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COMMISSION ON AUDIT ComnwnwealTtii five., Quezon City, TfziCipines
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STATE AUDITOR'S REPORT The Board of Directors PNOC Exploration Corporation Energy Center, Fort Bonifacio Taguig City, Metro Manila
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We have audited the accompanying financial statements of PNOC Exploration Corporation (a subsidiary of the Philippine National Oil Company), which comprise the balance sheet as of December 31, 2008 and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for 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. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. These standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. Our 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 these 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 preser3tation 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.
opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of the PNOC Exploration Corporation as of December 31, 2008 and its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards.
COMMISSION ON AUDIT
JOSE DENNIS'2i State Auditor V V
April 8, 2009
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PNOC EXPLORATION CORPORATION (A Subsidiary of the Philippine National Oil Company) BALANCE SHEET December 31, 2008 (With comparative figures for 2007) (In Philippine Peso) Notes
2008
ASSETS Current Assets Cash and cash equivalents Short-term investment Trade and other receivables - net Due from affiliates - net Inventories
5 6 7 40 8
2,204,299,424 1,040,283 1,030,794,597, 65,754,570
Assets Held for Sale - net
10
3,695,211
4,482,709
11
8,597,060,383 130,833,843 625,000 95,735,941 347,978,051 59,374,887 26,082,128 9,357,690,233
9,191,299,766. 34,593,842 625,000 157,526,134 307,315,650 143,181,995 14,364,579 9,848,906,966
13,402,913,358
12,907,322,360
536,860,218
650,770,426 200,000,000
Non-current Assets Property, plant and equipment - net Investments in joint ventures Investment in PNOC Malampaya Production Corporation Non-current trade accounts receivable - net Exploration and development costs Deferred tax asset Other assets total Non-current Assets
12 13 14 15 16 17
TOTAL ASSETS
2007
705,998,987 684,390,547 1,047,522,749 125,720,742
LIABILITIES AND EQUITY LIABILITIES Current Liabilities Trade and other payables Dividends payable Due to affiliates Total Current Liabilities
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.18 v •.25
Li'
Long-term Liabilities Due to affiliates Deferred credits Liability for future abandonment costs Deferred tax liabilities Other lono-term liabilities
40 19 20 21
19,941,958 2,979,570,852 64,020,654 284,454
TOTAL LIABILITIES
3,600,678,136
EQUITY
9,802,235,222 ,
TOTAL LIABILITIES AND EQUITY See accompanying Notes to Financial Statements,
13,402,913,358
1,946,316,999 3,137,695,243 57,672,418 347,435
6,159,124,441 6,748,197,919 12,907,322,360
PNOC EXPLORATION CORPORATION (A Subsidiary of the Philippine National Oil Company) INCOME STATEMENT For the year ended December 31., 2008 (With comparative figures for 2007 and 2006) (In Philippine Peso)
2008 REVENUES
26
8,647,384,772
6,412,367,903
6,217,063,663
COST OF SALES
27
3,622,508,973
2,930,682,658
2,059,331,234
5,024,875,799
3,511,685,245
4,157,732,429
GROSS PROFIT OTHER INCOME
28
149,451,338
248,108,090
185,760,200
OPERATING EXPENSES
29
(408,524,044)
(329,068,628)
(200,006,364)
FINANCE COSTS
30
(73,383,313)
(430,353,679)
(725,445,966)
FOREIGN EXCHANGE GAIN - NET
31
157,498,792
204,313,395
257,783,864
ROYALTY FEE DUE GOVERNMENT
32
(11,902,595)
(5,443,191)
(3,206,317)
OTHER CHARGES
33
(2,086,170)
(179,154,382)
(229,946,863)
INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX Current Deferred NET INCOME
4,835,929,807
3,020,086,850
(1,699,800,600) (82,091,904)
(1,171,241,718) (80,234,593)
3,054,037,303
1,768,610,539
2,603,307,662
1.52
0.88
1.30
3,442,670,983
34 (867,067,902) 27,704,581
See accompa,;ying Notes to Financial Statements. Earnings per Share
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PNOC EXPLORATION CORPORATION (A Subsidiary of the Philippine National Oil Company) STATEMENT OF CHANGES IN EQUrFY For the year ended December 31, 2005 (With comparative figures for 2007 and 2006) (In Philippine Peso)
Share Capital (Note 23) Balance, January I, 7006
2,002,253,065
Share Premium (Note 23) 22.424,950
Treasury Shares (at cost) (Note 23)
Donated Capital (Note 24)
(734,924)
95,720,590
P ri or p eriod adjustment Balance, January I, 2006 as restated
Appropriated Unappropriated Retained Retained Earnings Earnings (Note 25) (Note 25) -
(5,412,484) 2,002,253,065
22,424,950
(734,924)
576,615737
89,305,405
Dividends
553,025,221
2,696,219,715
2,603,307,662
2,603,307,662
(20,011 .,
2,696,279,718
6,412,484
Net income
ppropriation for investment projects and capital expenditures
Total Equity
1,550,000,000
(1,580,000,000)
(20,000,000) -
Balance, December 31, 2006
2,002,253,065
22,424,950
(734,921)
89,305,406
1,580,000000
1,586,335,883
5,279,587,380
Balance, January 1, 2007
2,002,253,065
22,421,950
(734,924)
95,720,890
1,550,000,000
1,579,923,399
5,279,557,350
-
(6,412,454)
Prior Period adjustment Balance, January t, 2007 as restated
2,002,253,065
22,424,950
(734,924)
89,308,406
11580,000,000
Net income Dividends Appr opriation for investment projects and ca pital expenditures
Balance, December 31, 2007
2,002,253,065
22,424,950
(734,924)
Balance, January, 1, 2008
2,002,253,065
22,424,950
(734,924)
See aecompa,rytng Notes to finandal Statements,
1,768,610,539
1,768,610,539
(300,011
(300,000,000)
89,308,406
3,000,000,000
1,634,946,422
6,748,197,919
89,308,405
31000,000,000
1,634,946,422
6,748,197,919
3,054,037,303
3,054,037,303
2,800,000,000 22,424,950
5,279,587,380
(1,420,000,000)
Appropriation for investment projects and capital expenditures 2,002,253,065
1,586,335,883
1,420,000,000
Net income
Balance, December 31, 2008
-
6,412,484
-
(2,800,000,000)
(734,924) 89,308,406 5,800000,000 1,888,983,725 91802,235,222
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PNOC EXPLORATION CORPORATION (A Subsidiary of the Philippine National Oil Company) CASH FLOW STATEMENT For the year ended December 31, 2008 (With comparative figures for 2007 and 2006) (In Philippine Peso)
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Note
2008
2007
2006
CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Interest income Cash paid to suppliers, affiliates and employees Cash Generated from Operations Interest paid Income taxes paid Net cash from operating activites
16,721,136,594 58,228,695 (12,025,500,698) 4,753,864,591 (80,517,387) (1,638,118,683) 3,035,228,521
6,071,337,153 100,866,015 (1,640,071,649) 1,532,131,519 (310,324,027) (1,132,688,968) 3,089,118,524
6,847,974,101 139,292,100 (1,332,660,044) 5,654,606,157 (843,608,176) (831,404,433) 3,979,593,548
CASH FLOWS FROM INVESTING ACTIVITIES Exploration and development costs Capital expenditures Investment in joint ventures Net cash used in investing activites
(40,662,401) (88,312,413) (96,240,001) (225,214,815)
(21,876,007) (110,058,967) (2,724,601) (134,659,575)
(27,695,067) (70,170,277) (121,176,647) (219,041,991)
- (1,092,941,815) (200,000,000) (1,292,941,815)
(2,755,569,130) (100,000,000) (2,855,569,130)
(350,000,000) (3,355,833,865) (20,000,000) (3,725,833,865)
(18,771,454)
(14,663,520)
(22,316,911)
1,498,300,437
84,226,299
12,400,781
, 705,998,987
621,772,688
609,371,907
2,204,299,424
705,998,987
621,772,688
CASH FLOWS FROM FINANCING ACTIVITIES Payment of loan from PNOC - Non-SC No. 38 Related Payment of loan from PNOC - SC No, 38 Related Payment of cash dividends Net cash used in financing activites EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR
5
See accompanying Notes to financial Statements.
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PNOC EXPLORATION CORPORATION (A Subsidiary of the Philippine National Oil Company) NOTES TO FINANCIAL STATEMENTS (In Philippine Peso)
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1. CORPORATE INFORMATION PNOC Exploration Corporation (PNOC EC or the Company) was incorporated under Philippine laws and registered with the Securities and Exchange Commission under Registration Certificate Number 67111 on April 20, 1976. The Company's common shares are listed in the Philippine Stock Exchange (PSE). PNOC EC is a subsidiary of the Pijilippine National Oil Company (PNOC) which was created under Presidential Decree No. 334 on November 9, 1973 In line with PNOC's mandate to provide and maintain an adequate supply of energy, the Company takes the lead in energy exploration and development. It has entered into service contracts with Department of Energy on oil, gas, and coal exploration projects where the Company has either 100% ownership or is in joint venture with other partners. The registered office address of PNOC EC is Building 1, Energy Center, Merritt Road, Global City, Taguig City, Philippines. The Board of Directors approved and authorized for issue the Company's financial statements on March 6, 2009 per Board Resolution No. 30 series of 2009. 2. STATUS OF OPERATIONS OIL AND GAS EXPLORATION AND PRODUCTION
APP 2
The Malam paya Project PNOC EC owns 10% stake in the upstream component of the Malampaya Deepwater Gas-to-Power Project, together with Shell Philippines Exploration B.V., the Operator (20%), Shell Philippines LLC (25%), and Chevron (45%). Commercial gas production from Malampaya commenced on January 1, 2002. The Malampaya Project provides the gas fuel requirements of its three power plant customers in Batangas, namely Sta. Rita (1,000 MW) San Lorenzo (500 MW) and Ilijan (1,200 MW), as well as the gas requirements of Pilipinas Shell Petroleum Corporation (PSPC) in Tabangao. In 2008, the Project produced 3.87 million cubic meters (136.90 billion cubic feet) of gas and 5.60 million barrels (0.89 million cubic meters) of condensate.
