The company has four existing geothermal production fields and has plans to expand existing fields and to develop new fields. Considering the nature and scale of the existing operations and the planned future expansion or development, the following IFC’s Performance Standards are applicable to the project: - PS1: Social and Environmental Assessment and Management System - PS2: Labor and Working Conditions - PS3: Pollution Prevention and Abatement - PS4: Community Health, Safety and Security - PS5: Land Acquisition and Involuntary Resettlement - PS6: Biodiversity Conservation and Sustainable Natural Resource Management - PS7: Indigenous Peoples - PS8: Cultural Heritage

The project will help the company to improve the efficiency and competitiveness of the existing geothermal production fields and to expand use of additional geothermal energy sources of the Philippines. Use of geothermal resources, if carefully designed and maintained, is inherently more environmentally friendly than use of conventional fossil fuels or large hydro projects, in terms of scale and nature of potentially adverse environmental or social impacts, and due to potential environmental benefits by reducing emissions of greenhouse gases and other conventional air pollutants by displacing alternative fossil fuel energy sources. The company has been a client of the World Bank for many years on both IBRD and Carbon Offset product lines, and its environmental and social management system has been strengthened to meet the requirements of the World Bank’s safeguard requirements. Considering all these, IFC determined this corporate investment project as a Category B project because of its potentially limited adverse social or environmental impacts.

Following environmental and social issues were reviewed during the IFC’s appraisal: - Corporate environmental management system to develop and operate geothermal and other renewable energy facilities - Environmental performance of the company’s existing geothermal facilities (e.g. environmental permits and compliance with their conditions, air emissions, noise, liquid effluents, hazardous and non-hazardous wastes, occupational and public health and safety) - Social performance of the company’s existing geothermal facilities (e.g., legacy issues, if any, such as compensation to project affected people) - Enhanced social and environmental performance of the company IFC’s appraisal has confirmed that the company’s established environmental and social management system is functioning well to manage E&S performance of the existing operations and to address potential E&S impacts of future developments, in compliance with the applicable Philippines regulations and standards and in general with the requirements of the IFC’s Performance Standards on Social and Environmental Sustainability. As part of IFC’s appraisal, the company has indicated its commitment to conducting their business in accordance with the IFC’s Performance Standards. Details of how PNOC EDC is addressing and managing E&S impacts are summarized in the paragraphs that follow. - Social and Environmental Assessment and Management System: Environmental Management System: The company has an established environmental and social management organization, headed by Vice President, Environment & External Affairs, and supported by Environmental Management Department, Community Partnerships Department and Public Relations Department. In February 1994, the company established Corporate Environmental Policy. As the client of the World Bank for many years on both IBRD and Carbon Financing product lines, the company’s environmental and social management system has been strengthened to meet the requirements of the World Bank’s safeguard policy requirements. In 2005, the company has engaged an ISO 14001 consultancy firm to assist the company in formulating a corporate Environmental Management System Manual and detailed corporate environmental management procedures. The Environmental Management Department has a total annual budget of over PhP 74,000 million for 2006 to implement various programs including environmental technical services, watershed technical services, laboratory analytical services, and environmental operations in each of the geothermal production fields. Environmental Audits: Environmental audits are being conducted by the Multi-Sectoral Monitoring Team (MSMT) at all the four existing geothermal production fields. The MSMTs are represented by DENR (Department of Environment and Natural Resources), Local Government Units (LGUs), local NGOs, concerned government agencies and the proponents (PNOC EDC and power plant operators). Environmental Impact Assessment: The Philippines has detailed environmental impact assessment requirements by PD 1586 (Philippine Environmental Impact Assessment Law) and DAO 2003-30 (Latest Implementing Rules and Regulations of PD 1586). Following preparation of Environmental Impact Statement (EIS) Report or Initial Environmental Examination (IEE) Report, stakeholder consultation, and information dissemination, the company needs to secure relevant environmental permits, including the major one called Environmental Compliance Certificate (ECC) from DENR. Hydrogen Sulfide Dispersion Modeling is conducted as a standard EIA tool for all of its geothermal projects. Where indigenous peoples are affected, the company needs to follow the requirements of the Philippine Indigenous Peoples Rights Act (IPRA) of 1997. New Investment Projects and EIAs / ECCs: The company has already obtained Environmental Compliance Certificates (ECCs) for most of the planned investments except for Nasulo Optimization Project (20MW) and Mindanao-3 Geothermal Project (50MW). Planned investments for which ECCs are already obtained include Southern Leyte Geothermal project (100MW), Tanawon Geothermal Project (40MW), Rangas Geothermal Project (40MW), Saoit Wind power Project (30MW), Nagsurot Wind Power Project (46MW), Pagudpud Wind power Project (40MW), and 230kV Transmission Line / Substation Project (Laoag-Burgos). The 20MW Nasulo Optimization Project is to be constructed within the existing geothermal complex and was exempt from the ECC requirements. The 50MW Mindanao-3 Geothermal Project is planned as an expansion to the existing Mindanao Geothermal Production Field (104MW) within the Mt Apo geothermal reservation, which started commercial operation in 1996 after an extensive public consultation with indigenous peoples in early 1990s. The Mindanao-3 Geothermal Project will be constructed inside the geothermal reservation and no additional land acquisition will be implemented. However, as the Mt. Apo geothermal reservation is embraced within the ancestral domain of Manobo (tribal peoples), all activities that may impact the indigenous peoples are disclosed, and the rules of IPRA in Free and Prior Informed Consent are followed. A series of public consultation with indigenous peoples are on-going including preparation of Environmental Performance Report and Management Plan (EPRMP), an equivalent to a comprehensive Environmental Impact Statement. The company expects to obtain ECC in 2007 for this project. Other Environmental and Social Regulations and Standards: In addition to the above EIA regulations, the company ensures to comply with all the relevant regulations and standards including Philippine Clean Air Act, Noise Control Regulations, Philippine Clean Water Act, Toxic Chemicals and Hazardous and Nuclear Wastes Control Act of 1990, Ecological Solid Waste Management Act of 2000, Philippine Forestry Code, National Integrated Protected Areas System Act of 1992, Comprehensive Agrarian Reform Law of 1998 (Amended), Indigenous Peoples Rights Act of 1997, Philippine Water Code, Fire Code of the Philippines, Sanitation Code of the Philippines, Department of Labor and Employment (DOLE) Occupational Health & Safety Standards (As Amended, 1989), and Revised Geothermal Safety and Health Rules & Regulations & Codes of Practice (1999, DOLE). In addition, the company has indicated its commitment to conducting its business in accordance with IFC’s Performance Standards on Social and Environmental Sustainability (April 30, 2006). Environmental Monitoring Program: The company is implementing detailed environmental monitoring programs at existing geothermal production fields. Parameters such as pH, Boron, Chlorine and Heavy Metals (Arsenic, Cadmium, Chromium, Lead, Mercury) are monitored for river water, groundwater and project effluents (brine water, condensate, cooling tower blowdown). Total Suspended Solids is also monitored for river water and Total Dissolved Solids for groundwater and project effluents. For air quality, both noise and Hydrogen Sulfide are monitored at work areas and communities. The pH and Heavy Metals are also monitored for river sediment and project wastes (scales, sludge, waste chemicals, etc.). In addition, specifies inventory and diversity indices are monitored in aquatic biota and terrestrial flora and fauna. The company has presented data explaining that the monitoring results are in compliance with the relevant environmental and occupational standards of the Philippines. Reporting of Environmental and Social Performance: In its corporate annual reports, the company reports their sustainability initiatives including environmental and watershed management activities and community enhancement programs. The company is planning to come up with a separate Corporate Social Responsibility Annual Report for the year 2006 and onwards. - Labor and Working Conditions: Human Resources / Retrenchment Management: The company has undergone a Manpower Reduction Program (MRP) in February 2005 by voluntary separation of 10% of the employee population (or equivalent to 298 personnel). The company is proactively working to reach Collective Bargaining Agreements with labor unions. All these are consistent with IFC