SMC GLOBAL POWER HOLDINGS CORP. (Formerly … GLOBAL POWER HOLDINGS CORP. (Formerly Global 5000...

SMC GLOBAL POWER HOLDINGS CORP. (Formerly Global 5000 Investment Inc.)

[A Wholly-owned Subsidiary of San Miguel Corporation] AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011



CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In Thousands)

December 31

Note 2012 2011

ASSETS

Current Assets Cash and cash equivalents 9, 27, 28 P23,555,445 P32,932,661Trade and other receivables - net 4, 10, 27, 28 17,788,133 15,100,025Inventories 4, 11 1,184,950 1,581,577Prepaid expenses and other current assets 8, 12 7,168,503 4,119,878

Total Current Assets 49,697,031 53,734,141

Noncurrent Assets Property, plant and equipment - net 4, 13 203,303,172 203,725,367Investment in an associate - net 14 13,420,954 13,209,960Goodwill and intangible assets 4, 7 1,728,592 1,728,592Deferred exploration and development costs 4, 7 325,219 183,859Deferred tax assets 4, 24 1,683,408 782,587Other noncurrent assets 15, 16 396,237 469,253

Total Noncurrent Assets 220,857,582 220,099,618

P270,554,613 P273,833,759

LIABILITIES AND EQUITY

Current Liabilities Accounts payable and accrued expenses 17, 20, 27, 28 P18,523,255 P15,942,349 Finance lease liabilities - current portion 4, 8, 27, 28 15,436,655 15,363,724 Other current liabilities 18, 27, 28 - 2,121,509

Total Current Liabilities 33,959,910 33,427,582

Noncurrent Liabilities Long-term debt - net of debt issue costs 19, 27, 28 20,393,929 21,724,990 Finance lease liabilities - net of current

portion 4, 8, 27, 28 179,664,911 192,823,085 Deferred tax liabilities 24 2,384,981 217,703

Total Noncurrent Liabilities 202,443,821 214,765,778

Total Liabilities 236,403,731 248,193,360

Forward

December 31

Note 2012 2011

Equity 21 Capital stock P1,062,504 P1,062,504 Additional paid-in capital 2,490,000 2,490,000 Reserves 745,973 744,797 Retained earnings 29,852,405 21,343,098

Total Equity 34,150,882 25,640,399

P270,554,613 P273,833,759

See Notes to the Consolidated Financial Statements.



CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data)

Years Ended December 31

Note 2012 2011

SALE OF POWER 5, 8, 20 P74,656,178 P70,591,168

COST AND EXPENSES Cost of power sold

Energy fees 8 33,149,802 30,262,866 Coal and other fuel oil 8, 11, 20 13,056,970 11,462,851 Depreciation 13 5,186,403 5,186,403Power purchases 8 4,452,329 4,006,733

Operating expenses 8, 20, 22 1,683,201 1,859,249

57,528,705 52,778,102

17,127,473 17,813,066

OTHER CHARGES - Net 23 (1,479,190) (11,410,543)

INCOME BEFORE INCOME TAX FROM CONTINUING OPERATIONS 15,648,283 6,402,523

INCOME TAX EXPENSE - Net 24, 25 1,438,976 21,033

INCOME FROM CONTINUING OPERATIONS 14,209,307 6,381,490

LOSS FROM DISCONTINUED OPERATION - Net of Tax 16 - (824,009)

NET INCOME P14,209,307 P5,557,481

Basic/Diluted Earnings Per Share from Continuing Operations 26 P11.37 P5.78




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)


Note 2012 2011

NET INCOME P14,209,307 P5,557,481

SHARE IN COMPREHENSIVE INCOME OF AN ASSOCIATE 14, 21 1,176 248

TOTAL COMPREHENSIVE INCOME P14,210,483 P5,557,729




CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands)

Capital Stock Additional

Paid-in Reserves Retained Earnings (Note 21) (Note 21) Capital (Note 21) Unappropriated Appropriated Total Equity

As of January 1, 2012 P1,062,504 P2,490,000 P744,797 P15,594,098 P5,749,000 P25,640,399

Share in comprehensive income of an associate - - 1,176 - - 1,176Net income for the year - - - 14,209,307 - 14,209,307

Total comprehensive income - - 1,176 14,209,307 - 14,210,483Dividends declared - - - (5,700,000) - (5,700,000)Reversal of appropriation - - - 3,000,000 (3,000,000) - Appropriation during the year - - - (4,675,800) 4,675,800 -

As of December 31, 2012 P1,062,504 P2,490,000 P745,973 P22,427,605 P7,424,800 P34,150,882

Forward

Capital Stock Additional

Paid-in Reserves Retained Earnings (Note 21) (Note 21) Capital (Note 21) Unappropriated Appropriated Total Equity

As of January 1, 2011 P1,000,000 P2,490,000 P734,785 P15,785,617 P - P20,010,402

Share in comprehensive income of an associate - - 248 - - 248Net income for the year - - - 5,557,481 - 5,557,481

Total comprehensive income - - 248 5,557,481 - 5,557,729Acquisition of subsidiaries - - (65) - - (65)Sale of a subsidiary - - 9,829 - - 9,829Subscriptions to capital stock 250,004 - - - - 250,004Subscription receivable (187,500) - - - - (187,500)Appropriation during the year - - - (5,749,000) 5,749,000 -

As of December 31, 2011 P1,062,504 P2,490,000 P744,797 P15,594,098 P5,749,000 P25,640,399




CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)


Note 2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax from continuing operations P15,648,283 P6,402,523

Loss before income tax from discontinued operation 16 - (1,091,398)

Gain on sale of discontinued operation 16 - 267,801

Income before income tax 15,648,283 5,578,926Adjustments for:

Finance cost 8, 16, 18, 19 12,726,547 12,924,347Depreciation 13, 16 5,194,238 5,431,535Impairment losses on receivables 10, 16 313,104 599,997Unrealized foreign exchange (gains) losses - net 27 (7,840,990) 354,808Equity in net earnings of an associate 14 (1,053,352) (818,751)Interest income 16, 23 (880,586) (426,812)Gain on sale of investment 14 (106,613) - Gain on sale of property, plant and equipment (178) - Gain on sale of discontinued operation 16 - (267,801)

Operating income before working capital changes 24,000,453 23,376,249Decrease (increase) in:

Trade and other receivables - net (2,981,581) (3,811,079)Inventories 396,627 (391,306)Prepaid expenses and other current assets (3,048,625) (2,321,243)Other noncurrent assets 73,016 (2,387)

Increase in accounts payable and accrued expenses 2,324,631 3,760,765

Cash generated from operations 20,764,521 20,610,999Interest income received 842,801 368,965Finance cost paid 19 (1,356,870) (1,097,891)Income tax paid (172,519) (2,427,406)

Net cash flows provided by operating activities 20,077,933 17,454,667

Forward


Note 2012 2011

CASH FLOWS FROM INVESTING ACTIVITIES

Dividends received P559,382 P - Proceeds from sale of property, plant and equipment 740 - Additions to property, plant and equipment 13 (4,772,605) (621,532)Payment of other current liabilities 18 (2,121,509) (2,460,941)Deferred exploration and development costs 7 (141,360) (59,936)Acquisitions of subsidiaries, net of cash and cash

equivalents 6 - 28Sale of a subsidiary net of cash and cash

equivalents disposed of 16 - (495,719)

Net cash flows used in investing activities (6,475,352) (3,638,100)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of investment 14 391,195 - Payments of finance lease liabilities (17,361,974) (11,749,783)Dividends paid 21 (5,700,000) - Proceeds from long-term borrowings 19 - 22,025,000Proceeds from capital stock subscription 21 - 62,504

Net cash flows provided by (used in) financing activities (22,670,779) 10,337,721

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (309,018) (289,996)

NET INCREASE IN CASH AND CASH EQUIVALENTS (9,377,216) 23,864,292

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32,932,661 9,068,369

CASH AND CASH EQUIVALENTS AT END OF YEAR 9 P23,555,445 P32,932,661




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Per Share Data and Number of Shares)

1. Reporting Entity SMC Global Power Holdings Corp. (the “Parent Company”) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on January 23, 2008, and its primary purpose of business is to purchase, sell, lease, develop and dispose of all properties of every kind and description, and shares of stocks or other securities or obligations, created or issued by any corporation or other entity. On October 15, 2010, the SEC approved the change in the corporate name of the Company from Global 5000 Investment Inc. to SMC Global Power Holdings Corp. The Parent Company’s registered office address is located at 155 EDSA, Brgy. Wack-Wack, Mandaluyong City, Metro Manila. The accompanying consolidated financial statements comprise the financial statements of the Parent Company and its Subsidiaries (collectively referred to as the “Group”). As of December 31, 2012 and 2011, the Parent Company is a wholly-owned subsidiary of San Miguel Corporation (“SMC”; the “Ultimate Parent Company”), a public company under Section 17.2 of the Securities Regulation Code and whose shares are listed and traded in the Philippine Stock Exchange (PSE). The Parent Company’s subsidiaries, primarily engaged in the generation/trading of power and coal mining are incorporated in the Philippines and registered with the Philippine SEC. The subsidiaries are as follows:

Percentage of Ownership December 31 Note 2012 2011

Power Generation / Trading Companies: San Miguel Energy Corporation (SMEC) 100 100 South Premiere Power Corp. (SPPC) (a) 100 100 Strategic Power Devt. Corp. (SPDC) (b) 100 100 San Miguel Electric Corp. (SMELCO) 100 100 SMC Consolidated Power Corporation (SCPC) (d) 100 100 San Miguel Consolidated Power Corporation

(SMCPC) (d) 100 100 SMC Power Generation Corp. (SPGC) (d) 100 100 SMC PowerGen Inc. (SPI) (d) 100 100 PowerOne Ventures Energy Inc. (PVEI) (c) 100 100

Coal Mining Companies: 7 Daguma Agro-Minerals, Inc. (DAMI) (e) 100 100 Sultan Energy Phils. Corp. (SEPC) (e) 100 100 Bonanza Energy Resources, Inc. (BERI) (e) 100 100

(a) Formerly Cross Road Realty Corporation. (b) Formerly Big Bucks Realty Corp. (c) Formerly Twin Doves Realty Corp. (d) Incorporated in 2011. (e) Indirectly owned by the Parent Company through SMEC and has not yet started commercial operation.

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In 2011, the Parent Company acquired 100% ownership interest in PVEI and SMELCO from SMC and established SMCPC, SCPC, SPGC and SPI. Panasia Energy Holdings, Inc. (PEHI) was sold in August 2011 (Note 16).

2. Basis of Preparation Statement of Compliance The consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS are based on International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). PFRS include statements named PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC), issued by the Financial Reporting Standards Council (FRSC). The consolidated financial statements are also prepared to comply with the requirements under Section 4.12, Provision of Financial Statements and Reports, of the US$300,000 7% Notes due 2016 bonds issued by the Parent Company (Note 19). The accompanying consolidated financial statements as of and for the years ended December 31, 2012 and 2011 were authorized for issue by the Board of Directors (BOD) on February 28, 2013. Basis of Measurement The consolidated financial statements of the Group have been prepared on a historical cost basis of accounting. Functional and Presentation Currency The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional currency. All financial information is rounded off to the nearest thousand (P000), except when otherwise indicated. Basis of Consolidation A subsidiary is an entity controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account. The financial statements of the subsidiaries are included in the consolidated financial statements from the date when the Group obtains control, and continue to be consolidated until the date when such control ceases. The consolidated financial statements are prepared for the same reporting period as the Parent Company, using uniform accounting policies for like transactions and other events in similar circumstances. Intergroup balances and transactions, including intergroup unrealized profits and losses, are eliminated in preparing the consolidated financial statements.

3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, except for the changes in accounting policies as explained below.

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Adoption of Amendments to Standards The FRSC approved the adoption of a number of amendments to standards as part of PFRS. Effective 2012, the Group has adopted the amendments to PFRS 7, Disclosures - Transfers of Financial Assets, which require additional disclosures about transfers of financial assets. The amendments require disclosure of information that enables users of the consolidated financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entity’s continuing involvement in the derecognized financial assets. The amendments are effective for annual periods beginning on or after July 1, 2011. The adoption of these amendments did not have an effect on the consolidated financial statements. Additional disclosures were included in the consolidated financial statements, where applicable. New or Revised Standards, Amendments to Standards and Interpretations Not Yet Adopted. A number of new or revised standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2012, and have not been applied in preparing the consolidated financial statements. Except as otherwise indicated, none of these is expected to have a significant effect on the consolidated financial statements of the Group. The Group does not plan to adopt these standards early. The Group will adopt the following new or revised standards, amendments to standards and interpretations on the respective effective dates: Presentation of Items of Other Comprehensive Income (Amendments to PAS 1,

Presentation of Financial Statements). The amendments: (a) require that an entity presents separately the items of other comprehensive income that would be reclassified to profit or loss in the future, if certain conditions are met, from those that would never be reclassified to profit or loss; (b) do not change the existing option to present profit or loss and other comprehensive income in two statements; and (c) change the title of the consolidated statement of comprehensive income to consolidated statement of profit or loss and other comprehensive income. However, an entity is still allowed to use other titles. The amendments do not address which items are presented in other comprehensive income or which items need to be reclassified. The requirements of other PFRS continue to apply in this regard. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to PFRS 7). These amendments include minimum disclosure requirements related to financial assets and financial liabilities that are: (a) offset in the consolidated statements of financial position; or (b) subject to enforceable master netting arrangements or similar agreements. They include a tabular reconciliation of gross and net amounts of financial assets and financial liabilities, separately showing amounts offset and not offset in the consolidated statements of financial position. The adoption of the amendments is required to be retrospectively applied for annual periods beginning on or after January 1, 2013.