San Antonio Gas Project
The Company owns and operates the San Antonio Gas Project which consists of a Gas Field and 3 MW Gas Power Plant located in the province of Isabela. The powerplant was fueled by the natural gas produced from the SA-1A well providing electricity to the municipalities of Echague, Jones, San Agustin and Santiago City through the Isabela-! Electric Cooperative, Inc. (ISELCO-I). In 2008, the SA-1A well produced 186.71 million standard cubic feet (mmscf) of gas which enabled the power plant to generate a total of 6.24 megawatt hours (MWHr) of electricity. In July 31, 2008, the San Antonio Gas power Plant was shutdown permanently after gas pressure dropped below the required inlet pressure of the Gas Turbine Engine of 250 psia. Since inception, the SA-1A well has produced a total of 3.543 . Bscf of gas and the power plant has delivered a total of 187.482 GWH of electricity. The SA-1A well is now set to be plugged and abandoned in 2009. However, Management is still conducting studies on reviving the well for other possible projects-
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• lL.S'YihdtLtb \' t_)_-' In 2008, PNOC EC revived the Batangas to Manila Natu tL$IIs f l jpØei PrL*cso4 it (BATMAN-1) and conducted pre-development activities suthmTIt T1d initiar market surveys and information campaign: For the gas supply, the Company submitted the pre-qualification documents, and was eventually pre-qualified, for the bidding of the new volume of gas from the Malampaya Service Contract 38. Parallel to this, PNOC EC started initial discussions with the NPC, PSALM and the DOE for the acquisition of the Ilijan Power Plant Banked Gas. Also in 2008, PNOC EC continued its efforts in the development of the Integrated LNG Terminal and Bataan to Manila Natural Gas Pipeline Project (BATMAN 2). This involved meetings with interested parties and stakeholders such as PTT of Thailand, NPC, PSALM and the DOE. Ragay Gulf (SC 43)
The Company has a 15% participating interest in SC-43 which was granted by the DOE on January 14, 2004, in the Ragay Gulf between Bicol, and the Bondoc Peninsula. Its partners in SC 43 are Pearl Energy Philippines ("Pearl") and Premier Oil Philippines BV ("Premier") which has 64% and 21% participating interests, respectively. Pearl replaced Premier Oil as operator of SC-43 when it acquired 21.5% from the latter's original 42.5% participating interest. The Monte Cristo prospect was drilled in June 2008. Although the target objective of the Monte Cristo 1 had been reached, it failed to flow hydrocarbons. The
Consortium has therefore decided to explore the deeper horizons, which is now the focus of the exploration program. .4
Offshore Mindoro (Sc 47) With the withdrawal of Petronas Carigali Overseas Sdn Bhd ("Petronas Carigali"), on January 10, 2008, the Company now has 97% participating interest. Its other partners are PetroEnergy Resources Corporation and Basic Energy Corporation with 2% and 1% participating interest, respectively. Since the last well drilled (Kamia-1 well in 2007) had only minor hydrocarbon shows, additional basin evaluation was done to further understand the area's petroleum system. The Company is now preparing to acquire additional seismic data in 2009 to develop the other prospects as drillable targets. Calamian (SC 57) The Company has a 100% participating interest in SC 57 when the DOE granted it on September 15, 2005. The Company subsequently entered into joint venture arrangements for the exploration of SC 57 in 2006 with China National Offshore Oil Corporation (CNOOC) acquiring 51% participating interests and operatorship of the block and Mitra Energy Inc. ("Mitra Energy") getting 21%, leaving the Company with the remaining 28%. However, the DOE has yet to approve their entry and transfer of participating interests of the Company to CNOOC. and Mitra Energy. Approximately 2,268 km. of new 20 seismic data has already been acquired in August-September 2006. The results of the interpretation showed several prospects that need to be fully evaluated before they are tested. How9ver, fUtufé exploiition plans in SC 57 will hinge on the DOE's approval of the Company's jiit.-véñtur&r partners. West Calamian (SC 58) 1,' 1 11^100 L it^ M/ 11on Jan._1 SC 58 was awarded to the Company by the DOE Company later entered into a joint venture arrangement for exploration with Nido Petroleum Philippines Ply. Ltd. ("Nido Petroleum") in July 2006 to acquire 50°k participating interest. Under the agreement, Nido Petroleum will be the operator and will fund the work program that includes 2D and 3D seismic surveys and the drilling of the first well. Results of the seismic interpretation are encouraging and the first well is expected to be drilled in 2010. West Balabac (Sc 59) SC 59 was awarded by the DOE on January 13, 2006. It is located in Southwest Palawan along the trend of the offshore oil and gas fields in Malaysia and interpreted to share a common petroleum system. The Company currently has a 100% participating interest in SC 59 and sought of a joint venture partner through public bidding in compliance with E.O. 556. Discussions are underway with a possible joint
venture partner to operate the block. The Company hopes to sign the joint venture agreement in early 2009. -t
East Sabina (SC 63) The Company and Nido Petroleum jointly entered into SC 63 with the former as Operator on November 24, 2006. Each of the companies has 50°7o participating interests in SC 63 and equally share the exploration costs. The block is located south of the oil and gas fields in offshore Palawan including Malampaya. Results of the seismic data acquired in late 2007 are encouraging and the acquisition of additional seismic data is being planned in 2009. A joint venture partner was sought through public bidding and,' discussions are now underway to enter into the block. Their participation in the block is expected to be finalized in early 2009. Joint Marine Seismic Undertaking (JMSLJ) The Company has signed a tripartite agreement with CNOOC and PetroVietnam on March 14, 2005 to jointly evaluate the petroleum potential of certain areas in the South China Sea, west of Palawan. This project, commonly referred to as JMSU, took effect on July 1, 2005 with a 3-year term. The expenses are equally shared by the three national oil companies and to-date over 22,000 km of 2D seismic data has been acquired. The agreement lapsed on June 30, 2008 and has not been renewed. The interpretation is still on-going and done separately by the particjpanttr H
Domestic The Company evaluated the areas offered by the DOE partic Visayan and Agusan-Davao Basins. It also evaluated farm operators in SC 52 (Northern Cagayan), SC 53 (Onshore (Northwest Palawan).
AFW 2 ' ?B blocks in the
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The Company also intends to join the DOE's next contracting round scheduled in 2009. Overseas The Company has evaluated overseas opportunities in Indonesia, Cyprus and Colombia. however, only the Colombian was found to be attractive. A Joint Application and Participation Agreement was signed with Pitkin Petroleum in 2008 to jointly file for an acreage in offshore Colombia. The exploration permit is expected to be signed by the Colombian Government in 2009. The Company will continue to look for overseas exploration opportunities to ensure the country's energy needs.
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COAL OPERA TIOIVS The Company holds five coal operating contracts (COCs) with the DOE under which it conducts activities for coal exploration or development and production of coal resources. While currently mining coal reserves in the contract area of COC-41 (known as the Malangas Coal Project) within the Malángas Coal Reservation located in Zamboanga Sibugay, PNOC EC is preparing to develop the coal reserves located in two other coal areas in Isabela (covered by COC-141 and COC-122) in connection with the objective of establishing a mine-mouth power plant project.
Coal Operating Contract (COC) No. 41— Malangas Coal Project PNOC EC operates Coal Operating Contract (COC) 41 within the Malangas Coal Reservation in Zamboanga Sibugay straddling portions of the municipalities of Malangas, Diplahan and Imelda. As holder of the COC, PNOC EC oversees the operations of a large-scale coal mine within the contract area known as the Integrated Little Baguio (ILB) colliery, in joint venture with Taiwan Overseas Mining Co., Phils., Inc. (TONiC). The ILB Colliery is the largest semi-mechanized underground coal mine in the country. An amended joint venture agreement was signed with Filsystems Inc. (FSI) in February 2008 for the joint development of PNOC EC's coal block 41-H-397 and FSI's block 41-H-396 in Lalat. PNOC EC also supervises mining operations of various small-scale coal miners
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Coal Exploration
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Coal Operating Contract (COC) No. 140— Surigao Coal iq9tn.
COC No. 140 was awarded to PNOC EC by the DOE on JulifS'3he tdalSff contract area with a total of 3,000 hectares is located in the Municipality of Tagö, Surigao del Sur. The COC will allow PNOC EC two years to conduct exploration activities within the coal concession. The DOE approved two applications for contract moratorium since 2006 due to the heightened insurgency and subsequent military alert in the area since 2006. The first moratorium covered the period from October 12, 2006 until July 5, 2007; and the second was for a one-year term from June 19, 2007 to July 5, 2008. Subsequently, the DOE approved the two-year extension of the CDC to enable the company to conduct exploration activities until July 5, 2009. PNOC EC applied for a Certificate of Non-Coverage (CNC) from the Environmental Management Bureau (EMB) covering its exploration activities at the COC No. 140 project area and received approval in July 2008. Despite the prevailing threat of insurgency in the area, PNOC EC conducted and completed the block boundary survey for the project area in December 2008. The objective of the survey was to delineate on the ground the actual location of the boundaries of the 3,000 hectares project area. PNOC EC intends to pursue exploration drilling activities at the project area during the first half of next year.
Coal Operating Contract (COC) No. 122 - Isabela Coal Mine-mouth Power Plant Project PNOC EC is the holder of COC-122 which straddles portions of Cauayan City and the municipalities of Naguilian and Benito Soliven in Isabela. The estimated PhP5.0 Billion project involves putting up a power plant with a generating capacity of 30-100 MW that will utilize the low-rank coal in the province. The project was shelved in July 2006. Efforts to renew the project were started in 2007. While the technical and economic studies on the project are continuing, attention was also given for Social Development Projects (SDP) in June 2008 after consultations with the concerned LGUs early in the year. SDPs include a medical mission, a supplemental feeding program, several health related seminars and other activities that targets the youth. The Environmental Impact Assessment (EIA) study, necessary for JbtappUcation-o------'--1 the Environmental Compliance Certificate (ECC) for the projects was formallyAwaç.dgd -. JUi1j to Geosphere Technologies, Inc. (Gil) in December 2008.
