LACHICA % ASSOCIATES RECEIVED BY: Wacoal DATES Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN| THE MATTER OF THE APPLICATION FOR APPROVAL OF THE POWER SALES AGREEMENT (PSA) BETWEEN DAVAO DEL SUR ELECTRIC COOPERATIVE, INC, (BASURECO) AND SARANGANI ENERGY CORPORATION (SEC), WITH PRAYER FOR PROVISIONAL AUTHORITY DAVAO DEL SUR ELECTRIC COOPERATIVE, INC. (DASURECO) AND SARANGANI ENERGY CORPORATION (SEC), Applicants. ERC CASE NO. 2014-107 RC On July 18, 2014, Davao Del Sur Electric Cooperative, Inc. {DASURECO) and Sarangani Energy Corporation (SEC) filed an application for the approval of their Power Sales Agreement (PSA), with prayer for provisional authority. In the said application, DASURECO and SEC alleged, among others, the following: 1, - DASURECO is an electric cooperative duly organized and existing under the laws of the Republic of the Philippines with principal office at Cogon, Digos City, Davao Del Sur. It has a franchise to distribute electricity in the City of Digos and the Municipalities of Bansalan, Don Marcelino, Jose Abad Santos, Hagonoy, Kiblawan, Magsaysay,ERC CASE NO. 2014-107 RC ORDER/August 22, 2044 Page 2 of 29 Malalag, Malita, Matanao, Padada, Sarangani, Sulop, Sta.Cruz, and Sta. Maria, all in the Province of Davao Del Sur. A copy of its Certificate of Franchise is attached to the joint application as Annex “A”; 2. SEC is a generation company duly authorized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at 4" Floor, Alphaland Southgate Tower, 2258 Chino Roces Avenue corner EDSA, Makati City. Copies of its Certificate of Incorporation and Certificate of Filing of Amended Articles of Incorporation issued by the Securities and Exchange Commission, Amended Articles of Incorporation and By-Laws, latest Genera! Information Sheet (GIS) and jatest Audited Financial Statements (AFS) are attached to the joint application as Annexes “B” and series; NATURE OF THE APPLICATION 3. Pursuant to Rule 20 (B) of the ERC Rules of Practice and Procedure, approved by the Commission on June 22, 2006 in Resolution No. 38, Series of 2006, the instant application is submitted to the Commission for its review and approval of their PSA dated March 29, 2014; A copy of the PSA is attached to the joint application as Annex °C”; COMPLIANCE WITH PRE-FILING REQUIREMENTS 4. In compliance with Rule 6 of the ERC Rules of Practice and Procedure, they have furnished the legislative bodies of each of the Local Government Units (LGUs) where they principally operate a copy of the joint application with all its annexes and accompanying documents. The corresponding proofs of receipt are attached to the joint application as Annexes “D” and series;ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 3 of 29 5. They caused the publication of the joint application in its entirety, excluding its annexes, in a newspaper of general circulation within DASURECO's franchise area. Copies of the newspaper and the corresponding Affidavit of Publication are attached to the joint application as Annexes "E” and “E-1,” respectively; STATEMENT OF FACTS 6. Shortage of Power Supply in the Mindanao Grid. The Mindanao Grid has long been suffering from a deficit in its power supply. The generating capacity in the grid is no longer sufficient to meet the power requirements of Mindanao; 7. As a result, Mindanao, including the franchise area of DASURECO, has experienced and is at risk of suffering power outages adversely affecting local businesses and the daily lives of all electricity consumers. The lack of sufficient and reliable power supply has long been a barrier to much needed capital investment that would spur the local economy not only in the franchise area of DASURECO but in greater Mindanao as well; 8. Drastic Reduction in the National Power Corporation/Power Sector Assets and _ Liabilities Management Corporation’s (NPC/PSALM) Supply. The main power supplier in Mindanao significantly reduced its allocations to distribution utilities, further aggravating the power shortage. 