Project Number: 43906-014 Investment Number: 7303 Loan Number: 2612 September 2015

Loan Visayas Base-Load Power Development Project (Philippines) This is the abbreviated version of the document that excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB’s Public Communications Policy 2011.

Extended Annual Review Report

CURRENCY EQUIVALENTS Currency Unit Peso (P) At Appraisal At Project

Completion 6 July 2009 31 May 2011

P1.00 $0.0209 $0.0231 $1.00 P47.96 P43.36

ABBREVIATIONS ADB – Asian Development Bank Credit Agricole – Crédit Agricole Corporate and Investment Bank CFBC – Circulating Fluidized Bed Combustion CFS – complementary financing scheme COD – commercial operations date CRP – Compliance Review Panel CSC – coal supply contract CSR – corporate social responsibility Doosan – Doosan Heavy Industries and Construction Company, Ltd. EIA – environmental impact assessment EIRR – economic internal rate of return EPC – engineering, procurement and construction EPIRA – Electricity Power Industry Reform Act EWP – EWP Cebu Corporation FIRR – financial internal rate of return Geumhwa – Geumhwa PSC Co., Ltd ING – ING Bank N.V., Seoul Branch IPP – independent power producer KEPCO – Korea Electric Power Company KEXIM – Korean Export Import Bank KPHI – KEPCO Philippines Holdings, Inc. LIBOR – London interbank offered rate MEMR Ministry of Energy and Mineral Resources MMT – multipartite monitoring team NPC – National Power Corporation NGCP – National Grid Corporation of the Philippines PDP – Power Development Plan PNOC – Philippine National Oil Company PPA – power purchase agreement PSALM – Power Sector Assets and Liabilities Management Corporation PSC – power supply contract PT IPC – PT Inkor Prima Coal PT JSKM – PT Jaya Samudra Karunia Mining PT LSP – PT Lembuswana Perkasa RRP – Report and Recommendation of the President to the Board of

Directors SPC – SPC Power Corporation SMBC – Sumitomo Mitsui Banking Corporation WACC – weighted average cost of capital

WEIGHTS AND MEASURES kV (kilovolt) – 1,000 volts kW (kilowatt) – 1,000 watts MW (megawatt) – 1,000,000 watt GWh (gigawatt-hour) – 1,000,000 kilowatt-hours

NOTES

(i) The fiscal year (FY) of KEPCO-SPC Power Corporation ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2015 ends on 31 December 2015.

(ii) In this report, "$" refers to US dollars.

Vice President D. Gupta, Private Sector and Cofinancing Operations Director General T. Freeland, Private Sector Operations Department (PSOD) Director C. Roberts, Portfolio Management Division, PSOD Team leader J. Limjap, Portfolio Management Division, PSOD Team members B. Garcia, Portfolio Management Division, PSOD V. Joshi, Transaction Support Division, PSOD

J. Munsayac, Transaction Support Division, PSOD K. Taniguchi, Transaction Support Division, PSOD M. Manguiat, Transaction Support Division, PSOD

CONTENTS

Page

BASIC DATA i

EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Background 1

B. Project Features 1

C. Progress Highlights 2

II. EVALUATION 2

A. Project Rationale and Objectives 2

B. Development Results 4

i. Contribution to Private Sector Development and ADB Strategic Development Objectives 4

ii. Economic Performance 4

iii. Environmental, Social, Health, and Safety Performance 5

iv. Business Success 7

C. ADB’s Additionality 8

D. ADB Investment Profitability 8

E. ADB Work Quality 8

F. Overall Evaluation 9

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 9

A. Issues and Lessons 9

APPENDICES

1. Project-related Data 11 2. Private Sector Development Indicators and Ratings: Infrastructure 12 3. Sector Review 19 4. Environmental Impact 21 5. Social Impact 26

BASIC DATA

Visayas Base Load Power Development Project (LN2612/E7303 PHI) Investee: KEPCO SPC Power Development Corporation (KSPC) Cofinanciers: a) Korea Export and Import Bank (KEXIM)

b) Commercial Banks covered by KEXIM guarantee - Sumitomo Mitsui Banking Corporation (SMBC)

- Credit Agricole Corporate and Investment Bank (Credit Agricole) - ING Bank, N. V., Seoul Branch (ING)

Key Dates Expected Actual Screening N/A March to June 2009 Appraisal N/A June 2009 Preliminary Investment Negotiations N/A June 2009 Board Approval July 2009 July 2009 Final Negotiations and Investment Agreements

N/A September 2009 to March 2010

Investment Project Completion February 2011 (Unit 1) and April 2011 (Unit 2)

February 2011 (Unit 1) and

May 2011 (Unit 2) Extended Annual Monitoring Report 2015 2015 Project Administration and Monitoring No. of Missions No. of Person-

Days Fact-Finding Appraisal and Negotiations Project Administration XARR Mission Others {including exit, final repayment,

workout transfer}

6 9 9 1

16 34 32

10 days

EXECUTIVE SUMMARY

In July 2009, the Board of Directors approved a direct loan of up to $120,000,000 to KSPC to finance the construction and operation of a 200 MW coal-fired power plant on 100,000 square meters of land in the barangay (district) of Colon, in the city of Naga, Cebu Province. Construction of the plant began in December 2007 and was completed in 2011.

At the time of project appraisal, the Visayas grid already reached a critical period

wherein the existing capacity would not be enough to meet electricity demand without any new capacity. The need for base-load capacity, specifically, was high as it will provide lower costing electricity. The Project displaced higher-costing electricity from diesel plants that were providing supply at the margin. KSPC was the second Project to use Circulating Fluidized Bed Combustion (CFBC) technology, known as a “cleaner coal” technology as CFBC boilers are very low generators of nitrogen oxide and sulfur dioxide emissions. Other fuel sources and technologies were considered for the Project but were not deemed optimal for the size and conditions of the Visayas grid.

The evaluation criteria used are based on Project Administration Instructions 6.07b on

Extended Annual Review Reports for Nonsovereign Operations issued on July 2008. Thus the Project was evaluated along the following dimensions: (i) development impacts and outcomes, (ii) ADB investment profitability, (iii) ADB work quality, and (iv) ADB Additionality.

The Development Impact is rated Satisfactory using four criteria: (i) Contribution to

private sector development and ADB Strategic Development Objectives; (ii) Economic Performance (iii) Environment, Social, Health, and Safety Performance and (iv) Business Success.

Contribution to private sector development and ADB Strategic Development Objectives

is rated Excellent as the Project improved dependable capacity in the Visayas Grid while maintaining competitive pricing for the electricity supplied to its off-takers. KSPC succeeded in providing additional reliable base load capacity to mitigate the projected power supply shortfall, with one of the lowest marginal costs in the system. Without KSPC’s entry into commercial operations in 2011, the reserve margin would have been lower than the required minimum and the Visayas would have been subjected to power outages.

Overall, the Project’s environmental, social, health, and safety performance is rated

Satisfactory. Key potential environmental impacts during operations such as air emissions, thermal discharge, wastewater effluent discharge, noise, and solid waste management are continuously being mitigated and monitored by KSPC’s health, safety, environment, and quality staff, both at the corporate and power plant levels. Social and health requirements are generally complied with.

The Project’s Business Success is rated Excellent. ADB’s Additionality is rated satisfactory as ADB played a crucial role as provider of a

direct loan and catalyst of commercial financing and in enabling the Project to achieve financial closure. ADB Investment Profitability is rated Satisfactory, as interest and principal payments were made on time.

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ADB’s Work Quality is rated Satisfactory based on: (i) a Satisfactory rating for screening, appraisal and structuring of the Project; (ii) a Satisfactory rating for monitoring and supervision; and (iii) a Satisfactory rating for role and contribution. ADB’s work quality during appraisal and structuring is considered satisfactory as it took the lead in structuring and negotiating the terms of the legal documentation. The financial structure was innovative in covering certain critical Project commercial risks. Sponsor support through equity contribution as well as guarantee from KEXIM of some participating banks’ exposures improved the Project’s viability for private commercial banking participation. Screening is Partly Satisfactory as the Compliance Review Panel (CRP) review process pointed out ADB’s non-compliance with certain policies on the environment, public communications and social dimensions as well as ADB’s Energy Policy. Monitoring was Satisfactory as ADB kept itself informed about the Project’s implementation through regular site visits, and monitoring reviews conducted annually. ADB’s role and contribution were in line with ADB’s country and private sector development strategies.

Overall, the KSPC plant is considered Successful being one of the least cost power generation companies in the Philippines and playing an important role in the fuel diversification and security of the Philippine’s power generation sector. ADB's involvement was crucial for the achievement of financial closure in the aftermath of the financial crisis and KSPC serves today as a benchmark and model for coal-fired power plants in the Philippines, in relation to its operations as well as its community relations and environmental management.

Compared to the Report and Recommendation of the President to the Board of Directors

(RRP), the Project was completed on time. The main lessons and recommendations ADB can draw from the Project are that (a) ADB should encourage effective communication between and among the Borrower, local communities, and non-governmental organizations (NGOs) to address any concerns regarding the Project to ensure successful Project implementation; (b) the CRP review had led to positive outcomes for the Project as it implemented programs with stronger civil society involvement, especially in environmental monitoring; and (c) some of the Project’s relocation activities related to transmission were handled by the Government through National Grid Corporation of the Philippines (NGCP) and KSPC had limited interaction with affected people. NGCP's process on establishing eligibility and documentation on asset valuation and agreements with affected people are good examples for other private sector Projects in the Philippines struggling with issues related to informal settlers.

