PETRON CORPORATION

Primary Offer in the Philippines of 50 million Preferred Shares

with an Oversubscription Option of up to 50 million Preferred Shares
at an Offer Price of P 100.00 per Share
to be listed and traded on the First Board of The Philippine Stock Exchange, Inc.

Joint Issue Managers and Bookrunners

BDO Capital & Investment Corporation
BPI Capital Corporation
ING Bank N.V., Manila Branch

Joint Lead Managers

BDO Capital & Investment Corporation
BPI Capital Corporation
ING Bank N.V., Manila Branch
RCBC Capital Corporation
Union Bank of the Philippines

Co-Lead Underwriters
First Metro Investment Corporation
Multinational Investment Bancorporation

Participating Underwriter
Amalgamated Investment Bancorporation

Selling Agents
The Trading Participants of The Philippine Stock Exchange, Inc.

This Prospectus is dated 10 February 2010

PETRON CORPORATION
Petron MegaPlaza, 358 Sen. Gil Puyat Avenue
Makati City 1200, Metro Manila, Philippines
Telephone number 886-3888
FAX number 886-3088

This Prospectus relates to the offer and sale by way of a primary offer (the Offer) of 50 million
cumulative, non-voting, non-participating, non-convertible peso-denominated Perpetual Preferred
Shares (the Preferred Shares or Shares) of Petron Corporation (Petron, the Company or the
Issuer), a corporation duly organized and existing under Philippine law. In the event of an
oversubscription, the Joint Issue Managers in consultation with the Issuer, reserve the right, but not
the obligation, to increase the Offer size up to an additional 50 million Preferred Shares, subject to the
registration requirements of the Philippine Securities and Exchange Commission (SEC) (the
Oversubscription Option).The Preferred Shares will be issued on March 5, 2010 (the Listing Date)
by the Company from its 624,895,503 authorized and unissued new preferred share capital. Each
Preferred Share has a par value of P1.00 and a liquidation right equal to the Issue Price of the
Preferred Share plus an amount equal to any dividends declared but unpaid in respect of the previous
dividend period and any accrued and unpaid dividends for the then-current dividend period to (and
including) the date of commencement of the Companys winding up or the date of any such other
return of capital, as the case may be (the Liquidation Right).

The Preferred Shares are being offered for subscription solely in the Philippines through the Joint
Lead Managers and Participating Underwriters (the Underwriters) and Selling Agents named herein
at a subscription price of P 100 per share (the Offer Price or the Issue Price).

Following the Offer, the Company will have (a) 9,375,104,497 common shares and (b) 50,000,000
preferred shares issued and outstanding, if the Oversubscription Option is not exercised. On the
other hand, if the Oversubscription Option is exercised in full, the Company will have (a)
9,375,104,497 common shares and (b) 100,000,000 preferred shares issued and outstanding. The
holders of the Preferred Shares do not have identical rights and privileges with holders of the existing
common shares of the Company.

The declaration and payment of dividends on the Shares on each Dividend Payment Date will be
subject to the sole and absolute discretion of the Issuers Board of Directors (the Board) to the
extent permitted by law. The declaration and payment of dividends (except stock dividends) do not
require any further approval from the shareholders.

As and if declared by the Board, dividends on the Shares shall be at a fixed rate of 9.5281% per
annum calculated in respect of each Share by reference to the Offer Price thereof in respect of each
Dividend Period (the Dividend Rate). Subject to the limitations described in this Prospectus,
dividends on the Shares will be payable quarterly in arrears on March 5, June 5, September 5 and
December 5 of each year (each a Dividend Payment Date). Unless the Shares are redeemed by the
Issuer on Optional Redemption Date, the dividends on the Shares will be adjusted on the Optional
Redemption Date to the higher of (a) the Dividend Rate or (b) the 10-year Fixed Rate Treasury Note
benchmark yield as displayed on the PDST-F screen of the PDEx page (or such successor page) of
Bloomberg for the date corresponding to the Optional Redemption Date plus a spread of 487.5 basis
points (see Summary of the Offering on page 18).

Dividends on the Shares will be cumulative. If for any reason the Issuers Board does not declare a
dividend on the Shares for a dividend period, the Issuer will not pay a dividend on the Dividend
Payment Date for the dividend period. However, on any future Dividend Payment Date on which
dividends are declared, holders of the Shares must receive the dividends due them on such Dividend
Payment Date as well as all dividends accrued and unpaid to the holders of the Shares prior to such
Dividend Payment Date (see Description of the Preferred Shares on page 25).

As and if declared by the Board, the Issuer may redeem the Preferred Shares on the fifth anniversary
from Listing Date (the Optional Redemption Date) or on any Dividend Payment Date thereafter in
whole (but not in part only), at a redemption price equal to the Issue Price of the Shares plus accrued
and unpaid dividends for all dividend periods up to the date of actual redemption by the Issuer.

2
The Issuer may purchase the Shares at any time in the open market or by public tender or by private
contract at any price through The Philippine Stock Exchange, Inc. (PSE). The Shares so purchased
may either be redeemed and cancelled after the Redemption Date or kept as treasury shares.

All payments in respect of the Preferred Shares are to be made free and clear of any deductions or
withholding for or on account of any present or future taxes or duties imposed by or on behalf of the
Government of the Republic of the Philippines (the Government), including but not limited to, stamp,
issue, registration, documentary, value added or any similar tax or other taxes and duties, including
interest and penalties. If such taxes or duties are imposed, the Issuer will pay additional amounts so
that the holders of Preferred Shares will receive the full amount of the relevant payment which
otherwise would have been due and payable, provided, however, that the Issuer shall not be liable for
(a) the final withholding tax applicable on dividends earned on the Preferred Shares prescribed under
the National Internal Revenue Code of 1997; (b) expanded value added tax which may be payable by
any holder of the Preferred Shares on any amount to be received from the Issuer under the Preferred
Shares; and (c) any withholding tax of any amount payable to any holder of the Preferred Shares or
any entity which is a non-resident foreign corporation. If payments become subject to additional
withholding or any new tax as a result of certain changes in law, rule or regulation, or in the
interpretation thereof, and such tax cannot be avoided by use of reasonable measures available to the
Issuer, the Issuer having given not more than 60 nor less than 30 days notice, may redeem the
Shares in whole, but not in part, on any Dividend Payment Date at the Issue Price plus all accrued
and unpaid dividends, if any (see Summary of the Offering on page 18 and Taxation on page 107).

The Shares will constitute direct and unsecured subordinated obligations of the Issuer ranking at least
pari passu in all respects and ratably without preference or priority among themselves with all other
Preferred Shares issued by the Issuer.

The Shares will be issued in scripless form. Title to the Shares shall pass by endorsement and
delivery to the transferee and registration in the registry of shareholders to be maintained by the
Registrar and Depository Agent. Settlement of the Shares in respect of such transfer or change of
title of the Shares, including the settlement of documentary stamp taxes, if any, arising from
subsequent transfers, shall be similar to the transfer of title and settlement procedures for listed
securities in the PSE (see Summary of the Offering on page 18).

The gross proceeds of the Offer are expected to reach approximately P5,000,000,000.00 or
P10,000,000,000.00, should the Issuer exercise in full its Oversubscription Option. The net proceeds
from the Offer, estimated to be at P4.947 billion or P9.902 billion, should the Issuer exercise in full its
Oversubscription Option, are determined by deducting from the gross proceeds the total issue
management, underwriting and selling fees, listing fees, taxes and other related fees and out-of-
pocket expenses, will be used by the Company to support its investment requirements, particularly for
its refinery and marketing operations as well as for general corporate purposes (see Use of
Proceeds on page 41). BDO Capital & Investment Corporation, BPI Capital Corporation, ING Bank
N.V., Manila Branch, RCBC Capital Corporation and Union Bank of the Philippines, acting as Joint
Lead Managers, shall receive an estimated fee of 0.75% of the gross proceeds of the Offer, inclusive
of amounts to be paid to any other underwriters and selling agents.

Some of the Companys existing loan agreements contain covenants that restrict the declaration or
payments of dividends under certain circumstances, such as the occurrence of an event of default
under such loan agreements or if such payment would cause an event of default to occur, if certain
financial ratios are not met or payment would cause them not to be met (see Description of the
Preferred Shares on page 25).

No dealer, salesman or any other person has been authorized to give any information or to make any
representation not contained in this Prospectus. If given or made, any such information or
representation must not be relied upon as having been authorized by the Company, the Issue
Managers or any of the Underwriters. The distribution of this Prospectus and the offer and sale of the
Preferred Shares may, in certain jurisdictions, be restricted by law. The Company and the Issue
Managers require persons into whose possession this Prospectus comes, to inform themselves of
and observe all such restrictions. This Prospectus does not constitute an offer of any securities, or
any offer to sell, or a solicitation of any offer to buy any securities of the Company in any jurisdiction,
to or from any person to whom it is unlawful to make such offer in such jurisdiction. Prior to the Offer,

3
there has been no public market for the Preferred Shares. Accordingly, there has been no market
price for the Preferred Shares derived from day-to-day trading. Unless otherwise stated, the
information contained in this Prospectus has been supplied by the Company. To the best of its
knowledge and belief, the Company (which has taken all reasonable care to ensure that such is the
case) confirms that the information contained in this Prospectus is correct, and that there is no
material misstatement or omission of fact which would make any statement in this Prospectus
misleading in any material respect. The Company hereby accepts full and sole responsibility for the
accuracy of the information contained in this Prospectus. The Joint Lead Underwriters and
Bookrunners confirm that it has exerted reasonable efforts to verify the information contained herein
but do not make any representation, express or implied, as to the accuracy or completeness of the
materials contained herein.

Unless otherwise indicated, all information in the Prospectus is as of February 10, 2010. Neither the
delivery of this Prospectus nor any sale made pursuant to this Prospectus shall, under any
circumstances, create any implication that the information contained herein is correct as of any date
subsequent to the date hereof or that there has been no change in the affairs of the Company and its
subsidiaries since such date. Market data and certain industry forecasts used throughout this
Prospectus were obtained from internal surveys, market research, publicly available information and
industry publications. Industry publications generally state that the information contained therein has
been obtained from sources believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. Similarly, internal surveys, industry forecasts and market research,
while believed to be reliable, have not been independently verified, and none of the Company, the
Issue Managers and the Joint Lead Underwriters makes any representation as to the accuracy of
such information.

Each person contemplating an investment in the Preferred Shares should make his own investigation
and analysis of the creditworthiness of Petron and his own determination of the suitability of any such
investment. The risk disclosure herein does not purport to disclose all the risks and other significant
aspects of investing in the Shares. A person contemplating an investment in the Preferred Shares
should seek professional advice if he or she is uncertain of, or has not understood any aspect of the
securities to invest in or the nature of risks involved in trading of securities, especially those high-risk
securities. Investing in the Preferred Shares involves a higher degree of risk compared to debt
instruments. For a discussion of certain factors to be considered in respect of an investment in the
Preferred Shares, see the section on Risks Factors starting on page 32.

An application to list the Preferred Shares has been filed with the PSE and has been approved by the
Board of Directors of the PSE on January 27, 2010. The PSE assumes no responsibility for the
correctness of any statements made or opinions expressed in this Prospectus. The PSE makes no
representation as to its completeness and expressly disclaims any liability whatsoever for any loss
arising from reliance on the entire or any part of the Prospectus. The listing of the Preferred Shares is
subject to the approval of the Board of Directors of the PSE. Such approval for listing is permissive
only and does not constitute a recommendation or endorsement of the Preferred Shares by the PSE.

4
Table of Contents
Forward-Looking Statements 7

Definition of Terms 8

Executive Summary 11

Summary of Financial Information 15

Capitalization 17

Summary of the Offering 18

Description of the Preferred Shares 25

Risk Factors 32

Use of Proceeds 41

Determination of Offer Price 43

Plan of Distribution 44

Dilution 48

The Company 49

Description of Property 62

Legal Proceedings 64

Ownership and Capitalization 70

Market Price of and Dividends on Petrons Common Equity and Related Stockholder Matters 72

Management, Employees and Structure 73

Certain Relationships and Related Transactions 85

Corporate Governance 86

Managements Discussion and Analysis of Results of Operations and Financial Condition 87

External Audit Fees and Services 103

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 104

Matters Affecting Liquidity and Capital Expenditure 105

Interest of Named Experts and Counsel 106

Taxation 107

Industry Overview 112

Regulatory Framework 115

The Philippine Stock Market 117

Appendix 121

6
Forward-Looking Statements

This Prospectus contains certain forward-looking statements. These forward-looking statements

can generally be identified by use of statements that include words or phrases such as Petron or its
management believes, expects, anticipates, intends, plans, projects, foresees, or other
words or phrases of similar import. Similarly, statements that describe Petron's objectives, plans or
goals are also forward-looking statements. All such forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially from those contemplated
by the relevant forward-looking statement. Important factors that could cause actual results to differ
materially from the expectations of Petron include, among others:

Political and economic considerations;

Oil price fluctuation risk;

Foreign currency exchange rate risk;

Risk of operational disruptions;

Supply and sales concentration risks;

Product substitution risk;

Regulatory risks;

Ongoing legal proceedings; and

Market for the Preferred Shares

7
Definition of Terms

TERM DEFINITION
AOC Aramco Overseas Company B.V.
ARO Asset Retirement Obligation
Banking Day A day other than a Saturday or Sunday on which banks are open for
business in Metro Manila
BIR Bureau of Internal Revenue
Black Products Refinery yields pertaining to fuel oil, asphalts
BOI Board of Investments
BPSD Barrels per Stream Day
BRC Bataan Refinery Corporation
BRUP Bataan Refinery Union of the Philippines
BSP Bangko Sentral ng Pilipinas
BTX Benzene Toluene Extraction
BWC Bureau of Working Conditions
CBA Collective Bargaining Agreement
CCRU Continuous Catalyst Regeneration Reformer
CGS Cost of Goods Sold
Chevron Chevron Philippines, Inc.
CME Coco Methyl Ester
Company Petron Corporation
CRPP Facility Currency Rate Risk Protection Program of the BSP
CTA Court of Tax Appeals
DENR Department of Environment and Natural Resources
Depository Agent Philippine Depository and Trust Corporation
DOE Department of Energy
DPLC Duty Paid Landed Cost
DOF Department of Finance
DOJ Department of Justice
DOLE Department of Labor and Employment
DOTC-OTS Department of Transportation and Communications Office of
Transport Security
DSWD Department of Social Welfare and Development
DTI Department of Trade and Industry
Dubai crude Arabian Dubai Fateh Crude
ECC Environment Clearance Certificate
EMS Environmental Management Systems
ERB Energy Regulatory Board
Esso Standard Oil Company of New Jersey
Esso Philippines Esso Philippines, Inc.
GDP Gross Domestic Product
GIS General Information Sheet
GRI Global Reporting Initiative
Government Any government agency, authority, bureau, department, court,
tribunal, legislative body, public official, statutory or legal entity
(whether autonomous or not), commission, corporation, or
instrumentality, whether national or local, of the Republic of the
Philippines

8
IOPC International Oil Pollution Compensation
ISO International Organization for Standardization
ISPS International Ships and Ports Facility Security
Issuer Petron Corporation
Joint Issue Managers and BDO Capital & Investment Corporation, BPI Capital Corporation and
Bookrunners ING Bank N.V., Manila Branch
Joint Lead Managers BDO Capital & Investment Corporation, BPI Capital Corporation,
ING Bank N.V., Manila Branch, RCBC Capital Corporation and
Union Bank of the Philippines
LBAA Local Board of Assessment Appeals
Listing Date The date when the Preferred Shares are listed in the PSE
LGU Local Government Unit
LPG Liquefied Petroleum Gas
LPP League of Provinces of the Philippines
LVN Light Virgin Naphtha
MB Thousand Barrels
MBCD Thousand Barrels per Calendar Day
MBSD Thousand Barrels per Stream Day
MCIT Minimum Corporate Income Tax
Meralco Manila Electric Company
MMB Million Barrels
Mobil Socony Vacuum Oil Company of New York
Moodys Moodys Investor Service
MOPS Mean of Platts Singapore
MT Metric tonnes
MX Mixed xylene
NAPOCOR National Power Corporation
NDCC National Disaster Coordinating Council
NOLCO Net Operating Loss Carry-over
NVRC New Ventures Realty Corporation
OPEC Organization of Petroleum Exporting Countries
OPEX Operating Expenses
OSCP Oil Spill Contingency Plans
Ovincor Overseas Insurance Corporation
PAS Philippine Accounting Standard
PDST-F Philippine Dealing System Treasury Fixing Rate
PDTC Philippine Depository and Trust Corporation
Pesos/ P Philippine Pesos, the legal currency of the Republic of the
Philippines
PEA Petron Employees Association
PELU Petron Employees Labor Union
Petrochemicals Feedstock to the petrochemical industry such as xylene, propylene,
benzene, toluene
PetroFCC PetroFluidized Catalytic Cracking Unit
Petrogen Petrogen Insurance Corporation
Petrophil Petrophil Corporation
PFC Petron Freeport Corporation
PFI Petron Foundation, Inc.
PFRS Philippine Financial Reporting Standards
PIL Primary Institutional Lender

9
PMC Petron Marketing Corporation
PNOC Philippine National Oil Company
Preferred Shares or 50 million preferred shares that are being offered by Petron
Shares Corporation
PRU Propylene Recovery Unit
PSE The Philippine Stock Exchange, Inc.
QMS Quality Management Systems
QSR Quick Serve Restaurants
Receiving Agent Banco De Oro Unibank, Inc. Trust and Investments Group
Refinery Petrons Bataan Oil Refinery
Registrar and Paying SMC Stock Transfer Service Corporation
Agent
Republic Act No. 9337 Expanded Value Added Tax Law
Republic Act No. 9367 Biofuels Act of 2006
Republic Act No. 8479 Downstream Oil Deregulation Law
Republic Act No. 9369 Amended Computerization Act of 2007
RTC Regional Trial Court
Saudi Aramco Saudi Arabian Oil Company
SBMI Special Board of Marine Inquiry
SC Supreme Court of the Philippines
SEA BV SEA Refinery Holdings B.V.
SEC Securities and Exchange Commission
Selling Agents The Trading Participants of the Philippine Stock Exchange
Shareholders Holders of Preferred Shares
Shell Pilipinas Shell Petroleum Company
SMC San Miguel Corporation
SRC SEA Refinery Corporation
TDM Tax Debit Memo
TCC Tax Credit Certificates
TESDA Technical Education and Skills Development Authority
Underwriters BDO Capital & Investment Corporation, BPI Capital Corporation and
ING Bank N.V., Manila Branch, RCBC Capital Corporation and
Union Bank of the Philippines
USD/US$ U.S. Dollars, the legal currency of the United States of America
US United States of America or USA
VAT Value-Added Tax
White Products Refinery yields pertaining to diesel, gasoline, jet fuel, LPG
YTD Year-to-date

10
Executive Summary
The following summary is qualified in its entirety by, and should be read in conjunction with the more detailed
information found elsewhere in this Preliminary Prospectus.

Prospective investors should read this entire Preliminary Prospectus fully and carefully, including Investment
Considerations and the Companys audited financial statements and the related notes. In case of any
inconsistency between this summary and the more detailed information in this Preliminary Prospectus, then the
more detailed portions, as the case may be, shall at all times prevail.

Brief Background on the Company

Petron Corporation (Petron or the Company) was incorporated under the Corporation Law of the
Philippines on December 15, 1966, as Esso Philippines, Inc. (Esso Philippines). On December 21,
1973, the Philippine National Oil Company (PNOC) acquired all of the shares in Esso Philippines
and the Company was renamed Petrophil Corporation (Petrophil). On November 5, 1985,
Petrophil Corporation and Bataan Refinery Corporation (formerly the Standard Vacuum Refining
Corporation) were merged, with Petrophil as the surviving corporation. Petrophil changed its
corporate name to Petron Corporation on April 21, 1987.

On March 4, 1994, PNOC sold 40% of its shares in Petron to Aramco Overseas Company B.V.
(AOC), a wholly owned corporation of Saudi Arabian Oil Company (Saudi Aramco). On
September 7, 1994, Petrons shares were listed with The Philippine Stock Exchange, Inc. (PSE).

On March 13, 2008, AOC entered into a share purchase agreement with Ashmore Investment
Management Limited and subsequently issued a Transfer Notice to PNOC to signify its intent to sell
its 40% equity stake in Petron. PNOC waived its right of first offer to purchase AOCs interest in
Petron. Together with the common shares that were tendered representing 10.57% of the total
outstanding common shares of Petron, the Ashmore group, through its corporate nominee SEA
Refinery Holdings B.V. (SEA BV), acquired 50.57% of the outstanding common shares in Petron in
July 2008. In December 2008, the 40% interest of PNOC in Petron was purchased by SEA Refinery
Corporation (SRC), a domestic corporation wholly-owned by SEA BV. In a related development,
SEA BV sold a portion of its interest in Petron equivalent to 10.1% of the issued shares, to SRC. At
year-end 2008, the capital structure of Petron is as follows: SRC - 50.1%; SEA BV - 40.47%; and
the general public - 9.43%.

On December 24, 2008, San Miguel Corporation (SMC) and SEA BV entered into an Option
Agreement granting SMC the option to buy the entire ownership interest of SEA BV in its local
subsidiary, SRC. The option may be exercised by SMC within a period of two years from December
24, 2008.

Petron is the Philippines largest oil refining and marketing company. As of year-to-date July 2009,
based on industry data from the Department of Energy (DOE), it had an overall market share of
36.4% ahead of Pilipinas Shell Petroleum Companys (Shell) 27.9% and Chevron Philippines,
Inc.s (Chevron, formerly Caltex) 13.9%. Petron, Shell, and Chevron account for 78.1% of the total
domestic oil market. The remainder is accounted for by smaller oil players, which started operations
after the deregulation of the downstream oil industry in 1998, as well as by direct imports primarily
by airlines.

The Companys ISO-14001-certified refinery which has a capacity of 180,000 barrels per stream day
(BPSD) processes crude oil into a full range of petroleum products including liquefied petroleum
gas (LPG), gasoline, diesel, jet fuel, kerosene, fuel oil, mixed xylene, propylene, benzene and
toluene. Petron distributes its products through a network of bulk plants and service stations. It also
has its own convenience stores under the brand name Treats, mostly located within selected service
stations. Diversifying into petrochemicals, Petron has built a mixed xylene recovery unit in 2000 and
a propylene recovery unit in 2008. Its benzene-toluene extraction unit became operational in May
2009.

11
Financial Highlights

Based on the year ended December 31, 2008 audited financial statements, Petron earned revenues
of P 267.7 billion, and incurred a net loss of P 3.9 billion. Total assets stood at P 111.8 billion and
stockholders' equity amounted to P 32.9 billion. As of year-end 2008, Petrons total market
capitalization was P 47.8 billion.

For the nine months ended September 30, 2009, Petrons unaudited financial statements show that
revenues were at P 123.6 billion and its net income was at P 3.4 billion. Total assets amounted to
P 117.1 billion and stockholders equity was at P 36.3 billion. As of end-September 2009, Petrons
total market capitalization was P 47.8 billion.

Strategies and Plans

Value optimization is the key to the Companys sustained growth. Amidst todays challenging
business environment, Petron will pursue growth and expansion through changes in internal
business processes, adapting to the shifting needs of the market, and tapping into new markets and
opportunities.

Petrons long-term vision is to be the leading provider of total customer solutions in the energy
sector and its derivative businesses. To achieve this, the Company will focus on the following
strategies: 1) Maximize revenue potential from the domestic market considering its vast retail
network; 2) Enhance value generation from operations; 3) Optimize supply chain cost efficiency; and
4) Seize opportunities for new businesses.

As export markets become more limited and competitive in the face of a slowdown in oil demand
and the coming in of new complex refineries, Petron will focus on strengthening its domestic market.
The Company will continue the aggressive expansion of its service station network, targeting growth
centers and real estate developments, and making greater inroads in provincial areas. The
Company will also expand businesses that can leverage on this network. The Company plans to
build aviation facilities in tourist destinations such as Boracay, Bohol, and Palawan. It will target
substantial market share in LPG, supported by more outlets and refilling plants that will bring the
product closer to the market. It will build more auto-LPG facilities in filling stations and fleet
accounts. Lube sales will be intensified with more lube outlets and Car Care Centers. These
expansion initiatives will be complemented by customer relationship programs that enhance the
customer experience, such as better and faster forecourt service, establishment of a customer
contact center that provides quick response to customer queries, and expansion of credit and fleet
card services for customer convenience.

At the Refinery, further upgrades are being evaluated to enhance the value of refinery production.
With fuel oil still comprising about 30% of refinery yield from crude, the Company will assess the
best option for full conversion of Black Products into higher-value White Products and/or
petrochemicals. It will also explore opportunities for venturing into downstream petrochemicals,
processing propylene, benzene, toluene or xylene production into derivatives or even into finished
products. These are encouraged by previous upgrades such as the PetroFCC unit which increased
cracking capacity to 19 MBSD, the Propylene Recovery Unit which recovers propylene from the
PetroFCCs LPG stream, the Mixed Xylene Plant which recovers MX from heavy gasoline streams,
and the Benzene-Toluene Extraction unit which recovers benzene and toluene from light gasoline
streams. These petrochemical units enhance product value by about US$ 30-40 a barrel over
alternative dispositions as LPG and gasoline.

The business cooperation with Innospec, a leading global supplier of fuel additives, has opened
Petrons doors to the blending and marketing of world class fuel additives. As Innospecs exclusive
blender in Asia-Pacific, Petron provides additives and technical services to Innospecs customers in
the region. The blending plant in Subic, completed in July 2008, has a capacity of 12,000 metric tons
per year.

Petrons revenue generating initiatives are complemented by cost efficiency programs to further
boost the Companys profitability. Major initiatives include: (a) crude mix optimization to reduce
supply cost; (b) enhancement of facilities to attain greater sourcing flexibility and support new growth

12
areas; (c) upgrade of the Refinerys power generation system to improve energy reliability and
efficiency; and d) depot rationalization and optimization of transportation and delivery fleet to lower
overall distribution costs.

The Company will also pursue mergers and acquisitions that will complement its core business and
leverage on its strengths. This could include downstream petrochemical production or LPG
import/refilling facilities. With its partnership with San Miguel, the Company will maximize synergies
with SMCs network, products and services, for further enhancement of Petrons retail and
distribution network/business.

Competitive Strengths

Petron believes that its competitive strengths will enable it to protect and build on its leadership
position in the domestic oil industry, its core business. At the same time, leveraging on its existing
assets and expertise, Petron will pursue opportunities that will complement its core business and
capture higher-value products and markets.

1. Philippines largest oil refining and marketing company: Petron has the biggest refining
capacity, most extensive distribution network and most number of service stations.

2. Leadership in a strategic industry: Petron is the market leader in the domestic oil industry
with an overall market share of 36.4% as of year-to-date July 2009.

3. Sound financial condition: Petron has consistently improved on its income performance
through the years, except in 2008 which is considered an uncharacteristic year.

4. Dynamic and experienced management: Petron management and employees, having long
years of experience in the Company, have demonstrated the ability to overcome various
challenges.

5. Strong growth potential: Petron is pursuing key strategic business imperatives that would
support sustainable growth.

Industry Overview

The Company operates in a deregulated business environment. The enactment of the Downstream
Oil Industry Deregulation Law in 1998 effectively removed the rate-setting function of the
Government through the then Energy Regulatory Board (ERB), leaving price-setting to market
forces. It also opened the oil industry to free competition.

The Philippine oil industry is dominated by the three long-staying oil firms: Petron, Shell, and
Chevron. The rest are small players who currently number about 90. Most of them entered the
industry since it was deregulated in 1998.

Petron and Shell operate the two refineries in the country. The rest of the industry players are
importers of finished products or purchase from other players in the local market.

