East Asia Power Resources Corporation Terms and Conditions of the 1.75:1 Stock Rights Offering

October 28, 1999 PSE CIRCULAR FOR BROKERS NO. 2770-99 SUBJECT : East Asia Power Resources Corporation Terms and Conditions of the 1.75:1 Stock Rights Offering The following are the terms and conditions of East Asia Power Resources Corporation's (the "Company") 1.75:1 Stock Rights Offering: Amount of Proceeds : P2,262,094,548.00 Offer Ratio : 1.75 Rights Share for every 1Common Share held. No fractional Offer Shares, par value : 2,262,094,548 common shares Offer Price : P1.00 par value Eligible Subscribers : All shareholder as of Record Date Record Date : November 19, 1999 Ex - date : November 15, 1999 Offer Period : November 25, 1999 to December 7, 1 999 Purchase of Additional Rights Shares : Subscribers who subscribe to the full extent of their pro-rata share of the Rights Offering shall be entitled to subscribe and pay for the unsubscribed shares, if any, by filling up a designated portion in the Application to Subscribe. Accordingly, the corresponding payment for the additional shares should already be tendered upon filing of the Application. Grant of additional Rights Shares shall be on a pro-rata basis. Payment Terms : The Rights Shares must be paid in full upon submission of the Application to Subscribe by a check drawn against a bank in Metro Manila to the order of EAPRC Rights Offer. The check must be dated as of the date of the Application to Subscribe and crossed for deposit. Refund : If no additional Rights Shares are allocated or if the number of additional Rights Shares allocated is less than the shares applied for, the excess payment will be refunded without interest. Underwriter : PNB Capital and Investment Corporation Stock Transfer Agent : Equitable Banking Corporation Legal Counsel to the Issue : Feria Feria Lugtu Lao Noche Law Offices Advisor on Accounting Matters : Joaquin Cunanan & Co. The net proceeds from the offering of approximately P2.187 billion will be used for the repayment of the outstanding debt, and the interests thereon, incurred by the Company from El Paso Philippines Holding Company, Inc. Attached is a copy of the Company's projected financial statements covering the year 1999. For your information and guidance. (SGD.) MARIA ISABEL T. GARCIA OIC, Listings & Disclosure Group EAST ASIA POWER RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED FORECASTED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDING DECEMBER 31, 1999 Report of Independent Accountants To the Board of Directors and Stockholders of East Asia Power Resources Corporation and Subsidiaries We have reviewed the accompanying consolidated forecasted balance sheet of East Asia Power Resources Corporation and its Subsidiaries as of December 31, 1999, and the related consolidated forecasted statements of income and retained earnings and of cash flows for the year then ending. Our review was made in accordance with generally accepted auditing standards, and accordingly included such procedures as we considered necessary to evaluate the reasonableness of the assumptions used by management as basis for the financial forecast and to evaluate the presentation of the forecast in conformity with the guidelines set out in the Notes to the Consolidated Forecasted Financial Statements Management is responsible for the consolidated forecasted financial statements including the assumptions on which these are based. In our opinion. the accompanying consolidated forecasted financial statements are presented in conformity with the guidelines set out in the Notes to the Consolidated Forecasted Financial Statements. and the underlying assumptions provide a reasonable basis for management's forecast However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Accordingly,. we do not vouch for the attainment of the forecast. We have no responsibility to update this report for events and circumstances occurring after the date of this report. The accompanying forecast and this report were prepared for submission to the Securities and Exchange Commission as part of its requirement for East Asia Power Resources Corporation's application for stock rights offering and should not be used for any other purpose. (SGD.) JOAQUIN CUNANAN & CO. Makati City August 16, 1999 EAST ASIA POWER RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED FORECASTED BALANCE SHEET DECEMBER 31, 1999 (Amounts in Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents P 1,156,289 Accounts receivable, net 1,186,355 Spare parts and supplies inventories, net 387,796 Prepaid expenses and other current assets 358,004 Total current assets 3,088.444 INVESTMENTS IN AND ADVANCES TO AFFILIATED 562,526 PROPERTY, PLANT AND EQUIPMENT, net 11,368,133 DEFERRED CHARGES, net 1,480,723 OTHER ASSETS 162,691 P 16,662,517 LIABILITIES AND STOCKHOLDERS' EQUlTY CURRENT LIABILITIES Accounts payable and accrued expenses P 859,158 Loans payable 471,821 Current portion of long-term debts 1,002,872 Total current liabilities 2,333,851 LONG-TERM DEBTS, net of current portion 6,404,410 ADVANCES FROM A STOCKHOLDER (Note 2) 760,000 9,619,465 STOCKHOLDERS' EQUITY Capital stock (Note 2) 3,554,720 Additional paid-in capital 2,645,956 Retained earnings 851,376 7,052,052 P16,662,517 (See accompanying notes to consolidated forecasted financial statements) (With review report of Joaquin Cunanan & Co. dated August 16, 1999) EAST ASIA POWER RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED FORECASTED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDING DECEMBER 31, 1999 (Amounts in Thousands) OPERATING REVENUES (Notes 2 and 3) Energy fees P 4,878,198 Service fees 16,026 4,894,224 OPERATING EXPENSES Operating and maintenance 2,126,553 Depreciation and amortization 596,294 Salaries and benefits 169,499 General and administrative 145,212 Property insurance 34,220 3,255,254 INCOME FROM OPERATIONS 1,638,970 OTHER INCOME (CHARGES) Interest and financing charges, net (1,034,606) Equity in net income of an affiliated company 20,742 Miscellaneous, net 238,367 (775,497) INCOME BEFORE PROVISION FOR INCOME TAX PROVISION FOR INCOME TAX - Deferred INCOME BEFORE PREACQUISITION INCOME OF CONSOLIDATED SUBSIDIARY AND MINORITY INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARY 839,148 PREACQUISITION INCOME OF A CONSOLIDATED SUBSIDIARY (Note 2) (48,070) MINORITY INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARY (Note 3) (172,912) NET INCOME FOR THE YEAR 618,166 RETAINED EARNINGS, January 1 233,210 RETAINED EARNINGS, December 31 P 851,376 EARNINGS PER SHARE P 40 WEIGHTED AVERAGE NUMBER OF SHARE 1,543,529,666 (See accompanying notes to consolidated forecasted financial statements) (With review report of Joaquin Cunanan & Co. dated August 16, 1999) EAST ASIA POWER RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDING DECEMBER 31, 1999 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year P 618,166 Adjustments to reconcile net income for the year to net cash provided by operating activities: Depreciation and amortization 596,794 Provision for deferred income tax 24,325 Minority interests in income of consolidated subsidiaries 172,912 Equity in net income of affiliated companies (20,742) Preacquisition income of a consolidated subsidiary 48,070 Increase in current assets: Accounts receivable (321,466) Spare parts and supplies inventories (126,886) Prepaid expenses and other current assets (283,778) Increase (decrease) in current liabilities: Accounts payable and accrued expenses 146,577 Income tax payable (7,004) Deferred credit (42,426) Net cash provided by operating activities 754,599 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment (3,007,022) Increase in: Investments in and advances to affiliated companies (191,778) Deferred charges (995,555) Decrease in other assets 28,690 Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from: Stock rights offering 2,186,863 Long-term debts 1,412,575 Increase in advances from a stockholder 761,696 Increase in loans payable 456,321 Decrease in minority interests (460,575) Net cash provided by financing activities 4,356,880 NET INCREASE IN CASH AND CASH EQUIVALENTS FOR THE YEAR 945,814 CASH AND CASH EQUIVALENTS, January 1 210,475 CASH AND CASH EQUIVALENTS, December 31 P1,156,289 (See accompanying notes to consolidated forecasted financial statements) (With review report of Joaquin Cunanan & Co. dated August 16, 1999) EAST ASIA POWER RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FORECASTED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDING DECEMBER 31, 1999 Note 1 - General The financial forecast presents to the best of management's knowledge and belief. East Asia Power Resources Corporation (EAPRC or Company), the Parent Company, and its subsidiaries expected financial position, results of operations and cash flows for the forecast period January 1, 1999 to December 1, 1999. Accordingly, the forecast reflects management's judgment as of July 30, 1999. the date of this forecast, of the expected conditions and its expected course of action The assumptions presented herein are those that management believes are significant to the forecast. There will usually be differences between the forecasted and actual results because events and circumstances frequently do not occur as expected. and those differences may be material. The principal assumptions adopted by EAPRC and its subsidiaries in the preparation of the forecast included, among others, that there will be no major changes in the existing political, legal, fiscal and economic conditions in the country that could have significant impact on the future operations of the Company. prcd Note 2 - Recent developments In February 1999, El Paso Philippine Holdings Company, Inc. (EPPHCI) acquired the controlling shareholding of Van der Horst Ltd (VDHL) in East Asia Power Resources Corporation (EAPRC) equivalent to 46% or 389,357,250 shares, together with VDHL's convertible loan to EAPRC of US$33.595 million. Also in February 1999, US$7.6 million of said convertible loan and the related accrued interest were converted into equity increasing EPPHCI's equity in EAPRC to 51.27% to equivalent to 480,412,278 shares. In April 1999, the balance of the loan of US$25.995 million and the related accrued interest aggregating to US$29 678 million were converted into equity, increasing EPPHCI's interest to 64 67% or an equivalent of 835.982.706 shares. Also in April 1999, EPPHCI advanced US$49 million to EAPRC in the form of a convertible loan with an annual interest at 16.5% which enabled the latter to exercise its option to buy back the Cebu projects (East Asia Utilities Corporation and Cebu Private Power Corporation) from Filinvest Development Corporation (FDC). This loan is expected to be paid from the proceeds of the stock rights offering as discussed in Note 6 FDC has a remaining loan to the Cebu