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I. THE PROJECT

A. Background 1. In July 2009, the Board of Directors approved a direct loan of up to $120,000,000 to KSPC to finance the construction and operation of a 200 MW coal-fired power plant on 100,000 square meters of land in the barangay (district) of Colon, in the city of Naga, Cebu Province. Construction of the plant began in December 2007 and was completed in 2011. 2. The primary objective of the Project was to support sustainable growth in the Visayas region by increasing the availability of reliable and competitively priced power to help alleviate the power supply shortage experienced in the country and in the Visayas region in particular, without imposing additional fiscal burden on the Government. The Project uses a more environment-friendly CFBC boiler technology and to align with industry best practices. The Project provides much-needed support for the Government’s reform agenda by demonstrating that a greenfield Project can be successfully financed and operated in light of imminent market-oriented sector reforms.

3. KSPC is a registered Philippine company that is 60% owned by KEPCO Philippines Holdings, Inc. (KPHI) and 40% owned by SPC Power Corporation (SPC). KEPCO is the Republic of Korea’s only fully integrated electric utility and is the monopoly operator of the country’s power transmission and distribution system. SPC is a Philippine company established in 1994 by Salcon Holdings Philippines, Inc. for the rehabilitation, operation, maintenance and management contract for National Power Corporation’s (NPC’s) Naga Power Plant Complex. Both KEPCO and SPC have a long history of operating power plants in the Philippines and contributed their invaluable technical expertise in the construction and operation of the Project.

B. Project Features

4. The plant consists of two nominal 100 MW units, each comprising a boiler, electrostatic precipitator for particulate matter control, steam turbine generator, condenser, and circulating water system. The plant uses CFBC boiler technology, known as a “cleaner coal” technology as CFBC boilers are very low generators of nitrogen oxide and sulfur dioxide emissions. Other fuel sources and technologies were considered for the Project but were not deemed optimal for the size and conditions of the Visayas grid. EPC was provided by Doosan on a fixed-price basis, with performance and schedule guarantees on capacity, heat rate and plant availability. 5. KSPC managed to diversify the off-taker risk of the company to several customers and provided a model for future investments in power generation in the country. KSPC entered into power supply contracts (PSCs) for roughly 86% of its total generation (171.9 MW) with electric cooperatives, distribution utilities, and industrial customers. The term of the PSCs average around 10 years from commercial operations date (COD). Under the PSCs, the off-taker purchases the capacity and energy output of the plant following COD on a take-or-pay basis. The tariff consists of an energy base price negotiated under the PSC, and are adjusted for changes in currency and coal prices.

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6. KSPC sources its coal from Indonesia through coal supply contracts (CSCs) with PT Jaya Samudra Karunia Mining (PT JSKM) and PT Lembuswana Perkasa (PT LSP).1 Coal is primarily shipped to the Facility via ocean transport, while transfers of coal from the off-site PNOC storage yard are delivered by truck.2

C. Progress Highlights 7. Plant Operations and Maintenance. From COD, the Plant was initially operated and maintained by EWP Cebu Corporation (EWP), a wholly-owned subsidiary of KEPCO. In 2013, KSPC terminated its O&M arrangement with EWP and assumed responsibility for operations and maintenance of the power plant. KSPC subsequently hired Geumhwa, a third-party contractor, to perform the routine and scheduled maintenance activities of the Plant for a term of three years. Geumhwa is responsible for the routine and planned maintenance of the plant, except for instrumentation and controls work, while KSPC remains responsible for the overall operations of the plant. 8. Compliance Review. In 2011/2012, non-government organizations raised concerns against the Project for dumping coal ash in different locations in the municipalities of Naga and Cebu. This ash was “old ash” that was in the Project’s plant site and had to be disposed of to build the new KSPC plant. Concerns were also raised on the legality and environmental acceptability of disposal of KSPC’s ash at the originally proposed site at Balili.

9. The Project was reviewed under ADB’s Accountability Mechanism and the CRP, which concluded that non-compliance existed regarding policies on the environment, public communications and social dimensions in ADB operations. The CRP also concluded that the Project was not fully compliant with ADB’s Energy Policy. The CRP made four recommendations to bring back the project under compliance3. These recommendations are being implemented by the ADB and the progress is being reported to CRP quarterly.

II. EVALUATION

A. Project Rationale and Objectives

10. The primary objective of the Project was to support sustainable growth in the Visayas region by increasing the availability of reliable and competitively priced power to help alleviate the power supply shortage experienced in the country and in the Visayas region in particular, without imposing additional fiscal burden on the Government. The Project was also intended to

1 The CSC signed in 2011 was between KSPC and PT IPC. PT IPC assigned its rights and responsibilities under the

CSC to its fully owned subsidiary, PT LSP, in 2014 following changes in the licensing rules and regulations in Indonesia.

2 While there were frequent and substantial amendments to the coal supply arrangements, the current coal suppliers

have covered the coal requirements of KSPC since the start of plant operations. 3 The complaint was lodged under Accountability Mechanism Policy, 2003. Under this Policy, after having established eligibility of

the complaint, the Compliance Review Panel made recommendations to bring back the project under compliance. In this case, four recommendations in summary were, (i) Undertake a comprehensive air dispersion modeling study, validate the predictions and develop an action plan for improvement of ambient air quality (ii) develop and implement an ash utilization plan and prepare and implement EMPs for the existing ash ponds and historic ash disposal sites, (iii) Expand or complement the existing MMT to ensure representation of all communities directly affected and all appropriate NGOs and to facilitate transparent and inclusive communication and grievance redress and (iv) Implement a community outreach program focusing on preventing negative health impacts from air, water and noise pollution and potentially negative impacts from exposure to unprotected coal ash deposits.

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provide a demonstration effect for future green field power plants (particularly coal-fired) in the Philippines under the new regulatory environment. 11. ADB’s country strategy and program for the Philippines (2005-2007, extended to 2010) lists infrastructure, fiscal imbalance and uncertain investment climate as binding constraints to more rapid poverty reduction. 12. The Project addresses the first binding constraint of infrastructure by providing much-needed base-load power capacity in the Visayas. At the time of Board approval of the Project, there was an urgent need for additional base-load capacity in the Visayas grid. Dependable capacity was at 1,493 MW of which only around 1,125 MW-1277 MW were supplied to the grid at any one time while peak load was at 1,176 MW. The Visayas grid already reached a critical period wherein the existing capacity would not meet peak demand plus the reserve margin required by the ERC. Should any of the plants in the Visayas shut down, the entire Visayas grid would suffer prolonged power outages. This shortfall partly came about because of a lack in new investments in electricity generation and transmission in the region. Heavy reliance on geothermal resources to meet the region’s growing electricity demand also aggravated the situation when most of the existing geothermal plants at the time did not operate efficiently. The KSPC plant now provides almost one third of total electricity production in Cebu or around 10% of total electricity supply in the Visayas Grid.

13. The second binding constraint of fiscal imbalance was addressed as the Project did not place additional strain on limited government financial resources in improving generation capacity in the country. Other large-scale power generation projects prior to the Electric Power Industry Reform Act (EPIRA) were either NPC-owned or typically had long-term PPAs with NPC or the major distribution utilities. With the enactment of EPIRA, NPC could no longer enter into new PPAs to attract new investments in power generation. The Project was one of the first merchant power plants in the Visayas and the first by the sponsors. Additional capacity was introduced to the grid without government exposure or investments. KSPC entered into various power supply contracts with nine electric cooperatives and one power distribution utility covering 172 MW of capacity that did not involve government investments or guarantee. 14. The third binding constraint was uncertainty in the investment climate at the time of project appraisal, in light of the imminent market-oriented sector reforms. EPIRA, which was enacted in 2001, aimed to restructure the power sector by introducing a stable regulatory framework for the electricity sector, introduce competition in the generation sector and encourage private sector investment in generation, transmission and distribution. The pace at which reforms such as the privatization of NPC generation and transmission assets and independent power producers (IPPs), and launching of the wholesale electricity spot market (WESM), were implemented was gradual. WESM, which is an integral part of electricity reforms, was launched in Luzon in 2006 while full implementation of the Visayas WESM only came about in 2010. 4 The Project demonstrated profitability and operating success in the Philippines under the new regulatory environment and supported government’s reform agenda in the power subsector.

4 The initial plan was to launch WESM in the Visayas in 2007 but was cancelled due to tightened supply conditions.

To stabilize supply, the DOE implemented a day-ahead market (the Visayas Supply Augmentation Auction Program) in 2009. As more electricity generation came online, including the KSPC coal-fired plant, the demand-supply conditions in the Visayas were deemed sufficient to support a well-functioning electricity spot market. WESM in the Visayas fully launched in 2010.