Risks of Investing

Prospective investors should consider the following risks of investing in the Preferred Shares:
1. Macroeconomic risks, including the current and immediate political and economic factors in the
Philippines as a principal risk for investing in general;
2. Risks relating to Petron, its subsidiaries and their business; and
3. The absence of a liquid secondary market for the Preferred Shares.
(see Risk Factors on page 32)

13
Use of Proceeds

The offer price shall be at P 100, which is 100 times the par value of the Preferred Shares. The net
proceeds from the Offer are estimated to be P 4.947 billion or P 9.902 billion, if the Oversubscription
Option is exercised, after deducting expenses relating to the issuance of the Preferred Shares.
Proceeds of the Offer will be used to support the Companys investment requirements, particularly
for its refinery and marketing operations as well as for general corporate purposes. (see Use of
Proceeds on page 41)

Plan of Distribution

Petron plans to issue the Preferred Shares to institutional and retail investors through a public
offering to be conducted through the Joint Lead Managers. (see Plan of Distribution on page 44)

14
Summary of Financial Information
The following tables set forth financial and operating information of Petron. Prospective purchasers
of the Preferred Shares should read the summary financial data below together with the financial
statements, including the notes thereto, included in this Prospectus and Management's Discussion
and Analysis of Results of Operations and Financial Condition. The summary financial data for the
three years ended December 31, 2008, 2007 and 2006 are derived from Petron's audited financial
statements, including the notes thereto, which are found elsewhere in this Prospectus.

For the Nine Months

Income Statement Data For the Year ended December 31
ended September 30
(in P millions) (Audited)
(Unaudited)
2009 2008 2008 2007 2006
Sales 123,635 216,427 267,676 210,520 211,726
Cost of Goods Sold 111,620 205,139 264,306 195,287 197,514
Gross Profit 12,015 11,288 3,370 15,233 14,212
Selling & Administrative
Expenses (4,116) (4,085) (5,222) (5,325) (4,482)
Interest income 147 234 354 344 371
Interest expense (3,284) (2,654) (4,180) (1,814) (2,684)
Others Net (124) (1,086) (115) 912 487
Income/ (Loss) Before Tax 4,638 3,697 (5,793) 9,350 7,904
Tax expense (benefit) 1,272 913 (1,873) 2,955 1,886
Net Income/ (Loss) 3,366 2,784 (3,920) 6,395 6,018

Consolidated Financial Position

As of Sept 30 As of December 31
Data
(Unaudited) (Audited)
(in P millions)
2009 2008 2007 2006
ASSETS
Current Assets
Cash and cash equivalents 16,746 12,827 9,732 11,735
Financial assets at fair value
through profit or loss 165 161 229 180
Available-for-sale investments - 331 164 103
Receivables - Net 26,163 16,875 17,869 15,629
Inventories - Net 32,611 30,792 30,271 26,289
Other current assets 3,881 11,977 10,672 7,054
Total Current Assets 79,566 72,963 68,937 60,990
Noncurrent Assets
Available-for-sale investments 1,359 351 468 529
Property, plant and equipment
Net 35,218 36,428 34,122 25,153
Investment property - Net 235 246 208 222
Deferred tax assets - Net - 885 1 1
Other noncurrent assets 715 925 738 621
Total Noncurrent Assets 37,527 38,835 35,537 26,526
Total Assets 117,093 111,798 104,474 87,516

15
Consolidated Financial Position
As of Sept 30 As of December 31
Data
(Unaudited) (Audited)
(in P millions)
2009 2008 2007 2006
LIABILITIES AND EQUITY
Current Liabilities
Short-term loans 45,587 53,979 33,784 28,135
Liabilities for crude oil and
petroleum product importation 10,480 8,907 12,873 7,541
Accounts payable and accrued
expenses 4,043 4,562 4,544 3,731
Income tax payable 8 22 523 452
Current portion of long-term debt -
Net 1,248 1,263 1,604 1,633
Total Current Liabilities 61,366 68,733 53,328 41,492
Noncurrent liabilities
Long-term debt net of current
portion 17,956 8,988 11,176 11,279
Deferred tax liabilities - Net 218 8 1,268 1,443
Other noncurrent liabilities 1,247 1,166 914 1,049
Total Noncurrent Liabilities 19,421 10,162 13,358 13,771
Total Liabilities 80,787 78,895 66,686 55,263

Stockholders Equity
Capital stock 9,375 9,375 9,375 9,375
Retained earnings 27,131 23,776 28,692 23,253
Other reserves (444) (473) (412) (490)
Equity attributable to Equity Holders
of the Parent 36,062 32,678 37,655 32,138
Minority interest 244 225 133 115
Total Equity 36,306 32,903 37,788 32,253
Total Liabilities and Equity 117,093 111,798 104,474 87,516

16
Capitalization
The following table sets forth the Companys unaudited consolidated short-term and long-term debt
and capitalization as of September 30, 2009. This table should be read in conjunction with the notes
thereto located elsewhere in this Prospectus.

As of As adjusted
(in P Millions) Sept 30, 2009 for maximum
(Unaudited) Issue Size of
P 10 Billion

Short Term Debt

Bank loans 56,067 56,067
Current portion of long-term debt 1,248 1,248
Total Short-Term Debt 57,315 57,315

Long Term Debt

Long term debt net of current portion 17,956 17,956
Total Debt 75,271 75,271

Equity
Common stock P 1 par value 9,375 9,375
Authorized 9,375,104,497 shares
Issued 9,375,104,497 shares
(1)
Preferred stock P 1 par value 100
Authorized 624,895,503 shares
(2)
Additional paid-in capital 9,814
Other reserves (444) (444)
Retained earnings 27,131 27,131
(2)
Equity attributable to equity holders of the parent 36,062 45,976
Minority Interest 244 244
(2)
Total Equity 36,306 46,220
(2)
Total Capitalization 111,577 121,491
Notes:

(1) The Issuer intends to offer 50 million shares at P100 per share, with an oversubscription option of up
to an additional 50 million shares.
(2) Less upfront fees, commissions and expenses related to the Offer (excluding listing fees and registrar/
stock transfer agent fees).

17
Summary of the Offering
The following do not purport to be a complete listing of all the rights, obligations and privileges of the
Preferred Shares. Some rights, obligations or privileges may be further limited or restricted by other
documents and subject to final documentation. Prospective Shareholders are enjoined to perform
their own independent investigation and analysis of the Issuer and the Preferred Shares. Each
prospective Shareholder must rely on its own appraisal of the Issuer and the proposed financing and
its own independent verification of the information contained herein and any other investigation it
may deem appropriate for the purpose of determining whether to participate in the proposed
financing and must not rely solely on any statement or the significance, adequacy or accuracy of any
information contained herein. The information and data contained herein are not a substitute for the
prospective Shareholders independent evaluation and analysis.

The following overview should be read as an introduction to, and is qualified in its entirety by
reference to, the more detailed information appearing elsewhere in this Prospectus. This overview
may not contain all of the information that prospective investors should consider before deciding to
invest in the Preferred Shares. Accordingly, any decision by a prospective investor to invest in the
Preferred Shares should be based on a consideration of this Prospectus as a whole. Should there
be any inconsistency between the summary below and the final documentation, the final
documentation shall prevail.

Summary of Key Indicative Terms

The Offer The Company, through the Underwriters and Selling Agents named
herein, is offering 50 million (if the Oversubscription Option is not
exercised) cumulative, non-voting, non-participating, non-convertible
peso-denominated perpetual Preferred Shares.

Over-Subscription In the event of an oversubscription, the Joint Issue Managers in

Option consultation with the Issuer, reserve the right, but not the obligation, to
increase the Offer size up to an additional 50 million Preferred Shares,
subject to the registration requirements of the Philippine Securities and
Exchange Commission (SEC) (the Oversubscription Option).

Par Value The Preferred Share shall have a par value of P1.00 per Share.

Offer Price The Preferred Shares shall be offered at a price of P100.00 per Share.

Dividend Rate As and if dividends are declared by the Board, dividends on the Shares
shall be at a fixed rate of 9.5281% per annum calculated in respect of
each Share by reference to the Offer Price thereof in respect of each
Dividend Period.

Base Rate The relevant Base Rate shall be the prevailing Philippine Dealing
System Treasury Fixing (PDST-F) 5-year treasury securities
benchmark rate displayed under the heading Bid Yield as published
on the PDEx Page (or such successor page) of Bloomberg (or such
successor electronic service provider) at approximately 11:30 a.m.,
Manila time on the dividend rate setting date.

Dividend Rate Step-Up Unless the Preferred Shares are redeemed by the Company on
Optional Redemption Date, the Dividend Rate shall be adjusted on the
Optional Redemption Date to the higher of (a) the Dividend Rate or (b)
the 10-year Fixed Rate Treasury Note benchmark yield as displayed on
the PDST-F screen of the PDEx page (or such successor page) of
Bloomberg (or such successor electronic service provider) at
approximately 11:30 a.m. for the date corresponding to the Optional

18
 Redemption Date plus a spread of 487.5 basis points.

Conditions on Payment The declaration and payment of dividends on each Dividend Payment
of Dividends Date will be subject to the sole and absolute discretion of the Board of
Directors to the extent permitted by law.

The Board of Directors will not declare and pay dividends on any
Dividend Payment Date where (a) payment of the Dividend would
cause the Company to breach any of its financial covenants or (b) the
profits available to the Company to distribute as dividends are not
sufficient to enable the Company to pay in full both the dividends on the
Preferred Shares and the dividends on all other classes of the
Companys shares that are scheduled to be paid on or before the same
date as the dividends on the Preferred Shares and that have an equal
right to dividends as the Preferred Shares.

If the profits available to distribute as dividends are, in the Boards

opinion, not sufficient to enable the Company to pay in full on the same
date both dividends on the Preferred Shares and the dividends on other
shares that have an equal right to dividends as the Preferred Shares,
the Company is required first, to pay in full, or to set aside an amount
equal to, all dividends scheduled to be paid on or before that dividend
payment date on any shares with a right to dividends ranking in priority
to that of the Preferred Shares; and second, to pay dividends on the
Preferred Shares and any other shares ranking equally with the
Preferred Shares as to participation in profits pro rata to the amount of
the cash dividends scheduled to be paid to them. The amount
scheduled to be paid will include the amount of any dividend payable
on that date and any arrears on past cumulative dividends on any
shares ranking equal in the right to dividends with the Preferred Shares.

The profits available for distribution are, in general and with some
adjustments, equal to the Companys accumulated, realized profits less
accumulated, realized loss.

Dividends on the Shares will be cumulative. If for any reason the

Companys Board does not declare a dividend on the Shares for a
dividend period, the Company will not pay a dividend on the Dividend
Payment Date for that dividend period. However, on any future
Dividend Payment Date on which dividends are declared, holders of the
Shares must receive the dividends due them on such Dividend
Payment Date as well as all dividends accrued and unpaid to the
holders of the Shares prior to such Dividend Payment Date.

Holders of Shares shall not be entitled to participate in any other or

further dividends beyond the dividends specifically payable on the
Shares.

19
Dividend Payment Subject to limitations described in this Prospectus, dividends on the
Dates Shares will be payable on March 5, June 5, September 5 and
December 5 of each year (each a Dividend Payment Date).

The dividends on the Shares will be calculated on a 30/360-day basis

and will be paid quarterly in arrears on the last day of each 3-month
Dividend Period (each a Dividend Payment Date), as and if declared by
the Board.

If the Dividend Payment Date is not a Banking Day, dividends will be

paid on the next succeeding Banking Day, without adjustment as to the
amount of dividends to be paid.

Optional Redemption As and if declared by the Board, the Company may redeem the
and Purchase Preferred Shares on the fifth anniversary from the Listing Date (the
Optional Redemption Date) or on any Dividend Payment Date
thereafter in whole (but not in part only), at a redemption price equal to
the Issue Price of the Shares plus accrued and unpaid dividends for all
dividend periods up to the date of actual redemption by the Company.

The Company may purchase the Shares at any time in the open market
or by public tender or by private contract at any price through the PSE.
The Shares so purchased may either be redeemed and cancelled (after
the Optional Redemption Date) or kept as treasury shares.

Early Redemption Due If payments become subject to additional withholding or any new tax as
to Taxation a result of certain changes in law, rule or regulation, or in the
interpretation thereof, and such tax cannot be avoided by use of
reasonable measures available to the Company even before the
Optional Redemption Date, the Company may redeem the Preferred
Shares in whole, but not in part, on any Dividend Payment Date (having
given not more than 60 nor less than 30 days notice) at the Issue Price
plus all accrued and unpaid dividends, if any.

No Sinking Fund The Company has not established, and currently has no plans to
establish a sinking fund for the redemption of the Preferred Shares.

Taxation All payments in respect of the Preferred Shares are to be made free
and clear of any deductions or withholding for or on account of any
present or future taxes or duties imposed by or on behalf of the
Republic of the Philippines, including but not limited to, stamp, issue,
registration, documentary, value added or any similar tax or other taxes
and duties, including interest and penalties. If such taxes or duties are
imposed, the Company will pay additional amounts so that holders of
the Preferred Shares will receive the full amount of the relevant
payment which otherwise would have been due and payable.
Provided, however, that the Company shall not be liable for: (a) the
10% final withholding tax applicable on dividends earned on the
Preferred Shares prescribed under the National Internal Revenue Code
of 1997, (b) expanded value added tax which may be payable by any
holder of the Preferred Shares on any amount to be received from the
Company under the Preferred Shares and (c) any withholding tax on
any amount payable to any holder of Shares or any entity which is a
non-resident foreign corporation. Provided, further, that all sums
payable by the Company to tax-exempt entities shall be paid in full
without deductions for taxes, duties, assessments or governmental
charges provided said entities present sufficient proof of such tax-
exempt status from the tax authorities.

Documentary stamp tax for the primary issue of the Shares and the

20
 documentation, if any, shall be for the account of the Company.

The standard taxes applicable to the subsequent sale of the Preferred

Shares by any holder of the Preferred Shares shall be for the account
of the said holder.

See also the discussion under Taxation on page 107.

Liquidation Rights In the event of a return of capital in respect of the Companys winding
up or otherwise (whether voluntarily or involuntarily) but not on a
redemption or purchase by the Company of any of its share capital, the
holders of the Preferred Shares at the time outstanding will be entitled
to receive, in Pesos out of the Companys assets available for
distribution to shareholders, together with the holders of any other of
the Companys shares ranking, as regards repayment of capital, pari
passu with the Preferred Shares and before any distribution of assets is
made to holders of any class of the Companys shares ranking after the
Preferred Shares as regards repayment of capital, liquidating
distributions in an amount equal to the Issue Price of the Preferred
Share plus an amount equal to any dividends declared but unpaid in
respect of the previous dividend period and any accrued and unpaid
dividends for the then-current dividend period to (and including) the
date of commencement of the Companys winding up or the date of any
such other return of capital, as the case may be. If, upon any return of
capital in the Companys winding up, the amount payable with respect
to the Preferred Shares and any other of the Companys shares ranking
as to any such distribution pari passu with the Preferred Shares are not
paid in full, the holders of the Preferred Shares and of such other
shares will share ratably in any such distribution of the Companys
assets in proportion to the full respective preferential amounts to which
they are entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of the Preferred
Shares will have no right or claim to any of the Companys remaining
assets and will not be entitled to any further participation or return of
capital in a winding up.

Form, Title and The Preferred Shares will be issued in scripless form through the
Registration of the electronic book-entry system of SMC Stock Transfer Service
Preferred Shares Corporation as Registrar for the Offer, and lodged with PDTC as
Depository Agent on Listing Date through PSE Trading Participants
nominated by the Applicants. Applicants shall indicate in the proper
space provided for in the Application Form the name of the PSE
Trading Participant under whose name their Shares will be registered.

After Listing Date, Shareholders may request the Registrar, through

their nominated PSE Trading Participant, to (a) open a scripless
registry account and have their holdings of the Preferred Shares
registered under their name (name-on-registry account), or (b) issue
stock certificates evidencing their investment in the Preferred Shares.
Any expense that will be incurred in relation to such registration or
issuance shall be for the account of the requesting Shareholder.

Legal title to the Shares will be shown in an electronic register of

shareholders (the Registry of Shareholders) which shall be
maintained by the Registrar. The Registrar shall send a transaction
confirmation advice confirming every receipt or transfer of the Preferred
Shares that is effected in the Registry of Shareholders (at the cost of
the requesting Shareholder). The Registrar shall send (at the cost of
the Company) at least once every quarter a Statement of Account to all
Shareholders named in the Registry of Shareholders, except
certificated Shareholders and Depository Participants, confirming the

21
 number of Shares held by each Shareholder on record in the Registry
of Shareholders. Such Statement of Account shall serve as evidence
of ownership of the relevant Shareholder as of a given date thereof.
Any request by Shareholders for certifications, reports or other
documents from the Registrar, except as provided herein, shall be for
the account of the requesting Shareholder.

(For the full description of the Form, Title and Registration of the
Preferred Shares, please see The Philippine Stock Market on page
117).

Status of the Preferred The Preferred Shares will constitute the direct and unsecured
Shares in the subordinated obligations of the Company ranking at least pari passu in
Distribution of Assets in all respects and ratably without preference or priority among
the Event of Dissolution themselves with all other Preferred Shares issued by the Company.

Selling and Transfer Initial placement of the Preferred Shares and subsequent transfers of
Restrictions interests in the Preferred Shares shall be subject to normal selling
restrictions for listed securities as may prevail in the Philippines from
time to time.

Title and Transfer Legal title to the Preferred Shares shall pass by endorsement and
delivery to the transferee and registration in the Registry of
Shareholders to be maintained by the Registrar. Settlement of the
Preferred Shares in respect of such transfer or change of title to the
Preferred Shares, including the settlement of documentary stamp
taxes, if any, arising from subsequent transfers, shall be similar to the
transfer of title and settlement procedures for listed securities in the
PSE.

Listing The Preferred Shares are expected to be listed on the PSE on March 5,
2010.

Governing Law The Preferred Shares will be issued pursuant to the laws of the
Republic of the Philippines.

Other Terms of the Offer

Offer Period The Offer Period shall commence 9:00 a.m. on February 15, 2010 and
end at 5:00 p.m. on February 26, 2010. The Company and the
Underwriters reserve the right to extend or terminate the Offer Period
with the approval of the SEC and the PSE.

Applications to subscribe to the Preferred Shares (each an

Application) must be received by the Receiving Agent, not later than
11:00 a.m., Manila time on February 26, 2010 if filed through a Selling
Agent, or not later than 5:00 p.m. Manila time on February 26, 2010 if
filed directly with an Underwriter. Applications received thereafter or
without the required documents and/or full payments will be rejected.
Application shall be considered irrevocable upon submission to any
Selling Agent or Underwriter, and shall be subject to the terms and
conditions of the offer as stated in this Prospectus and in the
application to subscribe and purchase form (the Application Form).

Minimum Subscription Each Application shall be for a minimum of 500 Shares, and thereafter,
to the Preferred Shares in multiples of 100 Shares. No Application for multiples of any other
number of Shares will be considered.

Eligible Investors The Preferred Shares may be owned or subscribed to by any person,
partnership, association or corporation regardless of nationality. In
addition, under certain circumstances the Company may reject an

22
 Application or reduce the number of Preferred Shares applied for
subscription or purchase.

Law may restrict subscription to the Preferred Shares in certain

jurisdictions. Foreign investors interested in subscribing or purchasing
the Preferred Shares should inform themselves of the applicable legal
requirements under the laws and regulations of the countries of their
nationality, residence or domicile, and as to any relevant tax or foreign
exchange control laws and regulations affecting them personally.
Foreign investors, both corporate and individual, warrant that their
purchase of the Preferred Shares will not violate the laws of their
jurisdiction and that they are allowed to acquire, purchase and hold the
Preferred Shares.

Procedure for Application Forms may be obtained from an Underwriter or Selling

Application Agent. All Applications shall be evidenced by the Application Form,
duly executed in each case by an authorized signatory of the applicant
and accompanied by two (2) completed signature cards, the
corresponding payment for the Shares covered by the Application and
all other required documents including documents required for registry
with the Registrar and Depository Agent. The duly executed
Application Form and required documents should be submitted to the
Underwriters or Selling Agents on or prior to the set deadline for
submission of Applications for Underwriters and Selling Agents,
respectively. If the Applicant is a corporation, partnership, or trust
account, the Application must be accompanied by the following
documents:

a. a certified true copy of the Applicants latest articles of incorporation

and by-laws and other constitutive documents, each as amended to
date, duly certified by the corporate secretary;

b. a certified true copy of the Applicants SEC certificate of

registration, duly certified by the corporate secretary; and

c. a duly notarized corporate secretarys certificate setting forth the

resolution of the Applicants board of directors or equivalent body
authorizing the purchase of the Preferred Shares indicated in the
application, the designated signatories authorized for the purpose,
including their respective specimen signatures.

Payment of the The Preferred Shares must be paid in full upon submission of the
Preferred Shares Application.

Payment shall be in the form of a Metro Manila clearing

Cashiers/Managers or corporate check drawn against a bank
account with a Bangko Sentral ng Pilipinas-authorized agent bank
located in Metro Manila and dated as of the date of submission of the
Application Forms covering the entire number of Offer Shares the
Trading Participant commits to purchase, including Additional Shares, if
any. Checks should be made payable to Petron Preferred Shares
Offer. Cash payments will not be accepted.

Applicants submitting their application to an Underwriter may remit

payment for their Preferred Shares through the Real Time Gross
Settlement facility of the BSP to the Underwriter to whom such
application was submitted or via direct debit to their deposit account
maintained with the Underwriter.

Acceptance/Rejection The actual number of Preferred Shares that an Applicant will be

of Applications allowed to subscribe to is subject to the confirmation of the

23
 Underwriters. The Company reserves the right to accept or reject, in
whole or in part, or to reduce any Application due to any grounds
specified in the Issue Management and Underwriting Agreement
entered into by the Company, the Issue Managers and Underwriters.
Applications which were unpaid or where payments were insufficient
and those that do not comply with the terms of the Offer shall be
rejected. Moreover, any payment received pursuant to the Application
does not mean approval or acceptance by the Company of the
Application.

An Application, when accepted, shall constitute an agreement between

the Applicant and the Company for the subscription to the Preferred
Shares at the time, in the manner and subject to terms and conditions
set forth in the Application Form and those described in this
Prospectus. Notwithstanding the acceptance of an Application by the
Company, the actual subscription by the Applicant for the Preferred
Shares will become effective only upon listing of the Preferred Shares
on the PSE and upon the obligations of the Underwriters under the
Issue Management and Underwriting Agreement becoming
unconditional and not being suspended, terminated or cancelled, on or
before the Listing Date, in accordance with the provision of the said
agreements. If such conditions have not been fulfilled on or before the
periods provided above, all Application payments will be returned to the
Applicants without interest.

Refunds of Application In the event that the number of Preferred Shares to be allotted to an
Payments Applicant, as confirmed by an Underwriter, is less than the number
covered by its Application, or if an Application is wholly or partially
rejected by the Company, then the Company shall refund, without
interest, within five (5) Banking Days from the end of the Offer Period,
all, or a portion of the payment corresponding to the number of
Preferred Shares wholly or partially rejected. All refunds shall be made
through the Underwriter or Selling Agent with whom the Applicant has
filed the Application.

Tentative Listing and The Preferred Shares are expected to be listed on the PSE on March 5,
Trading Date 2010. Trading of the Preferred Shares shall commence on the same
date. Shareholders may trade their Preferred Shares by giving
appropriate written instructions to any PSE Trading Participant.

Receiving Agent Banco De Oro Unibank, Inc. Trust and Investments Group

Depository Agent Philippine Depository and Trust Corporation (PDTC)

Registrar and Paying SMC Stock Transfer Service Corporation

Agent

24
Description of the Preferred Shares
Set forth below is information relating to the Preferred Shares. This description is only a summary
and is qualified by reference to Philippine law and Petrons Articles of Incorporation and By-laws,
copies of which are available at the SEC.

Petrons Share Capital

A Philippine Corporation may issue common or preferred shares, or such other classes of shares
with such rights privileges or restrictions as may be provided for in the articles of incorporation and
the by-laws of the corporation.

On January 21, 2010, the SEC approved the application of the Company for the reclassification of
its 624,895,503 unissued common shares into 624,895,503 preferred shares and the corresponding
amendment to its Articles of Incorporation.

The Companys Board of Directors approved on October 21, 2009, an amendment to the
Companys Articles of Incorporation to reclassify a total of Six Hundred Twenty Four Million Eight
Hundred Ninety Five Thousand Five Hundred Three (624,895,503) unissued common shares with
par value of One Peso (P1.00) per share to Six Hundred Twenty Four Million Eight Hundred Ninety
Five Thousand Five Hundred Three (624,895,503) million preferred shares with par value of One
Peso (P1.00) per share. The amendment was likewise approved by the stockholders holding at least
two-thirds of the outstanding capital stock of the Company through written assent on December 21,
2009.

As of September 30, 2009, the Company had an authorized capital stock consisting of
10,000,000,000 common shares with a par value of P1.00 per share, of which 9,375,104,497 were
issued and outstanding.

As of January 21, 2010, and following the SEC approval of the Amended Articles of Incorporation
embodying the preferred shares, the Company had an authorized capital stock consisting of:
(a) 9,375,104,497 common shares with a par value of P1.00 per share issued and outstanding
and
(b) 624,895,503 preferred shares with a par value of P1.00 per share, which are unissued.

Following the Offer, and if the Oversubscription is not exercised, the Company will have the
following as issued and outstanding shares:
(a) 9,375,104,497 common shares and
(b) 50,000,000 preferred shares.

The Preferred Shares

General Features

The Preferred Shares shall have the following features, rights and privileges:
The Offer Price of the Preferred Shares will be determined at the time of issuance;
The dividend rate of the Preferred Shares will be determined at the time of issuance;
Cumulative in payment of current dividends as well as any unpaid back dividends;
Non-convertible into common shares;
Preference over holders of common stock in the distribution of corporate assets in the event of
dissolution and liquidation of the Company and in the payment of the dividend at the rate
specified at the time of issuance;
Non-participating in any other or further dividends beyond the dividends specifically payable on
the Preferred Shares;
Non-voting except in those cases specifically provided by law;

25
 No pre-emptive rights to any subsequent issue of the Companys shares; and
Redeemable at the option of the Company under such terms as the Board may approve at the
time of the issuance of the Preferred Shares.

The holders of the Preferred Shares do not have identical rights and privileges with holders of the
existing common shares of the Company.

Features Specific or Particular to the Preferred Shares

Following are certain features specific or particular to the Preferred Shares.

In General: No Voting Rights

The Preferred Shares shall have no voting rights except as specifically provided by the Corporation
Code. Thus, holders of the Preferred Shares shall not be eligible, for example, to vote for or elect
the Companys Directors or to vote for or against the issuance of a stock dividend. Holders of
Preferred Shares, however, may vote on matters which the Corporation Code considers significant
corporate acts that may be implemented only with the approval of shareholders, including those
holding shares denominated as non-voting in the articles of incorporation. These acts, which require
the approval of shareholders representing at least two-thirds of the issued and outstanding capital
stock of the Company in a meeting duly called for the purpose, are as follows:
Amendment of the Articles (including any increase or decrease of capital stock);
Amendment of the Companys By-laws;
Sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the
Companys assets;
Incurring, creating or increasing bonded indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the Company with another corporation or corporations; and
Investment of corporate funds in any other corporation or business or for any purpose other than
the primary purpose for which the Company was organized; and
Dissolution of the Company.

Dividend Policy In Respect of the Preferred Shares

The declaration and payment of dividends on each Dividend Payment Date will be subject to the
sole and absolute discretion of the Board to the extent permitted by law. As and if dividends are
declared by the Board, dividends on the Shares shall be at a fixed rate of 9.5281% per annum
calculated in respect of each Share by reference to the Offer Price thereof in respect of each
Dividend Period.

Unless the Preferred Shares are redeemed by the Company on Optional Redemption Date, the
Dividend Rate shall be adjusted on the Optional Redemption Date to the higher of (a) the Dividend
Rate or (b) the 10-year Fixed Rate Treasury Note benchmark yield as displayed on the PDST-F
screen of the PDEx page (or such successor page) of Bloomberg (or such successor electronic
service provider) at approximately 11:30 a.m. for the date corresponding to the Optional Redemption
Date plus a spread of 487.5 basis points.

Dividends on the Shares will be payable on March 5, June 5, September 5 and December 5 of each
year (each a Dividend Payment Date). The dividends on the Shares will be calculated on a 30/360-
day basis and will be paid quarterly in arrears on the last day of each 3-month Dividend Period
(each a Dividend Payment Date), as and if declared by the Board. If the Dividend Payment Date is
not a Banking Day, dividends will be paid on the next succeeding Banking Day, without adjustment
as to the amount of dividends to be paid.