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PFRS 10, Consolidated Financial Statements, introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. An investor controls an investee when: (a) it is exposed or has rights to variable returns from its involvement with that investee; (b) it has the ability to affect those returns through its power over that investee; and (c) there is a link between power and returns. Control is reassessed as facts and circumstances change. PFRS 10 supersedes PAS 27 (2008), Consolidated and Separate Financial Statements, and Philippine Interpretation Standards Interpretation Committee (SIC) 12, Consolidation - Special Purpose Entities. The adoption of the new standard is required for annual periods beginning on or after January 1, 2013. The adoption of the new standard may result to changes in consolidation conclusion in respect of the Group’s investees and may lead to changes in the current accounting for these investees.

PFRS 11, Joint Arrangements, focuses on the rights and obligations of joint arrangements, rather than the legal form (as is currently the case). The new standard: (a) distinguishes joint arrangements between joint operations and joint ventures; and (b) eliminates the option of using the equity method or proportionate consolidation for jointly controlled entities that are now called joint ventures as it always requires the use of equity method. PFRS 11 supersedes PAS 31, Interests in Joint Ventures, and Philippine Interpretation SIC 13, Jointly Controlled Entities - Non-monetary Contributions by Venturers. The adoption of the new standard is required for annual periods beginning on or after January 1, 2013. The effect of the adoption of the new standard will result to the elimination of the option to use proportionate consolidation, which is the current practice of the Group.

PFRS 12, Disclosure of Interests in Other Entities, contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e., joint operations or joint ventures), associates and/or unconsolidated structured entities. The new standard provides information that enables users to evaluate: (a) the nature of, and risks associated with, an entity’s interests in other entities; and (b) the effects of those interests on the entity’s financial position, financial performance and cash flows. The adoption of the new standard is required for annual periods beginning on or after January 1, 2013. The Group is currently assessing the disclosure requirements for interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities in comparison with the existing disclosure.

Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to PFRS 10, PFRS 11, and PFRS 12). The amendments: (a) simplify the process of adopting PFRS 10 and 11, and provide relief from the disclosures in respect of unconsolidated structured entities; (b) simplify the transition and provide additional relief from the disclosures that could have been onerous depending on the extent of comparative information provided in the consolidated financial statements; and (c) limit the restatement of comparatives to the immediately preceding period; this applies to the full suite of standards. Entities that provide comparatives for more than one period have the option of leaving additional comparative periods unchanged. In addition, the date of the initial application is now defined in PFRS 10 as the beginning of the annual reporting period in which the standard is applied for the first time. At this date, an entity tests whether there is a change in the consolidation conclusion for its investees.

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The adoption of the amendments is required for annual periods beginning on or after January 1, 2013. The Group is currently assessing the disclosure requirements for consolidated financial statements, joint arrangements and disclosure of interests in other entities in comparison with the existing disclosure.

PFRS 13, Fair Value Measurement, replaces the fair value measurement guidance contained in individual PFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other PFRS. It does not introduce new requirements to measure assets or liabilities at fair value nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The adoption of the new standard is required for annual periods beginning on or after January 1, 2013. The adoption of the new standard is not expected to significantly change the Group’s methodologies in determining fair values.

PAS 19, Employee Benefits (Amended 2011), includes the following requirements: (a) actuarial gains and losses are recognized immediately in other comprehensive income; this change will remove the corridor method and eliminate the ability of entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss, which is currently allowed under PAS 19; and (b) expected return on plan assets recognized in profit or loss is calculated based on the rate used to discount the defined benefit obligation. The Group is currently assessing the impact of the removal of the accounting policy choice for recognition of actuarial gains and losses and the impact of the change in measurement principles of expected return on plan assets. The adoption of the amendments is required to be retrospectively applied for annual periods beginning on or after January 1, 2013.

PAS 28, Investments in Associates and Joint Ventures (2011), supersedes PAS 28 (2008). PAS 28 (2011) makes the following amendments: (a) PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, applies to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale; and (b) on cessation of significant influence or joint control, even if an investment in an associate becomes an investment in a joint venture or vice versa, the entity does not remeasure the retained interest. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013. The adoption of the amendments is not expected to have an effect on the consolidated financial statements since the Group continues to account for its investments in associates at equity method.

Improvements to PFRS 2009-2011 contain amendments to 5 standards with consequential amendments to other standards and interpretations, the adoption of which is not expected to have an effect on the consolidated financial statements. o Comparative Information beyond Minimum Requirements (Amendments to

PAS 1). These amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the consolidated financial statements. An entity must

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include comparative information in the related notes to the consolidated financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of consolidated financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the consolidated financial statements) are not required. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

o Presentation of the Opening Statement of Financial Position and Related Notes (Amendments to PAS 1). The amendments clarify that: (a) the opening consolidated statement of financial position is required only if there is: (i) a change in accounting policy; (ii) a retrospective restatement; or (iii) a reclassification which has a material effect upon the information in that consolidated statement of financial position; (b) except for the disclosures required under PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, notes related to the opening consolidated statement of financial position are no longer required; and (c) the appropriate date for the opening consolidated statement of financial position is the beginning of the preceding period, rather than the beginning of the earliest comparative period presented. This is regardless of whether an entity provides additional comparative information beyond the minimum comparative information requirements. The amendments explain that the requirements for the presentation of notes related to additional comparative information and those related to the opening consolidated statement of financial position are different, because the underlying objectives are different. Consequential amendments have been made to PAS 34, Interim Financial Reporting. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

o Classification of Servicing Equipment (Amendments to PAS 16, Property, Plant and Equipment). The amendments clarify the accounting of spare parts, stand-by equipment and servicing equipment. The definition of “property, plant and equipment” in PAS 16 is now considered in determining whether these items should be accounted for under this standard. If these items do not meet the definition, then they are accounted for using PAS 2, Inventories. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

o Income Tax Consequences of Distributions (Amendments to PAS 32, Financial Instruments Presentation). The amendments clarify that PAS 12, Income Taxes applies to the accounting for income taxes relating to: (a) distributions to holders of an equity instrument; and (b) transaction costs of an equity transaction. This amendment removes a perceived inconsistency between PAS 32 and PAS 12. Before the amendment, PAS 32 indicated that distributions to holders of an equity instrument are recognized directly in equity, net of any related income tax. However, PAS 12 generally requires the tax consequences of dividends to be recognized in profit or loss. A similar consequential amendment has also been made to Philippine Interpretation IFRIC 2, Members’ Share in Co-operative Entities and Similar Instruments. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

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o Segment Assets and Liabilities (Amendments to PAS 34). This is amended to align the disclosure requirements for segment assets and segment liabilities in interim consolidated financial statements with those in PFRS 8, Operating Segments. PAS 34 now requires the disclosure of a measure of total assets and liabilities for a particular reportable segment. In addition, such disclosure is only required when: (a) the amount is regularly provided to the chief operating decision maker; and (b) there has been a material change from the amount disclosed in the last annual consolidated financial statements for that reportable segment. The adoption of the amendments is required for annual periods beginning on or after January 1, 2013.

Offsetting Financial Assets and Financial Liabilities (Amendments to PAS 32). The

amendments clarify that: (a) an entity currently has a legally enforceable right to set-off if that right is: (i) not contingent on a future event; and (ii) enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties; and (b) gross settlement is equivalent to net settlement if and only if the gross settlement mechanism has features that: (i) eliminate or result in insignificant credit and liquidity risk; and (ii) process receivables and payables in a single settlement process or cycle. The adoption of the amendments is required to be retrospectively applied for annual periods beginning on or after January 1, 2014. The adoption of the amendments is not expected to have an effect on the consolidated financial statements. PFRS 9, Financial Instruments (2010) and (2009). PFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under PFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. PFRS 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of PFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting. PFRS 9 (2010 and 2009) is effective for annual periods beginning on or after January 1, 2015. The Group conducted an evaluation on the possible financial impact of the adoption of PFRS 9 and does not plan to adopt this standard early.

Financial Assets and Financial Liabilities Date of Recognition. The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition is done using settlement date accounting. Initial Recognition of Financial Instruments. Financial instruments are recognized initially at fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated as at fair value through profit or loss (FVPL), includes transaction costs. The Group classifies its financial assets in the following categories: held-to-maturity (HTM) investments, available-for-sale (AFS) financial assets, financial assets at FVPL and loans and receivables. The Group classifies its financial liabilities as either financial liabilities at FVPL or other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial

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liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of Fair Value. The fair value of financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there is no significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. ‘Day 1’ Profit. Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a ‘Day 1’ profit) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where the transaction price is based on data which are not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘Day 1’ profit amount. Financial Assets Financial Assets as at FVPL. A financial asset is classified at FVPL if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at FVPL if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Derivative instruments (including embedded derivatives), except those covered by hedge accounting relationships, are classified under this category. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Financial assets may be designated by management at initial recognition as at FVPL, when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that

would otherwise arise from measuring the assets or recognizing gains or losses on a different basis;

the assets are part of a group of financial assets which are managed and their

performances are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded

derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recognized.

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The Group carries financial assets as at FVPL using their fair values. Attributable transaction costs are recognized in profit or loss as incurred. Fair value changes and realized gains or losses are recognized in profit or loss. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in other comprehensive income and presented in equity. Any interest earned shall be recognized as part of “Other charges - net” in the consolidated statements of income. Any dividend income from equity securities classified as at FVPL shall be recognized in profit or loss when the right to receive payment has been established. As of December 31, 2012 and 2011, the Group has no financial assets accounted for under this category. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets as at FVPL. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment in value. Any interest earned on loans and receivables shall be recognized as part of “Other charges - net” in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The periodic amortization is also included as part of “Other charges - net” in the consolidated statements of income. Gains or losses are recognized in profit or loss when loans and receivables are derecognized or impaired, as well as through the amortization process. Cash includes cash on hand and in banks which are stated at face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. The Group’s cash and cash equivalents and trade and other receivables (current and noncurrent) are included in this category (Notes 9, 10 and 15). The combined carrying amounts of financial assets under this category amounted to P41,739,669 and P48,501,375 as of December 31, 2012 and 2011, respectively (Note 28). HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Group’s management has the positive intention and ability to hold until maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS financial assets. After initial measurement, these investments are measured at amortized cost using the effective interest rate method, less impairment in value. Any interest earned on the HTM investments shall be recognized as part of “Other charges - net” in the consolidated statements of income on an accrual basis. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. The periodic amortization is also included as part of “Other charges - net” in the consolidated statements of income. Gains or losses are recognized in profit or loss when the HTM investments are derecognized or impaired, as well as through the amortization process. As of December 31, 2012 and 2011, the Group has no investments accounted for under this category.

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AFS Financial Assets. AFS financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other financial asset categories. Subsequent to initial recognition, AFS financial assets are measured at fair value and changes therein, other than impairment losses and foreign currency differences on AFS debt instruments, are recognized in other comprehensive income and presented under the “Reserves” account in the consolidated statements of changes in equity. The effective yield component of AFS debt securities is reported as part of “Other charges - net” in the consolidated statements of income. Dividends earned on holding AFS equity securities are recognized as “Dividend income” when the right to receive payment has been established. When individual AFS financial assets are either derecognized or impaired, the related accumulated unrealized gains or losses previously reported in equity are transferred to and recognized in profit or loss. AFS financial assets also include unquoted equity instruments with fair values which cannot be reliably determined. These instruments are carried at cost less impairment in value, if any. As of December 31, 2012 and 2011, the Group has no financial assets accounted for under this category. Financial Liabilities Financial Liabilities as at FVPL. Financial liabilities are classified under this category through the fair value option. Derivative instruments (including embedded derivatives) with negative fair values, except those covered by hedge accounting relationships, are also classified under this category. The Group carries financial liabilities as at FVPL using their fair values and reports fair value changes in profit or loss. Fair value changes from derivatives accounted for as part of an effective accounting hedge are recognized in other comprehensive income and presented under the “Reserves” account in the consolidated statements of changes in equity. Any interest expense incurred shall be recognized as part of “Other charges - net” in the consolidated statements of income. As of December 31, 2012 and 2011, the Group has no financial liabilities accounted for under this category. Other Financial Liabilities. This category pertains to financial liabilities that are not designated or classified as at FVPL. After initial measurement, other financial liabilities are carried at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any premium or discount and any directly attributable transaction costs that are considered an integral part of the effective interest rate of the liability. Included in this category are the Group’s liabilities arising from its trade or borrowings such as accounts payable and accrued expenses (excluding statutory payables), finance lease liabilities, other current liabilities and long-term debt (Notes 8, 17, 18 and 19). The combined carrying amounts of financial liabilities under this category amounted to P228,525,522 and P243,815,697 as of December 31, 2012 and 2011, respectively (Note 28).

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Debt Issue Costs Debt issue costs are considered as an adjustment to the effective yield of the related debt and are deferred and amortized using the effective interest rate method. When a loan is paid, the related unamortized debt issue costs at the date of repayment are recognized in profit or loss. Embedded Derivatives The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized as at FVPL. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Derecognition of Financial Assets and Financial Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an

obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Group has transferred its rights to receive cash flows from the asset and either:

(a) has transferred substantially all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assesses at the reporting date whether a financial asset or group of financial assets is impaired.