projects of US$48.4 million with annual interest at 16.5%, which will mature in October 1999. Note 3 - Organization and operations The accompanying consolidated forecasted financial statements as of and for the year ending December 31, 1999 represent the consolidated accounts of EAPRC and the following subsidiaries: % of Ownership Direct Indirect East Asia Diesel Power Corporation (EADPC) 100 - Duracom Mobile Power Corporation (DMPC) - 40 Sunrise Power Company, Inc. (SPCI) - 66.67 East Asia Global Management Limited (EAGML) 100 - East Asia Power Services, Inc. (EAPSI) 100 - East Asia Transmission and Distribution Corporation (EATDC) 100 - East Asia Utilities Corporation (EAUC) 100 Cebu Private Power Corporation (CPPC) - 80 EAPRC is a publicly-listed holding company for entities most of which are engaged in power generation. EAGML is EAPRC's holding company for foreign operating subsidiaries. It used to have a direct equity investment in Asia Pacific Power and Light Limited (APPL), which in turn owns 51% equity in Taxing Huangquiao Pacific Power Co. Ltd. (THPPC), a company also engaged in power generation. The investment in APPL was sold in June 1999, subject to certain conditions. EAPSI is engaged in the business of managing, operating, maintaining and repairing power plants and other factories, machineries and equipment. EATDC was organized to engage primarily in the business of power transmission and distribution. The operating subsidiaries have power agreements with various third parties, as follows: EADPC DMPC SPCI EAUC CPPC Customer National Power Corporation (NAPOCOR) Manila Electric Company (MERALCO) Petrochemicals Corp. of Asia- Mactan Export Processing Zone (MEPZ) and VECO Visayan Electric Company (VECO) Power plant 109 MW diesel-fired-power barges 133 MW diesel-fired power barges 22.8 MW diesel-fired land-based power plant land-based power plant fired-land based power plant Location Navotas Navotas Mariveles, Mactan, Cebu Ermita, Cebu Co-operation periods No. of years 5 (may be extended up to 15 years) 10 (renewable for another period of 5 years) 20 15 for MEPZ and 10 for VECO 15 Start of commercial operations May 1994 February 25, 1996 June 25, 1997 May 25, 1998 for MEPZ and June 25, 1998 for VECO November 25, 1998 The power purchase agreement (PPA) of EADPC with NAPOCOR expired on May 31, 1999. EADPC is currently in the advanced stage of negotiations with certain third parties for its two power plant barges and the new PPAs are expected to be finalized before the end of August 1999. Note 4 - Significant accounting policies The more significant accounting principles and practices followed by EAPRC and its subsidiaries are set forth to facilitate the understanding of data presented in the consolidated forecasted financial statements: Basis of presentation and consolidation The consolidated forecasted financial statements of EAPRC and its subsidiaries have been prepared in accordance with generally accepted accounting principles, as these principles apply to power generation companies, and with EAPRC and subsidiaries' historical financial statements. The forecast is based on actual results for the period January 1 to June 30, 1999 and on estimates for the period July 1 to December 31, 1999. The excess of acquisition costs of investments in consolidated subsidiaries over equity in net assets is being amortized using the straight-line method over a period ranging from 15 to 25. DMPC, a 10%-owned affiliate of EADPC, was consolidated since EADFC has control over the financial and operating policies of DMPC. One-half of the shares registered in the name of the other stockholder of DMPC is the subject of a voting trust agreement (VTA) signed by EADPC and the other stockholder of DMPC whereby the trustee of these shares is a nominee of EADPC. The VTA can be utilized to vote on any matter which may arise at any stockholders' meeting but not including the sale or mortgage of the entire franchise, assets and property, or the dissolution of DMPC and shall be effective for an initial period of five years starting November 1996, renewable every five year; thereafter upon agreement of the parties. LexLib All significant intercompany accounts and transactions have been eliminated in consolidation. Cash equivalents Short-term. highly liquid investments that are both readily convertible to known amount of cash and so near maturity that they present insignificant risk of changes in value because of changes in interest rates are considered to be cash equivalents. These are investments with original maturities of three months or less from the date of purchase. Spare parts and supplies inventories These inventories are recorded at cost determined by the moving-weighted average method. Allowance for inventory obsolescence is provided for in the accounts if deemed necessary. Investments The equity method of accounting for investments in shares of stock of unconsolidated companies is followed where there is ability to exercise significant influence. Under this method, the cost of investment is increased or decreased by the equity in net income or losses of the investee since date of acquisition and reduced by dividends received. Investments in proprietary shares, included as part of other assets account in the consolidated forecasted balance sheet, are recorded at cost. Property, plant and equipment These are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method, except