The Board of Directors will not declare and pay dividends on any Dividend Payment Date where (a)
payment of the Dividend would cause the Company to breach any of its financial covenants or (b)

26
the profits available to the Company to distribute as dividends are not sufficient to enable the
Company to pay in full both the dividends on the Preferred Shares and the dividends on all other
classes of the Companys shares that are scheduled to be paid on or before the same date as the
dividends on the Preferred Shares and that have an equal right to dividends as the Preferred
Shares.

If the profits available to distribute as dividends are, in the Boards opinion, not sufficient to enable
the Company to pay in full on the same date both dividends on the Preferred Shares and the
dividends on other shares that have an equal right to dividends as the Preferred Shares, the
Company is required first, to pay in full, or to set aside an amount equal to, all dividends scheduled
to be paid on or before that dividend payment date on any shares with a right to dividends ranking in
priority to that of the Preferred Shares; and second, to pay dividends on the Preferred Shares and
any other shares ranking equally with the Preferred Shares as to participation in profits pro rata to
the amount of the cash dividends scheduled to be paid to them. The amount scheduled to be paid
will include the amount of any dividend payable on that date and any arrears on past cumulative
dividends on any shares ranking equal in the right to dividends with the Preferred Shares.

The profits available for distribution are, in general and with some adjustments, equal to the
Companys accumulated, realized profits less accumulated, realized loss.

Dividends on the Shares will be cumulative. If for any reason the Companys Board does not
declare a dividend on the Shares for a dividend period, the Company will not pay a dividend on the
Dividend Payment Date for that dividend period. However, on any future Dividend Payment Date on
which dividends are declared, holders of the Shares must receive the dividends due them on such
Dividend Payment Date as well as all dividends accrued and unpaid to the holders of the Shares
prior to such Dividend Payment Date.

Holders of Shares shall not be entitled to participate in any other or further dividends beyond the
dividends specifically payable on the Shares.

Redemption of the Preferred Shares

As and if declared by the Board, the Issuer may redeem the Preferred Shares on the fifth
anniversary from the Listing Date (the Optional Redemption Date) or any Dividend Payment Date
thereafter in whole (but not in part only), at a redemption price equal to the Issue Price of the Shares
plus accrued and unpaid dividends for all dividend periods up to the date of actual redemption by the
Company.

The Company has not established, and currently has no plans to establish, a sinking fund for the
redemption of the Preferred Shares.

The Company may purchase the Shares at any time in the open market or by public tender or by
private contract at any price through the PSE. The Shares so purchased may either be redeemed
and cancelled (after the Optional Redemption Date) or kept as treasury shares.

Early Redemption due to Taxation

If payments become subject to additional withholding or any new tax as a result of certain changes
in law, rule or regulation, or in the interpretation thereof, and such tax cannot be avoided by use of
reasonable measures available to the Company even before the Optional Redemption Date, the
Company may redeem the Preferred Shares in whole, but not in part, on any Dividend Payment
Date (having given not more than 60 nor less than 30 days notice) at the Offer Price plus all
accrued and unpaid dividends, if any.

27
Liquidation Rights in Respect of the Preferred Shares

The Preferred Shares will constitute the direct and unsecured subordinated obligations of the
Company ranking at least pari passu in all respects and ratably without preference or priority among
themselves with all other Preferred Shares issued by the Company.

In the event of a return of capital in respect of the Companys winding up or otherwise (whether
voluntarily or involuntarily) but not on a redemption or purchase by the Company of any of its share
capital, the holders of the Preferred Shares at the time outstanding will be entitled to receive, in
Pesos out of the Companys assets available for distribution to shareholders, together with the
holders of any other of the Companys shares ranking, as regards repayment of capital, pari passu
with the Preferred Shares and before any distribution of assets is made to holders of any class of
the Companys shares ranking after the Preferred Shares as regards repayment of capital,
liquidating distributions in an amount equal to the Issue Price of the Preferred Share plus an amount
equal to any dividends declared but unpaid in respect of the previous dividend period and any
accrued and unpaid dividends for the then-current dividend period to (and including) the date of
commencement of the Companys winding up or the date of any such other return of capital, as the
case may be. If, upon any return of capital in the Companys winding up, the amount payable with
respect to the Preferred Shares and any other of the Companys shares ranking as to any such
distribution pari passu with the Preferred Shares are not paid in full, the holders of the Preferred
Shares and of such other shares will share ratably in any such distribution of the Companys assets
in proportion to the full respective preferential amounts to which they are entitled. After payment of
the full amount of the liquidating distribution to which they are entitled, the holders of the Preferred
Shares will have no right or claim to any of the Companys remaining assets and will not be entitled
to any further participation or return of capital in a winding up.

Payments on the Preferred Shares

All payments in respect of the Preferred Shares are to be made free and clear of any deductions or
withholding for or on account of any present or future taxes or duties imposed by or on behalf of
Republic of the Philippines, including but not limited to, stamp, issue, registration, documentary,
value added or any similar tax or other taxes and duties, including interest and penalties. If such
taxes or duties are imposed, the Company will pay additional amounts so that holders of the
Preferred Shares will receive the full amount of the relevant payment which otherwise would have
been due and payable.

Provided, however, that the Company shall not be liable for: (a) the final withholding tax applicable
on dividends earned on the Preferred Shares prescribed under the National Internal Revenue Code
of 1997, (b) expanded value added tax which may be payable by any holder of the Preferred Shares
on any amount to be received from the Company under the Preferred Shares and (c) any
withholding tax on any amount payable to any holder of the Share or any entity which is a non-
resident foreign corporation. Provided, further, that all sums payable by the Company to tax-exempt
entities shall be paid in full without deductions for taxes, duties, assessments or governmental
charges provided said entities present sufficient proof of such tax-exempt status from the tax
authorities.

Documentary stamp tax for the primary issue of the Shares and the documentation, if any, shall be
for the account of the Company.

The standard taxes applicable to the subsequent sale of the Preferred Shares by any holder of the
Preferred Shares shall be for the account of the said holder.

No Pre-emptive Rights

There are no pre-emptive rights extended to holders of Preferred Shares over all share issuances of
the Company.

28
Transfer of Shares and Share Register

The Preferred Shares will be issued in scripless form through the electronic book-entry system of
SMC Stock Transfer Service Corporation as Registrar for the Offer, and lodged with PDTC as
Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants.

Legal title to the Shares will be shown in an electronic register of shareholders (the Registry of
Shareholders) which shall be maintained by the Registrar. The Registrar shall send a transaction
confirmation advice confirming every receipt or transfer of the Preferred Shares that is effected in
the Registry of Shareholders (at the cost of the requesting Shareholder). The Registrar shall send
(at the cost of the Company) at least once every quarter a Statement of Account to all Shareholders
named in the Registry of Shareholders, except certificated Shareholders and Depository
Participants, confirming the number of Shares held by each Shareholder on record in the Registry of
Shareholders. Such Statement of Account shall serve as evidence of ownership of the relevant
Shareholder as of a given date thereof. Any request by Shareholders for certifications, reports or
other documents from the Registrar, except as provided herein, shall be for the account of the
requesting Shareholder.

Initial placement of the Preferred Shares and subsequent transfers of interests in the Preferred
Shares shall be subject to normal Philippine selling restrictions for listed securities as may prevail
from time to time.

After Listing Date, Shareholders may request the Registrar, through their nominated PSE Trading
Participant, to (a) open a scripless registry account and have their holdings of the Preferred Shares
registered under their name (name-on-registry account), or (b) issue stock certificates evidencing
their investment in the Preferred Shares. Any expense that will be incurred in relation to such
registration or issuance shall be for the account of the requesting Shareholder.

Philippine law does not require transfers of the Preferred Shares to be effected on the PSE, but any
off-exchange transfers will subject the transferor to a capital gains tax that may be significantly
greater than the stock transfer tax applicable to transfers effected on an exchange. See Taxation.
All transfers of shares on the PSE must be effected through a licensed stock broker in the
Philippines.

Not convertible into Common Shares

The Preferred Shares shall not be convertible into Petrons common shares.

Other Rights and Incidents Relating to the Preferred Shares

Following are other rights and incidents relating to the Preferred Shares, which may also apply to
other classes of Petrons stock.

Directors

Unless otherwise provided by law or the Articles, the Companys corporate powers are exercised, its
business is conducted, and its property is controlled by the Board. Petron has 10 Directors who are
elected by holders of shares entitled to voting rights under the Articles of Incorporation during each
annual meeting of the shareholders for a term of one year. As mentioned, holders of Preferred
Shares are not entitled to vote for and elect the Companys Directors.

Petrons By-laws currently disqualify or deem ineligible for nomination or election to the Board any
person who is engaged in any business which competes with or is antagonistic to that of the
Company. Without limiting the generality of the foregoing, a person shall be deemed so engaged:

(a) If he is an officer, manager or controlling person of, or the owner (either of record or
beneficially) of 10% or more of any outstanding class of shares of, any corporation (other
than one in which the Company owns at least 30% of the capital stock) engaged in a
business which the Board determines by resolution to be competitive or antagonistic to that
of the Company;

29
 (b) If he is an officer, manager, controlling person of, or the owner (either of record or
beneficially of 10% or more of any outstanding class of shares of any other corporation or
entity engaged in any line of business of the Company, if the Board determines by
resolution that the laws against combinations in restraint of trade shall be violated by such
persons membership in the Board.

(c) If the Board, in the exercise of its judgment in good faith, determines by resolution that such
person is the nominee of any person set forth in (a) or (b).

The Company conforms to the requirement to have at least one independent director or
such number of independent directors as may be required by law. As of the date of this
Prospectus, the Companys independent directors are Mr. Angelico T. Salud and Mr.
Reynaldo G. David.

The presence of six (6) of the directors shall constitute a quorum for the transaction of
business at any meeting. Except as otherwise agreed at any time by stockholders holding
at least eighty percent (80%) of the total issued and outstanding capital stock of the
Corporation, any act of the Board shall require the affirmative vote of at least seven (7)
directors. In the absence of a quorum, a majority of the directors present may adjourn any
meeting from time to time until a quorum is achieved. Notice of any adjourned meeting need
not be given.

Any vacancy other than that caused by the removal by the shareholders, expiration of the
term or increase in the number of directors on the Board, may be filled by the affirmative
vote of at least seven (7) of the remaining directors. Any director elected in this manner shall
serve only for the unexpired term of the director replaced.

Appraisal Rights

Philippine law recognizes the right of a shareholder to institute, under certain circumstances,
proceedings on behalf of the corporation in a derivative action in circumstances where the
corporation itself is unable or unwilling to institute the necessary proceedings to redress wrongs
committed against the corporation or to vindicate corporate rights, as for example, where the
directors themselves are the malefactors.

In addition, the Corporation Code grants a shareholder a right of appraisal in certain circumstances
where he has dissented and voted against a proposed corporate action, including:
An amendment of the Articles of Incorporation which has the effect of adversely affecting the
rights attached to his shares or of authorizing preferences in any respect superior to those of
outstanding shares of any class or shortening the term of corporate existence;
The sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially all
of the assets of the corporation;
The investment of corporate funds in another corporation or business for any purpose other than
the primary purpose for which the corporation was organized; and
A merger or consolidation.

In these circumstances, the dissenting shareholder may require the corporation to purchase his
shares at a fair value which, in default of agreement, is determined by three disinterested persons,
one of whom shall be named by the shareholder, one by the corporation, and the third by the two
thus chosen. The SEC will, in the event of a dispute, determine any question about whether a
dissenting shareholder is entitled to this right of appraisal. The dissenting shareholder will be paid if
the corporate action in question is implemented and the corporation has unrestricted retained
earnings sufficient to support the purchase of the shares of the dissenting shareholders.

Shareholders Meetings

At the annual meeting or at any special meeting of the Companys shareholders, the latter may be
asked to approve actions requiring shareholder approval under Philippine law.

30
Quorum

The Corporation Code provides that, except in instances where the assent of shareholders
representing two-thirds of the outstanding capital stock is required to approve a corporate act
(usually involving the significant corporate acts where even non-voting shares may vote, as
identified above) or where the by-laws provide otherwise, a quorum for a meeting of shareholders
will exist if shareholders representing a majority of the capital stock are present in person or by
proxy.

Voting

At each shareholders meeting, each shareholder shall be entitled to vote in person, or by proxy, all
shares held by him which have voting power, upon any matter duly raised in such meeting.

The Companys By-laws provide that proxies shall be in writing and signed and in accordance with
the existing laws, rules and regulations of the SEC. Duly accomplished proxies must be submitted to
the office of the Corporate Secretary not later than 10 business days prior to the date of the
stockholders meeting. No proxies shall be valid after three (3) years from its date unless such proxy
expressly provide for a longer period.

Fixing Record Dates

The Board has the authority to fix in advance the record date for shareholders entitled: (a) to notice
of, to vote at, or to have their votes voted at, any shareholders meeting; (b) to receive payment of
dividends or other distributions or allotment of any rights; or (c) for any lawful action or for making
any other proper determination of shareholders rights. The Board may, by resolution, direct the
stock transfer books of the Corporation be closed for a period not exceeding 50 days preceding the
date of any meeting of stockholders. The record date shall in no case be more than 60 days or less
than 35 days preceding such meeting of shareholders.

Accounting and Auditing Requirements/Rights of Inspection

Philippine stock corporations are required to file copies of their annual financial statements with the
SEC. Corporations whose shares are listed on the PSE are also required to file quarterly and annual
reports with the SEC and the PSE. Shareholders are entitled to request copies of the most recent
financial statements of the corporation which include a statement of financial position as of the end
of the most recent tax year and a profit and loss statement for that year. Shareholders are also
entitled to inspect and examine the books and records that the corporation is required by law to
maintain.

The Board is required to present to shareholders at every annual meeting a financial report of the
operations of the corporation for the preceding year. This report is required to include audited
financial statements.

31
Risk Factors

General Risk Warning

The price of securities can and does fluctuate, and any individual security may experience upward
or downward movements, and may even become valueless. There is an inherent risk that losses
may be incurred rather than profit made as a result of buying and selling securities. Past
performance is not a guide to future performance.

There is an extra risk of losing money when securities are issued by smaller companies. There may
be a big difference between the buying price and the selling price of these securities.

Investors deal in a range of investments each of which may carry a different level of risk.

Prudence Required

The risk disclosure does not purport to disclose all the risks and other significant aspects of
investing in these securities. Investors should undertake independent research and study on the
trading of these securities before commencing any trading activity. Investors may request publicly-
available information on the Preferred Shares and the Company from the SEC and PSE.

Professional Advice

An investor should seek professional advice if he or she is uncertain of, or has not understood, any
aspect of the securities to invest in or the nature of risks involved in trading of securities, especially
high risk securities.

Risk Factors

An investment in the Preferred Shares described in this Prospectus involves a certain degree of risk.
A prospective purchaser of the Preferred Shares should carefully consider the following factors, in
addition to the other information contained in this Prospectus, in deciding whether to invest in the
Preferred Shares. This Prospectus contains forward-looking statements that involve risks and
uncertainties. Petron adopts what it considers conservative financial and operational controls and
policies to manage its business risks. The Companys actual results may differ significantly from the
results discussed in the forward-looking statements. See section Forward-Looking Statements of
this Prospectus. Factors that might cause such differences, thereby making the offering speculative
or risky, may be summarized into those that pertain to the business and operations of Petron, in
particular, and those that pertain to the over-all political, economic, and business environment, in
general. These risk factors and the manner by which these risks shall be managed are presented
below. The risk factors discussed in this section are of equal importance and are only separated
into categories for easy reference.

Investors should carefully consider all the information contained in this Prospectus including the risk
factors described below, before deciding to invest in the Preferred Shares. The Companys
business, financial condition and results of operations could be materially adversely affected by any
of these risk factors.

Risks Related to the Philippines

The growth and profitability of Petron will be influenced by the general situation in, and the state of
the economy of, the Philippines. Any political or economic instability in the future may have a
negative effect on the financial results of the Company.

32
Political Considerations

The Philippines has from time to time experienced political, social, economic and military instability.
For example, in 2005, following allegations of fraud and disenfranchisement of votes in relation to
the 2004 presidential elections, several members of the Arroyo administration resigned their posts
and, along with certain government officials, various opposition groups and individuals, began to call
for the resignation or impeachment of President Gloria Macapagal-Arroyo. Impeachment complaints
based on violations of the Constitution, graft and corruption and betrayal of public trust were filed
against President Arroyo with the House of Representatives. On August 31, 2005, the House
Committee on Justice dismissed all these impeachment complaints. On June 26, 2006, similar
impeachment complaints were filed against President Arroyo in the House of Representatives, but
these were subsequently dismissed in August 2006. On October 5, 2007, a new impeachment
complaint was filed against President Arroyo following bribery allegations involving government
officials allegedly involved in the approval of a government contract with a Chinese
telecommunications company. This impeachment complaint was dismissed by the House of
Representatives on November 26, 2007. A fourth impeachment complaint was filed against
President Arroyo on October 13, 2008 alleging culpable violation of the Constitution for approving
the Northrail rehabilitation project, numerous human rights violations and alleged ballot-switching in
the 2004 presidential election, among others. This impeachment complaint was also dismissed on
November 26, 2008. There have been media reports that opposition parties, including former
members of the military, continue to call for President Arroyos resignation.

The Philippine Presidential, Legislative and local elections are scheduled to be held on May 10,
th
2010. The 2010 elections will lead to the election of the 15 President as well as Vice President of
the Philippines. The legislators elected in the 2010 elections will join the senators in the 2007
th
elections and will comprise the 15 Congress of the Philippines. The 2010 election will be
administered by the Commission on Elections in compliance with the Republic Act No. 9369, also
known as the Amended Computerization Act of 2007, and thus, will also be the first computerized
election in the Philippines. There is no assurance that the elections will be peaceful and free of
allegations of fraud and voter disenfranchisement.

Furthermore, the Philippines has been subject to sporadic terrorist attacks in the past several years.
The Philippine army has been in conflict with the Abu Sayyaf organization, which has been identified
as being responsible for kidnapping and terrorist activities in the country. A series of bombings in the
southern part of the Philippines also occurred in 2004. Although no one has claimed responsibility
for these attacks, it is believed that the attacks are the work of various separatist groups, including
possibly the Abu Sayyaf organization, which is alleged to have ties to the Al-Qaeda terrorist network.
On February 14, 2005, three bomb explosions in the financial district in Manila, Davao City and
General Santos City resulted to the death of eight persons and injured more than 100 persons. The
Abu Sayyaf organization claimed responsibility for the attack. The Philippine army has also been
fighting a counter-insurgency campaign against the communist New Peoples Army for decades,
and the Arroyo administration has announced plans to increase the intensity of its efforts against
them. .There can be no assurance that the Philippines will not be subject to further acts of terrorism
or negative effects of its counter-insurgency campaign in the future.

No assurance can be given that the future political or social environment in the Philippines will be
stable or that current or future governments will adopt economic policies conducive to sustaining
economic growth. Political or social instability in the Philippines could negatively affect the general
economic conditions and operation environment in the Philippines, which could have a material
impact on the Companys business, financial position and result of operations.

Economic Considerations

Historically, oil demand and results of operations have been influenced to a significant degree by the
general state of the Philippine economy. In the past, the Philippines has experienced periods of
slow or negative growth, high inflation, significant devaluation of the peso and the imposition of
exchange controls.

From mid-1997 to 1999, the economic crisis in Asia adversely affected the Philippine economy,
causing a significant depreciation of the peso, increases in interest rates, increased volatility and the
downgrading of the Philippine local currency rating and the ratings outlook for the Philippine banking

33
sector. These factors had a material adverse impact on the ability of many Philippine companies to
meet their debt-servicing obligations. The Philippine economy has generally registered positive
economic growth since 1999.

The economy faced a significant budget deficit, limited foreign currency reserves and a relatively
weak banking sector until early this decade. Since then, the government implemented reforms in
the banking sector by allowing banks to set up special purpose vehicles to address the non-
performing loans and to improve capitalization through the issuance of Tier II capital. Government
also addressed the chronic budget deficit and implemented a fiscal consolidation program that has
brought the fiscal deficit to as low as 0.2% of GDP in 2007. The program has provided government
the ability to provide fiscal stimulus to the economy during this difficult period of global recession.
Real GDP rose by 5.4% in 2006, versus a growth of 4.9% in 2005. In 2007, GDP increased by
7.2%, the fastest in three decades, due to the robust performance of the industrial and services
sector. While the Philippine economy performed well in 2007, macroeconomic conditions became
challenging in 2008. Nonetheless, the economy was still able to post a 4.6% growth. Inflation rate in
2008 rose to an average of 9.3%, compared to an annual average of 3% in 2007 due to increasing
commodity prices including rice and oil products. External price pressures have continued to ease
since the middle of 2008. The softer global commodity prices and more moderate economic growth
kept inflation muted, with 2009 average inflation rate at 3.2% from a peak of 12.42% in August 2008.
The governments budget deficit for 2009 is expected to exceed the P250 billion target resulting from
pump priming efforts due to the difficult global economic environment as well as the typhoons that
hit the country.

Fitch Ratings (Fitch) has assigned a long-term foreign currency debt rating to the Philippines of
BB (two notches below investment grade) as of May 2009, Standard & Poors (S&P) has
assigned a BB- (three notches below investment grade) rating and Moodys Investors Service
(Moodys) has assigned a Ba3 (three notches below investment grade) rating to the Philippines
as of July 2009.

Recently, global developments have also affected the Philippine financial markets. The United
States is a major trading partner of the Philippines, and it is likely that the slowdown in the US
economy may adversely affect the Philippine economy. Recent events have already affected the
Philippine stock market, as well as the debt capital markets. It is not certain how the global events
will impact the Philippines in the long run.

Any deterioration in the Philippine economy, including a significant deterioration in the value of the
Philippine Pesos, may adversely affect consumer sentiment and lead to a reduction in demand for
the Companys products. There is no assurance that current or future Government administrations
will adopt economic policies conducive to sustaining economic growth.

The Company monitors the countrys key economic indicators in order to formulate appropriate
strategies to address economic uncertainties and market volatilities. The Company also targets to
maintain a conservative level of outstanding indebtedness and balance the currency mix of its
borrowings to mitigate foreign currency risk.

Risks Related to the Company

Oil Price Fluctuation Risk

Imported crude oil accounts for approximately 90% of Petrons total product cost and thus, changes
in the price of crude oil can be a significant risk factor for the Company.

Crude oil price was on a rising trend during the second half of 2004 and into 2005 up to early 2006.
The initial increase was caused by an upsurge in global oil demand, driven by the economies of the
US, China and India. The soaring global demand took place amidst smaller escalations in crude oil
supply and refining capacity, as well as several episodes of oil supply disruptions caused by
weather, war and other events.

34
The growth in demand continued until onset of the current global crisis, when demand began to
contract and oil prices went down. This was evident in 2007 and 2008 as Dubai crude spot hit
US$141 per barrel on July 4, 2008 and went down to US$40 per barrel within a few months.

Once the global economy picks up again, resurgence of oil prices is possible. Dubai is slowly
recovering. From US$44 a barrel in January 2009, it hovered in the US$70-80 a barrel range in
October-November.

A sharp drop in oil prices could adversely affect the Company in terms of holding higher-priced
inventory and selling them at lower prices, as the Company holds about 55 days of inventory. On
the other hand, higher oil prices could result to increased working capital requirements, resulting to
higher financing costs for the Company.

Oil price risk is primarily mitigated by the Companys ability to pass on the effects of crude oil price
changes to the market in a timely manner, given that Petron operates in a fully deregulated industry.

As an additional mitigating measure, the Company undertakes commodity hedging activities as a

policy to protect profit margins against inventory loss and against rising crude prices. To minimize
the impact of severe oil price volatility, commodity hedging management has been strengthened
with the expansion of hedging authorities to include: a) authority to lock-in product and refinery
margins to protect company profits; b) authority to address inventory losses brought about by abrupt
and significant downward price swings; and c) authority to hedge against rising crude and refined
product prices in instances wherein increased costs are not fully recovered through price
adjustments. Moreover, the authority also grants flexibility to hedge up to 100% of crude and
product volumes using a variety of instruments.

Furthermore, Petron routinely monitors its current and projected cash flows with the use of SAP, its
enterprise resource planning software platform, and maintains access to credit lines in excess of
typical requirements.

Foreign Currency Exchange Rate Risk

Foreign exchange risk is a major risk factor for Petron since a substantial portion of its revenues is
denominated in Philippine pesos while the bulk of its costs are in U.S. dollars. Changes in the
foreign exchange rate could adversely affect the Company in two ways.

First, a drop in the value of the peso directly increases the cost of purchased crude oil, thus
heightening oil price risk. As previously discussed, this is mitigated by the Companys ability to pass
on the effects of price changes to its customers.

Secondly, changes in the foreign exchange rate would result to the revaluation of key current assets
and liabilities, and could subsequently lead to financial losses for the Company. To mitigate this risk
and contain volatility, the Company hedges its dollar-denominated liabilities using forwards and
through the generation of dollar-denominated sales.

Another mitigation tool is the Companys use of the banks' outright forwards and non-deliverable
forwards as well as the Currency Rate Risk Protection Program (CRPP Facility) of the Bangko
Sentral ng Pilipinas (BSP). The CRPP Facility is a non-deliverable US$/P forward contract
between the BSP and a universal/commercial bank in response to the request of bank clients
desiring to hedge their eligible foreign currency obligations.

Petron is guided by the Value at Risk (VAR) methodology to measure the maximum loss that can
be incurred by the company due to foreign exchange rate volatility at a given level of confidence.

At the same time, Petron avoids the creation of risk from derivative speculation by ensuring that all
hedged levels are fully covered by underlying dollar-denominated liabilities.

Petron also uses SAP technology to track dollar-denominated assets and liabilities and the resulting
potential foreign exchange losses on a daily basis through a software program that monitors
financial transactions under the Companys enterprise resource planning system. This allows
almost real-time awareness and response to contain losses posed by foreign exchange exposure.

35
Such software is currently being upgraded to include tracking of risk exposures arising from other
market sensitive financial variables, such as interest rates and commodity prices.

Risk of Operational Disruptions

Accidents, process or machinery failure, human error or adverse events outside of human control
may cause substantial disruptions in the Companys operations. These disruptions may result to
injury or loss of life, as well as financial losses should these disruptions lead to product run-outs,
facility shutdown, equipment repair or replacement, insurance cost escalation and/or unplanned
inventory build-up. This risk is most relevant to Petrons refining facilities since disruptions in the
Refinery can have substantial ripple effects throughout the Companys supply chain.

In order to mitigate this risk, the Refinery has been implementing programs designed to directly
address the avoidance of operational disruptions through effective maintenance practices and the
inculcation of a culture of continuous improvement.

Moreover, Petron has a corporate-wide health, safety and environmental risk management program
to address the risk of operational disruptions in an integrated and proactive manner.

Supply Concentration Risks

Crude oil from Saudi Aramco, a company wholly owned by the Saudi Arabian government,
comprised about 90% of the total crude volume purchased by the Company in 2008. Thus, a
disruption in Saudi Aramcos operations could impact on the Companys crude oil supply
requirements.

However, this is mitigated by the low risk of a supply disruption in view of the huge oil reserves and
alternative terminaling facilities of Saudi Aramco.

Although the Refinery is configured to run light and sweet crudes, most of which are produced by
Saudi Aramco, it can run other types of crude. In line with a diversification strategy, Petron has
looked into various types of crude that could provide additional value to the Company and reduce
reliance on a single crude supplier.

The main storage facility of Petron is located in Pandacan, Manila. Approximately 40% to 50% of
Petrons total sales volume is moved through Pandacan. In order to mitigate this risk, the
Companys nearby depots in Navotas, Metro Manila and in Rosario, Cavite can also distribute
products to the areas being served by the Pandacan terminal. The Pandacan storage facility is the
subject of a relocation plan in compliance with Manila City Ordinance No. 8027 as discussed in
detail under Regulatory Risks below.

Sales Concentration Risk

Sales to NAPOCOR comprised about 8.1% of Petrons year-to-date September 2009 domestic
sales volume, the bulk of which was fuel oil. Loss of the Companys NAPOCOR volumes could
impact the Companys revenues. However, lost sales to NAPOCOR could be re-directed to the
export market.

Product Substitution Risk

In a scenario of high oil prices, as well as environmental concerns, the use of alternative fuels such
as natural gas and ethanol and coco-methyl ester (CME) fuel blends become attractive. In the
event that alternative fuels become more affordable and available than petroleum products,
customers may shift to these alternative fuels not offered by the Company, hence, affecting its sales
volume.

