulgated implementing rules and regulations by the DOE on “Renewable PortfolioStandards” mandates electric power industry participants (such as generation companies, DUs and ECs) to sourceor produce a fraction of their electricity requirements from eligible renewable energy resources and undertake acompetitive selective process in sourcing renewable energy.

The Philippines is also a party to the 2015 Paris Agreement, which aims to keep the increase in global average oftemperature to well below 2°C above pre-industrial levels and to limit the increase to 1.5°C, since this wouldsubstantially reduce the risks and effects of climate change. As a party to the agreement, the Philippines mayimpose more stringent regulations, particularly on coal-fired power plant emissions, requiring expensivepollution controls on coal-fired power plants, among other measures. These measures may significantly increasecosts of coal-fired power plants and, at the same time, increase the cost competitiveness of renewable energy. Assignificant portion of the captive market may shift away from coal and other hydrocarbon fuels may expose thecoal-fired power plants of the Company to stranded-asset risk (i.e., hazard of an asset suffering from anunanticipated write-down, devaluation, or conversion to liability).

The Company has been compliant with and continues to perform its obligations under applicable laws andregulations relevant to its businesses.

If SMC Global Power and its subsidiaries fails to comply with all applicable regulations or if the regulationsgoverning its business or their implementation change, SMC Global Power or its subsidiaries may incurincreased costs or be subject to penalties, which could disrupt its operations and have a material adverse effect onits business and results of operations.

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Tax Incentives.

On September 10, 2018, the House of Representatives of the Philippines approved on third and final readingHouse Bill No. 8083, also known as the Tax Reform for Attracting Better and High-quality Opportunities(“TRABAHO”) Bill. The TRABAHO Bill provides for lower corporate income taxes while reducing,suspending or otherwise canceling fiscal incentives for corporations, such as income tax holidays, special rates,and custom duty exemptions. If the bill is passed into law, the fiscal incentives currently enjoyed by theCompany may be adversely affected. To date, the House of Representatives is still awaiting the Senate’s actionon the TRABAHO Bill.

On November 21, 2018, the House Committee on Ways and Means approved the fourth package of the TaxReform for Acceleration and Inclusion (“TRAIN”) Bill, also known as the Passive Income and FinancialIntermediary Taxation Act. The TRAIN Bill removed the exemption of long-term deposit or investmentcertificates from income tax. In the event this legislation is enacted, and assuming the Securities are treated asdebt instruments for tax purposes, the expected yield of Securityholders subject to Philippine income tax may beaffected.

Further, there can be no assurance that any future tax changes in the Philippines would not have a material andadverse effect on the Company’s business, financial condition, and results of operation.

ERC Regulation of electricity rates of distribution utilities.

The imposition of more stringent regulations and similar measures by the ERC could have a material adverseeffect on the business, financial conditions and results of operations of SMC Global Power.

Sales to distribution utilities accounts for majority of the consolidated sales volume of SMC Global Power for thethree months ended March 31, 2019. While rates charged by SMC Global Power through its subsidiaries undertheir offtake agreements, including those with distribution utilities, are not regulated by the ERC, the rates thatdistribution utility customers charge to their customers are subject to review and approval by the ERC.Accordingly, the ability of distribution utility customers to pay the subsidiaries of SMC Global Power largelydepends on their ability to pass on their power costs to their customers. There is also no assurance that the currentlaws, regulations, and issuances affecting the industry, particularly the EPIRA and the issuances of the ERC, willnot change or be amended in the future.

There is no assurance that the ERC will permit the distribution utility customers of the subsidiaries of SMCGlobal Power to pass on or increase their rates or that subsequent reviews by the ERC will not result in thecancellation of any such increases or require such customers to refund payments previously received from theircustomers. In addition, there is no assurance that any rate increases approved by the ERC will not be overturnedby Philippine courts on appeal. For example, SMC Global Power and other generation companies are parties to apetition filed in the Supreme Court by special interest groups against Meralco in relation to the increase ingeneration rates for the billing months of November and December 2013. The case is pending resolution by theSupreme Court. For further details, see “Business — Legal Proceedings.”

The ERC also issued an order dated March 3, 2014, which voided the WESM prices for the November andDecember 2013 billing months, and imposed prices to be recalculated by the PEMC. However, the Court ofAppeals, in its decision dated November 7, 2017, declared the ERC order dated March 3, 2014 null and void andaccordingly reinstated and declared as valid the WESM prices for Luzon for the supply months of November toDecember 2013. Upon finality, a claim for refund may be made with the PEMC. See “Business — LegalProceedings — ERC Order voiding WESM prices.” More recently, the Supreme Court issued its ruling in May2019 in respect of the following ERC resolutions:

• Resolution No. 13, Series of 2015, entitled “A Resolution Directing All Distribution Utilities to Conduct aCompetitive Selection Process in the Procurement of their Supply to the Captive Market” (“CSPGuidelines”)

• Resolution No. 1, Series of 2016, entitled “A Resolution Clarifying the Effectivity of ERC ResolutionNo. 13, Series of 2015” (“ERC Clarificatory Resolution”)

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The CSP Guidelines and the ERC Clarificatory Resolution were issued by the ERC to implement the competitiveselection process, pursuant to the DOE’s Department Circular No. DC2015-06-0008 mandating all distributionutilities to undergo competitive selection process in securing power supply agreements.

In its decision, the Supreme Court, acting on a petition filed by certain entities, declared as void the firstparagraph of Section 4 of the CSP Guidelines and the ERC Clarificatory Resolution. See “Business — LegalProceedings — Petition to Nullify ERC Resolution No. 1, Series of 2016.” Consequently, all PSAs filed with theERC on or after June 30, 2015 must comply with the competitive selection process in accordance with prevailingrules and regulations. The power purchase cost resulting from the competitive selection process (the “CSPPower Purchase Cost”) would be the generation cost which the relevant distribution utility may pass on to itscustomers commencing on June 30, 2015.

The Supreme Court’s May 2019 ruling has not yet attained finality and is subject of motions for reconsiderationfiled by various parties. In the event that this decision becomes final, the ERC or the DOE may require therelevant distribution utilities and/or the relevant generation companies with PSAs that have not complied with thecompetitive selection process to refund the difference between the generation cost actually passed on tocustomers and the applicable CSP Power Purchase Cost that could be passed on to customers, accruing from June30, 2015 until the effectivity of the relevant CSP Power Purchase Cost.

The ERC in the exercise of its regulatory powers may also impose fines, penalties, or sanctions on SMC GlobalPower in appropriate cases. Any such fines, penalties, sanctions or restriction on the ability of distributionutilities and/or generation companies to pass on such costs or any intervention in such rates could have a materialadverse effect on the business, financial conditions and results of operations of SMC Global Power.

Trading on the WESM.

While the subsidiaries of SMC Global Power only sell a small amount of power through the WESM, volatilemarket conditions on the WESM may nevertheless pose risks to SMC Global Power regardless of whether thereis a shortage or a surplus of energy available. When the WESM experiences a shortage, there is little risk tosuppliers in terms of their value-position being destroyed. However, such a suppliers’ market exposes thesesuppliers to the risk that regulatory agencies may intervene (directly or indirectly) to dictate prices and dispatchof power plants. Consumer outrage, triggered by high prices, could precipitate attempts to suspend the WESMand return to subsidized rates regimes. Regardless of whether such a suspension ultimately comes to pass, marketanticipation of such an occurrence could lead to value-destructive market distortions. On the other hand, asurplus market tends to cause spot market prices to reflect the marginal cost of producing power. One of the mainfeatures of the WESM is a merit-order dispatch scheme wherein the cheapest sources of power, such as powerproduced from geothermal and hydroelectric energy, are dispatched first, before the more expensive powerproviders. While a supplier can mitigate its exposure to surplus risks by contracting the bulk of its capacity toofftakers to protect against low spot prices, as the subsidiaries of SMC Global Power have done, this also caps asupplier’s ability to take advantage of price spikes caused by temporary market shortages.

Currently, the ERC has implemented a reduced primary bid cap of P32,000 per MWh. In addition, a permanentsecondary price cap limits spot prices to P6,245 per MWh for as long as cumulative spot prices breach a certainthreshold. Prices are automatically capped at P6,245 per MWh for hours where the average price for the last120-hours exceeds P9,000 per MWh.

The occurrence of such events could have a material adverse effect on the business, financial conditions andresults of operations of SMC Global Power.

Possible conflicts of interest.

San Miguel Corporation is the sole shareholder of the Issuer, controls the board of directors of the Issuer andexerts significant influence over the policies, management and affairs of the Issuer. As a result, San MiguelCorporation is able to exercise significant control and influence over many corporate actions of the Issuer. Theinterests of San Miguel Corporation may differ from those of the Issuer which may adversely affect the interestsof the Securityholders. There can be no assurance that conflicts of interest between the Issuer and San MiguelCorporation will be resolved in favor of the Issuer or the Securityholders.

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Dependence on the support of San Miguel Corporation.

SMC Global Power relies upon San Miguel Corporation for certain shared services such as, but not limited to,human resources, corporate affairs, legal, finance and treasury functions. There is no guarantee that San MiguelCorporation will continue to provide these services or obtain its power requirements from SMC Global Power inthe future. Should San Miguel Corporation cease to provide these services, and if SMC Global Power is unable tosecure alternative sources from such services or enter into other power supply agreements, the Company’sbusiness, financial condition and results of operations could be adversely affected.

Legal and other proceedings arising out of its operations.

The Company and its subsidiaries, from time to time, may be involved in disputes with various parties involvedin the generation, supply and sale of electric power, including contractual disputes with subcontractors, suppliersand government agencies including those matters discussed in “Business — Legal Proceedings.” For example,SPPC and PSALM have an ongoing dispute arising from differing interpretations of certain provisions related togeneration payments under the Ilijan IPPA Agreement. As a result, the parties have arrived at differentcomputations regarding the subject payments. Pending resolution of the dispute, there are no restrictions orlimitations on the ability of SPPC to supply power from the Ilijan Power Plant and SPPC continues to be the IPPAdministrator for the Ilijan Power Plant. See “Business — Legal Proceedings — Ilijan IPPA AgreementDispute.” Regardless of the outcome, these disputes may lead to legal or other proceedings and may result insubstantial costs and delays in the operations of the SMC Global Power. The Company may also havedisagreements with regulatory bodies in the ordinary course of its business, which may subject it toadministrative proceedings and unfavorable decisions that will result in penalties and/or delay the developmentof its greenfield projects and its current operations. In such cases, the business, financial condition, results ofoperations and cash flows of the SMC Global Power could be materially and adversely affected.

RISKS RELATING TO THE PHILIPPINES

Volatility in the value of the Peso against the U.S. dollar and other currencies as well as in the globalfinancial and capital markets could adversely affect the Company’s businesses.

The Philippine economy has experienced volatility in the value of the Peso and also limitations to the availabilityof foreign exchange. In July 1997, the BSP announced that the Peso can be traded and valued freely on themarket. As a result, the value of the Peso underwent significant fluctuations between July 1997 and December2004 and the Peso declined from approximately P29.00 to U.S.$1.00 in July 1997 to P56.18 to U.S.$1.00 byDecember 2004.

While the value of the Peso has recovered since 2010, its valuation may be adversely affected by certain eventsand circumstances such as the strengthening of the U.S. economy, the rise of the interest rates in the U.S. andother events affecting the global markets or the Philippines, causing investors to move their investment portfoliosfrom the riskier emerging markets such as the Philippines. Consequently, an outflow of funds and capital fromthe Philippines may occur and may result in increasing volatility in the value of the Peso against the U.S. Dollarand other currencies. As of December 31, 2017, according to BSP data, the Peso remained steady at P49.93 perU.S.$1.00 from P49.81 per U.S.$1.00 at the end of 2016. More recently, the Peso has depreciated to P52.72against the U.S. dollar as of December 31, 2018. As of June 21, 2019, the exchange rate quoted on the BSPReference Exchange Rate Bulletin was P51.72 per U.S.$1.00.

Substantially all of the Company’s operations and assets are based in the Philippines and, therefore, aslowdown in economic growth in the Philippines could materially and adversely affect the Company’sbusiness, financial position and results of operations.

Substantially all of the Company’s business operations and assets are based in the Philippines. As a result, theCompany’s income, results of operations and the quality and growth of its assets depend, to a large extent, on theperformance of the Philippine economy. In the past, the Philippines has experienced periods of slow or negativegrowth, high inflation, significant devaluation of the Philippine currency and the imposition of exchangecontrols. In January 2018, inflation rose to an over three-year high of 3.4% and rose steadily to 5.2% by June2018 with the BSP projecting inflation to be at 4.6% on average in 2018. Inflation may breach the BSP’sinflation target for 2018 due primarily to temporary supply-side factors. The Monetary Board assessed that the

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balance of risks to the inflation outlook continues to lean toward the upside, with price pressures emanating frompossible adjustments in transport fares, utility rates, and wages. The upward adjustment in the BSP’s inflationforecasts indicate that inflation pressures could become more broad-based in the near term, the Monetary Boardraised interest rates by 25 basis points to 3.5%, effective June 21, 2018 and the BSP expects inflation to returnwithin the target range in 2019. On August 9, 2018, the Monetary Board decided to raise the interest rate on theBSP’s overnight reverse repurchase facility by 50 basis points to 4%, effective August 10, 2018. The interestrates on the overnight lending and deposit facilities were raised accordingly. On September 27, 2018, theMonetary Board decided to raise the interest rate further on the BSP’s overnight reverse repurchase facility by 50basis points to 4.5%, effective September 28, 2018. The interest rates on the overnight lending and depositfacilities were raised accordingly. At the Monetary Board meeting on November 15, 2018, the BSP implementeda rate hike for the fifth consecutive time. The Monetary Board decided to raise its key policy rates by 25 basispoints to 4.75% for overnight borrowing, effective November 16, 2018. The interest rates on the overnightlending and deposit facilities were also raised accordingly. In the succeeding Monetary Board meetings held onDecember 13, 2018, February 7, 2019, and March 21, 2019, the Monetary Board decided to keep the interest rateon the BSP’s overnight borrowing at 4.75%. The interest rates on the overnight lending and deposit facilitiesremain unchanged. However, the Monetary Board decided to reduce the interest rate on the BSP’s overnightborrowing to 4.5%, effective 10 May 2019. The interest rates on the overnight lending and deposit facilitiesreduced accordingly.

Factors that may adversely affect the Philippine economy include:

• decreases in business, industrial, manufacturing or financial activities in the Philippines, the SoutheastAsian region or globally;

• scarcity of credit or other financing, resulting in lower demand for products and services provided bycompanies in the Philippines, the Southeast Asian region or globally;

• exchange rate fluctuations and foreign exchange controls;

• rising inflation or increases in interest rates;

• levels of employment, consumer confidence and income;

• changes in the Government’s fiscal and regulatory policies;

• Government budget deficits;

• adverse trends in the current accounts and balance of payments of the Philippine economy;

• public health epidemics or outbreaks of diseases, such as re-emergence of Middle East RespiratorySyndrome-Corona virus (MERS-CoV), SARS, avian influenza (commonly known as bird flu), or H1N1, orthe emergence of another similar disease (such as Zika) in the Philippines or in other countries in SoutheastAsia;

• natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods and similarevents;

• political instability, terrorism or military conflict in the Philippines, other countries in the region orglobally; and

• other regulatory, social, political or economic developments in or affecting the Philippines.

The Philippines’ economic growth rate in 2018 was 6.2%, which was slower than the 6.7% growth rate registeredin 2017. For the first quarter of 2019, GDP growth was at 5.6%, compared to 6.5% in the first quarter of 2018.Moreover, uncertainty surrounding the global economic outlook could cause economic conditions in thePhilippines to deteriorate and there can be no assurance that current or future Philippine governmental policieswill continue to be conducive to sustaining economic growth. There can be no assurance that the Philippines will

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maintain strong economic fundamentals in the future. Any future deterioration in economic conditions in thePhilippines could materially and adversely affect the Company’s financial position and results of operations,including the Company’s ability to grow its energy portfolio, and its ability to implement the Company’sbusiness strategy. Changes in the conditions of the Philippine economy could materially and adversely affect theCompany’s business, financial condition or results of operations.

Political instability may have a negative effect on the business, financial position or results of operations ofthe Company.

The Philippines has from time to time experienced political and military instability, including acts of politicalviolence. The Philippine Constitution provides that, in times of national emergency, when the public interest sorequires, the Government may take over and direct the operation of any privately-owned public utility orbusiness. In the last few years, there were instances of political instability, including impeachment proceedingsagainst two former presidents, two chief justices of the Supreme Court of the Philippines, and public and militaryprotests arising from alleged misconduct by the previous administration. In addition, a number of current andpast officials of the Philippine government are currently under investigation or have been indicted for graft,corruption, plunder, extortion, bribery, or usurpation of authority.

On March 27, 2014, the Government and the Moro Islamic Liberation Front (“MILF”) signed a peaceagreement, the Comprehensive Agreement on Bangsamoro. On September 10, 2014, the draft of the BangsamoroBasic Law (“BBL”) was submitted by then-President Benigno C. Aquino III to the Philippine Congress. TheBBL is a draft law intended to establish the Bangsamoro political entity in the Philippines and provide for itsbasic structure of government, which will replace the existing Autonomous Region in Muslim Mindanao.Following the Mamasapano incident where high-profile terrorists clashed with armed members of theBangsamoro Islamic Freedom Fighters (“BIFF”) and MILF leading to the deaths of members of the SpecialAction Force of the Philippine National Police, MILF, the BIFF, and several civilians, Congress stalleddeliberations on the BBL.

On March 27, 2015, former President Aquino convened a Peace Council, originally composed of five members,to study the draft BBL. An additional 17 co-convenors were later named as part of the Peace Council. TheCouncil examined the draft law and its constitutionality and social impact. The Council Members testified beforeboth Houses of Congress, and submitted their report, which endorsed the draft BBL but with some proposedamendments. On May 13-14, 2015, the Senate conducted public hearings on the BBL in Zamboanga, Jolo, andSulu, with the Zamboanga City government and sultanate of Sulu opposing their inclusion in the proposedBangsamoro entity. The House committee approved the draft and renamed it as Basic Law for the BangsamoroAutonomous Region, while the Senate renamed its version as Bangsamoro Autonomous Region Law. Congress,however, failed to pass the law before it adjourned.

Presidential elections for the Philippines were held on May 9, 2016 and on June 30, 2016 President RodrigoDuterte assumed the presidency with a solid mandate to advance his “Ten-Point Socio-Economic Agenda”focusing on policy continuity, tax reform, infrastructure spending and countryside development, among others.The Duterte administration has initiated efforts to build peace with communist rebels and other separatiststhrough continuing talks with these groups.

A new version of the BBL was crafted under the Duterte administration, which was finally signed into law byPresident Rodrigo Duterte on July 26, 2018. The Bangsamoro Organic Law (“BOL”) abolished the AutonomousRegion in Muslim Mindanao, and created the Bangsamoro Autonomous Region in Muslim Mindanao(“BARMM”). The BARMM will be parliamentary-democratic in form, and will be headed by a chief minister,who will preside over an 80-member parliament. The BOL, however, still has to be cleared by a plebiscite andovercome possible legal challenges.

On May 11, 2018, the Supreme Court granted a quo warranto petition filed against then Chief Justice Lourdes A.Sereno resulting in her removal as Chief Justice. On June 19, 2018, the Supreme Court affirmed its decision. InJune 2018, former President Benigno Aquino III was indicted for usurpation of legislative powers concerning theDisbursement Acceleration Program during his term. Moreover, several individuals who were high-rankingofficers under the administration of President Aquino have also been indicted for graft and corruption chargesand drug trafficking among other offenses. In addition, since the commencement of the current administration,more than 1,000 alleged drug dealers and users have been killed in police operations, and more than 1,300 drugdealers and drug users have been killed by supposed vigilantes.

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Currently, the Duterte administration is pushing for a shift to a federal form of government. For this purpose, thePresident created a consultative committee to review the 1987 Constitution and draft a federal constitution.

There can be no assurance that there will not be any future political events that could destabilize the Philippinesresulting in a negative effect on the general economic conditions of the country. Any such event could have amaterial impact on the Company’s business, financial position, and results of operations.

Acts of terrorism and violent crimes could destabilize the country and could have a material adverse effecton the Company’s business, financial position and results of operations.

The Philippines has also been subject to a number of terrorist attacks since 2000, and the Armed Forces of thePhilippines has been in conflict with groups which have been identified as being responsible for kidnapping andterrorist activities in the Philippines. Additionally, there have been clashes with various separatist groups. Inaddition, bombings have taken place in the Philippines, mainly in cities in the southern part of the country. Forexample, in September 2013, a faction of the Moro National Liberation Front (“MNLF”) allegedly led by NurMisuari, a former governor of the Autonomous Region of Muslim Mindanao, staged an armed uprising inZamboanga City. The incident resulted in, among others, hostage situations and renewed tension between thePhilippine Armed Forces and the MNLF in the southern part of the country. In an operation to capture wantedinternational terrorist Zulkifli Bin Hir alias Marwan on January 25, 2015, 44 police commandos were killed in a12-hour fire fight with two Muslim rebel groups: MILF and BIFF in the Southern Philippines.

On May 23, 2017, a clash erupted in Marawi, Lanao del Sur between government security forces and the ISISaffiliated-Maute group, following the government’s offensive to capture alleged ISIS leader in Southeast Asia,Isnilon Hapilon, who was believed to be in the city. President Duterte immediately declared martial law inMindanao amid protests from the opposition and sectors of civil society. In a special joint session convened onJuly 22, 2017, both Houses of Congress voted to grant the request of President Duterte to extend martial law inMindanao until the end of 2017 as the rebellion could not be completely quashed over the initial 60-day period ofmartial law. Prior to the end of 2017, in a special joint session convened on December 13, 2017, both Houses ofCongress voted to grant the request of President Duterte to further extend martial law in Mindanao until the endof 2018 as there are continued threats from local and ISIS-inspired terrorist groups. Some sectors however arewary of the prolonged extension of the martial law, citing its negative impact on business, tourism, the country’simage (as this relates to the current administration’s ability to quickly restore peace and order in Marawi), andinvestor confidence. The ongoing clashes have resulted in the loss of lives of civilians, soldiers and ISIS-inspiredextremists, as well as damage to property and livelihood of Marawi residents. An increase in the frequency,severity or geographic reach of these terrorist acts, violent crimes, bombings and similar events could have amaterial adverse effect on investment and confidence in, and the performance of, the Philippine economy. Anysuch destabilization could cause interruption to parts of the Company’s businesses and materially and adverselyaffect its financial conditions, results of operations and prospects. For the third time on December 17, 2018,Martial Law was extended by both Houses of Congress until December 31, 2019. In January 2019, members ofthe House of Representatives, human rights lawyers, and Mindanao residents filed separate petitions with theSupreme Court questioning the third extension of Martial Law in Mindanao. On February 19, 2019, the SupremeCourt en banc voted to uphold the constitutionality of the third extension of martial law in Mindanao and todismiss the petitions.

Natural or other catastrophes, including severe weather conditions, may adversely affect the Company’sbusiness, materially disrupt the Company’s operations and result in losses not covered by its insurance.

The Philippines has experienced a number of major natural catastrophes over the years, including typhoons,droughts, volcanic eruptions and earthquakes. There can be no assurance that the occurrence of such naturalcatastrophes will not materially disrupt the Company’s operations. These factors, which are not within theCompany’s control, could potentially have significant effects on the Company’s power plants, assets andoperations. While the Company carries insurance for certain catastrophic events, of types, in amounts and withdeductibles that the Company believes are in line with general industry practices in the Philippines, there arelosses for which the Company cannot obtain insurance at a reasonable cost or at all. The Company also does notcarry any business interruption insurance. Should an uninsured loss or a loss in excess of insured limits occur, theCompany could lose all or a portion of the capital invested in such business, as well as the anticipated futureturnover, while remaining liable for any costs or other financial obligations related to the business. Any materialuninsured loss could materially and adversely affect the Company’s business, financial condition and results ofoperations.

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Corporate governance and disclosure standards in the Philippines may differ from those in moredeveloped countries.

Although a principal objective of Philippine securities laws is to promote full and fair disclosure of materialcorporate information, there may be less publicly available information about Philippine public companies, suchas the Company, than is regularly made available by public companies in the U.S. and other countries. As aresult, public shareholders of the Company may not have access to the same amount of information or haveaccess to information in as timely of a manner as may be the case for companies listed in the U.S. and manyother jurisdictions. Furthermore, although the Company complies with the requirements of the Philippine SECwith respect to corporate governance standards, these standards may differ from those applicable in otherjurisdictions.

Territorial disputes with China and a number of Southeast Asian countries may disrupt the Philippineeconomy and business environment.

Competing and overlapping territorial claims by the Philippines, China and several Southeast Asian nations (suchas Vietnam, Brunei and Malaysia) over certain islands and features in the West Philippine Sea (South China Sea)have for decades been a source of tension and conflicts.

China claims historic rights to nearly all of the West Philippine Sea based on its so-called “nine-dash line” and inrecent years dramatically expanded its military presence in the sea which has raised tensions in the region amongthe claimant countries. In 2013, the Philippines became the first claimant country to file a case before thePermanent Court of Arbitration, the international arbitration tribunal based at the Hague, Netherlands to legallychallenge claims of China in the West Philippine Sea and to resolve the dispute under the principles ofinternational law as provided for under the United Nations Convention on the Law of the Sea (UNCLOS). In July2016, the tribunal rendered a decision stating that the Philippines has exclusive sovereign rights over the WestPhilippine Sea (in the South China Sea) and that the “nine-dash line” claim of China is invalid. The Philippinegovernment, under the Duterte administration, has taken action to de-escalate tensions concerning the territorialdispute with China.

There is no guarantee that the territorial dispute between the Philippines and other countries, including China,would end or that any existing tension will not escalate further, as China has taken steps to exercise control overthe disputed territory. In such event, the Philippine economy may be disrupted and its business and financialstanding may be adversely affected.

Any deterioration in the Philippine economy as a result of these or other factors, including a significantdepreciation of the Philippine peso or increase in interest rate, may adversely affect the Company’s operations. Inparticular, further disputes between the Philippines and other countries may lead to reciprocal trade restrictionson the other’s imports or suspension of visa-free access and/or overseas Filipinos permits. Any impact from thesedisputes in countries in which the Company has operations could materially and adversely affect the Company’sbusiness, financial condition and results of operations.

Investors may face difficulties enforcing judgments against SMC Global Power.

Considering that the Company is organized under the laws of the Republic of the Philippines and substantialportion of its operating assets are located in the Philippines, it may be difficult for investors to enforce judgmentsagainst SMC Global Power obtained outside of the Philippines. In addition, all of the directors and officers ofSMC Global Power are residents of the Philippines, and all or a substantial portion of the assets of such personsare located in the Philippines. As a result, it may be difficult for investors to effect service of process upon suchpersons, or to enforce against them judgments obtained in courts or arbitral tribunals outside the Philippinespredicated upon the laws of jurisdictions other than the Philippines.

The Philippines is party to the United Nations Convention on the Enforcement and Recognition of ArbitralAwards, though it is not party to any international treaty relating to the recognition or enforcement of foreignjudgments. Nevertheless, a judgment or final order of a foreign court is, through the institution of an independent

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action, enforceable in the Philippines as a general matter, unless there is evidence that: (i) the foreign courtrendering judgment did not have jurisdiction in accordance with its jurisdictional rules; (ii) the party againstwhom enforcement is sought did not receive notice of the proceedings; (iii) judgment was obtained by collusion,fraud, or on the basis of a clear mistake of law or fact; or (iv) the judgment is contrary to the laws, public policy,customs or public order of the Philippines.

The credit ratings of the Philippines may restrict the access to capital of Philippine companies, includingthe Company.

Historically, the Philippines’ sovereign debt has been rated relatively low by international credit rating agencies.International credit rating agencies issue credit ratings for companies with reference to the country in which theyare resident. As a result, the sovereign credit ratings of the Philippines directly affect companies that are residentsin the Philippines, including SMC Global Power. As of March 31, 2019, the Philippines’ long-term foreigncurrency-denominated debt was rated BBB by Fitch and Baa2 by Moody’s. On April 30, 2019, S&P GlobalRatings upgraded its rating from BBB to BBB+. However, no assurance can be given that Fitch, Moody’s, S&PGlobal Ratings or any other international credit rating agency, will not downgrade the credit ratings of theGovernment in the future and, therefore, of Philippine companies, including the Company. Any such downgradecould have an adverse impact on the liquidity in the Philippine financial markets, the ability of the Governmentand Philippine companies, including SMC Global Power, to raise additional financing and the interest rates andother commercial terms at which such additional financing is available.

RISKS RELATING TO THE SECURITIES

The Additional Securities may not be a suitable investment for all investors.

Each potential investor in the Additional Securities must determine the suitability of investing in the AdditionalSecurities in light of its own circumstances. In particular, each potential investor should:

• have sufficient knowledge and experience to make a meaningful evaluation of the Additional Securities,the merits and risks of investing in the Additional Securities and the information contained or incorporatedby reference in this Offering Circular or any applicable supplement;

• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particularfinancial situation, an investment in the Additional Securities and the impact the Additional Securities willhave on its overall investment portfolio;

• have sufficient financial resources and liquidity to bear all of the risks of an investment in the AdditionalSecurities, including where the currency for principal or distribution payments is different from thepotential investor’s currency;

• understand thoroughly the terms of the Securities and be familiar with the behavior of any relevant indicesand financial markets; and

• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic,interest rate, foreign exchange rate and other factors that may affect its investment and its ability to bearthe applicable risks.

The Additional Securities are complex financial instruments and investors may purchase such instruments as away to manage risk or enhance yield with an understood, measured and appropriate addition of risk to theiroverall portfolios. A potential investor should not invest in the Additional Securities unless it has the expertise(either alone or with a financial adviser) to evaluate how the Additional Securities will perform under changingconditions, the resulting effects on the value of the Additional Securities and the impact this investment will haveon the potential investor’s overall investment portfolio.

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The Securities are perpetual securities and investors have no right to require redemption.

The Securities are undated and have no fixed final maturity date. Securityholders have no right to require theIssuer to redeem the Securities at any time and they can only be disposed of by sale. Holders who wish to selltheir Securities may be unable to do so at a price at or above the amount they have paid for them, or at all, ifinsufficient liquidity exists in the market for the Securities. Therefore, holders of Securities should be aware thatthey may be required to bear the financial risks of an investment in the Securities for an indefinite period of time.

Securityholders may not receive Distribution payments if the Issuer elects to defer Distribution payments.

Subject to the Conditions, SMC Global Power may, at its sole and absolute discretion, elect to defer anyscheduled Distributions on the Securities for any period of time. The Issuer is not subject to any limits as to thenumber of times Distributions and Arrears of Distributions can be deferred. Although, following a deferral,Arrears of Distributions are cumulative, subject to the Conditions, the Issuer may defer their payment for anindefinite period of time by delivering the relevant deferral notices to the Securityholders. Any such deferral ofDistributions shall not constitute a default for any purpose unless, in the case of a deferral, such payment isrequired in accordance with Condition 4.7 (Payment of Arrears of Distribution).

Any deferral of Distributions will likely have an adverse effect on the market price of the Securities. In addition,as a result of the Distributions deferral provision of the Securities, the market price of the Securities may be morevolatile than the market prices of other debt securities on which original issue discount or interest accrues that arenot subject to such deferrals and may be more sensitive generally to adverse changes in the business, financialcondition, results of operations and prospects of the Issuer.

The Securities may be redeemed at the option of the Issuer on the Step Up Date or any subsequentDistribution Payment Date or upon the occurrence of certain other events.

The Securities are redeemable at the option of the Issuer, in whole but not in part, on the Step Up Date or anyDistribution Payment Date falling after the Step Up Date at 100% of their principal amount together with allother outstanding amounts due under the Securities accrued to the date fixed for redemption.

The Issuer also has the right to redeem the Securities upon the occurrence of certain changes in Philippine taxlaw requiring the payment of Additional Amounts. In addition, the Securities may be redeemed (in whole but notin part) at the option of the Issuer (A) upon the occurrence of a Change of Control Event (i) at any time prior to(but excluding) the Step Up Date at the Special Redemption Price or (ii) on or at any time after the Step Up Dateat the Redemption Price, (B) upon the occurrence and continuation of a Reference Indebtedness Default Event atany time at the Redemption Price, (C) upon the occurrence and continuation of an Accounting Event (i) at anytime prior to (but excluding) the Step Up Date at the Special Redemption Price or (ii) on or at any time after theStep Up Date at the Redemption Price, or (D) in the event 25% or less of the aggregate principal amount of theSecurities issued on the Issue Date remain outstanding (i) at any time prior to (but excluding) the Step Up Date atthe Special Redemption Price (as defined below) or (ii) on or at any time after the Step Up Date at theRedemption Price, in each case on the giving of irrevocable notice of redemption to the Securityholders inaccordance with Condition 12.1 (Notices to the Securityholders).

The date on which the Issuer elects to redeem the Securities may not accord with the preference of individualSecurityholders. This may be disadvantageous to the Securityholders in light of market conditions or theindividual circumstances of the holder of the Securities. In addition, an investor may not be able to reinvest theredemption proceeds in comparable securities at an effective distribution rate at the same level as that of theSecurities.

There may be insufficient distributions upon liquidation.

The obligations of the Issuer under the Securities and under the Trust Deed will constitute its direct,unconditional, unsecured and unsubordinated obligations. In the event of liquidation or winding-up, the claims ofSecurityholders in respect of the Securities, including in respect of any claim to Arrears of Distribution, will

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(subject to and to the extent permitted by applicable law) be preferred over the subordinated obligations of theCompany and will rank at least pari passu with each other and with all other unconditional, unsecured andunsubordinated obligations of the Company (including the Original Securities).

There are limited remedies for default under the Securities.

Any scheduled Distribution will not be due if the Issuer elects to defer that Distribution pursuant to theConditions. Notwithstanding any of the provisions relating to non-payment defaults, the right to institutewinding-up proceedings is limited to circumstances where payment has become due and the Issuer fails to makethe payment when due. The only remedy against the Issuer available to the Trustee or (where the Trustee hasfailed to proceed against the Issuer, as provided in the Conditions) any Securityholder for recovery of amounts inrespect of the Securities following the occurrence of a payment default after any sum becomes due in respect ofthe Securities will be instituting winding-up proceedings and/or proving and/or claiming in winding-up in respectof the payment obligations of the Issuer arising from the Securities and the Trust Deed.

The adoption of new accounting policies of PFRS may have a significant impact on the financial condition andresults of operations of SMC Global Power and/or may result in a change to the accounting treatment of theSecurities, which could give the Issuer the right to elect to redeem the Securities.

The FRSC is continuing its policy of issuing PFRS and interpretations which are substantially based onInternational Financial Reporting Standards issued by the International Accounting Standards Board (“IASB”).FRSC has issued and may in the future issue more new and revised standards and interpretations, including thoserequired to conform with standards and interpretations issued from time to time by the IASB. Such factors mayrequire adoption of new accounting policies. There can be no assurance that the adoption of new accountingpolicies or new PFRS will not have a significant impact on the financial condition and results of operations of theCompany. In addition, any change or amendment to, or any change or amendment to any interpretation of, PFRSmay result in the reclassification of the Securities such that the Securities must not or must no longer be recordedas “equity” of the Issuer, and will give the Issuer the right to elect to redeem the Securities. See “— TheSecurities may be redeemed at the option of the Issuer on the Step Up Date or any subsequent DistributionPayment Date or upon the occurrence of certain other events.”

The applicable Rate of Distribution may decline on any Reset Date.

The Rate of Distribution will be reset on each Reset Date by reference to the then Treasury Rate (as defined inthe Conditions). Accordingly, a Securityholder is exposed to the risk of a fluctuating Rate of Distribution anduncertain distribution income. A fluctuating Rate of Distribution makes it impossible to determine the yield ofthe Securities with respect to any Reset Period in advance.

The Issuer and its subsidiaries may raise other capital and incur substantial indebtedness in the future andmay not be able to generate sufficient cash flows to meet its obligations.

The Issuer may from time to time and without prior consultation of the holders of the Securities create and issuefurther Securities (see Condition 9 (Further Issues)). Furthermore, the Issuer and its subsidiaries may from timeto time incur substantial additional indebtedness and contingent liabilities. Under the terms of the Securities,there is no restriction, contractual or otherwise, on the amount of Securities that the Issuer may further issue orsecurities or other liabilities that the Issuer and its subsidiaries may issue or incur and that rank senior to, or paripassu with, the Securities. If the Issuer or its subsidiaries incur additional debt, that could have importantconsequences to investors. For example, it could: (1) limit the ability of the Issuer to satisfy its obligations underthe Securities and other debt; (2) increase the vulnerability of the Issuer to adverse general economic andindustry conditions; (3) require the Issuer to dedicate a substantial portion of its cash flow from operations toservicing and repaying its indebtedness, thereby reducing the availability of its cash flow to fund working capital,planned capital expenditures and other general corporate purposes; (4) limit the flexibility of the Issuer inplanning for or reacting to changes in its businesses and the industries in which it operates; (5) increase the costof additional financing; and (6) place the Issuer at a competitive disadvantage compared to its competitors thathave less debt. If the subsidiaries of the Issuer incur additional indebtedness, that could also have adverse effectson the subsidiaries similar to those described above, and therefore on the Issuer. The issue of any further

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Securities or such other securities, or the incurrence of any such other liabilities, may reduce the amount (if any)recoverable by holders of the Securities on a winding-up of the Issuer and may also have an adverse impact onthe trading price of the Securities and/or the ability of Securityholders to sell them.

An active trading market for the Additional Securities may not develop or be sustained.

There has been no prior trading market for the Additional Securities. The Original Securities are currently listedon the SGX-ST. The Issuer has been advised that the Joint Lead Managers intend to make a market in theSecurities, but that they are not obligated to do so and may discontinue such market making activity at any timewithout notice. The Issuer cannot predict whether an active trading market for the Securities will be sustained.The Securities could trade at prices that may be lower than the initial offering price for the Additional Securities.The price at which the Securities trade depends on many factors, including, but not limited to:

• prevailing interest rates and the markets for similar securities;

• general economic conditions; and

• the financial condition of the Issuer, historical financial performance and future prospects.

Application will be made for the listing and quotation of the Additional Securities on the SGX-ST. No assurancecan be given that the application to the SGX-ST for the Additional Securities will be approved or that the Issuerwill be able to maintain a listing for the Securities or that a liquid trading market for the Securities will developor continue. If an active market for the Securities fails to be sustained, the trading price of the Securities could bematerially and adversely affected. Lack of a liquid or active trading market for the Securities may adverselyaffect the price of the Securities or may otherwise impede a holder’s ability to dispose of the Securities.

The Company will follow the applicable corporate disclosure standards for debt securities listed on theSGX-ST, which standards may be different from those applicable to debt or hybrid securities in certainother countries.

The Issuer will be subject to reporting obligations in respect of the Securities to be listed on the SGX-ST. Thedisclosure standards imposed by the SGX-ST are different from those imposed by securities exchanges in othercountries or regions, such as the United States or Hong Kong. As a result, the level of information that isavailable may not correspond to what investors in the Securities are accustomed to.

The conditions of the Securities contain provisions which may permit their modification without theconsent of all investors and confer significant discretions on the Trustee which may be exercised withoutthe consent of the Securityholders and without regard to the individual interests of particularSecurityholders.

The Trust Deed contains provisions for calling meetings of Securityholders to consider matters affecting theirinterests generally. These provisions permit defined majorities to bind all Securityholders, includingSecurityholders who did not attend and vote at the relevant meeting and Securityholders who voted in a mannercontrary to the majority. The Trust Deed also provides that the Trustee may, without consent of theSecurityholders, agree to any modification of any provision of the Securities which is not materially prejudicialto the interests of the Securityholders or which is of a formal, minor or technical nature or is made to correct amanifest error or an error which is, in the opinion of the Trustee, proven or to comply with mandatory provisionsof law, in the circumstances described in “Terms and Conditions of the Securities — Meetings of Securityholders,Modification, Waiver, Authorization and Determination — Modification, Waiver, Authorization andDetermination.”

The Trustee may decline to take actions requested by the Securityholders.

Under the Trust Deed, in certain circumstances, the Trustee may, at its sole discretion, request theSecurityholders to provide an indemnity and/or security and/or pre-funding to its satisfaction before it takes

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actions on behalf of the Securityholders. The Trustee shall not be obliged to take any such actions if no suchindemnity or security or pre-funding is provided to its satisfaction. Even if the Securityholders agree toindemnify and/or provide security to and/or pre-fund the Trustee, the time taken to agree to the indemnity and/orsecurity and/or pre-funding may have an impact as to when such action is taken. In addition, notwithstanding theprovision of an indemnity or security or pre-funding to the Trustee, the Trustee may decline to take actionrequested by the Securityholders if it determines that such actions are not permitted under the terms of the TrustDeed or applicable law.

The imposition of exchange controls could result in an investor not receiving payments on the Securities.

The Government has, in the past, instituted restrictions on the conversion of Philippine pesos into foreigncurrency and the use of foreign exchange received by Philippine residents to pay foreign currency denominatedobligations. The Monetary Board of the BSP, with the approval of the President of the Philippines, has statutoryauthority, in the imminence of, or during a foreign exchange crisis or in times of national emergency, to suspendtemporarily or restrict sales of foreign exchange, require licensing of foreign exchange transactions or requiredelivery of foreign exchange to the BSP or its designee. The Issuer is not aware of any pending proposals by theGovernment regarding such restrictions. Although the Government has from time to time made publicpronouncements of a policy not to impose restrictions on foreign exchange, there can be no assurance that theGovernment will maintain such policy or will not impose economic or regulatory controls that may restrict freeaccess to foreign currency. Any such restriction imposed in the future could adversely affect the ability ofinvestors to repatriate foreign currency upon receipt of any payments from the Issuer.

The priority of debt evidenced by a public instrument.

Under Philippine law, in the event of liquidation of a company, unsecured debt of a company (includingguarantees of debt) which is evidenced by a public instrument as provided in Article 2244(14) of the Civil Codeof the Philippines will rank ahead of unsecured debt of that company which is not so evidenced. Under Philippinelaw, a debt becomes evidenced by a public instrument when it has been acknowledged before a notary or anyperson authorized to administer oaths in the Philippines. Although the position is not clear under Philippine law,it is possible that a jurat (which is a statement of the circumstances in which an affidavit was made) may besufficient to constitute a debt evidenced by a public instrument. A portion of the Company’s financialindebtedness is covered by agreements which are embodied in public instruments. However, these agreementscontain a waiver by each of the respective lenders of the benefit of preference or priority accorded to publicinstruments under Article 2244(14) of the Civil Code of the Philippines. The waivers are subject to the conditionthat all present and future creditors of the Company are pari passu and no creditor shall be conferred a superiorright on the basis that its credit appears in a public instrument.

RISKS RELATING TO CERTAIN STATISTICAL INFORMATION IN THIS OFFERING CIRCULAR

Certain information contained herein is derived from unofficial publications.

Certain statistical information in this Offering Circular relating to the Philippines, the industries and markets inwhich the businesses of SMC Global Power compete and other data used in this Offering Circular was obtainedor derived from internal surveys, market research, governmental data, publicly available information and/orindustry publications. Industry publications generally state that the information they contain has been obtainedfrom sources believed to be reliable. However, there is no assurance that such information is accurate orcomplete. Similarly, internal surveys, industry forecasts and market research have not been independentlyverified by SMC Global Power and may not be accurate, complete, up-to-date, balanced or consistent with otherinformation compiled within or outside the Philippines.

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TERMS AND CONDITIONS OF THE SECURITIES

The following (other than any paragraph in italics), subject to alteration, are the terms and conditions of theAdditional Securities, which will be endorsed on the Certificates issued in respect of the Additional Securities.

The U.S.$[Š] Senior Perpetual Capital Securities (the Additional Securities) offered hereby are a furtherissuance of and will be fully consolidated and form a single series with, and rank pari passu with, theU.S.$500,000,000 Senior Perpetual Capital Securities issued by SMC Global Power Holdings Corp., acorporation organized under the laws of the Republic of the Philippines (the Issuer) on April 25, 2019 (theOriginal Securities and, together with the Additional Securities, the Securities, which expression, unless thecontext otherwise requires, includes any further Securities issued pursuant to Condition 9 and forming a singleseries with the Securities).

The Additional Securities will be issued on the same terms and conditions (other than the issue date and issueprice) as the Original Securities, and will vote on any matter submitted to holders with holders of the OriginalSecurities. The Additional Securities will share the ISIN and the Common Code and be fungible with the OriginalSecurities.

The issue of the Additional Securities of the Issuer are constituted by the trust deed dated April 25, 2019 (theOriginal Trust Deed) made between the Issuer and DB Trustees (Hong Kong) Limited (the Trustee, whichexpression includes its successor(s)) as trustee for the holders of the Securities (the Securityholders)), assupplemented by a first supplemental trust deed to be dated the issue date of the Additional Securities (the FirstSupplemental Trust Deed) made between the Issuer and the Trustee. From the issue date of the AdditionalSecurities, the Original Trust Deed and the First Supplemental Trust Deed shall be together defined as the TrustDeed.

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the TrustDeed and the agency agreement dated April 25, 2019 (the Agency Agreement) made between the Issuer, theTrustee, Deutsche Bank AG, Hong Kong Branch as principal paying agent (the Principal Paying Agent) and astransfer agent (the Transfer Agent), the other paying agents named therein (each a Paying Agent and, togetherwith the Principal Paying Agent, the Paying Agents), Deutsche Bank AG, Hong Kong Branch as calculationagent (the Calculation Agent) and as the registrar (the Registrar and, together with the Paying Agents, theTransfer Agent and the Calculation Agent, the Agents). Copies of the Trust Deed and the Agency Agreement areavailable for inspection with reasonable prior notification during normal business hours by the Securityholdersat the specified office of the Trustee and the Agents. The Securityholders are entitled to the benefit of, are boundby, and are deemed to have notice of all the provisions of the Trust Deed and the Agency Agreement applicableto them.

1. FORM, DENOMINATION AND TITLE

1.1 Form and denomination

The Securities are issued in registered form in amounts of U.S.$200,000 and integral multiples of U.S.$1,000 inexcess thereof (referred to as the Principal Amount of a Security).

Upon issue, the Additional Securities will be represented by a Global Certificate deposited with and registered inthe name of a nominee of a common depositary for Euroclear Bank SA/NV (Euroclear) and ClearstreamBanking, S.A. (Clearstream, Luxembourg). The Conditions are modified by certain provisions contained in theGlobal Certificate. See “The Global Certificate”.

The Additional Securities are not issuable in bearer form.

A certificate (each a Certificate) will be issued to each Securityholder in respect of its registered holding ofSecurities. Each Certificate will be numbered serially with an identifying number which will be recorded on therelevant Certificate and in the register of Securityholders (the Register) which the Issuer will procure to be keptby the Registrar.

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The Registrar will keep the Register outside of the United Kingdom in accordance with the provisions of theAgency Agreement.

Except in the limited circumstances described herein (see “The Global Certificate”), owners of interests in theAdditional Securities will not be entitled to receive physical delivery of Certificates. Issues of Certificates upontransfer of Additional Securities are subject to compliance by the transferor and transferee with the certificationprocedures described above and in the Agency Agreement.

1.2 Title

Title to the Securities passes only by registration in the Register. The person in whose name a Security isregistered in the Register will (except as otherwise required by law) be treated as the absolute owner of thatSecurity for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or anyinterest or any writing on, or the theft or loss of, the Certificate issued in respect of it) and no person will beliable for so treating the Holder. In these Conditions, Securityholder or Holder means the person in whose name aSecurity is registered in the Register.

For a description of the procedures for transferring title to book-entry interests in the Additional Securities, see“Clearance and Settlement of the Securities”.

2. TRANSFERS OF SECURITIES AND ISSUE OF CERTIFICATES

2.1 Transfers

Subject to Condition 2.4 and Condition 2.5, a Security may be transferred by depositing the Certificate issued inrespect of that Security, with the form of transfer on the back duly completed and signed, at the specified officeof the Registrar or any of the other Agents (other than the Calculation Agent) together with such evidence as theRegistrar or such other Agent may require to prove the title of the transferor and the authority of the individualwho has executed the form of transfer; provided, however, that such Security may not be transferred unless thePrincipal Amount of Securities transferred and (where not all of the Securities held by a Securityholder are beingtransferred) the Principal Amount of the balance of Securities not transferred are in authorized denominationsdescribed in Condition 1.1. In the case of a transfer of part only of a holding of Securities represented by oneCertificate, a new Certificate will be issued to the transferee in respect of the part transferred and a further newCertificate in respect of the balance of the holding not transferred will be issued to the transferor.

Transfers of interests in the Additional Securities evidenced by the Global Certificate will be effected inaccordance with the rules of the relevant clearing systems.

For a description of certain restrictions on transfers of interests in the Additional Securities, see “Subscriptionand Sale”.

2.2 Delivery of new Certificates

Each new Certificate to be issued upon transfer of Securities will, within five business days of receipt by theRegistrar or any of the other Agents (other than the Calculation Agent) of the duly completed form of transferendorsed on the relevant Certificate, be mailed by uninsured mail at the risk of the Holder entitled to thetransferred Securities to the address specified in the form of transfer. For the purposes of this Condition, businessday shall mean a day on which banks are open for business in the city in which the specified office of theRegistrar or such other Agent (other than the Calculation Agent) (as applicable) with whom a Certificate isdeposited in connection with a transfer is located.

Where some but not all of the Securities in respect of which a Certificate is issued are to be transferred, a newCertificate in respect of the Securities not so transferred will, within five business days of receipt by the Registraror any of the other Agents (other than the Calculation Agent) of the original Certificate, be mailed by uninsuredmail at the risk of the Holder of the Securities not so transferred to the address of such Holder appearing on theRegister or as specified in the form of transfer.

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2.3 Formalities free of charge

Registration of transfer of Securities will be effected without charge by or on behalf of the Issuer, the Registrar orany other Agent (other than the Calculation Agent) but upon payment (or the giving of such indemnity as theIssuer, the Registrar or any other Agent (other than the Calculation Agent) may reasonably require) by therelevant Holder in respect of any tax or other governmental charges which may be imposed in relation to suchtransfer.

2.4 Closed Periods

No Securityholder may require the transfer of a Security to be registered during the period of 15 calendar daysending on the due date for any payment of principal, premium (if any) or Distributions on that Security.

2.5 Regulations

All transfers of Securities and entries on the Register will be made subject to the detailed regulations concerningtransfer of Securities scheduled to the Agency Agreement. The regulations may be changed by the Issuer with theprior written approval of the Registrar and the Trustee. A copy of the current regulations will be mailed (free ofcharge) by the Registrar to any Securityholder who requests one.

3. STATUS

3.1 Status of the Securities

The Securities constitute direct, unconditional, unsecured and unsubordinated obligations of the Issuer and will atall times rank pari passu without any preference among themselves and at least pari passu with all otheroutstanding, unsecured and unsubordinated obligations of the Issuer, past and future, but, in the event ofinsolvency, only to the extent permitted by applicable laws relating to creditors’ rights.

The claims of the Securityholders in respect of the Securities, including in respect of any claim to Arrears ofDistribution (as defined herein), will, in the event of the Winding-Up of the Issuer (subject to and to the extentpermitted by applicable law), rank pari passu with each other and with all other unconditional, unsecured andunsubordinated obligations of the Issuer.

3.2 No set-off

To the extent and in the manner permitted by applicable law, no Securityholder may exercise, claim or plead anyright of set-off, counterclaim, compensation or retention in respect of any amount owed to it by the Issuer inrespect of, or arising from, the Securities and each Securityholder will, by virtue of his holding of any Security,be deemed to have waived all such rights of set-off, counterclaim, compensation or retention.

3.3 No Voting Rights

The Securities do not confer any voting rights on Securityholders with respect to the common shares or any otherclass of share capital of the Issuer.

4. DISTRIBUTIONS

4.1 Rate of Distribution

Subject to Condition 4.4 and Condition 4.5, the Securities will confer a right to receive distributions(Distributions):

(a) from the period commencing on (and including) the Issue Date to (but excluding) April 25, 2024 (the StepUp Date), at the Initial Rate of Distribution; and

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(b) from (and including) each Reset Date (including the Step Up Date) to (but excluding) the immediatelyfollowing Reset Date, at the relevant Reset Rate of Distribution (determined by the Calculation Agent on therelevant Reset Determination Date and notified to the Holders, the Principal Paying Agent and theRegistrar),

payable semi-annually in arrear on April 25 and October 25 of each year (each a Distribution Payment Date)commencing on October 25, 2019.

Reset Date means the Step Up Date and any subsequent date which is the fifth anniversary of any Reset Date.

4.2 Distribution Accrual

Each Security will cease to accrue Distributions from and including its due date for redemption unless, upon duepresentation, payment of the principal in respect of the Security is improperly withheld or refused or unlessdefault is otherwise made in respect of payment, in which event Distributions shall continue to accrue asprovided in the Trust Deed.

4.3 Calculation of Broken Amounts

When any Distribution is required to be calculated in respect of a period of less than a full six months, it shall becalculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of anincomplete month, the number of days elapsed on the basis of a month of 30 days.

4.4 Increase in Rate of Distribution

Following the earlier to occur of:

(a) the date which is the 61st day, or if such day is not a Business Day the first Business Day thereafter,following a Change of Control Event; and

(b) the date on which a Reference Indebtedness Default Event occurs,

and the Issuer does not elect to redeem the Securities pursuant to Condition 5.4, the Rate of Distribution willincrease by 2.50% per annum with effect from the next Distribution Payment Date (or, if the relevant eventoccurs on or after the date that is five Business Days prior to the next Distribution Payment Date, the nextfollowing Distribution Payment Date). For the avoidance of doubt, an increase (if any) in the Rate of Distributionpursuant to this Condition 4.4 shall not occur more than once.

A Change of Control Event means Permitted Holders ceasing to, whether directly or indirectly, have control inrespect of more than 50% of the outstanding Voting Stock of the Issuer.

Permitted Holders means any or all of the following: (a) San Miguel Corporation, (b) San Miguel CorporationRetirement Plan or any similar or successor employee retirement plan of San Miguel Corporation, and (c) anyPerson the Voting Stock of which at least a majority is beneficially owned, directly or indirectly, by a personspecified in subclauses (a) and (b) above.

Reference Indebtedness Default Event means an event of default occurs pursuant to Section 9.1(b) (Events ofDefault) of the trust agreement in respect of the Issuer’s outstanding P3,609,020,000 6.625% 10-year Series FBonds due 2027 (ISIN: PHY806B2AJ53) (the Initial Reference Notes) or any debt security issued in exchangefor, or the net proceeds of which are used to refinance or refund, replace, exchange, renew, repay, defease ordischarge the Initial Reference Notes prior to their maturity (the Refinancing Securities), as a result of theIssuer’s default in, non-compliance with or non-performance of the Initial Reference Notes or of the RefinancingSecurities, as the case may be, as such Initial Reference Notes or Refinancing Securities are amended from timeto time in accordance with the terms and conditions of the Initial Reference Notes or of the RefinancingSecurities, as the case may be.

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4.5 Optional Deferral of Distributions

(a) The Issuer may, in its sole and absolute discretion, on any day which is not less than five Business Daysprior to any Distribution Payment Date, resolve to defer payment of any or all of the Distribution whichwould otherwise be payable on that Distribution Payment Date unless, during the six months ending on thatscheduled Distribution Payment Date a Compulsory Distribution Payment Event has occurred (the DeferralElection Event). Any such deferred Distribution will constitute Arrears of Distribution and will not bedue and payable until the relevant Payment Reference Date. Distributions will accrue on each Arrears ofDistribution for so long as such Arrears of Distribution remains outstanding at the same Rate of Distributionas the Principal Amount of the Securities bears at such time and will be added to such Arrears ofDistribution (and thereafter bear Distributions accordingly) on each Distribution Payment Date.

(b) The Issuer will notify the Securityholders (in accordance with Condition 12.1), the Trustee and the PrincipalPaying Agent of any deferral of Distribution not less than five Business Days prior to the relevantDistribution Payment Date (the Deferral Election Notice). Deferral of a Distribution pursuant toCondition 4.5(a) will not constitute a default by the Issuer (including, without limitation, pursuant toCondition 10) or any other breach of its obligations under the Securities or the Trust Deed or for any otherpurpose.

(c) Each Deferral Election Notice shall be accompanied, in the case of the notice to the Trustee and thePrincipal Paying Agent, by a certificate in the form scheduled to the Trust Deed signed by two dulyAuthorized Signatories of the Issuer confirming that no Compulsory Distribution Payment Event hasoccurred.

The Trustee shall be entitled to rely on and accept, without liability to the Securityholders and withoutfurther investigation or enquiry, such certificate as sufficient evidence of the occurrence of a DeferralElection Event in which event such evidence shall be conclusive and binding on the Issuer and theSecurityholders.

(d) The Issuer is not subject to any limit as to the number of times Distributions and Arrears of Distributionsmay be deferred pursuant to the provisions of Condition 4.5(a).

Compulsory Distribution Payment Event means (a) a discretionary dividend, distribution, interest or otherpayment has been paid or declared on or in respect of any Junior Securities or (except on a pro rata basis) ParitySecurities of the Issuer, other than a dividend, distribution or other payment in respect of an employee benefitplan or similar arrangement with or for the benefit of employees, officers, directors and consultants of the Issuer;or (b) at the discretion of the Issuer, any Junior Securities or (except on a pro rata basis) Parity Securities of theIssuer have been redeemed, repurchased or otherwise acquired by the Issuer or any of its Subsidiaries, other thana redemption, repurchase or other acquisition in respect of an employee benefit plan or similar arrangement withor for the benefit of employees, officers, directors and consultants of the Issuer.

4.6 Restrictions in the case of Deferral

If on any Distribution Payment Date, payment of all Distributions scheduled to be made on such date is not madein full by reason of the Issuer deferring such Distributions in accordance with the terms of the Securities, theIssuer shall not, and shall procure that none of its Subsidiaries will:

(a) declare or pay any discretionary dividends, distributions or make any other discretionary payment on, andwill procure that no discretionary dividend, distribution or other payment is made on any class of JuniorSecurities or (except on a pro rata basis) Parity Securities of the Issuer, other than a dividend, distribution orother payment in respect of an employee benefit plan or similar arrangement with or for the benefit ofemployees, officers, directors and consultants of the Issuer; or

(b) redeem, reduce, cancel, buy-back or acquire for any consideration any of the Junior Securities or (except ona pro rata basis) Parity Securities of the Issuer, other than a redemption, reduction, cancellation, buy-backor acquisition in respect of an employee benefit plan or similar arrangement with or for the benefit ofemployees, officers, directors and consultants of the Issuer,

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unless and until (i) the Issuer has satisfied in full all outstanding Arrears of Distribution; or (ii) the Issuer ispermitted to do so with the consent of the Securityholders of at least a majority in aggregate principal amount ofthe Securities then outstanding. For the avoidance of doubt, nothing in Condition 4.6 shall restrict the ability ofany Subsidiary of the Issuer to declare and pay dividends, advance loans or otherwise make payments to theIssuer.

4.7 Payment of Arrears of Distribution

(a) The Issuer may elect to pay Arrears of Distribution (in whole or in part) at any time on the giving of at leastfive Business Days’ prior notice to Securityholders (in accordance with Condition 12.1), the Trustee and thePrincipal Paying Agent. If Arrears of Distribution have not been paid in full earlier, all outstanding Arrearsof Distribution will become due and payable, and the Issuer must pay such outstanding Arrears ofDistribution (including any amount of Distribution accrued thereon in accordance with Condition 4.5(a)), onthe relevant Payment Reference Date (in accordance with Condition 6). Any partial payment of outstandingArrears of Distribution by the Issuer shall be made on a pro rata basis between the Securityholders.

(b) Payment Reference Date means the date which is the earliest of:

(i) the date on which the Securities are redeemed in accordance with Condition 5;

(ii) the date on which an order is made for the Winding-Up of the Issuer; and

(iii) the date on which the Issuer is in violation of Condition 4.6 or on the occurrence of a CompulsoryDistribution Payment Event.

5. REDEMPTION AND PURCHASE

5.1 Redemption

The Securities have no fixed redemption date. Unless previously redeemed or purchased and cancelled asprovided in the following provisions of this Condition 5 (without prejudice to Condition 10), the Securities willhave no maturity date, unless the Issuer elects to retain a fixed corporate term under its articles of incorporation.If the Issuer elects to have a fixed corporate term under its articles of incorporation, the term of the Securitieswill mature on the date on which the corporate term of the Issuer expires in accordance with its articles ofincorporation.

As of the date of this Offering Circular, the Issuer’s articles of incorporation states that its corporate term willexpire on January 23, 2058. Under the Revised Corporation Code of the Philippines (Republic Act No. 11232,the Revised Corporation Code), the corporate term of corporations with certificates of incorporation issuedprior to the effectivity of the Revised Corporation Code (i.e., prior to February 23, 2019) shall have perpetualexistence unless the corporation elects to retain a specific corporate term through a shareholder vote and filingto this effect with the Securities and Exchange Commission of the Philippines. Thus, the Issuer no longer has afixed corporate term but has perpetual existence by operation of law.

5.2 Redemption at the option of the Issuer

Subject to applicable law, the Issuer may redeem the Securities (in whole but not in part) on:

(a) the Step Up Date; or

(b) any Distribution Payment Date falling after the Step Up Date,

in each case, at the Redemption Price, on the giving of not less than 30 and not more than 60 calendar days’irrevocable notice of redemption to the Securityholders in accordance with Condition 12.1.

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5.3 Early redemption due to a Gross-up Event

(a) If a Gross-up Event occurs, the Issuer may redeem the Securities (in whole but not in part) at theRedemption Price, on the giving of not less than 30 and not more than 60 calendar days’ irrevocable noticeof redemption to the Securityholders in accordance with Condition 12.1.

(b) No such notice of redemption may be given earlier than 45 calendar days prior to the earliest calendar dayon which the Issuer would be for the first time obliged to pay the Additional Amounts in question onpayments due in respect of the Securities.

(c) Prior to the giving of any such notice of redemption, the Issuer will deliver or procure that there is deliveredto the Trustee:

(i) a certificate signed by any two executive officers of the Issuer stating that the Issuer is entitled to effectsuch redemption and setting out a statement of facts showing that a Gross-up Event has occurred andthat the obligation to pay Additional Amounts cannot be avoided by the Issuer taking reasonablemeasures available to it; and

(ii) an opinion of an independent legal or tax adviser of recognized standing addressed to the Trustee to theeffect that the Issuer has or will become obliged to pay the Additional Amounts in question as a resultof a Gross-up Event,

and the Trustee shall be entitled to rely on and accept, without liability to the Securityholders and without furtherinvestigation or enquiry, the above certificate and opinion as sufficient evidence of the satisfaction of theconditions precedent set out above, in which event such evidence shall be conclusive and binding on theSecurityholders.

For the avoidance of doubt, a change of jurisdiction or domicile of the Issuer shall not be considered a reasonablemeasure.

Gross-up Event means that as a result of any change in, or amendment to, the laws or regulations or rulingspromulgated thereunder of the Relevant Jurisdiction, or any change in or amendment to any official interpretationor application of those laws or regulations or rulings promulgated thereunder, which change or amendmentbecomes effective on or after April 25, 2019, the Issuer has or will become obliged to pay Additional Amounts;provided that the payment obligation cannot be avoided by the Issuer taking reasonable measures available to it;provided further that where any Additional Amounts due in accordance with Condition 7 are in consequence ofany change in the laws or regulations or rulings promulgated thereunder of the Relevant Jurisdiction, or anychange in or amendment to any official interpretation or application of those laws or regulations or rulingspromulgated thereunder after April 25, 2019, a Gross-Up Event shall have occurred only in the event that the rateof withholding or deduction required by such law, regulation or rulings promulgated thereunder, or such officialinterpretation or application thereof, is in excess of 30.0%.

5.4 Early redemption due to a Change of Control Event, Reference Indebtedness Default Event, orAccounting Event

(a) If a Change of Control Event occurs, the Issuer may redeem the Securities (in whole but not in part) (i) atany time prior to but excluding the Step Up Date at the Special Redemption Price or (ii) on or at any timeafter the Step Up Date at the Redemption Price, in each case on the giving of not less than 30 and not morethan 60 calendar days’ irrevocable notice of redemption to the Securityholders in accordance withCondition 12.1.

(b) If a Reference Indebtedness Default Event occurs and is continuing, the Issuer may redeem the Securities (inwhole but not in part) at any time at the Redemption Price, on the giving of not less than 30 and not morethan 60 calendar days’ irrevocable notice of redemption to the Securityholders in accordance withCondition 12.1.

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(c) If an Accounting Event occurs and is continuing, the Issuer may redeem the Securities (in whole but not inpart) (i) at any time prior to but excluding the Step Up Date at the Special Redemption Price or (ii) on or atany time after the Step Up Date at the Redemption Price, in each case on the giving of not less than 30 andnot more than 60 calendar days’ irrevocable notice of redemption to the Securityholders in accordance withCondition 12.1.

(d) Such notice of redemption as provided in Conditions 5.4(a), 5.4(b), and 5.4(c) may only be givensimultaneously with or after a notification by the Issuer in accordance with Condition 12.1 that a Change ofControl Event, a Reference Indebtedness Default Event or an Accounting Event (as the case may be) hasoccurred.

(e) An Accounting Event means that an opinion of a recognized accountancy firm of international standing hasbeen delivered to the Issuer and the Trustee, stating the Securities may no longer be recorded as equity inthe audited consolidated financial statements of the Issuer prepared in accordance with PFRS or otherrecognized accounting standards that the Issuer has adopted from time to time for the preparation of itsaudited consolidated financial statements and such event cannot be avoided by the Issuer taking reasonablemeasures available to it.

Neither the Trustee nor the Agents shall be required to take any steps to ascertain whether a Gross-Up Event,Change of Control Event, Reference Indebtedness Default Event or Accounting Event has occurred and shall notbe responsible or liable to the Securityholders, the Issuer or any other person for any loss arising from any failureto do so.

5.5 Purchase of Securities

The Issuer or any of its Subsidiaries may, in compliance with applicable laws, purchase Securities in any mannerand at any price. Such acquired Securities may be surrendered for cancellation or held or resold.

5.6 Redemption of Securities in the case of minimal outstanding amounts

In the event that the Issuer and/or any of its Subsidiaries has, individually or in aggregate, purchased (and notresold) or redeemed Securities equal to or in excess of 75% of the aggregate Principal Amount of the Securitiesissued on the Issue Date, the Issuer may redeem the remaining Securities (in whole but not in part):

(a) at any time prior to the Step Up Date, at the Special Redemption Price; or

(b) on or at any time after the Step Up Date, at the Redemption Price,

on the giving of not less than 30 and not more than 60 calendar days’ irrevocable notice of redemption to theSecurityholders in accordance with Condition 12.1.

6. PAYMENTS

6.1 Payments in respect of Securities

Payment of principal, premium (if any) and Distributions will be made by transfer to the registered account of theSecurityholder or by U.S. dollar cheque drawn on a bank that processes payments in U.S. dollars mailed to theregistered address of the Securityholder if it does not have a registered account. Payments of principal andpremium (if any) and payments of Distribution due otherwise than on a Distribution Payment Date will only bemade against surrender of the relevant Certificate at the specified office of any of the Agents (other than theCalculation Agent). Distributions on Securities due on a Distribution Payment Date will be paid to the holdershown on the Register at the close of business on the date being the 15th calendar day before the relevantDistribution Payment Date (the Record Date).

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For the purposes of this Condition, a Securityholder’s registered account means the U.S. dollar accountmaintained by or on behalf of it with a bank that processes payments in U.S. dollars, details of which appear onthe Register at the close of business, in the case of principal and premium (if any) and Distributions dueotherwise than on a Distribution Payment Date, on the second Payment Business Day (as defined inCondition 6.4) before the due date for payment and, in the case of Distributions due on a Distribution PaymentDate, on the relevant Record Date, and a Securityholder’s registered address means its address appearing on theRegister at that time.

Notwithstanding the foregoing, so long as the Global Certificate is held on behalf of Euroclear, Clearstream,Luxembourg or any other clearing system, each payment in respect of the Global Certificate will be made to theperson shown as the holder in the Register at the close of business of the relevant clearing system on theClearing System Business Day before the due date for such payments, where “Clearing System Business Day”means a weekday (Monday to Friday, inclusive) except December 25 and January 1.

6.2 Payments subject to Applicable Laws

Payments in respect of principal, premium (if any) and Distributions on Securities are subject in all cases to anyfiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions ofCondition 7.

6.3 No commissions

No commissions or expenses shall be charged to the Securityholders in respect of any payments made inaccordance with this Condition.

6.4 Payment on Business Days

Where payment is to be made by transfer to a registered account, payment instructions (for value the due date or,if that is not a Payment Business Day (as defined below), for value the first following day which is a PaymentBusiness Day) will be initiated and, where payment is to be made by cheque, the cheque will be mailed, on thePayment Business Day preceding the due date for payment or, in the case of a payment of principal and premium(if any) or a payment of Distributions due otherwise than on a Distribution Payment Date, if later, on thePayment Business Day on which the relevant Certificate is surrendered at the specified office of an Agent (otherthan the Calculation Agent).

Securityholders will not be entitled to any Distributions or other payment for any delay after the due date inreceiving the amount due if the due date is not a Payment Business Day, if the Securityholder is late insurrendering its Certificate (if required to do so) or if a cheque mailed in accordance with this Condition arrivesafter the due date for payment.

In this Condition, Payment Business Day means a day (other than a Saturday or Sunday) on which commercialbanks are open for business in Mandaluyong City, New York City and Hong Kong and, in the case ofpresentation of a Certificate, in the place in which the Certificate is presented.

6.5 Partial Payments

If the amount of principal, premium (if any) or Distributions which is due on the Securities is not paid in full, theRegistrar will annotate the Register with a record of the amount of principal, premium (if any) or Distributions infact paid.

6.6 Agents

The Issuer reserves the right at any time to vary or terminate the appointment of any Agent and to appointadditional or other Agents provided that:

(a) there will at all times be a Principal Paying Agent;

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(b) there will at all times be a Registrar (which may be located in any jurisdiction other than the UnitedKingdom); and

(c) there will at all times be a Transfer Agent.

Notice of any termination or appointment and of any changes in specified offices will be given to theSecurityholders promptly by the Issuer in accordance with Condition 12.1.

6.7 Paying Agent

So long as the Securities are listed on the Singapore Exchange Securities Trading Limited (the SGX-ST) and therules of the SGX-ST so require, the Issuer shall appoint and maintain a paying agent in Singapore, where theSecurities may be presented or surrendered for payment or redemption, in the event that the Global Certificaterepresenting the Securities is exchanged for definitive certificates. In addition, an announcement of suchexchange shall be made by or on behalf of the Issuer through the SGX-ST and such announcement will includeall material information with respect to the delivery of the definitive certificates, including details of the payingagent in Singapore.

7. TAXATION AND GROSS-UP

7.1 Payment without withholding

All payments in respect of the Securities by or on behalf of the Issuer will be made without withholding ordeduction for, or on account of, any present or future taxes, duties, assessments or governmental charges ofwhatever nature (Taxes) imposed or levied by or on behalf of the Relevant Jurisdiction, unless the withholding ordeduction of the Taxes is required by law. In the event where such withholding or deduction is made by theIssuer, the Issuer shall pay such additional amount (Additional Amounts) as will result in receipt by theSecurityholders of such amounts as would have been received by them had no such withholding or deductionbeen required; except that no Additional Amounts will be payable in relation to any payment in respect of anySecurity:

(a) presented for payment (if applicable) by or on behalf of a Securityholder who is liable to the Taxes inrespect of such Security by reason of their having some connection with any Relevant Jurisdiction otherthan the mere holding of the Security;

(b) presented for payment (if applicable) more than 30 calendar days after the Relevant Date (as defined inCondition 7.2) except to the extent that a Holder of such Security would have been entitled to suchAdditional Amounts on presenting the same for payment on the last day of the period of 30 calendar daysassuming, whether or not such is in fact the case, that day to have been a Payment Business Day (as definedin Condition 6.4);

(c) where such withholding or deduction is imposed on a payment to an individual and is required to be madepursuant to European Council Directive 2003/48/EC (as amended from time to time) or any lawimplementing or complying with, or introduced in order to conform to, such Directive;

(d) where such withholding or deduction would not have been so imposed but for the failure by the Holder ofsuch Security, after written request made to that Holder at least 30 calendar days before any suchwithholding or deduction would be payable, by the Issuer, the Trustee or the Paying Agent, as applicable, tocomply with any identification, information, documentation or other similar reporting requirementconcerning its nationality, residence or connection with the Relevant Jurisdiction, which is required orimposed by a statute, regulation or published administrative interpretation of general application of theRelevant Jurisdiction as a precondition to reduction or exemption from such withholding or deduction; or

(e) presented for payment (if applicable) by or on behalf of a Securityholder who would have been able to avoidsuch withholding or deduction by presenting the relevant Security to another Paying Agent in a MemberState of the European Union.

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7.2 Interpretation

In these Conditions:

(a) The Relevant Date means the date on which the payment first becomes due but, if the full amount of themoney payable has not been received by the Principal Paying Agent or the Trustee on or before the duedate, it means the date on which, the full amount of the money having been so received, notice to that effecthas been duly given to the Securityholders by the Issuer in accordance with Condition 12.1.

(b) The Relevant Jurisdiction means the Republic of the Philippines or any political subdivision or anyauthority thereof or therein having power to tax, or in the event of any substitution or other corporate actionresulting in the Issuer being incorporated in any other jurisdiction, that other jurisdiction or any politicalsubdivision or any authority thereof or therein having power to tax.

7.3 Additional Amounts, principal and Distributions

Any reference in these Conditions to any amounts in respect of the Securities will be deemed also to refer to anyAdditional Amounts which may be payable under this Condition 7 or under any undertakings given in additionto, or in substitution for, this Condition pursuant to the Trust Deed. Unless the context otherwise requires, anyreference in these Conditions to principal includes any installment amount or redemption amount and any otheramounts in the nature of principal payable pursuant to these Conditions and Distributions includes all amountspayable pursuant to Condition 4 and any other amounts in the nature of distributions payable pursuant to theseConditions.

7.4 Payment of taxes

Neither the Trustee nor any Agent shall be responsible for paying any tax, duty, charges, withholding or otherpayment referred to in this Condition 7, or for determining whether such amounts are payable or the amountthereof, and none of them shall be responsible or liable for any failure by the Issuer, any Securityholder or anythird party to pay such tax, duty, charges, withholding or other payment in any jurisdiction or to provide anynotice or information to the Trustee or Agents that would permit, enable or facilitate the payment of anyprincipal, premium, interest or other amount under the Securities without deduction or withholding for or onaccount of any tax, duty, charge, withholding or other payment imposed by or in any jurisdiction.

8. PRESCRIPTION

Securities will become void unless presented for payment within periods of 10 years (in the case of principal) andfive years (in the case of Distributions) from the Relevant Date in respect of the Securities subject to theprovisions of Condition 6.

9. FURTHER ISSUES

The Issuer is at liberty from time to time without the consent of the Securityholders to create and issue furtherSecurities or bonds either (a) ranking pari passu in all respects (or in all respects save for the first payment ofDistributions thereon) and so that the same will be consolidated and form a single series with the Securities(which will be constituted by a deed supplemental to the Trust Deed) or (b) upon such terms as to ranking,distributions, conversion, redemption and otherwise as the Issuer may determine at the time of the issue.

10. NON-PAYMENT

10.1 Non-payment when due

Notwithstanding any of the provisions below in this Condition 10, the right to institute Winding-Up proceedingsis limited to circumstances where payment has become due. In the case of any Distributions, such Distributions

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will not be due if the Issuer has elected to defer Distributions in accordance with Condition 4.5. In addition,nothing in this Condition 10, including any restriction on commencing proceedings, shall in any way restrict orlimit any rights of the Trustee or any of its directors, officers, employees or agents to claim from or to otherwisetake any action against the Issuer, in respect of any actual, reasonable and documented costs, charges, fees,expenses or liabilities incurred by such party pursuant to or in connection with the Trust Deed or the Securities.

10.2 Proceedings for Winding-Up

If (a) an order is made or an effective resolution is passed for the Winding-Up of the Issuer or (b) the Issuer failsto make payment in respect of the Securities for a period of 10 calendar days or more after the date on whichsuch payment is due, the Issuer shall be deemed to be in default under the Trust Deed and the Securities and theTrustee may, subject to the provisions of Condition 10.4 and subject to and to the extent permitted by applicablelaw, institute proceedings for the Winding-Up of the Issuer, and/or prove in the Winding-Up of the Issuer, and/orclaim in the liquidation of the Issuer, for such payment.

10.3 Enforcement

Without prejudice to Condition 10.2 but subject to the provisions of Condition 10.4 the Trustee may withoutfurther notice to the Issuer institute such proceedings against the Issuer as it may think fit to enforce any term orcondition binding on the Issuer under the Trust Deed or the Securities (other than any payment obligation of theIssuer under or arising from the Securities or the Trust Deed, including, without limitation, payment of anyprincipal or premium or satisfaction of any Distributions (including any Arrears of Distribution) in respect of theSecurities, including any damages awarded for breach of any obligations) and in no event shall the Issuer, byvirtue of the institution of any such proceedings, be obliged to pay any sum or sums, in cash or otherwise, soonerthan the same would otherwise have been payable by it.

10.4 Entitlement of Trustee

Notwithstanding anything to the contrary, the Trustee shall not and shall not be obliged to take any of the actionsreferred to in these Conditions against the Issuer to enforce the terms of the Trust Deed or the Securities unlessand until (a) it shall have been so requested by an Extraordinary Resolution of the Securityholders or in writingby the Securityholders of not less than 25.0% in principal amount of the Securities then outstanding and (b) itshall have been indemnified and/or secured and/or pre-funded to its satisfaction.

10.5 Right of Securityholders

Securityholders are not entitled to proceed directly against the Issuer or to institute proceedings for theWinding-Up or claim in the liquidation of the Issuer or to prove in such Winding-Up unless the Trustee, havingbecome so bound to proceed or being able to prove in such Winding-Up or claim in such liquidation, fails to doso within a reasonable period and such failure shall be continuing, in which case the Securityholders shall haveonly such rights against the Issuer as those which the Trustee is entitled to exercise as set out in thisCondition 10.

10.6 Extent of Securityholders’ remedy

No remedy against the Issuer, other than as referred to in this Condition 10, shall be available to theSecurityholders, whether for the recovery of amounts owing in respect of the Securities or under the Trust Deedor in respect of any breach by the Issuer of any of its other obligations under or in respect of the Securities orunder the Trust Deed.

10.7 No reliance on Trustee

Each Securityholder shall be solely responsible for making and continuing to make its own independent appraisaland investigation into the financial condition, creditworthiness, condition, affairs, status and nature of the Issuerand the Trustee and the Agents shall not at any time have any responsibility for the same and each Securityholdershall not rely on the Trustee or Agents in respect thereof.

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11. REPLACEMENT OF CERTIFICATES

Should any Certificate be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office ofthe Registrar upon payment by the claimant of the expenses incurred in connection with the replacement and onsuch terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Certificatesmust be surrendered before replacements will be issued.

12. NOTICES

12.1 Notices to Securityholders

All notices to the Securityholders will be valid if mailed to them at their respective addresses in the Register andshall be deemed to have been received on the seventh calendar day after being so mailed. The Issuer shall alsoensure that notices are duly published in a manner that complies with the rules and regulations of any stockexchange or other relevant authority on which the Securities are for the time being listed. Any notice shall bedeemed to have been given on the date of publication or, if so published more than once or on different dates, onthe date of the first publication.

So long as all the Securities are represented by the Global Certificate and the same is/are deposited with anominee for a common depositary and Euroclear and Clearstream, Luxembourg, notices to Securityholders shallbe given by delivery to Euroclear and Clearstream, Luxembourg or such additional or substitute clearing systemby the Issuer, for communication by them to entitled accountholders in substitution for publication as required bythe Conditions.

12.2 Notices from Securityholders

Notices to be given by any Securityholder must be in writing and given by lodging the same, together with anyCertificate in respect of such Security or Securities, with the Registrar or, if the Securities are held in a clearingsystem, may be given through the clearing system in accordance with its standard rules and procedures.

13. SUBSTITUTION OR MODIFICATION TO REMEDY GROSS-UP EVENT OR ACCOUNTINGEVENT

The Trustee may, without the consent of the Securityholders, at any time agree with the Issuer to:

(a) the substitution in place of the Issuer (or of any previous substitute under this Condition) as the principaldebtor under the Securities and the Trust Deed of any other company being a direct or indirect Subsidiary ofthe Issuer; or

(b) the modification of these Conditions to the extent reasonably necessary in order to remedy a pending orexisting Gross-Up Event or Accounting Event provided that:

(i) the Securities are unconditionally and irrevocably guaranteed by the Issuer;

(ii) the Issuer procures, at its own cost, the delivery of a legal opinion(s) as to English and any otherrelevant law, addressed to the Trustee, dated the date of such substitution of the Issuer or modificationof these Conditions, as the case may be, and in a form acceptable to the Trustee from legal advisersacceptable to the Trustee; and

(iii) the Trustee is satisfied that the interests of the Securityholders will not be materially prejudiced by thesubstitution or modification.

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14. MEETINGS OF SECURITYHOLDERS, MODIFICATION, WAIVER, AUTHORIZATION ANDDETERMINATION

14.1 Meetings of Securityholders

The Trust Deed contains provisions for convening meetings of Securityholders to consider matters affecting theirinterests, including the sanctioning by Extraordinary Resolution of a modification of any of these Conditions orany provisions of the Trust Deed. Such a meeting may be convened by the Issuer and shall be convened by itupon the request of Securityholders holding not less than 50.0% in principal amount of the Securities for the timebeing outstanding. Except where the business of such a meeting includes consideration of a Reserved Matter (asdefined below), the quorum for any meeting convened to consider an Extraordinary Resolution will be one ormore persons holding or representing over 50.0% in principal amount of the Securities for the time beingoutstanding, or at any adjourned meeting, one or more persons being or representing Securityholders whateverthe principal amount of the Securities held or represented, unless the business of such meeting includesconsideration of proposals:

(a) to modify the dates on which Distributions are payable in respect of the Securities;

(b) to reduce or cancel the principal amount of, any premium payable on redemption of, or amount ofDistributions on or to vary the method of calculating the Rate of Distribution on, any Securities;

(c) to change the currency of payment of any Securities; or

(d) to amend this provision or to modify the provisions concerning the quorum required at any meeting of theSecurityholders or the majority required to pass an Extraordinary Resolution (each of (a), (b), (c) and(d) above, a Reserved Matter),

in which case the necessary quorum for passing an Extraordinary Resolution will be one or more persons holdingor representing not less than 75.0%, or at any adjourned such meeting not less than 25.0%, in principal amount ofthe Securities for the time being outstanding. An Extraordinary Resolution duly passed at any meeting ofSecurityholders or passed by way of electronic consent given by the Securityholders through the relevant clearingsystems in accordance with the Trust Deed will be binding on all Securityholders, whether or not they are presentat any meeting at which such resolution was passed. The vote required to pass an Extraordinary Resolution at anymeeting of Securityholders duly convened and held in accordance with the Trust Deed is not less than two-thirdsof the votes cast. The Trust Deed provides that a written resolution signed by or on behalf of the Holders of notless than 75.0% of the aggregate principal amount of Securities outstanding shall be as valid and effective as aduly passed Extraordinary Resolution.

The provisions of this Condition 14.1 are subject to the further provisions of the Trust Deed.

14.2 Modification, Waiver, Authorization and Determination

The Trustee may, without the consent of the Securityholders, agree to any modification of these Conditions orany of the provisions of the Trust Deed or the Agency Agreement (a) if, in the opinion of the Trustee, suchmodification will not be materially prejudicial to the interests of Securityholders or (b) which is of a formal,minor or technical nature or is to correct a manifest error or an error which, in the opinion of the Trustee, isproven or (c) to comply with mandatory provisions of law. In addition, the Trustee may, without the consent ofthe Securityholders, authorize or waive any breach or proposed breach of these Conditions or any of theprovisions of the Trust Deed if, in the opinion of the Trustee, the interests of the Securityholders will not bematerially prejudiced thereby other than certain Reserved Matters as provided in the Trust Deed.

14.3 Trustee to have Regard to Interests of Securityholders as a Class

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, withoutlimitation, any modification, waiver, authorization, determination or substitution), the Trustee must have regard

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to the general interests of the Securityholders as a class but must not have regard to any interests arising fromcircumstances particular to individual Securityholders (whatever their number) and, in particular but withoutlimitation, must not have regard to the consequences of any such exercise for individual Securityholders(whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwiseconnected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof andthe Trustee will not be entitled to require from the Issuer, nor will any Securityholder be entitled to claim fromthe Issuer, the Trustee or any other person, any indemnification or payment in respect of any tax consequence ofany such exercise upon individual Securityholders except to the extent already provided for in Condition 7 and/orany undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.

14.4 Notification to the Securityholders

Any modification, waiver, authorization, determination or substitution agreed to by the Trustee will be bindingon the Securityholders and, unless the Trustee agrees otherwise, any modification or substitution will be notifiedby the Issuer to the Securityholders as soon as practicable thereafter in accordance with Condition 12.1.

15. INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUER

15.1 Indemnification of the Trustee

The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility,including provisions relieving it from taking action unless indemnified and/or secured and/or pre-funded to itssatisfaction.

15.2 Trustee Contracting with the Issuer

The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter intobusiness transactions with the Issuer and/or any of its Subsidiaries and to act as trustee for the holders of anyother securities issued or guaranteed by, or relating to, the Issuer and/or any of its Subsidiaries, (b) to exerciseand enforce its rights, comply with its obligations and perform its duties under or in relation to any suchtransactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for,the Securityholders, and (c) to retain and not be liable to account for any profit made or any other amount orbenefit received thereby or in connection therewith.

15.3 Application of Moneys Received by the Trustee

All moneys received by the Trustee in respect of the Securities or amounts payable under the Trust Deed will,despite any appropriation of all or part of them by the Issuer, be held by the Trustee on trust to apply them:

(a) first, in payment of all properly incurred fees and expenses, and all costs, charges and liabilities incurred bythe Trustee (including remuneration payable to it) in carrying out its functions under the Trust Deed and bythe Agents (including remuneration payable to them) in acting as agents of the Trustee under the TrustDeed;

(b) secondly, subject to the provisions of Condition 3 and Condition 4 in payment of any amounts (includingprincipal, premium (if any) and Distributions and/or Arrears of Distribution) owing in respect of theSecurities pari passu and rateably; and

(c) thirdly, in payment of any balance to the Issuer for itself.

16. GOVERNING LAW AND SUBMISSION TO JURISDICTION

16.1 Governing law

The Trust Deed, the Agency Agreement, the Securities and any non-contractual obligations arising out or inconnection with the Trust Deed, the Agency Agreement and the Securities, are governed by, and shall beconstrued in accordance with, English law.

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16.2 Jurisdiction of English courts

(a) The Issuer has, in the Trust Deed, irrevocably agreed for the benefit of the Trustee and the Securityholdersthat the courts of England are to have exclusive jurisdiction to settle any disputes which may arise out of orin connection with the Trust Deed or the Securities (including any dispute relating to any non-contractualobligations arising out of or in connection with the Trust Deed or the Securities) and has accordinglysubmitted to the exclusive jurisdiction of the English courts.

(b) The Issuer has, in the Trust Deed, waived any objection to the courts of England on the grounds that theyare an inconvenient or inappropriate forum. The Trustee or the Securityholders may take any suit, action orproceeding (referred to as Proceedings) arising out of, or in connection with the Trust Deed or theSecurities (including any Proceedings relating to any non-contractual obligations arising out of or inconnection with the Trust Deed or the Securities) against the Issuer in any other court of competentjurisdiction and concurrent Proceedings in any number of jurisdictions.

16.3 Appointment of process agent

The Issuer has, in the Trust Deed, irrevocably and unconditionally appointed Law Debenture Corporate ServicesLimited at the latter’s registered office for the time being as its agent for service of process in England in respectof any Proceedings and has undertaken that in the event of such agent ceasing so to act it will appoint such otherperson as the Trustee may approve as its agent for that purpose.

17. RIGHTS OF THIRD PARTIES

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any termof this Security, but this does not affect any right or remedy of any person which exists or is available apart fromthat Act.

18. DEFINITIONS

Unless the context otherwise requires, the following terms will have the following meanings in these Conditions:

Accounting Event has the meaning specified in Condition 5.4.

Additional Amounts has the meaning specified in Condition 7.1.

Agency Agreement has the meaning specified in the preamble to these Conditions.

Agent and Agents have the meaning specified in the preamble to these Conditions.

Arrears of Distribution has the meaning specified in Condition 4.5(a).

Authorized Signatory has the meaning given to it in the Trust Deed.

Business Day means a day (other than a Saturday or Sunday) on which commercial banks are open for businessin Mandaluyong City, Hong Kong and New York.

Calculation Agent has the meaning specified in the preamble to these Conditions.

Certificate has the meaning specified in Condition 1.1.

Change of Control Event has the meaning given to it in Condition 4.4.

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Compulsory Distribution Payment Event has the meaning specified in Condition 4.5.

Conditions means these terms and conditions of the Securities.

Deferral Election Event has the meaning specified in Condition 4.5(a).

Deferral Election Notice has the meaning specified in Condition 4.5(b).

Distribution Payment Date has the meaning specified in Condition 4.1.

Distributions has the meaning specified in Condition 4.1.

Extraordinary Resolution has the meaning given to it in the Trust Deed.

Gross-up Event has the meaning specified in Condition 5.3.

Holder has the meaning specified in Condition 1.2.

Initial Credit Spread means 4.108%.

Initial Rate of Distribution means 6.50% per annum plus any increase pursuant to Condition 4.4.

Initial Reference Notes has the meaning specified in Condition 4.4.

Issue Date means April 25, 2019.

Issuer has the meaning specified in the preamble to these Conditions.

Junior Securities means (i) any class of the Issuer’s share capital (including preferred shares), (ii) anySubordinated Indebtedness issued by the Issuer, and (iii) the undated subordinated capital securities of the Issuer(ISIN: XS1061082696 / Common Code: 106108269 and ISIN: XS1277512775 / Common Code: 127751277)issued and outstanding as of the Issue Date.

Parity Securities means: (i) any instrument, security or obligation issued or entered into by the Issuer whichranks, or is expressed to rank, by its terms or by operation of law, pari passu with the Securities; and (ii) anysecurity guaranteed by, or subject to the benefit of an indemnity entered into by, the Issuer where the Issuer’sobligations under the relevant guarantee or indemnity rank, or are expressed to rank, pari passu with the Issuer’sobligations under the Securities.

Paying Agent has the meaning specified in the preamble to these Conditions.

Payment Business Day has the meaning specified in Condition 6.4.

Payment Reference Date has the meaning specified in Condition 4.7(b).

Person means any individual, corporation, partnership, limited liability company, joint venture, trust,unincorporated organization or government or any agency or political subdivision thereof.

Permitted Holders has the meaning specified in Condition 4.4.

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PFRS means Philippine Financial Reporting Standards and includes statements named PFRS and PhilippineAccounting Standards (PAS) and Philippine Interpretations of International Financial Reporting InterpretationCommittee (IFRIC) issued by the Financial Reporting Standards Council (FRSC) as in effect from time to time.

Principal Amount has the meaning specified in Condition 1.1.

Principal Paying Agent has the meaning specified in the preamble to these Conditions.

Proceedings has the meaning specified in Condition 16.2(b).

Rate of Distribution means the Initial Rate of Distribution or the Reset Rate of Distribution, as applicable.Record Date has the meaning specified in Condition 6.1.

Redemption Price means the Principal Amount of the Securities plus any accrued but unpaid Distributions andany Arrears of Distribution (including any amount of Distributions accrued thereon in accordance withCondition 4.5(a)), as applicable.

Reference Indebtedness Default Event has the meaning given to it in Condition 4.4.

Register has the meaning specified in Condition 1.1.

Registrar has the meaning given to it in the preamble to these Conditions.

Relevant Date has the meaning specified in Condition 7.2(a).

Relevant Jurisdiction has the meaning specified in Condition 7.2(b).

Reserved Matter has the meaning specified in Condition 14.1.

Reset Date has the meaning specified in Condition 4.1.

Reset Determination Date means, in relation to the calculation of a Reset Rate of Distribution, the secondBusiness Day before the commencement of the relevant Reset Period.

Reset Period means the period from and including the Step Up Date to but excluding the next Reset Date, andeach successive period from and including a Reset Date to but excluding the next succeeding Reset Date.

Reset Rate of Distribution in respect of any Reset Period means the Treasury Rate calculated on the ResetDetermination Date in respect of that Reset Period plus the Initial Credit Spread and the Step Up Margin.

Securities has the meaning specified in the preamble to these Conditions.

Securityholders has the meaning specified in the preamble to these Conditions.

Special Redemption Price means 101% of the Principal Amount of the Securities plus any accrued but unpaidDistributions and any Arrears of Distribution (including any amount of Distributions accrued thereon inaccordance with Condition 4.5(a)).

Step Up Date has the meaning given to it in Condition 4.1(a).

Step Up Margin means 2.50% per annum.

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Subordinated Indebtedness means all indebtedness for money borrowed or raised which, in the event ofWinding-Up of the issuer thereof, ranks or is expressed to rank, by its terms or by operation of law, in right ofpayment behind the claims of unsecured and unsubordinated creditors of such issuer, and for these purposesindebtedness shall include all liabilities, whether actual or contingent.

Subsidiary or Subsidiaries means, with respect to any Person, any corporation, association or other businessentity, more than 50.0% of the voting power of the outstanding Voting Stock of which is owned or controlled,directly or indirectly, by such Person and one or more other Subsidiaries of such Person. To be controlled byanother means that the other (whether, directly or indirectly, and whether by the ownership of share capital, thepossession of voting power, contract or otherwise) has the power to appoint and/or remove all or the majority ofthe members of the board of directors or other governing body of that company or otherwise controls or has apower to control the affairs and policies of that company and control shall be construed accordingly.

Taxes has the meaning specified in Condition 7.1.

Transfer Agent has the meaning specified in the preamble to these Conditions.

Treasury Rate means the rate in percent per annum equal to the yield, under the heading that represents theaverage for the week immediately prior to the Reset Determination Date, appearing in the most recentlypublished statistical release designated “H.15(519)” (currently set out on the websitehttp://www.federalreserve.gov/releases/h15/current/default.htm) or any successor publication that is publishedweekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively tradednon-inflation indexed U.S. Treasury securities adjusted to constant maturity under the caption “Treasury constantmaturities,” for the maturity corresponding to three years. If such release (or any successor release) is notpublished during the week preceding the Reset Determination Date or does not contain such yields, TreasuryRate shall be obtained from an internationally recognized investment bank selected by the Issuer.

Trust Deed has the meaning specified in the preamble to these Conditions.

Trustee has the meaning specified in the preamble to these Conditions.

Voting Stock means, with respect to any Person, share capital of any class or kind ordinarily having the power tovote for the election of directors, managers or other voting members of the governing body of such Person.

Winding-Up means, with respect to the Issuer, a final and effective order or resolution for the bankruptcy,winding up, liquidation, receivership, insolvency or similar proceedings in respect of the Issuer.

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THE GLOBAL CERTIFICATE

The Global Certificate contains provisions which apply to the Securities in respect of which the GlobalCertificate is issued, some of which modify the effect of the Terms and Conditions of the Securities set out in thisOffering Circular. Terms defined in the Terms and Conditions of the Securities have the same meaning in theparagraphs below. The following is a summary of certain of those provisions:

ACCOUNTHOLDERS

For so long as all of the Securities are represented by the Global Certificate and the Global Certificate is held onbehalf of a clearing system, each person (other than another clearing system) who is for the time being shown inthe records of Euroclear or Clearstream, Luxembourg (as the case may be) as the holder of a particular aggregateprincipal amount of such Securities (each an “Accountholder”) (in which regard any certificate or otherdocument issued by Euroclear or Clearstream, Luxembourg (as the case may be) as to the aggregate principalamount of such Securities standing to the account of any person shall, in the absence of manifest error, beconclusive and binding for all purposes) shall be treated as the holder of such aggregate principal amount of suchSecurities (and the expression “Securityholders” and references to “holding of Securities” and to a “holder ofSecurities” shall be construed accordingly) for all purposes other than with respect to payments on suchSecurities, the right to which shall be vested, as against SMC Global Power and the Trustee, solely in thenominee for the relevant clearing system (the “Relevant Nominee”) in accordance with and subject to the termsof the Global Certificate. Each Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as thecase may be, for its share of each payment made to the Relevant Nominee.

CANCELLATION

Cancellation of any Security following its redemption or purchase by SMC Global Power or any of itssubsidiaries will be effected by reduction in the aggregate principal amount of the Securities in the register ofSecurityholders and by the annotation of the appropriate schedule to the Global Certificate.

PAYMENTS

Payments of principal and Distributions in respect of Securities represented by the Global Certificate will bemade upon presentation or, if no further payment falls to be made in respect of the Securities, againstpresentation and surrender of the Global Certificate to or to the order of the Registrar or such other Agent as shallhave been notified to the holder of the Global Certificate for such purpose.

Each payment will be made to or to the order of the person whose name is entered on the Register at the close ofbusiness on the Clearing System Business Day immediately prior to the date for payment, where “ClearingSystem Business Day” means a day on which Euroclear and Clearstream, Luxembourg are both open forbusiness.

Distributions of amounts with respect to book-entry interests in the Securities held through Euroclear orClearstream, Luxembourg will be credited, to the extent received by the Registrar, to the cash accounts ofEuroclear or Clearstream, Luxembourg participants in accordance with the relevant rules and procedures of thesystem.

A record of each payment made will be endorsed on the appropriate schedule to the Global Certificate by or onbehalf of the Registrar and shall be prima facie evidence that such payment has been made.

NOTICES

So long as all the Securities are represented by the Global Certificate and the Global Certificate is held on behalfof a clearing system, notices to Securityholders may be given by delivery of the relevant notice to that clearingsystem for communication by it to entitled Accountholders in substitution for notification as required by theConditions. For so long as the Securities are listed on the SGX-ST notices shall also be published in the mannerrequired by the rules and regulations of the SGX-ST.

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REGISTRATION OF TITLE

Registration of title to Securities in a name other than that of the Relevant Nominee will not be permitted unlessEuroclear or Clearstream, Luxembourg, as appropriate, notifies SMC Global Power that it is unwilling or unableto continue as a clearing system in connection with the Global Certificate, and in each case a successor clearingsystem approved by the Trustee is not appointed by SMC Global Power within 90 days after receiving suchnotice from Euroclear or Clearstream, Luxembourg. In these circumstances, title to a Security may be transferredinto the names of holders notified by the Relevant Nominee in accordance with the Conditions, except thatdefinitive certificates in respect of Securities so transferred may not be available until 21 days after the requestfor transfer is duly made.

TRANSFERS

Transfers of book-entry interests in the Securities will be effected through the records of Euroclear, Clearstream,Luxembourg and their respective participants in accordance with the rules and procedures of Euroclear,Clearstream, Luxembourg and their respective direct and indirect participants, as more fully described under“Clearance and Settlement of the Securities.”

RECORD DATE

Distributions on Securities due on a Distribution Payment Date and Arrears of Distribution (and distributionsaccrued thereon) will be paid to the holder shown on the register of Securityholders at the close of business onthe date being the fifteenth calendar day before the relevant Distribution Payment Date.

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EXCHANGE RATES

The Bankers’ Association of the Philippines (“BAP”) announced that beginning April 2, 2018, spot and forwardcurrency exchange transactions will be effected using the Bloomberg trading platform. As a result, the BSP’sReference Exchange Rate Bulletin now refers to the closing rate quoted on the Bloomberg platform as the closingrate for the purchase of U.S. dollars with Pesos. Prior to this, the PDS rate appearing on the PDS platform, acomputer network supervised by the BSP, was quoted as the spot reference rate for foreign exchangetransactions.

The following table sets forth certain information concerning the exchange rate (based on the PDS rate for theyears 2013 to 2017 and based on the rate on the BAP’s website for the periods indicated in 2018, after thepublication of the PDS USD/PHP FX Spot Summary ceased on April 1, 2018) between the Peso and the U.S.dollar for the periods and dates indicated, expressed in Pesos per U.S.$1.00:

Peso/U.S. dollar exchange rate

Year Period end Average(1) High(2) Low(3)

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.41 42.42 44.66 40.572014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.62 44.39 45.41 43.282015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.17 45.49 47.44 44.052016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.81 47.47 49.98 45.922017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.92 50.40 51.80 49.402018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.56 52.68 54.34 49.782019

January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.17 52.45 52.91 52.03February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.70 52.17 52.45 51.70March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.55 52.48 52.90 51.74April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.92 52.05 52.52 51.65May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.17 52.26 52.64 51.86June (through June 21, 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.56 51.89 52.15 51.56

Notes:

(1) BAP volume weighted average for the period ended.