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A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Assets Carried at Amortized Cost. For assets carried at amortized cost such as loans and receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If no objective evidence of impairment has been identified for a particular financial asset that was individually assessed, the Group includes the asset as part of a group of financial assets pooled according to their credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in the collective impairment assessment. Evidence of impairment for specific impairment purposes may include indications that the borrower or a group of borrowers is experiencing financial difficulty, default or delinquency in principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to alleviate the financial condition of the borrower. For collective impairment purposes, evidence of impairment may include observable data on existing economic conditions or industry-wide developments indicating that there is a measurable decrease in the estimated future cash flows of the related assets. If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). Time value is generally not considered when the effect of discounting the cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For collective impairment purposes, impairment loss is computed based on their respective default and historical loss experience. The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The impairment loss for the period shall be recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal date. AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the difference between the cost (net of any principal payment and amortization) and its current fair value, less any impairment loss on that financial asset previously recognized in profit or loss, is transferred from equity to profit or loss. Reversals in respect of equity instruments classified as AFS financial assets are not recognized in profit or loss. Reversals of impairment losses on debt instruments are recognized in profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.

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In the case of an unquoted equity instrument or of a derivative asset linked to and must be settled by delivery of an unquoted equity instrument, for which its fair value cannot be reliably measured, the amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows from the asset discounted using its historical effective rate of return on the asset. Classification of Financial Instruments Between Debt and Equity From the perspective of the issuer, a financial instrument is classified as debt instrument if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions

that are potentially unfavorable to the Group; or satisfy the obligation other than by the exchange of a fixed amount of cash or another

financial asset for a fixed number of own equity shares. If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statements of financial position. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined on first-in, first-out method for coal inventory and moving average method for fuel oil inventories. Net realizable value is the current replacement cost. Business Combination Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. The Group measures goodwill at the acquisition date as: a) the fair value of the consideration transferred; plus b) the recognized amount of any non-controlling interests in the acquiree; plus c) if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less d) the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Subsequently, goodwill is measured at cost less any accumulated impairment in value. Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying amount may be impaired.

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The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Costs related to acquisition, other than those associated with the issue of debt or equity securities that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in profit or loss. Goodwill in a Business Combination

Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units, or groups of cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: o represents the lowest level within the Group at which the goodwill is monitored

for internal management purposes; and o is not larger than an operating segment determined in accordance with PFRS 8,

Operating Segment. Impairment is determined by assessing the recoverable amount of the cash-generating unit or group of cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit or group of cash-generating units and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. An impairment loss with respect to goodwill is not reversed.

Intangible Asset Acquired in a Business Combination The cost of an intangible asset acquired in a business combination is the fair value as at the date of acquisition, determined using discounted cash flows as a result of the asset being owned. Following initial recognition, intangible asset is carried at cost less any accumulated amortization and impairment losses, if any. The useful life of intangible asset is assessed to be either finite or indefinite. Intangible asset with finite life is amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each reporting date. A change in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for as a change in accounting estimates. The amortization expense on intangible asset with finite life is recognized in profit or loss.

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Loss of Control On the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently, it is accounted for as an equity-accounted investee or as an AFS financial asset depending on the level of influence retained.

Transactions under Common Control Transactions under common control entered into in contemplation of each other, and business combination under common control designed to achieve an overall commercial effect are treated as a single transaction. Transfers of assets between commonly controlled entities are accounted for using the book value accounting. Non-controlling Interests The acquisitions are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized as a result of such transactions. Any difference between the purchase price and the net assets of acquired entity is recognized in equity. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Investment in an Associate The Group’s investment in an associate is accounted for under the equity method of accounting from the date when it becomes an associate. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Under the equity method, the investment in an associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss of the associate after the date of acquisition. The Group’s share of the profit or loss of the associate is recognized as “Equity in net earnings of an associate” in the Group’s consolidated statements of comprehensive income. Dividends received from an associate reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the Group’s proportionate interest in the associate arising from changes in the associate’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The Group’s share of those changes is recognized in other comprehensive income. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group’s net investment in the associate. Profits or losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

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Upon acquisition of the investment, any difference between the cost of the investment and the investor’s share in the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities is accounted for in accordance with PFRS 3, Business Combination. Consequently: a. goodwill that forms part of the carrying amount of an investment in an associate is

not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.

b. any excess of the Group’s share in the net fair value of the associate’s identifiable

assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the Group’s share in the associate’s profit or loss in the period in which the investment is acquired.

The Group discontinues applying the equity method when its investment in an associate is reduced to zero. Additional losses are provided only to the extent that the Group has incurred obligations or made payments on behalf of the associate to satisfy obligations of the associate that the Group has guaranteed or otherwise committed. If the associate subsequently reports profits, the Group resumes applying the equity method only after its share of the profits equals the share of net losses not recognized during the period the equity method was suspended. The financial statements of the associate are prepared for the same reporting period as the Parent Company. The accounting policies of the associate conform to those used by the Group for like transactions and events in similar circumstances. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment in value. Such cost includes the cost of replacing part of the property, plant and equipment at the time that cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. The initial cost of property, plant and equipment consists its construction cost or purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably. Construction in progress (CIP) represents structures under construction and is stated at cost. This includes the costs of construction and other direct costs. Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period. CIP is not depreciated until such time that the relevant assets are ready for use.

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Depreciation, which commences when the asset is available for its intended use, is computed using the straight-line method over the following estimated useful lives of the assets:

Number of Years

Power plants 3 - 43 Other equipment 3 - 6

The remaining useful lives, residual values, and depreciation method are reviewed and adjusted periodically, if appropriate, to ensure that such periods and method of depreciation is consistent with the expected pattern of economic benefits from the items of property, plant and equipment. The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization are recognized in profit or loss. An item of property, plant and equipment is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising on the retirement and disposal of an item of property, plant and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period of retirement or disposal. Other Intangible Assets - Mining Rights Mining rights that are acquired by the Group and have finite lives are measured at costs less accumulated amortization and any accumulated impairment losses. Subsequent expenditures are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in profit or loss as incurred. Amortization of mining rights is recognized in profit or loss on a straight-line basis over the estimated useful lives. The estimated useful life of mining right is the period from commercial operations to the end of the operating contract. Amortization method and useful life are reviewed at each reporting date and adjusted as appropriate. Deferred Exploration and Development Costs Deferred exploration and development costs comprise expenditures which are directly attributable to: Researching and analyzing existing exploration data; Conducting geological studies, exploratory drilling and sampling; Examining and testing extraction and treatment methods; and Compiling pre-feasibility and feasibility studies. Deferred exploration and development costs also include expenditures incurred in acquiring mineral rights, entry premiums paid to gain access to areas of interest, amounts payable to third parties to acquire interests in existing projects.

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Exploration assets are reassessed on a regular basis and tested for impairment provided that at least one of the following conditions is met: the period for which the entity has the right to explore in the specific area has expired

during the period or will expire in the near future, and is not expected to be renewed; substantive expenditure on further exploration for and evaluation of mineral

resources in the specific area is neither budgeted nor planned; such costs are expected to be recouped in full through successful development and

exploration of the area of interest or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not yet reached a

stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.

If the project proceeds to development stage, the amounts included within deferred exploration and development costs are transferred to property, plant and equipment under mine development costs. Impairment of Non-financial Assets The carrying amounts of property, plant and equipment, investment in an associate, deferred exploration and development costs and other intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, and if the carrying amount exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

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Provisions Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of past event; (b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and those specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognized for the reimbursement shall not exceed the amount of the provision. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Share Capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the amount of the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sale of Power. Revenue from power generation is recognized in the period actual capacity is generated and transmitted to the customers, net of related discounts. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Dividend. Revenue is recognized when the Group’s right as a shareholder to receive the payment is established. Gain or Loss on Sale of Investments in Shares of Stock. Gain or loss is recognized if the Group disposes of its investment in a subsidiary or associate. Gain or loss is computed as the difference between the proceeds of the disposed investment and its carrying amount, including the carrying amount of goodwill, if any. Cost and Expense Recognition Costs and Expenses. Costs and expenses are recognized upon receipt of goods, utilization of services or at the date they are incurred. Cost of power sold is debited for the direct costs related to power generation/trading. Finance Cost. Finance cost comprises finance charges on finance lease liabilities and other borrowings. Finance charge on finance lease liabilities is recognized in profit or loss using the effective interest rate method. Share-based Payment Transactions Under SMC’s Employee Stock Purchase Plan (ESPP), employees of the Group receive remuneration in the form of share-based payment transactions, whereby the employees render services as consideration for equity instruments of SMC. Such transactions are handled centrally by SMC.

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Share-based payment transactions in which SMC grants option rights to its equity instruments directly to the Group’s employees are accounted for as equity-settled transactions. SMC charges the Group for the costs related to such transactions with its employees. The amount is charged to operations by the Group. The cost of ESPP is measured by reference to the market price at the time of the grant less subscription price. The cumulative expense recognized for share-based payment transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and SMC’s best estimate of the number of equity instruments that will ultimately vest. Where the terms of a share-based award are modified, as a minimum, an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the

arrangement; (b) a renewal option is exercised or extension granted, unless the term of the renewal or

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

specific asset; or (d) there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gives rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). Finance Lease Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Obligations arising from plant assets under finance lease agreement are classified in the consolidated statements of financial position as finance lease liabilities. Lease payments are apportioned between the financing charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Financing charges are recognized in the profit or loss. Capitalized lease assets are depreciated over the estimated useful life of the assets when there is reasonable certainty that the Group will obtain ownership by the end of lease term.

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Operating Lease Group as Lessee. Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term. Associated costs such as maintenance and insurance are expensed as incurred. Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. Foreign Currency Translations Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting date. Nonmonetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Nonmonetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of AFS financial assets, a financial liability designated as a hedge of the net investment in a foreign operation that is effective, or qualifying cash flow hedges, which are recognized in other comprehensive income. Taxes Current Tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred Tax. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an

asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

with respect to taxable temporary differences associated with investments in

subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of MCIT and NOLCO can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises

from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

with respect to deductible temporary differences associated with investments in

subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretation of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

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Value-added Tax (VAT). Revenues, expenses and assets are recognized net of the amount of VAT, except: where the tax incurred on a purchase of assets or services is not recoverable from the

taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

receivables and payables that are stated with the amount of tax included. The net amount of tax recoverable from, or payable to, the taxation authority is included as part of “Prepaid expenses and other current assets” or “Accounts payable and accrued expenses” in the consolidated statements of financial position. Assets Held for Sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Group’s other accounting policies. Thereafter, the assets or disposal groups are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or biological assets, which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortized or depreciated. In addition, equity accounting of equity-accounted investees ceases once classified as held for sale. Discontinued Operation A discontinued operation is a component of the Group’s business the operations and cash flows of which can be clearly distinguished from the rest of the Group and which that represents a separate major line of business that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the comparative consolidated statements of income are re-presented as if the operation had been discontinued from the start of the comparative period and show the results of discontinued operation separate from the results of continuing operation. Related Parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence. Related parties may be individuals or corporate entities. Transactions between related parties are on an arm’s length basis in a manner similar to transactions with non-related parties.

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Basic and Diluted Earnings Per Share (EPS) Basic and diluted EPS is computed by dividing the net income for the period attributable to equity holders of the Parent Company by the weighted average number of issued and outstanding shares during the period, with retroactive adjustment for any stock dividends declared. Diluted EPS is computed in the same manner, adjusted for the effects of the shares issuable to employees and executives under SMC’s ESPP, which are assumed to be exercised at the date of grant. Where the effect of the assumed conversion of shares issuable to employees and executives under SMC’s stock purchase and option plans would be anti-dilutive, diluted EPS is not presented. Operating Segments The Group’s operating segments are organized and managed separately based on the fuel source of the power plants, with each segment representing a strategic business unit that has different economic characteristic and activities. The BOD (the chief operating decision maker; CODM) reviews management reports on a regular basis. The measurement policies the Group used for segment reporting under PFRS 8 are the same as those used in its consolidated financial statements. There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss. All inter-segment transfers are carried out at arm’s length prices. Segment revenues, expenses and performance include sales and purchases between business segments. Such sales and purchases are eliminated in consolidation. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable. Events After the Reporting Date Post year-end events that provide additional information about the Group’s consolidated financial position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

4. Significant Accounting Judgments, Estimates and Assumptions The preparation of the Group’s consolidated financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and amounts of assets, liabilities, income and expenses reported in the consolidated financial statements at the reporting date. However, uncertainty about these judgments, estimates and assumptions could result in outcome that could require a material adjustment to the carrying amount of the affected asset or liability in the future.

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Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions are recognized in the period in which the judgments and estimates are revised and in any future period affected. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements: Finance Lease - Group as Lessee. In accounting for the Group’s Independent Power Producer (IPP) Administration Agreements with Power Sector Assets and Liabilities Management Corporation (PSALM), the Group’s management has made a judgment that the IPP Administration Agreement is an agreement that contains a lease. The Group’s management has made a judgment that it has substantially acquired all the risks and rewards incidental to ownership of the power plants. Accordingly, the Group accounted for the agreement as a finance lease and recognized the power plants and finance lease liabilities at the present value of the agreed monthly payments to PSALM (Note 8). Finance lease liabilities recognized in the consolidated statements of financial position amounted to P195,101,566 and P208,186,809 as of December 31, 2012 and 2011, respectively (Note 8). The carrying amount of power plants amounted to P198,505,506 and P203,691,909 as of December 31, 2012 and 2011, respectively (Note 13). Operating Lease Commitment - Group as Lessee. The Group has entered into a lease agreement as a lessee. The Group has determined that the lessor retains all significant risks and rewards of ownership of the property which is leased out under operating lease arrangement. Rent expense recognized in the consolidated statements of income amounted to P16,515 and P11,168 for the years ended December 31, 2012 and 2011, respectively (Note 22). Determining Fair Values of Financial Instruments. Where the fair values of financial assets and financial liabilities recognized in the consolidated statements of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The Group uses judgments to select from variety of valuation models and make assumptions regarding considerations of liquidity and model inputs such as correlation and volatility for longer dated financial instruments. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is exercised in establishing fair value. Contingencies. The Group has ongoing tax reviews, legal and administrative claims. The Group’s estimate of the probable costs for the resolution of these matters has been developed in consultation with in-house as well as outside legal counsels handling these matters and is based on an analysis of potential results. The Group currently does not believe that these matters will have a material adverse effect on its consolidated financial position and consolidated financial performance. Estimates and Assumptions The key estimates and assumptions used in the consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates.