Natural gas continues to play a prominent role in the Governments energy plans. Businesses using
or planning to use natural gas are being extended incentives such as lower tariffs for purchased
equipment, subsidy programs and preferential routes and franchises for land transport.

36
Republic Act No. 9367 or the Biofuels Act of 2006, which was approved in January 2007, mandates
that within two years from the effectivity of the Biofuels Act, at least 5% bioethanol shall comprise
the total volume of gasoline fuel actually sold and distributed by every oil company. Within four
years from the effectivity of the Biofuels Act, the National Biofuels Board shall determine its
feasibility and thereafter recommend to the DOE to mandate a minimum of 10% blend of bioethanol
by volume into all gasoline fuel distributed and sold by every oil company in the country.

In compliance with these regulations and to mitigate the risk of product substitution, the Company
has embarked on programs and strategies to address the possible shift by the market to non-oil
based alternatives. Petron has launched in 2008 its E10 Premium gasoline which contains 10% fuel-
grade ethanol and 90% premium unleaded gasoline. The product is being rolled-out in service
stations throughout the country. In addition, Petron also increased the CME blend of its diesel
product from 1% to 2%.

Regulatory Risks

Regulatory risks arise from possible changes in government policies and regulations that may
adversely affect the operations and financial viability of the Company, either directly or indirectly.

These policies and regulations include, but are not limited to, those relating to taxes and duties,
environmental laws such as the Clean Air Act, the Clean Water Act and the Solid Waste
Management Act, the Oil Industry Deregulation Law (Republic Act No. 8479) and various ordinances
of local government units in places where Petron has facilities.

The tax and duty structure of the oil industry has undergone some key changes in recent years.
Import duties for crude oil were increased effective January 1, 2005 to 5% from 3%, as embodied in
Executive Order No. 336. While this was subsequently rolled back to 3% on November 1, 2005 with
the implementation of Republic Act No. 9337 - The Expanded Value Added Tax Law, the said law
further imposed an additional 10% VAT on the sale or importation of petroleum products, including
raw materials with the rate increased to 12% effective February 1, 2006. On the other hand, specific
taxes on diesel, bunker fuel and kerosene were removed effective November 1, 2005, while the
specific taxes for regular gasoline were reduced effective on the same date. Finally, Republic Act
No. 9337 also mandated an increase in the corporate income tax rate from 32% to 35% effective
November 1, 2005 up to January 1, 2009 when the rate was reduced to 30%.

On October 23, 2009, President Gloria Macapagal-Arroyo signed Executive Order 839 which
directed oil industry players to maintain prices of petroleum products prevailing as of October 15
levels in Luzon. This was to ease the impact of the recent calamity that hit the country and was to
remain in effect only for the duration of the period of emergency in Luzon. EO 839 was lifted on
November 16, 2009. During this time Petron experienced margin compression.

There can be no assurance that future changes in taxes and duties and regulations affecting the
Company would have no substantial adverse effect on its operations, profitability and cash flows.

Meanwhile, Petron is in full compliance with applicable environmental laws. In particular, the
Company had put in place refinery facilities worth US$ 100 million to ensure compliance to the more
stringent Clean Air Act restrictions mandated starting in 2005.

However, future changes in environmental standards cannot be known with certainty.

Consequently, there is the risk that future changes in environmental regulations would require
substantial cost and investment for Petron to achieve compliance.

There is likewise the risk that the Oil Industry Deregulation Law may be modified or repealed on the
back of, for example, political pressure from the public to cap increases in pump prices. Petron had
been profitable under the former regulated industry structure but there is no assurance that a future
reversion to a regulated status would allow the continued profitability of the Company.

Finally, Petron faces the threat of adverse actions by local government units in areas ranging from
local taxation to changes in land zoning classification. For instance, the City Council of Manila,
citing concerns of safety, security and health, passed City Ordinance No. 8027 reclassifying the
areas occupied by the Oil Terminals of Petron, Shell and Chevron from Industrial to Commercial,

37
making the operation of the Terminals therein unlawful. To address the concerns of the City
Council, the three oil companies implemented a scale down program to reduce tankage capacities
and joint operation of facilities. The oil companies likewise filed cases to question the legality of the
ordinance and stop its implementation. Thereafter, the City of Manila approved the Comprehensive
Land Use Plan and Zoning Ordinance (Ordinance No. 8119) that allows the Company a seven-year
grace period. On February 13, 2008, the Supreme Court (SC) declared Manila City Ordinance No.
8027 valid and applicable to the oil terminals. The Supreme Court directed the oil companies to
submit their relocation plans to the Regional Trial Court within 90 days to determine, among others,
the reasonableness of the time frame for relocation. On February 28, 2008, the Company, jointly
with Chevron and Shell, filed its motion for reconsideration of the SC Resolution. On May 13, 2008,
the three oil companies submitted their Comprehensive Relocation Plans in compliance with the
February 13, 2008 Resolution of the SC.

It is possible that other facilities of Petron would be the target of similar moves by other local
government units, resulting to the risk of operational disruptions and financial losses for the
Company.

To mitigate these various regulatory risks, the Company actively maintains lines of communications
with the public, government agencies and other stakeholders at both local and national levels. Key
personnel at the corporate level and at each facility are designated to ensure that communication
with stakeholders remain proactive and constructive. The Company uses these lines of
communication to identify potential risk factors and respond to these in an appropriate manner.

Ongoing Legal Proceedings

The Company is involved in ongoing legal cases, the outcome of which may or may not have a
material adverse effect on its operations and profitability. These include: (a) the set of cases relating
to Petrons acceptance and use of tax credit certificates; (b) the Pandacan oil terminal case which
was discussed under the Regulatory Risks section above; (c) oil spill incident in Guimaras; and (d)
the Bataan real property tax cases.

These cases are discussed elsewhere in this Prospectus (see Legal Proceedings on page 64).

While the final outcomes of these legal proceedings are not certain, the Company believes it stands
on strong legal grounds in each of the aforementioned cases. Petron, therefore, has not made any
provisions in its financial statements for possible liabilities arising from adverse results of these legal
proceedings.

Risks Related to the Preferred Shares

Payment of Dividends on Preferred Shares

Dividends on the Preferred Shares may not be paid in full, or at all. Under the terms and conditions
governing the Preferred Shares, the Company may pay no dividends or less than full dividends on a
Dividend Payment Date. Holders of the Preferred Shares will not receive dividends on a Dividend
Payment Date or for any period during which the Company does not have retained earnings out of
which to pay dividends.

Subordination to the Companys Other Indebtedness

Petrons obligations in respect of the Preferred Shares are subordinated to all of the Companys
indebtedness, and it will not make any payments under the Preferred Shares unless it can satisfy in
full all of its other obligations that rank senior to the Preferred Shares.

Petrons obligations under the Preferred Shares are unsecured and will, in the event of the winding-
up of the Company, rank junior in right of payment to all indebtedness of the Company and junior in
right of payment to securities of, or claims against, the Company which rank or are expressed to
rank senior to the Preferred Shares. Accordingly, Petrons obligations under the Preferred Shares
will not be satisfied unless Petron can satisfy in full all of its other obligations ranking senior to the
Preferred Shares.

38
There are no terms in the Preferred Shares that limit Petrons ability to incur additional
indebtedness, including indebtedness that ranks senior to or pari passu with the Preferred Shares.

Insufficient Distributions upon Liquidation

Upon any voluntary or involuntary dissolution, liquidation or winding up of Petron, holders of

Preferred Shares will be entitled only to the available assets of the Company remaining after the
Companys indebtedness is satisfied. If any such assets are insufficient to pay the full amount due to
the holders of the Preferred Shares, then holders of Preferred Shares shall share ratably in any such
distribution of assets in proportion to the full distributions to which they would otherwise be
respectively entitled.

Ability to Make Payments Under the Shares is Limited by Terms of Petrons Other
Indebtedness

Petron has and will continue to have a certain amount of outstanding indebtedness. The current
terms of Petrons financing agreements contain provisions that could limit the ability of the Company
to make payments on the Preferred Shares. Also, Petron may in the future, directly or indirectly
through its subsidiaries, enter into other financing agreements which may restrict or prohibit the
ability of the Company to make payments on the Preferred Shares. There can be no assurance that
existing or future financing arrangements will not adversely affect Petrons ability to make payments
on the Preferred Shares.

No Stated Maturity Date and Company has the Sole Right to Redemption

The Preferred Shares have no fixed maturity date, and the Preferred Shares are not repayable in
cash unless the Issuer, at its sole discretion, redeems them for cash. Furthermore, holders of the
Preferred Shares have no right to require the Issuer to redeem the Preferred Shares. The Preferred
Shares are only redeemable at the option of the Issuer on the Optional Redemption Date or any
Dividend Payment Date thereafter. In addition, the Preferred Shares may be redeemed by the
Issuer in the event that Dividend Payments become subject to additional withholding tax as a result
of certain changes in law, rule or regulation, or in the interpretation thereof, and such tax cannot be
avoided by use of reasonable measures available to Petron. Accordingly, if a Preferred Shareholder
wishes to obtain the cash value of the investment, the holder will have to sell the Preferred Shares in
the secondary market.

Lack of Public Market for the Shares

The Philippine securities markets are substantially less liquid and more volatile than major securities
markets in other jurisdictions, and are not as highly regulated or supervised as some of these other
markets. The Company cannot guarantee that the market for the Preferred Shares will always be
active or liquid upon their listing on the PSE.

Limited Liquidity

The Underwriters are not obligated to create a trading market for the Preferred Shares and any such
market making will be subject to the limits imposed by applicable law, and may be interrupted or
discontinued at any time without notice. Accordingly, the Company cannot predict whether an active
or liquid trading market for the Preferred Shares will develop or if such a market develops, if it can
be sustained. Consequently, a shareholder may be required to hold his Preferred Shares for an
indefinite period of time or sell them for an amount less than the Offer Price.

Non-Payment of Dividends may affect the Trading Price of the Preferred Shares

If dividends on the Preferred Shares are not paid in full, or at all, the Preferred Shares may trade at
a lower price than they might otherwise have traded if dividends had been paid. The sale of
Preferred Shares during such a period by a holder of Preferred Shares may result in such holder
receiving lower returns on the investment than a holder who continues to hold the Preferred Shares
until dividend payments resume. In addition, because of the dividend limitations, the market price for
the Preferred Shares may be more volatile than that of other securities that do not have these
limitations.

39
Inability to Reinvest at a Similar Return on Investment

On the Optional Redemption Date or at any time redemption due to taxation occurs, Petron may
redeem the Preferred Shares for cash at the redemption price, as described in Description of the
Shares. At the time of redemption, interest rates may be lower than at the time of the issuance of
the Preferred Shares and, consequently, the holders of the Preferred Shares may not be able to
reinvest the proceeds at a comparable interest rate or purchase securities otherwise comparable to
the Preferred Shares.

No Voting Rights

Holders of Preferred Shares will not be entitled to elect the Directors of the Company. Except as
specifically set forth in the Articles of Incorporation and as provided by Philippine law, holders of
Preferred Shares will have no voting rights (see Description of the Preferred Shares on page 25).

40
Use of Proceeds
The Company estimates that the net proceeds of the Issue shall amount to approximately P 4.947
billion based on a P5.0 billion issue, or approximately P 9.902 billion based on a P10.0 billion issue if
the oversubscription option is exercised, after upfront fees, commissions and expenses. Estimated
fees, commissions and expenses relating to the Issue are as follows:

In P Millions At P5.0 Billion At P10.0 Billion

Underwriting Fees for the Preferred Shares being sold by
37.500 75.000
the Company
Taxes to be paid by the Company 0.250 0.500
Philippine SEC filing and legal research fee 1.831 3.093
Estimated PSE listing and processing fee 5.600 11.200
Estimated legal and other professional fees 6.657 7.137
Estimated other expenses 0.400 0.400
TOTAL 52.238 97.330

Proceeds from the Issue shall be used to support the investment requirements of the Company,
particularly for its refinery and marketing operations as well as for general corporate purposes.

Power Plant: The Refinerys power generation system is being upgraded to a more efficient
technology. This will improve the reliability, sourcing flexibility and cost efficiency of the Refinerys
system to meet its growing steam and power requirements. The power plant will be constructed
within the Companys Refinery compound in Limay, Bataan. The project cost is estimated to be
approximately US$200 million or about P10.0 billion over 2010 to 2012.

Marketing Retail Expansion: To protect its leadership in the domestic oil industry, the Company will
continue its service station network expansion. About P1.0 billion a year is programmed for this
over the next five years.

Repayment of Short-term Debt: To free up short term credit lines available to the Company for its
working capital requirements, particularly importation of crude oil supply and petroleum products, the
Company may repay short-term debts. As of September 30, 2009, the Company has consolidated
short term debt of P 45.6 billion, which can be partly paid using the proceeds of the Preferred
Shares as follows:

Amount to be Outstanding Interest Rate

Repaid Balance as of 31
December 2009
Metrobank P2.23 billion P6.9 billion 4.20%
Landbank P1.25 billion P3.9 billion 4.18%
Allied Bank P0.42 billion P2.0 billion 4.00%

Considering the amount of investments required for these projects, the Company plans to
complement the financing from internally generated cash flows as well as from borrowings from the
local and international debt markets.

The foregoing can be summarized as follows:

Amount from Net Proceeds Planned Use/ Investment Projected Timetable

P5.0 billion Power plant project 2010-2012
P1.0 billion Marketing retail expansion 2010
P3.9 billion Repayment of short-term debt 2010

41
Where less than P5.0 billion or P10.0 billion is raised from the Offer, the Issuer shall reduce the
amounts allocated to each project pro rata and fund the balance through internally generated cash
and additional borrowings. The Company may also use the proceeds for investments in financial
assets. The issuer may invest the proceeds temporarily in liquid money market instruments, which
provide flexibility for deployment for capital expenditures.

The specific nature of the short term investments have not yet been identified to date by the
Companys management, but the objective of the Company is to invest in financial assets with the
available cash, in order to minimize its negative carry, i.e., the financing cost that is not offset by
interest and other income earned from the proceeds of the Preferred Shares, until such time that the
proceeds need to be deployed for specific capital expenditures.

No amount of the proceeds will be used to prepay any long-term debt.

No amount of the proceeds is to be used to finance the acquisition of other businesses.

No amount of the proceeds is to be used to reimburse any officer, director, employee, or

shareholder, for services rendered, assets previously transferred, money loaned or advanced, or
otherwise.

Except for the underwriting fees and expenses related to the Offer, no amount of the proceeds will
be utilized to pay any outstanding financial obligations to the Joint Lead Managers.

In the event of any deviation or adjustment in the planned use of proceeds, Petron shall inform the
SEC and the Preferred Shareholders at least thirty (30) days prior to the implementation of such
deviation or adjustment. Any material or substantial adjustments to the use of proceeds, as indicated
above, should be approved by the Companys Board of Directors and disclosed to the PSE.

42
Determination of Offer Price
The Offer Price of P100.00 is at a premium to the Preferred Shares par value per share of P1.00.
The Offer Price was arrived at by dividing the desired gross proceeds of P10 billion, if the
Oversubscription Option is fully exercised, by the amount of Preferred Shares allocated for this
offering.

Prior to this offering, there has been no public market for the Preferred Shares.

43
Plan of Distribution
Petron plans to issue the Preferred Shares to institutional and retail investors through a public
offering to be conducted through the Joint Lead Managers.

Joint Lead Managers

BDO Capital & Investment Corporation (BDO Capital), BPI Capital Corporation (BPI Capital) and
ING Bank N.V., Manila Branch (ING) (Joint Issue Managers and Bookrunners), RCBC Capital
Corporation (RCBC Capital) and Union Bank of the Philippines (UnionBank) (collectively with
BDO Capital, BPI Capital and ING, the Joint Lead Managers), have agreed to distribute and sell
the Preferred Shares at the Issue Price, pursuant to an Underwriting Agreement to be entered into
with Petron (the Underwriting Agreement). Subject to the fulfillment of the conditions provided in
the Underwriting Agreement, the Joint Lead Managers have committed to underwrite the following
amounts on a firm basis:

BDO Capital & Investment Corporation P1,000,000,000

BPI Capital Corporation P1,000,000,000
ING Bank N.V., Manila Branch P1,000,000,000
RCBC Capital Corporation P1,000,000,000
Union Bank of the Philippines P1,000,000,000
TOTAL P5,000,000,000

The Underwriting Agreement may be terminated in certain circumstances prior to payment being
made to Petron of the net proceeds of the Preferred Shares.

The underwriting and selling fees to be paid by the Company in relation to the Offer shall be
equivalent to 0.75% of the gross proceeds of the Offer. This shall be inclusive of fees to be paid to
the Joint Lead Managers and sub-underwriters, if any, and commissions to be paid to the Trading
Participants of the PSE.

The Joint Lead Managers are duly licensed by the SEC to engage in underwriting or distribution of
the Preferred Shares. The Joint Lead Managers may, from time to time, engage in transactions with
and perform services in the ordinary course of its business for Petron or any of its subsidiaries.

The Joint Lead Managers have no direct relations with Petron in terms of ownership by either of
their respective major stockholder/s, and have no right to designate or nominate any member of the
Board of Directors of Petron.

The Joint Lead Managers have no contract or other arrangement with Petron by which it may return
to Petron any unsold Preferred Shares.

BDO Capital is the wholly owned investment-banking subsidiary of Banco de Oro Unibank, Inc. BDO
Capital is a full-service investment house primarily involved in securities underwriting and trading,
loan syndication, financial advisory, private placement of debt and equity, project finance, and direct
equity investment. Incorporated in December 1998, BDO Capital commenced operations in March
1999.

BPI Capital is the wholly-owned investment bank subsidiary of Bank of the Philippine Islands. BPI
Capital is an investment house focused on corporate finance and the securities distribution
business. It began operations as an investment house in December 1994. BPI Capital Corporation
has an investment house license.

ING is a corporation duly organized and validly existing under and by virtue of the laws of The
Kingdom of The Netherlands. The Philippine branch of ING is authorized to operate as a universal

44
bank by the BSP. Over its 18-year presence in the Philippines, ING has built a solid and well-
balanced track record in Philippine capital market transactions.

RCBC Capital is a licensed investment house providing a complete range of capital raising and
financial advisory services. Established in 1974, RCBC Capital has over 35 years of experience in
the underwriting of equity, quasi-equity and debt securities, as well as in managing and arranging
the syndication of loans, and in financial advisory. RCBC Capital is a wholly-owned subsidiary of the
Rizal Commercial Banking Corporation and a part of the Yuchengco Group of Companies, one of
the countrys largest fully integrated financial services conglomerates.

UnionBank is a universal bank in the Philippines and is authorized to engage in the business of an
underwriter of securities. UnionBank provides a wide range of commercial, retail and corporate
banking products and services, including loan and deposit products, cash management services,
trust banking services, consumer finance, treasury activities, electronic banking and corporate
finance services. UnionBank started its operations in 1968. Since then, it has expanded steadily and
has established itself as a leading bank in using state-of-the-art technology to provide advanced
banking solutions to its customers. UnionBank became a universal bank in 1992. In the same year
the banks shares were listed at the Philippine Stock Exchange.

Sale and Distribution

The distribution and sale of the Preferred Shares shall be undertaken by the Joint Lead Managers
who shall sell and distribute the Preferred Shares to third party buyers/investors. The Joint Lead
Managers are authorized to organize a syndicate of sub-underwriters, soliciting dealers and/or
selling agents for the purpose of the Offer.

Of the 50,000,000 Preferred Shares to be offered, 80% or 40,000,000 Preferred Shares are being
offered through the Joint Lead Managers for subscription and sale to Qualified Institutional Buyers
and the general public. The Company plans to make available 20% or 10,000,000 Preferred Shares
for distribution to the respective clients of the 132 Trading Participants of the PSE, acting as Selling
Agents. Each Trading Participant shall be allocated 75,700 Preferred Shares (computed by dividing
the Preferred Shares allocated to the Trading Participants by 132), subject to reallocation as may be
determined by the PSE. Trading Participants may undertake to purchase more than their allocation
of 75,700 shares. Any requests for shares in excess of 75,700 may be satisfied via the reallocation
of any Preferred Shares not taken up by other Trading Participants, or out of the Oversubscription
Option, if exercised.

Prior to the close of the Offer Period, any Preferred Shares not taken up by the Trading Participants
shall be distributed by the Joint Lead Managers directly to their clients and the general public. All
Preferred Shares not taken up by the Trading Participants, general public and the Joint Lead
Managers clients shall be purchased by the Joint Lead Managers pursuant to the terms and
conditions of the Underwriting Agreement.

Prior to the close of the Offer Period, the Joint Issue Managers in consultation with the Issuer,
reserve the right, but not the obligation, to increase the Offer size up to an additional 50 million
Preferred Shares, subject to the registration requirements of the Philippine Securities and Exchange
Commission (SEC) (the Oversubscription Option).

Term of Appointment

The engagement of the Joint Lead Managers shall subsist so long as the SEC Permit to Sell
remains valid, unless otherwise terminated pursuant to the Underwriting Agreement.

Manner of Distribution

The Joint Lead Managers shall, at its discretion, determine the manner by which proposals for
subscriptions to, and issuances of, the Preferred Shares shall be solicited, with the primary sale of
the Preferred Shares to be effected only through the Joint Lead Managers.

45
No shares are designated to be sold to specific persons.

Offer Period

The Offer Period shall commence 9:00 a.m. on February 15, 2010 and end at 5:00 p.m. on February
26, 2010, or such other date as may be mutually agreed between the Company and the Joint Issue
Managers and Joint Lead Managers.

Application to Purchase

All applications to purchase the Preferred Shares shall be evidenced by a duly completed and
signed application to purchase, together with 2 fully executed signature cards authenticated by the
Corporate Secretary with respect to corporate and institutional investors, and shall be accompanied
by the payment in full of the corresponding purchase price of the Preferred Shares applied for, by
check or by the appropriate payment instruction, and the required documents which must be
submitted to the Joint Lead Managers.

Corporate and institutional purchasers must also submit a copy of SEC-certified or corporate
secretary-certified true copy of the SEC Certificate of Registration, Articles of Incorporation and By-
laws, or such other relevant organizational or charter documents, and the original or Corporate
Secretary-certified true copy of the duly notarized certificate confirming the resolution of the board of
directors and/or committees or bodies authorizing the purchase of the Preferred Shares and
designating the authorized signatory/ies therefore. Individual Applicants must also submit a
photocopy of any one of the following identification cards (ID): passport/driver's license, company
ID, SSS/GSIS ID and/or Senior Citizen's ID or such other ID and documents as may be required by
or acceptable to the selling bank.

An Applicant who is exempt from or is not subject to withholding tax or who claims reduced tax
treaty rates shall, in addition, be required to submit the following requirements to the relevant Joint
Lead Manager (together with their applications) who shall then forward the same to the Registrar
and Depository, subject to acceptance by the Company as being sufficient in form and substance: (i)
certified true copy of the original tax exemption certificate, ruling or opinion issued by the BIR on file
with the Applicant as certified by its duly authorized officer; (ii) with respect to tax treaty relief, proofs
to support applicability of reduced treaty rates, consularized proof of tax domicile issued by the
relevant tax authority of the Preferred Shareholder, and original or SEC-certified true copy of the
SEC confirmation that the relevant entity is not doing business in the Philippines; (iii) an original of
the duly notarized undertaking, in the prescribed form, declaring and warranting its tax exempt
status, undertaking to immediately notify the Company and the Registrar and Depository of any
suspension or revocation of its tax exempt status and agreeing to indemnify and hold the Company,
the Registrar and Depository and the Paying Agent free and harmless against any claims, actions,
suits, and liabilities resulting from the non-withholding or reduced withholding of the required tax;
and (iv) such other documentary requirements as may be required under the applicable regulations
of the relevant taxing or other authorities.

The Joint Issue Managers and Joint Lead Managers shall be responsible for accepting or rejecting
any application or scaling down the amount of Preferred Shares applied for. The application, once
accepted, shall constitute the duly executed purchase agreement covering the amount of Preferred
Shares so accepted and shall be valid and binding on the Company and the Applicant. On the
Banking Day following the Closing Date, the Joint Issue Managers and Joint Lead Managers shall
advise the Joint Lead Managers of any applications that were rejected and/or scaled-down, with
copy to the Company.

Minimum Purchase

A minimum purchase of 500 shares shall be considered for acceptance. Purchases in excess of the
minimum shall be in multiples of 100 shares.

Refunds

In the event an application is rejected or the amount of Preferred Shares applied for is scaled down,
the Joint Lead Managers, upon receipt of such rejected and/or scaled down applications, shall notify

46
the Applicant concerned that his application has been rejected or the amount of Preferred Shares
applied for is scaled down, and refund the amount paid by the Applicant with no interest thereon.
With respect to an Applicant whose application was rejected, refund shall be made by the Joint Lead
Managers by making the check payment of the Applicant concerned available for his retrieval. With
respect to an Applicant whose application has been scaled down, refund shall be made by the
issuance by the concerned Joint Lead Managers of its own check payable to the order of the
Applicant and crossed Payees' Account Only corresponding to the amount in excess of the
accepted application. All checks shall be made available for pick up by the Applicant concerned at
the office of the Joint Lead Managers to whom the rejected or scaled down application was
submitted within 5 Banking Days after the last day of the Offer Period. The Company shall not be
liable in any manner to the Applicant for any check payment corresponding to any rejected or
scaled-down application which is not returned by the relevant Joint Lead Manager; in which case,
the relevant Joint Lead Manager shall be responsible directly to the Applicant for the return of the
check or otherwise the refund of the payment.

Secondary Market

Petron may purchase the Preferred Shares at any time without any obligation to make pro rata
purchases of Preferred Shares from all Shareholders.

Registry of Shareholders

The Preferred Shares will be issued in scripless form through the electronic book-entry system of
SMC Stock Transfer Service Corporation as Registrar for the Offer, and lodged with PDTC as
Depository Agent on Listing Date through PSE Trading Participants nominated by the Applicants.
Applicants shall indicate in the proper space provided for in the Application Form the name of the
PSE Trading Participant under whose name their Shares will be registered.

Legal title to the Shares will be shown in an electronic register of shareholders (the Registry of
Shareholders) which shall be maintained by the Registrar. The Registrar shall send a transaction
confirmation advice confirming every receipt or transfer of the Preferred Shares that is effected in
the Registry of Shareholders (at the cost of the requesting Shareholder). The Registrar shall send
(at the cost of the Company) at least once every quarter a Statement of Account to all Shareholders
named in the Registry of Shareholders, except certificated Shareholders and Depository
Participants, confirming the number of Shares held by each Shareholder on record in the Registry of
Shareholders. Such Statement of Account shall serve as evidence of ownership of the relevant
Shareholder as of a given date thereof. Any request by Shareholders for certifications, reports or
other documents from the Registrar, except as provided herein, shall be for the account of the
requesting Shareholder.

Expenses

All out-of-pocket expenses, including but not limited to, registration with the SEC, printing,
publication, communication and signing expenses incurred by the Joint Lead Managers in the
negotiation and execution of the transaction will be for Petron's account irrespective of whether the
transaction contemplated herein is completed. Such expenses are to be reimbursed upon
presentation of a composite statement of account. See Use of Proceeds on page 41 for details of
expenses.

47
Dilution
The Preferred Shares will not have any dilutive effect as these are non-voting, non-convertible and
non-participating.

48
The Company

History

Petrons history dates back to September 7, 1933, when two American oil firms, the Socony Vacuum
Oil Company of New York (Mobil) and the Standard Oil Company of New Jersey (Esso) merged
their Far East interests to form the Standard Vacuum Oil Company (Stanvac). This move allowed
them to expand and integrate their activities in the eastern hemisphere, including the Philippines
where Mobil had already been operating. After temporarily suspending operations during World War
II, Stanvac promptly resumed its operations in 1945, rebuilding damaged terminals and reopening
retail facilities. In 1957, Stanvac was granted a concession to build and operate the refinery later
known as Bataan Refinery Corporation (BRC). Esso and Mobil initially held 69% and 31%,
respectively, of the share capital of BRC. Each of Esso and Mobil subsequently established their
own nationwide marketing and distribution facilities.

In 1966, Esso Philippines, Inc. was incorporated. The Company was renamed Petrophil Corporation
(Petrophil) in 1973 when the Philippine National Oil Company purchased Essos 57% stake in BRC
and also acquired the marketing operations of Esso Philippines. On May 26, 1975, PNOC
purchased an additional 3% of the shares of BRC from Mobil, reducing Mobils stake to 40%. The
refinery continued to be owned by BRC, with PNOC as the managing company, serving both the
Petrophil and Mobil marketing systems.