(2) BAP (done) Highest daily closing exchange rate for the period.

(3) BAP (done) Lowest daily closing exchange rate for the period.

On June 21, 2019, the closing rate quoted by the BAP was P51.56 = U.S.$1.00.

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USE OF PROCEEDS

The net proceeds from the issue of the Additional Securities, which will be approximately U.S.$[Š] million (afterthe deduction of commissions), will be applied by the Company for general corporate purposes, investments inpower-related assets and repayment of indebtedness.

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CAPITALIZATION

The following table sets forth, in accordance with PFRS, the Company’s total capitalization (i) as of March 31,2019; (ii) adjustments to give effect to: (a) the issuance of the Original Securities, (b) the issuance of P30 billionPhilippine Peso fixed-rate bonds, (c) the issuance of the Additional Securities, and (d) repayment of theremaining balance of a U.S.$150 million term loan using proceeds from the Philippine Peso fixed-rate bonds; and(iii) as adjusted to give effect to the adjustments enumerated in (ii) above.

The table should be read in conjunction with the SMC Global Power’s condensed consolidated interim financialstatements as of March 31, 2019 and the notes thereto, included in this Offering Circular.

As of March 31, 2019 As of March 31, 2019 As of March 31, 2019

Actual Actual Adjustments(2) Adjustments(2) As adjusted As adjusted

(P) (U.S.$)(1) (P) (U.S.$)(1) (P) (U.S.$)(1)

(millions)

Long-term debt — net of currentmaturities and debt issuecosts . . . . . . . . . . . . . . . . . . . . . . . 203,244.9 3,871.3 21,965.7 418.4 225,210.6 4,289.7

Equity:Capital stock . . . . . . . . . . . . . . 1,062.5 20.2 — — 1,062.5 20.2Additional paid-in capital . . . . 2,490.0 47.4 — — 2,490.0 47.4Senior perpetual capital

securities(3)

Original Securities . . . . . . — — 26,105.6 497.3 26,105.6 497.3Additional Securities . . . . — — [Š] [Š] [Š] [Š]

Redeemable perpetualsecurities . . . . . . . . . . . . . . . 32,751.6 623.8 — — 32,751.6 623.8

Undated subordinated capitalsecurities . . . . . . . . . . . . . . . 26,933.6 513.0 — — 26,933.6 513.0

Equity reserves . . . . . . . . . . . . 595.1 11.3 — — 595.1 11.3Retained earnings . . . . . . . . . . 34,493.8 657.0 — — 34,493.8 657.0Non-controlling interest . . . . . 977.4 18.6 — — 977.4 18.6

Total equity . . . . . . . . . . . . . . . . . . 99,304.0 1,891.5 26,105.6 497.3 [Š] [Š]Total capitalization(4) . . . . . . . . . . 302,548.9 5,762.8 [Š] [Š] [Š] [Š]

Notes:

(1) Translations from Philippine Pesos to U.S. dollars for the convenience of the reader have been made at the BAP closing rate onMarch 29, 2019 of p52.50 to U.S.$1.00.

(2) Adjustments are to give effect to: (a) the issuance of the Original Securities in April 2019, (b) the issuance of p30 billion PhilippinePeso fixed-rate bonds in April 2019, (c) the issuance of the Additional Securities, and (d) repayment of the remaining balance of aU.S.$150 million term loan using proceeds from the Philippine Peso fixed-rate bonds.

(3) Net of commissions.

(4) Total capitalization constitutes long-term indebtedness (net of current portion of long-term debt) and equity.

Other than as described above, there has been no material change in the capitalization of SMC Global Powersince March 31, 2019.

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SELECTED FINANCIAL INFORMATION AND OTHER DATA

The selected historical consolidated statement of financial position data as of December 31, 2016, December 31,2017 and December 31, 2018 and selected historical consolidated statement of income and cash flow data for theyears ended December 31, 2016, December 31, 2017 and December 31, 2018 set forth below have been derivedfrom, and should be read in conjunction with, the audited consolidated financial statements of SMC GlobalPower, including the notes thereto, included elsewhere in this Offering Circular. The selected historicalconsolidated statement of financial position data as of March 31, 2019 and selected historical consolidatedstatement of income and cash flow data for the three months ended March 31, 2018 and March 31, 2019,respectively set forth below, have been derived from, and should be read in conjunction with, the unauditedinterim condensed consolidated financial statements of SMC Global Power, including the notes thereto, includedelsewhere in this Offering Circular.

The consolidated financial statements of SMC Global Power as of and for the years ended December 31, 2016,2017 and 2018, were audited by KPMG. The consolidated financial statements of SMC Global Power as of andfor the three months ended March 31, 2018 and March 31, 2019 were reviewed by KPMG. Unless otherwisestated, SMC Global Power has presented its consolidated financial results under PFRS.

Potential investors should read the following data together with the more detailed information contained in“Management’s Discussion and Analysis of Results of Operations” and the consolidated financial statementsand related notes included elsewhere in this Offering Circular. The following data is qualified in its entirety byreference to all of that information.


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CONSOLIDATED STATEMENT OF INCOME DATA



2016 2017 2018 2018 2019



Revenues . . . . . . . . . . . . . . 77,972.4 82,790.6 120,102.8 2,287.7 24,660.5 34,675.9 660.5Costs and ExpensesCost of power sold:Energy fees . . . . . . . . . . . . . 20,477.9 23,726.5 25,423.5 484.3 5,562.8 7,252.7 138.1Coal, fuel oil and other

consumables . . . . . . . . . . 10,046.7 13,039.1 32,563.7 620.3 5,256.6 8,902.6 169.6Power purchases . . . . . . . . . 7,836.6 10,725.5 11,181.2 213.0 2,579.1 3,707.0 70.6Depreciation and

amortization . . . . . . . . . . 6,164.9 5,842.4 9,108.9 173.5 1,765.3 2,392.4 45.6Plant operations and

maintenance fees . . . . . . 637.0 491.8 2,541.0 48.4 333.4 668.8 12.7Selling and administrative

expenses . . . . . . . . . . . . . 6,079.0 4,689.0 6,110.2 116.4 1,172.2 1,911.8 36.4

51,242.1 58,514.3 86,928.5 1,655.8 16,669.4 24,835.3 473.1

Income fromoperations . . . . . . . . . . . 26,730.3 24,276.3 33,174.3 631.9 7,991.1 9,840.6 187.4

Interest income . . . . . . . . . 200.5 460.9 661.2 12.6 155.5 145.6 2.8Gain on sale of property,

plant and equipment . . 116.4 — — — — — —Equity in net earnings

(losses) of associatesand joint ventures —net . . . . . . . . . . . . . . . . . (294.8) (40.4) (471.2) (9.0) (17.6) 163.1 3.1

Interest expense andother financingcharges . . . . . . . . . . . . . . (12,354.2) (13,244.6) (17,616.1) (335.5) (3,415.0) (4,874.1) (92.8)

Other income (charges)— net . . . . . . . . . . . . . . . (6,881.8) 2,944.2 (3,546.6) (67.6) (3,002.1) 127.7 2.4

Income before incometax . . . . . . . . . . . . . . . . . 7,516.4 14,396.4 12,201.6 232.4 1,711.9 5,402.9 102.9

Income tax expense —net . . . . . . . . . . . . . . . . . 3,365.7 6,179.5 3,901.5 74.3 365.0 1,824.4 34.8

Net income . . . . . . . . . . . . 4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2Attributable to:Equity holders of the Parent

Company . . . . . . . . . . . . 4,150.7 8,216.9 8,281.8 157.7 1,346.6 3,588.9 68.4Non-controlling interest . . . — — 18.3 0.3 0.3 (10.4) (0.2)

4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2

Earnings per common shareattributable to equityholders of the ParentCompany (Basic/Diluted) . . . . . . . . . . . . . P 0.97 P 4.11 P 2.67 U.S.$ 0.05 P 0.37 P 1.81 U.S.$ 0.03

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA

As of December 31, As of March 31,

2016 2017 2018 2018 2019


Q Q Q U.S.$ Q Q U.S.$ASSETSCurrent AssetsCash and cash equivalents . . . . . . . . . . . 21,491.4 28,655.4 28,511.9 543.1 32,465.7 23,144.2 440.8Trade and other receivables — net . . . . 22,342.9 20,435.1 33,046.7 629.5 26,906.3 37,000.0 704.8Inventories . . . . . . . . . . . . . . . . . . . . . . . 2,272.3 3,147.7 5,294.6 100.8 5,383.4 4,801.7 91.4Prepaid expenses and other current

assets . . . . . . . . . . . . . . . . . . . . . . . . . 17,683.0 17,791.8 21,761.7 414.5 20,377.3 21,843.1 416.1Assets held for sale . . . . . . . . . . . . . . . . 184.3 — — — — — —Total Current Assets . . . . . . . . . . . . . . 63,973.9 70,030.0 88,614.9 1,687.9 85,132.7 86,789.0 1,653.1

Noncurrent AssetsInvestments and advances — net . . . . . 16,245.4 16,621.1 12,149.0 231.4 16,884.2 11,375.7 216.7Property, plant and equipment —

net . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,488.0 250,961.3 312,315.4 5,948.9 312,707.2 144,602.0 2,754.3Right-of-use assets — net . . . . . . . . . . . — — — — — 168,375.2 3,207.1Deferred exploration and development

costs . . . . . . . . . . . . . . . . . . . . . . . . . . 693.4 699.0 705.5 13.4 700.0 706.5 13.5Intangible assets and goodwill – net . . . 2,572.1 2,594.2 72,613.4 1,383.1 72,587.1 72,617.1 1,383.2Deferred tax assets . . . . . . . . . . . . . . . . 2,955.6 1,316.9 1,137.6 21.7 1,633.8 1,156.5 22.0Other noncurrent assets — net . . . . . . . 1,020.8 7,950.5 6,314.4 120.3 10,277.0 13,666.8 260.3Total Noncurrent Assets . . . . . . . . . . . 269,975.3 280,143.0 405,235.3 7,718.8 414,789.3 412,499.8 7,857.1

333,949.2 350,173.0 493,850.2 9,406.7 499,922.0 499,288.8 9,510.3

LIABILITIES AND EQUITYCurrent LiabilitiesLoans payable . . . . . . . . . . . . . . . . . . . . — 5,930.0 8,675.7 165.2 8,277.2 8,662.5 165.0Accounts payable and accrued . . . . . . . 37,729.4 31,074.8 31,109.9 592.6 41,192.4 33,830.7 644.4Finance lease liabilities — current

portion . . . . . . . . . . . . . . . . . . . . . . . . 16,344.3 16,844.4 19,659.6 374.5 17,824.4 20,898.1 398.1Income tax payable . . . . . . . . . . . . . . . . 127.2 151.9 310.9 5.9 525.4 637.8 12.1Current maturities of long term debt —

net of debt issue costs . . . . . . . . . . . . 1,040.7 1,139.6 4,939.5 94.1 3,121.7 4,976.9 94.8

Total Current Liabilities . . . . . . . . . . . 55,241.6 55,140.7 64,695.6 1,232.3 70,941.1 69,006.0 1,314.4

Noncurrent LiabilitiesLong-term debt — net of current

maturities and debt issue costs . . . . . 65,283.0 89,589.1 202,025.8 3,848.1 182,851.2 203,244.9 3,871.3Deferred tax liabilities . . . . . . . . . . . . . . 4,785.2 7,324.1 8,180.1 155.8 7,468.6 9,233.1 175.9Finance lease liabilities — net of

current portion . . . . . . . . . . . . . . . . . . 153,745.3 137,949.3 122,347.4 2,330.4 136,568.8 117,679.1 2,241.5Other noncurrent liabilities – net of

current portion . . . . . . . . . . . . . . . . . . 223.5 404.3 843.6 16.1 8,451.1 821.6 15.6

Total Noncurrent Liabilities . . . . . . . . 224,037.0 235,266.8 333,396.9 6,350.4 335,339.7 330,978.7 6,304.4

Total Liabilities . . . . . . . . . . . . . . . . . . 279,278.6 290,407.5 398,092.5 7,582.7 406,280.8 399,984.8 7,618.8

EquityCapital stock . . . . . . . . . . . . . . . . . . . . . 1,062.5 1,062.5 1,062.5 20.2 1,062.5 1,062.5 20.2Additional paid-in capital . . . . . . . . . . . 2,490.0 2,490.0 2,490.0 47.4 2,490.0 2,490.0 47.4Redeemable perpetual securities . . . . . . — — 32,751.6 623.8 33,127.7 32,751.6 623.8Undated subordinated capital

securities . . . . . . . . . . . . . . . . . . . . . . 26,933.6 26,933.6 26,933.6 513.0 26,933.6 26,933.6 513.0Equity reserves . . . . . . . . . . . . . . . . . . . 758.9 761.6 618.3 11.8 796.1 595.1 11.3Retained earnings . . . . . . . . . . . . . . . . . 23,425.6 28,517.8 31,901.7 607.7 29,033.0 34,493.8 657.0

54,670.6 59,765.5 95,757.7 1,824.0 93,442.9 98,326.6 1,872.9Non-controlling interest . . . . . . . . . . . . — — — — 198.4 977.4 18.6

Total Equity . . . . . . . . . . . . . . . . . . . . . 54,670.6 59,765.5 95,757.7 1,824.0 93,641.2 99,304.0 1,891.5

333,949.2 350,173.0 493,850.2 9,406.7 499,922.0 499,288.8 9,510.3

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CONSOLIDATED STATEMENT OF CASH FLOWS DATA



2016 2017 2018 2018 2019



Net cash flows provided by operatingactivities . . . . . . . . . . . . . . . . . . . . . . . . 30,479.6 21,845.3 15,259.2 290.7 11,008.2 7,166.3 136.5

Net cash flows provided by (used in)investing activities . . . . . . . . . . . . . . . . (6,017.4) (16,279.3) (102,034.8) (1,943.5) (97,756.7) (7,861.7) (149.7)

Net cash flows provided by (used in)financing activities . . . . . . . . . . . . . . . . (25,233.8) 1,526.7 86,529.3 1,648.2 90,116.1 (4,729.4) (90.1)

Effect of exchange rate changes on cashand cash equivalents . . . . . . . . . . . . . . . 21.6 71.3 102.8 2.0 442.7 57.1 1.1

Net increase (decrease) in cash and cashequivalents . . . . . . . . . . . . . . . . . . . . . . (750.0) 7,164.0 (143.5) (2.6) 3,810.3 (5,367.7) (102.2)

Cash and cash equivalents at beginningof period . . . . . . . . . . . . . . . . . . . . . . . . 22,241.4 21,491.4 28,655.4 545.8 28,655.4 28,511.9 543.1

Cash and cash equivalents at end ofperiod . . . . . . . . . . . . . . . . . . . . . . . . . . 21,491.4 28,655.4 28,511.9 543.2 32,465.7 23,144.2 440.8

ADDITIONAL FINANCIAL AND OPERATING DATA

The table below provides summary additional financial and operating data for the periods indicated:



2016 2017 2018 2018 2019

(Audited) (Unaudited)(in millions unless indicated otherwise)


Net income . . . . . . . . . . . . . . . . . . . . . . . . . 4,150.7 8,216.9 8,300.1 158.1 1,346.9 3,578.5 68.2EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 10,475.4 7,654.4 10,716.9 204.1 3,092.7 3,036.8 57.8Electricity sold (GWh) . . . . . . . . . . . . . . . . 17,346.5 17,226.9 23,863.6 4,791.9 6,825.6

of which: bilateral offtakeagreements . . . . . . . . . . . . . . . . . . . 15,758.1 15,706.9 20,273.3 4,330.0 6,098.4

of which: WESM sales . . . . . . . . . . . . 1,588.4 1,520.0 3,590.3 461.9 727.2Electricity bought on WESM (GWh) . . . . . 767.2 683.8 1,144.1 213.2 279.1Average realized/paid electricity prices

(P/MWh) . . . . . . . . . . . . . . . . . . . . . . . .For electricity sold under bilateral

offtake agreements . . . . . . . . . . . . . 4,636.4 4,926.4 5,388.5 102.6 5,290.8 5,160.9 98.3For electricity sold on WESM . . . . . . 2,615.2 2,939.1 3,024.8 57.6 3,791.4 4,404.3 83.9For electricity purchased from

WESM . . . . . . . . . . . . . . . . . . . . . . . 4,278.1 4,753.0 4,342.7 82.7 4,001.4 5,516.1 105.1Net debt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 198,846.7 187,173.3 269,349.0 5,130.5 277,747.0 272,617.2 5,192.7Net debt to Consolidated total equity(3) . . . N/A 2.97 2.80 2.80 2.87 2.77 2.77

Notes:

(1) Calculated as (a) net income (excluding items between any or all of the Company and its subsidiaries) plus (b) income tax expense(benefit), finance cost (less interest income) and depreciation, in each case excluding amounts attributable to ring-fenced subsidiariesless (c) foreign exchange gain (loss), gain on sale of investment and aggregate fixed payments made to PSALM. EBITDA should not beviewed in isolation or as an alternative to financial measures calculated in accordance with PFRS. See “Presentation of FinancialInformation” and “Non-PFRS Financial Measures.”

(2) Net debt represents the consolidated debt of the Company and its subsidiaries — net of debt issue costs less cash and cash equivalentsand including PSALM finance lease liabilities, in each case, excluding amounts attributable to ring-fenced subsidiaries’ projectfinance debt. The ring-fenced subsidiaries are SCPC, SMCPC and PVEI.

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(3) The Company maintains a Net debt to Consolidated total equity ratio of not more than 3.25x. The Net debt to Consolidated total equityratio is computed by dividing Net debt over Consolidated total equity. Consolidated total equity is Equity as adjusted to excludeRetained earnings (deficit) of ring-fenced subsidiaries.

CALCULATION OF EBITDA

The following table presents a reconciliation of EBITDA(1) to net income for each of the periods indicated.



2016 2017 2018 2018 2019



Net income(1) . . . . . . . . . . . . . . . . . . . . . . . 5,390.7 9,215.1 5,094.5 97.0 1,295.1 2,363.8 45.0Add:

Income tax expense . . . . . . . . . . . . . 3,677.9 5,352.4 4,638.2 88.3 355.0 1,829.5 34.8Finance cost . . . . . . . . . . . . . . . . . . . 12,342.3 11,747.7 14,919.7 284.2 3,074.3 3,917.8 74.6Interest income . . . . . . . . . . . . . . . . . (196.6) (368.5) (463.5) (8.8) (104.5) (105.8) (2.0)Depreciation . . . . . . . . . . . . . . . . . . . 6,338.7 5,607.7 6,898.6 131.4 1,565.7 1,743.2 33.2

Less:Foreign exchange gains (loss) . . . . . (6,910.1) (975.0) 5,345.0 (101.8) (3,226.1) 27.3 0.5Aggregate fixed payments made to

PSALM(2) . . . . . . . . . . . . . . . . . . . 23,873.3 24,875.0 25,715.6 489.8 6,319.0 6,684.4 127.3Gain on Sale of Investment . . . . . . . 114.4 — — — — — —

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . 10,475.4 7,654.4 10,716.9 204.1 3,092.7 3,036.8 57.8

Notes:

(1) Amounts exclude items attributable to ring-fenced subsidiaries. Subsidiaries with project debts were nominated as ring-fencedsubsidiaries. If the amounts from the ring-fenced subsidiaries were to be included, the EBITDA would amount to p10,099.4 million,p9,013.8 million and p18,108.2 million (U.S.$344.9 million) for the years ended December 31, 2016, December 31, 2017 andDecember 31, 2018, and p3,912.2 million and p5,861.0 million (U.S.$111.6 million) for the three months ended March 31, 2018 andMarch 31, 2019, respectively.

(2) Aggregate fixed payments made to PSALM is reflected in the Statement of Cash Flows as Payments of Finance Lease Liabilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the section entitled “Selected Financial Informationand Other Data” and the Company’s audited consolidated financial statements as of and for the years endedDecember 31, 2016, 2017 and 2018 and its unaudited condensed consolidated financial statements as of, and forthe three months ended March 31, 2019 (with comparative figures for the three months ended March 31, 2018),including the notes thereto, included elsewhere in this Offering Circular. All necessary adjustments to presentfairly the results of operations of the Company have been made. Certain information and footnote disclosurenormally included in the audited consolidated financial statements prepared in accordance with the PhilippineFinancial Reporting Standards have been omitted.

This discussion contains forward-looking statements and reflects the current views of the Company with respectto future events and financial performance. Actual results may differ materially from those anticipated in theseforward-looking statements as a result of certain factors such as those set forth in the section entitled “RiskFactors” and elsewhere in this Offering Circular.


RESULTS OF OPERATIONS

Description of Certain Components of Results of Operations

Revenues

Revenues refers to the sale of power and electricity, which is derived substantially from offtake agreements. It isrecognized in the period when actual power or capacity is generated, transmitted and sold to the customers, net ofrelated discounts and adjustments. Retail and other power-related services is revenue from the supply of power tothe customers. The Uniform Filing Requirements on the rate unbundling released by the ERC specified thefollowing bill components: (a) generation charge, (b) transmission charge, (c) system loss charge, (d) distributioncharge, (e) supply charge, (f) metering charge, (g) currency exchange rate adjustments, where applicable and(h) interclass and life subsidies. Feed-in tariffs allowance, VAT, local franchise tax and universal charges arebilled and collected on behalf of the national and local government and do not form part of SMC Global Power’srevenue. Generation, transmission and system loss charges, which are part of revenues, are pass-through charges.

Cost of Power Sold

Cost of power sold consists primarily of (i) cost of coal, fuel oil and other consumables (which consists primarilyof the cost of purchasing coal for delivery to the Sual Power Plant, Limay Greenfield Power Plant, DavaoGreenfield Power Plant and Masinloc Power Plant), (ii) energy fees, which reflect the variable component of themonthly payments due from SMC Global Power to PSALM under the IPPA Agreements; (iii) power purchasedfrom external sources, which represents the cost of purchasing power from the WESM and other externalgenerators and distribution wheeling service fees incurred by RES-licensed companies (SMELC, SCPC andMPPCL); (iv) depreciation expenses relating to the Sual Power Plant, San Roque Power Plant and Ilijan PowerPlant under the finance lease accounting method applicable to the IPPA Agreements and Limay GreenfieldPower Plant, Davao Greenfield Power Plant and Masinloc Power Plant and amortization expenses relating to theconcession agreement with ALECO; and (v) plant operations and maintenance fees for the operation of theLimay Greenfield Power Plant, Davao Greenfield Power Plant and Masinloc Power Plant.

Selling and Administrative Expenses

For the three months ended March 31, 2018 and 2019 and for the years ended December 31, 2016, 2017 and2018, selling and administrative expenses consist principally of: (i) taxes and licenses, (ii) salaries, wages andbenefits, (iii) management fees, (iv) outside services, (v) professional fees, (vi) donations, (vii) corporation socialprogram, (viii) depreciation and amortization, (ix) repairs and maintenance, (x) market fees, (xi) insurance,(xii) impairment losses on trade receivables, and (xiii) rent.

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Other Income (Charges)

For the three months ended March 31, 2018 and 2019 and for the years ended December 31, 2016, 2017 and2018, other income (charges) consists of (i) PSALM monthly fees reduction, (ii) construction revenue,(iii) construction cost, (iv) foreign exchange losses — net and (v) miscellaneous income (charges) — net.

Each of the fixed monthly payments made under SMC Global Power’s IPPA Agreements is apportioned betweenfinance cost and reduction of the related finance lease liability so as to achieve a constant rate of interest on theremaining balance of the finance lease liability. Foreign exchange gains and losses result from the effect ofexchange rate movements on SMC Global Power’s foreign currency-denominated monetary assets and liabilities.

Results of Operations

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Revenues

Revenues for the three months ended March 31, 2019 increased by 40.6% or P10,015.4 million fromP24,660.5 million for the three months ended March 31, 2018, reflecting the sale of 4,792 GWh of power, toP34,675.9 million (U.S.$660.5 million) for the three months ended March 31, 2019, reflecting the sale of 6,826GWh of power. The increase was mainly driven by: (i) the revenues contributed by the operations of theMasinloc Power Plant for the full period of the first quarter in 2019 as compared to only 11 days in 2018,beginning from the acquisition of the “Masinloc Group” (comprised of SMCGP Masin and subsidiaries,SMCGP Transpower and SPHI) on March 20, 2018 in the amount of P5,893.1 million (U.S.$112.2 million), or58.8% of the increase in revenues, reflecting the sale of 1,330 GWh of power; (ii) the additional revenues fromthe full quarter operations of Unit 2 of the Davao Greenfield Power Plant and Unit 3 of the Limay GreenfieldPower Plant, which commenced commercial operations on February 26, 2018 and March 26, 2018, respectively;(iii) the increase in bilateral sales of SPPC due to higher average realization price and higher Meralconominations resulting from longer operating hours of the Ilijan Power Plant, as offset by (a) the decline inrevenues of SMEC due to lower average realization price on account mainly of lower indices of coal; and(b) lower spot sales volume of SPDC brought by unfavorable hydrological conditions and brief shutdown of theSan Roque Power Plant from February 15 to 18, 2019.

Cost of Power Sold

Cost of power sold likewise increased by 47.9% or P7,426.3 million, from P15,497.2 million for the threemonths ended March 31, 2018 to P22,923.5 million (U.S.$ 436.6 million) for the three months ended March 31,2019. The increase was mainly attributable to the following: (i) full quarter costs incurred by MPPCL in 2019,contributing P4,213.9 million (U.S.$80.3 million), or 56.7% of the increase in cost of power sold; (ii) highercosts incurred by SMCPC and SCPC from the full quarter operations of the combined additional two units, with acapacity of 150 MW each; and (iii) higher energy fees due to longer operating hours of the Ilijan Power Plant andSual Power Plant and higher average natural gas price for the Ilijan Power Plant.

Cost of coal, fuel oil and other consumables increased by 69.4% or P3,646.0 million, from P5,256.6 million forthe three months ended March 31, 2018 to P8,902.6 million (U.S.$169.6 million) for the three months endedMarch 31, 2019, primarily due to the (i) full quarter costs incurred by (a) MPPCL, contributing P3,087.4 million(U.S.$58.8 million), or 84.7% of the total increase in cost of coal, fuel oil and other consumables and (b) Unit 2of the Davao Greenfield Power Plant and Unit 3 of the Limay Greenfield Power Plant; and (ii) higher costsincurred by the Sual Power Plant as a result of longer operating hours in 2019 compared to 2018 wherein Unit 2was on a maintenance outage for the installation of main unit transformer (January 18 to February 12, 2018); and

Energy fees increased by 30.4% or P1,689.9 million, from P5,562.8 million for the three months endedMarch 31, 2018 to P7,252.7 million (U.S.$138.1 million) for the three months ended March 31, 2019. Thisincrease was primarily due to the increase in natural gas price and higher net generation of the Ilijan Power Plantwith lower outage hours compared to last year.

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Power purchased from external sources increased by 43.7% or P1,127.9 million, from P2,579.1 million for thethree months ended March 31, 2018 to P3,707.0 million (U.S.$70.6 million) for the three months endedMarch 31, 2019. This increase mainly relates to the full quarter power purchases incurred by the Masinloc PowerPlant, contributing P609.7 million (U.S.$11.6 million), and higher power purchases incurred by SCPC, SMCPC,SPDC and APEC due to increase in customers and demand.

Depreciation and amortization increased by 35.5% or P627.1 million, from P1,765.3 million for the threemonths ended March 31, 2018 to P2,392.4 million (U.S.$45.6 million) for the three months ended March 31,2019 primarily on account of the full quarter operations of the Masinloc Power Plant (contributingP364.6 million (U.S.$6.9 million) or 58.1% of the total increase in depreciation and amortization expenses), Unit2 of the Davao Greenfield Power Plant and Unit 3 of the Limay Greenfield Power Plant.

Plant operations and maintenance fees increased by 100.6% or P335.4 million, from P333.4 million for the threemonths ended March 31, 2018 to P668.8 million (U.S.$12.7 million) for the three months ended March 31, 2019.The increase is attributable to the full quarter operations of the Masinloc Power Plant, which was acquired inMarch 2018 contributing P152.2 million of the total increase in plant operations and maintenance fees, Unit 2 ofthe Davao Greenfield Power Plant and Unit 3 of the Limay Greenfield Power Plant.


Selling and administrative expenses increased by 63.1% or P739.6 million, from P1,172.2 million for the threemonths ended March 31, 2018 to P1,911.8 million (U.S.$36.4 million) for the three months ended March 31,2019. The increase was due mainly to (i) the operating expenses incurred by MPPCL during its full quarteroperations in 2019 in the amount of P448.6 million (U.S.$8.5 million), or 60.7% of the increase in selling andadministrative expenses; and (ii) higher local business and real property taxes incurred in 2019, and(iii) contributions to registered donee institutions for programs on education and environment.

Income From Operations

As a result of the foregoing, consolidated income from operations ended 23.1% or P1,849.5 million higher, fromP7,991.1 million for the three months ended March 31, 2018 to P9,840.6 million (U.S.$187.4 million) for thethree months ended March 31, 2019.

Other Income (Charges) — Net

Interest expense and other financing charges increased by 42.7% or P1,459.1 million, from P3,415.0 million forthe three months ended March 31, 2018 to P4,874.1 million (U.S.$92.8 million) for the three months endedMarch 31, 2019 due mainly to higher interest expense recognized on: (i) the long-term borrowings obtained bySMC Global Power to partially finance its acquisition of the Masinloc Group; (ii) project financing of SCPC andSMCPC; and (iii) existing long-term loans of MPPCL.

Interest income decreased by 6.4% or P9.9 million, from P155.5 million for the three months ended March 31,2018 to P145.6 million (U.S.$2.8 million) for the three months ended March 31, 2019, resulting from loweraverage balance of cash and cash equivalents during the year.

Equity in net earnings of associates and joint ventures improved by P180.7 million from a P17.6 million loss forthe three months ended March 31, 2018 to P163.1 million (U.S.$ 3.1 million) gain for the three months endedMarch 31, 2019 primarily due to the positive bottom line of AHC for the first quarter of 2019 arising mainlyfrom higher average price for its spot sales.

Other income (charges) increased mainly on account of the following (i) net foreign exchange differential,arising mainly from the Company’s U.S. dollar-denominated liabilities, improved by 100.7% orP3,460.2 million, from P3,436.9 million loss for the three months ended March 31, 2018 to P23.3 million(U.S.$0.4 million) gain for the three months ended March 31, 2019 on account of the appreciation of the

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Philippine peso against the U.S. dollar during the first quarter of 2019 (from P52.58 in December 31, 2018 toP52.50 in March 31, 2019) as compared to the same period last year (from P49.93 in December 31, 2017 toP52.16 in March 31, 2018) and (ii) lower PSALM monthly fees reduction income by 100% or P359.1 million(U.S.$6.8 million) due to lower outages of the Sual Power Plant in 2019 versus 2018. The Company’s U.S.dollar-denominated liabilities as of March 31, 2019 includes the outstanding U.S. dollar-denominated long-termborrowings amounting to U.S.$850 million out of the U.S.$1,350 million, obtained by SMC Global Power topartly finance the acquisition of the Masinloc Group in March 2018.

Income Before Income Tax

As a result of the foregoing factors, income before income tax increased by 215.6% or P3,691.0 million, fromP1,711.9 million for the three months ended March 31, 2018 to P5,402.9 million (U.S.$102.9 million) for thethree months ended March 31, 2019.

Income Tax Expense

Income tax expense of P1,824.4 million (U.S.$34.8 million) for the three months ended March 31, 2019 washigher by P1,459.4 million compared to P365.0 million for the three months ended March 31, 2018, mainly as aresult of (i) higher provision for deferred income tax expense recognized by the IPPA Power Plants on thetemporary difference of monthly fixed payments to PSALM over the finance lease liability-related expenses;(ii) higher provision for current income tax resulting from higher taxable income of MPPCL and SPPC; andoffset by (iii) lower provision for income tax recognized by SMEC due to the decline in its pre-tax income.

Net Income

Consequently, the consolidated net income of the Company for the three months ended March 31, 2019 washigher by 165.7% or P2,231.6 million from P1,346.9 million for the three months ended March 31, 2018 toP3,578.5 million (U.S.$68.2 million) for the three months ended March 31, 2019. Unrealized foreign exchangedifferential significantly improved from a P1,610.9 million loss recognized for the three months endedMarch 31, 2018 to a P308.0 million gain for the three months ended March 31, 2019 brought by the appreciationof the Philippine peso against the U.S. dollar.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenues

Revenues for the year ended December 31, 2018 increased by 45.1% or P37,312.2 million, fromP82,790.6 million in the year ended December 31, 2017, reflecting the sale of 17,227 GWh of power, toP120,102.8 million (U.S.$2,287.7 million) in the year ended December 31, 2018, reflecting the sale of 23,864GWh of power. The increase in revenue was mainly driven by (i) revenues contributed by Masinloc Power Plantfrom March 2018 onwards in the amount of P19,459.3 million (U.S.$370.7 million), or 52.2% of the increase inrevenues, reflecting the sale of 3,934 GWh of power; (ii) additional revenues from the commercial operations ofUnits 1, 2 and 3 of the Limay Greenfield Power Plant (starting in May 2017, September 2017 and March 2018,respectively) and Units 1 and 2 of the Davao Greenfield Power Plant (starting in July 2017 and February 2018,respectively); (iii) additional contracted customers of SMELC; and (iv) higher average prices for Sual PowerPlant and Ilijan Power Plant bilateral and spot offtake volumes.

Cost of Power Sold

Cost of power sold likewise increased by 50.1% or P26,993.0 million, from P53,825.3 million in the year endedDecember 31, 2017 to P80,818.3 million (U.S.$1,539.4 million) in the year ended December 31, 2018. Theincrease was attributable mainly to the following: (i) inclusion of cost of power sold, amounting toP13,347.8 million (U.S.$254.2 million), or 49.4% of the increase in cost of power sold, incurred by the newlyacquired Masinloc Power Plant which became a subsidiary of SMC Global Power only in 2018; (ii) costs

74

incurred by SMCPC and SCPC due to the start of commercial operations of its power plants; and (iii) higherpower distribution costs incurred by RES-licensed companies (SMELC and SCPC) due to the increase in theircustomers.

Cost of coal, fuel oil and other consumables increased by 149.7% or P19,524.6 million, from P13,039.1 millionin the year ended December 31, 2017 to P32,563.7 million (U.S.$620.3 million) in the year ended December 31,2018, primarily due to the commercial operations of Units 1, 2 and 3 of the Limay Greenfield Power Plant, Units1 and 2 of the Davao Greenfield Power Plant and the newly acquired Masinloc Power Plant (contributingP8,824.3 million (U.S.$168.1 million), or 45.2% of the total increase in cost of coal, fuel oil and otherconsumables).

Energy fees increased by 7.2% or P1,697.0 million, from P23,726.5 million in the year ended December 31,2017 to P25,423.5 million (U.S.$484.3 million) in the year ended December 31, 2018. This increase wasprimarily due to the increase in net generation of San Roque Power Plant brought by higher average reservoirlevel and having been tagged as a must-run unit resulting from persistent storms and rainfall from August toOctober 2018.

Power purchased from external sources increased by 4.2% or P455.7 million, from P10,725.5 million in the yearended December 31, 2017 to P11,181.2 million (U.S.$213.0 million) in the year ended December 31, 2018. Thisincrease mainly relates to the inclusion of power purchases incurred by the Masinloc Power Plant from March2018 onwards in the amount of P2,022.9 million (U.S.$38.5 million), higher power purchases and distributionwheeling services fees incurred by SMELC, SCPC, SMCPC and APEC due to increases in customers, in theamount of P2,411.6 million (U.S.$45.9 million), offset by the decline in the power purchases of SMEC in theamount of P4,087.3 million (U.S.$77.9 million) as a result of going back to normal operations of Unit 2 after itsextended outage in 2017 from June 14 to November 10.

Depreciation and amortization increased by 55.9% or P3,266.5 million, from P5,842.4 million in the year endedDecember 31, 2017 to P9,108.9 million (U.S.$173.5 million) in the year ended December 2018, primarily onaccount of the commercial operations of Limay Greenfield Power Plant and Davao Greenfield Power Plant andthe acquisition of Masinloc Power Plant (contributing P1,519.9 million (U.S.$29.0 million) or 46.5% of the totalincrease in depreciation and amortization expenses).

Plant operations and maintenance fees increased by 416.7% or P2,049.2 million, from P491.8 million in the yearended December 31, 2017 to P2,541.0 million (U.S.$48.4 million) in the year ended December 31, 2018. Theincrease is attributable to the start of the commercial operations of Limay Greenfield Power Plant and DavaoGreenfield Power Plant and the Masinloc Power Plant, which was acquired in March 2018 and contributedP980.7 million or 47.9% of the total increase in plant operations and maintenance fees.


Selling and administrative expenses increased by 30.3% or P1,421.2 million, from P4,689.0 million in the yearended December 31, 2017 to P6,110.2 million (U.S.$116.4 million) in the year ended December 31, 2018. Theincrease was due mainly to the operating expenses incurred by the newly acquired MPPCL in the amount ofP1,460.6 million (U.S.$27.8 million), and additional professional fees incurred for legal and financial advisoryservices rendered by third parties which were engaged by SMC Global Power for the acquisition of the MasinlocGroup in March 2018.

Income From Operations

As a result of the foregoing, consolidated income from operations ended 36.7% or P8,898.0 million higher, fromP24,276.3 million in the year ended December 31, 2017 to P33,174.3 million (U.S.$631.9 million) in 2018.


Interest expense and other financing charges increased by 33.0% or P4,371.5 million, from P13,244.6 million inthe year ended December 31, 2017 to P17,616.1 million (U.S.$335.5 million) in the year ended December 31,

75

2018 due to the following: (i) higher interests recognized by SMC Global Power on its redenominated loans andadditional long-term borrowings obtained to finance its acquisition of the Masinloc Group; (ii) higher financingcharges expensed by SCPC since the start of commercial operations of its Limay Greenfield Power Plant Units 1,2 and 3, which were previously capitalized during the aforesaid units’ construction; and (iii) financing chargesincurred by the newly acquired MPPCL from its short and long-term borrowings in the amount of P878.4 million(U.S.$16.7 million) or 20.1% of the total increase in interest expense and other financing charges.

Interest income increased by 43.5% or P200.3 million, from P460.9 million in the year ended December 31,2017 to P661.2 million (U.S.$12.6 million) in the year ended December 31, 2018, resulting from higher averagebalance of cash and cash equivalents during the year.

Equity in net losses was higher by P430.8 million, from P40.4 million in the year ended December 31, 2017 toP471.2 million (U.S.$9.0 million) in the year ended December 31, 2018, mainly on account of the significant netloss recognized by AHC in 2018 as against 2017 as a result of the unfavorable hydrological conditions and lowerwater allocations in the fourth quarter of 2018.

Other income (charges) declined mainly on account of the following (i) net foreign exchange differential, arisingmainly from the Group’s U.S. dollar-denominated liabilities, increased by 740.6% or P4,683.3 million, fromP632.4 million loss in the year ended December 31, 2017 to P5,315.7 million (U.S.$101.3 million) loss in theyear ended December 31, 2018 on account of the significant depreciation of the Philippine peso against the U.S.dollar in 2018 (from P49.93 to P52.58) as compared to the prior year (from P49.72 to P49.93) and theadditional U.S. dollar-denominated long-term borrowings, amounting to U.S.$1,350 million, obtained by SMCGlobal Power to partly finance the acquisition of the Masinloc Group in March 2018 and (ii) lower PSALMmonthly fees reduction income by 50.8% or P1,668.6 million (U.S.$31.8 million) due to lower outages of SualPower Plant in 2018 versus 2017.


As a result of the foregoing factors, income before income tax decreased by 15.2% or P2,194.8 million, fromP14,396.4 million in the year ended December 31, 2017 to P12,201.6 million (U.S.$232.4 million) in the yearended December 31, 2018.

Income Tax Expense

Income tax expense declined by 36.9% or P2,278.0 million, from P6,179.5 million in the year endedDecember 31, 2017 to P3,901.5 million (U.S.$74.3 million) in the year ended December 31, 2018, primarilybecause of lower income before tax and deferred income tax expense arising from the temporary differencesrelated to finance lease liability-related expenses of the IPPA entities.

Net Income

Consequently, the consolidated net income of the Group was slightly higher by 1.0% or P83.2 million, fromP8,216.9 million in the year ended December 31, 2017 to P8,300.1 million (U.S.$158.1 million) in the yearended December 31, 2018.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Revenues

Revenues for the year ended December 31, 2017 increased by 6.2% or P4,818.2 million, from P77,972.4 millionin the year ended December 31, 2016 to P82,790.6 million in the year ended December 31, 2017. The increasewas primarily driven by (i) higher average realization prices for the Sual and Ilijan bilateral offtake volumes dueto higher pass-through fuel and natural gas prices; (ii) additional contracted customers of SMELC; and(iii) additional revenues from Limay Greenfield Power Plant Units 1 and 2 and Davao Greenfield Power PlantUnit 1 which commenced commercial operations in 2017.

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Offtake volumes decreased by 0.7% from 17,346 GWh in the year ended December 31, 2016 to 17,227 GWh inthe year ended December 31, 2017, due to lower bilateral volumes from the Ilijan and Sual Power plants. IlijanPower Plant Block 1 underwent an annual maintenance shutdown as did the Malampaya, from January 28, 2017to February 16, 2017. Meanwhile, Block 2 experienced a temporary shutdown due to a series of earthquakes thathit Batangas in April 2017. Sual Power Plant’s Unit 2 likewise experienced extended shutdown due to atransformer failure from June 14, 2017 to November 10, 2017.

Cost of Power Sold

Cost of power sold increased by 19.2% or P8,662.2 million, from P45,163.1 million in the year endedDecember 31, 2016 to P53,825.3 million in the year ended December 31, 2017. The increase was due to thefollowing: (i) higher energy fees incurred by the Ilijan Power Plant due to higher natural gas prices andutilization of diesel resulting from the Malampaya shutdown; (ii) higher cost of coal for the Sual Power Plant;(iii) higher power distribution costs incurred by RES-licensed companies due to the increase in their customers;and (iv) higher power purchases from external generators by SMEC to compensate for its low generation.

Energy fees increased by 15.9% or P3,248.6 million, from P20,477.9 million in the year ended December 31,2016 to P23,726.5 million in the year ended December 31, 2017. The increase was primarily due to highernatural gas prices and use of diesel by Ilijan Power Plant during the Malampaya shutdown.

Cost of coal, fuel oil and other consumables increased by 29.8% or P2,992.4 million, from P10,046.7 million inthe year ended December 31, 2016 to P13,039.1 million in the year ended December 31, 2017. The increase wasprimarily due to higher average price of coal for the Sual Power Plant.

Power purchased from external sources increased by 36.9% or P2,888.9 million, from P7,836.6 million in theyear ended December 31, 2016 to P10,725.5 million in the year ended December 31, 2017. This increase wasdue to higher power purchased from external generators by SMEC to compensate for its low generation andhigher distribution wheeling services incurred by SMELC due to increase in its customers.

Depreciation and amortization decreased by 5.2% or P322.5 million, from P6,164.9 million in the year endedDecember 31, 2016 to P5,842.4 million in the year ended December 31, 2017, following the sale of the LimayCogeneration Plant to Petron Corporation in December 2016.


Selling and administrative expenses decreased by 22.9% or P1,390.0 million, from P6,079.0 million in the yearended December 31, 2016 to P4,689.0 million in the year ended December 31, 2017, resulting from a lowerprovision for probable losses on trade and other receivables by P959 million due to improved collectionexperiences and lower contributions to donee institutions by P436 million.

Income from Operations

Income from operations decreased by 9.2% or P2,454.0 million, from P26,730.3 million in the year endedDecember 31, 2016 to P24,276.3 million in the year ended December 31, 2017, as a result of the foregoingfactors. However, excluding the operations of the Limay Greenfield PowerPlant in 2016, operating income wouldhave increased by 3%.


Other income (charges) made a complete turnaround by P9,826.0 million, from charges (net) ofP6,881.8 million in the year ended December 31, 2016 to income (net) P2,944.2 million in the year endedDecember 31, 2017. The increase was due to (i) higher PSALM monthly fees reduction recognized on theextended outages of Sual Power Plant in 2017, and (ii) lower net foreign exchange losses by P7,442,7 milliondue to reduced U.S. dollar-denominated liabilities and softer depreciation of Philippine peso against theU.S. dollar for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

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Interest income increased by P260.4 million resulting from the higher average balance of cash and cashequivalents in the year ended December 31, 2017 and interest income recognized on advances granted to AHC in2017.

Equity in net losses declined by 86.3% mainly on account of AHC’s improved bottom line in 2017 as comparedto 2016, as a result of better hydrological condition, higher water allocation and higher average selling price forits offtake volumes.


As a result of the foregoing factors, income before income tax increased by 91.5% or P6,880.0 million, fromP7,516.4 million in the year ended December 31, 2016 to P14,396.4 million in the year ended December 31,2017.

Income Tax Expense

Net income tax expense increased by 83.6% or P2,813.8 million, from P3,365.7 million in the year endedDecember 31, 2016 to P6,179.5 million in the year ended December 31, 2017. This was mainly due to higherdeferred income tax expense arising from temporary differences relating to the IPPAs’ finance lease liabilities.

Net Income

As a result of the foregoing factors, net income increased by 98.0% or P4,066.2 million, from P4,150.7 millionin the year ended December 31, 2016 to P8,216.9 million in the year ended December 31, 2017.

CRITICAL ACCOUNTING POLICIES

For a discussion of the critical accounting policies and significant accounting judgments and estimates of SMCGlobal Power please see Note 3 of the audited consolidated financial statements included in this OfferingCircular.

In accounting for its IPPAs, Agreements with PSALM, SMC Global Power’s management has made a judgmentthat the IPPA Agreements are agreements that contain a lease.

The management of SMC Global Power has made a judgment that it has substantially acquired all the risks andrewards incidental to the ownership of the IPPA Power Plants. Accordingly, each IPPA Agreement wasaccounted for as a finance lease and SMC Global Power recognized the IPPA Power Plants as finance leaseliabilities at the present value of the agreed monthly payments to PSALM. Please see Notes 3, 4, 7 and 32 of theaudited consolidated financial statements and Note 1 of the unaudited interim condensed consolidated financialstatements included in this Offering Circular.

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INDUSTRY OVERVIEW

The information in this section has been derived from various Government and private publications and has notbeen prepared or independently verified by SMC Global Power, the Joint Lead Managers or any of theirrespective affiliates or advisors. Certain information in this section regarding demand for electricity in thePhilippines was derived from the DOE website www.doe.gov.ph and has been supplemented with informationfrom the ERC, the Philippine Statistics Authority, WESM and other sources. SMC Global Power does not haveany knowledge that such information from such sources is inaccurate in any material respect. The informationmay not be consistent with other information compiled within or outside the Philippines. The contents ofwww.doe.gov.ph do not form part of and are not incorporated by reference into this Offering Circular.

OVERVIEW

The Philippine power industry was historically dominated by the state-owned NPC. Since the 1990s, theGovernment decided to restructure and promote the development of the Philippine power industry throughprivate sector participation and has been privatizing its generation assets and capacity since December 2003.

The current framework of the Philippine power sector is governed by the EPIRA which was enacted in 2001. ThePhilippine power industry, following the passage of the EPIRA, has undergone major reforms. The EPIRA aimsto improve the power sector in the Philippines by ensuring and accelerating total electrification of the countryand providing a fairer, competitive landscape for power sector participants, resulting in a more efficient andtransparent industry. Among other things, the EPIRA set out:

• The creation of the ERC, which is an independent quasi-judicial regulatory body under the EPIRA;

• Separation of the industry into generation, transmission, distribution and supply sectors;

• Break-up and privatization of generation assets of the NPC, and the privatization of transmission assets byPSALM;

• Removal of the monopoly distribution utilities that held on retailing electricity within their franchise areasto allow retail competition; and

• RCOA to distribution networks.

79

Philippine Power Industry Structure

The Philippine power industry has evolved into a competitive market with clear separation between generation,transmission, distribution and supply. Under the EPIRA, cross ownership in the transmission sector with thegeneration and distribution sectors is not allowed.

Sector Details

Generation • Generation companies are involved in converting fuel and otherforms of energy into electricity

• Generation companies compete with each other for contracts withdistribution utilities or spot sales on the wholesale electricity spotmarket

• Generation sector is largely deregulated and competition basedlargely on pricing

• The generation sector consists of:

• NPC-owned and operated facilities

• NPC-owned and IPP-operated plants

• IPP-owned and operated plants

• IPPAs

Transmission • The transmission network is responsible for transmitting electricityfrom power generators to electricity distributors and large end-users

• The transmission sector is regulated and operated by a singletransmission network owner and system operator respectively on amonopolistic structure

• TransCo, which is owned by the Government, is the owner of thetransmission network and is responsible for maintaining thereliability, adequacy, security, stability and integrity of thenationwide electrical grid. It is mandated to provide open andnon-discriminatory access to its transmission system to allelectricity users

• The transmission of electricity through the transmission grid issubject to transmission wheeling charges

• NGCP is a private consortium of Monte Oro Grid Resources, CalacaHigh Power Corporation and the State Grid Corporation of China. Itholds the concession contract to operate, maintain and expand thetransmission network

Distribution • Distributors are responsible for distributing electric power off thetransmission network to end-users and consist of private distributionutilities such as Meralco and the Visayan Electric Company, electriccooperatives and local Government units

Supply • With the commencement of the RCOA, distribution utilities arerequired to unbundle their distribution operations from the supplyoperations which makes the supply function competitive in nature

• Private suppliers licensed by ERC are allowed to carry out thesupply function using the assets of the distribution utilities, subjectto payment of regulated tariffs

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POWER GENERATION OWNERSHIP

The ownership of various power generation assets in the Philippines can be subdivided into the followingcategories: (1) NPC-owned and operated facilities; (2) NPC-owned and IPP-operated plants (“NPC-IPP”); and(3) IPP-owned and operated plants (“Non-NPC”).

The IPPAs are qualified private sector independent entities that administer and manage the contracted energyfrom the energy conversion agreements and power purchase agreements that NPC entered into with the IPPs.

Under a typical IPPA agreement, the energy offtake, which would have been delivered to NPC in the absence ofan IPPA agreement, is instead delivered to the IPPA. The IPPA then looks to sell that committed power andproduction to customers and end users.

As a result of the privatization process under the EPIRA, there have been major changes to power plantownership and management in the Philippines. In 2018, Non-NPC was the largest segment in the country’spower generation sector, with a market share of 89.7% of total electricity production. NPC’s market share hassignificantly fallen from 6.1% in 2014 to 3.0% in 2018.

The table below depicts the gross electric power generation by ownership type in the past five years.

Gross Power Generation by Ownership Type (MWh)

Ownership Type 2014 2015 2016 2017 2018

NPC(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,692,425 3,759,355 2,714,603 3,346,327 3,007,296NPC-SPUG*(2) . . . . . . . . . . . . . . . . . . . . . . . . 416,243 405,097 440,496 410,511 431,512NPC-IPP(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,382,276 8,747,370 7,222,816 6,967,727 6,802,516Non-NPC(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 63,770,053 69,501,390 80,419,976 83,645,777 89,524,388

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,260,997 82,413,212 90,797,891 94,370,342 99,765,712

Source: DOE Power Statistics 2018

Notes:

* SPUG: Small Power Utilities Group

(1) NPC includes generation from power plants owned by NPC.

(2) NPC-SPUG includes generation from power plants owned by NPC and operating in off-grid areas.

(3) NPC-IPP includes generation of IPPs having contracts with NPC.

(4) Non-NPC includes generation of IPPs to customers (e.g. private distribution utilities and electric cooperatives).

ECONOMIC GROWTH DRIVERS FOR DEMAND OF POWER IN THE PHILIPPINES

From 2009 to 2018, the nominal GDP in the Philippines grew from approximately P8,017 billion toP17,405 billion, according to EIU, representing a compound annual growth rate (“CAGR”) of 9.0%.

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The Philippines’ Nominal GDP (P billion)

8,016.78,998.5 9,702.8

10,548.911,521.6

12,613.5 13,302.014,460.3

15,791.317,404.8

0.0

5,000.0

10,000.0

15,000.0

20,000.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Economist Intelligence Unit, the Philippine Statistics Authority

The electricity, gas and water subsector, also known as the utilities subsector, accounted for 3.3% of the GDP ofthe Philippines in 2015 (P434 billion) and 3.1% of GDP in 2018 (P544 billion).

Per capita electricity consumption in the Philippines has also increased from 561 kWh in 2009 to 776 kWh in2018, having increased at a CAGR of 3.6%. The per capita electricity consumption in the Philippines stillremains significantly lower than other emerging economies such as Thailand and China and developed countriesin Europe and North America. This indicates potential for growth in electricity demand as the Philippineeconomy continues to develop.

Annual Electricity Per Capita Consumption in the Philippines (kWh)

561.9606.5 612.3 632.9 625.2 632.8 666.6

717.7 741.5 775.7

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: DOE, Business Monitor

82

Electricity Per Capita Consumption Compared to Other Countries in 2018 (kWh)

775.7 888.6 983.5

2,470.0 2,667.9

4,547.8 4,646.1 4,763.0

7,439.1

9,500.7

11,882.1

14,268.7

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

Philippines Indonesia India Brazil Thailand China UK Malaysia France Australia US Canada

Source: DOE, Business Monitor

ELECTRICITY SUPPLY AND DEMAND

The Philippines’ strong GDP growth has underpinned robust electricity demand growth. Peak demand hasincreased from 9.5 GW in 2009 to 14.8 GW in 2018 at an AAGR of 5.1%. On the other hand, installed capacityhas only grown at an AAGR of 4.9%. This has resulted in a narrowing reserve margin of 39.3% in 2009 to 37.9%in 2018.

Historical Peak Demand vs Supply

9.5 10.4 10.3 10.7 11.3 11.8 12.2 13.3 13.814.815.6 16.4 16.2 17.0 17.3 17.9

18.821.4

22.7 23.8

39.3%

36.6%

36.4% 37.1%

34.7% 34.1%

34.9%

38.0%39.3%

37.9%

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

0

5

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Peak Demand (MW) Installed Capacity (MW) Reserve Margin

GW

Source: DOE Power Statistics 2018(1) Average annual growth rate (“AAGR”)

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I

•- - ----

Peak Deman d 2009-18 AAGRl1l: 5.1% ♦

-

~ ~ ~ ~ I 11 I I I I - - -

Projected Peak Demand Growth

5.1% 5.1% 4.8% 4.8% 4.8% 4.9%

7.2% 7.3%6.8% 6.8% 6.8% 6.8%

8.0% 8.0%7.5% 7.5% 7.5% 7.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2019 2020 2021 2022 2023 2024

Luzon Visayas Mindanao

Source: DOE

According to DOE Power Statistics 2018, as of December 31, 2018, the total installed capacity for the Philippinepower industry amounted to 23,815 MW. In 2018, 99,765 GWh of electricity was generated. Electricity in thePhilippines is distributed across three electricity grids comprising the Luzon, Visayas and Mindanao grids. TheLuzon grid contributes 73% of power generated in the Philippines

Gross Power Generation by Grid in 2018 (GWh)

Luzon,72,728,

73%

Visayas,14,266, 14%

Mindanao,12,770, 13%

Total: 99,765 GWh


According to the DOE Power Statistics 2018, the Philippine electricity market had a total non-coincident peakdemand of 14,782 MW in 2018. This demand is divided among the three major grids, with the Luzon grid havingthe largest demand at 10,876 MW in 2018. This was an increase of 8.2% compared to the 2017 level of 10,054MW. In 2018, the Visayas and Mindanao grids also encountered increased peak demands of 2,053 MW (2017:1,975 MW) and 1,853 MW (2017: 1,760 MW) respectively.

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Peak Demand by Region in 2018 (MW)

Luzon10,876 73.6%

Total: 14,782 MW

Visayas2,053 13.9%

Mindanao1,853 12.5%


ENERGY SOURCES

The Philippines’ main energy sources for power generation are coal, natural gas, geothermal, hydropower, fueloil and diesel oil. Coal-fired plants accounted for the largest proportion of installed capacity and also remainedthe largest energy source in 2018, accounting for 37.1% of the country’s total gross generation in 2018. Coal andnatural gas-fired plants are the dominant producers of electricity in the Luzon grid, together accounting for80.7% of the total generation in 2018. In the Visayas grid, gross generation from coal predominates, accountingfor 47.6% of total generation in 2018. Coal and hydropower plants in the Mindanao grid, accounting for 87.4%of the total generation in 2018.

Installed Capacity by Plant Type in the Philippines (MW)

2017 2018

Coal8,049 35.4%

Oil Based4,153 18.3%

Hydro3,627 16.0%

Natural Gas3,447 15.2%

Geothermal1,916 8.4%

Solar 885

1.1%

Wind427

1.9%

Biomass224

1.0%

Coal8,844 37.1%

Oil Based4,292 18.0%

Hydro3,701 15.5%

Natural Gas3,453 14.5%

Geothermal1,944 8.3%

Solar 896

3.8%

Wind427

1.8%

Biomass258

1.1%

Total: 22,728 MW Total: 23,815 MW


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Gross Power Generation by Plant Type in the Philippines (GWh)

2017 2018

Coal46,84749.6%

Natural Gas20,54721.8%

Geothermal10,27010.9%

Hydro9,61110.2%

Oil Based3,7874.0%

Solar1,2011.3%

Wind1,0941.2%

Biomass1,0131.1%

Coal51,93252.1%


Geothermal10,43510.5%

Hydro9,3849.4%

Oil Based3,1733.2%

Solar1,2491.3%

Wind1,1531.2%

Biomass1,1051.1%

Total: 94,370 GWh Total: 99,765 GWh


Gross Power Generation by Plant Type and Grid in 2018 (GWh)

Luzon Visayas Mindanao

Coal37,36251.4%


Hydro5,9458.2%

Geothermal3,8715.3%

Oil Based2,1883.0%

Wind931

1.3%

Biomass594

0.8%Solar503

0.7%

Coal6,78547.6%Geothermal

5,73740.2%

Solar658

4.6%

Biomass439

3.1%

Oil Based353

2.5%

Wind222

1.6% Hydro73

0.5%

Coal7,78561.0%

Hydro3,36626.4%

Geothermal826

6.5%

Oil Based633

5.0%

Solar88

0.7%

Biomass72

0.6%

Total: 72,728 GWh Total: 14,266 GWh Total: 12,770 GWh


The total electric power generation in 2018 was 99,765 GWh, 5.7% higher than the 94,370 GWh in 2017.Generation from fossil fuels (oil, coal and natural gas) increased by 7.4% to 76,439 GWh in 2018 from 71,182GWh in 2017. Generation from renewable energy increased by 0.6%, to 23,326 GWh in 2018 from 23,189 GWhin 2017.

Given its limited supply of natural resources, the Philippines largely relies on imports of coal and oil forgenerating electricity. The Government’s goal, as set out in the National Energy Sufficiency and ConservationProgram, is to meet supply targets while promoting energy self-sufficiency. Limiting the utilization of importedfuels will make the Philippines less vulnerable to increasing oil and coal prices and promoting the use ofindigenous sources of energy such as locally mined coal, geothermal and hydro, will play an increasingly vitalrole if the Government expects to achieve its self-sufficiency targets.

ELECTRICITY SUPPLY AND DEMAND OUTLOOK

According to the DOE, there are approximately 4.4 GW of private sector initiated power projects that arecommitted and 7.2 GW of private sector initiated power projects that are indicative from 2019 to 2023respectively. Approximately 3.6 GW of such committed and 5.9 GW of such indicative capacity is located inLuzon, and approximately 3.1 GW (committed) and 3.9 GW (indicative) are coal-fired projects.

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Private Sector Initiated Power Projects (MW) — Breakdown by Region

Committed

2019 2020 2021 2022 20232019-2023

Total

Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,339.0 312.6 303.0 31.0 600.0 3,585.6Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599.7 0.0 50.0 0.0 0.0 649.7Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154.4 25.0 0.0 0.0 0.0 179.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093.1 337.6 353.0 31.0 600.0 4,414.7

Indicative

2019 2020 2021 2022 20232019-2023

Total

Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,156.4 1,018.6 80.0 741.8 2,900.0 5,896.8Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110.0 460.4 14.0 17.5 0.0 601.9Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 244.9 113.0 334.1 0.0 700.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,274.4 1,723.9 207.0 1,093.4 2,900.0 7,198.7

Private Sector Initiated Power Projects (MW) — Breakdown by Fuel Type

Committed

2019 2020 2021 2022 20232019-2023

Total

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900.0 300.0 300.0 0.0 600.0 3,100.0Nat Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650.0 0.0 0.0 0.0 0.0 650.0Oil-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.0 0.0 0.0 0.0 0.0 70.0Geo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 50.0 31.0 0.0 81.0Hydro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.9 37.6 3.0 0.0 0.0 79.5Solar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140.0 0.0 0.0 0.0 0.0 140.0Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 0.0 0.0 0.0Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294.2 0.0 0.0 0.0 0.0 294.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093.1 337.6 353.0 31.0 600.0 4,414.7

Indicative

2019 2020 2021 2022 20232019-2023

Total

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 1,000.0 2,900.0 3,900.0Nat Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 0.0 0.0 0.0Oil-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311.0 5.9 0.0 0.0 0.0 316.9Geo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 110.0 20.0 0.0 130.0Hydro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.0 12.5 23.0 13.6 0.0 71.1Solar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588.0 662.0 60.0 18.8 0.0 1,328.8Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347.4 878.0 14.0 0.0 0.0 1,239.4Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 165.5 0.0 41.0 0.0 212.5

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,274.4 1,723.9 207.0 1,093.4 2,900.0 7,198.7

Source: DOE as of April 30, 2019

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CUSTOMER SEGMENTS

In 2018, the residential, industrial and commercial segments accounted for 34.2%, 33.4% and 29.1%,respectively, of total power used in the Philippines, with the remainder consumed by other users. The followingtable provides data for electric power consumption in the Philippines, with each sector’s percentage of salespresented as a percentage of total sales in 2018:

Electricity Sales by Customer Sector in 2018 (GWh)

Residential28,26134.2%

Industrial27,58733.4%

Commercial24,01629.1%

Others2,7533.3%

Total: 82,617 GWh


Note: Others include street lights, public buildings, irrigation, energy recovered and others not elsewhere classified.

INDEPENDENT POWER PRODUCER ADMINISTRATORS

IPPAs are qualified private sector independent entities that administer and manage the contracted energy fromenergy conversion agreements and power purchase agreements that NPC entered into with the IPPs. IPPAs areappointed through public bidding conducted by PSALM.

The IPPA process provides successful bidders a way to enter and trade in the WESM for a minimal capital outlaywithout the expense of building a new plant. This is a unique way to enter the WESM. This alternative alsoallows investors to partake in the benefits of owning generating stations when the IPPA agreement expires.Among these benefits are: (1) controlling the fuel and its dispatch and (2) trading and contracting of the plant’scapacity without the maintenance costs or capital upgrades associated with actual ownership of the plant.

NPC entered into several long-term contracts with IPPs to build or rehabilitate and/or operate power generationplants prior to the implementation of the EPIRA. A typical contract between NPC and an IPP requires fixed andvariable payments from NPC to the IPP in return for electrical power output. In some of the contracts, NPC alsois required to furnish fuel supplies to the IPP. NPC sells the power purchased under these contracts to distributionutilities or end-users.

Under a typical IPPA agreement, the energy offtake, which would have been delivered to NPC in the absence ofan IPPA agreement, is instead delivered to the IPPA. The IPPA has the right to sell the power generated by therelated IPP either to the WESM or pursuant to supply contracts with specific customers and often (but notinvariably) is obligated to supply fuel to that IPP. IPPAs pay PSALM a fixed monthly payment and a variableenergy or generation fee. IPPA agreements provide relief for IPPAs in the event that the associated IPPs areunable to dispatch power for a certain period of time for reasons other than the fault of the IPPA. PSALM/NPCin turn makes capacity and energy payments to the IPPs pursuant to the relevant IPP contract.

WHOLESALE ELECTRICITY SPOT MARKET

The WESM was established as part of EPIRA. The WESM provides a market in which IPPAs and othergenerators can sell power, and at the same time suppliers and wholesale consumers can purchase electricity

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where no bilateral contract exists between the two. The aim of the WESM is to provide transparent and efficientdispatch pricing. Its design is similar to the electricity markets in Australia, Singapore and New Zealand. ThePEMC is responsible for operating and regulating the WESM. The PEMC membership is comprised ofrepresentatives from the electricity industry and is chaired by the Secretary of the DOE. The diagram belowillustrates how the WESM operates:

DistributionUtilities

WholesaleConsumers

Retail Buyers(Residential

and Commercial)

PurchaseElectricity

Suppliers andWholesaleConsumers

WESM

PEMC

PowerGenerators

Sell Power

Operates andGoverns

Source: DOE, ERC

Historical WESM Average Market Prices (Q per MWh)

3,9883,471

3,414

3,812

3,836

3,898 3,960

3,298

2,424 2,387

3,740

5,095

4,196 4,105

4,0733,794

2,7132,966

3,819

3,324 3,186

4,727

4,058

5,082

7,315

1,500

2,500

3,500

4,500

5,500

6,500

7,500

8,500

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb

-19

Mar

-19

Apr

-19

Source: WESM Monthly Market Assessment Reports. Note: August 2017 represents average for Luzon

In the WESM, although generators are allowed to transact through bilateral contracts, these contracts will have tobe “offered” to the market for the purpose of determining the appropriate merit order of generators. Settlementfor bilateral contracts will, however, occur outside the market between the contracting parties. Traded electricitynot covered by bilateral contracts will be settled through the market on the basis of the market clearing prices foreach of the trading periods. Typically, the output of cost-efficient plants, such as hydroelectric plants, isdispatched first, due to a lack of corresponding fuel cost.

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♦ I I I I I I

BUSINESS

OVERVIEW

SMC Global Power, together with its subsidiaries, associates and joint ventures, is one of the largest powercompanies in the Philippines, controlling 4,197 MW of combined capacity as of March 31, 2019 and benefitsfrom a portfolio of diversified fuel sources, including natural gas, coal, hydroelectric power and more recently,battery energy storage systems. Based on the total installed generating capacities reported in the ERC Resolutionon Grid Market Share Limitation, the Company believes that its combined installed capacity comprisesapproximately 19% of the National Grid, 25% of the Luzon Grid and 9% of the Mindanao Grid, in each case asof March 31, 2019.

San Miguel Corporation entered the power industry in 2009 following the acquisition of rights to administer theoutput produced by IPPs in privatization auctions conducted by the Government through PSALM. The followingcompanies under the San Miguel Corporation group became the IPPA of the following plants: (1) SMEC becamethe IPPA for the Sual Power Plant, a coal-fired thermal power plant located in Sual, Pangasinan, in November2009; (2) SPDC became the IPPA for the San Roque Power Plant, a hydroelectric power plant located in SanManuel, Pangasinan in January 2010; and (3) SPPC became the IPPA for the Ilijan Power Plant, a naturalgas-fired combined cycle power plant located in Ilijan, Batangas in June 2010 (the Ilijan Power Plant, Sual PowerPlant and San Roque Power Plant are collectively referred to as the IPPA Power Plants).

An IPPA under the relevant IPPA agreement has the right to sell electricity generated by the power plants ownedand operated by the relevant IPPs without having to bear any of the large upfront capital expenditures for powerplant construction or maintenance. As an IPPA, each of SMEC, SPDC and SPPC also has the ability to manageboth market and price risks by entering into bilateral contracts with offtakers while capturing potential upsidefrom the sale of excess capacity through the WESM.

In September 2010, San Miguel Corporation consolidated its power generation business through the transfer ofits equity interests in SMEC, SPDC and SPPC to SMC Global Power. SMC Global Power also became a wholly-owned subsidiary of San Miguel Corporation. Since then, SMC Global Power has controlled the 2,545 MWcombined contracted capacity of the IPPA Power Plants through the IPPA agreements executed by SMEC, SPDCand SPPC, respectively.

Building on its experience as an IPPA since San Miguel Corporation’s transfer of interests in SMEC, SPDC andSPPC, SMC Global Power embarked on the development of its own greenfield power projects. In 2013, SMCGlobal Power initiated two greenfield power projects, namely, the construction of the 2 x 150 MW DavaoGreenfield Power Plant which is owned by SMCPC, its wholly-owned subsidiary, and the 4 x 150 MW LimayGreenfield Power Plant which is owned by SCPC, another wholly-owned subsidiary. Units 1, 2 and 3 of theLimay Greenfield Power Plant commenced commercial operations in May 2017, September 2017 and March2018, respectively, while Unit 4 has completed testing and commissioning and is expected to commencecommercial operations in the third quarter of 2019 once the ERC issues its certificate of compliance. Units 1 and2 of the Davao Greenfield Power Plant commenced commercial operations in July 2017 and February 2018,respectively.

SMC Global Power also pursued strategic acquisitions to increase its energy portfolio. In November 2014, SMCGlobal Power, through its subsidiary PVEI, acquired a 60% stake in AHC, the owner and operator of the218 MW AHEPP. More recently, on March 20, 2018, SMC Global Power acquired 51% and 49% of the equityinterests in SMCP Masin AES Phil and Gen Plus B.V., respectively. SMCGP Masin indirectly owns, through itssubsidiaries, MPPCL and SMCGP Philippines Energy. On September 19, 2018, PEGC, a wholly-ownedsubsidiary of SMC Global Power, and OPGC purchased the entire partnership interests in SMCGP PhilippinesEnergy from subsidiaries of SMCGP Masin. MPPCL owns, operates and maintains the 1 x 330 MW (Unit 1),1 x 344 MW (Unit 2) coal-fired power plant and 335 MW (Unit 3) expansion project under constructioncomprising the Masinloc Power Plant, and the Masinloc BESS, all located in Masinloc, Zambales, while SMCGPPhilippines Energy has commenced pre-construction of the Kabankalan BESS.

As part of the purchase relating to the Masinloc power assets, SMC Global Power also acquired SMCGPTranspower and SPHI. SMCGP Transpower was a subsidiary of The AES Corporation, which provides corporate

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support services to MPPCL through its Philippine regional operating headquarters, while SPHI was a wholly-owned subsidiary of AES Phil and provides energy marketing services to MPPCL.

In July 2018, PEGC acquired the entire equity interest of ALCO Steam Energy Corporation in Alpha Water,representing 60% of the outstanding capital stock of Alpha Water. As a result, SMC Global Power noweffectively owns 100% of Alpha Water through its subsidiaries, PEGC and MPPCL. Alpha Water is the owner ofthe land on which the current site of the Masinloc Power Plant in Zambales Province is located.

In September 2018, PEGC and OPGC, another wholly-owned subsidiary of SMC Global Power, purchased theentire partnership interests in SMCGP Philippines Energy from subsidiaries of SMCGP Masin.

SMC Global Power, through its subsidiaries SMEC, SPDC, SPPC, AHC, SCPC, SMCPC, SMELC and MPPCL,sells power through offtake agreements directly to customers, including Meralco and other distribution utilities,electric cooperatives and industrial customers, or through the WESM. The majority of the consolidated sales ofSMC Global Power are through long-term take-or-pay offtake contracts most of which have provisions forpassing on fuel costs, foreign exchange differentials and certain other fixed costs.

The following table sets forth selected data in respect of the Company’s power generation assets and interests asof the date of this Offering Circular.

Operational IPPA Plants JV Plant

NewlyAcquired

Plant Greenfield Plants

Sual Ilijan San Roque Angat

Masinlocand

MasinlocBESS Davao Limay

Type . . . . . . . . . . . . . . . . . . . . Coal NaturalGas

Hydro Hydro Coal andBattery

Coal Coal

Commercial OperationsDate . . . . . . . . . . . . . . . . . . 1999 2002 2003 1967

(112 MW)1968

(100 MW)1978

(6 MW)

1998(660 MW),

2018(14 MW),

2018(10 MW),

2019E(335 MW)

2017(150 MW),

2018(150 MW)

2017(300 MW),2018 (150

MW),2019E

(150 MW)

Year of Acquisition . . . . . . . . 2009 2010 2010 2014 2018 — —

Total Installed Capacity(MW)(1) . . . . . . . . . . . . . . . . 1,000 1,200 345 218 1,019 300 600

Technology . . . . . . . . . . . . . . PulverizedCoal

CombinedCycle

StorageHydropower

StorageHydropower

PulverizedCoal andBatteryEnergyStorageSystem

CirculatingFluidized

Bed

CirculatingFluidized

Bed

Emission LevelsNOx (ppm) . . . . . . . 223.8 — — — 97.0 76.1 101.1SOx (ppm) . . . . . . . 390.8 — — — 108.1 25.7 70.3

PM (Mg/Nm3) . . . . . . . . . . . . 15.6 — — — 54.4 3.4 6.5

Operator . . . . . . . . . . . . . . . . TeaM SualCorp.

KEILCO SRPC AHC MPPCL Safetech Mantech

Offtakers(2) . . . . . . . . . . . . . . . Meralco,ECs, DUs,

DCCs,Third-Party

RES, WESM

Meralco,WESM

Intercompany(3)

WESMWESM Meralco,

DUs, CCs,WESM

ECs, DUs,Industrialcustomers

DCCs,ECs, DUs,

CCs

IPPA Expiry / AssetTransfer Date(4) . . . . . . . . . 2024 2022 2028 N/A N/A N/A N/A

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Notes:

(1) Includes expected capacity following the expected commencement of commercial operations of (i) Unit 4, Limay Greenfield PowerPlant and (ii) Unit 3, Masinloc Power Plant, which are excluded in the calculation of SMC Global Power’s combined installedcapacity as of March 31, 2019.

(2) DUs: Distribution Utilities; ECs: Electric Cooperatives; CCs: Contestable Customers; DCCs: Directly Connected Customers.

(3) Within the SMC Global Power group.

(4) Under the respective IPPA Agreements of SMEC, SPDC and SPPC, these subsidiaries of SMC Global Power have the right to acquirethe Sual Power Plant in October 2024, the Ilijan Power Plant in June 2022 and the San Roque Power Plant in April 2028,respectively. See “—IPPA Framework.”

SMC Global Power is also engaged in distribution and retail electricity services. In 2013, SMC Global Powerentered into a concession agreement for the operation and maintenance of ALECO, which is the franchise holderfor the distribution of electricity in the province of Albay in Luzon. SMC Global Power has also expanded itssale of power to a broader range of customers, including retail customers. The three RES licenses issued to SMCGlobal Power, through SMELC, SCPC and MPPCL, allowed it to enter into contracts with contestable customersand expand its customer base.

SMC Global Power, through SMEC and its subsidiaries, Bonanza Energy, Daguma Agro and Sultan Energy, alsoowns coal exploration, production and development rights over approximately 17,000 hectares of land inMindanao. While the Company does not intend to develop these sites imminently, depending on prevailingglobal coal prices and the related logistical costs, it may consider eventually tapping these sites to serve as asignificant additional source of coal fuel for its planned and existing greenfield coal-fired power plants.

SMC Global Power is a wholly-owned subsidiary of San Miguel Corporation, one of the largest and mostdiversified conglomerates in the Philippines, founded in 1890 that is listed in the PSE. San Miguel Corporationhas market-leading businesses in various sectors, including beverages, food, packaging, fuel and oil, energy,infrastructure and property, and investments in car distributorship and banking services. The Company believesthat its relationship with San Miguel Corporation allows it to draw on the extensive business networks, localbusiness knowledge, relationships and expertise of San Miguel Corporation and its key executive officers.

For the years ended December 31, 2016, 2017 and 2018 and the three months ended March 31, 2018 and 2019,SMC Global Power sold 15,758 GWh, 15,707 GWh, 20,273 GWh, 4,330 GWh and 6,098 GWh of powerpursuant to bilateral offtake agreements and 1,588 GWh, 1,520 GWh, 3,590 GWh, 462 GWh and 727 GWh ofpower through the WESM, respectively. For the years ended December 31, 2016, 2017 and 2018 and the threemonths ended March 31, 2018 and 2019, SMC Global Power purchased 767 GWh, 684 GWh, 1,144 GWh, 213GWh and 279 GWh of power from the WESM, respectively.

For the year ended December 31, 2018, the total consolidated revenue, net income and EBITDA of SMC GlobalPower was P120,102.8 million (U.S.$2,287.7 million), P8,300.1 million (U.S.$158.1 million) andP10,716.9 million (U.S.$204.1 million), respectively. For the three months ended March 31, 2019, the totalconsolidated revenue, net income and EBITDA of SMC Global Power was P34,675.9 million (U.S.$660.5million), P3,578.5 million (U.S.$68.2 million) and P3,036.8 million (U.S.$57.8 million), respectively. As ofMarch 31, 2019, SMC Global Power had total consolidated assets of P499,288.8 million (U.S.$9,510.3 million).

Expansion Projects

SMC Global Power has expansion projects which are nearing completion namely, Unit 4 of the Limay GreenfieldPower Plant (150 MW), which has completed testing and commissioning and is expected to commencecommercial operations in the third quarter of 2019 once the ERC issues the certificate of compliance and Unit 3of the Masinloc Power Plant (335 MW), which is expected to commence operations in the third quarter of 2019.In addition, the Company has commenced pre-construction of the Kabankalan BESS (20MW) with one of theleading battery EPC contractors worldwide. The Kabankalan BESS is expected to commence operations in 2020.The expansion of the Masinloc Power Plant (Unit 3) is fully funded and once completed will increase its capacityby approximately 51%. Unit 3 of the Masinloc Power Plant is expected to contribute to SMC Global Power’s fullyear financials for the year 2020. SMC Global Power also owns 73.58% of the equity interests in MPGC, which

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intends to develop, construct, finance, own, operate and maintain a 4 x 150 MW CFB coal-fired power plant andassociated facilities in Mariveles, Bataan, expected to commence operations in 2022. The Company, through itswholly-owned subsidiary, Central Luzon Premiere Power Corp. (“CLPPC”), plans to pursue further expansionof its power portfolio through the development and construction of a new power plant located in Pagbilao,Quezon with a planned installed capacity of 4 x 150 MW and which is expected to commence operations in2023. MPGC and CLPPC have signed PSAs with Meralco for a combined 1,200 MW, which agreements havebeen filed with, and are pending approval of, the ERC. See “— Legal Proceedings — Petition to Nullify ERCResolution No. 1, Series of 2016.”

COMPETITIVE STRENGTHS AND BUSINESS STRATEGIES

Competitive Strengths

Industry leader with a strong growth platform.

SMC Global Power and its subsidiaries form one of the largest power companies in the Philippines with acombined installed capacity of 4,197 MW as of March 31, 2019 and an attributable installed capacity of 4,110MW, which the Company believes is one of the highest among Philippine power producers. SMC Global Powercontrols the capacities of among the largest baseload plants in the Philippines, including the Sual Power Plant(the largest coal-fired power plant in the Philippines) and the Ilijan Power Plant (the largest natural gas powerplant in the Philippines). The subsidiaries of SMC Global Power, namely SMEC, SPDC and SPPC, are the IPPAsfor the Sual, San Roque and Ilijan Power Plants, respectively, which have a combined contracted capacityattributable to SMC Global Power of 2,545 MW. SMC Global Power also owns a 60% stake in AHC, the ownerand operator of the 218 MW AHEPP, and wholly owns SCPC, SMCPC and MPPCL, the owners of the LimayGreenfield Power Plant, the Davao Greenfield Power Plant and the Masinloc Power Plant, respectively. Based onthe total installed generating capacities reported in the ERC Resolution on Grid Market Share Limitation, theCompany believes that its combined installed capacity comprises approximately 19% of the National Grid, 25%of the Luzon Grid and 9% of the Mindanao Grid, in each case as of March 31, 2019.

The IPPA business model provides SMC Global Power, through the IPPA subsidiaries, with the benefit of havingthe right to sell electricity generated by the IPPs without having to incur large upfront capital expenditures forpower plant construction, or to bear any related development risk or ongoing maintenance capital expenditures.The IPPA subsidiaries of SMC Global Power manage the amount of power to be produced by the IPP for supplyto the customers of the IPPA and sell the power generated by the IPPs either pursuant to bilateral offtakeagreements directly with customers or through the WESM. This business model provides SMC Global Power theability to manage both market and price risk by entering directly into bilateral contracts with establishedcustomers while capturing potential upside through the sale of excess capacity through the WESM when spotmarket prices are attractive.

SMC Global Power’s experience in acting as IPPA and its history of power plant ownership and operation hasenabled it to gain significant expertise in the Philippine power generation industry. With this experience, SMCGlobal Power embarked on its own greenfield power projects and pursued strategic acquisitions. It believes thatit is in a strong position to participate in the expected future growth of the Philippine power market, through boththe development of greenfield power projects and the acquisition of existing power generation capacity,including NPC-owned power generation plants that are scheduled for privatization as asset sales or under theIPPA framework, cost competitive baseload plants and renewable energy power plants.

To capitalize on changes in the Philippine regulatory structure, SMC Global Power, through SMELC, SCPC andMPPCL, holds RES licenses from the ERC, allowing the entry into offtake agreements with contestablecustomers. SMC Global Power, through SMEC and its subsidiaries, also maintains coal concession assets which,depending on prevailing global coal prices and the related logistical costs, may be tapped to serve as a back-upfuel source for its greenfield coal-fired power plants.

SMC Global Power is expected to expand its market leadership with its ongoing and future expansion that isanchored on cost competitive baseload plants. In addition, SMC Global Power is actively pursuing batterystorage technology investments and initiatives in the Philippines that will help regulate the transmission grid overthe Philippine archipelago, which is inherently prone to voltage and frequency instability.

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Well-positioned to capture future demand growth.

Demand for electricity in the Philippines is expected to continue to grow. According to the Power DevelopmentPlan 2016-2040 published by the DOE, to meet the projected electricity demand including reserve requirementsby 2040, the power system capacity addition that the Philippines will need is 43,765 MW broken down asfollows: 25,265 MW for baseload, 14,500 MW for mid-merit and 4,000 MW for peaking. For the period 2018 to2022, there is approximately 6,000 MW of private sector-initiated power projects that are either committed orindicative, according to the DOE. Construction of new power plants on average takes a minimum of three years.In addition, the depletion of the supply of natural gas from Malampaya may result in a reduction of energygenerated by natural gas power plants by 2024. Given the gap between projected electricity demand andcommitted power projects, SMC Global Power expects that there will be a power supply shortage in the mediumterm until new capacity is built to meet the growing consumption.

SMC Global Power believes it is well-positioned to take advantage of opportunities from continued growth in thePhilippine electricity market, as well as from the expected power supply shortage. The latter is exacerbated by anexisting base of old Government-owned power plants, which are nearing the end of their useful life, as well as alarge base of seasonal power supply, such as hydropower plants in Mindanao. To meet this need, SMC GlobalPower has a defined roadmap to increase capacity by developing greenfield power plants and pursuingopportunities to invest in renewable energy projects, particularly in battery technology, hydroelectric power andsolar power projects.

SMC Global Power’s expansion projects under construction and nearing completion include Unit 4 (150 MW) ofthe Limay Greenfield Power Plant and Unit 3 (335 MW) of the Masinloc Power Plant. In addition, the Companyhas commenced pre-construction of the Kabankalan BESS (20 MW) with one of the leading battery EPCcontractors worldwide. SMC Global Power also owns 73.58% of the equity interests in MPGC, which plans todevelop, construct, finance, own, operate and maintain a 4 x 150 MW CFB coal-fired power plant and associatedfacilities in Mariveles, Bataan. The Company is considering the further expansion of its power portfolio throughthe development and construction of a new power plant located in Pagbilao, Quezon with a planned installedcapacity of 600 MW.

In addition, as a leading power company in the Philippines with a large customer base, SMC Global Powerbelieves that it is in a strong position to leverage its relationships with its existing customers to service theirexpected increase in electricity demand.

Stable and predictable cash flows.

SMC Global Power, through its subsidiaries, sells power through offtake agreements directly to customers,including Meralco and other distribution utilities, electric cooperatives and industrial customers, or through theWESM. A substantial portion of the combined installed capacity of SMC Global Power is covered by bilateralcontracts that cover the term of the IPPA Agreements, where applicable. Revenue from bilateral contracts withofftakers contributed 95%, 95%, 91%, 93% and 91% of total revenue for the years ended December 31, 2016,2017 and 2018 and the three months ended March 31, 2018 and 2019, respectively. For the three months endedMarch 31, 2019, approximately 46% and 43% of the Company’s consolidated sales volumes were to (i) Meralcoand (ii) other distribution utilities, electric cooperatives, directly connected customers and contestable customers,respectively. Based on the publicly available disclosures of Meralco, the largest distribution utility in thePhilippines, SMC Global Power believes that it is Meralco’s largest power supplier as of March 2019, supplyingapproximately 30% of Meralco’s power purchases. In addition, the Company is a dominant player in the RESmarkets where is operates, based on data obtained from the ERC as of March 2019.

These offtake agreements provide SMC Global Power, through its subsidiaries, with stable and predictable cashflow by enabling it to manage both market and price risks. Despite the general volatility in market prices forelectric power due to supply and demand imbalances, SMC Global Power has been able to manage such risksthrough the contracted sale prices with offtakers, which also provide a long-term stable source of demand.Majority of the tariffs under these agreements take into account adjustments for fuel, foreign exchange, andinflation, thereby allowing SMC Global Power to pass through these costs to its offtakers. In addition, SMCGlobal Power’s diversified portfolio of baseload and peaking power plants helps mitigate market risks throughlong-term, intercompany, replacement power contracts.

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Flexible and diversified power portfolio.

SMC Global Power has a portfolio that includes some of the newest and largest power plants in the Philippines.The baseload and peaking plants with diversified fuel sources of the Company allow it to manage costs and offermore competitive baseload power rates.

As of March 31, 2019, the power portfolio of SMC Global Power consists of (i) the IPPA Power Plantsadministered by the Company, through its subsidiaries, as the IPPA (comprised of Sual Power Plant with SMECas IPPA representing 24% of SMC Global Power’s capacity, the San Roque Power Plant with SPDC as IPPArepresenting 8% of SMC Global Power’s capacity and the Ilijan Power Plant with SPPC as IPPA representing29% of SMC Global Power’s capacity), (ii) the AHEPP, through AHC, which represents 5% of the capacity ofSMC Global Power, and (iii) the power plants owned by SMC Global Power, particularly the Limay GreenfieldPower Plant of SCPC, which represents 11% of the capacity of SMC Global Power, the Davao Greenfield PowerPlant, which represents 7% of the capacity of SMC Global Power, and the Masinloc Power Plant (with theMasinloc BESS), which represents another 16% of the capacity of SMC Global Power.

Power generated by the Sual Power Plant, Ilijan Power Plant, Limay Greenfield Power Plant, Davao GreenfieldPower Plant and Masinloc Power Plant, is primarily used as baseload supply and sold to customers pursuant tobilateral offtake agreements. Power generated by the San Roque Power Plant and the AHEPP is used as peakingsupply, and sold through the WESM or as replacement power to affiliates. The entire capacity of the 10 MWMasinloc BESS is contracted to the NGCP and provides regulating reserve ancillary services to the Luzon Gridunder an Ancillary Services Procurement Agreement.

As of March 31, 2019, SMC Global Power’s coal-fired plants accounted for approximately 58% of its capacity.This is guided by the existing energy policy of the Government to provide relatively inexpensive and reliablepower to residential and commercial customers without the need for subsidies or escalating tariffs. Feed-in-tariffsfor renewable energy projects have been phased out by the Government, which makes it more challenging toembark on large-scale renewable energy projects.

SMC Global Power believes that the size and diversity of the fuel supply of its power portfolio reduces theexposure of the Company and its customers to fuel-type specific risks such as variations in fuel costs, andregulatory concerns that are linked to any one type of power plant or commodity price. SMC Global Powerbelieves that its management of the capacity of this diverse portfolio of power plants allows it to respondefficiently to market requirements at each point of the electricity demand cycle. This diversity helps it to improvethe profitability of its portfolio by flexibly dispatching electricity in response to market demand and fuels costcompetitiveness. SMC Global Power and its subsidiaries can enter into bilateral contracts and trade in the WESMfor the balance of its contracted capacities and energy. By managing the IPPA Power Plants as a single portfolioand actively managing the energy output of the plants, SMC Global Power seeks to offer more competitiveelectricity rates compared to other power companies with smaller and less diverse portfolios.

Established relationships with world class partners.

The IPPA Power Plants are owned, operated and maintained by world-class partners, including MarubeniCorporation, Tokyo Electric Power Corporation, Korea Electric Power Corporation and Mitsubishi Corporation.Since entering the power business, SMC Global Power has established relationships with internationallyrecognized fuel suppliers in Indonesia and Australia, as well as with its customers, including Meralco, its largestcustomer. SMC Global Power believes that these well-established relationships provide a strong foundation forits existing business and a platform of potential partners for future expansion.

A member of the San Miguel Corporation group of companies.

The principal shareholder of SMC Global Power, San Miguel Corporation, is one of the largest and mostdiversified conglomerates in the Philippines in terms of revenues and assets and is listed on the PSE. In additionto its power business, San Miguel Corporation has market-leading businesses in vital industries that support theeconomic development of the country, including food and beverages, packaging, fuel and oil, infrastructure,property and investments in car distributorship and banking.

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Under the stewardship of San Miguel Corporation, SMC Global Power has become one of the market leaders inthe Philippine power industry in a relatively short period of time. San Miguel Corporation provides SMC GlobalPower with key ancillary and support services in areas that promote operational efficiency, such as humanresources, corporate affairs, legal, finance and treasury functions. SMC Global Power believes it will continue tobenefit from the extensive business networks of San Miguel Corporation, its in-depth understanding of thePhilippine economy and expertise of its senior management to identify and capitalize on growth opportunities.Given the substantial electricity requirements of the other businesses of San Miguel Corporation, SMC GlobalPower believes that it can benefit from potential revenue and operational synergies and potentially provide alarge captive energy demand base for SMC Global Power.

Experienced and highly competent management team.

The senior management of SMC Global Power has extensive experience in the Philippine power industry and hasa deep understanding of the Philippine electricity markets with respect to the operational, financial, regulatory,and business development aspects of the operation and management of power plants. The senior managementteam of SMC Global Power has strong professional relationships with key industry participants, such as theDOE, PSALM, NPC, TransCo, NGCP, PEMC and ERC, as well as other government offices and agencies. Theemployees of SMC Global Power include experienced energy traders who pioneered WESM trading andmarketing executives who have established strong relationships with the extensive customer base of NPC. Themembers of the Executive Committee of SMC Global Power have an average of more than 25 years ofexperience in executive management and related government experience in the power industry, includingstrengths in key areas of engineering and finance. The executive and senior management have displayed a strongtrack record of growth and delivery since SMC Global Power commenced operations in November 2009.

Strong commitment to stringent environmental policies and pollution controls.

SMC Global Power closely supervises, controls and process improvements in the power plants it owns andoperates to ensure that regulated emission are within and below applicable environmental compliance standards.For example, the Company uses CFB technology in its Limay Greenfield Power Plant and Davao GreenfieldPower Plant. CFB technology is a technology employed to transform coal into a fuel source that is relatively lowin pollutant emissions. These low emissions are made possible by processes that are not used in non-CFBcoal-fired power plants, such as burning coal at low temperature and pressure, chemically washing minerals andimpurities from the coal, gasification, treating the flue gases with steam to remove sulfur dioxide, carbon captureand storage technologies to capture the carbon dioxide from the flue gas and dewatering lower rank coals (browncoals) to improve the calorific value, thereby improving the efficiency of the conversion into electricity. Inaddition, CFB plants have other elements that reduce emissions, such as fine coal grinders, limestone injections,and electrostatic precipitators to capture dust particles that escape the boiler. See “Safety, Health andEnvironmental Regulation and Initiatives.”

In 2018, the Company won the following Asian Power Awards: Environmental Upgrade of the Year (LimayGreenfield Power Plant), Power Utility of the Year (Davao Greenfield Power Plant) and Innovative PowerTechnology of the Year Philippines (Masinloc Power Plant). The Asian Power Awards recognizeground-breaking projects and trailblazing initiatives in the power sector in Asia.

Moreover, SMC Global Power has dedicated teams who monitor environmental compliance with internationalstandards. For example, the Sual Power Plant has an Environmental and Management System Certificate (ISO14001), Occupational Standard on Health Safety Certificate (ISO 18001) and Quality Management SystemCertificate (ISO 9001). The same ISO certifications were received by the Davao Greenfield Power Plant andLimay Greenfield Power Plant in 2017 and 2018, respectively, while the Masinloc Power Plant and MasinlocBESS received an Environmental and Management System Certificate (ISO 14001) and Occupational Standardon Health Safety Certificate (ISO 18001) in 2014.

Business Strategies

Optimize the installed capacity of its power portfolio and strategically contract capacity to enhance margins.

SMC Global Power (a) proactively manages its sales in order to achieve a balanced mix of power sales through(i) contractual arrangements with electricity customers including distribution utilities, industrial and commercial

96

customers, and the contestable market and (ii) engaging in power trading through the WESM, and (b) optimizesthe operations of its power plant portfolio through maximizing plant utilization, improving individual accountand plant margins and minimizing the impact of supply interruptions. This approach provides SMC GlobalPower with the certainty and predictability of sales from its contracted capacity while being able to realizetrading opportunities from the WESM to enhance its margins. The objective of SMC Global Power is to supplypower based on the least cost, and to sell available excess power through the WESM at favorable prices.

Specifically, in case of high prices in the WESM, SMC Global Power can optimize its portfolio and takeadvantage of such pricing and sell the excess output of its power plants to the WESM after delivering thecontractual amounts required under its offtake agreements. Alternatively, in case of low prices in the WESM,SMC Global Power can minimize the generation output of its power plants and deliver the contractual amountsrequired under its offtake agreements either with output from the San Roque Power Plant or with energypurchased from the WESM. In the event of tripping or shutdown of either the Sual Power Plant or Ilijan PowerPlant, SMC Global Power can maximize the dispatch of its remaining units by lowering the bid prices so that thebilateral contract quantity requirements will be served without buying at high prices from the WESM.

SMC Global Power also leverages on the diversity of its portfolio to create operational synergies and improve itssupply offers to offtakers. Having a portfolio of baseload and peaking power plants utilizing different fuelsources allows SMC Global Power to actively respond to the needs of its offtakers and the market, particularlywith regard to replacement power and pricing competitiveness.

Continue to grow its power portfolio through the development of greenfield power projects and acquisition ofpower generation capacity in line with regulatory and infrastructure developments.

SMC Global Power intends to utilize its strong platform, extensive relationships and experienced managementteam to address the growing demand for power in the Philippines. The Company plans to continue its strategicdevelopment of greenfield power projects in parallel with its plan to acquire existing power generation capacity.As of the date of this Offering Circular, the Company believes that coal remains the most reliable andcost-efficient fuel source for greenfield power projects and is using and will continue to use clean coaltechnology for its planned and existing greenfield power plants.

In addition to its strategy to grow its power portfolio, the Company is focused on further investments in batterytechnology to add to the existing 10 MW Masinloc BESS and the planned 20 MW Kabankalan BESS, currentlyunder pre-construction. SMC Global Power also actively seeks to identify and pursue renewable energyinvestments such as hydroelectric power and solar power projects, subject to the outcome of viability andfeasibility analyses. This is in line with the Company’s objective to operate in an environmentally-responsiblemanner, while taking into consideration energy security and affordability to its consumers.

SMC Global Power seeks to capitalize on regulatory and infrastructure developments by scheduling theconstruction of greenfield power projects to coincide with the planned improvements in the interconnectivity ofthe Luzon Grid and Visayas Grid, as well as the eventual interconnectivity and implementation of WESM inMindanao. In addition, SMC Global Power seeks to maintain the cost competitiveness of these new projects bystrategically locating them in high-demand areas and in areas with the closest proximity to the grid. SMC GlobalPower is considering the further expansion of its power portfolio of new capacity nationwide through greenfieldpower plants over the next few years, depending on market demand. See “— Overview — Expansion Projects.”SMC Global Power plans to carry out the expansion of its power portfolio in phases across Luzon, Visayas andMindanao. SMC Global Power is confident from its experience in building the Limay and Davao GreenfieldPower Plants that it will be able to build new cost competitive plants.

Vertically integrate complementary businesses in order to diversify its energy portfolio.

SMC Global Power continues to expand into businesses along the power sector value chain that complement itscurrent power generation business. The Company has obtained RES licenses, through SMELC, SCPC andMPPCL, to expand its customer base and diversify its sales. With the open access and retail competition fullyimplemented, the RES licenses allow SMC Global Power to enter into retail electricity supply agreements withcontestable customers. In addition, SMC Global Power has invested in distribution assets, namely OEDC andAPEC, which create a competitive advantage through integrated generation and distribution operations.

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Furthermore, depending on the prevailing global coal prices and the related logistical costs, SMC Global Powercould initiate coal exploration, development and production rights over approximately 17,000 hectares of land inMindanao held through SMEC and its subsidiaries. SMC Global Power could develop these assets, which couldpotentially provide a significant additional source of coal fuel for its planned and existing greenfield powerplants. SMC Global Power believes that the successful integration of viable coal mining operations into its powergeneration business could provide it with an additional competitive advantage over its competitors in the localpower industry.

Continue to pursue and develop measures to reduce gas emissions and operate power plants within and belowapplicable environmental compliance standards.

SMC Global Power intends to continuously supervise, control and improve processes in the power plants it ownsand operates to ensure that regulated emission from operations are within and below applicable environmentalcompliance standards. Moreover, SMC Global Power has dedicated technical teams to monitor environmentalcompliance with international standards. See “— Safety, Health and Environmental Regulation and Initiatives.”

Leverage operational synergies with San Miguel Corporation group of companies.

SMC Global Power creates operational synergies within and among its subsidiaries by performing keymanagement functions at the holding company level under management agreements. Key management functionsinclude sales and marketing, energy trading, finance, legal, human resources, and billing and settlement. Thisallows all the subsidiaries to benefit from the wealth of experience of the management team of SMC GlobalPower while optimizing initiatives at a portfolio level. SMC Global Power also intends to establish customerrelationships with the other subsidiaries and affiliates of San Miguel Corporation for the sale and supply ofpower. In addition, SMC Global Power, through its subsidiaries, Daguma Agro, Bonanza Energy and SultanEnergy, owns various coal properties that it may develop as a hedge against international coal price fluctuations.

RECENT DEVELOPMENTS

On January 25, 2019, the Company subscribed to 18,314,898 common shares of MPGC, increasing its ownershipfrom 49% to 73.58% of the total issued and outstanding capital stock of MPGC. The subscription was a result ofthe waiver by MPGC’s other shareholders of their right to contribute additional equity pursuant to the capital callapproved by MPGC. On the same date, the Company subscribed to an additional 28,929,347 common shares tobe issued out of the proposed increase in the authorized capital stock of MPGC, which is subject to the SEC’sapproval. As of March 31, 2019, MPGC’s application for the increase in authorized capital stock is pending.

On March 28, 2019, the Company priced three series of Philippine Peso fixed-rate bonds in an aggregate amountof P25 billion with an oversubscription option of up to P5 billion. The Philippine Peso fixed-rate bonds in theaggregate amount of P30 billion were issued and listed on the Philippine Dealing and Exchange Corp. onApril 24, 2019.

On April 25, 2019, the Company issued the Original Securities, which were listed on the SGX-ST on April 26,2019.

IPPA FRAMEWORK

PSALM, together with NPC, has ECAs or other PPAs in place with various IPPs in the Philippines. Under theEPIRA, PSALM is required to achieve, through open and competitive bidding, the transfer of the managementand control of at least 70% of the total energy output of the IPP plants under contract with NPC to IPPAspursuant to IPPA Agreements, such as those held by SMC Global Power, through SMEC, SPDC and SPPC.

Under IPPA Agreements, the IPPAs have the right to sell the electricity generated by such IPP in the WESM andthrough PSCs with specific customers. In addition, the IPPAs generally manage the procurement of the fuelsupply to the associated IPP where applicable. The IPPA has to pay PSALM a fixed monthly payment and a

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variable energy or generation fee the amount of which depends on the dispatch and performance of the IPP. IPPAAgreements provide relief for IPPAs such as SMC Global Power, through SMEC, SPDC and SPPC, in the eventthe associated IPPs are unable to dispatch for a certain period of time not due to the fault of the IPPA.

PSALM/NPC in turn, pays the IPPs capacity and energy payments based on their respective ECAs or PPAs. Insome cases, IPPA Agreements provide the IPPA with the right to acquire ownership of the power plants orgeneration facilities at the end of the terms of the ECAs or PPAs. Under the IPPA Agreements of SMEC, SPDCand SPPC, these subsidiaries of SMC Global Power have the right to acquire the Sual Power Plant in October2024, the Ilijan Power Plant in June 2022 and the San Roque Power Plant in April 2028 or at an earlier date dueto certain events such as changes in applicable law or non-performance by the IPP.