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Coal Operating Contract (COC) No. 141— Isabela Coal
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On July 5, 2005, the DOE awarded the COC No. 141 to PNOc 1 ci exploration of Coal Blocks 14-G-77, 78 and 79 covering an aa-5PajMiroxtmVtel7 3,000 hectares in the Municiplity of Benito Soliven, Province of Isabela, in the Cagayan Valley of Northern Luzon. The DOE subsequently approved the two-year extension of the COC, which is now valid until July 2009. The three coal blocks under COC No. 141 are located north and adjacent to the coal blocks of PNOC EC's CDC No. 122. The preliminary geologic assessments indicate that the mineable coal seams at the adjacent COC No. 122 blocks may extend northward into the COC No. 141 project area. In December 2008, PNOC EC initiated the application for a Certificate of NonCoverage (CNC) from the Environmental Management Bureau (EMB) covering its exploration activities at the COC No. 141 project area. PNOC EC also conducted the public bidding process for the block boundary survey for the contract area. The block boundary survey and the subsequent exploration drilling will commence next year. The additional coal reserves that will be delineated from these activities are intended to increase the already established economic viability of the Isabela Integrated Coal Mine Mouth Power Plant Project (COC No. 122). Coal Operating Contract (COC) No. 152 - Slay Coal Exploration Project In November 2008, COC No. 152 was awarded to both PNOC EC and Agusan Petroleum and Minerals Corporation (APMC), the winning bidders for six coal blocks located in Slay, Zamboanga Sibugay that were offered during the 2006 Philippine Energy Contracting Round (PECR 2006). The hew contract, which designates PNOC
I EC as the Operator, grants the two companies a minimum of two years to conduct joint exploration activities in Coal Blocks 41-H-315, 316, 355, 356, 357 and 395. Indonesian Coal Projects PNOC EC intends to establish strategic alliance and venture into coal mining business in Indonesia in order to ensure a stable and competitive supply of coal for the Philippine market. Definitive agreements between PNOC EC and Putra Asyano Mutiara Timur (PT PAMT) were pursued initially in 2007. Following PT PAMT's acquisitiewef-the-requisite-KP for Exploration in July 2008, PNOC EC commenced the condu ofJegaancLtechnical.-. r - 1 due diligence in Indonesia. F Coal Trading
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ini 40a!v)N j Aside from coal exploration and production, the Compan teca VT trading activities. To support its trading activities, the Comp rT\rflprates terminals where coal shipments, which are either sourced from its own coal mines or from third parties, may be received and stored before delivery to customers. ENERGY SUPPLY BASE Energy Supply Base (ESB) is located in Mabini, Batangas, with excellent berthing, cargo handling, storage and warehousing facilities that continues to serve the needs of various oil and energy-related companies. Although initially set up to cater to logistical support needs of the energy industry, ESB's services now extends to other commercial clients with the granting by the Philippine Ports Authority (PPA) of a permit to operate as a private commercial port under Certificate of Registration No. 291 on October 8, 1996. The permit is co-terminus with the 25-year foreshore lease agreement of ESB with the Department of Environment and Natural Resources (DENR) effective May 3, 1996, which will expire on May 3, 2021. ESB is also a Customs Bonded Warehouse which helps companies to expedite the unloading and loading of cargoes at ESB ports. The Company has entered into a 25-year long term lease with Zamboanga Development and Management Corporation (ZDMC) for a one-hectare land area and 61,100 square meters foreshore area for the latter to put up a grains bulkhandling, storage and jetty facilities (the first in Southern Luzon area) to achieve a sustainable logistics development program for the country as part of the ten-point agenda of the National Government. ESB also has long term lease contracts with a variety of companies including importers, logistics companies and a telecoms company. The Company has also negotiated for a one-hectare land area with a Singapore-based logistics company for the storage of casings/tubulars for the consumption of oil and gas exploration service contractors. ESB, as the only energy base in the Philippines, aims to contribute to the exploration industry by providing prompt and efficient service to the increasing needs of oil, gas and other energy related companies as well as commercial clients.
3. BASIS OF FINANCIAL STATEMENT PREPARATION The accompanying financial statements have been prepared in accordance with the accounting principles generally accepted in the Philippines as set forth in Philippine Financial Reporting Standards (PFRSs) and the applicable practices of the oil and gas industry not covered by the existing PFRS/PAS. PFRS include statements named PFRS and Philippine Accounting Standards (PAS) and interpretations issued by the Financial Reporting Standards Council (FRSC).
•,
The financial statements of the Company have been prepared using the historical cost basis and are presented in Philippine pesos, which is the Company's presentation currency. All values are rounded to the nearest peso. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. a. Revenue Recognition
A 2b Revenue is measured at the fair value of the con id&ratlon receiyed orJ receivable. Revenue is recognized when there is persu arrangement exists, delivery has occurred, title has tran tth&itn2Jrit is^ ii fixed or determinable and collectibility of the selling price is reasonably assured. Revenue from sale of gas, condensate and oil of the Malampaya Project is recognized upon delivery in accordance with the provisions of Gas Sales and Purchase Agreement (GSPA) with customers and the Joint Operating Agreement entered into by and among the SC 38 partners. Delivery of natural gas is recognized when the gas arrives at the designated delivery points at the power plants and meets the required quality specifications set out in the relevant GSPA. Billings for undelivered gas are credited to deferred income and recognized as revenue upon delivery. Under the "take-or-pay" provision of the GSPA, buyers shall pay the full contracted volume or quantity even if there is no delivery of the produced gas during the period. Annual reconciliation of volume actually taken and contracted volume is made to determine the deficiency or shortfall. The SC 38 consortium is bound to deliver the deficiency volumes in the future. Interest revenue is accrued on a time-proportion basis, by reference to the principal outstanding and at the effective interest rate applicable. b. 10% Interest in Service Contract 38
The Company records its 10% participating interest in the Malampaya Gas Project under the criteria• "jointly controlled assets". Under this criteria, the Company recognizes in its separate financial statements its share of the jointly
controlled assets, classified according to the nature of the assets rather than as investment; any liabilities that it has incurred; its share of any liabilities incurred jointly with other venturers in relation to the joint venture; any income from sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and any expenses that it has incurred in respect of its interest in the joint venture. Estimated abandonment and site restoration cost is provided using the accrued liability method and computed based on units of production and estimated proved reserves. a Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term money market placements that are readily convertible to known amounts of cash with original maturities of three months or less from dates o.acqLIiflQQpflØt1at l... are subject to insignificant risk of change in value.
I-
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d. Trade and Other Receivables
.PP 2 Trade and other receivables are stated at face value, (i ' qfEawance for doubtful accounts. The allowance is established by charges tQ iièorne. L SSIS_I çv151(
a Provision for Daub tful Accounts Allowances for doubtful accounts, estimated by the Company's management based on prior experience and their assessment of current economic environment, are provided at the following approved rates applied to the period the receivable is outstanding: Over 120 days Over 1-2 years Over 2-3 years Over 3 years
...................15% ...................35% ....................75% ....................100%
The receivable of the SC 38 Malampaya Project are not provided with allowance for doubtful accounts. This is in view of the Project being in operation as a specialized industry where both the SC 38 Project Consortium and its customers strictly adhere to their reciprocal obligations. Moreover, the Project's GSPA, as well as the related contracts, provides reasonable assurance to the SC 38 Project Consortium for the appropriate collection of its accounts receivable.
I
Inventories Parts and supplies as well as coal inventories are stated at the lower of cost or net realizable value. Cost includes invoice amount, net of trade and cash discounts. Cost is calculated using the moving average method. Net realizable value represents the estimated selling price less all estimated costs to sell.
N 1
The condensate inventory is valued at prevailing market
g. Property, Plant and Equipment
:::•:': LT.ASSST44 cvsO'44
Property, plant and equipment are stated at cost less accumulated depreciation, depletion and amortization and any impairment in value. The initial cost of property and equipment consists of its purchase price and costs directly attributable to bringing the asset to its working condition and location for its intended use. Subsequent expenditures relating to an item of property, plant and equipment that have already been recognized are added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the Company. All other expenses relating to an item of property, plant and equipment that is described as 'repairs and maintenance' are charged to profit or loss in the period these are incurred. Depreciation for non-SC 38 assets is computed on a straight-line method over the estimated useful lives of the assets ranging from 5 to 20 years. The cost of SC 38 project-related wells, platform and other facilities includes acquisition costs and capitalized exploration and development costs. The carrying values are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their estimated recoverable amount. Depreciation, depletion and amortization (DD&A) of wells, platform and other facilities are computed using the unit-of-production method based on the estimated proved reserves. Depreciation of other SC 38 Project-related facilities and equipment are computed using the straight-line method based on the estimated useful life of 21 years. Gain or loss arising from the disposal or retirement of an asset is determined by computing the difference between the sales proceeds and the carrying amount of the asset and is recognized as income or expense for the period. Construction in progress is stated at cost and is not depreciated until such time that the assets are completed and/or put into operational use. I,.