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Allowance for Impairment Losses on Trade and Other Receivables. Provisions are made for specific and groups of accounts, where objective evidence of impairment exists. The Group evaluates these accounts on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the customers and counterparties, the customers’ current credit status based on third party credit reports and known market forces, average age of accounts, collection experience, and historical loss experience. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. An increase in allowance for impairment losses would increase the recorded operating expenses and decrease current assets. The allowance for impairment losses amounted to P689,443 and P957,392 as of December 31, 2012 and 2011, respectively. The carrying amounts of trade and other receivables amounted to P17,788,133 and P15,100,025 as of December 31, 2012 and 2011, respectively (Note 10). Allowance for Inventory Losses. The Group provides an allowance for inventory losses whenever net realizable value becomes lower than cost due to damage, physical deterioration or other causes. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the inventories are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the reporting date to the extent that such events confirm conditions existing at the reporting date. The allowance account is reviewed periodically to reflect the accurate valuation in the financial records. The carrying amounts of the inventories amounted to P1,184,950 and P1,581,577 as of December 31, 2012 and 2011, respectively. The Group assesses that no allowance to reduce inventories to net realizable value is necessary as of December 31, 2012 and 2011 (Note 11). Financial Assets and Financial Liabilities. The Group carries certain financial assets and financial liabilities at fair value which requires extensive use of accounting estimates and judgments. Significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). The amount of changes in fair value would differ if the Group utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and financial liabilities would affect profit or loss and equity. Fair value of financial assets and financial liabilities are discussed in Note 28. Estimated Useful Lives of Property, Plant and Equipment. The Group estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets.

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In addition, estimation of the useful lives of property, plant and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future financial performance could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property, plant and equipment would increase recorded cost and expenses and decrease noncurrent assets, while an increase would have equal but opposite effect. Property, plant and equipment, net of accumulated depreciation amounted to P203,303,172 and P203,725,367 as of December 31, 2012 and 2011, respectively. Accumulated depreciation of property, plant and equipment amounted to P15,828,997 and P10,635,310 as of December 31, 2012 and 2011, respectively (Note 13). Estimated Useful Lives of Intangible Assets with Finite Lives. The useful lives of intangible assets are assessed at the individual asset level as having either a finite or indefinite life. Intangible assets are regarded to have an indefinite useful life when, based on analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. Impairment of Goodwill and Intangible Assets. The Group determines whether the goodwill and intangible assets acquired in business combination are impaired at least annually. This requires the estimation of the value in use of the cash-generating units to which the goodwill is allocated and the value in use of the intangible assets. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash-generating unit and from the intangible asset and to choose a suitable discount rate to calculate the present value of those cash flows. The carrying amount of intangible assets (mining rights and goodwill) as of December 31, 2012 and 2011 amounted to P1,728,592 (Note 7). Acquisition Accounting. The Group accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and the liabilities assumed be recognized at the date of acquisition at their respective fair values. The application of the acquisition method requires certain estimates and assumptions especially concerning the determination of the fair values of acquired intangible assets and property, plant and equipment as well as liabilities assumed at the date of the acquisition. Moreover, the useful lives of the acquired intangible assets and property, plant and equipment have to be determined. Accordingly, for significant acquisitions, the Group obtains assistance from valuation specialists. The valuations are based on information available at the acquisition date. The Group’s acquisitions have resulted in goodwill and intangible assets (mining rights) with finite lives. The total carrying amounts of goodwill and mining rights arising from business combinations in 2012 and 2011 amounted to P1,728,592 (Note 7). Recoverability of Deferred Exploration and Development Costs. A valuation allowance is provided for estimated unrecoverable deferred exploration and development costs based on the Group's assessment of the future prospects of the mining properties, which are primarily dependent on the presence of economically recoverable reserves in those properties.

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The Group’s mining activities are all in the exploratory stages as of December 31, 2012. All related costs and expenses from exploration are currently deferred as exploration and development costs to be amortized upon commencement of commercial operations. The Group had not identified any facts and circumstances which suggest that the carrying amount of the deferred exploration and development costs exceeded the recoverable amounts as of December 31, 2012 and 2011. Deferred exploration and development costs amounted to P325,219 and P183,859 as of December 31, 2012 and 2011, respectively (Note 7). There were no impairment losses recognized for the years ended December 31, 2012 and 2011. Realizability of Deferred Tax Assets. The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Group’s assessment on the recognition of deferred tax assets on deductible temporary difference and carryforward benefits of MCIT and NOLCO is based on the projected taxable income in the following periods. Deferred tax assets amounted to P1,683,408 and P782,587 as of December 31, 2012 and 2011, respectively (Note 24). Impairment of Non-financial Assets. PFRS requires that an impairment review be performed on property, plant and equipment and investment in an associate when events or changes in circumstances indicate that the carrying amount may not be recoverable. Determining the recoverable amount of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the financial performance. There were no impairment losses recognized for the years ended December 31, 2012 and 2011. Asset Retirement Obligation. Determining asset retirement obligation requires estimation of the cost of dismantling property, plant and equipment and other costs of restoring the leased properties to their original condition. The Group determined that there were no asset retirement obligations as of December 31, 2012 and 2011.

5. Segment Information Operating Segments The Group’s operations are segmented based on fuel source of the power plants consistent with the reports prepared internally for use by the Group’s CODM in reviewing the business performance of the operating segments. The differing economic characteristics and activities of these power plants make it more useful to users of the consolidated financial statements to have information about each component of the Group’s profit or loss, assets and liabilities.

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The coal mining companies, which were acquired in 2010, have not yet started commercial operations and are in the exploratory stage of mining activities (Note 7). The mining companies’ total assets do not exceed 10% of the combined assets of all operating segments. Accordingly, management believes that as of December 31, 2012 and 2011, the information about this component of the Group would not be useful to the users of the consolidated financial statements. The Group’s inter-segment sales of power are accounted for based on contracts entered into by the parties and are eliminated in the consolidation. Segment assets do not include investments, goodwill and other intangible assets, and deferred tax assets. The investment in Manila Electric Company (Meralco) and equity in Meralco’s net income are presented under “Others.” Segment liabilities do not include long-term debt (net), deferred income tax liabilities and income tax payable. Capital expenditures consist of additions to property, plant and equipment of each reportable segment. Major Customers The Group sells power, through power supply agreements (Note 8), either directly to customers (distribution utilities, electric cooperatives and industrial customers) or through the Philippine Wholesale Electricity Spot Market (WESM). Sale of power to individual external customers that represents 10 percent or more of the Group’s total revenues is as follows:

Customers Note 2012 2011

Meralco 20 P43,990,405 P37,274,195WESM 7,185,426 9,786,369

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For management reporting purposes, the Group’s operating segments are organized and managed separately as follows: Operating Segments Financial information about reportable segments follows:

For the Years Ended December 31 Continuing Operations Discontinued Operation Coal Mining PEHI SMEC SPPC SPDC Companies Others Eliminations Total (Note 16) Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011Fuel Source Coal Natural Gas Hydro Fuel Oil

Sale of Power External P31,758,764 P30,235,971 P40,178,721 P36,761,407 P2,718,693 P3,593,790 P - P - P - P - P - P74,656,178 P70,591,168 P - P449,727 P74,656,178 P71,040,895 Inter-segment 1,707,470 996,658 425,679 1,148,653 3,128,495 1,955,098 - - - - (5,261,644) (4,100,409) - - - - - -

33,466,234 31,232,629 40,604,400 37,910,060 5,847,188 5,548,888 - - - - (5,261,644) (4,100,409) 74,656,178 70,591,168 - 449,727 74,656,178 71,040,895

Cost and Expenses

Cost of power sold 23,531,811 21,432,143 35,261,564 31,602,763 2,313,773 2,365,683 - - - - (5,261,644) (4,481,736) 55,845,504 50,918,853 - 1,268,005 55,845,504 52,186,858

Operating expenses 972,920 766,515 638,276 839,485 60,865 106,933 5,640 744 462,647 201,615 (457,147) (56,043) 1,683,201 1,859,249 - 269,153 1,683,201 2,128,402

24,504,731 22,198,658 35,899,840 32,442,248 2,374,638 2,472,616 5,640 744 462,647 201,615 (5,718,791) (4,537,779) 57,528,705 52,778,102 - 1,537,158 57,528,705 54,315,260

Segment Result 8,961,503 9,033,971 4,704,560 5,467,812 3,472,550 3,076,272 (5,640) (744) (462,647) (201,615) 457,147 437,370 17,127,473 17,813,066 - (1,087,431) 17,127,473 16,725,635

Equity in net earnings of an associate 1,053,352 818,751 - - 1,053,352 818,751

Interest income 880,586 420,531 - 6,281 880,586 426,812 Gain on sale of

discontinued operation - - - 267,801 - 267,801

Gain on sale of investment 106,613 - - - 106,613 -

Finance cost (12,726,547) (12,924,347) - (2,213) (12,726,547) (12,926,560) Foreign exchange

gains (loss) - net 7,707,630 (193,479) - (8,035) 7,707,630 (201,514) Other income 1,499,176 468,001 - - 1,499,176 468,001 Income tax expense

- net (1,438,976) (21,033) - (412) (1,438,976) (21,445)

Consolidated Net Income P14,209,307 P6,381,490 P - (P824,009) P14,209,307 P5,557,481

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As of December 31, 2012 and 2011 Coal Mining SMEC SPPC SPDC Companies Others Eliminations Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Fuel Source Coal Natural Gas Hydro

Other Information Segment assets P113,661,610 P113,630,189 P77,321,817 P77,617,728 P43,244,160 P45,351,969 P353,686 P191,167 P25,934,751 P26,337,553 (P6,794,365) (P5,015,986) P253,721,659 P258,112,620Investments - net (Note 14) - - - - - - - - 13,420,954 13,209,960 - 13,420,954 13,209,960Goodwill and other intangible

assets 1,728,592 1,728,592 Deferred tax assets 1,683,408 782,587

Consolidated Total Assets P270,554,613 P273,833,759

Segment liabilities P106,208,697 P111,889,642 69,675,230 P72,893,330 P39,270,729 P43,820,548 P310,590 P142,437 P5,236,222 P2,591,977 (P7,076,647) (P5,087,267) P213,624,821 P226,250,667 Long-term debt - net of debt issue

costs 20,393,929 21,724,990 Deferred tax liabilities 2,384,981 217,703

Consolidated Total Liabilities P236,403,731 P248,193,360

For the Years Ended December 31

Continuing Operations Discontinued

Operation

SMEC SPPC SPDC Coal Mining Companies Others Eliminations Total

PEHI (Note 16) Total

2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Fuel Source Coal Natural Gas Hydro Fuel Oil

Depreciation of property, plant and equipment P2,571,778 P2,570,644 P1,615,675 P1,615,680 P1,003,790 P1,003,789 P251 P155 P2,744 P498 P - P - P5,194,238 P5,190,766 P - P240,769 P5,194,238 P5,431,535

Noncash items other than depreciation* (3,472,764) 85,367 (1,555,447) 702,467 (1,369,668) 19,931 - - (2,290,150) (671,711) - - (8,688,029) 136,054 - (186,248) (8,688,029) (50,194)

* Noncash items other than depreciation include unrealized foreign exchange gain/losses, impairment losses on receivables and equity in net earnings of an associate.

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6. Acquisitions of Subsidiaries Acquisitions of Subsidiaries SMELCO and PVEI On August 31, 2011, the Parent Company acquired SMC’s 100% equity interest in SMELCO and PVEI at par value as of February 8, 2011 and January 1, 2011 amounting to P250,000 and P250, respectively. Accordingly, the difference between the purchase price and carrying amount of net assets transferred was recognized in equity. On August 22, 2011, SMELCO was granted a Retail Electricity Supplier’s (RES) License by the Energy Regulatory Commission (ERC) pursuant to Section 29 of Republic Act (RA) No. 9136 or the Electric Power Industry Reform Act of 2001 which requires all suppliers of electricity to the contestable market to secure a license from the ERC. The term of the RES License is for a period of 5 years from the time it was granted and renewable thereafter.