Performance Standard 2 on Labor and Working Conditions. Occupational Health and Safety Performance: The company is using International Safety Rating Standards to manage heath and safety performance. The summarized data of 2005 indicates high performance levels. Detailed occupational health and safety performance of each geothermal production field are recorded and analyzed including Lost Time Accidents of Fatal and Non-Fatal, Number of Days Lost, Frequency Rate, Severity Rate, Physical Injury Cost, Major / Minor / Preventable / Non-Preventable Vehicular / Equipment Accidents etc. The company’s Safety Management Office and Safety Officers of the project sites are conducting seminars, trainings and orientations on various aspects of occupational health and safety and emergency response. - Pollution Prevention and Abatement: Heavy Metals Mitigation: Geothermal energy generation entails the tapping of deep geothermal fluids which may naturally contain traces of heavy metals leached from the surrounding rocks. PNOC EDC has instituted measures to address potential environmental impacts arising from this inherent characteristic of geothermal brine such as the installation of Zero Discharge System facilities (i.e. Fluid Collection and Recycling System pipelines, hot water / condensate canals, thermal ponds, and reinjection wells). Cooling tower sludge from geothermal power plant operations may also contain some heavy metals. Sludge containing these heavy metals are treated and disposed at a specially designed disposal facility. Sludges are mixed with an appropriate ratio of cement to immobilize the metals. The cemented sludge is disposed in a cemented cellar as permanent resting place. A monitoring well is drilled downslope of the cellar to check on potential leakages that may occur after emplacement of the treated sludge. Use of Reinjection: PNOC EDC does not discharge geothermal brine into rivers. All of the separated brine produced by PNOC EDC is re-injected back into the geothermal reservoir through reinjection wells achieving zero discharge. Reinjection wells typically range from 1,000 to 3,000 meters from the surface. Based on a typical reinjection well casing design, a slotted liner is set at 1,500 meters from the surface, or way below the water table in the project areas. The water table is found at the average depth of 30 to 100 meters from the surface. The upper levels of the reinjection well from 0 to 1,500 meters are either cased by steel, cemented, or both to prevent brine leakage. The company’s reinjection capacity of the existing geothermal production fields exceeds the brine load of each operating field. Effectiveness of these mitigation measures is monitored through regular monitoring of groundwater springs and water wells drilled by communities for drinking and other household use. Sinking of Land: PNOC EDC has no historical record of any subsidence or sinking of land issues arising from hot water extraction. The company explains that the precise leveling surveys conducted by the company in the operating geothermal production fields did not show any significant land subsidence that can be attributed to fluid extraction. Such results, according to the company’s analysis, are indicative of the competent or hard nature of the rocks underlying the project sites (mostly volcanic rocks) and the effectiveness of brine injection as a means of maintaining the pressure support within the reservoir, thereby arresting potential ground subsidence. Greenhouse Gas Emissions: In 2005, the company’s four existing geothermal production fields generated about 7,079 GWh of electricity. The company estimates that this is equivalent to avoided carbon dioxide emissions of about 4.1 million ton per year. The company has signed an Emission Reduction Purchase Agreement for one of the company’s new geothermal projects (Nasulo Geothermal Project) with the World Bank, as trustee of the Netherlands Clean Development Mechanism (CDM) Facility. The Facility is expected to purchase a minimum of 440,000 tons of carbon dioxide between 2008 and 2012. - Community Health, Safety and Security: Emergency Prevention, Preparedness and Response Arrangement: All the geothermal production fields of PNOC EDC have an Emergency Response Plan (ERP) consisting of the structure, communication and reporting protocols, major guidelines during critical emergencies, emergency procedures for specific incidents, contact numbers of major hospitals, Philippine National Police stations and other agencies involved in the ERP. The plan also has various specific contingency plans including Contingency Plan for Separated Geothermal Brine and Blowdown / Condensate Spills, Fire Emergency Plan, Typhoon Emergency Plan, and Earthquake Emergency Plan. Security Service: The company uses security service providers for its industrial / internal security concerns and also coordinates its needs with the national security personnel such as the Armed