8.1 PSALM, which took over all the power generation assets of NPC pursuant to Republic Act No. 9136, otherwise known as the “Electric Power Industry Reform Act of 2001” (EPIRA), supplies the bulk of the power requirements of Mindanao. NPC/PSALM, likewise, supplies majority of DASURECO's current power supply;ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 4 of 29 8.2 Recently, NPC/PSALM reduced by about one-third (1/3) its firm supply commitments to distribution utilities in Mindanao, including DASURECO. This has resulted in further widespread power shortages; and 8.3 NPC/PSALM Certification. DASURECO has requested NPC/PSALM for a certification on whether it will have available capacity and energy to supply DASURECO during the term of the PSA. DASURECO undertakes to submit the certification to this Honorable Commission once it is obtained. A copy of the said request is attached to the joint application as Annex “F"; 9. Necessity for a Long-term Power Supply Solution. It is necessary for a distribution utility, like DASURECO, to ensure thai the power supply requirements within its franchise area are adequately covered by supply contracts; 10. DASURECO’s power demand is expected to increase steadily in the coming years. Hence, there is a need for it to procure sufficient long-term power supply so that the long-term power requirements of its customers are adequately addressed; 11.. In 2012, DASURECO started receiving offers from Independent Power Producers (IPPs) for the supply of baseload and peaking power, among them, SEC; 12, After an assessment of the offers and to ensure sufficient, reliable and long-term power supply in its franchise area, DASURECO executed the subject PSA with SEC for the supply of up to fifteen (15) MW of baseload power over ‘the long-term; 13. Under the law, no contract for the supply of power can become legally effective unless approved by the Commission. Hence, the instant joint application;ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 5 of 29 ABSTRACT OF THE POWER SALES AGREEMENT REL, MATI 14. The Generation Facilities. To supply power under the PSA, SEC shali construct, own, operate, manage and maintain a 2x120 MW _ Circulating Fiuidized Bed Combustor Boiler CoalFired Power Plant in the Municipality of Maasim, Sarangani (SEC Power Station); 14.1 The SEC Power Station is being implemented in two (2) phases, each for one (1) unit with a net generating capacity of 105 MW; 14.2 The power to be supplied under the subject PSA shall be sourced from the second phase of the SEC. Power Station (SEC Phase II Plant). A copy of the Certification on the Piant’s Heat Rate is attached to the joint application as Annex "G’; and 14.3 Expected Commercial Operations. The SEC Phase Il Plant is scheduled to commence commercial operations within thirty-six (36) months from the effectiveness of the PSA, as discussed below, or such later date as may be agreed by the Parties; 15. Salient Features of the PSA: 15.1 Contracted Capacity. Under the PSA, SEC shail supply or cause to supply to DASURECO the latter’s baseload electric power requirements up to the Contracted Capacity in accordance with the following schedule and.the Dispatchable Energy as indicated in and subject to the terms and conditions of the PSA:ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 6 of 29 16. 17. 19. Contract Year | Contracted Capacity 1to2 10 MW. 3 to 25 15 _ MW 15.2 Within twenty-four (24) months after the Effective Date, DASURECO may increase the Contracted Capacity for the first and second contract years to 15 MW, subject to an adjustment of the Capital Recovery Fee (CRF), 15.3 Term. The term of supply and purchase under the PSA shall be for twenty-five (25) years commencing on the date the SEC Phase II Plant is ready to commence commercial operations; and 15. Effectiveness. The Parties’ obligations under the PSA shall become effective upon, among other conditions, the Commission's approval of the PSA and the pricing structure therein, and the attainment or waiver of financial close for the project; Stages of Supply. SEC shall supply power to DASURECO during the commissioning of tha SEC Phase ll Plant and thereafter, during the full commercial operations of the Plant. As discussed below, DASURECO shall pay a lower rate during commissioning; Tariff Lower than Appropriate Tariff. SEC understands that it may be allowed to charge an appropriate tariff that will enable it to recover allowable costs to build and operate: the SEC Phase II Plant at an approved rate of return consistent with recent rulings of this Honorable Commission; However, due to the request of its customers for lower rates and for parity of pricing for its customers, SEC agreed to a tariff that is lower than the tariff that it would have been allowed to charge; A comparison between the tariff in the subject PSA and the ‘appropriate tariff is summarized in the table below. The difference represents a reduction in revenue whichERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 7 of 29 SEC has agreed to absorb for the benefit of its customers: Appropriate PSA Tariff Tariff Difference Foreign | Local | Foreign | Local | Foreign] Local (USD) | (PhP) | (USD) | (PhP) (USD) | (PRP) CRF (/kWimo) Year 1 20.32 | 427.32 | 23.57 |495.69| 3.25 |68.37 Year 2 23.33 | 490.56 | 27.06 569.05) 3.73 | 78.49 Year 3 28.69 | 490.56 |. 