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B. Development Results

i. Contribution to Private Sector Development and ADB Strategic Development Objectives

15. Private Sector Development Indicators and Ratings are in Appendix 2. The Project is in line with ADB’s country operations business plan for the Philippines, 2009-2010, which calls for interventions designed to support critical infrastructure projects, including power generation, and cites power generation as a specific target area for private sector operations. ADB’s support of KEPCO and SPC’s first merchant power plant has improved competitiveness of the generation sector by reducing its oligopolistic structure. The Project was one of the first merchant power plants without Government-backed PPAs in the Visayas following the enactment of EPIRA in 2001.

16. KSPC’s coal-fired plant introduced much needed base load power in the Visayas, which stabilized power supply and provided the groundwork for introducing WESM in the Visayas grid. The construction and operation of the KSPC plant came at the right time when the Visayas was in the brink of power shortage. The plant helped avert power outages. While the Visayas grid has sufficient electricity at this time, the DOE and NGCP has noted the grid’s low reserve levels. The KSPC plant currently serves a critical role in the stability of electricity supply in the grid. The KSPC power plant provided the Visayas grid from 2011 with 200MW of base-load power, which translates to more than 1,300GWh of electricity per year. This accounts for roughly 12% of total electricity supply in the Visayas grid. The installed capacity in the Visayas has since increased by more than 100MW with the commercial operation of new private power producers (i.e., 9 MW SACASOL solar farm in San Carlos City and the 50 MW Nasulo Geothermal Power plant, both located in Negros Occidental). There are around eleven committed power projects with a total capacity of more than 500MW expected to commence operations in 2015/2016, including a 270MW coal-fired power plant expected to start operations in the 2nd quarter of 2016.

5 17. Having been financed with the participation of a number of international banks, the Project has spurred private sector investment in power generation not only in the Visayas, but in the whole country. The WESM operates on the principle of providing a level playing field to all electric power industry participants, including procedures for establishing the merit order dispatch for each time (hourly) trading period and determining market-clearing prices. KSPC’s comparatively lower fuel cost and tariff price places the plant high in the merit order dispatch and has improved competition in the grid. KSPC’s short-run marginal cost allowed the plant’s dispatch after hydro and geothermal power plants but before pulverized coal and diesel. The KSPC plant has displaced more expensive and polluting diesel generation. KSPC has been selling part of its generation capacity to the WESM, indicating the competitive pricing of the plant’s output. 18. The private sector development impact of the Project is considered Excellent.

ii. Economic Performance

19. Reliable and stable power generation was a high priority of the Government's power development policy because of the critical level of energy reserves in the grid. The main

5 Department of Energy website, 2015 Private-Sector Initiated Power Projects in the Visayas, www.doe.gov.ph

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contributor of the lower-than-the-original EIRR estimation was partly caused by the unexpected shut down of the Unit 2 in 2012 due to damage during a unit restart. Successful introduction of some of the sector reforms pursued by the Government were partly dependent on having sufficient electricity supply. The Project provided 200 MW of additional capacity and competitively priced power to prevent power shortages and meet the growing demand in the grid. KSPC looked at various fuel options that would provide stable and reliable capacity and decided coal to be the main fuel source. Other fuel sources and technologies are not deemed optimal for the size and conditions of the Visayas grid. The intangible environmental benefits of the cleaner coal technology are not valued, causing the underestimation of economic benefits in this analysis. 20. The Project is rated Satisfactory for economic performance.

iii. Environmental, Social, Health, and Safety Performance

21. Environmental Performance. The Project was in planning stage for years before it entered the ADB’s pipeline in 2008. The environmental impacts of the Project were assessed through an EIA that was approved by the Government on 5 December 2005. As a part of its due diligence, ADB classified the Project as category A for environment under ADB’s Environment Policy (2002), reviewed the EIA and required certain additional assessment and mitigation measures. A summary environmental impact assessment addressing these gaps was prepared and, in accordance with ADB's Public Communications Policy (2005), disclosed to the public through the ADB website on 10 March 2009. 22. The construction activity started in January 2008. The EPC Contractor was responsible for ensuring that the output of the plant is designed in accordance with the environmental regulations. Quarterly environmental monitoring was conducted during the construction phase, and measured parameters for ambient air, noise, surface water and groundwater. The construction performance was generally compliant with regulatory requirements except for a few spikes in the noise levels which were mainly related to vehicular movement. Total suspended particulate (TSP) was also observed to be elevated in the station nearest the power station, which is attributable to the construction activities, but still within the regulatory standards. There were no adverse or detrimental effects to the nearby surroundings that were reported during the period of monitoring. The periodic findings were also discussed in the Multi-partite Monitoring Team (MMT).

23. Key potential environmental impacts during operations such as air emissions, thermal discharge, wastewater effluent discharge, noise, and solid waste management are continuously being mitigated and monitored by KSPC’s health, safety, environment, and quality staff, both at the corporate and power plant levels. Monitoring results show that all tested parameters comply with Philippines’s National Environmental Quality Standards and the applicable international standards. KSPC has developed effective management plans and procedures and has integrated these into plant operations to further increase efficiency, minimize environmental impacts, improve health and safety performance, and ensure compliance with government regulatory requirements and international standards. An emergency response plan, including health and safety awareness training, is part of the safety management system strategies that positively contribute towards KSPC’s safety culture. KSPC is committed to maintain its good corporate environmental performance through compliance with local and international standards and adherence to its sustainability policy. Detailed information on the environmental impacts and mitigating measures is in Appendix 7.

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24. As stated in paragraph 12, a complaint was lodged with the CRP against the project on environmental and social issues. The CRP made four recommendations to bring back the project into compliance (footnote 4). ADB has been implementing these recommendations since 2013 and submitting quarterly progress reports to the CRP. The CRP recommendations relate to (i) air quality management study, (ii) management of fly ash and disposal of ‘old ash’ from the project site, (iii) participation of directly affected community and NGOs in MMT meetings and (iv) outreach on health related issues due to air, water and noise pollution in project catchment area. CRP inspected the coal ash disposal sites after remedial actions in terms of construction of embankment and soil cover were implemented. In their site visit report, CRP has expressed their satisfaction. During the preparation of XARR, the ADB mission also visited these locations and confirmed that the embankment and soil cover were intact. Cebu-based NGOs have also been invited to attend the MMT quarterly meetings. Regular medical missions are being conducted by KSPC in Barangays that surround the project site (e.g., Tangke, Colon and North Poblacion). For air quality management study, the consultants have been appointed but procurement of monitoring equipment has been delayed due to procedural issues6. 25. Social Performance. The social due diligence undertaken during Project preparation identified the following involuntary resettlement impacts: (i) relocation of 17 out of 22 informal settler families occupying the Naga land prior to ADB involvement; (ii) loss of private land and structures and impacts on informal settlers along the 138 KV Transmission Line alignment. The Project was classified as B with respect to ADB’s 1995 Involuntary Resettlement Policy and a short resettlement plan was prepared to address impacts of the 138kV transmission line. Implementation of the short resettlement plan was considered satisfactory with compensation rates paid above market rates. Two expropriation cases are pending resolution in court. Living conditions of those relocated by the local government prior to ADB involvement were improved with assistance from KSPC. Local officials were advised to closely regulate the construction of the additional structures in the relocation area because of the limited space. No indigenous people live in Naga City and households in the Project area and the Project was classified as C with respect to ADB’s 1998 Indigenous Policy. No indigenous people were affected by the Project. 26. KSPC is complying with the Philippine Labor Code and ADB’s Social Protection requirements. KSPC's rank and file staff and supervisory staff have formed labor unions for the purpose of collective bargaining over wages, benefits, and working conditions for their membership, and on representing their members in disagreements with management over contract provisions. KSPC management respects the rights of its employees to organize in accordance with the Philippine Labor Code and ADB’s Social Protection requirements.

27. As part of the requirements of the Philippine Environmental Impact Statement and KSPC’s commitment to build a harmonious relationship in the community, the Project was expected to have positive impacts through the implementation of the Social Development Plan, KSPC’s corporate social responsibility (CSR) programs and benefit-sharing under the Energy Regulations 1-94 (ER 1-94). KSPC’s Community and Public Relations Department (C&PR) have implemented community Projects totaling about P11.2million. Since commissioning in October 2010, a total of P40.5 million has been remitted to the DOE. One of the priority Projects

6 At the time of preparing of the XARR, the Naga plant has seized to operate and is expected to be replaced by a more efficient modern plant. Thus the most important source of air pollution in the region has seized to exist and the purpose of the air quality management study to recommend air quality management measures to improve air quality in the region to a large extent has been fulfilled.

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being proposed for financing is the much needed water supply system in Barangay Colon. KSPC’s C&PR department is assisting the local community in preparing Project proposals for submission to DOE.

28. When the Project was designed and approved by ADB in 2009, KSPC had entered into an MOU with the cement plants for the fly ash management. Immediately after approval during the first year of construction it was decided that a landfill site will be created for disposal of ash. A site called Balili was identified for the purpose and an initial environmental examination was prepared. During its review, ADB identified several issues in relation to the design and suitability of the landfill site and raised these issues with KSPC. Other issues also came into light in relation to the disposal of coal ash that was dumped in the project site. As a result of these issues, as well as the sensitivities related to the Balili site, a complaint was lodged in 2011 against the Project with the CRP for investigation and recommending actions to bring back the Project under compliance. 29. The CRP made its final recommendation in early 2012. The Project team worked closely with KSPC for implementation of these recommendations and at the time of the XARR, the Mission, based on the quarterly reports submitted to the CRP and observations on the site, observed that all CRP recommendations other than recommendations related to air quality modeling and identification of mitigation measures to improve the air quality in the air shed were substantially complied with. The implementation of air quality modeling studies was delayed due to certain procurement issues.