The IPPA framework is intended to provide successful bidders a way to enter and trade in the WESM for aminimal capital outlay without the expense of building a new power plant and for IPPAs to enjoy the benefitsnormally attributed to owners of power generation plants, including controlling the fuel and its dispatch, trading,and contracting of the power plant, without maintenance costs or capital upgrades, which remain with the IPPs.Also, many of the risks of owning a power plant are explicitly managed through the contract. If there is anextended outage at the power generation plants, for example, there is up to a 50% discount on the monthly fees,and PSALM bears the force majeure risks to the power generation plants. The IPPA framework also permits anIPPA to assume the role of NPC as an offtaker of power generated by IPPs without affecting NPCs underlyingagreements with the IPP.

IPPAs are permitted to trade in the WESM, and are also free to enter into bilateral contracts and seek othermarkets for the balance of their contracted capacities and energy, as well as enter into other forms of financialhedging instruments if desired to manage their position in and exposure to the market.

At the end of the terms of the IPPA Agreements, which normally coincide with the terms of the ECAs PPAsbetween NPC and the IPPs, the IPPA Agreements provide the IPPA with the right to acquire ownership of thepower plants or generation facilities without additional consideration aside from the IPPA fees paid throughoutthe term of the IPPA Agreement. Under the respective IPPA Agreements of SMEC, SPDC and SPPC, thesesubsidiaries of SMC Global Power have the right to acquire the Sual Power Plant in October 2024, the IlijanPower Plant in June 2022 and the San Roque Power Plant in April 2028, respectively.

The IPPA may exercise the option to acquire the power plants prior to the end of the IPPA Agreement undercertain circumstances, such as changes in law or non-performance by the IPP of its obligations under the ECA. Inthis case, the transfer price will be the net present value of the sum of the agreed monthly payments remainingunpaid at the date of termination of the IPPA Agreement.

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Set forth below is a general illustration of the IPPA framework.

Energy ConversionAgreement(“ECA”) /

Power PurchaseAgreement (“PPA”)

Construct, operate and maintainplants

Deliver electricity according to thePPA / ECA and dispatch instructionsfrom the IPPA

IPP counterparty

Become owner and operator of plantsif IPP defaults

Plant ownership will be transferred atexpiration of ECA

IPPA counterparty Hold rights to sell electricity generatedby IPPS

Procure fuel required by IPPs togenerate power (only applicable toSual power plant)

IPPA has the option to acquire thepower plant at the end of the IPPA

Extends equivalent relief to IPPA ifIPP defaults

Assumed all the assets and liabilitiesof NPC under the ECA.

IndependentPower

Producers(“IPPs”)

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SMC GLOBAL POWER PORTFOLIO

The map below sets out the locations of the power plants which SMC Global Power owns, operates or for whichit acts as IPPA, as well as the newly acquired and greenfield power plants that are partially operational orcurrently under construction.

Davao GreenfieldPower Plant

300 MW

Luzon

Visayas

Mindanao

Sual Power Plant1,000 MW

San Roque PowerPlant

345 MW

Ilijan PowerPlant

1,200 MW

Limay GreenfieldPower Plant

600 MW(1)

Angat HydroelectricPower Plant

MasinlocPower Plant &

Masinloc BESS1,019 MW(1)

(1) Includes Unit 4 (150 MW) of the Limay Greenfield Power Plant, expected to commence commercial operations in the third quarter of2019 and Unit 3 (335 MW) of the Masinloc Power Plant, expected to commence commercial operations in the third quarter of 2019.

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102

CORPORATE HISTORY AND MILESTONES

San Miguel Corporation entered the power business in 2009, when it successfully acquired, through privatizationauctions by PSALM, the IPPA rights for the Sual Power Plant. In order to consolidate its power generationbusiness, San Miguel Corporation eventually transferred these assets into SMC Global Power. In September2010, SMC Global Power became a wholly-owned subsidiary of San Miguel Corporation.

The following timeline sets forth key events in the corporate history of SMC Global Power:

January 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power is incorporated under the nameGlobal 5000 Investment Inc. (renamed SMC GlobalPower Holdings Corp. in October 2010)

January 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power acquires a 6.13% equity interestin Meralco, which was eventually sold in December2013.

November 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A San Miguel Corporation subsidiary, SMEC,becomes the IPPA for the Sual Power Plant.

SMC Global Power acquires a 60% equity interest inSMEC.

January 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A San Miguel Corporation subsidiary, SPDC,becomes the IPPA for the San Roque Power Plant.

SMEC acquires a 100% equity interest in BonanzaEnergy and Daguma Agro, the companies having coalmining rights over approximately 10,000 hectares inLake Sebu, South Cotabato and Tuanadatu, Maitum,Saranggani Province in Mindanao.

March 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power acquires from San MiguelCorporation a 60% equity interest in SPDC, the IPPAfor the San Roque Power Plant.

May 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMEC acquires a 100% equity interest in SultanEnergy, with coal mining rights over approximately7,000 hectares in Lake Sebu, South Cotabato andBagumbayan, Sultan Kudarat in Mindanao.

June 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A San Miguel Corporation subsidiary, SPPC becomesthe IPPA for the llijan Power Plant.

September 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power becomes a wholly-ownedsubsidiary of San Miguel Corporation, and acquiredfrom San Miguel Corporation, among others:

• a 100% equity interest in SPPC, the companythat is the IPPA for the Ilijan Power Plant; and

• the remaining 40% equity interests in SMECand SPDC.

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January 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Execution of EPC Contract with Formosa HeavyIndustries, for the construction of the Limay andDavao Greenfield Power Plants.

August 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Corporation transfers to SMC GlobalPower its 100% equity interest in SMELC. SMELCholds a RES license from the ERC.

July 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Groundbreaking of the 2 x 150 MW DavaoGreenfield Power Plant.

September 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power is awarded as the winningconcessionaire for the rehabilitation, operations andmaintenance of ALECO.

SMC Global Power, through SPI (a wholly ownedsubsidiary), acquires the 140 MW LimayCogeneration Plant from Petron Corporation.

SMC Global Power agreed to sell its 6.13% interest inMeralco. The sale was completed in March 2014.

October 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Groundbreaking of the 4 x 150 MW LimayGreenfield Power Plant.

February 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Start of APEC’s concession of ALECO’s distributionfranchise.

November 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power acquired 60% of AHC, the ownerand operator of the AHEPP.

July 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Groundbreaking of the AHEPP rehabilitation.

August 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCPC was granted a RES license by the ERC.

December 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Global Power, through SPI, sold the 140 MWLimay Cogeneration Plant back to PetronCorporation.

May 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Operations of Unit 1 of the LimayGreenfield Power Plant.

July 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Operations of Unit 1 of the DavaoGreenfield Power Plant.

September 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Operations of Unit 2 of the LimayGreenfield Power Plant.

February 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Operations of Unit 2 of the DavaoGreenfield Power Plant.

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March 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Operations of Unit 3 of the LimayGreenfield Power Plant.

Acquisition of the Masinloc Power Plant from AESand EGCO.

April 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Completed Masinloc Power Plant Unit 2 retrofit andperformance tests.

August 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Angat Dam & Dykes Strengthening Projectcompleted.

IPPA POWER PLANTS

The table below summarizes information regarding the power plants whose generation capacity is managed andsold by SMC Global Power, through its subsidiaries, under IPPA rights.

Plant Name

Sual San Roque Ilijan

Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . SMEC SPDC SPPCIPPA Acquisition Date . . . . . . . . . . . . . . . . . 11/2009 3/2010 9/2010Plant Commercial Operation Date . . . . . . . 1999 2003 2002Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . Marubeni

Corporation, TokyoElectric PowerCorporation(1)

MarubeniCorporation, KansaiElectric Company

Ltd.(2)

Korea Electric Power,Corporation,Mitsubishi

Corporation, TeaMEnergy(3)

Installed Capacity (MW) . . . . . . . . . . . . . . . 2 x 647 3 x 137 2 x 635.5Net Contracted Capacity (MW) . . . . . . . . . 1,000(4) 345(5) 1,200Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coal Hydroelectric Natural GasFuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . . PT Trubaindo Coal

Mining, PT KaltimPrima Coal, Vitol,Galaxy Energy and

Resources

N/A Camago-MalampayaGas Fields (through

NPC/PSALM)

Revenue Mix (as of March 31, 2019) . . . . . 94% bilateralcontract(6)

2% WESM; 98%replacement power

contracts

85% bilateralcontract(7)

Net Capacity Factor (%)December 31, 2016 . . . . . . . . . . . . . . . . . . . . 72% 26% 79%December 31, 2017 . . . . . . . . . . . . . . . . . . . . 61% 23% 77%December 31, 2018 . . . . . . . . . . . . . . . . . . . . 70% 34% 74%March 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . 83% 21% 82%Availability Factor (%)December 31, 2016 . . . . . . . . . . . . . . . . . . . . 84% 99% 95%December 31, 2017 . . . . . . . . . . . . . . . . . . . . 71% 97% 94%December 31, 2018 . . . . . . . . . . . . . . . . . . . . 85% 100% 93%March 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . 94% 83% 98%Offtakers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meralco, ECs,

DUs, DCCs,Third-PartyWESM(8)

Intercompany,WESM

Meralco,WESM

IPPA Expiry / Asset Transfer Date . . . . . . October 2024 April 2028 June 2022

Notes:

(1) Through TeaM Sual Corporation (“TeaM Energy”).

(2) Through San Roque Power Corporation.

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(3) Through KEPCO Ilijan Corporation (“KEILCO”).

(4) SMEC is entitled to dispatch up to 1,000 MW, which is the net contracted capacity of the Sual Power Plant. The owner of the plant hasthe right to generate power in excess of the dispatch instructions of SMEC and sell such excess generation.

(5) SPDC expects the San Roque Power Plant to generate power at levels below its contracted capacity due to water levels in the reservoirand downstream irrigation requirements.

(6) Unit 1 of the Sual Power Plant is fully contracted to Meralco under a long-term offtake agreement while the capacity of Unit 2 of theSual Power Plant is contracted to various distribution utilities, electric cooperatives and industrial customers under existing PSCs.

(7) The entire capacity of the Ilijan Power Plant is contracted to Meralco under a long-term power supply agreement up to 2019, whichcan be extended up to the end of the IPPA.

(8) ECs: Electric Cooperatives; DUs: Distribution Utilities; DCCs: Directly Connected Customers; and CCs: Contestable Customers.

POWER GENERATION FACILITIES

Sual Power Plant

The Sual Power Plant is a 2 x 647 MW coal-fired thermal power plant located in Sual, Pangasinan on theLingayen Gulf that commenced commercial operations in October 1999. It is the largest coal-fired thermal powerplant in the Philippines in terms of installed capacity. The Sual Power Plant was built by CEPA PangasinanElectric Limited pursuant to an ECA with NPC under a 25-year Build-Operate-Transfer (“BOT”) scheme thatexpires on October 24, 2024. In 2007, TeaM Energy, a joint venture between Marubeni Corporation and TokyoElectric Power Corporation, acquired the Sual Power Plant.

On September 1, 2009, SMEC, was declared the winning bidder and received the notice of award for the IPPAfor the Sual Power Plant. On November 6, 2009, SMEC assumed the administration of the capacity of the SualPower Plant in accordance with the provisions of the Sual IPPA Agreement.

Sual IPPA

Power Plant Capacity and Fuel Supply

SMC Global Power, through its wholly-owned subsidiary, SMEC, has the contractual right to manage, control,trade, sell or otherwise deal in up to 1,000 MW of the generation capacity of the Sual Power Plant pursuant to theSual IPPA Agreement. TeaM (Philippines) Energy Corporation, an affiliate of TeaM Energy, is allowed to sellthe remaining balance of 200 MW. Accordingly, for purposes of this Offering Circular, the contracted capacity ofthe Sual Power Plant is 1,000 MW.

SMEC must supply and deliver, at its own cost, the fuel that is necessary for the power plant to generate thepower that SMEC requires TeaM Energy to produce. TeaM Energy is responsible for supplying fuel at its owncost to the Sual Power Plant to produce power in excess of the dispatch instructions of SMEC.

IPPA Fees

SMEC pays PSALM a monthly fee that consists of a fixed payment and a variable energy fee.

The fixed payment consists of agreed amounts (in U.S. dollars and Pesos) for the applicable month set out in theSual IPPA Agreement. The specific amount of the fixed monthly payments under the Sual IPPA Agreementincreases over the life of the agreement, and the amounts and timing of such increases are specified in a scheduleto the agreement. In any month in which a unit of the Sual Power Plant is unable to produce power for at leastthree non-delivering days, these agreed amounts are reduced in proportion to the number of non-delivering daysin that month. A non-delivering day means a 24-hour period during which a unit is unable to produce power forreasons specified in the Sual IPPA Agreement, including planned and unplanned outages arising from causes notattributable to SMEC.

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In addition, SMEC must pay monthly energy fees that are periodically adjusted for inflation and that consist of(i) a fixed base energy rate for power actually delivered by the Sual Power Plant comprising both a U.S. dollarand Peso component plus (ii) a variable energy rate for power actually delivered by the Sual Power Plant, in U.S.dollars only, that takes into account the cost and efficiency of fuel supplied to the Sual Power Plant as well as theefficiency (unit heat rate) of the Sual Power Plant, which is measured on an annual basis.

Other Provisions

Offtake agreements with certain customers were also assigned to SMEC by NPC/PSALM. SMEC is required toperform the obligations of NPC under the NPC-assigned offtake agreements, including the obligation to procurepower at its own cost to meet deficiencies, in cases where the Sual Power Plant is unable to supply the contractedpower. SMEC is also required to maintain a U.S.$58 million performance bond in favor of PSALM. PSALMremains responsible to TeaM Energy for the payment obligations of NPC under the Sual ECA.

While SMEC is granted the right to coordinate with TeaM Energy, on behalf of NPC, on matters relating tomanagement of the generation capacity of the Sual Power Plant, SMEC cannot directly enforce the Sual ECAagainst TeaM Energy or NPC. Any claims for damages for breach, or other entitlement, benefit or relief underthe Sual IPPA Agreement arising from the breach by TeaM Energy of its Sual ECA obligations must be claimedby SMEC against PSALM through an equivalent relief claim (“ER Claim”). PSALM will then include the ERClaim in its claims against TeaM Energy (the “PSALM ER Claim”). The Sual IPPA Agreement does not permitset-off of claims, and SMEC is only entitled to payment of its ER Claim after PSALM has received paymentfrom TeaM Energy of its corresponding PSALM ER Claim.

Under the Sual IPPA Agreement, SMEC has the option to acquire the Sual Power Plant in October 2024 withoutany additional payment by SMEC. SMEC may exercise the option to acquire the Sual Power Plant prior toOctober 2024 under certain circumstances, such as changes in law or non-performance by TeaM Energy of itsobligations under the Sual ECA. In this case, the transfer price will be the net present value of the sum of theagreed monthly payments remaining unpaid at the date of termination of the Sual IPPA Agreement.

The Sual IPPA Agreement may be terminated by either SMEC or PSALM due to certain force majeure events. Incase of such termination, SMEC is entitled to receive from PSALM a termination payment equal to the aggregateagreed monthly payments paid by SMEC up to the date of termination less the aggregate capital recovery fees,fixed operating and maintenance fees, infrastructure fees and service fees paid or payable by PSALM up to thetermination date of the Sual IPPA Agreement.

Power Offtakers

The capacity of Unit 1 of the Sual Power Plant is fully contracted to (i) Meralco (DU) under a long-term offtakeagreement expiring in 2019, subject to extension up to 2024, and (ii) Meralco (RES) under a long-term offtakeagreement expiring in 2024, subject to extension upon mutual agreement by the parties. Meanwhile, the capacityof Unit 2 of the Sual Power Plant is contracted to various distribution utilities, electric cooperatives, directlyconnected customers and third-party RES under existing PSCs.

For energy-based contracts entered into by SMEC directly with offtakers on a bilateral basis, pricing is based ona reasonable return over the cost structure of SMEC.

For capacity-based contracts, pricing is based on a fixed and variable payment. The fixed payment represents themonthly fixed payments to PSALM and fixed operating and maintenance expenses. The variable paymentrepresents the energy fee, fuel and variable operating and maintenance expense.

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Operations Review

The table below is a summary of operating statistics of the Sual Power Plant for the periods indicated.

For the year endedDecember 31,

For the threemonths ended

March 31,

2016 2017 2018 2018 2019

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,341 5,333 6,133 1,536 1,812Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,015 8,388 8,416 2,109 2,379

of which: bilateral offtake agreements . . . . . . . . . . . . . . . . . . . . . . . . 7,480 7,850 7,725 1,955 2,178of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535 538 691 154 201

Average realized electricity prices(P/MWh):for electricity sold under bilateral offtake agreements . . . . . . . . . . . . 4,401 4,940 5,159 5,198 4,625for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,401 2,213 2,591 3,962 3,420

Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 61 70 71 84Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 71 85 88 94Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 74 98 99 88Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . . . . . . . . . . . . 955 830 956 999 1000Average Net Heat Rate (Kcal/KWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,419 2,448 2,472 2,444 2,486

Fuel Supply

The table below sets forth certain information regarding the supply of coal to the Sual Power Plant as of theperiods indicated.


For the threemonths ended

March 31,

2016 2017 2018 2018 2019

Metric tons (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,459.0 2,086.1 2,476.4 749.2 610.4Average calorific value (kcal/kg) . . . . . . . . . . . . . . . . . . . . . . 6,233.2 6,200.9 6,183.1 6,156.0 6,176.9(in millions P) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,799.3 10,562.3 15,131.6 4,593.7 3,485.8Average price per metric ton (P) . . . . . . . . . . . . . . . . . . . . . . 3,171.7 5,063.1 6,110.3 6,131.5 5,710.8

SMEC has an existing coal supply agreement with PT Kaltim Prima Coal (“KPC”), which will ensure a steadysupply of coal for SMEC. For 2018, KPC supplied 11 panamax shipments which is expected to increase to 12panamax shipments per year from 2019 to 2021. Each shipment shall comprise 65,000 metric tons +/- 10% vesseltolerance. Pricing under the coal supply agreement will be subject to adjustment based on certain standardsapplicable to the quality or grade of the coal delivered by KPC. For the three months ended March 31, 2018,KPC supplied 3 panamax shipments to SMEC. SMEC also has other coal supply contracts with other suppliers.

Operations and Maintenance

The Sual Power Plant is operated by TeaM Energy, the successor-in-interest of CEPA Pangasinan ElectricLimited. Under the Sual ECA, TeaM Energy is responsible, at its own cost, for the management, operation,maintenance, including the supply of consumables and spare parts, and the repair of the Sual Power Plant. TeaMEnergy is required to use its best endeavors to ensure that the Sual Power Plant is in good operating conditionand capable of converting fuel supplied by SMEC under the Sual IPPA Agreement, into electricity in a safe andreliable manner.

The maintenance plan for the Sual Power Plant is agreed upon annually between SMEC, NPC, PSALM, NGCPand TeaM Energy. The maintenance plan includes scheduled inspections and overhauls, including scheduledperiods of outage. Planned outages for maintenance are scheduled in such a way that only one unit is scheduledfor shut down at any given time. The maintenance plan is established with consideration given to the dispatchrequirements of SMEC and recommendations of the plant manufacturer. TeaM Energy is required to execute themaintenance plan in accordance with the recommendations of the original equipment manufacturer and good

108

utility practice. TeaM Energy performs periodic maintenance activities on the generating units of the Sual PowerPlant during the course of the operations of the plant. The Sual ECA requires TeaM Energy to conduct an annualtest to check the capacity and heat rate of the generating units of the Sual Power Plant, if requested by SMEC.

Each of the generating units of the Sual Power Plant historically has been, and is expected to continue to be, shutdown for routine maintenance for approximately 30 days per calendar year. SMEC also expects that TeaMEnergy will shut down these units for more significant maintenance and repair work for a total of approximately60 days in every fifth calendar year.

The table below sets forth actual planned outages of the Sual Power Plant for the periods indicated.

For the year ended December 31,For the three months

ended March 31,

2016 2017 2018 2018 2019

Unit 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 days 27 days 57 days None NoneUnit 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 days None 42 days 24 days None

In 2016, Unit 1 of the Sual Power Plant underwent 60 days major scheduled maintenance, which occurs onceevery five years, plus a 14-day extension. Unit 2 was scheduled to undergo its 30-day scheduled maintenance in2016 and the actual repair period was only 20 days.

In 2017, Unit 1 underwent 27 days of planned maintenance outage.

In 2018, Unit 1 was shut down for 55 days for the annual maintenance outage. Unit 2 was shut down for 22 daysfor the replacement of the main transformer and 17 days for the annual maintenance outage.

The table below sets forth unplanned outages of the Sual Power Plant for the periods indicated.


For the three monthsended March 31,

2016 2017 2018 2018 2019

Unit 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 days 33 days 5 days None NoneUnit 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 days 158 days 8 days 1 day 5 days

In 2016, Unit 1 of the Sual Power Plant underwent 9 days forced outages which were mostly due to boiler tubeleaks, stuck-up gland seal valve and switchyard hot spot on Phase C of XCT connector XCT301 and DS301.Unit 2, on the other hand, experienced 14 days forced outages, which were mostly due to boiler tube leaks andgenerator current transformer differential fault.

In 2017, 33 days forced outages in Unit 1 were mostly due to condenser tube leaks, water wall tube leaks andboiler tube leaks on panel area while 158 days forced outages in Unit 2 in the same year were due to maintransformer failure for 150 days from June 14 to November 10 and condenser tube leaks and boiler tube leaks foreight days.

In 2018, Unit 2 was shut down for eight days mainly due to power tripping attributable to the activation ofgenerator differential protection and burnt power supply interface board.

In the first three months of 2019, the Sual Power Plant experienced five days of forced outages, which weremostly due to boiler tube leaks.

Power Transmission

Power from the Sual Power Plant is transmitted through a 25 km 230 KV transmission line from the Sual PowerPlant switchyard to the Kadampat Substation located at Labrador, Pangasinan. The transmission line is owned bythe TransCo and operated and maintained by its concessionaire, NGCP.

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Ilijan Power Plant

Background

The Ilijan Power Plant commenced commercial operations on June 5, 2002, and is located on a 60-acre site atArenas Point, Barangay Ilijan, Batangas City. The Ilijan Power Plant was constructed and is owned by KEILCOpursuant to a 20-year ECA with NPC (“Ilijan ECA”) under a BOT scheme that expires on June 4, 2022. TheIlijan Power Plant consists of two blocks with a rated capacity of 600 MW each.

NPC/PSALM supplies natural gas to the Ilijan Power Plant from the Malampaya gas field in Palawan under a gassupply agreement with Shell Exploration Philippines BV. The Ilijan Power Plant can also run on diesel oil storedon site.

On April 16, 2010, SMC successfully bid for the appointment to be the IPP Administrator for the Ilijan PowerPlant and received a notice of award on May 5, 2010. On June 10, 2010, SMC and SPPC, entered into anassignment agreement with assumption of obligations whereby SMC assigned all of its rights and obligationswith respect to the Ilijan Power Plant to SPPC. SPPC assumed administration of the Ilijan Power Plant onJune 26, 2010 in accordance with the Ilijan IPPA Agreement.

Ilijan IPPA

Power Plant Capacity and Fuel Supply

SMC Global Power, through its wholly-owned subsidiary, SPPC, has the contractual right to manage, control,trade, sell or otherwise deal in the generation capacity of the Ilijan Power Plant pursuant to the Ilijan IPPAAgreement. Although the installed capacity of the Ilijan Power Plant totals 1,271 MW, ERC records attribute toSPPC a capacity of 1,200 MW for the Ilijan Power Plant. Accordingly, for purposes of this Offering Circular, thecontracted capacity of the Ilijan Power Plant is referred to as 1,200 MW.

Under the Ilijan ECA, NPC/PSALM is required to deliver and supply to KEILCO the fuel necessary to operatethe Ilijan Power Plant. If natural gas is unavailable, SMC Global Power, through SPPC, may require KEILCO torun the Ilijan Power Plant using diesel fuel. NPC/PSALM remains responsible for securing the natural gas anddiesel fuel supply to the Ilijan Power Plant.

IPPA Fees

SPPC must pay fixed monthly payments comprising both a U.S. dollar and Peso component. In addition, SPPCmust pay monthly generation payments comprising a “must pay” amount for electricity sold up to a givenvolume (the “Must Pay Volume”) and a variable amount for electricity sold in excess of the Must Pay Volume.

Other Provisions

SPPC is required to maintain a U.S.$60 million performance bond in favor of PSALM. PSALM remainsresponsible to KEILCO for the payment obligations of NPC under the Ilijan ECA.

While SPPC is granted the right to coordinate with KEILCO, on behalf of NPC, on matters relating tomanagement of the generation capacity of the Ilijan Power Plant, SPPC cannot directly enforce the Ilijan ECAagainst KEILCO or NPC. Any claims for damages for breach, or other entitlement, benefit or relief under theIlijan IPPA Agreement arising from the breach of KEILCO of its obligations under the Ilijan ECA must beclaimed by SPPC against PSALM through the ER Claim and the PSALM ER Claim mechanism.

Under the Ilijan IPPA Agreement, SPPC has the option to acquire the Ilijan Power Plant in June 2022 subject tocertain conditions under the Ilijan IPPA Agreement but without any additional payment by SPPC. SPPC may

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exercise the option to acquire the Ilijan Power Plant prior to June 2022 under certain circumstances, such aschanges in law or non-performance by KEILCO of its obligations under the Ilijan ECA. In this case, the transferprice will be the net present value of the sum of the agreed monthly payments remaining unpaid at the date oftermination of the Ilijan IPPA Agreement.

The Ilijan IPPA Agreement may be terminated by either SPPC or PSALM due to certain force majeure events. Incase of such termination, SPPC is entitled to receive from PSALM a termination payment equal to the aggregateagreed monthly payments paid by SPPC up to the date of termination less the aggregate capital recovery fees andfixed operating and maintenance fee paid or payable by NPC/PSALM to KEILCO from the effective date of theIlijan IPPA Agreement up to the termination date of the Ilijan IPPA Agreement.

Power Offtakers

The entire capacity of the Ilijan Power Plant is contracted to Meralco under a long-term power supply agreementexpiring in December 2019, which can be extended up to the end of the IPPA Agreement upon mutual agreementbetween the parties. The renewal of the contract is currently being negotiated.

In the years ended December 31, 2016, 2017 and 2018, and the three months ended March 31, 2018 and 2019,93%, 92%, 86%, 89% and 84%, respectively, of the volume of power sold from the Ilijan Power Plant werederived from sales made under offtake agreements. In the years ended December 31, 2016, 2017 and 2018 andthe three months ended March 31, 2018 and 2019, 7%, 8%, 14%, 11% and 16% of the volume of power soldfrom the Ilijan Power Plant, respectively, were derived from sales made through the WESM.

Operations Review

The table below is a summary of operating statistics of the Ilijan Power Plant for the periods indicated.



2016 2017 2018 2018 2019

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . . . . . 8,363 8,143 7,768 1,892 2,123Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,630 8,308 7,888 1,941 2,168

of which: bilateral offtake agreements . . . . . . . . . . . . . . . . 8,041 7,606 6,745 1,733 1,827of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 702 1,143 208 342

Average realized electricity prices(P/MWh):for electricity sold under bilateral offtake agreements . . . . 3,657 4,154 4,741 4,422 5,153for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . 2,301 3,070 3,426 3,444 4,892

Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 77 74 73 82Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 94 93 88 98Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 99 100 100 100Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . . . . 1,140 1,122 1,119 1,062 1,189Average Net Heat Rate (Kilo-Joule/KWh) . . . . . . . . . . . . . . . . . 6,897 6,870 6,926 6,852 6,823

Fuel Supply

Under the Ilijan IPPA Agreement, NPC is responsible for securing the natural gas and diesel fuel supply to theIlijan Power Plant. Pursuant to a fuel supply and management agreement among Shell Exploration B.V.,Occidental Philippines, Inc., and NPC, NPC supplies natural gas to the Ilijan Power Plant through a 480-kmundersea pipeline from the Camago-Malampaya field in Palawan to the Shell Refinery in Tabangao. From there,the natural gas is transported through a 16-inch diameter onshore pipeline running 15 km to the power plant.


KEILCO is responsible for the operations and maintenance of the Ilijan Power Plant for 20 years from June 2002.Under the Ilijan ECA, KEILCO is required to operate the Ilijan Power Plant pursuant to certain operating criteria

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and guidelines, governing the output of 1,200 MW guaranteed contracted capacity, baseload operation, andspinning reserve capability. Under the Ilijan ECA, KEILCO is responsible, at its own cost, for the management,operation, maintenance, including the supply of consumables and spare parts, and the repair of the Ilijan PowerPlant.

The maintenance plan for the Ilijan Power Plant is agreed upon annually between SPPC, NPC, PSALM, NGCPand KEILCO. The maintenance plan includes scheduled inspections and overhauls, including scheduled periodsof outage and details as to the personnel required to complete each inspection. Planned outages for maintenanceare scheduled in such a way that only one unit is scheduled for shut down at any given time. The maintenanceplan is established with consideration given to the dispatch requirements of SPPC and recommendations of theplant manufacturer. KEILCO is required to execute the maintenance plan in accordance with therecommendations of the original equipment manufacturer and good utility practice. KEILCO performs periodicmaintenance activities on the generating units of the Ilijan Power Plant during the course of the operations of theplant. The Ilijan ECA requires KEILCO to conduct an annual test to check the capacity of the generating units ofthe Ilijan Power Plant.

Each of the generating units of the Ilijan Power Plant historically has been, and is expected to continue to be, shutdown for routine maintenance for approximately 26 days per calendar year. SPPC also expects that KEILCO willshut down these units for more significant maintenance and repair work for a total of 35 to 43 days in every fifthcalendar year.

The table below sets forth actual planned outages of the Ilijan Power Plant for the periods indicated.



2016 2017 2018 2018 2019

Block 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 days 18 days 26 days 5 days 2 daysBlock 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 days 9 days 21 days 16 days None

The maintenance of the Ilijan Power Plant is conducted once the minimum equivalent operating hours of 12,000hours has been met. The minimum equivalent operating hours were not met and therefore there was minimalplanned outage for the year 2016 for Block 1 due to interim combustor inspection of one of the gas turbines. The26-day 2016 planned outage for Block 2 was due to Class B turbine inspection from August 4, 2016 toAugust 30, 2016.

In 2017, Blocks 1 and 2 was shut down for 18 days and 9 days, respectively, due to Malampaya gas restrictionfrom January 28, 2017 to February 16, 2017.

In 2018, Block 1 was shut down for a total of 26 days mainly due to turbine inspection and repair of HRSGcasing leak while Block 2 underwent combustor inspection for 16 days and an additional day due to HRSGcasing leak.

In the first quarter of 2019, Block 1 underwent an interim maintenance outage for the steam leak repair of theheat recovery steam generator’s primary reheater outline line and maintenance inspection of the fuel gas pilotpressure control valve.

The table below sets forth unplanned outages of the Ilijan Power Plant for the periods indicated.



2016 2017 2018 2018 2019

Block 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None 2 days 1 day None NoneBlock 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 days 10 days 0 day None None

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During 2016, no significant outages occurred for Block 1. In contrast, Block 2 underwent a five day forcedoutage during the year due to suspected faulty control signal that triggered the loss of running boiler feed waterpumps.

In 2017, there were no significant outages for Block 1 while Block 2 experienced a 10-day forced outage due todebris filter inspection.

In 2018, there was a one-day outage in Block 1 due to power tripping attributable to the fluctuation of combustorpressure and activation of gas turbine overspeed trip signal.

Power Transmission

Power from the Ilijan Power Plant is transmitted through a 500 KV transmission line that connects to the LuzonGrid through the Ilijan-Dasmarinas line and Ilijan-Tayabas line. The transmission line is owned by TransCo, andoperated and maintained by NGCP.

San Roque Power Plant

Background

The 345 MW San Roque Power Plant in San Manuel, Pangasinan, commenced operations on May 1, 2003, and isa peaking plant that was constructed by a consortium composed of Marubeni Corporation, Sithe PhilippinesHoldings, Ltd., and Italian-Thai Development Public Company Limited (the “Consortium”) pursuant to a powerpurchase agreement with NPC under a BOT scheme (the “San Roque PPA”).

The San Roque Power Plant utilizes the Agno River for peaking power, irrigation, flood control and water qualityimprovement for the surrounding region, and comprises three power generation units of 115 MW each. The SanRoque Power Plant provides an annual energy generation of 1,065 GWh from the 345 MW hydroelectric powerplant, irrigates approximately 34,450 hectares of agricultural land, stores water that would otherwise flood thePangasinan plains, and improves water quality of the Agno River which, otherwise, would pollute thedownstream rivers.

On December 15, 2009, SPDC, a wholly owned subsidiary of SMC Global Power, successfully bid for theappointment to be the IPPA for the San Roque Power Plant and received a notice of award on December 28,2009. SPDC assumed administration of the San Roque Power Plant on January 26, 2010 in accordance with theIPPA Agreement with PSALM (the “San Roque IPPA Agreement”). PSALM remains responsible under theSan Roque PPA to remunerate the IPP of the San Roque Power Plant for the electricity it produces.

San Roque IPPA

Power Plant Capacity

Under the San Roque IPPA Agreement, SPDC has the right to manage, control, trade, sell or otherwise deal inthe electrical generation capacity of the San Roque Power Plant, while NPC, which owns and operates the damand related facilities thereof, obtained and maintains water rights necessary for the testing and operation of thepower plant. SPDC is required to assist PSALM so that the San Roque Power Plant can draw water from theAgno River required by the power plant and necessary for it to generate the electricity required to be producedunder the San Roque PPA of NPC with San Roque Power Corporation (“SRPC”).

While the contracted capacity of SPDC is 345 MW, it may generate up to 435 MW depending on the water leveland inflow to the San Roque reservoir. Accordingly, for purposes of this Offering Circular, the contractedcapacity of the San Roque Power Plant is referred to as 345 MW.

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The San Roque Power Plant is a peaking plant. Under the terms of the San Roque PPA, power and energy aredelivered to SPDC at the delivery point (the high voltage side of the step-up transformers) located at theperimeter fence of the San Roque Power Plant site. SPDC is responsible for contracting with NGCP to wheelpower from the delivery point.

Minimum Run Rate

The San Roque PPA requires NPC to take-or-pay for a minimum amount of power from the San Roque PowerPlant. The minimum amount required increases from 85 MW through April 2007, 95 MW from May 2007through April 2013, 110 MW from May 2013 through April 2017 and 115 MW from May 2017 through April2028. Under the San Roque IPPA Agreement, SPDC is contractually obligated to purchase the minimum amountof power that NPC is obligated to take-or-pay for under the San Roque PPA.

IPPA Fees

SPDC pays PSALM a monthly fee that consists of a fixed payment and a variable energy fee.

The fixed payment consists of agreed amounts (in U.S. dollars and Pesos) for the applicable month as set out inthe San Roque IPPA Agreement. The specific amount of the fixed monthly payments under the San Roque IPPAAgreement increases over the life of the agreement, and the amounts and timing of such increases are specified ina schedule to the agreement. In any month that the San Roque Power Plant is unable to produce power for at leastthree non-delivering days, these fixed amounts are reduced in proportion to the number of non-delivering days inthat month. A non-delivering day means a 24-hour period during which the San Roque Power Plant is unable toproduce power for reasons specified in the San Roque IPPA Agreement, including unplanned outages arisingfrom causes not attributable to SPDC. No reduction in the fixed payment is made if the San Roque Power Plant isunable to produce power due to planned outages.

The energy fee is computed based on the actual energy delivered by the San Roque Power Plant at a fixed priceof P1.30 per KWh. The actual energy delivered and dispatched by the San Roque Power Plant at any given timeis dependent on the water levels in the reservoir and downstream irrigation requirements at that time.

Other Provisions

The San Roque IPPA Agreement requires SPDC to maintain a performance bond in favor of PSALM equivalentto U.S.$20 million. Under the San Roque IPPA Agreement, SPDC has the right to acquire the San Roque PowerPlant in May 2028, which is the end of the cooperation period between NPC and SRPC under the San RoquePPA, or on some earlier date due to certain events such as changes in law or non-performance by SRPC under theSan Roque PPA.

While SPDC is granted the right to coordinate with SRPC, on behalf of NPC, on matters relating to managementof the generation capacity of the San Roque Power Plant, SPDC cannot directly enforce the San Roque PPAagainst SRPC or NPC. Any claims for damages for breach, or other entitlement, benefit or relief under the SanRoque IPPA Agreement arising from the breach of SRPC of its San Roque PPA obligations must be claimed bySPDC against PSALM through the ER Claim and the PSALM ER Claim mechanism. Under the San Roque IPPAAgreement, SPDC has the option to acquire the San Roque Power Plant in May 2028 without any additionalpayment by SPDC. SPDC may exercise the option to acquire the San Roque Power Plant prior to May 2028under certain circumstances, such as changes in law or non-performance by SRPC of its obligations under theSan Roque PPA. In this case, the transfer price will be the net present value of the sum of the agreed monthlypayments remaining unpaid at the date of termination of the San Roque IPPA Agreement.

The San Roque IPPA Agreement may be terminated by either SPDC or PSALM due to certain force majeureevents. In case of such termination, SPDC is entitled to receive from PSALM a termination payment equal to theaggregate agreed monthly payments paid by SPDC up to the date of termination less the aggregate capitalrecovery, operating and watershed management fees paid or payable by NPC/PSALM to SRPC from theeffective date of the San Roque IPPA Agreement up to the termination date of the San Roque IPPA Agreement.

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Operations Review

The table below is a summary of operating statistics of the San Roque Power Plant for the periods indicated.



2016 2017 2018 2018 2019

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . 798 692 1,017 163 157Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,435 1,026 1,342 248 261

of which: bilateral offtake agreements . . . . . . . . . . . . . . . . . . . 971 827 898 191 254of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 199 444 56 7

Average realized electricity prices(P/MWh):for electricity sold under bilateral offtake agreement . . . . . . . . 5,464 5,844 6,340 7,065 7,097for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . . . . 3,251 4,395 2,950 4,499 5,353

Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 23 34 22 21Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 97 100 100 83Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100 100 100 97Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . . . . . . . 433 374 355 435 435

Water Rights

The generated output energy of the San Roque Power Plant is limited by the “Irrigation Diversion Requirements”set by the NIA of the Philippines. Water allocation is usually dictated by a rule curve that is derived fromhistorical data of river flows and water demands. A rule curve shows the minimum water level requirement in thereservoir at a specific time to meet the needs for which the reservoir is designed. The rule curve must generallybe followed except during periods of extreme drought and when public interest requires.

In general, the rule curve dictates the following:

• Water Level Above the Upper Rule Curve — All demands for water supply and irrigation are met andelectricity can be generated at the full capacity of the turbine units. Excess inflow is discharged through thespillway. Water released through the spillway is controlled and regulated by the NPC Dam Officepersonnel.

• Between the Upper and Lower Rule Curves — All demands for water supply and irrigation are satisfied.Generation of electricity is limited to the released water for water supply and irrigation.

• Water Level Below the Lower Rule Curve — The remaining water in the reservoir is reserved for watersupply and irrigation. Generation of electricity is limited to these water releases. If necessary, no furtherwater release for power generation is allowed.

Generally, the output energy of San Roque Power Plant is high during planting seasons which cover the monthsof December through April (dry planting season) and July through September (wet planting season). The waterreleases from the dam, and thus, energy generation, during the dry planting season is much higher due to theabsence of rain. The water rights of NPC are used by the San Roque Power Plant, and NPC, until the date oftransfer of the San Roque Power Plant to NPC (or SPDC, as the case may be), must obtain such renewals orextensions as may be required to maintain the water rights in full force and effect at all times. NPC derives itswater rights from a permit granted by the NWRB.


SRPC, the successor-in-interest of the Consortium, is responsible for the operations and maintenance of the SanRoque Power Plant for 25 years effective May 1, 2003. SRPC is owned by Marubeni Corporation and KansaiElectric Power Company Ltd. Under the San Roque PPA, SRPC is responsible for the management, operation,

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maintenance and repair of the San Roque Power Plant at its own cost until transfer to NPC or SPDC, as the casemay be. As operator, SRPC is entitled to conduct the normal inspection, regular maintenance, repair and overhaulfor a period of 15 days for each unit comprising the San Roque Power Plant. In addition, SRPC has the right toenter into contracts for the supply of materials and services, including contracts with NPC; appoint and removeconsultants and professional advisers; purchase replacement equipment; appoint, organize and direct staff;manage and supervise the power plant; establish and maintain regular inspection, maintenance and overhaulprocedures; and otherwise run the power plant within the operating parameters set out in the San Roque PPA.

The maintenance plan for the San Roque Power Plant is agreed upon annually between SPDC, NPC, PSALM,NGCP and SRPC. The maintenance plan includes scheduled inspections and overhauls, including scheduledperiods of outage and details as to the personnel required to complete each inspection. Planned outages formaintenance of the generating units are scheduled in such a way that only one unit is shut down at any giventime. The power tunnel that delivers water from the reservoir to the generating units also undergoes routineannual maintenance inspections, during which all units are shut down. The maintenance plan is established withconsideration given to the dispatch requirements of SPDC and recommendations of the plant manufacturer.SRPC is required to execute the maintenance plan in accordance with the recommendations of the originalequipment manufacturer and good utility practice. SRPC performs periodic maintenance activities on thegenerating units of the San Roque Power Plant during the course of the operation of the plant. The San RoquePPA requires SRPC to conduct an annual test to check the capacity of the generating units of the San RoquePower Plant. As of the date of this Offer Circular, the generating units of the San Roque Power Plant haveattained and maintained the required contracted capacity specified in the San Roque PPA.

Each of the generating units of the San Roque Power Plant historically has been, and is expected to continue tobe, shut down for routine maintenance for approximately 15 days per calendar year sometime between April toJune of each year, when water levels at the reservoir are low. Since 2010, during periods when a generating unitis shut down for routine maintenance, the San Roque Power Plant has historically been, and is expected tocontinue to be, able to generate power at the applicable minimum run rate from the other generating units. TheSan Roque Power Plant does not have a regular schedule for significant maintenance and repair work.

The power tunnel that delivers water from the reservoir to the generating units also undergoes routinemaintenance inspections for approximately 15 days per calendar year. Power tunnel inspections historically havebeen, and are expected to continue to be, conducted between April to June of each year, after the end of theirrigation period and when water levels at the reservoir are low.

The table below sets forth the actual planned outages of the power tunnel for the San Roque Power Plant for theperiods indicated.

For the year ended December 31, For the three months ended March 31,

2016 2017 2018 2018 2019

4 days(May 26 to May 30)

11 days(May 27 to June 6)

10 days(May 26 to June 4)

None None

The four days planned outages of the San Roque Power Plant during the year 2016 were due to power tunnelinspection, repair of revenue meter repair and installation of individual electronic meter of NGCP.

In 2017, 11 days planned outages of the San Roque Power Plant were due to power tunnel, inspection and annualpreventive maintenance of San Roque-San Manuel 230 KV lines.

In 2018, the San Roque Power Plant was shut down for 10 days due to switchyard maintenance activities inaccordance with the Grid Operating and Management Program.

Power Transmission

Power from the San Roque Power Plant is transmitted through a nine km 230 KV transmission line from the SanRoque Power Plant switchyard to the San Manuel substation located in Pangasinan. The transmission line isowned by TransCo, and operated and maintained by NGCP.

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Angat Hydroelectric Power Plant

The AHEPP is an operating hydroelectric power plant located at the Angat reservoir in San Lorenzo, Norzagaray,Bulacan, approximately 58 km northeast of Metro Manila. The AHEPP was privatized through an asset purchaseagreement between PSALM and Korea Water Resource Corporation (“K-water”). K-water assigned its rights infavor of AHC, a joint venture between K-water and PVEI.

The project has a total electricity generating capacity of 218 MW, comprised of four main units of 50 MWcapacity each and three auxiliary units of 6 MW capacity each. The Main Units 1 and 2 were commissioned in1967 and the Main Units 3 and 4 in 1968. The Auxiliary Units 1 and 2 were commissioned in 1967 and theAuxiliary Unit 3 in 1978. The Auxiliary Unit 3 was manufactured by Allis-Chalmer and Ebara and all the otherunits were manufactured by Toshiba Corporation of Japan. All units are run by the Francis-type turbines, whichare the most commonly used model in hydroelectric power generation. In August 2018, AHC completed therehabilitation of the Angat Dam and Dykes in accordance with the Operations and Maintenance Agreement withPSALM and NPC.

Fuel Supply and Water Rights

The AHEPP utilizes water resources of the Angat reservoir. The Angat reservoir is 35 km long and 3 km wide atits widest points, and has surface of 2,300 hectares and viable storage volume of 850 million cubic meters. Thewater discharged by the project is used for the following two purposes: (i) water discharged through AuxiliaryUnits and through the spillway that flows to the Ipo reservoir is used to supply 97% of the residential drinkingwater of Metro Manila; and (ii) water discharged through Main Units that flows downstream to the Bustosreservoir is utilized for irrigation purposes.

Water rights surrounding the AHEPP are co-owned and governed by the following entities, with its respectivepurposes, pursuant to the Water Code of the Philippines, Angat Reservoir Operation Rules issued and regulatedby NWRB as implemented by a Memorandum of Agreement on the Angat Water Protocol between MWSS, NIA,AHC, PSALM, NPC and NWRB: (i) MWSS, for domestic water supply to Metro Manila; (ii) provincialgovernment of Bulacan, for water supply in the Bulacan Province; (iii) NIA, for irrigation diversionrequirements; and (iv) AHC (through a lease contract with KWPP), for power generation.

Power Offtakers

AHC sells majority of its generated capacity to the WESM at the prevalent spot price. The Main Units areoperated as peaking units. The strategy for the Main Units is to allocate daily water release during peak hours.Auxiliary Units are operated as baseload units, as the water requirement from MWSS is continuous throughoutthe day, thus eliminating any discrete optionality to choose the hour of allocation. AHC periodically enters intoshort-term power supply contracts for the capacity of its auxiliary units and continues to explore options tocontract this capacity.

Operations Review

The table below is a summary of operating statistics of the AHEPP for the periods indicated.



2016 2017 2018 2018 2019

Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 27 22 31 30Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 87 76 91 94Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 95 98 100 100Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . . . . . . . . . . . . 176 199 165 174 177


AHC undertakes the operation and maintenance of AHEPP. The operations and maintenance team consist of thelocal technical team who have been operating the AHEPP supported by technical experts seconded fromK-water.

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AHC has entered into technical services agreements with each of K-water and PVEI to ensure that theappropriate level of technical and management support will be provided to support the operation andmaintenance requirements of AHC.

Limay Greenfield Power Plant

Background

The Limay Greenfield Power Plant owned by SMC Global Power through its subsidiary, SCPC, is a 4 x 150 MWCFB coal-fired power plant located in Limay, Bataan, which commenced construction in October 2013. Units 1,2 and 3 of the Limay Greenfield Power Plant achieved commercial operations in May 2017, September 2017 andMarch 2018, respectively. Unit 4 has completed testing and commissioning and is expected to commencecommercial operations in the third quarter of 2019, once the ERC issues the certificate of compliance. Theengineering, procurement, and construction contractors of the Limay Greenfield Power Plant are Formosa HeavyIndustries and True North Manufacturing Services Corporation. In June 2017, SCPC acquired all of the rightsand obligations on the completion of Units 3 and 4 of the Limay Greenfield Power Plant from anotherwholly-owned subsidiary, Limay Premiere Power Corp. Mantech Power Dynamics Services Inc., anotherwholly-owned subsidiary of SMC Global Power, is responsible for the operation and maintenance of the plant.

Power Offtakers

Units 1 and 2 of the Limay Greenfield Power Plant are fully contracted to various distribution utilities, electriccooperatives, directly connected and contestable customers, including facilities of SMC subsidiaries, under long-term offtake agreements mostly expiring in 10 years from effective date, subject to extension upon mutualagreement between the parties. Units 3 and 4 of the Limay Greenfield Power Plant are also contracted withdistribution utilities, directly connected customers and contestable customers. For the three months ended March31, 2019, 97% of revenues were from bilateral contracts while the remaining 3% was attributable to revenuefrom WESM. SCPC was granted a RES license on August 24, 2016, which is valid until August 24, 2021. TheRES license gave SCPC the ability to directly contract with contestable customers.

Fuel Supply

SCPC has executed two long-term coal supply agreements with Bayan Resources TBK (“Bayan”) and KPC, withterms of until 2022 and five years from effectivity date, respectively. As base quantity, Bayan is required tosupply five panamax shipments per year during the term of the contract, with an optional additional quantity ofthree shipments per year. KPC will supply four panamax shipments per year, with an option on the part of SCPCto add four more shipments per year upon prior notice. SCPC has also executed another long-term supplyagreement with Bayan, with terms of until January 31, 2029. As base quantity, Bayan is required to supply fivepanamax shipments per year during the term of the contract. Each shipment shall comprise 65,000 metric tons +/-10% vessel tolerance. Pricing under the coal supply agreement will be subject to adjustment based on certainstandards applicable to the quality or grade of the coal delivered by the supplier. SCPC has also executed spotcoal supply contracts with other suppliers. SCPC also has a three year contract of affreightment with D’AmicoShipping Singapore Pte. Ltd. from January 1, 2017 to December 31, 2019.

Davao Greenfield Power Plant

Background

The Davao Greenfield Power Plant owned by SMC Global Power through its subsidiary, SMCPC, is a 2 x 150MW CFB coal-fired power plant located in Malita, Davao Occidental, which commenced construction inSeptember 2013. Units 1 and 2 of the Davao Greenfield Power Plant achieved commercial operations in July2017 and February 2018, respectively.

The engineering, procurement, and construction contractors of the Davao Greenfield Power Plant are FormosaHeavy Industries and True North Manufacturing Services Corporation. Safetech Power Services Corp., anotherwholly-owned subsidiary of SMC Global Power, is responsible for the operation and maintenance of the plant.

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Power Offtakers

Units 1 and 2 of the Davao Greenfield Power Plant are substantially contracted to various distribution utilities,electric cooperatives and industrial customers under long-term offtake agreements mostly expiring in 10 yearsfrom effective date, subject to extension upon mutual agreement between the parties. Approximately 98% of thecustomers of the Davao Greenfield Power Plant are distribution utilities and electric cooperatives.

Fuel Supply

SMCPC executed a long-term coal supply agreement with Bayan, with terms of until January 31, 2029. As basequantity, Bayan is required to supply five panamax shipments per year during the term of the contract. Eachshipment shall comprise 65,000 metric tons +/- 10% vessel tolerance. Pricing under the coal supply agreementwill be subject to adjustment based on certain standards applicable to the quality or grade of the coal delivered bythe supplier. SMCPC also has executed spot coal supply contracts with other suppliers.

Masinloc Power Plant and Masinloc BESS

Background

The Masinloc Power Plant comprises 1 x 330 MW (Unit 1), 1 x 344 MW (Unit 2) and 1 x 335 MW (Unit 3)coal-fired power plant located in Masinloc, Zambales, and is owned and operated by MPPCL. Units 1 and 2 ofthe Masinloc Power Plant commenced commercial operations in June 1998 and December 1998, respectively,and were originally developed and owned by NPC. Unit 3, which is envisaged as a brown-field/expansion projectwithin the Masinloc Power Plant site, is 99% complete as of March 31, 2019 and is expected to commencecommercial operations in the third quarter of 2019. The engineering, procurement, and construction contractorsof Unit 3 of the Masinloc Power Plant are Posco Engineering & Construction and Ventanas PhilippineConstruction. MPPCL also owns the Masinloc BESS.

The Masinloc Power Plant and Masinloc BESS were acquired by SMC Global Power on March 20, 2018, SMCGlobal Power completed the acquisition of 51% and 49% equity interests in SMCGP Masin from AES Phil andGen Plus B.V., respectively.

Power Offtakers

Units 1, 2 and 3 of the Masinloc Power Plant are substantially contracted through medium to long-term bilateralcontracts with Meralco, electric cooperatives and contestable customers. For the three months ended March 31,2019, 89% of revenues were from bilateral contracts while the remaining 11% was attributable to revenue fromWESM. The RES license of MPPCL was renewed on June 27, 2016, and is valid until August 1, 2021. TheMasinloc BESS provides regulating reserve ancillary services to the Luzon Grid under an Ancillary ServicesProcurement Agreement with NGCP.

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Operations Review

The table below is a summary of operating statistics of the Masinloc Power Plant for the periods indicated.



2016(1) 2017(1) 2018(1) 2018(1) 2019

Actual Energy Generated (GWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,406 4,156 4,253 590 945Electricity sold (GWh): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,649 4,156 4,768 955 1,334

of which: bilateral offtake agreements . . . . . . . . . . . . . . . . . . . . 4,649 3,960 3,672 872 1,178of which: WESM sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 196 1,095 83 156

Average realized electricity prices(P/MWh):for electricity sold under bilateral offtake agreements . . . . . . . . 3,845 5,111 5,773 5,900 4,882for electricity sold on WESM . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,682 3,160 2,842 2,568 4,470

Net Capacity Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 80 73 45 67Availability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 91 84 47 83Reliability Factor (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 94 91 87 85Average Net Dependable Capacity (MW) . . . . . . . . . . . . . . . . . . . . . 590 590 619 590 619Average Net Heat Rate (Kilo-Calorie/Kilowatt hour or “Kcal/

KWh”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,518 2,530 2,462 2,513 2,500

Note:

(1) Data obtained from Masinloc Power Plant records. The Company completed its acquisition of the Masinloc Power Plant in March2018.

Fuel Supply

The table below sets forth certain information regarding the supply of coal to the Masinloc Power Plant as of theperiods indicated.



2016(1) 2017(1) 2018(1) 2018(1) 2019

Metric tons (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,862.4 1,807.6 1,693.3 252.8 450.6Average calorific value (kcal/kg) . . . . . . . . . . . . . . . . . . . . . . . 5,956.4 5,817.6 5,881.0 5,867.1 5,486.49(in millions P) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,125.0 8,928.8 9,879.0 1,397.2 1,973.5Average price per metric ton (P) . . . . . . . . . . . . . . . . . . . . . . . 3,288.8 4,939.5 5,817.1 5,541.4 4,438.8

Note:

(1) Data obtained from Masinloc Power Plant records. The Company completed its acquisition of the Masinloc Power Plant in March2018.

MPPCL has coal supply contracts with reputable international companies with durations ranging from six monthsto three years. All supplies are governed by a five year master agreement, which terms apply for all contracts tobe entered into between MPPCL and a coal supplier.

DISTRIBUTION AND RETAIL SERVICES

Albay Power and Energy Corp.

On October 29, 2013, after an open and competitive bidding, SMC Global Power entered into a concessionagreement for the operation and maintenance of ALECO, which is the franchise holder for the distribution ofelectricity in the province of Albay, Luzon. Under the concession agreement, there is no transfer of the franchiseto operate the distribution system and the ownership of the distribution assets remains with ALECO. At the endof the concession period, the distribution system will be turned over back to ALECO. Under the concession

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agreement, SMC Global Power would pay a concession fee consisting of quarterly payments for the operatingexpenses of residual ALECO, and 50% of the net cash flow if the net cash flow is positive within five years orearlier. SMG Global Power also paid for the severance pay of ALECO employees dismissed as a result of theconcession agreement. SMC Global Power established APEC as its wholly-owned subsidiary, and in January2014, SMC Global Power assigned all of its rights and obligations under the concession agreement to APEC, awholly-owned subsidiary. On February 26, 2014, APEC assumed the role of SMC Global Power under theconcession agreement.

Retail Electric Supply

SMC Global Power is pursuing downstream integration by capitalizing on changes in the Philippine regulatorystructure to expand its sales of power to a broader range of customers, including retail customers. The three RESlicenses issued to SMC Global Power, through SMELC, SCPC and MPPCL, have a term of five years each andare valid until August 20, 2021, August 24, 2021 and August 1, 2021, respectively. The RES licenses allow therelevant subsidiary of SMC Global Power to enter into RSCs with contestable customers and expand its customerbase. As of March 31, 2019, SMELC, SCPC and MPPCL supply an equivalent of 449 MW to various facilities ofSan Miguel Corporation subsidiaries. The Company believes that it is one of the major players in the contestablemarket, supplying over 151 contestable customers as of March 31, 2019 based on data obtained from the ERC.

COAL INVESTMENTS

Pursuant to its strategy of integrating viable complementary businesses to its power generation business, SMCGlobal Power, through SMEC and its subsidiaries, Bonanza Energy, Daguma Agro and Sultan Energy, acquiredcoal exploration, production and development rights over approximately 17,000 hectares of land in Mindanao.Depending on prevailing coal prices and the related logistical costs, SMC Global Power could develop theseassets to provide a significant additional source of coal fuel for its power plants, but such assets remain in thepreparatory stage of its mining activities, as of March 31, 2019. The Company continues to evaluate the viabilityof these assets.

The table below sets forth certain information regarding these assets.

Subsidiary Description of Asset Mining SiteCoal Operating Contract

(“COC”)

Bonanza Energy COC with the DOE coveringeight coal blocks with a totalarea of approximately 8,000hectares

Lake Sebu South Cotabatoand Maitum, SarangganiProvince

COC for explorationawarded in May 2005,converted to COC fordevelopment and productionin December 2009

Daguma Agro COC with the DOE coveringtwo coal blocks with a totalarea of approximately 2,000hectares.

Lake Sebu, South Cotabato COC for explorationawarded in November 2002;converted to COC fordevelopment and productionin March 2008

Sultan Energy COC with the DOE coveringseven coal blocks with a totalarea of 7,000 hectares

Lake Sebu, South Cotabatoand Bagumbayan, SultanKudarat

COC for explorationawarded in February 2005;converted to COC fordevelopment and productionin February 2009

Each of the COCs has a term of 10 years from the conversion date of the COC for development and production.The initial 10-year term of each COC may be extended for another 10-year period, and thereafter for a series ofthree-year periods not to exceed 12 years, in each case subject to agreement between the parties.

SALES STRATEGY AND CUSTOMERS

SMC Global Power seeks to sell substantially all of the power generated by its portfolio of power plants toofftakers whether in the form of distribution utilities, electric cooperatives or contestable customers. For the threemonths ended March 31, 2019, approximately 46% and 43% of consolidated sales volumes were to (i) Meralco

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and (ii) other distribution utilities, electric cooperatives, directly connected customers and contestable customers,respectively. Based on publicly available disclosures of Meralco, SMC Global Power believes that it is Meralco’slargest power supplier as of March 2019, supplying approximately 30% of Meralco’s power purchases. Meralcois the largest distribution utility in the Philippines.

Currently, the entire capacity of the Ilijan Power Plant and Unit 1 of the Sual Power Plant are contracted underlong-term offtake agreements with Meralco and its affiliates, while the capacity of Unit 2 of the Sual Power Plantis contracted to various distribution utilities, electric cooperatives, and industrial customers under existing offtakeagreements. These agreements typically include take-or-pay provisions whereby a customer is required to pay fora minimum contracted amount of power, regardless of whether or not the customer takes delivery of the entireamount, with the result that revenue from these offtake agreements is relatively stable for the duration of theagreements. If the generation output available to the subsidiaries of SMC Global Power from these plantsexceeds the amount deliverable under their offtake agreements, such subsidiaries of SMC Global Power offer theexcess power for sale through the WESM at the market clearing price. The Company believes that offtakeagreements with distribution utilities and electric cooperatives, while subject to approval of the ERC, arerelatively better in pricing compared to retail supply contracts with contestable customers. Units 1, 2 and 3 of theMasinloc Power Plant are substantially contracted through medium to long-term bilateral contracts with Meralco,electric cooperatives and industrial customers.

The power generation capacity of the San Roque Power Plant and the AHEPP at any given time depends on thewater levels in the reservoir and downstream irrigation requirements. As such, these plants sell majority of theirgenerated capacity to the WESM at the prevailing spot prices. The San Roque Power Plant and the Main Units ofthe AHEPP are operated as peaking units. Available water is used to generate power during peak hours whenprices are higher.

The Auxiliary Units of AHEPP are operated as baseload units, as the water requirement from MWSS iscontinuous throughout the day, thus eliminating any discretion to choose the hour of allocation. AHC isexploring options to contract the capacity of its Auxiliary Units.

In the years ended December 31, 2016, 2017 and 2018 and in the three months ended March 31, 2018 and 2019,approximately 91%, 91%, 85%, 90% and 89% respectively, of consolidated volume of power sold by theCompany are to customers pursuant to bilateral offtake agreements. Sales to Meralco accounted forapproximately 60%, 56%, 44%, 50% and 46% of the total consolidated sales volume of SMC Global Power forthe years ended December 31, 2016, 2017 and 2018 and for the three months ended March 31, 2018 and 2019.Sales through the WESM accounted for approximately 9%, 9%, 15%, 10% and 11% of SMC Global Power’stotal consolidated sales volume for the years ended December 31, 2016, 2017 and 2018 and for the three monthsended March 31, 2018 and 2019, respectively.

COMPETITION

SMC Global Power is one of the largest power companies in the Philippines. Based on the total installedgenerating capacities reported in the ERC Resolution on Grid Market Share Limitation, the Company believesthat its combined installed capacity comprises approximately 19% of the National Grid, 25% of the Luzon Gridand 9% of the Mindanao Grid, in each case as of March 31, 2019. Its main competitors are First Gen Corporationand the Aboitiz Group, which holds interests in Aboitiz Power Corporation and Hedcor, Inc., among others.

With the government committed to privatizing the majority of NPC-owned power generation facilities and theestablishment of WESM, the generation facilities of SMC Global Power will face competition from other powergeneration plants that supply the grid during the privatization phase. SMC Global Power will face competition inboth the development of new power generation facilities and the acquisition of existing power plants, as well ascompetition for financing for these activities. The performance of the Philippine economy and the potential for ashortfall in the Philippines’ energy supply have attracted many potential competitors, including multinationaldevelopment groups and equipment suppliers, to explore opportunities in the development of electric powergeneration projects within the Philippines. Accordingly, competition for and from new power projects mayincrease in line with the long-term economic growth in the Philippines.

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CUSTOMERS

SMC Global Power sells power, through power supply agreements, either directly to customers (distributionutilities, electric cooperatives and industrial customers) or through the WESM.

For the year ended December 31,

2016 2017 2018

CustomersVolume Sold

(GWh)Revenue

(in millions Q)Volume Sold

(GWh)Revenue


(GWh)Revenue

(in millions Q)Revenues

(in U.S.$ millions)

Meralco . . . . . . . . . 10,402 39,566 9,664 43,404 10,518 54,474 1,038WESM . . . . . . . . . . 1,588 4,154 1,520 4,468 3,590 10,860 207

Total MajorCustomers . . . . 11,990 43,720 11,184 47,872 14,108 65,334 1,245

Others(1) . . . . . . . . . 5,356 34,252 6,043 34,919 9,756 54,769 1,043

Total Sales . . . . . . 17,346 77,972 17,227 82,791 23,864 120,103 2,288

Note:

(1) Includes Non-Meralco DUs, ECs, Directly Connected Customers, Contestable Customers, Sales to Distribution Customers, and salesto related parties.

For the three months ended March 31,

2018 2019

CustomersVolume Sold

(GWh)Revenue


(GWh)Revenue

(in millions Q)Revenues

(in U.S.$ millions)

Meralco . . . . . . . . . . . . . . . . . . . . . . . . . 2,388 11,692 3,135 16,167 308WESM . . . . . . . . . . . . . . . . . . . . . . . . . 462 1,752 727 3,203 61

Total Major Customers . . . . . . . . . . . 2,850 13,444 3,862 19,370 369Others(1) . . . . . . . . . . . . . . . . . . . . . . . . . 1,942 11,217 2,964 15,306 292

Total Sales . . . . . . . . . . . . . . . . . . . . . . 4,792 24,661 6,826 34,676 661

Note:

(1) Includes Non-Meralco DUs, ECs, Directly Connected Customers, Contestable Customers, Sales to Distribution Customers, and salesto related parties.

SAFETY, HEALTH AND ENVIRONMENTAL REGULATION AND INITIATIVES

Power operations are subject to extensive, evolving and increasingly stringent safety, health and environmentallaws and regulations. These laws and regulations include the Philippine Clean Air Act of 1999 (“Clean AirAct”), the Philippine Clean Water Act of 2004 (“Clean Water Act”), Toxic Substances and Hazardous andNuclear Waste Control Act of 1990, and the Department of Labor and Employment Occupational Safety andHealth Standard of 1989, as amended. Such legislation addresses, among other things, air emissions, wastewaterdischarges as well as the generation, handling, storage, transportation, treatment and disposal of toxic orhazardous chemicals, materials and waste. It also regulates workplace conditions within power plants andemployee exposure to hazardous substances. The Occupational Safety and Health Standard, meanwhile, wasformulated to safeguard the workers’ social and economic well-being as well as their physical safety and health.

SMC Global Power complies for its company-owned generation plants, and it believes that the IPPs for each ofthe IPPA Power Plants managed by SMC Global Power comply, in all material respects with all applicablesafety, health and environmental laws and regulations.

The Sual Power Plant received its Environmental and Management System Certificate (ISO 14001) in 2004, itsOccupational Standard on Health Safety Certificate (ISO 18001) in 2007 and its Quality Management SystemCertificate (ISO 9001) in 2008. The same ISO certifications were received by Davao Greenfield Power Plant andLimay Greenfield Power Plant in 2017 and 2018, respectively, while the Masinloc Power Plant and the MasinlocBESS received an Environmental and Management System Certificate (ISO 14001) and Occupational Standardon Health Safety Certificate in 2014.

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For each of its greenfield power plants, SMC Global Power will comply with all applicable safety, health andenvironmental laws and regulations, including securing the necessary environmental compliance certificate(“ECC”) in accordance with Philippine law.

The Company’s coal-fired power plants have maintained levels of emission lower than the standards set by theDepartment of Environment and Natural Resources (“DENR”). The following table sets forth the level ofnitrogen oxide (“NOx”), sulfur dioxide (“SO2”) and particulate matter (“PM”) emissions of the power plantsowned and operated by the Company, as well as the applicable emission control standards, for the three monthsended March 31, 2019:

Power Plant

NOx SOx PM

Emissionlevel

DENRStandard

Emissionlevel

DENRStandard

Emissionlevel

DENRStandard

(ppm) (ppm) (Mg/Nm3)

Sual Power Plant* . . . . . . . . . . . . . . . . . . . . . . . . . . 223.8 732.0 390.8 524.0 15.6 200.0Masinloc Power Plant . . . . . . . . . . . . . . . . . . . . . . . 97.0 732.0 108.1 524.0 54.4 200.0Limay Greenfield Power Plant . . . . . . . . . . . . . . . . 101.1 487.0 70.3 245.0 6.5 150.0Davao Greenfield Power Plant . . . . . . . . . . . . . . . . 76.1 487.0 25.7 245.0 3.4 150.0

* Operated under IPPA Agreement

In addition, coal mining in the Philippines is subject to environmental, health and safety laws, forestry laws andother legal requirements. These laws govern the discharge of substances into the air and water, the managementand disposal of hazardous substances and wastes, site clean-up, groundwater quality and availability, plant andwildlife protection, reclamation and rehabilitation of mining properties after mining is completed and therestriction of open-pit mining activities in conserved forest areas.

Notwithstanding the foregoing, the discharge of chemicals, other hazardous substances and pollutants into theair, soil or water by the power plants owned or managed by SMC Global Power or the coal mines of SMC GlobalPower may give rise to liabilities to the Government and to local Government units where such facilities arelocated, or to third parties. In addition, SMC Global Power may be required to incur costs to remedy the damagecaused by such discharges or pay fines or other penalties for non-compliance.

Further, the adoption of new safety, health and environmental laws and regulations, new interpretations ofexisting laws, increased governmental enforcement of environmental laws or other developments in the futuremay require that SMC Global Power make additional capital expenditures or incur additional operating expensesin order to maintain the operations of its generating facilities at their current level, curtail power generation ortake other actions that could have a material adverse effect on the financial condition, results of operations andcash flow of the Company.

As part of its environmental, social and governance initiatives, the Company, through the SMCGP PhilippinesPower Foundation Inc., has undertaken various projects and programs in line with the United Nations SustainableDevelopment Goals. The foundation is focused on four thrusts: health, education, economic empowerment andenvironmental stewardship. Initiatives in the pipeline include the “747 Program” with the goal of planting sevenmillion trees over seven years through a combination of reforestation initiatives, protected forest reserves,biochar production and mangrove rehabilitation.

EMPLOYEES

As of March 31, 2019, SMC Global Power and its subsidiaries have 1,299 employees, of which 8 are executives,63 are managers and 137 are supervisors. All employees are based in Philippines.

Since 2008, employees of SMC Global Power have not been members of any labor union. The Company has notexperienced any work stoppages and considers its relationship with its employees to be good. Consistent with thegoal of SMC Global Power to be one of the Philippines’ preferred employers, SMC Global Power has adopted arewards and recognition policy that is competitive with industry standards in the Philippines. In addition to thestatutory benefits, SMC Global Power initiates benefits to provide for the increased security of its employees in

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the following areas: healthcare, leaves, miscellaneous benefits, loans and financial assistance applicable to avariety of uses, retirement benefits and survivor security and death benefits. Salaries and benefits are reviewedperiodically and adjusted to retain current employees and attract new talents. Tied to this is a performancemanagement system that calls for the alignment of individual key results, competencies and development planswith the overall business targets and strategy of the Company. Performance is reviewed annually and employeesare rewarded based on the attainment of pre-defined objectives. SMC Global Power also has programs for itsemployees’ professional and personal development.

The executives of SMC Global Power are granted options to subscribe for SMC common shares reserved forissuance under the Long-Term Incentive Plan of San Miguel Corporation, which is administered by the SMCExecutive Compensation Committee. A specified number of common shares of San Miguel Corporation arereserved for issuance under the plan at a price equivalent to the fair market value of the common shares of SanMiguel Corporation as of the date of the grant, with adjustments depending on the average stock prices of theprior three months.

With the ensuing 12 months, SMC Global Power may require additional hiring of employees to support itsbusiness expansion, the number of which cannot be determined.

INSURANCE

Pursuant to the IPPA arrangements of SMC Global Power, the IPPs associated with the power plants for whichSMC Global Power is the IPPA are responsible for maintaining insurance for all of the facilities, equipment andinfrastructure for those power plants, with the exception of the dam and spillway of the San Roque Power Plant,for which NPC is obligated to maintain insurance. SMC Global Power is not a beneficiary of any of theseinsurance agreements. SMC Global Power employs risk management for purposes of analyzing the risks faced byits business in the determining the appropriate insurance policies. SMC Global Power does not have businessinterruption insurance for its IPPA Power Plants and believes that there is no business interruption insuranceavailable for the IPPA business model under which SMC Global Power is currently operating. SMC GlobalPower has procured all the necessary policies to cover all insurable risks for the ownership and operation of theLimay Greenfield Power Plant, Davao Greenfield Power Plant and Masinloc Power Plant.

INTELLECTUAL PROPERTY

SMC Global Power owns exclusive rights to its corporate name. Management believes that the business of SMCGlobal Power as a whole is not materially dependent on any trademark or on any other intellectual property.

DESCRIPTION OF PROPERTY

SMC Global Power owns the Davao Greenfield Power Plant, Limay Greenfield Power Plant, Masinloc PowerPlant and Masinloc BESS. However, SMC Global Power does not own the IPPA Power Plants until it elects atransfer of ownership at the expiry of the IPPA Agreement.

The principal office address of SMC Global Power is 155 EDSA, Wack-Wack, Mandaluyong City, Philippinesand it has another office located at No. 7 St. Francis Street, Mandaluyong City, Philippines. These premises areleased by SMC Global Power from San Miguel Properties, Inc., a subsidiary of San Miguel Corporation.

LEGAL PROCEEDINGS

The subsidiaries of SMC Global Power are party to legal proceedings from time to time, including those set outbelow, and involving various parties, including the ERC. See “Risk Factors — Risks Relating to SMC GlobalPower — ERC Regulation of electricity rates of distribution utilities.” The outcome of these proceedings cannotbe presently determined or predicted with certainty.

Petition to stop the imposition of the increase in generation charge

SMEC, SPPC, SPDC, MPPCL and other generation companies became parties to a Petition for Certiorari andProhibition with prayer for Temporary Restraining Order (“TRO”) and/or Preliminary Injunction (“Petition”)filed in the Supreme Court by special interest groups which sought to stop the imposition of the increase ingeneration charge of Meralco for the November 2013 billing month. On December 23, 2013, the Supreme Court

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issued a TRO ordering Meralco not to collect, and the generators not to demand payment, for the increase ingeneration charge for the November 2013 billing month. The TRO was originally for a period of 60 days.

On January 8, 2014, Meralco filed its Consolidated Comment/Opposition with Counter-Petition (“CounterPetition”) which prayed, among others, for the inclusion of SMEC, SPPC, SPDC, MPPCL and severalgenerators as respondents to the case. On January 10, 2014, the Supreme Court issued an Order treating theCounter-Petition as in the nature of a Third-Party Complaint and granting the prayer to include SMEC, SPPC,SPDC and MPPCL as respondents in the Petition.

On February 18, 2014, the SC extended the TRO issued on December 23, 2013 for another sixty (60) days oruntil April 22, 2014 and granted additional TROs enjoining the PEMC and the generators from demanding andcollecting the deferred amounts. In a Resolution dated April 22, 2014, the Supreme Court extended indefinitelythe effectivity of the TROs issued on December 23, 2013 and February 18, 2014. To date, the Petition is pendingresolution with the Supreme Court.

ERC Order voiding WESM prices

Relative to the above-cited Petition, on December 27, 2013, the DOE, ERC and PEMC, acting as a tripartitecommittee, issued a joint resolution setting a reduced price cap on the WESM of P32/kWh. The price was set tobe effective for 90 days until a new cap will be decided upon.

On March 3, 2014, the ERC, in the exercise of its police power, issued an order in Miscellaneous CaseNo. 2014-021, declaring the November and December 2013 Luzon WESM prices void and imposed theapplication of regulated prices. On May 9, 2014, the ERC issued an order directing PEMC, the operator of theWESM, to calculate and issue adjustment bills using recalculated prices. Based on these orders, SMEC, SPPCand SPDC recognized a reduction in the sale of power while SMELC and MPPCL recognized a reduction in itspower purchases.

SMEC, SPPC, SPDC, SPI and MPPCL filed various pleadings requesting ERC for the reconsideration of theERC Order. Other generators also requested the Supreme Court to stop the implementation of the ERC Order.

On June 26, 2014, SMEC, SPPC, SPDC, and SPI, filed before the Court of Appeals a Petition for Review underRule 43 of the Revised Rules of Court assailing the ERC Orders dated March 3, 2014, March 27, 2014, andMay 9, 2014. On the other hand, MPPCL filed its Petition for Review with the Court of Appeals onDecember 12, 2014.

After consolidating the cases, the Court of Appeals, in its decision dated November 7, 2017, granted the Petitionfor Review filed by SMEC, SPPC, SPDC, SPI and MPPCL declaring the ERC Orders null and void and set asidethe Orders of the ERC dated March 3, 2014, March 27, 2014, May 9, 2014 and October 15, 2014 in ERC CaseNo. 2014-021 MC and accordingly reinstated and declared as valid the WESM prices for Luzon for the supplymonths November to December 2013.

Motions for reconsideration of the November 7, 2017 Decision and motions for intervention and motions toadmit motions for reconsideration were filed by various intervenors.

In a Resolution dated March 22, 2018, the Court of Appeals denied the aforesaid motions. In June 2018, theintervenors filed their respective motions for reconsideration of the said Resolution of the Court of Appeals datedMarch 22, 2018. On June 27, 2018, MPPCL filed a Consolidated Comment to the various Motions forReconsideration while SMEC and SPPC filed their Consolidated Opposition to said Motions for Reconsiderationon July 27, 2018.

On March 29, 2019, the Court of Appeals issued an Omnibus Resolution affirming its November 7, 2017Decision and March 22, 2018 Resolution.

Upon finality of the decision, a claim for refund may be made by the relevant subsidiaries with PEMC for anamount up to P2.322 billion, plus interest.

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Petition to Nullify ERC Resolution No. 1, Series of 2016

A Petition for Certiorari and Prohibition with Urgent Prayer for the issuance of the TRO and/or Writ ofPreliminary Injunction dated November 3, 2016 was filed before the Supreme Court by Alyansa Para Sa BagongPilipinas, Inc. (“Petition”) seeking the nullification of ERC Resolution No. 1, Series of 2016 (“ERC ResolutionNo. 1”) for allegedly having been issued in grave abuse of discretion, amounting to lack or excess of jurisdictionas it allowed Meralco to directly enter into power supply contracts with certain generators, including MPGC andCLPPC, without undergoing competitive selection process, as provided under ERC Resolution No. 1 whichmandates that effective April 20, 2016, all power supply contracts shall only be awarded to a generation companyfollowing a successful competitive selection process conducted by all distribution utilities.

The Petition was raffled to the Second Division of the Supreme Court.

On November 16, 2016, the Second Division of the Supreme Court issued an Order requiring the respondents tofile their comments to the Petition. On July 18, 2017, MPGC and CLPPC filed their respective Comments/Opposition to the said Petition.

In a Resolution dated September 5, 2018, the Second Division of the Supreme Court endorsed the Petition to theSupreme Court En Banc.

On May 3, 2019, the Supreme Court En Banc granted the Petition. In its decision, the Supreme Court En Bancheld that the ERC did not have the authority to postpone the effectivity date of the competitive selection processwhich was originally set by the DOE to June 30, 2015. Consequently, the Supreme Court En Banc (a) declaredvoid ab initio paragraph 4 of ERC issued Resolution No. 13, Series of 2015 (which moved the effectivity of thecompetitive selection process from June 30, 2015 to November 7, 2015) and ERC Resolution No. 1 (whichfurther moved the effectivity of the selection process from June 30, 2015 to April 30, 2016); and (b) mandated allapplications for approval of power supply agreements filed with the ERC on or after June 30, 2015 to complywith the competitive selection process in accordance with Department Circular No. DC2018-02-0003 issued bythe DOE.

Motions for reconsiderations have thereafter been filed by several respondents to the Petition thus, the May 3,2019 decision of the Supreme Court En Banc has not yet attained finality.

Ilijan IPPA Agreement Dispute

SPPC and PSALM are parties to the Ilijan IPPA Agreement covering the appointment of SPPC as the IPPAdministrator of the Ilijan Power Plant.

SPPC and PSALM have an ongoing dispute arising from differing interpretations of certain provisions related togeneration payments under the Ilijan IPPA Agreement. As a result of such dispute, the parties have arrived atdifferent computations regarding the subject payments. In a letter dated August 6, 2015, PSALM has demandedpayment of the difference between the generation payments calculated based on its interpretation and the amountwhich has already been paid by SPPC, plus interest, covering the period December 26, 2012 to April 25, 2015.

On August 12, 2015, SPPC initiated a dispute resolution process with PSALM as provided under the terms of theIlijan IPPA Agreement, while continuing to maintain its position that it has fully paid all of its obligations toPSALM. Notwithstanding the bona fide dispute, PSALM issued a notice terminating the Ilijan IPPA Agreementon September 4, 2015. On the same day, PSALM also called on the Performance Bond posted by SPPC pursuantto the Ilijan IPPA Agreement.

On September 8, 2015, SPPC filed a Complaint with the Regional Trial Court (“RTC”) of Mandaluyong City. Inits Complaint, SPPC requested the RTC that its interpretation of the relevant provisions of the Ilijan IPPAAgreement be upheld. The Complaint also asked that a 72-hour TRO be issued against PSALM for illegallyterminating the Ilijan IPPA Agreement and drawing on the performance bond of SPPC. On even date, the RTCissued a 72-hour TRO which prohibited PSALM from treating SPPC as being in Administrator Default and fromperforming other acts that would change the status quo ante between the parties before PSALM issued thetermination notice and drew on the performance bond of SPPC. The TRO was extended for until September 28,2015.

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On September 28, 2015, the RTC issued an Order granting a Preliminary Injunction enjoining PSALM fromproceeding with the termination of the Ilijan IPPA Agreement while the main case is pending.

On October 19, 2015, the RTC also issued an Order granting the Motion for Intervention and Motion to AdmitComplaint-in-intervention by Meralco.

In an order dated June 27, 2016, the RTC denied PSALM’s: (1) Motion for Reconsideration of the Order datedSeptember 28, 2015, which issued a writ of preliminary injunction enjoining PSALM from further proceedingswith the termination of the Ilijan IPPA Agreement while the case is pending; (2) Motion for Reconsideration ofthe Order, which allowed Meralco to intervene in the case; and (3) Motion to Dismiss. In response to thisJune 27, 2016 Order of the RTC, PSALM filed a petition for certiorari with the Court of Appeals seeking toannul the RTC’s Orders granting the writ of preliminary injunction, allowing Meralco’s intervention, and theOrders denying PSALM’s motions for reconsideration of said injunction and intervention orders. PSALM alsoprayed for the issuance of a TRO and/or writ of preliminary injunction “against public respondent RTC and itsassailed Orders”. The Court of Appeals, however, denied the petition filed by PSALM in its decision datedDecember 19, 2017 (“CA Decision”). In the CA Decision, the Court of Appeals upheld the lower court’sissuance of a writ of preliminary injunction against PSALM prohibiting the termination of the IPPA agreementwhile the case in the lower court is pending.

PSALM filed its Motion for Reconsideration dated January 19, 2018 to the CA Decision. In a Resolution datedJuly 12, 2018 (“CA Resolution”), the Court of Appeals denied PSALM’s Motion for Reconsideration of the CADecision.

On September 4, 2018, PSALM filed a Petition for Certiorari with urgent prayer for the issuance of a TRO and/orWrit of Preliminary Injunction dated September 4, 2018 before the Supreme Court praying for the reversal andnullification of the CA Decision and the CA Resolution. Said petition was denied by the Supreme Court in itsresolution dated March 4, 2019 due to lack of payment of the required fees and for PSALM’s failure tosufficiently show that the Court of Appeals committed any reversible error in the challenged decision andresolution as to warrant the exercise of this Court’s discretionary appellate jurisdiction.

Prior to the CA Decision, on December 18, 2017, the presiding judge of the RTC who conducted the judicialdispute resolution issued an Order inhibiting himself in the instant case. The case was then re-raffled to anotherRTC judge in Mandaluyong City, SPPC filed a Request for Motion for Production of Documents on February 28,2018, while PSALM filed its Manifestation with Motion to Hear Affirmative Defenses and Objections AdCautelam.

On September 24, 2018, the RTC issued an order denying PSALM’s Motion to Hear Affirmative Defense andgranted SPPC’s Motion for Production of Documents. PSALM then filed a Motion for Reconsideration of thesaid order. On December 14, 2018, SPPC filed its opposition to the Motion for Reconsideration. In an orderdated April 29, 2019, the RTC denied the Motion for Reconsideration filed by PSALM on the basis that it foundno strong and compelling reason to modify, much less reverse, its order dated September 24, 2018 which deniedthe Motion to Hear Affirmative Defenses filed by PSALM.

Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply power from the Ilijan PowerPlant to Meralco under its PSA with the latter, or the ability of SPPC to take possession of the Ilijan Power Plantupon the expiry of the IPPA Agreement in 2022.

By virtue of the Preliminary Injunction issued by the RTC, SPPC continues to be the IPP Administrator for theIlijan Power Plant.

Complaints for estafa and corruption against PSALM officers

On September 29, 2015, SPPC filed a criminal complaint for estafa and for violation of Section 3(e) of RepublicAct No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act (“R.A. 3019”), before theDepartment of Justice (“DOJ”), against certain officers of PSALM, in connection with the termination of SPPC’sIlijan IPPA Agreement, which was made by PSALM with manifest partiality and evident bad faith. Further, itwas alleged that PSALM fraudulently misrepresented its entitlement to draw on the Performance Bond posted by

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SPPC, resulting in actual injury to SPPC in the amount of U.S.$60 million. On June 13, 2017, the DOJ endorsedthe complete records of the complaint to the Office of the Ombudsman for appropriate action where it is stillpending to date.

On a related matter, on November 14, 2018, SPPC filed with the Office of the Ombudsman-Field InvestigationOffice, an administrative complaint against an executive officer of PSALM and several unidentified persons, forviolation of the Ombudsman Act and the Revised Administrative Code, in the performance of their functions aspublic officers. The case is still pending with the Ombudsman-Field Investigation Office.

Complaints for plunder and corruption against PSALM, TPEC, and TeaM Energy

On October 21, 2015, SMEC filed a criminal complaint for Plunder and violation of Section 3(e) and 3(f) of RA3019, before the DOJ against a certain officer of PSALM, and certain officers of Team Philippines Energy Corp.(TPEC) and Team Sual Corporation, relating to the illegal grant of the so-called “excess capacity” of the SualPower Plant in favor of TPEC which enabled it to receive a certain amount at the expense of the Government andSMEC.

In a Resolution dated July 29, 2016, the DOJ found probable cause to file an Information against the respondentsfor Plunder and violation of Section 3(e) and 3(f) of R.A. 3019. The DOJ further resolved to forward the entirerecords of the case to the Office of the Ombudsman for their proper action. Respondents have respectivelyappealed said DOJ’s Resolution of July 29, 2016 with the Secretary of Justice.

On October 25, 2017, the DOJ issued a Resolution partially granting the Petition for Review by reversing theJuly 29, 2016 DOJ Resolution insofar as the conduct of the preliminary investigation. On November 17, 2017,SMEC filed a motion for partial reconsideration of said October 25, 2017 DOJ Resolution. Said motion is stillpending to date.

SMEC Consignation Case

On June 17, 2016, SMEC filed with the Regional Trial Court, Pasig City (“RTC Pasig”) a civil complaint forconsignation against PSALM arising from PSALM’s refusal to accept SMEC’s remittances corresponding to theproceeds of the sale on the WESM of electricity generated from capacity in excess of the 1,000 MW of the SualPower Plant (“Sale of the Excess Capacity”). With the filing of the complaint, SMEC also consigned with theRTC Pasig, the amount corresponding to the proceeds of the Sale of the Excess Capacity for the billing periodsDecember 26, 2015 to April 25, 2016.

On October 3, 2016, SMEC filed an Omnibus Motion to Admit Supplemental Complaint and to Allow FutureConsignation without Tender (“Omnibus Motion”). Together with this Omnibus Motion, SMEC consigned withthe RTC Pasig an additional amount corresponding to the proceeds of the Sale of the Excess Capacity for thebilling periods from April 26, 2016 to July 25, 2016.

On July 5, 2017, SMEC consigned with the RTC Pasig the amount representing additional proceeds of Sale ofthe Excess Capacity for the billing period July 26, 2016 to August 25, 2016. SMEC also filed a Motion to AdmitSecond Supplemental Complaint in relation to said consignation.

On May 22, 2018, the RTC Pasig issued an Order dismissing the complaint for consignation filed by SMEC onthe ground that the court has no jurisdiction over the subject matter of the complaint.

On July 4, 2018, SMEC filed its Motion for Reconsideration (“MR”) to the May 22, 2018 order which dismissedthe consignation case. The MR was heard on July 13, 2018 where the parties were given time to file theirresponsive pleadings. PSALM filed its Comment dated July 26, 2018 to the MR and SMEC filed its Reply toPSALM’s Comment on August 13, 2018. To date, the said motion is still pending resolution.

Further related thereto, on December 1, 2016, SMEC received a copy of a Complaint filed by TPEC and TeamSual Corporation with the ERC against SMEC and PSALM in relation to the Excess Capacity issues, whichissues have already been raised in the abovementioned cases. SMEC filed a Motion to Dismiss and Motion toSuspend Proceeding of the instant case. The complaint is still pending with the ERC to date.

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Refund of system loss charge

In 2008, Meralco filed a petition for dispute resolution against PEMC, TransCo, NPC and PSALM seeking,among others, the refund of the transmission line loss components of the line rentals associated with PSALM/NPC bilateral transactions from the start of the WESM operations and Transition Supply Contract (“TSC”)implemented in 2006. In this case, the ERC concluded that Meralco was being charged twice considering that italready paid line rental to the WESM beginning June 2006. Hence, the ERC ordered PSALM/NPC to refundMeralco the 2.98% system loss charge embedded in the NPC Time-of-Use (“NPC TOU”) rate (Meralco vs.PSALM, NPC, TransCo).

On March 4, 2013, the ERC issued a subsequent order directing Meralco (i) to collect this system loss chargefrom the Successor Generating Companies (“SGCs”) including SMEC and MPPCL, which supplied theMeralco-NPC TSC and charged the NPC TOU rates, and (ii) to file a petition for dispute resolution against theSGCs, to recover the line loss collected by them as these SGCs were not parties to the petition for disputeresolution filed by Meralco in 2008. On July 1, 2013, the ERC clarified its previous order stating that SPPCshould be included as one of the SGCs against whom Meralco is directed to file a petition.

In compliance with the ERC’s March 4, 2013 and July 1, 2013 Order, Meralco filed a petition for disputeresolution with the ERC against all SGCs which supplied portions of the TSC (the “Meralco Petition”). OnSeptember 20, 2013, SMEC, SPPC and MPPCL, with the other SGCs, jointly filed a Motion to Dismiss beforethe ERC, on the ground of the Meralco Petition’s failure to state a cause of action and the ERC’s lack ofjurisdiction over the subject matter of the Petition. To date, the Joint Motion to Dismiss remains unresolved bythe ERC.

Validity of Concession Agreement with ALECO

The dispute arose from a Complaint for Injunction with a prayer for the issuance of writ of preliminaryprohibitory injunction, writ of preliminary mandatory injunction, temporary mandatory order and TRO filed onDecember 16, 2014 by a certain group of persons headed by an individual who claims to be the president ofALECO (the “Appellants”), against APEC and its former general manager (the “Defendants”), enjoining theimplementation of the 25-year Concession Agreement with ALECO dated October 29, 2013, with SMC GlobalPower that was subsequently assigned to APEC. The foregoing Complaint also questioned the validity of theConcession Agreement due to alleged oppressive and disadvantageous provisions therein. On September 29,2015, the trial court upheld the validity of the Concession Agreement and dismissed the Complaint. As a result,the Appellants filed an appeal with the Court of Appeals. On November 23, 2016, the Court of Appeals issued adecision (“November 2016 Decision”) reversing the decision of the trial court on the ground that no pre-trialconference was conducted and ruled that the case should be remanded back to conduct the pre-trial conferenceand for the case to be resolved with dispatch in accordance with the Rules of Court. After motion forreconsideration from Defendants, the Court of Appeals sustained its November 2016 Decision on June 26, 2018.

During the pre-trial conference on June 10, 2019, trial court judge to which the case was remanded ordered thedismissal of the case in favor of Defendants, as Appellants (now Plaintiffs) were deemed “non-suited” inviolation of Rule 18 of the Revised Rules of Court. The dismissal of the case validates the legitimacy of theConcession Agreement between APEC and ALECO.

Other than those mentioned above, there are no material pending legal proceedings to which SMC Global Poweror any of its subsidiaries and affiliates is a party or to which any of their material assets are subject.

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REGULATION AND ENVIRONMENTAL MATTERS

Organization and Operation of the Power Industry

Republic Act No. 9136 or the EPIRA established a framework for the organization, operation and restructuringof the electric power industry, with the industry divided into four sectors: generation, transmission, distributionand supply. The following diagram shows the current structure of the electric power industry under the EPIRA.

Industry structure under the EPIRA:

Policy & RegulatoryInstitutions

ERC PEZA

IEMOP

NGCP

MERALCO &Other Private

Investor-ownedUtilities

Captive Customers

Regulation Supervision Flow of Electricity

ContestableCustomers

IndustrialCustomers

Retail ElectricitySuppliers

ElectricCooperatives

Directly ConnectedCustomers

DOE

IPPs PSALM

NEA

Generation

Market

Transmission

Distribution

Supply

End Users

Through the EPIRA, the Government instituted major reforms with the goal of fully privatizing all aspects of thepower industry. The principal objectives of the EPIRA are:

• to ensure and accelerate the total electrification of the country;

• to ensure the quality, reliability, security and affordability of the supply of electric power;

• to ensure transparent and reasonable prices of electricity in a regime of free and fair competition and fullpublic accountability to achieve greater operational and economic efficiency and enhance thecompetitiveness of Philippine products in the global market;

• to enhance the inflow of private capital and broaden the ownership base of the power generation,transmission and distribution sectors;

• to ensure fair and non-discriminatory treatment of public and private sector entities in the process ofrestructuring the electric power industry;

• to protect the public interest as it is affected by the rates and services of electric utilities and otherproviders of electric power;

• to assure socially and environmentally compatible energy sources and infrastructure;

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• to promote the utilization of indigenous and new and renewable energy resources in power generation inorder to reduce dependence on imported energy;

• to provide for an orderly and transparent privatization of the assets and liabilities of NPC;

• to establish a strong and purely independent regulatory body and system to ensure consumer protection andenhance the competitive operation of the electricity market; and

• to encourage the efficient use of energy and other modalities of demand side management.

With a view to implementing these objectives, the DOE, in consultation with the relevant Government agencies,electric power industry participants, non-Government organizations and electricity consumers, promulgated theImplementing Rules and Regulations (the “IRR”) of the EPIRA on February 27, 2002.

The IRR governs the relations between, and respective responsibilities of, the different electric power industryparticipants as well as the particular Governmental authorities involved in implementing the structural reforms inthe industry, including, but not limited to, the DOE, NPC, NEA, ERC and PSALM.

Reorganization of the Electric Power Industry

Of the many changes initiated by the EPIRA, of primary importance is the reorganization of the electric powerindustry by segregating the industry into four sectors: (i) the generation sector; (ii) the transmission sector;(iii) the distribution sector; and (iv) the supply sector. The goal is for the generation and supply sectors to be fullycompetitive and open, while the transmission sector will be a regulated common electricity carrier business andthe distribution sector will be a regulated common carrier business requiring a national franchise, thus both thetransmission and distribution sectors will be regulated as public utilities. Prior to the EPIRA, the industry wasregulated as a whole, with no clear distinctions between and among the various sectors and/or services.

The Generation Sector

Under the EPIRA, power generation per se is not a public utility operation. Thus, generation companies are notrequired to secure congressional franchises, and there are no restrictions on the ability of non-Filipinos to ownand operate generation facilities. However, generation companies must obtain a certificate of compliance fromthe ERC, as well as health, safety and environmental clearances from appropriate Government agencies underexisting laws. Furthermore, PPAs and PSAs between generation companies and distribution utilities are subjectto the review and approval of the ERC. Generation companies are also subject to the rules and regulations of theERC on abuse of market power and anticompetitive behavior. In particular, the ERC has the authority to imposeprice controls, issue injunctions, require divestment of excess profits and impose fines and penalties for violationof the EPIRA and the IRR policy on market power abuse, cross-ownership and anti-competitive behavior.

The goal of the EPIRA is for the generation sector to be open and competitive, while the private sector isexpected to take the lead in introducing additional generation capacity. Generation companies will competeeither for bilateral contracts with various RESs, electric cooperatives and private distribution utilities, or throughspot sale transactions in the WESM. With the implementation of RCOA in Luzon and Visayas, generationcompanies are already able to sell electricity to eligible end-users. “Open Access” is defined under the IRR as thesystem of allowing any qualified person the use of electric power transmission and distribution systems; while“Retail Competition” is defined as the provision of electricity to a contestable market (which, under prevailingregulations, refer to electricity end-users with monthly average peak demand of at least 500 KW) by personslicensed by the ERC to engage in the business of supplying electricity end-users through Open Access.

Recovery by distribution utilities of their purchased power cost is subject to review by the ERC to determinereasonableness of the cost and to ensure that the distribution utilities do not earn any revenue therefrom. With thecommencement of the RCOA, generation rates, except those intended for such end-users who may not choosetheir supplier of electricity (the “Captive Market”), ceased to be regulated.

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The generation sector converts fuel and other forms of energy into electricity. It consists of the following:(i) NPC-owned-and-operated generation facilities; (ii) NPC-owned plants, which consist of plants operated byIPPs, as well as IPP-owned-and-operated plants, all of which supply electricity to NPC; and(iii) IPP-owned-and-operated plants that supply electricity to customers other than NPC.

Under the EPIRA, generation companies are allowed to sell electricity to distribution utilities or to RESs througheither bilateral contracts or the WESM as described below. With the implementation of RCOA on December 26,2013, as supplemented by DOE Department Circular No. DC2015-06-0010, generation companies may likewisesell electricity to eligible end-users with an average monthly peak demand of 750 KW and certified by the ERCto be contestable customers. In 2016, the ERC issued the implementing rules governing the issuance and renewalof licenses to RESs and the rules governing contestability of qualified end-users (collectively, the “ERC RESRules”). However, in February 2017, the Philippine Supreme Court, acting on the petition filed by certainentities, issued a temporary restraining order enjoining the DOE and the ERC from implementing the rules andregulations implementing the RCOA, including the ERC RES Rules.

The generation sector must observe the Market Share Limitations set in the EPIRA which states that nogeneration company or related group is allowed to own more than 30% of the installed generating capacity of theLuzon, Visayas or Mindanao Grids and/or 25% of the national installed generating capacity. Also, no generationcompany associated with a distribution utility may supply more than 50% of the distribution utility’s totaldemand under bilateral contracts, without prejudice to the bilateral contracts entered into prior to the effectivityof the said Act.

Historically, the generation sector has been dominated by NPC. To introduce and foster competition in the sector,and, more importantly, to lessen the debt of NPC, the EPIRA mandates the total privatization of the generationassets and IPP contracts of NPC, which exclude the assets devoted to missionary electrification through the smallpower utilities group of NPC. NPC is directed to transfer ownership of all the assets for privatization to aseparate entity, PSALM, which is specially tasked to manage the privatization. Beginning early 2004, PSALMhas been conducting public bidding for the generation facilities owned by NPC.

Based on latest available data from PSALM, PSALM has privatized 23 operating/generating power facilities andfour decommissioned power facilities, with a total gross capacity of 4,601.43 MW. Moreover, additional sevenpower plants with total gross capacity of over 3,600 MW were privatized through IPPA contracts. Majorgeneration assets sold include the 748 MW Tiwi-Makban geothermal power plant, the 600 MW Batangas(Calaca) coal-fired thermal power plant, the 600 MW Masinloc coal fired power plant, the 620 MW Limaycombined cycle power plant, 360 MW Magat hydroelectric power plant, and the 305 MW Palinpinon-Tongonangeothermal power plant. Among the capacities privatized through IPPA Agreements include the 92.52 MWMindanao I and II (Mt. Apo 1 and 2) geothermal power plants, 1,000 MW Sual coal-fired power plant, the700 MW Pagbilao coal-fired power plant, the 345 MW of the San Roque Power Plant, the 70 MW Bakunhydroelectric power plant, the 200 MW Unified Leyte Geothermal Power Plant, and the 1,200 MW Ilijancombined-cycle gas-fired power plant. In 2018, PSALM also commenced the privatization of the 650 MWMalaya thermal power plant in Rizal and the 210 MW Mindanao coal-fired plant in Misamis Oriental.

Section 47(j) of the EPIRA prohibits NPC from incurring any new obligations to purchase power throughbilateral contracts with generation companies or other suppliers. Also, NPC is only allowed to generate and sellelectricity from generating assets and IPP contracts that have not been disposed of by PSALM.

Generation companies which are not publicly listed are required to offer and sell to the public a portion of notless than 15% of their common shares of stock.

The Transmission Sector

Pursuant to the EPIRA, NPC has transferred its transmission and sub-transmission assets to TransCo, which wascreated pursuant to the EPIRA to assume, among other functions, the electrical transmission function of the NPC.The principal function of TransCo is to ensure and maintain the reliability, adequacy, security, stability andintegrity of the nationwide electrical grid in accordance with the Philippine Grid Code (“Grid Code”). TransCois also mandated to provide open and non-discriminatory access to its transmission system to all electricity users.

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The transmission of electricity through the transmission grid is subject to transmission wheeling charges. As thetransmission of electric power is a regulated common carrier business, TransCo’s transmission wheeling chargesare subject to regulation and approval by the ERC.

The EPIRA also requires the privatization of TransCo through an outright sale of, or the grant of, a concessionover the transmission assets while the sub-transmission assets of TransCo are to be offered for sale to qualifieddistribution utilities. In December 2007, NGCP, comprising a consortium of Monte Oro Grid Resources, CalacaHigh Power Corporation and State Grid Corporation of China, won the concession contract to operate, maintainand expand the TransCo assets with a bid of U.S.$3.95 billion. On January 15, 2009, NGCP was officiallygranted the authority to operate the sole transmission system of the country pursuant to a legislative franchisegranted by the Philippine Congress under Republic Act No. 9511.

The Grid Code establishes the basic rules, requirements, procedures and standards that govern the operation,maintenance and development of the Philippine Grid, or the high-voltage backbone transmission system and itsrelated facilities. The Grid Code identifies and provides for the responsibilities and obligations of three keyindependent functional groups, namely: (a) the grid owner, or TransCo; (b) the system operator, or NGCP as thecurrent concessionaire of TransCo; and (c) the market operator, or the PEMC. These functional groups, as well asall users of the grid, including generation companies and distribution utilities, must comply with the provisions ofthe Grid Code as promulgated and enforced by the ERC.