33.28 |569.05| 4.59 | 78.49 Year 4 and) 58.69" )603.37") 33.28 |699.91] 4.59 |96.54 Onwards FOMF . (PhP/kWimo) 333.23 333.23 VOMF . (PhP/kWh) 0.3170 0.3170 Fuel Cost Pass-through Pass-through - ‘The GRF for Year 4 and onwards shall be $30.89/kWimo and PhP668.68/KWimo if DASURECO does not exercise its option to increase the Contracted Capacity from 10 MW to 15 MW during the first two (2) years of commercial operations. 20. 21 A detailed explanation of the comparison is attached to the joint application as Annex “H"; In view of the foregoing, SEC submits that the evaluation of the present application should be based on the appropriate tariff, and not on the tariff in the PSA; Purchased Power Rate. The rates to be paid by DASURECO to SEC depend on whether the power is delivered during commissioning or during commercial operations of the SEC Phase II Plant. These rates and their corresponding adjustments are reflected in the formulas below:ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 8 of 29 1. Monthly Payments The Monthly Payments shall be paid to the Seller on a monthly basis in accordance with the following formula: Monthly Payments = CRF + FOMF + VOMF + AFC + SC + RCEC + BCEC + Taxes Where: CRF = Capital Recovery Fees FOMF = Fixed Operation and Maintenance Fee VOMF = Variable Operation and Maintenance Fee AFC = Actual Fuel Cost sc = Start-up Costs RCEC = Replacement Capacity and Energy Costs BCEC = Backup Capacity and Energy Costs Taxes = Value-Added Tax, other applicable taxes and Government impositions, if any 4.1. CRF The CRF shall be computed as follows: 1.1.1 During the First Contract Year: CRF, = (FCRF, + DCRF,) x CC X F Where: CRF, = Capital Recovery Fee for the First Contract Year FCRF, = $20.32 per kW per month which shall be converted to Philippine Pesos on the Commercial Operation Date at theERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 9 of 29 DCRF, cc Where: —D TMED weighted average US Dollar to Philippine Peso exchange rate provided in Schedule | (Power Plant Foreign Capital Recovery Fee Conversion) PhP427.32 per kW per month Contracted Capacity ED TMED Electricity delivered during the billing period in kWh Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant, and allowable start-up time due to period of non-generation due to a Buyer dispatch order or an Allowed Outage, and any other hours as a consequence of Buyer's failure to perform any of its obligations 1 if the foregoing formula results in F being greater than 1 1.1.2 During the Second Contract Year CRF, = (FCRF, + DCRF,) X CCX F Where: CRF2 Capital Recovery Fee for the Second Contract YearERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 10 of 28 FCRF, = DCRF, = cc = Where: TMED = $23.33 per kW per month which shall be converted to Philippine Pesos on the Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule | (Power Plant Foreign Capital Recovery Fee Conversion) PhP490.56 per kW per month Contracted Capacity =D TMED Electricity delivered during the billing period in kWh Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant, and allowable start-up time due to period of non-generation due to a Buyer dispatch order or an Allowed Outage, and any other hours as a consequence of Buyer's failure to perform any of its obligations 1 if the foregoing formula results in F being greater than 1 1.1.3 During the Third Contract Year CRF, = (FCRF, + DCRF3) X CCX FERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 11 of 29 Where: CRF3 = FCRF, = DCRF, = cc = Where: ED 5 TMED = Capital Recovery Fee for the third Contract Year $28.69 per KW per month which shall be converted to Philippine Pesos on the Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule (Power Plant Foreign Capital Recovery Fee Conversion) PhP490.56 per kW per month Contracted Capacity ED TMED Electricity delivered during the billing period in kWh Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant, and allowable start-up time due to period of non-generation due to a Buyer dispatch order or an Allowed Outage, and any other hours as a consequence of Buyer's failure to perform any of its obligations 1 if the foregoing formula results in F being greater than 1ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 12 of 29 1.1.4 From the Fourth Contract Year up to the End of the Term CRF = (FCRF + DCRF) x