7. Deferred Exploration and Development Cost DAMI DAMI, a coal mining company with coal property covered by Coal Operating Contract (COC) No. 126 issued by the Department of Energy (DOE), dated November 19, 2002, located in Barangay Ned, Lake Sebu, South Cotabato consisting of two (2) coal blocks with a total area of two thousand (2,000) hectares, more or less, and has an In-situ coal resources (measured plus indicative coal resources) of about 94 million metric tons as of February 13, 2013 based on exploratory drilling and additional in-fill drilling conducted by DAMI. SEPC SEPC, which has a coal mining property and right over an aggregate area of 7,000 hectares, more or less composed of seven (7) coal blocks located in Lake Sebu, South Cotabato and Sen. Ninoy Aquino, Sultan Kudarat covered by COC No. 134 issued by the DOE dated February 23, 2005. As of February 13, 2013, COC No. 134 has an In-situ coal resources (measured plus indicative coal resources) of about 35 million metric tons based on exploratory drilling and confirmatory drilling conducted by SEPC. BERI BERI, a mining company with coal property covered by COC No. 138 issued by the DOE dated May 26, 2005. COC No. 138 is located in Maitum, Sarangani Province and Barangay Ned, Lake Sebu, South Cotabato consisting of eight (8) coal blocks with a total area of 8,000 hectares, more or less, and has an In-situ coal resources (measured plus indicative coal resources) of about 22 million metric tons as of February 13, 2013 based on initial exploratory drilling conducted by SMEC geologists in Maitum, Sarangani. The exploratory drilling to be conducted on 4 coal blocks of BERI located in Barangay Ned, Lake Sebu Municipality is projected to contain 30 million metric tons based on a geological setting and initial exploratory drilling conducted in Maitum.

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The coal operating contracts met the contractual/legal criterion and qualified as intangible assets under PFRS 3. Accordingly, total mining rights recognized from the acquisitions of SEPC, DAMI and BERI amounted to P1,719,726, net of advances from related parties assigned to SMEC. On March 26, 2008, February 9, 2009 and December 15, 2009, the DOE approved the conversion of the COC for Exploration to COC for Development and Production of DAMI, SEPC and BERI, respectively, effective on the following dates:

Subsidiary COC No. Effective Date Term*

DAMI 126 November 19, 2008 10 years SEPC 134 February 23, 2009 10 years BERI 138 May 26, 2009 10 years

* The term is followed by another 10 year extension, and thereafter, renewable for a series of 3 year periods not exceeding 12 years under such terms and conditions as may be agreed upon with the DOE.

In May 2011, SEPC, DAMI and BERI separately wrote a letter to the DOE requesting for a moratorium on suspension of the implementation of the production timetable as specified in the Five-Year Development and Productive Work Progress of COC Nos. 126, 134 and 138 due to the newly enacted Environment Code of South Cotabato. This local ordinance prohibits open pit mining and other related activities, hence, constrained these companies into implementing the production timetable without violating this local ordinance. On April 27, 2012, the DOE granted SEPC, DAMI and BERI’s request for a moratorium on their work commitments from the effective dates of their respective COCs when these were converted to Development/Production Phase until December 31, 2012. As of December 31, 2012, SEPC, DAMI and BERI are in the exploratory stages of their mining activities. All related costs and expenses from exploration are currently deferred as exploration and development costs and will be amortized upon commencement of their commercial operations. The Group had not identified any facts and circumstances which suggest that the carrying amount of the deferred exploration and development costs exceeded recoverable amount as of December 31, 2012 and 2011. Deferred exploration and development costs consist of:

2012 2011

Balance at beginning of year P183,859 P123,923 Additions 141,360 59,936

Balance at end of year P325,219 P183,859

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8. Agreements a. Independent Power Producer (IPP) Administration (IPPA) Agreements

As a result of the biddings conducted by PSALM for the Appointment of the IPP Administrator for the Contracted Capacity of the following power plants, the Group was declared the winning bidder through the following subsidiaries (Note 29):

Subsidiary Power PlantContracted Capacity Location Date Awarded Effective Date*

SMEC Sual Coal - Fired Power Station (Sual Power Plant)

2 x 500 MW Sual, Pangasinan Province

September 1, 2009

November 6, 2009

SPDC San Roque Multi-Purpose Hydroelectric Power Plant (San Roque Power Plant)

345 MW San Roque, Pangasinan Province

December 22, 2009

January 26, 2010

SPPC Ilijan Natural Gas - Fired Combined Cycle Power Plant (Ilijan Power Plant)

1,200 MW Ilijan, Batangas City

May 5, 2010 June 26, 2010

*The date of assumption of the administration of the plant’s contracted capacity.

The IPPA Agreements are with the conformity of National Power Corporation (NPC), a government-owned and controlled corporation created by virtue of RA No. 6395, as amended, whereby NPC confirms, acknowledges, approves and agrees to the terms of the Agreement and further confirms that for so long as it remains the IPP Counterparty it will comply with its obligations and exercise its rights and remedies under the original agreement with the IPP at the request and instruction of PSALM. The IPPA Agreements include, among others, the following common salient rights and obligations: i. The right and obligation to manage and control the contracted capacity of the

power plant for its own account and at its own cost and risks; ii. The right to trade, sell or otherwise deal with the capacity (whether pursuant to

the spot market, bilateral contracts with third parties or otherwise) and contract for or offer related ancillary services, in all cases for its own account and at its own risk and cost. Such rights shall carry the rights to receive revenues arising from such activities without obligation to account therefore to PSALM or any third party;

iii. The right to receive a transfer of the power plant in case of buy-out or

termination of the Agreement for no consideration; iv. The right to receive an assignment of NPC interest to existing short-term bilateral

power supply contracts; v. The obligation to supply and deliver, at its own cost, fuel required by the IPP and

necessary for the Sual Power Plant to generate the electricity required to be produced by the IPP;

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vi. Maintain the performance bond in full force and effect with a qualified bank; and vii. The obligation to pay PSALM the monthly payments and generation fees in

respect of all electricity generated from the capacity, net of outages for SMEC. Relative to the IPPA Agreements, SMEC, SPDC and SPPC have to pay PSALM monthly fees for fifteen (15) years until October 1, 2024, eighteen (18) years until April 26, 2028 and twelve (12) years until June 26, 2022, respectively. Energy fees for 2012 and 2011 amounted to P33,149,802 and P30,262,866, respectively. SMEC, SPDC and SPPC renewed their performance bonds in United States dollar (US$) amounting to US$58,187, US$20,305 and US$60,000 which will expire on November 3, 2013, January 25, 2013 and June 16, 2013, respectively. Subsequently, the performance bond for SPDC was renewed up to January 25, 2014. The IPPA Agreements provide the Group with a right to receive a transfer of the power plant in case of buyout or termination. The finance lease liabilities are carried at amortized cost using the US dollar and Philippine peso discount rates as follows:

US Dollar Philippine Peso

SMEC 3.89% 8.16% SPPC 3.85% 8.05% SPDC 3.30% 7.90%

The discount determined at inception of the agreement is amortized over the period of the IPPA Agreement and recognized as part of “Other charges - net” in the consolidated statements of income. Finance cost in 2012 and 2011 amounted to P11,331,293 and P11,530,541, respectively (Note 23). The future minimum lease payments for each of the following periods are as follows:

2012 US Dollar Payments

Peso Equivalent of

US Dollar Payments

Peso Payments Total

Not later than one year US$211,614 P8,686,745 P10,129,882 P18,816,627

More than one year and not later than five years 959,742 39,397,384 45,953,818 85,351,202

Later than five years 1,937,637 79,539,990 92,838,629 172,378,619

3,108,993 127,624,119 148,922,329 276,546,448 Less: Future

finance charges on finance lease liabilities 636,249 26,118,059 55,326,823 81,444,882

Present values of finance lease liabilities US$2,472,744 P101,506,060 P93,595,506 P195,101,566

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Peso Equivalent of

US Dollar Payments

Peso Payments Total




3,301,456 144,735,805 158,134,722 302,870,527 Less: Future

finance charges on finance lease liabilities 729,589 31,985,144 62,698,574 94,683,718

Present values of finance lease liabilities US$2,571,867 P112,750,661 P95,436,148 P208,186,809

The present values of minimum lease payments for each of the following periods are as follows:


Peso Equivalent

of US Dollar Payments

Peso Payments Total




US$2,472,744 P101,506,060 P93,595,506 P195,101,566


Peso Equivalent

of US Dollar Payments

Peso Payments Total




US$2,571,867 P112,750,661 P95,436,148 P208,186,809

b. Market Participation Agreements (MPA)

SMEC, SPDC, SPPC and PEHI have entered into MPA with the Philippine Electricity Market Corporation (PEMC) to satisfy the conditions contained in the Philippine WESM Rules on WESM membership and to set forth the rights and obligations of a WESM member.

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Under the WESM Rules, the cost of administering and operating the WESM shall be recovered through a charge imposed on all WESM members or transactions, as approved by ERC. For the years ended December 31, 2012 and 2011, PEMC’s market fees charged to SMEC, SPDC and SPPC amounted to P187,088 and P192,507, respectively (Note 22). Market fees charged to PEHI, included in discontinued operation (Note 16), amounted to P1,055 for the period ended August 25, 2011. The Group purchases power from WESM during periods when the power generated from power plants is not sufficient to meet customers’ power requirements.

c. Power Supply Agreements SMEC and SPPC have Power Supply Agreements with various counterparties, including related parties, to supply or sell electricity produced by the power plants. All agreements provide for renewals or extensions subject to mutually agreed terms and conditions by both parties. The customers are billed based on the time-of-use per kilowatt hour (TOU/kWh). However, as stipulated in the contracts, each customer has to pay the minimum charge based on the contracted power using the basic energy charge and adjustments if customer has not fully taken or failed to consume the contracted power. For the years ended December 31, 2012 and 2011, all customers are above their minimum contracted power requirements. SMEC and SPPC also purchases power from WESM and other power generation companies during periods when the power generated from power plant is not sufficient to meet customers’ power requirements.

d. Coal Supply Agreement SMEC renewed the Supply Agreement for Steaming Coal with PT Bumi Resources Tbk’s subsidiary PT Kaltim Prima Coal, BANPU Public Company Limited Thailand and Noble Resources Pte. Ltd. (the Coal Suppliers) through Topcoal Trading Corporation for the coal requirements of the Sual Power Plant. Under the agreement, the parties shall negotiate and agree on the contract price of the coal at least 30 days prior to the delivery. On August 18, 2011, the parties desired to further extend the Agreement which may be further extended upon mutual agreement of the parties. On October 1, 2012, the Coal Supply Agreement was assigned to SMEC by Topcoal with the consent of the Coal Suppliers.

e. Lease Agreements The Group entered into various operating lease agreements with San Miguel Properties, Inc. (SMPI), a related party under common control, for a period of 1 to 6 years, renewable annually or upon agreement between parties. Relative to the leases, the Group was required to pay advance rental and security deposits which are included under “Prepaid expenses and other current assets” (Note 12) and “Other noncurrent assets” accounts in the consolidated statements of financial position (Note 15).

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Future minimum lease payments under the non-cancellable operating lease agreements follows:

2012 2011

Within one year P9,911 P9,010After one year but not more than five years 36,084 45,995

P45,995 P55,005

Rent expense amounted to P16,515 and P11,168 for the years ended December 31, 2012 and 2011, respectively (Note 22).

9. Cash and Cash Equivalents Cash and cash equivalents consist of:

Note 2012 2011

Cash in banks and on hand P322,426 P2,486,270 Short-term investments 23,233,019 30,446,391

27, 28 P23,555,445 P32,932,661

Cash in banks earns interest at the respective bank deposit rates. Short-term investments include demand deposits and short-term placements which can be withdrawn anytime depending on the immediate cash requirements of the Group and earn interest at the respective short-term investment rates.

10. Trade and Other Receivables Trade and other receivables consist of:

Note 2012 2011

Trade 20 P10,999,362 P10,542,145Other receivables 16, 20 7,478,214 5,515,272

18,477,576 16,057,417Less allowance for impairment losses 689,443 957,392

P17,788,133 P15,100,025

Trade receivables are non-interest bearing, unsecured and are generally on a 30-day term. The balance of trade receivables is inclusive of VAT on the sale of power collectible from customers. The movements in the allowance for impairment losses are as follows:

Note 2012 2011

Balance at beginning of period P957,392 P357,395Reversal of impairment (581,053) - Impairment losses 22 313,104 599,997

Balance at end of period P689,443 P957,392

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As of December 31, 2012 and 2011, the aging of trade receivables is as follows:

2012 2011

Current P6,652,380 P7,022,068Past due

Less than 30 days 1,101,145 942,84830-60 days 826,846 194,57461-90 days 553,779 80,658Over 90 days 1,865,212 2,301,997

P10,999,362 P10,542,145

The Group believes that the unimpaired past due trade receivables are still collectible based on the assessment of customer’s ability to pay, payment history and collection agreement. Other receivables include the following: a. On June 16, 2011, SMEC entered into a Memorandum of Agreement (MOA) with

Hardrock Coal Mining Pty Ltd. (HCML) and Caason Investments Pty Ltd. (Caason), a company registered in Australia, for the acquisition of shares in HCML. SMEC deposited Australian dollar (AUD) 12,000 (P550,000), through SMC Global Power Holdings Corp., for an option to subscribe to the shares in HCML (the “Deposit”) with further option for SMEC to decide not to pursue its investment in HCML, which will result in the return of the Deposit to SMEC plus interest. In a letter dated July 15, 2011, SMEC notified Caason and HCML that it shall not pursue said investment and therefore asked Caason and HCML for the return of the Deposit with corresponding interest (the “Amount Due”), pursuant to the terms of the MOA. Caason and HCML requested SMEC for additional time within which to return the Amount Due. In June 2012, HCML paid P42,460 for the partial payment of interest. As of December 31, 2012, SMEC is still in the process of collecting the Amount Due. Interest receivable amounted to P27,295 and P43,337 as of December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the total receivable from HCML amounted to P546,988 and P598,351.

b. SMEC has claims from PEHI totaling to P987,621 and P2,288,490 as of December 31, 2012, and 2011, respectively.

c. Pursuant to the Memorandum of Agreement in respect of excess capacity of Sual Power Station, SMEC has receivables from Team Philippines Energy Corp. (TPEC) and Team Sual Corporation for their share in fuel, market fees, coal and other charges related to the operation of the Sual Power Plant amounting to P165,746 and P250,000 as of December 31, 2012 and 2011, respectively. Likewise, SMEC has receivables from WESM for the account of TPEC amounting to P271,471 and P134,764 as of December 31, 2012 and 2011, respectively.

d. As of December 31, 2012 and 2011, the outstanding claims from PSALM due to fixed fee reduction amounted to P341,500 and P379,967, respectively.

e. The remaining other receivables of the Group pertain to advances to land holding companies for the purchase of parcels of land.

