Contents

Business Mission and Credo 2

Corporate Governance 3

Corporate Directory 4

Financial Highlights 5

PART I - BUSINESSAND GENERAL INFORMATION Item 1 Business 6 Item 2 Properties 27 Item 3 Legal Proceedings 30 Item 4 Submission of Matters to a Vote of Security Holders 34

PART II -OPERATIONAL AND FINANCIAL INFORMATION Item 5 Market for Issuer's Common Equity and Related Stockholders Matters 35 Item 6 Management's Discussion and Analysis or Plan of Operation :38 Item 7 Financial Statements 52 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62

PART III - CONTROL AND COMPENSATION INFORMATION Item 9 Directors and Executive Officers of the Registrant 63 Item 10 Compensation of Directors and Executive officers 72 Item 11 Security Ownership of Certain Beneficial Owners and Management 73 Item 12 Certain Relationships and Related Transactions '74,

PART IV - CORPORATE GOVERNANCE 74

PARTV - EXHIBITS AND SCHEDULES Item 13 a. Exhibits 76 b. Reports on SEC Form 17-C (Current Report) 76

SIGNATURES 79

STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS 80

REPORT OF INDEPENDENT AUDITORS 81

CONSOLIDATED BALANCE SHEETS 83

CONSOLIDATED STATEMENTS OF INCOME 85

CONSOLIDATED STATEMENTS OF CASH FLOWS 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89

INDEX TO FINANCIAL STATEMENTSAND SUPPLEMENTARY SCHEDULES 186

ANNEX A SUMMARY OF OWNERSHIP OF SHARES 192 Business Mission and Credo

BUSINESS MISSION

Our basic purpose is to create new wealth for our stakeholders.

Our business will focus on vital needs for national development in the areas

of energy, infrastructure, manufacturing, and supporting industries.

In pursuing our objective, we will be guided by the following fundamental

and imperishable values and principles: nationalism, entrepreneurship

and innovation, teamwork, a strong work ethic, and corporate social

responsibility.

CREDO

We believeintheFilipino'sabilitytoinnovate,toseizedevelopmental

opportunitiesbornefromtherealneedsofdomesticand overseasmarkets.

We affirm our partnership with the Filipino in their endeavor of ever pushing

the social development frontiers beyond currently known limits.

We share the Filipino's vision of spreading gainful employment to all who are

willing to put their talents in the total betterment of the Filipino.

,_ 2 Corporate Governance

First Philippine Holdings Corporation other directors themselves, have been made by the company to the

(First Holdings) has instituted corporate Securitiesand Exchange Commission (SEC)

governance as a working philosophy. The audit committee is itself chaired by and to the Philippine Stock Exchange for

It has adopted a Manual on Corporate an independent director. Its duty, among the benefit of the investing public.

Governance, then a Manual on Anti- others, isto ensure transparency and

Money Laundering, and finally a Code of integrity in financial management. External The law requires a company to have only

Corporate Conduct intended to serve as a and internal auditors assist in this work. two independent directors. First Holdings guide in dealing with stakeholders, has three. Their presence provides the

First Holdings has an Internal Audit Group board with broad and impartial viewpoints,

Indeed, First Holdings finds the philosophy (IAG) headed by a vice-president, with a thus allowing for deliberations. of corporate governance dovetailing with the manpower complement of eight senior commitment, articulated by the company's and junior audit personnel, all certified For corporate governance, a compliance founders and pursued to this day, of public accountants and mostly certified officer and assistant have been designated.

"sound strategic business management internal auditors. The lAG reports to the These are concurrently corporate secretary to improve the economic and commercial board through the audit committee, and assistant corporate secretary. First

prosperity of the corporation and enhance Holdings is ISO certified, and regulatory shareholder value." The lAG provides assurance and consulting compliance is one of the processes that are

functions for First Holdings and its subject to periodic audit under this system.

This philosophy finds serious practical subsidiaries in internal control, corporate adherence in the very composition of First governance, and risk management. It Among the current governance compliance

Holdings' board, which sits persons of observes faithfully the International steps taken by the company are: (1) the proven competence and integrity. Standards for Professional Practice of annual certification to the SEC regarding

Internal Auditing (ISPPIA). compliance by the corporation, its

The nomination committee itself initially directors, officers, and employees with the passes upon prospects for new board Since the company focuses on finding leading practices and principles on good members, demanding among other appropriate financing and business governance as embodied in the company's qualifications the capability to "bring prospects, First Holdings has also manual, and (2) the secretary's certification prudent judgment to bear on the decision- constituted a finance and investment as to attendance and sworn declarations making process," committee, whose job, among others, by all independent directors as to their

is to review investment objectives and qualifications as required under the SEC

The philosophy is passed on down the strategies, fund raising, major capital Notice dated October 20, 2006. line. For instance, a compensation and expenditures, investment opportunities, remuneration committee oversees a and divestments. First Holdings keeps an abiding rewards system, closely observing a commitment to a type of governance that policy intended to promote a culture that For further transparency, the company is sound, transparent, responsive, and supports enterprise and innovation, has allowed one board observer at board equipped with a system of checks and

meetings. Previously, there were two balances.

The chairman's own remuneration observing as creditors' representatives. is subject to review by a committee In any event, complete, prompt and composed of the vice-chairman and the timely disclosuresof material information Corporate Directory

iNVESTOR RELATIONS

4th Floor Benpres Building

Exchange Road corner Avenue

Ortigas Center, Pasig City, 1605

T (632) 631-2435, 910-3086

F (632) 631-4089

Email [email protected]

LEGAL COUNSEL STOCKHOLDER SERVICESAND ASSISTANCE

Quiason, Makalintal, Barot, Tortes & Ibarra Law Firm Mr. Antonio R. Galvez

21st Floor Robinsons Equitable-PCI Tower Head of Operations

ADB Avenue corner Poveda Road SecuritiesTransfer Services, Inc.

Ortigas Center, Pasig City, Philippines 4th Floor Benpres Building

T (632) 631-0981 to 85 Exchange Road corner Meralco Avenue

F (632) 631-3847 Ortigas Center, Pasig City, Philippines 1605

PO. Box No. 13951

Puno & Puno Law Offices T (632) 449-6149 to 69

12th Floor East Tower F (632) 631-7148

Philippine Stock Exchange Centre Email [email protected]

Exchange Road, Pasig City, Philippines

T (632) 631-1261 to 64 CORPORATE OFFICE

F (632) 631-2517 First Philippine Holdings Corporation

4th Floor Benpres Building

EXTERNAL AUDITOR Exchange Road corner Meralco Avenue

Sycip, Gorres, Velayo & Co Ortigas Center, Pasig City, Philippines 1600

SGV Building T (632) 631-8024

6760 Ayala Avenue F (632) 631-4089

1226 City, Philippines Website www.fphc.com

T (632) 891-0307 Email [email protected] F (632) 819-0872

Schedule of Annual Stockholders' Meeting

Every 3raMonday of May

_::,_ zl First Philippine Holdings Corporation And Subsidiaries Financial Highlights December 31 2006 2005

OPERATING RESULTS(In million Php) Revenues Sale of electricity 51,176 45,485 Toll operations 5,705 5,104 Contracts and services 1,326 1,402 Sale of merchandise 1,184 861 Sale of real estate 181 407 Equity in net earnings of associates 4,208 963 Gain on sale of investment in shares of stock 535 594 Finance costs (7,338) (5,455) Finance income 3,281 1,086 Net income for the year 15,468 9,705 Net income attributable to equity holders of the parent 8,699 4,912

FINANCIAL POSITION (In million Php) Total Assets 135,476 125,635 Investments and deposits 17 758 14,158 Long-term debt (including current portion) 42 201 52,261 Total Liabilities 71 378 76,173 Total equity attributable to equity holders of the parent 35 879 29,334 Minority Interest 28 219 20,128 Total Equity 64 098 49,462

FINANCIAL RATIOS Return on equity 3 24% 17% Dividend payout ratio (%)4 23% 31% Current Ratio (times) _ 2.35 2.09 Long-term debt to equity (times)6 1.18 1.78

PERSHARE DATA (In Php) Earnings per share7 Basic 15.147 8.798 Diluted 14.984 8.651 Book value per shares 61.80 51.39 Priceearnings ratio _ 4.159 5.569 Market price 63.00 49.00 Cash dividend paid per share 2.00 2,00

Number of shares issued and subscribed 580,565,599 570,855,717

Weighted average number of shares Basic 574,293,127 558,293,115 Diluted 580,543,212 567,769,724 Number of stockholders 13,473 13,789

1 Theresultsfor the yearsended December31,2006 and 2005 are set out on the consolidatedfinancial statements. 2 Thebalancesheetsas of December31,2006 and 2005 areset outon the consolidatedfinancialstatements. 3 Returnonequity= netincomefor theyearattributabletoequityholdersof the parent/totalequityattributableto equityholdersofthe parent. 4 Dividendpayout ratio= dividendspaid/prioryear'snet incomeattributableto equity holdersof the parent. Currentratio= current assets/currentliabilities 6 Long-termdebt to equity = long-term debt (includingcurrentportion)/total equityattributable to equityholdersof the parent. 7 The EPScomputationfor the yearsended December31,2005 and 2004 areset out on the notesto the consolidatedfinancialstatements. 8 Bookvaluepershare= total equityattributable to equity holdersof the parent/no, of sharesissuedand subscribed. 9 Price-Earningsratio = market valuepershare/basicearningspershare

5 PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business

(A) Description of Business of the Issuer and Selected Significant Subsidiaries

(1) Business Development

Describe the development of'the business of the registrant and its significant subsidiaries during the past three (3) years, or such shorter period as the registrant may have been engaged in business. If the registrant has not been in business f_)r three years, give the same inJbrmation fi)r predecessor (s) O]'the registrant, _['there is any. This business development description should include, Jbr the registrant and its subsidiaries, the Jbllowing: (a) fbrm and date q]'organization; (b) any bankruptcy, receivership or similar proceeding; and, (_9 any material reclass![ication, merger, consolidation or purchase or sale of a significant amount of. assets not in the ordinary course of business.

First Philippine Holdings Corporation (FPHC or the Company) is a holding company established in 1961 by the Lopez family to group together its investments in the energy sector in the Philippines. FPHC's principal activity is holdings in subsidiaries and associates. The subsidiaries and associates are engaged in, but not limited to, power generation and power distribution, roads and tollways operations, pipeline services, real estate development, manuthcturing, construction, securities transfer services and financing. The common shares of FPHC were listed on and traded in the Philippine Stock Exchange beginning May 3, 1963. The Company is 43.81% owned by Benpres Holdings Corporation (BHC), its parent company.

FPHC's net income attributed to equity holders of the Parent amounted to _8.7 billion for the year ended December 31,2006 on consolidated revenues of_a59.6 billion.

In 2001, the Company transferred all of its power generation companies to First Gen Corporation (First Gen), which owns and manages all of the Company's power generation business.

Also, the Company increased its investments in First Philippine Infrastructure Development Corporation (FPIDC), the assignee of BHC and FPITC's rights, interests, and privileges, in relation to the construction, operation and maintenance of the -Subic Expressway under a Memorandum of Agreement signed on February 8, 1994 by BtTC and FPHC with Philippine National Construction Corporation (PNCC), Subic Bay Metropolitan Authority, Bases Conversion and Development Authority and several other governmental and non-governmental entities.

In February 2006, the Board of Directors approved the resolution to effect the transfer of FPHC shares in the following subsidiaries: Philippine Electric Corporation (Philec), First Electro Dynamics Corporation (Fedcor), First Sumiden Circuits Inc. (FSCT) and First Sumiden Realty Inc. under First Philippine Electric Corporation, likewise a subsidiary of FPHC. In a Ruling dated March 30, 2007, the Bureau of Internal Revenue confirmed the tax-free character of said planned transfer.

Power Generation

o First Gen Corporation was incorporated on December 22, 1998. The Parent Company and its subsidiaries are involved in the power generation business. On February 10, 2006, First Gen successfully completed the Initial Public Off_ring (Offering) of 180,910,900 common shares in the Philippines. The proceeds i?om the Offering amounted to _8,502.8 million (US$162 million). The common shares of First Gen are now listed and traded on the First Board of the Philippine Stock Exchange. As a result of this Offering, the equity interest of FPHC (together with FGHC International) in First Gen was reduced from 88.44% to 67.05%. As of December 31, 2006, FPHC's ownership interest in First Gen is at 66.78%.

.i_ 6 First Gen is the largest Filipino majority-owned and controlled Independent Power Producer (IPP) in the Philippines, with installed capacity of 1,838.6 MW as of December 31, 2006. All of the Company's power gencration plants are operational, and, except for the Bauang plant, are majority- owned and controlled by the Company through its subsidiaries. Since 2005, First Gen's consolidated financial statements has been presented in US Dollars (US$) being the Group's functional and presentation currency under the Philippine Financial Reporting Standards (PFRS). First Gen's • consolidated net income attributable to equity holders of the Parent amounted to US$92.9 million lbr the year ended December 31, 2006, on revenues of US$1.04 billion. Below are descriptions of the diflbrent companies under FirstGen:

o First Gas Holdings Corporation (FGHC) was incorporated on February 3, 1995 as a holding company tbr the development of gas-fired power plants and other non-power gas related businesses. The company is 60% owned by First Gen and 40% owned by BG Consolidated Holdings (Philippines), Inc. FGHC wholly owns First Gas Power Corporation (FGPC), the project company of the 1,000 MW Santa Rita Power Plant.

o FGPC is the project company of the Santa Rita Power Plant. The company was incorporated on November 24, 1994 to develop the 1,000 MW gas fired cycle power plant located in Santa Rita, Batangas City. The Company started full commercial operations on August 17, 2000. FGPC generates electricity for Meralco under a 25-year Power Purchase Agreement. In order to thlfill its responsibility to operate and maintain the power plant, FGPC has an existing agreement with Siemens Power Operations, Inc. (SPOI), a 100% subsidiary of Siemens AG, to act as the Operator under an Operations & Maintenance Agreement. Net income and revenues for the period ended December 31,2006 amounted to US$91.9 million and US$682.8 million, respectively.

o Unified tloldings Corporation (UHC) was incorporated on March 30, 1999 as the holding company of First Gen's 60% equity share in FGP Corp. (FGP), the project company of the 500 MW San Lorenzo Power Plant. First Gen owns 100% of UHC.

o FGP is the project company of the San Lorenzo Power Plant. The company was cstablished on July 23, 1997 to develop a 500 MW gas-fired combined cycle power plant in Santa Rita, Batangas, adjacent to the 1000 MW Santa Rita Power Plant. FGP is owned 60% by UHC and 40% by BG Philippines Holdings, Inc. Most of the economic and structural features that made the Santa Rita project attractive were replicated in the San Lorenzo project to preserve the innovative risk-mitigating structure, All major project agreements were substantially similar to those used in the Santa Rita project. Also, the economic and commercial advantages of being located adjacent to the Santa Rita project were optimized. The project's strategic location allows it to share common facilities such as the tank fan_ and jetty facilities thus reducing the need to duplicate various operational facilities. Cost reductions associated with the operations and maintenance of power plant will also be achieved through the pooling of O&M personnel and other expenses. Net income and revenues lbr the period ended December 31,2006 amounted to US$48.2 million and US$333.7 million, respectively.

o First Private Power Corporation (FPPC) was established on November 27, 1992 to engage in power generation as an independent power producer (IPP). FPPC is 40% owned by First Gen. FPPC currently owns a 93.25% interest in Bauang Private Power Corporation (BPPC). Net income of FPPC for 2006 amounted to US$20.5 million on revenues ofUS$25.5 million.

o BPPC was incorporated on February 3, 1993. It operates the Bauang Power Plant in Bauang La Union, a 225 MW diesel-fired power plant in La Union which has a Build-Operate- Transfer (BOT) Agreement with the National Power Corporation (NPC) lbr a period of fifteen years from July 25, 1995. For calendar year ended December 31, 2006, BPPC's net income amounted to US$24.9 million and posted revenues of US$53.4 million. o First Gen Renewables, Inc. (FGRI), formerly known as First Philippinc Energy Corporation, was established on November 29, 1978. It is tasked to develop prospects in the renewable energy market. FGRI is transtbrming itself from a mere supplier of products and systems to a service provider in the countryside. Discussions with electric cooperatives for the possible supply of energy in various provinces are on-going. First Gen owns 100% of FGRI. FGRI's other income and net loss recognized Ibr the year ended December 31, 2006 reached 1a0.45 million and tal 1.7 million, respectively.

o First Gen participated and won the bid for the !.6 MW Agusan Mini-hydro Power Plant (FG Bukidnon Hydroelectric Power Plant or FGBHPP) conducted by the Power Sector Assets and Liabilities Management Corporation (PSALM) on June 4, 2004 in connection with the privatization of NPC assets. On July 5, 2004, First Gen entered into an Asset Purchase Agrcement (APA) with PSALM lbr the purchase of Agusan for a total consideration of US$1.5 million. On March 29, 2005, all the closing conditions for the execution of the APA were satisfied and the purchase was completed. On October 14, 2005, First Gen conveyed its rights and obligations on FGBHPP to FG Bukidnon.

FG Bukidnon, a wholly-owncd subsidiary o1"FGRI was incorporated on February 9, 2005. Upon conveyance of First Gcn in October 2005, FG Bukidnon took over the operations and maintenancc of the FGBItPP. FG Bukidnon's full-year net income for 2006 amounted to _9.2 million and posted revenues oft_33.0 million.

Commissioned and constructed by NPC in 1957, FGBHPP is located in Damilad, Manolo, Fortich, Bukidnon in Mindanao (Southern Philippines), 36 kilometers southeast of Cagayan de Oro City. The run-of-river plant consists of two 800-kW turbine generators that use water from the Agusan River to generate electricity. It is connected to the local Cepalco distribution grid via the Transco distribution line.

o FirstGen llydro Power Corp. (FG Hydro). On March 13, 2006, First Gen incorporated First FG Hydro as a wholly owned subsidiary. On Septcmber 8, 2006, FG Hydro emerged as the winning bidder for the 100 MW Pantabangan and the 12 MW Masiway hydroelectric Power Plants (together PMItEPP). The 112 MW PMHEPP was transferred to FG Hydro on Novembcr 18, 2006, representing the first major generating assets of NPC to be succcssfully transferred to the private sector. The PMHEPP assets that were transferred to FG Hydro include turbine runners, generators, generator buildings, transformers, a water treatment plant, warehouse buildings, main electrical controls, traveling goliath crane, among others. FG Hydro's net income and rcvcnues for the period November 18 to December 31, 2006 amounted to t_383.9 million and t_651.9 million, respectively.

The 100 MW Pantabangan commenced operations in 1977 and consists of two 50 MW generating units and the 12 MW Masiway commenced operations in 1981 and consists of one 12 MW operating unit. Both facilities are located in Pantabangan, Nueva Ecija Province Central Luzon, 180 kilometers north of Metro Manila.

Newly incorporated subsidiaries that have not started commercial operations as of December 31, 2006:

,, AlliedGen Power Corporation (AlliedGen). On February 14, 2005, First Gen incorporated AlliedGen as a wholly owned subsidiary. Allied Gen is the holding company of First Gcn Group's 60% equity interest in First NatGas Power Corp. (FNPC), which will be the operating company for the planned San Gabriel project.

o San Gabriel project pertains to the construction of a nominal 550 MW Natural Gas-Fired Power Plant on land adjacent to the FGPC and FGP plant sites. As of December 31, 2006, FNPC is still conducting a feasibility study for the San Gabriel project and has initiated the process required lo obtain the necessary regulatory approvals. San Gabriel has been granted an Environmental Compliance Certificate by the Department of Environment and Natural

8 Resources (DENR) in thc 4 th quarter of 2005 and has also obtained the DOE Endorsement for power plant projects in thc 3rdquarter of 2005.

o First Gen Luzon Power Corporation (FGLuzon). On May 26, 2005, First Gen incorporated FGLuzon as a wholly owned subsidiary. FGLuzon will be used as the operating company for acquired generating facilities. These facilities include NPC-owned power generation plants that are currently scheduled for privatization and privately-owned power generation facilities in the Philippines that may be put up for sale by other power generation companies.

o First NatGas Supply Corporation (FNSC). On November 16, 2005, First Gen, through the directors of FGHC, incorporated FNSC. It will be engaged in the trading of natural gas.

o First Gen Visayas Hydro Power Corporation (FG Visayas). On September 19, 2006, First Gcn incorporated FG Visayas as a wholly-owned subsidiary. FG Visayas will bc engaged in the generation, transmission and/or distribution of energy derived from hydro-power.

o First Gen Mindanao Ilydro Power Corporation (FG Mindanao). On September 19, 2006, First Gen incorporated FG Mindanao as a wholly-owned subsidiary. FG Mindanao will be engaged in the generation, transmission and/or distribution of energy from hydro-power.

o First Gen Geothermal Power Coq)oration (FG Geothermal). On March 14, 2006, First Gcn incorporated FG Geothermal as a wholly-owned subsidiary. FG Geothermal will be engaged in the generation, transmission and/or distribution of cnergy derived from geothermal power.

o First Gen Northern Energy Corporation (FGNEC). On November 8, 2006, First Gen incorporated FGNEC as a wholly-owned subsidiary. FGNEC will be engaged in the gcneration, transmission and/or distribution of energy derived from hydro-power.

o First Gen Energy Solutions, Inc. (FG Energy). On November 24, 2006, First Gen incorporated FG Energy as a wholly-owned subsidiary. FG Energy will be engaged in the marketing, supply, delivery, purchase and sale of electricity.

Power Distribution

,, FPHC has two affiliates in the power distribution business: (1)Directly and through First Philippine Union Fenosa, it has a 17.68% stake in Manila Electric Company (Meralco), which is by far the country's largest electric utility; and was acquired during the 1960s; and, (2) A 30% investment in Panay Electric Company, Inc. (PECO). On June 9, 2003, RA 9209 was signcd into law granting Meralco a 25-year franchise to construct, operate and maintain an electric distribution system. RA No. 9209 consolidated 50 previously held t_anchises covering 23 cities mad 88 municipalities in Metro Manila and in six surrounding provinces. Meralco is subject to the ratemaking regulations and policies of the ERC that replaced the Energy Regulatory Board (ERB) under RANo. 9136, the Electric Power Industry Reform Act (EPIRA) of 2001. For the year ended December 31, 2006, Meralco generated revenues of _190.8 billion and a net income attributable to equity holders of the Parent of _13.7 billion. The significant net income resulted from the reversal of all accumulated provisions for probable losses from 2004 to 2006 amounting to _10.22 billion (net of tax), as a result of the en banc decision by the Supreme Court on December 6, 2006 setting aside an adverse Court of Appeals ruling on Meralco's tariff unbundling.

Roads and Tollways Operations

o First Philippine lnt?astructure Development Corporation (FPII)C) is a subsidiary of BHC and FPHC, established on April 21, 1994 to contract with the public sector. FPIDC is the assignee of BHC and FPHC of all their rights, interests and privileges, in relation to thc construction, operation mad maintenance of the Manila-Subic Expressway under a Memorandum of Understanding (MOU) signed on February 8, 1994 by BHC and FPHC with Philippine National Construction Corporation (PNCC), Subic Bay Metropolitan Authority, Bases Conversion and Development Authority and several other governmental and non-governmental entities. The Manila-Subic Expressway connects the Subic and Clark Special Economic Zones to Metro Manila. For the calendar year ended December 3l, 2006, net income attributable to equity holders of the Parent amounted to 121.2 billion on revenues of t25.7 billion.

o Manila North Tollways Corporation (MNTC) was incorporated on February 4, 1997 for the sole purpose of implementing the provisions of the Joint Venture Agreement OVA) between FPIDC and the PNCC tbr the rehabilitation ol"the North Luzon Expressway (NLEX) and the installation of the appropriate collection systcm therein referred to as the "North Luzon Tollway Project" or "Project". The Project consists of three phases as follows:

Phase 1 - rehabilitation and expansion of the 84-kilometers of existing NLEX and the 8.8 kilometers stretch of road located in Bo. Tipo, Hermosa, Bataan.

Phase 2 - construction of the Northern parts of the 17-kilometers circumferential road (C- 5) to connect with NLEX

Phase 3 - construction of the 57-kilometer Subic arm of the NLEX to SBMA and the 5.85-kilometer road from Manila North Road (McArthur) to Letre.

Actual Phase 1 construction activities started on February 2003 and substantially completed on February 2005, as commercial operations commenced. The Project financing for Phase 1 consisted of 68% debt and 32% equity.

MNTC is 67.1.% owned by FPTDC; 16.5% by Leighton Asia Limited; 13.9% by Egis Projects SA and 2.5% by Philippine National Construction Corporation.

For the calendar year ended December 3 l, 2006, MNTC earned a net income oftal.7 billion on revenues of 125.7billion.

o Tollways Management Corporation (TMC) was incorporated on August 2, 2000 as Manila North Tollways Operations and Maintenance Corporation, primarily to engage in and carry on the operations and maintenance of tollways, its facilities, interchanges and related works, or otherwise engage in the operation and maintenance of roads, highways, bridges, buildings and structures of all kinds, and to make, execute, take, extend, received and finance any contracts or assignments of contracts therefore or relating thereto or connected therewith. On November 11, 2003, the Philippine Securities and Exchange Commission (SEC) approved the change in the Company's name to Tollways Management Corporation.

TMC, under an Operation and Maintenance Agreement with MNTC is the operator of Phase l of the NLE Project of MNTC. In accordance with the approval of the TRB and as advised by MNTC, the operation date of the NLE Project Phase T under the Supplemental Toll Operation Agreement commenced on February 10, 2005. TMC took over fi*om PNCC the operations of the NLE and fi'om FPIDC the operation of Segment 7 (Subic_Tipo Road). TMC is 46% owned by FPIDC, with Transroute International S.A. owning 34% and PNCC the remaining 20%. For the year ended December 31, 2006, TMC earned a net income of t_214.8 million on revenues of 121.2bill ion.

Pipeline Services

o Established on March 30, 1967 primarily to service the fuel requirements of Meralco and the oil refineries in Batangas, First Philippine Industrial Corporation (FPIC) operates the country's sole commercial oil pipeline transporting crude and refined petroleum products. FPIC is 60% owned by FPHC with Shell Petroleum Co., Ltd (UK) owning the remaining 40%. The Company operates a pipeline concession which was granted through the provisions of RA 387, otherwise known as the

._,._ _._ lO Petroleum Act of 1949 as amended. The concession is lbr an extended period of 50 years until July 23, 2017 and shall not be assignable or transferable in whole or in part, without prior written consent ti'om the Energy Regulatory Board or its successor. Further, the Energy Industry Administration Bureau of the Department of Energy granted a nonexclusive and non-transferable penlait to the Company to construct and operate a liquid or gas pipelinc. The pipeline covers the rome ti'om Batangas to Sucat and from Sucat to Bataan. FPIC's pipeline system consists of lwo main pipelines, one tbr refined petroleum products (the "white line") and the other for heavier petroleum products (the "black line"). The 14-inch diameter, 119.6 kilometer long white line transports product such as gasoline, aviation turbine fuel, diesel fuel and other refined petroleum products, employing one pumping station. The 16-inch diameter, 91.2 kilometer long black line moves products such as bunker fuel for power generation and reduced feedstock for the Shell Petroleum Corporation lubricating oil refinery in Pili lia, Rizal. In addition, FPIC has an 18-inch diameter, 14 kilometer long spurline which connects the black line to the Shell Refinery. This spurline was built on 1978. For calendar year ended December 31,2006, FPIC's net income amounted to 12223A million on revcnues of 12562.0 million. During the year, the company transported 17.2 million barrels of white oil and 3.0 million barrels of black oil.

Property Development o Rockwell Land Corporation (Rockwell), is the joint venture firm of Meralco, BHC and FPHC to develop the 15.5 hectare former Meralco plant site in Makati City. This upscale development projects entails the construction of several luxury residential condominiums, a shopping mall, office towers and the Ateneo graduate school. The four residential buildings were turned-over to the owncrs in 1999, while the Power Plant Mall was opened in December 2000. In May 2002, Rockwell commenced construction of its new condominium project - the Manansala. The Manansala is a residential condominium located at the east side of the Nestle and Phinma Buildings. Turnover of the Manansala units colmnenced in July 2005. In January 2004, Rockwell launchcd the Joya, a new residential tower at the east side of Rockwell Center. The spacious loft units featuring 20-fool ceiling and ground floor retail shops are its main attractions. The loft will be spread around the different podium levels and will be available in one and two bedroom variations. In 2005, Rockwell launched its seventh residential development project featuring a new unit type. The soon to be built two uniquely designed buildings will be situated at the entrance of the Rockwell Property, thus, the name Number One Rockwell. Number One Rockwell will l'eature a new product called the "Z-unit'. This mcans that a unit will include a passage across the floor corridor, thereby giving the resident a view from both sidcs of the building. For calendar year cnded December 31, 2006, Rockwell earned a net income of 12369.3 million on revenues of 122.9billion. o FPHC holds a 70% stake in First Philippine Industrial Park (FPIP), with the remaining 30% owned by Sumitomo Corporation. FPIP was lbnned on November 28, 1996 primarily to purchase, acquire, own, hold and subdivide industrial land. It is tasked to develop and manage an industrial estate for sale or Icase to various manuthcturing or service-oriented entities. The Company is registered with Philippine Economic Zone Authority (PEZA) pursuant to RA 7916, as amended, as an Ecozone Developer/Operator. For calendar year ended Deccmber 31, 2006, FPIP's net incomc amounted to 12139.6 million on revenues of 12561.0 million. o Inaec Development Corporation (IDC) was incorporated on January 9, 2002 primarily to lease, own, acquire, or sell real and personal properties. The Company is a wholly-owned subsidiary of FPHC. It started its commercial operations on March 1, 2003. For file calendar year ending December 31, 2006, IDC incurred a net loss of 122.5million on total revenues of t294.1 million.

Manufacturing and others o On February 9, 2006, the Board of Directors of FPHC approved the transtbr of FPHC shares in the following subsidiaries, Philec, Fcdcor, FSCI and First Sumiden Realty, Inc under First Philippine Electric Corporation, which is a newly formed subsidiary of FPHC.

T1 o Established on February 7, 1969, Philippine Electric Corporation (Philec) is the country's pioneer malml'aeturer of distribution transformers and power transformers. FPHC's ownership in Philec is currently at 97.98%. Philec manufactures a wide range of single and three phase distribution and power transformers of up to 15 MVA, 69 KV. It maintains a fully-integrated manufacturing facilities with the capability to produce over 600,000 KVA annually. For calendar year ended Deccmber 31, 2006, Philec's net income amounted to t_35.0 million on revenues of t_991.1 million.

o First Electro Dynamics Corporation (FEDCOR) was established on October 2, 1991. The Company is engaged in the manufacture of ballast and current transtbrmers, repairs of distribution and power translbrmers, substation and power center technical servicing. FPHC wholly owns Fedcor. For calendar year ended December 31, 2006, Fedcor's net income amounted to P-7.8million on revenues ofta186.0 million.

o A joint venture between FPHC (40%), Sumitomo Electric (51%) and Sumitomo Corporation (9%), First Smniden Circuits, Inc. (FSCI) manufacturcs and exports flexible printed circuits. For calendar year ending December 31, 2006, FSCI's net income amounted to US$ 1.4 million on revenues ofUS$64.8 million.

o First Philippine Balfour Beatty, lnc is the construction joint venture firm betwecn FPttC and Balfour Beatty, Inc. In March 2004, FPHC bought back Balfour Beatty Group Limitcd's 40% stake in FPBB for US$3.5 million and later renamed the finn First Ballbur Inc. (FBI). For calendar year ended December 31, 2006, Revenues amounted to ta548.3 million. However, FBI incurred an (unaudited) net loss oft_19.2 million.

There were no bankruptcy, receivership or similar proceedings initiated during the past three (13)years.

(2) Business of Issuer and Selected Significant Subsidiaries

This section shall describe in detail what business the registrant does and proposes to do, including what products or goods' are or will be produced or services that are or will be rendered.

First Phil. Holdings Corporation (FPHC), formed in 1961 with the primary purpose of purchasing and acquiring shares of stocks, bond issues, and notes of Meralco, has grown into a multi-billion company with diversified interests in power generation and distribution, tollways, pipeline service, property development, manufacturing, construction and engineering services.

FPHC's operating businesses are organized and managed separately according to the nature of the products and services, with each segment representing a strategic business unit that offers different products and serves different markets. The Group's major business segments are in Power Generation and Roads & Tollways Operations. The group's other activities consisting of roads and tollways operations, construction, sale of merchandise and real estate. The relative contribution of each product or service to total sales/revenues fbr the year ended December 31,2006 lbllows:

Amount in MM Php % contribution

Sale of electricity t_ 51,176 86% Revenue from toll operations 5,705 10% Revenue from contracts and services 1,326 2% Sale of merchandise 1,184 2 % Revenuefrornsaleof realestate 181 0%

Total t_59,572 100%

q2 FPHC (Parent Company) has no lbreign sales.

In the course of its operations, it enters into transactions with affiliates and subsidiaries on an arms-length basis.

The number of employees of the Parent Company was 98 as of December 3 l, 2006.

The main risks arising from FPlIC's financial instruments are liquidity risk, lbreign currency risk and credit risk:

The Company does not engage in any speculative dcrivative transactions.

Foreign Currency Risk. The Company's exposure to foreign exchange risk results from its business transactions denominated in foreign currencies. It is the Company's policy to ensure that capabilities exist for active and prudent management of its foreign exchange risk.

Liquidi.ty Risk. Liquidity risk arises from the possibility that the Company may encounter difficultics in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances. The Company's objectives to manage its liquidity profile are: (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 whcn needed at the least possible cost; and (d) to maintain an adequate time spread of refinancing maturities.

All other items required by Part 1, SRC Rule 12 ("Annex C') are not applicable to the Company.

Power Generation

First Gen Corporation (First Gen)

The Company's power generation projects are subject to numerous regulations, both as utilities and as participants in an environmentally critical industry. FPHC's power generation projects have been required to meet and strictly maintain international environmental standards.

The Philippine power industry is dominated by the National Power Corporation (NPC), a government owned and operated company. Thc Philippine generation sector can be grouped into three main categories: (1) NPC owned and operated generation facilities; (2) NPC-owned plants, which consist of plants operated by IPPs, as well as IPP-owned and opcrated plants, all of which supply electricity to NPC; and, (3) IPP-owned and operated plants that supply elcctricity to customers other than NPC.

The power generation sector is dominated by NPC which, as of December 31, 2004, controlled 4,439 MW or 28.5% of NPC power assets and 8,140 MW or 52.4% of NPC-IPP Group power assets, which in aggregate represented 80.9% of total installed capacity in the Philippines. The total installed capacity owned by the Non-NPC Group amounted to 2,969 MW or 19%.

Operating companies under First Gen umbrella include First Gas Power Corporation (FGPC) which operates the 1,000 MW gas-fired power plant in Sta. Rita, Batangas City (the Santa Rita Power Plant); FGP Corporation (FGP) which operates the 500 MW gas-fired power plant also in Sta. Rita, Batangas City (the San Lorenzo Power Plant); Bauang Private Power Corporation (BPPC), which constructed and operates the 225 MW Bauang Diesel-Fired Power Plant located in Bauang, La Union (the Bauang Power Plant); First Gen Ilydro Power Corp., which operates the 112 MW Pantabangan-Masiway Hydro power plants located in Nueva gcija; and, FG Bukidnon, which operatcs the 1.6 MW FG Bukidnon Hydroelectric Power Plant located in Dalnilag Manolo Fortich, Bukidnon. The Company has various other subsidiaries, which are not yet operating.

13 FGPC (Santa Rita Power Plant)

Under a 25-year power purchase agreement executed by FGPC and Meralco (the "Santa Rita PPA"), Meralco is contractually obligated to take or pay for, and the Santa Rita Power Plant is obligated to generate and deliver, a minimum energy quantity (MEQ) of net electrical output from the Santa Rita Power Plant situated in Santa Rita, Batangas.

The Santa Rita Power Plant's turbines have been designed to run on a wide variety of fuels including natural gas. In January 1998, FGPC entered into a 22-year Gas Sale and Purchase Agreement (GSPA) with the Shell Consortium tbr the purchase of natural gas from the Malampaya gas field. Under the terms of the GSPA, FGPC is obligated to take or pay 43.0PJ of natural gas per year, which is consistent with the level of MEQ dispatch under the Santa Rita PPA. Although the Santa Rita Power Plant is intended to opcrate on natural gas, if delivery of natural gas is delayed or interrupted for any reason, the plant has the ability to nm on liquid fuel for as long as necessary without adverse impact to its operation or revenues.

FGP (San Lorenzo Power Plant)

FGP, the operator of the 500 MW San Lorenzo combined cycle gas turbine power generating plant, executed a PPA (the "San Lorenzo PPA") with Meralco whereby the latter will purchase power generated by the San Lorenzo Power Plant for a period of 25 years, up to 2027.

FGPC and FGP Corp. operate under the same business environment as thc other power generating companies in the country.

BPPC (Bauang Power Plant)

BPPC is a special purpose company established to construct, commission, operate and maintain the 225 MW diesel-engine power gencrating plant pursuant to an Accession Undertaking to the 15-year BOT Agreement executed on January 11, 1993 between NPC and FPPC.

BPPC sells power generated by the Bauang Power Plant exclusively to NPC. NPC pays BPPC monthly Capacity and Energy Fees on a monthly basis. Capacity Fees are payable on a "take-or-pay" basis depending on the plant's Nominated Capacity and Availability. Energy Fees is variable and premised on actual power generated and delivered to Nf'C.

NPC provides the plant's major production input - bunker, diesel fuel and start-up electricity. NPC directly transacts with the fuel suppliers and coordinates delivery and product specifications of fuels as defined under a Fuel and Supply Management Agreement.

BPPC operates in the same business environment as most of the Independent Power Producers (IPPs) of NPC in the country.

(i) Principal products and services and their markets indicating the relative contribution to sales or revenues of each product _?]'service, or group of related products or services, which contribute ten percent (10%) or more to sales or revenues. If the relative contribution m net income of any product or service, or group _?f related products or services, is substantially d!fferent than its' relative contribution to sales or revenues, appropriate inJbrmation should be given;

14 Effective Contribution to Principal Consolidated Company products/services Market Sales/Revenues

FGPC - Power generation Meralco US$391 million* FGP - Power generation Meralco US$195 million* BPPC - Power generation NPC US$20 million FG Bukidnon - Power generation Cepalco Php 32 million FG Hydro - Power generation WESM/various Php 652 million cooperatives *pertains to revenuesfi'om sale of electricity only

(ii) Percentage q[sales or revenues and net income contributed by fi)reign sales (broken down into major markets such as western Europe, Southeast Asia, etc.).fi)r each of the last three years,"

All entities operate in the Philippines and no revenues and/or net income contributed by foreign sales.

(iii) Distribution methods of the products or services;

Products are directly distributed to buyer.

BPPC The power generated by BPPC is delivered to the Luzon grid through the plant's switchyard that is connected to the two 230kV high voltage transmission lines leading to the Bauang and Labrador circuits. Electricity can be delivered to the grid in two operating modes - manual and remote control - to satisfy diffi_rent scenarios as appropriatc. Delivery systems are all documented to systematically and effectively deliver customer's requirement. Under the BOT Agreement, NPC is responsible for the transmission of power generated.

(iv) Status of any publicly-announced new product or"service (e.g. whether in the planning stage, whether prototypes exisO, the degree to which product design has progressed or whether further engineering is necessary. Indicate !]'eompletion qf development of the product would require a material amount of the resources of the registrant, and the estimated amount,"

Not applicable

(v) Cbmpetition. Describe the industry in which the registrant is'selling or expects to sell its products or services, and where applicable, any recognized trends within that industry, l)escribe the part of the industry and the geographic area in which the business competes or will compete. Identi_ the principal methods' of competition (price, service, warranty or product performance). Name the principal competitors that the registrant has or expects to have in its area of competition. Indicate the relative ,size and financial and market strengths of the registrant's competitors. State why the registrant believes that it can effectively compete with other companies in its area of competition.

15 All the power generating companies under FirstGen have long standing power purchase agreement with its customers.

FGPC/FGP Corp. Meralco is the sole off-taker o1"power output of FGPC and FGP Corp. under a 25-year Power Purchase Agreement,

BPPC NPC is the sole offZtaker of power output of BPPC by virtue of the energy conversion scheme under the BOT Agreement. Because NPC is the sole customer of BPPC, the latter's revenue stream is assured for as long as it is able to nominate +/-5% of the 215 MW contracted capacity to NPC and to deliver the capacity nominated.

FG Hydro Pursuant to the terms of the Asset Purchase Agreement between FG Hydro and PSALM, NPC assigned to FG Hydro eight (8) Transition Supply Contracts with various electric cooperatives, an industrial customer and a municipality.

(vi) Sources and availability _?]'rawmaterials and the names of principal suppliers; _'the registrant is or is expected m be dependent upon one or a limited number qf suppliers Jbr essential raw materials, energy or other items, describe. Describe any major existing supply contracts.

Company Sources of raw materials Supplier of raw materials

FGPC/FGP - natural gas/lhcl Malampaya consortium composed of Shell Philippine Exploration, B.V./Shell Philippines LLC/Chevron Texaco Malampaya, LLC and PNOC Exploration Corporation

BPPC - bunker and diesel fuel NPC FGBukidnon - water The plant is a nan-of-river facility FG Hydro -water Water release generally determined by the National Irrigation Administration

(vii) Disclose how dependent the business is upon a single customer or a.[ew customers, the loss of any or more of which would have a material adverse e/flect on the registrant and its subsidiaries taken as a whole. Identify any customer that accounts fin, or based upon existing orders will accountJbr, twenty percent (20%) or more of the registrant's sales; describe any major existing sales contracts.

There is dependence on customer by virtue of the respective PPAs of FGPC and FGP with Meralco and BPPC with NPC.

_'___.; ___ 36 (viii) 7?ansactions with and dependence on related parties;

Company Related Party Nature of Transactions

FG PC Meralco Off-taker of power FGP Meralco Off-taker o f power

(ix) Summarize the principal terms and expiration dates of all patents, trademarks, copyrights, licenses, JFanchises, concessions, and royalty agreements hehk indicate the extent to which the registrant's operations depend, or are expected to depend, on the Jbregoing and what steps are undertaken to secure there rights';

Not applicable

(x) Need.for any government approval q[ principal products or services, if" govermnent approval is nec'essary and the registrant has not yet received that approval, discuss the status of the approval within the ,government approval process;

FGPC and FGP Corp have procured accreditation from the Energy Industry Accreditation Board (EIAB) for its operation as a private sector generation facility.

Pursuant to R.A. No. 9136, the Electric Power Industry Reform Act of 2001 (EPIRA) and its Implementing Rules and Regulations (IRR), FGPC, FGP, BPPC and FG Bukidnon have filed their application tbr the issuance of a Certificate of Compliance (COC) for the operations of their respective power plants. On September 14, 2005, November 5, 2003, June 4, 2003 and February 16, 2005, ERC issued the COCs of FGP, FGPC, BPPC and FG Bukidnon, respectively, which are requircd for all generation companies under the EPIRA. FG llydro has likewise obtained, which came in as part of the APA, the respective COCs dated December 3, 2005 for the Pantabangan plant and on December 7, 2005 for the Masiway plant. The COCs will be effective for a period of five years subject to further renewal.

The following have been issued to FGPC/FGP/BPPC previously:

Gov't Agency Documents Issued

BOI Certificate of Registration DENR Environment Compliance Certificate DENR Permit to Operate Water and Air Pollution Installation

(xi) Effect of ex&ting or probable governmental regulations on the business;

Republic Act 9136, otherwise known as EPIRA, and the covering [RR provides for significant changes in the power sector, which include, among others: the unbundling of the gcneration, transmission, distribution and supply, and other disposable assets of the company, including its contracts with lPPs and electricity rates; creation of a Wholesale Electricity Spot Market (WESM); and open and nondiscriminatory access to transmission and distribution systcm.

The law also requires public listing of not less than 15% of common shares of generation and distribution companies within five years from the effectivity date of the EPIRA. It provides cross ownership restrictions between transmission and generation companies and between transmission and distribution companies and a cap of 50% of its demand that a distribution utility is allowed to source from an associated company engaged in generation except for contracts entered into prior to the effectivity of the EPIRA.

17 Thcrc are also certain sections of the EPIRA, specifically relating to generation companies, which provide for a cap on the concentration of ownership to only 30% of the installed capacity of the grid and/or 25% of the national installed generating capacity; and VAT zero-rating of sale of generated power.

Pursuant also to the provisions of Section 36 of the EPIRA, all Electric Power Industry Participants shall prepare and submit for approval of the ERC their respective Business Separation and Unbundling Plan (BSUP) which requires all industry participants to maintain separate accounts for, or otherwisc "structurally and functionally unbtmdled" their business activities.

Since each of FGPC, FGP and BPPC is engaged solely in the business of power generation, to the exclusion of the other business segments of transmission, distribution, supply and other related business activities, compliance with the BSUP requirement on accounting separation is not reasonably practicable. Instead, each of FGPC and FGP flied its BSUP package on June 30, 2004 and BPPC filed its BSUP package on June 28, 2004 together with a copy of the audited financial statements as of December 31,2003 and other relevant documents.

In compliance with ERC's additional requirements for the BSUP, FGPC and BPPC submitted on April 28, 2005 and April 5, 2005, respectively, the following: (a) Verified Explanation (with Motion for Leave to Admit Attached Application); (b) Verified Application; (c) FGPC's 2004 audited financial statements; (d) FGPC and BPPC's Depreciation and Transfer Pricing Policies; and (e) FGPC and BPPC's expressed undertaking to comply with the obligations of the Business Separation Guideline (BSG) and develop a relevant plan for complying with the Code of Conduct once the same is promulgated.

ERC also conducted on September 29, 2005 a single hearing for the approval of BPPC's BSUP. BPPC testified that the application was prepared in accordance with the provisions and requirements of the EPIRA as well as the BSG and BSUP filing package of the ERC.

In March 2006, each of FGPC and BPPC received an order from the ERC requiring it to submit an Undertaking to comply with the applicable provisions of the BSG and the Code of Conduct once the same is promulgated by the ERC. BPPC and FGPC lilcd the required undertakings in April and May 2006, respectively. Based on the BSG, it appears that no further BSUP Applications need be filed by BPPC, FGPC and FGP Corp., until and unless any of them will engage in a business other than generation.

Based on FGPC, FGP and BPPC's assessments, they are in the process of complying with the provisions of the EPIRA and IRR.

(xii) Indicate the amount spent on research and development activities, and its' percentage to revenues during each of the last fiscal years;

Not applicable.

(xiii) Cost and effects of compliance with environmental laws;

On November 25, 2000, the IRR of the Philippine Clean Air Act (PCAA) took effect. The IRR contain provisions that have an impact on the industry as a whole, and on FGPC, FGP Corp and BPPC, in particular, that need to be complied with within 44 months (or July 2004) from the effectivity date, subject to approval by the DENR. The power plants of FGPC and FGP use natural gas as fuel and have emissions that are way below the limits set in the National Emission Standards lbr Sources Specific Air Pollution and Ambient Air Quality Standards. Based on FGPC and FGP's initial assessment of their power plants' existing facilities, the companies believe that both are in full compliance with the applicable provisions of the IRR of the PCAA.

On the other hand, BPPC believes that the Project Agreement specifically provides that it is not contractually obligated to bear the financial cost of complying with the PCAA. In this connection, the

_% ,_ 18 DENR has issued a Memorandum on September 19, 2006 directing all regional directors to hold in abeyance the implementation of the Continuous Emission Monitoring System (CEMS) which is required under the PCAA, until such time thal a set of guidelines has been approved. BPPC has been conducting Ambient Air Emission Monitoring every quarter and Source Emission Monitoring once a year in lieu of the installation of the CEMS. Results are submitted to the Enviromncntal Monitoring Bureau (EMB) and the DENR-Region 1 Office.

BPPC has also engaged a private consultant to study alternative means of compliance with PCAA requirements. On November 20, 2006, Apercu Consultants presented to representatives from the DENR-EMB and NPC the Buang Plant's Modified Compliance Plan to the PCAA. The plan reiterated earlier position on the use of (a) Predictive Emissions Monitoring Systcm as an alternative CEMS, (b) low sulfur fuel (2% or lower) to reduce SO2 emissions and (c) combustion to reduce NOX emission.

Company Cost of compliance with environmental laws

FGPC US$0.03 million

FGP US$0.02 million

BPPC US$0.02 million fbr environmental monitoring activities.

(xiv) State the number (f the registrant's present employees and the number of employees it anticipates to have within the ensuing twelve (12) months, hMicate the number by type of employee (i.e. clerical, operations, administrative, etc.), whether or not any of" them are subject to collective bargaining agreements (CBA) and the expiration dates of any CBA. If the registrant _' employees are on strike, or have been in the past three (3) years, or are threatening to strike, describe the dispute. Indicate any supplemental benefits or incentive arrangements the registrant has or will have with its employee.s;

Company Number of regular Union CBA employees Members Expiration

First Gen 11 None NA Vice President and up 1 Senior Manager 3 Manager 2 Supervisor 1 Staff 4 FGHC 18 None NA Assistant Vice-President 5 Senior Manager 1 Manager 2 Assistant Manager 1 Supervisor 7 Staff 2 FGPC 47 None NA Vice-President and up 7 Assistant Vice-President 2 Senior Manager 11 Manager 8

19 Assistant Manager 2 Supervisor 5 Staff 12 FGP 42 None NA Vice-President and up 2 Senior Manager 8 Manager 6 Assistant Manager 0 Supervisor 6 Staff 20 FGHPC 59 None NA Senior Manager 1 Manager 3 Supervisor 22 Staff 33 FGBPC 10 Assistant Manager 1 Staff 9 FGRI 3 Senior Manager 1 Staff 2 BPPC 197 EVP, Senior VP and Assistant VP 5 Senior Manager 8 Manager 16 Supervisor 43 Staff 125 77 July 2010

(xv) Discuss the major rislc_ involved in each of the businesses of the company and subsidiaries.. Include a disclosure of the procedures being undertaken to identify, assess and manage such risks.

As a matter of policy, First Gen Group does not trade in financial instalments. However, First Gen Group enters into derivative transactions primarily interest rate swaps, as needed, tbr the sole purpose of managing the relevant financial risks that are associated with First Gen Group's borrowing activities.

The main risks arising from First Gen Group's financial instruments are interest rate risk, tbreign currency risk, credit concentration risk and liquidity risk. The Board of Directors reviews and approves policies tbr managing each of these risks as summarized below. First Gen Group's accounting policies in relation to derivatives are set out in Note 2 - Summary of Significant Accounting Policies:

Interest Rate Risk. First Gen Group's exposure to the risk of changes in the market interest rate relates primarily to First Gcn Group's long-term debt obligations that are subject to floating interest rates. The Group believes that prudent management of its interest cost will entail a balanced mix of fixed and variable rate debts. To manage the exposure to floating interest rates in a cost-efficient manner, First Gen Group, FGP in particular, entered into an interest rate swap agreement involving half of its borrowings under ECGD facility. FGP agreed to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by rct_rence to the agreed-upon notional principal amount.

