EXECUTIVE SUMMARY

A. Introduction

Philippine National Oil Company (PNOC)

1. PNOC was created through Presidential Decree No. 334 on November 9, 1973 to
provide and maintain an adequate and stable supply of oil. Focusing its efforts and
resources in learning the ropes of the petroleum industry, PNOC rose to occupy
market leadership in an industry thought to be the domain of multinationals. Its
charter was amended in December 1992 to include energy exploration and
development.

It initiated the exploration of the country’s indigenous oil and non-oil energy
resources. Its purpose is to build an energy sector that will bring energy
independence to the country. Eventually, PNOC expanded its operations to include
total energy development, including indigenous energy sources like oil and gas, coal,
and geothermal.

2. PNOC’s Vision by 2030

The company has provided vital energy resource/development and energy

infrastructure, conducive to a clean environment and balanced and sustainable
economic growth.

3. PNOC’s Mission

Through the efforts and initiative of a dedicated and competent workforce, PNOC is
committed to develop and implement projects and programs in a financially prudent
and responsible manner aimed at increasing the country’s self-sufficiency level in oil,
gas and other energy sources; ensure security of supply; contributing to energy price
stability and affordability; foster sustainable and environmentally-friendly sources of
energy; promote energy efficiency and conservation; and maintain the highest
standard of service and corporate governance.

4. The Governance Commission for GOCCs (GCG) mandated PNOC to transform from
a mere holding to also an operating company in September 2014. Thus, GCG
recommended the abolition of PNOC Alternative Fuels Corporation (PAFC) and the
PNOC Development and Management Corporation (PDMC), which was duly
approved by the Office of the President that same month.

5. PNOC will continue to act as holding company in relation to PNOC Exploration

Corporation (PNOC-EC) and PNOC Renewables Corporation (PNOC-RC) while it
took over the ongoing programs and assumed the functions of the abolished
subsidiaries, PAFC and PDMC.

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 Objectives and Scope of Audit
6. Our objectives are 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 the
aggregate, they could reasonably be expected to influence the economic decisions
of users taken on the basis of these financial statements.

7. The audit covered the examination on a test basis of the accounts and financial
transactions and operations of PNOC for Calendar Years 2018 and 2017 in
accordance with ISSAIs. The audit also involved performing procedures to ascertain
the propriety of financial transactions and compliance of the Company to prescribed
laws, rules and regulations.

B. Financial Highlights (In Million Pesos)

Financial Position
Increase
2018 2017 (Decrease)
Assets 40,124.464 40,689.388 (564.924)
Liabilities 3,955.789 3,578.375 377.414
Equity 36,168.675 37,111.013 (942.338)

Results of Operation
Increase
2018 2017 (Decrease)
Income
Business Income 1,168.179 570.705 597.475
Non-Operating Income/Gain 2.604 1.023 1.581
Total Income 1,170.783 571.727 599.055

Expenses
Personnel Expenses (104.347) (91.973) (12.374)
Maintenance and Other Operating Expenses (140.699) (121.898) (18.801)
Financial Expenses (9.305) (2.025) (7.280)
Direct Cost (106.321) 0 (106.321)
Non-Cash Expenses (39.338) (41.276) 1.938
Total Expense (400.009) (257.172) (142.837)
Profit Before Tax 770.774 314.556 456.218
Income Tax Expense (155.103) (25.324) (129.779)
Profit After Tax 615.671 289.232 326.439
Other Comprehensive Income for the Period (2.350) 0.140 (2.490)
Comprehensive Income 613.321 289.372 323.949

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C. Auditor’s Opinion

The Auditor rendered an unmodified opinion on the fairness of presentation of the

financial statements of PNOC as at December 31, 2018 as stated in the Independent
Auditor’s Report in Part I.

D. Significant Audit Observations and Recommendations

Although the Auditor rendered an unmodified opinion, there are significant audit
observations that were noted in the review of transactions. These, together with the audit
recommendations that need immediate action are presented below. Details are in Part II
of this Report.

1. The non-recognition of assets and depreciation expenses relative to the Energy

Supply Base (ESB) operations and properties turned over by PNOC Exploration
Corporation (PNOC EC) to PNOC with a fair market value of P147.618 million is
contrary to Paragraph 15 of Philippine Accounting Standards (PAS) 1, Chapters
4.4(a), 4.38 and Chapter 3 of the Conceptual Framework, Paragraph 31 of IFRS 3
and the Matching Principle of accounting, thus, affecting the fair presentation of
balances of pertinent accounts in the financial statements.

Recommendations:

a. Facilitate/negotiate with PNOC EC to finalize the agreement on the transfer of

assets;

b. Recognize the assets of ESB at Fair Market Value in compliance with IFRS 3,
Paragraph 31, Conceptual framework Chapter 4.4(a) and 4.38 and PAS 1; and

c. Recognize depreciation expense pertaining to the ESB assets in compliance with

the Matching Principle of accounting.