In order to ensure the safe, reliable and efficient operation of the Philippine Grid, the Grid Code provides for,among others, the following regulations:

• the establishment of a grid management committee, which is tasked with the monitoring of the day-to-dayoperations of the grid;

• performance standards for the transmission of electricity through the grid, as well as the operation andmaintenance thereof, which standards shall apply to TransCo, NGCP, distribution utilities and suppliers ofelectricity; and

• technical and financial standards and criteria applicable to users of the grid, including generationcompanies and distribution utilities connected or seeking to connect thereto; and other matters relating tothe planning, management, operation and maintenance of the grid.

The Distribution Sector

The distribution of electric power to end-users may be undertaken by private distribution utilities, cooperatives,local Government units presently undertaking this function, and other duly authorized entities, subject toregulation by the ERC. The distribution business is a regulated public utility business requiring a franchise fromthe Philippine congress, although franchises relating to electric cooperatives remained under the jurisdiction ofthe NEA until the end of 2006. All distribution utilities are also required to obtain a certificate of publicconvenience and necessity from the ERC to operate as public utilities. Based on the latest available data from theDOE, there are 26 private distribution utilities and 124 electric cooperatives in the Philippines.

They are also required to submit to the ERC a statement of their compliance with the technical specificationsprescribed in the Philippine Distribution Code (“Distribution Code”) (which provides the rules and regulationsfor the operation and maintenance of distribution systems), the Distribution Services and Open Access Rules andthe performance standards set out in the IRR of the EPIRA.

The distribution sector is regulated by the ERC, with distribution wheeling charges, as well as connection feesfrom its consumers, subject to ERC approval. The retail rate imposed by distribution utilities for the supply ofelectricity to its captive consumers is also subject to ERC approval. In addition, as a result of the policy of theGovernment in promoting free competition and Open Access, distribution utilities are now required to provideuniversal and non-discriminatory access to their systems within their respective franchise areas followingcommencement of the RCOA.

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The Distribution Code establishes the basic rules and procedures that govern the operation, maintenance,development, connection and use of the electric distribution systems in the Philippines. The Distribution Codedefines the technical aspects of the working relationship between the distributors and all the users of thedistribution system, including distribution utilities, embedded generators and large customers. All such electricpower industry participants in distribution system operations are required to comply with the provisions of theDistribution Code as promulgated and enforced by the ERC.

To ensure the safe, reliable and efficient operation of distribution systems in the Philippines, the DistributionCode provides for, among others, the following regulations:

• technical, design and operational criteria and procedures to be complied with by any user who is connectedor seeking connection to a distribution system;

• performance and safety standards for the operation of distribution systems applicable to distributors andsuppliers; and

• other matters relating to the planning, development, management, operation and maintenance ofdistribution systems.

The Supply Sector

The supply of electricity refers to the sale of electricity directly to end-users. The supply function used to beundertaken largely by franchised distribution utilities. However, with the commencement of the RCOA, thesupply function has become competitive. The retail supply business is not considered a public utility operationand suppliers are not required to obtain franchises. However, the supply of electricity to a market of end-userswho have a choice on their supplier of electricity is considered a business affected with public interest. As such,the EPIRA requires all RESs to obtain a license from the ERC and they are subject to the rules and regulations ofthe ERC on the abuse of market power and other anti-competitive or discriminatory behavior.

A RES may only sell up to 50% of its total capacity to all of its end-user affiliates.

With the RCOA already implemented, a RES license will allow a generation company to enter into retailelectricity supply agreements with contestable customers. This will encourage competition at the retail level andit is planned that retail competition will gradually increase over time, provided that supply companies aresufficiently creditworthy to be suitable offtakers for generation companies.

The following table summarizes the power supply and demand highlights in the Philippines for 2017 based ondata from the DOE:

Grid

Installedcapacity(MW)

Dependablecapacity(MW)

Availablecapacity(MW)

Peak demand(MW)

Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,549 14,973 11,444 10,876Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,450 3,000 2,411 2,053Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,815 3,269 2,373 1,853Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,815 21,241 14,458 14,782

Role of the ERC

The ERC is the independent, quasi-judicial regulatory body created under the EPIRA that replaced the EnergyRegulatory Board. The ERC plays a significant role in the restructured industry environment, consisting of,among others, promoting competition, encouraging market development, ensuring consumer choice andpenalizing abuse of market power by industry participants.

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Among the primary powers and functions of the ERC are:

• to determine, fix and approve, after conducting public hearings, transmission and distribution wheelingcharges and retail rates and to fix and regulate the rates and charges to be imposed by distribution utilitieson their captive end-users, as well as the universal charge to be imposed on all electricity end-users,including self-generating entities;

• to grant, revoke, review or modify the certificates of compliance required of generation companies and thelicenses required of suppliers of electricity in the contestable market;

• to enforce the Grid Code and Distribution Code, which shall include performance standards, the minimumfinancial capability standards, and other terms and conditions for access to and use of transmission anddistribution facilities;

• to enforce the rules and regulations governing the operations of the WESM and the activities of the WESMoperator and other WESM participants to ensure a greater supply and rational pricing of electricity;

• to ensure that the electric power industry participants and NPC functionally and structurally unbundledtheir respective business activities and rates and to determine the levels of cross-subsidies in the existingand retail rates until the same is removed in accordance with the different sectors;

• to set a lifeline rate for marginalized end-users;

• to promulgate rules and regulations prescribing the qualifications of suppliers which shall include, amongothers, their technical and financial capability and creditworthiness;

• to determine the electricity end-users comprising the contestable and Captive Markets;

• to fix user fees to be charged by TransCo/NGCP for ancillary services to all electric power industryparticipants or self-generating entities connected to the grid;

• to monitor and adopt measures to discourage or penalize abuse of market power, cartelization and anyanticompetitive or discriminatory behavior by any electric power industry participant;

• to review and approve the terms and conditions of service of TransCo/NGCP and any distribution utility orany changes therein;

• to perform such other regulatory functions as are appropriate and necessary in order to ensure thesuccessful restructuring and modernization of the electric power industry; and

• to have original and exclusive jurisdiction over all cases that involve the contesting of rates, fees, fines andpenalties imposed in the exercise of its powers, functions and responsibilities and over all cases involvingdisputes between and among participants or players in the energy industry relating to the foregoing powers,functions and responsibilities except cases which involve abuse of market power, cartelization and anyanticompetitive or discriminatory behavior by any electric power industry participant.

Role of the DOE

In accordance with its mandate to supervise the restructuring of the electric power industry, the DOE exercises,among others, the following functions:

• preparation and annual updating of the Philippine Energy Plan and the Philippine Power DevelopmentProgram, and thereafter integrate the latter into the former;

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• ensuring the reliability, quality and security of the supply of electric power;

• exercise of supervision and control over all Government activities pertaining to energy projects;

• encouragement of private investment in the power industry and promotion of the development ofindigenous and renewable energy sources for power generation;

• facilitation of reforms in the structure and operation of distribution utilities for greater efficiency and lowercosts;

• promotion of a system of incentives to encourage industry participants, including new generatingcompanies and end-users, to provide adequate and reliable electric supply;

• education of the public (in coordination with NPC, ERC, NEA and the Philippine Information Agency) onthe restructuring of the industry and the privatization of NPC assets; and

• establishment of the WESM in cooperation with electric power industry participants, and formulating rulesgoverning its operations.

Role of the Joint Congressional Power Commission

The Joint Congressional Power Commission created pursuant to the EPIRA consists of 14 members selectedfrom the members of the Philippine senate and house of representatives. Its responsibilities and functionsinclude, among others, the following:

• monitoring and ensuring the proper implementation of the EPIRA;

• endorsement of the initial privatization plan of PSALM for approval by the President of the Philippines;

• ensuring transparency in the public bidding procedures adopted for the privatization of the generation andtransmission assets of NPC;

• evaluation of the adherence of industry participants to the objectives and timelines under the EPIRA; and

• determination of inherent weaknesses in the EPIRA and recommend necessary remedial legislation orexecutive measures.

Competitive Market Devices

WESM

The EPIRA mandates the establishment of the WESM, which is a pre-condition for the implementation of theRCOA, within one year from its effectivity. The WESM provides a venue whereby generators may sell power,and at the same time, suppliers and wholesale consumers can purchase electricity where no bilateral contractexists between the two.

The rules and regulations of WESM set the guidelines and standards for participation in the market, reflectingaccepted economic principles and providing a level playing field for all electric power industry participants, andprocedures for establishing the merit order dispatch for each time (hourly) trading period. These rules alsoprovide for a mechanism for setting electricity prices that are not covered by bilateral contracts betweenelectricity buyers and sellers.

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On November 18, 2003, upon the initiative of the DOE, the PEMC was incorporated as a non-stock, non-profitcorporation with membership comprising an equitable representation of electricity industry participants andchaired by the DOE. The PEMC acts as the autonomous market group operator and the governing arm of theWESM and was tasked to undertake the preparatory work for the establishment of the WESM, pursuant toSection 30 of the EPIRA and in accordance with the WESM Rules. Its primary purpose is to establish, maintain,operate and govern an efficient, competitive, transparent and reliable market for the wholesale purchase ofelectricity and ancillary services in the Philippines in accordance with relevant laws, rules and regulations.

The WESM commercial operations in the Luzon Grid started on June 26, 2006. The Visayas Grid was integratedinto the WESM on December 26, 2010.

As of June 2017, there were 260 wholesale membership participants and 946 retail membership entitiesregistered at the WESM based on its 2017 Annual Report.

The PEMC and the Independent Electricity Market Operator of the Philippines Inc. (“IEMOP”) have executedan operating agreement to formalize the transfer of all functions, assets and liabilities associated with marketoperations from the PEMC to the IEMOP effective September 26, 2018. With the signing of the operatingagreement, the IEMOP is poised to take over the market operations of the WESM, a function that is currentlyperformed by the PEMC. Republic Act No. 9136 requires the PEMC to divest itself of this function in favor of aseparate entity that is independent of the market participants. To comply with the requirement, on February 6,2018, the market participants and the DOE Secretary approved the transition plan calling for the formation of anindependent market operator and the transfer of the market operation functions to it. The IEMOP is a non-stock,non-profit corporation led by a board of directors, all of whom are independents and do not have any interest orconnection to the WESM participants, that was incorporated and organized to implement the plan. Beginning onSeptember 26, 2018, the IEMOP has been running the electricity market and, among other things, managing theregistration of market participants, receiving generation offers, announcing market prices, dispatching schedulesof the generation plants and handling billing, settlement and collections. Under the policy and regulatoryoversight of the DOE and the ERC, the PEMC has remained as the governing body for the WESM to monitorcompliance by the market participants with the market rules.

WESM in Mindanao

In anticipation of the increase of supply condition in Mindanao, the DOE, through DOE CircularDC2017-05-0009, has declared the launch of the WESM. Similar to the operations in Luzon and Visayas,WESM’s primary function is to be the venue for efficient scheduling, dispatch, and settlement of energywithdrawal and injections in the Mindanao Grid.

The PEMC has already initiated some preparatory activities in the upcoming WESM in Mindanao. During thefirst quarter of 2017, PEMC have conducted a series of public consultations. The WESM Trial OperationProgram has started last June 26, 2017 where its objective is to familiarize all Mindanao participants in theimplementation of the WESM.

RCOA

The EPIRA likewise provides for a system of Open Access on transmission and distribution wires, wherebyTransCo/NGCP and distribution utilities may not refuse the use of their wires by qualified persons, subject to thepayment of distribution wheeling charges. The full commercial operation of RCOA in Luzon and Visayascommenced on June 26, 2013 with a total of 275 registered participants. Conditions for the commencement ofsuch Open Access system are as follows:

• establishment of the WESM;

• approval of unbundled transmission and distribution wheeling charges;

• initial implementation of the cross-subsidy removal scheme;

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• privatization of at least 70% of the total capacity of generating assets of NPC in Luzon and Visayas; and

• transfer of the management and control of at least 70% of the total energy output of power plants undercontract with NPC to the IPPAs.

On June 6, 2011, pursuant to Resolution No. 10, Series of 2011, the ERC declared December 26, 2011 as the“Open Access Date” to mark the commencement of the full operations of the competitive retail electricity marketin Luzon and Visayas. Accordingly, all electricity-end users with an average monthly peak demand of one MWfor the 12 months preceding the Open Access Date, as certified by the ERC to be contestable customers, shallhave the right to choose their own electricity suppliers.

To ensure smooth transition from the existing structure to RCOA, the ERC promulgated Resolution No. 16,Series of 2012, providing for a transition period from December 26, 2012 until June 25, 2013. However, the ERCeffectively extended the transition period when it issued Resolution No. 11, Series of 2013, which allowedcontestable customers to stay with their current distribution utility until December 25, 2013, or until such timethat they were able to find a RES provided that it promptly informs the distribution utility of such fact. OnJune 19, 2015, the Department of Energy promulgated Department Circular No. DC2015-06-0010, whichmandated contestable customers to secure their RSCs by June 25, 2016, including contestable customers with anaverage demand of 750 KW to 999 KW for the 12-month period preceding June 25, 2016.

With the implementation of the RCOA, the contestable markets (i.e., under prevailing regulations, electricityend-users with monthly average peak demand of at least 500 KW) may choose where to source their electricpower requirements and can negotiate with suppliers for their electricity. Likewise, certain end-users will beallowed to directly source power through the WESM or by entering into contracts with generation companies.This will encourage competition at the retail level and it is anticipated that retail competition will graduallyincrease over time, provided that supply companies are sufficiently creditworthy to be suitable offtakers forgeneration companies.

With the implementation of the RCOA, certain contracts entered into by utilities and suppliers may potentially bestranded. Stranded contract cost refers to the excess of the contracted cost of electricity under eligible contractsof NPC over the actual selling price of the contracted energy output of such contracts in the market. Under theEPIRA, recovery of stranded contract cost may be allowed provided that such contracts were approved by theEnergy Regulatory Board (now the ERC) as of December 31, 2000.

On February 21, 2017, the Philippine Supreme Court, acting on the petition filed by the Philippine Chamber ofCommerce and Industry, San Beda College Alabang, Inc., Ateneo de Manila University, and RiverbanksDevelopment Corporation, issued a temporary restraining order enjoining the DOE and ERC from implementingDOE Department Circular DC2015-060010 and ERC Resolution Nos. 05, 10, 11 and 28, all series of 2016,which are the rules and regulations implementing the RCOA.

In response to the temporary restraining order, and to provide guidance to relevant power industry players, theDOE issued DC2017-12-0013 and DC2017-12-0014 encouraging eligible contestable customers to voluntarilyparticipate in the retail competition and open access.

Unbundling of Rates and Removal of Cross Subsidies

The EPIRA mandates that distribution wheeling charges be unbundled from retail rates and that rates reflect therespective costs of providing each service. The EPIRA also states that cross-subsidies shall be phased out withina period not exceeding three years from the establishment by the ERC of a universal charge, which shall becollected from all electricity end-users. However, the ERC may extend the period for the removal of the cross-subsidies for a maximum of one year if it determines that there will be a material adverse effect upon the publicinterest or an immediate, irreparable and adverse financial effect on a distribution utility.

These arrangements are now in place, in satisfaction of the conditions for the RCOA.

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The EPIRA likewise provides for a socialized pricing mechanism called a lifeline rate to be set by the ERC formarginalized or low-income captive electricity consumers who cannot afford to pay the full cost of electricity.These end-users are exempt from the cross-subsidy removal for a period of ten years, unless extended by law.

Implementation of the Performance-Based Regulation (“PBR”)

The ERC issued the Rules for Setting Distribution Wheeling Rates that apply to privately owned distributionutilities entering PBR, which set out the manner in which the new PBR rate-setting mechanism for distribution-related charges will be implemented. PBR is intended to replace the return-on-rate-base regulation that hashistorically determined the distribution charges paid by the distribution companies’ customers. Under the PBR,the distribution-related charges that distribution utilities can collect from customers over a four-year regulatoryperiod will be set by reference to projected revenues determined through a set regulatory asset base, theefficiency of the distribution utility and the latter’s capital, all of which are reviewed and approved by the ERCand used by the ERC to determine the efficiency factor of a distribution utility. For each year during theregulatory period, the distribution charge of a distribution utility is adjusted upwards or downwards taking intoconsideration the efficiency factor of the utility set against changes in overall consumer prices in the Philippines.The ERC has also implemented a performance incentive scheme whereby annual rate adjustments under PBRwill also take into consideration the ability of a distribution utility to meet or exceed service performance targetsset by the ERC, such as the average duration of power outages, the average time to provide connections tocustomers and the average time to respond to customer calls, with utilities being rewarded or penalizeddepending on their ability to meet these performance targets.

Reduction of Taxes and Royalties on Indigenous Energy Resources

To equalize prices between imported and indigenous fuels, the EPIRA mandates the President of the Philippinesto reduce the royalties, returns and taxes collected for the exploitation of all indigenous sources of energy,including but not limited to, natural gas and geothermal steam, so as to effect parity of tax treatment with theexisting rates for imported coal, crude oil, bunker fuel and other imported fuels. Following the promulgation ofthe IRR, then President Arroyo issued Executive Order No. 100 to equalize the taxes among fuels used for powergeneration. This mechanism, however, is yet to be implemented.

Government Approval Process

As set forth in the EPIRA, power generation is not considered a public utility operation. Thus, an entity engagedor intending to engage in the generation of electricity is not required to secure a national franchise. However, noperson or entity may engage in the generation of electricity unless such person or entity has complied with thestandards, requirements and other terms and conditions set by the ERC and has received a certificate ofcompliance from the ERC to operate facilities used in the generation of electricity. A certificate of compliance isvalid for a period of five years from the date of issuance.

In addition to the certificate of compliance requirement, a generation company must comply with government-prescribed technical, financial capability, health, safety and environmental standards. A generation companymust ensure that all its facilities connected to the grid meet the technical design and operational criteria of theGrid Code and Distribution Code promulgated by the ERC. In this connection, the ERC has issued guidelinessetting the minimum financial capability standards for generation companies. Under the guidelines, a generationcompany is required to meet a minimum annual interest cover ratio or debt service capability ratio (whichmeasures the ability of the power generation company to service its debts) of 1.5x throughout the period coveredby its certificate of compliance. For certificate of compliance applications and renewals, the guidelines requirethe submission to the ERC of, among other things, a schedule of liabilities, and a five-year financial plan. For theduration of the certificate of compliance, the guidelines also require a generation company to submit auditedfinancial statements and forecast financial statements to the ERC for the next two financial years, as well as otherdocuments. The failure by a generation company to submit the requirements prescribed by the guidelines may begrounds for the imposition of fines and penalties.

With the introduction of RCOA, the rates charged by a generation company are no longer regulated by the ERC,except rates for Captive Markets (as determined by the ERC). In addition, since the establishment of the WESM,generation companies are now required to comply with the membership criteria and appropriate dispatchscheduling as prescribed under the WESM Rules.

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In the course of developing a power plant, other permits, approvals and consents must also be obtained fromrelevant national, provincial and local Government authorities, relating to, among others, site acquisition,construction and operation, including environmental-related licenses and permits.

Registration under the BOI

Under the Executive Order No. 226, otherwise known as the Omnibus Investments Code, a BOI-registeredenterprise enjoy certain incentives, both financial and non-financial, provided such enterprise invests in preferredareas of investment enumerated in the Investment Priorities Plan annually prepared by the Government.However, prior to registration with the BOI, the enterprise must first satisfy the minimum equity required tofinance the project applied equivalent to 25% of the estimated project cost, or as may be prescribed by the BOI.Such incentives include: (i) income tax holiday, (ii) exemption from taxes and duties on imported spare parts;(iii) exemption from wharfage dues and export tax, duty, impost and fees; (iv) reduction of the rates of duty oncapital equipment, spare parts and accessories; (v) tax exemption on breeding stocks and genetic materials;(vi) tax credits; (vii) additional deductions from taxable income; (viii) employment of foreign nationals;(ix) simplification of customs procedure; and (x) unrestricted use of consigned equipment.

On April 12, 2019, Republic Act No. 11285, otherwise known as the Energy Efficiency and Conservation Act,was enacted. Under the said law, upon certification by the DOE, energy efficiency projects shall be included inthe annual investment priorities plan of the BOI and shall be entitled to the incentives provided under ExecutiveOrder No. 226, and any other applicable laws for 10 years from the effectivity of the Act. Said energy efficiencyprojects shall also be exempt from the requirements provided under Article 32(1) of Executive Order No. 226.Energy efficiency projects refer to projects designed to reduce energy consumption and costs by anyimprovement, repair, alteration, or betterment of any building or facility, or any equipment, fixture, or furnishingto be added to or used in any building, facility, or vehicle including the manufacturing and provision of servicesrelated thereto: provided, that such projects shall be cost-effective and shall lead to lower energy or utility costsduring operation and maintenance.

Philippine Competition Act

On July 21, 2015, the President of the Philippines signed into law Republic Act No. 10667 or the PhilippineCompetition Act, which became effective on August 8, 2015. It aims to enhance economic efficiency andpromote free and fair competition in trade, industry and all commercial economic activities, prevent economicconcentration which will manipulate or constrict the discipline of free markets, and penalize all forms of anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions, with theobjective of protecting consumer welfare and advancing domestic and international trade and economicdevelopment. Although the Philippine Competition Act is silent on its applicability specifically to the electricpower industry, Section 55(c) of the Philippine Competition Act provides that insofar as Section 43(u) of theEPIRA is inconsistent with provisions of the Philippine Competition Act, it shall be repealed. In view of this, thePhilippine Competition Commission (“PCC”) now has the original and exclusive jurisdiction over anti-competitive cases in the energy sector.

On May 31, 2016, the PCC promulgated rules and regulations in order to effectively carry out the provisions ofthe Philippine Competition Act. Under the Rules, parties to a merger or acquisition are required to providenotification to the PCC when the following thresholds are met: (i) the aggregate annual gross revenues in, into orfrom the Philippines, or value of the assets in the Philippines of the ultimate parent company of at least one of theacquiring or acquired entities, including that of all entities that the ultimate parent company controls, directly orindirectly (“Size of Party/Person”), exceeds P1,000,000,000.00; and (ii) the value of the transaction (“Size ofTransaction”) exceeds P1,000,000,000.00. Under PCC Advisory 2019-001, effective March 1, 2019, thethreshold in relation to the Size of Person was increased to P5,600,000,000.00, and the threshold for the Size ofTransaction was increased to P2,200,000,000.00. However, these revised threshold amounts do not apply tomergers or acquisitions pending review by the PCC, notifiable transactions consummated before March 1, 2019,and transactions already subject of a decision by the PCC.

In addition, beginning on March 1, 2019, and for every subsequent year, the notification thresholds will beindexed based on the official estimates by the Philippine Statistics Authority of the nominal GDP growth for theprevious calendar year rounded up to the nearest hundred million.

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Local Government Code

Republic Act No. 7160, otherwise known as the Local Government Code of 1991 (“LGC”) establishes thesystem and powers of provincial, city, municipal, and barangay governments in the country. The LGC generalwelfare clause states that every local government unit (“LGU”) shall exercise the powers expressly granted,those necessarily implied, as well as powers necessary, appropriate, or incidental for its efficient and effectivegovernance, and those which are essential to the promotion of the general welfare.

The power to tax and police power is exercised by the LGU through their respective legislative bodies.Specifically, the LGU, through its legislative body, has the authority to enact such ordinances as it may deemnecessary and proper for sanitation and safety, the furtherance of the prosperity, and the promotion of themorality, peace, good order, comfort, convenience, and general welfare of the locality and its inhabitants.Ordinances can reclassify land, impose real property taxes, order the closure of business establishments, andrequire permits and licenses from businesses operating within the territorial jurisdiction of the LGU.

Labor and Employment

The Department of Labor and Employment (“DOLE”) is the Philippine government agency mandated toformulate policies, implement programs and services, and serves as the policy-coordinating arm of the ExecutiveBranch in the field of labor and employment. The DOLE has exclusive authority in the administration andenforcement of labor and employment laws such as the Labor Code of the Philippines and the OccupationalSafety and Health Standards, as amended, and such other laws as specifically assigned to it or to the Secretary ofthe DOLE.

Social Security System, PhilHealth and the Pag-IBIG Fund

An employer or any person who uses the services of another person in business, trade, industry or anyundertaking is required under Republic Act No, 11199, the Social Security Act of 2018 to ensure coverage ofemployees following procedures set out by the law and the Social Security System (“SSS”). Under the said law,an employer must deduct from its employees their monthly contributions in an amount corresponding to hissalary, wage, compensation or earnings during the month in accordance with the monthly salary credits, theschedule and the rate of contributions as may be determined and fixed by the Social Security Commission, payits share of contribution and remit these to the SSS within a period set by law and/ or SSS regulations.

Employers are likewise required to ensure enrollment of its employees in a National Health Insurance Programadministered by the Philippine Health Insurance Corporation a government corporation attached to theDepartment of Health tasked with ensuring sustainable, affordable and progressive social health insurancepursuant to the provisions of Republic Act No. 10606, the National Health Insurance Act of 2013. OnFebruary 20, 2019, Republic Act No. 11223, the Universal Health Care Act, was enacted, which amended certainprovisions of the National Health Insurance Act of 2013. Under the said law, all Filipino citizens are nowautomatically enrolled into the National Health Program. However, membership is classified into two types,direct contributors and indirect contributors. Direct contributors refer to those who have the capacity to paypremiums, are gainfully employed and are bound by an employer-employee relationship, or are self-earning,professional practitioners, migrant workers, including their qualified dependents, and lifetime members. On theother hand, indirect contributors refer to all others not included as direct contributors, as well as their qualifieddependents, whose premium shall be subsidized by the national government including those who are subsidizedas a result of special laws. Every member is also granted immediate eligibility for health benefit package underthe program.

Under Republic Act No. 9679, the Home Development Mutual Fund Law of 2009, all employees who arecovered by the Social Security Act of 2018 must also be registered with and covered by the Home DevelopmentMutual Fund, more commonly referred to as the Pag-IBIG Fund.

Revised Corporation Code

Republic Act No. 11232, also known as the Revised Corporation Code, was signed into law by President Duterteon February 20, 2019. The Revised Corporation Code took effect on February 23, 2019 upon completion of itspublication in Manila Bulletin and the Business Mirror on February 23, 2019.

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Among the notable amendments in the Revised Corporation Code are as follows: (i) corporations are nowgenerally given a perpetual existence; (ii) a new section on one-person corporation was added; (iii) therequirement that at least 25% of the authorized capital stock must be subscribed, and at least 25% of thesubscribed shares must be paid-up was removed; (iv) stockholders can now vote in absentia; (v) the powers ofthe SEC to prosecute and investigate offenses under the Revised Corporation Code has been expanded.

Foreign Investments Act of 1991 (“FIA”)

The FIA liberalized the entry of foreign investment into the Philippines. Under the FIA, in domestic marketenterprises, foreigners can own as much as 100% equity except in areas specified in the Eleventh RegularForeign Investment Negative List (the “Negative List”). This Negative List enumerates industries and activitieswhich have foreign ownership limitations under the FIA and other existing laws. Nationalized activities include,among others, land ownership, telecommunications, mining and the operation of public utilities.

In connection with the ownership of private land, the Philippine Constitution states that no private land shall betransferred or conveyed except to citizens of the Philippines or to corporations or associations organized underthe laws of the Philippines at least 60% of whose capital is owned by such citizens. Likewise, under thePhilippine Constitution, only citizens of the Philippines or corporations or associations organized under the lawsof the Philippines at least 60% of whose capital is owned by such citizens may engage in activities relating to theexploration, development and utilization of natural resources, which covers the utilization of natural resources forthe operation of renewable energy power plants.

For the purpose of complying with nationality laws, the term Philippine National is defined under the FIA as anyof the following:

• a citizen of the Philippines;

• a domestic partnership or association wholly-owned by citizens of the Philippines;

• a corporation organized under the laws of the Philippines of which at least 60% of the capital stockoutstanding and entitled to vote is owned and held by citizens of the Philippines;

• a corporation organized abroad and registered to do business in the Philippines under the RevisedCorporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly-owned byFilipinos; or

• a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is aPhilippine National and at least 60% of the fund will accrue to the benefit of Philippine Nationals.

In SEC Memorandum Circular No. 08 dated May 20, 2013, or the Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engagedin Nationalized and Partly Nationalized Activities, it is provided that for purposes of determining compliancewith the nationality requirement, the required percentage of Filipino ownership shall be applied both to (a) thetotal number of outstanding shares of stock entitled to vote in the election of directors, and (b) the total numberof outstanding shares of stock, whether or not entitled to vote in the election of directors. A petition for certiorariquestioning the constitutionality of SEC Memorandum Circular No. 8 dated May 20, 2013 was filed in June2013. In Jose M. Roy III v. Chairperson Teresita Herbosa (G.R. No. 207246) dated April 18, 2017, the SupremeCourt affirmed the validity of SEC Memorandum Circular No. 08 dated May 20, 2013.

In the 2014 case of Narra Nickel Mining and Development Corporation, et.al vs. Redmont Consolidated MinesCorp (G.R. No. 195580) and its corresponding motions for reconsideration (the “Narra Nickel Case”), theSupreme Court affirmed that the Grandfather Rule, wherein shares owned by corporate shareholders areattributed either as Filipino or foreign equity by determining the nationality not only of such corporateshareholders, but also such corporate shareholders’ own shareholders, until the nationality of shareholder

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individuals is taken into consideration, is to be used jointly and cumulatively with the Control Test, which merelytakes into account the nationality of the listed shareholders of the corporation. Such joint and cumulativeapplication shall be observed as follows: (1) if the corporation’s Filipino equity falls below sixty percent (60%),such corporation is deemed foreign-owned, applying the Control Test; (2) if the corporation passes the ControlTest, the corporation will be considered a Filipino corporation only if there is no doubt as to the beneficialownership and control of the corporation; and (3) if the corporation passes the Control Test but there is doubt asto the beneficial ownership and control of the corporation, the Grandfather Rule must be applied.

ENVIRONMENTAL MATTERS

Environmental Compliance Overview

SMC Global Power applies the same focus and resources on operational excellence in its portfolio of coal-firedpower plants as with its environmental compliance. Efficient emission mitigation begins with a dynamic fuelpreparation process that ensures coal fineness thru the use of reliable and versatile coal milling and grindingequipment. SMC Global Power plans to use dynamic classifiers to further improve coal fineness in the future.This would allow more efficient burning of coal (reducing NOx) and the use of lower calorific value (“CV”) coalwith lower sulfur content (reducing SOx). High CV coal with high sulfur content inherently does not only havehigher emissions but are also significantly more expensive.

In addition to standard environmental control facilities customarily found in modern coal fired power plants suchas enclosed coal conveyor and storage systems, ash storage systems, waste water treatment systems and airpollution and smoke stack systems, SMC Global Power’s power plants have the following environmental controlequipment and features that ensure that its NOx, SOx and particulate matter emissions within and belowapplicable local limits set by the DENR and emission limits set by the World Bank:

• CFB technology (used in SMC Global Power’s greenfield power plants, Limay and Davao) operate theboilers at relatively lower pressure and temperatures (below 800 degrees centigrade) compared topulverized coal technology. This results in better combustion and lower NOx and material particulates.

• Limestone injection to the fuel as it goes to the boiler is used for SMC Global Power’s Plants to furtherreduce their SOx and particulate matter emissions.

• Unit 3 of Masinloc will use Supercritical boiler technology which, relative to an ordinary PC boiler(subcritical), has a significantly better combustion process resulting to a much-improved heat rate of coal— meaning less coal is required to produce a megawatt of electricity. This also allows the use of lower CVand lower sulfur coal, which is a key factor to lower SOx emissions.

• For Sual and Masinloc PC units, SMC Global Power uses Flue Gas Desulfurization (“FGD”) equipmentthat can remove up to 90% of the SOx and particulate matter in the flue gas emissions of these plants. TheFGDs use limestone and seawater to scrub SOx and particulate matter from the flue gases.

• For the greenfield plants, SMC Global Power uses Electrostatic Precipitators (“ESP”) to removeparticulate matter such as dust and soot, thru an electrostatic charge that captures these materials from theflowing gases on their way out the smoke stack.

• SMC Global Power conducts regular meetings with the IPP of the Sual Power Plant to ensure the Plant’sfuel efficiency and compliance to environmental standards.

• For the Masinloc PC Units, SMC Global Power has reduced the CV and sulfur content of coal used from6,100 kcal and 0.5% to only 5,500 kcal and 0.25%, respectively. This is accomplished without derating thepower output of the units as a result of a recent retrofit work done on Unit 2 and heavy regularmaintenance of Unit 1 that have retained and even improved the heat rate of these Units.

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SMC Global Power also plans to explore the use of catalytic reduction technology on its PC Plants to furtherimprove its NOx emissions. This is an advanced active emission control technology that injects a liquid reductantagent thru a special catalyst which is predominantly ammonia, into the flue gases to capture and remove NOxemissions.

SMC Global Power closely monitors and publishes on a weekly basis the emission data on the Limay and DavaoGreenfield Power Plants, which is reviewed by both the DOE and the DENR. These power plants have emissionlevels that are less than 50% of the applicable local and World Bank emission limits.

Environmental Regulation

The operations of the businesses of SMC Global Power are subject to various laws, rules and regulations thathave been promulgated for the protection of the environment.

EISS Law

The Philippine Environmental Impact Statement System (the “EISS Law”) established under Presidential DecreeNo. 1586, which is implemented by the DENR, is the general regulatory framework for any project orundertaking that is either (a) classified as environmentally critical or (b) is situated in an environmentally criticalarea. The DENR, through its regional offices or through the Environmental Management Bureau (“EMB”),determines whether a project is environmentally critical or located in an environmentally critical area andpossesses all applications for an ECC.

The law requires an entity that will undertake any such declared environmentally critical project or operate in anysuch declared environmentally critical area to submit an Environmental Impact Statement (“EIS”) which is acomprehensive study of the significant impacts of a project on the environment. The EIS serves as an applicationfor the issuance of an ECC, if the proposed project is environmentally critical or situated in an environmentallycritical area; or for the issuance of a Certificate of Non-Coverage, if otherwise. An ECC is a Governmentcertification that, among others, (i) the proposed project or undertaking will not cause significant negativeenvironmental impact; (ii) the proponent has complied with all the requirements of the EISS Law in connectionwith the project; and (iii) the proponent is committed to implement its approved Environmental ManagementPlan (“EMP”) in the EIS. The EMP details the prevention, mitigation, compensation, contingency andmonitoring measures to enhance positive impacts and minimize negative impacts and risks of a proposed projector undertaking.

Project proponents that prepare an EIS are required to establish an Environmental Guarantee Fund when the ECCis issued for projects determined by the DENR to pose a significant public risk to life, health, property and theenvironment or where the project requires rehabilitation or restoration. The Environmental Guarantee Fund isintended to meet any damage caused by such a project as well as any rehabilitation and restoration measures.Project proponents also required to establish an Environmental Monitoring Fund (“EMF”) when an ECC iseventually issued. The EMF is to support the activities of the team monitoring the project proponent’scompliance with ECC conditions, EMP and applicable laws, rules and regulations.

Power plant operations are considered environmentally critical projects for which an EIS and an ECC aremandatory.

The Clean Water Act

The Clean Water Act (Republic Act No. 9275) and its implementing rules and regulations provide for waterquality standards and regulations for the prevention, control, and abatement of pollution of the water resources ofthe country. The Clean Water Act requires owners or operators of facilities that discharge regulated effluents(such as wastewater from manufacturing plants or other commercial facilities) to secure a discharge permit fromthe DENR which authorizes the owners and operators to discharge waste and/or pollutants of specifiedconcentration and volumes from their facilities into a body of water or land resource for a specified period oftime. The DENR, together with other Government agencies and the different local Government units, is tasked toimplement the Clean Water Act and to identify existing sources of water pollutants, as well as strictly monitorpollution sources which are not in compliance with the effluent standards provided in the law.

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The Clean Air Act

Pursuant to the Clean Air Act of 1999 (Republic Act No. 8749) and its implementing rules and regulations,enterprises that operate or utilize air pollution sources are required to obtain a Permit to Operate from the DENRwith respect to the construction or the use of air pollutants. The issuance of the said permit seeks to ensure thatregulations of the DENR with respect to air quality standards and the prevention of air pollution are achieved andcomplied with by such enterprises.

The Renewable Energy Act

The Renewable Energy Act of 2008 (Republic Act No. 9513) aims to promote development andcommercialization of renewable and environment-friendly energy resources such as biomass, solar, and windthrough various tax incentives. Some of the tax incentives granted to renewable energy developers under the saidlaw include (i) a seven-year income tax holiday; (ii) duty free importation of renewable energy machinery,equipment, and materials; (iii) special realty tax rates on equipment and machinery; (iv) zero percent VAT ratefor power generated from these energy sources; and (v) the imposition of a reduced corporate tax of 10% on itsnet taxable income after the income tax holiday.

The RE Act establishes the framework for the accelerated development and advancement of renewable energyresources as well as the development of a strategic program to increase its utilization. The RE Act definesrenewable energy resources as energy resources that do not have an upper limit on the total quantity to be used.Such resources are renewable on a regular basis, and their renewal rate is relatively rapid to consider availabilityover an indefinite period of time. These include, among others, biomass, solar, wind, geothermal, ocean energy,and hydropower conforming to internationally accepted norms and standards on dams, and other renewableenergy technologies.

The DOE is the lead agency mandated to implement the provisions of the law.

Other Environmental Laws

Other regulatory environmental laws and regulations applicable to the businesses of SMC Global Power includethe following:

• The Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990 (Republic Act No. 6969),which regulates, restricts or prohibits the (i) importation, manufacture, processing, handling, storage,transportation, sale, distribution, use and disposal of chemical substance and mixtures that presentunreasonable risk or injury to health or the environment, and (ii) entry into the Philippines, or the keepingin storage of hazardous wastes which include byproducts, process residue, contaminated plant orequipment or other substances from manufacturing operations. The said law is implemented by the DENR.

• The Ecological Solid Waste Management Act of 2000 (Republic Act No. 9003), which provides for theproper management of solid waste which includes discarded commercial waste and non-hazardousinstitutional and industrial waste. The said law prohibits, among others, the transporting and dumping ofcollected solid wastes in areas other than prescribed centers and facilities. The National Solid WasteManagement Commission, together with other Government agencies and the different local Governmentunits, are responsible for the implementation and enforcement of the said law.

• The Code on Sanitation of the Philippines (the “Sanitation Code”) (Presidential Decree No. 856), whichprovides for sanitary and structural requirements in connection with the operation of certain establishmentssuch as industrial establishments. Under the Sanitation Code, which is implemented by the PhilippineDepartment of Health, no person, firm, corporation, or entity shall operate any industrial establishmentwithout first obtaining a sanitary permit.

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MANAGEMENT

The overall management and supervision of SMC Global Power is undertaken by the board of directors (the“Board”). The executive officers and management team cooperate with the Board by preparing appropriateinformation and documents concerning the SMC Global Power’s business operations, financial condition andresults of operations for its review.

BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Currently, the Board consists of seven members, of which three are independent directors. The table below setsforth certain information regarding the members of the Board as of the date of this Offering Circular.

Name Age Position Citizenship

Ramon S. Ang . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Director / Chairman FilipinoFerdinand K. Constantino . . . . . . . . . . . . . . . . . 67 Director FilipinoAurora T. Calderon . . . . . . . . . . . . . . . . . . . . . . 64 Director FilipinoVirgilio S. Jacinto . . . . . . . . . . . . . . . . . . . . . . . 62 Director FilipinoJack G. Arroyo, Jr. . . . . . . . . . . . . . . . . . . . . . . . 61 Independent Director FilipinoConsuelo Ynares-Santiago . . . . . . . . . . . . . . . . 79 Independent Director FilipinoJosefina Guevara-Salonga . . . . . . . . . . . . . . . . . 77 Independent Director Filipino

The business experience for the past five years of each of the directors and executive officers is set forth below.

Ramon S. Ang is the incumbent Chairman of the Board and Chief Executive Officer of SMC Global Power sinceAugust 31, 2010, and concurrently, the President and Chief Operating Officer of the Company since April 30,2017. He is also the Chairman of the Executive Committee of SMC Global Power since September 2, 2011. He isthe President and Chief Operating Officer of SMC since March 6, 2002 and Vice Chairman since 1999. He isalso the Chairman and President of several subsidiaries of SMC Global Power such as San Miguel EnergyCorporation (“SMEC”), San Miguel Electric Corp. (“SMELC”), South Premiere Power Corp (“SPPC”)Strategic Power Devt. Corp. (“SPDC”), SMC Consolidated Power Corporation (“SCPC”) and San MiguelConsolidated Power Corporation (“SMCPC”). He also holds, among others, the following positions in otherlisted and public companies: President and Chief Executive Officer of Top Frontier Investment Holdings, Inc.and Petron Corporation; President of Ginebra San Miguel; Chairman of the Board of San Miguel Brewery HongKong Limited (listed in the Hong Kong Stock Exchange), Petron Malaysia Refining & Marketing Bhd (acompany publicly listed in Malaysia), and Eagle Cement Corporation; and Vice Chairman of the Board,President and Chief Executive Officer of San Miguel Food and Beverage, Inc. He is the Chairman of the Boardof San Miguel Brewery Inc., San Miguel Foods, Inc., San Miguel Yamamura Packaging Corporation, ClaridenHoldings, Inc., Anchor Insurance Brokerage Corporation, and Philippine Diamond Hotel & Resort, Inc. He is thePresident of San Miguel Northern Cement, Inc.; President and Chief Executive Officer of Northern CementCorporation; and the Chairman and President of San Miguel Properties, Inc., San Miguel Holdings Corp., SanMiguel Equity Investments Inc., Sea Refinery Corporation and San Miguel Aerocity Inc. He is the Chairman ofthe Board and Chief Executive Officer of SMC Asia Car Distributors Corp. He is also the sole director andshareholder of Master Year Limited and the Chairman of the Board of Privado Holdings, Corp. He formerly heldthe following positions: Chairman of the Board of Liberty Telecoms Holdings, Inc. and Cyber Bay Corporation;President and Chief Operating Officer of PAL Holdings, Inc. and Philippine Airlines, Inc.; Director of AirPhilippines Corporation; and Vice Chairman of the Board and Director of Manila Electric Company. Mr. Angholds directorships in various domestic and international subsidiaries of SMC in the last five years. He has aBachelor of Science degree in Mechanical Engineering from Far Eastern University. On December 6, 2018, healso attended a corporate governance training seminar conducted by the Center for Global Best Practices.

Ferdinand K. Constantino is a Director of SMC Global Power since August 31, 2010, the Vice Chairman of theBoard of SMC Global Power since September 2, 2011, and was its Treasurer from August 31, 2010 toSeptember 1, 2011 and the Treasurer of San Miguel Food and Beverage, Inc. since July 5, 2018. He is a memberof the Executive Committee, Corporate Governance Committee, Audit and Risk Oversight Committee andRelated Party Transaction Committee of SMC Global Power. He is also the Chief Finance Officer and Treasurerof SMC. He also served as a Director of SMC from May 31, 2010 to February 28, 2018. He is the Treasurer ofSMEC. He also holds, among others, the following positions in other listed and public companies: Director ofTop Frontier Investment Holdings, Inc., and Petron Malaysia Refining & Marketing Bhd (a company publiclylisted in Malaysia). He is also the President of Anchor Insurance Brokerage Corporation; and Chairman of the

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San Miguel Foundation, Inc. and SMCGP Philippines Power Foundation Inc. He is also a director of San MiguelBrewery Inc., San Miguel Yamamura Packaging Corporation, San Miguel Pure Foods International Ltd., CitraMetro Manila Tollways Corporation, San Miguel Aerocity Inc. and Northern Cement Corporation. He is theDirector and Chief Finance Officer of San Miguel Northern Cement, Inc. He was formerly a Director of PALHoldings, Inc., and Philippine Airlines, Inc. Mr. Constantino previously served SMC as Chief Finance Officer ofthe San Miguel Beer Division; Chief Finance Officer and Treasurer of San Miguel Brewery Inc.; Director of SanMiguel Pure Foods Company, Inc.; Director of San Miguel Properties, Inc.; and Chief Finance Officer of ManilaElectric Company. He holds directorships in various domestic and international subsidiaries of SMC during thelast five years. He holds a degree in AB Economics from the University of the Philippines and completedacademic requirements for an MA Economics degree. On December 6, 2018, he also attended a corporategovernance training seminar conducted by the Center for Global Best Practices.

Aurora T. Calderon is a Director of SMC Global Power since August 31, 2010, a member of its ExecutiveCommittee since September 2, 2011. Ms. Calderon is also a member of the Audit and Risk Oversight Committeeand Related Party Transaction Committee of SMC Global Power. She is the Senior Vice President SeniorExecutive Assistant to the President and Chief Operating Officer of SMC since January 20, 2011 and has servedas a director of SMC since June 10, 2014. She holds the following positions in other publicly listed companies:Director and Treasurer of Top Frontier Investment Holdings, Inc. and Director of San Miguel Food andBeverage, Inc., Ginebra San Miguel, Inc., Petron Corporation and Petron Malaysia Refining & Marketing Bhd (acompany publicly listed in Malaysia). She is also a member of the Board of Directors of Petron MarketingCorporation, Petron Freeport Corporation, New Ventures Realty Corporation, Las Lucas Construction andDevelopment Corp., Thai San Miguel Liquor Co., San Miguel Equity Investments Inc., SMC Asia CarDistributors Corp., San Miguel Yamamura Packaging Corp. and San Miguel Aerocity Inc. She was formerly aDirector of PAL Holdings, Inc., Philippine Airlines, Inc., Trustmark Holdings Corporation, Zuma Holdings andManagement Corporation, Air Philippines Corporation, and Manila Electric Company. A certified publicaccountant, Ms. Calderon graduated magna cum laude from the University of the East with a degree in BSBusiness Administration, major in Accountancy. In addition, Ms. Calderon holds directorships in variousdomestic and international subsidiaries of SMC. On December 6, 2018, she also attended a corporate governancetraining seminar conducted by the Center for Global Best Practices.

Virgilio S. Jacinto is the Corporate Secretary of SMC Global Power since August 31, 2010, a Director, and itsCompliance Officer since September 2, 2011. He is also a member of the Corporate Governance Committee ofSMC Global Power. He is the Corporate Secretary, Senior Vice-President, General Counsel and ComplianceOfficer of SMC (since October 2010). He is also the Corporate Secretary of several subsidiaries of SMC GlobalPower such as SMEC, SMELC, SPPC, SPDC, SCPC and SMCPC. He is also the Corporate Secretary andCompliance Officer of Top Frontier Investment Holdings, Inc., and Ginebra San Miguel, Inc. He is a Director ofPetron Corporation and is a Director and Corporate Secretary of various domestic and international subsidiariesand affiliates of SMC. He was formerly the Vice President and First Deputy General Counsel of SMC. He was aDirector and Corporate Secretary of United Coconut Planters Bank, and a Partner at Villareal Law Offices. Atty.Jacinto is an Associate Professor at the University of the Philippines, College of Law. He obtained his law degreefrom the University of the Philippines cum laude where he was the class salutatorian and placed sixth in the 1981bar examinations. He holds a Masters of Laws degree from Harvard School. He holds directorships in variousdomestic and international subsidiaries of SMC. On December 6, 2018, he also attended a corporate governancetraining seminar conducted by the Center for Global Best Practices.

Jack G. Arroyo, Jr. is an Independent Director of SMC Global Power since September 2, 2011. He is also theChairperson of the Audit and Risk Oversight Committee, and a member of the Corporate Governance Committeeand Related Party Transaction Committee of SMC Global Power. He is a medical doctor and ophthalmologist byprofession and is currently affiliated with The American Eye Center, The Medical City, and Eye Referral Center.He is also a member of the Board of Directors of the Philippine Healthcare Educators, Inc., a member of theBoard of Trustees and Treasurer of Philippine Society of Cataract and Refractive Surgery, and the Vice-Presidentfor the National Capital Region of Centrist Democratic Political Educators, Inc. He is also currently the Presidentof Casino Español de Manila. Dr. Arroyo obtained his Doctor of Medicine degree from the University of thePhilippines College of Medicine. On December 6, 2018, he also attended a corporate governance trainingseminar conducted by the Center for Global Best Practices.

Consuelo M. Ynares-Santiago is an Independent Director of SMC Global Power since September 2, 2011. She isalso the Chairperson of the Corporate Governance Committee, and a member of the Audit and Risk Oversight

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Committee and Related Party Transaction Committee of SMC Global Power. She is also an Independent Directorof Anchor Insurance Brokerage Corporation, Top Frontier Investment Holdings, Inc., South Luzon TollwayCorporation and Phoenix Petroleum Phil. Inc. She served as an Associate Justice of the Supreme Court of thePhilippines; Associate Justice of the Court of Appeals of the Philippines; and a Regional Trial Court Judge ofMakati City. She graduated from the University of the Philippines College of Law. On December 6, 2018, shealso attended a corporate governance training seminar conducted by the Center for Global Best Practices.

Josefina Guevara-Salonga is an Independent Director of SMC Global Power since November 7, 2017. She isalso the Chairperson of the Related Party Transaction Committee and a member of the Corporate GovernanceCommittee and Audit and Risk Oversight Committee of SMC Global Power. She is a former Associate Justice ofthe Court of Appeals. Previously, she was an Executive Judge of the Makati Regional Trial Court. She iscurrently a trustee of the Tahanan Outreach Program since 2010 and a member of the following associations: SanPedro, Laguna Lawyer’s Association, University of the Philippines Women Lawyer’s Circle since 1966 andPhilippine Women’s Judges Association. She also served as a trustee of the Society for Judicial Excellence from2007 to 2014. She obtained her law degree from the University of the Philippines. On December 6, 2018, shealso attended a corporate governance training seminar conducted by the Center for Global Best Practices.

SENIOR MANAGEMENT

The table below sets forth certain information regarding the executive officers of SMC Global Power as of thedate of this Offering Circular.

Name Age Position Citizenship

Ramon S. Ang . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Chairman, Chief Executive Officer,President and Chief Operating Officer

Filipino

Ferdinand K. Constantino . . . . . . . . . . . . . . . . . 67 Vice Chairman FilipinoVirgilio S. Jacinto . . . . . . . . . . . . . . . . . . . . . . . 62 Corporate Secretary and Compliance Officer FilipinoElenita D. Go . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 General Manager FilipinoPaul Bernard D. Causon . . . . . . . . . . . . . . . . . . 41 Vice President and Chief Finance OfficerRamon U. Agay. . . . . . . . . . . . . . . . . . . . . . . . . 61 Assistant Vice President and Comptroller FilipinoIrene M. Cipriano . . . . . . . . . . . . . . . . . . . . . . . 44 Assistant Corporate Secretary FilipinoReynaldo S. Matillano . . . . . . . . . . . . . . . . . . . . 58 Internal Audit Manager FilipinoMaria Floreselda S. Abalos-Sampaga . . . . . . . . 54 Data Protection Officer FilipinoJeciel B. Campos . . . . . . . . . . . . . . . . . . . . . . . . 61 Assistant Vice President and Sales and

Marketing ManagerFilipino

Jose Ferlino P. Raymundo . . . . . . . . . . . . . . . . . 60 Assistant Vice President and EnergySourcing & Trading Manager

Filipino

Danillo T. Tolarba . . . . . . . . . . . . . . . . . . . . . . . 51 Assistant Vice President and HumanResources Group Manager

Filipino

The business experience for the past five years of each of the executive officers who are not directors is set forthbelow.

Elenita D. Go is the General Manager of SMC Global Power since December 14, 2011. She joined SMC GlobalPower in June 2011 as Head of its Sales and Trading Group. She is currently the General Manager of thesubsidiaries of the Company including SMEC, SMELC, SPPC, SPDC, SCPC and SMCPC and holds directorshipin some subsidiaries of the Company. She is also the President of SMGCP Philippines Power Foundation Inc.Previously, she was a Director of Manila Electric Company and Head of the Corporate Procurement Unit ofSMC. She graduated with a degree in Bachelor of Science in Electrical Engineering from Mapua Institute ofTechnology. On December 6, 2018, she also attended a corporate governance training seminar conducted by theCenter for Global Best Practices.

Paul Bernard D. Causon is the Chief Finance Officer of SMC Global Power since March 30, 2017 and wasappointed Vice President of the Company on June 5, 2018. Mr. Causon is concurrently the Chief Finance Officerand Treasurer of Angat Hydropower Corporation. He is also the Chief Financial Officer of SMGCP PhilippinesPower Foundation Inc. He previously served as Vice President, Head of Treasury and Head of Special Projects ofPhilippine Airlines Inc. and Air Philippines Corporation; Chief Finance Officer and Treasurer of Liberty

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Telecoms Holdings, Inc. and Wi-Tribe Telecoms Inc.; Partner, Audit Banks and Other Financial Institutions ofManabat Sanagustin & Co., CPAs; and Vice President and Comptroller of China Banking Corporation. Hegraduated magna cum laude from the University of the Philippines with a degree in Bachelor of Science inBusiness Administration and Accountancy and placed fourth in the Certified Public Accountant LicensureExamination in 2000. On December 6, 2018, he also attended a corporate governance training seminar conductedby the Center for Global Best Practices.

Ramon U. Agay is the Comptroller of SMC Global Power since September 2, 2011 and was appointed AssistantVice President on March 25, 2015. He is also the Finance Manager of the various subsidiaries of SMC GlobalPower such as SMEC, SMELC, SPPC, SPDC, SCPC and SMCPC, and the Treasurer of Daguma Agro, BonanzaEnergy and Sultan Energy. He had previously held finance positions in SMC and its subsidiaries. He obtained adegree in Bachelor of Science in Commerce, major in Accounting from San Sebastian College. On December 6,2018, he also attended a corporate governance training seminar conducted by the Center for Global BestPractices.

Irene M. Cipriano is the Assistant Corporate Secretary of SMC Global Power since 2010. She is an AssistantVice President and Associate General Counsel of SMC. She is also the Assistant Corporate Secretary of TopFrontier Investment Holdings, Inc., and the Corporate Secretary and Assistant Corporate Secretary of varioussubsidiaries of SMC Global Power and SMC. Atty. Cipriano was formerly the Assistant Corporate Secretary ofPAL Holdings, Inc. and Philippine Airlines Inc. She completed her Bachelors of Law degree from San BedaCollege of Law in 2000. On December 6, 2018, she also attended a corporate governance training seminarconducted by the Center for Global Best Practices.

Reynaldo S. Matillano is the Audit Manager of SMC Global since November 1, 2015 and was appointed asInternal Audit Manager on June 6, 2017. Prior thereto, he was part of the audit team of San Miguel YamamuraPackaging Corporation and SMC. He holds a degree in Bachelor in Business Administration, major inAccounting from Saint Paul University in Dumaguete City. On December 6, 2018, he also attended a corporategovernance training seminar conducted by the Center for Global Best Practices.

Maria Floriselda S. Abalos-Sampaga was appointed as the Data Protection Officer of the SMC Global Power onMarch 11, 2019 after having joined the Company as a regulatory compliance specialist on May 1, 2018. Priorthereto, she held positions in several agencies of the government such as the ERC, the National Wages andProductivity Commission and the Department of Labor and Employment. She obtained her Bachelor of Lawsfrom the Manuel L. Quezon University.

Jeciel B. Campos is the Sales and Marketing Manager of SMC Global Power since September 1, 2011 and wasappointed Assistant Vice President on June 5, 2018. Mr. Campos is a registered Mechanical Engineer andpreviously worked as a Marketing & Commercial Relations Officer for Central Luzon at the National PowerCorporation Regional Office. He graduated from Mapua Institute of Technology with a Bachelor of Sciencedegree in Mechanical Engineering. On December 6, 2018, he also attended a corporate governance trainingseminar conducted by the Center for Global Best Practices.

Jose Ferlino P. Raymundo is the Energy Sourcing & Trading Manager of SMC Global Power sinceSeptember 1, 2011 and was appointed Assistant Vice President on June 5, 2018. Mr. Raymundo and is aProfessional Electrical Engineer with over 32 years of experience in the power sector having worked for thePower Sector Assets and Liabilities Management Corporation and National Power Corporation prior to joiningSMC Global Power. He holds a Bachelor of Science in Electrical Engineering degree from Mapua Institute ofTechnology. On December 6, 2018, he also attended a corporate governance training seminar conducted by theCenter for Global Best Practices.

Danilo T. Tolarba has been the Head of the Human Resources Division of SMC Global Power since 2015 andwas appointed Assistant Vice-President and Human Resources Group Manager of the Company on June 5, 2018.Previously, Mr. Tolarba was the Manager of HR Services, Employee Relations, HR Technology, OrganizationDevelopment and Recruitment of SMC Corporate Human Resources; and also held other various senior humanresources positions in SMC and its subsidiaries prior thereto. He holds a Bachelor in Business Managementdegree from the Polytechnic University of the Philippines. On December 6, 2018, he also attended a corporategovernance training seminar conducted by the Center for Global Best Practices.

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PRINCIPAL SHAREHOLDER

San Miguel Corporation is the principal shareholder of SMC Global Power and owns 100% of the issued sharecapital of SMC Global Power.

San Miguel Corporation is a corporation organized and existing under the laws of the Republic of thePhilippines, with registered principal office address at No. 40 San Miguel Avenue, Mandaluyong City. SanMiguel Corporation is a public company under Section 17.2 of the Philippine SRC and its shares are listed on thePSE. San Miguel Corporation, together with its subsidiaries, is one of the largest publicly listed companies in thePhilippines.

San Miguel Corporation has become one of the largest and most diversified conglomerates in the Philippines,with sales equivalent to approximately 5.2% of Philippine GDP in 2017. Originally founded in 1890 as a singlebrewery in the Philippines, San Miguel Corporation currently owns market-leading businesses in various sectors,including beverages, food, packaging, fuel and oil, energy, infrastructure, and property and investments in cardistributorship and banking services. The common shares of San Miguel Corporation were listed on the PSE onNovember 5, 1948, and as of June 14, 2019 San Miguel Corporation had a market capitalization ofP430.5 billion (U.S.$8.2 billion).

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RELATED PARTY TRANSACTIONS

SMC Global Power engages from time to time in a variety of transactions with related parties. The Company hasconducted transactions with related parties on an arm’s-length basis. See Note 20 of the audited consolidatedfinancial statements of SMC Global Power as of and for the years ended December 31, 2018, 2017 and 2016 andNotes 15 of the unaudited interim condensed consolidated financial statements for more detailed information.

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TAXATION

The statements herein regarding taxation are based on the laws in force as of the date of this Offering Circularand are subject to any changes in law occurring after such date, which changes could be made on a retroactivebasis. The following summary does not purport to be a comprehensive description of all of the tax considerationsthat may be relevant to a decision to purchase, own or dispose of the Additional Securities and does not purportto deal with the tax consequences applicable to all categories of investors, some of which (such as dealers insecurities or commodities) may be subject to special rules. Prospective purchasers of the Additional Securitiesare advised to consult their own tax advisers concerning the overall tax consequences of their ownership ofAdditional Securities.

PHILIPPINE TAXATION

As used in this section, the term “resident alien” means an individual whose residence is within the Philippinesand who is not a citizen of the Philippines and a “non-resident alien” means an individual whose residence is notwithin the Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within thePhilippines for an aggregate period of more than 180 days during any calendar year is considered a “non-residentalien engaged in trade or business within the Philippines”; however, a non-resident alien who is actually withinthe Philippines for an aggregate period of 180 days or less during any calendar year is considered a “non-residentalien not engaged in trade or business within the Philippines.” A “resident foreign corporation” is a foreigncorporation engaged in trade or business within the Philippines and a “non-resident foreign corporation” is aforeign corporation not engaged in trade or business within the Philippines.

The characterization of the Additional Securities and Distributions for tax purposes is not settled underPhilippine tax laws and regulations. Subject to definitive law or regulation or a specific ruling issued byPhilippine tax authority in respect of the Additional Securities, the Distributions may be treated as dividends orinterest for tax purposes. Interest on debt instruments or interest-bearing obligations of residents (corporate orotherwise), and the amount received as dividend from domestic corporations, are generally considered as incomederived from a source within the Philippines. Since the Company is a Philippine resident or a domesticcorporation, Distributions received by Securityholders will be treated as income derived from a source within thePhilippines and will generally be subject to Philippine withholding tax.

Documentary Stamp Tax

Under the National Internal Revenue Code of 1997, as amended (the “Tax Code”), certain documents,instruments, papers, acceptances, assignments, sales and transfers of obligations, rights or property may besubject to documentary stamp tax. Documentary stamp tax will be levied, collected and paid for by the personmaking, signing, issuing, accepting or transferring the document wherever the document is made, signed, issued,accepted or transferred when the relevant obligation or right arises from a Philippine source or the relevantproperty is situated in the Philippines.

The Tax Code imposes documentary stamp tax on all original issuances of shares of stock at of P2.00 for eachP200, or fractional part thereof, of the par value of such shares of stock or actual consideration for the issuanceof the shares (in the case of no par value shares). On every original issuance of debt instruments, a documentarystamp tax of P1.50 on each P200, or fractional part thereof, of the issue price of any such debt instruments isimposed under the Tax Code. The original issuance of the Additional Securities (whether treated as shares ofstock or debt instruments) will therefore be subject to documentary stamp tax at the foregoing rates based on theissue price of the Additional Securities. The documentary stamp tax due on the original issuance of theAdditional Securities will be for the account of the Company.

Transfers of shares of stock by assignment in blank, delivery, or by any paper, agreement or memorandum orother evidence of transfer or sale (including to secure the future payment of money or for the future transfer ofstock) is subject to documentary stamp tax at the rate of P1.50 for each P200, or fractional part thereof, of thepar value of such shares of stock, or at an amount equivalent to 50% of the documentary stamp tax paid upon theissuance of the shares in the case of no par value shares. Accordingly, subsequent transfers or dispositions ofAdditional Securities, if treated as shares of stock for tax purposes, will be subject to documentary stamp tax atthese rates.

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No documentary stamp tax is generally payable on the subsequent transfer or disposition of debt instruments,provided that the transfer or disposition does not constitute a renewal or entail a change in the maturity date orremaining period of coverage of the relevant instrument. Accordingly, if the Additional Securities are treated asdebt instruments, no documentary stamp tax will generally be imposed on their subsequent transfer ordisposition, provided that any such transfer or disposition meets the foregoing requirements.

Distributions on the Additional Securities

Distributions that are characterized as dividends for Philippine tax purposes will be subject to final withholdingtax at the rate of (i) 10% if the Securityholder is a Philippine citizen or resident alien or (ii) 20% if theSecurityholder is a non-resident alien engaged in trade or business within the Philippines. A non-resident aliennot engaged in trade or business within the Philippines is subject to final withholding tax at the rate of 25%regardless of whether the Distributions are characterized as dividends or interest or other fixed or determinableperiodic or casual gains or profits. A non-resident foreign corporation is generally taxable on all gross incomereceived from all sources within the Philippines at the rate of 30%; however, if Distributions received by non-resident foreign corporations are regarded as taking the form of dividends for Philippine tax purposes, they maybe subject to final withholding tax at the rate of 15%, provided that the country in which the non-resident foreigncorporation is domiciled imposes no taxes on foreign-sourced dividends or allows a credit against the tax duefrom the non-resident foreign corporation, in which case taxes are deemed to have been paid in the Philippinesequivalent to 15%, representing the difference between the regular income tax rate of 30% and the 15% tax rateon dividends. Distributions received by domestic corporations and resident foreign corporations that are regardedas taking the form of dividends for Philippine tax purposes are not subject to Philippine tax.

On the other hand, the tax treatment of interest generally depends on the type of instrument from which theinterest arises and whether the class of taxpayer receiving the interest is a resident or a non-resident forPhilippine tax purposes. Interest on debt instruments arising from borrowing from the public (which for thispurpose means more than nineteen lenders), long-term deposits or investment certificates, currency bankdeposits, trust funds and similar instruments is generally subject to a 20% final withholding tax if received byPhilippine citizens, resident aliens, non-resident aliens engaged in trade or business within the Philippines,domestic corporations and resident foreign corporations (all of which may generally be considered as “residents”in respect of taxation of Philippine-sourced income). Interest on debt instruments not covered by the foregoinginstruments received by the same categories of residents will form part of their taxable income and will besubject to ordinary income tax rates (at graduated rates from 0% – 35% for individuals and 30% regularcorporate income tax or 2% minimum corporate income tax (“MCIT”), as the case may be, for domestic andresident foreign corporations), subject to the withholding by the issuer of an amount equivalent to 20% of suchinterest, which shall be creditable against the income tax liability of the resident for the relevant taxable year.

Interest on debt instruments received by non-residents will generally be subject to final withholding tax at therate of (i) 25%, if the holder is a non-resident alien not engaged in trade or business within the Philippines, or(ii) 20%, if the holder is a non-resident foreign corporation on the assumption that the debt instrument is a“foreign loan” granted by such non-resident foreign corporation. “Foreign loans” are defined as loan contracts,including all types of debt instrument, whether in kind or in cash, which are payable in a currency other than thePhilippine Peso, entered into by a Philippine resident, corporate or otherwise, with a non-resident. Distributionswill be taxed in the manner and at the rate described above if they are characterized as interest. The tax withheldconstitutes a final settlement of Philippine tax liability in respect of such interest or dividend income earned bythe non-resident individual not engaged in trade or business within the Philippines or by the non-resident foreigncorporation. For the purpose of implementing these rules, the Company will determine the holder of theAdditional Securities based on the records of the Registrar.

The Company, as required by the Tax Code, will withhold and make payment of the applicable withholding taxdescribed above. However, the Company shall pay Additional Amounts as may be necessary and subject tocertain exceptions, so that the net amounts received by Securityholders equal the amounts which would otherwisehave been receivable by them had no such deduction or withholding been required. See “Terms and Conditionsof the Additional Securities — Taxation and Gross-up.”

The above-mentioned tax rates are without prejudice to applicable preferential tax rates under tax treaties in forcebetween the Philippines and the country of domicile of the non-resident holder. Most tax treaties to which the

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Philippines is a party generally provide for a reduced tax rate of 15% in cases where the interest or dividendarises in the Philippines and is paid to a resident of the other contracting state. In addition, some treaties providethat the withholding tax rate may be reduced to 10% in cases where the interest arises in respect of a public issueof bonded indebtedness or in the case of a dividend, where the recipient of the dividend beneficially owns at least10% or 25% of the issuer, depending on which treaty applies. However, most tax treaties also provide thatreduced withholding tax rates shall not apply if the recipient of the interest or dividend, who is a resident of theother contracting state, carries on business in the Philippines through a permanent establishment and the holdingof the relevant interest-bearing or dividend-earning interest is effectively connected with such permanentestablishment.

The Philippine tax authorities have prescribed a certain procedure for claiming tax treaty benefits for dividendand interest income of non-resident income earners. The preferential treaty rates for dividend and interest incomeof non-residents shall be applied and used outright by the withholding agents upon submission by thenon-resident of a Certificate of Residence for Tax Treaty Relief (“CORTT”) Form that complies with RevenueMemorandum Order No. 8-2017. The use of the preferential rates shall be done through withholding final taxesat applicable treaty rates. Withholding agents or income payors can withhold at a reduced rate or exempt thenon-resident based on the duly accomplished CORTT Form submitted to them. Failure to submit a CORTT Formto the withholding agent or income payor would mean that the non-resident is not claiming any tax treaty reliefand therefore such income should be subjected to the normal rate provided under the Tax Code.

Sale or Other Disposition of the Additional Securities

A holder of a Security will recognize a gain or loss upon the sale or other disposition (including a redemption atmaturity or otherwise) of the Additional Securities in an amount equal to the difference between the amountrealized from such disposition and such holder’s basis in the Additional Securities.

The net capital gains realized by a citizen, resident alien, non-resident alien, whether or not engaged in trade orbusiness within the Philippines, or a domestic corporation (other than a dealer in securities) during each taxableyear from the sale, exchange or disposition of shares of stock outside the facilities of the PSE, are subject tocapital gains tax at the rate of 15% of the net capital gains realized during the taxable year.

The net capital gains realized by a resident foreign corporation or a non-resident foreign corporation during eachtaxable year from the sale, exchange or disposition of shares of stock in a domestic corporation outside thefacilities of the PSE are subject to final tax at the following rates:

Not over P100,000 5%On any amount in excess of P100,000 10%

Accordingly, if the Additional Securities are regarded as “shares of stock” for Philippine tax purposes, capitalgains tax will be payable on the sale or disposition of the Additional Securities. Gains from the sale of shares ofstock in a domestic corporation are treated as derived entirely from a source within the Philippines, regardless ofwhere the shares are sold.

Gains realized from the sale, exchange, or retirement of bonds, debentures, and other certificates of indebtednesswith an original maturity date of more than five years as measured from the date of the issuance of such bonds,debentures or other certificate of indebtedness (“Long-Term Bonds”) are exempt from income tax. Accordingly,if the Additional Securities are regarded as Long-Term Bonds for Philippine tax purposes, gains realized fromthe sale or transfer of the Additional Securities will be exempt from Philippine income tax.

If the Additional Securities are not regarded as Long-Term Bonds for Philippine tax purposes, the tax treatmentof gains from the sale or transfer of the Additional Securities will generally depend on whether the relevantSecurityholder is a resident or a non-resident for Philippine tax purposes. Any gain realized by residents from thesale or transfer of debt instruments forms part of their taxable income and is subject to ordinary income tax rates(at graduated rates from 0%-35% for individuals and 30% regular corporate income tax or 2% MCIT, as the casemay be, for domestic and resident foreign corporations). On the other hand, gains realized by non-residents from

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the sale or transfer of debt instruments are subject to final withholding tax at the rate of (i) 25%, if the holder is anon-resident alien not engaged in trade or business within the Philippines, or (ii) 30%, if the holder is anon-resident foreign corporation.

In case the Securityholder is (i) an individual, (ii) is not a dealer in securities, and (iii) has held the AdditionalSecurities for a period of more than 12 months prior to the sale, only 50% of any capital gain will be recognizedand included in said Securityholder’s gross taxable income for Philippine tax purposes.

Value-Added Tax

The transfer of the Additional Securities in the Philippines by dealers in securities will be subject to value-addedtax at the rate of 12% on the gross income they derive from the sale or exchange of the Additional Securities.

Estate and Donor’s Tax

Securities issued by a corporation organized or constituted in the Philippines in accordance with Philippine lawsare deemed to have a Philippine situs and their transfer by way of succession or donation is subject to Philippineestate and donor’s taxes.

The transfer by a deceased person, whether a Philippine resident or a non-Philippine resident, to his heirs of theAdditional Securities shall be subject to an estate tax which is levied on the net estate of the deceased at a rate of6%. A Securityholder shall be subject to donor’s tax at a rate based on the total gifts in excess of P250,000.00exempt gift made during the calendar year on the transfer of the Additional Securities by donation.

The estate or donor’s taxes payable in the Philippines may be credited with the amount of any estate or donor’staxes imposed by the authority of a foreign country, subject to limitations on the amount to be credited, and thetax status of the donor. The estate tax and the donor’s tax, in respect of the Additional Securities, shall not becollected (a) if the deceased, at the time of death, or the donor, at the time of the donation, was a citizen andresident of a foreign country which, at the time of his death or donation, did not impose a transfer tax of anycharacter in respect of intangible personal property of citizens of the Philippines not residing in that foreigncountry; or (b) if the laws of the foreign country of which the deceased or donor was a citizen and resident, at thetime of his death or donation, allows a similar exemption from transfer or death taxes of every character ordescription in respect of intangible personal property owned by citizens of the Philippines not residing in theforeign country.

In case the Additional Securities are transferred for less than an adequate and full consideration in money ormoney’s worth, the amount by which the fair market value of the Additional Securities exceeded the value of theconsideration may be deemed a gift and may be subject to donor’s taxes, provided that a transfer of propertymade in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from anydonative intent), will be considered as made for an adequate and full consideration in money or money’s worth.

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CLEARANCE AND SETTLEMENT OF THE SECURITIES

The information set out below is subject to any change in or reinterpretation of the rules, regulations andprocedures of Euroclear and Clearstream, Luxembourg (together, the “Clearing Systems”) currently in effect.The information in this section concerning the Clearing Systems has been obtained from sources that theCompany believes to be reliable, but neither the Company nor any Manager takes any responsibility for theaccuracy of this section. Investors wishing to use the facilities of any of the Clearing Systems are advised toconfirm the continued applicability of the rules, regulations and procedures of the relevant Clearing System.Neither the Company nor any other party to the Agency Agreement will have any responsibility or liability forany aspect of the records relating to, or payments made on account of, beneficial ownership interests in theAdditional Securities held through the facilities of any Clearing System or for maintaining, supervising orreviewing any records relating to such beneficial ownership interests. Custodial and depositary links have beenestablished with Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the AdditionalSecurities and transfers of the Additional Securities associated with secondary market trading.

THE CLEARING SYSTEMS

Euroclear and Clearstream, Luxembourg

Euroclear and Clearstream, Luxembourg each holds securities for participating organizations and facilitates theclearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of their participants. Euroclear and Clearstream, Luxembourg provide theirrespective participants with, among other things, services for safekeeping, administration, clearance andsettlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream,Luxembourg also deal with domestic securities markets in several countries through established depository andcustodial relationships. Euroclear and Clearstream, Luxembourg have established an electronic bridge betweentheir two systems across which their respective participants may settle trades with each other. Euroclear andClearstream, Luxembourg participants are financial institutions throughout the world, including underwriters,securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations.Indirect access to Euroclear or Clearstream, Luxembourg is also available to others, such as banks, brokers,dealers and trust companies which clear through or maintain a custodial relationship with a Euroclear orClearstream, Luxembourg participant, either directly or indirectly.

Distributions of principal with respect to book-entry interests in the Securities held through Euroclear orClearstream, Luxembourg will be credited, to the extent received by the Principal Paying Agent, to the cashaccounts of Euroclear or Clearstream, Luxembourg participants in accordance with the relevant rules andprocedures of the institution.

Registration and Form

Book-entry interests in the Additional Securities held through Euroclear and Clearstream, Luxembourg will beevidenced by the Global Certificate, registered in the name of nominee of the common depositary of Euroclearand Clearstream, Luxembourg. The Global Certificate will be held by a common depositary for Euroclear andClearstream, Luxembourg. Beneficial ownership in the Additional Securities will be held through financialinstitutions as direct and indirect participants in Euroclear and Clearstream, Luxembourg.

The aggregate holdings of book-entry interests in the Additional Securities in Euroclear and Clearstream,Luxembourg will be reflected in the book-entry accounts of each such institution. Euroclear and Clearstream,Luxembourg, as the case may be, and every other intermediate holder in the chain to the beneficial owner ofbook-entry interests in the Additional Securities, will be responsible for establishing and maintaining accountsfor their participants and customers having interests in the book-entry interests in the Additional Securities. TheRegistrar will be responsible for maintaining a record of the aggregate holdings of Additional Securitiesregistered in the name of a common nominee for Euroclear and Clearstream, Luxembourg and/or, if individualGlobal Certificates are issued in the limited circumstances described under “The Global Certificate —Registration of Title”, holders of Additional Securities represented by those individual Global Certificates. ThePrincipal Paying Agent will be responsible for ensuring that payments received by it from the Company forholders of interests in the Additional Securities holding through Euroclear and Clearstream, Luxembourg arecredited to Euroclear or Clearstream, Luxembourg, as the case may be.

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The Company will not impose any fees in respect of the Additional Securities; however, holders of book-entryinterests in the Additional Securities may incur fees normally payable in respect of the maintenance andoperation of accounts in Euroclear and Clearstream, Luxembourg.

CLEARANCE AND SETTLEMENT PROCEDURES

Initial Settlement

Upon their original issue, the Additional Securities will be in global form represented by the Global Certificate.Interests in the Additional Securities will be in uncertificated book-entry form. Purchasers electing to hold book-entry interests in the Additional Securities through Euroclear and Clearstream, Luxembourg accounts will followthe settlement procedures applicable to conventional eurobonds. Book-entry interests in the Additional Securitieswill be credited to Euroclear and Clearstream, Luxembourg participants’ securities clearance accounts on thebusiness day following the Closing Date against payment (for value on the Closing Date).

Secondary Market Trading

Secondary market sales of book-entry interests in the Additional Securities held through Euroclear orClearstream, Luxembourg to purchasers of book-entry interests in the Additional Securities through Euroclear orClearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures ofEuroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventionalparticipants.

General

Although the foregoing sets out the procedures of Euroclear and Clearstream, Luxembourg in order to facilitatethe transfers of interests in the Additional Securities among participants of Euroclear and Clearstream,Luxembourg, none of Euroclear and Clearstream, Luxembourg is under any obligation to perform or continue toperform such procedures, and such procedures may be discontinued at any time.

Neither the Company nor any of its agents will have any responsibility for the performance by Euroclear orClearstream, Luxembourg or their respective participants of their respective obligations under the rules andprocedures governing their operations.

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SUBSCRIPTION AND SALE

GENERAL

The Joint Lead Managers have agreed, pursuant to a Subscription Agreement dated [Š], 2019 (the “SubscriptionAgreement”) between SMC Global Power and the Joint Lead Managers and subject to the satisfaction of certainconditions, to procure subscriptions and payment for the aggregate principal amount of the Additional Securities.In addition, SMC Global Power has agreed to reimburse the Joint Lead Managers for certain of their expenses inconnection with the issue of the Additional Securities.

The Subscription Agreement provides that SMC Global Power will indemnify the Joint Lead Managers againstcertain liabilities. The Subscription Agreement entitles the Joint Lead Managers to terminate it in certaincircumstances prior to payment being made to SMC Global Power.

The Joint Lead Managers and their affiliates have performed and may perform in the future various financialadvisory, investment banking and commercial banking services for SMC Global Power and/or its affiliates fromtime to time for which they have received customary fees and expenses and may, from time to time, engage intransactions with and perform services for SMC Global Power, and/or its affiliates in the ordinary course of theirbusiness.

The Joint Lead Managers or certain of their affiliates may purchase the Additional Securities and be allocatedSecurities for asset management and/or proprietary purposes but not with a view to distribution. The Issuer or theJoint Lead Managers may pay commissions to certain third parties (including, without limitation, commission orrebate to private banks).

The Joint Lead Managers and their affiliates are full service financial institutions engaged in various activitieswhich may include securities trading, commercial and investment banking, financial advice, investmentmanagement, principal investment, hedging, financing and brokerage activities. Each of the Joint Lead Managersmay have engaged in, and may in the future engage in, investment banking and other commercial dealings in theordinary course of business with SMC Global Power or its subsidiaries, jointly controlled entities or associatedcompanies and may be paid fees in connection with such services from time to time. In the ordinary course oftheir various business activities, the Joint Lead Managers and their affiliates may make or hold (on their ownaccount, on behalf of clients or in their capacity of investment advisers) a broad array of investments and activelytrade debt and equity securities (or related derivative securities) and financial instruments (including bank loans)for their own account and for the accounts of their customers and may at any time hold long and short positionsin such securities and instruments and enter into other transactions, including credit derivatives (such as assetswaps, repackaging and credit default swaps) in relation thereto. Such transactions, investments and securitiesactivities may involve securities and instruments of SMC Global Power or its subsidiaries, jointly controlledentities or associated companies, including the Securities, may be entered into at the same time or proximate tooffers and sales of the Additional Securities or at other times in the secondary market and be carried out withcounterparties that are also purchasers, holders or sellers of Securities. The Joint Lead Managers do not intend todisclose the extent of any such investment or transactions otherwise than in accordance with any legal orregulatory obligation to do so.

If a jurisdiction requires that the offering of Additional Securities be made by a licensed broker or dealer and theJoint Lead Managers or any of their respective affiliates is a licensed broker or dealer in that jurisdiction, suchoffering shall be deemed to be made by the Joint Lead Managers or such affiliate on behalf of SMC GlobalPower in such jurisdiction. The distribution of this offering circular or any offering material and the offering, saleor delivery of the Additional Securities is restricted by law in certain jurisdictions. Therefore, persons who maycome into possession of this offering circular or any offering material are advised to consult with their own legaladvisers as to what restrictions may be applicable to them and to observe such restrictions. This offering circularmay not be used for the purpose of an offer or invitation in any circumstances in which such offer or invitation isnot authorized.

OFFERING AND SELLING RESTRICTIONS

None of SMC Global Power or the Joint Lead Managers makes any representation that any action will be takenin any jurisdiction by the Joint Lead Managers or SMC Global Power that would permit a public offering of the

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Additional Securities, or possession or distribution of this offering circular (in preliminary, proof or final form)or any other offering or publicity material relating to the Additional Securities, in any country or jurisdictionwhere action for that purpose is required. Each of the Joint Lead Managers will comply with all applicable lawsand regulations in each jurisdiction in which it acquires, offers, sells or delivers Additional Securities or has in itspossession or distributes this offering circular (in preliminary, proof or final form) or any such other material, inall cases at its own expense. The Joint Lead Managers will also ensure that no obligations are imposed on SMCGlobal Power in any such jurisdiction as a result of any of the foregoing actions. SMC Global Power will have noresponsibility for, and the Joint Lead Managers will not obtain any consent, approval or permission required by itfor, the acquisition, offer, sale or delivery by it of Additional Securities under the laws and regulations in force inany jurisdiction to which it is subject or in or from which it makes any acquisition, offer, sale or delivery. TheJoint Lead Managers are not authorized to make any representation or use any information in connection with theissue, subscription and sale of the Additional Securities other than as contained in, or which is consistent with,the offering circular or any amendment or supplement to it.

United States of America

The Additional Securities are being offered and sold only outside of the United States in offshore transactions inreliance on Regulation S. The Securities have not been and will not be registered under the Securities Act andmay not be offered or sold within the United States except in accordance with Regulation S or pursuant to anexemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In addition,until 40 days after the commencement of the offering of the Additional Securities, an offer or sale of Securitieswithin the United States by a dealer (whether or not participating in the offering) may violate the registrationrequirements of the Securities Act.

United Kingdom

Each of the Joint Lead Managers has represented, warranted and agreed that:

(1) it has only communicated or caused to be communicated and will only communicate or cause to becommunicated any invitation or inducement to engage in investment activity (within the meaning of section21 of the Financial Services and Markets Act 2000, as amended including by the Financial Services Act2012 (the “FSA”) (the “FSMA”)) received by it in connection with the issue or sale of any AdditionalSecurities in circumstances in which section 21(1) of the FSMA does not apply to the Company; and

(2) it has complied and will comply with all applicable provisions of the FSMA and Section 89 and 90 of theFSA with respect to anything done by it in relation to the Additional Securities in, from or otherwiseinvolving the United Kingdom.

Singapore

Each Joint Lead Manager has acknowledged that this Offering Circular has not been and will not be registered asa prospectus with the Monetary Authority of Singapore. Accordingly, each Joint Lead Manager has representedand agreed that it has not offered or sold any Additional Securities or caused such Additional Securities to bemade the subject of an invitation for subscription or purchase and will not offer or sell such Additional Securitiesor cause such Additional Securities to be made the subject of an invitation for subscription or purchase, and hasnot circulated or distributed, nor will it circulate or distribute this Offering Circular, or any other document ormaterial in connection with the offer or sale or invitation for subscription or purchase of such AdditionalSecurities, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor (asdefined in Section 4A of the SFA) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined inSection 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) ofthe SFA, and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuantto, and in accordance with the conditions of, any other applicable provision of the SFA.

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Where Additional Securities are subscribed or purchased under Section 275 of the SFA by a relevant personwhich is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole businessof which is to hold investments and the entire share capital of which is owned by one or more individuals,each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and eachbeneficiary of the trust is an individual who is an accredited investor,

securities or securities-based derivatives contracts (as defined in Section 2(1) of the SFA) of that corporation orthe beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six monthsafter that corporation or that trust has acquired the Additional Securities pursuant to an offer made underSection 275 of the SFA except:

(i) to an institutional investor or to a relevant person, or to any person arising from an offer referred to inSection 275(1A) or Section 276(4)(i)(B) of the SFA;

(ii) where no consideration is or will be given for the transfer;

(iii) where the transfer is by operation of law;

(iv) as specified in Section 276(7) of the SFA; or

(v) as specified in Regulation 37A of the Securities and Futures (Offers of Investments) (Securities andSecurities-based Derivatives Contracts) Regulations 2018.

Singapore SFA Product Classification: In connection with Section 309B of the SFA and the CMP Regulations2018, the Issuer has determined, and hereby notifies all relevant persons (as defined in Section 309A(1) of theSFA), that the Securities are ‘prescribed capital markets products’ (as defined in the CMP Regulations 2018)and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of InvestmentProducts and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).

Hong Kong

Each of the Joint Lead Managers has represented and agreed that:

(1) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any AdditionalSecurities other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap.571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do notresult in the document being an “offering circular” as defined in the Companies (Winding Up andMiscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to thepublic within the meaning of that Ordinance; and

(2) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possessionfor the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or documentrelating to the Additional Securities, which is directed at, or the contents of which are likely to be accessedor read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong)other than with respect to Securities which are or are intended to be disposed of only to persons outsideHong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and anyrules made under that Ordinance.

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Japan

The Securities have not been and will not be registered under the Financial Instruments and Exchange Act ofJapan (Act No. 25 of 1948, as amended; the “FIEA”) and are subject to the Special Taxation Measures Act ofJapan (Act No. 26 of 1957, as amended; the Special Taxation Measures Act). Each Joint Lead Manager hasrepresented and agreed that (i) it will not offer or sell any Additional Securities, directly or indirectly, in Japan orto, or for the benefit of, any resident of Japan (as defined under Item 5, Paragraph 1, Article 6 of the ForeignExchange and Foreign Trade Act (Act No. 228 of 1949, as amended)), or to others for re-offering or resale,directly or indirectly, in Japan or to, or for the benefit of, a resident of Japan, except pursuant to an exemptionfrom the registration requirements of, and otherwise in compliance with, the FIEA and any other applicable laws,regulations and ministerial guidelines of Japan; and (ii) it will not, directly or indirectly, offer or sell and will not,as part of its distribution of the Additional Securities at any time, directly or indirectly, offer or sell anyAdditional Securities to, or for the benefit of, any person other than (a) a beneficial owner that is, for Japanesetax purposes, neither (x) an individual resident of Japan or a Japanese corporation, nor (y) an individualnon-resident of Japan or a non-Japanese corporation that in either case is a specially-related person of SMCGlobal Power, or (b) a Japanese financial institution, designated in Article 6, Paragraph (9) of the SpecialTaxation Measures Act, except as specifically permitted under the Special Taxation Measures Act.

European Economic Area

Each Joint Lead Manager has represented and agreed that it has not offered, sold or otherwise made available andwill not offer, sell or otherwise make available any Additional Securities which are the subject of the offeringcontemplated by this offering circular to any retail investor in the EEA. For the purposes of this provision theexpression “retail investor” means a person who is one (or more) of the following:

(a) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or

(b) a customer within the meaning of Directive 2002/92/EC (as amended, the “Insurance MediationDirective”), where that customer would not qualify as a professional client as defined in point (10) ofArticle 4(1) of MiFID II.

Philippines

Under Republic Act No. 8799, known as the Securities Regulation Code (the “Philippine SRC”), and itsimplementing rules, securities, such as the Additional Securities, are not permitted to be sold or offered for saleor distribution within the Philippines unless such securities are registered with the SEC or are otherwise exemptsecurities or sold pursuant to an exempt transaction.

The Additional Securities are being offered in the Philippines to any number of qualified buyers as defined in thePhilippine SRC and applicable regulations. The offer and sale of the Additional Securities qualify as an exempttransaction pursuant to section 10.1(l) of the Philippine SRC. A confirmation of exemption from the SEC that theoffer and sale of the Additional Securities in the Philippines qualify as an exempt transaction under PhilippineSRC is not required to be, and has not been, obtained.

THE ADDITIONAL SECURITIES BEING OFFERED OR SOLD HAVE NOT BEEN REGISTERED, ANDWILL NOT BE REGISTERED WITH THE SEC UNDER THE PHILIPPINE SRC. ANY FUTURE OFFER ORSALE OF THE SECURITIES IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE,UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.

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LEGAL MATTERS

Certain legal matters as to Philippine law relating to the Securities and the offer through the Offering Circularwill be passed upon by Picazo Buyco Tan Fider & Santos, legal counsel to SMC Global Power, and SyCipSalazar Hernandez & Gatmaitan, legal counsel to the Joint Lead Managers. Certain legal matters as to UnitedStates federal law and English law will be passed upon by Latham & Watkins LLP, legal counsel to SMC GlobalPower, and Milbank LLP, legal counsel to the Joint Lead Managers.

Each of the foregoing legal counsel has neither shareholdings in SMC Global Power nor any right, whetherlegally enforceable or not, to nominate persons or to subscribe for securities in SMC Global Power. Each of thelegal counsel will not receive any direct or indirect interest in SMC Global Power or in any securities thereof(including options, warrants or rights thereto) pursuant to or in connection with the Offer.

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INDEPENDENT AUDITORS

The fiscal year of SMC Global Power begins on January 1 and ends on December 31 of each year.

KPMG, has audited the consolidated financial statements of SMC Global Power as of and for the years endedDecember 31, 2016, 2017 and 2018 and has reviewed the unaudited condensed consolidated financial statementsof SMC Global Power as of and for the three months ended 31 March 2019, in accordance with the PhilippineStandards on Auditing.

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GLOSSARY OF SELECTED TERMS

In this Offering Circular, unless the context otherwise requires, the following terms shall have the meanings setforth below.

Actual Energy Generated . . . . . . . . . . . . . Actual output of the power plant measured in GWh, MWh or KWhattributable to the contracted capacity of the Sual Power Plant, IlijanPower Plant or San Roque Power Plant, as applicable.

AHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Angat Hydropower Corporation.

AHEPP . . . . . . . . . . . . . . . . . . . . . . . . . . . Angat Hydroelectric Power Plant.

ALECO . . . . . . . . . . . . . . . . . . . . . . . . . . Albay Electric Cooperative, Inc.

APEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Albay Power and Energy Corp.

Average Net Dependable Capacity . . . . . Average for any given period of the Net Dependable Capacity withinthat period, expressed in MW.

Availability Factor . . . . . . . . . . . . . . . . . . Ratio, in percent, equal to (1)(a) the number of hours in a period(e.g., a month or a year) less (b) the average number of hours ofplanned and unplanned outages during that period, divided by (2) thenumber of hours in that period.

Bayan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bayan Resources TBK.

BESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . Battery energy storage system.

Bonanza Energy . . . . . . . . . . . . . . . . . . . . Bonanza Energy Resources, Inc.

BOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Build operate transfer.

BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bangko Sentral ng Pilipinas, the Central Bank of the Philippines.

BTU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . British thermal unit, a unit of heat energy.

CAGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compound annual growth rate.

CFB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Circulating fluidized bed.

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . The People’s Republic of China.

Clean Air Act . . . . . . . . . . . . . . . . . . . . . . The Philippine Clean Air Act of 1999.

Clean Water Act . . . . . . . . . . . . . . . . . . . . The Philippine Clean Water Act of 2004.

Clearing System Business Day . . . . . . . . A day on which Euroclear and Clearstream, Luxembourg are bothopen for business.

Clearing Systems . . . . . . . . . . . . . . . . . . . Euroclear and Clearstream, Luxembourg.

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Clearstream, Luxembourg . . . . . . . . . . . . Clearstream Banking, societe anonyme.

CLPPC . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Luzon Premiere Power Corp.

COC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coal operating contract.

contestable customer . . . . . . . . . . . . . . . . Electricity end-users with monthly average peak demand of at least1MW for the preceding 12 months to the initial implementation ofOpen Access, which shall be reduced to 750 KW two yearsthereafter. Under current regulations, end-users with monthlyaverage peak demand of at least 500 KW may voluntarily participatein the retail market.

contestable market . . . . . . . . . . . . . . . . . . A market of end-users who have a choice on their supplier ofelectricity.

Daguma Agro . . . . . . . . . . . . . . . . . . . . . . Daguma Agro Minerals, Inc.

Davao Greenfield Power Plant . . . . . . . . . The 2 x 150 MW coal-fired power plant located in Malita, DavaoOccidental.

DENR . . . . . . . . . . . . . . . . . . . . . . . . . . . . Department of Environment and Natural Resources of thePhilippines.

Distribution Code . . . . . . . . . . . . . . . . . . . The Philippine Distribution Code.

DOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Department of Energy of the Philippines.

ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Conversion Agreement.

ECC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmental Compliance Certificate.

EIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmental Impact Statement.

EISS Law . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Environmental Impact Statement System

EPIRA . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Republic Act No. 9136, otherwise known as the ElectricPower Industry Reform Act of 2001.

ERC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Regulatory Commission of the Philippines.

ER Claim . . . . . . . . . . . . . . . . . . . . . . . . . Equivalent relief claim.

ERC Order . . . . . . . . . . . . . . . . . . . . . . . . The order dated March 3, 2014 issued by the ERC which voided theWESM prices for the November and December 2013 billing monthsand imposed recalculated prices to be calculated by PEMC.

Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . Euroclear Bank SA/NV.

FIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Investments Act of 1991 of the Philippines.

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FRSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Financial Reporting Standards Council of the Philippines.

FSMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Financial Services and Markets Act 2000 of theUnited Kingdom.

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross domestic product.

Government . . . . . . . . . . . . . . . . . . . . . . . The Government of the Philippines.

Grid Code . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Grid Code.

GW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gigawatt, a unit of electrical power equivalent to 1,000 MW.

GWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gigawatt hours, a unit of electrical energy equivalent to 1,000 MWh.

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . The Hong Kong Special Administrative Region of the People’sRepublic of China.

IASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The International Accounting Standards Board.

Ilijan ECA . . . . . . . . . . . . . . . . . . . . . . . . The ECA under which NPC is required to deliver and supply toKEILCO the fuel necessary to operate the Ilijan Power Plant.

Ilijan IPPA Agreement . . . . . . . . . . . . . . . The IPPA agreement dated May 11, 2010 made between PSALMand SMC Global Power with the conformity of the NPC relative tothe IPP contract of NPC for the Ilijan Power Plant.

Ilijan Power Plant . . . . . . . . . . . . . . . . . . . Natural gas fired combined cycle power plant with installed capacityof 2 x 600 MW located in Ilijan, Batangas.

Installed Capacity . . . . . . . . . . . . . . . . . . . Gross maximum dependable capacity of a power plant, expressed inMW, i.e., the maximum amount of power that can be generated bythe power plant.

IPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Power Producer.

IPPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Power Producer Administrator.

IPPA Agreement . . . . . . . . . . . . . . . . . . . Independent Power Producer Administration Agreement.

IPPA Power Plants . . . . . . . . . . . . . . . . . . The Sual Power Plant, the San Roque Power Plant and the IlijanPower Plant.

IRR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Implementing Rules and Regulations of EPIRA promulgated onFebruary 27, 2002.

ISO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Organization for Standardization.

K-water . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea Water Resource Corporation.

Kcal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kilo-Calorie, a unit of heat energy.

167

KEILCO . . . . . . . . . . . . . . . . . . . . . . . . . . KEPCO Ilijan Corporation, owner of the Ilijan Power Plant, which isa joint venture between Korea Electric Power Corporation,Mitsubishi Corporation and TeaM Energy.

KPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kaltim Prima Coal.

KV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kilo-Volts, a unit of voltage equivalent to 1,000 volts.

KW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kilowatt, a unit of electrical power equivalent to 1,000 watt.

KWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kilowatt hours, a unit of electrical energy equivalent to 1,000 watthour.

Limay Greenfield Power Plant . . . . . . . . . The 4 x 150 MW coal-fired power plant located in Limay, Bataan.

Limay Cogeneration Plant . . . . . . . . . . . . The 140 MW cogeneration power plant owned by PetronCorporation.

Local Government Code . . . . . . . . . . . . . Philippine Republic Act No. 7160, as amended.

Luzon Grid . . . . . . . . . . . . . . . . . . . . . . . . An interconnected network of transmission lines running throughLuzon island for delivering electricity.

Masinloc BESS . . . . . . . . . . . . . . . . . . . . The 10 MW battery energy storage project in Masinloc, Zambales.

Masinloc Power Plant . . . . . . . . . . . . . . . The 1 x 330 MW (Unit 1), 1 x 344 MW (Unit 2) coal-fired powerplant and 335 MW (Unit 3) expansion project under constructionlocated in Masinloc, Zambales.

Meralco . . . . . . . . . . . . . . . . . . . . . . . . . . Manila Electric Company.

Mindanao Grid . . . . . . . . . . . . . . . . . . . . . An interconnected network of transmission lines running throughMindanao for delivering electricity.

MPGC . . . . . . . . . . . . . . . . . . . . . . . . . . . Mariveles Power Generation Corporation.

MPPCL . . . . . . . . . . . . . . . . . . . . . . . . . . . Masinloc Power Partners Co. Ltd.

Must Pay Volume . . . . . . . . . . . . . . . . . . . The monthly generation payments SMC Global Power “must pay”for electricity sold up to a given volume.

MW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Megawatt, a unit of electrical power equivalent to 1,000 kilowatt.

MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . Megawatt hours, a unit of electrical energy equivalent to1,000 kilowatt hour.

MWSS . . . . . . . . . . . . . . . . . . . . . . . . . . . Metropolitan Waterworks and Sewerage System.

NEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Electrification Administration of the Philippines.

168

Net Capacity Factor . . . . . . . . . . . . . . . . . Ratio, in percent, equal to (1) actual electricity generated by a powerplant in a period (net of electricity utilized to drive power plantservice or auxiliaries), divided by (2)(a) number of hours in theperiod multiplied by (b) the contracted capacity of such power plant.

Net Dependable Capacity . . . . . . . . . . . . . Gross dependable capacity of a power plant (which may be less thanInstalled Capacity at any given time if technical problems arepresent) less the power plant capacity utilized to drive power plantstation service or auxiliaries, expressed in MW.

Net Heat Rate . . . . . . . . . . . . . . . . . . . . . . Heat energy required by a power plant to produce one KWh ofelectrical energy net of the parasitic or auxiliary loads of the powerplant, usually expressed in terms of BTU/KWh, Kcal/KWh or Kilo-Joule/KWh.

NGCP . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Grid Corporation of the Philippines.

NIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Irrigation Administration.

Non-NPC . . . . . . . . . . . . . . . . . . . . . . . . . IPP-owned and operated plants.

NPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Power Corporation of the Philippines.

NPC-IPP . . . . . . . . . . . . . . . . . . . . . . . . . . NPC-owned and IPP-operated plants.

NWRB . . . . . . . . . . . . . . . . . . . . . . . . . . . National Water Resources Board.

Open Access . . . . . . . . . . . . . . . . . . . . . . . System of allowing qualified persons to use the transmission and/ordistribution systems and associated facilities of distribution utilitiessubject to the payment of transmission and/or distribution wheelingrates approved by the ERC.

PDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Dealing System.

PEMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Electricity Market Corporation.

PFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Financial Reporting Standards.

Philippine peso or Pesos or P . . . . . . . . . The lawful currency of the Philippines.

Philippines . . . . . . . . . . . . . . . . . . . . . . . . Republic of the Philippines.

Philippine SRC . . . . . . . . . . . . . . . . . . . . . Securities Regulation Code of the Philippines (Republic ActNo. 8799) and its implementing rules, as amended.

PPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power purchase agreement.

PSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power supply agreement.

PSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Philippine Stock Exchange.

169

PSALM . . . . . . . . . . . . . . . . . . . . . . . . . . Power Sector Assets and Liabilities Management Corporation.

PSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power supply contract.

PVEI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PowerOne Ventures Energy Inc.

RCOA . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail Competition and Open Access.

Reliability Factor . . . . . . . . . . . . . . . . . . . Ratio, in percent, equal to (1)(a) the number of hours in a period less(b) the average unplanned outage hours in that period divided by(2) the number of hours in that period.

RES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail Electricity Supplier.

Revised Corporation Code . . . . . . . . . . . . Republic Act No. 11232, also known as the Revised CorporationCode of the Philippines.

RSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail supply contract.

San Roque IPPA Agreement . . . . . . . . . . The IPPA Agreement dated December 29, 2009 made betweenPSALM and SMC Global Power with the conformity of NPCrelative to the IPP contract of NPC for the San Roque Power Plant.

San Roque Power Plant . . . . . . . . . . . . . . Hydroelectric multipurpose power plant with installed capacity of345 MW located in San Manuel, Pangasinan.

San Roque PPA . . . . . . . . . . . . . . . . . . . . The PPA made between SPDC and NPC dated October 11, 1997 inrelation to the San Roque Power Plant.

SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Philippine Securities and Exchange Commission.

Securities Act . . . . . . . . . . . . . . . . . . . . . . The United States Securities Act of 1933, as amended.

Securities and Futures Act . . . . . . . . . . . . The Securities and Futures Act, Chapter 289 of Singapore.