As of December 31, 2006, approximately 77.3% of First Gen Group's borrowings are subject to fixed interest rate after considering the effect of its lone interest rate swap agreement.

l_breign Currency Risk. First Gen Group's exposure to foreign currency risk arises as the functional currency of First Gen and certain subsidiaries, the U.S. Dollar, is not the local currency in its country

2o of operations. Certain financial assets and liabilities as well as some cost and operating expenses are denominated in Philippine peso.

The tbreign-currency denominated assets and liabilities pertaining to the Philippine peso-denominated balances are then translated to US Dollars as the presentation currency for statutory reporting purposes. In translating these lbreign currency-denominated monetary assets and liabilities into U.S. Dollars, the exchange rate used was Php49.045 to US$1.00, the Philippine Peso-U.S. Dollar exchange rates as of December 31, 2006.

Credit Concentration Risk. First Gen, through its operating subsidiaries, FGP and FGPC, earns substantially all of"its revenues from Meralco, its sole customer. Meralco is committed to pay for the capacity and energy generated by the San Lorenzo and Santa Rita power plants under the existing long-term Power Purchase Agreements (PPA) which are due to expire in September 2027 and August 2025, respectively. While the PPAs provide for the mechanisms by which certain costs and obligations including fuel costs, among others, are pass-through to Meralco or are otherwise recoverable from Meralco, it is the intention of First Gcn, FGP and FGPC to ensure that the pass- through mechanisms, as provided tbr in their respective PPA, are followed.

Under the current regulatory regime, generation rate charged by FGP and FGPC to Meralco are not subject to regulations and are complete pass-through charges to Meralco's customers. It is, likewise, worth noting that Meralco has always settled these charges on time and has not missed any single payment sincc the commencement of commercial operations of both the San Lorenzo and the Santa Rita power plants.

First Gen Group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of the receivables from Meralco.

Liquidity Risk. First Gen Group's exposure to liquidity risk refers to the lack of funding needed to finance its capital expenditures, service its maturing loan obligations in a timely fashion, and meet its capital requirements. To manage this exposure, the Group maintains its internally generated funds and prudently manages the proceeds obtained from both the debt and equity markets.

Except as otherwise discussed above, the other items under Part 1 (Item l) are not applicable to FirstGen and its material Subsidiaries.

Tollways Operations

First Philippine Infrastructure Development Corp. (FPIDC)

First Philippine Infrastructure Development Corp.'s (FPIDC) primary investments are in tollways operation, maintenance and management through its subsidiaries/associates Manila North Tollways Corporation (MNTC) and Tollways Management Corporation (TMC). MNTC financed the rehabilitation and operation of the NLE and acquired the right to collect tolls on the completed roads during the concession period, while TMC operates the NLE by virtue of the Operate and Maintenance Agreement (OMA) entered into by both parties. The contribution of MNTC's major operations to the sales/revenue is as follows:

Effective Contribution to Principal Consolidated Company products/services Market Sales/Revenues

MNTC - toll fees Motorists Php 3.4 billion

21 FPIDC has no foreign sales. In the course of its operations, it enters into transactions with affiliates and subsidiaries on an arms-length basis. The Parent's ta3ain sources of revenues include share in earnings and guarantee fees on loans of operating subsidiaries, while the principal sources of funds are derived from collection of dividends as well as guarantee fees from these subsidiaries.

The number of employees of the Parent Company (FPIDC) was 7 as of December 31, 2006.

FPIDC's principal financial instruments comprise of cash and short-term deposits and financial guarantees issued to subsidiaries under the Financing Agreement as well as Operate and Maintenance Agreement. FPIDC has various other financial instruments such as trade debtors and trade creditors, which arise directly f?om its operations. The main risks arising from the Company's financial instruments are foreign currency risk, credit risk and liquidity risk.

Foreign curreney risk. FPIDC is exposed to foreign exchange risk primarily with respect to its recognized assets denominated in US Dollar. The Company has not adopted a program to manage its currency exposures.

Credit risk. As a result of issued guarantee on obligations of TMC under the Operate and Maintenance Agreement as well as on the obligations of MNTC under the Financing Agreement, the Company may incur potential financial losses in the event of default of either subsidiary. However, the restricted fund established in compliance with financing agreement would mitigate possible liquidity risk from the execution of financial guarantee in case of MNTC's default. In addition, receivable balances are monitored on an on-going basis with the result that the Company's exposure to bad debts is insignificant.

Liquidity risk. Prudent liquidity risk management implies maintaining cash and cash equivalents to meet operating capital requirements. The Company's objective is to maintain a balance between continuity of funding and flexibility through an efficient collection of receivables. Potential exposure to liquidity risk would result from the execution of financial guarantee in the event of TMC's failure to comply with O&M Agreement.

All other items required by Part I, SRC Rule 12 ("Annex C') are not applicable to the Company.

MNTC

(!) Principal products and services and their markets indicating the relative contribution to xales or revenues of each product of service, or group of related products or services, which contribute ten percent (10%) or more to sales or revenues.. If the relative contribution to net income of any product or service, or group t?f related products or services, is substantially diJJerent than its relative contribution to sales or revenues, appropriate injbrmation should be given;

Manila North Tollways Corporation (MNTC) is a service company engaged in the operation and maintenance of the North Luzon Expressway (NLEX). Revenues arise from the collection of toll fees from motorists plying the NLEX. it caters to motorists coming from Metro Manila, Central and North Luzon and vice-versa. MNTC is allowed to collect access fees from prospective investors in commercial facilities along the N LEX primarily for the benefit and convenience of the motorists.

(ii) Percentage of sales or revenues and net income contributed by foreign sales (broken down into major markets such as western Europe, Southeast Asia, etc.) Jbr each of the last three.years';

No revenues and/or net income contributed by foreign sales.

22 (iii) Distribution methods of the products or services;

Manual toll fee payments account lbr at least 90% of toll revenues. Electronic toll collection (ETC) products like EC tags for Class 1 vehicles (cars/vans) and badges/cards fbr buses, trucks and jeepneys account for the balance of transactions in the NLEX.

(iv) Status of any publicly-announced new product or service (e.g. whether in the planning stage, whether prototypes c_xist),the degree to which pro_h_ct design has progressed or whether further engineering is necessary. Indicate if completion qf development of the product would require a material amount of the resources of the registrant, and the estimated amount;

Not applicable,

(v) Competition. Describe the indust_ in which the registrant is selling or expects to sell its products or services, and where applicable, any re.cognized trends' within that industry. Describe the part of the industry and the geographic area in which the business competes or will compete. IdentiJ.F the principal methodv <_feompetition (price, service, warranty or product performance). Name the principal competitors that the registrant has' or expects to have in its area of competition. Indicate the relative size and financial and market strengths of the registrant's competitors. State why the rc-_gistrantbelieves that it can effectively compete with other companie.s in its area of competition.

There is no competing toll road in the region.

(vi) Sources and availability of raw materials and the names of principal supplie_:_; i/'the registrant is or is expected to be dependent upon one or a limited number of suppliers ./'or essential raw materials, energy_or other items, describe. Describe any major existing supply contracts.

Not applicable

O_ii) Disclose how dependent the business is upon a single customer or a.few customers, the loss q/'any or more of which would have a material adverse e/.lect on the registrant and its subsidiaries taken as a whole. [dent!lyvany customer that accounts Jar, or based upon existing orders will account for, twenty percent (20%) or more of the registrant _'sales; describe any major existing sales contracts.

Not applicable

(viii.) Transactions with and dependence on related parties;

Related Party Nature of Transactions

Tollways Management Corporation To collect, operate and maintain the NLEX Egis Project SA Supply of spare parts and technology of the Fixed Operating Equipment Component Leighton Contractors (Asia) Ltd. Contractor

(ix) Summarize the principal terms and expiration dates of all patents, trademarks, copyrights, licenses, fi*anchises, concessions and royalty agreements held," indicate the extent to which the registrant's operations depend, or are expected to depend, on the foregoing and what steps are undertaken to secure these rights;

Pursuant to the STOA, MNTC was granted the concession to finance, design, construct, rehabilitate, expand, operate and maintain the Project for the concession period ti_omJune 15, 1998 to December 31, 2030.

Under the STOA, the Republic of the Philippines (ROP), as Grantor, recognized and confirmed the assignment by PNCC of its usufructuary rights, interest and privileges over the NLEX under the

23 original PNCC l}anchise in favor of MNTC. The ROP also granted MNTC the right to collect tolls during the conccssion period after which the NLEX will revert to the Government, without cost, tree from any liens and encumbrances, thlly operational, and in good working condition.

(x) Need./br any government approval of principal products' or services.(/'government approval is necessary and the registrant has not yet received that approval, discuss the status of the appraval within the government approval process;

MNTC is allowed to collect toll fees fkom the motorists based on the authorized toll rate tbnnula specified in the concession agreement. The initial toll rate charged by the company to the motorists at the start of its commercial operations on February 10, 2005 was computed by applying the authorized toll rate tbrmula and following the prescribed procedures (e.g. publication) in the concession agreement. Toll rates arc subject to bi-annual periodic adjustments. MNTC implcmented the toll tee reduction of 10% effective December 20, 2006.

(xO Effect of existing or probable government regulations on the business;

(1) 12% Expanded Value Added Tax (EVAT)- the implementation of the 12% EVAT on the toll fees is expected to have an impact on traffic since it will make toll fees more expensive which may suppress traffic into the NLEX.

(2) Anti-Overloading Law (RA 8794) - the implementation of RA 8794, Anti- Overloading Law, has created numerous criticisms from the trucking industry plying the expressway. This has led to the reduction of traffic in the NLEX especially among Class 3 vehicles.

(xii) Indicate the amount spent on research and development activities, and its percentage to revenues during each o/'the last three fiscal years;

Not applicable.

(xiii) Costs and _f/'ects'q/_compliance with environmental laws,"

MNTC is tully compliant with the strict requirements of the DENR as well as the World Bank environmental standards.

(xiv) State the number of the registrant's present employees and the number of employees it anticipates to have within the ensuing twelve (12) months. Indicate the number by type of employee (_.e. clerical, operations, administratiw_, etc.), whether or not any of them are sul?/eet to collective bargaining agreements' (CBA) and the expiration dates' t)/'any CBA. If the registrantS' employees are on strike, or have been in the past three (3) years', or are threatening to strike, describe the dispute. Indicate any supplemental benefits or incentive arrangements the registrant has or will have with its employeesv

MNTC employs 77 employees as of December 31, 2006, excluding seconded personnel, individual consultants, and agency-hired staff. It utilizes project teams in pursuing its various corporate initiatives. Project teams are usually composed of employees representing the various lhnctional areas of MNTC.

The current manpower complement of MNTC is experienced and technically equipped in all aspects of horizontal and vertical construction. Most of its executives came from FPIDC, the corporation which undertook the construction of Segment 7 (Subie-Tipo Road segment), as an access road to the Subic Special Economic Zone. These executives wcre also former employees of PNCC/CDCP, the premier construction arm of the Government, which handles big road construction projects locally and internationally.

24 MNTC is non-unionized.

Company Number of regular Probationary Project Total employees Officer 12 - 12 Manager 22 1 1 24 Supervisor 12 3 6 21 Rank and File 17 3 - 20 Total 63 7 7 77

(xv) Discuss the major risks involved in each of the businesses' of the company and subsidiaries'. Include a disclosure of the procedures being undertaken to ident!fy, assess and manage such risks.

Reliance on the Supplemental Toll Operation Agreement (STOA). Substantially all of MNTC'S assets and revenues relate to the rights, obligations and privileges granted to MNTC pursuant to the STOA. The business, operation, financial condition and prospects of MNTC could be materially and adversely affected if, for any reason, the STOA or any part thereof is indefinitely restrained, cancelled, terminated, becomes invalid or unenforceable or otherwise ceases to have full force and effect.

In respect to the foregoing, the STOA embodies the undertaking of each party, MNTC, the Toll Regulatory Board (TRB) and the PNCC to effectively carry out specific functions in thc operations of the NLEX. Further, the STOA adopts alternative dispute resolution mechanisms to resolve and settle disputes arising thereunder through amicable settlement, mediation and arbitration.

The STOA recognizes certain rights of Lenders in case the same is terminated or cancelled.

Expi_. of PNCC Franchise. The rights of MNTC to operate the NLEX pursuant to the STOA arose out of the assignment by the PNCC of its usufrnctuary rights, interests and privileges under the PNCC franchise (Presidential Decree Nos. 1113 and 1894) and which was approved by the President of the Philippines on May 16, 1995. The PNCC franchise (the usufructuary rights, interest and privileges of which were assigned to MNTC) will expire on May 1, 2007. There is a bill extending the said franchise by another 25 years which has passed second reading in the House of Representatives. The bill has to be passed by the Senate and approved by the President of the Philippines in order to become law.

In any event, pursuant to Clause 2.6 of the STOA, a Toll Operation Certificate (TOC) was issued on October 13, 2001 by the TRB, which authorizes MNTC to continue to operate the NLEX and collect tolls notwithstanding the expiry and subsequent non-renewal of the PNCC franchise.

Toll Rate Adjustments. MNTC derives substantially all of its revenue from toll collections from the users of the NLEX. The STOA sets a fair and reasonable toll rate formula and a clear toll rate adjustment procedure. However, it is possible that adjustments to the authorized toll rate, although warranted under the prescribed procedurc, are not effected due to reasons not attributable to MNTC.

In the event that adjustments in the toll rate are not effeeted in accordance with the STOA, the Republic of the Philippines warrants and undcrtakes to compensate MNTC for the resulting loss of revenue resulting from the difference between the authorized toll rate actually collected by MNTC and the authorized toll rate which MNTC would have been able to collect had the adjustments been implemented.

Concession Termination. MNTC's concession rights under the STOA shall be in effect for a period commencing on June 15, 1998 until December 31, 2030, or 30 years alter the issuance of the corresponding Toll Operation Pcrmit for the last completed Phase, whichever is earlier, unless further extended pursuant to the provision of the STOA.

25 Prior to such expiration, and subject to the terms of the STOA, the Concession granted to MNTC may be terminated by the Grantor if MNTC commits any of the following and fails to remedy the same within a period of at least 3 months li'om receipt of the written notice of default from the Grantor: • Materially fail to perfbrm the operation and maintenance of the Project Roads in accordance with the standards approved by the Grantor; or • Fail to implement the Project; or • Become subject to liquidation or dissolution proceedings; or • Be declared insolvent or in default of its loans; or, • Be persistently or flagrantly in breach of any material obligation under the STOA for causes solely attributable to MNTC; or • Abandon the construction of the operation and maintenance of the Project Roads.

As of December 31, 2006, MNTC has complied with and performed its obligations, and has not received any notice of default under the STOA.

Regulated Industry. MNTC operates in a regulated industry. The TRB, created by virtue of Presidential Decree No. 1112, is the Government agency authorized to regulate toll operations in the Philippines. The rights, obligations and privileges granted to MNTC with respect to the NLEX are provided lbr in the STOA, and these include, among others, the following: • Raise financing on its own without Government guarantee; • Rebuild and modernize the NLEX toUway system according to Government required standards and levels of service; • Complete construction within the time required; • Operate the NLEX according to Government standards; • Maintain the pavement and the toll collection system properly; and, • Return the NLEX system to the Government at no cost after the Concession period ends ......

Considering that the rights, obligations and privileges of MNTC with respect to the NLEX are highly dependent on Government requirements and regulations, there can be no assurance that future regulatory rulings and legislations will not adversely affect MNTC's business.

Any future regulatory rulings and legislations that has a material adverse effect on the rights and privileges of MNTC or its ability to comply with its financial and/or other contractual obligations under the STOA constitutes Material Adverse Grantor Action and could be a ground tbr default of the Grantor.

Legal Proceedings. MNTC is a party to various pending legal proceedings. Any adverse rulings or decisions in certain proceedings may have a material impact on MNTC's business. MNTC intends to diligently pursue and exhaust all legal remedies available to it in the event of any adverse ruling or decision in any of these proceedings.

Foreign Currency Exchange Rate Risk. MNTC is exposed to foreign exchange risk as its revenues are denominated in Pesos while its debt requirements are in US$. A depreciation of the Peso against the US$ will significantly increase the amount of Pesos required to service the semi-annual interest and principal repayment of the US$ loans.

The toll rate tbrmula set forth in the STOA mitigates this risk by allowing MNTC to pass on to the motorists up to 50% of the foreign exchange fluctuation on the adjusted ATR (Authorized Toll Rate) commencing January 2007. This means that if the Peso, on the 2 nd toll rate adjustment date, depreciates by 60% against the US$ from the reference year (i.e. June 1995 - when the foreign exchange rate was Php25:US$1), the initial reference ATR can be increased correspondingly by only 30% (50% of the actual peso depreciation of 60%) even if 100% of MNTC's debt service is in US$.

The MNTC's loan refinancing in 2006 (issuance of Notes denominated in Pesos) will effectively re- denominate a substantial portion of MNTC's existing US$ loans, hence, reducing the impact of any foreign exchange fluctuation in the future.

7=_

26 Political and Economic Factors. MNTC's business can be influenced by the general political and economic situation of the country. In the past, the Philippines experienced periods of slow or negative economic growth, and has from time to time experienced political instability. While the political situation and the Philippine economy have since improved, any political and/or economic instability in the future may have a negative effect on the business and results of operations of MNTC.

Historically, traffic volume in NLEX has consistently increased despite the several crises that have hit the country since 1982.

Occurrence of UnJbreseen Events. The use of the NLEX may be interrupted or otherwise affected by a variety of events, including force majeure, serious traffic accidents, natural disasters, defective design and construction, labor disputes and other unfureseen circumstances and incidents. If the use of the NLEX is interrupted in whole or in part lbr any period as a result of any such events, this could reduce MNTC's toll revenues and increase the costs of maintenance or restoration as well as reduce overall public confidence in the NLEX.

MNTC has the necessary insurances in place to cover the NLEX assets, liabilities resulting from claims relating to the maintenance or operation of the NLEX, lost toll revenues or increased expenses resulting from damage to the NLEX.

In addition, the STOA recognizes the occurrence of force majeure and affords relief to MNTC in case of such occurrence.

Except as otherwise discussed above, the other items under Part 1 (Item 1) are not applicable to FPIDC and its material Subsidiaries.

Item 2. Properties

Property, Plant and Equipment consists of land, power plant complex, buildings and improvements, machinery and other equipment of FPHC and its subsidiaries in various locations:

• First Gen Corporation

First Gas Holdings Corporation/First Gas Power Corporation

FGHC's wholly-owned subsidiary, First Gas Power Corporation operates the 1,000 MW Santa Rita Power Plant located in Sta. Rita, Batangas City. The power plant consists of four (4) units where each unit is composed of a gas turbine, a steam turbine, and a generator connected to a common shaft and the corresponding heat recovery steam generator.

The plant site occupies a total land area of 33 hectares. Buildings and structures consists of a power island, switchyard, control room and administration building, circulating water pump building, circulating water intake and outfall structure, tank farm, liquid fuel unloading jetty, water treatment plant, liquid fuel tbrwarding and treatment building, gas receiving station and other support structures. The power plant also includes a transmission line, which interconnects the Sta. Rita power plant to the Calaea substation.

The property, plant and equipment, with a net book value of US$396.3 million as of December 31, 2006, has been pledged as security for the long-term debt. The Company has entered into a Mortgage, Assignment and Pledge Agreement whereby a first priority lien on most of the Company's real and other properties, including revenues from operations of the power plant has been executed in favor of the lenders. In addition, the Company's shares of stock were pledged as part of the security to lenders.

27 Unified Holdings Corporation/FGP Corporation

UIIC's 60%-owned subsidiary, FGP Corp. operates the 500 MW San Lorenzo Power Plant located in Sta. Rita, Batangas City. The power plant consists of two (2) units where each unit is composed of a gas turbine, a steam turbine, and a generator connected to a con_non shaft and the corresponding heat recovery steam generator. The plant site occupies a total land area of 24 hectares. Buildings and structures consists of a power island, which consists of one (1) block with a capacity of 500 MW. It also shares some of the facilities being used by the Sta.Rita plant (e.g. control room and administration building, transmission line, circulating water pump building, tank fann, liquid fuel unloading jetty, water treatment plant, gas receiving station, among others).

The property, plant and equipment, with a net book value of US$246.6 million as of December 31, 2006 ihas been pledged as security for the long4crm debt. The Company has entered into a Mortgage, Assignment and Pledge Agreement whereby a first priority lien on most of the Company's real and other properties, including revenues from operations of the power plant has been executed in favor of the lenders. In addition, the Company's shares of stock were pledged as part of the security to lenders.

Bauang Private Power Corporation

Bauang Private Power Corporation's plant facility is located in Payoepoc Sur, Bauang La Union and has a net book value of US$42.35 million by end 2006. BPPC's property, plant and equipment arc in good condition and have been pledged as security for the company's long-term debt.

First Gen Hydro Power Corporation

The Pantabangan Hydroelectric Power Plant (PHEP - 112 MW) is located at the toe of the Pantabangan dam and consists of two (2) generators, each capable of generating full load power of 50 MW at 90% power factor. Each generator is coupled to a vertical shall Francis turbine that converts the kinetic energy of the water from the dam to 70,000 mechanical horsepower.

The electric power output of PHEP is dclivered to the Luzon Grid through a 13.8kV/230kV Ring Bus Switchyard, composed of two (2) 64 MVA transformers, switching and protective equipments.

The Masiway Hydroelectric Power Plant (MHEP) is located 7 kms. downstream of PHEP. it uses a 1.6,800 HP Kaplan turbine to convert the energy of the low head but high flow release of water from the Masiway re-regulating dam to a directly coupled generator that is capable of generating 12 MW of electric power at 90% power factor. The power output of MHEP is delivered to the Grid through a switchyard mainly composed of a 13.33 MVA transformer, switching and protective equipments all owned by FGHPC.

For both PHEP and MHEP, all power components, including penstocks, generators, power houses, turbines and transformers, are owned, maintained and operated by FG Hydro. The amount of water release in the Pantabangan reserw_ir is based on the Irrigation Diversion Requirement dictated by the National Irrigation Administration (NIA). NIA operates and maintains the non-power components which include watershed, spillway, intake structure and Pantabangan and Masiway reservoir.

Given that the acquisition of PMttEPP has been accounted for as a business combination, the provisional fair value of the identifiable assets (i.e. the property, plant and equipment account) as of the date of acquisition is t_4.65 billion. The net book value of FG Hydro;s property, plant and equipment amounted to _-4.62 billion as of December 31, 2006.

_8

28 FG Bukidnon Power Corp.

The FG Bukidnon Hydroelectric Power Plant (1.6 MW) is located at Damilag, Manolo Fortich, Bukidnon, approximately 36 kms. southeast of Cagayan de Oro City and 4 kms. from the pineapple plantations of Del Monte Philippines in Mindanao.

The run-off-river plant consists of two generating units each rated at 1,000 kVA, 0.8 pf. Power is generated by two identical Francis horizontal shall reaction turbines and generators with an effective head of 121.5 meters running at 900 rpm and 2.4 kV generated voltage.

The plant generates power through the use of water from Agusan River. Thc water from the dam passes through a waterway open canal 5,545 meter along with a bottom width of 1 mcter. The water is then conveyed through the thrash rack located at the intake structure of the reservoir with a total storage capacity of 40,000 m3, covering 2.83 ha. The water flows to the penstock and is directed to 2 pipes leading to each generating unit.

As of December 31, 2006, the net book valuc of FGBHPP's property, plant and equipment accounted amounted to ta90.3 million.

• First Philippine Infrastructure Development Corporation

Manila North Tollways Corp.

FPIDC's 67.1% owned subsidiary,MNTC, is engaged in the rehabilitation and expansion of the 84- kilometers of existing NLEX and the 8.8 kilometers stretch of road located in Bo. Tipo, Hermosa, Bataan. All the rights, titles and interest of the Company in roads and tollways with carrying amount oflal 5.21 billion as of December 31, 2006 and transportation equipment with aggregate cost in excess of US$500 thousand were pledged as collateral to sccure the Company's long-term debt.

Thcse are in addition to: lnaec Development Corporation's Building in Ortigas and Eugenio Lopez Center in Antipolo City; First Philippine Industrial Parks land holdings in Batangas; Philippine Electric Corporation's (PHILEC) manufacturing plant in Taytay, Rizal; First Sumiden Realty, Inc.'s (FSRI) land and building at the Light Industry and Science Park (LISP) in Cabuyao, Laguna; First Electro Dynamics Corporation's (FEDCOR) manufacturing plant at the First Philippine Industrial Park in Sto. Tomas, Batangas; and, First Philippine Industrial Corporation's (FPIC) pipeline and various pumping stations in Sto. Tomas and Batangas City.

All facilities are in good condition.

29 Item 3. Legal Proceedings

• First Philippine Holdings Corporation

First Philippine Holdings Corporation is not involved in litigation which would have a material adverse effect on the operations or financial condition of the Company.

First Philippine Holdings Corporation (FPHC) was allowed by the Supreme Court in FPHC vs. Sandiganbayan, G.R. No. 88345, 253 SCRA 30, to intervene and litigate its claim of ownership over 6,299,177 sequestered PCIBank shares of stock in the case of the ROP vs. Benjamin Romualdez, et aI., Civil Case No. 0035, which is pending before the Sandiganbayan. The intervention was filed on December 28, 1998 in connection with the complaint of the government tbr the reconveyance of the aforesaid shares in the government's favor on the ground that the shares form part of the "ill-gotten" wealth of Benjamin Romualdez. FPHC anchors its claim on, among other facts, the nullity or voidability of the contract transferring the shares i?om itself to Benjamin Romualdez, et al.

In a Resolution dated February 22, 2007, the Sandiganbayan dismissed FPHC's Complaint-in- Intervention on the ground that the complaint was filed beyond the period provided by law. FPHC sought reconsideration of this decision and seasonably filed on March 16, 2007 a Motion for Reconsideration of this decision asserting, among other things, that the contract transferring the shares from itself to the registered owner, Trans Middle East Equities (Phils.), Inc., the alleged dummy corporation of Benjamin Romualdez, is alleged to be void, for which prescription cannot be the basis for a dismissal. The motion is still pending.

There are other pending incidents which are still for resolution of the Court.

= First Gen Corporation

* FGPC's Engineering, Procurement and Construction (EPC) Contracts

FGPC entered into a Turnkey EPC Contract with Siemens AG, Siemens Power Generation and Siemens, Inc. for the construction of the 1,000 MW Combined Cycle Power Plant (Sta. Rita).

The arbitration proceedings were related to a dispute that arose between FGPC and Siemens in connection with the construction of FGPC's Power Plant. The dispute stemmed from the delays incurred by Siemens and its subcontractors in the timely completion of the Project. As a remedy available under the EPC Contract, FGPC withheld approximately US$94.2 million of milestone payments to Siemens to cover the corresponding liabilities that Siemens incurred to the Project as a result of its delays.

In December 2002, Siemens submitted a Request for Arbitration to the International Chamber of Commerce in London against FGPC arising out of alleged delays to the construction of the Project. In the Request for Arbitration, Siemens claimed payment for certain milestones achieved in the Project, which FGPC has previously withheld. Siemens also claimed an additional sum in the amount of approximately US$64.0 million for prolongation costs and miscellaneous matters.

The Arbitral Tribunal considered both claims and liabilities of Siemens during the hearings held in March and April 2005. On November 2005 the Arbitral Tribunal rendered its Second interim award in relation to Siemens' claim tbr extension of time and ruled that Siemens was entitled to an extension of time in respect of Block 1 and Block 2 completion of 32 days and 60 days, respectively. Accordingly, Siemens was saved from any liability during this time. However, notwithstanding Siemens' entitlement to an extension of time, the delays to the completion of the Project for which Siemens was responsible meant that it also incurred the corresponding obligations in the aggregate amount of US$99.3 million. As FGPC had already withheld

3O US$94.2 million in payment to Siemens, only the balance of US$5.1 million was due to be paid to FGPC by Siemens, subject to any set-offs and counterclaims to be determined by the Arbitral Tribunal in its final award.

The withheld amount of approximately US$93.9 million of unpaid EPC milestone payments, net of applicable taxes, was recorded in 2005 as a reduction in the cost of the power plant. The balance of US$5.1 million, from the full US$99.3 million of Siemens' incurred obligations, was recognized as part of "Other income (charges)" account in 2005.

Hearings were held in September 2005 to consider Siemens' monetary claims against FGPC and FGPC's counterclaims against Siemens. On April 6, 2006, the Arbitral Tribunal issued its Third interim award pursuant to which (i) FGPC was entitled to an US$11.2 million award (inclusive of the US$5.1 million already recognized as other income in 2005) for its remaining counterclaims against Siemens and (ii) Siemens was entitled to approximately US$8.5 million tbr its remaining claims against FGPC.

Following the Third interim award, on October 6, 2006, FGPC and Siemens entered into a Settlement Agreement to conclude the arbitration and to settle all outstanding matters between them, in respect of all other claims, counterclaims, interest and costs of the arbitration. Pursuant to the Settlment Agreement, Siemens agreed to make an additional net payment to FGPC of US$10.5 million (inclusive of the US$5.1 million that was initially recognized as other income in 2005 and the US$1.5 million outstanding receivables of FGPC from Siemens).

On October 16, 2006, FGPC received the net payment from Siemens of US$10.5 million. The net balance of US$3.9 million was recognized as part of "Other income (charges)" account in 2006.

On December 12, 2006, the Arbitral Tribunal issued its Final Award, which is final and binding incorporating all previous awards and the agreement of the parties to settle all outstanding matters between them in respect of all other claims, counterclaims, interest and costs of arbitration. The issuance of the Final Award finally resolved all outstanding matters in the arbitration, and formally concluded the dispute between FGPC and Siemens. o FGPC and FGP _"Gas Sale and Purchase Agreements (GSPA)

GSPA of FGP

FGP executed in March 2006 the Settlement Agreement (SA) and Payment Deferral Agreement (PDA) with the Gas Sellers to amicably settle their long-standing disputes under the GSPA. The disputes relate to the Gas Sellers' claim for Annual Deficiency payments totaling US$68 million from FGP for unconsumed gas volumes for Contract Years 2002 to 2004. Under the terms of the SA and the PDA, the claim has been reduced to US$32.7 million. An additional reduction of US$3.8 million is recognized under the SA and PDA to credit FGP for gas consumption in excess of the Take-Or-Pay Quantity (TOPQ) for 2005. The remaining liabilities will be paid through quarterly principal payments until December 26, 2009 with interest at LIBOR plus margin. The SA and PDA allow FGP to prepay all or part of the outstanding balance and make up for the volume of gas up to the extent of the principal repayments made under the PDA for a longer period of time instead of the ten contract year recovery period allowed under the GSPA.

In May 2006, all the conditions precedent set out in the SA and PDA were completely satisfied. Such conditions precedent includes an acknowledgement and consent by Meralco.

For Contract Year 2006, the Gas Sellers issued its Annual Reconciliation Statement (ARS) in December 2006. The Gas Sellers are claiming an Annual Deficiency payment for Contract Year 2006 amounting to US$3.9 million. FGP disagrees that any such Annual Deficiency payment is due. FGP has claimed relief for, among others, force majeure events arising from circumstances that affected the Transmission Facilities or the Transmission Company's ability to accept or

31 transmit electric energy generated by the power plant. FGP's position is that the power plant actually consumed more than the TOPQ and is thus entitled to make-up for its Outstanding Balancc of Annual Deficiencies. The GSPA provides a mechanism for the resolution of disputes arising from the GSPA.

GSPA o/'FGPC

FGPC executed on March 22, 2006 the SA and PDA with the Gas Sellers to amicably settle their long-standing disputes under the GSPA. The disputes relate to the Gas Sellers' claim for Annual Deficiency payments totaling US$163.4 million from FGPC for unconsumed gas volumes tbr Contract Years 2002 to 2004. Under the terms of the SA and the PDA, the claim has been reduced to US$115.3 million. An additional reduction ofUS$9.6 million is recognized under the SA and PDA to credit FGPC for gas consumption in excess of the Take-Or-Pay Quantity (TOPQ) for 2005. The remaining liabilities will be paid through quarterly principal payments until December 26, 2009 with interest at LIBOR plus margin. The SA and PDA allow FGPC to prepay all or part of the outstanding balance and make up for the volmnc of gas up to the extent of the principal repayments made under the PDA for a longer period of time instead of the ten contract year recovery period allowed under the GSPA.

In May 2006, all the conditions precedent set out in the SA and PDA were completely satisfied. Such conditions precedent includes an acknowledgement and consent by Meralco.

For Contract Year 2006, the Gas Sellers issued its Annual Reconciliation Statement (ARS) in December 2006. The Gas Sellers are claiming an Annual Deficiency payment for Contract Year 2006 amounting to US$5.4 million. FGPC disagrees that any such Annual Deficiency payment is due. FGP has claimed relief for, among others, force majeure events arising from circumstances that affbcted the Transmission Facilities or the Transmission Company's ability to accept or transmit electric energy generated by the power plant. FGP's position is that the power plant actually consumed more than the TOPQ and is thus entitled to make-up for its Outstanding Balance of Annual Deficiencies. The GSPA provides a mechanism lbr the resolution of disputes arising from the GSPA.

Under the terms of the PPA with Mcralco, all fuel and fuel-related payments are pass-through. The payment obligations of FGP and FGPC under their respective SAs, PDAs and GSPAs are passed on to Meralco on a back-to-back and full pass-through basis.

o FGPC was assessed by the BIR on July 19, 2004 for deficiency income tax lbr taxable years 2001 and 2000. FGPC filed its Protest Letter to the BIR on October 5, 2004. Management believes that the resolution of this assessment will not materially affect First Gcn Group's consolidated financial statements.

[] On June 25, 2003, FGPC received various Notices of Assessment and Tax Bills dated April 15 and 21, 2003 from the Provincial Government of Batangas, through the Officc of tile Provincial Assessor, imposing an annual real property tax (RPT) on steel towers, cable/transmission lines and accessories amounting to US$0.22 million per year. FGPC, claiming exemption from said RPT, appealed the assessment to the Provincial Local Board of Assessment Appeals (LBAA) and filed a Petition on August 13, 2003, praying for the following: (1) that tile Notices of Assessment and Tax Bills issued by the Provincial Assessor be recalled and revoked, and (2) that the Provincial Assessor drop t_om the Assessment Roll the 230 KV transmission lines from Sta. Rita to Calaca in accordancc with Section 206 of the Local Government Code (LGC). FGPC argued that the T-line does not constitute real property for RPT purposes, and even assuming that the T- Line is regarded as real propcrty, I:GPC is still not liable lbr RPT as it is NPC/Transco, which has actual, direct and exclusive use oth the T-line.

Pursuant to Section 234(c) of the LGC, a government-owned and controlled corporation engaged in the generation and/or transmission of electric power and which has actual, direct and exclusive usc thcreof, is exempt from RPT. FGPC sought for, and was granted, a preliminary injunction by

¢=,., ,_ _;_

32 the Regional Trial Court (Branch 7) of Batangas City to enjoin the Provincial Treasurer of Batangas City t_om collecting the RPT pending the decision of the LBAA. Despite the injunction, the LBAA issued an Order dated September 22, 2005, requiring FGPC to pay the RPT within 15 days from receipt of the Order. On October 22, 2005, FGPC filed an appeal before the Central Board of Assessment Appeal (CBAA) assailing the validity of the LBAA Order. In a resolution rendered on December 12, 2006, the CBAA set aside the LBAA Order and remanded the case to the LBAA. The LBAA was directed to proceed with the case on the merits without requiring FGPC to first pay the RPT on the questioned assessment.

In a decision dated January 30, 2006, the RTC of Batangas City denied a 2ndmotion to lift the injunction previously issued by the court to stop the Province from collecting the tax pending the decision of the LBAA. Hence, the preliminary injunction stays. The court is scheduled to conduct a pre-trial of the main case for prohibition.

[] As of December 31,2006, there arc a number of land titling cases filed by FGP. The land titling case filed by FGPC were resolved in 2006. Management believes that the resolution of these cases will not materially affect the consolidated financial statements.

Bauang Private Power Corporation

[] There are on-going cases involving the assessment of Real Property Tax (RPT) and Franchise Tax by the local govermnent. The Company believes that under the Project Agreement, any RPT and Franchise Tax that may be found due is for the sole account of NPC:

(1) The first case wast]led by NPC with the Local Board of Assessments Appeals (LBAA) of La Union Province in connection with the assessment of RPT by the Provincial Treasurer on the Company's Machinery and Equipment from 1995 to 1999. Following the denial of NPC's petition tbr exemption by the LBAA and NPC's appeal to the Central Board of Assessment Appeals (CBAA), BPPC formally intervened in the CBAA case to further protect its interest. The CBAA affirmed the decision of the LBAA. Both NPC and BPPC filed their respective appeals to the Court of Tax Appeals (CTA). Last February 13, 2006, the CTA promulgated a Decision denying the respective Appeal's filed by BPPC and NPC. While NPC elevated the matter directly to the Supreme Court (SC), BPPC filed a Motion lbr Reconsideration with the CTA, which denied said motion on July 10, 2006. BPPC then liled a Petition tbr Review on Certiorari with the SC on September 11, 2006, reiterating NPC's cxemption from RPT. In a minute resolution dated October 4, 2006, the SC's First Division denicd BPPC's petition on the ground that it failed to show that the CTA committed any reversible error as to warrant the exercise by the SC of its appellate jurisdiction. A Motion for Reconsideration was filed by BPPC on December 12, 2006.

(2) Thc second case was filed by NPC, for itself and on behalf of BPPC, following the issuance of a revised assessment of RPT on BPPC's Machinery and Equipment on July 15, 2003 by the Municipal Assessor of the Municipality of Bauang, La Union. Under the said revised Assessment, the maximum tax liability for thc period 1995 to 2003 is about US$15.8 milion (_775.1 million), based on the maximum 80% assessment level imposable on privately- owned entities and a tax rate of 2%. In addition, interest on the unpaid amounts (2% per month not exceeding 36 months) has reached a total of US$9.97 million (ta489.0 million). The case remains pending with the LBAA of the Province of La Union.

To date, the potential maximum tax liability on BPPC's Machinery and Equipment for the period from 1995 to 2006 is about US$21.63 million (t_1.06 billion), based on the maximum 80% assessment level imposable on privately-owned entities and a tax rate of 2%. In addition, maximum interest on the unpaid amounts (2% per month not exceeding 36 months) amounts to US$13.01 million (t_638.06 million).

In addition to the MR liled by BPPC, there are two other cases involving the very same issues also pending with the Third Division of the SC, which warrants a thorough review to

33 squarely address a substantive and novel issue on the validity of the imposition of RPT on the machinery and equipment being operated under the Build-Operate-Transfer (BOT) scheme, through a common resolution of the issue. Moreover, the outstanding preliminary injunction against collection of RPT by the Province of La Union, is for the benefit of both BPPC and NPC, and the Province cannot collect the tax until the NPC Petition (involving the same/bets and issues and the very same machinery and equipment, which has been given due course and is pending with the Third Division of the SC), is also finally resolved.

In any event, BPPC believes that NPC shall be directly responsible for the payment of all RPT that may be assessed on machineries and equipment at the Bauang Plant, pursuant to the terms of the Project Agreement which specifically provides that NPC shall pay all real estate taxes and assessments in respect of the site and machinery, equipment and improvements of the power plant complex.

(3) The third ease was filed on October 19, 2005 by NPC, for itself and on behalf of BPPC, following receipt of Statement of Account fi'om the Municipal Treasurer dated August 5, 2005 for RPT on the Company"s Buildings and Improvements for CY 2003 to August 2005 amounting to US$ 0.8 million 0a4.2 million). The case is pending with the LBAA of the Province of La Union. NPC paid all RPT on Buildings and Improvements directly to the local government from 1995 until 2003, when it stopped payment of the tax and claimed an exemption under the Local Government Code.

To date, the potential maximum tax liability on BPPC's Buildings and improvements for the period ending December 31, 2006 is about US$ 0.85 million (P-41.7 million), pursuant to the Statement of Account from the Municipal Treasurer dated March 8, 2006, including alleged back taxes and interest dating back from 1995.

[] BPPC also filed a Petition for Certiorari and Prohibition in September 2004, to contest an assessment for Franchise Tax/br the period 2000 to 2003 amounting to US$ 0.62 million (t_33.0 million), including surcharges and penalties, on the ground that BPPC is not a public utility which is required by law to obtain a legislative franchise before operating, thus, is not subject to f?anchise taxes. The case is pending before the Regional Trial Court ofBauang, La Union.

Both NPC and BPPC believe that they are not subject to pay Franchise Tax to the local govemment. In any case, BPPC believes that the Project Agreement with NPC allows to claim indemnity from NPC tbr any new imposition, including franchise tax, incurred by BPPC that was not originally contemplated when it entered into said Project Agreement.

[] First Philippine Infrastructure Development Corp.

Manila North Tollways Corporation

The Company is also a respondent in other cases arising from the normal course of business filed by third parties which are either pending decisions by the courts or are subject to settlement agreements.

The outcome of the above lawsuits or claims cannot be presently determined. In the opinion of management and its legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the Company's financial position and results of operations. Accordingly, no provision has been made by the Company for these contingent liabilities.

Certain subsidiaries and associates have contingent liabilities with respect to claims, lawsuits and tax assessments. The respective management of the subsidiaries and associates, after consultations with outside counsels, believes that the final resolution of these issues will not materially affect their respective financial position and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders N/A

_o

34 PART II - OPERATIONAL AND FINANCIALINFORMATION

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

(1) Market Information

(a) The registrant's common equity is being traded at the Philippine Stock Exchange.

(b) STOCK PRICES

Common High Low 2006 First Quarter ...... 53.50 40.00 Second Quarter ...... 52.50 42.00 Third Quarter ...... 50.00 41.00 Fourth Quarter ...... 63.50 50.00 2005 First Quarter ...... 61.50 30.50 Second Quarter ...... 54.50 42.00 Third Quarter ...... 46.00 36.50 Fourth Quarter ...... 51.50 40.50 2004 First Quarter ...... 26.50 19.25 Second Quarter ...... 30.00 20.50 Third Quarter ...... 29.00 22.75 Fourth Quarter ...... 32.50 26.00

FPHC was trading at ta75.00 per share as of April 13, 2007.

(c) DIVIDENDS PER SHARE - A total of _2.00 per share cash dividends were declared and paid in 2006. A _1.00 per share cash dividends and another ta1.00 per share special cash dividends or a total of t_2.00 per share cash dividends were declared and paid in 2005. A tal.00 per share cash dividends was declared and paid in 2004.

The number of shareholders of record as of December 31, 2006 was 13,473. Common shares issued and subscribed as of December 31, 2006 were 580,565,599.

35 Top 20 stockholders as of December 31, 2006:

Name No. of Shares Held % to Total

1. Bcnpres Holdings Corporation 254,121,719 43.815%

2. PCD Nominee Corporation 132,774,382 22.892%

3. PCD Nominee Corporation 129,168,892 22.271%

4. Oscar M. Lopez 5,307,475 0.915%

5. Siao Tick Chong 1,916,439 0.330%

6. Sergio Ong 1,568,400 0.270%

7. Ma. Consuelo R. Lopez 1,378,214 0.237%

8. Manuel M. Lopez &/or Ma. Teresa L. Lopez 1,150,773 0.198%

9. Ma. Teresa L. Lopez 1,061,398 0.183%

10. Ernesto B. Rufino, Jr. 985,244 0.169%

11. Sze Ye Se 937,315 0.161%

12. Francis Giles B. Puno and/or 806,808 0.139% Ma. Patricia D. Puno

13. William Go Kim 761,930 0.131%

14. Josephine Go 739,478 0.127%

15. First Philippine Holdings Corp. 697,177 0.120% Retirement Plan

16. Cualoping Securities Corporation 590,946 0.102%

17. Esteban Yau 589,557 0.102%

18. Arthur A. De Guia 561,628 0.096%

19. Perla R. Catahan 522,034 0.090%

20. Pua Yok Bing. 486,574 0.084%

36 Recent Sales of Unregistered Securities

As stated in Note 19 page 59 paragraph 7 & and page 60 first paragraph of the audited consolidated financial statements, on August 1,2002, FPH Fund issued US$100 million in floating rate notes (Guaranteed Notes) due on October l, 2009. The Guaranteed Notes arc guaranteed unconditionally and irrevocably by FPHC as to repayment. So long as the Guaranteed Notes are outstanding, FPH Fund and FPHC will be subject to certain undertakings with respect to negative pledge, debt incurrence, asset disposal, dividend payments, maintenance of financial covenants and financial reporting, among others, the violation of which may be constitute of an event of default under the Guaranteed Notes.

In 2006, a total of US$14 million were bought back from CSFBi. The outstanding obligation amounted to US$72 million as of December 31,2006.

FPHC's guarantee is exempt under Rule 10-1 from registration requirements. No written confirmation ti'om the Commission was requested.

On April 30, 2003, FGHC International entered into a Note Purchase Agreement with AIMCF (Cayman Islands) Limited for $35 million, 8-year notes which were drawn efl'ective July 11, 2003. These notes were guaranteed by FPHC. FPHC entered into a Call Option Agreement dated April 30, 2003 where AIMCF has the option to acquire certain shares of common stock and preferred stock of First Gcn, as well as the right to put the call options and certain other rights to FPHC.

On April 22, 2005, FPH Fund drew down a US$25 million loan with Standard Bank Asia Limited. The loan is fully guaranteed by FPIIC under a Parent Support Agreement. The loan bears interest of six-months LIBOR plus 5%, but was later swapped to a fixed rate of 9.37% payable semi-annually commencing October 22, 2005. Semi-annual amortizations ofUS$3.55 million will commence on April 2007 and end on April 2010. The proceeds were used to refinance a portion of maturing debt and for general corporate, working capital and investment purposes.

On March 28, 2007, FPHC signed a Fixed Corporate Notes Facility Agreement with ING Bank N. V. Manila Branch and certain institutions for the issuance of up to Five Billion Pesos worth of fixed rate corporate notes to no more than 19 lenders. The notes are divided into three (3) tranches with a tenor of 5, 7 and 10 years respectively.

37 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operation

The .following management's discussion and analysis of the Company's .financial condition and results of operations shouM be read in conjunction with the accompanying audited consolidated finaneial statements and the related notes as at December 31, 2006 and 2005 and for each of the two years in the period ended December 31, 2006 and 2005. This discussion includes forward-looking statements, which may include statements regarding Juture results of operations, financial condition or business prospects, which are subject to significant risk_, uncertainties and other factors and are based on FPHC's current expectations, some of which are beyond FPHC's control and are difficult to predict. These statements involve risks and uncertainties and our actual results may differ materially from those anticipated in these forward-looking statements.

OVERVIEW

The First Holdings Group's operating businesses are organized and managed separately according to the nature of the products and services, with each segment representing a strategic business unit that offers different products and serves different markets. The Group conducts the majority of its business activities in the following areas:

a Power generation and power-related activities ....power generation subsidiaries under First Gen Corporation (First Gen), power distribution under First Philippine Union Fenosa Inc. (FPUFI) and our oil transporting company under First Philippine Industrial Corporation (FPIC). • Roads and tollways operations - Subic Tipo Road and North Luzon Expressway under First Philippine Infrastructure and Development Corp. (FPIDC) a Manufacturing - our transformer manufacturing subsidiaries' Philippine Electric Corporation (Philec) and First Electro Dynamics Corp. (Fedcor). * Others - investments holdings, construction subsidiaries under First Balfour Inc. (FBI), real estate development under First Philippine Industrial Park (FPIP), securities transfer services under Securities Transfer Services Inc. (STSI) and financing under First Philippine Lending Corp. (FPLC).

The table below shows the contribution of each of our business segments to our consolidated revenues, finance income, finance costs, benefit from (provision for) income tax and net income (loss). Our revenues are derived from our operations conducted in the Philippines.

Power Roads and Generation and Tollways (in Millions) Power-related Operations Manufacturing Others Eliminations Consolidated Activities For the year ended Decem-ber 31, 2006 Revenues la 51,738 ta 5,709 ta 1,177 la 987 ta (39) ta 59,572 Finance costs (5,074) (1,419) (3) (842) (17,338) Finance Income 2,686 199 1 395 3,281 Provision for (benefit from) income tax 1,134 68 22 (4) 1,220 Net income (loss) 11,014 1,440 46 2,932 36 15,468

For the year ended December 31, 2005 Revenues t_46,080 ta 5,117 _a875 t_ I,192 ta(5) la 53,259 Finance costs (3,527) (958) (3) (967) (5,455) Finance Income 556 109 2 419 1,086 Provision for income tax 62 17 5 (8) 76 Net income (loss) 8,210 1,527 32 1,835 (1,899) 9,705

38 DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005

Results of Operations

Revenue

FPHC's consolidated revenues totaled ta59.6 billion for the year ended December 31, 2006. This is higher by 12% 0a6.3 billion) compared to the previous year.

The following table sets out the contribution of each of the components of revenues as a percentage of the Company's total revenue for December 31, 2006 and 2005:

FortheyearendedDecember31 Increase(decrease) 2006 2005 Amount % (amountsinMM¢, exceptpercentages)

Saleof electricity _ 51,176 86% _a45,485 85% ta5,691 13% Tolloperations 5,705 10% 5,104 9% 601 12% Contractsandservices 1,326 2% 1,402 3% (76) -5% Saleofmerchandise 1,184 2°/0 861 2% 323 38% Revenuefromsaleofrealestate 181 0% 407 1% (2262 -56%

Total _t59,572 100% _a53,259 100% ta6,313 12%

The company's revenues comprise of:

Sale of electricity

The Company's revenue ti_omthe sale of electricity is derived primarily fi'om the sale of electricity to Meralco pursuant to the 25-year Power Purchase Agreements (PPAs) between Meralco and each of the generation subsidiaries. Under these terms of the PPAs, Meralco is obligated to take or pay 83% of Santa Rita's and San Lorenzo's respective Net Dependable Capacity (NDC). Moreover, the newly-acquired Pantabangan-Masiway hydropower thcility was turned-over to First Gen on November 18, 2006, and started contributing revenue thereafter. Revenue from sale of electricity accounts for 86% of total revenues in 2006 and 85% in 2005.

Revenue from sale of electricity increased by 13% 0a5.7 billion) to ta51.2 billion from g45.5 billion in 2005, due to the increase in average prices of natural gas (from $6.82/GJ in 2005 to $8.35/GJ in 2006 for Sta. Rita and from $6.9/GJ to $8.35/GJ for San Lorenzo), use of liquid fuel (resulting from the scheduled 27-day maintenance outage of the Malampaya platform) and increase in fuel consumption (due to the slight increase in combined average dispatch levels for both plants). In addition, the Pantabangan-Masiway hydropower facility contributed $13.1 million (_a672million) in revenues.

Toll operations

Revenue from toll operations is derived from the use of the motoring public of the North Luzon Expressway (NLE) and Subic-Tipo Road. Revenue from toll operations is the second revenue driver, contributing 10% of total revenues in 2006 and 9% in 2005, Revenues from toll operations improved by 12% (ta601 million) to t_5.7 billion from ta5.1 billion against last year. The increase was brought about by the increase during the year in the traffic volume for Class 1 & 2 in the open system and for Class 2 & 3 in closed system.

39 Contracts and services

Revenue from contracts and services is primarily derived from construction contracts, engineering projects and pipeline shipment of fuel and other petroleum products. Revenue from contracts and services accounts for 2% of total revenues in 2006, down from the previous period's 3% contribution.