CCX F Where: CRF = FCRF = DCRF = cc = Where: ED = TMED = Capital Recovery Fee for the Fourth Contract Year up to the end of the Term $30.69 per kW per month which shall be converted to Philippine Pesos on Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule | (Power Plant Foreign Capital Recovery Fee Conversion); ot, if either of the conditions in Section 6.19(b)' of this Agreement applies, $28.69 PhP668.68 per kW per month; or, if either of the conditions in Section 6.19(b)' of this Agreement applies, PhP603.37 per kW per month Contracted Capacity ED TMED Electricity delivered during the billing period in kWh Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant, and * The entry "Section 6,19(by" in Schedule B, Sec. 1.1.4., page 40 of the PSA is a typographical error. The correct entry is “Section °6.1(b)",ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 13 of 29 allowable start-up time due to period of non-generation due to a Buyer dispatch order or an Allowed Outage, and any other hours as a consequence of Buyer's failure to perform any of its obligations F = 1 if the foregoing formula results in F being greater than 1 41.2 Fixed Operation and Maintenance Fee The Fixed Operation and Maintenance (O&M) Fee covers the operating and maintenance costs of the SEC Power Plant. It shail be computed according to the following formula: FCP FX LOR rouse — on x f(ae EE) fos cc Where: FOMF = Fixed Operation and Maintenance Fee in Philippine Pesos OMR = PhP333:23 per kW per month cc = Contracted Capacity ED F = TMED Where: ED = Electricity delivered during the billing period in kWh TMED = Theoretical Maximum Energy Delivered being the Contracted Capacity multiptied by the hours in the relevant month, less anyERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 14 of 29 FCP, LCP, adjustments made for Allowed Outage, limitation due to dispatch order, Force . Majeure of SEC Power Plant, and allowable start- up time due to period of non- generation due to a Buyer dispatch order or an Allowed Outage, and any other hours as a consequence of Buyer's failure to perform any of its obligations 1 if the foregoing formula results in F being greater than 1 The arithmetic average of the values of the United States Consumer Price Index for all Items, as last published on or before the last day of such billing month by the International Monetary Fund; provided that if the International Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shalt apply. The arithmetic average of the values as of May 31, 2011 of the United States Consumer Price Index for all Items; as published by the International Monetary Fund, provided that if the International Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shail apply. The arithmetic average of the values of the Consumer Price Index in the Philippines for all items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as last published on or before the last day of such Billing Month by the National Statistics Office.ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 15 of 29 LCPo = Fx = The arithmetic average of the values as of May 31, 2011 of the Consumer Price Index in the Philippines for all items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as published by the National Statistics Office. Actual Philippine Peso to US Dollar exchange rate on the meter reading date as published by the Bangko Sentral ng Pilipinas, www.bsp.gov.ph Actual Philippine Peso to US Dollar exchange rate on May 31, 2011 as published by the Bangko Sentral ng Pilipinas, www.bsp.gov.ph. 1.3. Variable Operation and Maintenance Fee The Variable Operation and Maintenance (O&M) Fee covers the cost of the use of, among other items, chemicals, lubricants, spare parts, that are directly related to the generation of the SEC Power Plant. It shall be computed according to the following formula: VOMF = voure{(o38 x rte) Bee (052262) ew PPPo) Fen LCPo, Where: VOMF = Variable Operation and Maintenance Fee in Pesos VOMR = PhPO.3170 per kWh ED = Electricity delivered during the billing period in kWh PPP,, = The arithmetic average of the values of the United States Producers’ Price Index for industrial goods; as last published on or before the last day of such billing month byERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 16 of 29 ‘ the International Monetary Fund; provided that if the International Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply. PPP = The arithmetic average of the values as of May 31, 2011 of the United States Producers’ Price Index for industrial goods; as published by the