30. Health and Safety. During construction, the contractor was in charge of management of the health and safety aspect of the Project. The contractor had health and safety policies in place. During the first three years of operations, another company, EWP, was responsible for O&M and had their own health and safety policies in place. KSPC took charge of H&S in 2014 when it took over O&M for the plant. KSPC’s records show that a Health and Safety Procedure formulated by the Company was approved in May 2014. The standards specified in the document are compliant with the requirements of the Department of Labor and Employment (DOLE) of the Philippines on Occupational Health and Safety under Article 162 of the Labor Code. The Safety Officer conducts a daily inspection within the plant, while the work supervisor conducts the periodic check of machine, equipment and workers’ adherence to the safety procedure. In 2014, KSPC met its target safety man-hours of 259,872 hours and recorded no fatality for the year (note: records from previous years have to be checked). An Emergency Response Team was also formed in April 2014 as part of compliance with DOLE. Trainings such as basic first aid and basic life support and fire safety are semi-annually provided to representatives of the KSPC.

31. The Project’s environmental, social, health, and safety performance is rated satisfactory.

iv. Business Success 32. KSPC has complied with its financial covenants, maintaining its historic debt-service coverage ratio above the covenanted 1.05x. The latest DSCR was computed on the last interest payment date in November 2014, wherein the historic debt-service coverage ratio was 2.25x and the projected 6-month debt-service coverage ratio was 1.50x. Since the start of commercial operations, operating cash flows have been strong, allowing the company to service its debts. The Project is rated Excellent for business success.

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C. ADB’s Additionality

33. ADB’s intervention was timely when the country’s generation sector was opened for private sector participation. While KEXIM provided additional guarantee to international private banks to support Korean business and technology in the country, ADB finance was a necessary condition for the timely realization of the Project, through direct mobilization of funds and/or indirectly by improving the risk perception of other financers. ADB’s cooperation with KEXIM encouraged other commercial banks to participate in the financing of the Project. The long-term tenor of the ADB loan likewise increased the Project’s financial viability. 34. ADB's Additionality is considered Satisfactory.

D. ADB Investment Profitability

35. ADB's Investment Profitability is considered Satisfactory.

E. ADB Work Quality

36. ADB’s overall work quality is rated satisfactory based on : (i) a satisfactory rating for screening, appraisal and structuring of the Project; and (ii) a satisfactory rating for monitoring and supervision; and (iii) a satisfactory rating for role and contribution. 37. ADB’s work quality during appraisal and structuring is considered satisfactory as it took the lead in structuring and negotiating the terms of the legal documentation. The financial structure was innovative in covering certain critical Project commercial risks. Sponsor support through equity contribution as well as guarantee from KEXIM of some participating banks’ exposures improved the Project’s viability for private commercial banking participation. Screening is partly satisfactory as the CRP review process pointed out ADB’s non-compliance with certain policies on the environment, public communications and social dimensions as well as ADB’s Energy Policy. KSPC was very accommodating and cooperative with ADB in bringing the Project back to compliance through the satisfaction of the CRP’s recommendations.

38. Monitoring was satisfactory as ADB kept itself informed about the Project’s implementation through regular site visits, and monitoring reviews conducted annually. ADB actively monitors the Project’s implementation and compliance with its environmental and safeguard policies and loan covenants through various reports. Quarterly environmental and social monitoring reports are disclosed on ADB website. KSPC have complied with all reporting requirements in a timely manner. ADB’s review has been conducted periodically. ADB has also attended the MMT quarterly meetings as part of its monitoring activities and to ensure participation of certain NGOs in the meeting.

39. ADB’s role and contribution were in line with ADB’s country and private sector development strategies. ADB played a crucial role as provider of a direct loan and catalyst of commercial financing, in enabling the Project to achieve financial closure. ADB’s participation helped mobilize commercial financing to bring about KSPC’s financial closure. KSPC also experienced delays in delivering some of the conditions subsequent required under the loan

9

agreements.7 While some were mostly beyond the control of the company (e.g., governmental permits and clearances), ADB and the other Lenders worked closely to assist KSPC in compliance and meeting the deadlines stated in the loan agreements. F. Overall Evaluation

Table 1 - Evaluation of the PHI: Visayas Base Load Power Development Project Indicator/Rating Unsatisfactory Partly

Satisfactory Satisfactory Excellent

Development Impact (i) Contribution to Private

sector development X

(ii) Economic Performance X (iii) Environment, Social, Health, and Safety Performance

X

(iv) Business Success X ADB Additionality X ADB Investment Profitability X ADB Work Quality X

(i) Screening, Appraisal and Structuring

X

(ii) Monitoring and Supervision

X

Unsuccessful Partly successful

Successful Highly successful

Overall Rating X

ADB = Asian Development Bank.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

40. Communicate effectively with local communities and NGOs for successful Project operation. KSPC has developed its relationship with the community by providing venues for information sharing primarily through the MMT meetings and through regular consultations with nearby communities or “barangays”. The company has been very active in its corporate social responsibilities, offering livelihood activities, scholarships for technical skills development, medical checkups and other assistance. The community relations program of KSPC promotes a two-way communication with local communities and its government. KSPC provided a number of locals within the nearby barangays with phone access that would allow them to inform the company immediately of any environmental concerns or other issues that the people may have towards the plant’s operations.

7 Prior to financial close, KSPC was not able to deliver all the security documents and government authorizations

that are typically condition precedents to the first disbursement. However, given the very strong sponsor support for the Project, the Lenders agreed to make the said deliverables as conditions subsequent due on various dates during the construction period.

10

41. KSPC now serves as a benchmark for other power generation Projects in the country for civil society involvement. KSPC has adopted a transparent approach in addressing civil society and NGO concerns. In addition to providing necessary documents to NGOs, including environmental reports and minutes of meetings of the multipartite committee, KSPC also invited NGOs for detailed discussions about their concerns. An important lesson from KSPC's experience is that effective communication with local communities, and a proactive approach to mitigate the community's and NGO's concerns can also enhance the Project's operational capacity. 42. Need to exercise greater caution on safeguards for projects where ADB enters late. ADB commenced its due-diligence in December 2008 while construction of the project was started in January 2008. By the time ADB entered the project, the contractor had already excavated certain fly ash8 from the project site and disposed it at private lots at Barangays Pangdan and Naalad. These lots were along the local streams and posed a danger of erosion of ash during the rains. As part of its safeguards due-diligence, ADB inspected these ash disposal sites but did not record any deficiencies that could pose environmental challenge. During the subsequent rainy season, the disposed ash was dislodged due to surface runoffs and force of river flow. As a result, there were complaints by the community and their representatives of contamination of community water resources. Similar deficiencies were encountered at the resettlement site but not identified during the safeguards due-diligence by ADB. These deficiencies along with another issue of fly ash disposal from the KSPC plant led to formal complaint and investigations under CRP. The key lesson of the project, therefore, is that ADB needs to undertake more careful safeguards due diligence through experienced staff or consultants on projects, especially for the projects where ADB enters after commencement of construction.

43. Social. Land acquisition and involuntary resettlement for the transmission line is undertaken by the Government through NGCP. KSPC, therefore, has limitations in terms of dealing with affected people. Issues related to compensation, particularly the two remaining expropriation cases in court could have been resolved through negotiated settlement. NGCP's policy and practice to compensate informal settlers for structures they own along the transmission line ROW is consistent with ADB requirements. Their detailed process on establishing eligibility and documentation on asset valuation and agreements with affected people are good examples for other private sector Projects in the Philippines struggling with issues related to informal settlers.

8 The KSPC project site was originally used to dispose fly ash from the Naga power plant. Any construction at the site

therefore required to excavate and dispose the fly ash.

Appendix 1 11

PROJECT-RELATED DATA A. Investment Identification 1. Country Philippines 2. Loan Number LN2612 3. Type of Business Power Generation – Coal 4. Project Title Visayas Base Load Power Development Project

5. Investee Company and/or Borrower

Borrower: KEPCO SPC Power Corporation

6. Amount of Approved ADB Assistance

Direct Loan Up to $120 million

B. Investment Data 1. Concept Clearance Approval 2. Date of Board Approval 11 December 2009 3. Signing Date of Legal

Documents 4 March 2010

4. Date of Loan Effectiveness In Loan Agreement 4 March 2010

Actual Number of Extensions -

5. Loan Closing Date (end of availability period)

In Loan Agreement 31 August 2011 Actual 31 December 2013 Number of Extensions 3

7. Disbursements

Initial Disbursement Final Disbursement Time Interval

10 Mar 2010 29-December-2013 3 years 9 months

Effectivity Date Original Closing Date Time Interval

10 March 2010 10 March 2010 -

8. Loan Repayment

a. A-Loan Initial Repayment Date Final Repayment Date

29 November 2011 28 May 20211

E. Data on ADB Missions No. of Missions No. of Person-Days Fact-Finding Appraisal and Negotiations Project Administration XARR Mission Others {including exit, final repayment, workout transfer}

6 9 9 1

16 34 32

10 days

12 Appendix 2

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—INFRASTRUCTURE

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

1. Within company PSD effects 1.1 Improved skills: New or strengthened strategic, managerial, operational, technical or financial skills.