Revenues from contracts and services decreased by 5% (ta76 million) to t_1.3 billion, due to the current period's lull in major construction projects for First Balfour Inc. (FBI) (wherein bulk of previous year's revenues pertains to The Manansala project). The decrease in revenues of FBI was mitigated by the higher revelmes posted by First Philippine Industrial Corp. (FPIC) -- as a result of the tariff increase.

Sa& of Merchandise

Revenue from sale of merchandise is derived from the sale of power and distribution transformers. Sale of merchandise contributed 2% to total revenues in 2006 and in 2005. Sale of merchandise grew by 38% (t_323 million) to ta1.2 billion from t_0.9 billion in 2005. Philec's revenues, at tal.0 billion, reached its highest level ever. The increase in customer base fueled the increase in sale of merchandise.

RevenueJ?om sale of real estate

Revenue from sale of real estate is derived from sale of industrial lots of First Philippine Industrial Park (FPIP) in Batangas. Sale of real estate contributed less than 1% to total revenues lbr 2006 and 1% in 2005. Sale of real estate decreased by 56% (b_226 million) to ta181 million due to lower sale of industrial lots in FPIP li'om 144,824 square meters in 2005 to only 96,592 in 2006.

Costs and expenses

FPHC's consolidated cost and expenses totaled tM7.3 billion. This is higher by 13% (ta5.5 billion) compared to the previous year's tM1.8 billion.

The following table sets out the contribution of each of the components of cost and expenses as a percentage of the Company's total cost and expenses lbr 2006 and 2005:

For the year ended December 31 Increase (decrease) 2006 2005 Amount % (amounts in MMt_,except percentages)

Operations emdmaintenance ta 38,610 81% _ 32,682 78% _ 5,928 18% Toll operations 2,690 6% 2,701 7% (11) -% Contracts and services 831 2% 984 2% (153) -16% Merchandise sold 978 2% 720 2% 258 36% Real estate sold 96 0% 176 0% (80) -45% General and administrative cxpcnsc 4,128 9% 4,553 I1% (425) -9%

Total _ 47,333 100% t_41,816 100% t_5,517 13%

The Company's costs and expenses comprise of:

Operations and maintenance

Power plant operations and maintenance (O&M) expenses include fuel charges, pipeline charges, fixed and variable O&M charges, start-up costs and Net Dependable Capacity bonuses paid to Siemens Operations as O&M contractor for Santa Rita and San Lorenzo. Cost of power plant operations and maintenance accounts for 81% of total cost and expenses in 2006 and 78% in 2005.

,_ _

40 As an offshoot to the revcnue increase, cost of power plant operations and maintenance increased by 18% (:la6.0 billion) to ta38.6 billion in 2006. The increase in average prices of natural gas and use of liquid fuel brought about the increase in cost of power plant operations and maintenance.

Toll operations

Cost of toll operations include service fees to Tollways Management Corporation, as O&M contractor for the NLE and Subic-Tipo Road, and amortization expense of the Roads and Tollways in operations. Cost of toll operations accounts for 6% of total cost and expenses in 2006 and 7% in 2005. Cost of toll operations at _a2.7 billion, was basically flat against last year.

Contracts and services

Cost of contracts and services pertains to contract costs, which include all direct materials, labor costs and indirect costs related to contract performance. Provision for estimated losses on uncompleted contracts, likewise, tbrm part of the cost of contracts and services. Such provision is recognized in the period in which the loss is determined. Cost of contracts and services accounts for 2% of total cost and expenses lbr 2006 and 2005. As a consequence of the decrease in revenucs, cost of contracts and services decreased by 16% (t_153 million) to ta831 million, again due to dearth in major construction projects for FBI.

Cost of Merchandise sold

Cost of merchandise sold pertains to costs which are related to the manufacture of products. Cost of merchandise sold accounts for 2% of total cost and expenses in 2006 and 2005. Cost of merchandise sold increased by 36% (ta258 million) to _a978 million in 2006 li_omta720 million in 2005, due to the increase in manuthcturing cost of Philec and Fcdcor, as a consequence of the increase in revenues, as well as the general increase in cost of raw materials, particularly silicon steel and copper wires.

Cost of real estate soM

Cost of real estate sold is determined on the basis of the acquisition cost of the land plus its thll development costs, which include estimates of costs for future development work. Cost of real estate sold accounts for less than 1% of total cost and expenses in 2006 and 2005. Cost of real estate sold decreased by 45% (t_80 million) to t_96 million, again due to lower sales.

General and administrative expenses

General and administrative expenses include depreciation and amortization, salaries and wages, taxes and license lees, insurance premiums and professional fees, repairs and maintenance, transportation and travel, rentals, and office supplies, among others. General and administrative expenses account for 9% of total cost and expenses in 2006 and 11% in 2005.

General and administrative expenses dccrcased by 9% (P-425 million) to ta4.1 billion due to: among others, (1) previous year's one-time payment by FGP for income taxes assessed on liquidated damages received from Siemens amounting to $1.9 million; (2) lower professional fees with the resolution of FGPC and FGP's disputes with Sicmens and the gas sellers; and, (3) cancellation of excise taxes on natural gas effective November 2005.

41 Finance costs

Finance costs comprise principally of interest expense on debt facilities of the Parent (through the Special Purpose Vehicles), Power Generation and Roads & Tollways Subsidiaries. Finance costs increased by 35% (ta1.9 billion) to _a7.3 billion fi'om ta5.5 billion year-ago level. Aside from the annual interest on existing loans, the higher finance costs was brought about by: the $27.3 million interest on Annual Deficiencies on gas take- or-pay obligations following the settlement of the dispute with the gas sellers; the full year effect of the interest on the $5.0 billion bond issued in June 2005 by First Gen; and, the write-off of previously deferred debt issuance costs amounting to $3.9 million related to the undrawn KfW facility of FGPC and _a350 million related to the refinancing transaction of MNTC. The KfW thcility was cancelled on March 2006 tbllowing the Settlement Agreement between FGPC and Siemens, while the partial prepayment and restructuring of MNTC's US Dollar-denominated long-term debt (using proceeds of a ta5.5 billion FXCN issue) was entered into on November 8, 2006.

Finance income

Finance income represents interest on the Group's cash balances. Finance income increased by 202% (ta2.2 billion) to ta3.3 billion due to higher average balance of cash and cash equivalents of First Gen (resulting from the proceeds of its IPO and Settlement Agreement with Siemens) and cash flow from operations of MNTC.

Equity in net earnings of associates

This represents the Company's share in the consolidated net income of, among others, Meralco, First Private Power Corporation, Rockwell Land Corporation and First Sumiden Circuits, Inc.

Equity in net earnings of associates registered an increase of 337% (ta3.2 billion) to ta4.2 billion from 12963 million last year. The increase was brought about by the higher income posted by the associates: (1) Meralco registered a net income (attributable to equity holders of the Parent) of _al3.7 billion, a complete reversal from the previous year's 12350 million net loss. The positive growth was mainly due to the reversal of all accumulated provision fro probable losses from 2004 to 2006 amounting to tal 5.7 billion (_10.2 billion net of tax) as a result of the en bane decision by the Supreme Court on December 6, 2006 setting aside an adverse Court of Appeals (CA) ruling on Meralco's tariff unbundling; (2) First Gen's BPPC earned a net income of $24.9 million, up against the $20.0 million income last year, and, (3) Rockwell Land's net income reached ta369.3 million, up against the 1a288.5 million net income last year.

Foreign exchange gain (loss)

Foreign exchange gain or loss arose primarily from the restatement of dollar-denominated transactions. Foreign exchange gain for the period rose by 9% (t_52 million) to ta656 million, due to translation adjustments on foreign exchange transactions mainly pertaining to FPIDC as the weighted average foreign exchange rate between Philippine peso and US dollar improved (US$1 :Php 51.3289 from US$1 :Php 55.0851 last year).

A portion of earnings this period and prior year came from non-recurring gains: Gain on sale of investments in shares of stock and gain on dilution.

Gain on sale of investment in shares of stock

During the year, the Parent Company sold a total of 380,000 shares of its investments in SiRF Technology Holdings, Inc.(SiRF) realizing a gain of 12535 million. This is, however, lower by 10% (t_59 million) compared to the previous year's gain of_594 million, wherein FPHC sold a total of 464,631 shares.

42 Gain on dilution

On February 10, 2006, First Gen successfully completed the Initial Public Offering (Offering) of 180,910,900 common shares in the Philippines. The proceeds |¥om the Offering amounted to t_9.0 billion. The common shares of First Gen are now listed and traded on the First Board of the Philippine Stock Exchange. As a result of this Offering, the equity interest of FPHC in First Gen was reduced from 88.44% to 67.05% from which FPHC recognized a gain on dilution amounting to _2.7 billion. FPHC's equity interest in First Gen as of December 3 I, 2006 is at 66.78%.

Other income

Other income represents management fees and others (like rent, dividends and miscellaneous income). Other income decreased by 17% (t_92 million) to t_454 million, due primarily to the decrease in annual management fees that First Gen receives from BPPC. The decrease resulted from the negotiated terms and conditions of the Management Contract between First Gen and BPPC. The new contract took effect on January 1, 2006 and valid until July 2010.

Income before income tax

As a result of the foregoing, income before income tax grew by 71% (ta6.9 billion) to t_16.7 billion from ta9.8 billion in 2005.

Provisions for (Benefit from) Income Tax

The Group reported a provision for income tax of t_1.2 billion for the year, significantly higher (by 1505% or _al.1 billion) compared to last year. Of the total provision, t_406 million pertains to current provision for income tax, which registered an increase of 184% (t_263 million) due to the increase in the taxable income as well as the income tax rate from 32% to 35%. Deferred provision for income tax amounted to _814 million, a reversal from the previous year's _a67 million benefit from income tax. The higher provision resulted from the differences between the treatment of taxes under Functional Currency Reporting (FCR) which First Gen and its major subsidiaries adopted in 2005. While the financial statements are presented in US Dollars for financial reporting purposes, based on the latest BIR requirements, companies that have adopted the FCR are obliged to continue presenting their financial statements, preparing their tax returns, and computing and paying their tax liabilities in Philippine pesos.

Net income

Net income increased by 59% (_5.8 billion) to _15.5 billion, primarily due to improvement in earnings of our subsidiaries (mainly, First Gen) and associates (particularly Meralco) and gains from dilution of our equity interest in First Gen.

Net income attributable to Equity holders of the Parent

Of the total net income, Net income attributable to Equity holders of the Parent amounted to _8.7 billion. This is higher by 77% (P3.8 billion) compared to the previous year's 1_4.9billion, for the same reasons cited above.

Minority Interest

PFRS requires changes in the presentation of minority interests in the consolidated balance sheets and consolidated statements of income. Minority Interests is now presented as a footnote in the Statement of income and as part o1'Equity in the consolidated Balance Sheets.

Minority interest increased by 41% (_2.0 billion) to g_6.8 billion in 2006 from _a4.8 billion in 2005 primarily due to the dilution of our shareholdings in First Gen. Minority interest in First Gen represents around 33% of its total outstanding capital stock.

43 Earnings per share for Net income attributable to Equity holders of the Parent

Basic earnings per share is at _15.147, while Diluted earnings per share is at ta14.984. These represents an increase of 72% and 73%, respectively. The increase in EPS for the period was attributed to the significant growth in the bottom line, again due to the improvement in the earnings of our subsidiaries and associates, as well as from the gain from dilution of our equity interest in First Gen.

DECEMBER 31, 2005 COMPARED TO DECEMBER 31, 2004

Results of Operations

Revenue

Fp ..... tat_, s consolidated revenues totaled 1253.3 billion. This is higher by 33% (t_13.3 billion) compared to the previous year's ta39.9 billion.

The tbllowing table sets out the contribution of each of the components of revenues as a percentage of the Company's total revenue for 2005 and 2004:

Years ended December 31 Increase (decrease) 2005 2004 (As restated) Amount % (amounts in MM _, except percentages)

Sale of electricity 1145,485 85% _ 36 969 93% t_8,516 23% Revenue from toll operations 5,104 10% 43 0% 5061 I1770% Revenue from contracts and services 1,402 3% I 630 4% (228) ( [4%) Sale of merchandise 861 2% 814 2% 47 6% Revenuefrom sale of real estate 407 0% 476 1% (69) (14%)

Total .. 1_53,259 100% t_39 932 100% t7 13,327 33%

Note: The _rans'iti_nt_ PFRS resulted in certain changes t_ p_P_C Gr_up's`previ_us aee_unting p_licies_ The comparativefigures.[br 2004 were adjusted to r(_leet the changes in accounting policies.

The company's income comprises of:

Revenue#ore sale of electrici_ty

The Company's revenue from the sale of electricity is derived primarily from the sale of electricity to Meralco pursuant to the 25-year Power Purchase Agreements (PPAs) betwccn Meralco and each of the generation subsidiaries. Under these terms of the PPAs, Meralco is obligated to take or pay 83% of Santa Rita's and San Lorenzo's respective Net Dependable Capacity (NDC). For 2005, revenue from sale of electricity accounts fbr 85% of total revenues.

Revenue from sale of electricity increased by 23% (t28.5 billion) to g45.5 billion ti'om t_37.0 billion in 2004, duc to, among others: (1) the increase in average prices of natural gas (from $5.76/GJ in 2004 to $6.82/GJ in 2005 in the case of Santa Rita and from $5.76/GJ in 2004 to $6.90/GJ in the case of San Lorenzo); (2) increase in fuel consumption due to the improvement of average dispatch levels at 77% for both Santa Rita and San Lorenzo, vis-/t-vis previous year's average dispatch of 64.7% for Santa Rita and 58.3% for San Lorenzo; and, (3) improvement in the NDC of both Santa Rita and San Lorenzo power plants. In the case of Santa Rita, NDC improved to 1,000 MW from the previous year's 996 MW, whereas in the case of San Lorenzo, NDC improved slightly to 503 MW from 502 MW previously.

44 Revenue fi"om toll operations

Revenue from toll operations is derived from the use of the motoring public of the North Luzon Expressway (NLE) and Subic-Yipo Road. For 2005, revenue from toll operations contributed 10% to the total revenues from its minimal contribution in 2004. This was due to the start of commercial operation of the NLE only on February 10, 2005, which brought revenue from toll operations to ta5.1 billion from _3 million in 2004.

Revenue J?om contracts and services

Revenue from contracts and services is primarily derived from construction contracts, engineering projects and pipeline shipment of fuel and other petroleum products. Revenue from contracts and services accounts tbr 3% of total revenues in 2005, down from the previous year's 4% contribution.

Revenue from contracts and services decreased by 14% (ta228 million) to _a1.4 billion from t_1.6 billion in 2004, due to the decrease in volume shipped and lack of viable construction projects.

Sale of Merchandise

Revenue from sale of merchandise is derived t_om the sale of power and distribution transfomaers. Sale of merchandise contributed 2% to total revenues for both years. In 2005, revenues from sale of merchandise grew by 6% 0a47 million) to ta861 million fi'om _814 million- due mainly to the contribution of newly developed product lines, such as dry type translbrmers and large power translbrmer repair.

Revenue fi'om sale of real estate

Revenue from sale of real estate is derived from sale of industrial lots of First Philippine Industrial Park in Batangas. Sale of real estate contributed less than 1% to total revenues ff)r 2005. Revenue from sale of real estate decreased by 14% (t_69 million) to _407 million from P-476 million in 2004, due to the decrease in lots sold from 200,000 square meters in 2004 versus only 144,824 square meters in 2005.

Costs and expenses

FPHC's consolidated cost and expenses totaled _-41.8 billion. This is higher by 39% (:lal 1.7 billion) compared to the previous year's t_30.1 billion.

The following table sets out the contribution o f each of the components of cost and expenses as a percentage of the Company's total cost and expenses for 2005 and 2004:

Years ended December 31 Increase (decrease) 2005 2004 (As restated) Amount % (amounts in MM¢, except percentages)

Cost of power plant operations and maintenance ta 32,682 78% _ 23,867 79% _ 8,815 37% Cost of toll operations 2flO1 7% 54 0% 2,647 4902% Cost of contracts and services 984 2% 946 3% 38 4% Cost of merchandise sold 720 2% 700 2% 20 3% Cost of real estate sold 176 0% 181 1% (5) (i3%1) General and administrative expense 4,553 11% 4,377 15% 176 4%

Total _ 41,816 100% _ 30,125 100% ta 11,691 39%

Note: The transition to PFRS resulted in certain changes to FPHC Group's previous accounting policies. The comparativefigures ,[or 2004 were adjusted to reflect the changes in accounting policies.

The Company's costs and expenses are comprised off

45 Cost of power plant operations and maintenance

Power plant operations and maintenance (O&M) expenses include fuel charges, pipeline charges, fixed and variable O&M eharges, start-up costs and NDC bonuses paid to Siemens Operations as O&M contractor for Santa Rita and San Lorenzo. Cost of power plant operations and maintenance accounts for 78% of total cost and expenses in 2005 and 79% in 2004.

Cost of power plant operations and maintenance increased by 37% (1a8.8 billion) to 1132.7 billion from t_23.9 billion. The higher average dispatch and average prices of gas, as mentioned earlier, brought about the increase.

Cost of toll operations

Cost of toll operations includes service fees of Tollways Management Corporation, as O&M contractor for the NLE and Subic-Tipo Road, and amortization expense of the Roads and Tollways in operations. Cost of toll operations which now accounts for 7% of total cost and expenses, reached 112.7 billion in 2005, This is significantly higher (4902%) compared to the previous year due to, as likewise mentioned earlier, start of commercial operations of the NLE in February 2005.

Cost of contracts and services

Cost of contracts and services pertains to contract costs, which include all direct materials, labor costs and indirect costs related to contract performance. Provision for estimated losses on uncompleted contracts, likewise, form part of the cost of contracts and services. Such provision is recognized in the period in which the loss is determined. Cost of contracts and services accounts fbr 2% of total cost and expenses for 2005 against 3% in 2004.

Cost of contracts and services slightly increased by 4% (t_38 million) to t_984 million from 11946 million in 2004. The increase was due to the general increase in cost of construction.

Cost of merchandise soM

Cost of merchandise sold pertains to cost which are related to the manufacture of products. Cost of merchandise sold accounts for approximately 2% of total cost and expenses in 2005 and 2004.

Cost of merchandise sold increased by 3% (t120 million) to 11720million from 11700 million as a consequence of the increase in revenues from sale of merchandise.

Cost of real estate soM

Cost of real estate sold is determined on the basis of the acquisition cost of the land plus its lull development costs, which include estimates of costs tbr future development work. Cost of real estate sold accounts for less than 1% of total cost and expenses in 2005 and 1% in 2004. Cost of real estate sold decreased by 3% (115 million) to ta176 million due to lower number of lots sold in 2005 vis-a-vis 2004.

General and administrative expenses

General and administrative expenses includes depreciation and amortization, taxes and license fees, insurance premiums and professional fees, repairs and maintenance, transportation and travel, rentals, and office supplies, among others. General and administrative expenses account for 11% of total cost and expenses in 2005 against 15% in 2004.

General and administrative expenses increased by 4% 0a176 million) to tt4.6 billion due to the start of payments of local business taxes for both the Santa Rita and San Lorenzo plants. In addition, there was a one-

_8 .qS__

46 time payment made by FGP amounting to $1.9 million in income taxes assessed on the liquidated damages received from Seimens in connection with the delay in the construction of the San Lorenzo plant.

Finance costs

Finance costs comprise principally of interest expense on debt facilities of the Parent, Power Generation and Roads & Tollways Subsidiaries. Finance costs increased by 37% (_1.5 billion) to _u5.5 billion from ta4.0 billion in 2004 due to interest on First Gen's _5.0 billion Senior Notes obtained in June 2005, FPH Fund's $25.0 million loan obtained in April 2005 and MNTC's project financing facility. Interest on MNTC's loans were capitalized prior to the start of commercial operation of the NLE.

Finance income

Finance income represents interest on the Group's cash balances. Finance income improved by 142% (ta638 million) to tal. 1 billion from t_448 million in 2004, due to higher cash and cash equivalents balance, primarily from the proceeds of First Gen's _a5.0 billion bond offering in June 2005.

Equity in net earnings of associates

This represents the Company's share in the consolidated net income of, among others, Meralco, FPPC, Rockwell Land Corporation and First Sumiden Circuits, Inc.

Equity in net earnings of associates increased by 142%(_565 million) to t_963 million owing to the decline in net loss of Meralco (attributable to equity holders) from _1.9 billion last year to _350 million this year, as well as the increase in net income of Rockwell Land Corp. and First Sumiden Circuits Inc.

Foreign exchange gain (loss)

Foreign exchange gain increased significantly (5133%)to _604 million from _12 million loss in 2004, due to restatement of dollar-denominatedtransactions,primarilythatof FGHC International,FPHFund and MNTC, as the peso appreciated againstthe US dollar froman averageexchange rateof_56.15:$1 in 2004 to _55.02:$1 in 2005.

Gain on sale of investment in shares of stock

In 2005, the Parent Company sold 464,631 shares of its investments in preferred stocks of SiRF Technology Holdings, Inc.(SiRF) at an average selling price of $23.6 per share realizing a gain of,U594 million. The gain on sale of such investments in shares of stock is non-recurring. SiRF is a supplier of GPS semiconductor and software solutions based in San Jose, California. In 2004, FPHC sold 1,100,000 pretErred shares at an average selling price of $7.15 per share realizing a gain of _z228 million.

Other income

Other income represents management fees and others (like rent, dividends and miscellaneous income). Other income increased by 216%(_373 million) to P546 million, due to, among others, the recognition of a one time gain of $5.1 million from the Tranche 2 interim award on the Siemens dispute of FGPC.

Income before income tax

As a result of the foregoing, income before income tax grew by 39% (_2.7 billion) to t_9.8 billion from #7.1 billion in 2004.

47 Provisions for (Benefit from) Income Tax

The Group reported a net provision for income tax of ta76 million for the year from t_23 million in 2004. Of the total provision, ta143 million pertains to current provision for income tax, which increased by 18% (ta22 million) from ta121 million primarily due to the increase in income tax rate from 32% to 35% effective November 1, 2005 and higher interest income earned from offshore deposits that are subject to the regular tax rate of 35%. On the other hand, the benefit from income tax (deferred) declined by 32% (ta31 million) to ta67 million owing to the decline in deferred tax liabilities.

Net income

Net income increased by 38% (ta2.7 billion) to t_9.7 billion, primarily due to start of commercial operation of the NLEX, gain on sale of SiRF shares, lower loss of Meralco and one-time gain from the Tranche 2 interim award on the Siemens dispute.

Net income attributable to Equity holders of the Parent

Of the total net income, Net income attributable to Equity holders of the Parent amounted to P-4.9 billion. This is higher by 33% (t_1.2 billion) compared to the previous year's t23.7 billion, for the same reasons cited above.

Minority lntcrest

PFRS requires changes in the presentation of minority interests in the consolidated balance sheets and consolidated statements of income. Minority Interests is now presented as a footnote in the Statement of income and as part of Equity in the consolidated Balance Sheets.

Minority interest increased by 43% (t_1.4 billion) to t_4.8 billion in 2005 from t_3.4 billion in 2004 due to the net increase in net income of FPIDC. Minority Interest in FPIDC represents 49% of the total outstanding capital stock.

DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005

Financial Condition

As of December 31, 2006, FPHC Group's audited consolidated assets totaled ta135.5 billion. This is higher by 8%, or _a9.8 billion, compared to the December 31, 2005 balance oft_125.6 billion.

Cash and cash equivalents increased by 47%

Cash consists of cash on hand and in banks. Cash equivalents include cash investments with original maturities of less than three months. It also includes the balance of FGPC and FGP's security accounts totaling t_8.5 billion (US$174 million). The increase in cash and cash equivalents, by 47% or s_10.4 billion, to ta32.2 billion was due to the proceeds from the following: First Gen's Initial Public Offering amounting to $166.4 million (net of issuance costs), sale of investments in SiRF, cancellation of the bond forward agreement with FPH Ventures resulting in the release of the $50 million cash deposit, and internally generated funds. These were reduced by the payment of loans and dividends.

Short-term cash investments decreased by 100%

Short-term cash investments include, but are not limited to, money market placements and investments in government securities. These investments have maturities of over three months but less than one year. Short- term cash investments of t_154 million in December 2005 were reclassified into "cash and cash equivalents" account.

48 Trade and other receivables - net increased by 28%

Trade and other receivables increased by 28%, or ia2.3 billion, to _10.6 billion duc mainly to increase in outstanding receivables f_om Meralco as a result of higher plant dispatch.

Inventories - decreased by 27%

Inventories decreased by 27%, or ta710 million, to _1.9 billion due to the 27-day maintenance outage of the Malampaya natural gas platform, which resulted in the consumption of liquid fuel inventory by both the Santa Rita and San Lorenzo power plants.

Receivable from Meralco decreased b.y 41%

This represents FGPC and FGP's payment obligations to Gas Sellers under the Gas Sales and Purchase Agreement which are ultimately pass-through Meralco. The corresponding receivables from Meralco, including accrued interest, are now presented as part of "Current portion of Receivable from Meralco" and "Receivable from Meralco" accounts in the consolidated balance sheets.

Receivable t_om Meralco decreased by 41%, or i_3.6 billion, to ta5.2 billion. The current portion anaounted to i_2.0 billion ($41.6 million), while the non-current portion amounted to ta3.1 billion ($63.7 million). The decrease was brought about by the principal and interest payments, as well as application of excess gas consumed during the year, part of the negotiated settlement of the gas supply take-or-pay obligations.

Investments and deposits increased by 25%

•..._.__. Invcstmcnts and deposits increased by 25%, or t_3.6 billion, to ia17.8 billion. The increase was mainly attributed to the Equity in net earnings of associates for the year amounting to _a4.2 billion, reduced by the dividends received totaling #0.9 billion.

Roads' and tollways - net decreased by 5%

Roads and tollways (net) decreased by 5%, or ta0.7 billion, to i_15.2 billion. The decrease was due to depreciation and amortization charges during the period- net of additions.

Investment properties decreased by 24%

Investment properties decreased by 24%, or t_314 million, to _1.0 billion. The decrease was due mainly to the sale of FPHC's land in Rockwell Center.

Goodwill increased by 565%

Goodwill increased by 565%, or _a1.8 billion, to t_2.1 billion. With First Gen's acquisition of the Pantabangan- Masiway hydropower facility in November 2006, a provisional goodwill amounting to $36.0 million was included in this account pending the results of the valuation of the plant.

De]_rred tax assets decreased by 6%, while deferred tax liabilities increased by 85%

Deterred tax assets decreased by 6%, or t_8 million, to _134 million, while deferred tax liabilities increased by 85%, or ta712 million, to t_1.6 billion. The net increase in tax liabilities was brought about by the foregone benefit of FGPC on the foreign exchange losses that would have been realized on its loans during the ITH extension. Based on BIR regulations, companies that have adopted the Foreign Currency Reporting should continue presenting their financial statements, preparing their tax returns, and computing and paying their tax liabilities in Philippine pesos. Moreover, the statutory corporate income tax rate was increased to 35%. This rate is effective until the end of 2008 and is schcduled to decline to 30% beginning 2009.

49 Other noncurrent axsets decreased by 20%

Other noncurrent assets decreased by 20%, or ta1.7 billion, to 1a6.6 billion. The decrease was due to the release and rcplacement of the tal.3 million sinking fund by irrevocable standby Letters of Credit (LC). The said LCs were subsequently terminated. Adding to the decrease was the cancellation of the bond forward agreement with FPH Ventures wherein cash deposits anaounting to $50 million were included in the "other noncurrent asset" account until April 3, 2006. The decrease was softened by the $50.1 million worth of prepaid gas resulting from payments made to gas sellers. The corresponding volume of prepaid gas arising fi'om the respective Settlement Agreement of FGP and FGPC can be recovered until December 2014. Considering the pass-through nature of fuel obligations, a corresponding liability (unearned income) was recognized to match the receipt to payments from Meralco which is shown as part of the "other non-current liabilities" account.

Loans payable decreased by 57%

Loans payable decreased by 57%, or ta13 million, to tal 0 million, representing payment by Philec of a portion of its outstanding loans.

Trade payables and other current liabilities increased by 23%

Trade payables and other current liabilities increased by 23%, or ta2.0 billion, to tal 0.8 billion primarily due to the increase in trade payables of First Gen, FPIDC and Philec.

Income and other taxes payable increased by 448%

Income and other taxes payable increased by 448%, or ta224 million, to ta274 million due to tax liabilities ...... pertaining to First Gen Hydro Power Corp. and First Gen Bukidnon...... "

D_!_rred payment facility m PSA LM increased by 100%

Deferred payment facility to PSALM amounted to ta3.8 bi]lion ($77.4 million), of which current portion amounted to P372 million ($8.0 million) and the balance ofta3.4 billion ($69.8 million) represents non-current portion. The amount stands for the obligation to Power Sector Assets and Liabilities Management Corporation (PSALM) under the Asset Purchase Agreement (APA) for the purchase of the 112 MW Pantabangan-Masiway Hydro Electric Power Plant payable in 14 semi-annual installments at 12% interest compounded annually.

Obligations to Gas Sellers

Obligation to Gas Sellers totaled P4.6 billion ($94.0 million), lower by 47%, or ta4.1 billion compared to the previous year. The decrease was due to payments made in accordance with the Payment Deferral Agreement (PDA) between First Gen and the Gas Sellers.

FGPC and FGP's executed on March 22, 2006, a Settlement Agreement (SA) and PDA, wherein, the take-or- pay obligation was brought down to $32.7 million from $68.0 million for FGP and to $115.3 million from $163.4 million for FGPC. Additional reductions of $3.8 million for FGP and $9.6 million for FGPC were recognized under the SA and PDA to credit FGP and FGPC for gas consumption in excess of the Takc-Or-Pay Quantity for 2005. Through the Payment Deferral Agreement, FGPC and FGP will be paying for the remaining gas take-or-pay liabilities through quarterly payments with final maturity on December 26, 2009 at an interest rate of LIBOR plus margin. The SA and PDA allowed FGP and FGPC to prepay all or part of the outstanding balance and to "make up" the volume of gas up to the extent of the principal repayments made under the PDA for a longer period of time instead of the 10 Contract Year recovery period allowed under the GSPA. The SA and PDA became effective upon satisfaction of the conditions precedents set out in the said agreements on May 31,2006. The Annual Deficiencies, including accrued interest, are now presented as part of"current portion of obligation to Gas Sellers" and "Other noncurrent liabilities" accounts in the consolidated balance sheets. These were previously reported under "other noncurrent liabilities".

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5O Since FGPC and FGP's payment obligations under the Gas Sales and Purchase Agreement are ultimately pass- through Mcralco, the corresponding receivables from Mcralco, including accrued interest and VAT, are now presented as part of"Current portion of Receivable from Meralco" and "Receivable from Meralco" accounts in the consolidated balance sheets.

The current portion amounted to $37.2 million (_1.8 billion), while the non-current portion amounted to $56.9 million (_2.8 billion). The details are as follows:

2006 2005 Amounts in US$ and in Thousands FGP Balance at beginning of year $ 36,229 $ 55 473 Principal payments (10,231) Interest payments (5,787) Annual deficiency for the year 3,945 Application of excess gas consumed (3,781) Interest 2,326 3,039 Reversal of annual deficiency (22 283) $ 22_701 $ 36,229 FGPC Balance at begiuning o['year $128,399 $167,579 Principal payments (39,907) Interest. payments (21 _418) Alleged Annual deficiency for the year 5,433 Application of excess gas consumed (19,546) Interest 8,379 8,985 Reversal of annual deficiency (48,165) $71,340 $128,399_ Total $ 94,041 $164 628 Less current portion __ (377174) (80,099) $ 56,867 $ 84,529

Long-term debt, including current portion, decreased by 19%

Long-term debt, including current portion decreased by 19%, or _10.0 billion, to #42.0 billion due to the loan repayments during the period.

Advances jkom related parties, decreased by 100%

The First Holdings Group provides advances to associates and other related parties for working capital and investment requirements. Outstanding balance of the advances to associates and other related parties amounted to t20.6 billion and 1_0.3billion as of December 31, 2006 and 2005, respectively. These were classified under the deposits lbr future stock subscription of the Investments and Deposits account. Last year, advances from associates and other related parties amounted to t_0.1 billion.

Other noncurrent liabilities increased by 744%

Other noncurrent liabilities increased by 744%, or ta2.8 billion, to t_3.2 billion. The increase was brought about by the $50.1 million unearned income recognized to match the receipt to payments from Meralco for prepaid gas (See other noncurrent assets).

Total equity attributable to equity holders" of the Parent increased by 22%

Total equity attributable to equity holders of the Parent increased by 22%, or #6.5 billion, to t_35.9 billion. This was brought about by the increase in retained earnings by 38%, or #7.5 billion, to t_27.4 billion due to current period's net income.

51 Share in unrealized fair value gains on available-for-sale investments of an associate increased by 60%, or 123.0 million, to 128.0 million, representing the Parent Company's share in the associates' recognition of unrealized fair value gains of investments.

Cumulative translation adjustments, however, decreased by 354%, or 121.3 billion, to a negative balance of 12962 million, while share in cumulative translation adjustments decreased by 168% to 1253 million. Upon adoption of PAS 21, The Effects of Changes in Foreign Exchange Rates, the functional and presentation currency of thc First Gen Group, FSRI, First Private Power Corp., and First Sumiden Circuits, Inc. was changed from Philippine peso to U.S. Dollar on a retroactive basis and prior year consolidated financial statements were restated. The capitalized foreign exchange differences arising from the U.S. Dollar- denominated obligations were eliminated in the translation process without negatively affecting the retained earnings. For the purposes of consolidating the accounts of First Gen and FSRI to the First Holdings Group consolidated financial statements, the accounts of First Gen and FSRI were translated to Philippine peso, which is the Parent Company's presentation currency. Any exchange differences from retranslation was taken directly as cumulative translation adjustments.

Minority interest increased by 40%

Minority interest increased by 40%, or 128.1billion, to 1228.2 billion due to the increase in the portion of assets attributed to minority shareholders, primarily that of First Gen and FPIDC. The former was mainly due to the dilution of FPHC's equity interest as a result of the IPO.

PFRS requires changes in the presentation of minority interests in the consolidated balance sheets and consolidated statements of income. Minority interest is now presented as a footnote in the Statement of income and as part of Equity in the consolidated financial statements.

Item 7. Financial Statements

Summary of Significant Accounting Policies

Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis, except for certain derivative financial instnlments and certain qualifying financial assets and liabilities, short-term cash investments and available-for-sale investments included under "Other noncurrent assets" which have been measured at fair value.

The consolidated financial statements are presented in Philippine pesos, the Parent Company's functional and presentation currency. All values are rounded to the nearest million peso, except when otherwise indicated.

Statement of Compliance The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS) as adopted by the Philippine Securities and Exchange Commission (SEC).

Changes in Accounting Policies The accounting policies adopted arc consistent with those of the previous financial year except for the adoption of the tbllowing new and amended PFRS and Philippine Interpretations during the year. Adoption of these revised standards and interpretations did not have any significant impact on the First Holdings Group. Additional disclosures as required under such new and amended PFRS and Philippine Interpretations were included in the consolidated financial statements and disclosed in Note 2 to the consolidated financial statements.

f,

52 Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and the companies under its control (see Note 1 to the consolidated financial statements) as of December 31 of each year. Control is normally evidenced when the Parent Company owns, either directly or indirectly, more than 50% of the voting rights of a company's capital stock.

The financial statements of all the subsidiaries are prepared for the same reporting year as the Parent Company.

Subsidiaries arc consolidated from the date on which control is transferred to the First Holdings Group and cease to be consolidated from the date on which control is transl_rred out of the First Holdings Group.

The consolidated financial statements are prepared using uniform accounting policies lbr like transactions and other events in similar circumstances. Intercompany balances and transactions, including intereompany profits and unrealized income and losses, are eliminated.

Significant Accounting Judgments and Estimates

The preparation of consolidated financial statements in conformity with PFRS requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The judgments and estimates used in the accompanying consolidated financial statements are based upon management's evaluation of relevant fhets and circumstances as of the date of the consolidated financial statements, giving due consideration to materiality. Actual results could differ from such judgments and estimates.

The summary of these significant judgments and estimates and related impact and associated risks are disclosed in Note 3 to the consolidated financial statements.

The consolidated financial statements and schedules listed in the accompanying Index to Financial Statements and Supplementary Schedules are filed as part of this Form 1%A (pages 75 to 186).

Segment Reporting

The First Holdings Group is organized into fbur major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial information on business segments is presented in Note 4 to the consolidated financial statements.

53 Property, Plant and Equipment

The breakdown of property, plant and equipment (disclosed in Note 11 to the consolidated financial statements) if non-depreciable property is segregated from dcpreciable property, is as follows:

2006 Buildings, Other Structures Machinery, and Transportation Equipment and Construction I_and Improvements Equipment Others in Progress Total (TnMillions) Cost: Balance at beginning of year P2,469 P20,353- ia284 t_28,483 P43 t_51,632 Acquisitions through business combination (see Note 5) - 1,244 - 3,319 - 4,563 Additions 4 227 85 41 (1) 356 Disposals (71) - (7) (25) - (39) Reclassification .... 13 (7) 6 Foreign currency translation adjustments (76) (1,507) (14) (2,079) - (3,676) Adj ustnlent - - (4) (! 6) - (20) Balance at end of year 2,390 20,317 344 29,736 35 52,822 Accumulated depreciation, amortization and impairment losses: Balance at beginning of year - 3,368 93 8,518 - 11,979 Depreciation and amortization for the year - 1,371 36 1,779 - 3,186 Disposals - (I 3) (24) - (37) Reclassification - 2 - 2 Foreign currency translation adjustments - (122) 20 (886) - (988) Balance at end of year - 4,617 136 9,389 - 14,142 t_2,390 1_15_700 P208 P20,347 1_35 P38,680

2005 Buildings, Olhcr Structures Machinery, and Transportation Equipmentand Construction Land Improvements F,quipmcnt Others in Progress Total (In Millions) Cost: Balance at beginning of year P2,531 P21,567 P300 t_35,773 ta6 t_60,177 Additions - 5 3 2 37 47 Disposals (2) (3 5) (307) - (324) Foreign currency translation adjustments (62) (1,217) (4) (2,000) (3,283) Adjustment (see Note 33k) (4,985) (4,985) Balance at end of year 2 469 20,353 284 28,483 43 51,632 Accumulated depreciation, amortization and impairment losses: Balance at beginning o[' year - 2,210 65 6,751 - 9,026 Depreciation and amortization for the year 1 323 30 2 211 3 564 Disposals (2) (11 ) (13) Foreign currency translation adjustments - (163) (2) (433) - (598) Balance at end of year - 3 368 93 8,518 - 11 979 ta2,469 ta16,985 ta191 ta19,965 ta43 ta39,653

54 Accrued Liabilities

The consolidated financial statements as of December 31, 2006 provide the required disclosure for components of accrued liabilities totaling tal,412 million. As shown in Note 17 to the consolidated financial statements, accrued interest payable and the accruals on payroll were separately disclosed.

Minority Interest

The equity of minority interest in the subsidiaries amounted to ta28.219 million as of December 31, 2006 has been disclosed in the consolidated balance sheets

Key Performance Indicators

The following are the key pcrtbnnance indicators for the Company:

.For the Years Endcd December 31 2006 2005 Financial ratios Return on average stockholders' equity (%) 26.7% 19.3% Long-term debt (net) to equity ratio 1.08 1.72 Current ratio 2.35 2.08

Per share data (Pesos) Earnings Per Share (EPS) Basic t_15.14 t_8.80 Diluted 15.00 8.65 Book value t_61.86 t_51.55

Return on Equity increased from 19.3% in December 31, 2005 to 26.7% in Deccmber 31, 2006, due to higher income this year. Net income increased by 77% ovcr last year, while Stockholders' Equity improved by just 28%.

Long term Debt-to-Equity ratio dropped l?om 1.18 in 2005 to only 1.08 as of December 31,2006. Loan repayments during the year reduced the group's long term debt. This year's net income (t_8.7 billion) increased the Stockholders' Equity by 28%.

Current ratio increased from 2.08 in 2005 to 2.35 as of December 31, 2006. There was substantial increase (68%) in current assets this year as a result of the public offering of First Gen shares and sale of investments. Current liabilities increased by only 9%.

Earnings per share increased from _8.80 in 2005 to _a15.15 in December 31, 2006. The company registered t_8.7 billion net income in 2006 which is 77% higher than last year's earnings oft_4.9 billion. Weighted average number of shares increased by only 2.9% in 2006.

Book value increased to ta61.86 in 2006 from only ta51.55 in 2005. This year's net income of t_8.7 billion increased the Stockholders' Equity by 28% over last year. Total outstanding shares increased by only 1.8%.

55 Formula Return on A verage Stockholders' Equity - reflccts how much the firm has earned on the Net Income funds invested by the shareholders Average SHE

Long-term Debt to Equity Ratio - measures the company's financial leverage Long-term Debt Stockholders' Equity

Current Ratio - indicator of company's ability to pay short-term Current Assets obligations Current Liabilities

Earnings Per Share - the portion of company's profit allocated to each Nct Income outstanding share of common stock Weighted Ave. No. of Shares Outstanding

Book Value Per Share - measure used by owners of common shares in Stockholders' Equity a finn to determine the level of safety Weighted Ave. No. of Shares Outstanding associated with each individual share after all debts are paid

Thc following are the key performance indicators for the First Gen (Parent Company):

For the Years Ended December 31 2006 2005 Current ratio 39.86 6.76 Long-term debt to equity ratio (times) 0.22 0.35 Debt ratio 18.87% 30.57% ReaLm on assets (%) 10.85% 16.27% Revenue to total assets (%) 14.15% 19.14%

Favorable variance in current ratio is due mainly to the increase in the cash balance brought about by the proceeds from IPO and receipt of cash dividends from subsidiaries.

Favorable variance in Long-term debt to equity ratio is due mainly to the increase in equity as a result of the IPO and net income earned tbr the year.

Favorable variance in debt ratio is duc mainly to the increase in assets as a result of the lPO and receipt of cash dividends from subsidiaries.

Unfavorable variance in return on assets and revenue to total assets is due mainly to the increase in total assets because of the IPO and receipt of cash dividends from subsidiaries.

Formula Current Ratio - indicates the company's ability to pay short-term Current Assets obligations Current Liabilities

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56 Long-term Debt to Equity Ratio - measures the company's financial leverage Lone-term Debt Stockholders' Equity Debt Ratio - measures the percentage of funds provided Total Liabilities by the creditors to the projects Total Assets

Return on Assets - measures how the company uses its total Net Income assets to generate profits Total Assets

.Revenue to Total Assets - measures how the company uses its total Gross Revenue asscts to generate revenue Total Assets

The following are the key performance indicators for the First Gas Power Corporation:

For the Years Ended December 31 2006 2005

Current ratio 1.40 1.71 Long-tcrnl debt plus noncurrent liabilities to equity ratio (times) 0.93 1.40 Debt ratio 64.01% 68.33% Return on assets (%) 10.78% 11.42% Debt-to-e_ 1.78 2.16

Decline in the current ratio is caused by the decrease in total current assets mainly due to (a) the settlement of dispute with the gas scllers in March 2006 which resulted to reduction of about $9.5 million in gas take-or-pay receivables from Meralco pertaining to excess gas consumed in 2005 and scheduled payments of the principal and interest portion during the year; and, (b) the release oF the $26.5 million real estate reserve account following the completion of the required land titling on certain parcels of land. These decreases were offset by higher receivables l_om Meralco resulting from higher actual average dispatch and the rise in fuel prices. On the contrary, current liabilities increased due to higher scheduled loan repayments in 2007 and recognition of payables to the liquid fuel supplier amounting to $24.7 million. These factors were partially offset by settlement of obligations to the gas sellers.

Favorable variance in long-term debt to equity ratio is duc to higher scheduled loan repayments in 2007 and successful negotiation of the gas take-or-pay obligations which brought down the payables to the gas sellers (as discussed above). The increase in total equity is due mainly to the income earned during the year, net of cash dividends.

Favorable variance in debt ratio is due to mainly to the successful resolution of the disputes, as discussed above, and the continuous pay down of the Santa Rita debt. These factors led to the substantial decrease in total liabilities in 2006 as compared to the level of liabilities in 2005.

Unlhvorable variance in rctunl on assets ratio is due to lower net income during the year which is mainly attributable to provision of deferred income tax amounting to $14.6 million which is $16.9 million higher than last year's benefit of $2.3 million due to the appreciation of Philippine peso against U.S. Dollar and the fi)regone benefit due to ITH extension. Total assets decreased due to the settlement of the disputes with the gas sellers and Siemens that resulted in the reduction of receivables from Meralco (pertaining to the GSPA dispute) and release of real estate reserve account.

Debt-to-equity ratio has significantly improved due mainly to the successful resolution of the disputes with the gas sellers and Siemens and the continuous pay down of debt during the year.

.57 Formula Current Ratio - indicator of company's ability to pay short-term Current Assets obligations Current Liabilities

Long-term Debt Plus Noncurrent Liabilities to Equity Ratio - measures the company's financial leverage Long-term Debt and Noncurrent Liabilities Stockholders' Equity

Debt Ratio - measures the percentage of funds provided Total Liabilities by the creditors to the projects Total Assets

Return on Assets - measures how the company uses its total Net Income assets to generate profits Total Assets

Total Debt-to-Equity Ratio - measures the percentage of funds provided Total Liabilities by the creditors Total Stockholders' Equity

The following are the key peribrmance indicators for the FGP Corp.:

For the Years Ended December 31 FGP (San Lorenzo) ...... 20_06 2005

Current ratio 1.43 1.47 Long-term debt plus noncurrent liabilities to equity ratio (times) 1.64 1.92 Debt ratio 70.20% 72.11% Return on assets (%) 11.11% 10.57% Debt-to-equity ratio (times) 2.36 2.59

Slight decrease in current ratio is due mainly to the increase in payable to FGPC to cover its share in the purchase of liquid fuel during the 27-day Malampaya outage. Although, this was tempered with the increase in receivables from Meralco resulting from higher fuel prices and slightly higher average dispatch of 81.0% as compared to its 2005 average dispatch of 76.9%.

Favorable variance in return on assets is due mainly on the account of the following: [i] increase in net income caused by lower administrative expenses and provision for income tax and higher interest income; [ii] the ability to use the current fuel inventory as a result of the 27-day scheduled maintenance outage of the off-shore natural gas platform; [iii] decrease in property, plant and equipment caused by the regular depreciation and amortization expenses recognized for the year; and [iv] decrease in input value added tax caused by receipt of TCCs from BIR.

Favorable variance in long-term debt to equity ratio is due mainly to the decrease in long-term debt resulting from the regular loan payments and increase in retained earnings brought about by higher income earned for the year, net of cash dividends.

58 Favorable variance in total debt to total asset ratio is due mainly to the decrease in loans as a result of regular loan payments. Although tempered with the increase in payables to FGPC as discussed above.

Favorable variance in total debt to equity ratio is due mainly to the decrease in loans and increase in retained earnings resulting from the higher income earned for the year, net of cash dividends.

Formula Current Ratio - indicator of company's ability to pay short-term Current Assets obligations Current Liabilities

Long-term Debt Plus Noncurrent Liabilities to Equity Ratio - measures the company's financial leverage Long-term Debt and Noncurrent Liabilities Stockholders' Equity Debt Ratio - measures the percentage of funds provided Total Liabilities by the creditors to the projects Total Assets

Return on Assets - measures how the company uses its total Net Income assets to generate profits Total Assets

Total Debt-to-Equity Ratio - measures the percentage of funds provided Total Liabilities by the creditors Total Stockholders' Equity

FG Hydro

On September 8, 2006, First Gen Hydro Power Corporation (FG Hydro) submitted the highest bid _br the 112 MW Pantabangan-Masiway hydro-electric power plants (PAHEP/MAHEP). The bidding was conducted by PSALM in connection with the privatization of NPC assets.

On October 5, 2006,FG Hydro entered into an Asset Purchase Agreement (APA) with PSALM for the purchase of the PAHEP/MAHEP for a total consideration of $129 million.On November 15, 2006, all the closing conditions for the execution of the APA were satisfied and the purchase was completed. Following the completion of the conditions precedent and the execution of the respective Certificates of Closing of FG Hydro and PSALM, the operations and maintenance of PAHEP/MAHEP were successfully transferred to FG Hydro on November 18, 2006.

For the period Nov. 18 to (in PHP thousands) Dec. 31, 2006

Operating revenues .... 651,9i 8 Operating income ...... 595, 391 Net income 383,853

iT0tal Current Assets 7101025 total Non-Current Assets 6,421,681 total Current Liabilities 718,547 Other liabilities 3,4491'i"78 l'otal equity 2,963,381

59 FG Hydro's initial operations lbr 44 days from November 18, 2006 (the turnover date) to December 31, 2006 generated revenues of t_651.9 million. Net income for the same period amounted to _383.9 million alter deducting operation and maintenance expenses, depreciation, interest, salaries, taxes and licenses, and other administrative expenses totaling t_268.0 million.

Total assets as of December 31, 2006 stood at t_7.13 billion, the bulk of which pertains to the cost of the PAHEP/MAHEP.

Total liabilities as of December 31, 2006 amounted to t_4.17 billion. This pertains mainly to the Company's long-term obligations to PSALM representing the 60% deferred portion of the $129.0 million acquisition cost of the power plants.

Total equity amounted to t_2.96 billion, t_2.58 billion of which came from the initial investment of First Gen while the remaining ta383.9 million represents net income generated from its operations.

FG Hydro For the period Nov. 18 to Dec. 31, 2006 Current Ratio 0.99% Return on Assets 5.38% Long-term Debt Plus Non-Current Liabilities / Equity 1.16 Ratio (times) Debt Ratio 58.45% Debt-to-equity ratio (times) 1.41

Fonnula Current Ratio - indicator of company's ability to pay short-term Current Assets obligations Current Liabilities

Long-term Debt Plus Noncurrent Liabilities to Equity Ratio - measures the company's financial leverage Long-term Debt and Noncurrent Liabilitics Stockholders' Equity Debt Ratio - measures the percentage of funds provided Total Liabilities by the creditors to the projccts Total Assets

Return on Assets - measures how the company uses its total Net Income assets to generate profits Total Assets

Total Debt-to-Equity Ratio - measures the percentage of funds provided Total Liabilities by the creditors Total Stockholders' Equity

FG BUKIDNON

FG Bukidnon 2006 2005 Current Ratio 3.48 0.07 Return on Assets 8.21% 2.90% Debt Ratio 9.42% 90.60% Debt-to-equity ratio (times) 0.10 9.64

Zz

60 Favorable variance in current ratio is due mainly to the increase in the cash balance brought about by accumulation of cash from operations.

Favorable variance in return on assets is due mainly to the full year commercial operations for 2006 as compared to the three months operation in 2005.

Favorable variance in debt ratio and debt to equity ratio is due mainly to the payment of advances to First Gen.

Formula Current Ratio - indicator of company's ability to pay short-tema Current Assets obligations Current Liabilitics

Return on Assets - measures how the company uses its total Net Income assets to generate profits Total Assets

Debt Ratio - measures the percentage of funds provided Total Liabilities by the creditors Total Assets

Total Debt-to-Equity Ratio - measures the percentage of funds provided Total Liabilities by the creditors Total Stockholders' Equity

The tbllowing are the key perfi_rmance indicators for the First Philippine Infrastructure Development Corporation:

For the Years Ended December 31 2006 I 200.5

Current ratio 1.36 0.90 Debt-to-equity (DE) ratio 2.10 2.53 Net profit margin 0.17 0.22 Return on assets 0.05 0.05 Return on stockholders' equity 0.22 0.21

The Current Ratio increased from 0.90 in 2005 to 1.36 in 2006 mainly due to the reduction in current liabilities. Current liabilities went down from t_3.8 billion in 2006 to only ta2.4 billion due to the payment of la1.4 billion advances li_omparent company.