Exploration and Development Costs PNOC EC adopts the successful efforts method of accountingfor its oil and gas operations. All exploration costs, except the cost of exploratory wells, are charged to expense as incurred. Costs of exploratory wells (including stratigraphic test wells) are initially capitalized and deferred pending the outcome of the drilling operation. If proved reserves are discovered, the associated costs
are capitalized and amortized as the related proved developed reserves are produced. However, if the exploratory well or stratigraphic test well proves to be dry, the accumulated drilling costs are charged to expense. Development costs, which include the costs of drilling development wells, are capitalized regardless of whether or not proved reserves are found while production costs are expensed as incurred. Capitalized cost is amortized using the "unit-of-production method" whereby property acquisition costs (net of accumulated DD&A) are amortized over the estimated proved reserves. For coal exploration and other projects, the Company uses the full-cost method of accounting. Under this method, all costs directly incurred in the acquisition, exploration and development of a project area, including directly-related overhead costs, are capitalized. All exploration cost, likewise, are tentatively deferred pending determination on whether the area contains coal reserves of commercial quantity. When coal reserves of commercial quanty-is- proved; -cest is amortized over proved reserves using the unit-of-production lruethod. I.
ImyafrmentofAssets I ft\
OR
2 ?'
The carrying values of long-lived assets are reviewed for events or changes in circumstances indicate that the carrying recoverable. If any such indication exists and where the carry gva1uEcexea the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. Recoverable amount is the greater of net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm's-length transaction. In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the statements of income. If at balance sheet date there is an indication that an impairment loss may have decreased, reversal of an impairment loss is recognized as income in the income statement. The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognized. j.
In vestment in Joint Ventures A joint venture is a contractual arrangement whereby the group and other parties undertake an economic activity that is subject to joint control. Where a group of companies undertakes its activities under joint venture arrangements directly, the group's share of jointly-controlled assets and any
It
liabilities incurred jointly with other venturers are recognized in the financial statements of the venturers and classified according to their nature. .4
Liabilities and expenses incurred directly in respect of interests in jointlycontrolled assets are accounted for on an accrual basis. Income from the sale or use of the group's share of the output of jointly-controlled assets, and its share of joint venture expenses, are recognized when it is probthle that the economic benefits associated with the transactions will flow to/froth the group and their amount can be measured reliably. The Company reports its 10% interest in SC 38 using joint venture proportionate consolidation. The Company's share of the assets, liabilities, income and expenses are combined with the equivalent items in the Company's financial statements on a line-by-line basis. Investments in joint venture include accumulated intangible costs directly attributable to exploration and development activities such as the expenses incurred to acquire the legal right to explore, and the costs of exploratory drilling and testing. In accordance with the successful-efforts method of accounting, non-drilling costs and other pre-operating expenses such as corporate overhead, except those expenses which are directly related to exploratory drilling activities, are expensed as incurred. I ['\r
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Ic Non-Current Assets Held for Sale
Wil?
h ;JQIIL:
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Non-current assets classified as held for sale are measured tbthe lower dfthe, carrying amount and the fair value less costs to sell. Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale that should be expected to qualify for recognition as a completed sale within one year from the date of classification. I.
Trade and Other Pa ya b/es Trade and other payables are stated at their nominal values.
in. Foreign Currency Transactions The Company converts into local currency its foreign currency-denominated transactions using, whenever appropriately applicable, the average and actual foreign exchange rate prevailing during the month and date of transaction, respectively. Monetary assets and liabilities that are denominated in foreign currencies are restated using the closing exchange rate at balance sheet date. The Company's foreign currency denominated assets and liabilities were restated based on prevailing exchange of US$1.00:P47.655 and 1.00:PO.5221 in 2008;
I;
and 1.00:P0.3642 in 2007. Non-monetary assets and liabilities are translated at historical exchange rates. Foreign exchange gains and losses arising from foreign currency fluctuations are recognized in profit or loss for the period. US$1.00:P41.411
n. Income Taxes
The tax expense represents the sum of the tax currently payable and deferred. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and items that are neither taxable nor deductible. The Company's liability for current tax is calculated using the applicable tax rate. Deferred income tax is accounted for using the balance sheet liability method on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to: (a) temporary differences between the financial reporting bases of assets and liabilities and their related tax bases; (b) net operating loss carryover, or NOLCO; and (c) the carryforward benefit of the excess of the minimum corporate income tax, or MCIT, over the regular corporate income tax. Deferred tax assets and liabilities are measured using the tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled and NOLCO and MCIT are expected to be applied. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer pro Liable thatsuffiCiehC taxable profits will be available to allow all or part of the asseft9ffrecPvereØ7 o. Contingencies
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Contingent liabilities are not recognized in the financial st ã?neictcThey are: disclosed unless the possibility of an outflow of resources benefit is remote. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. p. Subsequent Events
Post-year-end events that provide further evidence of existing conditions affecting Company's financial position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are indicative of conditions that arose subsequent to balance sheet date are disclosed in the notes to the financial statements when material.
.
q. Use of
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of relevant facts and circumstances as of the date of the financial statements. Actual results could differ from such estimates. r. Earnings per share
Earnings per share is computed based on the net income for the year divided by the weighted average number of outstanding shares during the year. There are" no dilutive potential common shares outstanding that would require disclosure of diluted earnings per share in the income statement.
S. CASH AND CASH EQUIVALENTS This account consists of the following: 2007
2008 Cash on hand and in banks Cash equivalents
730,979,305
311,353,201
1,473,320,119
394,645,786
2,204,299,424
705,9984987
Cash in banks earn interest at the respective bank deposit rates. Cash equivalents consist of money market placements or short-term time deposits, which are made for varying periods of up to three months depending on the immediate cash requirements of the Company and earn interest at the prevailing short-term deposit rates.
6. SHORT-TERM INVESTMENT This account pertains to the placement in high-yield savings account with Land Bank of the Philippines with a term of 340 days to mature on September 1, 2009 at an interest rate of 3.40%.
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7. TRADE AND OTHER RECEIVABLES account Trade Coal Project SC 38 Malampaya Project Energy Supply Base Head Office San Antonio Gas Project
527,626,668 431,841,597 32,738,238 2,719,312
- 994,925,815
331,149,553 197,034,175 89,049,536 4,748,649 6,248,434 628,230,347
72
Non-trade Allowance for doubtful accounts
50,731,635 (3,073,610) 47 1,030,794,597
67,116,486 (7,348,617 767.869 6841390,547
Trade receivables on SC 38 Malampaya Project consists mainly of the Company's 10% share in the SC 38 Consortium's receivables on gas and condensate sales in the amount of P429.99 million and share in aggregate other receivables in the amount of P1.85 million. Non-trade accounts' receivables consist of the Company's 10% share in the nontrade receivables of the SC 38 Consortium and claims from employees, officers and others. The net increase in allowance for doubtful accounts on trade receivables in the amount of P8.18 million was due to the significant defaults in payment of Coal and ESB customers, changes in customer payment terms and high probability that the amount due will not be received in full. 8. INVENTORIES This account consists of the following: 2008
Condensate Coal Fuel and Lubricants Parts and supplies: Landed -
A'
2007
14,484,210 96,392,045 3,046,728
36,736,749 23,772,303 3,104,219
55,273,428
63,705,986
-L.''L'.L1"N H p69,196,411 (4,801,347) Allowance for obsolescence 264,395,064
130,522,089 (4,801,347) 125,720,742
Condensate inventory pertains to the Company's 10 0/c share in the undelivered stock of SC 38 Malampaya Project stored in its offshore Concrete Gravity Structure in offshore Palawan with a volume of 10,882.17 bbls. On the other hand, coal inventory represents the undelivered stock of the Company in its various Coal Terminals with a total volume of 77,348.265 metric tons. Landed inventories pertains substantially to the 10% share of the Company in the aggregate parts and supplies inventory of SC 38 Consortium valued at P55.26 million in 2008 and P63.71 million in 2007. In-transit inventories include items not yet delivered or received by the warehouse but for which ownership or title to the goods has already passed to the Company. 9. PREPAID EXPENSES
This account consists of the following: Prepaid income tax Taxes withheld by customers Other prepaid expenses
I
2008 241,670,539 121,868,328 111,705,109
240,368,099 97,422,440 152,509,121
475,243 1 976
490,299,660
2007
Prepaid income tax pertains to the Company's 10% share in the tax component of the unearned revenue on the undelivered gas of the "take or pay" deficiency per GSPA with customers of the SC 38 Malampaya Project. Other prepaid expenses consist mainly of the excess funds of the retirement plan as determined by the recent actuarial valuation as of October 1, 2007, input VAT, the Company share in the aggregate prepaid assets of the SC 38 consortium, and the excess cash call payments to Shell Philippines Exploration BiLJontheComp share in the operational expenditures of SC 38.
ip,F 10. ASSETS HELD FOR SALE
This account consists of the fol Materials and supplies inventory for disposal Allowance for obsolescence Surplus property available for sale Accumulated depreciation
L
•.
. 1 U
- -
2,124,996 (1,487,498)
3,761,631 (66,420) 3,695,211
3,911,631 (66,420) 3,845,211
31 695,211
4,482,709
Materials and supplies inventory for disposal pertain to excess drilling supplies and chemicals left unused at the end of various drilling activities on several exploration projects. Surplus property available for sale pertains to the cost of levied properties for unpaid and delinquent rentals, including interest, on the use 1of_tbe. ESflopenard.
1TT'T' f-:
11. PROPERTY, PLANT AND EQUIPMENT This account consists of the following: Ge,dn'ai p/ant [adults COST January 1, 2008 Ad/lions
milling eqT7e7E
calMS mdfluac
69250,000 121,216,560 - -
ACCUMULATED DEPRECIATION (134 January 1, 20D8 (6 PTuvon
NET CARRYING AMOUNT December 31, 2008
50,905,142
23,567,160
Genera/plant Th'/%7ç faoYEkg equipment
h
rgurent ,Inunr and rrangpolayioo scteno)lc eqv/pPe't eqvrp,Int and d?obS equpwnt 12,471,776 6,450,794
31750,558 11,178,895
15,369,285
---- .- ,%//lA
61,339,870,344 49,960,227
(11,368432) (9,266,604) (2,352,046,656) (548,118,874) (667,236) (3,315,099)
(89,249,999) (92,505,268) (26,776,346) (5,14-4,139) (783,622)
1
2n
57,322,869
13,696,980
6,988,730
Walls aS Man,,e hnvtwe, eqrnpment flMwrs and Trans(v,ia/ion SkxvYfic 'v/lEad /dIItIes and momler equj'nelt equ(rment ngadpn,eit
8,488,965,029
mtfl',It 38,003,169 -
(5,557,376) (8,864,436)
30,738,357
48,136,279 (40,622,469)
- -
(2,754,156,637) (580,089,689)
1,513,810
&nnstnxtól Other Wa, p/a/lynn p'rreay and Tn Prrgcuss and other /,-8tj"c ,wvtfl
8,697,060,383 rob!