Introduction of expertise in CFBC Recycling of fly ash CSR

Satisfactory KSPC’s adoption of a cleaner coal technology, i.e., CFBC, required international expertise from the company’s pool of experts, introducing additional technical knowledge to the country. Recycling of fly ash in the process of manufacturing cement is an accepted practice globally. KSPC introduced this arrangement and can serve as a model for possible replication with new coal plants. KSPC also made strides in CSR activities and public consultations process.

KSPC is talking to other cement manufacturers as potential back up users of its fly ash Better relationship and communication with civil society organizations will further improve the plant’s operation.

Low

1.2 Improved business operations: Improved ways to operate the business and compete, as seen in investee operational performance against relevant best industry benchmarks or standards.

Diversification of off-taker risk

Satisfactory Other large-scale power generation Projects prior to EPIRA are either NPC-owned or typically had long-term PPAs with NPC or the major distribution utilities. With the enactment of EPIRA, NPC could no longer enter into new PPAs to attract new investments in power generation. Off-taker risk became a major stumbling block for new entrants in the generation sector. In the case of

New power plant projects are expected to execute power purchase agreements with various off-takers especially with open access already in place.

Medium

Appendix 2 13

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

KSPC, the company entered into PSCs for roughly 86% of its total generation (171.9 MW) with electric cooperatives, distribution utilities, and industrial customers. KSPC managed to diversify the off-taker risk of the company and provided a model for future investments in power generation in the country.

1.3 Improved governance: As evident in set standards related to corporate governance, stakeholder relations, ESHS fields and/or energy conservation, and their implementation.

Safeguards Monitoring Corporate Social Responsibility

Satisfactory

KSPC continues to conduct quarterly consultation meetings with the three nearest barangays of Colon, North Poblacion and Tangke to update the communities of the different activities of the power plant and get feedback from the nearby residents. Documentations of these consultations are reported in KSPC’s quarterly monitoring reports which are available on ADB website. Since 2009 up to March 2015, KSPC implemented CSR Projects totaling about P11.2million. Recipients of KSPC's community programs include residents of adjacent barangays Colon, Tangke and North Poblacion.

KSPC is expected to continue high level of governance in CSR and Safeguards.

Low

1.4 Innovation: New or improved infrastructure design, technology, service delivery, ways to cover or contain cost, manage demand or optimize utilization, improved risk

Reuse of Fly ash

Satisfactory Fly ash, a waste product of its operations, is delivered for recycling in a cement factory and

KSPC is expected to continue fly ash reuse. The cement company’s

Low

14 Appendix 2

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

allocation between private company and government, financial structure, etc..

Innovative Technology Safeguards Monitoring.

a ready-made concrete provider. While this has been a proven ash disposal mechanism in other countries, KSPC’s ash has been found to be suitable for cement manufacturing, allowing it to adopt this innovative method for bottom and fly ash waste disposal. Although CFBC boiler technology has been widely used worldwide, the KSPC plant is one of the first to introduce the technology to the Philippines (The other being Cebu Energy Development in 2010). Much innovation was also achieved on how KSPC adopted part of ADB recommendations regarding environmental monitoring. KSPC has adopted world-class monitoring and response systems and demonstrated active civil society involvement in plant operations. KSPC conducts quarterly consultation meetings with the three nearest barangays of Colon, North Poblacion and Tangke to update the communities of the different activities of the power plant and get feedback from the nearby residents.

potential to increase capacity to take on fly ash is high. Should KSPC pursue expansion, or if other new coal-fired plants are constructed, there is a high chance to replicate the Project’s fly ash disposal arrangement. KSPC is talking to other cement manufacturers. There is also a high chance for replication of safeguards and CSR activities of the company.

Appendix 2 15

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

1.5 Catalytic element: Mobilizing or inducing more local or foreign market financing or foreign direct investment in the company.

Model for Merchant power generation Increased dependable capacity in the Visayas Grid

Satisfactory KSPC provided a model for future investments in merchant power generation in the country. With the financial success of the company, other private sector corporations. Private sector investments in the electricity generation sector steadily increased. Dependable capacity in the Visayas Grid increased to 2,160 MW from 1,493 MW at the time of appraisal (6.35% annual growth rate).

The continued financial success of KSPC will encourage further investments in power generation.

Low

2. Beyond company PSD effects 2.1 Private sector expansion: Contribution by a pioneering or high-profile Project that facilitates in its own right, or paves the way, for more private participation in the sector and economy at large.

Increase in Number of new investments

Satisfactory The Project was one of the first merchant power plants in the Visayas following the enactment of the Electricity Power Industry Reform Act in 2001. The Project has spurred private sector investment in merchant power generation not only in the Visayas, but in the whole country. In Luzon, two coal plants were commissioned after the Project’s COD. (651MWMariveles and 140MW Petron); two diesel plant (52MW TransAsia Power and 242 MW TMO). In the Visayas, one solar complex (21MW SACASOL) and one diesel plant (1 MW Desco Natural Gas) were

We expect to see more investments in coal-fired plants using environment-friendly technology. SPC is undertaking a feasibility study for construction of a 300 MW coal-fired plant to replace the Naga power plant complex.

Low

16 Appendix 2

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

commissioned after 2011. In Mindanao, one diesel plant (103MW MPC) came in May 2013.

2.2 Competition: Contribution of new competition pressure on public and/ or other sector players to raise efficiency and improve access and service levels in the industry.

Lower costs; reliable capacity

Satisfactory The KSPC plant has one of the lowest marginal costs (i.e. fuel and variable O&M cost) in the system. KSPC ranks high in the WESM’s merit dispatch order.

The KSPC plant is expected to continue to be a low cost electricity producer.

Medium

2.3 Demonstration effects: Adoption of new skills, improved infrastructure assets and services, more efficient processes, maintenance regimes, improved standards, risk allocation and mitigation beyond the Project company.

High production efficiencies

Satisfactory KSPC is self-operating and has maintained very high production efficiency in its plants. It has demonstrated competitiveness in pricing through the entry of a number of contracts with various off-takers.

KSPC is expected to continue self-O&M and high efficiency in its operations.

Low

2.4 Linkages: Relative to investments, the Project contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries etc. in support of growth.

Taxes and ER 1-94

Satisfactory KSPC is registered as a company in Naga City, Cebu Province, which allows the city and provincial governments to collect taxes from the KSPC plant. To date, a total of P40.5 million has been remitted to the DOE pursuant to ER 1-94; the plant’s operation is expected to contribute at least P14 million annually to ER 1-94 funds.

The KSPC plant’s financial strength will continue to generate income and benefits for the province through taxes and ER 1-94.

Low

2.5 Catalytic element: Mobilizing or inducing more local or foreign market financing or foreign direct investment in the sector (beyond the company) through pioneering or catalytic finance.

International banks participated in the financing of KSPC plant.

Satisfactory Credit Agricole, SMBC and ING Bank provided total of $70 million in debt financing.

Local banks, in particular, have been leading the financing of new power generation facilities.

Low

2.6. Affected laws, frameworks, regulation: Contributes to improved laws and sector

The Project demonstrated the financial

Satisfactory Coal will remain an important fuel in the Philippines’ fuel mix

Appendix 2 17

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

regulation for public private partnerships, concessions, joint ventures, and build-operate-transfer Projects; and liberalizing markets as applicable for improved sector efficiency.

viability and sustainability of investing in a coal-fired base load merchant power plant in the current regulatory environment.

and is expected to play an important role in power generation in the Philippines to enhance energy supply security of the economy and help improve overall cost of power.

3. Contribution to other ADB strategic objectives

3.1 Sector development (outputs): Contribution to other sector development outputs and outcomes not captured under point 2., such as capacity or network expansion, etc.

Marginal cost of the Project is one third of diesel-based generation

Satisfactory With increased competition in the Visayas Grid, the Visayas WESM has been running smoothly and further reforms in the sector are expected, e.g., development of a contestable market. The plant also increased energy stability and dependable capacity of the Visayas Grid.

3.2 Sector development (outcomes): Contribution to other sector development outputs and outcomes not captured under point 2., such as increased infrastructure utilization or consumption, improved in-country connectivity, improved energy security, etc.

Improved energy security: -Reserve margin in the Visayas grid increases -Involuntary load shedding eliminated in Cebu, Negros and Panay sub grid by 2011

Satisfactory KSPC’s coal-fired plant introduced much needed base load power in the Visayas, which stabilized power supply and provided the groundwork for introducing WESM in the Visayas grid.

3.3 Inclusion: Improved access to, availability or affordability of infrastructure services for the poor and other disadvantaged groups.

Increased dependable capacity in the Visayas averted power outages. KSPC plant also provided lower cost power to the grid.

Satisfactory Increase in dependable capacity has lowered frequency of load shedding and increased the reliability of energy. This is essential for economic development in the province. The Project likewise provides cheaper base load coal

The plant is expected to continue to provide low-cost electricity.

Medium

18 Appendix 2

Results area Actual achievements

a

Rating b

Justification Potential future achievements

c

Risk d

electricity to the grid.