DE ratio improved ti'om last year's 2.53 to 2.10 (-20%) this year due to the reduction of dollar denominated liabilities and payment of advances from stockholders. Loan and interest payments brought down this year's liabilities. Equity slightly increased by the P204 million from income from toll operation.

Profit margin decreased from 0.22 in 2005 to only 0.17 in 2006. Net income went down by 12% from fal.13 billion in 2005 to only tal.0 billion this year. This year's gross revenues, however, improved by 12% to P5.7 billion ti'om only t25.1 billion in 2005.

6q Return on Assets remained at 0.05 this year. Net income decreased by 12% this year however, total assets also went down by 8% from ta21.2billion in 2005 to only t219.6billion in 2006. Assets went down by la1.6billion due to additional depreciation and the release of sinking fund.

Return on Equity also slightly increased from 0.21 in 2005 to 0.22 in 2006. Although the Company registered a net income of tal.0 billion this year, Stockholders' Equity increased by only t20.2 billion due to payment of dividends. The Company declared and paid t20.8billion dividends in 2006.

Formula

Current Ratio indicator of company's ability to pay short-term Current Assets obligations Current Liabilities

Debt-to-Equity Ratio shows how much capital was infused by the Total Liabilities stockholders for every amount of debt that Stockholders'Equity creditors have put in

Profit Margin indicator of company's profitability Net Income Revenues

Return on Assets measures how the company uses its total Net Income assets to generate profits Total Assets

Return on Stockholders' Equity reflects how much the firm has earned on the Net Income funds invested by the shareholders Stockholders' Equity

Item 8. Changes in and Disclosures with Accountants on Accounting and Financial Disclosures

None.

62 PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Registrant

Board of Directors

AUGUSTO ALMEDA-LOPEZ THELMO Y. CUNANAN JOSE P. DE JESUS PETER D. GARRUCHO, JR. OSCAR J. HILADO ELPIDIO L. IBANEZ EUGENIO L LOPEZ 111 FEDERICO R. LOPEZ MANUEL M. LOPEZ OSCAR M. LOPEZ VICENTE T. PATERNO ERNESTO B. RUFINO, JR. WASHINGTON Z. SYCIP

Executive/Corporate Officers

Mr. Oscar M. Lopez Chairman of the Board &Chicf Exec. Officer Mr. Augusto Almeda-Lopez Vice Chairman of the Board Mr. Elpidio L. Ibafiez President & Chief Operating Officer Mr. Erncsto B, Rufino, Jr. Senior Vice Pres., Treasurer & Chief Finance Officer Mr. Peter D. Garrucho, Jr. Managing Director for Energy Mr. Arthur A. De Guia Managing Director for Manufacturing & Portfolio Investments Group Mr. Benjamin K. Libom Senior Vice President Mr. Danilo C. Lachica Senior Vice President Mr. Federico R. Lopez Vice President & Assistant Treasurer Ms. Perla R. Catahan Vice President & Comptroller Mr. Ernesto A. Esguerra Vice President &Internal Auditor Mr. Reynaldo R. Sarmenta Vice President Mr. Anthony M. Mabasa Vice President Mr. Leonides U. Garde Vice President Mr. Ricardo B. Yatco Vice President Mr. Hector Y. Dimacali Vice President Mr. Richard B. Tantoco Vice President Mr. Francis Giles B. Puno Vice President Mr. Cesar Z. Gomez Vice President Mr. Victor Emmanuel B. Santos, Jr. Vice President Mr. Oscar R. Lopez, Jr. Vice President Mr. Robert C. Chan Vice President Mr. Rodrigo E. Franco Vice President Mr. Benjamin R. Lopez Vice President Mr. Enrique I. Quiason Corporate Secretary & Compliance Officer Mr. Rodolfo R. Waga, Jr. Vice President, Asst. Corp. Secretary & Asst. Compliance Officer

63 Independent Directors Mr. Oscar J. Hilado Mr. Washington SyCip Mr. Vicente T. Paterno

Directors and executive/corporate officers hold office tbr a period of one (1) year and until such time when their successors arc elected and have qualified.

BOARD OF DIRECTORS

OSCAR M. LOPEZ Oscar M. Lopez has been Chairman and Chief Executive Officer of the 77 Years Old Company since 1986. Mr. Lopez is the Chairman of the Board of Filipino Directors of Benpres Holdings Corp., Lopez, Inc., First Gen Corp., Manila North Tollways Corp., Tollways Management Corp., First Ballbur, Inc., First Phil. Electric Corp.,First Phil. Industrial Corp., First Phil. Infrastructure Development Corp., First Phil. Industrial Park, Inc. and First Sumiden Circuits, Inc., among others. Bctbrc joining the company, he was the President of Benpres Corp. from 1973 to 1986. He studied at the liarvard College and graduated cure laude (Bachelor of Arts) in 1951. He finished his Masters of Public Administration at the Littauer School of Public Administration, also at Harvard in 1955.

AUGUSTO ALMEDA-LOPEZ Augusto Almeda-Lopez has been a Director of the company sincc 78 Years Old 1986 and Vice-Chairman since 1993. Mr. Almcda-Lopez is also the Filipino Chairman of the Board of ADTEL, Inc. and ACRIS Corporation, Vice Chairman of ABS-CBN Broadcasting Corp. and a Director of First Phil. Industrial Corp., First Electro Dynamics Corp., Philippine Electric Corp., Bayan Telecommunications, Inc., SkyvisJon Corp., Radio Communications of the Phils., Inc. and a Trustee of ABS-CBN Foundation, Inc. He graduated with an Associate in Arts degree i?om Ateneo de Manila and a Bachelor of Laws degree f?om the University of the Philippines. He placed fourth in the 1952 Bar Exams.

THELMO Y. CUNANAN Mr. Thelmo Y. Cunanan has been a Director of the Company since 69 Years Old October 2004.Mr. Cunanan is a Lieutenant General at the Armed Filipino Forces of the Philippines. He was an Ambassador Extra-ordinary & Plenipotentiary to the Royal Kingdom of Cambodia and served as the President & CEO of the Philippine National Oil Company. He is currently the Chairman of the Social Security Commission. He graduated with a Bachelor of Science degree in Military Art & Engineering from the Philippine Military Academy in 1957 and the U.S. Military Academy in 1961. He finished his Masters in Business Administration at the University of the Philippines.

JOSE P. DE JESUS Jose P. De Jesus is the President & Chief Executive Officer of the 72 Years Old Manila North Tollways Corporation since 2000. lie was Executive Filipino Vice President of Philippine Long Distance Telephone Co. from 1993 to 1999 and Chairman of the Manila Waterworks & Sewerage System from 1992 to 1993. He was Secretary of the Dept. of Public Works & Highways from January 1990 up to February 1993, He graduated with

8

64 an AB Economics degree and Master of Arts in Social Psychology from the Ateneo de Manila University. He pursued his Graduate Studies in Human Development at the University of Chicago in 1968.

PETER D. GARRUCHO, JR. Peter D. Garrucho, Jr. has been Managing Director of the company 62 Years Old since 1994. lie has been a member of the Board for the same period. Filipino Mr. Garrucho is the Vice Chairman & CEO ot" First Gen Corp., First Gas Holdings, First Gas Power, FGP Corp. and First Gas Pipeline. He is the President and CEO of First Private Power Corp., Bauang Private Power Corp. and First Gen Renewables. He was tbrmerly Secretary of the Dcpartment of Trade & Industry (1991-1992) and of the Dcpartment of Tourism (1989-1990). He has likewise served as Executive Sceretary& Adviser on Energy Affairs in the Office of the President of the Philippines in 1992. Prior to joining government in June 1989, he was President of C.C, Unson Co., Inc., which hc joined in 1981 after serving as a Full Professor at the Asian Institute o1" Management. He has an AB-BSBA degree from De La Salle (1966) and an MBA degree from Stanlbrd University (1971 ).

OSCAR J. HILADO Oscar J. Hilado has been a Director of the company since 1996. Mr. Independent Director Hilado is the Chaimlan and Chief Executive Officer of the Philippine 69 Years Old Investment Management (PHINMA), Inc. He is also the President of Filipino Union Cement Corp. and Atlas Ccmcnt Corp. He is currently Chairman of the Board of Bacnotan Consolidated Industries, Inc., Union Cement Corp., Phinma Property Holdings Corp. and Microtel Development Corp., among others, and Vice Chairman of Trans Asia Oil & Energy Development Corp., Trans Asia Power Generation Corp., Bacnotan Steel Industries, Inc. and Bacnotan Industrial Park Corp. lie graduated with Highest Honors and with a Gold Medal for General Exccllence and a Bachelor of Science in Commerce Degree from De La Salle College (Bacolod). Ile pursued his Degree of Masters in Business Administration at the llarvard Graduate School of Business Administration from 1960-1962. Mr. Hilado is a Certified Public Accountant.

ELPIDIO L. IBANEZ Elpidio L. lbafiez has been a Director of the company since 1988 and 56Years Old was promoted to the position President & COO in May 1994, a Filipino position which he holds up to the present. Mr. Ibafiez was an Executive Vice President from 1987 to 1994. He was Vice President from 1985 to 1987. He is Chairman of the Board of First Batangas Ilotel Corporation and the President of First Philippine Union Fenosa, Inc. IIe is also a Director of various FPHC subsidiaries and affiliates such as First Balfour, Inc., First Philippine Electric Corp., First Phil. Industrial Corp., First Phil. Infrastructure Development Corp., First Philippine Industrial Park, Inc., Manila North Yollways Corp., Philippine Electric Corp. and Securities Transfer Services, Inc. He graduated with an AB Economies Degree from Atenco de Manila University. Hc pursued his MBA at the University of the Philippines in 1975.

EUGENIO LOPEZ III Eugenio L. Lopez 111 is the Chairman of the Board of ABS-CBN 55 Years Old Broadcasting Corporation and has held this position since December Filipino 10, 1997. He joined ABS-CBN in 1986 as Finance Director belbre he became General Manager in 1988 and thereafter President in 199Y He worked as General Manager of the MIS Group, Crocker National Bank in San Francisco, USA. Mr. Lopez is a recipicnt of various Philippine

65 broadcasting industry awards. Mr. Lopez served as Director of ABS- CBN from 1986 to 1997 and as Chairman and CEO since 1997. He graduated with a Bachelor of Arts degree in Political Science from Bowdoin College and has a Masters degree in Business Administration from Harvard Business School.

FEDERICO R. LOPEZ Federieo R. Lopcz has been a Vice President and Asst. Treasurer of the 45 Years Old company since 1993. He is the President & COO of First Gen Corp., Filipino First Gas Power Corp., First Gas Holdings Corp. and FGP Corp. He is currently the President of First Philippine Conservation, Inc. He is also a member of the Board of Directors of various subsidiaries such as First Balfour, Inc., First Electro Dynamics Corp., First Phil. Industrial Corp., Manila North Tollways Corp., Philippine Electric Corp., First Gen Renewables, Inc., ABS-CBN Broadcasting Corp. and Bauang Private Power Corp. He was an Asst. Vice President from October 1, 1990 to February 2, 1994. He graduated with a Bachelor of Arts Degree with a Double Major in Economics & International Relations (Cum Laudc)I_om the University of Pennsylvania in 1983.

MANUEL M. LOPEZ Manuel M. Lopez has been a Director of the company since 1992. Mr. 64 Years Old Lopez is the Chairman & Chief Exec. Officer ot" Manila Electric Filipino Company. He is also the Chairman of Rockwell Land Corp. and the Philippine Commercial Capital, Inc. He is also a Director of ABS- CBN Broadcasting Corp., Benpres Holdings Corp., First Private Power Corp. and lnaec Development Corp. He was an Executive Vice President of Benpres Corp. from 1973 to 1986 and of AFISCO Insurance Corp. from 1975 to 1982. He graduated with a Bachelor of Science Degree in Business Administration from the University of the East in 1967.

VICENTE T. PATERNO Vicente T. Paterno has been a Director of the company since 1993. Independent Director Mr. Patcrno is the Founding C.hairman of Philippine Seven Corp. since 81 Years Old 1982 and the Chairman of Phil-Seven Holdings Corp. since 2000. He Filipino served as a Senator from July 1987 to June 1992 and Chairman of the Committee on Economic Affairs. He likewise served as Deputy Executive Secretary for Energy, Office of the President, from April 1986 to February 1987. tie was Chairman and President of the Philippine National Oil Company from March 1.986 to February 1987 and served as Minister of Public Highways in July 1979 until be resigned in November 1980. He graduated with a Bachelor of Science in Mechanical Engineering Degree from the University of the Philippines and pursued his Master of Business Administration (with Distinction) at the Harvard University.

ERNESTO B. RUFINO, JR. Ernesto B. Rufino, Jr. is the Chief Finance Officer/Treasurer, holding 66 Years Old this position since 1994 and a Senior Vicc President of the company Filipino since 2005. He is also the President of Health Maintenance, Inc. and Securities Transfer Services, Inc. He was a Director of the company from 1986 until 2001. He was re-elected Director of the company on January 30, 2003 and has occupied that position since then. He is also thc Chairman & President of Zyloid Management, Inc. and a Director ot' First Balfour, inc., First Phil. Electric Corp., First Phil. Industrial Park, Inc., First Phil. Union Fenosa, Inc., Inaec Development Corp., Philippine Electric Corp., and Trust International Paper Corp. Before joining the company, he scrvcd as the President of Merchants Investments Corp. and Chaimaan & CEO of Mcvcr Films, Inc. He has

6

_4_ ,_

66 an AB, BSBA degree from Dc La Salle and an MBA degree from Itarvard University.

WASHINGTON Z. SYCIP Washington Z. Sycip has been a Director since 1997. Mr. Sycip is the Independent I)ircctor Founder of the SGV Group, auditors and management consultants, 85 Years Old with operations throughout East Asia, and advisor to Arthur Andersen. American He is the Chairman of the Board of Trustees and Board of Governors of the Asian Institute of Management. Ile was Chairman of the Euro- Asia Centre, IN SEAD Fountainbleau from 1981 to 1988 and Presidcnt of the International Federation of Accountants from 1982 to 1985. He graduated with a Bachelor of Science in Commerce degree (Summa Cure Laude) and a Master of Science in Commerce degree (Meritissimus) from the University of Santo Tomas, Philippines. He pursued his Master of Science in Commerce at Columbia University, New York and was admitted to the Beta Gamma Sigma, Honorary Business Society.

FORELECTIONTO THE NEW BOARD SEATS ONCE CREATED

CESAR B. BAUTISTA Cesar B.Bautista was an Ambassador Extraordinary & Plenipotentiary 75 Years Old to the United Kingdom of Great Britain and Northern Island, Republic Filipino of Ireland and Republic of Iceland. He was a Permanent Representative to the United Nations International Maritime Organization and a Special Presidential Envoy to Europe. Ambassador Bautista served as Secretary of the Department of Trade and Industry for five years. He served as Chairman of the Board of Investments, Export Development Council, Industry and Development Council, WTO/AFTA Advisory Commission, the National Development Corp., the Presidential Committee on National Museum Development and Cabinet Committee on Tariff and Related Matters, Economic Growth Areas/Zones, etc. He was President and Chairman of Philippine Refining Company Inc.-Unilever for eight years. He graduated with a dcgree in Bachelor of Science in Chemical Engineering from the University of the Philippines and pursued his Master's Degree in Chemical Engineering at the Ohio State University.

ANGEL S. ONG Angel S. Ong has been the President & COO of Benpres Holdings 57 Years Old Corporation since 1998. He is currently a member of the Board of Filipino Directors of Bayan Teleconmmnications Holdings Corp., Bayan Telecommunications, inc., Manila North Tollways Corporation and First Philippine Infrastructure Development Corp. He worked as Vice President-finance for Bayan Telecommunications, Inc. t_om 1994 to 1998 and Treasurer & Board Director for Mariwasa Manufacturing, Inc. He pursued his Master of Business Administration degree at the University of the Philippines in 1974. He is a Certified Public Accountant and placed 15thin the 1971 CPA Board Examinations.

EXECUTIVE/CORPORATE OFFICERS

ARTHUR A. DE GUIA Arthur A. de Guia has been the Managing Director lbr Manufacturing 54 Years Old and Portfolio Investments since he joined the company in June 1997. Filipino He is currently the President of First Philippine Electric Corp. and First Sumiden Realty, Inc. He is also a member of the Board of Directors of various FPHC subsidiaries and affiliates. He worked as a Manufacturing Director for the Malaysian Operations of Colgate- Palmolive Company l_om 1994 to 1997. He graduated Cum Laude with a Bachelor of Science in Electrical Engineering degree from the Mapua Institute of Technology in 1973. He pursued his Master of Engineering in Industrial Management degree at the Asian Institute of Technology (Thailand) from 1974 to 1975 and his Doctor of Engineering in Industrial Engineering degree from the University of California (Berkeley) from 1979 to 1983.

BENJAMIN K. LIBORO Bcniamin K. Liboro has been a Senior Vice President since 2005 and 56 Years Old was a Vice President of the company since 1987. He is currently a Filipino Director of First Philippine Electric Corp., First Philippine Lending Corp., Philippine Electric Corp., Sibulan Ice Plant & Cold Storage, Inc. and Delbros, Inc. He was a Senior Manager from 1979 to 1980 and an Asst. Vice President from 1981 to 1986. He finished his Bachelor of Arts in Economics degree from the Atenco de Manila University in October 1971 and pursued his Master of Science in Business Administration degrcc at the University of London in June 1975.

DANILO C. LACHICA Danilo C. Lachiea has been a Senior Vice President of the company 52 Years Old since July 2005. He was a Vice President l_om May 1999 until June American 2005. He is currently the President of First Sumiden Circuits, Inc. and is a Director & Managing Director for Electronics of First Philippine Electric Corp., Philippine Electric Corp. and First Electro Dynamics Corp. He graduated with a B.S. in Electrical Engineering degree from the University of the Philippines and pursued his M.B.A. at the San Jose State University, San Jose, California, U.S.A. lie is currently taking up his D.B.A. degree at De La Salle University.

REYNALDO R. SARMENTA Reynaldo R. Sarmenta has been a Vice President of the company since 65 Years Old 1987. He was an Asst. Vice President from 1982 to 1986. IIc is Filipino currently a Director of Philippine Electric Corp. and First Electro Dynamics Corp. He earned a degree in Bachelor of Science in Commerce major in Accounting and Auditing from the Far Eastern University from 1959 to 1961. He completed the academic requirements of a program leading to a degree of Masters in Business Administration f¥om the La Salle Graduate School of Business.

PERLA R. CATAHAN Perla R. Catahan has been a Vice President and Comptroller of the 54 Years Old company since 1994. She is a Director of First Philippine Electric Filipino Corp., Philippine Electric Corp. and Securities Transfer Services, Inc. She is also the comptroller of various FPHC subsidiaries. She was an Asst. Vice President of the Comptrollership Group from 1986 to 1994. She graduated Magna Cum Laude with a Bachelor of Science in Commerce (Major in Accounting) degree from the Philippine College of Commerce in 1974 and pursued her Master in Business Management degree at the Asian Institute of Management in 1983.

ANTHONY M. MABASA Anthony M. Mabasa has been a Vice President of the company since 47 Years Old 1994. He is currently the President of Toilways Management Corp. Filipino and a Director of First Electro Dynamics Corp. He was President of First Philippine Industrial Corp. from 2000 to 2003, an Executive Vice President of First Balfour, Inc. l_om 1998 to 1999 and President & COO of ECCO-Asia from August 1994 to October 1999. He earned a degree in Bachelor of Science in Commerce Major in Management of

68 Financial Institutions from the De La Salle University in 1979. He pursued his Master in Business Administration degree at the University of the Philippines in 1994.

LEONIDES U. GARDE Leonidcs U. Garde has been a Vice President of the company since 49YearsOld 1994. He was an Asst. Vice President from 1991 to 1993. He is Filipino currently the President & COO of First Philippine Industrial Corp. and a Director of Philippine Electric Corp. lte earned a degree in BSME from the University of the Philippines in 1979 and pursued his MBA at the Ateneo Graduate School of Business from 1981 to 1984.

RICARDO B. YATCO Ricardo B. Yatco has been a Vice President of the company since 52 Years Old 1996. lie is currently the President of First Gen Renewables, Inc. Filipino Prior to this posting, he was a Vice President of First Philippine Industrial Corp. He earned a degree in BS Industrial Management Engineering fi'om the De La Salle University from 1972 to 1977 and pursued his MBA at the University of San Francisco l?om 1980 to 1982.

ERNESTO A. ESGUERRA Ernesto A. Esguerra has been a Vice President for Internal Audit of the 55 Years Old company since September 1995. He was Asst. Vice President from Filipino 1990 to 1995. He earned a Bachelor of Science-Accounting degree from the Manuel L. Quczon University from 1974 to 1977 and pursued his M.B.A. at the De La Sallc University from 1991 to 1994.

RICHARD B. TANTOCO Richard B. Tantoco has been a Vice President of the company since 40 Years Old May 1997. He is currently a Senior Vice President for Gas Business Filipino Development of First Gen Corp. He is also a director and officer of First Gen subsidiaries and affiliates. He has a BS in Business Management degree from the Ateneo de Manila University where he graduated with honors and an MBA in Finance from the Wharton School of Business of the University of Pennsylvania.

FRANCIS GILES B. PUNO Francis Giles B. Puno has been Vice President since he joined the 42 Years Old company in June 1997. He is currently a Senior Vice President & Filipino Chief Finance Officer of First Gcn Corp. He is also a director and officer of First Gen subsidiaries and affiliates. He has a Bachelor of Science degree in Business Management from the Ateneo de Manila University and a Master o1"Management degree from Northwestern University's Kellogg Graduate School of Management.

HECTOR Y. DIMACALI Hector Y. Dimacali has been a Vice President of the company since 56 Years Old April 1997. He is currently the President of First Philippine Industrial Filipino Park, Inc. He was also a Director and President of First Sumiden Realty in 1997. He is also a Director of First Philippine Electric Corp. and First Batangas Hotel Corp. He was an Asst. Vice President from December 1994 to March 31, 1997. He earned a degree in B.S.E.E. from the University of the Philippines in 1973.

69 CESAR Z. GOMEZ Cesar Z.Gomez has been Vice President since December 1997. He is 55 Years Old a Director of First Gen Renewables, Inc. and First Philippine Lending Filipino Corp. and a Public Relations Officer of the Lopez Group Foundation, Inc. He was an Asst. Vice President from September 1993 to November 1997. lte earned an A.B. Philosophy degree from the Ateneo de Manila University and pursued his Masters in Business Administration at the University of the Philippines.

VICTOR EMMANUEL B. SANTOS, JR. Victor Emmanuel B. Santos, Jr. has been a Vice President since March 39 Years Old 30, 2001. He is currently a Vice President and Compliance Officer of Filipino First Gen Corp. and Vice President of FGP Corp. Before joining FPHC, he worked as Director for Global Markets at Enron Singapore. He earned his MBA in Finance at Fordham Univcrsity, New York in 1995.

OSCAR R. LOPEZ, JR. Oscar R. Lopez, Jr. has been a Vice President since May 2001. He is 48 Years Old currently the Head ot' the Administration Department of FPHC. He is Filipino currently the President of INAEC Development Corp. and First Philippine Development Corp. and is a Director of First Philippine Electric Corp. He has been with the company since October 1996. He went to college at the De La Salle University and attended the EMBA Program o1"the Asian Institute of Management.

ROBERT C. CHAN Robert C. Chan has been a Vice President since May 2001. He is a 59 Years Old Director and Managing Director lbr Electricals of First Philippine Filipino Electric Corp. and is the President of First Philippine Power Systems. He has been the President of Philippine Electric Corp. since 1995 and of First Electro Dynamics Corp. since 2000. tic was Executive Vice President from 1994 to 1995 and Vice President-Marketing from 1987 to 1994 of Philippine Electric Corp. He earned a degree in Bachelor of Science in Electrical Engineering from the Mapua Institute of Technology in 1970 and pursued his Masters in Business Administration at the University of the Philippines from 1982 to 1984.

RODRIGO E. FRANCO Rodrigo E. Franeo has bcen a Vice President since April 2003. Mr. 48 Years Old Franco came from JP Morgan Chase Bank where he workcd for twenty Filipino (20) years in Planning & Financial Management and Corporate Finance. Mr. Franco is part of FPHC's finance team and is presently the Chief Operating Officer, Executive Vice President, Treasurer & Chief Finance Officer of Manila North Tollways Corp. He earned a degree in Bachelor of Science in Management Engineering from the Ateneo de Manila University in 1981. l-le attended Ateneo de Manila University's Graduate School of Business from 1983 to 1988.

70 BENJAMIN R. LOPEZ Benjamin R. Lopez has been with FPItC since October 1993. He was 37 Years Old assigned to Rockwell Land Corporation in May 1995 where he held Filipino various posts in Business Development, Sales and Marketing. Prior to his recall to FPHC in June 2004, he was a Vice President for Project Development of Rockwell. He was promoted to Vice President of FPHC in November 2006. He is also a member of the Board of Directors of various subsidiaries such as First Philippine Electric Corp., Philippine Electric Corp., MHE-Demag (P), Inc. and First Electro Dynamics Corp. He graduated with a Bachelor of Arts degree in International Affairs in 1992 from the George Washington University. He pursued his Executive Masters in Business Administration degree at the Asian Institute of Management in 2001.

ENRIQUE 1. QUIASON Enrique I. Quiason has been the Corporate Secretary of the company 46 Years Old since 1993. lle is a Senior Partner of the Quiason Makalintal Barot Filipino Tortes & lbarra Law Firm. lie is also the Corporate Secretary of Benpres Holdings Corp. (BHC) and Asst. Corporate Secretary of ABS- CBN Broadcasting Corp. He is also the Corporate Secretary and Asst. Corp. Secretary of various subsidiaries or affiliates of FPHC and BHC. He graduated with B.S. Business Economics degree in 1981 and with Bachelor of Laws degree in 1985 fi'om the University of the Philippines. He pursued a degree in LL.M. Securities Regulation at Georgetown University in 1991.

RODOLFO R. WAGA, JR. Rodoltb R. Waga, Jr. has been a Vice President of the company since 47 Years Old May 2001 and is the Asst. Corporate Secretary of the company. He is Filipino also the Corporate Secretary and Asst. Corporate Secretary of various FPHC subsidiaries and affiliates. Ite was Asst. Vice President from 1997 to 2001. He graduated Magna Cum Laude with a Bachelor of Arts degree Major in Economics ti_om the Xavier University (Ateneo de Cagayan) in 1979 and a Bachelor of Laws dcgree from the University of the Philippines in 1983. He completed the academic requirements for his EMBA at the Asian Institute of Management.

(2) Identity of Significant Employees N/A

(3) Family Relationships

a) Oscar M. Lopez and Manuel M. Lopez arc brothers. b) Ernesto B. Rufino, Jr. is the brother-in-law of Oscar M. Lopez. His sister, Mrs. Consuelo Rttfino-Lopez, is the wife of Oscar M. Lopez. c) Federico R. Lopez, Oscar R. Lopez, Jr. and Benjamin R. Lopez are the sons of Oscar M. Lopez. d) Eugenio L. Lopez I11is the nephew of Oscar M. Lopez and Manuel M. Lopez.

(4) The registrant is not aware of any legal proceeding of the nature required to be disclosed with respect to any director and executive officer.

71 Item I0. Compensation of Directors and Executive Officers

Oscar M, Lopez 7Chairman of the Board & CEO Elpidio L. lbafiez - Director, Presidcnt& COO Ernesto B. Rufino, Jr. - Director, Senior Vice President & CFO Arthur A. De Guia - Managing Director- MPIG Benjamin K. Liboro - Senior Vice President TOTAL _ (Estimated) 2007 81,234,274 85,695,228 6' ..... (Actua!) .... 2006 77,514,966 74,694,806 0 .... (Actual) 2005 66.:643,690 52,618,752 ...... 0

All other directors ...... (Estimated) 2.007 0 27,000,000 0 ..... (Actual) 2006 _.. 0 27,680,000 0. (Actual) 2005 0...... 17,180,000 0

AI! other officcrs ...... (Estimated) 21J'07 6.1,061,040 50,884,200 0 as a Group unnamed (Actual) 2006 62,154,!92 46,332,637 .O ...... (Actual) 2005 50,785,238 31,866,482 0

,,,,,=,, ,

1 Includes projected movements of personnel who would qualify. 2 Leave conversion

Compensation of Directors

(A) Standard Arrangements. Directors receive a per diem of t_2,000 for every meeting. Under the Company's By-Laws, directors may receive up to a maximum of Three Fourths (3/4) of One Percent (1%) of the Company's annual profits or net carnings as may be determined by the Chairman of the Board and the President.

(B) Othcr Arrangements. The Company does not have any other arrangements pursuant to which any dircctor is compensated directly or indirectly for any service provided as a director.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

(A) All employees of the Company, including officers, sign a standard engagement contract which states their compensation, benefits and privileges. Under the Company's By-Laws, officers and employees may receive not more than Two and Three Fourths (2 ¾ %) Percent of the Company's annual profits or net earnings as may be determined by thc Chairman of the Board and the President. The Company maintains a qualified, non-contributory trusteed pension plan covering substantially all employees.

(B) The Company does not have any compensatory plan or arrangement resulting from the resignation, retirement, or any other termination of an executive officer's employment with the Company or its subsidiaries or fi"om a change in control of the Company or a change in an executive officer's responsibilities following a change-in-control except for such rights as )nay have already vested under thc Company's .Retirement Plan or as may be providcd for under its standard benefits.

_=___(

72 Item I1. Security Ownership of Certain Beneficial Owners and Management

A. Security Ownership of Beneficial Owners (as Of December 31, 2006)

Amount and Nature Percent of Record/Beneficial of C lass Name and Address Owncrship (indicate Title of Class Record/Beneficial Owner by 'r' or 'b') Common Benprcs I loldings Corp.* 254,121,719 r 43.82% 5/F Bcnpres Bldg. Meralco Avenue cot. Exchange Road Pasig City

Common-Filipino PCD Nominee Corporation** 129,168,892 r 22.27% Non-Filipino G/F Makati Stock Exchange 132,774,382 r 22.89% 6767 Ayala Avenue, Makati City

* the owner to the extent o1"43.82% is Benpres Holdings Corporation. The Chairman and Chief Executive Officer of Benprcs Holdings Corporation is Oscar M. Lopcz. ** participants owning more than 5% of the company's voting securities under PCD Nominee Corporation :

Percent of Shareholdings No. of Shares Social Security System 55,222,163 9.52% SSS Bldg., East Ave., Diliman, Quezon City The Hongkong & Shanghai Banking Corp. Custody & Clearing Dept. 30/F Discovery Suites 25 ADB Ave., Ortigas Ctr., Pasig City Filipino 0 0% Non-Filipino 68,902,866 11.88%

Standard Chartered Bank 47,087,175 8.12% 6756 Ayala Avenue Makati City

B. Security Ownership of Management

Amount and Nature Percent of Record/Beneficial of Class Name and Address Ownership (indicate Title of Class Record/Beneficial Owner by 'r' or 'b') Common Oscar M. Lopez 5,307,475 r 0.91511537%

Common Elpidio L. Ibafiez 362,296 r 0.06246711%

Common Ernesto B. Rufino, Jr. 985,244 r 0.16987587%

Common Peter D. Garrucho, Jr. 364,160 r 0.06278850%

Common Arthur A. De Guia 561,628 r 0.09683596%

Common Shares owned by other directors and officers 3,106,006 r 0.53553786%

Attached as Annex "A" is a complete summary of the ownership of shares in the Company by all of its officers and directors as of December 31,2006.

73 Item 12. Certain Relationships and Related Transactions

The Group has transactions within and among the consolidated entities, with associates and other related parties. PAS 24, "Related Party Disclosures," defines a related party as a party, whether a juridical or natural person, that has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Transactions among members of the Group and the related balances are eliminated in the consolidation and are no longer included in the disclosures. The significant transactions with associates and other related parties at market prices in the normal course of business, and the related outstanding balances are disclosed below and in Note 28 to the consolidated financial statements.

In April 2003, the Parent Company acquired a parcel of land at Rockwell Center from ROCKWELL with a total area of 5,220 square meters (including right of way of 2,212 sq.m) fbr a total consideration of ta267 million. The property was intended for future joint venture development with ROCKWELL. The said property is subject of a lease agreement for three years with rentals covered by an escalation rate of 10% per annum.

On May 3, 2006, ROCKWELL repurchased the aforementioned lot (inclusive of the right of way) for a total consideration ofta408 million, resulting in a gain amounting to P90 million.

On December 23, 2002, First Phil. ltoldings Corp. and Benpres Holdings Corp entered into a Memorandum of Agreement and Deed of Assignment for the modification of the ownership structure of First Phil. Infrastructure Development Corp., the Lopez Group's holding company for Manila North Tollways Corp. shares. Pursuant to the MOA, FPHC acquired from BHC the latter's interest in FPIDC of about tal. 1 billion.

PART IV - CORPORATE GOVERNANCE

FPHC's commitment to sound corporate governance remains on track since its adoption of a Manual on Corporate Governance on 1 January 2003. FPtIC had previously adopted a Manual on Anti-Money Laundering as well. Good govcrnance continues as the linchpin to advance FPHC's corporate commitments to all of its stakeholders. As stated in the Manual, corporate governance is an indispensable component of "sound strategic business management to improve the economic and commercial prosperity of the corporation and enhance shareholdcr value."

It has entrusted the company's governance in the capable hands of individuals of proven competence, probity and integrity supported by structures that have been created for this purpose. These individuals have been chosen as members of FPHC's standing committees.

FPHC's Board of Dircctors are: Mr. Oscar M. Lopcz (Chairman), Mr. Augusto Almeda-Lopez (Vice Chairman), Mr. Elpidio L. Ibafiez (President), Mr. Thelmo Y. Cunanan, Mr. Peter D. Garrucho, jr., Mr. Oscar J. Hilado, Mr. Jose P. De Jesus, Mr. Eugenio Lopcz Ill, Mr. Manuel M. Lopez, Mr. Vicente T. Paterno, Mr. Washington Z. Sycip, Mr. Federico R. Lopez and Mr. Ernesto B. Rufino, Jr.

The Board as a whole acts as the nomination committee which selects the directors and passes upon their qualil]cations as board members. With respect to nominations for independent directors, the members or"the nomination and election committee are composed of the tbllowing: Mr. Oscar M. Lopez as Chair, and all the independent directors, namely, Mr. Oscar J. Hilado, Mr. Viccnte T. Paterno and Mr. Washington Z. Sycip, as members. The nomination committee sclccts the directors and passes upon their qualifications as board members, to insure a mix of proficient directors who can add value and "bring prudent judgment to bear on the decision makin_ orocess."

74 The compensation and remuneration committee which oversees having an appropriate rewards system is composed of the tbllowing: Mr. Oscar M. Lopcz (Chairman), Mr. Washington Z. Sycip and Mr. Vicente T. Paterno. The policy is to promote a culture that supports enterprise and innovation, with suitable performance related rewards that help motivate management and the employees to be effective and productive.

With respect to the Chairman's compensation and remuneration, the committee which reviews the same is composed of Mr. Augusto Almeda-Lopez (Chairman), Mr. Washington Z. Sycip and Mr. Vicente T. Paterno. The audit committee which evaluates financial and accounting matters is composed of the following: Mr. Oscar J. Hilado (Chairman), Mr. Peter D. Garrucho, Jr. and Mr. Washington Z. Sycip. This committee, among other things, has the duty to cnsure that transparency in the financial management system in place and likewise aims to ensure the integrity of the same. The committee's work is enhanced by the assistance of external and internal auditors.

First Holdings has an Internal Audit Group (IAG) headed by a vice president with a manpower complement of eight senior and jtmior audit personnel, all CPAs and most of whom are Certified Internal Auditors. The IAG reports to the Board through the Audit Committee.

The IAG provides assurance and consulting functions lbr First Holdings and its subsidiaries in the areas of internal control, corporate governance and risk management. Its Internal Audit Activities are all in accordance with the International Standards for Professional Practice o f Internal Auditing (ISPPIA).

Considering the cmnpany's principal tbcus on finding appropriate financing and business prospects, First IIoldings has also constituted a finance and investment committee composcd of Mr. Oscar M. Lopcz (Chairman), Mr. Thelmo Y. Cunanan, Mr. Peter D. Garrucho, Jr., Mr. Elpidio L. Ibafiez and Mr. Jose P. De Jesus. It is tasked, among others, to review investmcnt objectives and strategies, lhnd raising, major capital expenditures, investment opportunities as well as divestments.

For added transparency, the company presently has one board observer during board meetings. Previously, two (2) board observers had been allowed to sit in the board as crcditors' representatives. In any event, complete, prompt and timely disclosures of material information have been made by the company to the Exchange and to the SEC for the benefit of the investing public.

The law only requires a company to have two (21)independent directors. First Holdings has three (3) such directors and the need for their office is likewise enshrined in its by-laws. Their presence results in a highcr level of discourse during board deliberations, providing the body with the benefit of their broader, as well as more impartial viewpoints.

Atty. Enrique 1. Quiason has been designated as Compliance Officer and Atty. Rodolfo R. Waga, jr. as Asst. Compliance Officer, specifically for corporate governance. Both are FPHC's Corporate Secretary and Assistant Corporate Secretary, respectively.

Among the current governance compliance steps made by the company are: the annual submission of a certification dated 4 January 2007 reporting to the SEC the corporation's, its directors', officers' and employees' compliance with the leading practices and principlcs on good governance as embodied in the company's Manual, a secretary's certificate dated 11 December 2006 on the record of attendance at board meetings and the relevant certification by all of its independent directors on their qualifications which was tiled last December 18, 2006 as required under the SEC Notice dated 20 October 2006.

Based on the foregoing, it is evident that FPHC's structures and people for sound corporate governance are all well in place.

FPHC likewise implements corporate excellence initiatives both at the parent and subsidiary levels such as ISO certification, Environment, Safety and Health programs, Risk Management, Six Sigma and Knowledge Management, the Oscar M. Lopez Award for Perlbrmance Excellence and the Lopez Achievement Award, among others.

75 PART V - EXHIBITS AND SCHEDU i,ES

Item 13. Exhibits and Reports on SEC Form 17-C

(a) Exhibits

The following exhibit is fi led as a separate section of this report:

The other exhibits, as indicated in the Index to Exhibils arc either not applicable to the Company or require no answer.

(b) Reports on SEC Form 17-C

The corporation disclosed the following matters on the dates indicated:

February6, 2006- Response to the letter from the Philippine Stock Exchange relating to the news article entitled "Spex, First Gas finalize $149- M settlement deal".

February 9, 2006 - The approval to effect the transfer of FPHC's shares in Philippine Electric Corp., First Electro Dynamics Corp., First Sumiden Circuits, Inc. and First Sumiden Realty, inc. to First Philippine Electric Corp.

The acceptance by the Board of the resignation of Mr. Steve E. Psinakis and the election of Mr. Vicente T. Pateruo and Mr. Federico R. Lopez as Directors.

March 16, 2006- Declaration of One Peso (Pl.00) per share cash dividend to stockholders of record as of April 7, 2006, payable on or before May 5, 2006.

Record date of March 31, 2006 for the Annual Stockholders Meeting on May 15, 2006.

The nominees of Benpres Holdings Corp. to the FPHC Board of Directors for the year 2006-2007.

The increase in the net proceeds from US$50 million to US$86 million of the Floating Rate Notes ("FRNs") issued by FPH Fund Corporation, a wholly-owned offshore subsidiary.

March 28, 2006 - The approval by the Board of Directors of the Audited Financial Statements of the company tbr the calendar year ended Dec. 31, 2005.

,_ 76 April 28, 2006 - The execution of an agreement by FPHC and its wholly-owned subsidiary, FGHC International Limited, with AIDEC FG Power Corp. Limited to extend the lock-up period over their shares in First Gen Corp. up to Dec. 31, 2006, which can be extended up to Feb. 10, 2007.

May 3, 2006 - The disclosure that FPHC needs more time to prepare, review and finalize its Annual Report (17-A) in view of the transition to the new accounting standards and the magnitude of its scope of business.

The re-setting of the Annual Stockholders Meeting from May 15, 2006 to June 14, 2006.

June 15, 2006 - The reports of the Chairman and of the President to the FPIIC Stockholders during the Annual Stockholders Meeting.

The election of the tbllowing persons as members of the Board of Directors of FPHC: 1. Mr. Augusto Almeda-Lopez 2. Mr. Thelmo Y. Cunanan 3. Mr. Jose P. De Jesus 4. Mr. Peter D. Garrucho, Jr. 5. Mr. Oscar J. Hilado 6. Mr. Elpidio L. l bafiez 7. Mr. Eugenio L. Lopez Ill 8. Mr. Federico R. Lopez 9. Mr. Manuel M. Lopez 10. Mr. Oscar M. Lopez 11. Mr. Vicente T. Paterno 12. Mr. Ernesto B. Rufino, Jr. 13. Mr. Washington Z. Sycip

Junc21,2006- In connection with Civil Case No. 0035 entitled R.P. vs. Benjamin Romualdez, et al., the filing of an Urgent Motion to require Equitable-PClBank to explain the reported release of dividends on the shares held in escrow and to order Trans Middle East (Phils.) Equities, inc. to retum any dividends released or withdrawn from escrow. Another Motion was filed whereby FPHC asked the Sandiganbayan to allow it, as claimant to the shares, to be heard before the Escrow Agreement shall be approved.

June 22, 2006 - Press statement in connection with the block of shares of stock of Equitable PCIBank registered in the name of Trans Middle East Equities Philippines, Inc. which were sequestered by the PCGG on the allegation that they are ill-gotten wealth of Benjamin (Kokoy) Romualdez, Ferdinand E. Marcos, et al.

77 July 6, 2006 - The election of the following persons as officers of FPHC:

Name Position Mr. Oscar M. Lopez Chairman & CEO Mr. Augusto Almeda-Lopez Vice Chairman Mr. Elpidio L. Ibafiez President & COO Mr. Ernesto B. Rufino, Jr. Senior Vice President, Treasurer & CFO Mr. Peter D. Garrucho, Jr. Managing Director tbr Energy Mr. Arthur A. De Guia Managing Director for Mfg. & Portlblio Investment Group Mr. Benjamin K. Liboro Senior Vice President Mr. Danilo C. Lachica Senior Vice President Mr. Federico R. Lopez Vice President/Asst. Treasurer Ms. Perla R. Catahan Vice President/Comptroller Mr. Reynaldo R. Sarmenta Vice President Mr. Anthony M. Mabasa Vice President Mr. Leonides U. Garde Vice President Mr. Ernesto A. Esguerra Vice President/Internal Auditor Mr. Ricardo B. Yatco Vice President Mr. Hector Y. Dimacali Vice President Mr. Richard B. Tantoco Vice President Mr. Francis Giles B. Puno Vice President Mr. Cesar Z. Gomez Vice President Mr. Victor Emmanuel B. Santos, Jr. Vice President Mr. Oscar R. Lopez, Jr. Vice President Mr. Robert C. Chan Vice President Mr. Rodrigo E. Franco Vice President Mr. Enrique I. Quiason Corporate Secretary & Compliance Officer Mr. Rodolfo R. Waga, Jr. Vice President, Asst. Corp. Sec. & Asst. Compliance Officer

The appointment of the chairman and members of the Executive Committee, Compensation and Remuneration Committee, the Audit Committee, the Nomination and Election Committee and the Committee to review/set the Chairman of the Board's compensation and remuneration.

The creation of the Investment & Finance Committee and the appointment of the chairman and members tbereol:

October 5, 2006 - The declaration of One Peso (P 1.00) per share cash dividend to all stockholders of record as of November 6, 2006, payable on or befbre November 15, 2006.

November 9, 2006- The election of Mr. Benjamin R. Lopez as Vice President of FPHC.

_

78 SIGNATURES

Pursuant to the requirements of Section 17 of the Code and Section 141 of the Corporation Code, this report is signed on behalf of the issuer by the undersigned, thereunto duly authorized, in the City of

FIRST pHILIPPINE HOLDINGS CORPORATION Issuer

By:

()SCAR M_ PERLAIL CATAHAN Chairman & Chief Executive Officer Vice President,Comptroller and

__ Acco_cer ELPIDIO L. IBANEZ ENRIQUE L QUIASON President & Chief Operating Officer Corporate Secretary

_UFINO, JR. Treasurer,Vice President and Chief Finance Officer

SUBSCRIBED AND SWORN to before me th,o.- ,,_, uf i12007 affiant(s) exhibiting to me his/their Community Tax Certificates, as follows:

Names Cone Tax Cert. No. Date/Place Issued

Oscar M. Lopez 18132772 1-16-07/Pasig City Elpidio L. Ibafiez 18191305 2-23-07/Pasig City Emesto B. Rufino, Jr. 15133376 1-17-07/Makati City Perla R. Catahan 15147052 1-10-07/Taguig City Enrique LQuiason 18133053 1-16-07/Pasig City

Page No. _- I,Oa_ IN"ITIECITYOFPASIGMETROHAN, It/g i[_OOk,N'O_ UNTILDECFt_R:_,r# :i2,_7 FrRNO_36_5207; I4':_I07;P_SIG Series of 2{)07, ' _ NO.694919;12/20/06;RIZAL_R Jt0tLNO._/._POlmNBcr NO.11t(a006-2007) iN=BB_t_ BLOG. "-- IBGIla_ ao_, _Clrl

79 HoldingsCorporation First Philippine April 12, 2007

SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA Grcenhills Mandaluyong City,Metro Manila

The management of First Philippine Holdings Corporation (the Company) is responsible for all information and representations contained in the consolidated financial statements as of December 31, 2006 and 2005 and for the three years in the period ended December 31, 2006. The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards and reflect amounts that arc based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the Company's audit committee and to its external auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to re_ord, process, and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of the Company.

SyCip Gorres Velayo & Co., the independent auditors appointed by the stockholders, has examined the consolidated financial statements of the Company in accordance with Philippine Standards on Auditing and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Stockholders and the Board of Directors.

Signed under oath by the following:

ELPIDIOf._ANEZ _UFINOJ-R. Chairman of the Board President & Treasurer, Vice President & & Chief Exccutvie Ottic_r Chief Operating Officer Chief Financial Officer

SUBSCRIBED AND SWORN to lmfor¢ me thiJ_R 16dg0 _ 2007, affiants exhibited to me their Community Tax Certificate Nos. as follows:

CTC NO. !)atelPlacc Issued Oscar M. Lopez 18132772 1-16-07/Pasig City Elpidio L. Ibanez 1g191305 2-23-07/Pasig City Ernesto B. Rufino, Jr. 15133376 1-17;07/I._akati City

Dec.No. 3 , IgSIRAL O C.;MIS'AD Page No. 3 Z : _rARVr_e_c Book No. _" FOR_o m THecrrvO_P_tC_MET_OmNOA ' UNTIL I_:C.EMe,ER31, 2007 Series of 2007. vrR NO. _lS_'a'7;LIgI_,7; PASIG ;eraNO.69_9; 1_1_o/o6_;g t.AC_L PTea

_ mat._ aw'_,ar.,.,_,,-..v__ ._.- " 4thFloor,BenpresBuilding,ExchangeRoadcor.MeralcoAvenue1600,PasigCity,Philippines _'_ Telephone:(632)631-80-24,(632)449-60-00,FaxNo.:(632)631-40-89,P,O,BoxNo.12457OrttgasCenter,PasigCity

_0 _"hitip_)irle_, b( ),:k/I_l_C_4_.,,,¢,Nc_. OI)Oi

INDEPENDENT AUDITORS' REPORT

The Stockholders and the Board of Directors First Philippine Holdings Corporation

We have audited the accompanying financial statements of First Philippine Holdings Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2006 and 2005, and the consolidated statements of income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31,2006, and a summary of significant accounting policies and other explanatory notes.

Management's Responsibility for the Financial Statements

Management is responsible tbr the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

81 Opinion

In our opinion, the consolidated financial statements present fairly, in all materials respects, the financial position of First Philippine Holdings Corporation and Subsidiaries as of December 31,2006 and 2005, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2006 in accordance with Philippine Financial Reporting Standards.

Without qualifying our opinion, we draw attention to Note 10 to the consolidated financial statements. As discussed in Note 10, Manila Electric Company (MERALCO), an associate accounted for under the equity method, has pending realty tax assessments and local franchise tax cases. To address these possible liabilities, MERALCO filed an application with the Energy Regulatory Commission for a recovery mechanism which is pending approval. The final outcome of these matters cannot be presently determined, and no provision fbr any additional liability that may result fi'om additional cases in the event of an adverse decision on these cases, has been made in the financial statements of MERALCO. The First Holdings Group also has not provided for its share in the liability that may result, in the accompanying consolidated financial statements.

SYCIP GORRES VELAYO & CO.