COST January 1, 2007 i/lIons Rrs/ficabons
180,165,020 10,270,117 (7,132,228)
89,250,000 121,216,560 - - - -
22,756,268 - 8,994,290
50,049,959 13,353,062 (3,258,482)
85,149,354 10,306,936 11,273,723,928 65,416,416 273,897 7,246,028 - (495,223) 1,891,643
38,103,169 -
34,676,233 13,460,046
Oeenter 31, 2007
183,302,909
89,250,000 121,216,560
31,150,558
60,154,549
21,900,259 12,471,776 11,339,170,344
38,103,869
48,136,279 11,945,456,403
(133 200 638) (89 249999) (83 556 536) (21 385 557) (23249298) (321,009) (6,739,152) (5,272,091) - (8,948,725) 42,635 - (5,069,680) - 5,032,586
(12,538 948) (8848303) (1605395735) (546,650,933) (1,870,168) (374075) 40,684 (46,225) -
(3742939) (1,814,437)
-
(2,181 668 046) (572,988,591)
(134,440,143) (89,249,999) (92,505,261) (26,776,346) (29,945,608)
(14,368,432) (9,266,604) (2,352,046,668)
(5,557,376)
-
(2,754,656,637)
January I 2007 Proc1on Reas/fro.tior
-
December 31, 2007 NET CARRYING AMOUNT December 31, 2007
48,862,765
8
28,711,299
4,974,212
30,208,741
7,531,827
3,205,172
8,987,123,676
32,545,793
46,136,279
Wells and related facilities refer to the capitalized exploration and development costs of the San Antonio Gas Project amounting to P23.57 million. Since the San Antonio Gas Power Plant was shut down permanently on July 2008, these assets remain idle as of balance sheet date. Wells, platforms & other facilities and other property & equipment pertain to the Company's 10°k share in the aggregate assets of the SC 38 Malampaya Project. Management believes that, based on the assessments performed, there are no impaired assets.
11,835,397,437 810,058,955 -
9,190,299,766
12. INVESTMENTS IN JOINT VENTURES This account consists of the following oil, gas and coal exploration projects in partnership with other oil companies: 2008
Permit No. Coal Mine Development (Lalat & JLB Areas) 10% Share in Investment of SC 38 Consortium Ragay Gulf
2007
CDC 41
33,321,719
33,321,719
SC 38
1,463,936
1,272,123
SC 43
96,048,188
-
130,833,843
34,593,842
In compliance with successful efforts method of accounting for oil and gas projects, P96.05 million drilling expenses were capitalized. 'INVESTM POCALMVRDUCTION
13.
a, Prpduction ,^^l a"' ml This account consists of investments in the PNOC r Corporation (PMPC), a wholly-owned subsidiary of the C prIma tj p pur ose is to prospect, explore, dig, and drill for, expl ut, exUactTp1tduer purchase or otherwise dispose of, import, export, and handle trade and generally deal in, refine, treat, reduce, distill, manufacture and smelt, any and all kinds of petroleum and petroleum products, oil, gas and other volatile substances. As originally envisioned, PMPC was to serve as the corporate vehicle for the privatization of PNOC EC's 10% participating interest in Service Contract 38. 14. NON-CURRENT TRADE ACCOUNTS RECEIVABLE This account consists of the Company's share in receivables, including interests, from the "take or pay" deficiency or the undelivered gas of the Malampaya Project for the years 2003 to 2006. These are receivables from: 2008 First Gas Power Corporation FGP Corporation
National Power Corporation 95
2007
62,015,525 17,684,479 16,035,937
111,484,095 31,784,780 14,257,259
4 735,941
157,526,134
The decrease in non-current trade accounts receivable is mainly due to the scheduled quarterly payments under the Payment Deferral Agreement for First Gas Power Corporation and FGP Corporation's take-or-pay (TOP) obligations. Total payments for 2008 amounted to US$1,787,244.
NPC's non-current trade accounts receivable balance increased due to realignment at year-end. No significant payment has been made pending reconciliation of accounts in view of the Deferred Payment Facility's expiration in 2009. 15. EXPLORATION AND DEVELOPMENT COSTS The deferred exploration and development costs pertain to the following projects: 2007 2008 Cauayan Coal Project Natural Gas Study BATMAN Natural Gas Study Project Isabela Coal Mine Mouth Power Plant Indonesia Coal Project Surigao COC Application Project Lumbog Coal Project Isabela Coal Exploration Project Malampaya Oil Rim Exploration MalonQan & Aleqria CoaRr.ejeetSlay Coal Project Natural Gas Vehicle Prr'\ Camago Malampaya Oi Ikq APt 2 71 .j, .,..J, II DOST-PCIERD Il\ ! c: 1 :S- '• ,-.,... c.-..'
97,819,519 60,722,258 59,904,066 41,469,503 26,068,297 19,776,322 14,400,751 11,799,605 10,114,403 2,635,798 1,737,033 1,320,035 122,807 87,654
97,819,519 60,701,149 57,196,546 34,766,163 17,780,064 8,969,081 17,274,187 10,114,403 1,164,042 1,320,035 122,807 87;654 307
16. DEFERRED TAX ASSET The significant components of deferred income tax assets are as follows:
Tax effect on temporary differences Carryforward of unused tax losses Minimum Corporate Income Tax
2008 4,458,856 26,822,196 28,093,835 59,374,887
3,834,700 116,721,660 22,625,635 143,181,92
The Company recognized deferred tax asset on temporary difference between the reported amount of net receivables and its related tax bases amounting to P0.62 million in 2008 and P2.27 million in 2007 in compliance with PAS No. 12. Deferred tax assets on the carryforward of unused tax losses were utilized in 2008 to offset the current year's taxable income of P244.08 million. As of 2008, accumulated Net Operating Loss Carryover (NOLCO), in which, for the purpose of determining the Company's income tax obligation, can be allowed as
deduction from gross income for three consecutive years immediately following the year of such loss, amounted to P89.41 million broken down as follows: YEAR INCURRED
YEAR OF APPLICATION
AMOUNT
APPLIED
Year 2005 Year 2006 Year 2007
2006 -2008 2007 —2009 2008-2010
208,317,463 95,607,015 29.565977
208,317,463 35,765,672 -
59,841,343 29.565.977
3331490,455
244,083,135
894407,320
-
UNAPPUED
The Company has fully utilized NOLCO incurred in 2005, applicable for Taxable Years 2006 to 2008. Moreover, it hasalso partially utilized NOLCO incurred in 2006 in the amount of P35.77 million. In effect, the Company has only P26.82 million remaining tax benefit from the carryforward of unused tax losses for the current year using the new income tax rate of 30% per Republic Act 9337 effective January 1, 2009: YEAR INCURRED
YEAR OF APPLICATION
AMOUNT
TAX RATE
Year 2006 Year 2007
2007 — 2008 2008 -2010
59,841,343 29,565,977
30% 300/a
TAX BENEFIT 17,952,403 8,869,793 26,822,196
Minimum Corporate Income Tax on the other hand, which is computed as two percent (2%) of gross taxable income and which can also be carried over and credited against normal income tax for the next three immediately succeeding taxable years, are broken down as follows: YEAR INCURRED YEAR OF APPLICATION Year 2006 2ear 2007 Year 2008
AMOUNT-
2007 -2009 2008 -2010 2009 -2011 •1"
-
-
17. OTHER ASSETS 2008
Cash - restricted Claims receivable Investments in shares of stock Special deposits Land, leases and easement Cash collateral (PCIR Bond)
21,101,552
2007
2,792,041 1,071,250 1,028,076 72,550 16,659
10,000,000 2,792,041 1,071,250 414,262 72,550 14,476
26 1 082,128
14,364,579
>1
Cash - restricted pertains to the balance of the trust fund placed in savings deposit with the Land Bank of the Philippines which is intended to cover indemnity benefits of directors and officers who are involved in any action or suit filed against the Company. Claims receivable consist mainly of the remaining estimated claim from the Government Service Insurance System on the reported loss of various properties damaged by typhoon "Caloy" at the Energy Supply Base at Batangas and typhoon "Paeng" at the San Antonio Gas Plant at Isabela amounting to P2.49 million and P0.19 million respectively. Investments in shares of stock represent the cost of investments in proprietary club membership shares. Land, leases and easement refer to a piece of land in Cotabato that was transferred to PNOC EC by a Deed of Absolute Sale dated April 27, 1999. The property was used in previous exploration project which was written off in 2004.
18. TRADE AND OTHER PAYABLES
This account consists of the following:
2
. I
Accounts payable and accrued expenses Taxes Payable Other current liabilities Liability for annuity
2007" IT SNEL
- .k4L2L8.
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U Y
(W II
n53 8 b879— 86,520,740 32,704,744 30,358,394 27,630,713 1,005,413 739,543
536,860,218
6501770,426
Accounts payable and accrued expenses are inclusive of the Company's 10 1/o share in the aggregate obligation of SC 38 Consortium in the amount of P134.47 million in 2008 and P123.42 million in 2007. Taxes payable include withholding taxes of P6.12 million in 2008 and P27.32 million in 2007 and output vat of P22.70 million in 2008 and P40.01 million in 2007. Other current liabilities include unclaimed payments, salaries payable, contract retention and other miscellaneous liabilities. Liability for annuity pertains to liabilities for accumulated sick leave credits of employees expected to retire in 2009.