3.4 Job creation: Creation of additional sustainable jobs or self-employment. Distinguish between jobs created within and beyond the company.

KSPC has become a major employer in Cebu.

Satisfactory KSPC generates employment income in the area as it directly employs around 140 technical/engineering staff and indirectly contracts around 210 service contractors. The service contractors are sourced locally.

KSPC will continue to employ locally. It has introduced technical/vocational skills training and internship to encourage development of manpower in the nearby townships (barangays).

Low

3.5 Environmental sustainability: Project net impact on GHG emissions. Any other contributions to environmental improvements.

Emissions of sulfur dioxide at less than target 572 mg/Nm3 and nitrous oxides at significantly less than 308 mg/Nm3 are below World Bank standards for thermal generation.

Satisfactory CFBC technology reduces SO2, NOx, and CO emissions due to the introduction of limestone in the fuel stream, staged combustion reducing operating temperatures, and fuel recirculation maximizing consumption respectively.

CFBC is a proven technology that is expected to continue reduction in harmful gasses at the plant. Nonetheless, annual GHG emissions from the plant is in the range of 1.2 million tons of CO2 eq. KSPC tries to compensate for this via its CSR initiatives like weekly medical missions to check on residents’ health and provide free medication.

Low

3.6 Regional integration: Project contributions to regional cooperation and integration by facilitating trade, cross-border mobility, cross-border power supplies, etc..

Coal Supply Contract

Satisfactory KSPC sources its coal from Indonesia through long-term CSCs with PT JSKM and PT LSP. Coal is shipped to the Facility via ocean transport.

The Project will continue to contract coal from Indonesia and international coal markets.

Medium

4. Overall Rating e Satisfactory

ESHS = environmental, social, health, and safety; GHG = greenhouse gas; PSD = private sector development.

Appendix 3 19

SECTOR REVIEW 1. The power system in the Philippines is divided into three major grids, each serving one of the country’s three regions – Luzon (northern), Visayas (central) and Mindanao (south). Since 1936, NPC has been the state-owned entity responsible for generation and transmission of electricity in the Philippines under the development plans of the DOE. However, by 2001, NPC had grown to become heavily indebted that it lacked the financial and technical resources to adequately invest in any new plants or rehabilitate existing ones.1 Intermittent blackouts became prevalent throughout the country as early as the 1990s because of the lack of new investments to improve the reliability of electricity supply. 2. To address the country’s looming energy crisis, the Philippine government enacted in 2001 the EPIRA, which aimed to restructure the power sector by introducing a stable regulatory framework for the electricity sector, introduce competition in the generation sector and encourage private sector investment in generation, transmission and distribution. EPIRA was designed to establish a model similar to those implemented in Australia, New Zealand and Singapore. By changing the structure of the sector and introducing private sector competition, the law aimed to increase efficiencies in the industry that will benefit the end-consumers through more competitive electricity rates and delivery of reliable power supply.

3. While many of the national institutions necessary for reform have been established, the pace of implementation varied across regions. Luzon led the way while the Visayas and Mindanao grid lagged behind. One of the major reforms pursued by EPIRA was for the establishment of a well-functioning WESM, which will provide the mechanism for trading electricity between the power sellers and purchasers. A fully-functioning WESM was essential to encourage new entrants to electricity generation as this will provide reliable price signals in weighing investment options. The price of electricity in the WESM is not subject to regulation and is market-driven, and is intended to reflect the true price of electricity in the long-run. The WESM also promotes cost-efficient dispatch of power plants through an economic merit order. WESM was launched in Luzon in 2006 while full implementation of the Visayas WESM came about in 2010.2 4. Demand and Supply. The DOE reports that in the Visayas, electricity supply is short by 160 to 180 MW daily because of the lack of supply from the Leyte-Luzon interconnection line, which was toppled as well as geothermal power plants that were damaged at the height of typhoon Yolanda. Various sources stated that the typhoon damaged more than 2,000 transmission structures of the 34 transmission lines in the Visayas and affected 22 substations in the area. NGCP has prioritized the restoration of major lines interconnecting Luzon to the Visayas, Leyte to Cebu, and then Leyte to Bohol. NGCP’s web site reported a system peak demand of 1,319 MW in Visayas (13 January 2014) against a capacity of 1,344 MW, with tight reserves of 25 MW or less than 2% of system capacity. Rotating brown-outs are expected to go on until operation of various plants in the Visayas heavily damaged by the typhoon resumes. The Unified Leyte geothermal complex, which supplies 500MW to the grid, is currently only

1 NPC owed approximately US$16.39 billion to creditors, consisting of US$10.42 billion worth of IPP obligations and

US$5.97 billion of debt. 2 The initial plan was to launch WESM in the Visayas in 2007 but was cancelled due to tight supply conditions. To

stabilize supply, the DOE implemented a day-ahead market (the Visayas Supply Augmentation Auction Program) in 2009. As more electricity generation came online, including the KSPC coal-fired plant, the demand-supply conditions in the Visayas were deemed sufficient to support a well-functioning electricity spot market. WESM in the Visayas fully launched in 2010.

20 Appendix 3

providing around 140MW. To date, coal and geothermal power plants remain the largest source of electricity in the Visayas, supplying 52% and 45% of total generation, respectively. 5. Privatization of NPC Assets. At the time of the Project’s approval, the Government had already sold 18 power plants, 16 of which are located in Luzon and Visayas, with a combined rated capacity of 2.77 GWs or 73% of total in the Luzon-Visayas grids. This has further improved to date to 22 generation plants with total installed capacity of around 4.5 GWs out of 34 plants for privatization. Government has also successfully assigned 3.6GWs of energy contracts with independent power producers to IPPAs. NPC still retains ownership of 12 plants with total capacity of 1.7GWs and IPP contracts with a total capacity of 1.4GWs

6. Visayas WESM Operations. In preparation for open access, the WESM was launched in Luzon in 2006 and in the Visayas in 2010. Around 90% of electricity pooled in the WESM is covered by bilateral contracts among generation plants and off-takers, e.g., distribution utilities, electric cooperatives and aggregators. Around 10% of supply is actively traded in the spot market. WESM in the Visayas started commercial operations on 26 December 2010. However, the market was suspended by the ERC in the Visayas grid starting 8 November 2013 because of the power system disturbance experienced in the region given the devastation caused by typhoon Yolanda that made landfall during the same day. Market suspension was in effect until April 2014, when supply, demand, and transmission network operations have normalized. The Visayas WESM is currently under normal operations.

7. Open Access. The DOE and the ERC, together with the PEMC launched the commercial operations and integration of the Retail Competition and Open Access (RCOA) into the WESM on 26 June 2013. PEMC is the Central Registration Body (CRB) of the RCOA. The RCOA will allow any qualified contestable customer the use of transmission, and/or distribution system and associated facilities subject to the payment of transmission and/or distribution retail wheeling rates as approved by the ERC. This means that aside from the Distribution Utilities (DUs), customers may now have the choice of procuring their power supply from Retail Electricity Suppliers (RES) other than the DU which has been their perpetual supplier. For the initial implementation of RCOA, the qualified customers are those with an average of 1 megawatt electricity consumption over the course of a year.

Appendix 4

21

ENVIRONMENTAL IMPACT A. Background 1. The Project was in planning stage much before when it entered the ADB’s pipeline in 2008. The environmental impacts of the Project were assessed through an environmental impact assessment (EIA) that was approved by the Government on 5 December 2005. As a part of its due diligence, ADB classified the Project as category A for environment under ADB’s Environment Policy (2002), reviewed the EIA and required certain additional assessment and mitigation measures. A summary environmental impact assessment addressing these gaps was prepared and, in accordance with ADB's Public Communications Policy (2005), disclosed to the public through the ADB website on 10 March 2009. 2. ADB commenced its due-diligence in December 2008 while construction of the project was started in January 2008. By the time ADB entered the project the contractor had already excavated certain fly ash1 from the project site and disposed it at private lots at Barangays Pangdan and Naalad. The Project site is located on reclaimed land where fly ash from an adjoining power plant was deposited. One of the key environmental aspects during the construction therefore was disposal of the excavated fly ash as a result of construction of the Project. Also at the time of Project approval by ADB, it was proposed that the fly ash from the Project will be utilized in a nearby cement plant. The arrangement for fly ash utilization though could not materialize and the Project was under pressure to develop alternate arrangements for ash disposal. 3. As a means to address this problem, it was proposed that a fly ash landfill be created at a site called Balili and the disposal of fly ash shall take place through the provincial government of Cebu. The Balili site though proved to be controversial and local NGO’s opposed its use for fly ash disposal. People also complained about air pollution. In 2011 a complaint was formally lodged with the compliance review panel (CRP) of ADB, which after its investigation confirmed non-compliance with ADB’s environmental policy on several counts and recommended four actions in 2012 to bring back the Project into compliance. ADB along with KSPC has been working on these recommendations since and regular quarterly reports are being submitted to the CRP. This report therefore also includes Mission’s observations in relation to progress on implementation of CRP recommendations. B. Mission Review Findings 4. Compliance with government permits. KSPC is in compliance with all the requirements of Environmental Clearance Certificate (ECC) issued by DENR as well as the EMP requirements for the Project. Up to the time of XARR review in April 2015, beginning April 2010, KSPC has been submitting regular quarterly environmental reports to ADB. These reports provide details of environmental monitoring including ambient air, stack testing, water effluent, ground water, marine water, river water, marine life (semiannual) and Toxicity Characteristic Leaching Procedure test for fly ash and bed ash (semiannual). The emissions from the plant are well within the applicable emission standards and barring occasional exceedance of particulates and noise near the adjoining highway, observations are with the ambient air quality and noise standards.