2. The balance of Due from Government Corporations - PSALM account in the amount
of P112.543 million as against the confirmed zero balance affected the fair
presentation of balances of pertinent account in the financial statements contrary to
Paragraph 15 of Philippine Accounting Standards (PAS) 1, thus, the existence,
validity and collectability cannot be ascertained.

Recommendations:

a. Continue to exert extra effort in resolving the issue on who is accountable

between PNOC and PSALM for the Output VAT; and

b. Facilitate/follow-up the resolution of OSG on Output VAT.

3. Loans Receivable from Natural Resources Development Corporation (NRDC) in the

amount of P70.090 million remained uncollected for more than ten years contrary to
Item no. 2 of Loan Agreements dated March 9, 2004 and June 11, 2004 respectively,
thereby, depriving the Company of its resources that could have been derived
therefrom.

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 Recommendations:

a. Exert extra effort in coordinating with NRDC for the issuance of Board Resolution
assigning its future dividends from PMDC to PNOC as partial settlement of its
long overdue accounts with PNOC; and

b. File appropriate legal charges against NRDC, if necessary.

4. The balance of Loans Receivable from NRDC of P70.090 million as against the
confirmed balance of P58.001 million showed a difference of P12.089 million
contrary to Paragraph 15 of Philippine Accounting Standards (PAS) 1 on the
Presentation of Financial Statements thus, affecting the fair presentation of the
balances of the account in the financial statements.

Recommendation:

Make representation and come up with an agreement with NRDC on the

computation of interest to arrive at the total amount of receivables.

5. The Other Financial Liabilities account as at year-end in the amount of P3.579 million
remained outstanding for more than two years and were not reverted to Cumulative
Results of Operations – Unappropriated or Retained Earnings, contrary to Sections
3.1 and 3.3 of DBM-COA Joint Circular No. 99-6 dated November 13, 1999.

Recommendations:

a. Review and analyze all the recorded payable accounts; and

b. Revert the other financial liabilities account that had been outstanding for more
than two years to the Cumulative Results of Operations-Unappropriated or
Retained Earnings as stated in Sections 3.1 and 3.3 of DBM-COA Joint Circular
No. 99-6 dated November 13, 1999.

6. Non-submission of the Report of the Annual Physical Inventory of Property and

Equipment amounting to P338.658 million is contrary to Section IV, V.2, V.3 and V.4
of COA Circular No. 80-124 dated January 18, 1980 and Section 122 of PD 1445,
thus, the existence, completeness and valuation cannot be ascertained and the
accountabilities of employees cannot be established.

Recommendations:

a. Prepare and gather all the necessary Inventory Sheets, PEL and Employee
Ledger Cards and other documents needed prior to the physical count;

b. Ensure that all properties have complete and readable asset tags for easy
identification and preparing and placing asset tags for those assets without tags
or unreadable tags;

c. Renew the Memorandum Receipts (Gen. Form No. 32) now PAR every three
years; and

d. Require the submission to COA of a fully accomplished and reconciled Inventory

Report.

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 7. The GAD Plan and Budget for the calendar year 2018 in the amount of P1.243
million was below the minimum requirement of at least five per cent of the approved
Corporate Operating Budget, contrary to Section 36 (a) of Republic Act (R.A.) 9710 –
An Act Providing for the Magna Carta of Women (MCW). Likewise, no GAD
Database and GAD Monitoring Evaluation System were developed for PNOC
contrary to Section 37 (D), Rule VI of the Implementing Rules and Regulations (IRR)
of RA No. 9710, Magna Carta of Women.

Recommendations:

a. Maximize the utilization of the GAD funds through the implementation of GAD
related programs and projects in order to attain the objective for which funds
were provided;

b. Require Management’s heads of implementing departments/offices to ensure

that GAD related activities are implemented as planned to attain the GAD
objectives;

c. Attribute expenses related to GAD; and

d. Facilitate the establishment of PNOC GAD Database and GAD Monitoring and
Evaluation System.

8. The Annual Physical Examination (APE) benefit under the Collective Negotiation
Agreement (CNA) in the amount of P2.020 million for the period February 1, 2018 to
January 31, 2019 granted to PNOC employees did not undergo public bidding
contrary to Section 10 of the 2016 Implementing Rules and Regulations of Republic
Act (RA) 9184.

Recommendation:

Comply with Section 10 of the 2016 IRR of Republic Act (RA) 9184 in every
procurement.

E. Summary of Total Disallowances, Suspensions and Charges as of December 31,

2018

There were no Notices of Disallowance (ND) issued to PNOC for the Calendar Year
(CY) 2018.

F. Status of Implementation of Prior Years’ Recommendations

Out of the 34 audit recommendations embodied in the prior years’ Annual Audit Report,
20 were fully implemented, 13 were partially implemented and one (1) was not
implemented, while three (3) of the partially implemented were reiterated in 2018. Details
are presented in Part III of this Report.