Betty C_Siy-Yap Partner CPA Certificate No. 57794 SEC Accreditation No. 0098-AR-1 Tax Identification No. 102-100-627 PTR No. 0267389, January 2, 2007, Makati City

April 12, 2007

v,.,z

82 First Philippine Holdings CorporationAnd Subsidiaries Consolidated Balance Sheets

December 31 2006 2005 (In Millions) ASSETS Current Assets Cash and cash equivalents (Notes 6 and 19) t_32,249 #21,889 Short-term cash investments - 154 Trade and other receivables - net (Notes 7, 29 and 33) 10,595 8,253 Inventories (Note 8) 1,899 2,609 Current pomo" n of receivable from Manila Electric Company (MERALCO) (Note 33) 2,1142 4,250 Other current assets (Notes 9, 19 and 33) 4,074 4,205 Total Current Assets 50,859 41,360 Noncurrent Assets Investments and deposits (Notes 10, 19 and 29) 17,758 14,158 Receivable from MERALCO - net of current portion. (Note 33) 3,124 4,485 Property, plant and equipment - net (Notes 5, 11, 19 and 29) 38,680 39,653 Roads and tollways -net (Notes 12 and 19) 15,205 15,931 Investment properties - net (Note 13) 983 1,297 Goodwill (Notes 5 and 14) 2,096 315 Deferred tax assets - net (Note 27) 134 142 Other noncurrent assets - net (Notes 15, 19, 29 and 33) 6,637 8,294 Total Noncurrent Assets 84,617 84,275

P135,476 t_125,635

t LIABILITIES AND EQUITY Current Liabilities Loans payable (Note 16) _10 #23 Trade payables and other current liabilities (Notes 17 and 29) 10,818 8,771 Income tax payable 274 50 Current portion of deferred payment facility with Power Sector Assets and Liabilities Management Corporation (PSALM) (Note 5) 372 - Current portion of obligations to Gas Sellers (Note 331) 1,823 4,250 Current portion of long-term debt (Notes 11, 12 and 19) 8,351 6,736 Total Current Liabilities 21,648 19,830

(Forward)

83 December 31 2006 2005

(In Millions) Noncurrent Liabilities Bonds payable (Note 18) P4,931 1a4,917 Long-term debt - net of current portion (Notes 11, 12 and 19) 33,850 45,525 Deferred payment facility with PSALM - net of current portion (Note 5) 3,424 - Advances fi'om related parties (Note 29) - 129 Deferred tax liabilities -.net (Note 271) 1,554 842 Obligations to Gas Sellers - net of current portion (Note 33) 2,789 4,485 Other noncurrent liabilities (Notes 21,26, 32 and 33) 3_182 445 Total Noncurrent Liabilities 491730 56,343 Equity Attributable to Equity Holders of the Parent Common stock (Notes 22 and 23) 5,806 5,708 Subscriptions receivable (Note 22) (4) (4) Capital in excess of par value (Note 23) 3,531 3,422 Unrealized fair value gains on available-tbr-sale investments (Note 15) 20 20 Share in unrealized fair value gains on available-for-sale investments of an associate (Note 10) 8 5 Cumulative translation adjustments (962) 379 Share in cumulative translation adjustments of an associate (Note 10) 53 (78) Retained earnings (Note 22) 27,427 19_882 Total Equity Attributable to Equity Holders of the Parent 35,879 29,334 Minority interests (Note 20) 28,219 20,128 Total Equity 64,098 49,462 i_135,476 ta125,635

See accompanying Notes to Consolidated Fimmeial Statements,

84 First Philippine Holdings CorporationAnd Subsidiaries ConsolidatedStatements Of Income

Years Ended December 31 2006 2005 2004 (In Millions, Except Per Share Data) REVENUE (Notes 29 and 33) Sale of electricity _51,176 _45,485 _36,969 Toll operations 5,705 5,104 43 Contracts and services 1,326 1,402 1,630 Sale of merchandise 1,184 861 814 Sale of real estate 181 407 476 59,572 53,259 39,932 COST AND EXPENSES (Notes 23, 24, 25 and 26) Operations and maintenance (Note 33) 38,610 32,682 23,867 Toll operations 2,690 2,701 54 Contracts and services 831 984 946 Merchandise sold 978 720 700 Real estate sold 96 176 181 General and administrative expenses 4,128 4,553 4,377 47,333 41,816 30,125 12,239 11,443 9,807 FINANCE COSTS (Notes 18, 19 and 25) (7,338) (5,455) (3,981) EQUITY IN NET EARNINGS OF ASSOCIATES (Note 10) 4,208 963 398 FINANCE INCOME (Notes 25 and 29) 3,281 1,086 448 GAIN ON DILUTION (Notes 1 and 2) 2,653 - - FOREIGN EXCHANGE GAIN (LOSS) - Net 656 604 (12) GAIN ON SALE OF INVESTMENT IN SHARES OF STOCK (Note 10) 535 594 228 OTHER INCOME (Note 29) 454 546 173 INCOM E BE FORE INCOME TAX 16,688 9,781 7,061 PROVISION FOR (BEN EFIT FROM) INCOME TAX (Notes 27 and 30) Current 406 143 121 Deferred 814 (67) (98) 1,220 76 23 NET INCOME (Note 28) _15_468 _9,705 #7,038 Attributable To Equity holders o f the Parent 8,699 ta4,912 ta3,68 l Minority interests 6,769 4,793 3,357 t_15,468 ta9,705 _7,038 Earnings Per Share for Net Income Attributable to the Equity Holders of the Parent (Note 28) Basic i_l 5.147 t_8.798 _6.798 Diluted 14.984 8.651 6.770

See accompanying Notes to Consolidated Financial Statements.

85 First Philippine Holdings Corporation And Subsidiaries Consolidated Statements Of Changes In Equity

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_ _" _ _,1_o_ __"_' ____._ _,I_ _-__ _ _ _I

_-_ 86 First Philippine Holdings Corporation And Subsidiaries Consolidated Statements Of Cash Flows

Years Ended December 31 2006 2005 2004 (InMillions) CASH FLOWS FROM OPERATING ACTIVITIES Income befbre income tax t_16,688 fa9,781 t_7,061 Adjustments for: Finance costs 7,338 5,455 3,981 Depreciation and amortization (Note 25) 4,235 4,812 2,518 Equity in net earnings of associates (Note 10) (4,208) (9631) (398) Finance income (3,281) (1,086) (448) Gain on dilution (Notes 1 and 2) (2,653) - - Net unrealized foreign exchange loss (gain) (656) (755) 100 Gain on sale of investment in shares of stock (Note 9) (535) (594) (228) Provisions for: Retirement cost (Note 26) 282 (242) 163 Impairment loss and doubtful accounts - 64 - Unrealized fair value gain on fair value through profit or loss investments (264) - - Gain on sale of property and equipment (90) .... (24) Share-based payments 50 56 49 Excess of cost over net realizable value - 28 - Operating income before working capital changes 16,906 16,556 12,774 Decrease (increase) in: Trade and other receivables (2,342) (2,168) (840I) Inventories 710 35 379 Other current assets 324 (1,259) (136) increase (decrease.) in trade payables and other current liabilities 2,860 962 (1,605) Income tax paid (182) (145) (120) Net cash provided by operating activities 18,276 13,981 10,452 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property, plant and equipment (Note 11) (356) (47) (461) Roads and tollways (Note 12) (244) (1,342) (15,734) Investment properties (Note 13) (164) (186) - Decrease (increase)in: Receivable from MERALCO 2,908 - - Other noncurrent assets 1,584 (1,222) 393 Investments and deposits (541) 29 1,191 Short-term investments 154 (154) ..... Interest received 3,338 967 268 Proceeds from sale of investment in shares of stock 541 615 347 Dividends received from associates (Note 10) 941 483 379 Proceeds from: Sale of property and equipment and investment properties 516 311 157 Net assets from business acquisitions (Note 5) (2,531) - (I,502_ Net cash provided by (used in) investing activities 6,146 (446) (4,962) (Forward)

87 Years Ended December 31 2006 2005 2004 (In Millions) CASH FLOWS FROM FINANCING ACTIVITIES Payments of borrowings from banks and other financial institutions (t_16,382) (P5,168) (P4,854) Interest paid (7,959) (4,773) (3,101) Proceeds from: Borrowings from banks and other financial institutions 6,108 4,794 4,545 Additional subscriptions to and issuances of shares of capital stock 157 303 114 Payments of cash dividends (1,154) (i, 140) (557) increase (decrease) in: Minority interests 5,312 - (1,597) Obligations to Gas Sellers (3,462) - - Other noncurrent liabilities 2,657 89 - Advances from related parties 5 (69) 192 Net cash used in financing activities (14,718) (5,964) (5,258) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 656 (235) 207 NET INCREASE IN CASH AND CASH EQUIVALENTS 10,360 7,336 439 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,889 14,553 14,114

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 6) 1_32,249 ta21,889 P14,553

See accompanying Notes to Consolidated Financial Statements.

88 First Philippine Holdings Corporation And Subsidiaries Notes To Consolidated Financial Statements

1. Corporate Intbrmation

First Philippine Holdings Corporation (the Parent Company or First Holdings) and the following subsidiaries (collectively referred to as the "First Holdings Group" or the "Company"), except (i) FGHC International Limited (FGHC International) and (it) FPH Fund Corporation (FPH Fund) and subsidiary (jointly referred to as "FPH Ventures") are incorporated in the Philippines and separately registered with the Philippine Securities and Exchange Commission (SEC):

Percentage of Ownership 2006 2005 2004 [nvestee Direct Indirect Direct Indirect Power Generation and Power-related Companies First Philippine Electric Corporation d 100.00 - 100,00 - 100.00 - First Gen Corporation (First Gen) 51.43 15,35 68.11 20,33 88.44 First Gen Renewables, nc. '_ - 66.78 88.44 - 88.44 FG Bukidnon Power Corp." - 66.78 - 88,44 - 88.44 Unified l loldmgs.__ (_orporatlon, a - 40,07 - 53,06 - 88.44 FGP Corp. (FGP) a - 6638 - 88.44 - 88.44 AlliedGen Power Corporation _ - 66.78 88.44 - -- First NatGas Power Corporation _' - 66.78 - 88,44 ..... First Gen Luzon Power Corp _ - 66.78 88.44 .... First Gas Holdings Corporation :_ - 40,07 - 53,06 - 53.06 First Gas Power Corporation (FGPC)" - 40.07 - 53.06 - 53.06 First NatGas Supply Corporation" - 40.07 - 53.06 .... First Gas Pipeline Corporation '_ - 40.07 - 53.06 .- 53.06 FGI. and ( orporat o 1a - 40.07 - 53.06 - 53.06 First Gen Hydro Power Corporatkm "_ - 66.78 -- - First Gen Visayas Hydro Power Corporation _ - 66.78 .... First (ken Mindanao Hydro Power Corporation" - 66.78 - - First Gen Geothermal Power Corporation '_ - 66.78 ...... First Gen Northern Energy Corpo "at o f_ - 66.78 .... First Gen Energy Solutions, Inc) - 66.78 .... Batangas Cogeneration Corporation (Batangas Cogen) 60.00 - 60.00 - 60.00 - First Philippine Industrial Corporation (FPIC) 60.00 - 60.00 60.00 - First Philippine Union Fel_osa, Inc. (FPUFI) 60.00 - 60,00 - 60.00 -

Roads and Tollways Operations First Ph ill pp ine Infrastructvre Development Corporation (FPIDC) 51.00 - 51.00 - 38.00 - Manila North Tollways Corporation h - 34.22 -. 34.22 - 25.38 Luzon Tollways Corporatio ) - 51.00 - 51.00 38.00

Manufacturing First Electro Dynamics Corporation (FEDCOR) 100.00 - 100.00 - 100.00 - Philippine Electric Corporation (PIIILEC) 97.98 - 97.98 - 97.98 -

Real Estate Development First Philippine Realty Development Corporation 100.00 - 100.00 - 100.00 - Inaec Development Corporation (IDC) 100.00 - 100.00 .... 100.00 _ - • d FPHC Realty and Development Corporatmn (Realty) 98.00 - 98,00 - 98,00 - First Philippine Industrial Park, Inc. (FPIP) 70.00 - 70.00 70.00 - FPIP Properly Developers and Management Corporation _ - 70.00 - 70.00 - 70.00 FPIP Utilities Incorporated _ - 70.00 - 70,00 - 70.00 First Sumiden Realty, Inc. (FSRI) 60.00 - 60.00 -. 60.00 -

a Through First Gen b Through FPIDC c' Through FPIP d Has not ,vet started operations

89 Percental/e of Ownership 2006 2005 2004 Investec Direct Indirect Direct Indirect Construction First Balfour, Tnc.(First Balfour) 100.00 - 100.00 100,00 ..... Others First Philippine Lending Corporation 100.00 - 100.00 - 100.00 - Securities Transfer Services, lnc. 100.00 - 100.00 - 100.00 - FGHC International 100.00 - 100.00 - 100.00 - FPH Ventures 100.00 - 100.00 - 100.00 -

FGHC International, FPH Fund and FPH Ventures are registered in the Cayman Islands.

The common shares of FPHC were listed on and traded on the Philippine Stock Exchange (PSE) beginning May 3, 1963.

The Parent Company's principal activity is to hold investments in subsidiaries and associates. The subsidiaries and associates are engaged in but not limited to, power generation and power distribution, roads and tollways operations, pipeline services, real estate development, manufacturing, construction, securities transfer services and financing. Certain of these subsidiaries operate under the jurisdiction of the Energy Regulatory Commission (ERC), which jurisdiction extends, among other things, to approving major services offered by its subsidiaries and associates and certain rates charged by these entities.

On February 10, 2006, the common shares of First Gen were listed on and traded in the Philippine Stock Exchange. As a result of the listing, the total direct and indirect equity ownership of the Parent Company was reduced ti-om 88.44% to 67.05% and a gain on dilution amounting to t_2.7 billion was recognized in the 2006 consolidated statement of income [see Note 2 - Effect of Exposure Draft of Amendments to Philippine Accounting Standards (PAS) 27, "Consolidated and Separate Financial Statements"].

The Parent Company is 43.82% owned by Benpres Holdings Corporation (Benpres), also a publicly-listed, Philippine-based entity. The remaining shares are held by various shareholder groups and individuals.

The registered office address of FPHC is 6th Floor, Benpres Building, Exchange Road, comer Meralco Avenue, Pasig City.

The consolidated financial statements as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 were reviewed and recommended to the Board of Directors (BOD) by the Audit Committee on March 20, 2007. The BOD approved the consolidated financial statements on April 12, 2007.

sl

9O 2. Summary of Significant Accounting Policies

Basis of Preparation The accompanying consolidated financial statements have been prepared on a historical cost basis, except fbr derivative financial instruments, financial assets at lair value through profit or loss (FVPL) and available-for-sale (AFS) investments which have been measured at fair value.

The consolidated financial statements are presented in Philippine peso, the Parent Company's functional and presentation currency. All values are rounded to the nearest million peso, except when otherwise indicated.

Statement of Compliance The accompanying consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS) as adopted by the Philippine Securities and Exchange Commission (SEC).

Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following new and amended PFRS and Philippine Interpretations during the year. Adoption of these revised standards and interpretations did not have any significant impact on the First Holdings Group. Additional disclosures as required under such new and amended PFRS and Philippine Interpretations were included in the consolidated financial statements.

• PAS 19, "Amendments - Employee Benefits" • PAS 39, "Amendments - Financial Instruments: Recognition and Measurement"

First Holdings Group has also early adopted the tbllowing Philippine Interpretations. Adoption of these interpretations did not have any significant effect on the financial position of First Gen Group. These, however, require additional disclosures on the consolidated financial statements.

• Philippine interpretation IFRIC 8, "Scope of PFRS 2" • Philippine Interpretation IFRIC 9, "Reassessment of Embedded Derivatives" • Philippine Interpretation IFRIC 10, "Interim Financial Reporting and Impairment"

Following is a discussion of the foregoing amendments and Interpretations:

• Amendments to PAS 19,"Employee Benefits"

Additional disclosures on the consolidated financial statements are made to provide information about trends in the assets and liabilities in the defined benefit plans and the assumptions underlying the components of the defined benefit cost. This change has no recognition nor measurement impact, as the First Holdings Group chose not to apply the new option offered to recognize actuarial gains and losses outside of the consolidated statement of income.

91 • PAS 39, "Financial Instruments: Recognition and Measurement"

• Amendment tbr financial guarantee contracts --amended the scope of PAS 39 to require financial guarantee contracts that are not considered to be insurance contracts to be recognized initially at fair value and to be remeasured at the higher of the amount determined in accordance with PAS 37, "Provisions, Contingent Liabilities and Contingent Assets," and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with PAS 18, "Revenue." This amendment did not have any significant effect on the consolidated financial statements.

• Amendment tbr hedges of forecast intra-group transactions -- amended PAS 39 to permit the foreign currency risk of a highly probable intra-group forecast transaction to qualit) as the hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign currency risk will affect the consolidated statement of income. As the First Holdings Group currently has no such transactions, the anaendment did not have any significant effect on the consolidated financial statements.

• Amendment lbr the f;airvalue option (issued June 2005) --- amended PAS 39 to prescribe the conditions under which the fair value option on classification of financial instruments at FVPL may be used. First Holdings Group has complied with these conditions.

• Philippine Interpretation IFRIC 8, "Scope PFRS 2"

This requires PFRS 2 to be applied to any arrangement where equity instruments are issued for consideration which appears to be less than fair value. The interpretation does not apply to the activities of the First Holdings Group, and thus, has no significant impact on its financial position.

• Philippine Interpretation IFRIC 9, "Reassessment of Embedded Derivatives"

This was issued in March 2006 and becomes effective for financial years beginning on or after June 1, 2006. This interpretation establishes that the date to assess the existence of an embedded derivative is the date an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. The interpretation does not apply to the activities of the First Holdings Group, and thus, has no significant impact on its financial position.

• Philippine Interpretation IFRIC 10, "interim Financial Reporting and Impairment"

This interpretation provides that the fiequency of financial reporting does affect the amount of impairment charge to be recognized in the annual financial reporting with respect to goodwill and AFS equity investments. It prohibits the reversal of impairment losses on goodwill and AFS equity investments recognized in the interim financial reports even if impairment is no longer present at the annual balance sheet date. The interpretation does not apply to the activities of the First Holdings Group, and thus, has no significant impact on its financial position.

92 The t_bllowing standard and Philippine Interpretations are effective for annual periods beginning on or after January 1, 2006 but are not relevant to the First Holdings Group:

• PAS 21, "Amendments - The Effects of Changes in Foreign Exchange Rates"; • Philippine Interpretation IFRIC 5, "Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds"; and • Philippine Interpretation IFRIC 6, "Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment."

Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and the companies under its control (see Note 1) as of December 31 of each year. Control is normally evidenced when the Parent Company owns, either directly or indirectly, more than 50% of the voting rights of a company's capital stock.

The financial statements of all the subsidiaries are prepared tor the same reporting year as the Parent Company.

Subsidiaries are consolidated from the date on which control is transferred to thc First Holdings Group and cease to be consolidated from the date on which control is transferred out of the First Holdings Group.

The consolidated financial statements are prepared using uniform accounting policies _br like transactions and other events in similar circumstances. Intercompany balances and transactions, including intercompany profits and unrealized income and losses, are eliminated.

Minority Interests The proportionate amount of the fair values of identifiable assets and liabilities upon acquisition of a consolidated subsidiary and any subsequent changes in equity of a consolidated subsidiary attributable to a minority shareholder's interest are shown separately as "Minority interests" in the consolidated balance sheets. A minority shareholder's interest in the result of operations of a subsidiary is shown separately as "Minority interests" in the consolidated statements of income. Any losses applicable to a minority shareholder in a consolidated subsidiary in excess of the minority shareholder's equity in the subsidiary are charged against the minority interest to the extent that the minority shareholder has binding obligation to, and is able to, make good of the losses.

Equity of minority interests represents the equity interests in all subsidiaries not held by the Parent Company. investments in Associates The First Holdings Group's investments in associates are accounted for under the equity method. These are entities where the First Holdings Group has significant influence and which are neither subsidiaries nor joint ventures of the First itoldings Group. The investments in associates are carried in the consolidated balance sheets at cost plus post-acquisition, changes in the First Holdings Group's share of net assets of thc associates (including share in cumulative translation adjustments) less any impairment in value. The consolidated statement of income reflects the First ftoldings Group's share of the results of operations of the associates.

93 Unrealized gains arising from transactions with its associates are eliminated to the extent of the First Holdings Group's interest in the associate. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred. The First Holdings Group's investments in associates include goodwill on acquisition, which is treated in accordance with the accounting policy for goodwill.

An assessment of the carrying value of First Holding's Group's investments in associates is perfbrmed when there is an indication that the investments have been impaired.

The reporting dates and that of the associates are identical and the associates' accounting policies conform to those that are used for like transactions and events in similar circumstances. In instances where such policies differ, the financial information of such associates are adjusted to conform with the Parent Company's accounting before the First Holding Group recognizes its share in the change in such associates' net assets.

Financial Instruments In 2005, First Holdings Group adopted PAS 32, "Financial Instruments: Disclosure and Presentation," and PAS 39, "Financial Instruments: Recognition and Measurement." Under PAS 39, every derivative financial instrument is recorded in the consolidated balance sheet as either an asset or liability measured at its t;hirvalue. Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through income. Prior to 2005, the mark-to-market losses on the outstanding interest rate swap are not included in determining the net income.

PAS 39 also requires debt issuance costs to be presented as a contra account to the related long-term debt and amortized using the effective interest method over the terms of the loans. Prior to adoption of PAS 39, debt issuance costs were presented as part of"Other noncurrent assets" account and amortized on a straight-line basis.

First Holdings Group availed of the exemption under PFRS 1, "First-time adoption of Philippine Financial Reporting Standards" and accounted for PAS 32 and PAS 39 effective January 1, 2005. The cumulative effect of adopting this accounting standard was adjusted to January 1, 2005 equity.

The change resulted in the recognition of a net derivative liability amounting to ta196 million, unrealized fhir value gains on AFS investments amounting to tal 5 million and share in unrealized fair value gains on AFS investments of an associate amounting to t_5 million as of January 1, 2005. Retained earnings increased by t_581 million, minority interests increased by tal,322 million and cumulative translation adjustments increased by t_88 million as of January l, 2005.

Accounting Policies _Effective January 1, 2005

Date of Recognition. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date. Derivatives are recognized on trade date basis.

_

94 Initial Recognition of Financial Instruments. All financial assets are initially recognized at fair value. The initial measurement of financial assets includes transaction costs, except for securities at FVPL. The First Holdings Group classifies its financial assets in the following categories: securities at FVPL, held-to-maturity (HTM) investments, AFS investments, and loans and receivables. Financial liabilities are classified as either financial liabilities at FVPL or other financial liabilities at amortized cost. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

Determination of Fair Value. The fair value for financial instruments traded in active markets at the balance sheet 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 asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a 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 net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Day 1 Prqfit. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the First Holdings Group recognizes the difference between the transaction price and fair value (a Day 1 profit) in the consolidated statement of income. In cases where data which is not observable was used, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the First Holdings Group determines the appropriate method of recognizing the "Day 1" profit amount.

Financial Assets or Liabilities at FVPL. Financial assets or liabilities classified in this category are designated by management on initial recognition when the following criteria are met:

• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;

• The assets and liabilities are part of a group of financial assets, liabilities or both which are managed and their performance 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 recorded.

95 Financial assets and liabilities at FVPL are recorded in the consolidated balance sheet at fair value. Subsequent changes in fair value are recognized in the consolidated statement of income. Interest earned or incurred is recorded in interest income or expense, respectively.

The Parent Company's investment in shares of stock of SiRF Technology Holdings, Inc. (SiRF) and derivatives not designated as hedges, are included in this category.

Financial assets and liabilities classified as held for trading are included in the category "financial assets and liabilities at fair value through profit or loss." Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and ettbctive hedging instruments. Gains or losses on investments held for trading are recognized in the statements of income.

HTM Investments,. ItTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities/_br which the First Holdings Group's management has the positive intention and ability to hold to maturity. Where the First Holdings Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in income when the HTM investments arc derccognized and impaired, as well as through the amortization process. The effects of restatement on foreign currency-denominated HTM investments are also recognized in the consolidated statement of income.

The First Holdings Group has no HTM investments as of December 31, 2006 and 2005.

Loans and Receivables. Loans and receivables are financial assets with fixed or determinable payments and fixed maturities and that arc not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified or designated as AFS investments or financial assets at FVPL. Classified under loans and receivables are trade and other receivables.

Alter initial measurement, the loans and receivables are subsequently mcasured at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fi_esthat are an integral part of the effective interest rate. The amortization is included in the consolidated statement of income. The losses arising from impairment of such loans and receivables are also recognized in the consolidated statement of income.

AFSInvestments. AFS investments are those which are designated as such or do not qualify to be classified as financial assets designated at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. These include short-term cash investments and investments in proprietary membership shares.

96 After initial measurement, AFS investments are subsequently measured at fair value. AFS investments are measured at fair value with gains and losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, are measured at cost.

Other Financial Liabilities. Other financial liabilities are initially recognized at fair value of the consideration received, less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any related issue costs, discount or premium. Gains and losses are recognized in the consolidated statement of income when the liabilities are dereeognizcd, as well as through the amortization process.

Accounting Policies Prior to January 1, 2005

a. Investments in Shares of Stock

Investments in proprietary membership shares were stated at cost. An allowance was provided tor any substantial and presumably permanent decline in the carrying values of the investments.

b. Derivative Financial Instruments

Mark-to-market gains or losses on the outstanding interest rate swap were not included in determining the net income. The fhir value of such derivative financial instrument was presented in the related notes to the consolidated financial statement/'or disclosure purposes only.

Derivative Financial Instruments and Hedg_z.Accounting

Effective Janua_ 1, 2005

FGP and FPH Ventures use interest rate swap agreements to manage their floating interest rate exposure on their foreign currency-denominated obligations. Accrual of interest on the receive and pay legs of the interest rate swap are recorded as adjustments to the interest expense on the related foreign currency-denominated obligations.

Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at thir value. The fair value of interest swap agreement is determined by reference to market values for similar instruments. Derivatives are carried as assets when the/air value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in t'air value on derivatives that do not qualify for hedge accounting are taken directly to the consolidated statement of income for the current year.

97 At the inception of a hedge relationship, the First Holdings Group formally designates and documents the hedge relationship to which the First Holdings Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrulncnt, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly eft_ctive in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis that they actually have been highly effective throughout the financial reporting periods for which they were designated.

For the purpose of hedge accounting, derivatives can be designated as cash flow hedges or fair value hedges, depending on the type of risk exposure.

As of December 31,2006 and 2005, there are no derivatives that are designated as fair value hedges.

Cash Flow Hedges. Cash flow hedges are hedges on the exposure to variability of cash flows that are attributable to a particular risk associated with a recognized asset, liability or a highly probable fbrecast transaction and could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognized directly in equity, while the ineffective portion is recognized in the consolidated statement of income.

Amounts taken to equity are transferred to the consolidated statement of income when the hedged transaction affects profit or loss, such as when hedged financial income or expense is recognized or when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction is no longer expected to occur, amounts previously recognized in equity are transferred to the consolidated statement of income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is recognized in the consolidated statement of income.

The First Holdings Group accounts for FGP's interest rate swap agreement as a cash flow hedge of the floating rate exposure on one of its long-term debt (see Notes 19 and 32).

Derecognition of Financial Assets and Liabilities

E[.liectiveJanuary 1, 2005

Financial Asset. A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is dereeognized when:

• the rights to receive cash flows from the asset have expired;

98 = the First Holdings Group retains the right to receive cash flows fi-om the asset, but has assumed as obligation to pay them in full without material delay to a third party under a "pass- through" arrangement; or

• the First Holdings Group has transferred its rights to receive cash flows fi-omthe asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset.

Where the First Holdings Group has transferred its rights to receive cash flows f_om an asset or has entered into a pass-through arrangement, 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 First tIoldings 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 First Holdings Group could be required to repay.

.Financial Liability. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another fi'om the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income.

Impairment of Financial Assets

Effective JanuarF 1, 2005

The First Holdings Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred airier the initial recognition of the asset (an incurred "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated lhture cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Loans and Receivables. For loans and receivables carried at amortized cost, the First Holdings Group first assesses whether an objective evidence of impairment exists individually fbr financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the First Holdings Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors' ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed fbr

99 impairment and tbr which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is charged to the consolidated statement of income. Interest income continues to be recognized based on the original effective interest rate of the asset. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account.

AFS Investments'. For AFS investments, the First Holdings Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired,

In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current flair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income, is removed lkom equity and recognized in the consolidated statement of income. Impairment losses on equity investments arc not reversed through the consolidated statement of income. Increases in lilir value after impairment are recognized directly in equity.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of interest income in the consolidated statement of income. IL in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.

Offsetting Financial Instrtunents Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet 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 at gross amounts in the consolidated balance sheet.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

Short-term Cash Investments Short-term cash investments are money-market placements and government securities with original maturities at acquisition dates of more than three months to one year and are stated at fair value.

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100 Inventories Inventories, excluding land held for sale and development costs, are valued at the lower of cost or net realizable value.

Costs incurred in bringing each item of inventories to its present location and condition are accounted for as follows:

Finished goods and work in process - Determined on the weighted average basis; cost includes materials and labor and a proportion of manufhcturing overhead costs based on normal operating capacity but excluding borrowing costs;

Real estate - Costs include expenditures tbr development and improvements of the land; and Raw materials, fuel inventories, spare parts and supplies - Purchase cost on weighted average basis.

Land held ibr sale and the related development costs are valued at the lower of cost, which include expenditures for development and improvements, or net realizable value.

The net realizable value for raw materials, spare parts and supplies inventories is the current replacement cost. The net realizable value ibr fuel inventories of FGPC and FGP is the fuel cost charged to the Manila Electric Company (MERALCO), under the respective Power Purchase Agreements (PPA) of FGPC and FGP with MERALCO (see Note 33a), which is based on weighted average cost of actual fuel consumed. Net realizable value for the other inventories is the selling price in the ordinary course of business, less the estimated costs of completion, marketing and distribution.

Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation, amortization and any impairment in value. Land is carried at cost (initial purchase price and other cost directly attributable to such property) less any impairment in value.

The initial cost of property, plant and equipment, except land, comprises its purchase price including import duties, borrowing costs (during the construction period) and tbreign exchange adjustments, and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Cost also includes the cost of replacing the part of such property, plant and equipment when the recognition criteria are met and the estimated cost of dismantling and removing the asset and restoring the site.

Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally charged to income in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard ofperfbrmance, the expenditures are capitalized as additional costs of property, plant and equipment.

101 The First Holdings Group identified the significant parts of its power plant assets to comply with the provisions of PAS 16, "Property, Plant and Equipment." Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:

Buildings, other structures and improvements 5 to 25 years Transportation equipment 3 to 5 years Machinery, equipment and others 3 to 25 years

The useful lives, residual values and depreciation and amortization method arc reviewed periodically to ensure that the periods and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the assets (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized.

Construction in progress represents properties under construction and is stated at cost. This includes cost of construction, equipment and other direct costs. Borrowing costs that are directly attributable to the construction of the plant and equipment are capitalized during the construction period. Construction in progress is not depreciated until such time that the relevant assets are substantially completed and available for use.

Roads and Tollways Roads and tollways in operations represent costs of North Luzon Tollways Project (NLE Tollway Project) consisting of significant parts of civil works and fixed operating and non-fixed operating equipment. Roads and tollways are carried at cost less accumulated depreciation and any impairment in value.

Costs of roads and tollways under construction include costs of construction, equipment and other direct costs. Borrowing costs that are directly attributable to the construction of the roads and tollways are capitalized during the construction period. Depreciation is calculated similar to the method applied for property, plant and equipment.

Roads and tollways under construction are not depreciated until such time that these are substantially completed and available fbr use.

Investment Properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and any impairment in value.

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102 Depreciation is computed using the straight-line method over the estimated useful lives of five to 20 years.

Investment properties are derecognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statement of income in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.

Impairment of Long-lived Assets The First Holdings Group assesses at each reporting date whether there is an indication that an asset may be impaired, if any such indication exists, or when an annual impairment testing for an asset is required, the First Holdings Group makes any estimate of the recoverable amount of the asset. The recoverable amount of an asset is the higher of an asset's or cash-generating asset's fair value less cost to sell or its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from assets or groups of assets. The net selling price is the amount obtainable from the sale of an asset in an arm's-length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset or from its disposal at the end of its useful life. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risk specific to the asset. Impairment losses are recognized in the consolidated statement of income.

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 change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. In such instance, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, 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 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.

As an exception, an impairment loss recognized for goodwill is not reversed in a subsequent period unless the impairment loss was caused by a specific external event of an exceptional nature that is not expected to recur and subsequent external events have occurred that reverse the eft_ct of that event.

103 Business Combination and Goodwill Business combinations are accounted for using the purchase method. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value.

Goodwill acquired in a business combination is initially measured at cost which is the excess of the cost of the business combination over the First Holdings Group's interest in the net lair value of identifiable tangible and intangible assets, liabilities and contingent liabilities. Following the initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.

The goodwill on investments in subsidiaries is presented as a separate account in the consolidated balance sheet. The goodwill on investments in associates is included in the carrying amount of the related investment.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the First Holdings Group's cash-generating units, or groups of cash-generating units, that are expected to benefit from the combination's synergies, irrespective of whether other assets or liabilities of the First Holdings Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the First Holdings Group at which the goodwill is monitored tbr internal management purposes.

hnpairment is determined by assessing the recoverable amount of the cash-generating unit (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 fbnlas part of a cash-generating unit (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.

Pipeline rights (included in the "Other noncurrent assets" account in the consolidated balance sheet) represent the construction cost of the natural gas pipeline facility connecting the natural gas supplier's refinery to FGP's power plant including incidental transfer costs incurred in connection with the transfer of ownership of the pipeline facility to the natural gas supplier. Pipeline rights cost is amortized using the straight-line method over 22 years, which is the term of the Gas Sale and Purchase Agreement (GSPA).

Prepaid Gas Prepaid gas (included in "Other noncurrent assets" account in the consolidated balance sheet), consists of payments to Gas Sellers for unconsumed gas, net of adjustment. The prepaid gas is recoverable in the form of future gas deliveries in the order that it arose and can be consumed within a 10-year period. Prepaid gas arising fiom the respective Settlement Agreements and Payment Deferral Agreements of FGPC and FGP can be recovered until December 2014 (see Note 33c). If it should be determined at some future date that the likelihood of any amount of

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104 gas usage or delivery is remote, then the relevant amount deemed no longer realizable will be written off against profit and loss.

Research and Development Costs Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured. Any expenditure carried tbrward is amortized in line with the expected future sales from the related project. Otherwise, development costs are expensed as incurred.

The carrying value of development costs is reviewed fbr impairment annually when the asset is not yet in use, or more frequently when an indication of impairment arises during the reporting year.

Interest-bearing Loans and Other Borrowings All loans and borrowings are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any related issue costs, discount or premium. Gains and losses are recognized in income when the liabilities are dereeognized, as well as through the amortization process.

Debt Issuance Costs Expenditures incurred in connection with the availments of long-term debt and bond issuances are deferred and amortized using effective interest method over the life of the loans and bonds. Debt issuance costs are netted against the related long-tenn debt and bonds payable allocated correspondingly between the current and noncurrent portkm.

Debt issuance costs that pertain to undrawn loan facility are presented as part of"Other noneurrent assets" account in the consolidated balance sheet.

Borrowing Costs Borrowing costs include interest charges and other costs incurred in eomaection with the borrowing of funds, including exchange differences arising from foreign currency borrowings used to finance the projects to the extent that they are regarded as an adjustment to interest costs, net of interest income.

Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they arc directly attributable to the 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 resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of income.

105 Provisions Provisions are recognized when First Holdings Group has a present obligation (legal or constructive): (i) as a result of a past event, (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (iii) a reliable estimate can be made of the anlount of the obligation. If the ellect 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, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as borrowing cost. Where the First Holdings Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.

The First Holdings Group recognized provisions arising from legal and/or constructive obligation associated with the cost of dismantling and removing an item of property, plant and equipment and restoring the site where it is located. The obligation of the First Holdings Group occurs either when the asset is acquired or as a consequence of using the asset for the purpose of generating electricity during a particular period.

Changes in the dismantling provision that result from a change in the current best estimate of cash flows required to settle the obligation or a change in the discount rate are added to (or deducted from) the amount recognized as the related asset.

Revenues Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the First Holdings Group and the amount of revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized:

Sale of Electricily. Revenues tiom sale of electricity is composed of capacity fees, fixed and variable operating and maintenance fees, fuel, wheeling and pipeline charges, sales tax and supplemental fees. Fixed capacity fees and fixed operating and maintenance fees are recognized on a straight-line basis, based on the actual capacity tested/proven, over the terms of the respective PPAs. Variable operating and maintenance fees, fuel and pipeline charges and supplemental fees are recognized monthly based on the actual energy delivered.

Construction Contracts. Revenues from construction contracts and engineered products are recognized using the percentage of completion method of accounting with reliance on surveys conducted by in-house engineers of work performed to measure the stage of completion.

Sale of Merchandise and Services'. Revenues from the sale of merchandise and from pipeline services are recognized upon billing. With respect to sale of merchandise, this coincides with the time of shipment. Adjustments of billings for pipeline services over and above the base charges are recorded at the time of settlement with shippers.

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q0G Sale of Real Estate. Revenue and cost from sale of real estate from complcted projects is accounted for using the full accrual method. The percentage of completion method is used to recognize income t_romsales of projects where the Company has material obligations under the sales contract to complete the project after the property is sold. Under this method, revenue is recognized as the related obligation are ti_lfilled, measured principally on the basis of the estimated completion of a physical proportion of the contract work.

Toll Fees. Revenue from toll fees is recognized upon the sale of toll tickets. Toll fees received in advance, through transponders or magnetic cards, are recognized as income upon the holders' avaihnent of the toll road services, net of sales discounts. The unused portion of toll fees received in advance is reflected as unearned toll revenue shown under "Accounts payable and other current liabilities" in the consolidated balance sheets.

Equity in Net Earnings (Losses). The First Holdings Group recognizes its share in the net income (loss) of associates proportionate to the equity in the voting shares of such associates in accordance with the equity method of accounting for investments.

Interest. Income is recognized as the interest accrues, taking into account the effective yield on the asset.

Dividend. Dividend income is recognized when the shareholders' right to receive the payment is established.

Rent. Rental income is recognized on a straight-line basis over the lease terms.

Foreign Currency Transactions and Translations The consolidated financial statements are presented in Philippine peso, which is the First Holdings Group's functional and presentation currency of the First Holdings Group. All subsidiaries and associates evaluate their primary economic and operating environment and, determine their tianctional currency and items included in the financial statements of each entity are initially measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate prevailing on the period of the transaction. Monetary assets and liabilities denominated in foreign currency are restated at the functional currency rate of exchange prevailing at the balance sheet date. All difIizrences are recognized in the consolidated statement of income. Nonmonetary items that are measured in terms of historical cost in a fbreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonrnonetary items measured at fair value in a tbreign currency are translated using the exchange rates at the date when the fair value was determined.

Except fbr First Gen Group and FSRI which have identified the US dollar as their functional currency, all other consider the Philippine peso as their functional currency. As of the reporting date, the assets and liabilities of the First Gen Group and FSRI are translated into the presentation currency of Parent Company at the rate of exchange ruling at the balance sheet date and, their statements of income are translated at the weighted average exchange rates t:brthe year. The exchange differences arising on the translation are taken directly to a separate component of equity as cumulative translation adjustments. Upon disposal of any of these subsidiaries, the deterred cumulative amount recognized in equity relating to that particular subsidiary will be recognized in the consolidated statement of income.

107 Leases IFRIC Interpretation 4, "'Determining whether an Arrangement contains a Lease," provides guidance in determining whether such arrangements are, or contain, leases that should be accounted for in accordance with PAS 17, "Leases." Effective January 1,2005, First Holdings Group early adopted Philippine Interpretation IFRIC 4. Based on the assessment made by First Holdings Group, the PPAs of FGP and FGPC and the Project Agreement of Bauang Private Power Corporation, an associate through First Gen, are arrangements containing leases and are to be accounted _bras operating leases. The adoption of this interpretation has no effect on retained earnings as of January 1, 2004 and December 31,2004. The adoption also did not result in changes in prcsentation and disclosures.

The determination ofwhcther an arrangement :is,or contains a lease is based on the substance of the arrangement and requires an assessment of whether the _hlfillment of the arrangement is dependent on the use of a speci tic asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after 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 that tern1 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 specified asset; or d. there is a substantial change to the asset.

Where a reassessment is made, lease accounting will commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) enumerated in the tbregoing, and at the date of renewal or extension period for scenario (b).

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the consolidated statemcnt of income on a straightqine basis over the lease terms. For income tax reporting purposes, expenses that should have been incurred under lease agreement are considered as deductible expenses.

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 common significant influence.

Retirement Costs The Parent Company and certain subsidiaries have distinct funded, noncontributory defined benefit retirement plan. The plans cover all permanent employees, each administered by their respective board of trustees.

The cost of providing benefits under the defined benefit plans is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit

108 obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a retirement plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized, and the )'air value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds fi-om the plans or reductions in the future contributions to the plans.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the tbrm of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated in the foregoing are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds fiom the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

Share-based Payment Transactions Certain employees (including senior executives) of the First Holdings Group receive remuneration in the form of share-based payment transactions. Under such circumstance, the employees render services in exchange for shares or rights over shares ("equity-settled transactions").

Equity-settled Transactions. The cost of equity-settled transactions with employees is measured by reference to the fair value of the stock options at the date the option is granted. The fair value is determined using the Black-Scholes Option Pricing Model, further details of which are given in Note 23 - Executive Stock Option Plan and Employee Stock Purchase Plan. In valuing equity- settled transactions, no account is taken of any performance conditions, other than market conditions, if applicable.

The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ("the vesting date"). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the consolidated statements of income/or a period represents the movement in cumulative expense recognized as of the beginning and end of that period.

No expense is recognized fbr awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, an expense, as a minimum is recognized as if the terms bad not been modified. An expense is recognized/'or any increase in the value of the transactions as a result of the modification, 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, ifa new award is substituted fbr the cancelled award, and designated as a replacement award on thc date that it is granted, the cancelled and new awards are treated as if they were modifications of the original award, as described in the foregoing.

The dilutive effect of outstanding options is reflected as additional share dilution in thc computation of earnings per share (EPS, see Note 28 - EPS Calculation).

Income Tax

Current Tax. Current tax liabilities for the current and prior years are measured at the amount expected to be paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted as of the balance sheet date.

D@rred Tax. Deterred tax is provided in full, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination, which that at the time of the transaction affects neither accounting nor taxable profit. Deferred income tax is determined using the tax rates (and tax laws) that have been enacted or substantially enacted as of the balance sheet date and are expected to be applied when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits from excess mininmm corporate income tax (MCIT) and net operating loss carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry4brward of MCIT and NOLCO can be utilized except:

• where the deterred income 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, attbcts neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the tbreseeable future and taxable profit will be available against which the temporary differences can be utilized.

,_ 110 The carrying amount of deterred income tax assets is reviewed at each balance sheet 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 income tax asset to be utilized. Unrecognized defbrred income tax assets are reassessed at each balance sheet 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.

Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income.

Defbrred tax assets and liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same tax authority.

Dividends on Common Shares of the Parent Company Dividends on common shares are recognized as liability and deducted fi-om equity when approved by the respective shareholders of the Parent Company. Dividends for the year that arc approved after the balance sheet date are dealt with as an event after the balance sheet date.

EPS Attributable to the Equity Holders of the Parent Comp..a.n_£ Basic EPS is calculated by dividing the net income tbr the year attributable to common shareholders by the weighted average number of common shares outstanding during the year, after giving retroactive effect to any stock dividends declared during the year.

Diluted EPS is calculated in the same manner assuming that, at the beginning of the year or at the time of issuance during the year, all outstanding stock options are exercised and debt instruments with potential common stock equivalent are converted to common shares and appropriate adjustments to net income are effected for the related expenses and income. Outstanding stock options will have dilutive effect under the treasury stock method only when the average market price of the underlying common share during the period exceeds the exercise price of the option.

Where the effect of the assumed exercise of outstanding options has anti-dilutive effect, diluted EPS is presented the same as basic EPS with a disclosure that the effect of the exercise of the instruments is anti-dilutive.

Segment Report.i.ng The First Holdings Group is organized into four major business segments. Such business segments are the bases upon which the Company reports its primary segment information. Financial in/bnnation on business segments is presented in Note 4 to the consolidated financial statements.

Contingencies Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

111 Events After the Balance Sheet Date Post year-end events that provide additional information about the First Holdings Group's financial position at the balance sheet 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 consolidated financial statements when material.

Future Changes in Accounting Policies The First Holdings Group did not adopt early the following standards and amendments that have been approved but are not yet effective:

• PFRS 1, "Amendments to PAS 1, Presentation of Financial Statements: Capital Disclosures"

This will be effective January 1,2007. This introduces disclosures about the level of an entity's capital and how it manages capital. The revised disclosures fi-om the amendment will be included in the First Holdings Group's consolidated financial statements when the amendment is adopted in 2007.

• PFRS 7, "Financial Instruments - Disclosures"

This will be effective January 1, 2007. The revised disclosures on financial instruments provided by this standard will be included on the financial statements when the standard is adopted effective January 1, 2007.

• PFRS 8, "Operating Segments

This will be effective January 1,2009 and will replace PAS 14, "Segment Reporting," and adopts a management approach to reporting segment information. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such infbrmation may be different from that reported in the consolidated balance sheet and consolidated statement of income and companies will need to provide explanations and reconciliations of the differences. The First Holdings Group will adopt PFRS 8 in 2009.

• Philippine Interpretation IFRIC 1I, "PFRS 2, Group and Treasury Share Transactions"

This interpretation which is effective for the First Holdings Group beginning January 1, 2008, requires arrangements whereby an employee is granted rights to an entity's equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides guidance on bow subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent company. First Holdings Group will apply this interpretation in 2008.

112 • Philippine Interpretation IFRIC 12, "Service Concession Arrangements"

This Interpretation which is effective for the First Holdings Group beginning January i, 2008, outlines an approach to account for contractual arrangements arising from entities providing public services, it provides that the operator should not account for the infi'astructure as property, plant and equipment, but recognize a financial asset and/or an intangible asset. A financial asset is recognized to the extent that the operator has a contractual right to receive cash from the grantor or has a guarantee from the grantor. An intangible asset is recognized to the extent that the entity has a right to charge the public fbr use of the asset. Entities with public-to-private service concessions will need to assess their existing contractual arrangements to identify the contracted cash flows that give rise to a financial asset and identify any intangible asset that may exist.

MNTC was granted by the Republic of the Philippines rights, obligations and privileges including the authority to finance, design, construct, operate and maintain the project as toll roads. MNTC in turn collects toll fbes fi-om the motoring public fbr the use of the roads.

MNTC is currently assessing the impact of this interpretation on its consolidated financial statements. Based on its initial assessment, the contractual arrangement may be within the scope of IFRIC 12 and may fhll under the intangible model which would require the roads and tollways to be recognized as intangibles in accordance with PAS 38, "Intangibles." The asset is currently recorded as a separate item in the consolidated balance sheet. MNTC will also conduct a technical study to arrive at the best estimate of the expenditure that would be required to restore the infrastructure upon hand-over to the Philippine Government as required under IFRIC 12.

First Holdings Group will apply this interpretation in 2008.

New and revised disclosure requirements will be included in the consolidated financial statements when the First Holdings Group adopts these standards, amendments and interpretations on their respective effectivity dates.

Effect of Exposure Draft (ED) of Amendments to PAS 27, "Consolidated and Separate Financial Statements" One of the changes that the ED proposes relates to changes in the parent company's ownership interest in a subsidiary after control is obtained that do not result in a loss of control. Based on the proposed amendment, such transaction should be accounted for as transactions with equity holders in their capacity as equity holders. As a result, no gain or loss on such changes would be recognized in profit or loss. Accordingly, when the ED is approved and becomes effective, the gain on dilution recognized in the 2006 consolidated statement of income related to the dilution of First Holdings in First Gen Group as a result of the latter's public offering of its common shares, amounting to ta2.7billion shall be reversed and be recognized directly in equity.

113 3. Significant Accounting Judgments and Estimates

The preparation of consolidated financial statements in conformity with PFRS requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The judgments and estimates used in the accompanying consolidated financial statements arebased upon management's evaluation of relevant fhcts and circumstances as of the date of the consolidated financial statements, giving due consideration to materiality. Actual results could differ from such judgments and estimates.

The First Holdings Group believes that the following represents a summary of these significant judgments and estimates and related impact and associated risks in our consolidated financial statements.

Judgments

Determination of Functional Currency. Except fbr First Gen and FSRI, both of which are subsidiaries of the Parent Company, and FPPC and FSCI, the Parent Company and all other subsidiaries and associates have determined that their functional currency is the Philippine peso. It is the currency of the primary economic environment in which the Parent Company and all other subsidiaries and associates, except First Gen Group, FSRI, FPPC and FSCI, operate. The First Gen Group, FSRI, FPPC and FSCI have dctcmained the US dollar to be their functional currency. Thus, the accounts of First Gen, FSRI, FPPC and FSCI were translated to Philippine peso for the purposes of consolidation to the First Holdings Group's accounts.

Operating Lease Commitments - First Holdings Group as Lessor. The respective PPAs of FGP and FGPC and the Project Agreement of BPPC qualify as leases on the basis that FGP and FGPC, and BPPC sell all their output to MERALCO and National Power Corporation (NPC), respectively. These agreements call for a take-or-pay arrangement where payment is made principally on the basis of the availability of the power plants and not on actual deliveries of electricity. These lease arrangements are determined to be operating leases where a significant portion of the risks and benefits of ownership of the assets are retained by FGP, FGPC and BPPC. Accordingly, the power plant assets are recorded as part of the cost of property, plant and equipment and the f_es billed to MERALCO and NPC are recorded as operating revenues on straight-line basis over the terms of the PPAs and the Project Agreement.

MNTC has a Supplemental Toll Operation Agreement, whereby the Republic of the Philippines granted MNTC the rights, obligations and privileges including the authority to finance, design, construct, operate and maintain the project roads as toll roads. MNTC has determined that the arrangement is or contains a lease based on the substance of the arrangement, which conveys to MNTC a right to use the roads fbr a specific period.

Input Value Added Tax (VAT). MNTC deferred the collection of VAT from the motorists at the directive of the Toll Regulatory Board (TRB). Republic Act (R.A.) No. 9337, which became effective on November 1, 2005, repealed MNTC's exemption from VAT granted under the PNCC franchise. MNTC, together with other toll operators, is currently discussing the issue on VAT with the concerned government agencies.

114 Upon effectivity of R.A. No. 9337, MNTC carved out the input tax from its purchases in 2004 (previously recorded as part of roads and tollways account) and recorded such input tax, together with the input tax from current purchases, which is included under "Other current assets" in the consolidated balance sheets. In September 2005, MNTC files a request fbr confirmation with the Bureau of Internal Revenue (BIR) that it may claim VAT input tax credit for the passed-on VAT f?om its purchases of goods and services for 2003 and prior years. As of April 12, 2007, MNTC is still awaiting confirmation by the BIR of the foregoing. Consequently, input tax from 2003 and prior years' purchases still tbrm part of roads and tollways and are subject to depreciation.

Management, in consultation with its legal counsel, believes that if and when the TRB authorizes the toll operators to collect VAT from motorists, it will be applied prospectively and at the same time be allowed to claim input tax against output tax. Accordingly, no VAT liability was recognized by MNTC.

As of December 31, 2006 and 2005, total input VAT capitalized as part of roads and tollways amounted to t_975 million and ta719 million, respectively, while roads and tollways amounted to t_l 5.2 billion and t_15.9 billion, respectively. Input VAT pertaining to 2003 and prior years that was capitalized as part of roads and tollways amounted to about ta270 million.

The carrying values of the affected assets and liability might change depending on the outcome of the uncertainties discussed in the foregoing.

Fair Value of Financial Instruments. Where the fair values of financial assets and financial liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of liquidity and model inputs such as correlation and volatility for longer dated financial instruments.

Estimates

Estimating U_eful Lives' of Property, Plant and Equipment. The estimated useful lives of our property, plant and equipment are based on the period over which the property, plant and equipment are expected to be available for use, and on the collective assessment of the industry practice, :internal technical evaluation and experience with similar assets. The estimated useful lives of property, plant and equipment are reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits in the use of the property, plant and equipment. However, it is possible that fhture results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned in the tbregoing. The amounts and timing of recording of depreciation for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of our property, plant and equipment would increase the recorded cost and expenses and decrease the balance of our noncurrent assets.

115 The carrying values of property, plant and equipment as of December 31, 2006 and 2005 amounted to ta38.7 billion and ta39.7 billion (see Note 11), respectively. The carrying values of roads and tollways amounted to tal 5.2 billion and t_15.9 billion as of December 31,2006 and 2005, respectively (see Note 12). In addition, the carrying values of investment properties amounted to tel.0 billion and #1.3 billion as of December 31, 2006 and 2005,respectively (see Note 13).

Impairment of Long-lived Assets (i.e., Property, Plant and Equipment, Roa& and Tollways, Investment Properties, Pipeline Rights, Prepaid Gas and Prepaid Major Spare Parts'). An annual impairment review of assets is performed when certain impairment indicators are present. The fair value of long-lived assets, which requires the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets. This requires certain estimates and assumptions to be made that can rnaterially affect the consolidated financial statements. Future events could cause the First Holdings Group to conclude that the property, plant and equipment are impaired. Any resulting impairment loss could have a material adverse impact on the consolidated financial condition and results of operations.