1 The KSPC project site was originally used to dispose fly ash from the Naga power plant. Any construction at the site

therefore required to excavate and dispose the fly ash.

Appendix 4 22

5. Environmental impacts. Environmental impacts were assessed to be minor, short-term, and temporary in nature during construction. Quarterly environmental monitoring was conducted during the construction phase, and measured parameters for ambient air, noise, surface water and groundwater. The quarterly reports also indicate satisfactory implementation of EMP and no significant violation of noise, air or water quality standards. Construction performance was generally compliant with regulatory requirements except for a few spikes in the noise levels which were mainly related to vehicular movement. Disposal of excavated ash was the only activity that gave rise to environmental impacts outside the plant premises. Initially this issue was not adequately managed which was also a cause for complaint against the Project. Post CRP recommendations, KSPC took adequate initiatives and, at the time of preparing this report, the issue was closed. During operations there were likely significant issues in relation to air emission and ambient air quality, thermal discharge, wastewater quality, ambient noise and health and safety; management of which required continued attention and adherence to operation phase EMP requirements for the Project. Following sections detail the status in relation to each of these issues:

i. Air Emissions 6. KSPC has initially maintained 7 monitoring stations during the start of construction in 2008 for the quarterly testing of ambient air quality. After the establishment of 2 continuous 24-hour ambient air quality monitoring equipment in 2011 located in Barangays Colon and North Poblacion, KSPC through DENR’s approval reduced the sampling points to 4. Parameters measured for these points are SO2, NOx, PM10, and noise, while the two continuous equipment are additionally capable of meteorological data measurement. 7. In 2013 two additional sampling points were added to measure PM10 and noise levels near the ash pond. In 2014, KSPC through its MMT established 1 additional sampling point at a residential area in Barangay North Poblacion to measure effects of the nearby coal handling and unloading activities at the coal yard area of KSPC’s plant site. Parameters measured are SO2, NOx, 24-hr PM-10, and noise. All the 7 manual air monitoring activities are conducted by a DENR-accredited third-party laboratory and witnessed by the MMT while the 2 continuous ambient air monitoring equipment are maintained and calibrated properly by KSPC. 8. KSPC has received some minor complaints on isolated cases often caused by sudden gusts of strong winds of air borne coal dust from coal handling area. Point persons in nearby community (Colon and North Poblacion) have been provided with mobile communication means to alert such incidences. Upon receiving a warning, the coal handling activities are suspended until the gust subsides (10-15 minutes). To minimize these incidents, the coal handling area is cleaned twice a month at end of every shipment. Mission specifically inspected the coal handling conveyors and coal handling area and was satisfied by the cleanliness and dust suppression mechanisms in place.

ii. Ash Disposal 9. The power plant during the full operation generates approximately 120 tons of fly ash and 20 tons of bed ash daily. At the Project design stage, the proposed fly ash management was by way of its utilization in neighboring cement plants that had adequate capacity to do so. Later, an option of landfill at Balili was contemplated which though did not materialize due to land ownership and environmental issues. In 2010, KSPC started constructing its own ash pond

Appendix 4

23

within its site including a big ash pond at the Naga Power Plant site for co-use. In 2012, KSPC started recycling of the ash to APO Cement, a company that has a cement plant in Naga, and to GeoTransport, a company with ready-mixed concrete batching plants in Cebu. In early 2014, as an additional safeguard, KSPC completed expanding its own emergency ash pond within its site, increasing the capacity to 44,000MT which can hold approximately a year’s worth of fly ash and bed ash generation of the power plant.

10. APO and GeoTransport agreements are for 10 years. APO can use bed ash and wet ash and therefore there is no need to separate in the ash pond. Closed pneumatic bulk trucks are used in transporting ash from KSPC site to APO and/or GeoTransport site. As a result of these contracts, a 100 percent recycling of all ash generated in the plant has been achieved. The emergency ash pond is used only when due to some maintenance or malfunctioning issue the recyclers are temporarily unable to accept the ash. At the time of this Mission approximately 1500 tons of ash is stored in emergency ash pond which just about 3 per cent of its capacity. Mission considers that the present system fly and bed ash utilization is adequate and sustainable.

iii. Noise Level

11. Noise levels have been observed during the construction as well as operations of the plant regularly. The noise standards are exceeded along the highway but nowhere else, indicating the plant itself is compliant with the noise standards for industrial areas. The power plant has installed noise buffers (turbine motor casings) and implemented proper maintenance of equipment. Noise levels in the working area are regularly checked and workers are provided with ear muffs. Ambient noise is also being monitored. No complaints on high noise levels have been received.

iv. Thermal Discharge 12. The plant operates using a once-through cooling system with the effluent coming out through a submerged discharge tunnel. The average seawater volume required for cooling per day is approximately 1,072,800 m3. The marine outfall was designed to enable the effluent cool and dilute effectively in the mixing zone (100-m radius of the discharge point) and generate a resultant increase in temperature within the mixing zone of not more than 3°C compared to the ambient temperature. DENR in their environmental clearance further specified that the temperature rise at a nearby coral reef should not exceed 0.5oC. Compliance to the said ADB standard and DENR-EMB requirement has been checked quarterly by a third-party and semi-annually by another third party company that conducts marine life monitoring at the sea area fronting the power plant. Results show that the maximum observed temperature rise is only 2°C which indicates compliance with the standards. No non-compliance in the thermal effluents has been observed during the operation stage in terms of temperature rise near the coral reef. Furthermore, the biological monitoring reports indicate (biannual, starting from 2013) no discernable impact on marine life.

v. Wastewater Effluent Management 13. Average daily quantity of industrial wastewater and domestic wastewater generated is 290m3 and 30m3, respectively. The industrial wastewater is treated in the centralized wastewater treatment facility comprising oil skimmers, coagulation tank, settling tank, activated carbon and pressure filters. The treated industrial wastewater is being re-used for dust

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suppression purposes. The domestic wastewater undergoes biological treatment and treated wastewater is discharged into the adjoining Bohol Strait. All tested parameters such as biological oxygen demand, chemical oxygen demand, oil and grease are within the limits of Philippines National Environment Quality Standards.

vi. Solid Waste Management 14. Wastes in the power plant are categorized as non-hazardous solid wastes and hazardous wastes. Non-hazardous solid wastes are all collected by the Naga City LGU. The non-hazardous solid waste generation in a month ranges over 2 -7 tons/month. Hazardous waste generated at the plant includes waste oils, busted fluorescent lamps, and contaminated containers. All wastes generated are temporarily stored in the waste treatment and sewerage building for future treatment and disposal by accredited service provider. An updated inventory of hazardous waste stored at the site is maintained.

vii. Greenhouse Gas Emission 15. KSPC is monitoring the CO2 emissions of the plant based on the coal consumption and percent of carbon in the tested coal. Accordingly the annual GHG emission from the plant is in the range of 1.2 million tons of CO2 eq. 16. Status of follow-up on Recommendations of Compliance Review Panel. The CRP in their final report on the non-compliance of the Project with the ADB’s safeguards policies made four recommendations2. According to Mission’s observations, the recommendation on ash utilization and management of old ash deposits has been fully complied with. Mission visited the old ash disposal sites and observed adequate cover and constructed river embankments along the ash deposit to ensure that ash does not get eroded and dislodged. KSPC has also started inviting Cebu-based NGO representatives to the MMT quarterly meetings. The progress on recommendation on community outreach on health issues is adequate and is being continued with the help of medical professions. The work on recommendation on dispersion modelling study though has commenced and the consultant to undertake the study has been appointed, the procurement of the monitoring equipment has not taken place and needs to be expedited 17. Safety and Health Management System. KSPC records show that a Health and Safety Procedure formulated by the Company was approved in May 2014. The standards specified in the document are compliant with the requirements of the Department of Labor and Employment (DOLE) of the Philippines on Occupational Health and Safety under Article 162 of the Labor Code. The Safety Officer conducts a daily inspection within the plant, while the work

2 (i) Undertake a comprehensive air dispersion modeling study that includes the key pollution sources in the project

area of influence and validate the predictions with actual air emissions and ambient air quality monitoring data. Develop an action plan based on recommendations from the modeling study and emphasize the potential for continuous monitoring and recording of air emissions and ambient air quality, (ii) Undertake a comprehensive study on ash utilization at cement plants and the ready-to-mix concrete plant and implement plant-specific recommendations and EMPs. In addition, prepare and implement EMPs for the existing ash ponds and historic ash disposal sites, (iii) Expand or complement the existing MMT to ensure representation of all communities directly affected and all appropriate NGOs and to facilitate transparent and inclusive communication and grievance redress and (iv)Implement a community outreach program focusing on preventing negative health impacts from air, water and noise pollution and potentially negative impacts from exposure to unprotected coal ash deposits.