19. DEFERRED CREDITS This account consists of the following:
.4
2007 Unearned Revenue Other deferred credits
2,979,428,894 141,958
3,137,416,247 278,996
2,979,570,852
3,137,695,243
Unearned revenue pertains to the net entitlements of the Company from the undelivered gas of the "take-or-pay" transactions of the SC 38 Malampaya Project where customers are obliged to pay the contracted volume or quantity even if there is no delivery or consumption of the produced gas during the period. Other deferred credits consist of deferred interest on car loans of officers. 20. LIABILITY FOR FUTURE ABANDONMENT COSTS This account pertains to the accumulated amount out of the estimated US$3.00 million Company share in the future abandonment costs of SC 38 Malampaya Project. Using the accrued liability method in: accounting for this transaction, the liability for future abandonment costs expensed amounted to P6.35 million in 2008 and P6.38 million in 2007. 21. DEFERRED TAX LIABILITIES Deferred tax liabilities were recognized for the tax company's advance payment of ESB's lot rental to PNOC 31, 2009.
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22. OTHER LONG TERM LIABILITIES This account consists of the syndicated Japanese yen loan, which is guaranteed by the National Government that was fully paid in December 2008. 23. SHARE CAPITAL The capital stock of the Company are common shares with 4 2 1.00 par value, all with same rights and privileges, except that Class "A" common shares shall be issued solely to the citizens of the Republic of the Philippines while Class "B" common shares may be issued to the citizens of the Republic of the Philippines or to aliens.
The capital structure of PNOC EC is as follows: Amount
No. of Shares Class A: Authorized Issued, subscribed and paid-up (PNOC) Unsubscribed Share premium Class B: Authorized Issued, subscribed and paid-up PNOC Public Treasury shares Unsubscribed Share premium
2,100,000,000 1,522,253,065 577,746,935
1,5 22, 253, 065 21,326,554
1,400,000,000 475,532,415 4,467,585 (734,924)
475,532,415 4467,585 (248,800) 920,000,000
1,098,396 2,023,943,091
There were no changes in the capital structure of the
24 DONATED CAPITAL
any-during the -ye&.----
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This account consists of the following: r •c:
Drilling Rig (Kremco Model Trailer) Others
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89,250,000 58,406 89,308,406
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-2007 --89,250,000 58,406 8943081406
The Kremco 750 Drilling Rig and the Drilling Rig Simulator were donated to the Company by Petro Canada under the Program Management Agreement between PNOC EC, Petro Canada and Office of Energy Affairs (OEA) in 1992. The equipments were received by PNOC EC in 1993 and were turned over to PNOC Energy Development Corporation (PNOC EDC) and were utilized for PNOC EDC's geothermal drilling operations and training of personnel respectively. The assets were returned to PNOC EC in 1998 as a result of the separation of PNOC EC from PNOC EDC Management. The Drilling Rig was eventually used by the Company for the drilling operations in Mindanao in 1999. It is being leased by Energy Development Corporation (EDC) for their drilling project in Lihir Island, Papua New Guinea under a Lease Agreement ending March 31, .2009. In 2005, the Drilling Rig Simulator, together with its housing facilities, was transferred back to PNOC EDC through a Deed of Donation between the two
companies. The adjustment in the total amount of P6,412,484 was effected in 2007. -s 25. RETAINED EARNINGS
The Board of Directors approved on November 11, 2008 per Board Resolution No. 78, series of 2008 the appropriation of P5,800 million retained earnings as of December 31, 2008 to meet the Company's cash requirements for capital expenditures and exploration projects in the next three (3) years. Cash dividends in the amount of P200 million and P100 million were paid in 2008 and 2007, respectively.
26. REVENUES
This account consists of revenues generated from the Company's four (4) major business units as follows:
Oil and Gas Production Coal Operations Energy Supply Base San Antonio Gas Project
2006
2008
2007
5,770,598,115 2,531,198,062 320,441,577 25,147,018
4,303,087,324 1,846,883,815 226,339,742 66,057,022
4,806,059,530 1,216,459,848 114,702,535 79,841,750
8,647,384,772 6,442,367,903
6,217,063,663
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27. COST OF SALES This account consists of the following: Coal purchases and landed cost Production costs Depreciation, depletion and amortization Fuel, oil, and TBA Coal marketing and selling Shipping and delivery Purchased services Employee cost Taxes and licenses Rental Maintenance and repairs Materials and supplies Business expense Miscellaneousexpense
1,966,334,863 666,413,158
2007 1,425,453,773 583,901,151
999,461,242 489,971,141
563,684,538 253,422,608 142,093,890 7,874,431 7,807,978 6,243,228 3,309,932 3,277,284 - 1,456,658 469,187 108,698 12,520
566,640,638 166,329,478 141,613,466 12,776,899 6,625,904 6,001,486 3,196,219 1,630,453 15,809,382 562,248 126,165 15,396
402,543,898 67,876,697 62,118,080 14,792,965 7,065,223 5,522,303 3,197,292 1,226,559 4,805,601 348,733 42,131 3591369
3,622,508,973
2,930,682,658
2,059,331 234
28. OTHER INCOME This account consists mainly of non-operating income as Interest income Equipment rental Guarantee fee Gain due to catastrophe Miscellaneous income
58,228,695 25,052,027 12,662,652 53,507,964
100,866,015 14,586,393 23,862,466 37,787,984 71,0051232
140,015,895 13,622,883 12,433,290 19,688,132
149,451,338
248,108,090
185,760,200
-
Interest income includes the Company's 10% share in the interest charged to SC 38 customers on their unpaid invoices for undelivered gas in the amount of P10.88 million in 2008, P40.47 million in 2007 and P90.06 million in 2006. while interest income from bank, mainly from placements and sinking fund amounted to P46.46 million in 2008, P57.27 million in 2007 and P46.82 million in 2006. The decrease in interest income was primarily due to the full payment of the SC 38-related loan in 2008 wherein a sinking fund was maintained. Gain on catastrophe pertains to net proceeds from insurance claim on damages on ESB's properties caused by typhoon Caloy in 2007.
Other Income from Guarantee Fee results from the difference between the contracted/guaranteed volume of production per Coal Contracts and actual volume of coal delivered.
29. OPERATING EXPENSES Professional/technical services Employee cost Purchased services Business expense depletion and Depreciation, amortization Maintenance and repairs Taxes and licenses Fuel, oil, and IBA Rental Insurance Materials and supplies Miscellaneous expenses Capitalized cost
2008 147,137,094 143,572,628 35,252,358 28,135,554
2007 100,619,939 121,459,573 37,143,473 25,853,610
2006 13,725,139 128,324,675 28,548,748 16,874,409
22,753,588 12,786,131 11,139,455 8,264,603 7,811,095 6,389,619 5,008,674 5,412,995 433,663,794 (25,139,750)
13,124,422 9,055,333 6,708,310 7,763,697 8,068,875 3,386,430 9,332,776 8,880,155 351,396,593 (22,327,965)
9,616,119 7,092,913 6,509,476 6,810,948 3,499,958 3,049,524 5,507,683 1,592,331 231,151,923 (31,145,
408,524,044
329,068,628
200,006,364
Increase in operating expenses, particularly the professional/technical services was attributed largely to the exploration activities, particularly of seismic surveys and data interpretation under the Joint Marine Seismic Und Fthkihg73M5U), the tripartite agreement of which lapsed in June 30, 2008 (Note 2
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30. FINANCE COSTS
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This account consists of the following: 2008 Interest expense on long-term liabilities Guarantee fee on loan Thruput fees on refinancing of
64,884,738 8,498,575
73,383,313
-
2007
2006
291,898,908 61,865,909
617,918,892
76,588,862
107,526,984
430,353,679
7251445,966
Interest on long-term liabilities pertains to the SC 38 related loan with Citibank, full payment of which was made in December 2008.
In connection with the loan, the Company pays guarantee fee to the Department of Finance and PNOC for the SC 38-related loan. Thru-put fees include arrangement fee, documentary stamp, agency fee and other out-of-pocket costs related to the refinancing of the Citibank loan. 31..
EXCHANGE GAIN (LOSS) - NET On placements On joint venture transactions On loan related transactions Others
120,989,352 79,254,290 (44,167,976) 1,423,126
(85,639,207) (126,453,522) 395,480,585 20,925,539
60,751,384 (3,050,608) 288,690,097 (88,607,00
157,498,792
204,313,395
257,7831864
A large portion of the net foreign exchange gain for 2908 is attributable to the realized gain on dollar placements amounting to P120.99 million and on joint venture transactions/remittances amounting to P79.25 million. While a large portion of 2007 and 2006 foreign exchange transaction was from the realignment of the SC-38 related loan in the amount of P358.80 million and P361.53 million, respectively. The SC-38 related loan was partially paid every quarter and was fully paid in December 2008. Other foreign exchange transactions include foreign exchange adjustments on dollar accounts and realignments on SC 38's trade accounts receivables balances, among others. C -
/W ? .) 'erñthrIt- fdr all The Company is required to share the net proceeds with service contracts and coal operating contracts entered into withffi&± Energy on the exploration, development and utilization of the country's natural resources in consideration for the right granted. The government's share comprises of income taxes and royalty fees. The royalty fees are shared by the government through DOE and the local government units.