SGX-ST . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Exchange Securities Trading Limited.

SMC Global Power . . . . . . . . . . . . . . . . . SMC Global Power Holdings Corp. including, as the contextrequires, its subsidiaries.

SCPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC Consolidated Power Corporation.

SMCPC . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Consolidated Power Corporation.

SMEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Energy Corporation.

SMELC . . . . . . . . . . . . . . . . . . . . . . . . . . San Miguel Electric Corp.

SPDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic Power Devt. Corp.

170

SPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMC PowerGen, Inc.

SPPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Premiere Power Corp.

SRPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Roque Power Corporation, operator of the San Roque powerplant.

Sual ECA . . . . . . . . . . . . . . . . . . . . . . . . . Energy Conversion Agreement dated September 2, 2009 madebetween NPC and CEPA Pangasinan Electric Limited for the Coal-Fired Thermal Power Station at Sual, Pangasinan, Philippines.

Sual IPPA Agreement . . . . . . . . . . . . . . . The IPPA Agreement dated September 2, 2009 made betweenPSALM and SMEC with the conformity of NPC relative to the IPPcontract of NPC for the Coal-Fired Thermal Power Station.

Sual Power Plant . . . . . . . . . . . . . . . . . . . 2 x 647 MW Coal-fired power plant located in Sual, Pangasinan.

Sultan Energy . . . . . . . . . . . . . . . . . . . . . . Sultan Energy Phils. Corp.

TeaM Energy . . . . . . . . . . . . . . . . . . . . . . TeaM Sual Corporation, owner of the Sual Power Plant, which is ajoint venture between Marubeni Corporation and Tokyo ElectricPower Corporation.

TransCo . . . . . . . . . . . . . . . . . . . . . . . . . . National Transmission Corporation.

unplanned outage . . . . . . . . . . . . . . . . . . . A shutdown of the plant for reasons other than planned outage. Forpurposes of calculating measures of power plant performance thatare reported by the IPPs such as availability and reliability factors,shutdown due to (1) faults or failures in the transmission system,(2) force majeure events, (3) disruptions in fuel supply and(4) dispatch orders from the grid system operators are not includedin unplanned outage.

United States or U.S. . . . . . . . . . . . . . . . . The United States of America.

U.S.$ or U.S. dollar . . . . . . . . . . . . . . . . . Lawful currency of the United States of America.

Visayas Grid . . . . . . . . . . . . . . . . . . . . . . . An interconnected network of transmission lines running throughVisayas for delivering electricity.

WESM . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale electricity spot market.

171

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Reviewed condensed consolidated interim financial statements as of and for the threemonths ended March 31, 2019

Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2Consolidated statements of financial position as of March 31, 2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . F-4Consolidated statements of income for the three months ended March 31, 2019 and 2018 . . . . . . . . . . . . . F-6Consolidated statements of comprehensive income for the three months ended March 31, 2019 and

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7Consolidated statements of changes in equity for the three months ended March 31, 2019 and 2018 . . . . . F-8Consolidated statements of cash flows for the for the three months ended March 31, 2019 and 2018 . . . . F-9Notes to the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11

Audited consolidated financial statements as of and for the years ended December 31,2018 and 2017

Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-74Consolidated statements of financial position as of December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . F-78Consolidated statements of income for the years ended December 31, 2018 and 2017 . . . . . . . . . . . . . . . . F-80Consolidated statements of comprehensive income for the years ended December 31, 2018 and 2017 . . . F-81Consolidated statements of changes in equity for the years ended December 31, 2018 and 2017 . . . . . . . . F-82Consolidated statements of cash flows for the years ended December 31, 2018 and 2017 . . . . . . . . . . . . . F-83Notes to the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85

Audited consolidated financial statements as of and for the years ended December 31, 2017 and2016

Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-200Consolidated statements of financial position as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . F-205Consolidated statements of income for the years ended December 31, 2017 and 2016 . . . . . . . . . . . . . . . . F-207Consolidated statements of comprehensive income for the years ended December 31, 2017 and 2016 . . . F-208Consolidated statements of changes in equity for the years ended December 31, 2017 and 2016 . . . . . . . . F-209Consolidated statements of cash flows for the years ended December 31, 2017 and 2016 . . . . . . . . . . . . . F-210Notes to the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-212

F-1

F-2

R.G. Manabat & Co. The KPMG Center, 9/F 6787 Ayala Avenue. Makatl City Philippines 1226 Telephone +63 (2) 885 7000 Fax +63 (2) 894 1985 Internet www.kpmg.com.ph Email [email protected]

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders SMC Global Power Holdings Corp. 155 EDSA, Brgy. Wack-Wack Mandaluyong City, Metro Manila

Opinion

We have audited the consolidated financial statements of SMC Global Power Holdings Corp. and Subsidiaries (the "Group•), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of income, consolidated statements of comprehensive income. consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31 , 2018, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial posilion of the Group as at December 31 , 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December 31 , 2018, in accordance with Philippine Financial Reporting Standards (PFRS).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditlng (PSA). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group In accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requfrements that are relevant to our audits of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibitities In accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained ls sufficient and appropriate to provide a basis for our opinion.

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F-3

Key Audit Matter

Key audit matter is a matter that, ln our professional judgment, is of most significance in our audit of the consolidated financial statements of the current period. This matter is addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter.

Valuation of Goodwill (P69, 944 million) Refer to Note 3. Significant Accounting Policies, Note 4, Signincant Judgments, Estimates and Assumptions, Note 5, Business CambinaUan to the consolidated financial statements, and Note 15, Goodwill and Intangible Assets.

The risk -The Group recognized a significant amount of provisional goodwill arising from the acquisition of Maslnl!oc Group. The annual impairment test on g;oodwill was significant to our audit since the assessment process is complex and Judgmental by nature as it is based on assumptions on future market and/or economic conditions including future cash flow projections, growth rate and discount rate.

Our response -We performed the following audit procedures, among others, on the valuation of goodwill:

• We tested the integrity and reasonableness of the discounted cash flow model used by the Group. This involved evaluating the models used and assumptions applied and comparing these assumptions to externally derived data as well as our own assessments in relation to key inputs such as projected economic growth, inflation and discount rates, as well as performing our own sensitivity analysis on the assumptions.

• We evaluated the adequacy of the disclosures, including disclosures of key assumptions, judgements and sensitivities.

Other Information

Management is responsible for the other information. The other information comprises the information included in the SEC Form 20-IS (Definitive Information Statement) and SEC Form 17-A as at and for the year ended December 31, 2018, but does not include the consolidated financial statements and our auditors' report thereon. The SEC Form 20-1S (Definitive Information Statement) and SEC Form 17-A as at and for the year ended December 31 , 2018 are elCpected to be made available to us after the date of this auditors' report

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audits .of the oonsolidated financial statements, our responsibility is to read the other information fdentified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits or otherwlse appears to be materially misstated,

F-4

Responsibilities of Management and Those Charged wffh Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with PFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated finandal statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern. drsdosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolida.ted financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted ln accordance with PSA will always detect a material misstatement when it exists, Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could 11easonab1y be expected to influence the economic decisions of users taken on the basis of these consolidated financlal statements.

As part of an audit in accordance with PSA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit 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 Group's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern ba.sis of accounting and, based on the audit evidence obtained, whether a mate11ial uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However. future events or conditions may cause the Group to cease to continue as a going concern.

F-5

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have comp.lied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where appHcable, related safeguards.

From the mat1ers communicated with those charged with governance, we determine the matter that was of most significance in the audit of the consolidated financial statements of the current period and is therefore the key audit matter. We describe the matter in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditors' report is Mr. Darwin P. Virocel.

R.G. MANABAT & CO.

DARWIN P. VIROCEL Partner CPA License No. 0094495 SEC Accreditation No. 1386-AR, Group A, valid until June 14, 2020 Tax Identification No. 912-535-864 BIR Accreditation No. 08-001987-31-2016 Issued October 18, 2016; valid until October 17, 2019

PTR No. MKT 7333639 Issued January 3, 2019 at Makatl City

March 11, 2019 Makati City, Metro Manila

SMC GLOBAL POWER HOLDINGS CORP. AND SUBSIDIARIES (A Wholly-owned Subsidiary of San Miguel Corporation)

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2018 AND 2017

(In Thousands)

Note 2018 2017

ASSETS Current Assets Cash and cash equivalents 8, 30, 31 P28,511,862 P28,655,359 Trade and other receivables - net 4, 7, 9, 20, 30, 31 33,046,686 20,435,068 Inventories 4, 7, 10, 20 5,294,631 3,147,668 Prepaid expenses and other

current assets 7, 11 21,761,716 17,791,915 Total Current Assets 88,614,895 70,030,010

Noncurrent Assets Investments and advances - net 4, 12 12,148,986 16,621,131 Property, plant and equipment - net 4, 7, 13 312,315,406 250,961,307 Deferred exploration and

development costs 4, 7, 14 705,458 699,001 Goodwill and other intangible

assets - net 4, 5, 7, 14, 15 72,613,363 2,594,136 Deferred tax assets 4, 27 1,137,565 1,316,926 Other noncurrent assets 16, 20, 30, 31 6,314,562 7,950,484

Total Noncurrent Assets 405,235,340 280,142,985

P493,850,235 P350,172,995

LIABILITIES AND EQUITY Current Liabilities Loans payable 17, 30, 31 P8,675,700 P5,930,000 Accounts payable and accrued

expenses 18, 20, 30, 31 31,109,917 31,074,714 Finance lease liabilities - current

portion 4, 7, 30, 31 19,659,645 16,844,431 Income tax payable 310,882 151,906 Current maturities of long-term

debt - net of debt issue costs 19, 30, 31 4,939,454 1,139,631 Total Current Liabilities 64,695,598 55,140,682

Noncurrent Liabilities Long-term debt - net of current

maturities and debt issue costs 19, 30, 31 202,025,806 89,589,070 Deferred tax liabilities 27 8,180,119 7,324,111 Finance lease liabilities -

net of current portion 4, 7, 30, 31 122,347,416 137,949,259 Other noncurrent liabilities 4, 7, 20, 21, 30, 31 843,571 404,361

Total Noncurrent Liabilities 333,396,912 235,266,801

Total Liabilities 398,092,510 290,407,483 Forward

F-6

Note 2018 2017

Equity 22 Capital stock P1,062,504 P1,062,504 Additional paid-in capital 2,490,000 2,490,000 Redeemable perpetual securities 32,751,570 - Undated subordinated capital securities 26,933,565 26,933,565 Equity reserves 21 618,307 761,647 Retained earnings 31,901,779 28,517,796

Total Equity 95,757,725 59,765,512

P493,850,235 P350,172,995

See Notes to the Consolidated Financial Statements.

SMC GLOBAL POWER HOLDINGS CORP. AND SUBSIDIARIES

F-7

(A Wholly-owned Subsidiary of San Miguel Corporation) CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (In Thousands, Except Per Share Data)

Note 2018 2017 2016

REVENUES 5, 20, 23, 33 P120,102,847 P82,790,575 P77,972,430 COST OF POWER SOLD 24 80,818,306 53,825,314 45,163,109

GROSS PROFIT 39,284,541 28,965,261 32,809,321 SELLING AND ADMINISTRATIVE

EXPENSES 25 6,110,210 4,688,981 6,078,981

INCOME FROM OPERATIONS 33,174,331 24,276,280 26,730,340 INTEREST EXPENSE AND

OTHER FINANCING CHARGES 7, 13, 17, 18, 19 (17,616,056) (13,244,581) (12,354,229)

INTEREST INCOME 8 661,212 460,958 200,502 EQUITY IN NET LOSSES OF

ASSOCIATES AND JOINT VENTURES 12 (471,236) (40,396) (294,795)

GAIN ON SALE OF PROPERTY, PLANT AND EQUIPMENT 13 - - 116,357

OTHER INCOME (CHARGES) - Net 7, 26 (3,546,602) 2,944,165 (6,881,754)

INCOME BEFORE INCOME TAX 12,201,649 14,396,426 7,516,421 INCOME TAX EXPENSE 27, 28 3,901,532 6,179,510 3,365,759 NET INCOME P8,300,117 P8,216,916 P4,150,662

Attributable to: Equity holders of the Parent

Company 29 P8,281,774 P8,216,916 P4,150,662 Non-controlling interest 18,343 - - P8,300,117 P8,216,916 P4,150,662

Earnings Per Common Share Attributable to Equity Holders of the Parent Company

Basic/Diluted 29 P2.67 P4.11 P0.97



F-8

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

(In Thousands)

Note 2018 2017 2016

NET INCOME P8,300,117 P8,216,916 P4,150,662 OTHER COMPREHENSIVE INCOME

(LOSS) Items that will not be reclassified to

profit or loss Equity reserve for retirement plan - net 21, 27 30,682 2,739 (10,723) Share in other comprehensive income

of an associate - net 12 1,002 - - 31,684 2,739 (10,723)

Items that may be reclassified to profit or loss

Gain on exchange differences on translation of foreign operations 145,256 - -

Net loss on cash flow hedges - net 31 (1,844) - - 143,412 - -

OTHER COMPREHENSIVE INCOME (LOSS) -Net of tax 175,096 2,739 (10,723)

TOTAL COMPREHENSIVE INCOME - Net of tax P8,475,213 P8,219,655 P4,139,939

Attributable to: Equity holders of the Parent Company P8,456,870 P8,219,655 P4,139,939 Non-controlling interest 18,343 - - P8,475,213 P8,219,655 P4,139,939


F-9

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F-10


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

(In Thousands)

Note 2018 2017 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P12,201,649 P14,396,426 P7,516,421 Adjustments for:

Interest expense and other financing charges 7, 17, 19 17,616,056 13,244,581 12,354,229

Depreciation and amortization 7, 13, 15, 24, 25 9,340,235 6,064,931 6,341,931

Unrealized foreign exchange losses (gains) - net 4,032,084 (786,921) 7,446,813

Interest income 8, 16 (661,212) (460,958) (200,502) Equity in net losses of associates

and joint ventures 12 471,236 40,396 294,795 Impairment losses on trade and

other receivables 9, 25, 26 135,426 - 1,210,451 Impairment losses on property, plant

and equipment 13, 26 70,265 - 323,788 Loss on retirement of property, plant

and equipment 13 34,869 - - Retirement benefit expense 21 32,525 12,653 8,388 Unrealized marked - to - market gain

on derivatives 31 (23,036) (61,903) - Impairment losses on concession

assets - - 20,460 Gain on sale of property, plant and

equipment 13 - - (116,357) Operating income before working

capital changes 43,250,097 32,449,205 35,200,417 Decrease (increase) in:

Trade and other receivables - net 9 (5,499,476) 2,114,023 (657,993) Inventories 10 266,017 (875,379) (1,009,071) Prepaid expenses and other current

assets 11 (9,936,971) (982,825) (2,614,273) Increase (decrease) in:

Accounts payable and accrued expenses 18 1,101,159 (4,864,843) 5,130,812

Other noncurrent liabilities and others 54,694 14,521 49,479

Cash generated from operations 29,235,520 27,854,702 36,099,371 Interest income received 687,752 395,960 203,493 Income taxes paid (2,550,880) (1,242,012) (2,640,580) Interest expense and other financing

charges paid (12,113,199) (5,163,304) (3,182,682) Net cash flows provided by operating

activities 15,259,193 21,845,346 30,479,602 Forward

F-11

Note 2018 2017 2016

CASH FLOWS FROM INVESTING ACTIVITIES

Decrease (increase) in other noncurrent assets P2,499,277 (P6,867,810) P1,227,455

Proceeds from sale of property, plant and equipment 13 - 54,184 13,820,388

Additions to deferred exploration and development costs 14 (6,457) (5,622) (3,831)

Additions to intangible assets 7, 15 (140,210) (132,474) (271,991) Net additions to investments and

advances 12 (471,385) (416,073) (5,927,312) Acquisition of non-controlling interest (532,425) - - Additions to property, plant and

equipment 13, 17, 19 (6,049,753) (8,911,531) (14,862,133) Acquisition of subsidiaries, net of cash

and cash equivalents acquired (97,333,757) - - Net cash flows used in investing

activities (102,034,710) (16,279,326) (6,017,424)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long-term debt 19, 32 106,026,200 77,000,000 30,684,375 Proceeds from short-term borrowings 17, 32 41,937,600 113,419,200 14,364,000 Proceeds from issuance of

redeemable perpetual securities 22 32,751,570 - - Cash dividends paid 22 - - (3,000,000) Cash dividends paid to previous holder

of non-controlling interest (4,050) - - Payment of stock issuance costs (7,855) (50,563) - Distributions paid to redeemable

perpetual securities (1,621,191) - - Distributions paid to undated

subordinated capital securities holders 22 (3,215,290) (3,074,204) (2,904,573)

Payments of long-term debt 19, 32 (22,112,232) (53,110,468) (26,348,700) Payments of finance lease liabilities 7, 32 (25,715,487) (24,874,993) (23,873,363) Payments of short-term borrowings 17, 32 (41,510,000) (107,782,255) (14,155,500) Net cash flows provided by (used in)

financing activities 86,529,265 1,526,717 (25,233,761)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 102,755 71,237 21,607

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (143,497) 7,163,974 (749,976)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,655,359 21,491,385 22,241,361

CASH AND CASH EQUIVALENTS AT END OF YEAR 8 P28,511,862 P28,655,359 P21,491,385


F-12


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Per Share Data and Number of Shares)

1. Reporting Entity

SMC Global Power Holdings Corp. (the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on January 23, 2008, and its primary purpose of business is to purchase, sell, lease, develop and dispose of all properties of every kind and description, and shares of stocks or other securities or obligations, created or issued by any corporation or other entity. registered office address is located at 155 EDSA, Brgy. Wack-Wack, Mandaluyong City, Metro Manila. The accompanying consolidated financial statements comprise the financial statements of the Parent Company and its Subsidiaries (collectively referred to as the s and joint ventures. The Parent Company is a wholly-owned subsidiary of San Miguel Corporation (SMC). The ultimate parent company of the Group is Top Frontier Investment Holdings, Inc. (Top Frontier). SMC and Top Frontier are public companies under Section 17.2 of the Securities Regulation Code and whose shares are listed on The Philippine Stock Exchange, Inc. (PSE).

2. Basis of Preparation Statement of Compliance The accompanying consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS are based on International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). PFRS consist of PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations issued by the Philippine Financial Reporting Standards Council (FRSC). The consolidated financial statements were approved and authorized for issue in accordance with a resolution by the Board of Directors (BOD) on March 11, 2019. Basis of Measurement The consolidated financial statements of the Group have been prepared on a historical cost basis except for the following items which are measured on an alternative basis on each reporting date: Items Measurement Basis Derivative financial instruments Fair value Defined benefit retirement liability Present value of the defined benefit

retirement obligation

F-13

- 2 -

Functional and Presentation Currency The consolidated financial statements are presented in Philippine peso, which is the functional currency of the Parent Company. All financial information are rounded off to the nearest thousand (P000), except when otherwise indicated. Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and its subsidiaries. The major subsidiaries include the following:

Percentage of Ownership 2018 2017 Power Generation

San Miguel Energy Corporation (SMEC) 100 100 South Premiere Power Corp. (SPPC) 100 100 Strategic Power Devt. Corp. (SPDC) 100 100 SMC PowerGen Inc. (SPI) 100 100 Limay Power Generation Corporation (a) 100 100 SMC Consolidated Power Corporation (SCPC) (b) 100 100 San Miguel Consolidated Power Corporation (SMCPC) (c) 100 100 Central Luzon Premiere Power Corp. (CLPPC) (d) 100 100 Limay Premiere Power Corp. (LPPC) (d) 100 100 PowerOne Ventures Energy Inc. (PVEI) (e) 100 100 Prime Electric Generation Corporation (PEGC) (f) 100 100 Oceantech Power Generation Corporation (f) 100 100 SMCGP Masin Pte. Ltd. (formerly Masin-AES Pte. Ltd. [MAPL]) (g) (h) (m) 100 - Masinloc Energy Resources Inc. (i) 100 - Power Ventures Generation Corporation (i) 100 - TopGen Energy Development Inc.(i) 100 -

Retail and Other Power-related Services San Miguel Electric Corp. (SMELC) 100 100 Albay Power and Energy Corp. (APEC) 100 100 SMC Power Generation Corp. (SPGC) (j) 100 100

Coal Mining Daguma Agro-Minerals, Inc. (k) 100 100 Sultan Energy Phils. Corp. (k) 100 100 Bonanza Energy Resources, Inc. (k) 100 100

Others Mantech Power Dynamics Services Inc. 100 100 Safetech Power Services Corp. 100 100 Ondarre Holding Corporation (l) 100 100 Grand Planters International, Inc. 100 100 Golden Quest Equity Holdings Inc. (k) 100 100 SMCGP Transpower Pte. Ltd. (formerly AES Transpower Private

Ltd. [ATPL]) (g) (m) 100 - SMCGP Philippines Inc. (formerly AES Philippines, Inc. [API]) (g) (n) 100 -

(a) Indirectly owned by the Parent Company through SPI and has not yet started commercial operations as of December 31, 2018.

(b) In May 2017, September 2017 and March 2018, SCPC started commercial operations of Units 1, 2 and 3, respectively, of its 4 x 150 megawatts (MW) Circulating Fluidized Bed (CFB) coal-fired power plant in Limay, Bataan (Phase I and II Limay Greenfield Power Plant) (Note 12).

(c) In July 2017 and February 2018, SMCPC started commercial operations of Units 1 and 2, respectively, of its 2 x 150 MW CFB coal-fired power plant in Malita, Davao (Davao Greenfield Power Plant) (Note 12).

(d) Incorporated in 2015 and has not yet started commercial operations as of December 31, 2018. (e) PVEI owns 60% of the outstanding capital stock of Angat Hydropower Corporation (AHC) and KWPP Holdings

Corporation (KWPP) as joint ventures. (f) Incorporated in 2017 and has not yet started commercial operations as of December 31, 2018. (g) Acquired in March 2018 (Note 5). (h) Indirectly owns, through its subsidiary, Masinloc Power Partners Co. Ltd (MPPCL) the Masinloc Power Plant

(Note 5). (i) Incorporated in 2018 and has not yet started commercial operations as of December 31, 2018. (j) SPGC owns 35% of the outstanding capital stock of Olongapo Electricity Distribution Company, Inc., (OEDC) as an

associate. (k) Indirectly owned by the Parent Company through SMEC and has not yet started commercial operations as of

December 31, 2018. (l) Acquired in February 2015 and has not yet started commercial operations as of December 31, 2018.

(m)

On May 30, 2018, MAPL and ATPL changed its name to SMCGP Masin Pte. Ltd. (SMCGP Masin) and SMCGP Transpower Pte. Ltd. (SMCGP Transpower), respectively.

(n) On May 22, 2018, API changed its name to SMCGP Philippines Inc. (SPHI).

F-14

- 3 -

A subsidiary is an entity controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. When the Group has less than majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including the contractual arrangement with the other vote holders of the investee, rights arising from other contractual arrangements and the

The financial statements of the subsidiaries are included in the consolidated financial statements from the date when the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company, using uniform accounting policies for like transactions and other events in similar circumstances. Intergroup balances and transactions, including intergroup unrealized profits and losses, are eliminated in preparing the consolidated financial statements. Non-controlling interests represent the portion of profit or loss and net assets not attributable to the Parent Company and are presented in the consolidated statements of income, consolidated statements of comprehensive income and within equity in the consolidated statements of financial position, separately from the equity attributable to equity holders of the Parent Company. Non-controlling interest pertained to the interest not held by the Parent Company in

March 20, 2018 to July 13, 2018, which is indirectly owned by SMCGP Masin through its subsidiary, MPPCL. The non-controlling interest in Alpha Water was acquired in July 2018 by PEGC (Note 12). A change in the ownership interest in a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, the Group: (i) derecognizes the assets (including goodwill) and liabilities of the subsidiary, the carrying amount of any non-controlling interests and the cumulative transaction differences recorded in equity; (ii) recognizes the fair value of the consideration received, the fair value of any investment retained and any surplus or deficit in the consolidated statements of income; and (iii) reclassify the Parent

her comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities.

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3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, except for the changes in accounting policies as explained below. Adoption of New and Amended Standards and Interpretation The FRSC approved the adoption of a number of new and amended standards and interpretation as part of PFRS. The Group has adopted the following PFRS starting January 1, 2018 and accordingly, changed its accounting policies in the following areas: PFRS 9 (2014), Financial Instruments, replaces PAS 39, Financial Instruments:

Recognition and Measurement, and supersedes the previously published versions of PFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). PFRS 9 includes revised guidance on the classification and measurement of financial assets that reflects the business model in which assets are managed and their cash flow characteristics, including a new forward-looking expected credit loss (ECL) model for calculating impairment, and guidance on own credit risk on financial liabilities measured at fair value. PFRS 9 incorporates new hedge accounting requirements that represent a major overhaul of hedge accounting and introduces significant improvements by aligning the accounting more closely with risk management. The Group adopted PFRS 9 using the cumulative effect method. The cumulative effect of applying the new standard is recognized at the beginning of the year of initial application, with no restatement of comparative period. The adoption of PFRS 9 has no significant effect on the classification and measurement of financial assets and financial liabilities of the Group except for the effect of applying the ECL model in estimating impairment as at December 31, 2018 which resulted in a recognition of additional allowance for impairment of receivables amounting to P59,346. The following table shows the original classification categories under PAS 39 and the new classification categories under PFRS 9 for efinancial assets as of January 1, 2018.

Classification under PAS 39

Classification under PFRS 9

Carrying Amount

under PAS 39

Carrying Amount

under PFRS 9 Cash and cash

equivalents Loans and

receivables Financial assets

at amortized cost P28,655,359 P28,655,359 Trade and other

receivables - net Loans and


at amortized cost 20,384,901 20,384,901 Derivative asset Financial assets

at fair value through profit or loss (FVPL)

Financial assets at FVPL

61,903 61,903 Noncurrent receivables Loans and


at amortized cost 278,965 278,965 Restricted cash Loans and


at amortized cost 4,805,175 4,805,175

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Financial Assets. The Group continued to measure at fair value, all financial assets previously held at fair value under PAS 39. The following are the changes

o Cash and cash equivalents, and trade and other receivables previously

classified as loans and receivables are held to collect contractual cash flows and give rise to cash flows representing solely payments of principal and interest. These are now classified and measured as financial assets at amortized cost beginning January 1, 2018.

Financial Liabilities. There are no changes in the classification and measurement

PFRS 15, Revenue from Contracts with Customers, replaces PAS 11, Construction Contracts, PAS 18, Revenue, International Financial Reporting Interpretations Committee (IFRIC) 13, Customer Loyalty Programmes, IFRIC 18, Transfer of Assets from Customers, and Standard Interpretation Committee 31, Revenue - Barter Transactions Involving Advertising Services. The new standard introduces a new and more comprehensive revenue recognition model for contracts with customers which specifies that revenue should be recognized when (or as) the Group transfers control of goods or services to a customer at the amount to which the Group expects to be entitled. PFRS 15 requires a contract with a customer to be legally enforceable and to meet certain criteria to be within the scope of the standard and for the general model to apply. It introduces detailed guidance on identifying performance obligations which requires entities to determine whether promised goods or services are distinct. It also introduces detailed guidance on determining transaction price, including guidance on variable consideration and consideration payable to customers. The transaction price will then be generally allocated to each performance obligation in proportion to its stand-alone selling price. Depending on whether certain criteria are met, revenue is recognized over time, in a manner that best reflects the entity a point in time, when control of the goods or services is transferred to the customer. The standard does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other PFRS. It also does not apply if two companies in the same line of business exchange nonmonetary assets to facilitate sales to other parties. Furthermore, if a contract with a customer is partly in the scope of another PFRS, then the guidance on separation and measurement contained in the other PFRS takes precedence. The Group has adopted PFRS 15 using the cumulative effect method. The cumulative effect of applying the new standard is recognized at the beginning of the year of initial application, with no restatement of comparative period. The impact of the adoption decreased retained earnings as of January 1, 2018 by P49,405. Additional disclosures were included in the consolidated financial statements as a result of the adoption of PFRS 15.

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The following tables summarize the impact of adoptinconsolidated financial statements as of and for the year ended December 31, 2018. Consolidated Statement of Financial Position

As Reported Adjustments

Amounts Without

Adoption of PFRS 15

Assets Trade and other receivables - net P33,046,686 P39,243 P33,085,929 Current Assets 88,614,895 39,243 88,654,138 Deferred tax assets 1,137,565 (6,351) 1,131,214 Noncurrent Assets 405,235,340 (6,351) 405,228,989

Total Assets P493,850,235 P32,892 P493,883,127

Liabilities Current Liabilities P64,695,598 P - P64,695,598 Noncurrent Liabilities 333,396,912 - 333,396,912

Total Liabilities 398,092,510 - 398,092,510

Equity Retained earnings 31,901,779 32,892 31,934,671

Total Equity 95,757,725 32,892 95,790,617

Total Liabilities and Equity P493,850,235 P32,892 P493,883,127

Consolidated Statement of Comprehensive Income

As Reported Adjustments

Amounts without

Adoption of PFRS 15

Revenues P120,102,847 (P20,743) P120,082,104 Cost of Power Sold 80,818,306 - 80,818,306 Gross Profit 39,284,541 (20,743) 39,263,798 Income Before Income Tax 12,201,649 (20,743) 12,180,906 Income Tax Expense 3,901,532 (4,230) 3,897,302 Net Income 8,300,117 (16,513) 8,283,604

Total Comprehensive Income - Net of tax P8,475,213 (P16,513) P8,458,700

The adjustments are due to the effect of variable consideration in the determination of transaction price in the recognition of revenue from sale of power. Prior to the adoption of PFRS 15, the Group recognized revenue upon supply of power to customers based on invoiced amounts, net of value-added tax, and separately recorded a reduction in revenue for discounts when availed by qualified customers. Under PFRS 15, the Group recognizes a reduction in its revenue from sale of power for the amount of expected discounts to be given to customers on the same reporting period the revenue was earned. The discounts

accordance with the specific terms and conditions provisupply contract with the customer. Discounts are not recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized due to such discounts will not occur. The Group recognizes revenue from contracts with customers when control is transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled, excluding amounts collected on behalf of third parties.

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Revenue from sale of power is recognized at the point in time when control is transferred to the customer, which is normally upon delivery. Further information on the new accounting policy for revenue recognition are discussed in the succeeding sections.

Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration. The interpretation clarifies that the transaction date to be used for translation of foreign currency transactions involving an advance payment or receipt is the date on which the entity initially recognizes the prepayment or deferred income arising from the advance consideration. For transactions involving multiple payments or receipts, each payment or receipt gives rise to a separate transaction date. The interpretation applies when an entity pays or receives consideration in a foreign currency and recognizes a non-monetary asset or liability before recognizing the related item.

Annual Improvements to PFRS Cycles 2014 - 2016 contain changes to three

standards, of which only the Amendments to PAS 28, Investments in Associates and Joint Ventures, on measuring an associate or joint venture at fair value is applicable to the Group. The amendments provide that a venture capital organization, or other qualifying entity, may elect to measure its investments in an associate or joint venture at FVPL. This election can be made on an investment-by-investment basis. The amendments also provide that a non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture.

Except as otherwise indicated, the adoption of the new and amended standards and interpretation did not have a material effect on the consolidated financial statements. New and Amended Standards, Interpretation and Framework Not Yet Adopted A number of new and amended standards, interpretation and framework are effective for annual periods beginning after January 1, 2018 and have not been applied in preparing the consolidated financial statements. Unless otherwise indicated, none of these is expected to have a significant effect on the consolidated financial statements. The Group will adopt the following new and amended standards, interpretation and framework on the respective effective dates: PFRS 16, Leases, supersedes PAS 17, Leases, and the related Philippine

Interpretations. The new standard introduces a single lease accounting model for lessees under which all major leases are recognized on-balance sheet, removing the lease classification test. Lease accounting for lessors essentially remains unchanged except for a number of details including the application of the new lease definition, new sale-and-leaseback guidance, new sub-lease guidance and new disclosure requirements. Practical expedients and targeted reliefs were introduced including an optional lessee exemption for short-term leases (leases with a term of 12 months or less) and low-value items, as well as the permission of portfolio-level accounting instead of applying the requirements to individual leases. New estimates and judgmental thresholds that affect the identification, classification and measurement of lease transactions, as well as requirements to reassess certain key estimates and judgments at each reporting date were introduced.

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PFRS 16 is effective for annual periods beginning on or after January 1, 2019 with several transition approaches and individual options and practical expedients that can be elected independently of each other. Earlier application is permitted for entities that apply PFRS 15 at or before the date of initial application of PFRS 16. When adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective approach, with options to use certain transition reliefs. The Group plans to apply the new standard on the effective date using the modified retrospective approach. The cumulative effect of adopting PFRS 16 will be recognized as an adjustment to the opening balance of retained earnings as of January 1, 2019, with no restatement of comparative information. The Group is currently performing detailed assessment of the potential effect of the new standard. The actual impact of applying PFRS 16 on the consolidated financial statements in the period of initial application will depend on future economic conditions, including the borrowing rate as of January 1, 2019, the composition of the lease portfolio at that date, the latest assessment of whether it will exercise any lease renewal options and the extent to which the Group chooses to use practical expedients and recognition exemptions.

Philippine Interpretation IFRIC 23, Uncertainty over Income Tax Treatments. The interpretation clarifies how to apply the recognition and measurement requirements in PAS 12, Income Taxes, when there is uncertainty over income tax treatments. Under the interpretation, whether the amounts recorded in the consolidated financial statements will differ to that in the tax return, and whether the uncertainty is disclosed or reflected in the measurement, depends on whether it is probable that the tax authority will accept the chosen tax treatment. If it is not probable that the tax authority will accept the chosen tax treatment, the uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty - either the most likely amount or the expected value. The interpretation also requires the reassessment of judgments and estimates applied if facts and circumstances change - e.g. as a result of examination or action by tax authorities, following changes in tax rules or when a

The interpretation is effective for annual periods beginning on or after January 1, 2019 with early application permitted. The interpretation can be initially applied retrospectively applying PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, if possible without the use of hindsight, or retrospectively with the cumulative effect recognized at the date of initial application without restating comparative information.

Long-term Interests (LTI) in Associates and Joint Ventures (Amendments to PAS 28). The amendments require the application of PFRS 9 to other financial instruments in an associate or joint venture to which the equity method is not applied. These include LTI that, in substance, form part of the entity's net investment in an associate or joint venture. The amendment explains the annual sequence in which PFRS 9 and PAS 28 are to be applied. In effect, PFRS 9 is first applied ignoring any PAS 28 loss absorption in prior years. If necessary,

n the current year which may -

allocating them between different LTI instruments. Any current year PAS 28 losses are allocated to the extent that the remaining LTI balance allows and any

then allocations against LTI.

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The amendments are effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Retrospective application is required, subject to relevant transitional reliefs.

Prepayment Features with Negative Compensation (Amendment to PFRS 9). The amendment clarifies that a financial asset with a prepayment feature could be eligible for measurement at amortized cost or FVOCI irrespective of the event or circumstance that causes the early termination of the contract, which may be within or beyond the control of the parties, and a party may either pay or receive reasonable compensation for the early termination. The amendment is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. Retrospective application is required subject to relevant transitional reliefs.

Plan Amendment, Curtailment or Settlement (Amendments to PAS 19, Employee Benefits). The amendments clarify that on amendment, curtailment or settlement of a defined benefit plan, an entity now uses updated actuarial assumptions to determine its current service cost and net interest for the period. The effect of the asset ceiling is disregarded when calculating the gain or loss on any settlement of the plan and is dealt with separately in other comprehensive income. The amendments apply for plan amendments, curtailments or settlements that occur on or after the beginning of the first annual reporting period that begins on or after January 1, 2019, with early application permitted.

Annual Improvements to PFRS Cycles 2015 - 2017 contain changes to three standards:

o Previously Held Interest in a Joint Operation (Amendments to PFRS 3, Business Combinations, and PFRS 11, Joint Arrangements). The amendments clarify how an entity accounts for increasing its interest in a joint operation that meets the definition of a business. If an entity maintains (or obtains) joint control, the previously held interest is not remeasured. If an entity obtains control, the transaction is a business combination achieved in stages and the acquiring entity remeasures the previously held interest at fair value.

o Income Tax Consequences of Payments on Financial Instrument Classified as Equity (Amendments to PAS 12). The amendments clarify that all income tax consequences of dividends, including payments on financial instruments classified as equity, are recognized consistently with the transactions that generated the distributable profits - i.e., in profit or loss, other comprehensive income or equity.

o Borrowing Costs Eligible for Capitalization (Amendments to PAS 23, Borrowing Costs). The amendments clarify that the general borrowings pool used to calculate eligible borrowing costs excludes borrowings that specifically finance qualifying assets that are still under development or construction. Borrowings that were intended to specifically finance qualifying assets that are now ready for their intended use or sale, or any non-qualifying assets, are included in that general pool.

The amendments are effective for annual periods beginning on or after January 1, 2019, with early application permitted.

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Amendments to References to Conceptual Framework in PFRS sets out amendments to PFRS, their accompanying documents and PFRS practice statements to reflect the issuance of the revised Conceptual Framework for Financial Reporting in 2018 (2018 Conceptual Framework). The 2018 Conceptual Framework includes: (a) a new chapter on measurement; (b) guidance on reporting financial performance; (c) improved definitions of an asset and a liability, and guidance supporting these definitions; and (d) clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting. Some standards, their accompanying documents and PFRS practice statements contain references to, or quotations from, the International Accounting Standards Committee Framework for the Preparation and Presentation of Financial Statements adopted by the IASB in 2001 or the Conceptual Framework for Financial Reporting issued in 2010. The amendments update some of those references and quotations so that they refer to the 2018 Conceptual Framework, and makes other amendments to clarify which version of the Conceptual Framework is referred to in particular documents. The amendments are effective for annual periods beginning on or after January 1, 2020.

Definition of a Business (Amendments to PFRS 3). The amendments narrowed and clarified the definition of a business. The amendments also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business. The amendments: (a) confirmed that a business must include inputs and a process, and clarified that the process must be substantive and the inputs and process must together significantly contribute to creating outputs; (b) narrowed the definitions of a business by focusing the definition of outputs on goods and services provided to customers and other income from ordinary activities, rather than on providing dividends or other economic benefits directly to investors or lowering costs; and (c) added a test that makes it easier to conclude that a company has acquired a group of assets, rather than a business, if the value of the assets acquired is substantially all concentrated in a single asset or group of similar assets. The amendments apply to business combinations and asset acquisitions in annual reporting periods beginning on or after January 1, 2020, with early application is permitted.

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Definition of Material (Amendments to PAS 1, Presentation of Financial Statements and PAS 8). The amendments refine the definition of what is considered material. The amended definition of what is considered material states that such information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. The amendments clarify the definition of what is considered material and its application by: (a) raising the threshold at which information becomes material by

n in the definition; (c) clarifying that the users to which the definition refers are the primary users of general purpose financial statements referred to in the Conceptual Framework; (d) clarifying the explanatory paragraphs accompanying the definition; and (e) aligning the wording of the definition of what is considered material across PFRS and other publications. The amendments are expected to help entities make better materiality judgments without substantively changing existing requirements. The amendments apply prospectively for annual periods beginning on or after January 1, 2020, with early application permitted.

Deferral of the local implementation of Amendments to PFRS 10, Consolidated Financial Statements and PAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Sale or Contribution of Assets between an Investor and its Associate or Joint

Venture (Amendments to PFRS and PAS 28). The amendments address an inconsistency in the requirements in PFRS 10 and PAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require that a full gain or loss is recognized when a transaction involves a business whether it is housed in a subsidiary or not. A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. Originally, the amendments apply prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. However, on January 13, 2016, the FRSC decided to postpone the effective date until the IASB has completed its broader review of the research project on equity accounting that may result in the simplification of accounting for such transactions and of other aspects of accounting for associates and joint ventures.

Current versus Noncurrent Classification The Group presents assets and liabilities in the consolidated statements of financial position based on current and noncurrent classification. An asset is current when it is: (a) expected to be realized or intended to be sold or consumed in the normal operating cycle; (b) held primarily for the purpose of trading; (c) expected to be realized within 12 months after the reporting period; or (d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. A liability is current when: (a) it is expected to be settled in the normal operating cycle; (b) it is held primarily for trading; (c) it is due to be settled within 12 months after the reporting period; or (d) there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period.

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The Group classifies all other assets and liabilities as noncurrent. Deferred tax assets and liabilities are classified as noncurrent. Financial Instruments Recognition and Initial Measurement. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at the fair value of the consideration given or received. The initial measurement of financial instruments, except for those designated as at FVPL, includes transaction costs. Financial Assets Classification and Subsequent Measurement - Policy Applicable from January 1, 2018 The Group classifies its financial assets, at initial recognition, and subsequently measured at amortized cost, FVOCI and FVPL. The classification depends on the contractual cash flow characteristics of the financial assets and the business model of the Group for managing the financial assets. Subsequent to initial recognition, financial assets are not reclassified unless the Group changes the business model for managing financial assets. All affected financial assets are reclassified on the first day of the reporting period following the change in the business model. The business model refer to how the Group manages the financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. The Group considers the following information in assessing the objective of the business model in which a financial asset is held at a portfolio level, which reflects the way the business is managed information is provided to management. the stated policies and objectives for the portfolio and the operations of those

policies in practice;

management; the risks that affect the performance of the business model (and the financial

assets held within that business model) and how those risks are managed; how employees of the business are compensated; and

the frequency, volume and timing of sales of financial assets in prior periods, the

reasons for such sales and expectations about future sales activity. For the purposes of the cash flow characteristics of financial assets, "Principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

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The Group considers the contractual terms of the instrument in assessing whether the contractual cash flows are solely payments of principal and interest. The assessment includes whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. The Group considers the following in making the assessment: contingent events that would change the amount or timing of cash flows;

terms that may adjust the contractual coupon rate, including variable rate

features; prepayment and extension features; and

terms that limit the G

A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. Additionally, for a financial assets acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at initial recognition. For purposes of subsequent measurement, financial assets are classified in the following categories: financial assets at amortized cost, financial assets at FVOCI (with or without recycling of cumulative gains and losses) and financial assets at FVPL. Financial Assets at Amortized Cost. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVPL: it is held within a business model with the objective of holding financial assets to

collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding. Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in the consolidated statements of income when the financial asset is derecognized, modified or impaired.

investment in debt instruments, noncurrent receivables and restricted cash are included under this category (Notes 8, 9, 11, 16, 30 and 31). Financial Assets at FVOCI. Investment in debt instruments is measured at FVOCI if it meets both of the following conditions and is not designated as at FVPL: it is held within a business model whose objective is achieved by both collecting

contractual cash flows and selling the financial assets; and its contractual terms give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding.

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At initial recognition of an investment in equity instrument that is not held for trading, the Group may irrevocably elect to present subsequent changes in the fair value in other comprehensive income. This election is made on an instrument-by-instrument basis. Financial assets at FVOCI are subsequently measured at fair value. Changes in fair value are recognized in other comprehensive income. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment on investment in debt instruments are recognized in the consolidated statements of income. When investment in debt instruments at FVOCI is derecognized, the related accumulated gains or losses previously reported in the consolidated statements of changes in equity are transferred to and recognized in the consolidated statements of income. Dividends earned on holding an investment in equity instrument are recognized as dividend income in the consolidated statements of income when the right to receive the payment has been established, unless the dividend clearly represents a recovery of the part of the cost of the investment. When investment in equity instruments at FVOCI is derecognized, the related accumulated gains or losses previously reported in the consolidated statements of changes in equity are never reclassified to the consolidated statements of income. The Group has no financial assets at FVOCI. Financial Assets at FVPL. All financial assets not classified as measured at amortized cost or FVOCI are measured at FVPL. This includes derivative financial assets that are not designated as cash flow hedge. Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVPL. At initial recognition, the Group may irrevocably designate a financial asset as at FVPL if the designation eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on different bases. The Group carries financial assets at FVPL using their fair values. Attributable transaction costs are recognized in the consolidated statements of income as incurred. Changes in fair value and realized gains or losses are recognized in the consolidated statements of income. Fair value changes from derivatives accounted for as part of an effective cash flow hedge are recognized in other comprehensive income. Any interest earned from investment in debt instrument designated as at FVPL is recognized in the consolidated statements of income. Any dividend income from investment in equity instrument is recognized in the consolidated statements of income when the right to receive payment has been established, unless the dividend clearly represents a recovery of the part of the cost of the investment.

that is not designated as cash flow hedge is classified under this category (Notes 11, 30 and 31).

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Classification and Subsequent Measurement - Policy Applicable before January 1, 2018 The Group classifies its financial assets, at initial recognition, in the following categories: financial assets at FVPL, loans and receivables, available-for-sale (AFS) financial assets and held-to-maturity (HTM) investments. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. The Group determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. The Group has no financial assets classified as AFS financial assets and HTM investments as of December 31, 2017. Financial Assets at FVPL. A financial asset is classified as at FVPL if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated as at FVPL if the Group manages such investments and makes purchase and sale decisions based on their fair values in accordance with the documented risk management or investment strategy of the Group. Derivative instruments (including embedded derivatives) with positive fair values, except those covered by hedge accounting relationships, are classified under this category. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that

would otherwise arise from measuring the assets or recognizing gains or losses on a different basis;

the assets are part of a group of financial assets which are managed and their

performances are 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 recognized.

The Group carries financial assets at FVPL using their fair values. Attributable transaction costs are recognized in the consolidated statements of income as incurred. Fair value changes and realized gains or losses are recognized in the consolidated statements of income. Fair value changes from derivatives accounted for as part of an effective cash flow hedge are recognized in other comprehensive income and presented in the consolidated statements of changes in equity. Any

ount in the consolidated statements of income. Any dividend income from equity securities classified as at FVPL is recognized in the consolidated statements of income when the right to receive payment has been established.

that is not designated as cash flow hedge is classified under this category (Notes 16, 30 and 31).

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Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities 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 designated as AFS financial assets or financial assets at FVPL. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value.

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. The

consolidated statements of income. Gains or losses are recognized in the consolidated statements of income when loans and receivables are derecognized or impaired. Cash includes cash on hand and in banks which are stated at face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

receivables and restricted cash are included under this category (Notes 8, 9, 16, 30 and 31). Financial Liabilities The Group classifies its financial liabilities, at initial recognition, in the following categories: financial liabilities at FVPL and other financial liabilities. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. Financial Liabilities at FVPL. Financial liabilities are classified under this category through the fair value option. Derivative instruments (including embedded derivatives) with negative fair values, except those covered by hedge accounting relationships, are also classified under this category. The Group carries financial liabilities at FVPL using their fair values and reports fair value changes in the consolidated statements of income. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in other comprehensive income and presented in the consolidated statements of changes in equity. Any interest expense i

income.

y that is not classified as cash flow hedge is classified under this category (Notes 18, 30 and 31). Other Financial Liabilities. This category pertains to financial liabilities that are not designated or classified as at FVPL. After initial measurement, other financial liabilities are carried at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any premium or discount and any directly attributable transaction costs that are considered an integral part of the effective interest rate of the liability. The effective interest rate amortization is

consolidated statements of income. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized as well as through the amortization process.

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Debt issue costs are considered as an adjustment to the effective yield of the related debt and are deferred and amortized using the effective interest rate method. When a loan is paid, the related unamortized debt issue costs at the date of repayment are recognized in the consolidated statements of income.

rrowings such as loans payable, accounts payable and accrued expenses, long-term debt, finance lease liabilities and other noncurrent liabilities are included under this category (Notes 17, 18, 19, 30 and 31). Derecognition of Financial Assets and Financial Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized when: the rights to receive cash flows from the asset have expired; or

the Group has transferred its rights to receive cash flows from the asset or has

assumed an obligation to pay them in full without material delay to a third party -

all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the

associated liability. The transferred asset and the associated liability are measured on the basis that reflects the rights and obligations that the Group has retained. 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 the Group is required to repay. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When 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 an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of income. Impairment of Financial Assets Policy Applicable from January 1, 2018 The Group recognizes allowance for ECL on financial assets at amortized cost. ECLs are probability-weighted estimates of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e., the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive), discounted at the effective interest rate of the financial asset, and reflects reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions.

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The Group recognizes an allowance for impairment based on either 12-month or lifetime ECLs, depending on whether there has been a significant increase in credit risk since initial recognition. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis,

credit assessment and including forward-looking information. The Group recognizes lifetime ECLs for receivables that do not contain significant financing component. The Group usehistorical credit loss experience, adjusted for forward-looking factors specific to the borrowers and the economic environment. At each reporting date, the Group assesses whether financial assets at amortized cost are credit-impaired. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: (a) significant financial difficulty of the issuer or the borrower; (b) a breach of contract, such as a default or past due event; (c) the lender(s) of the borrower, for economic or contractual reasons relating to the

borrower's financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

(d) it is becoming probable that the borrower will enter bankruptcy or other financial

reorganization; (e) the disappearance of an active market for that financial asset because of

financial difficulties; or (f) the purchase or origination of a financial asset at a deep discount that reflects

the incurred credit losses. The Group considers a financial asset to be in default when a counterparty fails to pay its contractual obligations, or there is a breach of other contractual terms, such as covenants. The Group directly reduces the gross carrying amount of a financial asset when there is no reasonable expectation of recovering the contractual cash flows on a financial asset, either partially or in full. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. The ECLs on financial assets at amortized cost are recognized as allowance for impairment losses against the gross carrying amount of the financial asset, with the resulting impairment losses (or reversals) recognized in the consolidated statements of income.

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Policy Applicable before January 1, 2018 The Group assesses, at the reporting date, whether 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 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. Assets Carried at Amortized Cost. For financial assets carried at amortized cost such as loans and receivables, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If no objective evidence of impairment has been identified for a particular financial asset that was individually assessed, the Group includes the asset as part of a group of financial assets with similar credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in the collective impairment assessment. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing financial difficulty, default or delinquency in principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to alleviate the financial condition of the borrower. For collective impairment purposes, evidence of impairment may include observable data on existing economic conditions or industry-wide developments indicating that there is a measurable decrease in the estimated future cash flows of the related assets. If there is objective evidence of impairment, the amount of loss is measured as the

future cash flows (excluding future original effective interest rate (i.e., the effective interest rate computed at initial recognition). Time value is generally not considered when the effect of discounting the cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For collective impairment purposes, impairment loss is computed based on their respective default and historical loss experience. The carrying amount of the asset is reduced either directly or through the use of an allowance account. The impairment loss for the period is recognized in the consolidated statements of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal date. Classification of Financial Instruments between Liability and Equity Financial instruments are classified as liability or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

F-31

- 20 -

A financial instrument is classified as liability if it provides for a contractual obligation to: deliver cash or another financial asset to another entity;

exchange financial assets or financial liabilities with another entity under

conditions that are potentially unfavorable to the Group; or satisfy the obligation other than by the exchange of a fixed amount of cash or

another financial asset for a fixed number of own equity shares. If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole or in part, the amount separately determined as the fair value of the liability component on the date of issue. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position 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 assets and settle the liabilities simultaneously. Derivative Financial Instruments and Hedge Accounting The Group uses derivative financial instruments, such as call spread swaps, currency forwards and commodity swaps to manage its exposure on foreign currency and commodity price risks. Derivative financial instruments are initially recognized at fair value on the date the derivative contract is entered into and are subsequently remeasured 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. Changes in the fair value of derivatives that are not designated as hedging instruments are recognized in the consolidated statements of income. Freestanding Derivatives The Group designates certain derivatives as hedging instruments to hedge the exposure to variability in cash flows associated with recognized liabilities arising from changes in foreign exchange rates. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The Group also documents the economic relationship between the hedged item and the hedging instrument, including whether the changes in fair value or cash flows of the hedging instrument are expected to offset the changes in fair value or cash flows of the hedged item. Cash Flow Hedge. When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and accumulated in the hedging reserve. The effective portion of changes in the fair value of the derivative that is recognized in other comprehensive income is limited to the cumulative change in fair value of the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in the consolidated statements of income.

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The Group designates only the intrinsic value of options and the change in fair value of the spot element of forward contracts as the hedging instrument in cash flow hedging relationships. The change in fair value of the time value of options, the forward element of forward contracts and the foreign currency basis spread of financial instruments are separately accounted for as cost of hedging and recognized in other comprehensive income. The cost of hedging is removed from other comprehensive income and recognized in the consolidated statements of income, either over the period of the hedge if the hedge is time related, or when the hedged transaction affects the consolidated statements of income if the hedge is transaction related. When the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is transferred and included in the initial cost of the hedged asset or liability. For all other hedged transactions, the amount accumulated in equity is reclassified to the consolidated statements of income as a reclassification adjustment in the same period or periods during which the hedged cash flows affect the consolidated statements of income. If the hedge no longer meets the criteria for hedge accounting or the hedging instrument expires, is sold, is terminated or is exercised, hedge accounting is discontinued prospectively. The amount that has been accumulated in equity is: (a) retained until it is included in the cost of non-financial item on initial recognition, for a hedge of a transaction resulting in the recognition of a non-financial item; or (b) reclassified to the consolidated statements of income as a reclassification adjustment in the same period or periods as the hedged cash flows affect the consolidated statements of income, for other cash flow hedges. If the hedged future cash flows are no longer expected to occur, the amounts that have been accumulated in equity are immediately reclassified to the consolidated statements of income. The Group has outstanding derivative assets accounted for as cash flow hedge as of December 31, 2018 (Notes 16, 30 and 31). Embedded Derivatives The Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if the host contract is not a financial asset and all of the following conditions are met: (a) the economic characteristics and risks of the embedded derivative are not

closely related to the economic characteristics and risks of the host contract; (b) a separate instrument with the same terms as the embedded derivative would

meet the definition of a derivative; and (c) the hybrid or combined instrument is not recognized as at FVPL. 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. The Group has no embedded derivatives as of December 31, 2018 and 2017.

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Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using specific identification method and weighted average method for coal inventories and weighted average method for fuel oil and other consumables, and spare parts. Net realizable value is the current replacement cost. Any write-down of inventories to net realizable value and all losses of inventories are recognized as expense in the year of write-down or loss occurrence. The amount of reversals, if any, of write-down of inventories arising from an increase in net realizable value are recognized as reduction in the amount of inventories recognized as expense in the year in which the reversal occurs. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets represents expenses not yet incurred but already paid in cash. These are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are recognized in the consolidated statements of income as they are consumed or expire with the passage of time. Business Combination Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at proportionate share of the acqui Acquisition-related costs are expensed as incurred and included as part of Selling and administrative expenses account in the consolidated statements of income. When the Group acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of

the acquisition date fair value and any resulting gain or loss is recognized in the consolidated statements of income. The Group measures goodwill at the acquisition date as: a) the fair value of the consideration transferred; plus b) the recognized amount of any non-controlling interests in the acquiree; plus c) if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less d) the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated statements of income. Subsequently, goodwill is measured at cost less any accumulated impairment in value. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying amount may be impaired.

F-34

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The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in the consolidated statements of income. Costs related to the acquisition, other than those associated with the issuance of debt or equity securities that the Group incurs in connection with a business combination, are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the consolidated statements of income. Goodwill in a Business Combination

Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units, or groups of cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: o represents the lowest level within the Group at which the goodwill is

monitored for internal management purposes; and o is not larger than an operating segment determined in accordance with

PFRS 8, Operating Segments. Impairment is determined 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, an impairment loss is recognized. 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 when 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 of and the portion of the cash-generating unit retained. An impairment loss with respect to goodwill is not reversed.

Intangible Assets Acquired in a Business Combination The cost of an intangible asset acquired in a business combination is the fair value as at the date of acquisition, determined using discounted cash flows as a result of the asset being owned. Following initial recognition, intangible asset is carried at cost less any accumulated amortization and impairment losses, if any. The useful life of an intangible asset is assessed to be either finite or indefinite. An intangible asset with finite life is amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each reporting date. A change in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for as a change in accounting estimate. The amortization expense on intangible asset with finite life is recognized in the consolidated statements of income.

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Business Combinations under Common Control The Group accounts for business combinations involving entities that are ultimately controlled by the same ultimate parent before and after the business combination and the control is not transitory, using the pooling of interests method. The assets and liabilities of the combining entities are reflected in the consolidated statements of financial position at their carrying amounts. No adjustments are made to reflect fair values, or recognize any new assets or liabilities, at the date of the combination. The only adjustments are those to align accounting policies between the combining entities. No new goodwill is recognized as a result of the business combination. The only goodwill that is recognized is any existing goodwill relating to either of the combining entities. Any difference between the consideration paid or transferred and the equity acquired is recognized in equity. The consolidated statements of income reflect the results of the combining entities for the full year, irrespective of when the combination took place. Comparatives are presented as if the entities had been combined for the period that the entities were under common control. Non-controlling Interests The acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized as a result of such transactions. Any difference between the purchase price and the net assets of the acquired entity is recognized in equity. The adjustments to non-controlling interests are based on a proportionate amount of the identifiable net assets of the subsidiary. Investments in Shares of Stock of Associates and Joint Ventures An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control is similar to those necessary to determine control over subsidiaries.

shares of stock of associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in shares of stock of an associate or joint venture is initially recognized at cost. The carrying amount of the investment is

associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.

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an associate or joint venture is recognized as

statements of income. Adjustments to the carrying amount may also be necessary

arising from changes in the associate s other comprehensive income.

comprehensive income of an in the consolidated statements of comprehensive income. Unrealized gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture. After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in the shares of stock of an associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in shares of stock of an associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount and carrying amount of the investment in shares of stock of an associate or joint venture and then recognizes the account in the consolidated statements of income. Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at fair value. Any difference between the carrying amount of the investment in an associate or joint venture upon loss of significant influence or joint control, and the fair value of the retained investment and proceeds from disposal is recognized in the consolidated statements of income. The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. Property, Plant and Equipment Property, plant and equipment, except for land, are stated at cost less accumulated depreciation and amortization and any accumulated impairment in value. Such cost includes the cost of replacing part of the property, plant and equipment at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. Land is stated at cost less impairment in value, if any. The initial cost of property, plant and equipment comprises its construction cost or purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation (ARO), if any. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably. Capital projects in progress (CPIP) represents the amount of accumulated expenditures on unfinished and/or ongoing projects. This includes the costs of construction and other direct costs. Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period. CPIP is not depreciated until such time that the relevant assets are ready for use.

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Depreciation and amortization, which commence when the assets are available for their intended use, are computed using the straight-line method over the following estimated useful lives of the assets:

Number of Years Power plants 10 - 43 Leasehold improvements 5 - 25 or term of the lease,

whichever is shorter Other equipment 2 - 20 Building 10 - 25

The remaining useful lives, residual values, and depreciation and amortization methods are reviewed and adjusted periodically, if appropriate, to ensure that such periods and methods of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of property, plant and equipment. The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Fully depreciated assets are retained in the accounts until they are no longer in use. An item of property, plant and equipment is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising from the retirement and disposal of an item of property, plant and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in the consolidated statements of income in the period of retirement and disposal. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Subsequently, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditures are recognized in the consolidated statements of income in the year in which the related expenditures are incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful life and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method used for an intangible asset with a finite useful life are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimate. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income consistent with the function of the intangible asset.

F-38

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Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:

Number of Years Power concession right 25 Computer software and licenses 3

Gains or losses arising from the disposal of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the consolidated statements of income when the asset is derecognized. Service Concession Agreements Public-to-private service concession arrangements where: (a) the grantor controls or regulates what services the entity in the Group can provide with the infrastructure, to whom it can 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 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 the Interpretation if the conditions in (a) are met. The Interpretation applies to both: (i) infrastructure that the entity in the Group construct or acquire from a third party for the purpose of the service arrangement; and (ii) existing infrastructure to which the grantor gives the entity in the Group access for the purpose of the service arrangement. Infrastructures within the scope of the Interpretation are not recognized as property, plant and equipment of the Group. Under the terms of the contractual arrangements within the scope of the Interpretation, an entity acts as a service provider. An entity 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.

to the Parent Company, through APEC, to operate and maintain the franchise of Albcarried at cost less accumulated amortization and any accumulated impairment losses. The useful life of power concession right is assessed to be either finite or indefinite. Power concession right arising from a service concession arrangement is amortized using straight-line method over the concession period, which is 25 years from the first day of the commencement of operations, or the estimated useful lives of the infrastructure, whichever is shorter, and assessed for impairment whenever there is an indication that the asset may be impaired. The amortization period and method are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense is recognized in the consolidated statements of income in the expense category consistent with the function of the concession assets.

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The power concession right is derecognized on disposal or when no further economic benefits are expected from its use or disposal. Gain or loss from derecognition of the power concession right is measured as the difference between the net disposal proceeds and the carrying amount of the asset, and is recognized in the consolidated statements of income. An entity recognizes and measures revenue in accordance with PFRS 15 for the services it performs. If an entity performs more than one service under a single contract or arrangement, consideration received or receivable is allocated by reference to the relative stand-alone selling prices of the services delivered. When an entity provides construction or upgrade services, the consideration received or receivable by the entity is recognized at fair value. Revenue from construction contracts is recognized based on the percentage-of-completion method, measured by reference to the proportion of costs incurred to date, to estimated total costs for each contract. An entity 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. An entity recognizes an intangible asset to the extent that it receives a right (a license) to charge users of the public service. When the applicable entity has contractual obligations to fulfill as a condition of its license: (i) to maintain the infrastructure to a specified level of serviceability; or (ii) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service arrangement, it recognizes and measures the contractual obligations in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, i.e., at the best estimate of the expenditure that would be required to settle the present obligation at the reporting date. In accordance with PAS 23, borrowing costs attributable to the arrangement are recognized as expenses in the period in which they are incurred unless the applicable entities have 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. Concession payable is recognized at the date of inception of the concession agreement. Fixed concession fees are recognized at present value using the discount rate at the inception date. This account is debited upon payment of fixed fees and such payments are apportioned between interest payment and payment of the principal. Interest arising from the accretion of concession payable is presented under Interest expense and other financing charges account in the consolidated statements of income. Concession payable that are expected to be settled within 12 months after the reporting date are classified as current liabilities. Otherwise, these are classified as noncurrent liabilities. Mining Rights The Group's mining rights have finite lives and are carried at cost less accumulated amortization and any accumulated impairment losses. Subsequent expenditures are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in the consolidated statements of income as incurred.

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Amortization of mining rights is recognized in the consolidated statements of income based on the units of production method utilizing only recoverable coal reserves as the depletion base. In applying the units of production method, amortization is normally calculated using the quantity of material extracted from the mine in the period as a percentage of the total quantity of material to be extracted in current and future periods based on proved and probable reserves. The amortization of mining rights will commence upon commercial operations. Gain or loss from derecognition of mining rights is measured as the difference between the net disposal proceeds and the carrying amount of the asset, and is recognized in the consolidated statements of income. Deferred Exploration and Development Costs Deferred exploration and development costs comprise of expenditures which are directly attributable to: Researching and analyzing existing exploration data; Conducting geological studies, exploratory drilling and sampling; Examining and testing extraction and treatment methods; and Compiling pre-feasibility and feasibility studies.

Deferred exploration and development costs also include expenditures incurred in acquiring mining rights, entry premiums paid to gain access to areas of interest and amounts payable to third parties to acquire interests in existing projects. Exploration assets are reassessed on a regular basis and tested for impairment provided that at least one of the following conditions is met: the period for which the entity has the right to explore in the specific area has

expired during the period or will expire in the near future, and is not expected to be renewed;

substantive expenditure on further exploration for and evaluation of mineral

resources in the specific area is neither budgeted nor planned; such costs are expected to be recouped in full through successful development

and exploration of the area of interest or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not yet reached a

stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.

If the project proceeds to development stage, the amounts included within deferred exploration and development costs are transferred to property, plant and equipment.

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Impairment of Non-financial Assets The carrying amounts of investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill are tested for impairment annually either individually or at the cash-generating unit level. If any such indication exists, and if the carrying amount exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale

less costs of disposal. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. 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 assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting 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

impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of income. After such a reversal, the depreciation and amortization charge is adjusted in future periods to

basis over its remaining useful life. An impairment loss with respect to goodwill is not reversed. Fair Value Measurements The Group measures financial and non-financial assets and liabilities at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or most advantageous market must be accessible to the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

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All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1: quoted prices (unadjusted) in active markets for identical assets or

liabilities; Level 2: inputs other than quoted prices included within Level 1 that are

observable for the asset or liability, either directly or indirectly; and Level 3: inputs for the asset or liability that are not based on observable market

data. For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorization at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. Provisions Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of past events; (b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset only when it is virtually certain that reimbursement will be received. The amount recognized for the reimbursement shall not exceed the amount of the provision. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. 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 the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. ARO. The Group records a provision for asset retirement costs of its power plants. Asset retirement costs are provided at the present value of expected costs to settle the obligation using estimated cash flows and are recognized as part of property, plant and equipment. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the retirement liability. The unwinding of the discount is expensed as incurred and recognized in the consolidated statements of income as

expense and other financing charges . The estimated future costs of asset retirement are reviewed annually and adjusted prospectively. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the power plants. If the decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognized immediately in the consolidated statements of income.

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Capital Stock and Additional Paid-in Capital Common Shares Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects. Additional Paid-in Capital When the shares are sold at premium, the difference between the proceeds and the par value is credited to the Additional paid-in capital account. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received. In case the shares are issued to extinguish or settle the liability of the Parent Company, the shares are measured either at the fair value of the shares issued or fair value of the liability settled, whichever is more reliably determinable. Redeemable Perpetual Securities (RPS) and Undated Subordinated Capital Securities (USCS) RPS and USCS are classified as equity when there is no contractual obligation to deliver cash or other financial assets to another person or entity or to exchange financial assets or financial liabilities with another person or entity that is potentially unfavorable to the issuer. Incremental costs directly attributable to the issuance of RPS and USCS are recognized as a deduction from equity, net of tax. The proceeds received, net of any directly attributable transaction costs, are credited to RPS and USCS. Retained Earnings Retained earnings represent the accumulated net income or losses, net of any dividend, distributions and other capital adjustments. Appropriated retained earnings represent that portion which is restricted and therefore not available for any dividend declaration. Revenue Recognition Policy from January 1, 2018 The Group recognizes revenue from contracts with customers when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. Revenues are inclusive of pass-through charges, net of value-added tax (VAT) and other fees collected on behalf of other parties collected on behalf of other parties. The transfer of control can occur over time or at a point in time. Revenue is recognized at a point in time unless one of the following criteria is met, in which case it is recognized over time: (a) the customer simultaneously receives and consumes

creates or enhances an asset that the customer controls as the asset is created or e an asset with an

alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. The Group assesses its revenue arrangements to determine if it is acting as principal or agent. The Group has concluded that it acts as a principal as it controls the goods or services before transferring to the customer.

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The following specific recognition criteria must also be met before revenue is recognized: Sale of Power Revenue from power generation and trading is recognized over time when actual power or capacity is generated, transmitted and/or made available to the customers, net of related discounts and adjustments. Retail and Other Power-related Services Revenues from retail and other power-related services are recognized over time upon the supply of electricity to the customers. The Uniform Filing Requirements on the rate unbundling released by the Energy Regulatory Commission (ERC) on October 30, 2001 specified the following bill components: (a) generation charge, (b) transmission charge, (c) system loss charge, (d) distribution charge, (e) supply charge, (f) metering charge, (g) currency exchange rate adjustments, where applicable and (h) interclass and life subsidies. Feed-in tariffs allowance, VAT and universal charges are billed and collected on behalf of the national and local government and do not form part of the Group Generation, transmission and system loss charges, which are part of revenues, are pass-through charges. Others Interest income is recognized using the effective interest rate method. In calculating interest income, the effective interest rate is applied to the gross carrying amount of the asset. Management income is recognized when earned in accordance with the terms of the agreement. Rent income from operating lease is recognized on a straight-line basis over the related lease terms. Lease incentives granted are recognized as an integral part of the total rent income over the term of the lease. Construction right to operate and maintain the franchise of ALECO, which is the fair value of the intangible asset, is earned and recognized as the construction progresses. The Group recognizes the corresponding amount as intangible asset as it recognizes the construction revenue. The Group assumes no profit margin in earning the right to operate and maintain the franchise of ALECO. The Group uses the cost to cost percentage-of-completion method to determine the appropriate amount of revenue to be recognized in a given period. The stage of completion is measured by reference to the costs incurred related to the construction of ALECO infrastructure up to the end of the reporting period as a percentage of total estimated cost of the construction. Policy before January 1, 2018 Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. Revenues are stated at amounts invoiced to customers, inclusive of pass-through charges, net of value-added tax (VAT) and other taxes.

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The following specific recognition criteria must also be met before revenue is recognized: Sale of Power. Revenue from power generation and trading is recognized in the period when actual power or capacity is generated, transmitted and/or made available to the customers, net of related discounts and adjustments. Retail and Other Power-related Services. Revenues are recognized upon the supply of electricity to the customers. The Uniform Filing Requirements on the rate unbundling released by the Energy Regulatory Commission (ERC) on October 30, 2001 specified the following bill components: (a) generation charge, (b) transmission charge, (c) system loss charge, (d) distribution charge, (e) supply charge, (f) metering charge, (g) currency exchange rate adjustments, where applicable and (h) interclass and life subsidies. Feed-in tariffs allowance, VAT and universal charges are billed and collected on behalf of the national and local

and system loss charges, which are part of revenues, are pass-through charges. Others Interest income is recognized as the interest accrues, taking into account the effective yield on the asset. Management income is recognized when earned in accordance with the terms of the agreement. Rent income from operating lease is recognized on a straight-line basis over the related lease terms. Lease incentives granted are recognized as an integral part of the total rent income over the term of the lease. Construction right to operate and maintain the franchise of ALECO, which is the fair value of the intangible asset, is earned and recognized as the construction progresses. The Group recognizes the corresponding amount as intangible asset as it recognizes the construction revenue. The Group assumes no profit margin in earning the right to operate and maintain the franchise of ALECO. The Group uses the cost to cost percentage-of-completion method to determine the appropriate amount of revenue to be recognized in a given period. The stage of completion is measured by reference to the costs incurred related to the construction of ALECO infrastructure up to the end of the reporting period as a percentage of total estimated cost of the construction. Costs and Expenses Costs and expenses are decreases in economic benefits during the reporting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Cost of power sold is debited for the direct costs related to power generation, retail and distribution of electricity, and/or trading. Expenses are recognized when incurred. Interest Expense and Other Financing Charges. Interest expense and other financing charges comprise finance charges on finance lease liabilities, loans, concession payable, premium on option liabilities and other borrowings. Finance charges on finance lease liabilities, loans, concession payable and premium on option liabilities are recognized in the consolidated statements of income using the effective interest rate method.

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Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the

arrangement; (b) a renewal option is exercised or an extension is granted, unless the term of the

renewal or extension was initially included in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on a

specific asset; or (d) there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gives rise to the reassessment for scenarios (a), (c) or (d), and at the date of renewal or extension period for scenario (b) above. Finance Lease Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Obligations arising from plant assets under finance lease agreement are classified in the consolidated statements of financial position as finance lease liabilities. Lease payments are apportioned between financing charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Financing charges are recognized in the consolidated statements of income. Capitalized leased assets are depreciated over the estimated useful lives of the assets when there is reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating Lease Group as Lessee. Leases which do not transfer to the Group substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. Associated costs such as maintenance and insurance are expensed as incurred. Group as Lessor. Leases where the Group does not transfer substantially all the risks and rewards of ownership of the assets are classified as operating leases. Rent income from operating leases is recognized as income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as rent income. Contingent rents are recognized as income in the period in which they are earned.

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Borrowing Costs Borrowing costs directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. Employee Benefits Short-term Employee Benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Retirement Costs The net defined benefit retirement liability or asset is the aggregate of the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of economic benefits available in the form of reductions in future contributions to the plan. The cost of providing benefits under the defined benefit retirement obligation is actuarially determined using the projected unit credit method. Projected unit credit method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning projected salaries of employees. Actuarial gains and losses are recognized in full in the period in which they occur in other comprehensive income. Such actuarial gains and losses are also immediately recognized in equity and are not reclassified to profit or loss in subsequent period. Defined benefit costs comprise the following: Service costs; Net interest on the defined benefit retirement liability or asset; and Remeasurements of defined benefit retirement liability or asset.

Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in the consolidated statements of income. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuary. Net interest on the net defined benefit retirement liability or asset is the change during the period as a result of contributions and benefit payments, which is determined by applying the discount rate based on the government bonds to the net defined benefit retirement liability or asset. Net interest on the net defined benefit retirement liability or asset is recognized as expense or income in the consolidated statements of income. Remeasurements of net defined benefit retirement liability or asset comprising actuarial gains and losses, return on plan assets, and any change in the effect of the asset ceiling (excluding net interest) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to consolidated statements of income in subsequent periods.

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When the benefits of a plan are changed, or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the consolidated statements of income. The Group recognizes gains and losses on the settlement of a defined benefit retirement plan when the settlement occurs. Foreign Currency Foreign Currency Translations Transactions in foreign currencies are translated to the respective functional currency of the Group entities at exchange rates at the dates of the transactions. Monetary assets and monetary liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the reporting date. Nonmonetary assets and nonmonetary liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date the fair value was determined. Nonmonetary items in foreign currencies that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognized in the consolidated statements of income. Foreign Operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Philippine peso at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to Philippine peso at average exchange rates for the period. Foreign currency differences are recognized in other comprehensive income and

Translation changes in equity. However, if the operation is not a wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in shares of stock of an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognized in other

Translation consolidated statements of changes in equity.

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Taxes Current Tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax relating to items recognized directly in equity is recognized in equity and not in profit or loss. The Group periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretations and establishes provisions where appropriate. Deferred Tax. Deferred tax is recognized using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or 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 profit nor taxable profit or loss; and

with respect to taxable temporary differences associated with investments in

shares of stock of subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of MCIT and NOLCO can be utilized, except: where the deferred tax asset relating to the deductible temporary difference

arises 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 profit nor taxable profit or loss; and

with respect to deductible temporary differences associated with investments in

shares of stock of subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in 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 at the reporting date. Current tax and deferred tax are recognized in the consolidated statements of income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. VAT. Revenues, expenses and assets are recognized net of the amount of VAT, except: where the tax incurred on a purchase of assets or services is not recoverable

from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

receivables and payables that are stated with the amount of tax included.

The net amount of tax recoverable from, or payable to, the taxation authority is included as part of Prepaid expenses and other current assets or Accounts payable and accrued expenses accounts in the consolidated statements of financial position. Related Parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. Transactions manner similar to transactions with non-related parties. Basic and Diluted Earnings Per Common Share (EPS) Basic EPS is computed by dividing the net income for the period attributable to equity holders of the Parent Company, net of distributions to the holders of RPS and USCS, by the weighted average number of issued and outstanding common shares during the period, with retroactive adjustment for any stock dividends declared. Diluted EPS is computed in the same manner, adjusted for the effect of all potential dilutive debt or equity instruments. As of December 31, 2018, 2017 and 2016, the Group has no dilutive equity instruments as disclosed in Note 29 to the consolidated financial statements. Operating Segments

according to the services provided, with each segment representing a strategic business unit that offers different economic characteristic and activities. Financial Information on operating segments is presented in Note 6 to the consolidated financial statements. The Chief Executive Officer (the chief operating decision maker) reviews management reports on a regular basis.

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The measurement policies the Group used for segment reporting under PFRS 8 are the same as those used in the consolidated financial statements. There have been no changes in the measurement methods used to determine reported segment profit or loss from prior periods. All inter-prices. Segment revenues, expenses and performance include sales and purchases between business segments. Such sales and purchases are eliminated in consolidation. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable. Events After the Reporting Date Post year-end position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

4. Use of Judgments, Estimates and Assumptions The preparation of the consolidated financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expenses reported in the consolidated financial statements at the reporting date. However, uncertainty about these judgments, estimates and assumptions could result in an outcome that could require a material adjustment to the carrying amount of the affected asset or liability in the future. 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. Revisions are recognized in the period in which the judgments and estimates are revised and in any future period affected. Judgments In the process of applying the accounting policies, the Group has made the following judgments, apart from those involving estimations, which have an effect on the amounts recognized in the consolidated financial statements: Determining Functional Currency. The Parent Company has determined that its functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company operates. It is the currency that mainly influences the sales price of goods and services and the costs of providing these goods and services.

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Finance Lease - Group as Lessee. The Independent Power Producer Administration (IPPA) Agreements with the Power Sector Assets and Liabilities Management Corporation (PSALM) provide the Group with a right to receive a transfer of the power plant upon termination of the IPPA Agreement at the end of the cooperation period or in case of buy-out. IPPA Agreements, the

A Agreements are agreements that contain a lease. MPPCL also entered into a lease agreement with PSALM for the lease of land where a portion of the Masinloc Power Plant is situated.

the risks and rewards incidental to the ownership of the power plants and land. Accordingly, the Group accounted for the agreements as finance lease and recognized the power plants, land and finance lease liabilities at the present value of the agreed monthly payments to PSALM (Notes 7 and 13). Finance lease liabilities recognized in the consolidated statements of financial position amounted to P142,007,061 and P154,793,690 as of December 31, 2018 and 2017, respectively (Notes 7, 30 and 31). The combined carrying amounts of power plants and land under finance lease amounted to P168,266,667 and P172,573,492 as of December 31, 2018 and 2017, respectively (Note 13). Operating Lease Commitments - Group as Lessor/Lessee. The Group has entered into various lease agreements either as a lessor or a lessee. The Group had determined that it retains all the significant risks and rewards of ownership of the property leased out on operating leases while the significant risks and rewards for property leased from third parties and related parties are retained by the lessors (Note 7). Rent income recognized in the consolidated statements of income amounted to P6,170, P10,686 and P21,147 in 2018, 2017 and 2016, respectively (Notes 7 and 26). Rent expense recognized in the consolidated statements of income amounted to P356,606, P376,499 and P351,091 in 2018, 2017 and 2016, respectively (Notes 7 and 25). Determining Whether the Group is acting as a Principal or Agent in a Revenue Transaction. The determination whether the Group is a principal or agent in a contract is made by identifying each specified goods or services promised to the customers in the contract and evaluating whether the Group obtains control of the specified goods and services before it is transferred to the customer. For the sale of power and retail and other power-related services, the Group has the obligation to provide a recurring service to the customer over the contract term and transfers control upon delivery, hence, the Group has determined that it is acting as principal in these revenue arrangements with customers. Applicability of Philippine Interpretation IFRIC 12. In accounting for the Grouptransactions in connection with its Concession Agreement with ALECO, significant judgment was applied to determine the most appropriate accounting policy to use.

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Management used Philippine Interpretation IFRIC 12 as guide and determined that the Concession Agreement is within the scope of the Interpretation. Management determined that the consideration receivable, in exchange for the fulfillment of the

form of a right (license) to charge fees to users. Judgment was further exercised by management in determining the costs components of acquiring the right (Notes 3, 7 and 15). Power Concession Right. operate and maintain the franchise of ALECO; i.e., the right to collect electricity fees from the consumers of ALECO. At the end of the concession period, all assets and improvements shall be returned to ALECO and any additions and improvements to the system shall be transferred to ALECO. Difference in judgment in respect to the accounting treatment of the transactions would materially affect the assets, liabilities and operating results of the Group. Classification of Joint Arrangements. The Group has determined that it has rights only to the net assets of the joint arrangements based on the structure, legal form, contractual terms, and other facts and circumstances of the arrangement. As such, the Group classified its joint arrangements in Angat Hydropower Corporation (AHC) and KWPP Holdings Corporation (KWPP) as joint venture (Note 12). Adequacy of Tax Liabilities. The Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretation of tax laws and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. Classification of Financial Instruments. The Group exercises judgments in classifying financial instrument or its component parts, on initial recognition as a financial asset, a financial liability, or an equity instrument in accordance with the substance of the contractual arrangement and the definitions 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 statements of financial position. The Group uses its judgment in determining the classification of financial assets based on its business model in which assets are managed and their cash flow characteristics. The classification and fair values of financial assets and financial liabilities are presented in Note 31. Contingencies. The Group is currently involved in various pending claims and cases

probable costs for the resolution of these pending claims and cases has been developed in consultation with in-house as well as outside legal counsel handling the prosecution and defense of these matters and is based on an analysis of potential results. The Group currently does not believe that these pending claims and cases will have a material adverse effect on its financial position and financial performance. It is possible, however, that future financial performance could be materially affected by the changes in the estimates or in the effectiveness of strategies relating to these proceedings (Note 33).

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Estimates and Assumptions The key estimates and assumptions used in the consolidated financial statements are based upon evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates. Assessment for ECL on Trade and Other Receivables (Upon Adoption of PFRS 9). The Group, applying the simplified approach in the computation of ECL, initially uses a provision matrix based on historical default rates for trade and other receivables. The Group also uses appropriate groupings if its historical credit loss experience shows significantly different loss patterns for different customer segments. The Group then adjusts the historical credit loss experience with forward-looking information on the basis of current observable data affecting each customer segment to reflect the effects of current and forecasted economic conditions. The Group has assessed that the forward-looking default rate component of its ECL on trade and other receivables is not material because substantial amount of trade and other receivables are normally collected within one year. Moreover, based on

assessment, current conditions and forward-looking information does not indicate a significant increase in credit risk exposure of the Group from its trade and other receivables. There were no trade and other receivables written-off in 2018. The allowance for impairment losses on trade and other receivables amounted to P2,574,423 as of December 31, 2018. The carrying amount of trade and other receivables amounted to P33,046,686 as of December 31, 2018 (Note 9). Assessment for ECL on Other Financial Assets at Amortized Cost (Upon Adoption of PFRS 9). The Group determines the allowance for ECL using general approach based on the probability-weighted estimate of the present value of all cash shortfalls over the expected life of financial assets at amortized cost. ECL is provided for credit losses that result from possible default events within the next 12 months unless there has been a significant increase in credit risk since initial recognition in which case ECL is provided based on lifetime ECL. When determining if there has been a significant increase in credit risk, the Group considers reasonable and supportable information that is available without undue cost or effort and that is relevant for the particular financial instrument being assessed such as, but not limited to, the following factors: actual or expected external and internal credit rating downgrade;

existing or forecasted adverse changes in business, financial or economic

conditions; and actual or expected significant adverse changes in the operating results of the

borrower. The Group also considers financial assets at day one to be the latest point at which lifetime ECL should be recognized unless it can demonstrate that this does not represent a significant risk in credit risk such as when non-payment was an administrative oversight rather than resulting from financial difficulty of the borrower.

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The Group has assessed that the ECL on other financial assets at amortized cost is not material because the transactions with respect to these financial assets were entered into by the Group only with reputable banks and companies with good credit standing and relatively low risk of defaults. Accordingly, no provision for ECL on other financial assets at amortized cost was recognized in 2018. The carrying amounts of other financial assets at amortized cost are as follows: Note 2018 Cash and cash equivalents 8 P28,511,862

expenses and other current assets account) 11 54,009

16 265,298

other current assets and accounts) 11, 16 4,742,219

P33,573,388 Allowance for Impairment Losses on Trade and Other Receivables, and Noncurrent Receivables (Prior to the Adoption of PFRS 9). Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Group evaluates these accounts on the basis of factors that affect the collectability of the

relationship with the counterparties, the current credit status based on third party credit reports and known market forces, average age of accounts, collection experience and historical loss experience. The amount and timing of the recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in the allowance for impairment losses would increase the recorded costs and expenses and decrease current and noncurrent assets. The allowance for impairment losses on trade and other receivables amounted to P2,451,818 as of December 31, 2017. There was no allowance for impairment losses recognized on noncurrent receivables as of December 31, 2017 (Notes 9 and 16). The carrying amount of trade and other receivables, and noncurrent receivables amounted to P20,664,166 as of December 31, 2017 (Notes 9,16, 30 and 31). Fair Value Measurements. disclosures require the measurement of fair values for both financial and non-financial assets and liabilities. The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has the overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information is used to measure fair values, then the valuation team assesses the evidence obtained to support the conclusion that such valuations meet the requirements of PFRS, including the level in the fair value hierarchy in which such valuations should be classified. The Group uses market observable data when measuring the fair value of an asset or liability. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques (Note 3).

F-56

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If the inputs used to measure the fair value of an asset or a liability can be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy based on the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. The methods and assumptions used to estimate the fair values for both financial and non-financial assets and liabilities are discussed in Notes 11, 16, 18 and 31. Write-down of Inventory. The Group writes-down the cost of inventory to net realizable value whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the inventories are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the reporting date to the extent that such events confirm conditions existing at the reporting date. The Group assessed that no write-down of inventories to net realizable value is necessary as of December 31, 2018 and 2017. The carrying amount of inventories amounted to P5,294,631 and P3,147,668 as of December 31, 2018 and 2017, respectively (Note 10). Estimated Useful Lives of Property, Plant and Equipment. The Group estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of property, plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future financial performance could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property, plant and equipment would increase the recorded cost of power sold and selling and administrative expenses and decrease noncurrent assets. Property, plant and equipment, net of accumulated depreciation and amortization, amounted to P312,385,671 and P250,961,307 as of December 31, 2018 and 2017, respectively. Accumulated depreciation and amortization of property, plant and equipment amounted to P52,054,109 and P42,776,912 as of December 31, 2018 and 2017, respectively (Note 13).

F-57

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Estimating Coal Reserves. Coal reserve estimates are based on measurements and geological interpretation obtained from natural outcrops, trenches, tunnels and

-development projects

only where there is a significant commitment to project funding and execution and for which applicable governmental and regulatory approvals have been secured or are reasonably certain to be secured. All proven reserve estimates are subject to revision, either upward or downward, based on new information, such as from block grading and production activities or from changes in economic factors, including product prices, contract terms or development plans. Estimates of reserves for undeveloped areas are subject to greater uncertainty over their future life than estimates of reserves for areas that are substantially developed and depleted. The Philippine Department of Energy (DOE) is the government agency authorized to implement Coal Operating Contracts (COC) and regulate the operation of contractors pursuant to DOE Circular No. 81-11-10: Guidelines for Coal Operations in the Philippines. For the purpose of the 5-year development and production program required for each COC, the agency classifies coal reserves, according to increasing degree of uncertainty, into (i) positive, (ii) probable, and (iii) inferred. The DOE also

--situ reserve for

underground, and 85% for surface (including open-pit) coal mines (Note 14). Recoverability of Deferred Exploration and Development Costs. A valuation allowance is provided for estimated unrecoverable deferred exploration and development costs based on the Group's assessment of the future prospects of the mining properties, which are primarily dependent on the presence of economically recoverable reserves in those properties.

ain in the preparatory stages as of December 31, 2018. All related costs and expenses from the mining activities are currently deferred as exploration and development costs, which will be amortized upon commencement of commercial operations. The Group has not identified any facts and circumstances which suggest that the carrying amount of the deferred exploration and development costs exceeded the recoverable amounts as of December 31, 2018 and 2017. Deferred exploration and development costs amounted to P705,458 and P699,001 as of December 31, 2018 and 2017, respectively (Note 14). Estimated Useful Lives of Intangible Assets. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or an indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. Intangible assets with finite useful lives, such as mining rights and computer software and licenses, amounted to P1,778,858 and P1,803,386 as of December 31, 2018 and 2017, respectively. Accumulated amortization of computer software and licenses amounted to P259,588 and P154,849 as of December 31, 2018 and 2017, respectively (Note 15). The amortization of mining rights will commence upon commercial operations. Intangible assets with indefinite useful life amounted to P69,953,222 and P8,866 as of December 31, 2018 and 2017, respectively (Notes 5 and 15).

F-58

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Estimated Useful Lives of Intangible Assets - Power Concession Right. The Group estimates the useful life of power concession right based on the period over which the assets are expected to be available for use. The Group has not included any renewal period on the basis of uncertainty of the probability of securing renewal contract at the end of the original contract term as of the reporting date. The amortization period and method are reviewed when there are changes in the expected term of the contract or the expected pattern of consumption of future economic benefits embodied in the asset. The carrying amount of power concession right amounted to P881,283 and P781,884 as of December 31, 2018 and 2017, respectively (Note 15). Impairment of Goodwil with Indefinite Useful Life. The Group determines whether the goodwill acquired in a business combination is impaired at least annually. This requires the estimation of value in use of the cash-generating units to which the goodwill is allocated. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash-generating unit and to choose a suitable discount rate to calculate the present value of those cash flows. The recoverable amount of goodwill arising from the acquisition of SMCGP Masin, SMCGP Transpower and SPHI (collectively referred to as Masinloc Group) has been determined based on the value in use using discounted cash flows (DCF). Assumptions used in the DCF include terminal growth rate and discount rate of 3.0% and 9.0% in 2018, respectively (Notes 5 and 15). Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause its carrying amount to exceed its recoverable amount. No impairment loss was recognized in 2018 in relation to the goodwill arising from the acquisition of the Masinloc Group, which accounts for almost 100% of the goodwill in the consolidated statements of financial position as of December 31, 2018. The carrying amount of goodwill amounted to P69,953,222 and P8,866 as of December 31, 2018 and 2017, respectively (Notes 5 and 15). Acquisition Accounting. At the time of acquisition, the Group considers whether the acquisition represents an acquisition of a business or a group of assets. The Group accounts for an acquisition as a business combination if it acquires an integrated set of business processes in addition to the group of assets acquired. The Group accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and the liabilities assumed are recognized at the date of acquisition based on their respective fair values. The application of the acquisition method requires certain estimates and assumptions concerning the determination of the fair values of acquired intangible assets and property, plant and equipment as well as liabilities assumed at the acquisition date. Moreover, the useful lives of the acquired intangible assets and property, plant and equipment have to be determined. Accordingly, for significant acquisitions, the Group obtains assistance from valuation specialists. The valuations are based on information available at the acquisition date. The Group has determined that the acquisition of the Masinloc Group represents a business due to the presence of the integrated set of activities acquired.

F-59

- 48 -

The carrying amount of goodwill arising from business combinations amounted to P69,953,222 and P8,866 as of December 31, 2018, and 2017, respectively (Note 15). Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the

deferred tax assets on deductible temporary differences and carryforward benefits of MCIT and NOLCO is based on the projected taxable income in the following periods. Deferred tax assets arising from MCIT and NOLCO have not been recognized because the management believes that it is not probable that future taxable income will be available against which the Group can utilize the benefits therefrom (Note 27). Deferred tax assets from temporary differences amounted to P1,137,565 and P1,316,926 as of December 31, 2018 and 2017, respectively (Note 27). Impairment of Non-financial Assets. PFRS requires that an impairment review be performed on investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Determining the recoverable amounts of these assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the financial performance. Accumulated impairment losses on property, plant and equipment amounted to P70,265 and nil as of December 31, 2018 and 2017, respectively (Note 13). The combined carrying amounts of investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives amounted to P327,829,991 and P270,866,709 as of December 31, 2018 and 2017, respectively (Notes 12, 13, 14 and 15). Present Value of Defined Benefit Retirement Obligation. The present value of the defined benefit retirement obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. These assumptions are described in Note 21 to the consolidated financial statements and include discount rate and salary increase rate. The Group determines the appropriate discount rate at the end of each reporting period. It is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the retirement obligations. In determining the appropriate discount rate, the Group considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid. The terms to maturity of these bonds should approximate the terms of the related retirement obligation. Other key assumptions for the defined benefit retirement obligation are based in part on current market conditions.

F-60

- 49 -

While it is believed that the assumptions of the Group are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the defined benefit retirement obligation of the Group. The present value of defined benefit retirement obligation amounted to P227,091 and P78,104 as of December 31, 2018 and 2017, respectively (Note 21). ARO. The Group has ARO arising from power plants and leased properties. Determining ARO requires estimation of the costs of dismantling, installing and restoring leased properties to their original condition. The Group determined the amount of the ARO by obtaining estimates of dismantling costs from the proponent

credit-adjusted risk-free rate of 8.371% depending on the life of the capitalized costs. 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 obligation in future periods. The Group ARO account in the consolidated statements of financial position amounted to P287,075 and P157,632 as of December 31, 2018 and 2017, respectively.

5. Business Combination On March 20, 2018, the Parent Company acquired 51% and 49% equity interests in

respectively. SMCGP Masin indirectly owns, through its subsidiaries, MPPCL and SMCGP Philippines Energy Storage Co. Ltd. (formerly, AES Philippines Energy

MPPCL owns, operates and maintains the 1 x 330 MW and 1 x 344 MW coal-fired power plant (Units 1 and 2), the under-construction project expansion of the 335 MW unit (Unit 3

, and the 10 MW battery energy storage project , all located in Masinloc, Zambales, SMCGP Philippines Energy plans to construct the 2 x 20 MW battery energy storage facility in Kabankalan, Negros Occidental. The MPPCL Assets add 684 MW capacity to the existing portfolio of the Group. As part of the acquisition, the Parent Company also acquired SMCGP Transpower and SPHI. SMCGP Transpower was a subsidiary of The AES Corporation which provides corporate support services to MPPCL through its Philippine Regional Operating Headquarters, while SPHI was a wholly-owned subsidiary of AES Phil and provides energy marketing services to MPPCL. With the acquisition by the Parent Company of the Masinloc Group (the

ensure its ability to provide affordable and reliable supply of power to its customers. The additional power assets provide an opportunity for the Group to increase its footprint in clean coal technology that provides reliable and affordable power, particularly in Luzon. The Transaction will result in the production of electricity in an environmentally responsible way.

F-61

- 50 -

The total consideration for the Transaction in United States dollar (US$) is US$1,900,000 (equivalent to P98,990,000). The total consideration was paid in cash by the Parent Company using the proceeds of (a) US dollar-denominated long-term borrowings obtained from various financial institutions totaling to US$1,200,000 and (b) the issuance of RPS and obtaining advances from SMC amounting to US$650,000 and US$150,000, respectively (Notes 19, 20 and 22). The Transaction gave the Parent Company 100% ownership and control based on PFRS 3, and was consolidated effective March 20, 2018. From the date of acquisition, the Masinloc Group has contributed P19,459,316 and P2,781,309 of revenues and net income For the year ended December 31, 2018, the consolidated revenues and net income of the Group would have been P124,949,444 and P8,508,703 respectively, had the Transaction been completed at the beginning of the reporting period. The Parent Company has elected to measure non-controlling interest at proportionate interest in identifiable net assets. The following summarizes the recognized provisionary amounts of assets acquired and liabilities assumed at the acquisition date:

2018 Assets Cash and cash equivalents P1,656,243 Trade and other receivables 2,438,955 Inventories 2,378,065 Prepaid expenses and other current assets 1,691,735 Property, plant and equipment 62,274,180 Intangible assets 79,553 Other noncurrent assets 3,039,797 Liabilities Loans payable (2,343,600) Accounts payable and accrued expenses (9,590,653) Finance lease liabilities (including current portion) (30,775) Income tax payable (139,445) Long-term debt - net (including current maturities) (31,951,895) Deferred tax liabilities (54,520) Other noncurrent liabilities (203,919) Total identifiable net assets P29,243,721

Provisional goodwill recognized as a result of acquisition follows:

Note 2018 Consideration transferred P98,990,000 Non-controlling interest measured at proportionate

interest in identifiable net assets 198,077 Total identifiable net assets (29,243,721) Provisional Goodwill 15 P69,944,356

Trade and Other Receivables. The fair value of trade and other receivables amounted to P2,438,955. The gross amount of trade and other receivables is P2,503,458, of which P64,503 is expected to be uncollectible as at the acquisition date (Note 9).

F-62

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Acquisition-related Costs The Parent Company incurred acquisition-related costs of P286,192 and P194,688 for the years ended December 31, 2018 and 2017, respectively, which have been

consolidated statements of income. Goodwill arising from the Transaction is attributable to the benefit of expected synergies, revenue growth, future development and the assembled workforce. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. The Group is currently completing the purchase price allocation exercise on the acquisition. The identifiable net assets at fair value are based on provisionary amounts as at the acquisition date, which is allowed under PFRS 3, within 12 months from the completion of the Transaction.

6. Segment Information Operating Segments

into four businesses: a) power generation, b) retail and other power-related services, c) coal mining and d) others consistent

business performance of the operating segments. The differing economic characteristics and activities of these power plants make it more useful to users of the consolidated financial statements to have information about each component of

The coal mining companies, which were acquired in 2010, have not yet started commercial operations and remain in the preparatory stages of mining activities (Note 14). Segment Assets and Liabilities Segment assets include all operating assets used by a segment and consist primarily of operating cash, receivables, inventories, property, plant and equipment, net of allowances, accumulated depreciation and amortization, and impairment, deferred exploration and development costs, and other noncurrent assets. Segment liabilities include all operating liabilities and consist primarily of loans payable, accounts payable and accrued expenses, finance lease liabilities, and other noncurrent liabilities. Segment assets and liabilities do not include deferred taxes. Inter-segment Transactions Segment revenues, expenses and performance include sales and purchases between operating segments. Transfer prices between operating segments are set

transactions are eliminated in consolidation. The Group operates only in the Philippines which is treated as a single geographical segment.

F-63

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Major Customers The Group sells, retails and distributes power, through power supply agreements, retail supply contracts, concession agreement and other power-related service agreements (Note 7), either directly to customers (other generators, distribution utilities, electric cooperatives and industrial customers) or through the Philippine Wholesale Electricity Spot Market (WESM). Sale of power to Manila Electric Company (Meralco) amounting to P54,474,012, P43,404,148 and P39,565,977 for the years ended December 31, 2018, 2017 and 2016, respectively, represents more than 10%

F-64

- 53

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F-65

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7. Significant Agreements and Lease Commitments a. Independent Power Producer (IPP) Administration (IPPA) Agreements

As a result of the biddings conducted by PSALM for the Appointment of the IPP Administrator for the capacity of the following power plants, the Group was declared the winning bidder to act as IPP Administrator through the following appointed subsidiaries:

Subsidiary Power Plant Location SMEC Sual Coal - Fired Power Station

(Sual Power Plant) Sual, Pangasinan

Province SPDC San Roque Hydroelectric Multi-purpose

Power Plant (San Roque Power Plant) San Roque,

Pangasinan Province SPPC Ilijan Natural Gas - Fired Combined

Cycle Power Plant (Ilijan Power Plant) Ilijan, Batangas

Province The IPPA Agreements are with the conformity of the National Power Corporation (NPC), a government-owned and controlled corporation created by virtue of Republic Act (RA) No. 6395, as amended, whereby NPC confirms, acknowledges, approves and agrees to the terms of the IPPA Agreements and further confirms that for so long as it remains the counterparty of the IPP, it will comply with its obligations and exercise its rights and remedies under the original agreement with the IPP at the request and instruction of PSALM. The IPPA Agreements include, among others, the following common salient rights and obligations: i. the right and obligation to manage and control the capacity of the power plant

for its own account and at its own cost and risks; ii. the right to trade, sell or otherwise deal with the capacity (whether pursuant

to the spot market, bilateral contracts with third parties or otherwise) and contract for or offer related ancillary services, in all cases for its own account and at its own cost and risks. Such rights shall carry the rights to receive revenues arising from such activities without obligation to account therefore to PSALM or any third party;

iii. the right to receive a transfer of the power plant upon termination of the IPPA

Agreement at the end of the cooperation period or in case of buy-out; iv. for SMEC and SPPC, the right to receive an assignment of NPC interest in

existing short-term bilateral power supply contracts; v. the obligation to supply and deliver, at its own cost, fuel required by the IPP

and necessary for the Sual Power Plant to generate the electricity required to be produced by the IPP;

vi. maintain the performance bond in full force and effect with a qualified bank;

and vii. the obligation to pay PSALM the monthly payments and energy fees in

respect of all electricity generated from the capacity, net of outages.

