EXECUTIVE SUMMARY

A. Introduction

PNOC Alternative Fuels Corporation (PNOC-AFC)

1. PNOC-AFC was formerly known as PNOC Petrochemical Development Corporation

(PPDC). The PPDC was incorporated on May 13, 1993, and registered with the
Securities and Exchange Commission (SEC) under SEC Registration No. AS093-
03633, to develop the first integrated petrochemical industry in the Philippines. On
July 13, 2006, the Amended Articles of Incorporation of the PPDC was approved by
the SEC reflecting its new name as PNOC Alternative Fuels Corporation.

2. Its mandates are (a) to explore, develop and accelerate the utilization and
commercialization of existing and emerging alternative sources of energy and
technologies and carry on the business of alternative fuels and other related
activities thereto; (b) to enhance the energy security and promote sustainable energy
development; (c) to develop projects for implementation of alternative fuel sources
which shall include but not limited to bio-fuels, bio-diesel, bio-mass, bio-gas and such
other energy systems that support environmental sustainability and energy
consumption efficiency; (d) to purchase, acquire, own, hold, lease, develop, sell,
construct, maintain and operate production plants, refineries, factories, equipment,
pipelines, transportation facilities, patent rights, technical and engineering know-how,
appliances, industrial sites, storage, warehouses, offsite and industrial utilities which
are used or incidental to production, manufacturing, processing, converting,
fabricating, storage, trading, marketing, distributing, beneficiating, disposing, buying,
selling, bartering, transporting, importing, exporting, or making of alternative fuels;
and (e) to advance energy research development of alternative energy sources
through technical, financial and institutional arrangements, as well as venture into
financing and operating of energy projects, utilizing alternative fuels through
innovating schemes, such as but not limited to joint ventures and other sharing
arrangements.

3. The Corporation has retained its secondary purpose to manage, operate, and
develop some 530 hectares of land in Bataan as a petrochemical industrial estate,
known as Petrochem Park pursuant to its Articles of Incorporation. The Corporation
was also mandated to cause the establishment of petrochemical and related
industries thereat either by itself or in joint venture with private investors.

Dissolution of PNOC-AFC

4. In a Memorandum from the Executive Secretary dated September 8, 2014, then

President approved the recommendation of the Governance Commission for GOCCs
(GCG) to abolish PNOC-AFC, including the creation of a Technical Working Group
(TWG) for the pursuance of dissolution. The Philippine National Oil Company
(PNOC) as Administrator of PNOC-AFC is in the process of complying with the
dissolution and liquidation requirements in coordination with the GCG and other
government agencies.

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 Objectives and Scope of Audit

5. The audit was conducted to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with International Standards of Supreme Audit Institutions
(ISSAIs) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in
aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of these financial statements.

6. The audit covered the examination on a test basis of the accounts and financial
transactions and operations of PNOC-AFC for the period January 1 to December 31,
2018 in accordance with ISSAIs. The audit also involved performing procedures to
ascertain the propriety of financial transactions and compliance of the Corporation to
prescribed laws, rules and regulations.

B. Financial Highlights (In Million Pesos)

The financial position and results of operations of PNOC-AFC are summarized as

follows:

Financial Position

Increase
2018 2017 (Decrease)
Assets 4,167.355 4,121.865 45.490
Liabilities 807.345 799.119 8.226
Equity 3,360.010 3,322.746 37.264

Results of Operation

Increase
2018 2017 (Decrease)
Total Income 134.054 110.156 23.898
Total Expenses 56.713 47.303 9.410
Profit/Loss Before Tax 77.341 62.853 14.488
Income Tax Expense 17.510 14.814 2.696
Profit/(Loss) After Tax 59.831 48.039 11.792
Other Comprehensive Income 0.000 0.000 0.000
Comprehensive Income 59.831 48.039 11.792

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C. Auditor’s Opinion

The Auditor rendered a qualified opinion on the fairness of the presentation of the 2018
financial statements because PNOC-AFC did not re-measure its land classified as
Property, Plant and Equipment (PPE) and Investment Property at current fair value for
five years after the last revaluation in 2013 despite the July 2017 appraisal, resulting in
understatement of PPE, Investment Property and Net Income estimated at P2,423.963
million contrary to Paragraph 55 of Philippine Accounting Standards (PAS) 40 and
Paragraph 31 of PAS 16.

D. Significant Audit Observations and Recommendations

In addition to the audit observations which was considered in the rendition of a qualified
opinion, presented below are other significant audit observations and recommendations,
which are discussed in detail in Part II of the Report.

1. More than four years after the approval of the dissolution of PNOC-AFC by the Office
of the President on September 8, 2014, the disposition of assets and settlement of
liabilities and the transfer of its remaining assets to Philippine National Oil Company
were not yet completed contrary to Section 122 of the Corporation Code of the
Philippines.

Recommendations:

a. Seek approval from SEC and GCG on the reckoning date of the 5-year period;
and

b. Create a Technical Working Group and assign PNOC officials to take charge of
the dissolution/liquidation and make a definite timeline for all pending activities to
facilitate and implement dissolution and liquidation of PNOC-AFC.

2. PNOC-AFC declared dividends for CYs 2014 to 2016 in the amount of P7.00 million
only instead of the required dividends equivalent to 50 per cent of the net income of
P180.682 million, or P90.341 million, from 2014 to 2018 resulting in under remittance
of P83.341 million, pursuant to Section 5 (a.i) of the Revised Implementing Rules
and Regulations (RIRR) of the Republic Act (RA) No. 7656 and Section 122 of the
Corporation Code.

Recommendation:

Seek approval from Department of Finance on the non-declaration of dividends due

to PNOC-AFC’s status pursuant to Section 7 (a) of the RIRR of RA 7656.

3. More than four years after signing of the Memorandum of Agreement (MOA) by and
between Department of Environment and Natural Resources (DENR) and PNOC-
AFC on December 16, 2014, on the Non-Com Persistent Organic Pollutants Project,
PNOC-AFC’s outlay/investment in the amount of P172 million, remained to be
unpaid/unrecovered and no lease agreement was executed for the use of the
land/facility, contrary to Section 1 (a) and 1 (d) of the subject MOA.

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 Recommendations:

a. Revisit the MOA and enforce conditions on the MOA; and

b. Execute lease agreement with DENR/NRDC for land use where the facility is
located.

4. Market value of Investment Property located in Lamao, Limay and Batangas Dos,
Mariveles, Bataan was reduced by P88.3 million due to residential structures of
1,766 informal settlers as reported by a third party appraiser, thus the objectives of
PNOC Systems Procedure Manual on the Maintenance of Real Estate Properties
and the safeguarding of assets under Section 2 of Presidential Decree (PD) 1445
were not achieved.

Recommendations:

a. Conduct Relocation Survey to determine actual boundaries of PNOC-AFC

properties and to curtail any expansion of informal settlers; and

b. Monitor performance of Security Service with regard to prevention of further

proliferation of informal settlers.

E. Summary of Total Suspensions, Disallowances and Charges as of Year-end

There was no Notice of Disallowance (ND) issued to PNOC-AFC for the Calendar Year
2018. As at December 31, 2018, the unsettled disallowances on seven NDs issued in
2011 and 2015 amounted to P4.376 million. Details are presented under Section F of
Part II of the Report.

F. Statement of Prior Years’ Audit Recommendations

Out of the 19 audit recommendations embodied in the previous years’ Annual Audit
Reports, five were fully implemented, eight were partially implemented and six were not
implemented, with seven of the partially implemented and not implemented were
reiterated as shown in Part III of this Report.

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