In 1983, PNOC purchased Mobils remaining 40% interest in BRC, giving PNOC 100% ownership of
BRC. During 1987 and 1988, PNOC merged its marketing (Petrophil), refining (BRC), as well as its
tires, batteries and accessories (Petron TBA Corporation) operations into one entity, Petron
Corporation.

The 1990s saw the Government gradually moving towards deregulation of the oil industry.
Anticipating this development, PNOC offered 40% of its ownership in Petron for sale in a move to
pave the way to privatize the organization. This was deemed necessary to prepare Petron to
respond to the challenges and opportunities expected to be brought about by the oil industry
deregulation. On February 3, 1994, PNOC and Aramco Overseas Company B.V. (AOC), a wholly
owned subsidiary of Saudi Aramco, signed a share purchase agreement that gave AOC a 40%
ownership share in Petron. Later in the same year, PNOC sold an additional 20% of its shares in
Petron in an Initial Public Offering, thus reducing its ownership in the Company to 40%.

On March 13, 2008, AOC, entered into a share purchase agreement with Ashmore Investment
Management Limited (Ashmore) and subsequently issued a Transfer Notice to PNOC to signify its
intent to sell its 40% equity stake in Petron. PNOC eventually waived its right of first offer to
purchase AOC's interest in Petron. A total of 990,979,040 common shares representing a 10.57%
stake in Petron were subsequently tendered following the mandatory tender offer. Together with the
private sale of AOC's 40% interest in Petron, the Ashmore group, through its corporate
nominee, SEA Refinery Holdings B.V. (SEA BV), acquired 50.57% of the outstanding common
shares in Petron in July 2008. SEA BV is a company owned by funds managed by the Ashmore
group.

On October 6, 2008, the PNOC informed Petron of its intent to dispose of its 40% stake in the
Company. In December 2008, the 40% interest of PNOC in Petron was purchased by SEA Refinery
Corporation (SRC), a domestic corporation wholly-owned by SEA BV. In a related development,
SEA BV sold a portion of its interest in Petron equivalent to 10.1% of the issued shares, to SRC.

As at year-end 2008, the capital structure of Petron is as follows: SRC - 50.1%; SEA BV - 40.47%;
and the general public - 9.43%.

On December 24, 2008, San Miguel Corporation and SEA BV entered into an Option Agreement
granting SMC the option to buy the entire ownership interest of SEA BV in its local subsidiary, SRC.
The option may be exercised by SMC within a period of two years from December 24, 2008. The
Option Agreement provided that SMC will have representation in the Board and Management of

49
Petron. SMC representatives were elected to the Petron Board and appointed as senior officers of
the Company on January 8, February 27 and August 12, 2009.

Company Vision and Strategies

The Companys framework for sustainable growth is anchored on value optimization.

Petrons Vision, Mission and Values Statement, To be the leading provider of customer solutions in
the energy sector and its derivative businesses, reflects the Companys commitment to outstanding
performance in the energy industry and continuing growth of shareholder value.

To achieve this, the Company will focus on the following strategies: 1) Maximize revenue potential
from the domestic market considering its vast retail network; 2) Enhance value generation from
operations; 3) Optimize supply chain cost efficiency; and 4) Seize opportunities for new businesses.

Maximize Revenue Potential from Domestic Market

Petron has the widest network of service stations in the country. Moving forward, it will be more
aggressive in its expansion with the construction of more micro-filling, medium, and large stations
nationwide. The Company will strengthen its presence in existing and emerging urban centers, real
estate developments, as well as create inroads for the Company in provincial areas.

Potential locations have been identified by the Companys Marketing group, but the search for
suitable locations nationwide is a continuing process. Generally, micro-filling stations (MFS) are
geared for rural areas, while large stations are focused on urban centers. To date the Company
already has 100 MFS nationwide, majority of which are in Visayas-Mindanao (VisMin). The market
potential of a site is considered to ensure adequate return on investment. The Company pursues
lease (or in some cases, purchase) agreements with lot owners, while there is a different process for
selection of service station dealers. Dealership contracts are awarded based on a set of criteria.

The Company will also take advantage of this network to expand its retail businesses. Petrons
large stations will continue to be developed as integrated convenience centers offering varied
products and services such as quick-serve restaurants, food outlets, coffee shops, bookstores,
ATMs, and spa services, among others.

The Company will also target high growth industrial sectors. It will strengthen its aviation facilities in
tourist destinations such as Boracay, Bohol, and Palawan. It will develop synergies with industries
that will promote travel and patronage of Petron products.

Petron will strengthen its aviation facilities thru the construction of storage facilities for jet fuel at
airport depots as well as the purchase of additional equipment for refueling planes (refueling trucks,
pipelines). Even as airport projects are still in early stages of design/ construction/ development, the
Company is actively engaging the implementing agencies for Petron to secure fuel supply
arrangements at these locations.

With regard to travel, Petron supported publications that promoted road travel within the Philippines.
The Petron fleet card which is also bundled with a loyalty program facilitates fleet management of
companies as it offers cashless transactions and enables monitoring of fuel expenses.

In LPG, the Company will target substantial share of the market. It will continue to expand its LPG
network with more outlets and refilling plants that will bring the product closer to the market, and
support greater penetration of high growth areas. It will build more auto-LPG facilities in stations and
in fleet accounts. Its acquisition in 2007 of Chevrons retail business and the launch of its second
brand Fiesta Gas further increased the Companys network and allowed it to sell Fiesta LPG
cylinders at Chevron service stations. Petron has also installed centralized LPG distribution systems
in various malls nationwide and will continue to acquire supply contracts for other malls.

The Company has identified existing service station locations that will be fitted with LPG refilling
facilities, and also potential stand alone locations. Similar to service stations, the search for suitable
locations is a continuing process, as market developments and population growth give rise to new

50
demand centers. A high number of LPG filling facilities are in Metro Manila considering that bulk of
the current auto-LPG market consists of taxis, but expansion is also planned for the VisMin area.

For Lubes, car care centers as alternative distribution channels will continue to be established in
addition to other lube outlets such as distributors and Petron lube and specialties centers. The
Company will also maintain its stronghold in the Industrial sector through excellent technical support
and provision of storage and related facilities for the industrial consumer.

In addition to its expansion programs, Petron will also focus on providing total customer experience
to build loyalty and long-term customer relationships. Petron is intensifying its dealer and forecourt
personnel training, establishing a customer contact center in the Pandacan terminal to facilitate
quick and uniform response to customer queries and complaints, and expanding credit and fleet
card services for more customer convenience.

The customer contact center was launched last December 12, 2009 at Petrons Pandacan office.
Initially, it will handle sales ordering, queries, complaints and feedbacks for Pandacan, Navotas and
Pasig areas. The system will expand to cover the rest of the Luzon by mid-year and VisMin by year-
end.

Enhance Value Generation from Operations

Over the years, the Company has invested in refinery upgrades that enhanced the value of refinery
production. In 2000, Petron ventured into petrochemicals with the construction of the Mixed Xylene
(MX) Plant which recovers MX from streams that would otherwise be sold as gasoline. Thus,
product value increased by about US$40 a barrel.

The PetroFCC Unit was put up in 2008 with a 19 MBSD cracking capacity. By converting fuel oil into
higher-value White Products such as gasoline and diesel, the PetroFCC improves revenues. The
installation of the Propylene Recovery Unit (PRU) recovered propylene from the PetroFCCs LPG
stream, thus improving product value by about US$30 a barrel.

In 2009, the completion of the Benzene-Toluene Extraction (BTX) Unit allowed the recovery of
benzene and toluene from streams that would otherwise be sold as gasolines. The debottlenecking
of the CCRU and MX Plant also increased production capacity for MX. These aromatics products
(benzene, toluene, xylene) boost revenues by about US$30 a barrel.

Beyond 2010, the Company is evaluating technology options for the upgrade of the Refinery to fully
convert Black Products to White Products and/or Petrochemicals. It will also evaluate opportunities
for venturing into downstream petrochemicals, such as processing of propylene, xylene, benzene or
toluene production into derivatives or into finished products.

Petron is also expanding into blending and export of fuel additives, leveraging on its technology
partnership with Innospec, a global fuel additives supplier. With the completion of its 12,000 MT a
year blending plant in Subic last July 2008, Petron is the exclusive blender of Innospec products in
the Asia-Pacific region. Petron will also provide technical services to Innospecs customers, and
cross-sell Petron products to the network.

Optimize Supply Chain Cost Efficiencies

Cost efficiency programs to improve competitiveness are being implemented across the supply
chain: a) Reduction of supply cost through optimization of the crude mix to produce the best value
from the existing refining configuration; b) Reduction of inventory levels by sourcing feedstock from
nearer locations or through synergies with other parties for sharing transportation and/or production;
c) Enhancement of receiving and storage facilities to attain greater sourcing flexibility and support
new growth areas; d) Stability of crude freight costs and continued availability of terminal-compliant
vessels are being managed with contracts of affreightment that guarantee costs competitive with the
spot market; and e) Reduction of distribution cost through rationalization of the depot network, joint
operations with other companies, and optimized utilization of the marine and tank truck fleet.

Moreover, the Refinerys power generation system is being upgraded to improve reliability, sourcing
flexibility and cost efficiency to meet its growing steam and power requirements.

51
Seize Opportunities for new Businesses

The Company will pursue mergers and acquisitions that will complement its core business, leverage
on its strengths, and capture high growth sectors. This could include downstream petrochemical
production and LPG import/refilling facilities.

With its partnership with San Miguel Corporation, the Company will maximize synergies with the
SMC network, products and services.

Subsidiaries

At present, Petron has the following subsidiaries:

New Ventures Realty Corporation (NVRC) is a realty firm established on August 24, 1995. The
company was then equally owned by Petron and the Petron Retirement Fund. As of end-2008,
equity ownership was at 40% Petron and 60% Petron Retirement Fund. It is authorized to acquire
and develop land but it does not engage in the subdivision business. Land suitable for use as
service station sites, bulk plants or sales offices are purchased by NVRC. These properties are
leased to Petron for use in the latters operation. A wholly owned subsidiary of NVRC, Las Lucas
Development Corporation was acquired in July 2003. On September 15, 2009, the SEC approved
the amendment of the Articles of Incorporation of Las Lucas to include construction as its primary
business, consequently changing its name to Las Lucas Construction and Development
Corporation.

Petrogen Insurance Corporation (Petrogen) is a wholly-owned subsidiary of Petron

incorporated on August 23, 1996. It serves the insurance requirements of Petron and its allied
business partners such as contractors, suppliers and dealers. Licensed by the Insurance
Commission in November 1996, Petrogen has the authority to issue policies on fire, marine,
casualty and bonds. Insurance provided excludes life insurance. In 2001, it was granted authority to
cover insurance for accidental death and dismemberment, travel and directors and officers liability.

Overseas Insurance Corporation (Ovincor) was incorporated on November 16, 1995 under the
laws of Bermuda for the purpose of expediting the reinsurance of Petrons insurable interests as
covered by Petrogen Insurance Corporation. Reinsurance includes the insurance cover for the
refinery, the bulk plants and service station properties, petroleum and cargo insurance as well as
performance bonds for Petron contractors and haulers.

Petron Freeport Corporation (PFC) was incorporated on November 6, 2003. It is a Petron

subsidiary empowered, among others, to sell on wholesale or retail fuels such as gasoline,
kerosene, diesel, LPG, lubricants and greases as well as operate retail outlets, restaurants,
convenience stores and the like. The company has its principal office at the Subic Bay Metropolitan
Area, and operates Petrons mega station in that area. In 2008, the company ventured into the
manufacture of fuel additives with the establishment of an oil blending plant.

Petron Marketing Corporation (PMC) was incorporated on January 27, 2004 with the same
business purpose as the Petron Freeport Corporation. The Retail Trade Liberalization Act paved
the way for Petron to form a direct-retailing subsidiary. The new subsidiary operates company-
owned, company-operated (COCO) service stations and non-fuel businesses. It offers a complete
range of fuel products and holds franchise for several locator brands such as Jollibee and
Chowking. The COCO stations play a major part in launching market initiatives to strengthen the
Petron brand and give Petron the opportunity to quickly introduce innovations beyond the present
services that are available in Petron stations.

The revenue and income contribution by these entities as well as their assets and liabilities as of
December 31, 2008 and as of September 30, 2009 are as shown below.

52
 in P Millions NVRC Petrogen Ovincor PFC PMC
Petron Ownership 40% 100% 100% 100% 100%
December 31, 2008
Sales 163.0 76.0 57.0 472.0 3,811.0
Net Income 115.2 85.4 71.4 69.5 23.3
Assets 2,609.0 1,044.0 992.0 321.0 1,191.0
Liabilities 1,797.0 301.0 235.0 64.0 816.0
Stockholders Equity 812.0 743.0 757.0 257.0 375.0
Note: Ovincor translated at an exchange rate of P44.499/US$ (average) and P47.52/US$ (closing rate)
NVRC consolidated with wholly-owned subsidiary Las Lucas Construction and Development Corporation

September 30, 2009 NVRC Petrogen Ovincor PFC PMC

Sales 144.3 59.4 56.0 280.0 2,116.0
Net Income 32.1 61.9 65.9 52.6 8.3
Assets 2,741.7 1,100.2 1,015.3 376.8 770.9
Liabilities 1881.8 290.9 171.4 67.6 387.8
Stockholders Equity 859.9 809.3 843.9 309.2 383.1
Note: Ovincor translated at an exchange rate of P 47.926/US$ (average) and P47.390/US$ (closing rate)
NVRC consolidated with wholly-owned subsidiary Las Lucas Construction and Development Corporation

Neither Petron nor any of its subsidiaries has been the subject of any bankruptcy, receivership or
similar proceedings.

In addition, Petron incorporated Petron Foundation, Inc. (PFI) on July 25, 1996. PFI was
created to function and operate as a charitable and research foundation; to handle social,
environmental, and music and arts development projects of Petron; to institutionalize and intensify
Petrons active involvement in corporate and social responsibility projects; to support scholarship
programs for financially-handicapped but deserving students; and to participate in other social
projects supported by Petron. As of September 30, 2009, PFI has a fund balance amounting to
P40.8 million.

Operations

Scope of Business
Petrons principal business involves the refining of crude oil and the marketing and distribution of
refined petroleum products, mainly for the domestic market. Today, Petron is the largest oil refining
and marketing company in the Philippines, supplying more than one-third of the countrys oil and
petroleum product requirements.

It refines and sells a full range of petroleum products, including LPG, gasoline, diesel, jet fuel,
kerosene, fuel oil, mixed xylene, propylene, benzene and toluene. Lubricating oils and greases are
manufactured at Petrons Lube Oil Blending Plant at the Pandacan Terminal. Please refer to
Appendix A for a complete listing of the products.

The major domestic markets in the petroleum industry are Retail, Industrial, LPG and Lube Trades.
Petron sells its products to both industrial end-users and resellers through a nationwide network of
service stations, dealers, distributors and retail outlets. In line with the Companys efforts to increase
its presence in the regional market, it exports various petroleum and non-fuel products to Asia-
Pacific countries such as Cambodia, South Korea, China, Australia and Indonesia. Exports, which
generate dollar inflows for the Company, provide a natural hedge against losses which may arise
from fluctuations in the foreign exchange rate.

All of the Companys permits and licenses are valid and subsisting.

53
Crude and Product Supply

Under the Far East Crude Oil Sales Agreement signed in 2008, Petron may purchase about 140
MBCD of various Saudi Aramco crudes including the premium-grade Arab Super Light. Payment for
Saudi crude shipments is on open account basis secured by an irrevocable standby Letter of Credit
consistent with standard practice for Far East customers.

The risk of a supply disruption is likely to be low in view of the huge oil reserves and alternative
terminaling facilities of Saudi Aramco.

In order to achieve a balanced and optimized crude mix, Petron regularly renews its one-year
contract with Petronas for Malaysian crude oil. The 2009 Petronas crude contract covers the period
January to December.

Although the Refinery is configured to run light and sweet crudes, most of which are produced by
Saudi Aramco, it can run other types of crude. In line with a diversification strategy, Petron has
looked into various types of crudes, other than Saudi Aramcos and Petronas, that could provide
additional value to the Company and reduce reliance on a single crude supplier.

Other product supply contracts that are in effect include import contracts for LPG and aviation gas
as well as contracts for the domestic supply of LPG.

Spot imports, which included gasoline blending components, diesel, jet fuel and low-sulfur fuel oil,
among others, are sometimes needed to balance production and demand.

Marketing

Petron is the market leader in the domestic oil industry with 36.4% share of the market as of year-to-
date July 2009.

In the retail market, Petron has 1,349 service stations all over the country as of October 2009,
representing about 29% of the industrys total gasoline station count of 4,629. About 57% of these
stations are located in Luzon where demand is heaviest. Similarly, 41% of these stations are
directly owned by Petron, with 12 being operated by the Company. The remaining stations are
operated by independent dealers. The Companys leadership in the retail business is supported by
a fleet card base of almost 69,000 cardholders.

The point of sale system has already been installed in several service stations nationwide. It is
designed to help provide customers with consistent and efficient customer service, standardized
promotions, and build a database that can be used for market sales analysis.

In order to improve traffic in the service stations and gain from the potential of the non-fuel business,
51 Treats convenience stores and 128 quick-serve restaurants (QSRs) and service locators were
established in strategic service stations in Luzon. The non-fuel businesses are either owned by
Petron or are covered by contracts with third party operators.

Petron also services 38% of the countrys Industrial Civil sector, which includes major
manufacturing, aviation, and marine accounts. In addition, the Company serves 57% of the fuel
requirements of the National Power Corporation (NAPOCOR).

Sales to NAPOCOR comprised about 8.1% of Petrons year-to-date September 2009 domestic
sales volume, the bulk of which was fuel oil. The supply for NAPOCORs fuel requirements is
allocated through an annual bidding process among industry players.

Petron continues to be the single biggest player in the LPG market. The Company has set up more
than 70 additional branch stores through its Gasul dealers as of September 2009. It has also gained
headway in the field of alternative fuels through its auto-LPG program Petron Xtend, of which auto-
LPG facilities are already installed in 20 service stations nationwide. After Petrons acquisition of the
Chevron LPG retail business, Petron started to offer re-branded LPG as Fiesta Gas.

54
Petron Lubes has a network of 12 Car Care Centers, 25 Petron Sales Centers, and 14 Lubes &
Specialties Centers nationwide to augment lubes and greases sales.

The number of fleet card and BPI Mastercard holders similarly increased. The Petron e-Fuel Card
was launched in July 2008 initially as a promotional item. Total cards issued as of year-to-date
September 2009 is almost 9,000.

Product Distribution

To serve its domestic markets, Petron maintains more than 30 depots and terminals all over the
Philippines. Depots and terminals have marine receiving facilities, multiple product storage tanks for
liquid fuels and LPG, drummed products storage, and warehouses for packaged products like
lubricants and greases. From its Bataan Refinery, refined products are distributed to the various
depots and terminals, as well as direct consumer accounts nationwide, using a fleet of barges and
tankers. The barges and tankers are chartered on term or spot contracts from third-party ship
owners.

From the storage depots, bulk products are hauled via tank trucks to service stations and direct
consumer accounts. Like the barge and tanker owners, tank truck haulers are third-party
contractors.

The main storage facility of Petron is located in Pandacan, Manila. Pandacan is also the site of the
main terminals of Shell and Chevron. In 2004, the Pandacan operations of Petron, Shell and
Chevron were integrated to address the safety and environmental concerns of the surrounding
community. The integrated facility is now operated by a joint venture company, the Pandacan Depot
Services Inc.

The Pandacan terminal distributes products to a large tributary area that extends south, north and
east of Manila. Approximately 40% to 50% of Petrons total sales volume is moved through
Pandacan.

Training programs on preparing and implementing security plans have been conducted for terminal
and depot personnel in compliance with the International Ships and Ports Facility Security (ISPS).
To date, a total of 19 depots and terminals have been ISPS certified by the Department of
Transportation and Communications-Office of Transport Security (DOTC-OTS). Of these, seven
domestic ports (Navotas, Palawan, Mactan, Ormoc, Roxas, Iligan and Rosario) have been aligned
to ISPS standards. Petrons port facility security programs particularly in Zamboanga and Mandaue
had also been used as model by DOTC-OTS in their trainings and presentations, notably during
visits of their Australian counterparts.

The Quality Management Systems of 26 Petron terminals and depots are currently certified to QMS
ISO 9001:2000. Starting next year, terminals and depots that are scheduled for re-certification will
be subject to the updated QMS ISO 9001:2008 standard. These quality certifications assure
customers that they are provided with the best products and services in the industry.

On environmental sustainability, 16 Petron terminals and depots are now certified to EMS ISO
14001:2004, an international standard on Environmental Management Systems, with the Aparri
depot as the most recent facility to be certified in September 2009.

An ongoing project of the Company is to have the occupational health and safety management
systems of its terminals and depots certified to the OHSAS 18001:2007 standard. As of November
2009, the Companys facilities in Iloilo, Bacolod, Mandaue and Davao have been recommended for
certification to the said standard. The Tagoloan depot is slated for certification audit in December
2009.

While the facilities handle products that are potentially harmful to people and the environment,
Petron assures its employees, customers, business partners and adjacent communities of the high
level of safety awareness, utmost care of the environment and emergency preparedness within and
immediately around its depot facilities. The company has ongoing thrusts to further expand the
number of locations certified to these international standards.

55
Petron terminals and depots have oil spill contingency plans (OSCP) which can be executed
whenever necessary. The OSCP of Petrons Zamboanga depot was the first to be approved by the
Philippine Coast Guard in the entire country.

Refinery Operations

Petron owns and operates the largest oil refinery in the Philippines with a capacity of 180,000
BPSD. It has three Crude Distillation Units, a Vacuum Pipestill, a PetroFluidized Catalytic Cracking
Unit, a Propylene Recovery Unit, a Continuous Catalyst Regeneration Reformer, a Powerformer
Unit, a Mixed Xylene Recovery Unit, a Benzene-Toluene Extraction Unit, two Gasoil Hydrotreater
Units, an Isomerization Unit, a Sulfur Recovery Unit, a Kerosene Merox Treater, two Naphtha
Hydrotreaters, two LPG Treaters, a Caustic Regeneration Unit, Waste Water Treatment Facilities,
Bulk Asphalt Receiving Facilities, several crude storage tanks, as well as several refined petroleum
products storage tanks. It has its own piers and other berthing facilities, one of which can
accommodate very large crude carriers.

The Refinery is capable of producing the full range of petroleum products from LPG, gasoline, jet
fuel, diesel and fuel oil. In 2000, the refinery ventured into petrochemical production with the
commercial operation of its mixed-xylene plant. Furthermore in 2008, the Refinery started producing
propylene with the commissioning of its Propylene Recovery Unit, which is designed to produce
140,000 tons per year of polymer-grade propylene. Also in 2008, the Refinery started the
construction of the BTX Unit to further expand its capability to produce petrochemical feedstock. The
BTX unit, which became operational in May 2009, is designed to produce benzene and toluene at a
capacity of 25,000 and 157,000 tons per year, respectively.

The refining process flow diagram is shown below.

The Refinery has been implementing various programs and initiatives to achieve Key Performance
Indices (KPIs) on reliability, efficiency and safety. These programs include Reliability Availability
Maintenance (RAM) program and the Profitability Improvement Program (PIP), which were
developed and implemented in coordination with KBC, an international consultant. The RAM

56
program resulted in improved operational availability and lower maintenance cost through higher
plant reliability and a longer turnaround cycle of four to five years from the previous two years. The
PIP likewise significantly improved white products recovery particularly diesel and LPG.

The Refinery has also adopted a continuous improvement culture through a Total Quality
Management program.

The Refinerys Continuous Improvement Program was one of the finalists for the 2008 Peoples
Program of the Year award sponsored by the People Management Association of the Philippines.
This five-year old program has established a refinery culture of continuously seeking for
improvement opportunities in everyday work environment and activities. As of the last season
(13th), the program has produced 420 improvement projects with an accumulated total equivalent
savings/benefits of about P500 million.

In April 2008, the Refinery commenced the development and implementation of an Integrated
Management System (IMS). The IMS is an integration of three management systems: (1) Quality
ISO 9001:2000, (2) Environment ISO 14001:2004, and (3) Health and Safety OHSAS 18001:2007,
which was implemented last December 1, 2008. The benefits of an IMS for the refinery are:
standardized and more systematized work procedures, instructions and practices for QEHS;
improved quality, productivity, environment, health and safety performance through continual
improvement and compliance to legal requirement; customer satisfaction; and hazard and injury free
working environment, and environmentally friendly operations.

In addition to its Environment Management System ISO 14001: version 2004 certification which
was awarded last May 2008 and which successfully passed the recertification audit in May 2009, the
Refinery was awarded certification for Safety Management System BS OHSAS 18001: version
2007 in June 2009 as well as for Quality Management System ISO 19001: version 2008 in July
2009. Thus, the Refinery has completed its Integrated Management System certification. The three
certificates were formally turned over last October 16, 2009 in a simple ceremony attended by TUV-
SUD-PSB Philippines Managing Director Masanori Matsuda and Petron Executives headed by
President Eric O. Recto.

Risk Management Framework and Process

Petron follows an enterprise-wide risk management framework for identifying, mapping and
addressing the risk factors that affect or may affect its businesses. The Companys risk
management process is a bottom-up approach, with each division mandated to conduct regular
assessment of its risk profile and formulate action plans for managing identified risks. The results of
these activities flow up to the Management Committee and eventually, the Board, through the
Companys annual Business Planning process and quarterly divisional Management Reviews.

Oversight and technical assistance is likewise provided by corporate units with special duties such
as Financial Planning, the Transactions Management Unit, Financial Risk Management, the
Commodity Risk Management Committee, the Investment and Risk Management Committee, the
Health, Corporate Technical Services Group and the Internal Audit Department.

Health, Safety and Environment

In November 2009, the Department of Labor and Employment (DOLE) through the Bureau of
Working Conditions (BWC) recognized Petron for operating without lost time accident during the
year. DOLEs safety recognition program honors companies who have achieved exemplary safety
performance and have shown outstanding implementation of Occupational Safety and Health
(OSH) through various activities. The award re-affirmed the Companys commitment to continually
provide a safe and healthy working environment for all employees. Safety Milestone Achievement
Awards were given to 24 depots and terminals (Aparri, Poro, Rosario, Palawan, Limay, Batangas,
JOCASP/NAIA, Mactan, Isabel, Tacloban, Ormoc, Bacolod, Tagbilaran, Amlan, Iloilo, Roxas,
Mandaue, Zamboanga, Davao, Tagoloan, Jimenez, Bawing, Nasipit, Iligan). The DOLE-BWC also
recognized the contributions of 19 Petron employees, who are accredited safety practitioners.

57
In 2008, the DOLE-BWC conferred a Safety Milestone Award (Smile) to 12 Petron facilities for
attaining a record of 11.9 million man-hours without lost-time accident from January 1, 1978 to June
30, 2008. This was a result of their commitment in implementing programs and activities on
occupational health and safety.

Petron has conducted training and skills development for employees, contractors and other
business partners. The training programs were designed to raise awareness and impart vital
knowledge in connection with oil spill response, fire-fighting and basic safety.

In line with the Companys implementation of a Safety Management System (SMS), an awareness
course on Occupational Health and Safety Administrative Series 18001 (OHSAS 18001 ) was held
and attended by personnel from various divisions. OHSAS 18001 is an international occupational
health and safety management systems that uses a systematic approach in hazard analysis and
accident prevention. Moreover, several depot personnel recently completed the Occupational
Health & Safety Management System Auditing Course. The session aimed at facilitating
knowledge, understanding and application of audit principles, audit techniques and audit process for
an OHSAS 18001 occupational health and safety management systems audit. The Refinery has a
certification on the ISO Integrated Management System that includes OHSAS 18001, ISO 14001
(Environmental Management System), and ISO 9001 (Quality Management System).

Meanwhile, Petron is in full compliance with applicable environmental laws. In particular, the
Company had put in place refinery facilities worth US$ 100 million to ensure compliance to the more
stringent Clean Air Act restrictions mandated starting in 2005.

Corporate Social Responsibility

Petron categorizes corporate social responsibility (CSR) into: a) community relations and advocacy
which involve immediate support to society; b) corporate strategic philanthropy which responds to
bigger national social concerns and takes into consideration both national and global agenda; and c)
CSR as core business which focuses on developing business solutions to address social problems.