for power plants, over the estimated useful lives of the assets ranging from five to 20 years. Depreciation of the power plants is computed using the unit of production method (based on estimated number of Kilowatt-hours to be generated over 20 years). The costs of repairs and maintenance are changed to operations as incurred; significant renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Borrowing costs These costs are generally recognized as expense in the year in which these costs are incurred, except those borrowing costs that are directly attributable to the construction and installation of power plants and related equipment which are capitalized as part of the cost of such assets. The capitalization of borrowing costs as part of the cost of such assets (a) commences when the expenditures and borrowing costs for the assets are being incurred and activities that are necessary to prepare the assets for their intended use are in progress, (b) is suspended during the extended periods in which active development of the assets is interrupted, and (c) ceases when substantially all the activities necessary to prepare the assets for their intended use are complete. Preoperating expenses Expenses incurred prior to the start of commercial operations were capitalized and are being amortized over a 10-year period from the start of commercial operations. Foreign exchange transactions Exchange gains or losses arising from foreign currency transactions are credited or charged to operations. except those pertaining to foreign currency denominated long-term loans used for the acquisition and development of the power plants which were capitalized as part of the cost of the asset acquired. Revenue recognition Energy fees are recognized based on installed net contracted plant capacity and electric energy actually delivered to customers service fees are recognized by reference to the stage of completion of the corresponding operation and maintenance, repairs and other related services. Pension costs These costs are determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees' projected salaries. Deferred income tax EAPRC and its subsidiaries are using the liability method of accounting for deferred income tax. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences, if any, between the financial reporting bases of assets and liabilities and their related tax bases. Deferred income tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets at December 31, 1999 are expected to be realized after the end of the income tax holidays of the subsidiaries. Earnings per share Earnings per share is computed based on the weighted average number of shares outstanding during the year. Note 5 Revenues and expenses accounts Revenues Revenues consist of energy fees of all power generating subsidiaries and of service fees of EAPSI during the year based on signed agreements. Energy revenues are expected to increase as a result of the buy-back of the Cebu projects and the new PPAs for the Red and Blue barges. llcd Equity in net earnings of an affiliated company This account represents the share of EATDC in the expected net income on its investment in San Fernando Electric Light and Power Company, Inc. (SFELAPCO). Operating and maintenance This consists mainly of fuel cost which is computed using the weighted average of fuel inventory values. The fuel price for each month's delivery is referenced on the Mean of Platt's Singapore (MOPS), the arithmetic mean of the previous calendar month's daily SPOT prices as published in the Platt's Oilgram Price Report. MOPS is an oil industry reference when of offtake from Singapore (a hub of oil refining activity) is contemplated. It reflects the price range of daily traded transactions and is a good indicator of the supply/demand situation for finished refined petroleum products in Singapore and is also influenced by global factors. MOPS is estimated to average US$86.50/MT for the second half of the year. The fuel for EADPC's contract with NAPOCOR was supplied by NAPOCOR. Both DMPC and SPCI have five-year fuel supply contracts with Petron Corporation until December 31, 2000. The Cebu-based projects, EAUC and CPPC, have fuel supply contracts with Subic Bay Distribution, Inc. until September 25, 1999. Salaries and benefits The amount is based on budget with a provision for 10% increase from last year. General and administrative These expenses are based on budget which consist mainly of consultancy and professional fees, travel and transportation, utilities and office overhead, and management fees paid to EPPHCI for technical. engineerings, financial, administrative and other related services to assist and support EAPRC in its operations. Interest expense and financing charges Interest expense for the year aggregating to P1.1 billion (US$29.4 million) arise mainly from foreign currency-denominated long-term debts and convertible loan with annual interest ranging from 11% to 16.5%. Financing costs and expenses related to the debt-restructuring and re-financing of these debts, expected in the second half of 1999, are estimated at P11 million for EADPC, P37 million for DMPC, P6.6 million for SPCI and P60 million for both EAUC and CPPC. Income tax Except for EAPSI and EAGML, the following operating subsidiaries enjoy a six-year income tax holiday incentive granted by the Board of Investments, thus there is no current provision for income tax for