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Relative to the IPPA Agreements, SMEC, SPDC and SPPC have to pay PSALM monthly payments for 15 years until October 1, 2024, 18 years until April 26, 2028 and 12 years until June 26, 2022, respectively. Energy fees amounted to P25,423,530, P23,726,459 and P20,477,903 in 2018, 2017 and 2016, respectively (Note 24). SMEC and SPDC renewed their performance bonds amounting to US$58,187 and US$20,305 which will expire on November 3, 2019 and January 25, 2019, respectively. Subsequently, the performance bond of SPDC was renewed up to January 25, 2020. On June 16, 2015, SPPC renewed its performance bond amounting to US$60,000 with a validity period of one year. This performance bond was subsequently drawn by PSALM on September 4, 2015 which is subject to an ongoing case (Note 33). The finance lease liabilities are carried at amortized cost using the US dollar and Philippine peso discount rates as follows: US Dollar Philippine Peso SMEC 3.89% 8.16% SPPC 3.85% 8.05% SPDC 3.30% 7.90%

The discount determined at inception of the agreement is amortized over the period of the IPPA Agreement and recognized as part of Interest expense and other financing charges account in the consolidated statements of income. Interest expense amounted to P8,320,739, P9,074,226 and P9,667,662 in 2018, 2017 and 2016, respectively. The future minimum lease payments for each of the following periods are as follows:

2018 US Dollar

Peso Equivalent

of US Dollar Peso Total Not later than 1 year US$268,064 P14,094,815 P12,835,994 P26,930,809 More than 1 year and not later

than 5 years 1,053,631 55,399,904 50,478,061 105,877,965 Later than 5 years 360,158 18,937,118 17,275,304 36,212,422 1,681,853 88,431,837 80,589,359 169,021,196 Less: Future finance charges

on finance lease liabilities 184,939 9,724,085 17,381,029 27,105,114

Present values of finance lease liabilities US$1,496,914 P78,707,752 P63,208,330 P141,916,082

2017 US Dollar

Peso Equivalent

of US Dollar Peso Total Not later than 1 year US$255,784 P12,771,279 P12,249,270 P25,020,549 More than 1 year and not later

than 5 years 1,114,370 55,640,495 53,374,792 109,015,287 Later than 5 years 567,483 28,334,431 27,214,567 55,548,998 1,937,637 96,746,205 92,838,629 189,584,834 Less: Future finance charges



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The present values of minimum lease payments for each of the following periods are as follows:

2018 US Dollar

Peso Equivalent

of US Dollar Peso Total Not later than 1 year US$216,662 P11,392,106 P8,198,471 P19,590,577 More than 1 year and

not later than 5 years 938,838 49,364,101 39,688,606 89,052,707 Later than 5 years 341,414 17,951,545 15,321,253 33,272,798 US$1,496,914 P78,707,752 P63,208,330 P141,916,082

2017 US Dollar

Peso Equivalent

of US Dollar Peso Total Not later than 1 year US$196,709 P9,821,652 P7,022,779 P16,844,431 More than 1 year and

not later than 5 years 963,978 48,131,431 39,493,581 87,625,012 Later than 5 years 532,936 26,609,498 23,714,749 50,324,247 US$1,693,623 P84,562,581 P70,231,109 P154,793,690

b. Land Lease Agreement with PSALM

MPPCL has an existing lease agreement with PSALM for the lease of the 199,600 square meters land located in Barangay Bani, Masinloc, Zambales. The lease agreement will expire on April 11, 2028. The finance lease liability is amortized using a 4.52% discount rate over the period of the agreement. Amortization is

which amounted to P66,511 in 2018.

is he consolidated statements of financial position

amounted to P879,578 as at December 31, 2018 (Note 13). Future minimum lease payments under finance lease with the present value of future minimum lease payments follow:

2018

Minimum Lease

Payments

Present Value of Minimum

Lease Payments

Not later than 1 year P69,145 P69,068 More than 1 year and not later than 5 years 15,282 12,077 Later than 5 years 16,385 9,834 100,812 90,979 Less: Future finance charges on finance

lease liabilities 9,833 - Present values of finance lease liabilities P90,979 P90,979

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c. Market Participation Agreements (MPA) SMEC, SPDC, SPPC, SCPC, SMELC and MPPCL each entered into separate MPAs with the Philippine Electricity Market Corporation (PEMC) to satisfy the conditions contained in the Philippine WESM Rules on WESM membership and to set forth the rights and obligations of a WESM member. The relevant parties in each of the MPAs acknowledged that PEMC was entering into the agreement in its capacity as both governing arm and autonomous group market operator of the WESM, and that in due time the market operator functions shall be transferred to an independent market operator (IMO) pursuant to

2obligations and authority of PEMC under the MPA shall also pertain to the IMO and that all references to PEMC shall also refer to such IMO. Upon the initiative of the DOE and PEMC, Independent Electricity Market Operator of the Philippines (IEMOP) was incorporated and assumed the functions and obligations as the market operator of the WESM commencing on September 26, 2018. Consequently, SMEC, SPDC, SPPC, SCPC, SMELC and MPPCL each entered into separate Supplemental MPAs with PEMC and IEMOP for the transfer of rights of the market operator to IEMOP. Under the WESM Rules, the cost of administering and operating the WESM shall be recovered through a charge imposed on all WESM members or transactions, as approved by the ERC. Market fees charged by PEMC to SMEC, SPDC, SPPC, SCPC and MPPCL, recognized and maintenance, in the consolidated statements of income, amounted to P325,188, P146,550 and P160,669 in 2018, 2017 and 2016, respectively (Note 24). SMELC, SCPC and MPPCL each has a standby letter of credit, expiring in 2019 and 2020, to secure the full and prompt performance of obligations for its transactions as a Direct Member and trading participant in the WESM.

d. Power Supply Agreements (PSA) and Retail Supply Contracts (RSCs) SMEC, SPPC, SPDC, SMCPC, SCPC and MPPCL have offtake contracts such as PSAs and RSCs with various counterparties to sell electricity produced by the power plants. Counterparties for PSAs include distribution utilities, electric cooperatives, third party RES and other entities. Counterparties for RSCs are Contestable Customers, or large industrial users which have been certified contestable by the ERC. Majority of the consolidated sales of the Group are through long-term take-or-pay offtake contracts, which may have provisions for passing on fuel costs, foreign exchange differentials or certain other fixed costs. Most of the agreements provide for renewals or extensions subject to mutually agreed terms and conditions by the parties and applicable rules and regulations. Tariff structures vary depending on the customer and their needs, with some having structures based on energy-based pricing, flat generation rates, or capacity-based pricing.

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For capacity-based contracts, the customers are charged with the capacity fees based on the contracted capacity plus the energy fees for the associated energy taken during the month. As stipulated in the contracts, energy-based contracts on the other hand are based on the actual energy consumption of customers using the basic energy charge and/or adjustments. SMEC, SPPC, SPDC, SMCPC, SCPC and MPPCL can also purchase power from WESM and other power generation companies during periods when the power generated from the power plants power requirements. Power purchases amounted to P11,181,239, P10,725,490 and P7,836,564 in 2018, 2017 and 2016, respectively (Note 24). The PSA of SPI with Petron Corporation (Petron), an entity under common control, was terminated effective December 23, 2016 pursuant to the sale of

(Note 13). Revenues from retail sales to contestable customers amounted to P18,808,010 P12,295,813 and P5,722,121 in 2018, 2017 and 2016, respectively, and was

income (Note 23).

e. Memorandum of Agreement (MOA) with San Roque Power Corporation (SRPC) On December 6, 2012, SPDC entered into a 5-year MOA with SRPC to sell a portion of the capacity of the San Roque Power Plant. Under the MOA, i) SRPC shall purchase a portion of the capacity sourced from the San Roque Power Plant; ii) SRPC shall pay a settlement amount to SPDC for the capacity; and iii) the MOA may be earlier terminated or extended subject to terms and mutual agreement of the parties. On March 23, 2018, SPDC and SRPC finalized the extension of the MOA until March 25, 2020. Revenue from sale of capacity of the San Roque Power Plant amounted to P412,595, P944,139 and P758,134 in 2018, 2017 and 2016, respectively, and was recognized as part of Revenues account in the consolidated statements of income (Note 23).

f. Ancillary Service Procurement Agreement (ASPA) On September 8, 2017, MPPCL entered into an ASPA with the National Grid Corporation of the Philippines (NGCP) for a period of 5 years to allocate the entire capacity of its 10 MW Masinloc BESS as frequency regulating reserve for the NGCP to maintain power quality, reliability and security of the grid. Revenue from ancillary services of MPPCL amounted to P191,176 in 2018 and

he consolidated statements of income (Note 23).

g. Coal Supply Agreements SMEC, SMCPC, SCPC and MPPCL have supply agreements with various coal suppliers for the coal requirements of the power plants.

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h. Operations and Maintenance (O&M) Services Agreement In exchange for the O&M services rendered by Petron, SPI pays for all the documented costs and expenses incurred in relation to the operation, maintenance and repair of its 4 x 35 MW Limay Co-generation Solid Fuel-fired Power Plant (Limay Co-gen Power Plant). The agreement is effective for 25 years from September 2013 until 2038 and was terminated upon sale of SPI power plant to Petron on December 23, 2016 (Note 13).

i. Distribution Wheeling Service (DWS) Agreements As Retail Electricity Supplier (RES), SMELC, SCPC and MPPCL each entered into DWS Agreements with certain Distribution Utilities (DUs) for the conveyance of electricity through its distribution systems in order to supply the power requirements of their respective contestable customers. The agreements are valid and binding upon execution unless terminated by either party. The DWS charges from the DUs are passed on to its customers as mandated by the ERC thru the Single-Billing Policy .

j. Lease Agreements Group as Lessee i. The Parent Company has operating lease agreements for the use of office

spaces with San Miguel Properties, Inc., an entity under common control, and an external party for a period of 1 to 5 years which is renewable upon agreement between the parties.

ii. SMEC has a lease agreement with Challenger Aero Air Corporation, an entity under common control, for the lease of aircrafts for a period of 1 year from May 1, 2015 to April 30, 2016. The lease agreement was renewed up to December 31, 2019.

iii. In November 2015, SCPC leased parcels of land from New Ventures Realty Corporation (NVRC), an entity under common control, for its Phase I Limay Greenfield Power Plant and ash dump facility. This is covered by two lease agreements, each having an initial term of 25 years with an option to renew for a further 25 years. The agreements contain a clause allowing annual escalation adjustments of rental rates starting on certain anniversary dates.

iv. On December 7, 2015, LPPC leased a parcel of land from NVRC for its Phase II Limay Greenfield Power Plant for a period of 25 years from the effective date with an option to renew this lease for another 25 years. The rent shall be increased annually by 6.0% starting from the second anniversary of the lease execution. The lease agreement was assigned to SCPC pursuant to the sale of the Phase II Limay Greenfield Power Plant on June 22, 2017.

v. DAMI leases a parcel of land in General Santos City with SMC. The existing lease agreement is for a 10-year period up to June 30, 2023, subject to renewal. The rent is subject to an automatic 10.0% per annum escalation rate. Rent for the year, capitalized in Deferred exploration and development costs account in the consolidated statements of financial position, amounted to P517 and P490 as of December 31, 2018 and 2017, respectively (Note 14).

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vi. In 2016, the SMCPC entered into an agreement with Kyron Landholdings Inc., an entity under common control, for the sub-lease of a parcel of land for its Davao Greenfield Power Plant. The initial term of the lease is for a period of 25 years with the option to renew further for 25 years. Beginning January 1, 2018 until the end of the term, the rental shall be increased by 5.1% per annum.

vii. On December 13, 2017, SCPC leased a foreshore area aggregating to 465,967 square meters from the Department of Environment and Natural Resources (DENR) for its pier and jetty facility. The lease is for a period of 25 years with an option to renew for another 25 years. The agreement contains a clause to increase annual rental based on appraised value of land and improvements every 10 years.

viii. On March 7, 2017, SCPC leased a parcel of land with approximate area of

50,000 square meters from PNOC Alternative Fuels Corporation for the construction of auxiliary facilities of the Limay Greenfield Power Plant. The lease is for a period of 25 years with an option to renew for another 25 years. The agreement contains a clause to increase the annual rental by 3% and every 5 years, the amount equivalent to 5% of the re-appraised value shall be the new rental rate.

ix. On October 3, 2018, SMCPC leased a foreshore area aggregating to 68,779

square meters from the DENR for its pier and jetty facility. The lease is for a period of 25 years with an option to renew for another 25 years. The agreement contains a clause to increase annual rental based on appraised value of land and improvements every 10 years.

Relative to the lease agreements, the Group was required to pay advance rental and security deposits which are included under Trade and other receivables - net or Prepaid expenses and other current assets accounts in the consolidated statements of financial position (Notes 9 and 11). Future minimum lease payments under the non-cancellable operating lease agreements are as follows: 2018 2017 Not later than 1 year P122,709 P92,253 More than 1 year and not later than 5 years 418,987 373,416 Later than 5 years 2,457,247 2,435,954 P2,998,943 P2,901,623

Rent expense recognized in the consolidated statements of income amounted to P356,606, P376,499 and P351,091 in 2018, 2017 and 2016, respectively (Notes 4 and 25). Group as Lessor i. In 2014, the Parent Company has an operating sub-lease agreement with

Clariden Holdings, Inc., an entity under common control, for a period of 2 years which is renewable upon agreement between the parties. The agreement expired on December 31, 2016.

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ii. In May 2011, GPII entered into an agreement with NVRC, for the lease of certain parcels of land located in Limay, Bataan with a total area of 612,193 square meters. The lease term is for a period of 10 years up to May 2021, with an option to renew not later than 6 months prior to expiration and a 3.0% escalation rate of the rental every year from signing of the contract. This agreement was subsequently amended, reducing the leased area to 340,646 square meters effective October 1, 2013. This was further amended reducing the leased area to 130,980 square meters and with a corresponding reduction in the monthly rental effective on December 1, 2016. On June 20, 2017, NVRC assigned its leasehold rights to Petron. There are no restrictions imposed on these lease agreements such as those concerning dividends, additional debt and further leasing.

Future minimum lease receivables under the non-cancellable operating lease agreements are as follows: 2018 2017 Not later than 1 year P6,373 P6,187 After 1 year but not more than 5 years 9,332 15,705 P15,705 P21,892

Rent income recognized under Other income (charges) account in the consolidated statements of income amounted to P6,170, P10,686 and P21,147 in 2018, 2017 and 2016, respectively (Notes 4 and 26).

k. Concession Agreement The Parent Company entered into a 25-year Concession Agreement with ALECO on October 29, 2013. It became effective upon confirmation of the National Electrification Administration on November 7, 2013. On January 24, 2014, the Parent Company and APEC entered into an Assignment Agreement whereby APEC assumed all the rights, interests and obligations of the Parent Company under the Concession Agreement effective January 2, 2014. The Concession Agreement include, among others, the following rights and obligations: i. as Concession Fee, APEC shall pay to ALECO: (1) separation pay of

ALECO employees in accordance with the Concession Agreement and (2) the amount of P2,100 every quarter for the upkeep of residual ALECO (fixed concession fee);

ii. if the net cash flow of APEC is positive within 5 years or earlier from date of

signing of the Concession Agreement, 50% of the Net Cash Flow each month shall be deposited in an escrow account until the cumulative nominal sum reaches P4,048,529;

iii. on the 20th anniversary of the Concession Agreement, the concession period

may be extended by mutual agreement between ALECO and APEC; and

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iv. at the end of the concession period, all assets and system, as defined in the Concession Agreement, shall be returned by APEC to ALECO in good and usable condition. Additions and improvements to the system shall likewise be transferred to ALECO.

In this regard, APEC shall provide services within the franchise area and shall be allowed to collect fees and charges, as approved by the ERC. APEC formally assumed operations as concessionaire on February 26, 2014. The Group recognized as intangible assets all costs directly related to the Concession Agreement. The intangible assets consist of: a) concession rights, which include fixed concession fees and separation pay of ALECO employees amounting to P384,317. Fixed concession fees are recognized at present value using the discount rate at the inception date with a corresponding concession payable recognized; and b) infrastructure, which includes the costs of structures and improvements, distribution system and equipment. Cost of infrastructure amounted to P649,631 and P509,419 as of December 31, 2018 and 2017, respectively. Interest expense on concession payable, included as part of

statements of income, amounted to P5,851, P5,993 and P6,127 in 2018, 2017 and 2016, respectively. Amortization of concession assets recognized in the

ount in the consolidated statements of income amounted to P40,813, P30,426 and P25,060 in 2018, 2017 and 2016, respectively (Note 25). Maturities of the carrying amount of concession payable are as follows: 2018 2017 Not later than 1 year P2,700 P2,549 More than 1 year and not later than 5 years 12,490 11,794 Later than 5 years 84,480 87,876 P99,670 P102,219

Power concession assets consist of:

Concession

Rights Completed

Projects/Others

Asset Under Construction

(Contract Asset) Total Cost January 1, 2017 P384,317 P231,910 P154,173 P770,400 Additions - 115,055 8,281 123,336 December 31, 2017 384,317 346,965 162,454 893,736 Additions - 105,067 35,145 140,212 Reclassification - 144,481 (144,481) - December 31, 2018 384,317 596,513 53,118 1,033,948

Accumulated Amortization January 1, 2017 43,557 37,869 - 81,426 Amortization 15,373 15,053 - 30,426 December 31, 2017 58,930 52,922 - 111,852 Amortization 15,372 25,441 - 40,813 December 31, 2018 74,302 78,363 - 152,665

Carrying Amount December 31, 2017 P325,387 P294,043 P162,454 P781,884

December 31, 2018 P310,015 P518,150 P53,118 P881,283

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The Group accounted for revenue and costs relating to construction or upgrade services in accordance with PFRS 15 based on the stage of completion of work performed. The fair value of the construction and upgrade services provided is equal to the recorded cost of the intangible asset built up from day one until the construction activity ceases. Construction revenue and construction cost amounted to P140,212, P123,336 and P226,997 in 2018, 2017 and 2016, respectively (Note 26).

8. Cash and Cash Equivalents Cash and cash equivalents consist of: Note 2018 2017 Cash in banks and on hand P8,733,340 P3,557,558 Short-term investments 19,778,522 25,097,801 30, 31 P28,511,862 P28,655,359

Cash in banks earn interest at bank deposit rates. Short-term investments include demand deposits which can be withdrawn at anytime depending on the immediate cash requirements of the Group and earn interest at short-term investment rates. Interest income from cash and cash equivalents amounted to P626,195, P374,509 and P176,681 in 2018, 2017 and 2016, respectively.

9. Trade and Other Receivables Trade and other receivables consist of: Note 2018 2017 Trade P21,402,654 P14,332,102 Non-trade 8,055,865 6,674,594 Amounts owed by related parties 7, 12, 20 6,162,590 1,880,190 35,621,109 22,886,886 Less allowance for impairment losses 4 2,574,423 2,451,818 30, 31 P33,046,686 P20,435,068

Trade and other receivables are non-interest bearing, unsecured and are generally on a 30-day term or an agreed collection period. The balance of trade receivables is inclusive of VAT on the sale of power collectible from customers. The movements in the allowance for impairment losses are as follows: 2018 2017 Balance at beginning of year P2,451,818 P2,451,818 Acquisition of subsidiaries 64,503 - Impairment losses during the year 135,426 - Cumulative translation adjustment and others (77,324) - Balance at end of year P2,574,423 P2,451,818

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Impairment losses are recognized in profit or loss as follows: Note 2018 2017 2016 Selling and administrative

expenses 25 P135,426 P - P958,784 Other income (charges) - net 26 - - 251,667 P135,426 P - P1,210,451

Non-trade receivables include the following: a.

performance bond pursuant to the Ilijan IPPA Agreement that was drawn by PSALM on September 4, 2015. The validity of PSALM's action is the subject of an ongoing case filed by SPPC with the Regional Trial Court ( RTC ) of Mandaluyong City (Note 33).

b. As of December 31, 2018 and 2017, SMEC has receivables for the cost of fuel, market fees, and other charges related to the dispatch of the excess capacity of the Sual Power Plant amounting to P51,937 and P41,413, respectively. Likewise, SMEC has receivables arising from WESM transactions related to the excess capacity amounting to P2,104,840 and P1,198,200 as of December 31, 2018 and 2017, respectively. The issue on excess capacity is subject of ongoing cases (Note 33).

c. On June 16, 2011, SMEC entered into a MOA with Hardrock Coal Mining Pty Ltd. (HCML) and Caason Investments Pty Ltd. (Caason), companies registered in Australia, for the acquisition of shares in HCML. SMEC paid Caason Australian dollars 12,000 (equivalent to P550,000), for an option to subscribe to the shares in HCML (the Deposit) with further option for SMEC to decide not to pursue its investment in HCML, which will result in the return of the Deposit to SMEC plus interest. In a letter dated July 15, 2011, SMEC notified Caason and HCML that it shall not pursue the said investment and therefore asked Caason and HCML for the return of the Deposit with corresponding interest (the Amount Due), pursuant to the terms of the MOA. On September 2, 2014, SMEC, HCML and Caason agreed to a schedule of payment of the outstanding Amount Due to SMEC. For the years ended December 31, 2018 and 2017, HCML and Caason paid a total amount of nil and P18,925, respectively. As of December 31, 2018 and 2017, total outstanding receivable from HCML amounting to P421,784 has been fully provided with allowance.

d. Advances made by SCPC for the construction of transmission assets on behalf

of NGCP. The reimbursement shall take place after full payment and proper turnover of the transmission assets to NGCP.

e. The remaining balance mainly pertains to receivables from customers which will be remitted to the Government upon collection.

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10. Inventories Inventories at cost consist of: Note 2018 2017 Coal 7 P4,436,348 P2,910,853 Materials and supplies 687,336 96,793 Fuel oil 20 118,308 110,858 Other consumables 52,639 29,164 4 P5,294,631 P3,147,668

There were no inventory write-downs to net realizable value for the years ended December 31, 2018, 2017 and 2016. Inventories charged to cost of power sold amounted to P32,563,689, P13,039,144 and P10,046,687 in 2018, 2017 and 2016, respectively (Note 24).

11. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of: Note 2018 2017 Input VAT P13,151,775 P11,792,871 Prepaid tax 5,767,602 4,883,278 Restricted cash 16 1,045,598 - Derivative asset not designated as

cash flow hedge 16, 30, 31 96,203 - Investment in debt instruments 54,009 - Prepaid rent and others 7, 20 1,646,529 1,115,766 P21,761,716 P17,791,915

Input VAT consists of VAT on purchases of goods and services which can be offset against the output VAT payable (Note 18). Prepaid tax consists of creditable withholding taxes and excess tax credits which can be used as a deduction against future income tax payable. Restricted cash pertains to the Cash Flow Waterfall accounts of SCPC and SMCPC, maintained with a local Trust Company as required in its respective Omnibus Loan and Security Agreements (OLSA), with balances amounting to P671,576 and P374,022, respectively (Note 19). The methods and assumptions used to estimate the fair values of restricted cash and derivative asset not designated as cash flow hedge are discussed in Note 31.

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Prepaid rent and others pertain to the following: a. Prepaid rent of the Group from various operating lease agreements amounted to

P33,165 and P15,347 as of December 31, 2018 and 2017, respectively (Note 7). b. PSALM monthly fee outage credits of SMEC for the approved reduction in its

future monthly fees payable to PSALM resulting from the outages of the Sual Power Plant in 2018 and 2017.

c. prepaid legal and financial advisory fees relating to its

financing activities.

12. Investments and Advances Investments and advances consist of: 2018 2017 Investments in Shares of Stock of

Associates and Joint Ventures Cost P8,583,462 P8,583,462 Accumulated Equity in Net Losses Balance at beginning of year (927,355) (886,959) Equity in net losses during the year (442,262) (28,302) Share in other comprehensive income during

the year 1,395 - Adjustment to equity in net losses in prior year (28,974) (12,094) Adjustment to share in other comprehensive

income in prior year (393) - Balance at end of year (1,397,589) (927,355)

7,185,873 7,656,107 Advances 4,963,113 8,965,024 P12,148,986 P16,621,131

Advances pertain to deposits made to certain land holding companies which will be applied to future stock subscriptions. In 2018, SMC bought ownership interests in certain land holding companies. Consequently, the related deposits to the said land holding companies amounting to P4,472,785, were reclassified to mounts owed by related parties account (Notes 9 and 20).

investments in shares of stock of associates and joint ventures: a. Investment in shares of stock of associates

i. Olongapo Electricity Distribution Company, Inc. (OEDC) In April 2013, SPGC and San Miguel Equity Investments, Inc. (SMEII), an entity under common control, entered into a Deed of Assignment of Subscription Rights whereby SMEII agreed to assign 35% ownership interest in OEDC to SPGC for a consideration of P8,750. Subscriptions payable amounted to P28,101 as of December 31, 2018 and 2017 (Note 20).

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ii. Mariveles Power Generation Corporation (MPGC) On June 16, 2016, Meralco Powergen Corporation (MGen), a subsidiary of Meralco, and Zygnet Prime Holdings, Inc. (Zygnet) subscribed to 2,500 and 102 common shares of MPGC, respectively. As a result, the Parent Company now holds 49% of the outstanding capital stock of MPGC while MGen and Zygnet holds 49% and 2%, respectively. MPGC was a wholly-owned subsidiary of the Parent Company prior to the subscription of MGen and Zygnet. Following the change in interest of ownership from 100% to 49% in MPGC, the Parent Company now has significant influence to participate in the financial and operating policy decisions of MPGC and accounts for the investment using the equity method. MPGC shall develop, construct, finance, own, operate and maintain a 4 x 150 MW CFB Coal-fired Power Plant and associated facilities in Mariveles, Bataan. On July 13, 2016, the Parent Company subscribed to 9,643,200 shares, representing 49% of the total shares subscribed by all shareholders out of the increase in the authorized capital stock of MPGC, at the subscription price of P100 per share. On January 25, 2019, the Parent Company subscribed to the remaining unissued 18,314,898 common shares of MPGC, thereby increasing the

49% to 73.6%, and an additional 28,929,347 common shares out of the increase in the authorized capital stock of MPGC at the subscription price of P100 per share. On the same date, the Parent Company has partially paid P4,508,850 of the total subscriptions. The additional capital infusion is for the power plant project of MPGC.

capital stock is still pending. The acquisition of MPGC is accounted for as an asset acquisition since the acquired set of assets and activities does not constitute a business as defined in PFRS 3.

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The table below summarizes the financial information of investment in shares of stock of associates which is accounted for using the equity method: December 31, 2018 (Unaudited) OEDC MPGC Country of Incorporation Philippines Philippines Current assets P334,770 P17,646 Noncurrent assets 1,211,335 1,961,419 Current liabilities (350,069) (32,074) Noncurrent liabilities (694,833) - Net assets P501,203 P1,946,991

Revenue P1,399,872 P -

Net income P23,265 P739 Other comprehensive income 3,985 - Total comprehensive income P27,250 P739

Share in net income P8,143 P362

Share in other comprehensive income P1,395 P -

Carrying amount of investment P187,823 P954,079 December 31, 2017 (Audited) OEDC MPGC Country of Incorporation Philippines Philippines Current assets P292,099 P16,907 Noncurrent assets 1,177,931 1,951,791 Current liabilities (865,689) (22,446) Noncurrent liabilities (130,389) - Net assets P473,952 P1,946,252


Net losses P14,516 P10,208* Other comprehensive loss 1,123 - Total comprehensive loss P15,639 P10,208

Share in net losses P5,081 P5,002

Share in other comprehensive loss P393 P -

Carrying amount of investment P178,285 P953,717 *Inclusive of P9,840 stock issuance costs directly charged to equity in 2017.

b. Investments in shares of stock of joint ventures

i. AHC and KWPP The Parent Company, through PVEI, and Korea Water Resources Corporation (K-Water) entered into a joint venture partnership for the acquisition, rehabilitation, operation and maintenance of the 218 MW Angat Hydroelectric Power Plant (Angat Power Plant) awarded by PSALM to K-Water.

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On November 18, 2014, PVEI acquired from the individual stockholders and K-Water, 2,817,270 shares or 60% of the outstanding capital stock of AHC and from the individual stockholders, 75 shares representing 60% of KWPP outstanding capital stock. Subsequently, AHC and KWPP each issued shares in favor of nominee directors of PVEI and K-Water to complete their respective shareholding interest. In accordance with the entry of PVEI into AHC and KWPP, K-Water and PVEI are jointly in control of the management and operation of AHC and KWPP. AHC AHC was incorporated on November 15, 2013 and was created to engage in the operations and maintenance of the Angat Power Plant and to supply power generated to power corporations and to electric utilities, to import hydro-electric facilities and equipment, and to do all acts necessary and incidental thereto, in accordance with RA No. 9136 or otherwise known as the EPIRA. KWPP KWPP was incorporated on November 27, 2013 and was established for the purpose of acquiring, holding or leasing water and flowage rights. The table below summarizes the financial information of investments in shares of stock of joint ventures which is accounted for using the equity method: December 31, 2018 (Unaudited) AHC KWPP Country of Incorporation Philippines Philippines Current assets P2,878,296 P7,655 Noncurrent assets 18,054,586 20,214 Current liabilities (1,049,537) (10,804) Noncurrent liabilities (11,980,222) (15,906) Net assets P7,903,123 P1,159


Net income (losses)/total comprehensive income (losses) (P751,294) P16

Share in net income (losses)/total comprehensive income (losses) (P450,777) P10

Carrying amount of investment P6,043,051 P920

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December 31, 2017 (Audited) AHC KWPP Country of Incorporation Philippines Philippines Current assets P2,847,731 P5,878 Noncurrent assets 18,753,313 20,348 Current liabilities (1,689,991) (9,157) Noncurrent liabilities (11,256,635) (15,926) Net assets P8,654,418 P1,143


Net income (losses)/total comprehensive income (losses) (P78,723)* P70

Share in net income (losses)/total comprehensive income (losses) (P47,234) P42

Carrying amount of investment P6,493,828 P910 *Inclusive of P46,207 stock issuance costs directly charged to equity in 2017.

Investment in Shares of Stock of Subsidiaries The following are the developments relating to the subsidiaries: i. SCPC

In 2013, SCPC started the construction of its Phase I Limay Greenfield Power Plant (comprising of Units 1 and 2). On June 22, 2017, SCPC acquired the Phase II Limay Greenfield Power Plant (comprising of Units 3 and 4) from LPPC. The Units 1, 2 and 3 were successfully synchronized to the Luzon Grid in November 2016, May 2017 and November 2017, respectively. Commercial operations of Units 1, 2 and 3 commenced on May 26, 2017, September 26, 2017 and March 26, 2018, respectively, following the completion of testing and commissioning phase and the ERC issuance of a Provisional Authority to Operate (PAO) in favor of SCPC for its 3 units. Unit 4 is still under construction as of December 31, 2018.

ii. SMCPC In 2013, SMCPC started the construction of its Davao Greenfield Power Plant. Units 1 and 2 were successfully synchronized to the Mindanao Grid in May 2016 and February 2017, respectively. Units 1 and 2 started commercial operations on July 26, 2017 and February 26, 2018, respectively, following the completion of its testing and commissioning phase and the ERC issuance of a PAO in favor of SMCPC for its 2 units.

iii. PVEI In January 2017, PVEI granted shareholder advances amounting to US$31,800 (equivalent to P1,578,870) to its joint venture company, AHC. The advances bear an annual interest rate of 4.50% and are due on April 30, 2017. The due date of the advances may be extended as agreed amongst the parties.

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On April 10 and December 27, 2017, PVEI partially collected the foregoing advances amounting to US$19,703 (equivalent to P984,550). On March 1 and October 16, 2018, PVEI collected an additional US$9,816 (equivalent to P518,366) from AHC as partial payment of the advances. Payment date of the remaining balance of the advances amounting to US$2,281 (equivalent to P119,946) was extended to March 31, 2019.

iv. PEGC On July 13, 2018, PEGC, a wholly-owned subsidiary of the Parent Company,

in Alpha Water, representing sixty percent (60%) of the outstanding capital stock of Alpha Water, for a total consideration of US$9,950 (equivalent to P532,425). MPPCL owns the 40% equity interests in Alpha Water. Alpha Water is the owner of the land on which the current site of the Masinloc Power Plant Complex in Zambales Province is located.

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F-84

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a. The combined carrying amounts of power plants under finance lease amounted to P167,387,089 and P172,573,492 as of December 31, 2018 and 2017, respectively (Note 7).

b. The carrying amount of land under finance lease amounted to P879,578 as of December 31, 2018 (Note 7).

c. On September 15, 2016, the BOD of the Parent Company and SPI approved the sale of its 4 x 35 MW Limay Co-gen Power Plant located in Petron Bataan Refinery in favor of Petron. Accordingly, the carrying amount of certain property, plant and equipment, amounting to P18,093,254 as of September 30, 2016 were

P323,788 at initial classification to measure its assets held for sale at lower of their carrying amount and fair value less costs to sell (Note 26). On October 28, 2016, SPI signed an agreement with Petron for the sale of the power plant and all pertinent assets, assignment of contracts to Petron, and the transfer of all remaining inventories, tools, supplies and other working capital necessary for the operation and maintenance of the power plant, among others. Effective December 23, 2016, SPI closed the sale of the power plant to Petron for a total consideration of P20,029,983 (inclusive of tax), which was collected in tranches up to June 2017 based on the terms of the agreement. Consequently, a

tements of income. Pursuant to the sale of the power plant, all SPI agreements mentioned in Note 7 were terminated effective December 23, 2016.

d. The capitalized asset retirement costs, net of accumulated depreciation, amounted to P201,830 and P151,306 as of December 31, 2018 and 2017, respectively.

e. Other equipment includes machinery and equipment, transportation equipment, mining equipment, office equipment and furniture and fixtures.

f. Capital projects in progress pertains to the following: i. Project of SMCPC for the construction of the Davao Greenfield Power Plant.

Following the completion of Units 1 and 2, and the ERC grant of a Provisional Authority to Operate (PAO) in favor of SMCPC for the 2 units, all CPIP costs were reclassified to the appropriate property, plant and equipment account.

ii. Projects of SCPC for the construction of Phases I and II Limay Greenfield Power Plant. Following the completion of Units 1, 2 and 3 and the ERC grant of a PAO in favor of SCPC for the 3 units, all related CPIP costs were reclassified to the appropriate property, plant and equipment account. As of December 31, 2018, CPIP costs pertain to Unit 4 which is still in testing and commissioning phase.

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iii. Plant optimization and pumped-storage hydropower projects of SPDC. iv. Expenditures for the 500 kilovolts connection facilities in relation to the

600 MW Pagbilao power plant project of CLPPC. v. Ongoing construction of the Unit 3, Masinloc Power Plant of MPPCL and the

2 x 20 MW battery energy storage facility of SMCGP Philippines Energy, which is still at the pre-development stage.

g. Depreciation and amortization related to property, plant and equipment are

recognized in the consolidated statements of income as follows: Note 2018 2017 2016 Cost of power sold 24 P9,068,086 P5,811,941 P6,139,882 Selling and administrative

expenses 25 126,317 142,533 109,388 P9,194,403 P5,954,474 P6,249,270

Total depreciation and amortization recognized in the consolidated statements of income include amortization of capitalized interest and decommissioning and dismantling costs amounting to P93,670, P22,451 and P10,020 in 2018, 2017 and 2016, respectively. In 2018, the Group recognized impairment loss amounting to

- consolidated statement of comprehensive income. The Group has borrowing costs amounting to P1,830,949, P1,362,871 and P610,707 which were capitalized in 2018, 2017 and 2016, respectively. The capitalization rates used to determine the amount of interest eligible for capitalization range from 3.50% to 7.39% and from 2.75% to 6.54% in 2018 and 2017, respectively. The unamortized capitalized borrowing costs amounted to P2,906,057 and P1,968,151 as of December 31, 2018 and 2017, respectively (Notes 17 and 19).

14. Deferred Exploration and Development Costs The movement in deferred exploration and development costs is as follows: Note 2018 2017 Balance at beginning of year P699,001 P693,379 Additions 6,457 5,622 Balance at end of year 4 P705,458 P699,001

Deferred exploration and development costs comprise of expenditures which are directly attributable to the mining activities of DAMI, BERI and SEPC in relation to their respective COC. In 2010, SMEC acquired DAMI, SEPC and BERI resulting in the recognition of mining rights of P1,719,726 (Notes 4 and 15).

126, issued by the DOE, is located in South Cotabato consisting of 2 coal blocks with a total area of 2,000 hectares, more or less, and has an In-situ coal resources (measured plus indicated coal resources) of about 93 million metric tons as of December 31, 2018 and 2017.

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SEPC has a coal mining property and right over an aggregate area of 7,000 hectares, more or less, composed of 7 coal blocks located in South Cotabato and Sultan Kudarat. As of December 31, 2018 and 2017, COC No. 134 has an In-situ coal resources (measured plus indicated coal resources) of about 35 million metric tons.

Cotabato consisting of 8 coal blocks with a total area of 8,000 hectares, more or less, and has an In-situ coal resources (measured plus indicated coal resources) of about 24 million metric tons as of December 31, 2018 and 2017. Status of Operations In 2006 and 2009, the DOE approved the conversion of the COC for Exploration to COC for Development and Production of DAMI, SEPC and BERI effective on the following dates:

Subsidiary COC No. Effective Date Term* DAMI 126 November 19, 2006 20 years SEPC 134 February 23, 2009 10 years BERI 138 May 26, 2009 10 years

* The term is followed by another 10-year extension, and thereafter, renewable for a series of 3-year periods not exceeding 12 years under such terms and conditions as may be agreed upon with the DOE.

On April 27, 2012 and January 26, 2015, the DOE granted the requests by DAMI, SEPC and BERI, for a moratorium on suspension of the implementation of the production timetable as specified under their respective COCs. The request is in connection with a resolution passed by South Cotabato in 2010 prohibiting open-pit mining activities in the area. The moratorium was retrospectively effective from the dates of their respective COCs, when these were converted to Development and Production Phase, until December 31, 2017 or until the ban on open-pit mining pursuant to the Environment Code of South Cotabato has been lifted, whichever comes first. On October 20, 2017, DAMI, SEPC and BERI again requested for extension of the moratorium. This was granted on March 27, 2018, with effectivity of January 1, 2018 to December 31, 2018, along with an approved Work Program and Budget (WPB) to be complied with by DAMI, SEPC and BERI during the extended moratorium period. On September 18, 2018, SEPC applied with the DOE for a ten-year extension of its COC No. 134 which is due to expire on February 23, 2019. This application was accompanied by a new 5-year WPB as required for the extension of the moratorium period to expire in December 2018. In answer to these two requests, the DOE, in a letter dated January 11, 2019, required the submission of a new 5-year WPB, initially with a deadline on January 25, 2019 but was extended until February 20, 2019 which SEPC complied with. On December 18, 2018, DAMI further requested for another extension of the moratorium. The DOE replied on January 11, 2019 requiring instead of considering another moratorium extension, the submission of a 5-Year WPB initially with a deadline of January 25, 2019 but extended into February 20, 2019 which DAMI complied with.

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On December 18, 2018, BERI requested for another extension of the moratorium. Further, on December 27, 2018, BERI applied for a 10-year extension of its COC No. 138 which would be due to expire on May 23, 2019. In answer to these two requests, the DOE, in a letter dated January 11, 2019, required the submission of a 5-year WPB, consistent with the COC No. 138 status as a Development and Production Contract, which BERI had actually submitted earlier on January 9, 2019. The first two years of this new 5-year WPB submitted by BERI focuses on the supplemental exploration, with drilling activity especially in Block 58 of the COC No. 138 where mineable reserves of coal are expected to be delineated. Further, within the first two years of the 5-year WPB submitted by DAMI, SEPC and BERI, focuses

respective COC areas as identified by Mines and Geosciences Bureau/Department of Environment and Natural Resources XII, and requested by the Municipality of Lake Sebu. Full-scale coal production will start during the third year when the Provincial Government of South Cotabato would have endorsed the Project on any or all of the following grounds: a. The mining of coal in Barangay Ned is found to be beneficial to the host

community as it reduces landslide risks and protects lives; b.

- c. DAMI, SEPC and BERI have vested right to mining within their respective COCs

prior to the issuance of the open-pit mining ban; and d. The ban could be lifted as a result of court cases filed against it. As of December 31, 2018, the mining activities of DAMI, SEPC and BERI remain in the preparatory stages. All related costs and expenses from exploration are currently deferred as exploration and development costs and will be amortized upon commencement of their commercial operations.

amount of the mining rights exceeds its recoverable amount as of December 31, 2018 and 2017.

15. Goodwill and Intangible Assets Intangible assets and goodwill consist of: Note 2018 2017 Goodwill 4, 5 P69,953,222 P8,866 Mining rights 14 1,719,726 1,719,726 Power concession assets - net 4, 7 881,283 781,884 Computer software and licenses - net 59,132 83,660 P72,613,363 P2,594,136

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Goodwill In November 2009 and March 2010, the Parent Company acquired 60% ownership interest in SMEC and SPDC, respectively. As a result of these transactions, the Parent Company recognized goodwill amounting to P8,349 and P517, respectively. In March 2018, the Parent Company acquired ownership interest in the Masinloc Group. As a result of this transaction, the Parent Company recognized goodwill amounting to P69,944,356 (Note 5). Impairment of Goodwill from Masinloc Group Goodwill arising from the acquisition of Masinloc Group, which accounts for almost 100% of the total goodwill in the consolidated statements of financial position as of December 31, 2018, is allocated to the cash generating unit of the Masinloc Group. The recoverable amount of goodwill has been determined based on the value in use using DCF and was based on the following key assumptions: Cash flows were projected based on past experience and actual operating

results and covers forecast until 2045 based on long range plans approved by Management. Management believes that forecast until 2045 was justifiable due to long-term contract with major customers. Cash flows beyond 2045 are extrapolated using a constant growth rate determined per cash-generating unit.

A discount rate of 9.0% in 2018 was applied based on the weighted-average cost

the cash-generating unit.

Terminal growth rate of 3.0% in 2018 was applied as the Group is in the process

of increasing its capacity and upgrading its facilities and hence foresees growth in cash flows generated perpetually. This growth rate is consistent with the long-term average growth rate for the industry.

of future trends in the industry and are based on internal sources (historical data). For purposes of discount rate sensitivity, discount rate scenarios of 8% and 10% in 2018 are applied on the discounted cash flows analysis. Management believes that any reasonably possible change in the discount rate on which the recoverable amount is based would not cause its carrying amount to exceed its recoverable amount.

amount of the related net assets of SMEC, SPDC, and the Masinloc Group for which the goodwill was attributed still exceeds its carrying amount as of December 31, 2018 and 2017.

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Computer Software and Licenses The movements in computer software and licenses are as follows: Note 2018 2017 Cost Balance at beginning of year P238,509 P229,371 Acquisition of subsidiaries 5 79,553 - Additions - 9,138 Cumulative translation adjustments 658 - Balance at end of year 318,720 238,509

Accumulated Amortization Balance at beginning of year 154,849 74,818 Amortization 25 105,019 80,031 Cumulative translation adjustments (280) - Balance at end of year 259,588 154,849

P59,132 P83,660

16. Other Noncurrent Assets Other noncurrent assets consist of: Note 2018 2017 Restricted cash - net of current portion P4,442,553 P5,578,357 Deferred input VAT - net of

current portion 1,251,619 2,081,126 Advances to suppliers and contractors 188,246 - Amount owed by a related party 20 170,390 199,610 Derivative assets designated as cash

flow hedge 30, 31 163,630 - Noncurrent receivables 94,908 29,488 Derivative asset not designated

as cash flow hedge 11, 20, 31 - 61,903 Other assets 3,216 - 30, 31 P6,314,562 P7,950,484

Restricted cash comprises ofto P1,448,074 and P4,805,175 as of December 31, 2018 and 2017, respectively (Notes 11 and 19); (b) MPPCL's Cash Flow Waterfall accounts with a local Trust Company as required in its credit facilities, totaling to P2,248,527 as at December 31, 2018; (c) the amount received from PEMC amounting to P491,242 as of December 31, 2018 and 2017, representing the proceeds of sale on WESM for a specific period in 2016, for the electricity generated from the excess capacity of the Sual Power Plant, which SMEC consigned with the RTC of Pasig City (Note 33); and

collected from customers for membership fees and bill deposits which are refundable amounting to P254,690 and P281,940 as of December 31, 2018 and 2017, respectively. Amount owed by a related party pertains to the loan granted by SPGC to OEDC which is collectible in equal monthly payments of principal and interest, initially pegged at 4.73% and subject to change every 6 months. The equal monthly payments of OEDC shall be made on the first day of each month commencing in January 2017 until December 2024 (Note 20).

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As of December 31, 2018 and 2017, the deferred input VAT mainly pertains to the input VAT on the purchase of power plant from LPPC in June 2017 (Note 13). The methods and assumptions used to estimate the fair values of restricted cash, noncurrent receivables and derivative assets are discussed in Note 31.

17. Loans Payable Note 2018 2017 Foreign currency-denominated Parent Company P6,309,600 P - MPPCL 2,366,100 - Philippine peso-denominated SMCPC - 5,930,000

30, 31 P8,675,700 P5,930,000 Loans payable mainly represent unsecured short-term Philippine peso and US dollar-denominated amounts obtained from various local banks. Interest rates for dollar-denominated loans ranged from 3.61% to 4.10% in 2018. Interest rates for peso-denominated loan ranged from 2.75% to 3.25% in 2017. Interest expense on loans payable amounted to P216,394 and P93,051, inclusive of P15,957 and P55,371 capitalized in CPIP, in 2018 and 2017, respectively (Note 13). On August 17, 2018, SMCPC fully paid its P5,930,000 loans payable using the proceeds of its P20,322,000 term loan (Note 19).

18. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of: Note 2018 2017 Trade 7 P14,967,636 P14,994,454 Non-trade 7 7,248,252 9,693,202 Output VAT 6,855,666 5,140,417 Accrued interest 7, 17, 19 1,031,474 427,469 Amounts owed to related parties 20 586,606 541,428 Withholding and other accrued taxes 366,172 277,744 Premium on option liabilities 50,349 - Retirement benefit liability 21 2,779 - Derivative liability not designated as

cash flow hedge 31 983 - 30, 31 P31,109,917 P31,074,714

Trade payables consist of payable related to energy fees, inventories and power purchases. These are generally on a 30-day term and are non-interest bearing. Non-trade payables include liability relating to power rate adjustments, payables to contractors, concession payables and other payables to the Government excluding output VAT and withholding taxes.

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Output VAT consists of current and deferred output VAT payable. Deferred output VAT represents the VAT on sale of power which will be remitted to the Government only upon collection from the customers (Note 9). The methods and assumptions used to estimate the fair values of financial liabilities not designated as cash flow hedge are discussed in Note 31.

19. Long-term Debt Long-term debt consists of: Note 2018 2017 Bonds Parent Company

Peso-denominated Fixed interest rate of 6.7500% maturing

in 2023 (a) P14,823,529 P - Fixed interest rate of 5.3750%, 6.2500%

and 6.6250% maturing in 2022, 2024 and 2027, respectively (b) 19,812,609 19,784,249

Fixed interest rate of 4.3458%, 4.7575% and 5.1792% maturing in 2021, 2023 and 2026, respectively (c) 14,889,229 14,865,330

49,525,367 34,649,579

Term Loans Parent Company

Peso-denominated Fixed interest rate of 6.9265%, with

maturities up to 2024 (d) 14,726,126 14,856,835 Foreign currency-denominated

Floating interest rate based on London Interbank Offered Rate (LIBOR) plus margin, maturing in 2021 and 2023 (e) (f) 43,799,781 -

Subsidiaries Peso-denominated

Fixed interest rate of 6.2836%, 6.5362% and 7.3889% with maturities up to 2029 (g) 42,247,279 41,222,287

Fixed interest rate of 7.7521% with maturities up to 2030 (h) 20,060,138 -

Foreign currency-denominated Fixed interest rate of 4.7776% and

5.5959%, with maturities up to 2023 and 2030, respectively (i) (j) 27,504,342 -

Floating interest rate based on LIBOR plus margin, with maturities up to 2023 and 2030 (i) (j) 9,102,227 -

157,439,893 56,079,122

30, 31 206,965,260 90,728,701 Less current maturities 4,939,454 1,139,631 P202,025,806 P89,589,070

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a. The amount represents the second P35,000,000 fixed rate bonds shelf registration . The Series G Bonds, with an aggregate principal amount of P15,000,000, were issued and listed in the Philippine Dealing and Exchange Corp. (PDEx) for trading on August 17, 2018 at the issue price of 100% of face value with a 5-year term, due 2023, and interest rate of 6.7500%. Interest on the Series G Bonds shall be payable quarterly in arrears every February 17, May 17, August 17 and November 17 of each year starting November 17, 2018, as the first interest payment date. The proceeds were used by the Parent Company to refinance its outstanding shareholder advances, to partially refinance the US$500,000, 5-year term loan obtained in March 2018 and for payment of transaction-related expenses (Note 5). Unamortized debt issue costs amounted to P176,471 as of December 31, 2018. Accrued interest amounted to P99,000 as of December 31, 2018 and interest expense amounted to P376,875 in 2018.

b. The amount represents the first tranche of the Pafixed rate bonds shelf registration. The first tranche, with an aggregate principal amount of P20,000,000, was issued and listed in the PDEx for trading on December 22, 2017 at the issue price of 100% of face value. It comes in three series, with terms and interest rates as follows:

Term Interest Rate Per Annum

Series D Bonds 5 years, due 2022 5.3750% Series E Bonds 7 years, due 2024 6.2500% Series F Bonds 10 years, due 2027 6.6250%

Interest on the Bonds shall be payable quarterly in arrears every March 22, June 22, September 22 and December 22 of each year starting March 22, 2018 as the first interest payment date. Proceeds from the issuance were used by the Parent Company to refinance its P20,000,000 short-term loans obtained from local banks. Unamortized debt issue costs amounted to P187,391 and P215,751 as of December 31, 2018 and 2017, respectively. Accrued interest amounted to P23,536 as of December 31, 2018 and 2017. Interest expense amounted to P1,170,258 and P29,420 in 2018 and 2017, respectively.

c. The amount represents the Parent Company fixed rate bonds issued with an aggregate amount of P15,000,000. The Bonds were issued and listed in the PDEx on July 11, 2016 at the issue price of 100% of face value in three series with terms and interest rates as follows:

Term Interest Rate Per Annum

Series A Bonds 5 years, due 2021 4.3458% Series B Bonds 7 years, due 2023 4.7575% Series C Bonds 10 years, due 2026 5.1792%

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Interest is payable quarterly in arrears every January 11, April 11, July 11 and October 11 of each year starting October 11, 2016, as the first interest payment date. The net proceeds were used on July 25, 2016 to refinance the US$300,000 short-term loan provided by a local bank of which the proceeds were used for the redemption of the US$300,000 bond in January 2016. Unamortized debt issue costs amounted to P110,771 and P134,670 as of December 31, 2018 and 2017, respectively. Accrued interest amounted to P127,503 as of December 31, 2018 and 2017. Interest expense amounted to P708,349 in 2018 and 2017.

d. The amount represents the availment by the Parent Company of P15,000,000 fixed rate 7-year Term Loan Facility on April 26, 2017 from a local bank. Interest is payable quarterly in arrears on the last day of the agreed interest period. Principal repayment shall be in 14 semi-annual installments starting at the end of the first year from drawdown date. The proceeds were used to fund the payment of the remaining US$300,000 out of the US$700,000 term loan. On April 26 and October 26, 2018, the Parent Company made principal repayments totaling to P150,000, pursuant to the loan agreement. Unamortized debt issue costs amounted to P123,874 and P143,165 as of December 31, 2018 and 2017, respectively. Accrued interest amounted to P184,802 and P186,669 as of December 31, 2018 and 2017, respectively. Interest expense amounted to P1,043,088 and P455,995 in 2018 and 2017, respectively.

e. The amount represents the availment by the Parent Company of a US$500,000, 5-year credit facility agreement with a foreign financial institution on March 15, 2018. The proceeds were used by the Parent Company to partially finance the acquisition of the Masinloc Group (Note 5). On September 12, 21 and October 23, 2018, the Parent Company has partially paid a total of US$350,000 out of the US$500,000 term loan. Unamortized debt issue costs amounted to P176,169 as of December 31, 2018. Accrued interest amounted to P18,622 as of December 31, 2018 and interest expense amounted to P750,552 in 2018.

f. The amount represents the US$700,000 floating interest term loan availed by the Parent Company from a syndicate of foreign banks on March 16, 2018. The US$700,000 is divided into Facility A Loan amounting to US$200,000 maturing on March 12, 2021 and Facility B Loan amounting to US$500,000 maturing on March 13, 2023. The proceeds were used by the Parent Company to partially finance the acquisition of the Masinloc Group (Note 5). Unamortized debt issue costs amounted to P717,050 as of December 31, 2018. Accrued interest amounted to P19,092 as of December 31, 2018 and interest expense amounted to P1,117,855 in 2018.

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g. The amount represents the P42,000,000 and P2,000,000 drawn by SCPC on June 28, 2017 and January 31, 2018, respectively, from a P44,000,000, 12-year Omnibus Loan and Security Agreement (OLSA) with a syndicate of local banks dated June 22, 2017. The proceeds were used mainly by SCPC for the following purposes: i. the settlement of the US$360,000 short-term loan availed on May 8, 2017

from a local bank; ii. the funding of the acquisition of the Phase II Limay Greenfield Power Plant,

under construction, from LPPC; and iii. the repayment of advances from the Parent Company. On March 28, June 28, September 28 and December 28, 2018, SCPC has partially paid a total of P1,050,000 to the first tranche of the P44,000,000 loan, pursuant to the terms and conditions of the OLSA. Unamortized debt issue costs amounted to P702,720 and P777,713 as of December 31, 2018 and 2017, respectively. Accrued interest amounted to P18,493 and P17,948 as of December 31, 2018 and 2017, respectively. Interest expense amounted to P2,840,950 and P1,390,948 (inclusive of P948,070 and P872,289 capitalized in CPIP) in 2018 and 2017, respectively.

h. The amount represents the P20,322,000 drawn by SMCPC on August 17, 2018 from its P21,300,000, 12-year OLSA with a syndicate of local banks dated August 9, 2018. The proceeds were used mainly by SMCPC for the following purposes: i. the repayment in full of the P5,930,000 short-term loan used to fund the

design, construction and operation of the Davao Greenfield Power Plant (Note 13);

ii. the partial financing of the remaining works for the project; iii. the repayment of advances from the Parent Company; and iv. the payment of transaction-related fees and expenses. Unamortized debt issue costs amounted to P261,862 as of December 31, 2018. Accrued interest amounted to P154,037 as of December 31, 2018 and interest expense amounted to P595,144 (inclusive of P7,029 capitalized in CPIP) in 2018.

i. The amount represents the US$299,400 total outstanding loan drawn in tranches by MPPCL from its Omnibus Refinancing Agreement (ORA), dated December 28, 2012, with local banks, which refinanced its debt obligations previously obtained to partially finance the acquisition, operation, maintenance and repair of the power plant facilities purchased from PSALM by MPPCL on April 16, 2008. The loan is divided into fixed interest tranche and floating interest tranche based on a 6-month LIBOR plus margin maturing on January 2, 2023. On April 30 and October 31, 2018, MPPCL has partially paid a total of US$38,100 pursuant to the terms and conditions of the ORA.

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Unamortized debt issue costs pertaining to fixed and floating interest tranche amounted to P26,957 and P9,728, respectively, as of December 31, 2018. Accrued interest pertaining to fixed and floating interest tranche amounted to P94,777 and P31,592, respectively, as of December 31, 2018. Interest expense on fixed and floating interest tranche amounted to P498,955 and P166,318, respectively, for the period from March 20 up to December 31, 2018 (inclusive of P276,934 and P92,311 capitalized in CPIP, respectively).

j. The amount represents the US$407,000 total outstanding loan drawn in tranches

by MPPCL from its Omnibus Expansion Financing Agreement (OEFA) dated December 1, 2015, with local banks, to finance the construction of the additional 335 MW coal-fired plant within MPPCL existing facilities. The loan is divided into fixed interest tranche and floating interest tranche based on a 6-month LIBOR plus margin maturing on December 16, 2030. On July 6 and October 8, 2018, MPPCL has drawn US$120,000 in total from its OEFA. Unamortized debt issue costs pertaining to fixed and floating interest tranche amounted to P375,611 and P123,648, respectively, as of December 31, 2018. Accrued interest pertaining to fixed and floating interest tranche amounted to P148,110 and P48,756, respectively, as of December 31, 2018. Interest expense on fixed and floating interest tranche amounted to P637,012 and P209,698, respectively, for the period from March 20 up to December 31, 2018 (inclusive of P353,560 and P116,389 capitalized in CPIP, respectively). On January 11, 2019, MPPCL has drawn US$ 35,000 from its OEFA.

Valuation Technique for Peso-denominated Bonds The market value was determined using the market comparison technique. The fair values are based on PDEx. The Bonds are traded in an active market and the quotes reflect the actual transactions in identical instruments. The fair value of the Bonds, amounting to P47,499,734 and P35,651,237 as of December 31, 2018 and 2017, respectively, has been categorized as Level 1 in the fair value hierarchy based on the inputs used in the valuation techniques. The debt agreements of the Parent Company, SCPC, SMCPC and MPPCL impose a number of covenants including, but not limited to, maintenance of certain financial ratios throughout the duration of the term of the debt agreements. The terms and conditions of the debt agreements also contain negative pledge provision with certain limitations on the ability of the Parent Company and its material subsidiaries, SCPC, SMCPC and MPPCL to create or have outstanding any security interest upon or with respect to any of the present or future business, undertaking, assets or revenue (including any uncalled capital) of the Parent Company or any of its material subsidiaries, SCPC, SMCPC and MPPCL to secure any indebtedness, subject to certain exceptions. The loans of SCPC and SMCPC are secured by real estate and chattel mortgages on all present and future assets and reserves of SCPC and SMCPC as well as a pledge by the Parent Company of all its outstanding shares of stock in SCPC and SMCPC. The loans of MPPCL obtained from its ORA and OEFA are secured by real estate and chattel mortgages on all present assets (purchased under its asset purchase agreement, and all its rights in a land lease agreement, with PSALM) and all future assets as defined in its loan agreements. As of December 31, 2018 and 2017, the Group is in compliance with the covenants, including the required financial ratios, of the debt agreements.

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The movements in debt issue costs are as follows: 2018 2017 Balance at beginning of year P1,271,299 P1,346,578 Additions 1,560,440 1,297,703 Acquisition of subsidiaries 572,065 - Currency translation adjustments and others 34,658 - Capitalized amount (21,037) (80,480) Amortization (425,173) (1,292,502) Balance at end of year P2,992,252 P1,271,299

Repayment Schedule The annual maturities of the long-term debt are as follows:

Gross Amount

Year US Dollar

Peso Equivalent of

US Dollar Peso Debt Issue

Costs Net 2019 US$49,398 P2,597,357 P2,436,391 P94,294 P4,939,454 2020 62,750 3,299,395 2,896,390 195,327 6,000,458 2021 266,027 13,987,689 9,834,640 359,153 23,463,176 2022 46,545 2,447,361 13,825,163 267,692 16,004,832 2023 822,726 43,258,924 23,232,643 1,093,739 65,397,828

2024 to thereafter 308,954 16,244,786 75,896,773 982,047 91,159,512

US$1,556,400 P81,835,512 P128,122,000 P2,992,252 P206,965,260

owings and

exposure to interest rate, foreign currency and liquidity risks are discussed in Note 30.

20. Related Party Disclosures The Group, in the normal course of business, purchases products and services from and sells products and renders services to related parties. Transactions with related parties are made at normal market prices and terms. Amounts owed by/owed to related parties are collectible/will be settled in cash. An assessment is undertaken at each financial year by examining the financial position of the related party and the market in which the related party operates.

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The following are the transactions with related parties and the outstanding balances as of December 31:

Note Year

Revenues from

Related Parties

Purchases from

Related Parties

Amounts Owed by Related Parties

Amounts Owed to Related Parties Terms Conditions

SMC 23, 25 2018 P483,003 P925,639 P87,768 P29,339 On demand or 30 days; Unsecured; 2017 215,004 664,262 87,697 9,273 non-interest bearing no impairment

11, 16 2018 - - 96,203 - 1 year; non- Unsecured; 2017 - - 61,903 - interest bearing no impairment

Entities under 7, 9, 10, 18, 23, 24, 25 2018 2,697,651 1,077,826 5,150,603 526,290 On demand or 30 days; Unsecured; Common Control 2017 2,365,748 1,134,950 741,814 483,990 non-interest bearing no impairment 18 2018 - - - 492 More than 1 year; Unsecured; 2017 - - - 492 non-interest bearing

Associates 9, 12, 18, 23 2018 996,108 16,647 117,229 29,936 On demand or 30 days; Unsecured; 2017 902,864 - 98,556 29,643 non-interest bearing no impairment

9, 16 2018 13,342 - 250,581 - 9 years; Unsecured; 2017 13,458 - 250,603 - interest bearing no impairment

Joint Venture 9, 26 2018 30,395 86,700 7,653 - 30 days; Unsecured; 2017 24,183 416,058 1,937 18,522 non-interest bearing no impairment 9, 12 2018 15,138 - 131,928 - 92 days; Unsecured;

2017 64,797 - 635,163 - interest bearing no impairment

Associates of 7, 9, 10, 23 2018 893,024 - 162,488 - 30 days; Unsecured; Entities under 2017 850,515 23,880 133,236 - non-interest bearing no impairment Common Control

Others 9, 18, 23 2018 1,832,837 - 424,730 1,041 On demand or 30 days; Unsecured; 2017 45,161 - 130,794 - non-interest bearing no impairment

2018 P6,961,498 P2,106,812 P6,429,183 P587,098

2017 P4,481,730 P2,239,150 P2,141,703 P541,920

a. Amounts owed by related parties consist of trade and other receivables,

derivative asset and security deposits (Notes 9, 11 and 16). b. Amounts owed to related parties consist of trade and non-trade payables,

management fees, purchases of fuel, reimbursement of expenses, rent, insurance, services rendered, customers deposits and subscriptions payable to OEDC (Notes 10, 12 and 18).

c. Amounts owed by associates mainly consist of interest bearing loan granted to

OEDC included as part of assets accounts in the consolidated statements of financial position (Notes 9 and 16).

d. Amounts owed by a joint venture consists of interest bearing loan granted and

management fees charged to AHC by PVEI included as part r account in the consolidated statements of financial position

(Notes 9, 12 and 26). e. The compensation of key management personnel of the Group, by benefit type,

follows:

Note 2018 2017 2016 Short-term employee benefits P103,911 P81,537 P42,432 Retirement cost (benefit) 21 (1,451) 1,398 1,205

P102,460 P82,935 P43,637

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21. Retirement Plan The Parent Company, SMEC, MPPCL, SMCGP Transpower and SPHI have unfunded, noncontributory, defined benefit retirement plans covering all of its permanent employees. Retirement benefits expense pertains to accrual of expected retirement benefits of active employees in accordance with RA No. 7641, The Philippine Retirement Law. Retirement benefits expense and liability are determined using the projected unit credit method. The latest actuarial valuation date is December 31, 2018. Valuations are obtained on a periodic basis. The following table shows reconciliation of the net defined benefit retirement obligation and its component: 2018 2017 Balance at beginning of year P78,104 P69,364 Benefit obligation of newly-acquired

subsidiaries 165,455 - Recognized in Profit or Loss Current service cost 31,740 8,942 Interest expense 14,070 3,711 Settlement gain (13,285) - 32,525 12,653

Recognized in Other Comprehensive Income Remeasurements:

Actuarial (gains) losses arising from: Experience adjustments 1,779 23,523 Changes in demographic assumptions - (24,922) Changes in financial assumptions (33,342) (2,514)

(31,563) (3,913)

Others Transfer from other plans 598 - Transfer to other plans (598) - Benefits paid (17,430) - (17,430) -

Balance at end of year P227,091 P78,104

Defined benefit retirement obligation included as part of

Other noncurrent liabilities accounts in the consolidated statements of financial position, amounted to P227,091 and P78,104 as of December 31, 2018 and 2017, respectively. The retirement costs are recognized in the consolidated statements of income as follows: Note 2018 2017 2016 Cost of power sold 24 P27,388 P - P - Selling and administrative

expenses 25 5,137 12,653 8,388 P32,525 P12,653 P8,388

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The equity reserve for retirement plan as of December 31, 2018 and 2017, includes accumulated net actuarial gains and losses

recognized in other comprehensive income, net of tax, amounted to P8,052 and (P23,632), respectively. The principal actuarial assumptions used to determine retirement benefits are as follows: 2018 2017 Discount rate 7.13% - 7.51% 5.70% Salary increase rate 6.50% - 7.00% 7.00%

Assumptions for mortality and disability rates are based on published statistics and mortality and disability tables. The weighted average duration of the defined benefit retirement obligation ranges from 6.2 to 21 years and 7.0 to 9.5 years as of December 31, 2018 and 2017, respectively. Sensitivity Analysis As of December 31, 2018 and 2017, the reasonably possible changes to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit retirement obligation by the amounts shown below:

Defined Benefit

Retirement Obligation 2018 2017 1% Increase 1% Decrease 1% Increase 1% Decrease Discount rate (P15,985) P18,719 (P6,791) P7,935 Salary increase rate 17,666 (15,384) 7,131 (6,260)

Risks and Management of Risks The defined benefit retirement obligation exposes the Group to actuarial risks, such as longevity risk and interest rate risk. The defined benefit retirement obligation is calculated using a discount rate set with reference to government bond yields as such is exposed to market factors including inflation. Higher inflation will lead to higher liability. Also, the defined benefit retirement obligations are to provide benefits for the life of members, so increase in

managed with the objective of reducing the impact of these risks to the cash flows of the Group. The Group does not have a formal retirement plan and therefore has no plan assets to match against the liability under the defined benefit retirement obligation. Also, benefit claims under the defined benefit retirement obligation will be paid directly by the Group when they become due.

22. Equity Capital Stock

is P2,000,000, divided into 2,000,000,000 common shares with par value of P1 per share.

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Capital stock consists of: 2018 2017 Subscribed capital stock P1,250,004 P1,250,004 Less subscription receivable 187,500 187,500 P1,062,504 P1,062,504

The number of shares subscribed is 1,250,004,000 common shares as of December 31, 2018 and 2017. Equity Reserves In September 2010, the Parent Company acquired the remaining 40% non-controlling ownership interest of SMC in SMEC and SPDC. The difference between the price paid and carrying amount of net assets transferred was recognized in equity. In July 2018, PEGC acquired the 60% non-controlling ownership interest of ALCO in Alpha Water. The difference between the price paid and carrying amount of net assets transferred was recognized in equity. Retained Earnings

calculated based on the regulatory requirements of the Philippine SEC, amounted to P667,627 and P3,054,068 as at December 31, 2018 and 2017, respectively. The difference between the consolidated retained earnings and the Parretained earnings available for dividend declaration primarily consist of undistributed earnings of subsidiaries and equity method investees. Stand-alone earnings of the subsidiaries and share in net earnings of equity method investees are not available for dividend declaration by the Parent Company until declared by the subsidiaries and equity investees as dividends. December 31, 2016

Date of Declaration

Stockholders of Record Date Payable

Dividend Per Share Amount

June 7, 2016 June 7, 2016 June 14, 2016 P1.20 P1,500,000 August 11, 2016 August 11, 2016 August 18, 2016 1.20 1,500,000

P3,000,000

There were no cash dividend declarations to stockholders during the years ended December 31, 2018 and 2017. Parent Company On December 23, 2015, the BOD approved the appropriation amounting to P7,700,000 for the payment of the US$700,000, 5-year term loan that was redenominated in 2017 (Note 19). Reversals during 2015 pertain to: (a) construction of power plant amounting to P2,092,750; (b) interest on bonds payable amounting to P446,250; (c) interest on loans payable amounting to P104,000; and (d) expansion projects amounting to P9,128,000. In 2018, 2017 and 2016, reversals amounted to P3,580,000, P1,154,000 and P2,966,000, respectively, for the debt servicing of the redenominated US$700,000 loan, as intended. Total appropriated retained earnings of the Parent Company amounted to nil, P3,580,000 and P4,734,000 as at December 31, 2018, 2017, and 2016 respectively.

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SMEC, SPPC and SPDC On December 21, 2016, the BOD of SMEC and SPPC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P1,099,300 and P2,990,300, respectively, pursuant to their IPPA Agreements. On December 18, 2017, the BOD of SMEC, SPPC and SPDC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P2,585,000, P3,514,050 and P474,000, respectively, pursuant to their IPPA Agreements. On December 21, 2018, the BOD of SPPC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P2,685,700, pursuant to its IPPA Agreement. On the same date, the BOD of SPDC approved the re-appropriation of its remaining P1,566,600 appropriated retained earnings, initially intended for San Roque Optimization pumped-storage project, for the fixed monthly PSALM payments of SPDC, pursuant to its IPPA Agreement. In 2018, the appropriations reversed by SMEC and SPDC amounted to P290,000 and P67,400, respectively. Total combined appropriated retained earnings of SMEC, SPPC and SPDC amounted to P29,408,550, P27,080,250 and P20,507,200 as at December 31, 2018, 2017 and 2016, respectively. USCS The Parent Company issued and listed on the Singapore Stock Exchange the following USCS at an issue price of 100%:

Date of Issuance

Distribution Payment Date

Initial Rate of

Distribution Step-Up Date

Amount of USCS

Issued

Amount in Philippine

Peso August 26, 2015 August 26 and

February 26 of each year 6.75%

per annum February 26, 2021 US$300,000 P13,823,499

May 7, 2014 May 7 and November 7 of each year

7.5% per annum

November 7, 2019 300,000 13,110,066

US$600,000 P26,933,565

The holders of the USCS have conferred a right to receive distributions on a semi-annual basis from their issuance dates at the initial rate of distribution, subject to the step-up rate. The Parent Company has a right to defer this distribution under certain conditions. The USCS have no fixed redemption date and are redeemable in whole, but not in

-up date, or any distribution payment date thereafter or upon the occurrence of certain other events at the principal amounts of the USCS plus any accrued, unpaid or deferred distribution. The proceeds were used by the Parent Company to finance investments in power-related assets and other general corporate purposes.

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Details of distributions paid to USCS holders are as follows: 2018 2017 2016 February P746,068 P720,611 P689,223 May 830,491 799,583 756,804 August 767,981 729,868 681,412 November 870,750 824,142 777,134 P3,215,290 P3,074,204 P2,904,573

On February 26, 2019, the Parent Company paid distributions to holders of the US$300,000 USCS issued in August 2015, amounting to P757,133. On March 11, 2019, the Parent Company's BOD approved the payment of distribution in the total amount of US$11,250, plus applicable taxes, on May 7, 2019 to the holders of the US$300,000 USCS issued in May 2014. RPS On March 16, 2018, the Parent Company issued the RPS at an issue price of 100% amounting to US$650,000 (equivalent to P32,751,570, net of issuance costs) in favor of SMC, the Security Holder. The RPS are direct, unconditional, unsecured and subordinated capital securities with no fixed redemption date. The Security Holder shall have the right to receive distribution at the rate of 6.25% per annum, payable quarterly in arrears every March 16, June 16, September 16 and December 16 of each year commencing on June 16, 2018. The Parent Company has a right to defer this distribution under certain conditions. The proceeds were used to partially finance the acquisition of the Masinloc Group by the Parent Company (Note 5). Distributions to RPS Holder On June 16, September 16 and December 16, 2018, the Parent Company paid distributions to the Security Holder amounting to P543,156, P536,758 and P541,277, respectively.

distribution, amounting to US$10,156 on March 16, 2019, to the Security Holder.

23. Revenues Revenues consist of: Note 2018 2017 2016 Sale of power 6, 20 P101,294,837 P70,494,762 P72,250,309 Retail and other power-

related services 6, 7, 20 18,808,010 12,295,813 5,722,121 P120,102,847 P82,790,575 P77,972,430

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24. Cost of Power Sold Cost of power sold consist of: Note 2018 2017 2016 Coal, fuel oil and other

consumables 6, 7, 10, 20 P32,563,689 P13,039,144 P10,046,687 Energy fees 6, 7 25,423,530 23,726,459 20,477,903 Power purchases 6, 7 11,181,239 10,725,490 7,836,564 Depreciation and

amortization 6, 7, 13, 15 9,108,899 5,842,367 6,164,942 Plant operations and

maintenance, and other fees 6, 7, 20, 21 2,540,949 491,854 637,013

P80,818,306 P53,825,314 P45,163,109

25. Selling and Administrative Expenses Selling and administrative expenses consist of: Note 2018 2017 2016 Taxes and licenses P1,171,370 P945,406 P982,855 Salaries, wages and benefits 20, 21 820,552 708,162 361,854 Management fees 20 798,039 664,493 652,167 Outside services 658,604 189,268 212,975 Professional fees 524,726 136,397 137,303 Rent 4, 7, 20 356,606 376,499 351,091 Corporate special program 309,220 349,667 384,166 Repairs and maintenance 292,251 126,906 308,335 Donations 231,992 303,426 738,980 Depreciation and amortization 6, 13, 15 231,336 222,564 176,989 Travel and transportation 184,140 132,869 141,463 Impairment losses on trade

receivables 9 135,426 - 958,784 Supplies 120,342 210,687 250,200 Advertising and promotions 51,821 70,772 119,874 Insurance 38,260 19,198 63,827 Miscellaneous 185,525 232,667 238,118 P6,110,210 P4,688,981 P6,078,981

Donations represent contributions to registered donee institutions for their programs on education, environment and disaster-related projects. Corporate special program pertains to the .

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26. Other Income (Charges) Other income (charges) consist of: Note 2018 2017 2016 PSALM monthly fees

reduction 7 P1,615,181 P3,283,745 P1,509,225 Construction revenue 4, 7 140,212 123,336 226,997 Loss on retirement of

equipment 13 (34,869) - - Construction cost 4, 7 (140,212) (123,336) (226,997) Foreign exchange

losses - net 30 (5,315,726) (632,416) (8,075,159) Miscellaneous

income (charges) - net 4, 7, 9, 13, 20 188,812 292,836 (315,820)

(P3,546,602) P2,944,165 (P6,881,754) Miscellaneous income (charges) recognized in 2018, 2017 and 2016 mostly pertain to management income, rent income, loss on impairment of PPE and other receivables, marked-to-market gain on derivatives, utilities income and sale of fly ash to related parties (Notes 4, 7, 13, 20 and 31).

27. Income Taxes The components of income tax expense are as follows: Note 2018 2017 2016 Current 28 P2,931,295 P2,003,146 P2,668,503 Deferred 970,237 4,176,364 697,256 P3,901,532 P6,179,510 P3,365,759

The deferred taxes are reported in the consolidated statements of financial position as follows: 2018 2017 Deferred tax assets P1,137,565 P1,316,926 Deferred tax liabilities (8,180,119) (7,324,111) (P7,042,554) (P6,007,185)

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The movements in deferred tax assets (liabilities) - net are as follows:

December 31, 2018

Balance at Beginning

of Year Recognized in Profit or Loss

Recognized in Other

Comprehensive Income Others

Balance at End of Year

Allowance for impairment losses on trade receivables P458,043 P40,628 P - (P76,554) P422,117

Defined benefit retirement obligation 13,303 9,758 - 72,238 95,299

Difference of amortization of borrowing costs over payment and others (1,410,812) 1,588,000 - (124,121) 53,067

Difference of depreciation and other related expenses over monthly lease payments (5,077,847) (2,608,623) - 63,396 (7,623,074)

Equity reserve for retirement plan 10,128 - (881) - 9,247 Net loss on cash flow hedges - - 790 - 790 (P6,007,185) (P970,237) (P91) (P65,041) (P7,042,554)

December 31, 2017


of Year Recognized in Profit or Loss

Recognized in Other

Comprehensive Income Others


Allowance for impairment losses on trade receivables P458,043 P - P - P - P458,043

Defined benefit retirement obligation 9,507 3,796 - - 13,303

Difference of amortization of borrowing costs over payment and others (268,192) (1,142,620) - - (1,410,812)

Difference of depreciation and other related expenses over monthly lease payments (2,040,307) (3,037,540) - - (5,077,847)

Equity reserve for retirement plan 11,302 - (1,174) - 10,128

(P1,829,647) (P4,176,364) (P1,174) P - (P6,007,185)

As of December 31, 2018, the NOLCO and MCIT of the Group that can be claimed as deduction from future taxable income and deduction from corporate income tax due, respectively, are as follows:

Year Incurred/Paid

Carryforward Benefits Up To NOLCO MCIT

Year 2018 December 31, 2021 P5,941,127 P60,607 Year 2017 December 31, 2020 7,764,487 38,003 Year 2016 December 31, 2019 3,016,102 20,145

P16,721,716 P118,755 The reconciliation between the statutory income tax rate on income before income

2018 2017 2016 Statutory income tax rate 30.00% 30.00% 30.00% Increase (decrease) in the income

tax rate resulting from: Unrecognized deferred tax assets 15.11% 18.06% 17.85% Availment of optional standard

deduction and others (13.13%) (5.14%) (3.07%) Effective income tax rate 31.98% 42.92% 44.78%

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28. Registrations and License Registrations with the Board of Investments (BOI) i. In 2013, SMCPC and SCPC were granted incentives by the BOI on a pioneer

status for 6 years subject to the representations and commitments set forth in the application for registration, the provisions of Omnibus Investments Code of 1987, (Executive Order (EO) No. 226), the rules and regulations of the BOI and the terms and conditions prescribed. On October 5, 2016, BOI granted SCPC's request to move the start of its commercial operation and Income Tax Holiday (ITH) reckoning date from February 2016 to September 2017 or when the first kilowatt-hour (kWh) of energy was transmitted after commissioning or testing, or 1 month from the date of such commissioning or testing, whichever comes earlier as certified by the NGCP. Subsequently, on December 21, 2016, BOI granted a similar request of SMCPC to move the start of its commercial operation and ITH reckoning date from December 2015 to July 2016, or the actual date of commercial operations subject to compliance with the specific terms and conditions, due to delay in the implementation of the project for reasons beyond its control. from July 2016 to September 2017 was likewise approved by the BOI on December 5, 2018. The ITH period for Unit 1 and Unit 2 of SCPC commenced on May 26, 2017. The ITH incentives shall only be limited to the conditions given under the specific terms and conditions of their respective BOI registrations.

ii. On September 20, 2016, LPPC was registered with the BOI under the Omnibus Investment Code of 1987 as expanding operator of 2 x 150 MW CFB Coal-fired Power Plant (Phase II Limay Greenfield Power Plant) on a non-pioneer status. The BOI categorized LPPC as an Expansion based on the 2014 to 2016 IPP's Specific Guidelines for Energy in relation to SCPC's 2 x 150 MW Coal-fired Power Plant (Phase I Limay Greenfield Power Plant). As a registered entity, LPPC is entitled to certain incentives that include, among others, an ITH for 3 years from January 2018 or date of actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. The ITH incentives shall only be limited to the conditions given under the specific terms and conditions of LPPC's BOI registrations. In June 2017, the BOI approved the transfer of ownership and registration of Phase II Limay Greenfield Power Plant from LPPC to SCPC. On July 13, 2018,

equest to move the start of its commercial operation and ITH reckoning date from January 2018 to March 2018 or actual start of commercial operations, whichever is earlier. The ITH period for Unit 3 commenced on March 26, 2018. On August 26, 2015, February 11, 2016 and October 26, 2016, the BOI issued a Certificate of Authority (COA) to SMCPC, SCPC and LPPC, respectively, subject to provisions and implementing rules and regulations of EO No. 70, entitled Reducing the Rates of Duty on Capital Equipment, Spare Parts and Accessories

imported by BOI Registered New and Expanding Enterprises. The COA shall be valid for 1 year from the date of issuance. All capital equipment, spare parts and accessories imported by SMCPC and SCPC for the construction of the power plants were ordered, delivered and completed within the validity period of their respective COAs.

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On July 10, 2017, the BOI issued a new COA to SCPC, as the new owner of the Phase II Limay Greenfield Power Plant, subject to provisions and implementing rules and regulations of EO No. 22 (which replaced EO No. 70), also entitled "Reducing the Rates of Duty on Capital Equipment, Spare Parts and Accessories imported by BOI Registered New and Expanding Enterprisesvalid for one (1) year from the date of issuance. All capital equipment, spare parts and accessories imported by the Company for the construction of the Phase II of the Power Plant were ordered, delivered and completed within the validity period of the COA.

iii. SMEC, SPDC and SPPC are registered with the BOI as administrator of their respective power plants on a pioneer status with non-pioneer incentives and were granted ITH for 4 years without extension beginning August 1, 2010 up to July 31, 2014, subject to compliance with certain requirements under their registrations. The ITH incentive availed was limited only to the sale of power generated from the power plants. Upon expiration of the ITH in 2014, SMEC, SPDC and SPPC are now subject to the regular income tax rate.

iv. On August 21, 2007, SEPC was registered with the BOI under the Omnibus Investments Code of 1987, as New Domestic Producer of Coal on a Non-pioneer Status.

v. On October 12, 2012, MPPCL received the BOI approval for the application as

expanding operator of 300 MW Coal-Fired Thermal Power Plant. As a registered entity, MPPCL is entitled to ITH for 3 years from December 2018 or actual start of commercial operations, whichever is earlier (but not earlier than the date of registration) subject to compliance with the specific terms and conditions set forth in the BOI registration. On June 25, 2015, BOI approved the amendments on the registration which includes the downgrade of registered capacity from 600 MW to 300 MW and the extension of start of commercial operation date to December 2019. However, the ITH reckoning date remains to be the same (December 2018). On December 21, 2015, MPPCL received the BOI approval for the application as new operator of 10 MW BESS Project. The BESS Facility provides 10 MW of interconnected capacity and enhances the reliability of the Luzon grid using the Advancion energy storage solution. As a registered entity, MPPCL is entitled to incentives that include, among others, an ITH for 6 years from December 2018 or date of actual start of commercial operations, whichever is earlier (but not earlier than the date of registration) subject to compliance with the specific terms and

vi. On August 24, 2016, SMCGP Philippines Energy received the BOI approval for

the application as new operator of 2 x 20 MW Kabankalan Advancion Energy Storage Array on a pioneer status. SMCGP Philippines Energy, a registered entity, is entitled to incentives that include, among others, an ITH for 6 years from July 2019 to December 2024 or date of actual start of commercial operations, whichever is earlier (but not earlier than the date of registration). The incentives shall be limited to the specific terms and conditions of SMCGP Philippines Energy

License Granted by the ERC On August 04, 2008, August 22, 2011 and August 24, 2016, MPPCL, SMELC and SCPC, respectively, were granted a RES License by the ERC pursuant to Section 29 of the EPIRA which requires all suppliers of electricity to the contestable market to secure a license from the ERC. The term of the RES License is for a period of 5 years from the time it was granted and renewable thereafter.

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On July 26, 2016, the ERC approved the renewal of MPPCL s RES License, valid from August 2, 2016 to August 1, 2021. On August 19, 2016, the ERC approved the renewal of SMELC s RES License for another 5 years from August 22, 2016 up to August 21, 2021.

29. Basic and Diluted Earnings Per Share Basic and diluted EPS is computed as follows:

2018 2017 2016 Net income attributable to equity

holders of the Parent Company P8,281,774 P8,216,916 P4,150,662

Distributions to USCS holders for the year (3,229,781) (3,076,042) (2,938,623)

Distributions to RPS holder for the year (1,710,194) - -

Net income attributable to common shareholders of the Parent Company (a) 3,341,799 5,140,874 1,212,039

Weighted average number of common shares outstanding (in thousands) (b) 1,250,004 1,250,004 1,250,004

Basic/Diluted Earnings Per Share (a/b) P2.67 P4.11 P0.97

As of December 31, 2018, 2017 and 2016, the Group has no dilutive debt or equity.

30. Financial Risk and Capital Management Objectives and Policies Objectives and Policies The Group has significant exposure to the following financial risks primarily from its use of financial instruments:

Interest Rate Risk Foreign Currency Risk Commodity Price Risk Liquidity Risk Credit Risk

This note presents information about the exposure to each of the foregoing risks, the objectives, policies and processes for measuring and managing these risks, and for management of capital. The principal non-trade related financial instruments of the Group include cash and cash equivalents, restricted cash, noncurrent receivables, loans payable, long-term debt and derivative instruments. These financial instruments, except derivative instruments, are used mainly for working capital management purposes. The trade-related financial assets and financial liabilities of the Group such as trade and other receivables, accounts payable and accrued expenses, finance lease liabilities and other noncurrent liabilities arise directly from and are used to facilitate its daily operations.

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The outstanding derivative instruments of the Group which are call spread swaps, currency forwards and commodity swaps are intended mainly for risk management purposes. The Group uses derivatives to manage its exposures to foreign currency and commodity price risks arising from the operating and financing activities. The accounting policies in relation to derivatives are set out in Note 3 to the consolidated financial statements. The BOD has the overall responsibility for the establishment and oversight of the risk management framework of the Group. The risk management policies of the Group are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The BOD constituted the Audit and Risk Oversight Committee to assist the BOD in fulfilling its oversight responsibility of the Group's corporate governance process relating to the: a) quality and integrity of the consolidated financial statements and financial reporting process and the systems of internal accounting and financial controls; b) performance of the internal auditors; c) annual independent audit of the consolidated financial statements, the engagement of the independent auditors and the evaluation of the independent auditors' qualifications, independence and performance; d) compliance with tax, legal and regulatory requirements; e) evaluation of management's process to assess and manage the enterprise risk issues; and f) fulfillment of the other responsibilities set out by the BOD. The Audit and Risk Oversight Committee shall prepare such reports as may be necessary to document the activities of the committee in the performance of its functions and duties. Such reports shall be included in the annual report of the Group and other corporate disclosures as may be required by the Philippine SEC and/or the PDEx. The Audit and Risk Oversight Committee also oversees how management monitors compliance with the risk management policies and procedures of the Group and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Internal Audit assists the Audit and Risk Oversight Committee in monitoring and evaluating the effectiveness of the risk management and governance processes of the Group. Internal Audit undertakes both regular and special reviews of risk management controls and procedures, the results of which are reported to the Audit and Risk Oversight Committee. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market iinterest rates relates primarily to the long-term borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. On the other hand, borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group manages its interest cost by using an optimal combination of fixed and variable rate debt instruments. Management is responsible for monitoring the prevailing market-based interest rate and ensures that the mark-up rates charged on its borrowings are optimal and benchmarked against the rates charged by other creditor banks.

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On the other hand, the investment policy of the Group is to maintain an adequate yield to match or reduce the net interest cost from its borrowings pending the deployment of funds to their intended use in the operations and working capital management. However, the Group invests only in high-quality short-term investments while maintaining the necessary diversification to avoid concentration risk. In managing interest rate risk, the Group aims to reduce the impact of short-term fluctuations on the earnings. Over the longer term, however, permanent changes in interest rates would have an impact on profit or loss. The management of interest rate risk is also supplemented by monitoring the

-standard interest rate scenarios. Interest Rate Risk Table The terms and maturity profile of the interest-bearing financial instruments, together with its gross amounts, are shown in the following tables:

December 31, 2018 1 Year or

Less >1-2 Years >2-3 Years >3-4 Years >4-5 Years >5 Years Total Fixed Rate Philippine peso-denominated P2,436,391 P2,896,390 P9,834,640 P13,825,163 P23,232,643 P75,896,773 P128,122,000 Interest rate 6.2836% to 6.2836% to 4.3458% to 5.3750% to 4.7575% to 5.1792% to

7.7521% 7.7521% 7.7521% 7.7521% 7.7521% 7.7521% Foreign currency-denominated

(expressed in Philippine peso) 1,949,148 2,477,048 2,606,388 1,838,347 6,814,415 12,221,564 27,906,910 Interest rate 4.7776% to 4.7776% to 4.7776% to 4.7776% to 4.7776% to 5.5959% to

5.5959% 5.5959% 5.5959% 5.5959% 5.5959% 5.5959% Floating Rate Foreign currency-denominated

(expressed in Philippine peso) 648,209 822,347 11,381,301 609,014 36,444,509 4,023,222 53,928,602 Interest rate LIBOR + LIBOR + LIBOR + LIBOR + LIBOR + LIBOR +

Margin Margin Margin Margin Margin Margin P5,033,748 P6,195,785 P23,822,329 P16,272,524 P66,491,567 P92,141,559 P209,957,512

December 31, 2017

1 Year or Less >1-2 Years >2-3 Years >3-4 Years >4-5 Years >5 Years Total

Fixed Rate Philippine peso-denominated P1,200,000 P1,200,000 P1,620,000 P8,508,250 P12,477,960 P66,993,790 P92,000,000 Interest rate 6.2836% 6.2836% 6.2836% 4.3458% 5.3750% 4.7575%

to 6.9265% to 6.9265% to 6.9265% to 6.9265% to 6.9265% to 6.9265%

P1,200,000 P1,200,000 P1,620,000 P8,508,250 P12,477,960 P66,993,790 P92,000,000

The sensitivity to a reasonably possible 1% increase in the interest rates, with all other variables held constant, would have (through the impact on floating rate borrowings) by P109,809, nil and P14,127 in 2018, 2017 and 2016, respectively. A 1% decrease in the interest rate would have had the equal but opposite effect. These changes are considered to be reasonably possible given the observation of prevailing market conditions in those periods.

s other comprehensive income. Foreign Currency Risk The functional currency is the Philippine peso, which is the denomination of the bulk

The exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign currency-denominated transactions of the Group. The risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. The Group enters into foreign currency hedges using derivative instruments such as foreign currency forwards to manage its foreign currency risk exposure.

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Short-term currency forward contracts (non-deliverable) and long-term call spread swaps are entered into to manage foreign currency risks relating to foreign currency-denominated obligations and long- term borrowings. Certain derivative contracts are designated as cash flow hedges. The Group applies a hedge ratio of 1:1 and determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency amount and timing of the cash flows. The Group assesses whether the derivatives designated in the hedging relationship is expected to be effective in offsetting changes in cash flows of the hedged item using the cumulative dollar-offset and hypothetical derivative method. The following are the main sources of ineffectiveness in the hedge relationships: alue

of the derivative contracts, which is not reflected in the change in the fair value of the hedged cash flows attributable to the change in foreign exchange rates; and

changes in the timing of the hedged transactions.

ign currency-denominated monetary assets and

monetary liabilities and their Philippine peso equivalents is as follows:

December 31, 2018 December 31, 2017

Note US Dollar Peso

Equivalent US Dollar Peso

Equivalent Assets Cash and cash equivalents 8 US$289,050 P15,198,248 US$102,067 P5,096,218 Trade and other receivables 9 157,125 8,261,638 85,664 4,277,192 Investment in debt instruments 1,027 54,009 - - 447,202 23,513,895 187,731 9,373,410

Liabilities Loans payable 17 165,000 8,675,700 - - Accounts payable and

accrued expenses 18 153,013 8,045,444 122,259 6,104,423 Long-term debt (including

current maturities) 19 1,556,400 81,835,512 - - Finance lease liabilities

(including current portion) 7 1,498,645 78,798,731 1,693,623 84,562,581 Other noncurrent liabilities 3,456 181,705 - - 3,376,514 177,537,092 1,815,882 90,667,004

Net foreign currency-denominated monetary liabilities US$2,929,312 P154,023,197 US$1,628,151 P81,293,594

The Group reported net losses on foreign exchange amounting to P5,315,726, P632,416 and P8,075,159 in 2018, 2017 and 2016, respectively, with the translation of its foreign currency-denominated assets and liabilities (Note 26). These mainly resulted from the movements of the Philippine peso against the US dollar as shown in the following table:

US Dollar

to Philippine Peso December 31, 2018 52.58 December 31, 2017 49.93 December 31, 2016 49.72

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The management of foreign currency risk is also supplemented by monitoring the

rate scenarios. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange raprofit before tax (due to changes in the fair value of monetary assets and liabilities)

operations):

P1 Decrease in the US Dollar

Exchange Rate P1 Increase in the US Dollar

Exchange Rate

December 31, 2018

Effect on Income before

Income Tax Effect on

Equity



Equity Cash and cash equivalents (P249,946) (P214,066) P249,946 P214,066 Trade and other receivables (89,044) (133,806) 89,044 133,806 Investment in debt instruments - (1,027) - 1,027 (338,990) (348,899) 338,990 348,899

Loans payable 120,000 129,000 (120,000) (129,000) Accounts payable and

accrued expenses 46,673 138,988 (46,673) (138,988) Long-term debt (including

current maturities) 850,000 1,301,400 (850,000) (1,301,400) Finance lease liabilities

(including current portion) 784,542 1,049,570 (784,542) (1,049,570) Other noncurrent liabilities 3,132 2,516 (3,132) (2,516) 1,804,347 2,621,474 (1,804,347) (2,621,474)

P1,465,357 P2,272,575 (P1,465,357) (P2,272,575)

*Consistent with SMC’s disclosure on Foreign Currency Risk; To account for the Impact of Masinloc Entities in Equity (Translation reserve)

P1 Decrease in the US Dollar

Exchange Rate P1 Increase in the US Dollar

Exchange Rate

December 31, 2017



Equity



Equity Cash and cash equivalents (P102,067) (P71,447) P102,067 P71,447 Trade and other receivables (85,664) (59,965) 85,664 59,965 (187,731) (131,412) 187,731 131,412

Accounts payable and accrued expenses 122,259 85,581 (122,259) (85,581)

Finance lease liabilities (including current portion) 1,693,623 1,185,536 (1,693,623) (1,185,536)

Other noncurrent liabilities - - - - 1,815,882 1,271,117 (1,815,882) (1,271,117)

P1,628,151 P1,139,705 (P1,628,151) (P1,139,705)

Exposures to foreign exchange rates vary during the year depending on the volume of foreign currency-denominated transactions. Nonetheless, the analysis above is

foreign currency risk. Commodity Price Risk Commodity price risk is the risk that future cash flows from a financial instrument will fluctuate because of changes in commodity prices.

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The Group, through SMC, enters into commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Group, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market position is offset by the resulting lower physical raw material cost. Commodity Swaps. to volatility in prices of coal. Liquidity Risk Liquidity risk pertains to the risk that the Group will encounter difficulty to meet payment obligations when they fall under normal and stress circumstances.

adequate funding is available at all times; (b) to meet commitments as they arise without incurring unnecessary costs; (c) to be able to access funding when needed at the least possible cost; and (d) to maintain an adequate time spread of refinancing maturities. The Group constantly monitors and manages its liquidity position, liquidity gaps and surplus on a daily basis. A committed stand-by credit facility from several local banks is also available to ensure availability of funds when necessary. The Group also uses derivative instruments such as forwards and swaps to manage liquidity.

financial liabilities based on contractual undiscounted receipts and payments used for liquidity management:

December 31, 2018 Carrying Amount

Contractual Cash Flow

1 Year or Less

>1 Year - 2 Years

>2 Years - 5 Years

Over 5 Years

Financial Assets Cash and cash equivalents P28,511,862 P28,511,862 P28,511,862 P - P - P - Trade and other receivables - net* 32,964,489 32,964,489 32,964,489 - - - Investment in debt instruments

expenses and other current 54,009 54,009 54,009 - - -

Derivative asset not designated as cash flow hedge (included

account) 96,203 96,203 96,203 - - - Derivative assets designated as

cash flow hedge (included

) 163,630 163,630 - - 163,630 - Noncurrent receivables (included

including current portion) 344,440 371,445 79,143 39,427 115,903 136,972

Restricted cash (included under

noncur ) 4,742,219 4,742,219 1,045,598 3,696,621 - - Financial Liabilities Loans payable 8,675,700 8,675,700 8,675,700 - - - Accounts payable and accrued

expenses* 23,001,830 23,001,830 23,001,830 - - - Long-term debt - net (including

current maturities) 206,965,260 281,593,786 16,872,297 17,734,562 134,539,115 112,447,812 Finance lease liabilities (including

current portion) 142,007,061 169,122,008 26,999,954 29,670,859 76,222,388 36,228,807 Other noncurrent liabilities

(including current portions of Concession liability and Premium on option liabilities) 385,232 383,011 53,049 55,533 89,331 185,098

*Excluding statutory receivables and payables

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December 31, 2017 Carrying Amount

Contractual Cash Flow

1 Year or Less

>1 Year - 2 Years

>2 Years - 5 Years

Over 5 Years

Financial Assets Cash and cash equivalents P28,655,359 P28,655,369 P28,655,369 P - P - P - Trade and other receivables - net* 20,384,901 20,384,901 20,384,901 - - - Derivative asset not designated

as cash flow hedge (included

61,903 61,903 - 61,903 - - Noncurrent receivables (included

assets account; including current portion) 278,965 322,012 60,773 39,371 115,904 105,964

Restricted cash (included under

account) 4,805,175 4,805,175 - 4,805,175 - - Financial Liabilities Loans payable 5,930,000 5,938,566 5,938,566 - - - Accounts payable and accrued

expenses* 24,818,444 24,818,444 24,818,444 - - - Long-term debt - net (including

current maturities) 90,728,701 133,277,391 6,837,616 6,760,234 38,229,217 81,450,324 Finance lease liabilities (including

current portion) 154,793,690 189,584,834 25,020,549 26,220,439 82,794,848 55,548,998 Other noncurrent liabilities

(including current portion of Concession liability) 171,174 246,756 8,400 74,118 25,200 139,038


Credit Risk Credit risk is the risk of financial loss to the Group when a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from trade and other receivables. The Group manages its credit risk mainly through

to enter into transactions with a wide diversity of creditworthy counterparties to mitigate any significant concentration of credit risk. The Group has regular internal control reviews to monitor the granting of credit and management of credit exposures. Trade and Other Receivables The exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the

operate, as these factors may have an influence on the credit risk. The Group has established a credit policy under which each new customer is analyzed individually for creditworthiness before the standard payment and delivery terms and conditions are offered. The Group ensures that sales on account are made to customers with appropriate credit history. The Group has detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. The review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer and are reviewed on a regular basis. Customers that fail to meet the benchmark creditworthiness may transact with the Group only on a prepayment basis. The Group establishes an allowance for impairment losses that represents its estimate of expected losses in respect of trade and other receivables. The main components of this allowance include a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.

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m exposure to credit risk as of December 31, without considering the effects of other risk mitigation techniques, is presented below: 2018 2017 Cash and cash equivalents

(excluding cash on hand) P28,509,806 P28,653,631 Trade and other receivables - net* 32,964,489 20,384,901 Investment in debt instruments 54,009 - Derivative asset not designated

as cash flow hedge 96,203 61,903 Derivative assets designated

as cash flow hedge 163,630 - Noncurrent receivables 344,440 278,965 Restricted cash 4,742,219 4,805,175 P66,874,796 P54,184,575

*Excluding statutory receivables The table below presents the Grquality of the assets by indicating whether the assets are subjected to 12-month ECL or lifetime ECL. Assets that are credit-impaired are separately presented.

2018 Financial Assets at Amortized Cost

12-month

ECL

Lifetime ECL - not credit

impaired

Lifetime ECL - credit

impaired

Financial Assets at

FVPL

Financial Assets at

FVOCI Total Cash and cash

equivalents (excluding cash on hand) P28,509,806 P - P - P - P - P28,509,806

Trade and other receivables - 32,964,489 2,574,423 - - 35,538,912

Investment in debt instruments 54,009 - - - - 54,009

Derivative asset not designated as cash flow hedge - - - 96,203 - 96,203

Derivative assets designated as cash flow hedge - - - - 163,630 163,630

Noncurrent receivables - 344,440 - - - 344,440 Restricted cash 4,742,219 - - - - 4,742,219 P33,306,034 P33,308,929 P2,574,423 P96,203 P163,630 P69,449,219

Receivables that are not credit impaired are considered high grade since the counterparties have strong financial capacity and business performance and with the lowest default risk. The aging of trade and other receivables as of December 31 is as follows:

2018 2017

Trade Non-trade

Amounts Owed by Related Parties Total Trade Non-trade

Amounts Owed by Related Parties Total

Current P10,003,553 P1,283,318 P5,294,148 P16,581,019 P6,824,541 P647,896 P1,106,847 P8,579,284 Past due:

1-30 days 2,454,185 145,195 421,531 3,020,911 934,933 68,034 161,730 1,164,697 31-60 days 1,022,965 101,006 12,443 1,136,414 410,187 71,377 6,362 487,926 61-90 days 280,800 173,005 9,209 463,014 184,690 1,001 2,414 188,105 Over 90 days 7,641,151 6,353,341 425,259 14,419,751 5,977,751 5,886,286 602,837 12,466,874

P21,402,654 P8,055,865 P6,162,590 P35,621,109 P14,332,102 P6,674,594 P1,880,190 P22,886,886

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Past due trade receivables more than 30 days pertain mainly to output VAT. The Group believes that the unimpaired amounts that are past due and those that are neither past due nor impaired are still collectible based on historical payment behavior and analyses of the underlying customer credit ratings. There are no significant changes in their credit quality. The credit risk for cash and cash equivalents, investment in debt instruments, derivative assets and restricted cash is considered negligible, since the counterparties are reputable entities with high quality external credit ratings. The Group has significant concentration of credit risk. Sale of power to Meralco

revenues for the years ended December 31, 2018, 2017 and 2016, respectively. The Group does not execute any credit guarantee in favor of any counterparty. Other Market Price Risk

value (financial assets at FVOCI). The Group manages its risk arising from changes in market price by monitoring the changes in the market price of the investments. Capital Management The Group maintains a sound capital base to ensure its ability to continue as a going concern, thereby continue to provide returns to stockholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce cost of capital. The Group manages its capital structure and makes adjustments in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, distribution payment, pay-off existing debts, return capital to shareholders or issue new shares, subject to compliance with certain covenants of its long-term debts, RPS and USCS (Notes 19 and 22). The Group defines capital as capital stock, additional paid-in capital, RPS, USCS and retained earnings, both appropriated and unappropriated. Other components of equity such as equity reserves are excluded from capital for purposes of capital management. The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as total debt divided by total equity. Total debt is defined as total current liabilities and total noncurrent liabilities, while equity is total equity as shown in the consolidated statements of financial position. The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the external environment and the

year.