32. ROYALTY FEE DUE GOVERNMENT
33. OTHER CHARGES This account consists of the following: Impairment loss Prior period adjustments Other miscellaneous expenses TOTAL
-
2008 - - 2,086,170
2007 48,229,203 120,496,339 10,4281840
2006 165,356,407 42,519,186 22,071,270
2,086,170
179,154,382
22919461863
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Other charges of 2008 mainly pertain to bank charges from the trading of imported coal. Prior period adjustments in 2007 pertains to P120.50 million adjustments on costs incurred for various exploration projects capitalized in prior years, while for 2006, P42.52 relates to the write-off of prior period interest receivable with SC 38 customers. 34. INCOME TAXES Income taxes are due from the operations of the following major business units: 2008 1,688,713,735 9,449,588 1,141,043 496,234 1,699,800,600 82,091,904
Oil and gas production Coal operations Energy Supply Base San Antonio Gas Project Current portion Deferred portion
2007 1,161,769,384 6,517,639 1,792,949 1,161,746 1,171,241,718 80,234,593
,
2006 861,371,345 3,375,483 779,902 1,541,172 867,067,902 (27,704,581)
1181,892,504 1,251,476,311 839,363,321 Income taxes for oil and gas production pertain to the Malampaya Project, which was computed and settled consistent with the pertinent provisions of SC 38. On the other hand, income tax on the operations of coal projects, SAGP and ESB was based on the Minimum Corporate Income Tax (MCIT) of two percent (2%) of the gross income. Under RA No. 8424 entitled "An Act Amending the National Internal Revenue code, As Amended and For Other Purposes," the MCIT shall be imposed whenever a domestic corporation has zero taxable income or whenever the amount of MCIT is greater than the normal income tax due from such corporation. Taxable income for the year 2008 for Coal Operations, ESS and San Antonio Power Plant was determined to be positive. However, since the Company still has a NOLCO balance for the previous years, this was utilized to fully offset the current year's taxable - income, hence, MCIT was still used (see Note 16). I, I. )Ilfl.3
35. EARNINGS PER SHARE (EPS) The earnings per share amount was computed as follows: 3,054,031,303
2007 1,76,610,5id
2006 2,603,307,662
2,002,253,065
2,002,253,065
21002,253,065
1.52
0.88
1.30
2008 Net income Weighted average number of shares
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36. EMPLOYEE COSTS - Salaries and other benefits Social security costs Separation pay on MRP participants
2007
2008 147,634,046 2,181,809 -
125,469,565 120,012,766 1,949,149 1,991,494 - 11,885,063
149,815,855
127 4 461,059 133,846,978
lUub
The expansion of the Company's operations particularly on exploration activities (gas, oil and coal) led to the continuous hiring of new employees for the year 2008. As of end 2008, the Company has 182 employees as compared to 170 employees in 2007, and 139 in 2006. A Manpower Reduction Program (MRP) was implemented in 2005 and 2006, in compliance with Administrative Order 103 and Executive Order 366 which directed the implementation of cost-cutting and rationalization measures in the government. Part of the Company's rationalization program included the implementation of its new organizational structure that is responsive to its new vision, mission and corporate objectives. Five (5) employees availed the said program in 2006. 37. RETIREMENT PLAN The Company has funded a non-contributory retirement plan covering all regular employees under the trust management of the Bank of the Philippine Islands Asset Management and Trust Group (BPI-AMTG). The most recent actuarial valuations were carried out by EM Zalamea Actuarial Services, Inc. The present value of the defined benefit obligation and the related current service cost was measured using the projected unit credit method. The present value of the defined benefit obligation is P47,533,549 and the fair value of plan assets is P80,617,887. 38. PRIVATIZATION
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Oda1rdved a blah-- c.J
In February 2007, the Boards of Directors of PNOC EC and au to privatize PNOC EC through an Additional Public Offering stock. In this connection, the PNOC EC Privatization Committee (PRIVACOM) was also formed and authorized by the Boards of Directors of PNOC and PNOC EC to coordinate the process of selecting the Financial Advisor/Lead Arranger/Underwriters/Global Coordinator to advise, guide and assist in the design, planning, preparation and implementation of the program for the privatization of PNOC EC.
Is
The mandate for the financial advisory/underwriting/global coordinating services was awarded by the PRIVACOM in September 2007 to Citigroup Global Markets Ltd. and ATR KimEng Capital Partners, Incorporated.
-
However, due to the effects of the global financial crisis and the current volatility in the global market, the planned privatization was postponed pending the uncertainties in the market.
39. CONTINGENCIES
As Petitioner Particulars
Case No. 02-47516
PNOC-EC vs. Rafael G. Mangubat Venue: Quezon City Regional Trial Court (RTC) Branch 218 Nature of Case/Claim: For collection of sum of money (P655,294.70) plus interest. The case was filed because of non-payment by Mr. Mangubat of his remaining loan obligation to PNOC EC, which he was able to secure pursuant to a Vehicle Acquisition Plan (VAP) duly approved by the President of the Philippines. Status: A writ of execution for the sum of P665,294.70, plus attorney's fees of P66,529,47, has been issued against Mr. Mangubat and in favor of PNOC EC. The court sheriff is looking for properties and bank accounts of Mr. Mangubat to attach and/or garnish. ij
69263
PNOC-EC vs Jose M Asistio
-
Venue: Pasig City Regional Trial Court (RTC) Branch07,:.• ;ys Nature of Case/Claim:
-
For collection of sum of money (P719,333.30) plus interest. The case was filed because of non-payment by Mr. Asistio of his remaining loan obligation to PNOC EC, which we was able to secure pursuant to a Vehicle Acquisition Plan (VAP) duly approved by the President of the Philippines.
Status: PNOC EC's Motion to Declare Mr. Asistio in default was granted by the Court. The Company will present evidence ex-parte at the soonest time possible.
02-48508
PNOC-EC vs. Bernardo F. Ople Venue: Quezon City Regional Trial Court (RTC) Branch 98 Nature of Case/Claim: For collection of sum of money (P805,555.54) plus interest. The case was filed because of non-payment by Mr. Ople of his remaining loan obligation to PNOC EC, which we was able to secure pursuant to a Vehicle Acquisition Plan (VAP) duly approved by the President of the Philippines. Status: The next hearing for continuation of the presentation of Mr. Ople's evidence will be held on February 2009. Mr. Ople intends to present a witness, Mr. Rafael G. Mangubat, at the said hearing.
CM 69262
PNOC-EC vs. Pedro T. Santos Venue: Pasig City Regional Trial Court
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Nature of Case/Claim: For collection of sum of money (P697,666.60) plus interest. The case was filed because of non-payment by Mr. Santos of his remaining loan obligation to PNOC EC, which he was able to secure pursuant to a Vehicle Acquisition Plan (VAP) duly approved by the President of the Philippines. Status: Mr. Santos filed a Petition for Review in the Supreme Court from the Court of Appeals' decision denying his petition for certiorari, which, in turn, questioned the RTC's Order declaring him in default. The Supreme Court denied Mr. Santos' petition in a decision promulgated on September 23, 2008. To date, Mr. Santos has not flied any motion for reconsideration from the
Supreme Court's decision. The high court is thus expected to issue a finality in judgment and order remanding the case to the Regional trial Court.
1901-1907
PNOC-EC vs. Felimon Joson Venue: l st Municipal Circuit Trial Court (MCTC) of Mabini & Tingloy, Batangas Nature of Case/Claim: Criminal cases for bouncing checks in the total amount of P1.52 million. Mr. Joson issued the checks in payment of United Planters Products' (customer of ESB) outstanding obligation to PNOC EC. Status: Mr. Joson was acquitted by the trial court of the charges against him in a decision dated February 28, 2007. PNOC EC intends to file a civil action against UnitS Planters Products for payment of its outstanding obligations.
15070/JEM
SC 38 Consortium vs. First Gas Power Corporfldn and FGP Corporation
- 14
I
C Venue: Hong Kong International Arbitration Ct!u)1S'F 'IIN'U
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Nature of Case/Claim: The SC 38 Consortium is party to Gas Sale and Purchase Agreements (GSPA) with First Gas Power Corporation (FGPC) and FGP Corporation (FGP). In July 2007 the 5C38 Consortium commenced arbitration against FGPC and FGP to resolve disputes arising under the GSPA5 regarding Force Majeure (FM) claims made by FGP and FGPC and unused scheduled maintenance days. FGPC and FGP are claiming that, by reason of various outages said to have occurred in the transmission lines which transmit electrical power from the FGPC's and FGP Corp.'s power plants to Meralco, the electrical output from the said plants was restricted and such outages fall under the definition of FM under the GSPAs. The second issue pertains to periods of Scheduled Maintenance alloWed under the GSPAS, and how unused Scheduled Maintenance Days are accounted for at the end of each
LI
Contract Year. The amount being claimed by the 5C38 Consortium in this arbitration is US$5.4 Million for FGPC and US$3.9 Million for FGP (PNOC EC's share in the claim is 10%, commensurate to its 10% participating interest in SC38). SC 38 Consortium has also sought clarity on the language of the FM provision considering that the issue on Force Majeure is a recurrent issue as FGPC and FGP continue to make similar claims. Status: The parties have exchanged witness statements and arbitration hearing has been set on April 2009.
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As Defendant Case No.
CCN 4108
Province of Palawan vs. SC 38 Joint Venture Partners Venue: Palawan Regional Trial Court (PTTC) Nature of Case/Claim: As a member of the SC 38 Consortium, PNOC EC is involved as a party defendant in a case filed by the Province of Palawan in a Regional Trial Court in Puerto Princessa City against the SC 38 Consortium for the collection of alleged delinquent real property taxes for the years 2002 to 2005 totaling P265,259,194.28, 10% of which shall be paid by PNOC EC if the Consortium will lose the case. For its defense, the Consortium relies mainly on the provision of SC 38 granting exemption to the SC 38 Consortium from local and national taxes, except income tax. Status: The case is at the trial proper stage, with the Province of Palawan set to present a witness from the provincial treasurer's office in February 2009.