Forces of the Philippines (AFP) and the Philippines National Police (PNP) to protect vital installations. As a standard company requirement, all guards are oriented on the Code of Ethics and Code of Conduct. In addition, the company provides in-house training supervised by the internal on-site security officer to teach the company policies and law enforcement-related subjects to ensure continual skill development. With regard to AFP / PNP, they have their Standard Operating Procedures in the discharge of their individual duties and functions. On-site security offers of the company are monitoring to ensure that security service arrangements are in compliance with the company’s policy. - Land Acquisition and Involuntary Resettlement: Land Acquisition: Acquisition of lands within the project development block, either by long-term lease or outright purchase is being undertaken for privately-owned lands. For public/forest lands, the Company applies for Special Land Use Permits (SLUP) with DENR. PNOC EDC observes the various national and international policies with regard to land acquisition and involuntary resettlement. These include The Bill of Rights of the 1987, Republic Act 8974 (Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National Government Infrastructure Projects and for other Purposes), Republic Act 7279 (Urban Development and Housing Act), Republic Act 8371 (Indigenous Peoples Rights Act), and World Bank Operational Policy / Bank Procedure on Involuntary Resettlement. The company has adopted its own resettlement policy aimed at providing: - relocation of the settlers to a safe place, away from potential health and safety hazards, - just compensation of crops and property, - assistance in order to regain and improve the settlers’ standard of living, and - facilitate promotion of self reliance and productivity through the formation of a community institution. This is in consistent with the requirements of IFC Performance Standard 5 – Land Acquisition and Involuntary Resettlement. Existing Resettlement Sites: PNOC EDC has three existing resettlement sites located in Leyte Geothermal Production Field (51 households resettled), Mindanao Geothermal Production Field (21 households resettled), and Northern Negros Geothermal Project Site (25 households resettled). For every resettlement activity of the company, a resettlement plan is prepared. The plan is a consolidation of agreed arrangement between the company and the affected households. Prior to the finalization of resettlement plan, extensive consultations and meetings with the affected households, including the concerned local government unit and government agencies, are conducted to ensure transparency and proper placement of measures to mitigate resettlement impact on livelihood, basic services, and physical transfer. The company monitors implementation of resettlement status. Socio-Economic Monitoring Program: The company is conducting socio-economic monitoring at every three to five years to collect and evaluate parameters including household income data, basic services, capacity building for farmers’ associations. There are in total 126 farmers associations organized at the company’s existing geothermal production fields. - Biodiversity Conservation and Sustainable Natural Resource Management: Protection of Natural Habitat / Critical Habitat: PNOC EDC is a member of Committee on Energy Project in NIPAS (National Integrated Protected Areas System) Areas – CEPNA, which was created through the DENR-DOE Memorandum of Agreement for Cooperation and Assistance on Energy Projects in NIPAS Areas, signed on October 28, 1996. The activities / procedures of CEPNA are governed by a joint DENR-DOE Administrative Order 01, Series of 2002, issued on November 13, 2003. This Administrative Order aims to ensure that the Philippine Energy Plan is met to provide stable, reliable, adequate, affordable and safe energy with emphasis on indigenous energy resources, while at the same time the area is protected and its biodiversity is conserved within the context of the NIPAS Act. The company regularly coordinates with the CEPNA in regard to its prospect areas within the NIPAS areas. The company promotes the management and protection of natural habitats that fall within the confines of their project areas. The company also initiates biodiversity conservation strategies as part of its environmental management program such as support to Philippine Eagle Foundation in Mindanao, protection of bat sanctuary at Bacon-Manito Geothermal Production Field, and use of indigenous forest tree species in reforestation areas at Northern Negros Geothermal Protection Site. - Indigenous Peoples: The company’s Mindanao Geothermal Production Field (106MW) was developed in the lands of tribal peoples or Indigenous Cultural Communities (ICCs) within the geothermal reservation of Mt. Apo National Park. In the early 1990s, prior to the start of operations in 1996, and