With the initiative of integrating CSR into Petrons core business that was started in 2005, the
promotion of CSR is now incorporated in the Companys business planning guidelines. Steps were
undertaken to help elevate Petrons business practice by addressing the triple bottom line of
economic, environment and social performance. The foundation for a Sustainability Plan has been
laid that will ensure measurement and reporting of the Companys sustainability performance data in
accordance with the internally accepted Global Reporting Initiative (GRI) guidelines. The first GRI-
based and registered Sustainability Report was released in May 2009.

The FUEL H.O.P.E. or Helping Filipino Children and Youth Overcome Poverty through Education
program is the Companys anchor initiative to advocate CSR. Its objective is to strengthen its
corporate strategic philanthropy by helping alleviate poverty through education. Under this initiative
is the continued implementation of Tulong Aral ng Petron which as of end-October 2009 has 6,109
scholars enrolled in different elementary schools as well as 293 high school scholars. The program
is recognized by the Department of Social Work and Development (DSWD) as the only partnership
with the private sector that has been effectively sustained.

A complementary program and in support of the Department of Educations Adopt-A-School

campaign is the Petron School. The Company is putting up schools in communities where the need
is greatest. By end-October 2009, the Company has sponsored the construction of 44 school
buildings, which translate to 129 classrooms, in several areas in the country. Moreover, the
Company has undertaken the repair of 280 classrooms.

The Company has been regularly leading coastal clean-ups and tree and mangrove planting and
has undertaken various environmental awareness programs and initiatives. In November 2008, the
Refinery signed a Memorandum of Agreement with the municipality of Limay, Bataan and the
Department of Environment and Natural Resources for the reforestation of 300 hectares of the
Lamao Forest Reserve. Since 2001, Petron had helped in the reforestation of the La Mesa
Reservation Area. The Company has taken active leadership in the Bataan Integrated Coastal
Management Program, in partnership with the Bataan provincial and local government units, the
Bataan Coastal Care Foundation, and Partnerships in Environmental Management for the Seas of

58
East Asia (PEMSEA). The program aims to protect, preserve, and improve the management of the
environmental, natural and cultural features of Bataans coastal environment.

Competitive Strengths

Petron believes that its competitive strengths will enable it to protect and build on its leadership
position in the domestic oil industry, its core business. At the same time, leveraging on its existing
assets and expertise, Petron will pursue opportunities that will complement its core business and
capture higher-value products and markets.

Philippines Largest Oil Refining and Marketing Company

The Companys operations basically comprise a single value chain. This chain consists of the
refining of crude oil, the distribution of oil products across the country and its sale and marketing to
retail and industrial customers.

Petron operates the largest refinery in the Philippines with a capacity of 180,000 BPSD (the
Refinery). There is only one other refinery in the country that of Shell with a capacity of 110,000
BPSD. Petrons refinery operations is ISO 14001 certified which makes it compliant with the
strictest international environmental standards. With the completion of the Light Virgin Naphtha
(LVN) Isomerization Unit and Gasoil Hydrotreater in 2006, the Refinery has complied with the
standards mandated by the Clean Air Act.

Petrons distribution infrastructure is the most extensive in the industry. From the Bataan Refinery,
petroleum products are brought to all points of the archipelago through more than 30 depots,
terminals, and sales offices.

It has the widest marketing and retail network, with 1,349 service stations, 51 convenience stores
and over 100 locators as of October 2009. Petrons Marketing Division also serves roughly 1,200
industrial customers who comprise close to 40% of total sales.

Petron sells a full range of fuel products, lubes and greases. Sales for the nine-month period ended
September 30, 2009 reached 32 million barrels or about 19 million liters a day. Aside from fuels, it
also produces and sells petrochemical feedstock - mixed xylene, propylene, benzene and toluene.
During the same period, about 1.0 million barrels were sold which contributed about P4.8 billion in
sales.

In line with the Companys efforts to increase its presence in the regional market, it exports various
petroleum and non-fuel products to Asia-Pacific countries such as Cambodia, South Korea, China,
Australia and Indonesia. Export sales, which amounted to P34.3 billion in 2006, P31.9 billion in
2007 and P36.8 billion in 2008, accounted for about 15% of total sales in the last three years.

The Company likewise offers various services: convenience stores (Treats), quick-serve restaurants
and service locators, technical services, fleet card services.

Leadership in a Strategic Industry

As of year-to-date July 2009, Petron remains the over-all market leader at 36.4% ahead of Shells
27.9% and Chevrons 13.9%. The Philippine oil industry is dominated by three long-staying oil
firms: Petron, Shell and Chevron. The rest are smaller oil players numbering about 90, which
started operations after the deregulation of the oil industry in 1998.

Notwithstanding the challenging market, Petrons lead over its nearest competitor has remained
substantial over the last five years.

59
 COMPARATIVE MARKET SHARES (%)
Year-to-date
2004 2005 2006 2007 2008
July 2009
Petron 37.7 38.1 38.8 38.6 39.0 36.4
Shell 33.1 31.6 31.4 31.2 29.2 27.9
Chevron 16.0 15.1 15.1 14.6 13.8 13.9
New Players 12.0 13.8 14.4 13.9 16.2 19.4

Petron leads in all fuel market segments with the exception of the Lubes and Greases market. It
has 32.9% of retail trade and 40.4% of the industrial market including NAPOCOR. Meanwhile,
Gasul combined with another Petron LPG brand Fiesta Gas, holds 34.5% of the market, where it
remains the single biggest player. In the Lubes and Greases market, the Company is a strong
number 2 with a 37.2% share.

Sound Financial Condition

Through the years, Petron has consistently improved on its income performance. The trend was
broken only in 2008, which was considered an uncharacteristic year for most oil refining companies,
because of the extreme volatility in oil prices. As a result, the Company suffered a net loss of P3.9
billion in 2008 mainly due to significant inventory losses.

As of Sept
P billion 2002 2003 2004 2005 2006 2007 2008
2009
Net Income 2.9 3.1 4.1 6.1 6.0 6.4 (3.9) 3.4

The loss in 2008 was largely attributed to margin contraction due to the substantial and abrupt drop
in crude prices. After reaching a record high level of US$141/bbl on July 4, Arabian Dubai Fateh
Crude (Dubai crude) prices plummeted by more than US$100/bbl or 70% within a span of 4
months. When Dubai crude prices started to crash in August, domestic prices of refined products
fell much faster than the Companys crude costs resulting in negative margins.

Financial ratios are within the covenant limits imposed by Petrons creditor banks.
As of Sept
2004 2005 2006 2007 2008 Limits
2009
Current Ratio 1.2x 1.3x 1.5x 1.1x 1.1x 1.3x Minimum
1.0x
Debt-Equity 1.8x 1.5x 1.7x 1.8x 2.4x 2.2x Maximum
Ratio 64:36 60:40 63:37 64:36 71:29 69:31 2.5x or 71:29
Debt Service
Minimum
Coverage 1.6x 1.8x 3.2x 3.2x 1.2x 2.8x
1.1x
Ratio
Tangible Net
Worth Minimum
22.3 27.6 32.3 37.8 32.9 36.3
P16 billion
(In P billion)

Dynamic and Experienced Management

The Petron Board is composed of individuals who have wide exposure in various fields, while its
executives, managers and supervisors have long years of experience in the Company.
Average Years
in Petron
Executives 20
Managers and Supervisors 22
Professional and Technical Staff 11
Rank and File 14
Average 17

60
With this comes the ability to manage change, respond to the environment and provide a platform
for sustainable growth. Petrons management and employees have demonstrated the ability to
operate and focus on the business throughout various changes restructuring and privatization
(1993-94), the Asian currency crisis (1997), oil industry deregulation (1997-1998), political turmoil
(1986/2001), the Guimaras oil spill (2006), and sub-prime crisis (2008). The Petron organization
remained resilient in the face of these challenges.

The Petron management team has been strengthened further with the entry of seasoned executives
from San Miguel Corporation.

Strong Growth Potential

With value optimization as its framework for sustainable growth, Petron is set to protect its
leadership in the domestic oil industry, its core business. It will continue its service station network
expansion. It will also continue to seek growth in the complementary non-fuel businesses such as
Treats convenience stores, franchises and other locators at the stations. Non-fuels help pull traffic
into the fuels business and at the same time provide incremental revenues.

Leveraging on existing assets and expertise, Petron will continue to pursue moves towards higher
value products and markets. Refining and petrochemical synergies which started in 2000 with the
production of mixed xylene, and were expanded in 2008 with the production of propylene, increased
further when the BTX Unit became operational in May 2009. The Company added benzene and
toluene to its petrochemical product line.

Over the five-year planning horizon, the Company is evaluating further upgrading its Refinery to
higher conversion capability that will completely eliminate production of the low value fuel oil and
increase production of higher margin products.

Moreover, the Refinerys power generation system is being upgraded to a more efficient technology.
This will improve the reliability, sourcing flexibility and cost efficiency of the Refinerys system to
meet its growing steam and power requirements.

61
Description of Property
Petron owns the largest petroleum refinery complex in the Philippines located in Limay, Bataan. This
refinery has a crude distillation capacity of 180,000 barrels per stream day. It has three Crude
Distillation Units, a Vacuum Pipestill Unit, a PetroFluidized Catalytic Cracking Unit, a Propylene
Recovery Unit, a Continuous Catalyst Regeneration Platformer Unit, a Powerformer Unit, two
Naphtha Hydrotreaters, two LPG Treaters, an Isomerization Unit, a Mixed Xylene Recovery Unit, a
Benzene-Toluene Extraction Unit, Kerosene Merox Treater, two Gas Oil Hydrotreater Units, a Sulfur
Recovery Unit, a Caustic Regeneration Unit, Waste Water Treatment Facilities, eight Steam
Generators, five Turbo Generators, Flare and Safety Relieving Facilities, Bulk Asphalt Receiving
Facilities, several crude storage tanks, as well as several refined petroleum products storage tanks.
It has its own piers and other berthing facilities one of which can accommodate very large crude
carriers.

Petron also operates an extensive network of terminals and bulk storage and satellite facilities and
LPG plants which are located in Luzon, Visayas and Mindanao.

Bulk Plants and Sales Offices

Major Terminals
Luzon
Limay, Bataan Aparri, Cagayan
Pandacan, Manila Calapan, Oriental Mindoro
Mabini, Batangas Navotas, Metro Manila
Mandaue City, Cebu Pasacao, Camarines Sur
Puerto Princesa, Palawan
Poro Point, La Union
Rosario, Cavite
San Jose, Occidental Mindoro
Visayas and Mindanao
Amlan, Negros Oriental
Bacolod, Negros Occidental
Iloilo City
Isabel, Leyte
Mactan, Lapu-lapu City
Ormoc, Leyte
Culasi, Roxas City
Anibong, Tacloban City
Tagbilaran City, Bohol
Davao City
Bawing, General Santos City
Iligan City, Lanao del Norte
Jimenez, Misamis Occidental
Nasipit, Agusan del Norte
Tagoloan, Misamis Oriental
Zamboanga City

Petron has LPG operations in its depots in Pasig, Metro Manila; Legaspi City; and San Fernando,
Pampanga. It also has a warehouse in Calamba, Laguna.

Petron has airport installations at the JOCASP, NAIA, Pasay City; Laoag City; Iloilo City and Davao
City.

As of October 2009, Petron has 1,349 service stations all over the country representing about 29%
of the industrys total gasoline station count of 4,629. About 41% of these stations are directly
owned by Petron, with 12 being operated by the Company. The remaining stations are operated by
independent dealers.

All facilities owned by Petron are free from any liens, encumbrances and mortgages.

The Company entered into commercial leases on certain parcels of land for its refinery and certain
service stations. These leases have an average life between one to sixteen years with renewal
options included in the contracts. There are no restrictions placed upon the Company by entering
into these leases. The lease agreements include upward escalation adjustment of the annual rental
rates. The Company is in the process of entering into a sublease with NVRC (lessee of PNOC) over
the site of the Companys Refinery, which sublease will ensure continued possession of the property
by the Company for thirty (30) years from January 1, 2010 or until December 31, 2039, renewable
upon agreement of the parties for another 25 years.

62
Total lease payments in 2008 amounted to P487.5 million covering leases of the Refinery, 16 bulk
plants and 484 service station lots in Luzon; 9 bulk plants and 106 service station lots in the Visayas
and 14 bulk plants and 81 service station lots in Mindanao. Leases would expire from 2010 to 2031.

The Company has no plans to acquire real estate properties in the next twelve months.

63
Legal Proceedings
Except as disclosed herein, there are no material pending legal proceedings to which Petron or any
of its subsidiaries is a party or of which any of their material property is subject. Except as otherwise
indicated, it is difficult to accurately assess the impact upon the business and operations of Petron of
any adverse ruling in the cases described below.

Tax Credit Certificates (TCC) Related Cases

1. Commissioner of Internal Revenue v. Petron Corporation

CA GR No. 55330
Court of Appeals

Petron Corporation v. Commissioner of Internal Revenue and

BIR Regional Director of Makati, Region 8
CTA Case No. 5657
Court of Tax Appeals

In 1998, the Company contested before the Court of Tax Appeals (CTA) the collection by the
Bureau of Internal Revenue (BIR) of deficiency excise taxes arising from the Companys acceptance
and use of Tax Credit Certificates (TCCs) worth P = 659 million from 1993 to 1997. In July 1999, the
CTA ruled that, as a fuel supplier of BOI-registered companies, the Company was a qualified
transferee for the TCCs. The CTA ruled that the collection by the BIR of the alleged deficiency
excise taxes was contrary to law. The BIR appealed the ruling to the Court of Appeals where the
case is still pending. The Court of Appeals issued a resolution suspending decision on the case until
the termination of the DOF investigation on the TCCs assigned to Petron. Petron filed a motion for
reconsideration which remains unresolved as of this date. Petron filed a Motion for Re-raffle
requesting the re-raffle of the case and its immediate resolution.

2. Petron Corporation v. Commissioner of Internal Revenue

SC G.R. No. 180385
Supreme Court

Petron Corporation v. Commissioner of Internal Revenue

CTA EB No. 238
CTA Case No. 6136
Court of Tax Appeals

In November 1999, BIR issued an assessment against the Company for deficiency excise taxes of P =
284 million plus interest and charges for the years 1995 to 1997, as a result of the cancellation by
the Department of Finance (DOF) Center ExCom of Tax Debit Memos (TDMs), the related TCCs
and their assignments. The Company contested on the grounds that the assessment has no factual
and legal bases and that the cancellation of the TDMs was void. The Company elevated this protest
to the CTA on July 10, 2000. On August 23, 2006, the Second Division of the CTA rendered its
Decision denying the Companys petition and ordered it to pay the BIR P = 580 million representing
deficiency excise taxes for 1995 to 1997 plus 20% interest per annum from December 4, 1999. The
Companys motion for reconsideration was denied on November 23, 2006. The Company appealed
the Divisions Decision to the CTA En Banc. On October 30, 2007, the CTA En Banc dismissed the
Companys appeal, with two of four justices dissenting. The Company filed its appeal on November
21, 2007 with the Supreme Court. On December 21, 2007, in the substantially identical case of
Pilipinas Shell, the Supreme Court decided to nullify the assessment of the deficiency excise taxes
and declared as valid Pilipinas Shells use of Tax Credit Certificates for payment of its tax liabilities.
On November 7, 2008, the Supreme Court gave due course to the Companys appeal and directed
the Company to file its Memorandum. After the parties filed their respective memoranda, the case is
now submitted for resolution.

64
3. Petron Corporation v. Commissioner of Internal Revenue
SC GR No. 185568
Supreme Court

CTA EB 311
CTA Case No. 6423
Court of Tax Appeals

In May 2002, the BIR issued a collection letter for deficiency taxes of P
= 254 million plus interest and
charges for the years 1995 to 1998, as a result of the cancellation of TCCs and TDMs by the DOF
Center ExCom. The Company protested this assessment on the same legal grounds used against
the tax assessment issued by the BIR in 1999. The Company elevated the protest to the CTA. The
Second Division of the CTA promulgated a decision on May 4, 2007 denying our Petition for Review
for lack of merit. The Company was ordered to pay the respondent the reduced amount of P = 601
million representing the Companys deficiency excise taxes for the taxable years 1995 to 1998. In
addition, the Company was ordered to pay the BIR 25% late payment surcharge and 20%
delinquency interest per annum computed from June 27, 2002. The Companys Motion for
Reconsideration was denied on August 14, 2007. The Company appealed to the CTA En Banc. On
December 3, 2008, the CTA En Banc promulgated a decision reversing the unfavorable decision of
the CTA 2nd Division. The CIR filed a Petition for Review with the Supreme Court. The Supreme
Court directed Petron to file comment on the petition in the Resolution dated February 4,
2009. Petrons Comment was filed on April 20, 2009.

It should be noted that there are duplications in the TCCs subject of the three assessments.
Excluding these duplications, the basic tax involved in all three assessments represented by the
face value of the related TCCs is P
= 910.7 million.

The Company does not believe these tax assessments and legal claims will have an adverse effect
on its consolidated financial position and results of operations. The Companys external counsels
analysis of potential results of these cases was subsequently supported by the Decision of the
Supreme Court in the case of Pilipinas Shell and in the Decision of the CTA En Banc on December
3, 2008.

Pandacan Terminal Operations

1. Petron Corporation v. The City of Manila, et al.

Civil Case N0. 07-116700
RTC Manila Br. 41

2. Petron Corporation v. City Council of Manila, et al.

Civil Case N0. 03-106379
RTC Manila Br. 42

3. Social Justice Society (SJS) v. Alfredo S. Lim

SC G.R. No. 187836
Supreme Court

4. Jose L. Atienza vs. Mayor Alfredo S. Lim

SC G.R. No. 187916
Supreme Court

5. Social Justice Society (SJS), Vladimir Alarique T. Cabigao and Bonifacio S. Tumbokon v.
Hon. Jose L. Atienza, Jr. (Chevron, Petron and PSPC, Movant-Intervenors)
SC G.R. No. 156052
Supreme Court 1st Division

The City Council of Manila, citing concerns of safety, security and health, passed City Ordinance No.
8027 reclassifying the areas occupied by the Oil Terminals of Petron, Shell and Chevron from
Industrial to Commercial, making the operation of the Terminals therein unlawful. Simultaneous with
efforts to address the concerns of the City Council with the implementation of a scale down program
to reduce tankage capacities and joint operation of facilities with Shell and Chevron, the Company

65
filed a petition to annul city Ordinance No. 8027 and enjoin the City Council of Manila, as well as
Mayor Joselito Atienza from implementing the same.

Thereafter, the City of Manila approved the Comprehensive Land Use Plan and Zoning Ordinance
(CLUPZO) (Ordinance No. 8119) that allows The Company a seven-year grace period. The passage
of Ordinance No. 8119 was thought to effectively repeal Manila Ordinance No. 8027. However, on
March 7, 2007, the Supreme Court rendered a Decision in the case of SJS Society vs. Atienza,
directing the Mayor of Manila to immediately enforce Ordinance No. 8027.

On March 12, 2007, the Company, together with Shell and Chevron, filed an Urgent Motion
for Leave to Intervene and Urgent Motion to Admit Motion for Reconsideration of the decision dated
March 7, 2007, citing that the Supreme Court failed to consider supervising events, notably (i) the
passage of Ordinance No. 8119 which supersedes Ordinance No. 8027, as well as (ii) the writs of
injunction from the RTC presenting the implementation of Ordinance No. 8027, the Supreme
Courts decision and the enforcement of Ordinance No. 8027 improper. Further, The Company,
Shell, and Chevron noted the ill-effects of the sudden closure of the Pandacan Terminals on the
entire country.

As a result of the passage of Ordinance No. 8119, on April 23, 2007, upon motion of the Company,
Mayor of Manila and the City Council, on the ground that the issues raised in said case has become
academic; the RTC dismissed the case filed by the Company questioning Ordinance No. 8027.

On February 13, 2008, the Supreme Court allowed the oil companies intervention but denied their
motion for reconsideration, declaring Manila City Ordinance No. 8027 valid and applicable to the oil
terminals at Pandacan. The Court dissolved all existing injunctions against the implementation of the
ordinance and directed the oil companies to submit their relocation plans to the Regional Trial Court
within 90 days to determine, among others, the reasonableness of the time frame for relocation. On
February 28, 2008, the Company, jointly with Chevron and Shell, filed its motion for reconsideration
of the Resolution. On May 13, 2008, the three oil companies submitted their Comprehensive
Relocation Plans in compliance with the February 13 Resolution of the Supreme Court.

Social Justice Society (SJS), Vladimir Cabigao and Bonifacio Tumbokon filed before the Supreme
Court a Motion to stop the City Council of Manila from further hearing the amending ordinance to
Ordinance No. 8027. Petitioners alleged that the proposed amendment is "a brazen and malicious
attempt by the City of Manila to thwart the Supreme Court's 7 March 2007 decision and 13 February
2008 resolution on the case". To date, the Supreme Court has not issued any Temporary
Restraining Order or Order granting the motion filed by the petitioners.

On May 28, 2009, Mayor Alfredo Lim of Manila approved and signed proposed Ordinance 7177
(which became Ordinance No. 8187) repealing Ordinance No. 8027 and 8119 and allowing the
continued stay of the oil depots at Pandacan.

On June 1, 2009, SJS officers filed a petition for prohibition against Mayor Lim before the Supreme
Court, seeking the nullification of Ordinance 8187. On June 5, 2009, former Manila Mayor Lito
Atienza filed his own petition with the Supreme Court seeking to stop the implementation of
Ordinance 8187. The Court has ordered the City to file its comment but the Court did not issue a
temporary restraining order. The City filed its Comment on August 13, 2009.

Oil Spill Incident in Guimaras

1. In the Matter of the Sinking of the MT Solar I

SBMI No. 936-06
Special Board of Marine Inquiry

M/T Solar I sunk 13 nautical miles southwest of Guimaras in rough seas on August 11, 2006 en
route to Zamboanga, loaded with about 2 million liters of industrial fuel oil.

66
The Company immediately dispatched its oil spill gear, equipment and oil spill teams upon receiving
information of the incident. An aerial and surface assessment was conducted to determine the
extent of the spill.

Inspection by the Survey Ship Shinsei Maru, using a remote-operated vehicle (ROV), found the
vessel upright with minimal traces of leakage. All cargo compartment valves were tightened by the
ROV to ensure against further leakage. The Shinsei Maru was contracted by the Protection and
Indemnity (P & I) Club and the International Oil Pollution Compensation (IOPC) from Fukada
Salvage & Marine Works Co. Ltd.

On separate investigations by the Special Task Force on Guimaras by the Department of Justice
and the Special Board of Marine Inquiry (SBMI), both found the owners of M/T Solar I, Sunshine
Marine Development Corporation (SMDC) liable. The DOJ found no criminal liability on the part of
the Company. However, the SBMI found the Company to have overloaded the vessel. The
Company has appealed the findings of the SBMI to the Department of Transportation and
Communication (DOTC) and is awaiting its resolution.

The Company implemented a Cash for Work program involving residents of the affected areas in
the clean-up operations and mobilized its employees to assist in the operations. By the middle of
November 2006, the Company had cleaned up all affected shorelines and was affirmed by the
inspections made by Taskforce Solar 1 Oil Spill (SOS), a multi-agency group composed of officials
from the Local Government Units, Departments of Health, Environment and Natural Resources,
Social Welfare and Development, and the Philippine Coast Guard.

The Company collected a total 6,000 metric tons of debris which were brought to the Holcim Cement
facility in Lugait, Misamis Oriental for processing/treatment of waste. On November 20, 2006, one of
[1]
the last barge shipments of oil debris unfortunately sunk en route to the same plant .

The Company worked closely with the provincial government, Department of Welfare and Social
Development (DSWD), Department of Agriculture (DA), Technical Education and Skills
Development Authority (TESDA), the Philippine Business for Social Progress (PBSP), in developing
livelihood programs for the local community. Last November 27, 2006, the Company held a scientific
conference in cooperation with the University of the Philippines - Visayas, the National Disaster
Coordinating Council (NDCC), the World Wildlife Fund (WWF) and the Guimaras Provincial
Government with the objective of developing an integrated assessment and protocol for the
rehabilitation of the province. On top of providing alternative livelihood for affected Guimarasnons,
the company has established programs and facilities aimed at helping improve basic education in
the province.

The Company also established a mari-culture park at the Southeast Asian Fisheries Development
Center (SEAFDEC) area in the town of Nueva Valencia in August 2007. Several representatives
from nearby barangays received hands-on training including the construction of fish cages, stocking
of fingerlings, feeding, maintenance work on the fish cages, harvesting and packaging for shipment
to ensure that the program is sustainable.

With regard to the retrieval of the remaining oil still trapped in M/T Solar I, the P & I contracted a
sub-sea systems technology provider (Sonsub) to recover the oil from the sunken vessel. Oil
recovery operation was technically completed on April 1, 2007. A total of 9,000 liters of oil was
recovered.

Representatives from the IOPC met with the claimants from various affected areas of Guimaras to
give an orientation on the requirements of the claim as well as the documents required to be
submitted in support of the claim. The Company has filed a total of P
= 220 million against the IOPC
as of September 2008. A total of P = 129 million has been paid to the Company. The recent
installment was collected last June 13, 2008. As of September 30, 2008, total outstanding claims
from IOPC amounted to P = 91 million.

1 To dispel fear of contamination in the area, personnel and equipment were brought to the sink site. In separate statements made by the
Philippine Coast Guard (PCG), DENR and the Bureau of Fisheries and Aquatic Resources (BFAR), they found no traces of oil in the water.
The Company engaged the services of Mindanao State University and Dr. Angel Alcala of the Silliman University to conduct an impact
assessment of the sunken debris on the environment. Both studies concluded that the sinking of the ship had no effect on the environment.

67
2. Dalida and Gacho v. Petron,
Sunshine Maritime and Capt. Aguro
NPS # VI-08-INV-09F-00081
Office of the Provincial Prosecutor, Guimaras

3. Oliver Chavez vs. Petron,

Sunshine Maritime and Capt. Aguro
NPS # VI-08-INV-09G-00098
Office of the Provincial Prosecutor, Guimaras

On June 17, 2009, a certain Emily Dalida, whose child Remelo M. Dalida died on August 16, 2006 at
Brgy. Cabalagnan, Nueva Valencia, Guimaras, and Marcelino Gacho who was hospitalized for
seventeen (17) days due to parapneumonic effusion, filed formal complaints for Homicide for the
death of Remelo Dalida and for Less Serious Physical Injuries suffered by Gacho allegedly due to
exposure to the oil spill along the shores of Cabalagnan against the respondents Sunshine Maritime
Development Corp., Petron and its officers and Capt. Norberto Aguro, Master of M/T Solar I. On the
basis of the statement in the counter-affidavit submitted by Petron, Dalida and Gacho amended their
complaint, changing the offense alleged to violations of Sec 28, par. 5 in relation to Sec 4 of the Phil.
Clean Water Act of 2004, and dropping current Petron President Eric O. Recto, the Vice President
and Board of Directors as respondents.

On August 4, 2009, the Provincial Prosecutor served a subpoena with a complaint-affidavit from
Oliver Chavez, supposedly the Municipal Agriculturist of Nueva Valencia who claims to be suffering
from PTB due to his exposure to and close contact with waters along the shoreline and mangroves
affected by the oil spill. The respondents are being charged of Violation of the Philippine Clean
Water Act of 2004 (RA 9275). On or about August 24, 2009, Chavez filed a Manifestation and
Motion to Amend Complaint, changing the offense alleged to violations of Sec 28, par. 5 in relation
to Sec 4 of the Phil. Clean Water Act of 2004, and dropping current Petron President Eric O. Recto
as respondent.

The cases are still pending preliminary investigation by the Provincial Prosecutor.

Bataan Real Property Tax Cases

1. Petron vs. LBAA and Hon. Enrique T. Garcia, in his capacity as Provincial Governor,
Ms. Emerlinda S. Talento, in her capacity as Provincial Treasurer, and Engr. Ricardo C.
Herrera, in his capacity as OIC-Provincial Assessor, Province of Bataan.
CBAA Case No. L-85 (LBAA Case No. 2007-01)
CBAA

2. Talento vs. Hon. Escalada and Petron

SC GR No. 180884
Supreme Court

Petron vs. Emerlinda S. Talento, in her capacity as Provincial Treasurer of the Province
of Bataan
Civil Case No. 8801
RTC Br. 3 Balanga, Bataan

On August 21, 2007, Bataan Provincial Treasurer issued a Final Notice of Delinquent Real Property
Tax requiring the Company to settle the amount of P = 2,168 million allegedly in delinquent real
property taxes as of September 30, 2007.