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31. Financial Assets and Financial Liabilities The table below presents a comparison by category of the carrying amounts and fair

December 31, 2018 December 31, 2017

Carrying Amount Fair Value

Carrying Amount Fair Value

Financial Assets Cash and cash equivalents P28,511,862 P28,511,862 P28,655,359 P28,655,359 Trade and other receivables -

net* 32,964,489 32,964,489 20,384,901 20,384,901 Investment in debt instruments

expenses and other current ccount) 54,009 54,009 - -

Derivative asset not designated as cash flow hedge (included under

accounts) 96,203 96,203 61,903 61,903 Derivative assets designated

as cash flow hedge

) 163,630 163,630 - - Noncurrent receivables

account; including current portion) 344,440 344,440 278,965 278,965

Restricted cash (included repaid expenses

s) 4,742,219 4,742,219 4,805,175 4,805,175 P66,876,852 P66,876,852 P54,186,303 P54,186,303

Financial Liabilities Loans payable P8,675,700 P8,675,700 P5,930,000 P5,930,000 Accounts payable and

accrued expenses* 23,001,830 23,001,830 24,818,444 24,818,444 Long-term debt - net (including

current maturities) 206,965,260 209,582,998 90,728,701 96,948,336 Finance lease liabilities

(including current portion) 142,007,061 142,007,061 154,793,690 154,793,690 Other noncurrent liabilities

(including current portions of Concession liability and Premium on option liabilities) 385,232 392,867 171,174 171,174

P381,035,083 P383,660,456 P276,442,009 P282,661,644


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The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents, Trade and Other Receivables (excluding statutory receivables), Noncurrent Receivables, and Restricted Cash. The carrying amount of cash and cash equivalents, and trade and other receivables approximates fair value primarily due to the relatively short-term maturities of these financial instruments. In the case of noncurrent receivables and restricted cash, the carrying amounts approximate their fair values, since the effect of discounting is not considered material. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. In the case of freestanding currency and commodity derivatives, the fair values are determined based on quoted prices obtained from their respective active markets. Fair values for stand-alone derivative instruments that are not quoted from an active market and for embedded derivatives are based on valuation models used for similar instruments using both observable and non-observable inputs. The fair values of the derivatives have been categorized as Level 2 in the fair value hierarchy. Loans Payable and Accounts Payable and Accrued Expenses (excluding statutory payables). The carrying amount of loans payable and accounts payable and accrued expenses approximates fair value due to the relatively short-term maturities of these financial instruments. Long-term Debt, Finance Lease Liabilities and Other Noncurrent Liabilities. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable market rates for similar types of instruments as of reporting date. Discount rates used for Philippine peso-denominated loans range from 5.22% to 7.06% and 2.47% to 5.70% as of December 31, 2018 and December 31, 2017, respectively. Discount rates used for foreign currency-denominated loans range from 2.46% to 2.97% as of December 31, 2018. The carrying amounts of floating rate loans with quarterly interest rate repricing approximate their fair values. The fair value of peso-denominated bonds has been categorized as Level 1 and interest-bearing fixed-rate loans, finance lease liabilities and other noncurrent liabilities have been categorized as Level 2 in the fair value hierarchy. Derivative Financial Instruments

risk being managed and the details of freestanding derivative financial instruments that are categorized into those accounted for as cash flow hedges and those that are not designated as accounting hedges are discussed below. The Group enters into various foreign currency and commodity derivative contracts to manage its exposure on foreign currency and commodity price risks. The portfolio is a mixture of instruments including forwards and swaps.

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Derivative Instruments Accounted for as Cash Flow Hedges Call Spread Swaps As of December 31, 2018, the Group has outstanding call spread swaps designated as cash flow hedges with an aggregate notional amount of US$100,000 and with an average strike rate range of P52.95 to P56.15. The call spread swaps are designated to hedge foreign currency exposure on US dollar-denominated loans maturing in March 2021 and 2023. As of December 31, 2018, the positive fair value

assets . The table below provides for a reconciliation of the components of equity and other comprehensive income items, net of tax, resulting from cash flow hedge accounting as of December 31, 2018:

Cost of Hedging Reserve

Balance at beginning of year P - Changes in fair value of derivatives (24,747) Amount reclassified to profit or loss -

Interest expense and other financing charges 22,113 Income tax benefit 790 Balance at end of year (P1,844)

The hedges were assessed to be effective as the critical terms of the hedged items match the hedging instruments. No ineffectiveness was recognized in the consolidated statements of income for the year ended December 31, 2018. The Group has no outstanding derivative instruments accounted as cash flow hedges as of December 31, 2017. Derivative Instruments not Designated as Hedges The Group enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding derivatives which are not designated as accounting hedges. Changes in fair value of these instruments are accounted for directly in the consolidated statements of income. Details are as follows: Freestanding Derivatives Freestanding derivatives consist of foreign currency and commodity derivatives entered into by the Group. Currency Forwards The Group has outstanding foreign currency forward contract with notional amount of US$5,000 as of December 31, 2018 which will mature in 2019. The negative fair value of this currency forward amounted to P983 as of December 31, 2018 (Note 18). Commodity Swap The Group has an outstanding fixed swap agreement covering the coal requirements of a subsidiary for the calendar year 2019. Under the agreement, payment is made either by the Group or its counterparty for the difference between the hedged fixed price and the relevant monthly average index price. The outstanding notional quantity covered by the commodity swap is 60,000 metric tons as of December 31,

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2018 and 2017. The positive fair value of this swap amounted to P96,203 and P61,903 as of December 31, 2018 and 2017, respectively (Notes 11 and 16). The Group recognized marked-to-market gains from freestanding derivatives amounting to P23,036 and P50,470 in 2018 and 2017, respectively (Note 26). Fair Value Changes on Derivatives The net movements in fair value of all derivative instruments are as follows: 2018 2017 Balance at beginning of year P61,903 P - Net change in fair value of derivatives:

Designated as accounting hedge 185,743 - Not designated as accounting hedge 23,036 50,470

270,682 50,470 Less fair value of settled instruments 11,832 (11,433) Balance at end of year P258,850 P61,903

32. Supplemental Cash Flows Information The following table summarizes the changes in liabilities and equity arising from financing activities, including both changes arising from cash flows and non-cash changes:

Loans Payable

Long-term Debt

Finance Lease

Liabilities

Redeemable Perpetual Securities

Shareholder Advances Total

Balance as of January 1, 2018 P5,930,000 P90,728,701 P154,793,690 P - P - P251,452,391

Changes from financing cash flows Proceeds from borrowings 41,937,600 106,026,200 - - 7,789,500 155,753,300 Proceeds from issuance of RPS - - - 32,751,570 - 32,751,570 Payments of borrowings (41,510,000) (22,112,232) - - (8,013,750) (71,635,982) Payments of finance lease liabilities - - (25,715,487) - - (25,715,487)

Total changes from financing cash flows 427,600 83,913,968 (25,715,487) 32,751,570 (224,250) 91,153,401

Acquisition of subsidiaries 2,343,600 32,523,960 30,775 - - 34,898,335 Effect of changes in foreign exchange

rates (48,000) 1,263,550 4,510,368 - 224,250 5,950,168 Other changes 22,500 (1,464,919) 8,387,715 - - 6,945,296

Balance as of December 31, 2018 P8,675,700 P206,965,260 P142,007,061 P32,751,570 P - P390,399,591

Loans Payable Long-term Debt

Finance Lease Liabilities Total

Balance as of January 1, 2017 P - P66,323,726 P170,089,536 P236,413,262 Changes from financing cash flows Proceeds from borrowings 113,419,200 77,000,000 - 190,419,200 Payments of borrowings (107,782,255) (53,110,468) - (160,892,723) Payments of finance lease liabilities - - (24,874,993) (24,874,993) Total changes from financing cash flows 5,636,945 23,889,532 (24,874,993) 4,651,484

Effect of changes in foreign exchange rates 293,055 440,164 497,704 1,230,923

Other changes - 75,279 9,081,443 9,156,722

Balance as of December 31, 2017 P5,930,000 P90,728,701 P154,793,690 P251,452,391

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33. Other Matters a. EPIRA

The EPIRA sets forth the following: (i) Section 49 created PSALM to take ownership and manage the orderly sale, disposition and privatization of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other disposable assets; (ii) Section 31(c) requires the transfer of the management and control of at least 70% of the total energy output of power plants under contract with NPC to the IPP Administrators as one of the conditions for retail competition and open access; and (iii) Pursuant to Section 51(c), PSALM has the power to take title to and possession of the IPP contracts and to appoint, after a competitive, transparent and public bidding, qualified independent entities who shall act as the IPP Administrators in accordance with the EPIRA. In accordance with the bidding procedures and supplemented bid bulletins thereto to appoint an IPP Administrator relative to the capacity of the IPP contracts, PSALM has conducted a competitive, transparent and open public bidding process following which the Group was selected winning bidder of the IPPA Agreements (Note 7). The EPIRA requires generation and DU companies to undergo public offering within 5 years from the effective date, and provides cross ownership restrictions between transmission and generation companies. If the holding company of generation and DU companies is already listed with the PSE, the generation company or the DU need not comply with the requirement since such listing of the holding company is deemed already as compliance with the EPIRA. A DU is allowed to source from an associated company engaged in generation up to 50% of its demand except for contracts entered into prior to the effective date of the EPIRA. Generation companies are restricted from owning more than 30% of the installed generating capacity of a grid and/or 25% of the national installed generating capacity. The Group is in compliance with the restrictions as of December 31, 2018 and 2017.

b. Contingencies The Group is a party to certain cases or claims which are either pending decision by the court/regulators or are subject to settlement agreements. The outcome of these cases or claims cannot be presently determined. i. Temporary Restraining Order (TRO) Issued to MERALCO.

SMEC, SPPC, SPDC, MPPCL and other generation companies became parties to a Petition for Certiorari and Prohibition with prayer for Temporary Restraining OSupreme Court (SC) by special interest groups which sought to stop the imposition of the increase in generation charge of Meralco for the November 2013 billing month. As a result, Meralco was constrained to fix its generation rate to its October 2013 level of P5.67/kWh. Claiming that since the power

-through basis, Meralco deferred a portion of its payment on the ground that it was not able to collect the full amount of its generation cost. The TRO was originally for a period of 60 days. On January 8, 2014, Meralco filed its Consolidated Comment/Opposition with Counter-inclusion of SMEC, SPPC, SPDC, MPPCL and several generators as respondents to the case. On January 10, 2014, the SC issued an order treating the Counter Petition as in the nature of a Third-Party Complaint and

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granting the prayer to include SMEC, SPPC, SPDC and MPPCL as respondents in the Petition. On February 18, 2014, the SC extended the TRO issued on December 23, 2013 for another 60 days or until April 22, 2014 and granted additional TROs enjoining the PEMC and the generators from demanding and collecting the deferred amounts. In a Resolution dated April 22, 2014, the SC extended indefinitely the effectivity of the TRO issued on December 23, 2013 and February 18, 2014. To date, the Petition is pending resolution with the SC.

ii. ERC Order Voiding WESM Prices Relative to the above-cited Petition, on December 27, 2013, the DOE, ERC and PEMC, acting as a tripartite committee, issued a joint resolution setting a reduced price cap on the WESM of P32/kWh. The price was set to be effective for 90 days until a new cap will be decided upon. On March 3, 2014, the ERC, in the exercise of its police power, issued an order declaring the November and December 2013 Luzon WESM prices void and imposed the application of regulated prices. On May 9, 2014, the ERC issued an order directing PEMC, the operator of the WESM, to calculate and issue adjustment bills using recalculated prices.Based on these orders, SMEC, SPPC and SPDC recognized a reduction in the sale of power while SMELC and MPPCL recognized a reduction in its power purchases. Consequently, a payable and receivable were also recognized for the portion of over-collection or over-payment, the settlement of which have been covered by a 24-month Special Payment Arrangement with PEMC which was already completed on May 25, 2016. SMEC, SPPC, SPDC, SPI and MPPCL filed various pleadings requesting ERC for the reconsideration of the ERC order. Other generators also requested the SC to stop the implementation of the ERC order. On June 26, 2014, SMEC, SPPC, SPDC, and SPI, filed before the Court of Appeals (CA) a Petition for Review under Rule 43 of the Revised Rules of Court assailing the ERC orders dated March 3, 2014, March 27, 2014, and May 9, 2014. On the other hand, MPPCL filed its Petition for Review with the CA on December 12, 2014. After consolidating the cases, the CA, in its decision dated November 7, 2017, granted the Petition for Review filed by SMEC, SPPC, SPDC, SPI and MPPCL declaring the ERC orders null and void and set aside the orders of the ERC dated March 3, 2014, March 27, 2014, May 9, 2014 and accordingly reinstated and declared as valid the WESM prices for Luzon for the supply months November to December 2013. Motions for reconsideration of the November 7, 2017 decision and motions for intervention and motions to admit motions for reconsideration were filed by various intervenors. In a Resolution dated March 22, 2018, the CA denied the aforesaid motions. In June 2018, the intervenors filed their respective motions for reconsideration of the said Resolution of the CA dated March 22, 2018. On June 27, 2018, MPPCL filed a Consolidated Comment to the various Motions for Reconsideration, while SMEC and SPPC filed their Consolidated Opposition to said Motions for Reconsideration on July 27, 2018. To date, the CA has yet to resolve the aforesaid Motions, Comments, and Oppositions filed by the various parties.

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Upon finality of the decision, a claim for refund may be made by the relevant subsidiaries with PEMC for an amount up to P2,321,785, plus interest.

iii. Generation Payments to PSALM SPPC and PSALM are parties to the Ilijan IPPA Agreement covering the appointment of SPPC as the IPP Administrator of the Ilijan Power Plant. SPPC and PSALM have an ongoing dispute arising from differing interpretations of certain provisions related to generation payments under the Ilijan IPPA Agreement. As a result of such dispute, the parties have arrived at different computations regarding the subject payments. In a letter dated August 6, 2015, PSALM has demanded payment of the difference between the generation payments calculated based on its interpretation and the amount which has already been paid by SPPC, plus interest, covering the period December 26, 2012 to April 25, 2015. On August 12, 2015, SPPC initiated a dispute resolution process with PSALM as provided under the terms of the Ilijan IPPA Agreement, while continuing to maintain that it has fully paid all of its obligations to PSALM. Notwithstanding the bona fide dispute, PSALM issued a notice terminating the Ilijan IPPA Agreement on September 4, 2015. On the same day, PSALM also called on the Performance Bond posted by SPPC pursuant to the Ilijan IPPA Agreement. On September 8, 2015, SPPC filed a Complaint with the RTC of

s Complaint, SPPC requested the RTC that its interpretation of the relevant provisions of the Ilijan IPPA Agreement be upheld. The Complaint also asked that a 72-hour TRO be issued against PSALM for illegally terminating the Ilijan IPPA Agreement and drawing on the Performance Bond of SPPC. On even date, the RTC issued a 72-hour TRO which prohibited PSALM from treating SPPC as being in Administrator Default and from performing other acts that would change the status quo ante between the parties before PSALM issued the termination notice and drew on the Performance Bond of SPPC. The TRO was extended for until September 28, 2015. On September 28, 2015, the RTC issued an order granting a Preliminary Injunction enjoining PSALM from proceeding with the termination of the Ilijan IPPA Agreement while the main case is pending. On October 19, 2015, the RTC also issued an order granting the Motion for Intervention and Motion to Admit Complaint-in-intervention by Meralco.

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In an order dated June 27, 20Reconsideration of the order dated September 28, 2015, which issued a writ of preliminary injunction enjoining PSALM from further proceedings with the termination of the Illijan IPPA Agreement while the case is pending; (2) Motion for Reconsideration of the order, which allowed Meralco to intervene in the case; and (3) Motion to Dismiss. In response to this order, PSALM filed a petition for certiorari with the Court CA seeking to annul the

orders granting thintervention, and the osaid injunction and intervention orders. PSALM also prayed for the issuance

inst public respondent RTC and its assailed orders . The CA, however, denied the petition filed by

y injunction against PSALM prohibiting the termination of the IPPA agreement while the case in the lower court is pending. PSALM filed its Motion for Reconsideration dated January 19, 2018 to the

s Motion for Reconsideration of the CA Decision. In a Resolution dated

Reconsideration of the CA Decision. On September 4, 2018, PSALM filed a Petition for Certiorari with urgent prayer for the issuance of a TRO and/or Writ of Preliminary Injunction dated September 4, 2018 before the SC praying for the reversal and nullification of the CA Decision and the CA Resolution. Prior to the CA Decision, on December 18, 2017, the presiding judge of the RTC who conducted the judicial dispute resolution issued an order inhibiting himself in the instant case. The case was then re-raffled to another RTC judge in Mandaluyong. SPPC filed a Request for Motion for Production of Documents on February 28, 2018, while PSALM filed its Manifestation with Motion to Hear Affirmative Defenses and Objections Ad Cautelam. On September 24, 2018, the RTC issued an oto Hear Affirmative Defense and tion of Documents. PSALM then filed a Motion for Reconsideration of the said order. On December 14, 2018, SPPC filed its Opposition to the Motion for Reconsideration. The issue is now pending resolution with the RTC. Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply power from the Ilijan Power Plant to Meralco under its PSA with the latter, or the ability of SPPC to take possession of the Ilijan Power Plant upon the expiry of the IPPA Agreement in 2022. By virtue of the Preliminary Injunction issued by the RTC, SPPC continues to be the IPP Administrator for the Ilijan Power Plant.

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iv. Criminal Cases

SPPC On September 29, 2015, SPPC filed a criminal complaint for estafa and for violation of Section 3(e) of RA No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act, before the Department of Justice (DOJ), against

Agreement, which was made by PSALM with manifest partiality and evident bad faith. Further, it was alleged that PSALM fraudulently misrepresented its entitlement to draw on the Performance Bond posted by SPPC, resulting in actual injury to SPPC in the amount of US$60,000. On June 13, 2017, the DOJ endorsed the complete records of the complaint to the Office of the Ombudsman for appropriate action where it is still pending to date. On a related matter, on November 14, 2018, SPPC filed with the Office of the Ombudsman-Field Investigation Office, an administrative complaint against an executive officer of PSALM and several unidentified persons for violation of the Ombudsman Act and the Revised Administrative Code, in the performance of their functions as public officers. The case is still pending with the Ombudsman-Field Investigation Office. SMEC On October 21, 2015, SMEC filed a criminal complaint for Plunder and violation of Section 3(e) and 3(f) of RA No. 3019, before the DOJ against a certain officer of PSALM, and certain officers of Team Philippines Energy Corp. (TPEC) and Team Sual Corporation, relating to the illegal grant of the so-enabled it to receive a certain amount at the expense of the Government and SMEC. In a Resolution dated July 29, 2016, the DOJ found probable cause to file Information against the respondents for Plunder and violation of Section 3(e) and 3(f) of the RA No. 3019. The DOJ further resolved to forward the entire records of the case to the Office of the Ombudsman for their proper action.

July 29, 2016 with the Secretary of Justice. On October 25, 2017, the DOJ issued a Resolution partially granting the Petition for Review by reversing the July 29, 2016 DOJ Resolution insofar as the conduct of the preliminary investigation. On November 17, 2017, SMEC filed a motion for partial reconsideration of said October 25, 2017 DOJ Resolution. Said motion is still pending to date.

v. Civil Cases SMEC On June 17, 2016,

WESM of electricity generated from capacity in excess of the 1,000 MW of

complaint, SMEC also consigned with the RTC Pasig, the amount corresponding to the proceeds of the Sale of the Excess Capacity for the billing periods December 26, 2015 to April 25, 2016.

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On October 3, 2016, SMEC filed an Omnibus Motion To Admit Supplemental

Pasig an additional amount corresponding to the proceeds of the Sale of the Excess Capacity for the billing periods from April 26, 2016 to July 25, 2016. On July 5, 2017, SMEC consigned with the RTC Pasig the amount representing additional proceeds of Sale of the Excess Capacity for the billing period July 26, 2016 to August 25, 2016. SMEC also filed a Motion to Admit Second Supplemental Complaint in relation to said consignation. On May 22, 2018, the RTC Pasig issued an order dismissing the complaint for consignation filed by SMEC on the ground that the court has no jurisdiction over the subject matter of the complaint.

May 22, 2018 order which dismissed the consignation case. The MR was heard on July 13, 2018 where the parties were given time to file their responsive pleadings. PSALM filed its Comment dated July 26, 2018 to the

August 13, 2018. To date, the said motion is still pending resolution. Further related thereto, on December 1, 2016, SMEC received a copy of a Complaint filed by TPEC and Team Sual Corporation with the ERC against SMEC and PSALM in relation to the Excess Capacity issues, which issues have already been raised in the abovementioned cases. SMEC filed a Motion to Dismiss and Motion to Suspend Proceeding of the instant case. The complaint is still pending with the ERC to date. As of December 31, 2018 and 2017, the total amount consigned with the RTC Pasig is P491,242, i

financial position.

c. Commitments The outstanding purchase commitments of the Group amounted to P7,550,637 and P1,996,473 as of December 31, 2018 and 2017, respectively. Amount authorized but not yet disbursed for capital projects as of December 31, 2018 and 2017 is approximately P17,689,641 and P12,861,746, respectively.

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R.G. Manabat & Co. The KPMG Center, 9/F 6787 Ayala Avenue, Makatl City Philippines 1226 Telephone +63 (2) 885 7000 Fax +63 (2) 894 1985 Internet www.kpmg.com.ph Emal I [email protected]

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders SMC Global Power Holdings Corp. 155 EDSA, Brgy. Wack-Wack Mandatuyong City, Metro Manila

Opinion

We have audited the consolidated financial statements of SMC Global Power Holdings Corp. and Subsidiaries {the "Group"), which comprise the consolidated statements of financial position as at December 31 , 2017 and 2016, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31 , 2017, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolfdated financial statements present fairty, in all material respects, the consolidated financial position of the Group as at December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December 31, 2017, in accordance with Philippfne Financial Reporting Standards (PFRS).

Bas;s for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSA). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consot;dated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audits of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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Key Audit Matter

Key audit matter Is a matter that, in our professional judgment, is of most significance in our audit of the consolidated financial statements of the current period. This matter is addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter.

Valuation of Trade and Other Receivables

The risk-The Group's disclosures about the measurement and impaf rment assumptions to determine the recoverability and carrying amount of trade and other receivables are included in the significant accounting policies in Notes 3, 4 and 8 to the consolidated financial statements. As required by Philippine Accounting Standards No. 39, an entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial assets measured at amortized cost is impaired. The determination of the recoverable amounts Is subject to significant management's judgment and estimation. As a result, we assessed that the impairment testing ls a key audit matter. Given the significant management's judgment and estimation, there is a risk that potential impairment loss on trade and other receivables may not be adequately recognized resulting in over valuation of the Group's trade and other receivables,

Our response -Our audit procedures induded, among others, the identification of any events and objective evidence that impairment may exist individually for trade and other receivables that are individually significant and collectively for trade and other receivables that are not individually significant. We evaluated the possible impact that these indications might have on the recoverability of trade and other receivables.

We have:

• Discussed with management regarding the level and aging of trade and other receivables and recoverability of amounts due from customers.

• Assessed the recoverability of trade and other receivables with reference to the historical levels of bad debt expense and credit history of the counterparties.

• Evaluated the calculations of the impairment testing as well as the presentation and the relevant disclosures within the c-onsotidated flnanclal statements.

• Performed retrospective review of the impairment losses recognized and assumptions made by the management in previous years.

• Considered the consistency of judgments by the management regarding the recoverability of trade and other receivables to consider whether there is evidence of management blas through discussions with management on their rationale and obtaining evidence to support their judgments.

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Other Information

Management Is responsible for the other information. The other information comprises the information included in the SEC Form 20-IS (Definitive Information Statement) and SEC Form 17-A as at and for the year ended December 31 , 2017, but does not include the consolidated financial statements and our auditors' report thereon. The SEC Form 20-1S (Definitive Information Statement) and SEC Form 17-A as at and for the year ended December 31 , 2017 are expected to be made available to us after the date of this auditors' report.

Our opinion on the consolfdated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit.s of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits or otheiwlse appears to be materially misstated.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the c-0nsolidated financial statements in accordance with PFRS, and for such internal control as management determines is necessary to enable the preparation of consol.idated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, Individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

F-131

As part of an audit in accordance with PSA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evtdence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may Involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit 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 Group's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors· report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the c-0nsolidated financial statements, includin91 the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financ1al information of the entities or business activities wfthin the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group a.udit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findfngs, includlng any significant deficiencies in internal control that we identify during our audit

We also provide those charged with governance with a statement that we have complied w ith relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where appllcabte, related safeguards.

F-132

From the matters communicated with those charged with governance, we determine the matter that was of most significance in the audit of the consolidated financial statements of the current period and is therefore the key audit matter. We describe the matter in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of dof ng so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditors' report is Mr. Darwin P. Viroc.el.

R.G. MANABAT & CO.

~~ DARWIN P. VIROCEL Partner CPA License No. 0094495 SEC Accreditation No. 1386-AR,. Group A, valid until June 14, 2020 Tax Identification No. 912-535-864 BIR Accreditation No. 08-001987~31-2016 Issued October 18, 2016; valid until October 17, 2019

PTR No. 6615157MD Issued January 3, 2018 at Makati City

March 9, 2018 Makati City, Metro Manila

SMC GLOBAL POWER HOLDINGS CORP. AND SUBSIDIARIES(A Wholly-owned Subsidiary of San Miguel Corporation)

CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONDECEMBER 31, 2017 AND 2016

(In Thousands)

Note 2017 2016

ASSETSCurrent AssetsCash and cash equivalents 7, 30, 31 P28,655,359 P21,491,385Trade and other receivables - net 4, 6, 8, 20, 30, 31 20,435,068 22,342,846Inventories 4, 6, 9, 20 3,147,668 2,272,289Prepaid expenses and other

current assets 6, 10 17,791,915 17,683,02070,030,010 63,789,540

Assets held for sale 11, 13 - 184,324Total Current Assets 70,030,010 63,973,864

Noncurrent AssetsInvestments and advances - net 4, 12 16,621,131 16,245,454Property, plant and equipment - net 4, 6, 13 250,961,307 246,488,027Deferred exploration and

development costs 4, 6, 14 699,001 693,379Intangible assets and goodwill - net 4, 6, 14, 15 2,594,136 2,572,119Deferred tax assets 4, 27 1,316,926 2,955,570Other noncurrent assets - net 16, 20, 30, 31 7,950,484 1,020,771

Total Noncurrent Assets 280,142,985 269,975,320

P350,172,995 P333,949,184

LIABILITIES AND EQUITYCurrent LiabilitiesLoans payable 17, 30, 31 P5,930,000 P -Accounts payable and accrued

expenses 18, 20, 30, 31 31,074,714 37,729,415Finance lease liabilities - current

portion 4, 6, 30, 31 16,844,431 16,344,246Income tax payable 151,906 127,198Current maturities of long-term

debt - net of debt issue costs 19, 30, 31 1,139,631 1,040,690Total Current Liabilities 55,140,682 55,241,549

Noncurrent LiabilitiesLong-term debt - net of current

maturities and debt issue costs 19, 30, 31 89,589,070 65,283,036Deferred tax liabilities 27 7,324,111 4,785,217Finance lease liabilities -

net of current portion 4, 6, 30, 31 137,949,259 153,745,290Other noncurrent liabilities 4, 6, 20, 21, 30, 31 404,361 223,468

Total Noncurrent Liabilities 235,266,801 224,037,011

Total Liabilities 290,407,483 279,278,560Forward

F-133

Note 2017 2016

Equity 22Capital stock P1,062,504 P1,062,504Additional paid-in capital 2,490,000 2,490,000Undated subordinated capital securities 26,933,565 26,933,565Equity reserves 785,279 785,279Equity reserve for retirement plan 21 (23,632) (26,371)Retained earnings 28,517,796 23,425,647

Total Equity 59,765,512 54,670,624

P350,172,995 P333,949,184


F-134


CONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(In Thousands, Except Per Share Data)

Note 2017 2016 2015

REVENUES 5, 20, 23, 33 P82,790,575 P77,972,430 P77,506,691COST OF POWER SOLD 24 53,678,763 45,002,440 48,899,927

GROSS PROFIT 29,111,812 32,969,990 28,606,764SELLING AND

ADMINISTRATIVE EXPENSES 25 4,835,532 6,239,650 4,904,135

INCOME FROM OPERATIONS 24,276,280 26,730,340 23,702,629INTEREST INCOME 7, 16 460,958 200,502 414,444GAIN ON SALE OF PROPERTY,

PLANT AND EQUIPMENT 13 - 116,357 -EQUITY IN NET LOSSES OF

ASSOCIATES AND JOINT VENTURES 12 (40,396) (294,795) (528,445)

INTEREST EXPENSE AND OTHER FINANCING CHARGES 6, 17, 19 (13,244,581) (12,354,229) (13,130,252)

OTHER INCOME (CHARGES) - Net 6, 26 2,944,165 (6,881,754) (5,926,050)

INCOME BEFORE INCOME TAX 14,396,426 7,516,421 4,532,326INCOME TAX EXPENSE 27, 28 6,179,510 3,365,759 2,703,408NET INCOME P8,216,916 P4,150,662 P1,828,918

Basic/Diluted Earnings (Loss) Per Share 29 P4.11 P0.97 (P0.07)


F-135


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(In Thousands)

Note 2017 2016 2015

NET INCOME P8,216,916 P4,150,662 P1,828,918OTHER COMPREHENSIVE INCOMEItem that will not be reclassified to

profit or lossEquity reserve for retirement plan 21 3,913 (15,319) (22,354)Income tax benefit (expense) 27 (1,174) 4,596 6,706

2,739 (10,723) (15,648)

TOTAL COMPREHENSIVE INCOME P8,219,655 P4,139,939 P1,813,270


F-136

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F-137


CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(In Thousands)

Note 2017 2016 2015

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P14,396,426 P7,516,421 P4,532,326Adjustments for:

Interest expense and other financing charges 6, 17, 19 13,244,581 12,354,229 13,130,252

Depreciation and amortization 6, 13, 15, 24, 25 6,064,931 6,341,931 6,539,813

Equity in net losses of associates and joint venture 12 40,396 294,795 528,445

Retirement benefit expense 21 12,653 8,388 6,611Unrealized marked - to - market

gain on derivatives (61,903) - -Interest income 7, 16 (460,958) (200,502) (414,444)Unrealized foreign exchange (gains)

losses - net (786,921) 7,446,813 7,505,369Impairment losses on trade

and other receivables 8, 25, 26 - 1,210,451 374,801Impairment losses on property,

plant and equipment 13 - 323,788 -Impairment losses on concession

assets - 20,460 -Gain on sale of property, plant and

equipment 13 - (116,357) -Operating income before working

capital changes 32,449,205 35,200,417 32,203,173Decrease (increase) in:

Trade and other receivables - net 8 2,114,023 (657,993) (749,571)Inventories 9 (875,379) (1,009,071) 101,815Prepaid expenses and other current

assets 10 (982,825) (2,614,273) (6,647,768)Increase (decrease) in:

Accounts payable and accrued expenses 18 (4,864,843) 5,130,812 4,686,593

Other noncurrent liabilities 14,521 49,479 (565,860)Cash generated from operations 27,854,702 36,099,371 29,028,382Interest income received 395,960 203,493 426,480Income taxes paid (1,242,012) (2,640,580) (1,517,632)Finance cost paid (5,163,304) (3,182,682) (2,907,116)Net cash flows provided by operating

activities 21,845,346 30,479,602 25,030,114Forward

F-138

Note 2017 2016 2015

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of property, plant and equipment 13 P54,184 P13,820,388 P -

Additions to deferred exploration and development costs 14 (5,622) (3,831) (17,765)

Additions to intangible assets 6, 15 (132,474) (271,991) (117,735)Net additions to investments and

advances 12 (416,073) (5,927,312) (529,105)Additions to other noncurrent assets (6,867,810) 1,227,455 (32,811)Additions to property, plant and

equipment 13, 17, 19 (8,911,531) (14,862,133) (33,832,759)Net cash flows used in investing activities (16,279,326) (6,017,424) (34,530,175)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from short-term borrowings 17, 32 113,419,200 14,364,000 -Proceeds from long-term debt 19, 32 77,000,000 30,684,375 8,825,000Proceeds from issuance of undated

subordinated capital securities 22 - - 13,823,499Cash dividends paid 22 - (3,000,000) (4,500,000)Payment of stock issuance costs (50,563) - -Distributions to undated subordinated

capital securities holders 22 (3,074,204) (2,904,573) (1,450,688)Payments of finance lease liabilities 6, 32 (24,874,993) (23,873,363) (22,280,118)Payments of long-term debt 19, 32 (53,110,468) (26,348,700) (1,373,100)Payments of short-term borrowings 17, 32 (107,782,255) (14,155,500) -Net cash flows provided by (used in)

financing activities 1,526,717 (25,233,761) (6,955,407)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 71,237 21,607 392,535

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,163,974 (749,976) (16,062,933)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,491,385 22,241,361 38,304,294

CASH AND CASH EQUIVALENTS AT END OF YEAR 7 P28,655,359 P21,491,385 P22,241,361


F-139


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands, Except Per Share Data and Number of Shares)

1. Reporting Entity

SMC Global Power Holdings Corp. (the Parent Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on January 23, 2008, and its primary purpose of business is to purchase, sell, lease, develop and dispose of all properties of every kind and description, and shares of stocks or other securities or obligations, created or issued by any corporation or other entity. The Parent Company’s registered office address is located at 155 EDSA, Brgy. Wack-Wack, Mandaluyong City, Metro Manila.

The accompanying consolidated financial statements comprise the financial statements of the Parent Company and its Subsidiaries (collectively referred to as the Group) and the Group’s interests in associates and joint ventures.

The Parent Company is a wholly-owned subsidiary of San Miguel Corporation (SMC). The ultimate parent company of the Group is Top Frontier Investment Holdings, Inc. (Top Frontier). SMC and Top Frontier are public companies under Section 17.2 of the Securities Regulation Code and whose shares are listed on The Philippine Stock Exchange, Inc. (PSE).

2. Basis of Preparation

Statement of ComplianceThe accompanying consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS are based on International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). PFRS consist of PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations issued by the Philippine Financial Reporting Standards Council (FRSC).

The consolidated financial statements were approved and authorized for issue in accordance with a resolution by the Board of Directors (BOD) on March 9, 2018.

Basis of MeasurementThe consolidated financial statements of the Group have been prepared on thehistorical cost basis except for the following items which are measured on an alternative basis on each reporting date:

Items Measurement BasisDerivative financial instruments Fair valueDefined benefit retirement liability Present value of the defined benefit

retirement obligation

F-140

- 2 -

Functional and Presentation CurrencyThe consolidated financial statements are presented in Philippine peso, which is the functional currency of the Parent Company. All financial information are rounded off to the nearest thousand (P000), except when otherwise indicated.

Basis of ConsolidationThe Parent Company’s subsidiaries, primarily engaged in power generation, retailand other power-related services and coal mining are incorporated in the Philippines and registered with the Philippine SEC. The consolidated financial statements include the accounts of the Parent Company and its Subsidiaries as follows:

Percentage of Ownership2017 2016

Power GenerationSan Miguel Energy Corporation (SMEC) 100 100South Premiere Power Corp. (SPPC) 100 100Strategic Power Devt. Corp. (SPDC) 100 100SMC PowerGen Inc. (SPI) 100 100Limay Power Generation Corporation (c) 100 100SMC Consolidated Power Corporation (SCPC) (g) (j) 100 100San Miguel Consolidated Power Corporation (SMCPC) (b) 100 100Central Luzon Premiere Power Corp. (CLPPC) (e) 100 100Limay Premiere Power Corp. (LPPC) (e) (j) 100 100PowerOne Ventures Energy Inc. (PVEI) (h) 100 100Prime Electric Generation Corporation (k) 100 -Oceantech Power Generation Corporation (k) 100 -

Retail and Other Power-related Services San Miguel Electric Corp. (SMELC) 100 100Albay Power and Energy Corp. (APEC) 100 100SMC Power Generation Corp. (SPGC) (i) 100 100

Coal MiningDaguma Agro-Minerals, Inc. (DAMI) (a) 100 100Sultan Energy Phils. Corp. (SEPC) (a) 100 100Bonanza Energy Resources, Inc. (BERI) (a) 100 100

OthersMantech Power Dynamics Services Inc. 100 100Safetech Power Services Corp. 100 100Ondarre Holding Corporation (OHC) (d) 100 100Golden Quest Equity Holdings Inc. (a) 100 100Grand Planters International, Inc. (GPII) (f) 100 100

(a) Indirectly owned by the Parent Company through SMEC and has not yet started commercial operations as of December 31, 2017.

(b) In July 2017, SMCPC started commercial operations for Unit 1 of its 2 x 150 Mega Watt (MW) Coal-fired Power Plant in Malita, Davao.

(c) Indirectly owned by the Parent Company through SPI and has not yet started commercial operations as of December 31, 2017.

(d) Acquired in February 2015 and has not yet started commercial operations as of December 31, 2017.(e) Incorporated in 2015 and has not yet started commercial operations as of December 31, 2017.(f) Acquired in September 2015.(g) In May and September 2017, SCPC started commercial operations of Unit 1 and Unit 2, respectively,

of its initial 2 x 150 MW Coal-fired Power Plant in Limay, Bataan.(h) PVEI owns 60% of the outstanding capital stock of Angat Hydropower Corporation and KWPP

Holdings Corporation as joint ventures.(i) SPGC owns 35% of the outstanding capital stock of Olongapo Electricity Distribution Company, Inc.,

as an associate.(j) On June 22, 2017, LPPC sold its 2 x 150 MW Coal-fired Power Plant under construction to SCPC.(k) Incorporated in 2017 and has not started commercial operations as of December 31, 2017.

F-141

- 3 -

A subsidiary is an entity controlled by the Group. The Group controls an entity whenit is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.

When the Group has less than majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including the contractual arrangement with the other vote holders of the investee, rights arising from other contractual arrangements and the Group’s voting rights and potential voting rights.

The financial statements of the subsidiaries are included in the consolidated financial statements from the date when the Group obtains control, and continue to be consolidated until the date when such control ceases.

The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company, using uniform accounting policies for liketransactions and other events in similar circumstances. Intergroup balances and transactions, including intergroup unrealized profits and losses, are eliminated in preparing the consolidated financial statements.

A change in the ownership interest in a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, the Group: (i) derecognizes the assets (including goodwill) and liabilities of the subsidiary, the carrying amount of any non-controlling interests and the cumulative transaction differences recorded in equity; (ii) recognizes the fair value of the consideration received, the fair value of any investment retained and any surplus or deficit in the consolidated statements of income; and (iii) reclassify the Parent Company’s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities.

3. Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periodspresented in the consolidated financial statements, except for the changes in accounting policies as explained below.

Adoption of New and Amended Standards and InterpretationThe FRSC approved the adoption of a number of new and amended standards and interpretation as part of PFRS.

Amendments to Standards Adopted in 2017

The Group has adopted the following amendments to PFRS starting January 1, 2017 and accordingly, changed its accounting policies in the following areas:

Disclosure Initiative (Amendments to PAS 7, Statement of Cash Flows). The amendments resulted in improved disclosures about the net debt of an entity relevant to the understanding of its cash flows. The amendments require entities to provide disclosures that enable users of the financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes - e.g., by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities.

F-142

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Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to PAS 12, Income Taxes). The amendments clarify that: (a) the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset; (b) the calculation of future taxable profit in evaluating whether sufficient taxable profit will be available in future periods excludes tax deductions resulting from the reversal of the deductible temporary differences; (c) the estimate of probable future taxable profit may include the recovery of some of an entity's assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this; and (d) an entity assesses a deductible temporary difference related to unrealized losses in combination with all of its other deductible temporary differences, unless a tax law restricts the utilization of losses to deduction against income of a specific type.

Annual Improvements to PFRS Cycles 2014 - 2016 contain changes to three standards, of which only the Amendments to PFRS 12, Disclosure of Interests in Other Entities, on clarification of the scope of the standard is applicable to the Group. The amendments clarify that the disclosure requirements for interests in other entities also apply to interests that are classified as held for sale or distribution.

Except as otherwise indicated, the adoption of amendments to standards did not have a material effect on the consolidated financial statements.

New and Amended Standards and Interpretations Not Yet Adopted

A number of new and amended standards and interpretations are effective for annual periods beginning after January 1, 2017 and have not been applied in preparing the consolidated financial statements. Unless otherwise indicated, none of these isexpected to have a significant effect on the consolidated financial statements.

The Group will adopt the following new and amended standards and interpretations on the respective effective dates:

Annual Improvements to PFRS Cycles 2014 - 2016 contain changes to three standards, of which only the Amendments to PAS 28, Investments in Associates,on measuring an associate or joint venture at fair value is applicable to the Group. The amendments provide that a venture capital organization, or other qualifying entity, may elect to measure its investments in an associate or joint venture at fair value through profit or loss (FVPL). This election can be made on an investment-by-investment basis. The amendments also provide that a non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture.

The amendments are to be applied retrospectively on or after January 1, 2018, with early application permitted.

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PFRS 9 (2014), Financial Instruments, replaces PAS 39, Financial Instruments: Recognition and Measurement, and supersedes the previously published versions of PFRS 9 that introduced new classifications and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). PFRS 9 includes revised guidance on the classification and measurement of financial assets, including a new expected credit loss model for calculating impairment, guidance on own credit risk on financial liabilities measured at fair value and supplements the new general hedge accounting requirements. PFRS 9 incorporates new hedge accounting requirements that represent a major overhaul of hedge accounting and introduces significant improvements by aligning the accounting more closely with risk management.

The new standard is required to be applied retrospectively for annual periods beginning on or after January 1, 2018, with early adoption permitted.

The Group will adopt the new standard on the effective date and will not restate comparative information. The Group has performed an assessment which is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to the Group in 2018. The adoption of PFRS 9 will have no significant effect on the classification and measurement of financial assets and liabilities of the Group. The Group does not expect any impact on its consolidated statement of financial position except for the possible effect of applying the expected credit loss model in estimating impairment.

PFRS 15, Revenue from Contracts with Customers, replaces PAS 11, Construction Contracts, PAS 18, Revenue, International Financial Reporting Interpretations Committee (IFRIC) 13, Customer Loyalty Programmes,IFRIC 18, Transfer of Assets from Customers and Standard Interpretation Committee - 31, Revenue - Barter Transactions Involving Advertising Services. The new standard introduces a new revenue recognition model for contracts with customers which specifies that revenue should be recognized when (or as) the Group transfers control of goods or services to a customer at the amount to which the Group expects to be entitled. Depending on whether certain criteria are met, revenue is recognized over time, in a manner that best reflects the Group’s performance, or at a point in time, when control of the goods or services is transferred to the customer. The standard does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other PFRS. It also does not apply if two companies in the same line of business exchange nonmonetary assets to facilitate sales to other parties. Furthermore, if a contract with a customer is partly in the scope of another PFRS, then the guidance on separation and measurement contained in the other PFRS takes precedence.

The new standard is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. An entity can apply the new standard using either the retrospective or the cumulative effect method. Under the retrospective method, each comparative period presented is retrospectively adjusted, with a choice of practical expedients. While under the cumulative effect method, the cumulative effect of applying the new standard is recognized at the beginning of the year of initial application, with no restatement of comparative periods, with a choice of practical expedients.

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The Group will adopt the new standard on the effective date using the cumulativeeffect method. The cumulative impact of the adoption will be recognized in retained earnings as of January 1, 2018 and comparative information will not be restated. As of March 9, 2018, the Group is in the process of finalizing its assessment on the impact of adopting PFRS 15 on the Group’s revenue recognition policies, but it does not expect any significant impact on its consolidated financial position and consolidated net income.

Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration. The amendments clarify that the transaction date to be used for translation of foreign currency transactions involving an advance payment or receipt is the date on which the entity initially recognizes the prepayment or deferred income arising from the advance consideration. For transactions involving multiple payments or receipts, each payment or receipt gives rise to a separate transaction date. The interpretation applies when an entity pays or receives consideration in a foreign currency and recognizes a non-monetary asset or liability before recognizing the related item.

The interpretation is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

PFRS 16, Leases, supersedes PAS 17, Leases, and the related Philippine Interpretations. The new standard introduces a single lease accounting model for lessees under which all major leases are recognized on-balance sheet, removing the lease classification test. Lease accounting for lessors essentially remains unchanged except for a number of details including the application of the new lease definition, new sale-and-leaseback guidance, new sub-lease guidance and new disclosure requirements. Practical expedients and targeted reliefs were introduced including an optional lessee exemption for short-term leases (leases with a term of 12 months or less) and low-value items, as well as the permission of portfolio-level accounting instead of applying the requirements to individual leases. New estimates and judgmental thresholds that affect the identification, classification and measurement of lease transactions, as well as requirements to reassess certain key estimates and judgments at each reporting date were introduced.

PFRS 16 is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply PFRS 15 at or before the date of initial application of PFRS 16. The Group is currently assessing the potential impact of the new standard.

Philippine Interpretation IFRIC 23, Uncertainty over Income Tax Treatments,clarifies how to apply the recognition and measurement requirements in PAS 12 when there is uncertainty over income tax treatments. Under the interpretation, whether the amounts recorded in the financial statements will differ to that in the tax return, and whether the uncertainty is disclosed or reflected in the measurement, depends on whether it is probable that the tax authority will accept the Group’s chosen tax treatment. If it is not probable that the tax authority will accept the Group’s chosen tax treatment, the uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty -either the most likely amount or the expected value. The interpretation also requires the reassessment of judgments and estimates applied if facts and circumstances change - e.g. as a result of examination or action by tax authorities, following changes in tax rules or when a tax authority’s right to challenge a treatment expires.

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The interpretation is effective for annual periods beginning on or after January 1, 2019 with earlier application permitted.

Long-term Interests in Associates and Joint Ventures (Amendments to PAS 28). The amendment requires the application of PFRS 9 to other financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests (LTIs) that, in substance, form part of the entity's net investment in an associate or joint venture. The amendment explains the annual sequence in which PFRS 9 and PFRS 28 are to be applied. In effect, PFRS 9 is first applied ignoring any prior years’ PAS 28 loss absorption. If necessary, prior years’ PAS 28 loss allocation is trued-up in the current year which may involve recognizing more prior years’ losses, reversing these losses or re-allocating them between different LTI instruments. Any current year PAS 28 losses are allocated to the extent that the remaining LTI balance allows and any current year PAS 28 profits reverse any unrecognized prior years’ losses and then allocations against LTI. The amendment is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Retrospective application is required, subject to relevant transitional reliefs.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to PFRS 10, Consolidated Financial Statements, and PAS 28). The amendments address an inconsistency in the requirements in PFRS 10 and PAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require that a full gain or loss is recognized when a transaction involves a business whether it is housed in a subsidiary or not. A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary.

Originally, the amendments apply prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. However, on January 13, 2016, the FRSC decided to postpone the effective date until the IASB has completed its broader review of the research project on equity accounting that may result in the simplification of accounting for such transactions and of other aspects of accounting for associates and joint ventures.

Current versus Noncurrent ClassificationThe Group presents assets and liabilities in the consolidated statements of financial position based on current and noncurrent classification. An asset is current when it is: (a) expected to be realized or intended to be sold or consumed in the normal operating cycle; (b) held primarily for the purpose of trading; (c) expected to be realized within 12 months after the reporting period; or (d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

A liability is current when it is: (a) expected to be settled in the normal operating cycle; (b) held primarily for trading; (c) due to be settled within 12 months after the reporting period; or (d) there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period.

The Group classifies all other assets and liabilities as noncurrent. Deferred tax assets and liabilities are classified as noncurrent.

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Financial Assets and Financial LiabilitiesDate of Recognition. The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of a financial instrument. In the case of a regular way purchase or sale of financial assets, recognition is done using settlement date accounting.

Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated as at FVPL, includes transaction costs.

‘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, the Group recognizes the difference between the transaction price and the fair value (a ‘Day 1’ difference) in the consolidated statements ofincome unless it qualifies for recognition as some other type of asset. In cases where data used is not observable, the difference between the transaction price and model value is only recognized in the consolidated statements of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Financial AssetsThe Group classifies its financial assets, at initial recognition, in the following categories: financial assets at FVPL, loans and receivables, available-for-sale (AFS)financial assets and held-to-maturity (HTM) investments. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. The Group determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

The Group has no AFS financial assets and HTM investments as of December 31, 2017 and 2016.

Financial Assets at FVPL. A financial asset is classified as at FVPL if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated as at FVPL if the Group manages such investments and makes purchase and sale decisions based on their fair values in accordance with the documented risk management or investment strategy of the Group. Derivative instruments (including embedded derivatives), except those covered by hedge accounting relationships, are classified under this category.

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

Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met:

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

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

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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 recognized.

The Group carries financial assets at FVPL using their fair values. Attributable transaction costs are recognized in the consolidated statements of income as incurred. Fair value changes and realized gains or losses are recognized in the consolidated statements of income. Any interest earned is recognized as part of “Interest income” account in the consolidated statements of income. Any dividend income from equity securities classified as at FVPL is recognized in the consolidated statements of income when the right to receive payment has been established.

The Group’s derivative assets and financial assets at FVPL are classified under this category (Notes 30 and 31).

Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities 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 designated as AFS financial assets or financial assets at FVPL.

Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value. Any interest earned on loans and receivables is recognized as part of “Interest income”account in the consolidated statements of income on an accrual basis. 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. The periodic amortization isalso included as part of “Interest income” account in the consolidated statements ofincome. Gains or losses are recognized in the consolidated statements of incomewhen loans and receivables are derecognized or impaired.

Cash includes cash on hand and in banks which are stated at face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

The Group’s cash and cash equivalents, trade and other receivables, noncurrent receivables and restricted cash are included under this category (Notes 7, 8, 16, 30and 31).

Financial LiabilitiesThe Group classifies its financial liabilities, at initial recognition, in the following categories: financial liabilities at FVPL and other financial liabilities. The Group determines the classification of its financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

Financial Liabilities at FVPL. Financial liabilities are classified under this category through the fair value option. Derivative instruments (including embedded derivatives) with negative fair values, except those covered by hedge accounting relationships, are also classified under this category.

The Group carries financial liabilities at FVPL using their fair values and reports fair value changes in profit or loss. Any interest expense incurred is recognized as part of “Interest expense and other financing charges” account in the consolidated statements of income.

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The Group has no financial liabilities at FVPL as of December 31, 2017 and 2016.

Other Financial Liabilities. This category pertains to financial liabilities that are not designated or classified as at FVPL. After initial measurement, other financial liabilities are carried at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any premium or discount and any directly attributable transaction costs that are considered an integral part of the effective interest rate of the liability. The effective interest rate amortization is included in “Interest expense and other financing charges” account in the consolidated statements of income. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized as well as through the amortization process.

The Group’s liabilities arising from its trade or borrowings such as loans payable, accounts payable and accrued expenses, long-term debt, finance lease liabilities andother noncurrent liabilities are included under this category (Notes 6, 17, 18, 19, 30and 31).

Derivative Financial Instruments and HedgingFreestanding DerivativesFor the purpose of hedge accounting, hedges are classified as either:

(a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk);

(b) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or

(c) hedges of a net investment in foreign operations.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes 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 to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Fair Value Hedge. Derivatives classified as fair value hedges are carried at fair value with corresponding change in fair value recognized in the consolidated statements of income. The carrying amount of the hedged asset or liability is also adjusted for changes in fair value attributable to the hedged item and the gain or loss associated with that remeasurement is also recognized in the consolidated statements of income.

When the hedge ceases to be highly effective, hedge accounting is discontinued and the adjustment to the carrying amount of a hedged financial instrument is amortized immediately.

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The Group discontinues fair value hedge accounting if:

(a) the hedging instrument expires, is sold, is terminated or is exercised;

(b) the hedge no longer meets the criteria for hedge accounting; or

(c) the Group revokes the designation.

The Group has no outstanding derivatives and financial instruments accounted for as a fair value hedge as of December 31, 2017 and 2016.

Cash Flow Hedge. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized in other comprehensive income and presented in the consolidated statements of changes in equity. The ineffective portion is immediately recognized in the consolidated statements of income.

If the hedged cash flow results in the recognition of an asset or a liability, all gains or losses previously recognized directly in the consolidated statements of changes in equity are transferred and included in the initial measurement of the cost or carrying amount of the asset or liability. Otherwise, for all other cash flow hedges, gains or losses initially recognized in the consolidated statements of changes in equity are transferred to the consolidated statements of income in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affects the consolidated statements of income.

When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been reported directly in the consolidated statements of changes in equity is retained until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gain or loss previously reported in the consolidated statements of changes in equity is recognized in the consolidated statements of income.

The Group has no outstanding derivatives and financial instruments accounted for as a cash flow hedge as of December 31, 2017 and 2016.

Net Investment Hedge. Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized in other comprehensive income while any gains or losses relating to the ineffective portion are recognized in the consolidated statements of income. On disposal of a foreign operation, the cumulative value of any such gains and losses recorded in the consolidated statements of changes in equity is transferred to and recognized in the consolidated statements of income.

The Group has no hedge of a net investment in a foreign operation as of December 31, 2017 and 2016.

Changes in fair values of derivatives that do not qualify for hedge accounting are recognized directly in the consolidated statements of income.

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Embedded DerivativesThe Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group becomes a party to the contract.

An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid or combined instrument is not recognized as at FVPL.

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.

The Group has no embedded derivatives as of December 31, 2017 and 2016.

Derecognition of Financial Assets and Financial LiabilitiesFinancial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized when:

the rights to receive cash flows from the asset have expired; or

the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; and either: (a) has transferred substantially all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes the associated liability. The transferred asset and the associated liability are measured on the basis that reflects the rights and obligations that the Group has retained.

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 the Group is required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When 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 an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of income.

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Impairment of Financial AssetsThe Group assesses, at the reporting date, whether 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 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.

Assets Carried at Amortized Cost. For financial assets carried at amortized cost such as loans and receivables, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If no objective evidence of impairment has been identified for a particular financial asset that was individually assessed, the Group includes the asset as part of a group of financial assets with similar credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in the collective impairment assessment.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing financial difficulty, default or delinquency in principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to alleviate the financial condition of the borrower. For collective impairment purposes, evidence of impairment may include observable data on existing economic conditions or industry-wide developments indicating that there is a measurable decrease in the estimated future cash flows of the related assets.

If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). Time value is generally not considered when the effect of discounting the cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For collective impairment purposes, impairment loss is computed based on their respective default and historical loss experience.

The carrying amount of the asset is reduced either directly or through the use of an allowance account. The impairment loss for the period is recognized in the consolidated statements of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of income, to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal date.

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Classification of Financial Instruments between Liability and EquityFinancial instruments are classified as liability or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

A financial instrument is classified as liability if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity;

exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or

satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole or in part, the amount separately determined as the fair value of the liability component on the date of issue.

Debt Issue CostsDebt issue costs are considered as an adjustment to the effective yield of the related debt and are deferred and amortized using the effective interest rate method. When a loan is paid, the related unamortized debt issue costs at the date of repayment are recognized in the consolidated statements of income.

Offsetting Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position 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 assets and settle the liabilities simultaneously.

InventoriesInventories are valued at the lower of cost and net realizable value. Cost is determined using specific identification method or weighted average method for coal inventories, weighted average method for fuel oil and other consumables and specific identification method for spare parts. Net realizable value is the current replacement cost.

Any write-down of inventories to net realizable value and all losses of inventories are recognized as expense in the year of write-down or loss occurrence. The amount of reversals, if any, of write-down of inventories arising from an increase in net realizable value are recognized as reduction in the amount of inventories recognized as expense in the year in which the reversal occurs.

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Business CombinationBusiness combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included as part of “Selling and administrativeexpenses” account in the consolidated statements of income.

When the Group acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured at the acquisition date fair value and any resulting gain or loss is recognized in the consolidated statements of income.

The Group measures goodwill at the acquisition date as: a) the fair value of the consideration transferred; plus b) the recognized amount of any non-controlling interests in the acquiree; plus c) if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less d) the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated statements of income. Subsequently, goodwill is measured at cost less any accumulated impairment in value. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying amount may be impaired.

The consideration transferred does not include amounts related to the settlement ofpre-existing relationships. Such amounts are generally recognized in the consolidated statements of income. Costs related to the acquisition, other thanthose associated with the issuance of debt or equity securities that the Group incurs in connection with a business combination, are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the consolidated statements of income.

Goodwill in a Business CombinationGoodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units, or groups of cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and

is not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.

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Impairment is determined 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, an impairment loss is recognized. 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 when 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 of and the portion of the cash-generating unit retained. An impairment loss with respect to goodwill is not reversed.

Intangible Assets Acquired in a Business CombinationThe cost of an intangible asset acquired in a business combination is the fair value as at the date of acquisition, determined using discounted cash flows as a result of the asset being owned.

Following initial recognition, intangible asset is carried at cost less anyaccumulated amortization and impairment losses, if any. The useful life of anintangible asset is assessed to be either finite or indefinite.

An intangible asset with finite life is amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each reporting date. A change in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for as a change in accounting estimate. The amortization expense on intangible asset with finite life is recognized in the consolidated statements of income.

Transactions under Common ControlTransactions under common control entered into in contemplation of each other and business combination under common control designed to achieve an overall commercial effect are treated as a single transaction.

Transfers of assets between commonly controlled entities are accounted for using book value accounting.

Investments in Shares of Stock of Associates and Joint VenturesAn associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control is similar to those necessary to determine control over subsidiaries.

The Group’s investments in shares of stock of associates and joint ventures are accounted for using the equity method.

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Under the equity method, the investment in shares of stock of an associate or joint venture is initially recognized at cost. The carrying amount of the investment isadjusted to recognize the changes in the Group’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and isneither amortized nor individually tested for impairment.

The Group’s share in profit or loss of an associate or joint venture is recognized as “Equity in net losses of associates and joint ventures” account in the consolidated statements of income. Adjustments to the carrying amount may also be necessary for changes in the Group’s proportionate interest in the associate or joint venture arising from changes in the associate or joint venture’s other comprehensive income. The Group’s share on these changes is recognized in the consolidated statements ofcomprehensive income. Unrealized gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture.

After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in the shares of stock of anassociate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in shares of stock of an associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount and carrying amount of the investment in shares of stock of an associate or joint venture and then recognizes the loss as part of “Equity in net losses of associates and joint ventures” account in the consolidated statements of income.

Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at fair value. Any difference between the carrying amount of the investment in an associate or joint venture upon loss of significant influence or joint control, and the fair value of the retained investment and proceeds from disposal is recognized in the consolidated statements of income.

The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

Property, Plant and EquipmentProperty, plant and equipment, except for land, are stated at cost less accumulated depreciation and amortization and any accumulated impairment in value. Such cost includes the cost of replacing part of the property, plant and equipment at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment in value.

The initial cost of property, plant and equipment comprises its construction cost or purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation (ARO). Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably.

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Capital projects in progress (CPIP) represents the amount of accumulated expenditures on unfinished and/or ongoing projects. This includes the costs of construction and other direct costs. Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period. CPIP is not depreciated until such time that the relevant assets are ready for use.

Depreciation and amortization, which commence when the assets are available for their intended use, are computed using the straight-line method over the following estimated useful lives of the assets:

Number of YearsPower plants 10 - 43Leasehold improvements 5 - 25 or term of the lease,

whichever is shorterOther equipment 2 - 20Building 10 - 25

The remaining useful lives, residual values, and depreciation and amortization methods are reviewed and adjusted periodically, if appropriate, to ensure that such periods and methods of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of property, plant and equipment.

The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Fully depreciated assets are retained in the accounts until they are no longer in use.

An item of property, plant and equipment is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising from the retirement and disposal of an item of property, plant and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in the consolidated statements of income in the period of retirement and disposal.

Intangible AssetsIntangible assets acquired separately are measured on initial recognition at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Subsequently, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditures are recognized in the consolidated statements of income in the year in which the related expenditures are incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite.

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Intangible assets with finite lives are amortized over the useful life and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method used for an intangible asset with a finite useful life are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes inaccounting estimate. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income consistent with the function of the intangible asset.

Amortization is computed using the straight-line method over the following estimated useful lives of intangible assets with finite lives:

Number of YearsPower concession right 25Computer software and licenses 3

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

Power Concession Assets and ObligationsPublic-to-private service concession arrangements where: (a) the grantor controls or regulates what services the entity in the Group can provide with the infrastructure, to whom it can 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 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 the Interpretation if the conditions in (a) are met.

The Interpretation applies to both: (a) infrastructure that the entity in the Groupconstruct or acquire from a third party for the purpose of the service arrangement; and (b) existing infrastructure to which the grantor gives the entity in the Groupaccess for the purpose of the service arrangement.

Infrastructures within the scope of the Interpretation are not recognized as property, plant and equipment of the Group. Under the terms of the contractual arrangements within the scope of the Interpretation, an entity acts as a service provider. An entity 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.

The Group’s power concession right pertains to the right granted by the Government to the Parent Company, through APEC, to operate and maintain the franchise of Albay Electric Cooperative, Inc. (ALECO). The Group’s power concession right is carried at cost less accumulated amortization and any accumulated impairment losses.

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The useful life of power concession right is assessed to be either finite or indefinite. Power concession right arising from a service concession arrangement is amortized using straight-line method over the concession period, which is 25 years from the first day of the commencement of operations, or the estimated useful lives of the infrastructure, whichever is shorter, and assessed for impairment whenever there is an indication that the asset may be impaired. The amortization period and method are reviewed at least at each reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense is recognized in the consolidated statements of income in the expense category consistent with the function of the concession assets.

The power concession right is derecognized on disposal or when no further economic benefits are expected from its use or disposal. Gain or loss from derecognition of the power concession right is measured as the difference between the net disposal proceeds and the carrying amount of the asset, and is recognized in the consolidated statements of income.

An entity recognizes and measures revenue in accordance with PAS 11 and PAS 18 for the services it performs. If an entity performs more than one serviceunder 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 an entity provides construction or upgrade services, the consideration received or receivable by the entity is recognized at fair value. An entity accounts for revenue and costs relating to construction or upgrade services in accordance with PAS 11. Revenue from construction contracts is recognized based on the percentage-of-completion method, measured by reference to the proportion of costs incurred to date, to estimated total costs for each contract. The applicable entityaccounts for revenue and costs relating to operation services in accordance with PAS 18.

An entity 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. An entity recognizes an intangible asset to the extent that it receives a right (a license) to charge users of the public service.

When the applicable entity has contractual obligations to fulfill as a condition of its license: (i) to maintain the infrastructure to a specified level of serviceability; or (ii) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service arrangement, it recognizes and measures thecontractual obligations in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, i.e., at the best estimate of the expenditure that would be required to settle the present obligation at the reporting date.

In accordance with PAS 23, Borrowing Costs, borrowing costs attributable to the arrangement are recognized as expenses in the period in which they are incurred unless the applicable entities have 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.

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Concession payable is recognized at the date of inception of the concession agreement. Fixed concession fees are recognized at present value using the discount rate at the inception date. This account is debited upon payment of fixed fees and such payments are apportioned between interest payment and payment of the principal. Interest arising from the accretion of concession payable is presented under “Interest expense and other financing charges” account in the consolidated statements of income.

Concession payable that are expected to be settled within 12 months after the reporting date are classified as current liabilities. Otherwise, these are classified as noncurrent liabilities.

Mining Rights The Group's mining rights have finite lives and are carried at cost less accumulated amortization and any accumulated impairment losses.

Subsequent expenditures are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in the consolidated statements of income as incurred.

Amortization of mining rights is recognized in the consolidated statements of income based on the units of production method utilizing only recoverable coal reserves as the depletion base. In applying the units of production method, amortization is normally calculated using the quantity of material extracted from the mine in the period as a percentage of the total quantity of material to be extracted in current and future periods based on proved and probable reserves. The amortization of mining rights will commence upon commercial operations.

Gain or loss from derecognition of mining rights is measured as the difference between the net disposal proceeds and the carrying amount of the asset, and is recognized in the consolidated statements of income.

Deferred Exploration and Development CostsDeferred exploration and development costs comprise of expenditures which are directly attributable to:

Researching and analyzing existing exploration data;

Conducting geological studies, exploratory drilling and sampling;

Examining and testing extraction and treatment methods; and

Compiling pre-feasibility and feasibility studies.

Deferred exploration and development costs also include expenditures incurred in acquiring mining rights, entry premiums paid to gain access to areas of interest andamounts payable to third parties to acquire interests in existing projects.

Exploration assets are reassessed on a regular basis and tested for impairment provided that at least one of the following conditions is met:

the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed;

substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

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such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or

exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.

If the project proceeds to development stage, the amounts included within deferred exploration and development costs are transferred to property, plant and equipment.

Impairment of Non-financial AssetsThe carrying amounts of investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill are tested for impairment annually either individually or at the cash-generating unit level. If any such indication exists, and if the carrying amount exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

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 assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting 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. Apreviously 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. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of income. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. An impairment loss with respect to goodwill is not reversed.

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Fair Value MeasurementsThe Group measures a number of financial and non-financial assets and liabilities at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3: inputs for the asset or liability that are not based on observable market data.

For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorization at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy.

ProvisionsProvisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of past events; (b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset only when it is virtually certain that reimbursement will be received. The amount recognized for the reimbursement shall not exceed the amount of the provision. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

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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 the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense.

ARO. The Company records a provision for asset retirement costs of its power plants. Asset retirement costs are provided at the present value of expected costs to settle the obligation using estimated cash flows and are recognized as part of property, plant and equipment. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the retirement liability. The unwinding of the discount is expensed as incurred and recognized in the consolidated statements of income as “Interest expense and other financing charges”. The estimated future costs of asset retirement are reviewed annually and adjusted prospectively. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the power plants. If the decrease in the liability exceedsthe carrying amount of the asset, the excess shall be recognized immediately in the statement of income.

Capital Stock and Additional Paid-in CapitalCommon Shares. Common shares are measured at par and are classified as equity.Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.

Additional Paid-in Capital. When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital”account in the consolidated statements of financial position. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received. In case the shares are issued to extinguish or settle the liability of the Parent Company, the shares are measured either at the fair value of the shares issued or fair value of the liability settled, whichever is more reliably determinable.

Undated Subordinated Capital SecuritiesUndated subordinated capital securities (USCS) are classified as equity when there is no contractual obligation to deliver cash or other financial assets to another person or entity or to exchange financial assets or financial liabilities with another person orentity that is potentially unfavorable to the issuer.

Incremental costs directly attributable to the issuance of USCS are recognized as a deduction from equity, net of tax. The proceeds received, net of any directly attributable transaction costs, are credited to USCS.

Retained EarningsRetained earnings represent the accumulated net income or losses, net of any dividend, distributions and other capital adjustments. Appropriated retained earnings represent that portion which is restricted and therefore not available for any dividend declaration.

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Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefitsassociated with the transaction will flow to the Group and the amount of revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. Revenues are stated at amounts invoiced to customers, inclusive of pass-through charges, net of value-added tax (VAT) and other taxes.

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

Sale of Power. Revenue from power generation and trading is recognized in the period when actual power or capacity is generated, transmitted and/or made available to the customers, net of related discounts and adjustments.

Retail and Other Power-related Services. Revenues are recognized upon the supply of electricity to the customers. The Uniform Filing Requirements on the rate unbundling released by the Energy Regulatory Commission (ERC) on October 30, 2001 specified the following bill components: (a) generation charge, (b) transmission charge, (c) system loss charge, (d) distribution charge, (e) supply charge, (f) metering charge, (g) currency exchange rate adjustments, where applicable and (h) interclass and life subsidies. Feed-in tariffs allowance, VAT, local franchise tax and universal charges are billed and collected on behalf of the national and local government and do not form part of the Group’s revenue. Generation, transmission and system loss charges, which are part of revenues, are pass-through charges.

OthersInterest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Management income is recognized when earned in accordance with the terms of the agreement.

Rent income from operating lease is recognized on a straight-line basis over the related lease terms. Lease incentives granted are recognized as an integral part of the total rent income over the term of the lease.

Construction revenue related to the Group’s recognition of intangible asset on the right to operate and maintain the franchise of ALECO, which is the fair value of the intangible asset, is earned and recognized as the construction progresses. The Group recognizes the corresponding amount as intangible asset as it recognizes the construction revenue. The Group assumes no profit margin in earning the right to operate and maintain the franchise of ALECO.

The Group uses the cost to cost percentage-of-completion method to determine the appropriate amount of revenue to be recognized in a given period. The stage of completion is measured by reference to the costs incurred related to the construction of ALECO infrastructure up to the end of the reporting period as a percentage of total estimated cost of the construction.

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Cost and Expense RecognitionCosts and Expenses. Costs and expenses are decreases in economic benefits during the reporting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Cost of power sold is debited for the direct costs related to power generation, retail and distribution of electricity, and/or trading. Expenses are recognized when incurred.

Interest Expense and Other Financing Charges. Interest expense and other financing charges comprise finance charges on finance lease liabilities, loans, concession payable and other borrowings. Finance charges on finance lease liabilities, loans, and concession payable are recognized in consolidated statements of income using the effective interest rate method.

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

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

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

(c) there is a change in the determination of whether fulfillment is dependent on a specific asset; or

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

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

Finance LeaseFinance leases, which transfer to the Group substantially all the risks and rewardsincidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Obligations arising from plant assets under finance lease agreement are classified in the consolidated statements of financial position as finance lease liabilities.

Lease payments are apportioned between financing charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Financing charges are recognized in the consolidated statements of income.

Capitalized leased assets are depreciated over the estimated useful lives of the assets when there is reasonable certainty that the Group will obtain ownership by the end of the lease term.

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Operating LeaseGroup as Lessee. Leases which do not transfer to the Group substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. Associated costs such as maintenance and insurance are expensed as incurred.

Group as Lessor. Leases where the Group does not transfer substantially all the risks and rewards of ownership of the assets are classified as operating leases. Rent income from operating leases is recognized as income on a straight-line basis overthe lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as rent income. Contingent rents are recognized as income in the period in which they are earned.

Borrowing CostsBorrowing costs directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use.

Employee BenefitsShort-term Employee Benefits. Short-term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Retirement Costs. The net defined benefit retirement liability or asset is the aggregate of the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of economic benefits available in the form of reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit retirement obligation is actuarially determined using the projected unit credit method. Projected unit credit method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning projected salaries of employees. Actuarial gains and losses are recognized in full in the period in which they occur in other comprehensive income. Such actuarial gains and losses are also immediately recognized in equity and are not reclassified to profit or loss in subsequent period.

Defined benefit costs comprise the following:

Service costsNet interest on the net defined benefit retirement liability or assetRemeasurements of net defined benefit retirement liability or asset

Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in the consolidated statements of income. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuary.

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Net interest on the net defined benefit retirement liability or asset is the change during the period as a result of contributions and benefit payments, which is determined by applying the discount rate based on the government bonds to the net defined benefit retirement liability or asset. Net interest on the net defined benefit retirement liability or asset is recognized as expense or income in the consolidated statements of income.

Remeasurements of net defined benefit retirement liability or asset comprising actuarial gains and losses, return on plan assets, and any change in the effect of the asset ceiling (excluding net interest) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to consolidated statements of income in subsequent periods.

When the benefits of a plan are changed, or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the consolidated statements of income. The Group recognizes gains and losses on the settlement of a defined benefit retirement plan when the settlement occurs.

Foreign Currency TranslationsTransactions in foreign currencies are translated to the functional currency of the Group at exchange rates at the dates of the transactions. Monetary assets and monetary liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the reporting date.

Nonmonetary assets denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date the fair value was determined. Nonmonetary items in foreign currencies that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on translation are recognized in the consolidated statements of income.

TaxesCurrent Tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

The Group periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretations and establishes provisions where appropriate.

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Deferred Tax. Deferred tax is recognized using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or 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 profit nor taxable profit or loss; and

with respect to taxable temporary differences associated with investments inshares of stock of subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of MCIT and NOLCO can be utilized, except:

where the deferred tax asset relating to the deductible temporary difference arises 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 profit nor taxable profit or loss; and

with respect to deductible temporary differences associated with investments inshares of stock of subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

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

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in 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 at the reporting date.

Current and deferred tax are recognized in the consolidated statements of incomeexcept to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

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

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VAT. Revenues, expenses and assets are recognized net of the amount of VAT, except:

where the tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

receivables and payables that are stated with the amount of tax included.

The net amount of tax recoverable from, or payable to, the taxation authority is included as part of “Prepaid expenses and other current assets” or “Accounts payable and accrued expenses” accounts in the consolidated statements of financial position.

Assets Held for SaleNoncurrent assets, or disposal groups comprising assets and liabilities, are classified as held for sale if their carrying amount will be recovered primarily through sale rather than through continuing use.

The assets or disposal groups are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or biological assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the consolidated statements of income. Gains are not recognized in excess of any cumulative impairment losses.

The criteria for held for sale is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the sale will be withdrawn.

Property and equipment once classified as held for sale are not amortized or depreciated. In addition, equity accounting of equity accounted investees ceases once classified as held for sale.

Assets and liabilities classified as held for sale are presented separately as current items in the consolidated statements of financial position.

Related PartiesParties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. Transactions between related parties are on an arm’s length basis in a manner similar to transactions with non-related parties.

Basic and Diluted Earnings Per Common Share (EPS)Basic EPS is computed by dividing the net income for the period attributable to equity holders of the Parent Company, net of distributions to the holders of USCS, by the weighted average number of issued and outstanding common shares during the period, with retroactive adjustment for any stock dividends declared.

Diluted EPS is computed in the same manner, adjusted for the effect of all potential dilutive debt or equity instruments.

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As of December 31, 2017, 2016 and 2015, the Group has no dilutive equityinstruments as disclosed in Note 29 to the consolidated financial statements.

Operating SegmentsThe Group’s operating segments are organized and managed separately according to the services provided, with each segment representing a strategic business unit that offers different economic characteristic and activities. Financial Information on operating segments is presented in Note 5 to the consolidated financial statements. The Chief Executive Officer (the chief operating decision maker; CODM) reviews management reports on a regular basis.

The measurement policies the Group used for segment reporting under PFRS 8 are the same as those used in the consolidated financial statements. There have been no changes in the measurement methods used to determine reported segment profit or loss from prior periods. All inter-segment transfers are carried out at arm’s length prices.

Segment revenues, expenses and performance include sales and purchases between business segments. Such sales and purchases are eliminated in consolidation.

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

Events After the Reporting DatePost year-end events that provide additional information about the Group’s financial position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

4. Use of Judgments, Estimates and Assumptions

The preparation of the consolidated financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income andexpenses reported in the consolidated financial statements at the reporting date. However, uncertainty about these judgments, estimates and assumptions could result in an outcome that could require a material adjustment to the carrying amount of the affected asset or liability in the future.

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. Revisions are recognized in the period in which the judgments and estimates are revised and in any future period affected.

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JudgmentsIn the process of applying the accounting policies, the Group has made the following judgments, apart from those involving estimations, which have an effect on the amounts recognized in the consolidated financial statements:

Finance Lease - Group as Lessee. The Independent Power Producer Administration (IPPA) Agreements with the Power Sector Assets and Liabilities Management Corporation (PSALM) provide the Group with a right to receive a transfer of the power plant upon termination of the IPPA Agreement at the end of the cooperation period or in case of buy-out. In accounting for the Group’s IPPA Agreements, the Group’s management has made a judgment that the IPPA Agreements areagreements that contain a lease.

The Group’s management has also made a judgment that it has substantially acquired all the risks and rewards incidental to the ownership of the power plants. Accordingly, the Group accounted for the agreements as a finance lease and recognized the power plants and finance lease liabilities at the present value of the agreed monthly payments to PSALM (Notes 6 and 13).

Finance lease liabilities recognized in the consolidated statements of financial position amounted to P154,793,690 and P170,089,536 as of December 31, 2017 and 2016, respectively (Notes 6, 30 and 31).

The combined carrying amounts of power plants under finance lease amounted toP172,573,492 and P177,759,894 as of December 31, 2017 and 2016, respectively (Note 13).

Operating Lease Commitments - Group as Lessor/Lessee. The Group has entered into various lease agreements either as a lessor or a lessee. The Group haddetermined that it retains all the significant risks and rewards of ownership of the property leased out on operating leases while the significant risks and rewards for property leased from third parties and related parties are retained by the lessors (Note 6).

Rent income recognized in the consolidated statements of income amounted toP10,686, P21,147 and P28,104 in 2017, 2016 and 2015, respectively (Notes 6and 26).

Rent expense recognized in the consolidated statements of income amounted to P376,499, P351,091 and P360,091 in 2017, 2016 and 2015, respectively (Notes 6and 25).

Applicability of Philippine Interpretation IFRIC 12. In accounting for the Group’s transactions in connection with its Concession Agreement with ALECO, significant judgment was applied to determine the most appropriate accounting policy to use.

Management used Philippine Interpretation IFRIC 12 as guide and determined that the Concession Agreement is within the scope of the Interpretation. Management determined that the consideration receivable, in exchange for the fulfillment of the Group’s obligation under the Concession Agreement, is an intangible asset in the form of a right (license) to charge fees to users. Judgment was further exercised by management in determining the costs components of acquiring the right (Notes 3, 6and 15).

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Power Concession Right. The Group’s power concession right represents the right to operate and maintain the franchise of ALECO; i.e., the right to collect electricity fees from the consumers of ALECO. At the end of the concession period, all assets and improvements shall be returned to ALECO and any additions and improvements to the system shall be transferred to ALECO.

Difference in judgment in respect to the accounting treatment of the transactions would materially affect the assets, liabilities and operating results of the Group.

Classification of Joint Arrangements. The Group has determined that it has rights only to the net assets of the joint arrangements based on the structure, legal form, contractual terms, and other facts and circumstances of the arrangement. As such, the Group classified its joint arrangements in Angat Hydropower Corporation (AHC)and KWPP Holdings Corporation (KWPP) as joint venture (Note 12).

Adequacy of Tax Liabilities. The Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretation of tax laws and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.

Classifying Financial Instruments. The Group exercises judgments in classifying a financial instrument, or its component parts, on initial recognition as a financial asset, a financial liability, or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset or liability. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated statements of financial position.

Contingencies. The Group is currently involved in various pending claims and caseswhich could be decided in favor of or against the Group. The Group’s estimate of the probable costs for the resolution of these pending claims and cases has been developed in consultation with in-house as well as outside legal counsel handling the prosecution and defense of these matters and is based on an analysis of potential results. The Group currently does not believe that these pending claims and caseswill have a material adverse effect on its financial position and financial performance. It is possible, however, that future financial performance could be materially affected by the changes in the estimates or in the effectiveness of strategies relating to these proceedings (Note 33).

Estimates and AssumptionsThe key estimates and assumptions used in the consolidated financial statements are based upon the Group’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

Fair Value Measurements. A number of the Group’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities.

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The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has the overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information is used to measure fair values, then the valuation team assesses the evidence obtained to support the conclusion that such valuations meet the requirements of PFRS, including the level in the fair value hierarchy in which such valuations should be classified.

The Group uses market observable data when measuring the fair value of an asset or liability. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques (Note 3).

If the inputs used to measure the fair value of an asset or a liability can becategorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy based on the lowest level input that is significant to the entire measurement.

The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

The methods and assumptions used to estimate the fair values for both financial andnon-financial assets and liabilities are discussed in Note 31.

Allowance for Impairment Losses on Trade and Other Receivables. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Group evaluates these accounts on the basis of factors that affect the collectability of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the customers and counterparties, the current credit status based on third party credit reports and known market forces, average age of accounts, collection experience and historical loss experience. The amount and timing of the recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in the allowance for impairment losses would increase the recorded selling and administrative expenses and decrease current assets.

The allowance for impairment losses on trade and other receivables amounted to P2,451,818 as of December 31, 2017 and 2016. The carrying amount of trade and other receivables amounted to P20,435,068 and P22,342,846 as ofDecember 31, 2017 and 2016, respectively (Note 8).

Write-down of Inventory. The Group writes-down the cost of inventory to net realizable value whenever net realizable value becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes.

Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the inventories are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the reporting date to the extent that such events confirm conditions existing at the reporting date.

The Group assessed that no write-down of inventories to net realizable value is necessary as of December 31, 2017 and 2016.

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The carrying amount of inventories amounted to P3,147,668 and P2,272,289 as ofDecember 31, 2017 and 2016, respectively (Note 9).

Estimated Useful Lives of Property, Plant and Equipment. The Group estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets.

In addition, estimation of the useful lives of property, plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future financial performance could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property, plant and equipment would increase the recorded cost of power sold and selling and administrative expenses and decrease noncurrent assets.

Property, plant and equipment, net of accumulated depreciation and amortization,amounted to P250,961,307 and P246,488,027 as of December 31, 2017 and 2016, respectively. Accumulated depreciation and amortization of property, plant and equipment amounted to P42,776,912 and P36,822,438 as of December 31, 2017 and 2016, respectively (Note 13).

Estimating Coal Reserves. Coal reserve estimates are based on measurements and geological interpretation obtained from natural outcrops, trenches, tunnels and drillholes. In contrast with “coal resource” estimates, profitability of mining the coal during a defined operating period or “mine-life” is a necessary attribute of “coal reserve”. Proven reserves estimates are attributed to future development projects only where there is a significant commitment to project funding and execution and for which applicable governmental and regulatory approvals have been secured or are reasonably certain to be secured. All proven reserve estimates are subject to revision, either upward or downward, based on new information, such as from block grading and production activities or from changes in economic factors, including product prices, contract terms or development plans. Estimates of reserves for undeveloped areas are subject to greater uncertainty over their future life than estimates of reserves for areas that are substantially developed and depleted.

The Philippine Department of Energy (DOE) is the government agency authorized to implement coal operating contracts (COC) and regulate the operation of contractors pursuant to DOE Circular No. 81-11-10: Guidelines for Coal Operations in the Philippines. For the purpose of the 5-year development and production program required for each COC, the agency classifies coal reserves, according to increasing degree of uncertainty, into (i) positive, (ii) probable, and (iii) inferred. The DOE alsoprescribes the use of “total in-situ reserves” as the sum of positive reserves and 2/3 of probable reserve; and “mineable reserve” as 60% of total in-situ reserve for underground, and 85% for surface (including open-pit) coal mines (Note 14).

Recoverability of Deferred Exploration and Development Costs. A valuation allowance is provided for estimated unrecoverable deferred exploration and development costs based on the Group's assessment of the future prospects of the mining properties, which are primarily dependent on the presence of economically recoverable reserves in those properties.

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The Group’s mining activities remain in the preparatory stages as of December 31, 2017. All related costs and expenses from the mining activities are currently deferred as exploration and development costs, which will be amortized upon commencement of commercial operations. The Group has not identified any facts and circumstances which suggest that the carrying amount of the deferred exploration and development costs exceeded the recoverable amounts as of December 31, 2017 and 2016.

Deferred exploration and development costs amounted to P699,001 and P693,379as of December 31, 2017 and 2016, respectively (Note 14).

Estimated Useful Lives of Intangible Assets. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or an indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group.

The Group estimates the useful life of intangible assets with finite useful life based on the period over which the asset are expected to be available for use. The estimated useful life of intangible asset with finite useful life is reviewed periodically and is updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets.

In addition, estimation of the useful life of intangible assets with finite useful life is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future financial performance could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful life of intangible assets with finite useful life would increase recorded cost and expenses and decrease noncurrent assets.

There is no change in estimated useful lives of property, plant and equipment, intangible assets with finite useful lives and investment property based on management’s review at the reporting date.

Intangible assets with finite useful lives such as mining rights and computer software and licenses amounted to P1,803,386 and P1,874,279 as of December 31, 2017 and 2016, respectively (Note 15).

Intangible assets with indefinite useful life amounted to P8,866 as of December 31, 2017 and 2016 (Note 15).

Estimated Useful Lives of Intangible Assets - Power Concession Right. The Group estimates the useful life of power concession right based on the period over which the assets are expected to be available for use. The Group has not included any renewal period on the basis of uncertainty of the probability of securing renewal contract at the end of the original contract term as of the reporting date.

The amortization period and method are reviewed when there are changes in the expected term of the contract or the expected pattern of consumption of future economic benefits embodied in the asset.

The carrying amount of power concession right amounted to P781,884 and P688,974 as of December 31, 2017 and 2016, respectively (Notes 6 and 15).

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Impairment of Goodwill. The Group determines whether the goodwill acquired in business combination is impaired at least annually. This requires the estimation of value in use of the cash-generating units to which the goodwill is allocated. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash-generating unit and to choose a suitable discount rate to calculate the present value of those cash flows.

The carrying amount of goodwill amounted to P8,866 as of December 31, 2017 and 2016 (Note 15).

Acquisition Accounting. At the time of acquisition, the Group considers whether the acquisition represents an acquisition of a business or a group of assets. The Group accounts for an acquisition as a business combination if it acquires an integrated set of business processes in addition to the group of assets acquired.

The Group accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and the liabilities assumed are recognized at the date of acquisition based on their respective fair values.

The application of the acquisition method requires certain estimates and assumptions concerning the determination of the fair values of acquired intangible assets and property, plant and equipment as well as liabilities assumed at the acquisition date. Moreover, the useful lives of the acquired intangible assets and property, plant and equipment have to be determined. Accordingly, for significant acquisitions, the Group obtains assistance from valuation specialists. The valuations are based on information available at the acquisition date.

The carrying amount of goodwill and mining rights as a result of the business combination amounted to P8,866 and P1,719,726, respectively, as of December 31, 2017 and 2016 (Note 15).

Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Group’s assessment on the recognition of deferred tax assets on deductible temporary differences and carryforward benefits of MCIT and NOLCO is based on the projected taxable income in the following periods.

Deferred tax assets arising from MCIT and NOLCO have not been recognized because the management believes that it is not probable that future taxable income will be available against which the Group can utilize the benefits therefrom (Note 27).

Deferred tax assets from temporary differences amounted to P1,316,926 andP2,955,570 as of December 31, 2017 and 2016, respectively (Note 27).

Impairment of Non-financial Assets. PFRS requires that an impairment review be performed on investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Determining the recoverable amounts of these assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the financial performance.

F-176

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The Group assessed that its non-financial assets are not impaired as of December 31, 2017 and 2016.

The combined carrying amounts of investments and advances, property, plant and equipment, deferred exploration and development costs and intangible assets with finite useful lives amounted to P270,866,709 and P265,990,113 as ofDecember 31, 2017 and 2016, respectively (Notes 12, 13, 14 and 15).

Present Value of Defined Benefit Retirement Obligation. The present value of the defined benefit retirement obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. These assumptions are described in Note 21 to the consolidated financial statements and include discount rate and salary increase rate.

The Group determines the appropriate discount rate at the end of each reporting period. It is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the retirement obligations. In determining the appropriate discount rate, the Group considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid. The terms to maturity of these bonds should approximate the terms of the related retirement obligation.

Other key assumptions for the defined benefit retirement obligation are based in part on current market conditions.

While it is believed that the Group’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group’s defined benefit retirement obligation.

The present value of defined benefit retirement obligation amounted to P78,104 and P69,364 as of December 31, 2017 and 2016, respectively (Note 21).

ARO. Determining ARO requires estimation of the costs of dismantling and restoring leased properties to their original condition. The Group recognizes an obligation to retire the power plants of SMCPC and SCPC at the end of their respective lease term or operating life, whichever comes earlier. This represents the best estimate of the expenditures required to settle the present obligation, as adjusted for the effects of inflation, at the end of the current reporting date. Such cost estimates, expressed at current price levels at the date of the estimate, are discounted using the credit-adjusted risk-free rate of 8.371% at reporting date to take into account the timing of payments. Changes in ARO that result from a change in the current best estimate of cash flows required to settle the obligation or a change in the discount rate are added to or deducted from the amount recognized in the related asset.

While the Group has made its best estimate in establishing the asset retirementobligation, because of potential changes in technology as well as safety and environmental requirements, plus the actual time scale to complete the retirementactivities, the ultimate provision requirements could either increase or decrease significantly from the Group’s current estimates.

The Group’s ARO presented under “Other noncurrent liabilities” account in the consolidated statements of financial position amounted to P157,632 as at December 31, 2017.

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5. Segment Information

Operating SegmentsThe Group’s operations are segmented into four businesses: a) power generation, b) retail and other power-related services, c) coal mining and d) others consistent with the reports prepared internally for use by the Group’s CODM in reviewing the business performance of the operating segments. The differing economiccharacteristics and activities of these power plants make it more useful to users of the consolidated financial statements to have information about each component of the Group’s profit or loss, assets and liabilities.

The coal mining companies, which were acquired in 2010, have not yet started commercial operations and remain in the preparatory stages of mining activities (Note 14). The mining companies’ total assets do not exceed 10% of the combined assets of all operating segments. Accordingly, management believes that as of December 31, 2017 and 2016, the information about this component of the Group would not be useful to the users of the consolidated financial statements.

Segment Assets and LiabilitiesSegment assets include all operating assets used by a segment except investments and advances, intangible assets and goodwill and deferred tax assets. Segment liabilities include all operating liabilities except long-term debt, deferred tax liabilities and income tax payable. Capital expenditures consist of additions to property, plant and equipment of each reportable segment.

Inter-segment TransactionsThe Group’s inter-segment sales are accounted for based on contracts entered into by the parties and are eliminated in the consolidation. Transfer prices between operating segments are set on an arm's length basis in a manner similar to transactions with third parties. Such transactions are eliminated in consolidation.

The Group operates only in the Philippines which is treated as a single geographical segment.

Major CustomersThe Group sells, retails and distributes power, through power supply agreements, retail supply contracts, concession agreement and other power-related service agreements (Note 6), either directly to customers (other generators, distribution utilities, electric cooperatives and industrial customers) or through the Philippine Wholesale Electricity Spot Market (WESM). Sale, retail and/or distribution of power to individual external customers that represents 10% or more of the Group’s total revenues is as follows:

2017 2016 2015Manila Electric Company (Meralco) P43,404,148 P39,565,977 P40,889,098WESM 4,467,399 4,153,980 6,217,243

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F-180

- 42 -

6. Significant Agreements and Lease Commitments

a. Independent Power Producer (IPP) Administration (IPPA) Agreements

As a result of the biddings conducted by PSALM for the Appointment of the IPP Administrator for the capacity of the following power plants, the Group was declared the winning bidder to act as IPP Administrator through the following appointed subsidiaries:

Subsidiary Power Plant LocationSMEC Sual Coal - Fired Power Station

(Sual Power Plant)Sual, Pangasinan

ProvinceSPDC San Roque Hydroelectric Multi-purpose

Power Plant (San Roque Power Plant)San Roque,

Pangasinan Province

SPPC Ilijan Natural Gas - Fired Combined Cycle Power Plant (Ilijan Power Plant)

Ilijan, Batangas Province

The IPPA Agreements are with the conformity of the National Power Corporation (NPC), a government-owned and controlled corporation created by virtue of Republic Act (RA) No. 6395, as amended, whereby NPC confirms, acknowledges, approves and agrees to the terms of the IPPA Agreements and further confirms that for so long as it remains the counterparty of the IPP, it will comply with its obligations and exercise its rights and remedies under the original agreement with the IPP at the request and instruction of PSALM.

The IPPA Agreements include, among others, the following common salient rights and obligations:

i. the right and obligation to manage and control the capacity of the power plant for its own account and at its own cost and risks;

ii. the right to trade, sell or otherwise deal with the capacity (whether pursuant to the spot market, bilateral contracts with third parties or otherwise) and contract for or offer related ancillary services, in all cases for its own account and at its own cost and risks. Such rights shall carry the rights to receive revenues arising from such activities without obligation to account therefore to PSALM or any third party;

iii. the right to receive a transfer of the power plant upon termination of the IPPA Agreement at the end of the cooperation period or in case of buy-out;

iv. for SMEC and SPPC, the right to receive an assignment of NPC’s interest inexisting short-term bilateral power supply contracts;

v. the obligation to supply and deliver, at its own cost, fuel required by the IPP and necessary for the Sual Power Plant to generate the electricity required to be produced by the IPP;

vi. maintain the performance bond in full force and effect with a qualified bank; and

vii. the obligation to pay PSALM the monthly payments and energy fees in respect of all electricity generated from the capacity, net of outages.

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Relative to the IPPA Agreements, SMEC, SPDC and SPPC have to pay PSALM monthly payments for 15 years until October 1, 2024, 18 years until April 26, 2028 and 12 years until June 26, 2022, respectively. Energy fees amounted to P23,726,459, P20,477,903 and P23,224,178 in 2017, 2016 and 2015, respectively (Note 24). SMEC and SPDC renewed their performance bonds in United States dollar (US$) amounting to US$58,187 and US$20,305which will expire on November 3, 2018 and January 25, 2018, respectively.Subsequently, the performance bond of SPDC was renewed up to January 25,2019.

On June 16, 2015, SPPC renewed its performance bond amounting to US$60,000 with a validity period of one year. This performance bond was subsequently drawn by PSALM on September 4, 2015 which is subject to an ongoing case (Note 33).

The finance lease liabilities are carried at amortized cost using the US dollar and Philippine peso discount rates as follows:

US Dollar Philippine PesoSMEC 3.89% 8.16%SPPC 3.85% 8.05%SPDC 3.30% 7.90%

The discount determined at inception of the agreement is amortized over the period of the IPPA Agreement and recognized as part of “Interest expense and other financing charges” account in the consolidated statements of income.Interest expense amounted to P9,074,226, P9,667,662 and P10,212,753 in 2017, 2016 and 2015, respectively.

The future minimum lease payments for each of the following periods are as follows:

2017 US Dollar

PesoEquivalent

of US Dollar Peso TotalNot later than 1 year US$255,784 P12,771,279 P12,249,270 P25,020,549More than 1 year and not later

than 5 years 1,114,370 55,640,495 53,374,792 109,015,287Later than 5 years 567,483 28,334,431 27,214,567 55,548,998

1,937,637 96,746,205 92,838,629 189,584,834Less: Future finance charges



2016 US Dollar

PesoEquivalent

of US Dollar Peso TotalNot later than 1 year US$252,950 P12,576,692 P12,112,310 P24,689,002More than 1 year and not later

than 5 years 1,117,374 55,555,827 53,512,338 109,068,165Later than 5 years 820,263 40,783,474 39,326,292 80,109,766

2,190,587 108,915,993 104,950,940 213,866,933Less: Future finance charges



F-182

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The present values of minimum lease payments for each of the following periods are as follows:

2017 US Dollar

Peso Equivalent

of US Dollar Peso TotalNot later than 1 year US$196,709 P9,821,652 P7,022,779 P16,844,431More than 1 year

and not later than5 years 963,978 48,131,431 39,493,581 87,625,012

Later than 5 years 532,936 26,609,498 23,714,749 50,324,247US$1,693,623 P84,562,581 P70,231,109 P154,793,690

2016 US Dollar

Peso Equivalent

of US Dollar Peso TotalNot later than 1 year US$191,961 P9,544,293 P6,799,953 P16,344,246More than 1 year

and not later than 5 years 770,562 38,312,364 24,671,265 62,983,629

Later than 5 years 917,848 45,635,397 45,126,264 90,761,661US$1,880,371 P93,492,054 P76,597,482 P170,089,536

b. Market Participation Agreements (MPA)

SMEC, SPDC, SPPC and SCPC entered into a MPA with the Philippine Electricity Market Corporation (PEMC) to satisfy the conditions contained in the Philippine WESM Rules on WESM membership and to set forth the rights and obligations of a WESM member. Under the WESM Rules, the cost of administering and operating the WESM shall be recovered through a charge imposed on all WESM members or transactions, as approved by the ERC.PEMC’s market fees charged to SMEC, SPDC, SPPC and SCPC recognized in the consolidated statements of income amounted to P146,550, P160,669 and P219,681 in 2017, 2016 and 2015, respectively (Note 25).

Market fees charged to SCPC during its testing and commissioning phase, recognized as part of CPIP under the “Property, plant and equipment” account in the consolidated statements of financial position, amounted to P531 as of December 31, 2016 (Note 13).

In March 2013, SMELC entered into a MPA for Supplier as Direct WESMMember - Customer Trading Participant Category with the PEMC to satisfy the conditions contained in the Philippine WESM Rules on WESM membership and to set forth the rights and obligations of a WESM member. SMELC has a standby letter of credit, expiring on December 26, 2018, to secure the full and prompt performance of obligations for its transactions as a Direct Member and trading participant in the WESM.

c. Power Supply Agreements (PSA)

SMEC, SPPC, SPDC, SMCPC and SCPC have PSA with various counterparties, including related parties, to sell electricity produced by the power plants. Most of the agreements provide for renewals or extensions subject to mutually agreed terms and conditions by the parties and applicable rules and regulations.

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Certain customers, particularly electric cooperatives and industrial customers, are billed using energy-based pricing, such as time-of-use (TOU), flat generation rate or fixed energy rate, while others are billed at capacity-based rate. As stipulated in the contracts, each energy-based customer has to pay based on actual energy consumption using the basic energy charge and/or adjustments.For capacity-based contracts, the customers are charged with the capacity fees based on the contracted capacity plus the energy fees for the associated energy taken during the month.

SMEC, SPPC, SPDC, SMCPC and SCPC can also purchase power from WESM and other power generation companies during periods when the power generated from the power plants is not sufficient to meet customers’ power requirements. Power purchases amounted to P10,725,490, P7,836,564 and P8,330,550 in 2017, 2016 and 2015, respectively (Note 24).

The PSA of SPI with Petron Corporation (Petron), an entity under common control, was terminated effective December 23, 2016 pursuant to the sale of SPI’s power plant to Petron (Note 13).

d. Memorandum of Agreement (MOA) with San Roque Power Corporation (SRPC)

On December 6, 2012, SPDC entered into a 5-year MOA with SRPC to sell a portion of the capacity of the San Roque Power Plant. Under the MOA, i) SRPC shall purchase a portion of the capacity sourced from the San Roque Power Plant; ii) SRPC shall pay a settlement amount to SPDC for the capacity; and iii) the MOA may be earlier terminated or extended subject to terms and mutual agreement of the parties. As of December 31, 2017, SPDC and SRPC are finalizing the extension of the MOA until March 25, 2020.

Revenue from sale of capacity of the San Roque Power Plant amounted to P944,139, P758,134 and P1,274,893 in 2017, 2016 and 2015, respectively, and was recognized as part of “Revenues” account in the consolidated statements of income (Note 23).

e. Coal Supply Agreements

SMEC, SMCPC and SCPC have supply agreements with various coal suppliers for the coal requirements of the power plants.

f. Operations and Maintenance (O&M) Services Agreement

In exchange for the O&M services rendered by Petron, SPI pays for all the documented costs and expenses incurred in relation to the operation, maintenance and repair of its 4 x 35 MW Limay Co-generation Solid Fuel-fired Power Plant (Limay Co-gen Power Plant). The agreement is effective for 25 years from September 2013 until 2038 and was terminated upon sale of SPI’spower plant to Petron on December 23, 2016 (Note 13).

g. Retail Supply Contracts

SMELC and SCPC have retail supply contracts with contestable customers, including related parties, to supply or sell electricity either produced by SCPC orpurchased from WESM, SMEC or other affiliate power generators. Most contracts provide for renewals or extensions subject to terms and conditionsmutually agreed upon by the parties and applicable rules and regulations.

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Certain contestable customers are billed using energy-based pricing, such as TOU, flat generation rate or fixed energy rate, while others are billed at capacity-based rates. As stipulated in the contracts, each energy-based customer has to pay based on actual energy consumption using the basic energy charge and/or adjustments. For capacity-based contracts, the customers are charged with the capacity fees based on the contracted capacity plus the energy fees for the associated energy taken during the month.

h. Distribution Wheeling Service (DWS) Agreements

SMELC and SCPC, related to its Retail Electricity Supplier (RES) licenses,entered into DWS Agreements with certain Distribution Utilities (DU) for the conveyance of electricity through its distribution systems in order to meet the demand of the contestable customers. The agreements are valid and binding upon execution unless terminated by either party.

The DWS charges from the DUs are passed on to its customers as mandated by ERC thru the “Single-Billing Policy”.

i. Lease Agreements

Group as Lessee

i. The Group has operating lease agreements with San Miguel Properties, Inc., an entity under common control, for a period of 1 to 6 years which isrenewable annually or upon agreement between parties.

ii. SPI subleases its plant premises from New Ventures Realty Corporation (NVRC), an entity under common control. The existing lease agreement is for a 25-year period up to September 30, 2038, subject to renewal. The yearly rental is subject to an automatic 3.0% per annum escalation rate for the 4 years following the negotiation under the lease terms. Pursuant to the sale of power plant to Petron, all agreements between SPI and Petron and its subsidiaries were terminated effective December 23, 2016.

iii. SMEC entered into a lease agreement with Challenger Aero Air Corporation (Challenger), an entity under common control, for the lease of certain aircrafts for a period of 1 year from October 1, 2014 to September 30, 2015.The lease agreement was pre-terminated on April 30, 2015.