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supervisor conducts the periodic check of machine, equipment and workers’ adherence to the safety procedure. In 2014, KSPC met its target safety man-hours of 259,872 hours and recorded no fatality for the year (note: records from previous years have to be checked). An Emergency Response Team was also formed in April 2014 as part of compliance with DOLE. Trainings such as basic first aid and basic life support and fire safety are semi-annually provided to representatives of the KSPC. 18. Grievance Redress Mechanism. KSPC has effectively organized a team where all grievances and complaints are brought for the company’s attention, discussion, and resolution. The MMT is composed of all concerned stakeholders majority of which are leaders of the host communities and related sectors therein. The MMT acts as the contact point and information sources of the local populace. Improvements and expansion of the MMT are among the future plans of KSPC. Quarterly MMT Technical Committee Meetings have been conducted quite regularly during the Project’s operations. 19. The Community Relations Officer (CRO) also acts as the front line in responding to direct complaints and grievances forwarded to the management. The Pollution Control Officer (PCO) as well as the other technical supervisors, and managers coordinate and support the CRO in this undertaking through the company’s complaint management program. C. Conclusion 20. Based on the review and evaluation of available safeguards documents, the site visit, and interviews with KSPC’s health and safety department staff members, it is concluded that national and Asian Development Bank safeguards requirements related to the Project’s environmental and social impacts have been adequately met. KSPC’s environmental and social performance has been satisfactory. Monitoring and reporting activities of the Project are being conducted and reported regularly. KSPC has satisfactorily implemented the CRP recommendations in relation to management of old ash, outreach on community health and expanding of the MMT to include NGO’s representation.

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SOCIAL IMPACT

I. Project Overview 1. The Project involved the construction and operation of a 200 MW coal-fired power plant in Colon, in the city of Naga, Cebu Province, about 20 km from Cebu City. The plant was constructed on 10 hectares of land (the Naga land) which was formerly the ash disposal site of the existing Salcon coal power plant across the Project. 2. The social due diligence undertaken during Project preparation identified the following involuntary resettlement impacts: (i) relocation of 17 out 22 informal settler families occupying the Naga land prior to ADB involvement; (ii) loss of private land and structures and impacts on informal settlers along the 138 KV Transmission Line (T/L) alignment. The Project was classified as B with respect to ADB’s 1995 Involuntary Resettlement Policy and a resettlement plan was prepared. No indigenous people live in Naga City and households in the Project area classify themselves as Cebuano. The Project was classified as C with respect to ADB’s 1998 Indigenous Policy. No indigenous people were affected by the Project. As part of the requirements of the Philippine Environmental Impact Statement and KSPC’s commitment to build a harmonious relationship in the community, the Project was expected to have positive impacts through the implementation of the Social Development Plan (SDP), KSPC’s Corporate Social Responsibility (CSR) programs and benefit-sharing under the Energy Regulations 1-94 (ER 1-94). II. Review Findings

A. Compliance with Social Safeguard Requirements

3. Involuntary Resettlement. Out of 22 informal settler families who occupied the plant site, 17 were relocated by the local government prior to ADB involvement on reclaimed land adjacent to the power plant. Affected families preferred to relocate in the same vicinity to be closer to employment opportunities. The relocation activity was carried out as a joint effort by Barangay Colon, Naga-LGU, NPC and KSPC. KSPC provided financial assistance, labor force needed to construct homes for the relocated families, basic infrastructure and power and water utilities at the relocation site. To improve the living conditions and protect the residents from direct contact with the land reclaimed with ash, KSPC financed the concreting of the area where the houses of the residents are standing including the pathways and open spaces. Using local government funds, the Barangay has also recently improved the safety and security of the area by constructing a concrete pathway over the discharge canal of the old Salcon power plant. Barangay officials have advised the residents not to allow anymore relatives to come to the area. The barangay officials are also closely regulating the construction of the additional structures because of the limited space. 4. Five families claim to have legal titles and partially encroached in the leased land. In 2009, NPC filed a civil case for recovery of possession of the areas occupied by these 5 families. While the court case is in progress, KSPC had a compromise agreement with three families and compensation for structures encroaching on Naga land was paid in April 2010. KSPC’s contractor then proceeded to construct the plant’s perimeter fence. The other two encroachers did not respond to the complaint nor did they appear in court and were declared in default by the local court. In 2011, the Court Order declared NPC entitled to the possession of the property and ordered the 2 defendants to remove the improvements that they have introduced in the lot

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and to pay P 5,000.00 to the plaintiff as litigation expense. KSPC and NPC did not recover the litigation expense from the encroachers.

5. Construction of the 0.7km 138 KV transmission line affected 10 land parcels with a total area of 6,036 sqm. At the time of Project preparation, it was anticipated that the T/L will affect 5 landowners, 4 tenants, 13 structure owners and 10 relocatee-households. Following the final alignment, 11 landowners, 1 tenant, 13 structures owners and 10 relocatee-households were affected. Out of the 10 land parcels, 7 were acquired and paid a total amount of P3,460,941.00 at a compensation rate of P813.00 per square meter in 2010 prior to works starting on those lands. Meanwhile, 4 underwent expropriation proceedings before the Regional Trial Court (RTC) in Cebu City. Compensation has been paid for 2 landowners and the transfer of ownership is in progress. As of January 2015, two cases are still in court. Once the court has ruled on the just compensation, the affected landowner will have to abide by such decision and accept the applicable payment. As a security for the landowners, a provisional deposit equivalent to 100 percent of the properties’ BIR zonal value has been made, which they can request from the Court to be released to them anytime. All the affected 13 house/structure owners (of which 10 are informal settlers) within the 30 meters right-of-way of the transmission received the compensation/payments for their properties including plants crops and trees. 6. NGCP's policy and practice to compensate informal settlers for structures they own along the transmission line ROW is consistent with ADB requirements. Their detailed process on establishing eligibility begins with the preparation of a master list of all project affected persons and an inventory of land, structures or any other assets such as crops and trees. A valuation of affected houses and other structures is undertaken by calculating the cost of materials at current market process and labor to construct a similar structure. A complete supporting documentation on the valuation of the replacement cost of the structure such as the bill of materials and detailed cost estimate calculation for each type of work (carpentry, electrical, painting, etc.) required, the floor plan, the abstract of canvass from three hardware and construction supply suppliers, among others is prepared and signed by NGCP and the affected person. Once the replacement cost for the house is determined, agreements are then signed with affected people in English and Cebuano. In addition to the replacement cost for structure, disturbance compensation is also provided to affected informal settlers. As a result, at least 4 informal settler families affected by the transmission line ROW purchased land and constructed better homes in adjacent lots outside the ROW using the compensation received while the others have moved out and bought new properties in other locations. 7. Indigenous Peoples. No indigenous people were affected by the Project. B. Other Social Dimensions 8. Community Engagement. KSPC continues to conduct quarterly consultation meetings with the three nearest barangays of Colon, North Poblacion and Tangke to update the communities of the different activities of the power plant and get feedback from the nearby residents. Documentations of these consultations are reported in KSPC’s quarterly monitoring reports which are available on ADB website. 9. Labor and working conditions. KSPC is complying with the Philippine Labor Code and ADB’s Social Protection requirements. KSPC's rank and file staff and supervisory staff have formed labor unions for the purpose of collective bargaining over wages, benefits, and working conditions for their membership, and on representing their members in disagreement with management over contract provisions. KSPC Management respects the rights of its employees

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and has thus exerted best efforts in accordance with the Philippine Labor Code and ADB’s Social Protection requirements. 10. Social Development and CSR. During Project preparation, it was anticipated that an annual budget of P240,000 will be allocated for such programs. Since 2009 up to March 2015, KSPC’s Community and Public Relations Department (C&PR) have implemented Projects totaling about P11.2 million. Recipients of KSPC's community programs include residents of adjacent barangays Colon, Tangke and North Poblacion. Relocated families also benefitted from jobs during construction phase, medical programs, and the technical skills and livelihood trainings conducted annually. Women in the host barangays benefitted from livelihood skills training, weekly medical check-ups and other programs. 11. Benefit Sharing. KSPC is setting aside one centavo per kilowatt-hour of its electricity sales as financial benefits to the host communities, i.e. Barangay Colon, North Poblacion and Tangke, Naga City, Cebu Province and the region, pursuant to ER 1-94. Since the Project started selling power during the commissioning phase in October 2010, a total of P40.5 million has been remitted to the DOE. One of the priority Projects is the much needed water supply system in Barangay Colon. KSPC’s C&PR department is assisting the local community in preparing Project proposals for submission to DOE. III. Conclusion 12. Aside from the 2 remaining expropriation cases in the RTC, there are no other outstanding issues on land acquisition and resettlement. These cases are expected to be resolved soon and KSPC will report on the status to ADB through its periodic environmental and social monitoring reports which are disclosed on ADB website. KSPC will also update ADB on the progress on the formation of labor unions and outcome of the collective bargaining negotiations. ER 1-94 funds from the KSPC plant is expected to be at least P14 million annually. For 25 years of operation, these benefits can provide electricity to several barangays, pave roads, and construct water supply systems and other basic facilities. KSPC is therefore recognized as a strong partner in the continuing growth and progress of the community.