The Company had previously contested the assessments subject of the Notice of Delinquent Real
Property Taxes, appealed the same to the Local Board of Assessment Appeals (LBAA), and posted
the necessary surety bonds to stop collection of the assessed amount. The Company contested the
first assessment covering the Isomerization and Gas Oil Hydrotreater (GOHT3) Facilities of the
Company which enjoy, among others, a 5-year real property tax exemption under the Oil
Deregulation Law (RA 8479) per Board of Investments (BOI) Certificates of Registration. The
second assessment is based on alleged non-declaration by the Company of machineries and
equipment in its Bataan refinery for real property tax purposes and/or paid the proper taxes thereon

68
since 1994. The Company questioned this second assessment on the ground among others that:
there was no non-declaration; back taxes can be assessed only for a maximum of 10 years, even
assuming fraud; erroneous valuations were used; some adjustments like asset retirement and non-
use were not considered; some assets were taken up twice in the assessments; and some assets
enjoyed real property tax exemptions.

Notwithstanding the appeal to the LBAA and the posting of the surety bond, the Provincial Treasurer
proceeded with the publication of the Public Auction of the assets of The Company, which she set
for October 17, 2007.

The Company exerted all efforts to explain to the Treasurer that the scheduled auction sale was
illegal considering the Companys appeal to the LBAA and the posting of the surety bond.
Considering the Treasurers refusal to cancel the auction sale, the Company filed a complaint for
injunction on October 8, 2007 before the Regional Trial Court to stop the auction sale. A writ of
injunction stopping the holding of the public auction until the case is finally decided was issued by
the RTC on November 5, 2007.

A motion to dismiss filed by the Provincial Treasurer on the ground of forum-shopping was denied
by the RTC. However, a similar motion based on the same ground of forum shopping was filed
before the LBAA by the respondents and the motion was granted by the LBAA on December 10,
2007.

On January 4, 2008, the respondents appealed the RTCs grant of a writ of injunction to the
Supreme Court. On February 28, 2008, our counsel was served notice of the Resolution of the
Supreme Court directing the Company to file its Comment on the petition of the Provincial Treasurer
of Bataan questioning the RTCs issuance of a writ of injunction against the holding of a public
auction for alleged delinquency in payment of real property taxes. The Companys comment was
filed on March 7, 2008.

Last January 17, 2008, the Company appealed from the LBAAs dismissal of its appeal by filing a
Notice of Appeal with the CBAA. On August 13, 2008, the CBAA remanded the case to the LBAA of
Bataan for factual determination, effectively granting our appeal and reversing the LBAA's dismissal
of the case.

On June 27, 2008, the Supreme Court dismissed the petition filed by Talento on the Order granting
the writ of injunction. All five Justices concurred that Talentos appeal was procedurally defective
and/or was filed out of time. The Court also faulted the petitioner for disregarding the hierarchy of
courts when it went straight to the Supreme Court without going thru the Court of Appeals. More
importantly, the Court ruled that the issues raised by the Company against the assessment should
be resolved before any auction sale is conducted; that the auction sale will have serious
repercussions on the operations of the Company; and that a surety bond may be filed in lieu of
payment of the taxes under protest to stop collection. Motions for reconsideration filed by Provincial
Treasurer and the League of Provinces of the Philippines (LPP) were denied.

All pending incidents in the RTC case are now deemed submitted for resolution.

69
Ownership and Capitalization

Ownership Structure

Petron is a publicly listed company owned by SEA Refinery Corporation, SEA Refinery Holdings,
B.V. and the public.

100%

SEA Refinery Holdings,

B.V.
Public
100%
Option to
Purchase
SEA Refinery Corporation

50.10% 40.47% 9.43%

Ashmore Investment Management Limited

Ashmore Investment Management Limited (Ashmore) is a leading emerging markets fund

manager based in London. Ashmore was started in 1992 as part of the Australia and New Zealand
Banking Group. In 1999, Ashmore became independent and as of December 31, 2008 managed
US$ 24.6 billion in pooled funds, segregated accounts and structured products.

Ashmore has a proven investment process resulting in a track record of strong financial
performance and growth. Its client base includes a broad range of institutional investors including
central banks, government/public and corporate pensions, banks and insurance companies, among
others.

In 2006, the shares of Ashmores parent company, Ashmore Group plc were listed in the London
Stock Exchange.

SEA Refinery Holdings, B.V.

SEA Refinery Holdings, B.V. is a company owned by funds managed by Ashmore Investment
Management Limited.

SEA Refinery Corporation

SEA Refinery Corporation is a domestic corporation wholly-owned by SEA Refinery Holdings B.V.

San Miguel Corporation

By virtue of the Option Agreement between San Miguel Corporation (SMC) and SEA BV, SMC
may potentially be among the top 20 shareholders once it exercises said Option Agreement.

SMC is Southeast Asia's oldest and largest beer brewer. It was incorporated in 1913 as La Fabrica
de Cerveza de San Miguel.

70
SMC was originally built around closely-related businesses beverage, food and packaging. Over
the years, SMC has established itself as Southeast Asias largest publicly-listed food, beverage, and
packaging company. Recently, SMC acquired stakes in two strategic companies Manila Electric
Company (Meralco) and Petron. Thus, it has gained access to an even wider distribution network.

Top 20 Stockholders

Listed below are the top 20 stockholders of Petron as of September 30, 2009.

Rank Name Nationality No. of shares %

1 SEA Refinery Corporation Filipino 4,696,885,564 50.10

2 SEA Refinery Holdings, B.V. Netherlands 3,794,093,495 40.47

3 PCD Nominee Corp. (Filipino) Filipino 212,437,063 2.27

4 PCD Nominee Corp. (non-Filipino) Foreign 45,054,860 0.48

5 Home Development Mutual Fund Filipino 18,830,091 0.20

Ansaldo, Godinez & Co. Inc. FAO Mark V.
6 Filipino 8,000,000 0.09
Pangilinan
Ernesto Chua Chiaco &/or Margaret Sy Chua
7 Filipino 7,780,000 0.08
Chiaco
8 Marciano V. Pangilinan American 5,000,000 0.05

9 Raul Tomas Concepcion Filipino 3,504,000 0.04

10 Ernesto Chua Chiaco Filipino 3,450,000 0.04

11 Ernesto Chua Chiaco Filipino 3,100,000 0.03

12 Ching Hai Go &/or Martina Go Filipino 2,500,000 0.03

13 China Banking Corporation Filipino 2,287,500 0.02

14 Allied Banking Corporation Filipino 2,145,000 0.02

15 Conrado S. Chua, Sr. Filipino 2,130,000 0.02

16 Shahrad Rahmanifard Iranian 2,000,000 0.02

17 Frank Chua &/or Genevieve Lim Chua Filipino 1,453,588 0.02

18 Home Development Mutual Fund Pag-ibig Fund Filipino 1,335,000 0.01

19 Mateo Lim Filipino 1,244,500 0.01

20 Nicasio I. Alcantara Filipino 1,238,704 0.01

Stock Ownership Plan

Currently, Petron does not have a stock ownership plan or program. In 1994, when Petrons initial
public offering was undertaken, a special secondary sale of Petrons shares was offered to
employees. Entitlement of shares at the listing price of P9.00 per share was made equivalent to the
employees base pay factored by his/her service years with Petron. Petrons Executive Officers,
except the Chairman, the President and the Vice President for Corporate Planning, were entitled to
own Petron shares under this Stock Ownership Plan.

71
Market Price of and Dividends on Petrons Common
Equity and Related Stockholder Matters
Market Information

The registrants common equity is principally traded at the Philippine Stock Exchange. The high and
low sales prices for each period are indicated in the table below:

Highest Close Lowest Close

Period Price Date Price Date
2009
1st Quarter 5.90 26-Feb-09 4.70 Jan 8,9,19,21,22
April 14,15
May 18,19,29
2nd Quarter 6.00 June 1 5.20 23-Jun-09
3rd Quarter 5.80 Aug 11,13 5.10 Sept 25,28,30
2008
1st Quarter 6.20 28-Feb-08 4.75 22-Jan-08
2nd Quarter 6.50 23-Jun-08 5.10 30-May-08
3rd Quarter 6.50 1-Jul-08 5.70 26-Aug-08
4th Quarter 5.70 9-Dec-08 4.20 26-Nov-08
2007
1st Quarter 4.90 26-Feb-07 3.75 8-Jan-07
2nd Quarter 5.70 21-Jun-07 4.70 3-Apr-07
3rd Quarter 6.40 18-Jul-07 4.60 11-Aug-07
4th Quarter 7.20 5-Nov-07 5.60 21-Dec-07

The total number of stockholders as of December 31, 2008 was 178,578. Price as of last trading
day of the year, December 24, 2008 was P5.10 per share.

As of September 30, 2009, the total number of stockholders was 176,659 and the stock price as of
September 30, 2009 was P5.10 per share.

Dividends

Petrons dividend policy is to declare as dividends out of the companys unrestricted retained
earnings at least 25% of its unappropriated net income (after taxes) for the prior fiscal year, payable
either in cash, property or shares. The Board shall determine, by resolution, the exact amount, date
and shareholders entitled to such dividends.

On May 7, 2008, the Companys Board of Directors declared a cash dividend in the amount of P0.10
per share. Stockholders on record as of June 2, 2008 were paid their dividend on June 27, 2008.

The previous year, on May 3, the Board also declared a cash dividend of P0.10 per share.
Stockholders on record as of May 28, 2007 were entitled to the dividend and the payment date was
June 22, 2007.

Sale of Unregistered or Exempt Including Securities Constituting an Exempt Transaction

In August 2006, the Company issued five-year Fixed Rate Corporate Notes amounting to P6.3
billion through private placement to not more than nineteen primary institutional lenders, arranged by
BPI Capital and ING. Subsequently in June 2009, the Company issued five and seven-year Fixed
Rate Corporate Notes totaling P10 billion to primary institutional lenders not exceeding nineteen,
arranged by BPI Capital, DBP, The Hongkong and Shanghai Banking Corporation Limited and ING.

The Company did not seek written confirmation from the Commission that such issuances are
exempt from registration.

72
Management, Employees and Structure
As of October 31, 2009, the Companys employees totaled 1,344 broken down as follows: 17
Executives, 99 Managerial, 753 Professional and Technical employees, and 475 Rank and File
employees. The refinery upgrade as well as retail network expansion may require additional hiring
to support the same, the number of which cannot be determined until project implementation
proceeds.

Organization Structure

CHAIRMAN & CEO

and
BOARD OF DIRECTORS

BOARD EXECUTIVE
COMMITTEE

BOARD GENERAL COUNSEL

COMPENSATION & CORPORATE
COMMITTEE SECRETARY

BOARD AUDIT
COMMITTEE INTERNAL AUDIT

BOARD NOMINATION
COMMITTEE

PRESIDENT

PETRON PUBLIC AFFAIRS

FOUNDATION

CHIEF FINANCE GENERAL MANAGER

OFFICER

RESEARCH CORP. TECHL

& DEVT SERVICES
GROUP

CORPORATE TREASURERS CONTROLLERS RETAIL COMMERCIAL REFINERY DEPOT & PLANT

PLANNING MARKETING MARKETING OPERATIONS

SUBSIDIARIES HUMAN SUPPLY PROCUREMENT

RESOURCES

Board of Directors

Name Designation
Ramon S. Ang Chairman/CEO and Director
Eric O. Recto President and Director
Eduardo M. Cojuangco, Jr Director
Estelito P. Mendoza Director
Seumas S. Dawes Director
Bernardino R. Abes Director
Roberto V. Ongpin Director
Ron W. Haddock Director
Reynaldo G. David Independent Director
Angelico T. Salud Independent Director

73
Ramon S. Ang, Filipino, 55 years old, is the Chairman and Chief Executive Officer of Petron since
January 8, 2009. He is also the Chairman of the Board Executive Committee and Compensation
Committee. He is also Chairman of Petrogen Insurance Corporation, Las Lucas Construction and
Development Corporation, Overseas Ventures Insurance Corporation, Ltd. (OVINCOR), New
Ventures Realty Corporation and Chairman/CEO of Petron Marketing Corporation and Petron
Freeport Corporation. He also serves as the Vice Chairman (since January 1999) and President
and Chief Operating Officer of San Miguel Corporation (since March 2002), Chairman of Liberty
Telecom Holdings Inc. (since December 2008) and Vice Chairman and Director of Manila Electric
Company (since December 2008). Other current positions include: Chairman and President of San
Miguel Brewery Inc.; Chairman of San Miguel Properties, Inc., The Purefoods-Hormel Company,
Inc., Anchor Insurance Brokerage Corporation and San Miguel Brewery Hongkong Ltd. (Hongkong),
Philippine Diamond Hotel & Resort Inc., Philippine Oriental Realty Development Inc., Atea Terra
Corporation and Cyber Bay Corporation; Director of Ginebra San Miguel Inc. and San Miguel
Purefoods Company Inc.; and an Independent Director of Philweb Corporation. Previously, Mr. Ang
was the Chief Executive Officer of the Paper Industries Corporation of the Philippines and Executive
Managing Director of Northern Cement Corporation, Aquacor Food Marketing, Inc., Marketing
Investors Inc., PCY Oil Mills, Metroplex Commodities, Southern Island Oil Mills and Indophil Oil
Corporation. He has a Bachelor of Science degree in Mechanical Engineering from the Far Eastern
University.

Eric O. Recto, Filipino, 45 years old, is a director of Petron since July 31, 2008 and President of
Petron since October 7, 2008. He is a member of the Board Executive Committee and the
Nomination and Compensation Committees. He is a Director of Petrogen Insurance Corporation,
Petron Marketing Corporation, and Petron Freeport Corporation. He is also the Chairman/CEO of
Petron Foundation, Inc. He is currently, the Chief Executive Officer of Eastern Telecommunications
Philippines, Inc. (ETPI) and Vice Chairman and President of ISM Communications Corporation,
ETPIs parent company. He is also Vice Chairman of Philweb Corporation and Alphaland
Corporation. He is also an independent director of the Philippine National Bank, PNOC Energy
Development Corporation and Metro Pacific Investment Corporation. He was previously
Undersecretary of the Department of Finance, in charge of both the International Finance Group and
the Privatization Office from 2002-2005. Before his work with the government, he was CFO of
Alaska Milk Corporation (2000-2002) and Belle Corporation (1994-2000). Mr. Recto has a degree in
Industrial Engineering from the University of the Philippines and has an MBA from the Johnson
School, Cornell University.

Eduardo M. Cojuangco, Jr., Filipino, 74 years old, is a non- executive director of Petron since
January 8, 2009. He is the Chairman and Chief Executive Officer of San Miguel Corporation since
July 1998. He is also the Chairman and Chief Executive Officer of Ginebra San Miguel Inc.;
Chairman of ECJ & Sons Agricultural Enterprises Inc., Eduardo Cojuangco Jr. Foundation Inc., and
San Miguel Purefoods Company Inc.; and a Director of Manila Electric Company and Cainaman
Farms Inc. Previously held positions include: President and Chief Executive Officer of United
Coconut Planters Bank; President and Director of United Coconut Life Assurance Corporation and
Governor of the Development Bank of the Philippines. Mr. Cojuangco was formerly a member of the
House of Representatives (1970-1972), Governor of Tarlac (1967-1979) and Philippine Ambassador
Plenipotentiary. He attended the College of Agriculture at the University of the Philippines Los
Baos and the California Polytechnic College in San Luis Obispo, U.S.A. and was conferred a post
graduate degree in Economics, honoris causa, from the University of Mindanao.

Estelito P. Mendoza, Filipino, 79 years old, is a non- executive director since January 8, 2009. He
is a member of the following Board Committees: Nomination, Compensation, and Audit Committees.
He is currently the Chairman of Prestige Travel Inc. He holds directorships in San Miguel
Corporation, a position which he also held in 1991-1993 and 1998; the Manila Electric Company;
Philippine Airlines, Inc.; and is head of E. P. Mendoza Law Office. He was previously the Chairman
of Dutch Boy Philippines, Inc. and Alcorn Petroleum and Minerals Corporation and a Director of East
West Bank. Earlier, he served the Philippine Government as a former Solicitor General (1972-1986),
Minister of Justice (1984-1986), Member of the Batasang Pambansa (1984-1986) and Governor of
the Province of Pampanga (1980-1986). His professional affiliations include membership with the
Integrated Bar of the Philippines, the Philippine Bar Association, International Academy of Trial
Lawyers (USA), and the American Society of International Law. Mr. Mendoza took his pre-law
course and Bachelor of Laws degree, cum laude, at the University of the Philippines. He also holds
a Master of Laws degree from Harvard Law School.

74
Seumas S. Dawes, Australian, 52 years old, is a non- executive director since May 12, 2009. He is
a Senior Fund Manager and member of the Investment Committee, who joined Ashmore in 2000
from Paribas Limited, where he was responsible for local markets derivatives trading. Prior to
Paribas he worked for two years as Head of Local Markets Proprietary Trading at ANZ Investment
Bank and before that, was a Director at Merrill Lynch, in the International Credit Trading group. He
has extensive trading experience in Emerging Markets, credit products, and foreign exchange,
interest rate and equity derivatives. Before commencing his career in the financial markets in 1989,
he held a number of positions in the Australian public sector, including three years as a senior
adviser to the then Treasurer of Australia (later, Prime Minister) Paul Keating.

Presently, Mr. Dawes sits as a Director in the Board of the following companies: Offshore Strategic
Assets Private Limited (since Feb. 27, 2007), Rubicon Holdings Private Limited and Rubicon
Maritime Private Limited (since May 2, 2007), Rubicon Vantage Offshore Private Limited (since May
4, 2007), Rubicon MSV Holdings Limited and Rubicon Offshore Holdings Ltd (since June 16, 2007),
Rubicon Offshore International Holdings Limited (since June 19, 2007), Rubicon Venture Limited
(since July 23, 2007), ECI Holdings (Hungary) KFT (since Sept. 1, 2007), Telecom Investments
(Finance) LLC (since Sept. 4, 2007), Telecom Investment (Finance) Ltd. (since Sept. 18, 2007),
Rubicon Offshore International Private Limited (since Sept. 5, 2006), Morton Bay (Holdings) Pte
Limited, Singapore (since Oct. 8, 2005), Jasper Investments Limited, Pacnet Holdings Limited, Star
Energy Holdings (Sebatik) Pte Ltd., Star Energy Holdings Pte Ltd., and Neptune Marine Oil & Gas
(now delisted from OTC), Neptune Marine Investment and Rubicon SP Holdings Limited.

Bernardino R. Abes, Filipino, 78 years old, has been a non-executive director of the Company
since July 2001. He is currently the Chairman of the Government Service Insurance System,
following a three-year term as Chairman of the Social Security Commission. He was also a Director
of the Manila Electric Company, Philippine Stock Exchange, Union Bank of the Philippines, First
Philippine Holdings, Philex Mining Corporation, Belle Corporation and Clark Development
Corporation. He held the position of Presidential Adviser on Legislative Affairs and Head,
Presidential Legislative Liaison Office in 2001. Other positions include: Consultant for the Philippine
Senate (1992-1993), Director for Bureau of Labor Relations (1957-1961), Secretary of Labor (1962-
1964), Administrator and Chairman of SSS (1963-1965). He graduated from the University of Santo
Tomas with a Bachelor of Laws degree.

Roberto V. Ongpin, Filipino, 72 yrs. old, is a non-executive director of the Company since July 31,
2008. He is a member of the Board Executive and Compensation Committees. He is currently the
Chairman of the following corporations: Philweb Corporation (since January 2000), ISM
Communications Corporation (since 2001), ETPI (since March 2006), Developing Countries
Investment Corporation (since January 1987), La Flor de la Isabela, Inc. (since April 1996) and
Alphaland Corporation (since May 2007). He is also the Deputy Chairman of South China Morning
Post, Hong Kong (since October 1993). He is a Director of Philex Mining Corporation (since June
2007), Araneta Properties, Inc. (since May 1998), and Shangri-la Asia, Hong Kong (since March
1993). Mr. Ongpin joined SGV & Co. in 1964 and was Chairman and Managing Partner of the firm
from 1970 to 1979. He served as Minister of Trade and Industry of the Republic of the Philippines
from 1979 to 1986. Mr. Ongpin holds a Bachelor of Science in Business Administration, major in
Accountancy, cum laude, from the Ateneo de Manila University. He is a Certified Public Accountant
(CPA) and has an MBA from Harvard Business School.

Ron W. Haddock, American, 68 years old, is a non-executive director since December 2, 2008. He
is a member of the Audit Committee and an alternate member of the Executive Committee. He sits
as the Chairman of the Board of Ashmore Energy International which he has occupied since
September 2006. His other current positions include: Chairman of Safety-Kleen, Trinity Industries
Compensation Committee, Adea International Compensation Committee, Safety-Kleen
Compliance/Governance Committees; and Member of the Boards of Ashmore Energy International;
Alon Energy USA; Adea International, Inc.; Safety-Kleen; Trinity Industries and Rubicon Offshore
International. Previously, he was Chairman and CEO of Prisma Energy International and FINA. He
started his career with Exxon in 1963 and held various management positions thereafter which
include: Manager of Baytown Refinery; Corporate Planning Manager; Vice President for Refining;
Executive Assistant to the Chairman; and Vice President and Director of Esso Eastern, Inc. Mr.
Haddock is an active member of several industry and civic organizations in the U.S. and was a
former Honorary Consul of Belgium in Dallas, Texas. He holds a degree in Mechanical Engineering
from the Purdue University.

75
Reynaldo G. David, Filipino, 66 years old, is a non-executive director since May 12, 2009. He is
the President and Chief Executive Officer of the Development Bank of the Philippines, a position
which he has occupied since October 2004. He is also actively involved as Chairman of the
following institutions: DBP-Daiwa Securities SMBC Philippines Inc., LGU Guarantee Corporation
and NDC Maritime Leasing Corporation; and as Director of DBP Data Center, Inc., Megalink Inc.
and Al-Amanah Islamic Bank of the Philippines. Previously, he was the Vice Chairman/CEO and
Executive Committee Chairman of Export and Industry Bank (September 1997-September 2004);
Director/CEO of Unicorp Finance Limited and Consultant of PT United City Bank (concurrently held
from 1993-1997; Vice President and FX Manager of the Bank of Hawaii (April 1984-August 1986);
and held various directorships and/or executive positions with The Pratt Group (September 1986-
December 1992), a major industrial Australian firm based in Hong Kong. Other positions held
include: President and Chief Operating Officer of Producers Bank of the Philippines (October 1982-
November 1983); President and Chief Operation Officer of International Corporation Bank (March
1979-September 1982); and Vice President and Treasurer of Citibank N. A. (November 1964-
February 1979). A TOYM Awardee for Offshore Banking in 1977, he has likewise been awarded by
the Association of Development Financing Institutions in Asia & the Pacific (ADFIAP) as the
Outstanding Chief Executive Officer in 2007. A Certified Public Accountant since 1964, he
graduated from the De La Salle University with a Liberal Arts degree in Commerce in 1963 and has
attended the Advance Management Program of the University of Hawaii (1974). He was recently
conferred with the title Doctor of Laws, honoris causa, by the Palawan State University in 2005.

Angelico T. Salud, Filipino, 47 years old, is an independent director since January 8, 2009. He is
the Chairman of the Nomination Committee and a member of the Audit and Compensation
Committees. He is currently a Legal Consultant at the Office of the Mayor of Makati City. He was
formerly the President of the National Resources Development Corporation (October 2004-March
2006); National Home Mortgage Finance Corporation (September 2000-September 2004); and
Home Development Mutual Fund (August-September 2000). A law practitioner, Mr. Salud has had
extensive work experience with both government and private sectors. He is a graduate of a Bachelor
of Science degree in Legal Management from the Ateneo de Manila University and a Bachelor of
Laws degree from the University of the Philippines.

Special Advisers to the Board

On August 12, 2009, a Board of Advisors was created to assist and advise the Board on matters
relating to business strategies and directions aimed at improving shareholder value. It was further
stressed that the advisors shall have non-voting rights. Three out of the original five members have
been selected by the Board to form the Board of Advisors. Mr. Mirzan Mahathir, Ms. Aurora T.
Calderon and Amb. Romela M. Bengzon were appointed Board Advisors.

Other Executive Officers

Name
Lubin B. Nepomuceno
Emmanuel E. Eraa
Jose Jesus G. Laurel
Ramon V. del Rosario
Miguel V. Angeles
Ma. Rowena O. Cortez
Peter Paul V. Shotwell
Susan Y. Yu
Freddie P. Yumang
Ma. Concepcion F. de Claro
Ma. Cristina M. Menorca
Albertito S. Sarte
Efren P. Gabrillo
Nathaniel R. Orillos
Wilfredo A. Galoyo
Position
Senior Vice President & General Manager
Senior Vice President & Chief Finance Officer
Vice President, General Counsel and Corporate Secretary
Vice President, Retail Marketing
Vice President, Commercial Marketing
Vice President, Supply
Vice President, Depot & Plant Operations
Vice President, Procurement
Vice President, Refinery
Vice President, Corporate Planning
Vice President, Controllers
Vice President, Treasurers
Assistant Vice President, Internal Audit
Assistant Vice President, Refinery Production
Assistant Vice President, Human Resources

76
Lubin B. Nepomuceno, Filipino, 58 years old, was appointed as General Manager of Petron and
heads the Supply and Refinery Divisions of the Company since January 8, 2009. He is a director of
Las Lucas Construction and Development Corporation, New Ventures Realty Corporation and
Petron Freeport Corporation. He is presently the Chairman of San Miguel Corporation Shipping and
Lighterage. His other current positions include: directorships in Corporate Technology Group, San
Miguel Food and Beverage International Ltd., and Thai San Miguel Liquor Co. Ltd; President of
Archen Technologies, Inc.; Senior Vice President and Manager of Corporate Technical Services;
and Board Member of San Miguel Yamamura Packaging Corporation. He has held various board
and executive positions in San Miguel group. Mr. Nepomuceno holds a Bachelor of Science degree
in Chemical Engineering and an MBA from the De La Salle University. He also attended trainings at
the University of Hawaii, University of Pennsylvania and Japans Sakura Bank Business
Management.

Emmanuel E. Eraa, Filipino, 49 years old, is the Chief Finance Officer of Petron and heads the
Finance and Corporate Planning Divisions of the Company since January 8, 2009. He is the
President/CEO of Petrogen Insurance Corporation, Deputy Chairman of Overseas Ventures
Insurance Corporation, Ltd. and a director of Las Lucas Construction and Development Corporation,
New Ventures Realty Corporation, Petron Marketing Corporation, Petron Freeport Corporation and
Trustee of Petron Foundation Inc. He also holds the position of Chief Information Officer of the
Corporate Service Unit of San Miguel Corporation. He started his career with San Miguel as
Finance Manager in 1998, then went on to hold other positions in the field of finance, namely:
Finance Manager, San Miguel Foods, Inc. (Oct. 1999-Dec, 1999); Finance and Management
Services Officer, San Miguel Food Group (2000-2001); Finance Officer, San Miguel Purefoods
Corporation (Jan. 2001-Jun. 2002); Chief Finance Officer, San Miguel Purefoods Corporation (Jul.
2002-May 2005); Chief Finance Officer, SMFBIL/NFL Australia (May 2005-Nov. 2006); Executive
Assistant to the Chief Financial Officer, Corporate Service Unit (Dec. 2006-Jan. 2008). Mr. Eraa
has a Bachelor of Science degree in Accounting from the Colegio de San Juan de Letran.