Subsequently, SMEC entered into a new lease agreement with Challenger for the lease of the same aircrafts for a period of 1 year from May 1, 2015 toApril 30, 2016. The lease agreement was renewed up to December 31, 2017.

iv. In November 2015, SCPC leased parcels of land from NVRC for theconstruction of its 2 x 150 MW Circulating Fluidized Bed (CFB) Coal-fired Power Plant (Phase I Limay Power Plant) and ash dump facility. This is covered by two lease agreements, each having an initial term of 25 years with an option to renew for a further 25 years. The agreements contain a clause allowing annual escalation adjustments of rental rates starting on certain anniversary dates.

F-185

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v. On December 7, 2015, LPPC leased a parcel of land from NVRC for the construction of its 2 x 150 MW CFB Coal-fired Power Plant (Phase II Limay Power Plant) for a period of 25 years from the effective date with an option to renew this lease for another 25 years. The rent shall be increased annually by 6.0% starting from the second anniversary of the lease execution. The lease agreement was assigned to SCPC pursuant to the sale of the Phase II Limay Power Plant on June 22, 2017.

vi. DAMI leases a parcel of land in General Santos City with SMC. The existing lease agreement is for a 10-year period up to June 30, 2023, subject to renewal. The rent is subject to an automatic 10.0% per annum escalation rate. Rent for the year, capitalized in “Deferred exploration and development costs” account in the consolidated statements of financial position, amounted to P490 and P402 as of December 31, 2017 and 2016, respectively(Note 14).

vii. In 2016, SMCPC entered into an agreement with Kyron Landholdings Inc. for the sublease of a parcel of land for the construction, erection and installation of its 2 x 150 MW CFB Coal-fired Power Plant in Malita, Davao Occidental (Malita Power Plant). The initial term of the lease is for a period of 25 years with the option to renew for a further 25 years. Beginning January 1, 2018 until the end of the term, the rental shall be increased by 5.1% per annum.

viii. On December 13, 2017, SCPC leased a foreshore area of 465,967 square meters from the Department of Environment and Natural Resources for the construction of pier and jetty facility. The lease is for a period of 25 years with an option to renew for another 25 years. The agreement contains a clause to increase annual rental based on appraised value of land and improvements every 10 years.

Relative to the lease agreements, the Group was required to pay advance rental and security deposits which are included under “Trade and other receivables -net” or “Prepaid expenses and other current assets” accounts in the consolidated statements of financial position (Notes 8 and 10).

Future minimum lease payments under the non-cancellable operating lease agreements are as follows:

2017 2016Not later than 1 year P88,782 P119,335More than 1 year and not later than 5 years 357,321 244,067Later than 5 years 2,293,501 1,871,061

P2,739,604 P2,234,463

Rent expense recognized in the consolidated statements of income amounted to P376,499, P351,091 and P360,091 in 2017, 2016 and 2015, respectively (Notes 4 and 25).

Group as Lessor

i. In 2014, the Parent Company has an operating sub-lease agreement with Clariden Holdings, Inc., an entity under common control, for a period of 2 years which is renewable upon agreement between the parties. The agreement expired on December 31, 2016.

F-186

- 48 -

ii. In May 2011, GPII entered into an agreement with NVRC, for the lease of certain parcels of land located in Limay, Bataan with a total area of 612,193 square meters. The lease term is for a period of 10 years up to May 2021, with an option to renew not later than 6 months prior to expiration and a 3.0% escalation rate of the rental every year from signing of the contract. This Agreement was subsequently amended, reducing the leased area to 340,646 square meters effective October 1, 2013. This was further amended reducing the leased area to 130,980 square meters and with a corresponding reduction in the monthly rental effective on December 1, 2016. On June 20, 2017, NVRC assigned its leasehold rights to Petron.

There are no restrictions imposed on these lease agreements such as those concerning dividends, additional debt and further leasing.

Future minimum lease receivables under the non-cancellable operating lease agreements are as follows:

2017 2016Not later than 1 year P6,187 P6,007More than 1 year and not later than 5 years 15,705 21,892

P21,892 P27,899

Rent income recognized under the “Miscellaneous income (charges) - net”account in “Other income (charges)” account in the consolidated statements of income amounted to P10,686, P21,147, and P28,104 in 2017, 2016 and 2015,respectively (Notes 4 and 26).

j. Concession Agreement

The Parent Company entered into a 25-year Concession Agreement with ALECO on October 29, 2013. It became effective upon confirmation of the National Electrification Administration on November 7, 2013.

On January 24, 2014, the Parent Company and APEC entered into an Assignment Agreement whereby APEC assumed all the rights, interests and obligations of the Parent Company under the Concession Agreement effective January 2, 2014.

The Concession Agreement include, among others, the following rights and obligations:

i. as Concession Fee, APEC shall pay to ALECO: (1) separation pay of ALECO employees in accordance with the Concession Agreement and(2) the amount of P2,100 every quarter for the upkeep of residual ALECO(fixed concession fee);

ii. if the net cash flow of APEC is positive within 5 years or earlier from date of signing of the Concession Agreement, 50% of the Net Cash Flow each month shall be deposited in an escrow account until the cumulative nominal sum reaches P4,048,529;

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iii. on the 20th anniversary of the Concession Agreement, the concession period may be extended by mutual agreement between ALECO and APEC; and

iv. at the end of the concession period, all assets and system, as defined in the Concession Agreement, shall be returned by APEC to ALECO in good and usable condition. Additions and improvements to the system shall likewise be transferred to ALECO.

In this regard, APEC shall provide services within the franchise area and shall be allowed to collect fees and charges, as approved by the ERC. APEC formally assumed operations as concessionaire on February 26, 2014.

The Group recognized as intangible assets all costs directly related to theConcession Agreement. The intangible assets consist of: a) concession rights, which include fixed concession fees and separation pay of ALECO employees amounting to P384,317. Fixed concession fees are recognized at present value using the discount rate at the inception date with a corresponding concession payable recognized; and b) infrastructure, which includes the costs of structures and improvements, distribution system and equipment. Cost of infrastructure amounted to P509,419 and P386,083 as of December 31, 2017 and 2016, respectively. Interest expense on concession payable is included as part of“Interest expense and other financing charges” account in the consolidated statements of income amounted to P5,993, P6,127 and P6,254 in 2017, 2016 and 2015, respectively. Amortization of concession assets recognized in the“Depreciation and amortization” account in the consolidated statements of income amounted to P30,426, P25,060 and P21,296 in 2017, 2016 and 2015, respectively.

Maturities of the carrying amount of concession payable are as follows:

2017 2016Not later than 1 year P2,549 P2,407More than 1 year and not later than 5 years 11,794 11,136Later than 5 years 87,876 91,083

P102,219 P104,626

Power concession assets consist of:

Concession Rights

Completed Projects/Others

Asset Under Construction Total

CostJanuary 1, 2016 P384,317 P159,086 P - P543,403Additions - 72,824 154,173 226,997December 31, 2016 384,317 231,910 154,173 770,400Additions - 115,055 8,281 123,336December 31, 2017 384,317 346,965 162,454 893,736

Accumulated Depreciation and Amortization

January 1, 2016 28,184 7,722 - 35,906Additions 15,373 30,147 - 45,520December 31, 2016 43,557 37,869 - 81,426Additions 15,373 15,053 - 30,426December 31, 2017 58,930 52,922 - 111,852

Carrying AmountDecember 31, 2016 P340,760 P194,041 P154,173 P688,974

December 31, 2017 P325,387 P294,043 P162,454 P781,884

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The Group accounted for revenue and costs relating to construction or upgrade services in accordance with PAS 11 based on the stage of completion of work performed. The fair value of the construction and upgrade services provided is equal to the recorded cost of the intangible asset built up from day one until the construction activity ceases. Construction revenue and construction costamounted to P123,336, P226,997 and P47,091 in 2017, 2016 and 2015, respectively (Note 26).

7. Cash and Cash Equivalents

Cash and cash equivalents consist of:

Note 2017 2016Cash in banks and on hand P3,557,558 P2,089,297Short-term investments 25,097,801 19,402,088

30, 31 P28,655,359 P21,491,385

Cash in banks earn interest at bank deposit rates. Short-term investments include demand deposits which can be withdrawn at anytime depending on the immediate cash requirements of the Group and earn interest at short-term investment rates.Interest income from cash and cash equivalents amounted to P374,509, P176,681and P261,338 in 2017, 2016 and 2015, respectively.

8. Trade and Other Receivables

Trade and other receivables consist of:

Note 2017 2016Trade P14,332,102 P12,269,984Non-trade 6,674,594 6,613,459Amounts owed by related parties 6, 20 1,880,190 5,911,221

22,886,886 24,794,664Less allowance for impairment losses 4 2,451,818 2,451,818

30, 31 P20,435,068 P22,342,846

Trade and other receivables are non-interest bearing, unsecured and are generally on a 30-day term or an agreed collection period. The balance of trade receivables is inclusive of VAT on the sale of power collectible from customers.

The movements in the allowance for impairment losses are as follows:

2017 2016Balance at beginning of year P2,451,818 P1,241,487Impairment losses during the year - 1,210,451Amounts written-off - (120)Balance at end of year P2,451,818 P2,451,818

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Impairment losses are recognized in profit or loss as follows:

Note 2016 2015Selling and administrative expenses 25 P958,784 P142,658Other income (charges) - net 26 251,667 232,143

P1,210,451 P374,801

No impairment loss on trade and other receivables was recognized during the current year.

The aging of trade and other receivables as of December 31 are as follows:

2017 2016

Trade Non-trade

Amounts Owed by Related Parties Total Trade Non-trade

Amounts Owed by RelatedParties Total

Current P6,824,541 P647,896 P1,106,847 P8,579,284 P5,576,247 P1,031,133 P5,282,075 P11,889,455Past due:

1-30 days 934,933 68,034 161,730 1,164,697 671,466 73,200 8,900 753,56631-60 days 410,187 71,377 6,362 487,926 505,682 62,467 27,134 595,28361-90 days 184,690 1,001 2,414 188,105 201,448 10,207 31,563 243,218Over 90 days 5,977,751 5,886,286 602,837 12,466,874 5,315,141 5,436,452 561,549 11,313,142

P14,332,102 P6,674,594 P1,880,190 P22,886,886 P12,269,984 P6,613,459 P5,911,221 P24,794,664

Past due trade receivables more than 30 days pertain mainly to output VAT. The Group believes that the unimpaired amounts that are past due and those that are neither past due nor impaired are still collectible based on historical payment behavior and analyses of the underlying customer credit ratings. There are no significant changes in their credit quality. There were no write-offs and reversals in 2017.

Non-trade receivables include the following:

a. Due from PSALM amounting to US$60,000 which pertains to SPPC’s performance bond pursuant to the Ilijan IPPA Agreement that was drawn by PSALM on September 4, 2015. The validity of PSALM's action is the subject of an ongoing case filed by SPPC with the Regional Trial Court (RTC) of Mandaluyong City (Note 33).

b. As of December 31, 2017 and 2016, SMEC has receivables for the cost of fuel, market fees, and other charges related to the dispatch of the excess capacity of the Sual Power Plant amounting to P41,413 and P37,568, respectively. Likewise, SMEC has receivables arising from WESM transactions related to the excess capacity amounting to P1,198,200 and P1,245,819 as of December 31, 2017 and 2016, respectively. The issue on excess capacity is subject of ongoing cases (Note 33).

c. On June 16, 2011, SMEC entered into a MOA with Hardrock Coal Mining Pty Ltd. (HCML) and Caason Investments Pty Ltd. (Caason), companies registered in Australia, for the acquisition of shares in HCML. SMEC paid Caason Australian dollars 12,000 (equivalent to P550,000), for an option to subscribe to the shares in HCML (the Deposit) with further option for SMEC to decide not to pursue its investment in HCML, which will result in the return of the Deposit to SMEC plus interest. In a letter dated July 15, 2011, SMEC notified Caason and HCML that it shall not pursue the said investment and therefore asked Caason and HCML for the return of the Deposit with corresponding interest (the Amount Due), pursuant to the terms of the MOA.

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On September 2, 2014, SMEC, HCML and Caason agreed to a schedule of payment of the outstanding Amount Due to SMEC. For the years ended December 31, 2017 and 2016, HCML and Caason paid a total amount of P18,925 and nil, respectively. As of December 31, 2017 and 2016, total outstanding receivables from HCML (net of allowance for impairment losses)amounted to nil and P7,145, respectively.

d. The balance mainly pertains to receivables from customers which will be remitted to the Government upon collection.

9. Inventories

Inventories at cost consist of:

Note 2017 2016Coal 6 P2,910,853 P2,120,657Fuel oil 20 110,858 84,885Materials and supplies 96,793 53,322Other consumables 29,164 13,425

4 P3,147,668 P2,272,289

There were no inventory write-downs to net realizable value for the years ended December 31, 2017 and 2016. Inventories charged to cost of power sold amounted to P13,039,144, P10,046,687 and P10,376,590 in 2017, 2016 and 2015, respectively(Note 24).

10. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of:

Note 2017 2016Input VAT P11,792,871 P12,398,635Prepaid tax 4,883,278 3,735,642Prepaid rent and others 6, 20 1,115,766 1,548,743

P17,791,915 P17,683,020

Input VAT consists of input VAT on purchases of goods and services which can be offset against the output VAT payable (Note 18).

Prepaid tax consists of creditable withholding taxes and excess tax credits which can be used as a deduction against future income tax payable.

Prepaid rent and others pertain to the following:

a. Prepaid rent of the Group from various operating lease agreements amounted to P15,347 and P39,044 as of December 31, 2017 and 2016, respectively (Note 6).

b. PSALM monthly fee outage credits pertain to the approved reduction in future monthly fees payable to PSALM resulting from the outages of the Sual Power Plant in 2017 and 2016.

c. Professional services related to project financing of SCPC for 2016 (Note 19).

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11. Assets Held For Sale

On September 15, 2016, the BOD of SPI approved the plan to sell certain machinery and equipment. Accordingly, the carrying amount, which is the fair value, of the otherequipment amounting to P184,324 was reclassified as “Assets held for sale” account in the consolidated statements of financial position (Note 13). The sale of the machinery and equipment was completed in 2017.

12. Investments and Advances

Investments and advances consist of:

2017 2016Investments in Shares of Stock of Associates

and Joint VenturesCostBalance at beginning of year P8,583,462 P2,074,052Additions - 6,509,410Balance at end of year 8,583,462 8,583,462

Accumulated Equity in Net LossesBalance at beginning of year (886,959) (592,164)Equity in net losses during the year (28,302) (293,113)Adjustment to equity in net losses in prior year (a)(c) (12,094) (1,682)Balance at end of year (927,355) (886,959)

7,656,107 7,696,503Advances 8,965,024 8,548,951

P16,621,131 P16,245,454

Advances pertain to deposits made for future investment in land holding companies and power-related expansion projects.

The following are the developments relating to the Group’s investments in shares of stock of associates and joint ventures:

a. Investment in shares of stock of associates

i. Olongapo Electricity Distribution Company, Inc. (OEDC)

In April 2013, SPGC and San Miguel Equity Investments, Inc. (SMEII), an entity under common control, entered into a Deed of Assignment of Subscription Rights whereby SMEII agreed to assign 35% ownership interest in OEDC to SPGC for a consideration of P8,750.

Subscriptions payable amounted to P28,101 as of December 31, 2017 and 2016, respectively (Note 20).

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ii. Mariveles Power Generation Corporation (MPGC)

On June 16, 2016, Meralco Powergen Corporation (MGen), a subsidiary of Meralco, and Zygnet Prime Holdings, Inc. (Zygnet) subscribed to 2,500 and 102 common shares of MPGC, respectively. As a result, the Parent Company now holds 49% of the outstanding capital stock of MPGC while MGen and Zygnet holds 49% and 2%, respectively. MPGC was a wholly-owned subsidiary of the Parent Company prior to the subscription of MGen and Zygnet. Following the change in interest of ownership from 100% to 49% in MPGC, the Parent Company now has significant influence to participate in the financial and operating policy decisions of MPGC and accounts for the investment using the equity method.

MPGC shall develop, construct, finance, own, operate and maintain a 4 x150 MW CFB Coal-fired Power Plant and associated facilities in Mariveles, Bataan.

On July 13, 2016, the Parent Company subscribed to 9,643,200 shares, representing 49% of the total shares subscribed by all shareholders out of the increase in the authorized capital stock of MPGC, at the subscription price of P100 per share.

On January 9, 2017, the SEC approved the increase in the authorized capital stock of MPGC.

The table below summarizes the financial information of investment in shares of stock of associates which is accounted for using the equity method:

December 31, 2017 (Unaudited)

OEDC MPGCCountry of Incorporation Philippines PhilippinesCurrent assets P337,757 P122,044Noncurrent assets 1,175,089 1,846,654Current liabilities (687,732) (22,446)Noncurrent liabilities (354,211) -Net assets P470,903 P1,946,252


Net losses/total comprehensive losses P18,688 P10,208

Share in net losses/total comprehensive losses P6,541 P5,002

Carrying amount of investment P177,219(a) P953,717(a)This is net of adjustment to equity in net losses of P12,963 based on the 2016 audited balances.

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December 31, 2016 (Audited)

OEDC MPGCCountry of Incorporation Philippines PhilippinesCurrent assets P317,664 P18,620Noncurrent assets 1,181,537 1,945,960Current liabilities (881,709) (445)Noncurrent liabilities (127,901) -Net assets P489,591 P1,964,135


Net losses/total comprehensive losses P18,771 P4,334

Share in net losses/total comprehensive losses P6,570 P5,851(b)

Carrying amount of investment P196,723 P958,719(b)The Group’s share in net losses/ total comprehensive losses for the period from June 16, 2016 to

December 31, 2016 of MPGC.

b. Investments in shares of stock of joint ventures

i. AHC and KWPP

The Parent Company, through PVEI, and Korea Water Resources Corporation (K-Water) entered into a joint venture partnership for the acquisition, rehabilitation, operation and maintenance of the 218 MW Angat Hydroelectric Power Plant (Angat Power Plant) awarded by PSALM to K-Water.

On November 18, 2014, PVEI acquired from the individual stockholders andK-Water, 2,817,270 shares or 60% of the outstanding capital stock of AHCand from the individual stockholders, 75 shares representing 60% of KWPP outstanding capital stock.

Subsequently, AHC and KWPP each issued shares in favor of nominee directors of PVEI and K-Water to complete their respective shareholding interest.

In accordance with the entry of PVEI into AHC and KWPP, K-Water and PVEI are jointly in control of the management and operation of AHC and KWPP.

Further, PVEI agreed to pay K-Water a support fee amounting to 3.0% of the total amount of the bridge loan facility which was obtained for the acquisition by AHC of the Angat Power Plant. This was subsequently reduced to 1.5% of the total amount of the bridge loan facility effective August 4, 2015. The obligation to pay support fee terminated on July 15, 2016 with the refinancing of the bridge loan facility.

On July 11, 2016, PVEI, subscribed to 27,724,200 shares, out of the increase in the authorized capital stock of AHC, at the subscription price of P200 per share. Total subscription amounting to P5,544,840 represents PVEI’s 60% share in the additional equity infusion required by AHC from its existing stockholders as of date pursuant to AHC’s project financing requirements.

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AHCAHC was incorporated on November 15, 2013 and was created to engage in the operations and maintenance of the Angat Power Plant and to supply power generated to power corporations and to electric utilities, to import hydro-electric facilities and equipment, and to do all acts necessary and incidental thereto, in accordance with RA No. 9136 or otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA).

KWPPKWPP was incorporated on November 27, 2013 and was established for the purpose of acquiring, holding or leasing water and flowage rights.

The table below summarizes the financial information of investments in shares of stock of joint ventures which is accounted for using the equity method:

December 31, 2017 (Unaudited)

AHC KWPPCountry of Incorporation Philippines PhilippinesCurrent assets P2,873,159 P5,496Noncurrent assets 18,779,052 20,253Current liabilities (1,689,697) (8,837)Noncurrent liabilities (11,257,290) (15,850)Net assets P8,705,224 P1,062


Net losses/total comprehensive losses P27,918 P13

Share in net losses/total comprehensive losses P16,751 P8

Carrying amount of investment P6,524,310 P861(c)

(c)This is net of adjustment to equity in net income of P1,188 based on the 2016 audited balances, net of unrecognized share in net losses of P319 in 2015 and 2014.

December 31, 2016 (Audited)

AHC KWPPCountry of Incorporation Philippines PhilippinesCurrent assets P2,784,060 P3,962Noncurrent assets 19,302,652 20,391Current liabilities (13,333,995) (7,430)Noncurrent liabilities (19,576) (15,850)Net assets P8,733,141 P1,073


Net income (losses)/total comprehensive income (losses) (P489,424) P1,979

Share in net income (losses)/total comprehensive income (losses) (P293,655) P1,188

Carrying amount of investment P6,541,061 P -

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Investment in shares of stock of subsidiaries

The following are the developments relating to the subsidiaries:

i. SCPC

In 2013, SCPC started the construction of its Phase I Limay Power Plant (comprising of Units 1 and 2). The 2 Units were successfully synchronized to the Luzon Grid in November 2016 and May 2017, respectively.

On June 22, 2017, SCPC acquired the Phase II Limay Power Plant (comprising of Units 3 and 4) from LPPC. The Unit 3 was synchronized to the Luzon Grid in November 2017 while Unit 4 is still under construction as of December 31, 2017.

Commercial operations of Units 1 and 2 commenced on May 26, 2017 and September 26, 2017, respectively, following the completion of the testing and commissioning phase and the ERC issuance of a Provisional Authority to Operate in favor of SCPC for both units.

ii. SMCPC

In 2013, SMCPC started the construction of its Malita Power Plant. The 2 units were successfully synchronized to the Mindanao Grid in May 2016 and February 2017, respectively.

In 2017, SMCPC deferred the commercial operations of Unit 1 of the power plant until July 25, 2017 which was initially declared to commence on December 26, 2016. This is to conduct further testing of Unit 1 to ensure the stable and reliable operation and readiness of the power plant for its intended use. SMCPC’s Unit 1 started commercial operations on July 26, 2017.

On February 26, 2018, SMCPC declared the commercial operations of its Unit 2.

iii. SPI

In 2013, SPI acquired from Petron the 2 x 35 MW Limay Co-gen Power Plantand all other pertinent machineries, equipment, facilities and structures being constructed and installed which comprise the additional 2 x 35 MW Limay Co-gen Power Plant in Bataan.

On September 15, 2016, the BOD of the Parent Company and SPI approved the sale of its 4 x 35 MW Limay Co-gen Power Plant in favor of Petron.

SPI closed the sale of the power plant and all pertinent assets to Petron effective December 23, 2016.

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iv. PVEI

In January 2017, PVEI granted shareholder advances amounting to US$31,800 (equivalent to P1,578,870) to its joint venture company, AHC. The advances bear an annual interest rate of 4.50% and are due on April 30, 2017. The due date of the advances may be extended as agreed amongst the parties.

On April 10 and December 27, 2017 PVEI partially collected the foregoing advances amounting to US$19,703 (equivalent to P984,550). Payment date for the remaining balance of the advances amounting to US$12,097 (equivalent to P603,987) was extended to March 31, 2018 (Notes 20, 30 and 31).

On March 1, 2018, PVEI collected an additional US$5,766 (equivalent to P299,366) from AHC as partial payment of the advances.

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-

13.P

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Pro

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Impr

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a. The combined carrying amounts of power plants under finance lease amounted to P172,573,492 and P177,759,894 as of December 31, 2017 and 2016, respectively (Note 4).

b. The capitalized asset retirement costs, net of accumulated depreciation, amounted to P151,306 as of December 31, 2017.

c. On September 15, 2016, the BOD of the Parent Company and SPI approved the sale of its 4 x 35 MW Limay Co-gen Power Plant located in Petron Bataan Refinery in favor of Petron. Accordingly, the carrying amount of certain property, plant and equipment, amounting to P18,093,254 as of September 30, 2016 were reclassified to “Assets held for sale” account (Note 11). SPI recognized impairment loss of P323,788 at initial classification to measure its assets held for sale at lower of their carrying amount and fair value less costs to sell (Note 26).

On October 28, 2016, SPI signed an agreement with Petron for the sale of the power plant and all pertinent assets, assignment of contracts to Petron, and the transfer of all remaining inventories, tools, supplies and other working capital necessary for the operation and maintenance of the power plant, among others.

Effective December 23, 2016, SPI closed the sale of the power plant to Petron for a total consideration of P20,029,983 (inclusive of tax), payable based on the terms of the agreement. Consequently, gain of P114,447 was recognized on the sale and presented as part of “Gain on sale of property, plant and equipment”account in the consolidated statements of income.

As of December 31, 2016, SPI received P15,966,458 as initial payment, and the remaining P4,063,525 was collected in June 2017 (Notes 8 and 20).

Pursuant to the sale of the power plant, all SPI agreements mentioned in Note 6 were terminated effective December 23, 2016.

d. Other equipment includes machinery and equipment, transportation equipment, mining equipment, office equipment and furniture and fixtures.

e. Capital projects in progress pertains to the following:

i. Project of SMCPC for the construction of 2 x 150 MW (Units 1 and 2) Malita Power Plant.

Following the completion of Unit 1 and the ERC grant of a Provisional Authority to Operate in favor of SMCPC in October 2016, all CPIP costs pertaining to Unit 1 were reclassified to the appropriate property, plant and equipment account. As of December 31, 2017, CPIP pertains to costs of Unit 2 which is still in testing and commissioning phase.

ii. Projects of SCPC for the construction of 4 x 150MW (Phase I and II) Limay Power Plant.

Following the completion of Units 1 and 2 and the ERC grant of a Provisional Authority to Operate in favor of SCPC in 2017, all CPIP costs pertaining to Units 1 and 2 were reclassified to the appropriate property, plant and equipment account. As of December 31, 2017, CPIP pertains to costs of Unit 3 which started its testing and commissioning phase in November 2017, and the costs of the ongoing construction of Unit 4.

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iii. Plant optimization and pumped-storage hydropower projects of SPDC.

iv. Expenditures for the 500 kilovolts connection facilities in relation to the 600MW Pagbilao power plant project of CLPPC.

Depreciation and amortization related to property, plant and equipment arerecognized in profit or loss as follows:

Note 2017 2016 2015Cost of power sold 24 P5,811,941 P6,139,882 P6,445,102Selling and administrative

expenses 25 142,533 109,388 67,983P5,954,474 P6,249,270 P6,513,085

Total depreciation and amortization recognized in the consolidated statements of income include amortization of capitalized interest and decommissioning and dismantling costs amounting to P22,451, P10,020 and P13,360 in 2017, 2016 and 2015, respectively.

The Group has borrowing costs amounting to P1,362,871, P610,707 and P105,549which were capitalized in 2017, 2016 and 2015, respectively. The capitalization rates used to determine the amount of interest eligible for capitalization range from 2.75%to 6.54% and from 3.88% to 6.29% in 2017 and 2016, respectively. The unamortized capitalized borrowing costs amounted to P1,968,151 and P627,126 as ofDecember 31, 2017 and 2016, respectively (Note 19).

14. Deferred Exploration and Development Costs

The movement in deferred exploration and development costs is as follows:

Note 2017 2016Balance at beginning of year P693,379 P689,548Additions 5,622 3,831Balance at end of year 4 P699,001 P693,379

Deferred exploration and development costs comprise of expenditures which are directly attributable to the mining activities of DAMI, BERI and SEPC in relation to their respective COC.

In 2010, SMEC acquired DAMI, SEPC and BERI resulting in the recognition of mining rights of P1,719,726 (Notes 4 and 15).

DAMI’s coal property covered by COC No. 126, issued by the DOE, is located in South Cotabato consisting of 2 coal blocks with a total area of 2,000 hectares, more or less, and has an In-situ coal resources (measured plus indicated coal resources) of about 93 million metric tons as of December 31, 2017 and 2016.

SEPC has a coal mining property and right over an aggregate area of 7,000 hectares, more or less, composed of 7 coal blocks located in South Cotabato and Sultan Kudarat. As of December 31, 2017 and 2016, COC No. 134 has an In-situ coal resources (measured plus indicated coal resources) of about 35 million metric tons.

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BERI’s COC No. 138, issued by the DOE is located in Sarangani and South Cotabato consisting of 8 coal blocks with a total area of 8,000 hectares, more or less, and has an In-situ coal resources (measured plus indicated coal resources) of about 24 million metric tons as of December 31, 2017 and 2016.

Status of OperationsIn 2006 and 2009, the DOE approved the conversion of the COC for Exploration to COC for Development and Production of DAMI, SEPC and BERI effective on the following dates:

Subsidiary COC No. Effective Date Term*DAMI 126 November 19, 2006 20 yearsSEPC 134 February 23, 2009 10 yearsBERI 138 May 26, 2009 10 years

* The term is followed by another 10-year extension, and thereafter, renewable for a series of 3 year periods not exceeding 12 years under such terms and conditions as may be agreed upon with the DOE.

On April 27, 2012 and January 26, 2015, the DOE granted the requests by DAMI, SEPC and BERI, for a moratorium on suspension of the implementation of the production timetable as specified under their respective COCs. The request is in connection with a resolution passed by South Cotabato in 2010 prohibiting open-pit mining activities in the area. The moratorium was retrospectively effective from the dates of their respective COCs, when these were converted to Development and Production Phase, until December 31, 2016 or until the ban on open-pit mining pursuant to the Environment Code of South Cotabato has been lifted, whichever comes first. On February 1, 2017, the DOE granted another extension on the moratorium for the 3 COCs valid from January 1, 2017 to December 31, 2017. As of March 9, 2018, DAMI, SEPC and BERI are awaiting DOE’s approval of their requests for another extension on the moratorium filed on October 20, 2017.

As of December 31, 2017, the mining activities of DAMI, SEPC and BERI remain in the preparatory stages. All related costs and expenses from exploration are currently deferred as exploration and development costs and will be amortized upon commencement of their commercial operations.

Based on management’s assessment, there are no indicators that the carrying amount of the mining rights exceeds its recoverable amount as of December 31, 2017 and 2016.

15. Intangible Assets and Goodwill

Intangible assets and goodwill consist of:

Note 2017 2016Mining rights 4, 14 P1,719,726 P1,719,726Power concession assets - net 4, 6 781,884 688,974Computer software and licenses - net 4 83,660 154,553Goodwill 4 8,866 8,866

P2,594,136 P2,572,119

GoodwillIn November 2009 and March 2010, the Parent Company acquired 60% ownership interest in SMEC and SPDC, respectively. As a result of these transactions, the Parent Company recognized goodwill amounting to P8,349 and P517, respectively.

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Based on management’s assessment, goodwill is not impaired since the recoverable amount of the related net assets of SMEC and SPDC for which the goodwill was attributed still exceeds its carrying amount as of December 31, 2017 and 2016.

Computer Software and LicensesThe movements in computer software and licenses are as follows:

Note 2017 2016CostBalance at beginning of year P229,371 P184,377Additions 9,138 44,994Balance at end of year 238,509 229,371

Accumulated AmortizationBalance at beginning of year 74,818 7,217Amortization 25 80,031 67,601Balance at end of year 154,849 74,818

P83,660 P154,553

16. Other Noncurrent Assets

Other noncurrent assets consist of:

Note 2017 2016Restricted cash 30, 31 P5,578,357 P663,820Deferred input VAT - net of

current portion 2,081,126 84,876Amounts owed by related parties 20, 30, 31 199,610 227,394Derivative asset 20, 30, 31 61,903 -Noncurrent receivables 30, 31 29,488 44,681

P7,950,484 P1,020,771

Restricted cash comprises: (a) SCPC’s Cash Flow Waterfall accounts (Trust Fund) with a local Trust Company, as required in its Omnibus Loan and Security Agreement (OLSA), amounting to P4,805,175 as of December 31, 2017 (Note 19); (b) the amount received from PEMC totaling to P491,242 and P475,057 as of December 31, 2017 and 2016, respectively, representing the proceeds of sale on WESM for a specific period in 2016, for the electricity generated from the excess capacity of the Sual Power Plant, which SMEC consigned with the RTC of Pasig City (Note 33); and (c) APEC’s reinvestment fund for sustainable capital expenditures and contributions collected from customers for membership fees and bill deposits which are refundable amounting to P281,940 and P188,763 as of December 31, 2017 and 2016, respectively.

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Amounts owed by related parties mainly pertains to loan granted by SPGC to OEDC which is collectible in equal monthly payments of principal and interest, initially pegged at 4.73% and subject to change every 6 months. The equal monthly payments of OEDC shall be made on the first day of each month commencing in January 2017 until December 2024 (Note 20).

As of December 31, 2017, the deferred input VAT mainly pertains to the input VAT on the purchase of power plant from LPPC in June 2017 (Note 13).

17. Loans Payable

Loans payable represents unsecured peso-denominated short-term loan of SMCPC obtained on June 29, 2017 from a local financial institution. Interest rates for the loan ranged from 2.75% to 3.25% in 2017 (Notes 30 and 31).

Interest expense on loans payable amounted to P93,051 (inclusive of P55,371capitalized in CPIP, Note 13) for the year ended December 31, 2017.

18. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of:

Note 2017 2016Trade 6 P14,994,454 P11,914,211Non-trade 9,693,202 19,125,230Output VAT 5,140,417 5,569,399Amounts owed to related parties 20 541,428 633,436Accrued interest 6, 17, 19 427,469 283,724Withholding taxes 277,744 203,415

30, 31 P31,074,714 P37,729,415

Trade payables consist of payable related to energy fees, inventories and power purchases. These are generally on a 30-day term and are non-interest bearing.

Non-trade payables include liability relating to power rate adjustments, payables to contractors and other payables to the Government except output VAT and withholding taxes.

Output VAT consists of current and deferred output VAT payable. Deferred output VAT represents the VAT on sale of power which will be remitted to the Government only upon collection from the customers (Note 8).

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19. Long-term Debt

Long-term debt consists of:

Note 2017 2016BondsParent Company

Peso-denominatedFixed interest rate of 5.3750%, 6.2500%

and 6.6250% maturing in 2022, 2024 and2027, respectively (a) P19,784,249 P -

Fixed interest rate of 4.3458%, 4.7575% and 5.1792% maturing in 2021, 2023 and 2026, respectively (b) 14,865,330 14,842,563

34,649,579 14,842,563

Term LoansParent Company

Peso-denominatedFixed interest rate of 6.9265%, with

maturities up to 2024 (c) 14,856,835 -Foreign currency-denominated

Floating interest rate based on London Interbank Offered Rate (LIBOR) plus margin, maturing in 2018 (d) - 34,482,157

SubsidiaryPeso-denominated

Fixed interest rate of 6.2836% and 6.5362%with maturities up to 2029 (e) 41,222,287 -

Foreign currency-denominatedFloating interest rate based on LIBOR plus

margin, with maturities up to 2022 (f) - 16,999,00656,079,122 51,481,163

30, 31 90,728,701 66,323,726Less current maturities 1,139,631 1,040,690

P89,589,070 P65,283,036

a. The amount represents the first tranche of the Parent Company’s P35,000,000 fixed rate bonds shelf registration. The first tranche, with an aggregate principal amount of P20,000,000, were issued and listed in the Philippine Dealing and Exchange Corp. (PDEx) for trading on December 22, 2017 at the issue price of 100.00% of face value. It comes in three series, with terms and interest rates as follows:

TermInterest Rate Per Annum

Series D Bonds 5 years, due 2022 5.3750%Series E Bonds 7 years, due 2024 6.2500%Series F Bonds 10 years, due 2027 6.6250%

Interest on the Bonds shall be payable quarterly in arrears starting on March 22, 2018, for the first interest payment date, and June 22, September 22, December 22 and March 22 of each year thereafter.

Proceeds from the issuance were used by the Parent Company to refinance its P20,000,000 short-term loans obtained from local banks.

Unamortized debt issue costs amounted to P215,751 as of December 31, 2017.Accrued interest amounted to P23,536 as of December 31, 2017 and interest expense amounted to P29,420 in 2017.

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b. The amount represents issuance of the Parent Company of the fixed rate Philippine peso-denominated bonds with an aggregate principal amount of P15,000,000. The Bonds were issued and listed in the PDEx on July 11, 2016 at the issue price of 100.00% of face value in three series with terms and interest rates as follows:

TermInterest Rate Per Annum

Series A Bonds 5 years, due 2021 4.3458%Series B Bonds 7 years, due 2023 4.7575%Series C Bonds 10 years, due 2026 5.1792%

Interest is payable quarterly in arrears starting on October 11, 2016, for the first interest payment date, and January 11, April 11, July 11 and October 11 of each year thereafter.

The net proceeds were used on July 25, 2016 to refinance the US$300,000 short-term loan provided by a local bank of which the proceeds were used for the redemption of the US$300,000 bond in January 2016.

Unamortized debt issue costs amounted to P134,670 and P157,437 as of December 31, 2017 and 2016, respectively. Accrued interest amounted to P127,503 and P159,379 as of December 31, 2017 and 2016, respectively. Interest expense amounted to P708,349 and P336,466 in 2017 and 2016, respectively.

c. The amount represents the availment by the Parent Company of P15,000,000 fixed rate 7-year Term Loan Facility on April 26, 2017 from a local bank. Interest is payable quarterly in arrears on the last day of the agreed interest period.Principal repayment shall be in 13 semi-annual installments starting at the end of the first year from drawdown date. The proceeds were used to fund the payment of the remaining US$300,000 out of the US$700,000 term loan.

Unamortized debt issue costs amounted to P143,165 as of December 31, 2017. Accrued interest amounted to P186,669 as of December 31, 2017 and interest expense amounted to P455,995 in 2017.

d. The amount represents the Parent Company’s drawdown of US$500,000 from the US$650,000 5-year term loan Facility Agreement with a syndicate of banks signed on September 9, 2013. Subsequently, on November 15, 2013, the US$650,000 Facility Agreement was amended increasing the loan facility from US$650,000 to US$700,000. The proceeds were used by the Parent Company to refinance the US$200,000 3-year term loan and to finance new investments in power-related assets.

In March 2015, the Parent Company made the final drawdown of US$200,000 for the financing of ongoing construction of power plants in Malita, Davao and Limay, Bataan investments in power-related assets, and for general corporate purposes.

On March 31 and August 31, 2017, the Parent Company prepaid a total of US$400,000 (equivalent to P20,259,000) out of the US$700,000 term loan. The prepayments were funded by short-term loans availed in 2017 from local banks solely for this purpose.

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On April 26, 2017, the Parent Company prepaid the remaining US$300,000 (equivalent to P14,911,500), out of the US$700,000 term loan, by availing of a P15,000,000 fixed rate 7-year term loan from a local bank to minimize exposure to foreign exchange losses brought by the continuing peso depreciation against the US dollar.

Unamortized debt issue costs amounted to P321,843 as of December 31, 2016. Accrued interest amounted to P5,128 as of December 31, 2016 and interest expense amounted to P331,817, P921,882 and P734,255 in 2017, 2016 and 2015, respectively.

e. The amount represents the P42,000,000 drawn by SCPC on June 28, 2017 from a P44,000,000 12-year OLSA with a syndicate of banks that was signed on June 22, 2017. The proceeds were used by SCPC for the following purposes:

i. the settlement of the US$360,000 short-term loan availed on May 8, 2017 from a local bank;

ii. to fund the acquisition of the Phase II Limay Power Plant, under construction, from LPPC, and

iii. the repayment of advances by the Parent Company.

Unamortized debt issue costs amounted to P777,713 as of December 31, 2017. Accrued interest amounted to P17,948 as of December 31, 2017 and interest expense amounted to P1,390,948 in 2017 (inclusive of P872,289 capitalized in CPIP in 2017, Note 13).

On January 31, 2018, SCPC has drawn the remaining P2,000,000 of the P44,000,000 12-year OLSA.

f. The amount represents the US$400,000 loan facility entered into by SCPC on December 29, 2015. The loan is payable within 7 years up to 2022. Series of drawdowns were made in 2016 for a total of US$359,339 (equivalent to P17,866,304) which included an amount owed to a related party of P2,687,451. Proceeds of the loan were used to finance the construction of the Phase I Limay Power Plant.

On May 9, 2017, SCPC prepaid the US$359,339 term loan using the proceeds of a US$360,000 (equivalent to P17,949,600) short-term bridge financing loan availed from a local bank solely for this purpose.

Unamortized debt issue costs amounted to P867,298 as of December 31, 2016. Accrued interest amounted to P50,036 as of December 31, 2016. Interest expense amounted to P378,747 and P519,534 in 2017 and 2016, respectively, (inclusive of P354,731 and P519,534 capitalized in CPIP in 2017 and 2016, respectively, Note 13).

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Valuation Technique for peso-denominated BondsThe market value was determined using the market comparison technique. The fair values are based on PDEx. The Bonds are traded in an active market and the quotes reflect the actual transactions in identical instruments.

The fair value of the Bonds, amounting to P35,651,237 and P15,129,886 as ofDecember 31, 2017 and 2016, respectively, has been categorized as Level 1 in the fair value hierarchy based on the inputs used in the valuation techniques (Note 31).

The debt agreements of the Parent Company and SCPC impose a number of covenants including, but not limited to, maintenance of certain financial ratios throughout the duration of the term of the debt agreements. The terms and conditions of the debt agreements also contains negative pledge provision with certain limitations on the ability of the Parent Company and its material subsidiaries and SCPC to create or have outstanding any security interest upon or with respect to any of the present or future business, undertaking, assets or revenue (including any uncalled capital) of the Parent Company or any of its material subsidiaries and SCPC to secure any indebtedness, subject to certain exceptions.

The loan of SCPC is secured by real estate and chattel mortgages on all present and future assets and reserves of SCPC as well as a pledge by the Parent Company of all its outstanding shares of stock in SCPC.

As of December 31, 2017 and 2016, the Group is in compliance with the covenants of the debt agreements.

The movements in debt issue costs are as follows:

Note 2017 2016Balance at beginning of year P1,346,578 P685,839Additions 1,297,703 1,142,741Amortization (1,292,502) (369,403)Capitalized amount 13 (80,480) (112,599)Balance at end of year P1,271,299 P1,346,578

Repayment ScheduleThe annual maturities of the long-term debt are as follows:

Year Gross Amount Debt Issue Costs Net2018 P1,200,000 P60,369 P1,139,6312019 1,200,000 60,871 1,139,1292020 1,620,000 170,832 1,449,1682021 8,508,250 151,481 8,356,7692022 12,477,960 207,849 12,270,111

2023 and thereafter 66,993,790 619,897 66,373,893P92,000,000 P1,271,299 P90,728,701

Contractual terms of the Group’s interest bearing loans and borrowings and exposure to interest rate, foreign currency and liquidity risks are discussed in Note 30.

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20. Related Party Disclosures

The Group, in the normal course of business, purchases products and services from and sells products and renders services to related parties. Transactions with related parties are made at normal market prices and terms. Amounts owed by/owed to related parties are collectible/will be settled in cash. An assessment is undertaken at each financial year by examining the financial position of the related party and the market in which the related party operates.

The following are the transactions with related parties and the outstanding balancesas of December 31:

Note Year

Revenuesfrom

RelatedParties

Purchasesfrom

RelatedParties

AmountsOwed byRelatedParties

AmountsOwed toRelatedParties Terms Conditions

SMC 25 2017 P215,004 P664,262 P87,697 P9,273 On demand or Unsecured;2016 P - P660,590 P252 P6,201 30 days; no impairment

non-interestbearing

16 2017 - - 61,903 - More than 1 Unsecured;2016 - - - - year; no impairment

non-interestbearing

Entities 6, 8, 9, 18, 25 2017 2,365,748 1,134,950 741,814 484,482 On demand or Unsecured;Under 2016 10,248,500 3,300,854 1,589,923 562,408 30 days; no impairmentCommon non-interestControl bearing

8, 13 2017 - - - - 180 days; Unsecured;2016 17,883,913 - 4,063,525 - non-interest no impairment

bearing

Associates 8, 18 2017 902,864 - 98,556 29,643 30 days; Unsecured;2016 956,610 201 88,838 28,299 non-interest no impairment

bearing

16 2017 13,458 - 250,603 - 9 years; Unsecured;2016 12,929 - 254,827 - interest no impairment

bearing

Joint Venture 2017 24,183 416,058 1,937 18,522 On demand or Unsecured;2016 48,357 198,244 1,929 7,741 30 days; no impairment

non-interestbearing

2017 64,797 - 635,163 - 92 days; Unsecured;2016 - - - - interest bearing no impairment

Associates of 6, 8, 9 2017 850,515 23,880 133,236 - 30 days; Unsecured;Entities 2016 763,309 199,635 102,256 28,787 non-interest no impairment Under bearingCommonControl 19 2017 - - - - 7 years; Secured

2016 - - - 2,687,451 interest Bearing

Others 8, 18 2017 45,161 - 130,794 - On demand or Unsecured;2016 84,493 - 37,065 - 30 days; no impairment

non-interestbearing

2017 P4,481,730 P2,239,150 P2,141,703 P541,920

2016 P29,998,111 P4,359,524 P6,138,615 P3,320,887

a. Amounts owed by related parties consist of trade and other receivables, derivative asset and security deposits (Notes 8 and 16).

b. Amounts owed to related parties consist of trade and non-trade payables,management fees, purchases of fuel, reimbursement of expenses, rent, insurance and services rendered by related parties, customers’ deposits and subscriptions payable to OEDC (Notes 9, 12 and 18).

c. Amounts owed by associates mainly consist of interest bearing loan granted to OEDC included as part of “Trade and other receivables” and “Other noncurrent assets” accounts in the consolidated statements of financial position (Notes 8and 16).

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d. Amounts owed by a joint venture consists of interest bearing loan granted and management fees charged to AHC by PVEI included as part of “Trade and other receivables” accounts in the consolidated statements of financial position (Notes 8, 12 and 26).

e. The amount owed to associate of an entity under common control consists of interest bearing loan obtained from Bank of Commerce included as part of “Long-term debt” account in the consolidated statements of financial position(Note 19).

f. The compensation of key management personnel of the Group, by benefit type, follows:

Note 2017 2016 2015Short-term employee benefits P81,537 P42,432 P37,226Retirement cost 21 1,398 1,205 283

P82,935 P43,637 P37,509

21. Retirement Plan

The Parent Company and SMEC have unfunded, noncontributory, defined benefitretirement plans covering all of their permanent employees. Retirement benefits expense pertains to accrual of expected retirement benefits of active employees in accordance with RA No. 7641, The Philippine Retirement Law. Retirement benefitsexpense and liability is determined using the projected unit credit method. The Group’s latest actuarial valuation date is December 31, 2017. Valuations are obtained on a periodic basis.

The following table shows reconciliation of the net defined benefit retirement obligation and its component:

2017 2016Balance at beginning of year P69,364 P45,657Recognized in Profit or LossCurrent service cost 8,942 6,174Interest cost 3,711 2,214

12,653 8,388

Recognized in Other Comprehensive IncomeRemeasurements:

Actuarial (gains) losses arising from:Experience adjustments 23,523 17,502Changes in financial assumptions (2,514) (2,183)Changes in demographic assumptions (24,922) -

(3,913) 15,319

Balance at end of year P78,104 P69,364

Defined benefit retirement obligation included as part of “Other noncurrent liabilities”account in the consolidated statements of financial position amounted to P78,104and P69,364 as of December 31, 2017 and 2016, respectively.

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The retirement costs amounting to P12,653, P8,388 and P6,611 in 2017, 2016 and 2015, respectively, are recognized as part of “Salaries, wages and benefits” under “Selling and administrative expenses” account in the consolidated statements of income (Note 25).

The equity reserve for retirement plan as of December 31, 2017 and 2016 includesaccumulated net actuarial gains and losses recognized in other comprehensive income, net of related tax, amounting to P23,632 and P26,371, respectively.

The principal actuarial assumptions used to determine retirement benefits are as follows:

2017 2016Discount rate 5.70% 4.93% - 5.38%Salary increase rate 7.00% 7.00%

Assumptions for mortality and disability rates are based on published statistics and mortality and disability tables.

The weighted average duration of the defined benefit retirement obligation ranges from 7.0 to 9.5 years and 8.0 to 9.0 years as of December 31, 2017 and 2016, respectively.

Sensitivity AnalysisAs of December 31, 2017 and 2016, the reasonably possible changes to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit retirement obligation by the amounts shown below:

Defined Benefit Retirement Obligation2017 2016

1% Increase 1% Decrease 1% Increase 1% DecreaseDiscount rate (P6,791) P7,935 (P4,151) P4,558Salary increase rate 7,131 (6,260) 4,063 (3,793)

Risks and Management of RisksThe defined benefit retirement obligation exposes the Group to actuarial risks, such as longevity risk and interest rate risk.

The defined benefit retirement obligation is calculated using a discount rate set with reference to government bond yields as such is exposed to market factors including inflation. Higher inflation will lead to higher liability. Also, the defined benefit retirement obligations are to provide benefits for the life of members, so increase in life expectancy will result in an increase in the plan’s liability. These risks are managed with the objective of reducing the impact of these risks to the cash flows of the Group.

The Group does not have a formal retirement plan and therefore has no plan assets to match against the liability under the defined benefit retirement obligation. Also, benefit claims under the defined benefit retirement obligation will be paid directly by the Group when they become due.

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22. Equity

Capital StockAs of December 31, 2017 and 2016, the Parent Company’s authorized capital stock is P2,000,000, divided into 2,000,000,000 common shares with par value of P1 per share.

Capital stock consists of:

2017 2016Subscribed capital stock P1,250,004 P1,250,004Less subscription receivable 187,500 187,500

P1,062,504 P1,062,504

The number of shares subscribed is 1,250,004,000 and 1,250,003,500 commonshares as of December 31, 2017 and 2016, respectively.

Equity ReservesIn September 2010, the Parent Company acquired the remaining 40% non-controlling ownership interest of SMC in SMEC and SPDC. The difference between the price paid and carrying amount of net assets transferred was recognized in equity.

Retained EarningsThe Parent Company’s retained earnings available for dividend declaration,calculated based on the regulatory requirements of the Philippine SEC, amounted to P3,054,068 and P508,785 as at December 31, 2017 and 2016, respectively. The difference between the consolidated retained earnings and the Parent Company’s retained earnings available for dividend declaration primarily consist of undistributed earnings of subsidiaries and equity method investees. Stand-alone earnings of the subsidiaries and share in net earnings of equity method investees are not available for dividend declaration by the Parent Company until declared by the subsidiaries and equity investees as dividends.

The Parent Company’s BOD declared cash dividends as follows:

December 31, 2016

Date of Declaration


DividendPer Share Amount

June 7, 2016 June 7, 2016 June 14, 2016 P1.20 P1,500,000August 11, 2016 August 11, 2016 August 18, 2016 1.20 1,500,000

P3,000,000

December 31, 2015

Date of Declaration


DividendPer Share Amount

March 25, 2015 March 25, 2015 March 31, 2015 P1.20 P1,500,000July 2, 2015 July 2, 2015 July 9, 2015 1.20 1,500,000

November 5, 2015 November 5, 2015 November 10, 2015 1.20 1,500,000P4,500,000

There were no cash dividend declarations during the year ended December 31, 2017.

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Parent CompanyOn December 23, 2015, the BOD approved the appropriation amounting to P7,700,000 for the payment of the US$700,000, 5-year term loan that will mature in September 2018 (Note 19). Reversals during 2015 pertain to: (a) construction of power plant amounting to P2,092,750; (b) interest on bonds payable amounting to P446,250; (c) interest on loans payable amounting to P104,000; and (d) expansion projects amounting to P9,128,000.

In 2017 and 2016, reversals amounted to P1,154,000 and P2,966,000, respectively,for the debt servicing of the US$700,000 loan, as intended.

Total appropriated retained earnings of the Parent Company amounted to P3,580,000, P4,734,000 and P7,700,000 as at December 31, 2017, 2016, and 2015respectively.

SMEC, SPPC and SPDCOn December 23, 2015, the BOD of SMEC, SPPC and SPDC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P4,990,000, P1,806,300 and P352,400, respectively, pursuant to the IPPA Agreements and additional funding requirements on their expansion project.

On December 21, 2016, the BOD of SMEC and SPPC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P1,099,300 and P2,990,300, respectively, pursuant to the IPPA Agreements and additional funding requirements on their expansion project.

On December 18, 2017, the BOD of SMEC, SPPC and SPDC approved the appropriation of retained earnings for fixed monthly payments to PSALM amounting to P2,585,000, P3,514,050 and P474,000, respectively, pursuant to the IPPA Agreements.

The appropriations reversed in 2016 and 2015 were used for the required capital expenditures and fixed monthly payments of SMEC and SPDC to PSALM, as intended.

Total combined appropriated retained earnings of SMEC, SPPC and SPDC amounted to P27,080,250, P20,507,200 and P17,455,600 as at December 31, 2017, 2016 and 2015, respectively.

USCSThe Parent Company issued and listed on the Singapore Stock Exchange the following USCS at an issue price of 100%:

Date of Issuance

Distribution Payment Date

Initial Rate of

DistributionStep-Up

Date

Amount of USCS

Issued

Amount in Philippine

PesoAugust 26, 2015 August 26 and

February 26 of each year

6.75%per annum

February 26, 2021

US$300,000 P13,823,499

May 7, 2014 May 7 and November 7of each year

7.5%per annum

November 7, 2019

300,000 13,110,066

US$600,000 P26,933,565

The holders of the USCS have conferred a right to receive distributions on a semi-annual basis from their issuance dates at the initial rate of distribution, subject to the step-up rate. The Parent Company has a right to defer this distribution under certain conditions.

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The USCS have no fixed redemption date and are redeemable in whole, but not in part, at the Parent Company’s option on step-up date, or any distribution payment date thereafter or upon the occurrence of certain other events at the principal amounts of the USCS plus any accrued, unpaid or deferred distribution.

The proceeds were used by the Parent Company to finance investments in power-related assets and other general corporate purposes.

Details of distributions paid to USCS holders are as follows:

2017 2016 2015February P720,611 P689,223 P - May 799,583 756,804 714,616August 729,868 681,412 -November 824,142 777,134 736,072

P3,074,204 P2,904,573 P1,450,688

On February 22, 2018, the Parent Company paid distributions to holders of the US$300,000 USCS issued in August 2015, amounting to P746,068.

On March 9, 2018, the Parent Company’s BOD approved the payment of distribution in the total amount of US$11,250, plus applicable taxes, on May 7, 2018 to the holders of the US$300,000 USCS issued in May 2014.

23. Revenues

Revenues consist of:

Note 2017 2016 2015Sale of power 20 P70,494,762 P72,250,309 P73,849,465Retail and other power-

related services 6, 20 12,295,813 5,722,121 3,657,226P82,790,575 P77,972,430 P77,506,691

24. Cost of Power Sold

Cost of power sold consist of:

Note 2017 2016 2015Energy fees 5, 6 P23,726,459 P20,477,903 P23,224,178Coal, fuel oil

and other consumables 5, 6, 9, 20 13,039,144 10,046,687 10,376,590

Power purchases 5, 6 10,725,490 7,836,564 8,330,550Depreciation and

amortization 5, 6, 13, 15 5,842,367 6,164,942 6,466,398Plant operations and

maintenance fees 5, 6, 20 345,303 476,344 502,211P53,678,763 P45,002,440 P48,899,927

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25. Selling and Administrative Expenses

Selling and administrative expenses consist of:

Note 2017 2016 2015Taxes and licenses P945,406 P982,855 P946,801Salaries, wages and benefits 20, 21 708,162 361,854 222,994Management fees 20 664,493 652,167 1,196,789Rent 4, 6, 20 376,499 351,091 360,091Corporate special program 349,667 384,166 245,736Donations 303,426 738,980 59,781Depreciation and amortization 5, 13, 15 222,564 176,989 73,414Supplies 210,687 250,200 105,617Outside services 189,268 212,975 749,207Market fees 6 146,550 160,669 219,681Professional fees 136,397 137,303 124,221Travel and transportation 132,869 141,463 57,544Repairs and maintenance 126,906 308,335 138,067Advertising and promotions 70,772 119,874 59,653Insurance 19,198 63,827 65,434Impairment losses on trade

receivables 8 - 958,784 142,658Miscellaneous 232,668 238,118 136,447

P4,835,532 P6,239,650 P4,904,135

Donations represent contributions to registered donee institutions for their programson education, environment and disaster-related projects. Corporate special program pertains to the Group’s corporate social responsibility projects.

26. Other Income (Charges)

Other income (charges) consist of:

Note 2017 2016 2015PSALM monthly fees

reduction 6 P3,283,745 P1,509,225 P1,858,506Construction revenue 4, 6 123,336 226,997 47,091Construction cost 4, 6 (123,336) (226,997) (47,091)Foreign exchange losses - net 30 (632,416) (8,075,159) (7,582,548)Miscellaneous income

(charges) - net 4, 6, 8 13, 20 292,836 (315,820) (202,008)P2,944,165 (P6,881,754) (P5,926,050)

Miscellaneous income (charges) recognized in 2017 mostly pertain to management income, rent income and sale of fly ash to related parties. In 2016, the Group recognized impairment losses on non-trade receivables and property, plant and equipment, management income and rent income charged to related parties(Notes 4, 6, 8, 13 and 20).

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27. Income Taxes

The components of income tax expense are as follows:

Note 2017 2016 2015Current 28 P2,003,146 P2,668,503 P2,181,771Deferred 4,176,364 697,256 521,637

P6,179,510 P3,365,759 P2,703,408

Deferred tax assets (liabilities) - net arise from the following:

Note 2017 2016Items Recognized in Profit or LossAllowance for impairment losses on

trade and other receivables 8 P458,043 P458,043Defined benefit retirement obligation 21 13,303 9,507Difference of amortization of borrowing

costs over payments and others (1,410,812) (268,192)Difference of depreciation and other

related expenses over monthly lease payments 6 (5,077,847) (2,040,307)

Item Recognized in Other Comprehensive Income

Equity reserve for retirement plan 21 10,128 11,302(P6,007,185) (P1,829,647)

The deferred taxes are reported in the consolidated statements of financial position as follows:

2017 2016Deferred tax assets P1,316,926 P2,955,570Deferred tax liabilities (7,324,111) (4,785,217)

(P6,007,185) (P1,829,647)

The movements in deferred tax assets (liabilities) - net are as follows:

December 31, 2017


of Year

Recognized in Profit or Loss

Recognized in Other

Comprehensive Income


Allowance for impairment losses on trade and other receivables P458,043 P - P - P458,043

Defined benefit retirement obligation 9,507 3,796 - 13,303

Difference of amortization of borrowing costs over payments and others (268,192) (1,142,620) - (1,410,812)

Difference of depreciation and other related expenses over monthly lease payments (2,040,307) (3,037,540) - (5,077,847)

Equity reserve for retirement plan 11,302 - (1,174) 10,128

Net liabilities (P1,829,647) (P4,176,364) (P1,174) (P6,007,185)

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December 31, 2016


of Year

Recognized in Profit or Loss

Recognized in Other

Comprehensive Income


Allowance for impairment losses on trade and other receivables P170,443 P287,600 P - P458,043

Defined benefit retirement obligation 6,991 2,516 - 9,507

Difference of amortization of borrowing costs over payments and others (471,750) 203,558 - (268,192)

Difference of depreciation and other related expenses over monthly lease payments (849,377) (1,190,930) - (2,040,307)

Equity reserve for retirement plan 6,706 - 4,596 11,302Net liabilities (P1,136,987) (P697,256) P4,596 (P1,829,647)

As of December 31, 2017, the NOLCO and MCIT of the Group that can be claimed as deduction from future taxable income and deduction from corporate income tax due, respectively, are as follows:

Year Incurred/Paid

CarryforwardBenefits Up To NOLCO MCIT

Year 2017 December 31, 2020 P9,509,739 P36,617Year 2016 December 31, 2019 3,137,496 17,641Year 2015 December 31, 2018 2,931,633 10,195

P15,578,868 P64,453

The reconciliation between the statutory income tax rate on income before income tax and the Group’s effective income tax rate is as follows:

2017 2016 2015Statutory income tax rate 30.00% 30.00% 30.00%Increase (decrease) in the income

tax rate resulting from:Unrecognized deferred tax assets 18.06% 17.85% 30.43%Availment of optional standard

deduction and others (5.14%) (3.07%) (0.78%)Effective income tax rate 42.92% 44.78% 59.65%

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28. Registrations and License

Registrations with the Board of Investments (BOI)

i. In 2013, SMCPC and SCPC were granted incentives by the BOI on a pioneer status for 6 years subject to the representations and commitments set forth in the application for registration, the provisions of Omnibus Investments Code of 1987, (Executive Order (EO) No. 226), the rules and regulations of the BOI and the terms and conditions prescribed. On October 5, 2016, BOI granted SCPC's request to move the start of its commercial operation and Income Tax Holiday (ITH) reckoning date from February 2016 to September 2017 or when the first kilowatt-hour (kWh) of energy was transmitted after commissioning or testing, or 1 month from the date of such commissioning or testing, whichever comes earlier as certified by the National Grid Corporation of the Philippines. Subsequently, on December 21, 2016, BOI granted a similar request of SMCPC to move the start of its commercial operation and ITH reckoning date from December 2015 to July 2016, or the actual date of commercial operations subject to compliance with the specific terms and conditions, due to delay in the implementation of the project for reasons beyond its control. SMCPC has a pending request with BOI on the further extension of the ITH reckoning date from July 2016 to September 2017. The ITH period for Unit 1 and Unit 2 of SCPC commenced on May 26, 2017 and September 26, 2017, respectively. The ITH incentives shall only be limited to the conditions given under the specific terms and conditions of their respective BOI registrations.

ii. On September 20, 2016, LPPC was registered with the BOI under the Omnibus Investment Code of 1987 as expanding operator of 2 x 150 MW CFB Coal-fired Power Plant (Phase II Limay Power Plant) on a non-pioneer status. The BOI categorized LPPC as an “Expansion” based on the 2014 to 2016 IPP's Specific Guidelines for “Energy” in relation to SCPC's 2 x 150 MW Coal-fired Power Plant(Phase I Limay Power Plant). As a registered entity, LPPC is entitled to certain incentives that include, among others, an ITH for 3 years from January 2018 or date of actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. The ITH incentives shall only be limited to the conditions given under the specific terms and conditions of LPPC's BOI registrations.

In June 2017, the BOI approved the transfer of ownership and registration of Phase II Limay Power Plant from LPPC to SCPC. SCPC has a pending request with BOI on the extension of the ITH reckoning date for Phase II Limay Power Plant from January 2018 to December 2018 or actual start of commercial operations, whichever is earlier.

iii. On August 26, 2015, February 11, 2016 and October 26, 2016, the BOI issued a Certificate of Authority (COA) to SMCPC, SCPC and LPPC, respectively, subject to provisions and implementing rules and regulations of EO No. 70, entitled “Reducing the Rates of Duty on Capital Equipment, Spare Parts and Accessories imported by BOI Registered New and Expanding Enterprises.” The COA shall be valid for 1 year from the date of issuance. All capital equipment, spare parts and accessories imported by SMCPC and SCPC for the construction of the power plants were ordered, delivered and completed within the validity period of their respective COAs.

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On July 10, 2017, the BOI issued a new COA to SCPC, as the new owner of the Phase II Limay Power Plant, subject to provisions and implementing rules and regulations of EO No. 22 (which replaced EO No. 70), also entitled "Reducing the Rates of Duty on Capital Equipment, Spare Parts and Accessories imported by BOI Registered New and Expanding Enterprises”. The COA shall be valid for 1 year from the date of issuance or up to the expiration of EO No. 22 or until a new law amending the Omnibus Investments Code of 1987 is enacted, whichever comes earlier.

iv. SMEC, SPDC and SPPC are registered with the BOI as administrator/operator of their respective power plants on a pioneer status with non-pioneer incentives and were granted ITH for 4 years without extension beginning August 1, 2010 up to July 31, 2014, subject to compliance with certain requirements under their registrations. The ITH incentive availed was limited only to the sale of power generated from the power plants. Upon expiration of the ITH in 2014, SMEC, SPDC and SPPC are now subject to the regular income tax rate.

v. On August 21, 2007, SEPC was registered with the BOI under the Omnibus Investments Code of 1987, as New Domestic Producer of Coal on a Non-pioneer Status.

License Granted by the ERCOn August 22, 2011 and August 24, 2016, SMELC and SCPC, respectively, weregranted a RES License by the ERC pursuant to Section 29 of the EPIRA which requires all suppliers of electricity to the contestable market to secure a license from the ERC. The term of the RES License is for a period of 5 years from the time it was granted and renewable thereafter.

On August 19, 2016, the ERC approved the renewal of SMELC’s RES License for another 5 years from August 22, 2016 up to August 21, 2021.

29. Basic and Diluted Earnings (Loss) Per Share

Basic and diluted EPS is computed as follows:

2017 2016 2015Net income attributable to equity

holders of the Parent Company P8,216,916 P4,150,662 P1,828,918

Distributions to USCS holders for the year (3,076,042) (2,938,623) (1,918,382)

Net income (loss) attributable to common shareholders of theParent Company (a) 5,140,874 1,212,039 (89,464)

Weighted average number of common shares outstanding (in thousands) (b) 1,250,004 1,250,004 1,250,004

Basic/Diluted Earnings (Loss) Per Share (a/b) P4.11 P0.97 (P0.07)

As of December 31, 2017, 2016 and 2015, the Group has no dilutive debt or equity instruments.

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30. Financial Risk and Capital Management Objectives and Policies

Objectives and PoliciesThe Group has significant exposure to the following financial risks primarily from itsuse of financial instruments:

Interest Rate RiskForeign Currency RiskCommodity Price RiskLiquidity RiskCredit Risk

This note presents information about the exposure to each of the foregoing risks, theobjectives, policies and processes for measuring and managing these risks, and formanagement of capital.

The principal non-trade related financial instruments of the Group include cash and cash equivalents, restricted cash, noncurrent receivables, loans payable, long-term debt and derivative instruments. These financial instruments, except derivative instruments, are used mainly for working capital management purposes. The trade-related financial assets and financial liabilities of the Group such as trade and other receivables, accounts payable and accrued expenses, finance lease liabilities and other noncurrent liabilities arise directly from, and are used to facilitate, its daily operations.

The outstanding derivative instruments of the Group which is fixed swaps are intended mainly for risk management purposes. The Group uses derivatives to manage its exposures to foreign currency and commodity price risks arising from the operating and financing activities. The accounting policies in relation to derivatives are set out in Note 3 to the consolidated financial statements.

The BOD has the overall responsibility for the establishment and oversight of the risk management framework of the Group.

The risk management policies of the Group are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The BOD constituted the Audit and Risk Oversight Committee to assist the BOD in fulfilling its oversight responsibility of the Group's corporate governance process relating to the: a) quality and integrity of the consolidated financial statements and financial reporting process and the systems of internal accounting and financial controls; b) performance of the internal auditors; c) annual independent audit of the consolidated financial statements, the engagement of the independent auditors and the evaluation of the independent auditors' qualifications, independence and performance; d) compliance with tax, legal and regulatory requirements; e) evaluation of management's process to assess and manage the enterprise risk issues; and f) fulfillment of the other responsibilities set out by the BOD. The Audit and Risk Oversight Committee shall prepare such reports as may be necessary to document the activities of the committee in the performance of its functions and duties. Such reports shall be included in the annual report of the Group and other corporate disclosures as may be required by the SEC and/or the PDEx.

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The Audit and Risk Oversight Committee also oversees how management monitors compliance with the risk management policies and procedures of the Group and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Internal Audit assists the Audit and Risk Oversight Committee in monitoring and evaluating the effectiveness of the risk management and governance processes of the Group. Internal Audit undertakes both regular and special reviews of risk management controls and procedures, the results of which are reported to the Audit and Risk Oversight Committee.

Interest Rate RiskInterest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Group’s exposure to changes in interest rates relates primarily to the long-term borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. On the other hand, borrowings issued at variable rates expose the Group to cash flow interest rate risk.The Group manages its interest cost by using an optimal combination of fixed and variable rate debt instruments. Management is responsible for monitoring the prevailing market-based interest rate and ensures that the mark-up rates charged on its borrowings are optimal and benchmarked against the rates charged by other creditor banks.

On the other hand, the investment policy of the Group is to maintain an adequate yield to match or reduce the net interest cost from its borrowings pending the deployment of funds to their intended use in the operations and working capital management. However, the Group invests only in high-quality short-term investments while maintaining the necessary diversification to avoid concentration risk.

In managing interest rate risk, the Group aims to reduce the impact of short-term fluctuations on the earnings. Over the longer term, however, permanent changes in interest rates would have an impact on profit or loss.

The management of interest rate risk is also supplemented by monitoring the sensitivity of the Group’s financial instruments to various standard and non-standard interest rate scenarios.

The sensitivity to a reasonably possible 1% increase in the interest rates, with all other variables held constant, would have decreased the Group’s profit before tax (through the impact on floating rate borrowings) by nil, P14,127 and P2,092 in 2017, 2016 and 2015, respectively. A 1% decrease in the interest rate would have had the equal but opposite effect. These changes are considered to be reasonably possible given the observation of prevailing market conditions in those periods. There is no impact on the Group’s other comprehensive income.

The Group does not account for any fixed-rate financial assets or financial liabilities at FVPL and the Group does not designate derivatives as hedging instruments under a fair value hedge accounting model. Therefore, a change in interest rates at the reporting date would not affect profit or loss.

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Interest Rate Risk TableThe terms and maturity profile of the interest-bearing financial instruments, together with its gross amounts, are shown in the following tables:

December 31, 20171 Year or

Less >1-2 Years >2-3 Years >3-4 Years >4-5 Years >5 Years TotalFixed RatePhilippine peso-denominated P1,200,000 P1,200,000 P1,620,000 P8,508,250 P12,477,960 P66,993,790 P92,000,000Interest rate 6.2836% 6.2836% 6.2836% 4.3458% 5.3750% 4.7575%

to 6.9265% to 6.9265% to 6.9265% to 6.9265% to 6.9265% to 6.9265%P1,200,000 P1,200,000 P1,620,000 P8,508,250 P12,477,960 P66,993,790 P92,000,000

December 31, 20161 Year or

Less >1-2 Years >2-3 Years >3-4 Years >4-5 Years >5 Years Total

Fixed RatePhilippine peso-denominated P - P - P - P - P6,153,250 P8,846,750 P15,000,000Interest rate 4.3458% 4.7575%

to 5.1792%

Floating RateForeign currency-denominated

(expressed in Philippine peso) 1,218,482 36,392,314 1,681,219 1,768,764 1,892,042 9,717,483 52,670,304Interest rate LIBOR + LIBOR + LIBOR + LIBOR + LIBOR + LIBOR +

Margin Margin Margin Margin Margin Margin

P1,218,482 P36,392,314 P1,681,219 P1,768,764 P8,045,292 P18,564,233 P67,670,304

Foreign Currency RiskThe functional currency is the Philippine peso, which is the denomination of the Group’s revenues. The exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign currency-denominated transactions of the Group. The risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. The Group enters into foreign currency hedges using derivative instruments such as foreign currency forwards to manage its foreign currency risk exposure.

Short-term currency forward contracts (non-deliverable) are entered into to manage foreign currency risks arising from foreign currency denominated obligations.

Information on the Group’s foreign currency-denominated monetary assets and monetary liabilities and their Philippine peso equivalents as of December 31 are asfollows:

2017 2016

Note US DollarPeso

Equivalent US DollarPeso

EquivalentAssetsCash and cash equivalents 7 US$102,067 P5,096,218 US$108,229 P5,381,123Trade and other receivables 8 85,664 4,277,192 80,301 3,992,573

187,731 9,373,410 188,530 9,373,696

LiabilitiesAccounts payable and

accrued expenses 18 122,259 6,104,423 312,823 15,553,551Long-term debt (including

current maturities) 19 - - 1,059,339 52,670,304Finance lease liabilities

(including current portion) 6 1,693,623 84,562,581 1,880,371 93,492,0541,815,882 90,667,004 3,252,533 161,715,909

Net foreign currency-denominated monetary liabilities US$1,628,151 P81,293,594 US$3,064,003 P152,342,213

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The Group reported net losses on foreign exchange amounting to P632,416, P8,075,159 and P7,582,548 in 2017, 2016 and 2015, respectively, with thetranslation of its foreign currency-denominated assets and liabilities (Note 26). These mainly resulted from the movements of the Philippine peso against the US dollar as shown in the following table:

US Dollarto Philippine Peso

December 31, 2017 49.93December 31, 2016 49.72December 31, 2015 47.06

The management of foreign currency risk is also supplemented by monitoring the sensitivity of the Group’s financial instruments to various foreign currency exchange rate scenarios.

The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities)for the years ended December 31:

2017 2016P1 Decrease

in the US Dollar

Exchange Rate

P1 Increase in the US

Dollar Exchange

Rate

P1 Decrease in the US

Dollar Exchange

Rate

P1 Increase in the US Dollar

Exchange Rate

Cash and cash equivalents (P102,067) P102,067 (P108,229) P108,229Trade and other receivables (85,664) 85,664 (80,301) 80,301

(187,731) 187,731 (188,530) 188,530

Accounts payable and accrued expenses 122,259 (122,259) 312,823 (312,823)

Long-term debt (including current maturities) - - 1,059,339 (1,059,339)

Finance lease liabilities (including current portion) 1,693,623 (1,693,623) 1,880,371 (1,880,371)

1,815,882 (1,815,882) 3,252,533 (3,252,533)

P1,628,151 (P1,628,151) P3,064,003 (P3,064,003)

Exposures to foreign exchange rates vary during the year depending on the volume of foreign currency-denominated transactions. Nonetheless, the analysis above is considered to be representative of the Group’s foreign currency risk.

Commodity Price RiskCommodity price risk is the risk that future cash flows from a financial instrument will fluctuate because of changes in commodity prices.

The Group, through SMC, enters into commodity derivatives to manage its price risks on strategic commodities. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices of commodities are fixed at levels acceptable to the Group, thus protecting raw material cost and preserving margins. For hedging transactions, if prices go down, hedge positions may show marked-to-market losses; however, any loss in the marked-to-market position is offset by the resulting lower physical raw material cost.

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Commodity Swaps. Commodity swaps are used to manage the Group’s exposures to volatility in prices of coal.

Liquidity RiskLiquidity risk pertains to the risk that the Group will encounter difficulty to meet payment obligations when they fall due under normal and stress circumstances.

The Group’s objectives to manage its liquidity risk are as follows: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to be able to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities.

The Group constantly monitors and manages its liquidity position, liquidity gaps andsurplus on a daily basis. A committed stand-by credit facility from several local banks is also available to ensure availability of funds when necessary. The Group also uses derivative instruments such as forwards and swaps to manage liquidity.

The table below summarizes the maturity profile of the Group’s financial assets and financial liabilities based on contractual undiscounted receipts and payments used for liquidity management as of December 31:

2017Carrying Amount

ContractualCash Flow

1 Yearor Less

>1 Year -2 Years

>2 Years -5 Years

Over5 Years

Financial Assets Cash and cash equivalents P28,655,359 P28,655,369 P28,655,369 P - P - P -Trade and other receivables - net* 20,384,934 20,384,934 20,384,934 - - -Derivative asset (included under

“Other noncurrent assets - net” account) 61,903 61,903 - 61,903 - -

Noncurrent receivables (included under “Other noncurrent assets - net” account; including current portion) 278,965 322,012 60,773 39,371 115,904 105,964

Restricted cash (included under “Other noncurrent assets - net” account) 4,805,175 4,805,175 - 4,805,175 - -

Financial LiabilitiesLoans payable 5,930,000 5,938,566 5,938,566 - - -Accounts payable and accrued

expenses* 24,818,444 24,818,444 24,818,444 - - -Long-term debt - net (including

current maturities) 90,728,701 133,277,391 6,837,616 6,760,234 38,229,217 81,450,324Finance lease liabilities (including

current portion) 154,793,690 189,584,834 25,020,549 26,220,439 82,794,848 55,548,998Other noncurrent liabilities

(including current portion of concession liability) 171,174 246,756 8,400 74,118 25,200 139,038


2016 Carrying AmountContractualCash Flow

1 Yearor Less

>1 Year -2 Years

>2 Years -5 Years

Over5 Years

Financial Assets Cash and cash equivalents P21,491,385 P21,491,385 P21,491,385 P - P - P -Trade and other receivables - net* 22,316,325 22,316,325 22,316,325 - - -Noncurrent receivables (included

under “Other noncurrent assets - net” account; including current portion) 298,437 353,700 38,634 77,195 116,640 121,231

Financial LiabilitiesAccounts payable and accrued

expenses* 31,095,490 31,095,490 31,095,490 - - -Long-term debt - net (including

current maturities) 66,323,726 77,424,824 3,618,010 38,428,920 15,077,705 20,300,189Finance lease liabilities (including

current portion) 170,089,536 213,866,933 24,689,002 24,966,835 84,101,330 80,109,766Other noncurrent liabilities

(including current portion of concession liability) 156,512 238,086 8,400 8,400 25,200 196,086


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Credit RiskCredit risk is the risk of financial loss to the Group when a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from trade and other receivables. The Group manages its credit risk mainly through the application of transaction limits and close risk monitoring. It is the Group’s policy to enter into transactions with a wide diversity of creditworthy counterparties to mitigate any significant concentration of credit risk.

The Group has regular internal control reviews to monitor the granting of credit and management of credit exposures.

Trade and Other ReceivablesThe exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Group’s customer base, including the default risk of the industry in which customers operate, as these factors may have an influence on the credit risk.

The Group has established a credit policy under which each new customer is analyzed individually for creditworthiness before the standard payment and delivery terms and conditions are offered. The Group ensures that sales on account are made to customers with appropriate credit history. The Group has detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. The review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer and are reviewed on a regular basis. Customers that fail to meet thebenchmark creditworthiness may transact with the Group only on a prepayment basis.

The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance include a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.

Financial information on the Group’s maximum exposure to credit risk as ofDecember 31, without considering the effects of other risk mitigation techniques, is presented below.

2017 2016Cash and cash equivalents

(excluding cash on hand) P28,653,631 P21,490,065Trade and other receivables - net* 20,384,934 22,316,325Derivative asset (included under “Other

noncurrent assets - net” account) 61,903 -Noncurrent receivables (included under “Other

noncurrent assets - net” account; including current portion) 278,965 298,437

Restricted cash (included under “Other noncurrent assets - net” account) 4,805,175 -

P54,184,608 P44,104,827*Excluding statutory receivables

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The credit risk for cash and cash equivalents and restricted cash is considered negligible, since the counterparties are reputable entities with high quality external credit ratings.

The Group has significant concentration of credit risk. Sale of power to Meralco accounts for 52%, 51% and 53% of the Group’s total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. The Group does not execute any credit guarantee in favor of any counterparty.

Capital ManagementThe Group maintains a sound capital base to ensure its ability to continue as a going concern, thereby continue to provide returns to stockholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce cost of capital.

The Group manages its capital structure and makes adjustments in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, distribution payment, pay-off existing debts, return capital to shareholders or issue new shares, subject to compliance with certain covenants of its long-term debt and USCS (Notes 19and 22).

The Group defines capital as capital stock, additional paid-in capital, USCS and retained earnings, both appropriated and unappropriated. Other components of equity such as equity reserves and equity reserve for retirement plan are excluded from capital for purpose of capital management.

The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as total debt divided by total equity. Total debt is defined as total current liabilities and total noncurrent liabilities, while equity is total equity as shown in the consolidated statements of financial position.

The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the external environment and the risks underlying the Group’s business, operation and industry.

There were no changes in the Group’s approach to capital management during the year.

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31. Financial Assets and Financial Liabilities

The table below presents a comparison by category of the carrying amounts and fair values of the Group’s financial instruments as of December 31:

2017 2016CarryingAmount Fair Value

CarryingAmount Fair Value

Financial AssetsCash and cash equivalents P28,655,359 P28,655,359 P21,491,385 P21,491,385Trade and other receivables -

net* 20,384,934 20,384,934 22,316,325 22,316,325Derivative asset (included

under “Other noncurrent assets - net” account) 61,903 61,903 - -

Noncurrent receivables (included under “Other noncurrent assets - net” account; including current portion) 278,965 278,965 298,437 298,437

Restricted cash (included under “Other noncurrent assets - net” account) 4,805,175 4,805,175 - -

P54,186,336 P54,186,336 P44,106,147 P44,106,147

Financial LiabilitiesLoans Payable P5,930,000 P5,930,000 P - P -Accounts payable and

accrued expenses* 24,818,444 24,818,444 31,095,490 31,095,490Long-term debt - net (including

current maturities) 90,728,701 96,948,336 66,323,726 66,611,049Finance lease liabilities

(including current portion) 154,793,690 154,793,690 170,089,536 170,089,536Other noncurrent liabilities

(including current portion of concession liability) 171,174 171,174 156,512 156,512

P276,442,009 P282,661,644 P267,665,264 P267,952,587


The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents and Trade and Other Receivables (excluding statutory receivables). The carrying amounts of cash and cash equivalents and trade and other receivables approximate their fair values primarily due to the relatively short-term maturities of these financial instruments.

Restricted Cash and Noncurrent Receivables. The carrying amounts of restricted cash and noncurrent receivables approximate their fair values, since the effect of discounting is not considered material.

Derivatives. The fair values of freestanding currency and commodity derivatives are determined based on quoted prices obtained from their respective active markets. The fair values of the derivatives have been categorized as Level 2 in the fair value hierarchy.

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Loans Payable and Accounts Payable and Accrued Expenses (excluding statutory payables). The carrying amount of loans payable and accounts payable and accrued expenses approximates fair value due to the relatively short-term maturities of these financial instruments.

Long-term Debt, Finance Lease Liabilities and Other Noncurrent Liabilities. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable market rates for similar types ofinstruments as of reporting date. Discount rates used for Philippine peso-denominated loans range from 2.47% to 5.70% and 2.18% to 4.88% as of December 31, 2017 and 2016, respectively. The carrying amounts of floating rate loans with quarterly interest rate repricing approximate their fair values.

The fair value of peso-denominated bonds has been categorized as Level 1 and interest-bearing fixed-rate loans, finance lease liabilities and other noncurrent liabilities have been categorized as Level 2 in the fair value hierarchy.

Derivative Financial Instruments The Group’s derivative financial instruments according to the type of financial risk being managed and the details of freestanding derivative financial instruments are discussed below.

The Group entered into currency and commodity derivative contracts to manage its exposure on foreign currency and commodity price risk. The portfolio is a mixture of instruments including forwards and swaps.

Derivative Instruments not Designated as HedgesThe Group enters into certain derivatives as economic hedges of certain underlying exposures. These include freestanding derivatives which are not designated as accounting hedges. Changes in fair value of these instruments are accounted for directly in the consolidated statements of income. Details are as follows:

Freestanding DerivativesFreestanding derivatives consist of currency and commodity derivatives entered into by the Group.

Currency ForwardsAs of December 31, 2017, the Group has no outstanding currency forwards.

Commodity SwapThe Group has an outstanding fixed swap agreement covering its purchase of coal for calendar year 2019. Under the agreement, payment is made either by the Group or its counterparty for the difference between the hedged fixed price and the relevant monthly average index price. The outstanding equivalent notional quantity covered by the commodity swap is 60,000 metric tons as of December 31, 2017. The positive fair value of this swap amounted to P61,903 as of December 31, 2017.

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32. Supplemental Cash Flows Information

Changes in liabilities arising from financing activities:

Loans Payable Long-term DebtFinance Lease

Liabilities TotalBalance as of January 1, 2017 P - P66,323,726 P170,089,536 P236,413,262Changes from financing cash flowsProceeds from borrowings 113,419,200 77,000,000 - 190,419,200Payments of borrowings (107,782,255) (53,110,468) - (160,892,723)Payments of finance lease liabilities - - (24,874,993) (24,874,993)Total changes from financing cash flows 5,636,945 23,889,532 (24,874,993) 4,651,484

Effect of changes in foreign exchange rates 293,055 440,164 497,704 1,230,923Other changes - 75,279 9,081,443 9,156,722Balance as of December 31, 2017 P5,930,000 P90,728,701 P154,793,690 P251,452,391

33. Other Matters

a. EPIRAThe EPIRA sets forth the following: (i) Section 49 created PSALM to take ownership and manage the orderly sale, disposition and privatization of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other disposable assets; (ii) Section 31(c) requires the transfer of the management and control of at least 70% of the total energy output of power plants under contract with NPC to the IPP Administrators as one of the conditions for retail competition and open access; and (iii) Pursuant to Section 51(c), PSALM has the power to take title to and possession of the IPP contracts and to appoint, after a competitive, transparent and public bidding, qualified independent entities who shall act as the IPP Administrators in accordance with the EPIRA. In accordance with the bidding procedures and supplemented bid bulletins thereto to appoint an IPP Administrator relative to the capacity of the IPP contracts, PSALM has conducted a competitive, transparent and open public bidding process following which the Group was selected winning bidder of the IPPA Agreements (Note 6).

The EPIRA requires generation and DU companies to undergo public offering within 5 years from the effective date, and provides cross ownership restrictions between transmission and generation companies. If the holding company of generation and DU companies is already listed with the PSE, the generation company or the DU need not comply with the requirement since such listing of the holding company is deemed already as compliance with the EPIRA.

A DU is allowed to source from an associated company engaged in generation up to 50% of its demand except for contracts entered into prior to the effective date of the EPIRA. Generation companies are restricted from owning more than 30% of the installed generating capacity of a grid and/or 25% of the national installed generating capacity. The Group is in compliance with the restrictions as of December 31, 2017 and 2016.

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b. ContingenciesThe Group is a party to certain cases or claims which are either pending decision by the court/regulators or are subject to settlement agreements. The outcome of these cases or claims cannot be presently determined (Note 4).

i. Generation Payments to PSALMSPPC and PSALM are parties to the Ilijan IPPA Agreement covering the appointment of SPPC as the IPP Administrator of the Ilijan Power Plant.

SPPC and PSALM have an ongoing dispute arising from differing interpretations of certain provisions related to generation payments under the Ilijan IPPA Agreement. As a result of such dispute, the parties have arrived at different computations regarding the subject payments. In a letter dated August 6, 2015, PSALM has demanded payment of the difference between the generation payments calculated based on its interpretation and the amount which has already been paid by SPPC, plus interest, covering the period December 26, 2012 to April 25, 2015.

On August 12, 2015, SPPC initiated a dispute resolution process with PSALM as provided under the terms of the Ilijan IPPA Agreement, while continuing to maintain that it has fully paid all of its obligations to PSALM. Notwithstanding the bona fide dispute, PSALM issued a notice terminating the Ilijan IPPA Agreement on September 4, 2015. On the same day, PSALM also called on the Performance Bond posted by SPPC pursuant the Ilijan IPPA Agreement.

On September 8, 2015, SPPC filed a Complaint with the RTC of Mandaluyong City. In its Complaint, SPPC requested the RTC that its interpretation of the relevant provisions of the Ilijan IPPA Agreement be upheld. The Complaint also asked that a 72-hour Temporary Restraining Order (TRO) be issued against PSALM for illegally terminating the Ilijan IPPA Agreement and drawing on the Performance Bond. On even date, the RTC issued a 72-hour TRO which prohibited PSALM from treating SPPC as being in Administrator Default and from performing other acts that would change the status quo ante between the parties before PSALM issued the termination notice and drew on the Performance Bond. The TRO was extended for until September 28, 2015.

On September 28, 2015, the RTC issued an Order granting a Preliminary Injunction enjoining PSALM from proceeding with the termination of the Ilijan IPPA Agreement while the main case is pending.

On October 22, 2015, the RTC also issued an Order granting the Motion for Intervention and Motion to Admit Complaint-in-intervention by Meralco.

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In an Order dated June 27, 2016, the RTC denied PSALM’s: (1) Motion for Reconsideration of the Order dated September 28, 2015, which issued a writ of preliminary injunction enjoining PSALM from further proceedings with the termination of the IPPA Agreement while the case is pending; (2) Motion for Reconsideration of the Order, which allowed Meralco to intervene in the case; and (3) Motion to Dismiss. In response to this Order, PSALM filed a petition for certiorari with the Court of Appeals (CA) seeking to annul the RTC’s Orders granting the writ of preliminary injunction, allowing Meralco’s intervention, and the Orders denying PSALM’s motions for reconsideration of said injunction and intervention orders. PSALM also prayed for the issuance of a TRO and/or writ of preliminary injunction “against public respondent RTCand its assailed Orders.” The CA, however, denied the petition filed by PSALM in its Decision dated December 19, 2017.

The preliminary conference on the RTC case was suspended to pave way formediation between the parties. During the last mediation conference on January 6, 2017, mediation between the parties was terminated. Thereafter, the case was referred to judicial dispute resolution. During the dispute conference between the parties on September 28, 2017, the judicial dispute process was terminated. The parties were required to submit their respective position papers on whether or not the case should be re-raffled. In compliance with the Order of the RTC dated October 24, 2017, on December 8, 2017 SPPC filed its Comment and Opposition to the Motion for Inhibition filed by PSALM. On December 18, 2017, the presiding judge of the RTC who conducted the judicial dispute resolution issued an Order inhibiting himself in the instant case. The case was then re-raffled to another RTC judge in Mandaluyong City which scheduled the Pre-Trial Conference on May 11, 2018. SPPC filed a Request for Motion for Production of Documents on February 28, 2018, while PSALM filed its Manifestation with Motion to Hear Affirmative Defenses and Objections Ad Cautelam. Both motions are still pending with the court as of March 9, 2018.

Meanwhile, there are no restrictions or limitations on the ability of SPPC to supply power from the Ilijan Power Plant to Meralco under its PSA with the latter.

By virtue of the Preliminary Injunction issued by the RTC, SPPC continues to be the IPP Administrator for the Ilijan Power Plant.

ii. Criminal Cases SPPCOn September 29, 2015, SPPC filed a criminal complaint for estafa and for violation of Section 3(e) of RA No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act, before the Department of Justice (DOJ), against certain officers of PSALM, in connection with the termination of SPPC’s IPPA Agreement, which was made by PSALM with manifest partiality and evident bad faith. Further, it was alleged that PSALM fraudulently misrepresented its entitlement to draw on the Performance Bond posted by SPPC, resulting in actual injury to SPPC in the amount of US$60,000. The case is still pending with the DOJ as of December 31, 2017.

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SMECOn October 21, 2015, SMEC filed a criminal complaint for Plunder and violation of Section 3(e) and 3(f) of RA 3019, before the DOJ against a certain officer of PSALM, and certain officers of Team Philippines Energy Corp. (TPEC) and TSC, relating to the illegal grant of the so-called “excess capacity” of the Sual Power Plant in favor of TPEC which enabled it to receive a certain amount at the expense of the Government and SMEC.

In a Resolution dated July 29, 2016, the DOJ found probable cause to file Information against the respondents for (a) Plunder; (b) Violation of Sec. 3(e) of the Anti-Graft and Corrupt Practices Act; and (c) Violation of Sec. 3(f) of the Anti-Graft and Corrupt Practices Act. The DOJ further resolved to forward the entire records of the case to the Office of the Ombudsman for their proper action. Respondents have respectively appealed said DOJ’s Resolution of July 29, 2016 with the Secretary of Justice. On October 25, 2017, the DOJ issued a Resolution partially granting the Petition for Review by reversing the July 29, 2016 DOJ Resolution insofar as the conduct of the preliminary investigation. On November 17, 2017, SMEC filed a motion for partial reconsideration of said October 25, 2017 DOJ Resolution.

On June 17, 2016, SMEC filed with the RTC Pasig a civil complaint for consignation against PSALM arising from PSALM’s refusal to accept SMEC’s remittances corresponding to the proceeds of the sale on the WESM of electricity generated from capacity in excess of the 1000 MW of the Sual Power Plant (“Sale of the Excess Capacity”). With the filing of the complaint, SMEC also consigned with the RTC Pasig, the amount corresponding to the proceeds of the Sale of the Excess Capacity for the billing periods December 26, 2015 to April 25, 2016.

On October 3, 2016, SMEC filed an Omnibus Motion (To Admit Supplemental Complaint and To Allow Future Consignation without Tender).Together with this Omnibus Motion, SMEC consigned with the RTC Pasig an additional amount corresponding to the proceeds of the Sale of the Excess Capacity for the billing periods from April 26, 2016 to July 25, 2016.

Pending for resolution are (a) PSALM’s Motion for Preliminary Hearing and Special and Affirmative Defenses and (b) SMEC’s Omnibus Motion (to Admit Supplemental Complaint and to Allow Future Consignations without Tender).

On December 1, 2016, SMEC received a copy of a Complaint filed by TPEC and TSC with the ERC against SMEC and PSALM in relation to the Excess Capacity issues, which issues have already been raised in the abovementioned cases. SMEC filed a Motion to Dismiss and Motion to Suspend Proceeding of the instant case.

On July 5, 2017, SMEC consigned with the RTC Pasig the amount representing additional proceeds of Sale of the Excess Capacity for the billing period July 26, 2016 to August 25, 2016. SMEC also filed a Motion to Admit Second Supplemental Complaint in relation to said consignation. With the submission of manifestation from PSALM, the Motion to Admit Second Supplemental Complaint is submitted for resolution.

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As of December 31, 2017 and 2016, the total amount consigned with the RTC Pasig is P491,242 and P475,057, respectively, included under “Other noncurrent assets”, particularly “Restricted cash” account, in the consolidated statements of financial position.

iii. TRO Issued to MeralcoOn December 23, 2013, the Supreme Court (SC) issued a TRO, effective immediately, preventing Meralco from collecting from its customers the power rate increase pertaining to November 2013 billing. As a result, Meralco was constrained to fix its generation rate to its October 2013 level of P5.67/kWh. Claiming that since the power supplied by generators, including SMEC and SPPC is billed to Meralco's customers on a pass-through basis, Meralco deferred a portion of its payment on the ground that it was not able to collect the full amount of its generation cost. Further, on December 27, 2013, the DOE, the ERC and PEMC, acting as a tripartite committee, issued a joint resolution setting a reduced price cap on the WESM of P32/kWh. The price will be effective for 90 days until a new cap is decided upon.

On January 16, 2014, the SC granted Meralco’s plea to include other power supplier and generation companies, including SMEC and SPPC, as respondents to an inquiry. On February 18, 2014, the SC extended the period of the TRO until April 22, 2014 and enjoined the respondents (PEMC and the generators) from demanding and collecting the deferred amounts.

On March 3, 2014, the ERC issued an order declaring the November and December 2013 Luzon WESM prices void and imposed the application of regulated prices. Accordingly, SMEC, SPPC and SPDC recognized a reduction in the sale of power while SMELC recognized a reduction in its power purchases. Consequently, a payable and receivable were also recognized for the portion of over-collection or over-payment, the settlement of which have been covered by a 24-month Special Payment Arrangement with PEMC which was already completed on May 25, 2016. On June 26, 2014, SMEC, SPPC, SPDC and SPI filed with the CA a Petition for Review of these orders.

In a Decision dated November 7, 2017 (“Decision”), the CA granted the Petition for Review filed by SMEC, SPPC, SPDC and SPI, declaring the aforesaid ERC Order null and void and set aside the Orders of the ERC dated March 3, 2014, March 27, 2014, May 9, 2014 and October 15, 2014 and accordingly reinstated and declared as valid the WESM prices for Luzon for the supply of months of November to December 2013.

Upon finality of the Decision, a claim for refund may be made by the relevant subsidiaries with PEMC for an amount up to P2,625,585, plus interest.

c. Commitments

The outstanding purchase commitments of the Group amounted to P1,996,473and P1,588,516 as of December 31, 2017 and 2016, respectively.

Amount authorized but not yet disbursed for capital projects as of December 31, 2017 and 2016 is approximately P12,861,746 and P23,038,949, respectively.

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34. Events After the Reporting Date

Acquisition of Subsidiaries

On December 17, 2017, the Parent Company executed a Share Purchase Agreement with AES Phil Investment Pte. Ltd. (AES Phil) and Gen Plus B. V. (Gen Plus) for the purchase by the Parent Company of (a) 51% and 49% equity interests of AES Phil and Gen Plus, respectively, in Masin-AES Pte. Ltd. (the “Target Company”); (b) 100% equity interest of The AES Corporation in AES Transpower Private Ltd. (ATPL); and (c) 100% equity interest of AES Phil in AES Philippines Inc. (API), (collectively, the “Transaction”).

The Target Company, through its subsidiaries [including Masinloc Power Partners Co. Ltd. (MPPCL)], owns and/or operates (i) the 2 x 315 MW coal-fired power plant; (ii) the under construction project expansion of the 335 MW unit known as Unit 3; (iii) the 10 MW battery energy storage project, all located in the Province of Zambales, Philippines; and (iv) the 2 x 20 MW battery energy storage facility in Kabankalan, Negros Occidental, which is still at the pre-development stage. ATPL has a Philippine Regional Office and Headquarters which provides the corporate support services to MPPCL, while API provides energy marketing services to MPPCL.

With the acquisition by the Parent Company of the Target Company, ATPL and API, the Group aims to improve its existing baseload capacity to further ensure its ability to provide affordable and reliable supply of power to its customers. The additional power assets provide an opportunity for the Group to increase its footprint in clean coal technology that provides reliable and affordable power, particularly in Luzon. The Transaction will result in the production of electricity in an environmentally responsible way.

The total consideration for the Transaction is US$1,900,000, subject to a post-closing purchase price adjustment. The total consideration will be paid in cash by the Parent Company to be funded through a combination of its (a) availment of US dollar-denominated long-term borrowings from various financial institutions totaling to US$1,200,000 and (b) issuing Redeemable Perpetual Securities to, and obtaining advances from, SMC amounting to US$650,000 and US$150,000, respectively.

On February 23, 2018, the Philippine Competition Commission (“PCC”) issued its decision which states that the Transaction does not result in a substantial lessening of competition in the relevant markets, and as such, the PCC resolved that it will take no further action with respect to the Transaction (the “PCC Decision”).

Other than the issuance of the PCC Decision, there are other conditions precedent that are required for the closing and completion of the Transaction.

As of March 9, 2018, all parties to the Transaction have yet to complete the conditions precedent for the closing and completion of the Transaction.

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The following summarizes the initial financial information as of December 31, 2017 of assets to be acquired and liabilities to be assumed:

Provisionary Amounts

AssetsCash and cash equivalents P2,152,225Trade and other receivables - net 2,609,037Inventories 1,616,060Prepaid expenses and other current assets 1,515,826Property, plant and equipment - net 56,693,900Other noncurrent assets 1,727,896

LiabilitiesLoans payable (2,243,250)Accounts payable and accrued expenses (9,473,903)Finance lease liabilities - net (including current portion) (41,709)Long-term debt - net (including current maturities) (28,080,053)Other noncurrent liabilities (285,053)

Total identifiable net assets P26,190,976

Based on the foregoing initial amounts of net assets to be acquired, the goodwill is estimated to be as follows:

Provisionary Amounts

Consideration transferred P94,867,000Non-controlling interest measured at proportionate interest in

identifiable net assets 87,639Total identifiable net assets (26,190,976)Goodwill P68,763,663

The estimates above will be updated to their fair values as at the date of acquisition when the Transaction is closed for purposes of recognizing the business combination and will involve identification and recognition of identifiable assets or intangible assets and will likely reduce the amount of initial goodwill above.

Acquisition-related CostsAs of December 31, 2017, the Parent Company incurred acquisition-related costs of P194,688 which have been included in the “Selling and administrative expenses” account in the consolidated statements of income.

Goodwill expected to arise from the Transaction is attributable to the benefit of expected synergies, revenue growth, future development and the assembled workforce. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

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THE ISSUER

SMC Global Power Holdings Corp.155 EDSA, Wack-Wack

Mandaluyong CityMetro Manila 1550

Philippines

TRUSTEE

DB Trustees (Hong Kong) LimitedLevel 52, International Commerce Centre

1 Austin Road WestKowloon

Hong Kong

REGISTRAR, PRINCIPAL PAYING AGENT,TRANSFER AGENT, AND CALCULATION

AGENT

Deutsche Bank AG, Hong Kong BranchLevel 52, International Commerce Centre

1 Austin Road WestKowloon

Hong Kong

LEGAL ADVISORS

To the Issuer as to Philippine law

Picazo Buyco Tan Fider & SantosPenthouse, Liberty Center – Picazo Law

104 H.V. dela Costa StreetSalcedo Village, Makati City 1227

Philippines

To the Joint Lead Managers as to Philippine law

SyCip Salazar Hernandez & GatmaitanSyCipLaw Center

105 Paseo de RoxasMakati City 1226

Metro ManilaPhilippines

To the Issuer as to English law To the Joint Lead Managers and the Trustee as toEnglish law

Latham & Watkins LLP18th Floor, One Exchange Square

8 Connaught Place, CentralHong Kong

Milbank LLP30/F Alexandra House

18 Chater RoadCentral Hong Kong

INDEPENDENT AUDITOR

R.G. Manabat & Co., formerly Manabat Sanagustin & Co, a member firm of KPMG9th Floor, The KPMG Center

6787 Ayala AvenueMakati City 1226

Philippines

LISTING AGENT

Latham & Watkins LLP9 Raffles Place

#42-02 Republic PlazaSingapore 048619

767010D FIN

SMC GLOBAL POWER - PDS Group

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