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11. Inventories Inventories at cost consist of:

Note 2012 2011

Coal 8 P1,065,682 P1,508,930Fuel oil 20 119,268 72,647

P1,184,950 P1,581,577

There were no inventory write-downs to net realizable value for the years ended December 31, 2012 and 2011. Coal and fuel oil charged to cost of power sold amounted to P13,056,970 and P11,462,851 in 2012 and 2011, respectively. Fuel oil and other consumables included in discontinued operation amounted to P594,199 for the period ended August 25, 2011 (Note 16).

12. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of:

Note 2012 2011

Input VAT P5,402,236 P3,253,025Prepaid tax 872,618 820,545PSALM monthly fee outage credits 8 800,557 - Prepaid rent and others 8 93,092 46,308

P7,168,503 P4,119,878

Input VAT consists of current and deferred Input VAT on purchases and can be offset against the output VAT payable (Note 17). Prepaid tax consists of creditable withholding taxes of the Group. PSALM monthly fee outage credits pertain to the approved reduction in future monthly fees payable to PSALM resulting from the outages at the Sual Power Plant.

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13. Property, Plant and Equipment Property, plant and equipment consist of:

Note Power Plants Other

Equipment Construction

in progress Total

Cost: January 1, 2011 8 P214,899,485 P17,952 P - P214,917,437 Additions 597,195 14,627 9,710 621,532 Disposals 16 (1,176,921) (1,371) - (1,178,292)

December 31, 2011 214,319,759 31,208 9,710 214,360,677 Additions - 13,180 4,759,425 4,772,605 Disposals - (1,113) - (1,113)

December 31, 2012 214,319,759 43,275 4,769,135 219,132,169

Accumulated depreciation: January 1, 2011 5,610,535 3,254 - 5,613,789 Additions 5,427,028 4,507 - 5,431,535 Disposals 16 (409,713) (301) - (410,014)

December 31, 2011 10,627,850 7,460 - 10,635,310 Additions 5,186,403 7,835 - 5,194,238 Disposals - (551) - (551)

December 31, 2012 15,814,253 14,744 - 15,828,997

Net book value:

December 31, 2011 P203,691,909 P23,748 P9,710 P203,725,367

December 31, 2012 P198,505,506 P28,531 P4,769,135 P203,303,172

The power plants, except for the Limay Power Plant, are under the IPPA Agreements with PSALM (Note 8). Limay Power Plant was sold in August 2011 (Note 16). Depreciation is recognized in profit or loss as follows:

Note 2012 2011

Continuing Operation Cost of power sold P5,186,403 P5,186,403Operating expenses 22 7,835 4,363

Discontinued Operation 16 - 240,769

P5,194,238 P5,431,535

14. Investment in an Associate Investment in an associate consists of 69,059,538 quoted common shares of Meralco, representing 6.13% ownership interest (Note 18). The Parent Company has determined that it has obtained significant influence over the financial and operating policies of Meralco in conjunction with SMC and subsidiaries’ ownership of 32.04% interest in Meralco. Accordingly, the Parent Company applied the equity method of accounting on its investment in shares of stock of Meralco.

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The details and movements of this account are as follows:

Note 2012 2011

Cost P12,824,356 P12,824,356

Accumulated Equity in Net Earnings Balance at beginning of year 385,604 105,270Equity in net earnings during the year 1,053,352 818,751Share in other comprehensive income 21 1,176 248Dividends (843,534) (538,665)

Balance at end of year 596,598 385,604

P13,420,954 P13,209,960

On May 14, 2012, the Parent Company received the stock certificate for the property dividend from Meralco consisting of 194,624,266 common shares of stock of Rockwell Land Corporation, with a book value of P P284,151. On July 27, 2012, the Parent Company sold through the PSE its Rockwell Land Shares at P2.01 per share and recognized a gain of P106,613 included as part of “Other charges - net” account in the consolidated statements of income. The fair value of the Parent Company’s investment in Meralco amounted to P17,996,916 and P16,919,587 as of December 31, 2012 and 2011, respectively. The following table summarizes the condensed financial information of Meralco as of and for the years ended December 31, 2012 and 2011:

2012

(Unaudited) 2011

(Audited) (in Millions)

Total assets P218,298 P210,385Total liabilities 150,563 141,884Revenue 285,240 256,808Net income 17,158 13,726

15. Other Noncurrent Assets Other noncurrent assets consist of:

Note 2012 2011

Other receivable - net of current portion 16 P396,091 P468,689Miscellaneous 146 564

P396,237 P469,253

16. Discontinued Operation On August 26, 2011, the Parent Company sold its 100% ownership interest in PEHI to a third party for P625,000, payable based on the terms of the share purchase agreement. Consequently, the Parent Company recognized a gain of P267,801 on the sale of PEHI.

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The Parent Company received P25,000 down payment, and the balance of the receivable was recognized at present value discounted at applicable rate of similar instrument. The current portion of the receivable is included under “Trade and other receivable - net” account (Note 10) and the noncurrent portion is reported as part of “Other noncurrent assets” account in the consolidated statements of financial position (Note 15). The discount is amortized over the collection period and recognized as “Interest income” under “Other charges - net” in the consolidated statements of income. Interest income amounted to P21,273 and P7,223 for the years ended December 31, 2012 and 2011, respectively. The results of discontinued operation are presented below:

Note

For the Period January 1 to

August 25, 2011

SALE OF POWER P449,727

COSTS AND EXPENSES Cost of power sold

Fuel oil and other consumables 594,199 Operation and maintenance fees 433,180 Depreciation 13 240,626

Operating expenses 269,153

1,537,158

(1,087,431)

OTHER INCOME (CHARGES) Foreign exchange losses (8,035)Finance cost (2,213)Interest income 6,281

(3,967)

Loss before income tax (1,091,398)Income tax expense 24, 25 (412)

Loss from discontinued operation (1,091,810)Gain on sale of discontinued operation 267,801

Net loss from discontinued operation (P824,009)

Basic/diluted loss per share from discontinued operation 26 (P0.75)

Cost and expenses included impairment losses on receivables amounting to P80,818 for the period ended August 25, 2011. PEHI has an O&M Agreement with Alstom Philippines, Inc. for the operation and maintenance of the 620 MW Limay Combined Cycle Power Plant (Limay Power Plant) which expired on February 17, 2011. PEHI and Alstom entered into a new agreement which extended Alstom as operation and maintenance provider until August 15, 2011. Total expenses for O&M fees amounted to P433,180 for the period January 1 to August 25, 2011. PEHI originally leases from PSALM the land where the Limay Power Plant is located for a total of P37,728 and a term of twenty-five (25) years from January 2010, renewable upon mutual agreement of the parties. However, in May 2010, with the consent of PSALM, PEHI’s option to acquire the land was assigned to Pacific Central Properties, Inc. (PCPI), a related party under common control. Accordingly, PCPI assumed all the

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rights and obligations under the original contract between PEHI and PSALM. On September 30, 2010, PCPI exercised the option and acquired ownership of the land for P125,256 through a cash advance from PEHI. Rent expense included under “Income (loss) from discontinued operation” account in the consolidated statements of income amounted to P975 for the period ended August 25, 2011. Cash flows from (used in) discontinued operation are as follows:

For the Period January 1 to August 25,

2011

Net cash flows used in operating activities (P600,794)Net cash flows used in investing activities (597,615)Net cash flows provided by financing activities 1,036,245

(P162,164)

The effect of the sale of discontinued operation on the financial position of the Group is as follows:

2011

Cash and cash equivalents (P520,719)Trade and other receivables (1,899,570)Inventories (983,514)Prepaid expenses and other current assets (247,835)Property, plant and equipment (768,219)Other noncurrent assets (7,507)Accounts payable and accrued expenses 4,164,156

Net assets and liabilities P263,208

Cash proceeds P25,000Cash and cash equivalents disposed of (520,719)

Net cash outflow (P495,719)

17. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of:

Note 2012 2011

Trade 8, 20 P12,104,772 P10,609,998Output VAT 4,648,547 3,781,386Accrued expenses 1,264,169 943,497Accrued interest 8, 18, 19 447,162 484,302Withholding taxes 58,605 123,166

P18,523,255 P15,942,349

Output VAT consists of current and deferred output VAT payable. Deferred output VAT represents the VAT on the sale of power which will be remitted to the Government only upon collection from the customers (Note 10).

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18. Other Current Liabilities In 2009 and 2008, the Parent Company entered into a sale and purchase agreement to acquire 6,068,900 and 62,990,638 Meralco shares held by Development Bank of the Philippines (DBP) and Social Security System (SSS), respectively, for a total consideration of P6,215,358 plus a total additional fixed term interest of P801,441 payable up to January 31, 2012. On January 31, 2012, the Parent Company paid DBP and SSS the remaining balance of P2,121,509 on the purchase of Meralco shares.

19. Long-term Debt Long term debt - net of debt issue costs consists of:

2012 2011

Bonds payable P12,315,000 P13,152,000 Less debt issue costs 105,538 139,912

12,209,462 13,012,088

Loans payable 8,210,000 8,768,000 Less debt issue costs 25,533 55,098

8,184,467 8,712,902

P20,393,929 P21,724,990

a. Bonds Payable

On January 28, 2011, the Parent Company carried out a US$300,000, 7%, 5-year bond issue under Regulations of the U.S. Securities Act of 1933, as amended. The unsecured bond issue is listed in the Singapore Exchange Securities Trading Limited. The terms and conditions of the bonds contain a negative pledge provision with certain limitations on the ability of the Parent Company and its material subsidiaries to create or have outstanding any security interest upon, or with respect to, any of the present or future business, undertaking, assets or revenue (including any uncalled capital) of the Parent Company or any of its material subsidiaries to secure any indebtedness, subject to certain exceptions. Upon the occurrence of a change of control, each bondholder has the right, at its option, to require the Parent Company to repurchase all (but not some only) of its bonds, at a redemption price equal to 101.0% of the principal amount thereof plus accrued interest on the change of control put date. The Parent Company has agreed to observe certain covenants, including, among other things, limitation on guarantees and loans, limitation on indebtedness, limitation on restricted payments, limitation on dividends and other restrictions affecting material subsidiaries, limitation on transactions with shareholders and affiliates, limitation of asset sales, consolidation, merger and sales of assets and certain other covenants. Interest is payable semi-annually in arrears on January 28 and July 28 of each year, with first interest payment on July 28, 2011. Bonds payable amounted to P12,315,000 and P13,152,000 while accrued interest amounted to P359,188 and P400,558 as of December 31, 2012 and 2011, respectively. Interest expense amounted to P1,017,769 and P443,000 in 2012 and 2011, respectively.

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b. Loans Payable On March 31, 2011, the Parent Company signed a US$ 200,000, 3-year term loan with a syndicate of banks. The entire available amount under the Facility Agreement, being US$200,000, was drawn down by the Parent Company on September 30, 2011. Pursuant to the Facility Agreement, the amount of the loan drawn down will bear interest at the rate of the London interbank offered rate plus a margin, payable in arrears on the last day of the interest period. The Facility Agreement has a final maturity date of September 2014. The Parent Company may, by giving not less than ten (10) business days’ prior written notice to the Facility Agent, prepay the loan in whole or in part with accrued interest on the amount prepaid and subject to Break Funding Cost where the prepayment is made on a day other than the last day of an interest period, without minimum penalty. The Facility Agreement imposes a number of covenants on the part of the Parent Company including, but not limited to, maintaining a leverage ratio and a specified interest coverage ratio throughout the duration of the term of the Facility Agreement. The terms and conditions of the Facility Agreement contains a negative pledge provision with certain limitations on the ability of the Parent Company and its material subsidiaries to create or have outstanding any security interest upon or with respect to, any of the present or future business, undertaking, assets or revenue (including any uncalled capital) of the Parent Company or any of its material subsidiaries to secure any indebtedness, subject to certain exceptions. Loans payable amounted to P8,210,000 and P8,768,000 while accrued interest amounted to P1,683 and P1,190 as at December 31, 2012 and 2011, respectively. Interest expense amounted to P234,284 and P55,000 in 2012 and 2011, respectively.

The amortization of debt issue costs of P63,939 and P42,159 plus bank charges on the long-term debt of P195,010 is included as part of “Other charges - net” account in the consolidated statements of income in 2012 and 2011, respectively.

20. Related Party Disclosures The Group, in the normal course of business, purchases products and services from and sells products to related parties. Transactions with related parties are made at normal market prices and terms. An assessment is undertaken at each financial year by examining the financial position of the related party and the market in which the related party operates.