International Monetary Fund, provided that if the International Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply. LCP, = The arithmetic average of the values of the Consumer Price Index in the Philippines for all items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as last published on or before the last day of such Billing Month by the National Statistics Office. LCP, = The arithmetic average of the values as of May 31, 2011 of the Consumer Price Index in the Philippines for all items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as published by the National Statistics Office. Fxq = Actual Philippine Peso to US Dollar exchange rate on the meter reading date as published by the Bangko Sentral ng _ Pilipinas, www.bsp.gov.ph. Fx. = Actual Philippine Peso to US Dollar exchange tate on May 31, 2011 as published by the Bangko Sentral ng Pilipinas, www.bsp.gov.ph. 1.4 Actual Fuel Cost The Actual Fuel Cost is the fee paid to the Seller as payment for the procurement and delivery of the coal used in the operation ofERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 17 of 29 the SEC Power Plant. The Actual Fuel Cost shall be computed as follows: FOR Coal Price + TC + Other Char scat ren =( s consunption hate x Fore eD T000kg ton Where: A Cates HOR Base Price x Calorie Values FOB Goal Price = °* GON Clerifc Value Where: FOB Base Price = _— The price expressed in US Dollars applicable for all Shipments for which the Bill of Lading Date falls within the period from and including the date of this Agreement until and including the last day of the Quarter in which the date of this Agreement occurs. (the “FOB Base Price’), shall be equal to the globalCOAL Newcastle Index (which is the coal price per ton, FOB Newcastle, stated in USD, as published by globalCOAL on www.globalcoal.com under the heading “Weekly Index, NEWC Index" (or under such other replacement heading under which such prices are published by globalCOAL) with calorific value basis of 6,000 kcal/kg net as received) for the week immediately preceding the week in which the date of signing of this Agreement occurs. The FOB Base Price shall be reset every Quarter following the Quarter in which the date of this Agreement occurs, and such FOB Base Price applicable for ail Shipments for which the B/L Date falls within and including the first day and the lastERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 18 of 29 Calorific Value, 1 Other Charges 1 Consumption Rate = Forex = day of such Quarter shall be equal to the arithmetic average of the globalCOAL Newcastle Index for the immediately preceding Quarter. Average calorific value of the coal used in the billing period Discount or premium applied to the coal used during the billing period Actual transport cost, including transshipment cost of the coal used during the billing period in USD per metric ton Actual insurance cost and port charges (all charges incurred by a vessel at a loading port and discharge port including towage, pilotage, light dues, moor or unmoor, berthing and deberthing, assist tugs, wharfage, tonnage dues and sundries, including agent's fees, communications charges and other miscellaneous expenses customarily regarded as port charges) and applicable customs duties and import taxes of the coal used during the billing period O.7kg/kWh, escalated at 0.5% annually Actual Philippine Peso to US Dollar exchange rate on the date the Seller makes payment to the fuel supplier Electricity delivered during the billing period in kWhERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 19 of 29 Note: In the event that the Seller procures coal from multiple suppliers, the weighted average of the relevant values above shall be used. 1.5 Start-Up Costs The Buyer shall pay the Seller Start-Up Costs for the cost of starting up the SEC Power Plant after a period of shutdown due to any reason attributable to the Buyer. The Start-Up Costs shall be paid in accordance with the following schedule: Cost per Event Type of Synchronization (PhP) Cold Start-up to Synchronization 4,209,906 Warm _Start-up to Synchronization 2,872,221 Hot Start-up to Synchronization 4,227,515 1.6 Replacement Capacity and Energy Cost _ The Buyer shall pay the Seller Replacement Capacity and Energy Cost in accordance with the invoice provided by the supplier of Replacement Capacity and Energy. 1.7 Backup Capacity and Energy Cost The Buyer shall pay the Seller Backup Capacity and Energy Cost equivalent to the Monthly Payment had there been no Forced Outage. 