06-450
Burgundy Global Exploration Corp. vs. PNOC-EC and Mitra Energy Ltd. Venue: Makati City Regional Trial Court (RTC) Branch 59
Nature of Case/Claim: For prohibition and mandamus. This case was file by Burgundy Global to stop PNOC EC from awarding the CMOL project to Mitra Energy Ltd and to require PNOC EC to award the same project to Burgundy Global allegedly as the most qualified Filipino corporation pursuant to the "Filipino First" policy of the Constitution. Status: The case was dismissed because of Burgundy's failure to r3rosecute the same. Burgundy filed a Motion for Reconsideration on December 18, 2007, which motion was granted by the trial court on December 21, 2007. On January 21, 2008, the trial court issued a decision in favor of Burgundy granting it the right to develop the CMOL Project. PNOC EC's motion for reconsideration was denied by the court on April of 2008. A notice of appeal was filed by PNOC EC; consequently, the trial court will elevate the records of the case to the Court of Appeals. With the parties signing a Participation Agreement for the development of the CMOL Project, a compromise agreement will soon be filed in court.
06-450
Taiwan Overseas Mining Co., Phils., Inc. vs. PNOC and PNOC EC Venue: Makati City Regional Trial Court (RTC) Branch 59 Nature of Case/Claim: For Declaratory Relief. TOMC prays that the Court rule on the respective rights and obligations of the parties under the Joint Venture Agreement signed between TOMC and PNOC Coal Corp., the predecessor-in-interest of PNOC EC. Status: The court issued an Order on September 13, 2007 admitting PNOC EC's counterclaim and converted TOMC's petition for declaratory relief but converted said petition into an ordinary civil case for specific performance, i.e. for PNOC EC to collect from TOMC the latter's unpaid guarantee fee..The .c-eurt has issUd âîï Order setting the case for Judicial DispUt esolui,pFpp-FebcAS of 2009. •I'( C'
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40. RELATED PARTY TRANSACTIONS Due from Affiliates - net: 2008 Philippine National Oil Company (PNOC) PNOC Malampaya Production Corporation PNOC Management & Development Corporation PNOC Alternative Fuel Corporation Due from Joint Venture Partners Nido Petroleum Philippines China National Offshore Oil Corporation Petro-Vietnam Investment and Development Corp. Shell Philippines Exploration BV Pearl Oil (Rag y) Limited
Due to Affiliates: Philippine National Oil Company (PNOC) Nido Petroleum PNOC Coal Corporation Current portion
2007
78,606,864 1,545,301 - - 80,152,165
967,417,289 1,525,487 37,586 3,945 968,984,307
- 432,880 432,880 (15,263,355) - (14,397,595)
75,275,299 1,183,677 1,168,244 470,195 441,027 78,538,442
65 1 754 4 570
1,047,522,749
4,177,088 15,764,870 - 19,941,958 -
1,959,552,658 145,123,200 7,898,964 2,112,574,822 (166,257,823)
19,941,958
1,946,316,999
Due from affiliates account represents charges and credits from affiliated companies which are payable within a year or the following month upon presentation of debit/credit notes. Due from joint venture partners, on the other hand, are expenses incurred in connection with joint explorations which were paid for and advanced by the Company. Due to PNOC balance of P4.18 million pertains to miscellaneous intercompany charges. The interest-bearing SC 38-related loan of PNOC from Citibank in the amount of US $47 million in 2007 was fully paid in December 2008. Due to Nido Petroleum represents security deposit for the second sub-phase acquisition of 3D seismic data for SC 58 West Calamian Project.
-
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41. FINANCIAL RISK MANAGEMENT
4
The Company's financial instruments consist mainly of cash and cash equivalents. The main sources of which are proceeds from sales of gas, coal, fuel and other services. The Company has various financial assets and liabilities such as trade receivables, trade payables and other liabilities which arise directly from its operations. The main risks arising from the Company's financial instruments are credit risk, foreign currency risk, interest rate risk and liquidity risk. The Company's Risk Management Committee is currently in the process of identifying the risks that affect PNOC EC and evaluating the ways on how to mitigate or minimize these risks. Credit Risk
The Company's major customers are the SC 38 power plant customers and coal trading customers. SC 38 customers include the National Power Corporation (NPC), First Gas Power Corp., Shell International Eastern Trading and Chevron Malampaya Llc. SC 38 customers are covered by Gas Sales and Purchase Agreements (GSPA5) which are long term contracts with provisions for interests on payment default and take-or-pay commitments, and NPC being a Government Owned and Controlled Corporation (GOCC) is guaranteed by the Government. Coal trading customers include Holdm Philippines Inc., National Power Corporation, Saturn Cement Marketing Corp., Republic Cement Corporation, Rock Energy International Corp., Iligan Cement Corp. and Pacific Cement Corporation among others. Coal trading customers are covered by coal sales agreements also with provisions for interests on payment default and inflationary adjustments. Receivable balances are monitored on an ongoing basis to ensure that the Company's exposure to bad debts is not significant. The maximum exposure of trade receivable is equal to the carrying amount. The Company trades only with recognized, creditworthy third parties and/or transacts only with institutions and/or banks which have demonstrated financial soundness and which have passed the financial evaluation and accreditation of the Company. Foreign Currency Risk
The Company's exposure to foreign currency risk resulted from the financial assets and liabilities that are dollar denominated. The Company's exposure to foreign currency risk to some degree is mitigated by some provisions in the Company's service contracts and gas sales and purchase agreements. The sales agreements include billing adjustments covering the movements in Philippine Peso and the US Dollar rates. I\
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Interest Rate Risk The company is not exposed to interest rate risk since the Company does not have any long term debt obligations with floating interest rates and AFS investments.
Liquidity Risk The Company's objective is to maintain balance between continuity of funding and sourcing flexibility through the use of financial instruments. The Company manages its liquidity profile to meet its working capital and capital expenditure requirements and service debt obligations. The Company is not exposed to liquidity risk since the Company is involved in the sale of oil, gas and coal which are readily marketable. The Company also maintains enough funding $ources to meet its debt obligations.
42. EVENTS AFTER BALANCE SHEET DATE
On February 10, 2009, PNOC EC entered into a Heads of Agreement (HOA) with Taiwan Overseas Mining Co., Phils., Inc. (TOMC) to buy-out TOMC's rights and interests in the Project, Joint Venture Agreement and Operating Agreement in the amount of P108,500,000.00. Nothing in the HOA or in the Buy-out Agreement shall be construed as PNOC EC acquiring, merging with or buying an interest in TOMC. TOMC remains a separate and distinct corporation.
COMMENTS AND OBSERVATIONS 1. Establishment of a P50 million Directors' and Officers' Liabilit y Trust Fund without legal basis Account 104001 - Restricted Cash refers to PNOC EC Directors' and Officers' Liability Trust Fund intended to cover indemnity benefits of directors and officers who are involved in any action or suit filed against the Company. It was set up pursuant to Board Resolution No. 11 dated February 13, 2007 and is covered by a Trust Agreement with Land Bank of the Philippines (LBP). The total amount of the trust fund shall be P50 million. On April 11, 2007, LBP ITF No. 03-690 was opened with an initial deposit of-P10 million. On April 11, 2008, another PlO million was deposited to the fund. The fourth quarterly report on the Trust Fund furnished by L! P showed that the Fund has total assets amounting to P21,101,551.51 and I net income of P758,628.53 for the period ending December 31, 2008. A review of the board resolution and other pertinent documents relating to the establishment of the Fund disclosed no statement of the legal basis on which the creation thereof is anchored on. Further, Section 138 of the Government Accounting and Auditing Manual Volume 1, "Fundamental Principles", sub paragraph (b) provides that "Government funds or property shall be spent or used solely for public purposes." We believe that the Fund's purpose does not conform with this provision. We recommended and management agreed that the maintenance of the Directors' and Officers' Liability Trust Fund be discontinued and that the fund be reverted back to the original cash in bank account.
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2. Outstanding receivable from a former member of the board amounting to 0728,109.38 has remained uncollected since March 2007 Account 114301 - Other Current Receivables - includes an outstanding account of Mr. Jeci A. Lapus, a former member of the board of directors (until June 2008) amounting to P728,109.38. His account consists of personal call charges dating back from 2006 in the total amount of P77,230.88 and outstanding personal accounts totaling P650,878.50. The latter pertains to payments to St. Luke's Medical Center amounting to P979,731.52 advanced by the Company through LBP check no. 2068857 dated May 8, 2007 net of reimbursements made by Insular Life amounting to P328,853.02 for his hospital bills during his confinement from March'21-24, 2007. Apparently, due to insufficient documentation, Insular Life was unable to process all medical insurance claims of Mr. Lapus. We recommended and management agreed that serious efforts be exerted to collect the outstanding receivable from the former member of the board.
I,
STATEMENT OF MANAGEMENT'S RESPONSLBLLI1'Y FOR FINANCIAL STATEMENTS The management of PNOC Exploration Corporation (PNOC EC) is responsible for all infonnation and representations contained in the financial statements of the company for the years ended December 31, 2008 and 2007. The financial statements have been prepared in conformity with generally accepted accounting principles in the Philippines as set forth in the Philippine Financial Reporting Standards (PFRS) and the applicable practices of the oil and gas industry not covered by PFRS/PAS and reflect amounts that are based on the best estimates and consideration for materiality. informed judgment of management with all [it regard, the management maintains a system of accounting and reporting which provides
for the necessary internal controls to ensure that transactions are properly huthorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders of the Company. The COmmission on Audit (COA). - pursuant to Section 2.1, Article IX-D of the Constitution; has independently audited the above-mentioned financial statements of the Company in accordance with generally accepted auditing standards. The COA, consequent to the completion of such examination, has expressed its opinion on the fair presentation in the aforementioned financial statements of the Financial position and operating results of the Company.
JAC1N'L< PAS hairriltin the Board
RAFAELE. DEL PILAJA President and CEO
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LO W)ES S. CELACIO Acting VP and GM for FCS1CT Division
March 2009 at L SUBSCRIBED AND SWORN TO BEFORE ME this àaI8 Affiants exhibited to me their Residence Certificates, as follows: Jacinto V. Paras Rafael E. del Pilar Lourdes S. Gelacio
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April 17, 2008 February 4, 2009 2009 January
Guihulngan, Negros Oriental Manila Manila
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