prior to the passing of the Indigenous Peoples Rights Act (IPRA) of 1997, the company conducted extensive consultations with the tribal peoples. The company has been providing support to the affected indigenous peoples through the Environmental Tribal Welfare Trust Fund being managed by Mt. Apo Foundation Inc., which focuses on indigenous peoples’ development, specifically providing scholarship and education assistance and supporting livelihood programs and community organization capacity building. In addition, the company is providing other benefits, such as royalty pursuant to the Local Government Code, eighty percent of which is used to subsidize the electricity used by the resident tribes. The company is also providing livelihood support to 30 indigenous peoples’ communities. As part of applying a permit for the Mindanao-3 Geothermal Project, PNOC EDC strictly adheres to the provisions of the Indigenous Peoples Rights Act (IPRA) of 1997 and the guidelines on securing Free Prior Informed Consent (FPIC) from the community. - Cultural Heritage: Cultural Heritage: The company adheres to the provision of RA 9237 (or the Mt. Apo Protected Area Act of 2003). Chapter III Sections 12 to 14 states the right of the indigenous peoples to ancestral land and domain, the rights of tenured migrants, and respect for prior rights and properties within the buffer zone and ancestral domains.

The Resident Managers of existing geothermal production fields have overall responsibility for community engagement. With the support of Environmental Officers designated by the Environmental Management Department, Resident Managers implement public consultation programs and disseminate information about environmental performance to the local communities and other interested stakeholders. Resident Managers also oversee community development initiatives implemented with the support of Chief Officers designated by the company’s Community Partnerships Department, including efforts to maintain good relations with local communities, identify their most pressing needs, and help them formulate projects. For all new investment projects, the company carries out Environmental Impact Assessments (EIAs), discloses project information to local communities, consults with them, and obtains the necessary environmental permits in accordance with the Philippine Environmental Impact Assessment Law (PD 1586) and its latest Implementing Rules & Regulations of PD 1586 (DAO 2003-30). Projects that impact indigenous peoples can only proceed with the free and prior informed consent (FPIC) of these peoples, as required by the Indigenous Peoples Rights Act (RA 8371). Environmental and social information about the company’s operations is also disclosed through the company’s website (www.energy.com.ph). Furthermore, in March 2006, the company initiated its first PNOC EDC Stakeholders’ Meeting to inform its stakeholders about the company’s accomplishments, to strengthen mutual trust, and to secure stakeholders’ continued support. Various stakeholders were invited, including host communities, Local Government Units and NGOs. A Report to Stakeholders was published on March 2, 2006. The company regularly remits royalty payments to the national and local government, which are required by law. For 2005, actual royalty payments to the DOE and Local Government Units (LGUs) amounted to PhP 412 million. The company established its CSR Policy in June 2004, which states that PNOC EDC is committed to promote social and environmental prosperity through the implementation of a comprehensive, responsive and sustained corporate program on social responsibility (CSR), in partnership with its stakeholders and in keeping with its energy objectives. Various CSR projects are being implemented, including Balik-Biyaya Para sa Kalusugan (Health and Sanitation) project, Balik-Biyaya Para sa Karunungan (Education) project, Balik-Biyaya Para sa Kabuhayan (Livelihood) project, Balik-Biyaya Para sa Kapaligiran (Environment) project, Energy Camp 2005 project, Rural Electrification project, and Mt. Apo Foundation projects (educational development program, environmental awareness program, health services program, livelihood support program, tribal capability program, and social infrastructure assistance program). The company is currently implementing community engagement projects that benefit 18,900 poor families in 84 barangays near the company’s project sites. The objective of the projects is to help these families surpass the poverty threshold level almost two-fold, with an ambitious target of PhP 100,000 per household per year. The company is also supporting programs in the areas of education, health and environment. In 2005, the company assisted farmers in their efforts to organize 57 farmers’ associations and supported 21 livelihood projects. This is in addition to the 83 farmers’ associations that were organized with the assistance of the company in previous years.