2. Commissioning Output Charge The Buyer shail pay the Seller the Commissioning Output Charge for electricity supplied prior to the Commercial Operation Date. The Commissioning Output Charge shall be computed as follows:ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 20 of 29 COC = FOMF + VOMF + ACF + Taxes Where: coc FOMF VOMF ACF = Commissioning Output Charge = Fixed Operation and Maintenance Fee computed in accordance with Item 1.2 of this Schedule B = Variable Operation and Maintenance Fee computed in accordance with Item 1.3 of this Schedule B = Actual Cost of Fuel computed in accordance with Item 1.4 of this Schedule B For reference, a sample computation of the generation rate is contained in Schedule C of the PSA. 21.41 Basis for Indexation. As indicated in the formulae above, the monthly fees to be paid by DASURECO are subject to adjustments based on various indices or factors; The Foreign CRF component is fixed and is subject only to a one-time conversion to Philippine Pesos on Commercial Operation Date at the weighted average exchange rate as computed in accordance with the PSA. This will ensure that DASURECO does not carry a long-term foreign exchange exposure on the CRF component; and The components of the O&M Fees representing dollar-denominated costs are adjusted based on the foreign exchange rate and the US Consumer Price and Producer Price indices. Those representing local costs are adjusted based on the local Consumer Price Index. The Actual Fuel Costs vary based on actual costs as well as the foreignERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 21 of 29 exchange rate and on the Global Coal Newcastle index; 22. Sources of Funds/Financial Plans. The project will be financed through loans and equity, with an indicative debt-equity ratio of 70:30. 23. 22.1 22.2 22.3 Project Cost. The total estimated project cost for the SEC Phase il Plant is US$ 303.8 Million. A breakdown of the project cost, including the cost of interconnection facilities, is attached to the joint application as Annex “I”; Annual Interest. SEC is currently discussing with prospective lenders the terms and conditions of the project financing; and Computation of Weighted Average Cost of Capital (WACC). Consistent with previous rulings of the Commission, the nominal pre-tax WACC is 13.59%. A computation of the WACC is shown in Annex “J” of the joint application; Cash Flow. 23.1 23.2 Breakdown of Operating, and Maintenance Expenses. A breakdown of the operating expenses which form the basis of the tariff is attached to the joint application as Annex “kK”; Offtake Arrangement. Under the PSA, SEC shall make available, reserve, guaraniee, and deliver to DASURECO ithe Contracted Capacity, and DASURECO shall pay for such quantity of electric power. SEC shall utilize such Contracted Capacity to generate energy for DASURECO; andERC CASE NO, 2014-107 RC ORDER/August 22, 2014 Page 22 of 29 24. 25. 26. 27. 28. 29. 23.3 There is no minimum energy offtake under the PSA. As SEC will dedicate capacity to DASURECO, the Capital Recovery and the Fixed Operations and Maintenance Fees are computed based the contracted capacity, and on the proportion of actual energy delivered to the energy that could have been delivered; Prompt Payment Discount (PPD). DASURECO shall be entitled to discount of 1.5% of the amount paid for the CRF in case of prompt payment; Fuel Procurement, An international public tender was conducted for the purpose of procuring fuel for the SEC. Phase II Plant. The conduct of the tender and the fuel procurement process is summarized in Annex “L” of the joint application; The conduct of an international public tender assures DASURECO of the best available cost of fuel supply. It must be stressed that SEC derives no revenue whatsoever from the fuel supply; Environmental Compliance Certificate (ECC). The Department of Environment and Natural Resources (DENR) has issued ECC Ref. No. 0901-001-4021 for the SEC Power Station. A copy of the said ECC is attached to the joint application as Annex “M”, DOE Certification. On February 25, 2014, the DOE issued Certificate of Endorsement No. 2014-02-004, certifying that the SEC Phase II Plant is consistent with the Power Development Plan (PDP) of the Government. A copy of the said certificate is attached to the joint application as Annex “N"; Certificate of Compliance (COC). As the SEC Phase II Plant is still to be constructed, it is not yet covered by a COC. In accordance with ERC Resolution No. 9, SeriesERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 23 of 29 of 2010, SEC shall file the necessary application