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Transactions and account balances with related parties are as follows:

Year

Revenue From

Related Parties

Purchases From

Related Parties

Amounts Owed by

Related Parties

Amounts Owed to Related Parties Terms Conditions

Associate 2012 P43,990,405 P - P5,045,384 P - On demand; Unsecured; 2011 37,274,195 - 4,571,355 - non-interest no impairment

bearing Ultimate 2012 33,930 241,604 19,290 40,622 On demand; Unsecured;

Parent Company

2011 - 227,832 25 54,528 non-interest bearing

no impairment

Entity Under 2012 712,584 265,826 110,034 69,172 On demand; Unsecured;

Common Control

2011 714,153 744,217 63,047 77,354 non-interest bearing

no impairment

2012 P44,736,919 P507,430 P5,174,708 P109,794

2011 P37,988,348 P927,049 P4,634,427 P131,882

a. Amounts owed to related parties consist of trade payables, management fees,

reimbursement of expenses, rent, insurance and services rendered from/by related parties.

b. Amounts owed by related parties consist of trade receivables, share in expenses, advance rental and security deposits.

c. SMEC and SPPC supply power to Meralco for certain capacity of the Sual Power Plant and Ilijan Power Plant, respectively. SMEC also supplies power to other related parties under common control of SMC (Note 8).

d. PEHI and SMEC purchase fuel from Petron for the Limay Power Plant and Sual Power Plant, respectively.

e. The Group obtains cash advances from SMC for working capital requirements. The Group also pays SMC for reimbursement of travel and transportation and professional fees. The management fees charged by SMC amounted to P241,604 and P227,832 for the years ended December 31, 2012 and 2011, respectively (Note 22).

f. The Group leases office spaces from SMPI. The lease is renewable annually (Note 8).

g. The compensation of key management personnel of the Group amounted to P32,598 and P22,100 for the years ended December 31, 2012 and 2011, respectively.

h. SMC offers shares of stock to employees of SMC and its subsidiaries under the ESPP. Under the ESPP, all permanent Philippine-based employees of SMC and its subsidiaries who have been employed for a continuous period of one year prior to the subscription period will be allowed to subscribe at a price equal to weighted average daily closing prices for three months prior to the offer period less 15% discount. A participating employee may acquire at least 100 shares of stock up to a maximum of 20,000 shares, subject to certain conditions, through payroll deductions. The ESPP requires the subscribed shares and stock dividends accruing thereto to be pledged to SMC until the subscription is fully-paid. The right to subscribe under the ESPP cannot be assigned or transferred. A participant may sell his shares after the second year from exercise date. The ESPP also allows subsequent withdrawal and cancellation of participant’s subscriptions under certain terms and conditions. As of December 31, 2012 and 2011, the Group has no expenses related to ESPP.

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i. The Group does not provide yet post-employment benefits to its employees. Management believes that the retirement expense is not significant based on the employees’ average age and years of service to the Group, and payroll costs as of December 31, 2012 and 2012.

All outstanding balances with these related parties are expected to be settled in cash within twelve months as of the reporting date. None of these balances is secured.

21. Equity Capital Stock On July 29, 2011, the BOD and stockholders approved the increase in authorized capital stock of the Parent Company from P1,000,000, divided into 10 million shares at P100 par value per share, to P2,000,000, divided into 2 billion shares at P1 par value per share. Out of the increase in authorized capital stock, SMC subscribed to 250 million shares and paid the amount of P62,504 on August 4, 2011. The increase in authorized capital stock was approved by the SEC on August 25, 2011. The movements in the balance of capital stock are as follows:

2012 2011

Subscribed capital stock Balance at beginning of year P1,250,004 P1,000,000 Subscriptions during the year - 250,004

Balance at end of year 1,250,004 1,250,004

Less subscription receivable Balance at beginning of year 187,500 - Addition - 187,500


P1,062,504 P1,062,504

The movements in the number of subscribed shares of common stock are as follows:

2012 2011

Balance at beginning of year 1,250,003,500 10,000,000Shares issued as a result of reduction in par value - 990,000,000 Additional subscriptions - 250,003,500

Balance at end of year 1,250,003,500 1,250,003,500

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Reserves Reserves consist of:

Note 2012 2011

Excess of net assets over purchase price of acquired subsidiaries under common control Balance at beginning of year P785,279 P775,515Additions 6 - (65)Sale of a subsidiary 16 - 9,829


Share in other comprehensive income (loss) of Meralco - net 14 Balance at beginning of year (40,482) (40,730)Additions 1,176 248

Balance at end of year (39,306) (40,482)

P745,973 P744,797

Excess of net assets over purchase price of acquired subsidiaries under common control at the beginning of year pertains to the acquisitions of noncontrolling interest in SMEC, SPDC, SPPC and PEHI. As of December 31, 2012 and 2011, the share in other comprehensive income (loss) of Meralco, consists of unrealized fair value gain on AFS financial assets and cumulative translation adjustments. Retained Earnings The Group’s retained earnings include the accumulated equity in the net earnings of subsidiaries and an associate amounting to P20,004,438 and P10,011,812 as of December 31, 2012 and 2011, respectively. Such amounts are not available for declaration as dividends until declared by the respective investees. The Parent Company’s BOD declared cash dividends as follows:

Date of Declaration Stockholders of Record Date Payable Amount

January 27, 2012 January 27, 2012 February 15, 2012 P2,000,000 April 25, 2012 April 25, 2012 May 8, 2012 1,700,000 July 26, 2012 July 26, 2012 August 8, 2012 1,000,000

November 9, 2012 November 9, 2012 November 9, 2012 1,000,000

P5,700,000

On December 27, 2012, the Parent Company appropriated: a) P2,092,750 for the construction of a power plant; and b) P446,250 for the payment of interest on the bonds payable; and c) P104,000 for the payment of interest on the loans payable (Note 19), SPPC appropriated P232,800 for the payment of fees due to PSALM under its IPPA Agreement for the Ilijan Power Plant, and SMEC appropriated: a) P1,238,000 for mining project development costs, b) P500,000 for the upgrading of the power plant’s coal unloading facility, and c) P62,000 for the purchase of computer software. These projects were approved by the BOD on the same date, and are expected to commence in 2013. On December 7, 2012, the Parent Company reversed its appropriation of retained earnings made on December 14, 2011.

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On December 14, 2011, the Parent Company appropriated: a) P2,122,000 for the payment of the final installment of the purchase price for the acquisitions of a total of 69,059,538 common shares of Meralco (Note 14); and b) P701,000 for the payment of interest on the bonds payable; and c) P177,000 for the payment of interest on the loans payable (Note 19), and SPPC appropriated P2,749,000 for the payment of energy fees due to PSALM under its IPPA Agreement for the Ilijan Power Plant.

22. Operating Expenses Operating expenses consist of:

Note 2012 2011

Impairment losses on receivables 10 P313,104 P599,997Outside services 270,756 13,125Management fees 20 257,270 229,356Donations 215,728 8,362Market fees 8 187,088 192,507Professional fees 146,469 152,030Taxes and licenses 74,614 341,680Salaries, wages and benefits 71,670 47,505Rent 4, 8 16,515 11,168Travel and transportation 9,112 25,431Supplies 8,652 15,876Depreciation 13 7,835 4,363Freight, trucking & handling 2,438 6,065Miscellaneous 101,950 211,784

P1,683,201 P1,859,249

The Group’s corporate social responsibility projects, included in the “Miscellaneous expense” account, amounted to P43,372 and P71,379 for the years ended December 31, 2012 and 2011, respectively.

23. Other Income (Charges) Other income (charges) consist of:

Note 2012 2011

Equity in net earnings of an associate 14 P1,053,352 P818,751Foreign exchange gains (losses) - net 27 7,707,630 (193,479)PSALM monthly fees reduction 8 917,901 444,776Interest income 16 880,586 420,531Gain on sale of investment 106,613 - Finance cost 8, 18, 19 (12,726,547) (12,924,347)Miscellaneous income 581,275 23,225

(P1,479,190) (P11,410,543)

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24. Income Taxes The components of income tax expense (benefit) are as follows:

2012 2011

Current P172,519 P736,567Deferred 1,266,457 (715,534)

Income tax from continuing operations 1,438,976 21,033Income tax from ordinary activities of

discontinued operation - 412

P1,438,976 P21,445

Current income tax expense in 2012 and 2011 represents regular corporate income tax of 30% on taxable income not covered by SMEC, SPPC and SPDC’s ITH (Note 25), MCIT and final tax on interest income. Deferred tax assets (liabilities) arise from the following:

2012 2011

Difference of depreciation and other related expenses over monthly payments (P716,778) P388,268

NOLCO 16 16Allowance for impairment losses on

receivables 15,189 176,600

(P701,573) P564,884

The difference of depreciation and other related expenses over monthly payments represents timing difference between tax and accounting recognition of expenses. The amounts above are reported in the consolidated statements of financial position as follows:

2012 2011

Deferred tax assets P1,683,408 P782,587Deferred tax liabilities (2,384,981) (217,703)

(P701,573) P564,884

As of December 31, 2012, the NOLCO of the Group that can be claimed as deduction from future taxable income is as follows:

Incurred Date of Expiry NOLCO

Year 2010 December 31, 2013 P235,787 Year 2011 December 31, 2014 1,348,267 Year 2012 December 31, 2015 1,786,978

P3,371,032

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The carryforward benefits of MCIT which the Group can claim as tax credits from regular corporate income tax payable are as follows:

Taxable year Amount Expired Balance Expiry Date 2011 P1,378 P - P1,378 December 31, 20142012 7,417 - 8,795 December 31, 2015

The reconciliation between the statutory income tax rate on income before income tax from continuing operations and the Group’s effective income tax rate is as follows:

2012 2011

Statutory income tax rate 30.00% 30.00% Increase (decrease) in the income tax rate resulting from:

Income subject to ITH (11.44%) (54.27%)Difference of depreciation and other related

expenses over monthly payments (4.58%) 28.00% Nondeductible expenses and others (4.78%) (3.41%)

Effective income tax rate 9.20% 0.32%

25. Registration with the Board of Investments (BOI)

SMEC, SPDC, SPPC and PEHI are registered with the BOI as administrator/operator of their respective power plant on a pioneer status with non-pioneer incentives and were granted Income Tax Holiday (ITH) for four (4) years without extension beginning August 1, 2010, subject to compliance with certain requirements under their registrations. The ITH incentive availed was limited only to the sale of power generated from the power plants. As discussed in Note 16, on August 26, 2011, the Parent Company sold its 100% ownership interest in PEHI to a third party.

26. Basic and Diluted Earnings Per Share

Basic and diluted earnings (loss) per share EPS (LPS) is computed as follows:

Note 2012 2011 Income from continuing operations attributable to

equity holders of the Parent Company (a) P14,209,307 P6,381,490 Loss from discontinued operation attributable to

equity holders of the Parent Company (b) 16 - (824,009)

Net income attributable to equity holders of the Parent Company P14,209,307 P5,557,481

Weighted average number of shares outstanding (c) 1,250,003,500 1,104,168,333

Basic/Diluted EPS from continuing operations (a/c) P11.37 P5.78 Basic/Diluted LPS from discontinued operation (b/c) - (0.75)

As of December 31, 2012 and 2011, the Group has no dilutive debt or equity instruments.

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27. Financial Risk Management Objectives and Policies Objectives and Policies The Group has significant exposure to the following financial risks primarily from its use of financial instruments: Market Risk

- Interest Rate Risk - Foreign Currency Risk

Liquidity Risk Credit Risk

This note presents information about the Group’s exposure to each of the foregoing risks, the Group’s objectives, policies and processes for measuring and managing these risks, and the Group’s management of capital. The Group’s principal non-trade related financial instruments include cash and cash equivalents, other receivables, finance lease liabilities, other current liabilities and long-term debt. These financial instruments are used mainly for working capital management and investment purposes. The Group’s trade-related financial assets and liabilities such as trade and other receivables and accounts payable and accrued expenses arise directly from and are used to finance its daily operations. The BOD has the overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyze the financial risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The BOD oversees how management monitors compliance with the Ultimate Parent Company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The BOD is assisted in its oversight role by SMC’s Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the BOD. Market Risk Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices will affect the Group’s income and equity or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Interest Rate Risk Interest rate risk is the risk that future cash flows from a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) will fluctuate because of changes in market interest rates. The Group’s exposure to changes in market interest rates relates primarily to the Group’s borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Management is responsible for monitoring the prevailing market-based interest rate and ensures that the mark-up rates charged on its borrowings are optimal and benchmarked against the rates charged by other creditor banks.

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On the other hand, the Group’s investment policy is to maintain an adequate yield to match or reduce the net interest cost from its borrowings pending the deployment of funds to their intended use in the Group’s operations and working capital management. However, the Group invests only in high-quality short-term investments and maintains the necessary diversification to avoid concentration risk. In managing interest rate risk, the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over long term, however, permanent changes in interest rates would have an impact on profit or loss. The management of interest rate risk is also supplemented by monitoring the sensitivity of the Group’s financial instruments to various standard and non-standard interest rate scenarios. Interest rate movements affect reported equity in the following ways: retained earnings arising from increases or decreases in interest income or interest

expense as well as fair value changes reported in profit or loss, if any; fair value reserves arising from increases or decreases in fair values of AFS financial

assets reported as part of other comprehensive income; and hedging reserves arising from increases or decreases in fair values of hedging

instruments designated in qualifying cash flow hedge relationships reported as part of other comprehensive income.