There is no impairment loss recognized in the consolidated financial statements for the years ended December 31,2006, 2005 and 2004. The aggregate carrying amount of assets subjected to impairment testing amounted to ta60.6 billion and #59.2 billion as of December 31, 2006 and 2005, respectively (see Notes 11, 12, 13 and 15).

Impairment of Goodwill. The First Holdings Group performs impairment review on goodwill on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash-generating units to which goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

There is no impairment loss on goodwill recognized in the consolidated financial statements lbr the years ended December 3l, 2006, 2005 and 2004. The carrying values of goodwill as of December 31,2006 and 2005 amounted to ta2.l billion and t_315 million, respectively (see Note 14).

Estimating AllowanceJbr Doubt./ul Accounts. The First Holdings Group reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes in the allowance.

In addition to specific allowance against individually significant loans and receivables, the First Holdings Group also makes a collective impairment allowance against exposure which, although not specifically identified as requiring allowance, have a greater risk of default than when originally granted. This level of allowance is based on the status of the receivables, past collection experience and other fi_ctors that may affect eollectibility.

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116 The allowance is established by charges to income in the fbnn of provision for doubtful accounts. The allowance for doubtful accounts amounted to ta124 million and P87 million as of December 31, 2006 and 2005, respectively.

Receivables (including current and noncurrent portion of receivable from MERALCO) amounted to i_l 5.8 billion and i_l 7.0 billion as of December 31,2006 and 2005, respectively (see Note 7).

Estimating Net Realizable Value of Inventories. Inventories arc presented at the lower of cost or net realizable value. 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 realize. A review of the items of inventories is performed at each balance sheet date to reflect the accurate valuation of inventories in the consolidated financial statements.

Inventories amounted to t_1.9 billion and t_2.6 billion as of December 31, 2006 and 2005, respectively (see Note 8).

Impairment qfInvestments in Shares of Stock. An impairment review is pertbrmed on investments in shares of stock whenever impairment indication exists. This requires an estimation of the value in use of the associates. Estimating the value in use requires estimates of the expected future cash flows from the associates and to make use of a suitable discount rate to calculate the present value of those future cash flows.

No impairment loss on investments in shares of stock was recognized in the consolidated financial statements for the years ended December 31, 2006, 2005 and 2004. The carrying amount of investments in shares of stock as of December 31,2006 and 2005 amounted to t_l 7.1 billion and _13.9 billion, respectively (see Note 10).

Retirement Costs. The determination of the First Holdings Group's retirement cost is dependent on certain assumptions which the management provided to the actuary to use as basis to calculate such amount. Those assumptions are described in Note 26 - Retirement benefits and include, among others, discount rates, expected returns on plan assets and rates of compensation increase. In accordance with PAS 19, past service costs, experience adjustments, and effects of the changes in actuarial assumptions are deemed to be amortized over the average remaining working lives of employees. While the assumptions are reasonable and appropriate, significant differences in the First Iloldings Group's actual experience or significant changes in the assumptions may materially affect the retirement benefit obligation.

Net retirement liability of the Parent Company and certain subsidiaries amounted to ta253 million and #268 million as of December 31,2006 and 2005, respectively (see Note 26). Net retirement benefit asset of the Parent Company and a subsidiary amounted to t_320 million and _68 million as of December 31, 2006 and 2005, respectively (see Note 15). Unrecognized cumulative actuarial losses as of December 31, 2006 and 2005 amounted to t_1,241 million and #247 million, respectively. Unrecognized past service cost amounted to t_29 million and P31 million as of December 31, 2006 and 2005, respectively.

117 Deferred Tax Assets. The carrying amounts of deferred tax assets at each balance sheet date are reviewed and are reduced to the extent that there are no longer sufficient taxable profits available to allow all or part of the deterred tax assets to be utilized. First Gen Group's assessment of the recognition of deferred tax assets on deductible temporary differences, carry forward benefits of minimum corporate income tax (MCIT) and net operating loss carryover (NOLCO) is based on the forecasted taxable income of the following reporting period. This forecast is based on First Holdings Group's past results and future expectations on revenues and expenses.

As of December 31,2006 and 2005, the amount of gross deferred tax assets recognized in the consolidated balance sheets amounted to ta134 million and P142 million, respectively. Unrecognized gross deferred tax assets as of December 3l, 2006 and 2005 amounted to t_3.8 billion and t_2.6 billion, respectively (see Note 27).

Asset Retirement Obligations. Under their respective Environmental Compliance Certificate (ECC) issued by the Department of Environmental and Natural Resources, FGP and FGPC have legal obligations to dismantle their power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has contractual obligation under the lease agreements with PSALM to dismantle its power plant assets at the end of the useful lives. The asset retirement obligations recognized represent the best estimate of the expenditures required to dismantle the power plants at the end of their useful lives. Such cost estimates are discounted using a pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the liability. Each year, the asset retirement obligations are increased to reflect the accretion of discount and to accrue an estimate for the effects of inflation, with the charges being recognized under "Finance costs" account. While it is believed that the assumptions used in the estimation of such costs are reasonable, significant changes in these assumptions may materially affect the recorded expense or obligations in future periods.

Asset retirement obligations amounted to P38 million as of December 31,2006 and 2005 (see Note 21).

Legal Contingencies. The estimate of probable costs fbr the resolution of possible claims has been developed in consultation with the external counsels handling the Company's defense in these matters and is based upon an analysis of potential results.

The First Holdings Group is inwflved in various legal proceedings as discussed in Note 33 - Commitments and Contingencies. Based on the advice of our legal counsels, we do not believe that these proceedings will have a material adverse effect on the consolidated financial statements. However, it is possible that future results of operations could be materially affected by changes in the estimates or the effectiveness of management's strategies relating to these proceedings.

As of December 31, 2006 and 2005, there are no provisions for probable losses arising from contingencies recognized in the consolidated financial statements.

.0_8

., _z_ _._ 118 4. Segment Information

Operating segments are components of the First Holdings Group that engage in business activities t_om which they may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about how resources are to be allocated to the segment and assess their pertbrmances, and for which discrete financial information is available.Our operating businesses are organized and managed separately according to the nature of the products and services, with each segment representing a strategic business unit that offers different products and serves different markets.

First Holdings Group conducts the majority of its business activities in the following areas:

• Power generation and power-related activities; •Roads and tollways operations; • Manufacturing; and • Investment holdings, construction, real estate development, securities transfer services and financing, which are aggregated as "Others."

The operations of these business segments are in the Philippines.

Segment revenue, segment expenses and segment performance include transfers between business segments. The transfers are accounted for at competitive market prices charged to unrelated customers for similar products. Such transfers are eliminated in consolidation.

Segment assets and results of the segments for 2005 and 2004 have been restated to reflect the effects of the change in policies with respect to the new accounting standards.

Financial intbrmation about the business segments follows:

2006 Power Generation and Power- Roads and related Tollways Manufac- Activities Operations turing Others Eliminations Consolidated (in Millions) Earnings in_brmation: Revenue 1_51,738 P5,709 _1,177 _987 (1a39) t_59,572 Segment results 10,900 2,280 42 (1,074) 91 12,239 Finance costs (5,074) (1,419) (3) (842) - (7,338) Finance income 2,686 199 1 395 - 3,281 Provision tbr (benefit from) income tax 1,134 68 22 (4) - 1,220 Net income 11,014 1,440 46 2,932 36 15,468 Other inlbrmation: Segment assets 99,856 19,596 1,495 49,446 (35,051) 135,342 Property, plant and equipment - net 36,479 67 63 2,071 - 38,680 Roads and tollways - net 15,205 - - - 15,205 Consolidated total assets 99,870 19,596 1,585 49,473 (35,051) 135,476 Segment liabilities 49,012 11,622 897 8,981 (688) 69,824 Consolidated total liabilities 50,503 11,685 897 8,981 (6881) 71,378 Depreciation and amortization 3,097 995 11 132 - 4,235

119 2005 Power Generation and Power- Roads a_ld related Tollways Manufac- Activities Operations turing Others Eliminations Consolidated (In Millions) Earnings infonnation: Revenue t_46,080 t_5,117 P875 ta1,192 (t_5) t_53,259 Segment results 10,442 1,853 44 (1,005) 78 11,412 Finance costs (3,527) (958) (3) (936) (5,424) Finance income 556 109 2 419 - 1,086 Provision for (benefit from) income tax 62 17 5 (8) - 76 Net income 8,210 1,527 32 1,835 (1,899) 9,705 Other intbrmation: Segment assets 90,382 21,187 1,068 44,306 (31,450) 125,493 Property, plant and equipment - net 37,441 55 48 2,109 - 39,653 Roads and tol Iways - net - 15,931 .... 15,931 Consolidated total assets 90,408 21,187 1,147 44,343 (31,450) 125,635 Segment liabilities 53,769 12,355 564 12,871 (4,228) 75,331 Consolidated total liabilities 54,601 12,361 564 12,875 (4,228) 76,173 Depreciation and amortization 3,490 1,181 12 129 - 4,812

2004 Power Gencration and Power- Roads and related Tollways Manufac- Activities Operations turing Others Eliminations Consolidated (In Millions) Earnings information: Revenue P37,513 ta42 ta819 t_1,558 I_- I_39,932 Segment results 10,707 (287) 5 (814) 196 9,807 Finance costs (3,279) (1) (4) (755) 58 (13,981) Finance income 148 29 3 326 (58) 448 Provision _br income tax 7 2 6 8 - 23 Net income 7,669 (1561) 14 (538) 49 7,038

Other infbrmation: Segment assets 96,555 19,619 927 38,840 (27,311) 128,630 Property, plant and equipment - net 48,719 52 54 2,326 - 51,151 Roads and tollways - net 15,752 - - - 15,752 Consolidated total assets 96,607 19,622 996 38,849 (127,31I) 128,763 Segment liabilities 61,161 14,643 445 13,096 (4,273) 85,072 Consolidated total liabilities 62,056 14,648 445 13,096 (4,273) 85,972 Depreciation and amortization 2,368 25 12 113 2,518

8

120 5.Acquisitions and Disposals of Investments

a. Acquisition of Pantabangan-Masiway Hydro Electric Power Plant (PAH EP/MAttEP) or Purchased Assets

On September 8, 2006, FGHydro participated and won the bid for the 112 mega-watt (MW) PAHEP/MAI{EP conducted by PSALM in connection with the privatization of NPC assets.

On October 5, 2006, following the successful bidding, FG Hydro entered into an Asset Purchase Agreement (APA) with PSALM for the purchase of the PAHEP/MAHEP facilities for a total consideration of#6.3 billion (US$129 million). On November 15, 2006 (the "Closing Date"), all the closing conditions tbr the execution of the APA were satisfied and the purchase was completed.Following the completion of the conditions precedent and the execution of the respective Certificates of Closing of FGHydro and PSALM, the operations and maintenance PAHEP/MAHEP was successfully transferred to FG Hydro on November 18, 2006.

Pursuant to the provisions of the APA, FG Hydro shall directly assume and agree to discharge the following as it pertains to the Purchased Assets, including but not limited to the following, among others from Closing Date:

• all rights, obligations and liabilities of PSALM arising from Operating Contracts which remain effective on or after the Closing Date;

• all rights, obligations and liabilities of PSALM arising from contracts which remain effective on or after the Closing Date, though with limitations; and

• all the rights and obligations of PSALM and/or NPC trader the existing Power Supply Contracts, subject to their respective terms and conditions indicated in these contracts.

The provisional fair value of the identifiable assets of PAHEP/MAHEP as of the date of acquisition is as _bllows:

Amount (In Millions) Property, plant and equipment #4,563 Goodwill arising on acquisition 1,764 Total consideration i_6,327

The total cost of the business combination was US$129 million. Under the APA, 40% of the total consideration (US$51.6 million) was paid as an Up-Front Payrnent to PSALM on November 17, 2006 and the remaining 60% (the Deferred Payment Facility) will be paid in 14 semi-annual installments including 12% interest per annum compounded semi-annually.

The fair value adjustments are taken up using the provisional amount since the results of the valuation of property, plant and equipment from independent appraiser have not yet been received as of December 31,2006.

121 To guarantee full, prompt, fhithful and complete performance of FG Hydro's obligations in the APA, FG Hydro posted a Performance Bond amounting to US$2.6 million (2% of the total consideration) in the form of an irrevocable standby letter of credits. The Perfbrmance Bond which will be reduced every year at an amount equivalent to 2% of the aggregate amount of the Deferred Payment Facility.

The net cash flow on acquisition follows:

Amount (In Millions) Total consideration ta6,327 Deferred payment facility 3,796 Net cash outflow ta2,531

From the date of acquisition, FG Hydro has contributed ta313 million (US$7 million) to the net income of the First Holdings Group.

b. Holdings in First Gen

On August 17, 2005, First Gen approved the conversion of 1,540,090 redeemable preferred shares into comlnon shares at a conversion ratio of one redeemable preferred share to 100 common shares and the 154,009,000 common shares. First Holdings converted only about 7% of its total preferred share holdings into common shares in First Gen. The other preferred shareholders, namely, Asian Infrastructure Development Co., Ltd., Sumitomo Corporation and FGHC International opted to convert all their preferred shares. As a result, the Parent Company's direct ownership in First Gen was reduced to 68.11% as of December 31, 2005. In addition, the Parent Company has a 20.33%-indirect ownership through FGHC International, a wholly owned subsidiary. The conversion was effected on November 22, 2005.

In 2006, the initial public offering of the shares of First Gen resulted in a decrease in the direct and indirect holdings of the Parent Company (see Notes 1 and 2).

c. FPlDC

In 2005, the equity interest of the Parent Company in FPIDC was increased to 51% upon conversion of a portion of its advances into equity of FPIDC. Total advances amounting to ta1.0 billion were converted into equity at t_161.96 per share. In addition to its direct ownership in FPIDC, the Parent Company has a 23% equivalent voting right granted by the other shareholders of FPIDC.

122 d. FPH Ventures

On July 19, 2002, the Parent Company incorporated FPH Ventures in the Cayman Islands as a wholly owned subsidiary. Thereafter, on July 30, 2002, the Parent Company entered into a Share Purchase Option Rights (SPORs) with FPH Ventures, whereby the Parent Company transferred 39,819,998 Class "A" shares and 241,507 Class "B" shares of MERALCO, for a total consideration of US$15 million 0a768 million). Under the terms of the agreement, the MERALCO shares, which are subject of the SPORs, are and will continue to be registered in the name of and legally owned by the Parent Company, until FPH Ventures exercises its options. Further, since FPH Ventures is a wholly owned subsidiary, the SPORs are eliminated in the consolidated financial statements.

6. Cash and Cash Equivalents

This account consists of:

2006 2005 (In Millions) Cash on hand and in banks (see Note 19) 1_2,570 P2,817 Short-term placements (see Note 19) 29,679 19,072 P32,249 _a21,889

Cash in banks earns interest at the prevailing bank deposit rates. Short-term placements are made tbr varying periods of up to three months depending on the immediate cash requirements of the First Holdings Group, and earn interest at the prevailing short-term placement rates.

7. Trade and Other Receivables

This account consists of:

2006 2005 (in Millions) Trade (see Notes 29 and 33a) P9,778 P7,282 Others (see Note 29) 941 1,058 10,719 8,340 Less allowance for doubtful accounts 124 87 PI 0,595 P8,253

123 8. Inventories

This account consists of:

2006 2005

(In Millions) At cost: Real estate t_1,079 t_1,335 Finished goods 77 59 Work in process 230 212 Costs and estimated earnings in excess of billings on uncompleted contracts 82 63 At net realizable value: Raw materials 299 183 Fuel inventories, spare parts and supplies: 53 707 In-transit 79 50 1_1,899 ta2,609

The cost of raw materials amountcd to t_332 million in 2006 and ta213 million in 2005. The cost of fuel inventories, spares and supplies amounted to P54 million in 2006 and P729 million in 2005.

9. Other Current Assets

This account consists of:

2006 2005 (In Millions) Prepaid expenses t_2,356 t_1,742 Input tax 1,028 759 FVPL investments 275 - Restricted cash deposits (see Notes 19 and 331) 103 1,406 Others 312 298 t_4,074 t_4,205

FVPL investments consist of investments in shares of stock of SiRF technology ttoldings, Inc. which is held for trading. Unrealized fair value gains on this investment amounted to _264 million in 2006.

124 10. Investments and Deposits

The First Holdings Group's associates, all incorporated in the Philippines, consist of the following:

Percentage Associate Principal Activity of Ownership FPPC and Subsidiary Power generation 40.00 FSCI Semiconductors 40.00 Panay Electric Company Power distribution 30.00 MERALCO and Subsidiaries Power distribution 26.82 Rockwell Land Corporation (ROCKWELL) Real estate development 24.50

This account consists of:

2006 2005 (In Millions) Investments in shares of stock 1_17,133 t_13,875 Deposits for future investments - net (see Note 29) 625 283 1_17,758 i_14,158

The details of the investments in shares of stock follow:

2006 2005 (In Millions:) Investments in associates - at equity: Acquisition cost of investments 1_20,126 t_20,214 Accumulated equity in net losses: Balance at beginning of year (6,355) (6,7751) Equity in net earnings of associates 4,208 963 Dividends received (941) (483) Foreign currency translation adjustments (24) (60) Balance at end of year (3,112) (6,355) Share in cumulative translation adjustments of an associate: Balance at beginning of year (78) (91 ) Foreign currency translation adjustments 131 13 Balance at end of year 53 (78) Share in unrealized fair value gains on available- for-sale investments of an associate Balance at beginning of year 5 5 Change in share in unrealized lair value gains on available-for-sale investments during the year 7 - Balance at end of year 12 5 17,079 13,786 Others - at fair value 54 89 P17,133 t_l 3,875

125 The carrying values of the First Holdings Group's investments in the significant associates follow:

2006 2005 (In Millions) MERALCO i_14,657 t_10,351 ROCKWELL 1,556 1,528 FPPC 1,231 1,307

The fair value of the MERALCO shares as of December 31,2006 and 2005 was i_14.6 billion and t_3.9 billion, respectively, while those of ROCKWELL and FPPC are not determinable since there is no publicly quoted price for such shares.

Following are the condensed financial information of First Holdings Group's significant associates equivalent to their equity ownership:

2006 2005 Current Current Current Current Assets Liabilities Assets Liabilities

(In Millions) MERALCO t_13,176 1_13,186 t_12,611 tal 3,045 ROCKWELL 1,317 306 997 509 FPPC 739 490 706 466

2006 2005 Total Total Total Total Assets Liabilities Assets Liabilities

(In Millions) MERALCO t_24,443 1_31,471 1a38,245 1a33,593 ROCKWELL 2,338 774 2,765 1,230 FPPC 1,855 570 2,122 792

Revenue 2006 2005 2004

(In Millions) MERALCO i_51,169 ia46,893 t_40,663 ROCKWELL 706 625 674 FPPC 1,097 1,140 1,178

Cost and Expenses 2006 2005 2004

(In Millions) MERALCO t_49,930 ta48,500 t_41,915 ROCKWELL 564 514 586 FPPC 380 466 496

126 Net Income (Loss) 2006 2005 2004 (In Millions) MERALCO P3,723 i_213 (Ia220) ROCKWELL 86 71 58 FPPC 510 412 383

Following are significant transactions and infbrmation on certain associates:

A. MERALCO

General MERALCO distributes power under separate t_anchises granted by the Philippine Government. On March 24, 2003, the Energy Regulatory Commission (ERC) granted MERALCO a Provisional Authority to continue to operate electric services in the cities of Manila, San Juan, Las Pifias, Quezon, Malabon, Makati, Caloocan, Pasay, Mandaluyong and Parafiaque and the municipality of Navotas. On June 9, 2003, R.A. No. 9209 was signed into law granting MERALCO a 25-year fi-anchise to construct, operate and maintain an electric distribution system. R.A. No. 9209 consolidated 50 previously held tl'anchises of MERALCO covering 25 cities and 86 municipalities in Metro Manila and six surrounding provinces.

MERALCO is subject to the ratemaking regulations and policies of the ERC. The ERC replaced the Energy Regulatory Board (ERB) under R.A. No. 9136, otherwise known as the Electric Power Industry Reform Act (EPIRA) of 2001.

Generation Rate Adjustment Mechanism (GRAM) Case In its March 2003 Decision on MERALCO's rate unbundling, the ERC directed MERALCO to discontinue implementing the Purchased Power Adjustment clause in its tariffs. Instead, subsequent changes in MERALCO's generation charge would be covered by the ERC's GRAM rules.

Under the GRAM rules promulgated by the ERC in February 2003, a distribution utility was required to file a deferred generation cost accounting application, setting tbrth its calculations of the generation :rate. The GRAM rules did not require the publication of the application prior to its filing with the ERC, nor the conduct of fbrmal hearings thereon.

MERALCO made three filings under the GRAM rules in respect of its deferred cost accounting application and, with the replacement of GRAM by an Automatic Generation Rate Adjustment :mechanism starting November 2004, MERALCO also made a final GRAM filing to account for all generation costs prior to November 2004.

The ERC's approval of MERALCO's second GRAM filing was questioned before the Supreme Court (SC) of the Philippines by a group of electricity consumers. According to their petition, MERALCO and ERC tailed to comply with Section 4(e), Rule 3 of EPIRA's Implementing Rules and Regulations (IRR), which required publication, notice, and hearing of application prior to issuance of the second GRAM Order.

In a decision dated February 2, 2006, the SC ruled that strict compliance with Section 4(e), Rule 3 of the EPIRA IRR is jurisdictional and applies to GRAM. Accordingly, ERC's second

127 GRAM Order was declared void and set aside. On February 20, 2006, the ERC and MERALCO filed separate motions asking the SC to reconsider its decision. However, through a Resolution promulgated on August 16, 2006, the separate Motions for Reconsideration (MR) filed by the ERC and MERALCO were denied with finality by the SC.

MERALCO was thereby directed to refund affected customers the amount of ta0.1327 per kilo-watt-hour (kwh) "reckoned from when the same was charged and collected", equivalent to a total amount oft_827 million. Accordingly, MERALCO recognized the GRAM to be rcfunded amounting to #827 million as of December 31, 2006. Such amount was recorded as a liability with a corresponding debit to other noncurrent assets. Generation costs Ibr the period covered by the GRAM have all been confirmed for recovery from customers. If recovery is not allowed through GRAM, it will be recovered through some other methods that the ERC may allow.

The GRAM refund was implemented from January to March 2007.

More significantly, as a result of the SC's ruling, MERALCO can adjust its generation charges only after the filing of an appropriate application and approval by the ERC. Thus, MERALCO has been prevented from automatically reflecting increases in the cost of generation in a timely manner.

As of April 12, 2007, MERALCO has filed six separate applications with the ERC, for the recovery of generation costs for the supply months of August, September, October, November and December 2006 and January 2007. All six applications are still pending and are in various stages of disposition by the ERC. ERC has already given provisional approval to three of the six applications and has concluded hearings on one of the applications. Further, for each passing supply-month, MERALCO will be filing a new application with the ERC.

To ensure that regulated entities, such as MERALCO, will be able to comply with jurisdictional and procedural requirements for rate adjustments as enunciated by the SC's GRAM ruling, ERC is drafting the "Rules to Govern the Filing of Consolidated, Monthly/Annual Applications for Adjustments of Rates Under Adjustment or True-Up Mechanisms Approved by the Energy Regulatory Commission." The said draft rules will govern applications for adjustments of certain unbundled bill components that are currently subject to the following mechanisms, as enumerated in the table below. Until the rules are promulgated, the mechanisms are not operative and any under- or over- recoveries in a particular unbundled bill component will remain unresolved.

Unbundled Bill Component Mechanism Generation and System Loss Charges • Guidelines tbr the Automatic Adjustment of Generation Rates and System Loss Rates by Distribution Utilities, as Amended Transmission Charge * Guidelines for the Adjustment of Transmission Rates by Distribution Utilities • Rules for Calculation of the Over- or Under- recovery in the Implementation of Transmission Rates and the Corresponding System Loss Rates by Distribution Utilities

128 Unbundled Bill Component Mechani sin Currency Exchange Rate Adjustment • Implementing Rules for the Incremental Currency Exchange Rate Adjustment Lifeline Rate/Subsidy • Guidelines tbr the Calculation of the Over- or Under-recovery in the implementation of Lit_line Rates by Distribution Utilities Inter-class subsidy • Guidelines for a"Tme-Up Mechanism of the Over- or Under-recovery in the Implementation of Inter-class Cross Subsidy Removal by Distribution Utilities

Unbundling Rate Case Filed with the SC On April 14, 2000, MERALCO filed with the ERB an application for a t_0.30 per kwh rate increase.

In accordance with Section 36 of R.A. No. 9136, the ERC required the NPC and all the distribution utilities to file their unbundled rate charges within six months from the effectivity of R.A. No. 9136. On December 26, 2001, MERALCO filed with the ERC a petition for its unbundled rate charges. The filing was made in accordance with the Uniform Filing Requirements issued by the ERC on October 30, 2001. On June 17, 2002, the ERC issued an Order consolidating MERALCO's ta0.30 per kwh rate increase petition (ERC Case No. 2001- 646) with its unbundling petition (ERC Case No. 2001-900), in order to simplify and expedite the resolution of the rate cases. All records and proceedings of the rate increase application were deemed consolidated with that of the unbundling. The hearings on the consolidated petitions were terminated on December 19, 2002.

On March 20, 2003, the ERC promulgated its Decision on the consolidated petitions. MERALCO filed on April 9, 2003 an MR in respect of the March 20, 2003 decision of the ERC. On May 30, 2003, the ERC issued an Order resolving MERALCO's MR. It also approved MERALCO's unbundled tariffs that will result in a total increase of ta0.17 per kwh over the May 2003 levels, after giving effect to the reduction of rates ordered by the SC in April 2003. This consisted oft_0.0835 per kwh increase reflecting higher generation and transmission charges and #0.0865 per kwh increase in MERALCO-related charges (distribution, supply and metering). The tariff increase was implemented in June 2003.

On August 4, 2003, certain consumer and civil society groups filed with the Court of Appeals (CA) a "Petition for Review" of the ERC's ruling. On July 22, 2004, the CA set aside ERC's ruling on MERALCO's rate unbundling and remanded the case back to the ERC. According to the CA, the ERC should have asked the Commission on Audit (COA) to audit the books of MERALCO.

The ERC and MERALCO subsequently filed separate motions asking the CA to reconsider its decision. On January 24, 2005, the CA denied the motions, thus, the ERC and MERALCO elevated the case to the SC. In an en bane decision promulgated on December 6, 2006, the SC set aside the CA ruling saying that a COA audit was not a prerequisite in the determination of a utility's rates. But, while the SC affirmed ERC's authority in rate-fixing, the SC also recognized the potential social impact of the matter. Thus, the SC directed the ERC to request COA to undertake a complete audit of the books, records and accounts of MERALCO. On

129 January 15, 2007, in compliance with the SC's directive, the ERC requested the COA to conduct an audit &the books, records, and accounts of MERALCO. In its request, ERC indicated its expectation of receiving the COA's report by September 2007.

As of April 12, 2007, MERALCO is not aware of any MR that has been filed regarding the SC's December 2006 decision and ERC has not received a reply from COA on the former's request for an audit of MERALCO's books.

In the meantime, MERALCO recognized an allowance for probable losses when the CA decision was released in 2004. The provisions made in 2004 and 2005 represent management's best estimate of probable losses in the event the SC upholds the CA decision. This amounted to t_9.8 billion and ta5.9 billion in 2004 and 2005, respectively. In 2006, the SC decision effectively reversed the CA decision. Under PAS 37, "Provisions, Contingent Liabilities and Contingent Assets," if it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the obligation should be reversed. The reversal of such provision should be recognized prospectively as required by PAS 8, "Accounting Policies, Changes in Accounting Estimates and Errors." Accordingly, in 2006, MERALCO reversed the entire provision for probable losses related to this case amounting to tal 5.7 billion.

SC Decision on the ta0.167 per kwh Refund Following the SC's final ruling that directed MERALCO to refund affected customers t_0.167 per kwh covering the billing period from February 1994 to April 30, 2003, the ERC approved the release of the refund in/bur phases. The last phase, Phase IV (/or non-residential accounts), is ongoing as of December 31, 2006.

MERALCO implemented the refund in four phases in such a way that would first satisfy MERALCO's obligations to the larger number but smaller and, mainly residential customers, who account for its lower income accounts. In June 2003, the ERC ordered the implementation of Phase I, which involves refunds to residential and general service customers who consumed 100 kwh or less of electricity in April 2003 (or in their last complete month's bill for services whose contracts with MERALCO have been terminated). On July 11, 2003, the ERC ordered the implementation of Phase II, which involves refunds to residential and general service customers who consumed 101 to 300 kwh in April 2003 (or in their last complete month's bill for services whose contracts with MERALCO have been terminated), from September 2003 to February 2004. Phase lII, which involves refunds to residential and general service customers who consumed more than 300 kwh of electricity per month, was implemented starting January 2004 over a period of twelve months.

Finally, MERALCO submitted its proposal to the ERC last September 3, 2004 with respect to Phase IV of the refund, which involves commercial and industrial customers and all other customers not covered by Phases I III. MERALCO's proposed scheme covers two sub- phases. Phase IV-A will cover small commercial and industrial customers, flat streetlights and government hospitals and metered streetlights with contracted demand of less than 40 kwh, flat streetlights and all government accounts. Phase IV-B will cover medium to extra large commercial and industrial customers and government hospitals and metered streetlights with contracted demand greater than or equal to 40 kwh.

8 J o,,

130 On January 5, 2005, the ERC issued an order to implement Phase IV-A starting January 2005 until June 2006. MERALCO l_hrther submitted to the ERC specific details on the implementation of Phase IV-B which was approved by the latter on June 29, 2005. ttowever, Revenue Regulation 8-2005 issued by the Bureau of Internal Revenue (BIR) in February 2005 stated that the refunds to Phase IV customers are income payments subject to creditable withholding tax (CWT). The CWT is withheld on the gross amount of the refund at the following rates: 25% for customers with active contracts and 32% for customers with terminated contracts. The ERC allowed MERALCO to defer the implementation of the refunds for Phase IV until the BIR releases its implementing guidelines and MERALCO prepares Ibr compliance with such guidelines.

The implementing guidelines of the BIR on the imposition of CWT on the Phase IV reIhnd was released in August 2005. MERALCO had to re-adjust its existing refund system and procedures to comply with the guidelines of BIR, and therefore the actual implementation of the refund only commenced in the 4th quarter of 2005. Customers are required to submit complete documents to MERALCO prior to the latter's release of their refund either through checks or monthly credit to their billings. Once a customer is able to comply with the requirements, be will receive the refunds due him from the original start dates as approved by the ERC.

MERALCO has remitted in advance a portion of the withholding tax for Phase IV refund, amounting to ta896 million.

The ERC-approved amended refund schemes are as follows:

Customer Customer Options Rethnd Term

Phase IV-A, Active • 6 checks, or • In equal amounts • Fixed credit to bills with • July 2005 to December 2006 option to receive cash • Quarterly post-dated checks Phase IV-A, Terminated • Single check payment • November 2006 Phase IV-B, Active • 21 checks or • In equal amounts • Fixed credit to bills with • October 2005 to December option to receive cash 2010 • Quarterly post-dated checks

Phase IV-B, Terminated • 21 checks, or • Same as Phase IV-B Active, • Single check payment or • June 2008

As of April 12, 2007, MERALCO is implementing Phase IV in accordance with the ERC- approved scheme. As of December 31, 2006, the balance of the refund (inclusive of the preset value effect) for each &the fbur phases is as follows:

Beginning Cash Application Phase Balance Payments against Billings Balance (Amounts in Millions) I t_365 ta9 ta6 t_350 II 308 10 1 297 III 395 46 6 343 IV 18,689 2,599 16,090 ta19,757 t_65 ta2,612 ta17,080

Based on MERALCO's implementation, customer refunds estimated to be made in 2007 amount to t_5.5 billion (exclusive of the present value effect).

In connection with the foregoing refund, GMA Network, Inc. and RGMA Network, Inc. ,joined the National Association of Electricity Consumers for Reforms (NASECORE) in requesting the ERC to compel MERALCO to pay interest on the refund. However, in an Order dated December 21, 2004, the ERC denied their motions on the grounds that: (i) the SC's judgment on the refund did not provide for payment of interest and (ii) it had long become final and executory and can no longer be altered or amended.

On February 2, 2005, GMA Network, Inc. and RGMA Network, Inc. filed a petition with the CA asking that MERALCO be ordered to immediately refund the amounts due to them plus legal interest of 6% per annum from February 1994 to April 9, 2004 when the decision of the SC became final and executory and 12% per annum f_om April 9, 2004 until fully paid. MERALCO opposed the petition.

On December 22, 2005, the CA denied the petition of GMA Network, Inc. and RGMA Network, Inc. on the ground that the ruling of the ERC on the refund implementation deserves respect and that the refund amounts do not earn interest. GMA Network, Inc. and RGMA Network, Inc. eventually elevated the matter to the SC.

On March 15, 2006, the SC denied the petition for review on certiorari of the CA ruling filed by GMA Network, Inc. and RGMA Network, Inc. Finally, on June 28, 2006, the SC denied with finality a motion asking the SC to reconsider its March 2006 decision.

Rate Increase Application dated May 31, 2005 On May 31,2005, MERALCO filed an application with the ERC (ERC Case No. 2005-028) seeking to adjust MERALCO's rate by an average ofta0.1476 per kwh based on (a) an independent appraisal of MERALCO's 2004 assets appraised at an exchange rate of #56.267:US$1.00; (b) MERALCO's 2004 audited financial statements; and (c) MERALCO's weighted average cost of capital (WACC) for 2004.

The presentation by MERA LCO of all of its witnesses and their cross-examination by oppositors were completed on August 16, 2006. However, the commencement of hearings for the presentation of oppositors' evidence is still to be scheduled. As of April 12, 2007, the case remains pending at the ERC.

132 First Performance-Based Rate (PBR) Application in accordance with the ERC's Rules for the Setting of Distribution Wheeling Rates (RDWR), MERALCO, along with two other distribution utilities (Dagupan Electric Corporation and Cagayan Electric Power and Light Company), filed its first PBR application last September 1, 2006.

The RDWR, formerly known as the Distribution Wheeling Rate Guidelines (DWRG), embodies a new rate-fixing scheme, now popularly known as, Performance-based Rate- making, or PBR. Under the current return on rate base (RORB) methodology, utility tariffs are based on historical costs plus a reasonable rate of return. On the other hand, the PBR scheme sets tariffs according to forecasts of operational performance and of capital and operating expenditures. The RDWR also employs a penalty/reward mechanism depending on a utility's actual performance.

The presentation and cross-examination of all of MERALCO's witnesses were concluded on November 21,2006. The Napocor Industrial Customers Association, Inc. (NICAI), which was the only intervenor recognized by the ERC, informed the ERC that it will not be presenting any witness.

Based on the ERC's schedule of proceedings, it expects to release a draft determination to the public fbr comments on February 16, 2007, to be tbllowed by a public consultation on April 3, 2007. The ERC said that they would promulgate a final decision by May 31, 2007, so that the new PBR tariffs could be in place by July 2007. As of April 12, 2007, the draft determination has not yet been released.

Contingencies

1) Contingent assets

(a) As of December 31,2006, MERALCO has contingent asset amounting to ta6.5 billion consisting of under-recoveries for Transmission Charge ofta4.0 billion, Lifeline and Inter-class Subsidy oft_l.7 billion and System Loss Charge of ta805 million. These under-recoveries accumulated in the absence of an adjustment mechanism for these two charges when the unbundled rates were implemented.

While an automatic adjustment mechanism for the system loss charge was authorized by the ERC for implementation starting November 2004, the guidelines prescribing a recovery mechanism for the under-recoveries on the system loss charge for prior periods promulgated by the ERC on November 23, 2005 became effective only on January 12, 2005.

Based on these guidelines, MERALCO may already start recovering ta284 million of unbilled system loss charges. Implementation of the recovery is through a ta0.0084 per kwh adjustment to the system loss charge for all consumptions starting with the February 2006 billing and will continue until the amount is fully collected. However, tbllowing ERC's provisional approval of MERALCO's application to recover the September 2006 generation costs, the collection of the remaining unbilled system loss charges has been suspended.

133 While the Guidelines on the Adjustment of Transmission Rates by Distribution Utilities have already been promulgated last September 28, 2005, the said guidelines do not prescribe a recovery mechanism for the under-recoveries in transmission charges fbr prior periods. Meanwhile, on October 1,2004, the ERC released an Order that resulted in the revision of the computation of the Transmission Charge component of the minimum charge. Such revision meant a potential liability to customers estimated at tal. 1 billion as of April 12, 2007. However, MERALCO still intends to bring this matter to the ERC considering that MERALCO is in an under- recovery situation with respect to the transmission charges under the current unbundled rates.

Following the SC's GRAM ruling, to ensure that regulated entities such as MERA LCO will be able to comply with jurisdictional and procedural requirements for rate adjustments as enunciated in the said ruling, ERC is drafting the "Rules to Govern the Filing of Consolidated, Monthly/Annual Applications for Adjustments of Rates Under Adjustment True-Up Mechanism" to be approved by the ERC.

(b) MERALCO has a contingent asset for overpaid income taxes fbr taxable years 1994 to 1998 and 2000 to 2001 estimated at ta7.1 billion. MERALCO has filed its claim for the recovery of the excess income taxes fbr the said taxable years. The BIR has issued the letters of authority lbr the examination of MERALCO's books during the said periods, including submission of the documents. The BIR examination resulted in net income tax refund of P6.7 billion subject to a resolution of the issue on prescription, which is being heard by the Court of Tax Appeals (CTA). In 2005, the BIR grantcd MERALCO an income tax refund for taxable year 2001 oft_894 million. MERALCO amended its Petition in the CTA to reflect the recoverable amount establishcd by the BIR.

2) Contingent liabilities

(a) Realty tax assessment

MERALCO is being assessed by six local government units (LGUs) fbr realty taxes on certain properties such as electric poles, wires, insulators, and transformers. One of these cases is now on appeal with the SC because of the CA's decision declaring that the electric poles, wires, insulators and transtbrmers are subject to realty tax under the Local Govemment Code. An adverse decision on any of these cases may result in tax assessments by all LGUs within the franchise areas of MERALCO. To date, there are 114 cities and municipalities under MERALCO's fi'anchise.

To address the possible liabilities fbr realty taxes, MERALCO filed an application for a mechanism to recover all types of tax assessments by LGUs, excluding the local franchise tax with the ERC on December 23, 2004. The first and only hearing related to the application filed was conducted on May 23, 2005. MERALCO is awaiting the guidelines from ERC that would set forth the recovery mechanism fbr these taxes. MERALCO believes that with a "pass-through" mechanism, the LGUs will exercise prudence with respect to the issuance of an assessment since a retroactive or prospective application will translate to higher amount of bills for its constituents.

134 (b) Local franchise tax

MERALCO was assessed by certain local governments for local franchise tax during the period when such LGUs were not qualified to issue assessments. In the opinion of management and its legal counsel, MERALCO has strong legal grounds to contest the assessments. Moreover, if management will agree to pay the assessments, any interested party may contest the "pass-through" of such payments in the bills of consumers as not prudent recoverable costs. At any rate, even assuming that the said assessments are upheld by the courts, the principle adopted by the ERC is that fi-anchise tax payments are recoverable from the rates. The unbundled rates approved by the ERC allow MERALCO to recover the current franchise tax payments.

The final outcome of the realty and local franchise tax assessments cannot presently be determined, and no other provisions for liabilities, other than those provided for pending cases, that may arise from additional cases in the event of any adverse decision on these cases, have been made in the consolidated financial statements of MERALCO.

(c) Income tax assessments

When the SC decision ordering MERALCO to ref_md _0.167 per kwh to affected customers became final in April 2003, it resulted in total overpayment of income taxes of_8.9 billion estimated at that time. MERALCO exercised its option to amend its income tax return for taxable year 1999, which was then pending for audit by the BIR, to reflect an overpayment of income tax for that year in the sum ofta977 million. The overpayment of #977 million was carried over and credited to the income tax liabilities for taxable year 2002, since the books of accounts of MERALCO for the years 2000 and 2001 have already been audited and examined by the BIR and the corresponding returns can no longer be amended.

On March 16, 2007, MERALCO received a Preliminary Assessment Notice dated January 2, 2007 from the BIR-Large Taxpayers Division disallowing the carryover and crediting of overpaid income tax oft a977 million for taxable year 1999 to taxable year 2002. The BIR Preliminary Assessment Notice was for t_2.2 billion including surcharge and interests.

The BIR maintained that the disallowance of the carryover was on the ground that the crediting of the 1999 overpayment of income tax was done beyond the two-year prescriptive period to ask for tax refund and that such carryover of tax credit can only be applied in the immediately succeeding year.

MERALCO intends to protest this assessment and even go to the extent of contesting this assessment before the CTA. It strongly believes that it had acted properly when it credited the ta977 million overpayment of income tax in 1999 against its tax liabilities for 2002. The two-year prescriptive period cited by the BIR applies only for tax refund claim and not in the amendment of income tax returns. As regards the contention that the carryover of tax credit can only be applied in the immediately succeeding taxable year, MERALCO believes that this may be true under the 1977 National Internal Revenue Code (NIRC). However, this has been superseded by

135 Section 76 of the 1997 NIRC which states that if the "corporation is entitled to a tax credit or refimd of the excess estimated quarterly income taxes paid, the excess amount shown in its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities.[br the taxable quarters of the succeeding taxable years. " Furthermore, MERALCO argued that to prevent it from carrying over the amount of its overpaid income tax in 1999 directly to 2002 would be tantamount to unjust enrichment on the part of the Philippine Government.

B. FPPC

On August 22, 2005, the BOD of FPPC approved the reduction in par value of the shares of FPPC fi-om t_100 a share to t193.75 a share, and the decrease of the authorized capital stock from #2 billion, divided into 20 million shares with par value oftal00 a share, to #1.9 billion, divided into 20 million shares with par value oft193.75 a share. The t_6.25 per share reduction in par value pertaining to the 16 million issued and outstanding shares was converted to additional paid-in capital of FPPC equivalent to US$4 million and was then applied against the deficit. FPPC obtained the SEC approval on the foregoing equity restructuring on December 27, 2005.

Investments in associates include goodwill of t13.3 billion as of December 31, 2006 and 2005.

11. Property, Plant and Equipment

This account consists of:

2006 Buildings, Other Structures Machinery, and Transportation Equipmeut and Construction Laud Improvements Equipment Others in Progress Total (In Millions) Cost: Balance at beginning of year 1_2,469 !J20,353 tm284 t_28,483 P43 t_51,632 Acquisitions throngh business combination (see Note 5) - 1,244 - 3,319 - 4,563 Additions 4 227 85 41 (1) 356 Disposals (7) - (7) (25) - (39) Reclassification - - - 13 (7) 6 Foreign currency translation adjustments (76) (1,507) (14) (2,079) -(3,676) Adjustment - - (4) (16) - (20) Balance at end of year 2,390 20,317 344 29,736 35 52,822 Accumulated depreciation, _unortization and impairment losses: Balance at beginning of year - 3,368 93 8,518 - 11,979 Depreciation and amortization for the year - 1,371 36 1,779 - 3,186 Disposals - - (13) (24) - (37) Reclassification - - - 2 - 2 Foreign currency translation adjustments - (122) 20 (886) - (988) Balance at end of year - 4,617 136 9,389 - 14,142 t_2,390 t_15,700 t_208 1_20,347 1_35 t_38,680

,_a_... ,,e > - ,,

136 2005 Buildings, (_)thor Structures Machinery, and Transportation Equipment alnd Construction Land hnprovemenls Equipment Others in Progress Total (In Millions) Cost: Balance at beginning of year P2 531 t_21,567 1_300 t_35 773 t_6 t_60 177 Additions - 5 3 2 37 47 Disposals - (2) (15) (307) (324) Foreign currency translation adjustments (62) (1,217) (4) (2,000) - (3,283) Adjustment (see Note 33k) - - (4,985) - (4,985) Balance at end of year 2,469 20 353 284 28 483 43 51,632 Accumulated depreciation, amortization and impairment losses: Balance at beginning of year 2,210 65 6 751 9 026 Depreciation and amortization for the year - I 323 30 2,21 I - 3 564 Disposals - (2) - (11 ) (] 3) Foreign currency translation adjttstments .... (163) (2) (433) - (598) Balance at end of year - 3,368 93 8,518 11,979 ta2 469 ta16,985 P191 tal 9,965 P43 ta39,653

No borrowing costs were capitalized in 2006 and 2005.

Property, plant and equipment with net book values ofta36.3 billion and #37.3 billion as of December 3 l, 2006 and 2005, respectively, have been pledged as security for long-term debt (see Note 191).

MNTC's property and equipment in excess of US$100,000 were pledged as collateral to secure its long-term debt (see Note 191).

12. Roads and Tollways

The movements of this account arc as follows:

2005 2006 Under In Service Construction Total Cost: Balance, January 1, 2005 i_644 t_15,150 ia15,794 1_17,136 Additions 265 1,077 1,342 244 Reclassification 16,227 (16,227) - - Balance, December 31, 2005 17,136 ..... 17,136 17,380 Accumulated depreciation: Balance, January 1,2005 42 - 42 1,205 Depreciation for the year 1,163 ..... 1,163 970 Balance at end of the year 1,205 - 1,205 2,175 Net book val ue # 15,931 _- # 15,931 i_15,205

137 Roads and tollways in service consists of civil works with net book value ofla15,205 million and t_l 5,931 million as of December 31,2006 and 2005, respectively, and fixed operating and non-fixed operating equipment with net book value oft_2,919 million and ta3,330 million as of December 31, 2006 and 2005, respectively.

Roads and tollways in service is depreciated as follows:

• Civil works (except asphalt overlay with net book value ofta336 million and t_1,414 million as of December 31, 2006 and 2005, respectively, which is depreciated over three to ten years in 2006 and three to five years in 2005) -- 25 years in 2006 and 26 in 2005, which is the remaining term of the concession period.

• Fixed operating equipment and nonfixed operating equipment -- 2 to 10 years

All rights, titles and interests of MNTC in roads and tollways with carrying amount of ta15,205 million and t_15,931 million as of December 31,2006 and 2005, respectively, and transportation equipment with aggregate cost in excess oft_25 million (US$500,000) were pledged as collateral to secure the MNTC's long-term debt (see Note 19).

Borrowing costs, including tbreign exchange losses regarded as adjustment to interest, capitalized fbr the year ended December 31, 2005 amounted to ta84 million. The construction of Phase I of the Project was substantially completed on February 8, 2005. Accordingly, interest on loans incurred thereafter is charged to profit and loss.

The interest rate used to determine the amount of borrowing costs eligible for capitalization was 11% in 2005.

!3. Investment Properties

Movements of this account are as follows:

2006 2005 Buildings Buildings and and Land Others Total Land Others Total (In Millions) Cost: Balance at beginning of year 1_442 t_1,092 1al,534 ta446 tal,016 tal,462 Additions 80 84 164 - 86 86 Disposals (301) (174) (475) - - - Foreign currency translation adjustments (5) (12) (17) (4) (10) (14) 216 990 1,206 442 1,092 1,534 Accumulated depreciation: Balance at beginning of year - 237 237 - 189 189 Depreciation tbr the year - 48 48 - 52 52 Disposals (51) (51) - - - Foreign currency translation adjustments - (11) (11) - (4) (4) - 223 223 - 237 237 Net book value t_216 P767 P983 ta442 P855 P1,297

3!

138 14. Goodwill

Movement of goodwill is as follows:

2006 20O5 (In Millions) Balance at beginning of year t_315 t_345 Additions during thc year (see Note 5) 1,764 - Foreign currcnc¥ translation adjustment 17 (30) tt2,096 t_315

Goodwill acquired through business combinations have been allocated to the applicable cash- generating units for impairment testing. The recoverable amount has been determined based on its value-in-use using cash flow projections based on financial budgets approvcd by senior management covering a five-year period. For 2006, the discount rate applied to cash flow projections is 8.49% and cash flows beyond the remaining terna of the existing agreements are extrapolated using growth rate of 2.5%.

Key assumptions used for the value in use of the cash-generating units for December 31,2006 and 2005 on which management has based its cash flow projections to undertake impairment testing of goodwill are as fbllows:

• Budgeted Gross Margins

The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budgeted year, increased for expected efficiency improvements.

• Bond Rates

The yield on a five-year government bond rate at the beginning of the budgeted year is utilized.

15. Other Noncurrent Assets

This account consists of:

2006 2005 (In Millions) Prepaid gas (see Note 33c) 1_2,939 t_520 Prepaid major spare parts (see Note 33e) 2,305 1,247 Pipeline rights - net of amortization 524 599 Retirement benefit asset (see Note 26) 320 68 Input tax 204 1,132

(Forward)

139 2006 2005 (In Million,_) Debt issuance costs on undrawn facilities (see Note 19) t_43 #251 Advances to contractors and others (see Note 29) 42 74 AFS investments 31 31 Cash deposit (see Note 19) - 2,655 Sinking fund - 1,297 Restricted cash deposits (see Notes 19 and 331) - 107 Others 229 313 t_6,637 #8,294

Pipeline Rights Pipeline rights represent the construction cost of the natural gas pipeline facility connecting the natural gas supplier's refinery to FGP's power plant, including incidental transfer costs incurred in con nection with the transfer of ownership of the pipeline facility to the FGP's natural gas supplier, pursuant to a Deed of Transfer executed with the Gas Sellers under the GSPA (see Note 33c).

Movements of pipeline rights are as follows:

2006 2005 Net book value as of beginning of year 1_599 #670 Amortization for the year (31) (33) Foreign currency translation adjustments (44) (38) Net book value as of end of year 1_524 _599

The remaining amortization period of pipeline rights is 17.75 years as of December 3l, 2006.

Cash Deposit As of December 3l, 2005, cash deposit represents the US$50 million upfront payment made by FPH Ventures to the holders of the Guaranteed Notes issued by FPH Fund pursuant to the terms of the forward purchase transaction entered into by FPH Ventures on August 1, 2002.

On April 3, 2006, CSFBi returned to FPH Ventures its initial payment of US$50 million (see Note 19). As of December 31,2006, the amount of cash is included in cash and cash equivalents account in the consolidated balance sheet.

Sinking Fund In 2005, the sinking fund represents the fund established by FPIDC in favor of Philippine Export- Import Credit Agency (PhilEXIM) under the Indemnity Agreement entered into by the two parties. The sinking fund covers up to the total face value of the letters of credit (LC) of FPIDC paid by PhilEXIM in accordance with its guarantee in favor of the LC's issuing bank.

In 2006, the sinking fund was released and replaced by an irrevocable standby letters of credit. Relative to the refinancing of MNTC loans in June 2006, the irrevocable letters of credit were terminated upon submission by FPIDC of the notice of termination to ABN AMRO Bank, Inc. on November 22, 2006.

140 Advances to Contractors and Others Advances to contractors and others mainly represent payments in excess of billings for services rendered by the contractors of the North Tollway Project of MNTC.

AFS Investments AFS investments consist of proprietary membership shares amounting to ta31 million as of December 31, 2006 and 2005. Unrealized fair value gains on such investments amounting to P20 million as of December 31, 2006 and 2005 were recognized directly in equity.