for a COC no later than three (3) months before the commencement of commercial operations; 30. Load Forecast. A copy of DASURECO's Distribution Development Plan (DDP) showing its load forecast projections is attached to the joint application as Annex ‘O” RATE IMPLICATIONS OF THE POWER SALES AGREEMENT 31. In order to determine the impact of the implementation of the PSA on DASURECO’s generation costs, an analysis was conducted taking into consideration the expected supply from its other suppliers; 32. It should be emphasized that the analysis covers 2016 as the sample year, and considers the forecasted power requirements and expected supply for that year. In the analysis, two (2) scenarios are considered: one without supply from SEC under the PSA, and another with SEC ‘supply. A copy of the said analysis is attached to the joint application as Annex “P"; 33. The results of the said analysis are summarized in the table below: Without SEC Supply With SEC Supply Year 2016 Year 2016 (PSALM + TUDAYA + (PSALM + TUDAYA + Rate Im; pact TSI + AEDC) TSI + AEDC + SEC) (PhP/kWh) Power Cost Power Cost (PhP/ kWh) (PhP/kWh) 5.49 5.12 0.37 34, The supply from SEC under the PSA will not only provide additional stable and reliable baseload power supply butERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 24 of 29 35. 36. 37. 38. 39. 40. will also serve to reduce the power costs of DASURECO, to the benefit of its customers; ALLEGATIONS IN SUPPORT OF THE MOTION FOR PROVISIONAL AUTHORITY There is a need for DASURECO to procure sufficient long-term power supply so that the power requirements of its customers are adequately addressed, especially as its power requirements are forecasted to rise steadily in the coming years due to the increasing demand of its customers; Moreover, NPC/PSALM, which currently supplies majority of DASURECO’s electricity requirements, drastically reduced its firm supply commitments by about one-third (1/3); Thus, given DASURECO’s increasing power requirements, the procurement of additional power supply is imperative in order to address its power requirements adequately and in a timely manner; The provisional approval of the instant application is necessary for SEG to secure, in a timely manner, the necessary financing for the SEC Phase |I Plant. The project of developing and constructing the Plant is capital- intensive, and will take an extended period of time. Consequently, obtaining financing in a timely manner is critical to complete the Plant, Thus, the issuance of a provisionai approval will enable SEC to complete the project and consequently, provide thé power needed by DASURECO under the PSA in a timely manner, Hence, they move for the provisional approval of the instant application pursuant to Rule 14 of the ERC Rules of Practice and Procedure. A copy of the Sworn Statement supporting the said motion is attached to the joint application as Annex "Q”;ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 25 of 29 41. They pray that the Commission: a. Immediately issue an Order provisionally approving the PSA subject of the instant joint application as well as the generation rate and adjustment mechanisms indicated therein; and b. After due hearing, render judgment making such provisional approval permanent. Finding the said joint application to be sufficient in form and in substance with the required fees having been paid, the same is hereby set for jurisdictional hearing, pre-trial conference, expository presentation and evidentiary hearing on October 2, 2014 (Thursday) at one thirty in the afternoon (1:30 P.M.) at DASURECO’s Principal Office, Barangay Cogon, Digos City, Davao Del Sur. DASURECO and SEC are hereby directed to cause the publication of the attached Notice of Public Hearing, at their own expense, twice (2x) for two (2) successive weeks in two (2) newspapers of general circulation in the Philippines, with the date of the last publication to be made not later than ten (10) days before the date of the scheduled initial hearing. They are also directed to inform the consumers within DASURECO's franchise area, by any other means available and appropriate, of the filing of the instant joint application, its reasons therefor, and of the scheduled hearing thereon. Let copies of the application, this Order and the attached Notice of Public Hearing be furnished the Office of the Solicitor General (OSG), the Commission on Audit (COA), and the Committees on Energy of both Houses of Congress. They are hereby requested, if they so desire, to send their duly authorized representatives at the scheduled hearing. Likewise, let copies of this Order and the attached Notice of Public Hearing be furnished the Offices of the Governor of the Province of Davao del Sur and the Mayors of the City and the Municipalities within the franchise area of DASURECO for appropriate posting thereof on their respective bulletin boards.ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 26 of 29 DASURECO and SEC are hereby directed to furnish all those making requests therefor with copies of the joint application and its attachments, subject to reimbursement of reasonable photocopying costs. On the date of the initial hearing, DASURECO and SEC must submit to. the Commission their written Compliance with the jurisdictional requirements attaching therewith, methodically arranged and duly marked, the evidences on the actual posting and publication of the Notice of Public Hearing consisting of certifications issued to that effect, signed by the aforementioned Governor, Mayors or their duly authorized representatives, bearing the seals of their offices, and the affidavits of the Editors or Business Managers of the newspapers where the said Notice of Public Hearing were published together with the complete issues of the said newspapers, and such other proofs of compliance with the requirements of the Commission. DASURECO, SEC and ail other interested parties are directed to submit, at least five (5) days before the date of initial hearing and pre-trial conference, their respective Pre-trial Briefs containing, among others: (a) a summary of admitted facts and proposed stipulation of facts; {b) _ the issues to be tried or resolved; (c) the documents or exhibits to be presented, stating the purposes thereof and proposed markings therefore; and (d) the number and names of the witnesses, with their written testimonies in an individual affidavit form, to be attached to the Pre-trial Brief. Failure of DASURECO and SEC to submit the required Pre- Trial Brief and Judicial Affidavits of their witnesses within the prescribed period shall be a ground for cancellation of the scheduled hearing, and the resetting of which shall be six (6) months from said date of cancellation.ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 27 of 29 As part of the pre-trial conference, DASURECO and SEC must also be prepared to make an expository presentation of their joint application, aided by whatever communication medium that it may deem appropriate for the purpose, in order to put in plain words and explain, for the benefit of the consumers and other concerned parties, what the joint application is all about and the reasons and justifications being cited in support of the rate adjustments prayed for. SO ORDERED. Pasig City, August 22, 2014. FOR AND BY AUTHORITY OF THE COMMISSION: » hd NAIDA G. CRUZ-DUCUT Chairperson “~~ERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 28 of 29 Copy Furnished: 1. 10. 11. 12. 13, Atty. Donna Ametyst R. Bernardo LACHICA & ASSOCIATES Suite 2304-B, West Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Centre, Pasig City Davao Del Sur Electric Cooperative, Inc. (DASURECO) Barangay Cogon, Digos City, Davao Del Sur Office of the Solicitor General 134 Amorsolo Street, Legaspi Village Makati City, Metro Manila Commission on Audit Commonwealth Avenue Quezon City, Metro Manila Senate Committee on Energy GSIS Bldg. Roxas Blvd., Pasay City Metro Manila House Committee on Energy Batasan Hills, Quezon City, Metro Manila Office of the City Mayor Digos City, Davao Del Sur Office of the Municipal Mayor Magsaysay, Davao Del Sur Office of the Municipal Mayor Sulop, Davao Del Sur Office of the Municipal Mayor Jose Abad Santos, Davao Del Sur Office of the Municipal Mayor Sta, Cruz, Davao Del Sur Office of the Municipal Mayor Hagonoy, Davao Del Sur Office of the Municipal Mayor Malalag, Davao Del SurERC CASE NO. 2014-107 RC ORDER/August 22, 2014 Page 29 of 29 * 14. Office of the Municipal Mayor Don Marcelino, Davao Del Sur 15. Office of the Municipal Mayor Bansalan, Davao Del Sur 46. Office of the Municipal Mayor Padada, Davao Del Sur 17. Office of the Municipal Mayor Sta. Maria, Davao Del Sur 18, Office of the Municipal Mayor Sarangani, Davao Dei Sur 19, Office of the Municipal Mayor Matanao, Davao Del Sur 20. Office of the Municipal Mayor Kiblawan, Davao Del Sur 21. Office of the Municipal Mayor Malita, Davao Del Sur 22. Office of the Provincial Governor Province of Davao Del Sur 23. President Philippine Chamber of Commerce and Industry (PCCl) 3" Floor, ECC Building, Sen. Gil Puyat Avenue Makati City