these companies. The expiration dates of the income tax holidays are as follows: EAUC - December 31, 1999 EADPC - June 5, 2000 DMPC - February 25, 2000 SPCI - June 25, 2003 CPPC - November 25, 2004 Note 6 - Balance sheet accounts Cash and cash equivalents Cash is forecasted to approximate one month's operating expenses. Excess of available cash over the average balance is forecasted to be placed in share-term cash investments. Investments in and advances to affiliated companies This consists of EATDC's equity investments in and advances to First Electric Utilities Service Corporation (FUSE) and SFELAPCO FUSE is assumed to have not yet started commercial operations as of December 31, 1999. Deferred charges Included in this account are costs and expenses expected to be incurred in 1999 in preparation for the new PPAs of EADPC. The new offtakers are electric power distribution utilities both located in the Visayas. As such, the Company will incur certain capital expenditures which will cover, among others, the physical transfer of the two power barges from Navotas to the Visayas, the construction of new mooring and fuel receiving facilities at the new sites, overhauling works on the generating equipment, and the reconfiguration of both barges transformers (stepping down the output side from 115 Kilo Volts (KV) required by NAPOCOR to 69 KV now required by the distribution utilities). In an effort to expedite the preparation works needed which will enable the barges to comply with the new requirements of the new offtakers. EADPC began implementing the engine overhauling and transformer reconfiguration works as early as June this year These works required the involvement of a barge mounted heavy lift crane capable of lifting the 20 to 30 ton transformers of the barges, as well as the time of electrical engineers for the engine overhauling works. Project cost approximating US$10 million for each barge were included in new capital costs. To carry out these works, EADPC has retained most of its personnel to assist in the preparatory works and has maintained its Navotas office as a base of operations from where most of the coordination and supervision are conducted. With the timely funding of the associated capital costs and successful implementation of the preparatory activities, commercial operations on these new PPAs with their respective new customers may be expected to begin as early as November 25, 1999 for the Red barge and December 25, 1999 for the Blue barge. prcd Long-term debts These consist of US dollar short-term and long-term loans and trust receipts liability used to finance the construction and development of the power plants of EADPC, DMPC, SPCI. These loans are expected to be restructured with an annual interest from the original 2.5% over LIBOR to 5% over LlBOR retroactive to January 1999 and are secured by various collaterals ranging from mortgages over power plants, several real estate properties and certain shares of stock, assignment of proceeds from and rights in the power agreements, among others. The loan agreements with banks impose certain conditions and restrictions to several consolidated subsidiaries such as pledging or consolidation, obtaining or granting loans, investing of corporate funds, declaration of dividends, change in stock ownership, maintenance of certain financial ratios, among others It is assumed that all the companies will service their debts for both interest and loan repayments falling due during the year. At the time of the buy-back on April 30, 1999, EAUC and CPPC had an outstanding loan of US$48.4 million payable to Filinvest Development Corporation with annual interest of 11% which was increased to 16.5% at the time of the buy-back This loan plus the balance of the equity premium and the interest due on both amounts aggregating to US$55.3 million will mature in October 1999. It is expected that this loan will be refinanced in October 1999 with peso loans with annual interest of 15%. Related party transactions Transactions with related parties consist mainly of non interest-bearing intercompany advances. Capital stock On April 22, 1999, EAPRC's board of directors approved the rights offering of 2,262,094,548 shares. The shares will be offered for subscription to stockholders who will be granted the rights to subscribe the 7 shares for every 4 shares held. The estimated net proceeds of US$55 million from this stock rights offering is expected to be paid to EPPHCI for the US$53.8 million loan, including accrued interest of US$4.8 million, which was extended to EAPRC for the buy back of the Cebu projects The excess amount will cover all costs related to the rights offering. For this purpose, EAPRC has applied for an increase in its authorized shares of stock from 13 billion shares to 6 billion shares with a par value of P1 per share which application was approved by the Securities and Exchange Commission on August 12, 1999. In the assumption that none of the other shareholders subscribe to their rights shares. EPPHCI's post-rights interest on the issued and outstanding shares will be 87.15% or 3,098,077,254 shares. Dividend policy As a matter of policy, the Company intends to declare dividends (either in cash or stock or both) in the future, the amounts of which will depend on EAPRC's distributable earning, cash flow, financial condition, investment program and other factors. No dividend declaration is expected for 1999.