16. Loans Payable

Loans payable consist of short-term, unsecured, peso-denominated loans obtained from local financial institutions with interest rates ranging from 8.5% to 9.75% in 2006 and 9.75% to 9.95% in 2005.

17. Trade Payables and Other Current Liabilities

This account consists of:

2006 2005 (In Millions) Trade payables t_7,365 t_5,531 Accruals for: Interest 566 700 Salaries and bonuses 334 299 Construction costs 148 225 Others 851 505 1,899 1,729 Due to a related party (see Note 29) 388 404 Liabilities under trust receipts 227 95 Due to contractors and consultants 213 252 Others 726 760 t_10,818 t_8,771

18. Bonds Payable

On June 24, 2005, First Gen issued P5 billion Peso-denominated Fixed-rate Bonds (Bonds) due on July 30, 2010 with a coupon rate of 11.55%. The effective interest rate of Bonds is 12.03%. Interest is payable semi-annually. The Bonds constitute the direct, unconditional, unsecured and general obligations of First Gen. The proceeds from the Bonds were intended to be used for general corporate purposes, including working capital and investments. The Bonds may be redeemed at the option of First Gen after three years from issue date or if payments under the Bonds become subject to additional or increased taxes as a result of certain changes in law.

141 As set forth in the Trust Agreement in connection with the issuance of the Bonds, First Gen is obligated to perform certain covenants with respect to, among others: maintenance of specified debt-to-equity and a minimum debt-service-coverage ratios; disposition of all or substantially all of its assets; maintenance of majority and controlling interests in its subsidiaries; pledging present and future properties under certain circumstances; and material change of corporate structure. In addition, First Gen is restricted from declaration or payment dividends (other than stock dividend) during an Event of Default (as defined in the Trust Agreement) or if such payment would result in an Event of Default without the prior written consent of Bondholders representing at least 51% of the aggregate outstanding principal amount of the Bonds.

As of December 31,2006, First Gen is in compliance with all of the foregoing covenants.

As of December 31, 2006 and 2005, the unamortized debt issuance costs incurred :inconnection with the issuance of bonds amounting to ta74 million (US$1.5 million) and ta83 million (US$1.6 million), respectively, were deducted against the carrying value of the bonds payable. The movements of the debt issuance costs are as follows:

2006 2005 (In Millions) Balance at beginning of year 1_83 8- Accretion during the year (14) (7) Debt issuance costs incurred - 91 Foreign exchange adjustments 5 ( 1) Unamortized debt issuance costs at end of year P74 ta83

19. Long-term Debt

This account consists of long-term debt of:

2006 2005 (In Millions) FGPC t_15,635 t_21,160 FGP 10,466 12,620 MNTC 9,625 10,725 FPtt Fund 4,756 5,893 FGHC International 1,716 1,858 Others 3 5 42,201 52,261 Less current portion 8,351 6,736 t_33,850 t_45,525

142 FGPC The long-term debt of FGPC consists of US dollar-denominated borrowings which were availed of under the fbllowing project financing facilities ti-om various financial institutions to partly finance the construction of its power plant complex:

Facility Outstanding Balance Amount (:In Millions) Nature Repayment Schedule (InMillions) 2006 2005

Foreign currency- Back-ended and annuity US$360 _8_614 US$176 P10,688 US$201 denominated loans style repayment to be payable to _brcign made in various semi- financing institutions at annual installments fi'om various interest rates 2001 up to 2012 ranging ti'om 2.69% to 8.79%

US Private Placements Repayment to be made in US$160 6,266 128 7,965 150 with annual interest various semi-annual based on the applicable installments fi'om 2005 treasury yield plus 2.5% up to 2012 Foreign Currency Back-ended repayment to US$110 755 15 2,507 47 Deposit Unit (FCDU) be made in 15 unequal loans payable to local semi-annual installments banks with annual from 2001 up to 2007 interest at LIBOR plus 2.875% 15,635 319 21,160 398 Less current portion 6,235 127 4,249 80 Long-term portion t_9,400 US$192 tal6,911 US$318

As of December 31,2006 and 2005, the unamortized debt issuance costs incurred in connection with the availment of long-term debt amounting to t2279 million (US$6 million) and _407 million (US$8 million), respectively, were deducted against the long-term debt. The movements of the debt issuance costs are as follows:

2006 2005 (ln Million._) Balance at beginning of year t_407 P549 Accretion during the year charged to interest expense (I 02) (117) Foreign exchange adjustments (26) (25) Balance at end of year P279 ta407

FGPC has available undrawn committed borrowings amounting to US$32 million from its KfW Facility as &December 31, 2005. The availability period for the KfW Facility of FGPC expired on March 17, 2006, thus the deferred debt issue costs amounting to US$3.9 million relating to the undrawn KfW facility has been written-off against current year's earnings. All conditions precedent to these borrowings had been met.

143 Under certain project financing facility agreements, FGPC is required to pay to certain tbreign lenders a commitment fee ranging from 0.35% to 0.375% based on the undrawn and uncancelled portion of the principal amount of the financing facilities. In addition, a guarantee fee to a certain facility is also required to be paid to the guarantors at the rate of 1.5% a year on the outstanding principal amount. Such fees are payable semi-annually on each interest payment date.

The common terms of the project financing facility agreements (Common Terms Agreement) contain covenants concerning restrictions with respect to, among others: maintenance of specified debt to equity ratio; acquisition or disposition of major properties; pledging present and future properties (see Note 12); change in ownership; any acts that would result in a material adverse effect on the operations of the power plant; and maintenance of good, legal and valid title to the site free from all liens and encumbrances other than permitted liens. As of December 31,2006, FGPC is in compliance with the terms of the said agreements.

FGPC has entered into the tbllowing agreements in connection with the financing facilities:

• Mortgage, Assignment and Pledge Agreement whereby a first priority lien on most of FGPC's real and other properties, including revenues from the operation of the power plant, has been executed in favor of the lenders. In addition, the shares of stock of FGPC were pledged as part of security to the lenders. The carrying values of the collaterals is ta 17.1 billion (US$396 million) and ta22.9 billion (US$431.0 million) as of December 31, 2006 and 2005, respectively.

• Inter-Creditor Agreement, which describes the administration of the loans.

• Shareholder Contribution Agreement, which covers additional equity contribution to FGPC in order to meet the debt to equity ratio requirement under the Common Terms Agreement.

• Trust and Retention Agreement with the lenders' designated trustees. Pursuant to the terms and conditions of the Trust and Retention Agreement, the Security and Co-Security Trustees have established various security accounts where inflows and outflows of proceeds fi-om loans, equity contributions and project revenues are monitored. Disposition of cash deposits on these security accounts requires the prior approval of the Inter-Creditor Agent acting on the instructions of the lenders.

The balance of FGPC's security accounts, included as part of"Cash and cash equivalents" in the consolidated balance sheets as of December 31, 2006 and 2005 amounted to ta7.2 billion (US$147 million) and la7.4 billion (US$140 million), respectively. The restricted security account relating to land titling cases, which is expected to be released within 12 months fi'om the balance sheet date is included as part of the "Other current assets" account (see Note 9) in the consolidated balance sheets amounted to tal,406 million (US$27 million) as of December 31, 2005, while the balance expected to be released beyond one year is included as part of"Other noncurrent assets" account (see Note 151)in the consolidated balance sheet amounted to #1,457 million (US$25.8 million) as of December 3 l, 2005.

;_>_.

144 On February 28, 2007, given the resolution of the disputes between FGPC and Siemens AG, Siemens Power Generation and Siemens, Inc. (collectively, "Siemens") (see Note 33k) and as required under the TRA Supplement and the CTA of FGPC, an aggregate amount of $88.1 million of security amounts was used to prepay the Secured Indebtedness and all indebtedness under the EIB Finance Contracts of FGPC on a pro-rata basis.

FGP The long-term debt of FGP consists of US dollar-denominated borrowings which were availed of •under the following project financing facilities from various financial institutions to partly finance the construction of its power plant complex:

Facility Outstanding Balance Amount (In Millions) Nature Repayment Schedule (In Million# 2006 2005

IIERMES Covered Repayment to be made in US$133 t_4,125 1JS$84 ta4,995 S$94 Facility Agreement with 24 equal semi-annual annual interest at installments t?om 2003 commercial interest up to 2014 reference rate of 7.48%

Commercial Loan Credit Repayment to be made in US$115 3,659 75 4,442 84 (ECGD) Facility 24 equal semi-annual Agreement with interest installments from 2003 at 3-month to 6-month up to 2014 LIBOR plus 2.15% GKA Covered Facility Repayment to be made in US$77 2,682 55 3 183 60 Agreement with annual 27 equal semi-annual interest at 6-month insta ments from 2003 LIBOR plus I..4% with up to 2016 option to convert into fixed interest rate loan 10,466 214 12,620 238 Less current portion 1,206 25 1,296 24 Long-term portion 1_9,260 US$189 tal 1,324 US$214

As of December 3 l, 2006 and 2005, the unamortized debt issuance costs incurred in connection with the availment of long-term debt amounting to ta451 million (US$9 million) and ta591 million (US$11 million), respectively, were deducted against the long-term debt. The movements of the debt issuance costs are as follows:

2006 2005 (In Millions) Balance at beginning of year t_591 #744 Accretion during the year charged to interest expensc (101) (1161) Foreign exchange adjustments (39) (37) Balance at end of year t_451 ta591

145 FGP has available undrawn committed borrowing amounting to US$50 million from its Revolving/Working Capital Facility which is available until March 2007. All conditions precedent to these borrowings had been met.

The common terms of the project financing facility agreements (Common Terms Agreement) contain covenants concerning restrictions with respect to, among others: maintenance of specified debt to equity ratio; acquisition or disposition of major properties; pledging present and future properties (see Note 11); change in ownership; any acts that would result in a material adverse effect on the operations of the power plant; and maintenance of good, legal and valid title to the site, free from all liens and encumbrances other than permitted liens. As of December 31, 2006, FGP is in compliance with the terms of the said agreements.

FGP also entered into the following agreements in connection with the financing fhcilities:

• Mortgage, Assignment and Pledge Agreement whereby a first priority lien on most of FGP's real and other properties, including revenues from the operations of the power plant, has been executed in favor of the lenders. In addition, the shares of capital stock of FGP are pledged as part of security to the lenders. The carrying values of our collaterals is t_12.1 billion (US$247 million) and t_14.1 billion (US$266 million) as of December 3 l, 2006 and 2005, respectively.

• Inter-Creditor Agreement, which describes the administration of the loans.

• Shareholders' Contribution Agreement, which covers additional equity contribution to FGP in order to meet the debt to equity ratio requirement under the Common Terms Agreement.

• Trust and Retention Agreement with the lenders' designated trustees. Pursuant to the terms and conditions of the Trust and Retention Agreement, the Security and Co-Security trustees have established various security accounts where inflows and outflows of proceeds from loans, equity contributions and project revenues are monitored. Disposition of cash deposits on these security accounts requires prior approval of the Inter-Creditor Agent acting on the instructions of the lenders.

The balance of FGP's security accounts included as part of"Cash and cash equivalents" in the consolidated balance sheets as of December 31, 2006 and 2005 amounted to ta1.3 billion (US$27 million) and t_1.4 billion (US$24.2 million), respectively (see Note 6). The restricted security account relating to land titling cases is included as part of the "Other current assets" account in the consolidated balance sheet amounting to ta103 million (US$2.1 million) as of December 31, 2006 (see Note 9) and as part of"Other noncurrent assets" account amounting to ta98 million (US$2 million) as of December 31,2005 (see Note 15).

FGHC International On April 30, 2003, FGHC International entered into a Note Purchase Agreement with AIMCF (Cayman Islands) Limited (AIMCF). Under the Note Purchase Agreement, FGHC International issued a US$35 million, 8-year notes and drew on the facility provided by AIMCF effective July 11,2003. FGHC International shall make a principal payment in US dollars in an amount equal to one-seventh (1/7) of the aggregate principal amount oftal.7 billion (US$35 million) beginning on July 11, 2008, fifth anniversary fi-om date of issue, and annually thereafter, until full payment. All payments of principal shall be made together with all accrued but unpaid interest on

9!

146 the principal being repaid. The outstanding principal amount of the 8-year Note shall bear interest at a rate of: (a) 9% per annum fi-om the funding date to the fourth anniversary; and (b) 10.5% per annum from the fourth anniversary to the maturity date.

At anytime after the third and fifth anniversaries, FGHC International shall have the option to repay in whole but not in part, at a redemption price equal to 100% of the outstanding aggregate principal amount of the Notes, together with all interest accrued and unpaid up to the date of prepayment subject to certain provisions and the applicable prepayment fee.

The 8-year Note is guaranteed unconditionally and irrevocably by the Parent Company under a Parent Support Agreement dated April 30, 2003.

Under the Call Option Agreement dated April 30, 2003, AIMCF has the option to acquire certain shares of common stock and preferred stock of First Gen, as well as the right to put the call options and certain other rights to the Parent Company.

The Call Option Agreement was amended last January 12, 2006. Among other things, the amendments were made in order: (1) to recognize certain changes in the capital structure of First Gen Corporation, particularly the creation of a new class of preferred shares and (2) in connection with First Gen's initial public offering, to allow a cash settlement in lieu of an actual exercise of the call option. AIMCF did not avail of this cash settlement during the initial public offering which has been concluded.

So long as the 8-year Note is outstanding, FGHC International and the Parent Company will be subject to certain undertakings with respect to negative pledge, debt incurrence, asset disposal, dividend payments, maintenance of financial covenants and financial reporting, among others. The violation of the aforementioned may constitute an event of default under the Note Purchase Agreement, the Parent Support Agreement and the Call Option Agreement.

FPH Fund On August 1,2002, FPH Fund issued floating rate notes (Guaranteed Notes) totaling US$100 million due on October 1,2009. The payment of such notes is guaranteed unconditionally and irrevocably by the Parent Company. Interest on the Guaranteed Notes is based on six months LIBOR, from August 1, 2002, payable semi-annually commencing on April 1,2003. The terms of the Guarantee Notes have since been amended to remove the holder's put option on the interest payment date nearest to October 1, 2005 as well as the issuer's early redemption option on the interest payment date nearest to October 1, 2007. In 2006, a total of US$14 million were bought back from CSFBi. The outstanding obligation amounted to ta3.5 billion (US$72 million) as of December 31, 2006.

On April 22, 2005, FPH Fund drew a US$25 million loan from Standard Bank Asia Limited, which is fully guaranteed by First Holdings under a Parent Support Agreement. The loan bore interest at the six-month LIBOR plus 5%, but was later swapped to a fixed rate of 9.37% payable semi-annually commencing October 22, 2005. Semi-annual amortization of US$3.55 million will commence in April 2007 through April 2010.

147 FPH Fund and the Parent Company will be subject to certain undertakings with respect to negative pledge, debt incurrence, asset disposal, dividend payments, maintenance of financial covenants and financial reporting, among others. Any violation of the foregoing covenants may constitute an event of default under the terms of the Guaranteed Notes.

FPH Ventures On August 1, 2002, FPH Ventures entered into a Forward Purchase transaction to acquire, by August 1, 2005, all the Guaranteed Notes issued by FPH Fund. FPH Ventures made upfront and periodic cash payments pursuant to the terms of the Forward Purchase Agrccment. Upon specified events, FPH Ventures may be required to accelerate its commitment to acquire the Guaranteed Notes and to exercise its purchase rights pursuant to the MERALCO SPORs described in Note 5.

The final exchange of the forward purchase transaction has been postponed to April I, 2008 from August 1, 2005, with the Initial Exchange Amount decreased from US$60 million to US$50 million, as a result of the return of US$10 million to FPH Ventures. Thereafter, interim payments are to be made on forward purchase transaction for three years, at US$7 million for any interim payment date up to and including April 1,2006, US$6 million for any interim payment date from but not including April 1,2006 and including October 1,2007 and US$11 million on April 1, 2008.

Cash deposit pursuant to the terms of the Forward Purchase Agreement amounting to ta2.7 billion (US$50 million) is included in "Other noncurrent assets" account in the consolidated balance sheet as of December 31, 2005. As of December 31,2006, the amount is included in "Cash and cash equivalents" account in the consolidated balance sheet.

On March 15, 2006, CSFBi notified FPH Ventures of its intention to exercise its right under the Forward to cancel all of the transaction of FPH Ventures on the periodic payment date falling on April 1,2006. Since April 1,2006 was not a business day, the cancellation date was effective on the next business day which was April 3, 2006. The amount cancelled under the notice was the US$86 million outstanding. On April 3, 2006, CSFBi returned to FPH Ventures its initial payment of US$50 million.

MNTC On July 7, 2001, MNTC entered into a Common Terms Agreement with the lenders, the security trustee, the co-security trustee and inter-creditor agent. The Common Terms Agreement specifies the mechanics on the funding under the term facilities, payment and prepayments, as well as the conditions precedent to drawdowns set forth by the secured lenders. The Common Tcnns Agreement also contains covcnants concerning restrictions with respect to, among others, waiver, modification, amendment or assignment of the key project agreements, hedge agreements, restricted payments, and the maximum debt-to-base equity ratio and the level of the debt-service- coverage ratio. Total financing facility available to MNTC under the Common Telar_sAgreement amounted to US$252 million in term-loan facilities and US$8 million in the form of a standby letter of credit facility.

-02

;_ _,__g

148 Long-term debt consists of direct fiacilities and syndicated facilities. Interest rates on direct facilities, consisting of fixed and floating rates, range from 8.0% to 8.8% in 2006 and 6.1% to 8.7% in 2005. Interest rates on syndicated facilities, also consisting of fixed and floating rates, range from 5.6% to 7.8% in 2006 and 4.3% to 7.8% in 2005 excluding risk premium. Risk premium paid annually is equivalent to 1.4% of current debt plus 2.7% of standby debt while risk premium paid up-front is equivalent to about 10% of the facility amount.

The outstanding balance of loans, gross of unamortized debt issue costs of ta481 million and ta651 million as of December 31, 2006 and 2005, respectively, amounted to t_10,106 million (US$94 million in US dollar loans and t_5.5 billion in FXCN) as of December 31,2006 and tal 1,376 million (US$214 million) as of December 31, 2005.

The loans were granted under a limited recourse project finance structure. All existing and tiature assets of MNTC are mortgaged in favor of the lenders in line with the requirements of the Mortgage, Assignment and Pledge Agreement, known as the Master Security Agreement (MSA). In addition, FPIDC and Egis S.A. (Egis) provided completion support as agreed under the Sponsor Support Agreement (SSA).

MNTC also entered into the following major agreements in connection with the financing facilities: a. Trust and Retention Agreement (TRA) with the secured lenders' designated trustees and the inter-creditor agent. The TRA provides for the establishment and regulation of the security accounts and the security account collateral where the inflows and outflows of loans obtained from the secured lenders may be monitored. The security accounts Ibrm part of"Cash and cash equivalents" account in the consolidated balance sheets.

On March 24, 2005, the CTA and TRA were further amended to accommodate the Amended and Restated Supplemental Agreement to Construction Contract.

b. The MSA which grants to the trustees, on behalf of the secured lenders, the security interest in MNTC's various assets. Real estate mortgage and chattel mortgage shall be constituted in favor of the co-security trustee for the benefit of the secured lenders, as required under the financing agreements.

c. Shareholder Contribution Agreement (SCA) with the Principal Shareholders, Benpres, Lopez, Inc., Transroute International S.A., the security trustee, the co-security trustee and inter- creditor agent which provides, among others, for the Principal Shareholders to make additional equity contributions to MNTC in order to meet the required debt-to-base equity ratio prior to the proposed drawdown date.

The Common Terms Agreement and related agreements were amended on January 30, 2003 to reflect certain changes in the deal, mainly: (a) the replacement of BHC with the Parent Company, and the removal of Lopez, Inc. in the Financing Agreements; (b) the entry of LAL as a new shareholder and the revised shareholders structure; and (c) credit enhancement of the Parent Company guarantee under the SSA through the provision of FPIDC of a sponsor support letter of credit equivalent to US$21 million which was subsequently released in November 2006.

149 d. SSA with FPIDC, Egis, the security trustee, the co-security trustee and inter-creditor agent, which provides, among others, for FPIDC and Egis to provide certain support to MNTC up to a maximum of US$25 million. The SSA provides for certain restrictions with respect to, among others, waiver, modification, amendment or assignment of the key project agreements, merge or amalgamate or be consolidated with any other person or entity and enter into any arrangement or commitment on terms less favorable to MNTC other than arm's-length open market terms unless otherwise approved by the lenders. Benpres and Egis have guaranteed the obligations of FPIDC and Egis, respectively, as MNTC sponsors under the SSA.

On December 28, 2005, the lenders, through the inter-creditor agent, confirmed that the conditions to the reduction of the sponsor support commitment have been met. This allowed the reduction of the US$25 million commitment to US$3 million, computed based on the sum of the post-material completion (MC) works reserve amount and the estimated right-of-way dispossession exposure. Of this total, FPIDC provided security for US$3 million in the form of an irrevocable stand-by letter of credit while Egis provided security for the balance of US$0.5 million in the fbrm of a corporate guarantee. The sponsor support securities were released in November 2006.

On November 8, 2006, MNTC entered into a refinancing transaction which involved the partial prepayment and restructuring of MNTC's US dollar-denominated long-term debt using the proceeds of a t_5.5 billion FXCN issue. The :refinanced debt package consisted of a total of US$100 million in US dollar ten:: loan facilities participated in by majority of the original project lenders and a t_5.5 billion FXCN issue participated in by sixteen (16) qualified local institutional investors. The US dollar term loan facilities are payable in 16 equal semi-annual installments starting December 15, 2006 up to June 15, 2014. The FXCNs are payable within seven years from issue date under a bullet-like structure, as follows: 94% of the principal is payable on maturity date (November 17, 2013) while the balance of 6% is payable over the term of the notes in minimal annual installments. The simultaneous prepayment and drawdown on refinancing date (November 17, 2006) was facilitated through a $96 million Conversion Bridge Facility (Bridge Loan) provided by Mizuho Corporate Bank, Ltd. of Singapore. This was a cash-secured temporary dollar facility backed by the FXCN proceeds that allowed MNTC to obtain the necessary dollars for the lump sum prepayment on refinancing date. The Bridge Loan was fully paid on December 5, 2006.

In connection with the refinancing transaction, the Common Terms Agreement, TRA and MSA were amended to reflect the revised covenants and security package covering all MNTC's debt on a parri-passu basis. Certain agreements, like the SCA and the SSA, were terminated and the sponsor guarantees along with other elements of the original security package were released effective November 17, 2006.

4g_

]50 20. Share Option Acquisition Rights (SOARs)

On December 23, 2002, the Parent Company, FPIDC, Benpres and Lopez, Inc. entered into a Memorandum of Agreement (MOA) whereby the parties agreed to the following terms:

a. Benpres shall assign t_1.1 billion worth of advances made to FPIDC in favor of the Parent Company fbr a total consideration of tal. 1 billion (Acquired Advances).

b. The Parent Company shall issue a promissory note in the same amount, payable to Benpres in ] 8 months after the date of the issue, subject to conversion into a 15-year loan under such telanS that may be agreed with Benpres. The Parent Company shall have the right, but not the obligation, to apply any portion of the promissory note against the corresponding amount of the SOAR issue price and deposit for the relevant SOAR, as discussed in the following.

c. The Parent Company shall convert a portion of its original advances and a portion of the Acquired Advances into such number of shares of stock of FPIDC which will result in a combined ownership of Benpres and Lopez, Inc. of not more than 33½% of FPIDC.

The MOA also states that until after the Acquired Advances have been fhlly paid, the Parent Company undertakes that, upon each conversion of any portion of the Acquired Advances into shares of FPIDC, the Parent Company shall create SOARs on such shares in favor of Benpres fbr a consideration of t_0.10 per share plus a ta99.90 deposit, which will be applied towards the purchase price of the Underlying Share. The SOARs shall entitle Benpres to (a) delivery of one share of stock of FPIDC which has been converted from the Acquired Advances upon the occurrence of any trigger event, as defined in the MOA, (b) delivery of the net proceeds arising from the sale of such underlying share in the event of a sale by the Parent Company, and (c) rights to dividends or other economic benefits relating to or arising out of each underlying share.

Also on December 23, 2002, the Parent Company and Benpres entered into a Deed of Assignment to execute the said MOA and the Parent Company issued a promissory note to Benpres in consideration of the assignment.

In 2005, the SOARs are included in the "Minority interests" account in the consolidated balance sheets.

On December 22, 2006, pursuant to the provisions of the SOAR Instrument executed by the Parent Company on November 28, 2003, Benpres gave notice of the exercise of its SOAR pertaining to the 6,79i ,800 SOARs.

151 21. Other Noncurrent Liabilities

This account consists of:

2006 2005 (In Millions) Unearned revenue (see Note 33c) t_2,459 _- Deferred output value added tax on annual deficiency 337 - Retirement benefit liability (see Note 26) 253 268 Customers' deposits 65 44 Asset retirement obligation 38 38 Derivative liability (see Note 32) 19 52 Others 10 43 I_3,181 #445

As discussed in Note 2, under their respective ECCs, FGPC and FGP have a legal obligation to dismantle their respective power plant assets at the end of their useful life. FGPC, FGP and FG Bukidnon established their respective provisions to recognize their estimated liability for the dismantlement of the power plant assets. FG Bukidnon, on the other hand, has contractual obligation under the lease agreement with PSALM to dismantle its power plant assets at the end of their useful lives.

Movements of asset retirement obligations follow:

2006 2005

(In Millions) Balance at beginning of year t_38 ta34 Additions during the year - 4 Accretion during the year charged to interest expense 3 3 Foreign currency translation adjustments (3) (3) Balance at end of year t_38 t_38

22. Common Stock and Retained Earnings

a. Movements of the Parent Company's common stock follow:

Number of Shares 2006 2005 2004 Authorized - i_10 par value per share 1,210,000,000 1,210,000,000 1,210,000,000 issued: Balance at beginning of year 569,614,261 547,538,819 539,473,964 Issuances 10,407,539 22,075,442 8,064,855 Balance at end of year 580,021,800 569,614,261 547,538,819

f, nv_

'I52 Number of Shares 2006 2005 2004 Subscribed: Balance at beginning of year 1,241,456 6,682,133 7,317,555 Subscriptions 9,709,882 16,634,765 7,429,433 Issuances (10,407,539) (22,075,442) (8,064,855) Balance at end of year 543,799 1,241,456 6,682,133

b. The composition of the Parent Company's retained earnings account at equity follows: 2006 2005 2004 (In Millions) Available for dividend declaration: Balance at beginning of year 1_12,705 t_10,740 t_9,500 Effect of PAS 39 adoption (see Note 2) - (18) - 12,705 10,722 9,500 Net income (loss) excluding equity in net earnings of subsidiaries and associates (23) 1,830 (1276) Dividends received 1,460 1,293 2,073 Cash dividends declared - in2 a share in 2006 and 2005; t_1 a share in 2004 (1,154) (1,140) (557) 12,988 12,705 10,740 Not available for dividend declaration - Accunmlated net earnings of subsidiaries and associates: Balance at beginning of year 7,177 4,789 2,905 Effect of PAS 39 adoption (see Note 2) - 599 - 7,177 5,388 2,905 Earnings of subsidiaries and associates fbr the year 6,679 3,082 3,957 Gain on dilution (see Note 1) 2,043 - - Dividcnds received (1,460) (1,293) (2,073) Balance at end of year 14,439 7,177 4,789 1_27,427 fa19,882 ta15,529

23. Executive Stock Option Plan and Employee Stock Purchase Plan

The Parent Company has an Executive Stock Option Plan (ESOP) and Employee Stock Purchase Plan (ESPP) (collectively referred to as the "Plains") that entitle the directors and the senior officers (for the ESOP) and the employees (for the ESPP) to purchase up to 10% of the Parent Company's authorized capital stock on the offering years at a pre-set purchase price with payment and other terms to be defined at the time of the offering. The purchase price per share shall not be less than the average of the last dealt price per share of the Parent Company's share of stock. The terms of the Plans include, among others, a two or four-year holding period from the date of purchase for ESPP, a limit as to the number of shares an executive and employee may purchase and the manner of payment based on equal semi-monthly installments over a period of five or ten years through salary deductions.

153 Movements in the number of stock options outstanding are as follows:

ESOP

2006 2005 Total shares allocated 37,568,407 35,766,589 Options exercisable: Balance at beginning of year 15,930,615 22,676,127 Granted 3,002,307 1,801,816 Exercised (9,590,9191) ....(8,547,328) Balance at end of year 9,342,003 15,930,615

ESPP

2006 2005 Total shares subscribed 9,548,271 9,548,271 Issuances: Balance at beginning of year 8,088,349 7,550,655 Issuances during the year 697,657 537,694 Balance at cnd of year 8,786,006 8,088,349 Balance of subscribed shares at end of year 762,265 1,459,922

Exercise price of the stock option under the ESOP is sct at _a4.67per share. The weighted average share price at the dates of options exercisc during the year was ta41.0 per share. The weightcd average fair value of options granted was #8.8 per sharc.

The weighted average remaining contractual life for the share option outstanding as of December 3l, 2006 is 5.5 years.

The fair value of share options granted under the ESOP is estimated at the dates of grant using the Black-Scholes Option Pricing Model, taking into account the terms and conditions upon which the options were granted. The _bllowing table lists the inputs to the model:

2006 2005 Dividend yield (%) 5.0 0.0 Expected volatility (%) 21.7 38.2 Risk-free interest rate (%) 8.5 10.9 Expected life of option (years) 5.5 5.5 Weighted average share price (ta) 41.0 60.0

The share-based payment transaction amounted to ta50 million, ta56 million and ta49 million in 2006, 2005 and 2004, respectively.

The expected lifb ofthc options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which likewise, may not necessarily be the actual outcome.

_

154 No other features of options grant were incorporated into the measurement of the fair value of the options.

The options granted under the ESPP are not valued since these cannot qualify as share-based payments.

24. Cost and Expenses

This account consists of: 2006 2005 2004 (In Millions) Power plant operations and maintenance (see Notes 33c and 33e) t_35,633 i_29,256 t_22,050 Depreciation and amortization (see Note 25) 4,235 4,812 2,322 Personnel expenses (see Notes 23 and 26) 1,757 2,156 1,570 Toll operator's _tbes 1,293 1,073 - Raw materials and supplies 916 677 858 Professional fees 820 729 855 Taxes and licenses 788 1,098 790 Insurance 5116 506 392 Franchise fees 299 304 - Rent and subcontract costs 229 276 415 Land development costs 96 176 237 Others 761 753 636 i_47,333 ia41,816 P30,125

25. Finance Costs, Finance Income and Depreciation and Amortization

Finance Costs 2006 201)5 2004 (In Millions) Interest on loans and bonds (.see Notes 16, 18 and 19) t_5,511 ta5,213 ta3,719 Annual deficiency (see Note 33c) 1,409 ...... Accretion on debt issuance costs (see Notes 18 and 19) 215 239 260 Write-off of deferred debt issuance costs on undrawn facility (see Note 19) 200 - - Accretion on asset retirement obligations (see Note 21) 3 3 2 t_7,338 #5,455 t_3,981 Finance Income

2006 2005 2004 (In Millions) Annual deficiency (see Note 33c) P1.,409 g- _- Short-term cash investments 1,835 1,066 372 Others 36 20 76 P3,280 t21,086 t_448

Depreciation and Amortization

2006 2005 2004

(In Millions) Property, plant and equipment (see Note 11) 1_3,186 t_3,564 ta2,231 Roads and tollways (see Note 12) 970 1,163 23 Investment properties (see Note 13) 48 52 31 Pipeline rights (see Note 15) 31 33 37 1_4,235 ta4,812 t_2,322

26. Retirement Benefits

The Parent Company and certain subsidiaries maintain qualified, noncontributory, defined benefit retirement plans covering substantially all their regular employees.

The _bllowing tables summarize the components of net benefit expense recognized in the consolidated statements of income and the funded status and amounts recognized in the consolidated balance sheets tbr the plan.

Retirement benefit expense

2006 2005 2004 (/n Millions) Current service cost P!37 t_87 i_78 interest cost 202 174 ] 15 Expected return on plan assets (65) (391) (30) Net actuarial losses recognized 6 20 - Amortization of past service cost 2 - - I_282 ta242 _ 163

156 Retirement benefit asset (liability)

2006 2005 (In Million,s) Present value of benefit obligation t_2,98! ta1,710 Fair value of plan assets (1,778) (1,279) Present value of unfunded obligation 1,203 43 l Unrecognized actuarial losses (!,241) (247) Unrecognized past service cost (29) (31) Reduction in the carrying amount due to PAS 19 - 47 (67) 200 Retirement asset recognized by the Parent Company and a subsidiary 320 68 t_253 1a268

Movements in the present value of the defined benefit obligation are as fbllows:

2006 2005 (In Millions)

Balance at beginning of year 1_1,710 t_1,367 Current service cost 137 87 Interest cost 202 174 Benefits paid (86) (51) Actuarial losses 1,014 137 Foreign currency translation adjustment 4 (4) Balance at end of year t_2,981 ta1,710

Movements in the fair value of plan assets are as tbllows:

2006 2005 (In Millions) Balance at beginning of year t_1,279 t_763 Expected return on plan assets 65 39 Contributions 503 462 Benefits paid (86) (51 ) Actuarial losses 14 66 Foreign currency translation adjustment 3 -- Balance at end of year PI,778 t_1,279

The First Holdings Group expects to contribute ta542 million to its defined benefit retirement plan in 2007.

157 The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2006 2005 Cash and cash equivalents 84.8% 85.1% investment in shares of stock 10.4 10.1 Investments in government securities 3.1 3.4 Others 1.7 1.4 100.0% 100.0%

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. There has been a significant change in the expected rate of return on assets due to the improved stock market services.

The principal actuarial assumptions at the balance sheet dates used for the Parent Company and subsidiaries' actuarial valuations are as follows:

2006 2005 Discount rate 11.0%-14.5% 11.0%-14.0% Expected rate of return on plan assets 6.0%-10.0% 4.0%-10.0% Future salary increases 5.0%-14.0% 5.0%-14.0%

Amounts for the current and previous periods are as fbllows:

December 31, December 31, December 31, 2006 2005 2004 (In Millions) Defined benefit obligation t_2,981 t_1,710 ta 1,367 Plan assets (1,778) (1,279) (763) Deficit tt1,203 _431 #604

27. Income Tax

The consolidated deferred tax assets and liabilities as of December 31,2006 and 2005 consist of the following:

2006 2005

(In Millions) Foreign exchange differentials: Excess of carrying amounts of nonmonetary assets over the tax base (1_1,653) (t_2,575) Unrealized foreign exchange losses 508 1,804 NOLCO 94 25O MCIT 26 17 Others .(.395) (196) (P!_420) (]a700)

-tz _?

158 The deferred tax assets (liabilities) are presented in the consolidated balance sheets as follows:

2006 2005 (In Millions) Deferred tax assets - net ia134 8142 Deferred tax liabilities - net (1,554) (842) (Pl,420) (t_700_

A reconciliation between the statutory income tax rates and effective income tax rates as shown in the consolidated statements of income fbllows:

2006 2005 2004 Statutory income tax rates 35.0% 32.5% 32.0% Income tax effects oL Income tax holiday (5.2) (18.31) (38.4) Equity in net earnings of associates (8.8) (3.2) (2.01) Income subjected to final tax (6.9) (0.2) (0.21) Gain on dilution (5.6) - - Others (1.2) (10.0) 8.9 Effective income tax rates 7.3% 0.8% 0.3%

Certain deferred income tax assets of the Parent Company and certain other subsidiaries have not been recognized since management believes that it is not probable that sufficient taxable profits will not be available against which they can be utilized. The deductible temporary differences of certain balance sheet items and the carryforward benefits of NOLCO and MCIT for which no deferred tax asset has been recognized in the consolidated balance sheets are as follows:

2006 2005 (In Millions') NOLCO 1_2,099 ]_800 Unrealized foreign exchange loss 882 659 Allowance for doubtful accounts 626 366 MCIT 37 35 Others 1,634 726 _5,278 t_2,586

As of December 3 l, 2006 and 2005, the temporary differences representing the excess of the carrying amount of the investments in subsidiaries over the tax base amounted to ta1.9 billion and 1_3.1billion, respectively. The deferred liability has not been recognized as the temporary difference may not reverse in the foreseeable future since the First Holdings Group has no intention of disposing its investments in subsidiaries.

159 The consolidated unutilized NOLCO and MCIT as of December 31,2006 are detailed as follows:

Car .ryforward Benefit Amount Year Incurred/Paid Up To NOLCO MCIT (In Million,_) 2004 December 3I, 2007 ta691 1t12 2005 December 31,2008 646 23 2006 December 31, 2009 1,031 28 i_2,368 t_63

NOLCO and MCIT amounting to t_640 million and #25 million, respectively, expired in 2006.

Amendments to Value-Added Tax (VAT) and Income Tax Laws R.A. No. 9337, which became effbetive November 1, 2005, amended certain provisions of Tax Reform Act of 1997 including the Expanded VAT Act (EVAT). Under the provisions of R.A. No. 9337, the exemptions on power and fuel, among others, were lifted.

The amended law also raises the corporate income tax rate to 35% from 32% effective November 1, 2005 and will be reduced to 30% effective January 1,2009. Taxable income for fiscal year covering periods before and after November 1,2005 is to be prorated.

28. EPS Computation

The fbllowing table presents information necessary to compute EPS:

2006 2005 2004 (In Millions, Except Number of Shares and Per Share Data) (a) Net income attributable to equity holders of the Parent f/8,699 ta4,912 tt3,681

Number of shares: Common shares outstanding at beginning of year 569,614,261 547,538,819 539,473,964 Effect of common share issuances during the year 4,678,866 10,754,296 2,046,496 (b) Adjusted weighted average number of common shares outstanding - basic 574,293,127 558,293,115 541,520,460 Effect of dilutive potential common shares 6,250,085 9,476,609 2,167,552 (c) Adjusted weighted average number of common shares outstanding - diluted 580,543,212 567,769,724 543,688,012

EPS: Basic (a/b) 1_15.147 ia8.798 #6.798 Diluted (a/c) 14.984 8.651 6.770

,_ ._ 160 29. Related Party Transactions

The First Holdings Group has transactions within and among the consolidated entities, with associates and other related parties. PAS 24, "Related Party Disclosures," defines a related party as a party, whether ajuridical or natural person, that has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Transactions among members of the First Holdings Group and the related balances are eliminated in the consolidation and are no longer included in the disclosures. The significant transactions with associates and other related parties at market prices in the normal course of business, and the related outstanding balances arc disclosed below.

a. FGPC and FGP earn all of their income fi'om sale ofclectricity to MERALCO under separate PPA (see Note 33a). Billings to MERALCO totalcd i_51.2 billion,P45.5 billion and _37.0 billion in 2006, 2005 and 2004, respectively.Outstanding receivables from MERALCO from the sale of elcctricity are included in the "Trade and other receivables" account and amountcd to _8.2 billion and _6.4 billion as of Decembcr 31, 2006 and 2005, respectively (see Note 7).

b. MNTC awarded a Construction Contract in 2001 to Leighton Contractors (Asia) Limited (LCAL) for the construction of Segments 1,2 and 3 of Phase 1of the NLE Tollway Project under a competitive bidding (see Note 33b). The peso component of the Construction Contract was originally set at ta5.0 billion and its US dollar component was at US$37 million (ta1,963 million). Billings for contract accomplishments of LCAL totaled tal,374 million in 2005 (2006: nil). Total billings as of December 31,2006 and 2005 related to this contract amounted to ta8,547 million.

MNTC also provided customary mobilization advances to LCAL in 2003 amounting to t_1.2 billion, which will be applied against future billings for contract accomplishments. The unapplied mobilization advance included in "Advances to contractors and others" under the "Other noncurrent assets" account amounted to P37 million and P74 million as of December 31, 2006 and 2005, respectively (see Note 15).

c. Management services are rendered by First Gen to BPPC under certain terms and conditions of Management Contract (Contract), in consideration of the payment of management fees is fixed at ta26 million (US$0.5 million) per year effective January 1, 2006. Prior to 2006, management fees are based on BPPC's income from operations after certain adjustments. The Contract is effective for a period of five years until December 31,2005. On March 13, 2006, First Gen and BPPC renewed the Contract effective from January 1, 2006 until the end of the 15-year cooperation period of the Project Agreement of BPPC, which will expire in July 2010. Management fees amounted to approximately ta26 million (US$0.5 million) in 2006, #92 million (US$1.67 million) in 2005 and ta91 million (U S$1.63 million) in 2004.

d. Maintenance services rendered by Meralco Industrial Engineering Services Corporation (MIESCOR), a subsidiary of MERALCO, on the 230 kilo-volt transmission line from the Santa Rita plant to the Calaca Substation in Batangas under the Transmission Line Maintenance Agreement. This involves the monthly payment ofta0.6 million ($0.02 million) as retainer fee, and ta2.3 million (US$0.07 million) for every six-month period as service tee, with both tees subject to periodic adjustment as set forth in the agreement. The amount of

161 compensation for additional services requested by the FGPC outside the scope of the agreement is subject to mutual agreement between FGPC and MIESCOR.

e. In April 2003, the Parent Company acquired a parcel of land at Rockwell Center from ROCKWELL with a total area of 5,220 square meters (including right of way of 2,212 sq.m) for a total consideration of P267 million. The property was intended for future joint venture development with ROCKWELL. The said property is subject of a lease agreement for three years with rentals covered by an escalation rate of 10% per annum.

On May 3, 2006, ROCKWELL repurchased the aforementioned lot (inclusive of the right of way) for a total consideration of_a408 million, resulting in a gain amounting to _a90million.

f. PHILEC and FEDCOR earn portion of their income from selling ballasts and power transformers to MERALCO. Billings to MERALCO totaled P582 million, t_502 million and _490 million in 2006, 2005 and 2004, respectively. Outstanding receivables from MERALCO for the sale of ballasts and power transformers are included in the "Trade and other receivables" account and amounted to _a153 million and t_166 million as of December 31,2006 and 2005, respectively.

g. Tollways Management Corporation (TMC), an associate, provides services as operator under an Operations and Maintenance (O&M) Agreement with MNTC as employer. The O&M agreement contains the terms and conditions/'or the operation and maintenance by TMC of Phase I of the NLE Tollway Project and subsequently, of Segment 7, and sets forth the scope of its services. TMC is assisted by Transroute Philippines, Inc. as service provider in accordance with the Technical Assistance Agreement. Under the O&M, MNTC shall pay TMC the following: (a) compensation for the per/brmance of pre-start-up services amounting to #177 million (ta30 million during the first 12 months and ta147 million during the second 12 months) subject to escalation payable in monthly installment over the two years preceding the Anticipated Start-up Date, based on the schedule provided in the O&M agreement; and (b) a minimum fixed annual amount currently set at ta637 million/or the NLE Tollway Project and ta41 million for Segment 7, to be escalated on a quarterly basis plus a variable component, which will take effect upon start of commercial operations. The O&M agreement shall be effective tb:r the entire concession period.

Service fees of TMC amounted to tal.2 billion in 2006 and 2005 and ta403 in 2004, of which t_108 million in 2005 and t_403 in 2004 were capitalized as part of"Roads and Tollways." In 2006, MNTC also rewarded an accuracy bonus amounting to ta47 million for the latter's efficiency and accuracy in collection, handling and accounting for MNTC's toll receipts during the first and second year of operations.

MNTC has also agreed to make available to TMC a financing facility under the Operator Equipment Loan Agreement (OELA) dated April 15, 2003 with an aggregate principal amount not exceeding US$5 million for the acquisition &the equipment together with minor items of equipment or plant as may be reasonably required for the performance of the contracted services and for payment of deposits required for utilities. Interest is at LIBOR plus 1%.

] 62 On June 17, 2004, the OELA was superseded whereby TMC agrees and undertakes to repay, in a one lump-sum payment, the loan less the book value of any Operator's Equipment returned to MNTC on the last day of the term of the O&M ("the Repayment Date"). As security tbr the timely payment, discharge, observance and performance of its obligations, TMC shall create, establish and constitute, by the execution of a Security Agreement and Quarterly Security Supplements, a mortgage over TMC's right, title and interest in and to the Operator's Equipment to be acquired by TMC from the proceeds of the loan and any replacement thereoE Among others, the OELA contains certain negative covenants, which, include non-incurrence of additional indebtedness, prepayment of indebtedness, sale, lease, encumber, assign or otherwise transfer substantial portion of its assets otherwise required by the Mortgage, Assignment and Pledge Agreement.

TMC has availed the entire US$5 million from thc thcility, included as part of"Trade and other receivables" account in the consolidated balance sheets. Interest income charged to operations amounted to ta16 million and ta13 million in 2006 and 2005, respectively. Interest income charged to "Roads and tollways" amounted to ta3 million in 2004.

h. The First Holdings Group provides advances to associates and other related panics/br working capital and investment requirements. Outstanding balance of the advances amounted to ta0.6 billion and ta0.3 billion as of December 31, 2006 and 2005, respectively. Also, the First Holdings Group obtains cash advances from related parties in the normal course of business.

i. Compensation of key management personnel are as follows:

2006 2005 (In Millions) Short-term employee benefits t_397 t_379 Retirement benefits (see Note 26) 58 55 Share-based payments (see Note 23) 24 24 t_479 ta458

30. Registrations with the Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA)

FGRI, PHILEC, FGPC, FGP, and MNTC are registered with the BOI under the Omnibus Investments Code of 1987, whereas FP[P and FSRI are registered with PEZA pursuant to Presidential Proclamation Nos. 1103 and 1208 and R.A. No. 7916. As registered enterprises, these subsidiaries are entitled to certain tax and nontax incentives which include, among others, income tax holiday (ITH). On October 29, 2001, the BOI granted MNTC's request to extend the reckoning period date for its ITH incentives from December 1999 to first quarter of 2004.

Total incentives availed of by these subsidiaries amounted to t_ 2.4 billion and t_1.8 billion for the years ended December 31,2006 and 2005, respectively. 31. Financial Risk Management Objectives and Policies

The main purpose of these financial instruments is to raise funds for the First Holdings Group's operations. The First Holdings Group also enters into derivative transactions, as needed, the purpose of which is to manage the interest rate risk arising fi-om its operations and its sources of financing.It is, and has been throughout the year under review, the First Holdings Group's policy that there be no trading in financial instruments.

The principal financial instruments, other than derivatives, comprise mainly of'loans, cash and short-term cash investments. Also, the First Holdings Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

The main risks arising from the Group's financial instruments are interest rate risk, liquidity risk, foreign currency risk, credit risk and credit concentration risk. The BOD reviews and approves policies for managing each of these risks and they are smnmarized below. The First Holdings Group's accounting policies in relation to derivatives are set out in Note 2.

Interest Rate Risk The First Holdings Group's exposure to the risk for changes in market interest rates relates primarily to the First Holdings Group's long- term debt obligations with floating interest rates. In particular, FGP has an existing interest rate swap agreement in order to manage its exposure to interest rate fluctuations on half of its ECGD Facility Agreement.

The First Holdings Group's policy is to manage its interest cost using a mix of fixed and variable rate debts. To manage this mix in a cost-efficient manner, the First Holdings Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed- upon notional principal amount. As indicated, the existing interest rate swap is designated to hedge half of FGP's floating rate exposure on its ECGD Facility Agreement. At December 3l, 2005, after taking into account the effect of interest rate swaps, approximately 67% of the First Holdings Group's borrowings are at a fixed rate of interest.

Foreign Currency Risk The fbreign-currency denominated assets and liabilities, which pertain to the U.S. dollar denominated balances, are then translated to Philippine pesos being the functional currency for statutory reporting purposes. In translating these foreign currencyLdenominated monetary assets and liabilities into Philippine peso, the exchange rates used were ta49.03 to US$1.00 and t_53.06 to US$1.00, the Philippine peso-U.S, dollar exchange rates as of December 31, 2006 and 2005, respectively.

To better manage the foreign exchange risk, stabilize cash flows, and further improve the investment and cash flow planning, we enter into forward foreign exchange contracts, foreign currency swap contracts, currency option contracts and other hedging products, as needed, which is aimed to reduce and/or manage the adverse impact of changes in fbreign exchange rates on our operating results and cash flows. However, these hedges do not cover all the exposure to foreign exchange risks.

164 It is First Holdings Group's policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximize hedge efi_ctiveness.

Credit Risk The First Holdings Group trades only with recognized, creditworthy third parties. It is the First Holdings Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the First Holdings Group's exposure to bad debts is not significant.

With respect to credit risk arising from the other financial assets of the First Holdings Group, which comprise mostly of cash and cash equivalents, trade and other receivables, and certain derivative instruments, the First Holdings Group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

Credit Concentration Risk The First ttoldings Group, through its operating subsidiaries FGP and FGPC, earns substantially all of its revenues from MERALCO, its sole customer. MERALCO is committed to pay Ibr the capacity and energy generated by the San Lorenzo and the Santa Rita power plants under the existing long-term PPAs which are due to expire in September 2027 and August 2025, respectively. While the PPAs provide tbr the mechanisms by which certain costs and obligations including thel costs, among others, are treated as "pass-through" to MERALCO or are otherwise recoverable from MERALCO, it is the intention of the Parent Company, FGP and FGPC to ensure that the pass-through mechanisms, as provided for in their respective PPA, are followed.

Under the current regulatory regime, generation rate charged by FGP and FGPC to MERALCO are not subject to regulations and are complete pass-through charges to MERALCO'S customers. It is likewise worth noting that MERALCO has always settled these charges on time and has not missed any single payment since the commencement of commercial operations &both the San Lorenzo and the Santa Rita power plants.

Liquidity Risk The First Holdings Group's objective is to manage the liquidity profile to be able to finance the capital expenditures and to service the maturing loan obligations. To cover the financing requirements, it is the First Holdings Group's intention to use internally generated funds and to maximize the proceeds obtained from debt and equity market issues.

165 32. Financial Instruments

Fair Values Set out below is a comparison by category of carrying amounts and fair values of all of First Holdings Group's financial instruments that are carried in the consolidated financial statements as of December 31, 2006 and 2005.

2006 2005 Carrying Fair Carrying Fair Amount Value Amount Value (In Millions) Financial assets: Cash and cash equivalents t_32,249 1_32,249 t_21,889 ta21,889 Short-term cash investments - - 154 154 Trade and other receivables 10,595 10,595 8,253 8,253 Receivables from MERALCO, including current portion 5,166 5,148 8,735 9,542 Cash deposit - - 2,655 2,655 Restricted cash deposits 103 103 1,513 1,513 Sinking fund - - 1,297 1,297 Other current assets 463 463 71 71 FVPL investments 275 275 ...... AFS investments (presented under "Other noneurrent assets") 31 31 31 31 1_48,882 li48,864 t_44,598 ta45,405

Financial liabilities: Loans payable t_10 P10 t_23 P23 Trade payables and other current liabilities 10,818 10,818 8,771 8,771 Bonds payable 4,931 5,588 4,917 5,497 Obligation to Gas Sellers, including current portion 4,612 4,644 8,735 9,542 Deferred payment facility with PSALM, including current portion 3,796 4,211 - - Long-term debt, including current portion 42,201 45,672 52,261 55,502 Derivative liability (presented under "Other noncurrent liabilities") 19 19 52 52 Other financial liabilities 134 134 129 129 1_66,521 t_71,096 t_74,888 t_79,516

The fair value of cash and cash equivalents (including cash deposit, sinking fund, refundable deposits and restricted cash deposits), short-term cash investments, receivables, other current assets, loans payable, accounts payable and other current liabilities approximates the carrying amounts at balance sheet date due to the short-term nature of the accounts.