The Group has no variable rate financial instruments as of December 31, 2012 and 2011. Foreign Currency Risk The Group’s exposure to foreign currency risk results from significant movements in foreign exchange rate that adversely affect the foreign currency-denominated transactions of the Group. The Group’s risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity. Information on the Group’s foreign currency-denominated monetary assets and liabilities and their Philippine peso equivalents are as follows:

December 31, 2012 December 31, 2011

US Dollar Peso

Equivalent US Dollar Peso

Equivalent

Assets Cash and cash equivalents US$102,531 P4,208,894 US$299,800 P13,143,183 Trade and other receivables 17,171 704,895 18,442 806,844

119,702 4,913,789 318,242 13,950,027

Liabilities Accounts payable and

accrued expenses 20,689 849,287 26,154 1,146,579 Finance lease liabilities

(Note 8) 2,472,744 101,506,060 2,571,867 112,750,654 Long-term debt (Note 19) 500,000 20,525,000 500,000 21,920,000

2,993,433 122,880,347 3,098,021 135,817,233

Net foreign currency- denominated monetary liabilities US$2,873,731 P117,966,558 US$2,779,779 P121,867,206

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The Group reported unrealized foreign exchange gains (losses) - net amounting to P7,840,990 and (P354,808) for the years ended December 31, 2012 and 2011, respectively, with the translation of its foreign currency-denominated assets and liabilities. These mainly resulted from the movement of the Philippines peso against US dollar as shown in the following table:

Peso to US Dollar

2012 Average during the year P42.22 Closing rate at December 31, 2012 41.05

2011 Average during the year 43.31 Closing rate at December 31, 2011 43.84

Sensitivity Analysis The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities) for the years ended December 31, 2012 and 2011:

December 31, 2012 December 31, 2011

P1 Decrease in the US

Dollar Exchange

Rate

P1 Increase in the US

Dollar Exchange

Rate

P1 Decrease in the US

Dollar Exchange

Rate

P1 Increase in the US

Dollar Exchange

Rate

Cash and cash equivalents (P102,531) P102,531 (P299,800) P299,800

Trade and other receivables (17,171) 17,171 (18,442) 18,442

(119,702) 119,702 (318,242) 318,242

Accounts payable and accrued expenses 20,689 (20,689) 26,154 (26,154)

Finance lease liabilities 2,472,744 (2,472,744) 2,571,867 (2,571,867)Long-term debt 500,000 (500,000) 500,000 (500,000)

2,993,433 (2,993,433) 3,098,021 (3,098,021)

P2,873,731 (P2,873,731) P2,779,779 (P2,779,779)

Equity Price Risk Equity price risk is the risk that the fair value of equity investments decreases as a result of change in the quoted price of the stock. As of December 31, 2012 and 2011, the Group has no AFS financial asset. Liquidity Risk Liquidity risk pertains to the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Group’s objectives to manage its liquidity risk are as follows: a) to ensure that adequate funding is available at all times; b) to meet commitments as they arise without incurring unnecessary costs; c) to be able to access funding when needed at the least possible cost; and d) to maintain an adequate time spread of refinancing maturities.

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The Group monitors and manages its liquidity position, liquidity gaps or surplus on a daily basis. A committed stand-by credit facility from several local banks is also available to ensure availability of funds when necessary. The table below summarizes the maturity profile of the Group’s financial assets and financial liabilities based on contractual undiscounted receipts and payments used for liquidity management as of December 31, 2012 and 2011. December 31, 2012

Carrying Amount

Contractual Cash Flow

1 Yearor Less

1 Year - 2 Years

2 Years - 5 Years

Over5 Years

Financial Assets Cash and cash equivalents P23,555,445 P23,555,445 P23,555,445 P - P - P - Trade and other receivables -

net 17,788,133 17,788,133 17,788,133 - - - Other receivable - net of

current portion (included under “Other noncurrent assets” account in the consolidated statements of financial position) 396,091 396,091 - 90,810 305,281 -

Financial Liabilities Accounts payable and accrued

expenses (excluding statutory payables) 13,030,027 13,030,027 13,030,027 - - -

Finance lease liabilities (including current portion) 195,101,566 276,546,448 18,816,627 19,387,598 65,963,604 172,378,619

Long-term debt (net) 20,393,929 24,775,793 1,062,698 1,062,698 22,650,397 -

December 31, 2011

Carrying Amount

Contractual Cash Flow

1 Year or Less

1 Year - 2 Years

2 Years - 5 Years

Over 5 Years

Financial Assets Cash and cash equivalents P32,932,661 P32,932,661 P32,932,661 P - P - P - Trade and other receivables -

net 15,100,025 15,100,025 15,100,025 - - - Other receivable - net of

current portion (included under “Other noncurrent assets” account in the consolidated statements of financial position) 468,689 550,000 - 75,000 475,000 -


expenses (excluding statutory payables) 11,782,389 11,782,389 11,782,389 - - -

Finance lease liabilities (including current portion) 208,186,809 302,870,527 17,649,992 28,430,043 55,804,215 200,986,277

Other current liabilities 2,121,509 2,121,509 2,121,509 - - - Long-term debt (net) 21,724,990 27,594,628 1,134,926 1,134,926 25,324,776 -

Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade and other receivables. The Group manages its credit risk mainly through the application of transaction limits and close risk monitoring. It is the Group’s policy to enter into transactions with creditworthy customer or counterparty to mitigate any significant concentration of credit risk. The Group has regular internal reviews to monitor the granting of credit and management of credit exposures. Where appropriate, the Group obtains collateral or arranges netting agreements.

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Trade and Other Receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer or counterparty. However, management also considers the demographics of the Group’s customer base, including the default risk of the industry in which customers operate, as these factors may have an influence on the credit risk. The Group has established a credit policy under which each new customer or counterparty is analyzed individually for creditworthiness before the Group’s standard payment and terms and conditions are offered. The Group ensures that sales on account are made to customers with appropriate credit history. The Group has detailed credit criteria and several layers of credit approval requirements before engaging a particular customer or counterparty. The Group’s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer and are reviewed on a regular basis. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Financial information on the Group’s maximum exposure to credit risk as of December 31, 2012 and 2011, without considering the effects of collaterals and other risk mitigation techniques, is presented below.

2012 2011

Cash and cash equivalents P23,555,335 P32,932,571Trade and other receivables - net 17,788,133 15,100,025Other receivable - net of current portion 396,091 468,689

P41,739,559 P48,501,285 The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable entities with high quality external credit ratings. The Group’s exposure to credit risk arises from default of counterparty. Generally, the maximum credit risk exposure of receivables is its carrying amount without considering collaterals or credit enhancements, if any. The Group has no significant concentration of credit risk since the Group deals with a large number of homogeneous trade customers. The Group does not execute any credit guarantee in favor of any counterparty. Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to stockholders, pay-off existing debts, return capital to stockholders or issue new shares, subject to compliance with certain covenants of long-term debt (Note 19). The BOD has overall responsibility for monitoring capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Group’s external environment and the risks underlying the Group’s business, operation and industry.

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The Group monitors capital on the basis of debt-to-equity ratio, which is calculated as total debt divided by total equity. Total debt is defined as total current liabilities and total noncurrent liabilities, while equity is total capital as shown in the consolidated statements of financial position. There were no changes in the Group’s approach to capital management. The Group is not subject to externally-imposed capital requirements.

28. Financial Assets and Financial Liabilities The table below presents a comparison by category of carrying amounts and fair values of the Group’s financial instruments as of December 31, 2012 and 2011:

2012 2011

Carrying Amount Fair Value

Carrying Amount Fair Value

Financial Assets Cash and cash equivalents P23,555,445 P23,555,445 P32,932,661 P32,932,661Trade and other receivables -

net 17,788,133 17,788,133 15,100,025 15,100,025 Other receivable - net of

current portion (included under “Other noncurrent assets” account in the consolidated statements of financial position) 396,091 396,091 468,689 468,689


expenses (excluding statutory payables) 13,030,027 13,030,027 11,782,389 11,782,389

Finance lease liabilities (including current portion) 195,101,566 195,101,566 208,186,809 208,186,809

Other current liabilities - - 2,121,509 2,121,509 Long-term debt - net 20,393,929 22,985,068 21,724,990 25,236,799

The following methods and assumptions are used to estimate the fair value of the financial instruments: Cash and Cash Equivalents, Trade and Other Receivables (current and noncurrent), Accounts Payable and Accrued Expenses (excluding statutory payables) and Other Current Liabilities. The carrying amounts of these financial assets and financial liabilites approximate fair values primarily due to the relatively short-term nature/maturities of these financial instruments. The fair value of other receivable (noncurrent) is based on the present value of expected future cash flows using applicable discount rates based on current market rates of identical or of similar instruments. Long-term Debt. The fair value of fixed rate interest-bearing notes is based on the discounted value of future cash flows using the applicable rates for similar financial instruments. As of December 31, 2012 and 2011, the discount rate used range from 0.21% to 0.79% and 0.26% to 1.05%, respectively Finance Lease Liabilities. The fair value is based on the present value of expected cash flows using the applicable discount rates based on current market rates of similar instruments.

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Fair Value Hierarchy The different levels of valuation method for financial instruments carried at fair value are defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or

liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable

for the asset or liability, either directly or indirectly. Level 3: inputs for the asset or liability that are not based on observable market

data. As of December 31, 2012 and 2011, the Group has no financial instruments carried at fair value.

29. Other Matters a. Contingencies

SPPC disputed the claims of PSALM for generation payments. The claims arose from differing interpretations of certain provisions in the IPPA Agreement related to generation payments, the fees payable to PSALM for the generation of power to customers. SPPC’s management is in discussions with PSALM to secure a common understanding through amicable means. However, management and its legal counsel assessed that SPPC’s bases for the amounts due to PSALM are consistent with the terms of the Ilijan IPPA Agreement. The outcome of these claims is uncertain; accordingly, the amount cannot be presently determined.

b. Commitments The outstanding purchase commitments of the Group as of December 31, 2012 amounted to P6,021. Amount authorized but not yet disbursed for capital projects as of December 31, 2012 is approximately P26,708,911.

c. Increase in Capital Stock of Subsidiaries On December 7, 2012, the BOD and stockholders of SMCPC, resolved and approved the increase in authorized capital stock from P100,000 divided into 1 million common shares at P100 par value per share to P5,700,000, divided into 57 million common shares at P100 par value per share. The Parent Company has made payment for stock subscription amounting to P2,372,164. The Parent Company shall subscribe to 23,603,625 common shares at the subscription price of P150 per share, in cash, or for a total of P3,540,544, with 750,000 common shares to be issued out of the current unissued capital stock of SMCPC and the balance of the subscription amounting to 22,853,625 common shares shall be issued out of the aforementioned increase in the authorized capital stock of SMCPC. As of December 31, 2012, there is a pending application with the SEC of SMCPC’s request for an increase in its authorized capital stock. On December 7, 2012, the BOD and stockholders of SCPC, resolved and approved the increase in authorized capital stock from P100,000 divided into 1 million common shares at P100 par value per share to P5,700,000, divided into 57 million common shares at P100 par value per share. The Parent Company has made payment for stock subscription amounting to P2,372,165. The Parent Company shall subscribe to 23,603,625 common shares at the subscription price of P150 per share, in cash, or for a total of P3,540,544, with 750,000 common shares to be issued out of the current

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unissued capital stock of SCPC and the balance of the subscription amounting to 22,853,625 common shares shall be issued out of the aforementioned increase in the authorized capital stock of SCPC. As of December 31, 2012, there is a pending application with the SEC of SCPC’s request for an increase in its authorized capital stock.

d. Electric Power Industry Reform Act of 2001 RA No. 9136, otherwise known as the “Electric Power Industry Reform Act of 2001” (EPIRA) sets forth the following: (a) Section 49 created PSALM to take ownership and manage the orderly sale, disposition and privatization of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other disposable assets; (b) Section 31(c) requires the transfer of the management and control of at least seventy percent (70%) of the total energy output of power plants under contract with NPC to the IPP Administrators as one of the conditions for retail competition and open access; and (c) Pursuant to Section 51(c), PSALM has the power to take title to and possession of the IPP contracts and to appoint, after a competitive, transparent and public bidding, qualified independent entities who shall act as the IPP Administrators in accordance with the EPIRA. In accordance with the bidding procedures and supplemented bid bulletins thereto to appoint an IPP Administrator relative to the capacity of the IPP contracts, PSALM has conducted a competitive, transparent and open public bidding process following which the Group has been selected as the winning bidder of the IPPA Agreements discussed in Note 8. The EPIRA requires generation and distribution utility (DU) companies to undergo public offering within 5 years from the effective date, and provides cross ownership restrictions between transmission and generation companies. If the holding company of generation and DU companies is already listed with the Philippine Stock Exchange, the generation company or the DU need not comply with the requirement since such listing of the holding company is deemed already as compliance with the EPIRA. A DU is allowed to source from an associated company engaged in generation up to 50% of its demand except for contracts entered into prior to the effective date of the EPIRA. Generation companies are restricted from owning 30% of the installed capacity of the grid and/or 25% of the national installed generating capacity.

30. Subsequent Events On February 19, 2013, the Parent Company’s BOD declared cash dividends amounting to P1,000,000 payable on February 28, 2013.

COVER SHEET C S 2 0 0 8 - 0 1 0 9 9 S.E.C. Registration Number

S M C G L O B A L P O W E R H O L D I N G S

C O R P . ( F o r m e r l y G l o b a l 5 0 0 0

I n v e s t m e n t I n c . )

[ A W h o l l y - o w n e d S u b s i d i a r y o f

S a n M i g u e l C o r p o r a t i o n ]

A N D S U B S I D I A R I E S (Company's Full Name)

1 5 5 E D S A , B r g y . W a c k - W a c k

M a n d a l u y o n g C i t y

M e t r o M a n i l a

(Business Address : No. Street Company / Town / Province)

Mr. Alexander Benhur M. Simon 667-5390 Contact Person Company Telephone Number

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Annual Meeting

Secondary License Type, If Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

.Document I.D. Cashier

S T A M P S

Remarks = pls. use black ink for scanning purposes.

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