166 The lair value of long-tenla debt and obligation to Gas Sellers was computed by discounting the instruments' expected future cash flows using the prevailing credit adjusted LIBOR interest rates.

The fair value of bonds payable and deferred payment facility with PSALM was computed by discounting the bonds' expected future cash flows using the prevailing credit adjusted MART 1 interest rates.

The fair value of interest rate swap represents the present value of expected t'uture cash flows of the instrument as confirmed by third counterparty.

Interest Rate Risk The following table sets out the carrying amount, by maturity, of First Holdings Group's financial instruments that are exposed to interest rate risk:

First Gen Within More than 1 Year 2-3 Years 4-5 Years 5 Years Total (In Millions) 2006 Fixed Rate KfW Facility Pl,489 _959 P959 P480 P3,887 US-Private Placements 2,102 870 2,233 1,073 6,278 EIB Facility 840 531 620 348 2,339 t_;CGDFacility 235 470 470 705 1,880 Hermes-Covered Facility 545 1,090 1,090 1,634 4,359

2006 Floatin_ Rate Mexim/Mecib Facility 737 724 212 - 1,673 Mexim Facility 397 359 227 - 983 FCDU Loans 755 - - - 755 ECGD Facility 235 470 470 705 1,880 GKA-Covcrcd Facility 280 560 560 1,399 2,799

2005 Fixed Rate KfW Facility 701 1,401 1,401 1,401 4,905 US-Private Placements 1,189 1,316 1,868 3,608 7,981 EIB Facility 319 717 837 976 2,849 ECGD Facility 254 508 508 1,017 2,288 Hermes-Covered Facility 589 1,179 1,179 2,357 5,305

2005 Floating_Rate Mexim/Mecib Facility 310 931 880 - 2,121 Mexim Facility 138 455 607 - 1,200 FCDU Loans 1,693 145 - - 1,838 ECGD Facility 254 508 508 1,017 2,288 GKA-Covered Facility 302 605 605 1,816 3,329

167 MNTC Within More than I Year 2-3 Years 4-5 Years 5 Years Total (In Millions) US dollar-denominated loans 2006 Fixed Rate Asian Development Bank ]gll0 1_221 ]g221 1_276 tg828 Export Finance and Insurance Corporation 92 184 184 230 690 Calyon S.A. Corporate and Investment Bank (COFACE) 92 183 183 229 687

2006 Floating Rate Asian Development Bank 122 245 245 307 919 USD Bank 196 393 393 491 1,473

Peso-denominated notes FXCN - BDO 28 82 110 5,280 5,500

2005 Fixed Rate COFACE - 354 364 637 1,355 Export Finance and Insurance Corporation 292 584 584 1,021 2,481 International Finance Corporation 174 405 482 843 1,904

2005 Floating Rate Asian Development Bank 371 743 743 1,300 3,157 WestLB, AG 252 504 504 882 2142 COFACE 182 10 - - 192 IFC 67 77 - - 144

FGHC International Within More than 1 Year 2-3 Years 4-5 Years 5 Years Total (In Millions) 2006 Fixed Rate AIMCF l_- 1_981 1_735 P- t_1,716

2005 Fixed Rate AIMCF - 265 1,062 531 1,858

_,_ ,_._-_ 168 FPH Fund Within More than 1 Year 2-3 Years 4-5 Years 5 Years Total (In Millions') 2006 Fixed Rate CS FB 1_- i_3,530 i_- P- _3,530 SBA, Ltd. 348 696 182 - 1,226

2005 Fixed Rate CS FB 640 1,221 2,655 - 4,566 SBA, Ltd. - 754 573 - 1,327

Interest on financial instruments classified as floating rate is repriced semi-annually oll each interest payment date. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of First Holdings Group that are not included in the above tables are noninterest-bearing and are, thcretbre, not subject to interest rate risk. ttedging Activities Cash Flow Hedge. As of December 31,2006 and 2005, FGP has an interest rate swap agreement with ABN AMRO Bank NV to hedge half of its floating rate exposure on its ECGD Facility Agreement. Under the interest rate swap agreement, FGP pays a fixed rate of 7.475% and receives a floating rate ofU.S. LIBOR plus spread on a semi-annual basis simultaneous with interest payments on the loan. The original term loan was priced against the benchmark 3 to 6 month LIBOR plus 215 basis points.

FGP has designated the interest rate swap as a hedging instrument to hedge the variability in the cash flows involving half of the floating rate loan from the ECG D Facility Agreement, which is attributable to the movements of interest rates. The hedge is accounted for as cash flow hedges. Under a cash flow hedge, the effective portion of changes in the fair value of the hedging instrument are recognized as cumulative translation adjustments in equity until the hedged item affects earnings. As of December 31, 2006, the change in fair value of the interest rate swap that was deterred to cumulative translation adjustments amounted to t_52 million (US$1 million).

The outstanding notional amount of the interest rate swap agreement and the related mark-to- market losses are as follows:

2006 2005 In Philippine In U.S. In Philippine In U.S. Peso Dollar Peso Dollar (In Millions) Notional amount _1,864 $38 ia2,288 $43 Mark-to-market losses 19 1 52 1 The movements in fair value changes of derivative transactions are as follows:

2006 2005 Fair value at beginning of year (t_52) (t_146) Fair value change taken into equity during the year 44 164 Fair value change realized during the year (14) (75) Foreign currency adjustments 3 5 .._1_.!9) (t_52)

Other derivative financial instruments, such as the interest rate swap entered into by FPH Fund are accounted for as financial assets at thir value through profit or loss.

33. Commitments and Contingencies

The First Holdings Group has the following significant contracts and commitments:

a. PPAs

FGPC and FGP each have existing PPAs with MERALCO, the largest power distribution company in the Philippines and the sole customer of both subsidiaries. Under the PPAs, MERALCO will purchase in each contract year fi-om the start of commercial operations, a minimum number of kilowatt-hours of the net electrical output of FGPC and FGP for a period of 25 years up to 2027. Billings to MERALCO under the PPAs are substantially in US dollars and a small portion is billed in Philippine pesos.

On January 7, 2004, MERALCO, FGPC and FGP signed the Amendment to their respective PPAs. The negotiations resulted in a package of concessions including the assumption of FGPC and FGP of community taxes at current tax rates, while conditional concessions include increasing the discounts on excess generation, payment of higher penalties fbr non- performance up to a capped amount, and recovery of accumulated deemed delivered energy until 2011 resulting in the non-charging of MERALCO of excess generation charge for such energy delivered beyond the contracted amount but within a 90% capacity quota. The amended terms under the respective PPAs of FGPC and FGP were approved by the ERC on May 31, 2006.

Under the respective PPAs of FGPC and FGP, the capacity and fixed operating and maintenance fees are recognized on a monthly basis based on the actual Net Dependable Capacity (NDC) tested and proven, which is usually conducted on a semi-annnal basis. Total fixed capacity fees and fixed operating and maintenance fees earned are US$268 million, US$268 1trillion, and US$266 million for the years ended December 31, 2006, 2005, and 2004, respectively.

BPPC has an existing Fast Track Build, Operate and Transfer Project Agreement (Project Agreement) with NPC. Under the Project Agreement, NPC supplies all the fuel required to generate electricity, with all electricity generated purchased by NPC. BPPC is entitled to payment of fixed capacity and operations and maintenance t_es based on the nominated capacity as well as energy fees fi'om the delivery of electric power to NPC. The Project Agreement will be for a period of 15 years which runs up to 2010. Upon expiration of the

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,_ q70 15-year period, BPPC shall transfbr to NPC all its rights, titles and interests in the power plant complex, fi'ee of liens created by BPPC and without any compensation.

In April 2005, BPPC, NPC and PSALM signed the General Framework Agreement (GFA) dated March 14, 2005, which embodies the outcome of the negotiations among the three parties. The agreement is a result of the mandatory review and renegotiation of all contracts between NPC and its independent power producers (lPP), including the Project Agreement of BPPC. The GFA achieved its objectives of: (1) resolving the contractual and financial issues under the Project Agreement raised by the Government's Inter-Agency Committee (IAC) through PSALM; (2) documenting the voluntary concessions granted by BPPC to NPC after the enactment of EPIRA; and (3) setting certain additional concessions that BPPC is willing to grant to NPC and PSALM. BPPC was informed that the GFA was endorsed by NPC/PSALM to the National Economic Development Authority (NEDA)/IAC in June 2005 fbr approval/notation. As of April 12, 2007, NEDA has not yet approved the GFA. b. NLE Tollway Project Agreements

Joint Venture Agreement (JVA)/Supplemental Toll Operation Agreement (STOAt FPIDC has a JVA with the Philippine National Construction Corporation (PNCC) for the establishment of a Joint Venture Company (JVC) with the sole purpose of implementing the NLE Tollway Project. MNTC was established to be the JVC. The JVA is for a period of 30 years from the construction and delivery of the last segment of the NLE Tollway Project.

PNCC is the franchise holder for the construction, operation and maintenance of toll facilities in the North and South Luzon Tollways and the Metro Manila Expressway by virtue of Presidential Decree (P.D.) No. 1113, "Granting the Construction and Development Corporation of the Philippines a Franchise to Operate, Construct and Maintain Toll Facilities in the North and South Luzon Toll Expressways and for Other Purposes," issued on March 31, 1977, as amended by P.D. No. 1894 issued on December 22, 1983. The Philippine National Construction Corporation (PNCC) has an existing Toll Operations Agreement (TOA) with the Government of the Republic of the Philippines, by and through the TRB.

Pursuant to the JVA entered into by PNCC and FPIDC on August 29, 1995, PNCC assigned its rights, interests and privileges under its franchise to construct, operate and maintain toll fhcilities in the NLE in favor of MNTC, including the design, funding and rehabilitation of the NLE, and installation of the appropriate collection system therein is concerned. FPIDC in turn assigned all its rights, interests and privileges to the Binictican-Bo. Tipo road project, as defined in the MOU dated March 6, 1995, to MNTC, which assumed all the rights and obligations as a necessary and integral part of the NLE project. The assignment of PNCC's usufi-uctuary rights, interests and privileges under its franchise, to the extent of the portion pertaining to the NLE, was approved by the then President of the Republic of the Philippines. On October 10, 1995, the Department of Justice issued Opinion No. 102, Series of 1995, affirming the authority of the TRB to grant authority to operate a toll t'acility and to issue the necessary Toll Operation Certificate in favor of PNCC and its joint venture partner, as reiterated and affirmed by the Secretary of Justice in his letter to the Secretary of Public Works and Highways dated November 24, 1995, for the proper and orderly construction, operation and maintenance of the NLE as a toll road during the concession period.

171 In April 1998, the Government of the Republic of the Philippines, acting as "Grantor" by and through the TRB, PNCC (Franchisee) and MNTC (Concessionaire) executed the STOA for the Manila-North Expressway, whereby the Government of the Republic of the Philippines granted MNTC the rights, obligations and privileges including the authority to finance, design, construct, operate and maintain the project roads as toll roads (Concession) commencing upon the date the STOA comes into effect until December 31, 2030 or 30 years airier the issuance of the TOP fbr the last completed phase, whichever is earlier, unless fhrther extended pursuant to the STOA. Unless the PNCC f?anchise is further extended beyond its expiry on May 1,2007, the ROP undertook to issue the necessary Toll Operation Certificate for the NLE, in order to allow the continuation of the Concession. As further discussed in Note 11, the Company pays a certain amount to PNCC in consideration l_brthe assignment of its franchise in favor of MNTC.

Also, under the STOA, MNTC shall pay for Grantor's project overhead expenses based on certain percentages of total construction costs or of periodic maintenance works on the project roads. Fees billed by TRB amounted to t_13.5 million and ta17.0 million in 2006 and 2005, respectively.

Upon expiry of the concession period, MNTC shall hand-over the project roads to the Grantor without cost, free from any and all liens and encumbrances and fully operational and in good working condition, including any and all existing land required, works, toll road facilities and equipment found therein directly related to and in connection with the operation &the toll road facilities.

Cooperation A_reement FPIDC has a Cooperation Agreement with Egis in relation to the NLE Tollway Project.

Provisional Operating and Maintenance Agreement (POMA) On April 5, 1997, a POMA was signed by the Subic Base Management Authority (SBMA) to initiate the collection process of Segment 7. On May 24, 2002, the TRB issued a resolution authorizing a set of toll rates starting February 1,2003.

Construction Contract MNTC has awarded a Construction Contract to LCAL fbr the construction of Segments 1, 2 and 3 of Phase ! of the NLE Tollway Project. The Contract is a firm fixed price contract and is not subject to indexation or exchange rate fluctuations except where expressly stated in the Contract or otherwise agreed with LCAL the Philippine Peso component of the Contract price was originally set at ta5.8 billion and the US dollar component is US$37 million. In addition to the fixed Contract price, LCAL shall be entitled to an early completion bonus to be computed based on the terms of the contract.

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"172 c. Gas Sale and Purchase Agreements (GSPA)

GSPA of FGPC FGPC has a GSPA with Shell Philippine Exploration B.V., Shell Philippines LLC, Chevron Texaco Malampaya, LLC and PNOC Exploration Corporation (collectively, "Gas Sellers"), for the supply of natural gas in connection with the operations of the power plant. The GSPA, now on its sixth Contract Year, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to t_19.5 billion (US$397 million), t_18.3 billion (US$333 million) and #11.6 billion (US$237 million) for the years ended December 31, 2006, 2005 and 2004, respectively.

Under the GSPA, FGPC is obligated to consume (or pay for, if not consumed) a mininmm quantity of gas tbr each Contract Year (which runs from December 26 of a particular year up to December 25 of the immediately succeeding year), called the Take-Or-Pay Quantity (TOPQ). Thus, if the TOPQ is not consumed within a particular Contract Year, FGPC incurs an "Annual Deficiency" for that Contract Year equivalent to the total volume of unused gas (i.e., the TOPQ less the actual quantity of gas consumed). FGPC is required to make payments to the Gas Sellers tbr such Annual Deficiency alter the end of the Contract Year. Atler paying for Annual Deficiency gas, FGPC can "make-up" such Annual Deficiencies by consuming the unused-but-paid-tbr gas (without further charge) within ten-Contract Year alter the Contract Year for which the Annual Deficiency was incurred, in the order that it arose.

FGPC executed on March 22, 2006 the Settlement Agreement (SA) and Payment Deferral Agreement (PDA) with the Gas Sellers to amicably settle their long standing disputes under the GSPA.

The disputes relate to Gas Sellers' claim for Annual Deficiency payments totaling ta8.0 billion (US$163 million) from FGPC for unconsumed gas volumes for Contract Years 2002 to 2004. Under the terms of the SA and the PDA, the claim has been reduced to t_5.6 billion (US$115 million). A mandatory prepayment ofta490 million (US$8 million) and pre- settlement interest ofta196 million (US$4 million) were paid on June 7, 2006. An additional reduction of Annual Deficiency amounting to ta490 million (US$10 million) was recognized in 2006 to credit FGPC for gas consumption in excess of the TOPQ for 2005. The remaining liabilities will be paid through quarterly principal payments until December 26, 2009 with interest at LIBOR plus margin. The SA and PDA allow FGPC to prepay all or part of the outstanding balance and to "make up" the volume of gas up to the extent of the principal repayments made under the PDA for a longer period of time instead of the 10-Contract Year recovery period allowed under the GSPA.

On May 3l, 2006, all the conditions precedent set out in the SA and PDA were completely satisfied. Such conditions precedent included an acknowledgement and consent by MERALCO.

173 For Contract Year 2006, the Gas Sellers issued its Annual Reconciliation Statements (ARS) on December 29, 2006. The Gas Sellers are claiming Annual Deficiency payment fbr Contract Year 2006 amounting to ta196 million (US$5 million). FGPC disagrees with the Gas Sellers' claim and is of the position that no such Annual Deficiency payment is due. FGPC has claimed relief for, among others, force majeure events arising from circumstances which affected the Transmission Facilities or the Transmission Company's ability to accept or transmit electric energy generated by the plant. FGPC's position is that the plant actually consumed more than the TOPQ and is entitled to make-up its Outstanding Balance of Annual Deficiencies. The GSPA provides a mechanism fbr the resolution of the disputes arising from the GSPA.

Under the terms of the PPA with MERALCO, all fuel and fuel related payments are pass- through. The payment obligations of FGPC under the SA and PDA are passed on to MERALCO on a "back-to-back" and full pass-through basis.

GSPA of FGP FGP also has a GSPA with Gas Sellers, tbr the supply of natural gas in connection with the operations of the power plant. The GSPA, now on its fifth Contract Year, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to t_9.6 billion (US$197 million), ta9.0 billion (US$169 million), ta5.6 billion (US$106 million) fbr the years ended December 31, 2006, 2005 and 2004, respectively.

Under the GSPA, FGP is obligated to consume (or pay for, if not consumed) a minimum quantity of gas for each Contract Year (which runs from December 26 of a particular year up to December 25 of the immediately succeeding year), called the TOPQ. Thus, if the TOPQ is not consumed within a particular Contract Year, FGP incurs an "Annual Deficiency" fbr that Contract Year equivalent to the total volume of unused gas (i.e., the TOPQ less the actual quantity of gas consumed). FGP is required to make payments to the Gas Sellers for such Annual Deficiency after the end of the Contract Year. Al_terpaying for Almual Deficiency gas, FGP can "make-up" such Annual Deficiencies by consuming the unused-but-paid-for gas (without f_arthercharge) within 10-Contract Years after the Contract Year for which the Annual Deficiency was incurred, in the order that it arose.

FGP paid certain fees to the Gas Sellers, in lieu of incurring certain Annual Deficiency payment obligations for the first Contract Year (2002) as a result of the failure to commence commercial operations of the power plant at the Start Date (July 2, 2002) in accordance with the GSPA. These fees amounted to t_490 million (US$10 million) and have been booked as prepaid gas, net of adjustment, in the same manner as if the tees were paid for Annual Deficiencies incurred in Contract Year 2002 (see Note 15).

FGP executed on March 22, 2006 the SA and PDA with the Gas Sellers to amicably settle their long standing disputes under the GSPA.

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q74 The disputes relate to Gas Sellers' claim for Annual Deficiency payments totaling ta3.3 billion (US$68 million) from FGP for unconsumed gas volumes for Contract Years 2002 to 2004. Under the terms of the SA and thc PDA, the claim has been reduced to tel.6 billion (US$33 million). A mandatory prepayment of US$2.05 million and pre-settlement interest of US$1.25 million were paid on June 7, 2006. An additional reduction of Annual Deficiencies amounting to t_185 million (US$4 million) was recognized in 2006 to credit FGP for gas consumption in excess of the TOPQ for 2005. The remaining liabilities will be paid through quarterly principal payments until December 26, 2009 with interest at LIBOR plus margin. The SA and PDA allow FGP to prepay all or part of the outstanding balance and to "make up" the volume of gas UPto the extent of the principal repayments made under the PDA for a longer period of time instead of the ten-Contract Year recovery period allowed under the GSPA.

On May 31, 2006, all the conditions precedent set out in the SA and PDA were completely satisfied. Such conditions precedent included an acknowledgement and consent by MERALCO.

For Contract Year 2006, the Gas Sellers issued its ARS on December 29, 2006. The Gas Sellers are claiming Annual Deficiency payment for Contract Year 2006 amounting to ta193 million (US$4 million). FGP disagrees that any such Annual Deficiency payment is due. FGP has claimed relief for, among others, force majeure events arising from circumstances which affected the Transmission Facilities or the Transmission Company's ability to accept or transmit electric energy generated by the plant. FGP's position is that the plant actually consumed more than the TOPQ and is entitled to make-up its Outstanding Balance of Annual Deficiencies. The GSPA provides a mechanism for the resolution of the disputes arising ti'om the GSPA.

Under the terms of the PPA with MERALCO, all fuel and fuel related payments are pass- through. The payment obligations of FGP under the SA, the PDA, and the GSPA are passed on to MERALCO on a "back-to-back" and full pass-through basis.

Starting June 7, 2006 and on a quarterly basis thereafter, the pre-settlement interest, mandatory prcpayments, and the quarterly payments set forth in the SA and PDA of FGPC were paid on a timely manner. Upon payment of the principal amount, a corresponding prepaid gas is recognized to cover the principal portion paid to the Gas Sellers (shown as part of"Other noncurrent assets" account in the consolidated balance sheet, see Note 15) and a corresponding credit to the unearned revenue is recognized for the principal portion that was already paid by MERALCO (shown as part of"Other noncurrent liabilities" account in the consolidated balance sheet, see Note 21).

As of December 31,2006, the prepaid gas arising from the SA and PDA and the corresponding unearned revenue amounted to ta2.5 billion (US$50 million) (see Notes 15 and 21).

The unpaid balance of the Annual Deficiencies, including accrued interest, are presented as "Obligations to the Gas Sellers" account in the consolidated balance sheets and the corresponding receivables from MERALCO, including accrued interest, are presented as part of"Receivables from MERALCO" account in the consolidated balance sheets.

175 The details of the Annual Deficiency, including accrued interest, arc as follows:

20116 2005 In Philippine In U.S. In Philippine In U.S. Peso Dollar Peso Dollar (In Millions) FGPC: Balance at beginning of year t_6,813 $128 P9,441 $167 Principal payments (I,957) (40.) - - Interest payments (1,050) (21) .... Application &excess gas consumed (468) (10) - - Interest 411 8 477 9 Alleged annual deficiency for the year 266 6 - - Reversal of annual deficiency - - (2,556) (48) Foreign exchange adjustments (5:16) - (549) - 3,499 71 6,813 128 FGP: Balance at beginning of year 1,922 36 3,125 55 Principal payments (502) (10) - Interest payments (284) (6) ...... Alleged annual deficiency for the year 193 4 - - Application of excess gas consumed in 2005 (185) (4) .... Interest I14 3 161 3 Reversal of annual deficiency - - (1,1821) (22) Foreign exchange adjustments (145) - (,182) I,113 23 1,922 36 Total 4,612 94 8,735 164 Less current portion 1,823 38 4,250 80 1_2,789 $57 ta4,485 $84

d. Lubricating Oil Supply Agreement

BPPC entered into a supply contract with Shell, whereby the latter will supply lubricating oil fi)r a period of 15 years until 2010 at the agreed price indicated in the contract. The price is subject to adjustments twice a year based on various conditions, such as changes in the cost or rates of the product, among others.

e. Operations and Maintenance (O&M) Agreements

FGPC and FGP have separate O&M Agreements with Siemens Power Operations, Inc. (SPO) mainly Ibr the operation, maintenance, management and repair services of their respective power plants. As stated in the respective O&M Agreements of FGP and FGPC,SPO is responsible to maintain adequate inventory of accessories and consumables. SPO is also responsible to replace the necessary parts of the power plants to ensure the proper operation and maintenance of the power plants in accordance with the Good Utility Practice. Total operations and maintenance costs charged to the consolidated statements of income amounted to ta1.5 billion (US$29 million) in 2006, _1.5 billion (US$28 million) in 2005 and #2.5 billion (US$45 million) in 2004. As of December 31, 2006 and 2005, certain O&M fees amounting

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176 to t_2.3 billion (US$47 million) and i_1.2 billion ($24 million), respectively, which relates to major spare parts that will be replaced during the scheduled maintenance outage, were presented as part of"Other noncurrent assets" account in the consolidated balance sheets (see Note 15).

Based on the current operating regime, it is estimated that the O&M Agreements will expire in 2010.

E Substation Interconnection Agreement

FGPC has an agreement with MERALCO and NPC tbr: (a) the construction of substation upgrades at the NPC substation in Calaca and the donation of such substation upgrades to NPC; (b) the construction of a dedicated 35-kilometer transmission line from the power plant to the NPC substation in Calaca and subsequent donation of such transmission line to NPC; (c) the interconnection of the power plant to the NPC Grid System; and (d) the receipt and delivery of energy and capacity from the power plant to MERALCO's point of receipt.

As of December 31, 2006, FGPC is still in the process of transferring the substation upgrades in Calaca, as well as the 230 KV Santa Rita to Calaca transmission line, to NPC. g. Interim Interconnection Agreement

FGP has an agreement with NPC and MERALCO whereby NPC will be responsible for the delivery and transmission of all energy and capacity from FGP's power plant to MERALCO's point of receipt. h. Franchise

First Gen, through First Gas tIoldings Corporation (FGHC), has a franchise granted by the 1lth Congress of the Philippines through R.A. No. 8997, to construct, install, own, operate and maintain a natural gas pipeline system tbr the transportation and distribution of the natural gas throughout the island of Luzon (the "Franchise"). The Franchise is for a term of 25 years until February 25, 2026. FGHC must commence the exercise of any privileges granted under the Franchise within five years (until February 25, 2006) from its effectivity, otherwise, the Franchise shall be deemed revoked. As of March 7, 2007, FGHC, among others, has secured an ECC on May 16, 2005 and has undertaken substantial pre-engineering works and design and commenced preparatory works for the right-of-way acquisition activities. i. First Gen's Shareholders' Agreements

The Parent Company has, likewise, entered into individual agreements with each of the other shareholders of First Gen (each an "Investor"). Common to these agreements arc buy-out option provisions, based on pre-agreed pricing formulae: (x) exercisable by the Parent Company, either by itself or through or with a designee, to purchase all the shares of the relevant Investor, in cases of (i) dispute between the Parent Company and an Investor, as defined in the agreements, or (ii) upon the occurrence of a default, as defined in the said agreements, attributable to such Investor; and (y) exercisable by the relevant non-defaulting Investor (the optionee), upon the occurrence of a deDult by the other party, to require the defhulting party to purchase all the shares held by the optionee.

177 The Parent Company has likewise agreed to purchase all of the shares of the relevant Investor, based on pre-agreed pricing fbrmulae, which will provide Investor with a specified return in United States dollar, only upon the occurrence of certain trigger events and in the event that: (a) with respect to one Investor, First Gen does not meet certain payout ratios beginning on a future date, or (b) with respect to the other Investor, First Gen does not list the First Gen common stock within a period beginning March 31, 2005 and ending December 31, 2008.

These agreements with the Investors will automatically expire and terminate upon listing of the common stock of First Gen.

The common shares of First Gen were listed with the Philippine Stock Exchange on February 10, 2006.

j. Guarantee on Perfbrmance and Surety Bonds

First Balfour is contingently liable for guarantees arising in the ordinary course of business, including letters of guarantee for performance and surety bonds for various construction projects amounting to about ta72 million and tal 15 million as of December 31, 2006 and 2005, respectively.

k. Engineering, Procurement and Construction (EPC) Contract

FGPC entered into a Turnkey EPC Contract with Siemens AG, Siemens Power Generation, and Siemens, Inc. (collectively, "Siemens") for the construction of the 1,000 Megawatt (MW) Combined Cycle Power Plant.

The arbitration proceedings were related to a dispute that arose between FGPC and Siemens in connection with its construction of FGPC's power plant. The dispute stemmed from the delays incurred by Siemens and its subcontractors in the timely completion of the Project. As a remedy available under the EPC Contract, FGPC withheld approximately ta4.6 billion (US$94 million) of milestone payments to Siemens to cover the corresponding liabilities that Siemens incurred to the Project as a result of its delays.

In December 2002, Siemens submitted a Request for Arbitration to the International Chamber of Commerce (ICC) in London against FGPC arising out of alleged delays to the construction of the Project. In its Request for Arbitration, Siemens claimed payment for certain milestones achieved in the Project, which FGPC previously withheld. Siemens also claimed an additional sum in the amount of approximately ta3.1 billion (US$64 million) for prolongation cost and miscellaneous matters.

The Arbitral Tribunal considered both claims and liabilities of Siemens during the hearings held in March and April 2005. In November 2005, the Arbitral Tribunal rendered its Second interim award in relation to Siemens' claim for extension of time and ruled that Siemens was entitled to an extension of time in respect of Block 1 and Block 2 completion of 32 days and 60 days, respectively. Accordingly, Siemens was saved from any liability during this time. However, notwithstanding its entitlement to an extension of time, the delays to the completion of the Project for which Siemens was responsible meant that it also incurred the corresponding obligations in the aggregate amount ofta4.9 billion (US$99 million). As FGPC had already withheld P4.6 billion (US$94 million) in milestone payments to Siemens, only the balance of

178 ta250 million (US$5 million) was due to be paid to FGPC by Siemens, subject to any set-offs and counterclaims to be determined by the Arbitral Tribunal in its Final Award.

The withheld amount of approximately ta4.6 billion (US$94 million) of unpaid EPC milestone payments, net of applicable taxes, was recorded in 2005 as a reduction in the cost of the power plant. The balance oft_250 million (US$5 million), fi-om the full 114.9billion (US$99 million) of Siemens' incurred obligations, was recognized as part of "Other income" account in the consolidated statement of income in 2005.

Hearings were held in September 2005 to consider Siemens' monetary claims against FGPC and FGPC's counterclaims against Siemens. On April 6, 2006, the Arbitral Tribunal issued its Third interim award pursuant to which (i) FGPC was entitled to an 11549million (US$11 million) award [inclusive of the t_250 million (US$5 million) already recognized as other income in 2005] for its remaining counterclaims against Siemens and (ii) Siemens was entitled to approximately P417 million (US$9 million) fbr its remaining claims against FGPC.

Following the Third interim award, on October 6, 2006, FGPC and Siemens entered into a Settlement Agreement to conclude the arbitration and to settle all outstanding matters between them, in respect of all other claims, counterclaims, interest and costs of the arbit_ation. Pursuant to the Settlement Agreement, Siemens agreed to make an additional net payment to FGPC of $10.5 million [inclusive of the 11250million (US$5 lrfillion) that was initially recognized as other income in 2005 and the $1.5 million outstanding receivables of FGPC from Siemens].

On October 16, 2006, FGPC received the net payment from Siemens of ta515 million (US$11 million). The net balance oftal91 million (US$4 million) was recognized as part of "Other income" account in the consolidated statement of income in 2006.

On December 12, 2006, the Arbitral Tribunal issued its Final Award, which is final and binding, incorporating all previous awards and the agreement of the parties to settle all outstanding matters between them in respect of all other claims, counterclaims, interest and costs of the arbitration. The issuance oft he Final Award finally resolved all outstanding matters in the arbitration, and fbrmally concluded the dispute between FGPC and Siemens.

1. Land Titling Cases

As of December 3 l, 2006, there are a number of land titling cases filed by FGPC and FGP. Management believes that the resolution of these cases will not materially affect the consolidated financial statements. m. Contingencies

FGPC FGPC was assessed by the BIR on July 19, 2004 tbr deficiency income tax for taxable years 2001 and 2000. FGPC filed its Protest Letter to the BIR on October 5, 2004. Management believes that the resolution of this assessment will not materially affect the First Holding Group's consolidated financial statements.

179 On June 25, 2003, FGPC received various Notices of Assessment and Tax Bills dated April 15 and 21,2003 from the Provincial Government of Batangas, through the Office of the Provincial Assessor, imposing an annual real property tax (RPT) on steel towers, cable/transmission lines and accessories (the "T-Line") amounting to t_12 per year. FGPC, claiming exemption from said RPT, appealed the assessment to the Provincial Local Board of Assessment Appeals (LBAA) and filed a Petition on August 13, 2003, praying for the following: (1) that the Notices of Assessment and Tax Bills issued by Provincial Assessor be recalled and revoked, and (2) that the Provincial Assessor drop from the Assessment Roll the 230 KV transmission lines from Sta. Rita to Calaca in accordance with Section 206 of the LGC. FGPC argued that the T-Line does not constitute real property fbr real property tax purposes, and even assuming that the T-Line is regarded as real property, FGPC is still not liable for RPT as it is NPC/Transco, a government-owned and -controlled corporation (GOCC) engaged in the generation and/or transmission of electric power, which has actual, direct and exclusive use of the T-Line.

Pursuant to Section 234 (c) of the LGC, a GOCC engaged in the generation and/or transmission of electric power and which has actual, direct and exclusive use thereof, is exempt from RPT. FGPC sought tbr, and was granted, a preliminary injunction by the Regional Trial Court (Branch 7) of Batangas City to enjoin the Provincial Treasurer of Batangas City from collecting the RPT pending the decision of the LBAA. Despite the injunction, the LBAA issued an Order dated September 22, 2005 requiring FGPC to pay the RPT within fifteen (15) days from receipt of the Order. On October 22, 2005, FGPC tiled an appeal betbre the Central Board of Assessment Appeals (CBAA) assailing the validity of the LBAA order. In a Resolution rendered on December 12, 2006, the CBAA set aside the LBAA Order and remanded the case to the LBAA. The LBAA was directed to proceed with the case on the merits without requiring FGPC to first pay the RPT on the questioned assessment.

In a decision dated January 30, 2006, the Regional Trial Court (Branch 7) of Batangas City denied a 2nd motion to lift the injunction previously issued by the court to stop the Province from collecting the tax pending decision of the LBAA. Hence, the preliminary injunction stays. The court is scheduled to conduct a pre-trial of the main case fbr prohibition. BPPC There are ongoing cases involving the assessment of RPT and franchise tax by the local government. BPPC believes that under the Project Agreement, any RPT and franchise tax that may be found due is for the sole account of NPC.

1) The first case was filed by NPC with the Local Board of Assessment Appeals (LBAA) of Province of La Union in connection with the assessment of RPT by the Provincial Treasurer on BPPC's machinery and equipment from 1995 to 1999. Following the denial of NPC" petition for exemption by the LBAA and NPC's appeal to the CBAA, BPPC formally intervened in the CBAA case to further protect its interest. The CBAA affirmed the decision of the LBAA. Both NPC and BPPC filed their respective appeals to the CTA. Last February 13, 2006, the CTA promulgated a decision denying the respective Appeal's filed by BPPC and NPC. While NPC elevated the matter directly to the SC, BPPC filed an MR with the CTA, which denied said motion on July 10, 2006. BPPC then filed a Petition for Review on Certiorari with the SC on September 11,2006, reiterating NPC's exemption from RPT. In a minute resolution dated October 4, 2006, the SC's First Division denied BPPC's petition on the ground that it .tailed to show that the CTA

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180 committed any reversible error as to warrant the exercise by the SC of its appellate jurisdiction. An MR was filed by BPPC on December 12, 2006. The MR was denied with finality by the 3rd Division of the SC in another minute resolution dated February 26, 2007.

2) The second case was filed by NPC, fbr itself and on behalf of BPPC, following issuance of a revised assessment of RPT on BPPC's machinery and equipment on July 15, 2003 by the Municipal Assessor of the Municipality of Bauang, La Union. Under the said revised Assessment, the maximum tax liability for the period 1.995 to 2003 is about P775 million, based on the maximum 80% assessment level imposable on privately-owned entities and a tax rate of 2%. In addition, interest on the unpaid amounts (2% per month not exceeding 36 months) has reached a total amount oft_489 million. The case remains pending with the LBAA of the Province of La Union.

In addition to the case filed by BPPC, there are two other cases involving the very same issues which are still pending with the Third Division of the SC. Notwithstanding the denial of its MR, BPPC believes it will benefit if the SC conducts a thorough review of these two pending cases and subsequently rules in favor of NPC on the substantive and novel issue on the validity of the imposition of RPT on the machinery and equipment being operated under the Build-Operate-Transfer (BOT) scheme, which was not squarely addressed in the BPPC case.

There is also an outstanding preliminary injunction against the collection of RPT by the Province of La Union, which is for the benefit of both BPPC and NPC, and the Province cannot collect the tax until the NPC petition (involving the same facts and issues and the very same machinery and equipment, which has been given due course and is pending with the Third Division of the SC) is also finally resolved.

In any event, BPPC believes that NPC shall be directly responsible for the payment of all RPT that may be assessed on machineries and equipment at Bauang Plant, pursuant to the terms of the Project Agreement which specifically provides that NPC shall pay all real estate taxes and assessments in respect of the site, machineries and equipment and improvements of the power plant complex.

To date, the potential maximum tax liability on BPPC's machinery and equipment for the period from 1995 to 2006 is about tal. 1 billion, based on the maximum 80% assessment level imposable on privately-owned entities and a tax rate of 2%. In addition, maximum interest on the unpaid amounts (2% per month not exceeding 36 months) amounts to ta638 million.

31) The third case was filed on October 19, 2005 by NPC, for itself and on behalf of BPPC, following receipt of Statement of Account from the Municipal Treasurer dated August 5, 2005 for RPT on BPPC's buildings and improvements ti'om 2003 to August 2005 amounting to ta4 million. The case is pending with the LBAA of the Province of La Union. NPC paid all RPT on Buildings and Improvements directly to the local government tiom 1995 until 2003, when it stopped payment of the tax and claimed an exemption under the LGC. To date, the potential maximum tax liability on BPPC's and improvements for the period ending 2006 is about ta42 million, pursuant to Statement of Account from the Municipal Treasurer dated March 8, 2006, including alleged back-taxes and interest dating back fiom 1995.

4) BPPC also filed a Petition for Certiorari and Prohibition in September 2004 to contest an assessment for franchise tax tbr the period 2000 to 2003 amounting to ta33.0 million, including surcharges and penalties, on the ground that BPPC is not a public utility which is required by law to obtain a legislative franchise before operating, thus is not subject to franchise taxes. The case is pending before the Regional Trial Courts (RTC) of Bauang, La Union.

Both NPC and BPPC believe that they are not subject to pay franchise tax to the local government. In any case, the Company believes that the Project Agreement with NPC allows BPPC to claim indemnity from NPC for any new imposition, including franchise tax, incurred by BPPC that was not originally contemplated when it entered into said Project Agreement.

Panay Power Corporati.on (PPC) Last September 2005, Mirant Global Corporation, on behalf of Claredon Towers Holdings Corporation (the Purchaser of PPC), notified the Parent Company, Panay Electric Company, Inc. and FPPC (the Sellers), claiming for indemnity for taxes assessed by the BIR on PPC for the year 2000 amounting to t_331 million.

The Sellers have denied any liability to indemni_ the Purchaser on the ground that: (i) the claim was made after the expiry of the statute of limitations for the taxable period to which the claim relates; (ii) the claim was made beyond the allowable period for claims (18 months after Closing Date) indicated in the Sale and Purchase Agreement (SPA) entered into by the parties in June 2003; and (iii) the Purchaser had failed to provide the Sellers the proper written notice within the appropriate time under the SPA.

In the meantime, the Purchaser has issued a waiver on the statute of limitations (without abandoning its defense that the assessment of the BIR had already prescribed) and is conducting discussions with the BIR.

Certain associates have contingent liabilities with respect to claims, lawsuits and tax assessments. The respective management of the associates, after consultations with outside counsels, believes that the final resolution of these issues will not materially affect their respective financial position and results of operations.

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182 34. Other Matters

EPIRA R.A. No. 9136, otherwise known as the EPIRA, and the covering IRR provides fbr significant changes in the power sector, which include among others: the tmbundling of the generation, transmission, distribution and supply and other disposable assets of a company, including its contracts with IPP and electricity rates; creation of a Wholesale Electricity Spot Market (WESM); and open and nondiscriminatory access to transmission and distribution systems.

The law also requires public listing of not less than 15% of common shares of generation and distribution companies within five years from the effectivity date of the EPIRA. It provides cross ownership restrictions between transmission and generation companies and between transmission and distribution companies and a cap of 50% of its demand that a distribution utility is allowed to source fi'om an associated company engaged in generation except for contracts entered into prior to the effectivity of the EPIRA.

There are also certain sections of the EPIRA, specifically relating to generation companies, which provide for a cap on the concentration of ownership to only 30% of the installed capacity of the grid and/or 25% of the national installed generating capacity; and VAT zero-rating of sale of generated power.

Pursuant to the EPIRA's mandate and that of its IRRs, FGP, FGPC, BPPC and FG Bukidnon have filed its application for the issuance of a Certificate of Compliance (COC) for the operations of their respective power plants. On September 14, 2005, November 5, 2003, June 4, 2003 and February 16, 2005, ERC issued the COCs of FGP, FGPC, BPPC and FG Bukidnon, respectively, which are required for all generation companies under the EPIRA. FG Hydro has likewise obtained, which came in as part of the APA, the respective COCs dated December 3, 2005 for the Pantabangan plant and on December 7, 2005 tbr the Masiway plant. The COCs will be effective for a period of five years subject to further renewal.

Pursuant to the provisions of Section 36 of the EPIRA, all Electric Power Industry Participants shall prepare and submit for approval of the ERC their respective Business Separation and Unbundling Plan (BSUP) which requires all industry participants to maintain separate accounts fbr, or otherwise "structurally and functionally unbundled" their business activities.

Since each of FGP, FGPC, and BPPC is engaged solely in the business of power generation, to the exclusion of the other business segments of transmission, distribution, supply and other related business activities, compliance with the BSUP requirement on maintaining separate accounts is not reasonably practicable. Instead, each of FGP and FGPC filed its BSUP package on June 30, 2004 and BPPC filed its BSUP package on June 28, 2004 together with a copy of the audited financial statements as of and tbr the year ended December 31,2003 and other relevant documents.

183 In compliance with ERC's additional requirements for the BSUP, FGPC and BPPC submitted on April 28, 2005 and April 5, 2005, respectively, the following: (a) Verified Explanation (with Motion for Leave to Admit Attached Application); (b) Verified Application; (c) FGPC's 2004 audited financial statements; (d) FGPC and BPPC's Depreciation and Transfer Pricing Policies; and (e) FGPC and BPPC's expressed undertaking to comply with the obligations of the Business Separation Guideline (BSG) and develop a relevant plan for complying with the Code of Conduct once the same is pronmlgated.

ERC also conducted on September 29, 2005 a single hearing _br the approval of BPPC's BSUP. BPPC testified that the application was prepared in accordance with the provisions and requirements of the EPIRA as well as the BSG and BSUP filing package of the ERC. To date, the ERC has not yet decided on BPPC's application. However, BPPC is confident that the ERC will grant its approval of the BSUP.

Based on FGP, FGPC and BPPC's assessments, they are in the process of complying with the provisions of the EPIRA and its IRR.

Clean Air Act On November 25, 2000, the IRR of the Philippine Clean Air Act (PCAA) took effect. The IRR contain provisions that have an impact on the industry as a whole, and on FGP, FGPC and BPPC in particular, that need to be complied with within 44 months (or July 2004) from the effectivity date, subject to approval by the DENR. The power plants of FGP and FGPC use natural gas as fuel and have emissions that are way below the limits set in the National Emission Standards tbr Sources Specific Air Pollution and Ambient Air Quality Standards. Based on FGP and FGPC's initial assessments of the power plants' existing facilities, the companies believe that both are in full compliance with the applicable provisions of the IRR of the PCAA.

On the other hand, BPPC believes that the Project Agreement specifically provides that it is not contractually obligated to bear the financial cost of complying with the PCAA. In this connection, the DENR has issued a Memorandum on September 19, 2006 directing all regional directors to hold in abeyance the implementation of the Continuous Emission Monitoring System (CEMS) which is required under the PCAA, until such time that a set of guidelines has been approved. BPPC has been conducting Ambient Air Emission Monitoring every quarter and Source Emission Monitoring once a year in lieu of the installation of the CEMS. Results are submitted to the Environmental Monitoring Bureau (EMB) and the DENR-Region 1 Office.

BPPC has also engaged a private consultant to study alternative means of compliance with PCAA requirements. On November 20, 2006, Apercu Consultants presented to representatives fiom the DENR-EMB and NPC the Bauang Plant's Modified Compliance Plan to the PCAA. The plan reiterated earlier position on the use of (a) Predictive Emissions Monitoring System as an alternative to CEMS, (b) low sulfur thel (2% or lower) to reduce SO2 emissions and (c) combustion to reduce NOX emission.

,_

184 35. Events After the Balance Sheet Date

a.On March 28, 2007, the Parent Company signed a i_5.0 Billion Fixed Rate Corporate Notes (the "Notes") with 19 lender institutions and drew the full amount on April 11, 2007. The Notes are divided into three tranches: i_1.65 billion tbr the 5-year Note and interest rate at 7.15%, #2.0 billion/or the 7-year Note at 7.90% and i_1.35 billion for the 10-year Note at 8.37%. The proceeds &the Notes will be used for general corporate purposes which may include capital expenditures and acquisitions.

b. On April 12, 2007, the BOD approved a cash dividend oftal per share to stockholders of record as of April 27, 2007, payable on or before May 10, 2007.

c. On April 12, 2007, the BOD approved the transfer of First Holdings' shares in FPIDC to City Resources (Philippines) Corporation (City Resources) in exchange for shares of common stock of the latter.

City Resources is listed with the Philippine Stock Exchange. It is intended as the holding company for the tollways and infrastructure business of First Holdings and Benpres.

After the planned transfer of shares, City Resources will become a majority owned subsidiary of First ttoldings and the parent company of FPIDC, while Benpres and minority shareholders will own the remaining shares. City Resources will house the holdings of First Holdings and Benpres in the tollway business by virtue of their ownership of MNTC, which has the concession to the NLE, and Tollways Management Corp., MNTC's operator for the NLE.

36. Supplemental Information - Consolidated Statements of Cash Flows

In 2006, the non-cash investing activity includes the t_3.8 billion (US$77.4 million) dcferred payment thcility availed fi-om PSALM in relation to the PAHEP/MAHEP acquisition (see Note 5).

In 2005, the non-cash investing activity includes the reduction in the cost of the property, plant and equipment ofta5.0 billion ($93.9 million) representing claims of the First Holdings Group for the delays incurred by Siemens (see Note 33b).

I85 6760 AyalaAvenue Fax: (632)819-0B72 1226MakatiCity w'ww_sRv.com.ph Philippines I_DA.IPRCReg.No. 0001 SECAccreditatio_No.0012-FR-1

INDEPENDENT AUDITORS' REPORT

The Stockholders and the Board of Directors First Philippine Holdings Corporation 6th Floor, Benpres Building Exchange Road comer Meralco Avenue, Pasig City

We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statci_nts of First Philippine Holdings Corporation and subsidiaries included in this Form 17-A and have issued our report thereon dated April 12, 2007. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules are the responsibility of the Company's management. These schedules am presentod for purposes of complying with Securities Regulation Code Rule 68 and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basle financial statements and, in our opinion, fairly state in all material respect the financial data requiredto be set forth therein in relation to the basic financial statementstaken as a whole.

SYCIP GORRES VELAYO& CO.

iy-Yap Partner CPA Certificate No. 57794 SEC AccreditationNo. 0098-AR-1 Tax IdentificationNo. 102-100-627 PTRNo. 0267389, January 2, 2007, MakatiCity

April 12, 2007

SGV& Cois a memberprao'iceof Ernst& YoungGlobal

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_87 FIRST PHILIPPINE HOLDINGS CORPORATION AND SUBSIDIARIES SCHEDULE D - DEPOSITS FOR FUTURE INVESTMENTS DECEMBER 31, 2006 (Amounts in millions)

Beginning Ending Balance Name of Affiliate Balance

Investment at Equity First Private Power Corporation ta3 t_3

Advances to a Related Party of a Subsidiary First Philippine Infrastructure Development Corporation and Subsidiaries - Tollways Management Corporation 262 604

Investment at Cost Asian Eye Institute, Inc. 18 18 t_283 ta625

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189 FIRST PHILIPPINE HOLDINGS CORPORATION AND SUBSIDIARIES SCHEDULE F - LONG-TERM DEBT DECEMBER 31, 2006 (Amounts in millions)

Amount Amount Shown as Shown as Name of Issuer and Type of Obligation Total Loans Current Long-term

First Gas Power Corporation Foreign currency denominated loans payable t_8,614 i_3,381 1a5,233 to foreign financing institutions US Private Placements 6,266 2,099 4,167 FCDU Facility 755 755 0 15,635 6,235 9,400 FGP Corp. HERMES Covered Facility 4,125 496 3,629 ECGD Commercial Loan Credit 3,659 449 3,210 GKA Covered Facility 2,682 261 2,421 1.0,466 1,206 9,260 FGHC International Limited US$35 AIMCF Note 1,716 1,716

FPH Fund Corporation US$100 Guaranteed Floating Rate Notes 4,756 4,756

Manila North Tollways Corporation US$261 Project Financing Facility 9,625 910 8,715

Others 3 3 ta42,201 ta8,351 ta33,850

Please refer to Note 18 to the consolidated.financial statements Jbr additional information.

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191 A_TN]_ "Avv FIRST PHILIPPINE HOLDINGS,CORP, LIST OF DIRECTORS AND OFFICERS AND THE STOCKHOLDERS OWNING t0=/oOR MORE AND THEIR RESPECTIVE SHAREHOLDINGS As of December 31, 2006 PERCENT TO OUTSTANDING TOTAL GRAND TOTAL SUBSCRIBED DIRECTORS SHARES ESPP SHARES TOTAL AND OUTSTANDING Oscar M. Lopez 5,307,475 5,307,475 0,91425814% AugustoAlmeda Lopez 155,001 155,001 0,02670025% ThelmoY. Cunanan 1 1 0.00000017% Peter D, Garrucho,Jr. 364,150 364,160 0.06272969% ElpidioL. Ibanez 362,296 362,296 0.06240860% Oscar Hilado 1 0.00000017% ManuelM Lopez 71,758 71,758 0,01236093% ErnestoB. Rufino,Jr. 985,244 985,244 0.16971674% Vicente T. Paterno 6,381 6,381 0.00109918% FedericoR. Lopez 171,285 10,650 181,935 0.03133967% WashingtonSycip 1 0_00000017% EugenioLopezIII 14,335 14,335 0.00246933% Jose P, de Jesus 42,200 42,200 0,00726931%

OFFICERS ArthurA. de Guia 561,628 - 561,628 0.09674525% ReynaldoR. Sarmenta 291,109 - 291,109 0.05014602% BenjaminK. Liboro 241,423 - 241,423 0.04158718% PerlaR_Catahan 556,826 556,826 0.09591806% AnthonyMabasa 3,240 3,240 0.00055812% LeonidesU. Garde 124,249 124,249 0.02140296% Emesto A. Esguerra 720 720 0.00012403% RicardoB, Yatco 48,801 48,801 0_00840639% HectorY. Dimacali 89,218 23,290 112,508 0.01938047% RichardB.Tantoco 90,303 90,303 0.01555547% FrancisGilesPuno&/orPatricia 1,028,211 1,028,211 0.17711817% Cesar Z_Gomez 46,454 46,454 0.00800210% DaniloC. Lachica 12,000 12,000 0.00206710% VictorEmmanuelB.Santos 0.00000000% Oscar R.Lopez, Jr. 7,476 7,476 0.00128781% RobertoC. Chan 20,626 20,626 0.00355301% EnriqueI. Quiason 0.00000000% RodolfoR.Waga, Jr. 39,792 39,792 0.00685451% RodrigoE, Franco 10,655 10,655 0.00183542% BenjaminErnestoR. Lopez 204,049 204,049 0.03514919%

Owning 10% or more: BenpresHoldingsCorp. 254_'I21,719 2_, 121,719 43.77464822%

TOTAL 264,975,397 37,180 265,012,577 45.65069203% Other Stockholders 316,003,386 506,619 315,510,007 54.34930797%

GRAND TOTAL 579,978_785 543,7_9 580_522,584 _00o00_001_%

Co_rectb_:

192