Jose Jesus G. Laurel, Filipino, 54 years old, has been the Companys General Counsel since May
12, 2005 and Vice President for Legal and External Affairs since July 26, 2005. He is also Corporate
Secretary and Compliance Officer of the Company as well as of Petrogen Insurance Corporation,
Petron Marketing Corporation, and Petron Freeport Corporation. He is the General Counsel and
Corporate Secretary of New Ventures Realty Corporation and Las Lucas Construction and
Development Corporation. He is a Trustee and President of Petron Foundation, Inc. Prior to Petron,
he worked with PNOC Energy Development Corporation as General Counsel and Corporate
Secretary from 1992 to 2001 and as Vice President for Corporate Services from 2001 to 2005 and
was later promoted to Vice President/Chief Operating Officer. He was also General Counsel and
Corporate Secretary of the PNOC Coal Corporation and PNOC Exploration Corporation in 1992 until
1999. Atty. Laurel was with the Securities and Exchange Commission (SEC) from 1982 to 1992 as
Hearing Officer and was later appointed as Deputy Executive Director. He holds an A.B. Economics
nd
degree from the Ateneo de Manila University and an LL.B degree also from the same university (2
th
Honors/Silver Medal). He is a 6 -place Bar examinations topnotcher and holds a Master of Laws
degree from Yale Law School, Yale University, USA.

Ramon V. del Rosario, Filipino, 59 years old, is the Vice President for Retail Marketing since
September 1, 2009. Prior to his current appointment, he was the General Manager for Reseller
Trade from November 2005 to June 2009. In his 30 years of service with the Company, he has
been assigned to various positions in the Marketing, Operations and Corporate Planning Divisions,
based in Manila and Vismin. He started his stint in Petron in 1979 as a Field Engineer at PNOC-
EDCs Geothermal Division. A Mechanical Engineering graduate of De La Salle College, Mr. del
Rosario holds a Masters degree in Mechanical Engineering from the University of the Philippines
and an MBA from the Ateneo de Manila University. He completed courses on Petroleum Policy and
Management at the Norwegian Petroleum Directorate in 1991 and Supply Chain Management at
INSEAD in Fontainbleau, France in 2000.

Miguel V. Angeles, Filipino, 49 years old, is the Vice President for Commercial Marketing since
September 1, 2009. He was previously the General Manager for Industrial Trade from August 2006
to June 2009 before becoming the Head for Commercial Marketing in June this year. He started his
career with Petron as an Analyst in the Project Development Department of the Corporate Planning

77
Division in March 1981, then went on to assume various posts in Corporate Planning, Supply and
Marketing. He has been with the Company for a period of 28 years. Mr. Angeles has a Bachelors
degree in Mathematics and an MBA from the University of the Philippines.

Ma. Rowena O. Cortez, Filipino, 44 years old, is the Vice President for Supply since September 1,
2009. She was the Head for Supply prior to her current designation. She joined Petrons Marketing
Division in 1993 as a Market Planning Analyst then moved on to several supervisorial and
managerial positions in the Marketing and Supply Divisions. She was also the Project Manager for
the Demand Planner implementation of Petron, and subsequently delivered a paper on this
experience at the i2 Planet in Phoenix, Arizona (USA) in May 2005. Prior to her transfer to Petron,
she started her career with the PNOC-Energy Research and Development Center where she
handled computer training, information system-related activities and various research work on new
and renewable sources of energy. She is a member of the UP Industrial Engineering Alumni
Association. Ms. Cortez holds a Bachelor of Science in Industrial Engineering (1986) and an MBA
(1994) from the University of the Philippines. She has attended the prestigious Energy Course at
the University of Oxford in Oxfordshire, UK in 2008.

Peter Paul V. Shotwell, Filipino, 56 years old, is the Vice President for Depot & Plant Operations
since September 1, 2009. He was formerly the Manager for Supply & Operations Planning
Department from May 2005-June 2009 before becoming Head last June 2009. He has been with
the Company for 29 years and has held various positions mostly in the Operations Division since
1980. He holds a Bachelor of Science degree in Mechanical Engineering (1976) from the De La
Salle University.

Susan Y. Yu, Filipino, 33 years old, was appointed as the Vice President for Procurement last
February 27, 2009. She is the Treasurer of Petrogen Insurance Company and Director of Overseas
Ventures Insurance Corporation, Ltd. Prior to joining Petron, she was the Assistant Vice President
and Senior Corporate Procurement Manager of San Miguel Brewery, Inc. From July 2003 to
February 2008, she was the Assistant Vice President and Senior Corporate Procurement Manager
of San Miguel Corporation Corporate Procurement Unit. Ms. Yu also worked with Philippine Airlines
from May 1997-June 2003 as Fuel Purchasing and Price Risk Management Manager. She has a
Commerce degree in Business Management from De La Salle University and an MBA from the
Ateneo de Manila University, for which she was awarded a Gold Medal for Academic Excellence.
She is presently pursuing her doctorate degree in Business Administration at De La Salle University.

Freddie P. Yumang, Filipino, 51 years old, is the Vice President for Refinery since September 1,
2009. He brings in an extensive 27 years of work experience in refinery operations. He joined
Petron as a Project Engineer Trainee in January 1982 then went on to assume various supervisorial
and managerial positions at the Refinery. He has been sent overseas on numerous occasions to
lead technical teams for Foster Wheeler International (1998-1999) and Petronas Refinery in
Malaysia (1987-1989) and has served as resource person and speaker at conferences in several
Asian countries. Mr. Yumang is a registered and professional mechanical engineer (RME/PME) and
is an active member of the Philippine Society for Mechanical Engineers (PSME) of which he served
as National Director in 2006 and 2007. Among his most notable achievements was receiving a
Plaque of Recognition from the ME Alumni Association of MIT in 2007; a citation as one of the
Outstanding Mechanical Engineers (TOME) by the PSME in 2005; and an award as Outstanding
President of PSME Bataan Chapter in 1995. He is a Mechanical Engineering graduate of the Mapua
Institute of Technology (1981) and has MBA units from De La Salle University (1987). He also
attended the Basic Management and Management Development Programs of the Asian Institute of
Management in 1992 and 2002, respectively, from which he received separate awards for Superior
Performance.

Ma. Concepcion F. de Claro, Filipino, 51 years old, is the Vice President for Corporate Planning
since November 7, 2008. She was the Accounting Manager from April 2003 and became the
Controller of the Company as well as its subsidiaries, namely, Petrogen Insurance Corporation, New
Ventures Realty Corporation, Petron Foundation, Inc., Petron Marketing Corporation, Petron
Freeport Corporation, Las Lucas Construction and Development Corporation and New Ventures
Realty Corporation. She has been with the Company for 27 years. She started as a Financial
Analyst and held several supervisory positions at the PNOC Energy Development Corporation
(PNOC EDC), a former affiliate of Petron. After 11 years in PNOC EDCs Finance Division, Ms. De
Claro transferred to PNOCs Budget and Control Department, where she was a Supervisor for three

78
years before she was assigned to Petrons Corporate Planning Department when the Company was
privatized in 1994. She was the Planning Officer for the Department for seven years, after which
she became the Manager for Strategic Planning. She graduated magna cum laude with a degree in
Bachelor of Science in Commerce, major in Accounting from the Colegio de San Juan de Letran.

Ma. Cristina M. Menorca, Filipino, 54 years old, is the Vice President for Controllers since
September 1, 2009. She has been with Petron for 31 years. She has been the Controller of the
Company since November 7, 2008. She is a Director and the Controller of New Ventures Realty
Corporation and its affiliate Las Lucas Construction and Development Corporation, Petrogen
Insurance Corporation, Petron Marketing Corporation and Petron Freeport Corporation; and a
Trustee and Controller of Petron Foundation Inc. She started her career with Petron in 1978 as
Financial Analyst and then held various supervisory positions before moving on to managerial posts
which include: HR Manager PNOC Marine Group of Companies (1990-1993); Purchasing
Manager (1993-1995); SAP Project Manager (1995-1996); Business Systems Support Manager
(1996-2001); HR Manager (2001-2008) and Financial Planning and Risk Management Manager and
Special Assistant to the President and the Chairman (Oct. 2008-Nov. 2008). Prior to joining Petron,
she was a Staff Auditor at SGV in 1976 and the Chief Accountant of San Beda College in 1977.
She was recently awarded as the 2008 PMAP (People Management Association of the Philippines)
People Manager of the Year. Ms. Menorca holds a Bachelor of Science degree in Commerce,
th
major in Accounting, magna cum laude, from the University of Sto. Tomas and placed 18 in the
1976 CPA Board examinations.

Albertito S. Sarte, Filipino, 42 years old, is the Vice President for Treasurers since September 1,
2009. He is the Treasurer of Petrogen Insurance Corporation, Las Lucas Construction and
Development Corporation, New Ventures Realty Corporation, Petron Marketing Corporation, Petron
Freeport Corporation and Petron Foundation, Inc. He has had twenty years of experience in the
field of corporate finance. He joined San Miguel Corporation (SMC) in 1988 as Budget Analyst for
Corporate Budget, and then worked his way up to becoming a Senior Financial Analyst for Funds
Planning Department (1995 to November 1999) and Assistant Vice President for International
Treasury of SMC (December 1999-June 2009). He is a graduate of a Bachelor of Science degree in
Business Management from the Ateneo de Manila University in 1987 and attended the Management
Development Program of the Asian Institute of Management in 1995.

Efren P. Gabrillo, Filipino, 54 years old, is the Assistant Vice President for Internal Audit since
September 1, 2009. He was the Manager of Internal Audit from April 2003 to August 2009. He
began his career with Petron as an Auditor in 1977 then went on to assume positions in Accounting,
Treasury, Organizational Development Task Force (ODTF), Materials & Services Procurement
within a 30-year span. Prior to Petron he worked with Pilipinas Shell from December 1977 to
December 1978. A Certified Public Accountant, Mr. Gabrillo is a member of the Philippine Institute
of Certified Public Accountants (PICPA) and the Institute of Internal Auditors (IIA) Philippines. He is
a graduate of a Bachelor of Science degree in Commerce, majoring in Accounting, from the De La
Salle University in 1975. He has also completed the Management Development Program of the
Asian Institute of Management in October 2003 and has attended numerous trainings here and
abroad.

Nathaniel R. Orillos, Filipino, 50 years old, is the Assistant Vice President for Refinery Production
since September 1, 2009. He has been with the Company for over 27 years since starting as a
Process Engineer in 1982. Previous to his current position, he was the Operations Division
Manager of Petrons Refining Division from January 2007 to August 2009. He also assumed various
managerial positions such as: Area Manager for Oil Movement & Storage and Terminalling
Operations (July 2005-December 2006); Administration Manager (January 2005-June 2005);
Planning & Quality Control Manager (January 2003-December 2004); and Engineering Technology
Manager (July 2001-December 2002). He was also assigned as Business Development Officer
under Business Development Department of Corporate Planning Division from January 1997 to
June 2001. He earned a Bachelor of Science degree in Chemical Engineering from the University of
Sto. Tomas in 1981, and is a licensed professional Chemical Engineer. He has attended various
management courses such as the Asian Institute of Managements Basic Management and
Management Development Programs in 1994 and 2003, respectively.

Wilfredo A. Galoyo, Filipino, 59 years old, is the Assistant Vice President for Human Resources
since September 1, 2009. He started his career with Petron as an HR Assistant in 1979 then went

79
on to assume various positions within the Human Resource Department for a span of 30 years. He
has also held a number of special assignments for the Company, most notably as a delegate to the
ILO Tripartite Conference in Geneva, Switzerland in 1998. Mr. Galoyo holds a degree in Philosophy
from the Divine Word Seminary in 1972 and a Masters of Arts degree in Industrial Relations from the
University of the Philippines in 1989. He has attended extensive trainings in the field of human
resources locally and overseas.

Significant Employees

There is no significant employee or personnel who is not an executive officer but is expected to
make a significant contribution to the business.

Family Relationship

Mr. Eric O. Recto, the President and also a director of the Company, is the nephew of Mr. Roberto
V. Ongpin who is also a Director.

Involvement in Certain Legal Proceedings

For the past five years and up to the date of this Prospectus, the Company is not aware that anyone
of the incumbent directors and executive officers have been the subject of bankruptcy petitions or
pending criminal proceedings in court or have been by judgment or decree found to have violated
securities or commodities law and enjoined from engaging in any business, securities, commodities
or banking activities.

Compensation of Directors and Executive Officers

Standard Arrangements

Petrons Executive Officers are also regular employees of the Company and are similarly
remunerated with a compensation package comprising of twelve (12) months base pay. They also
receive whatever gratuity pay the Board extends to the managerial, supervisory and technical
employees of the Company.

The members of the Board of Directors who are not Executive Officers are elected for a term of one
year. They likewise receive remuneration for 12 months in Directors fees and gas allowance, in
addition to compensation on a per meeting participation.

The aggregate compensation paid or incurred during the last two fiscal years and the estimate for
the ensuing year are as follows:

Compensation of Executive Officers and Directors (In Million Pesos)

Name Principal Position Period Covered Year Salary Bonus Total

Ramon S. Ang Chairman January 9, 2009 to

Present
Eric O. Recto President October 7, 2008 to
present
Lubin B. Sr. Vice President and January 9, 2009 to
Nepomuceno General Manager present
Emmanuel E. Sr. Vice President and January 9, 2009 to
Erana Chief Financial Officer present
Ramon V. del Vice President September 1, 2009 to
Rosario Retail Marketing present
Miguel V. Angeles Vice President September 1, 2009 to
Commercial Marketing present
Freddie P. Yumang Vice President - September 1, 2009 to
Refinery present

80
 Peter Paul V. Vice President Depot September 1, 2009 to
Shotwell and Plant Operations present
Rowena O. Cortez Vice President Supply September 1, 2009 to
present
Concepcion F. de Vice President - November 7, 2008 to
Claro Corporate Planning Present
Jose Jesus G. General Counsel and April 1, 2005 to
Laurel Vice-President for Legal present
and External Affairs;
Corporate Secretary and
Compliance Officer
Susan Y. Yu Vice President - March 1, 2009 to
Procurement present
Albertito S. Sarte Vice September 1, 2009 to
President/Treasurer present
Ma. Cristina M. Vice September 1, 2009 to
Menorca President/Controller present
Efren P. Gabrillo Asst. Vice President- September 1, 2009 to
Internal Audit present
Nathaniel R. Orillos Asst. Vice President- September 1, 2009 to
Refinery Production present
Wilfredo A. Galoyo Asst. Vice President- September 1, 2009 to
Human Resources present
Total (Top 5 Executives) 2009
Estimate 41.48 6.96 48.44
2008 40.63 19.05 59.68
2007 39.24 25.85 65.09
Total (All Executives and Directors) 2009
Estimate 50.06 8.41 58.47
2008 69.52 32.73 102.25
2007 79.32 36.63 115.95

Other Arrangements

There are no other arrangements for which the Directors are compensated by the Company for
services other than those provided as a Director.

Employment Contract

In lieu of an employment contract, the Directors are elected at the annual meeting of stockholders
for a one (1) year term. Any Director elected in the interim will serve for the remaining term until the
next annual meeting.

Warrants or Options

There are no warrants or options held by Directors or Officers.

Security Ownership of Management and Certain Record and Beneficial

Owners

Security ownership of certain record and beneficial owners of more than 5% of common shares as
of September 30, 2009:

81
 Name of beneficial owner &
Title of Name & address of record No. of shares
relationship with record Citizenship Percent
Class owner & relationship with issuer held
owner
Common SEA Refinery Corporation SEA Refinery Corporation Filipino 4,696,885,564 50.10%
Stock 19F Liberty Center
Dela Costa St.
Salcedo Village
Makati City
Major Stockholder
Common SEA Refinery Holdings B.V. SEA Refinery Holdings B.V. Netherlands 3,794,093,495 40.47%
Stock Prins Bernhardplein 200
1097JB Amsterdam
The Netherlands
Major Stockholder

Security ownership of directors and executive officers as of September 30, 2009:

Amount and Nature of Percent of

Title of Class Name of Beneficial Owner Citizenship
Beneficial Ownership Class

Directors
Common Stock Ramon S. Ang Filipino 1,000 (d) Nil
Common Stock Eduardo M. Cojuangco, Jr. Filipino 1,000 (d) Nil
Common Stock Estelito P. Mendoza Filipino 1,000 (d) Nil
Common Stock Bernardino R. Abes Filipino 1 (d) Nil
Common Stock Angelico T. Salud Filipino 1,000 (d) Nil
Common Stock Roberto V. Ongpin Filipino 1 (d) Nil
Common Stock Eric O. Recto Filipino 1 (d) Nil
Common Stock Ron W. Haddock American 1 (d) Nil
Common Stock Seumas S. Dawes Filipino 1 (d) Nil
Common Stock Reynaldo G. David Filipino 1,000 (d) Nil
Executive Officers
Common Stock Lubin B. Nepomuceno Filipino 5,000 (d) Nil
Common Stock Emmanuel E. Eraa Filipino - Nil
Common Stock Jose Jesus G. Laurel Filipino 10,000 (d) Nil
Common Stock Miguel V. Angeles Filipino 52,169 (d) .001%
Common Stock Ma. Concepcion F. de Claro Filipino 22,513 (d) Nil
Common Stock Rowena O. Cortez Filipino 8,580 (d) Nil
Common Stock Ramon V. del Rosario Filipino - Nil
Common Stock Cristina M. Menorca Filipino 200 (d) Nil
Common Stock Peter Paul V. Shotwell Filipino - Nil
Common Stock Susan Y. Yu Filipino 3,000 (d) Nil
Common Stock Freddie P. Yumang Filipino 118,402 (d) .001%
Common Stock Albertito S. Sarte Filipino - Nil
Common Stock Efren P. Gabrillo Filipino 103,124 (d) .001%
Common Stock Wilfredo A. Galoyo Filipino - Nil
Common Stock Nathaniel R. Orillos Filipino 29,953 (d) Nil
Directors and Executive Officers as a group 357,946 .004%

Labor Unions

Petron has 3 labor unions: Petron Employees Association (PEA) with 186 members, Petron
Employees Labor Union (PELU) with 39 members, and the Bataan Refiners Union of the
Philippines (BRUP) with 219 members. Relations with the unions are governed by separate
Collective Bargaining Agreements (CBA). The CBA with BRUP covers the period January 1, 2008
to December 31, 2010; PELU, from January 1, 2009 to December 31, 2011; and PEA-NATU, from
January 1, 2008 until December 31, 2010.

82
The Company has had no labor strikes for the past 27 years, and no union complaints were
submitted before Department of Labor and Employment during the pendency of the three-year CBA
period of the three unions (2006-2009).

Employee Benefits

The Company provides a pension plan, a corporate performance incentive program, a savings plan
and a land/home ownership plan as benefits to its employees, which are discussed in the Notes to
the Audited Financial Statements.

Voting Trust Holders of 5% or more

None of the directors and officers owns 5% or more of the outstanding capital stock of the Company.
The Company is also not aware of any person holding 5% or more of the Companys outstanding
shares under voting trust agreement.

Investor Relations

In addition to being the Chief Finance Officer of the Company, Mr. Emmanuel E. Eraa is also the
Companys Corporate Information Officer and the head of the Investor Relations Unit. His contact
details are as follows:
Telephone Number (632) 886-3888
Email Address estamayo@petron.com
Office Address Petron Megaplaza, 358 Sen. Gil Puyat Avenue, Makati City

See Other Executive Officers on page 76 for Mr. Eraas brief profile.

Changes in Control

Prior to the entry of the Ashmore group, PNOC and AOC each owned a 40% share of equity in
Petron. The remaining 20% was then held by the general public.

On March 13, 2008, AOC, entered into a share purchase agreement with Ashmore Investment
Management Limited (Ashmore) and subsequently issued a Transfer Notice to PNOC to signify its
intent to sell its 40% equity stake in Petron. PNOC eventually waived its right of first offer to
purchase AOC's interest in Petron. A total of 990,979,040 common shares representing a 10.57%
stake in Petron were subsequently tendered following the mandatory tender offer. Together with the
private sale of AOC's 40% interest in Petron, the Ashmore group, through its corporate
nominee, SEA BV,, acquired 50.57% of the outstanding common shares in Petron in July 2008.
SEA BV is a company owned by funds managed by the Ashmore Group.

On October 6, 2008, PNOC informed Petron of its intent to dispose its 40% stake in the
Company. In December 2008, the 40% interest of PNOC in Petron was purchased by SRC, a
domestic corporation wholly-owned by SEA BV. In a related development, SEA BV sold a portion of
its interest in Petron equivalent to 10.1% of the issued shares, to SRC.

As at year-end 2008, the capital structure of Petron was as follows: SRC - 50.10%; SEA B.V. -
40.47%; and the general public - 9.43%.

On December 24, 2008, SMC and SEA BV entered into an Option Agreement granting SMC the
option to buy the entire ownership interest of SEA BV in its local subsidiary, SRC. The option may
be exercised by SMC within a period of two years from December 24, 2008. The Option Agreement
provided that SMC will have representation in the Board and Management of Petron. SMC
representatives were elected to the Board and appointed as senior officers of the Company as
follows:

83
 Ramon S. Ang Chairman of the Board and Chief Executive Officer
Emmanuel E. Eraa Chief Finance Officer
Lubin B. Nepomuceno General Manager
Susan Y. Yu Vice President-Procurement
Albertito S. Sarte Vice President-Treasurers

In its February 27, 2009 meeting, the Board approved the amendment of the Articles of
Incorporation of the Company to include the generation and sale of electric power in its primary
purpose. The objective is principally to lower the refinery power cost through self-generation and, in
the event there is excess power, to sell the same to third parties. The Board also approved an
increase of the Companys capital stock from the current P 10 billion to P 25 billion through the
issuance of preferred shares, raising funds for capital expenditures related to expansion programs,
and possibly, to reduce some of the Company's debts. Both items, including a waiver to subscribe
to the preferred shares to be issued as a result of the increase in capital stock, were approved by
the stockholders during the meeting held on May 12, 2009.

84
Certain Relationships and Related Transactions
Petron Corporation has no transactions or proposed transactions with any of its directors or officers.

The major stockholders of the Company are:

(a) SEA Refinery Corporation - 50.10%

(b) SEA Refinery Holdings B.V. - 40.47%

The basis of control is the number of the percentage of voting shares held by each.

Petron has been leasing from its previous major shareholder, PNOC, certain parcels of land where
its Refinery and most of its bulk plants, terminals, and service stations are located. The leases will
expire in 2018 and are extendable for another 25 years.

Petron has been leasing from its affiliate, New Ventures Realty Corporation, some parcels of land
where some of its depots, terminals and many service stations are located. Starting January 1,
2010, NVRC will be the holder of the lease over the site of Petrons Refinery (with PNOC as lessor)
and Petron is in the process of executing a sublease agreement with NVRC that would ensure
Petrons continued possession of the property for 30 years until December 31, 2039 and possibly
another 25 years thereafter.

Under the Retail Trade Liberalization Law, Petron is allowed to engage in direct retail of its fuel
products through its subsidiaries, namely, PMC and PFC. PMC is also leasing service station sites
from NVRC.

Also, Petron has been purchasing most of its crude requirements from Saudi Aramco, a previous
major stockholder. The supply agreement with Saudi Aramco has been revised and will be renewed
annually.

Apart from the foregoing, there are no related party transactions other than as disclosed in the
financial statements.

85
Corporate Governance
Petrons Board of Directors is composed of ten members, two of whom are Independent Directors.
Currently, only two of the members are Executive Directors, occupying the positions of the
Chairman and the President of the Company. Petron Directors sign Conflict-of-Interest Statements,
disclosing their respective business interests, to ensure that these are not in competition with the
business of Petron. The schedule of board meetings for the entire year is fixed at the start of the
year and board materials are given not later than two weeks prior to every meeting. All Directors,
officers and senior managers are required to attend basic corporate governance seminar
immediately upon assuming office.

To instill a stable and transparent process of conducting its business and at the same time
identifying accountability at all times, a system of approvals is in place whereby only authorized
officer(s) may approve a particular business transaction and only up to the authorized amount.
Transactions with amounts exceeding the joint approval limit of the Chairman and the President are
elevated to the Board for approval. Aside from the Corporate Governance Manual, several other
manuals have been instituted by Management to establish company policies and guide the
employees in carrying out their respective functions and duties, address business operations, set
contracting and bidding procedures, and instill business ethics, office decorum and employee
discipline.

Reports required to be given to the stockholders pursuant to its By-Laws and the Securities and
Regulation Code and submissions to the SEC/PSE, including quarterly financial reports, annual
report and disclosures, GIS, request for explanation or information on news items are complied with.
The Company sees to it that queries or requests from shareholders are immediately attended to and
that written communications, including notices of stockholders meetings, are properly sent. Pursuant
to the requirements of the Securities and Exchange Commission, the Corporate Secretary and
Compliance Officer have submitted in January 2006 the required yearly certification to the SEC on
the extent of compliance by the Company with its Corporate Governance Manual.

With the election of 2 independent Directors to the Petron Board; the election of members and
alternate members, in proper cases, of the Audit, Compensation and Nomination Committees; the
conduct of regular quarterly board meetings, special board meetings and board committee meetings
and the faithful attendance of and proper discharge of duties and responsibilities of Directors at such
meetings; the conduct of training/seminar for Corporate Governance for incoming Directors and
Officers; and strict adherence to national and local laws pertaining to its business operations,
including applicable accounting standards and disclosure requirements, the Company is in
compliance with its Corporate Governance Manual.

A performance evaluation system to assess the performance of Directors, Board Committees and
the Board itself is in place and will be carried out periodically. An integrated compliance checklist
form to facilitate compliance monitoring has been completed in 2006.

86
Managements Discussion and Analysis of Results of
Operations and Financial Condition

For the Nine Months ended September 30, 2009

Operating Revenues and Expenses

YTD September
(In Million Pesos) 2009 2008 % Inc(Dec)
Sales Revenues 123,635 216,427 (43)
Cost of Goods Sold 111,620 205,139 (46)
Gross Margin 12,015 11,288 6
Selling and Administrative 4,116 4,085 1
Non-Operating Charges 3,262 3,506 (7)
Net Income-Consolidated 3,366 2,784 21
EBITDA 10,395 8,483 22
Sales Volume (MB) 32,324 38,799 (17)
Earnings per Share 0.36 0.30 20
Return on Sales (%) 2.7 1.3 108

In the first nine months of the year, Petron posted a net profit of P
= 3.36 billion, 21% higher than the
P
= 2.78 billion earnings in the same period in 2008.

The total plant shutdown until the first half of February and the drop in regional prices enabled the
Company to take advantage of cheap imported products, thus, maximizing trading gains in the first
quarter of the year. Towards the second quarter, net earnings slowed down when the refinery
reverted to production mode and eventually, sold the remaining expensive crude bought in 2008 as
the Company carried an inventory of about two months supply. On the other hand, more favorable
market conditions characterized the third quarter of 2009 which resulted in higher margins from the
third quarter year-ago level. Also, it would be noted that the global financial crisis worsened in third
quarter 2008 when the demand for oil contracted which led to the collapse in oil prices. Benchmark
Dubai crude then softened from a historical high of US$141/bbl in July to about US$88/bbl in
September, the month when most of the expensive crude were sold. The latter triggered the start of
losses for the Parent Company with a negative margin of P = 1.88 billion sustained for the month of
September 2008 alone. Thus, consolidated net profit rose to P = 1.56 billion in the third quarter of this
year, more than triple the P
= 462 million income reported in the same period last year.

With improved bottom line, earnings before interest, taxes, depreciation and amortization (EBITDA)
= 10.4 billion was 23% better than previous years P
of P = 8.48 billion.

As a result, earnings per share grew by 20% to P= 0.36 from previous years P
= 0.30. Likewise, return
on sales rose to 2.7%, more than double the prior years level of 1.3%.

Major contributory factors follow:

Gross margin (GM) grew by 6% to P = 12 billion from same period in 2008 of P

= 11.29 billion. At the
same time, GM rate was higher at 9.7% compared to corresponding period a year-ago of 5.2%.
Favorable margin was attributed to the relatively steady movement in crude/regional prices in 2009
as well as lighter sales mix (2009: 77%White vs. 2008: 70%White).

87
The following accounted for the variance in gross margin:

Sales volume of 32.3 million barrels was 6.5 million barrels short of the 38.8 million barrels
achieved in the first nine months of 2008 owing mainly to the decline in Exports. This was
due to the lower crude runs compared to previous year as a result of thinning refining
margins which rendered exports unattractive. Domestic sales also contracted by 2.7% due
to inventory build up of service station dealers last year in response to the spiraling fuel
prices which peaked in July and the push program in September 2008 when prices began to
drop steeply. Furthermore, the global economic slowdown which resulted in reduced
operations and closure of several semi-conductor and other manufacturing accounts also
contributed to the lower sales volume this year.

Net revenues totaled P = 92.8 billion) lower than last years P

= 123.63 billion, 43% (P = 216.43
billion essentially due to the fall in the average selling price by P = 11.03 per liter. The
significant decline in selling prices was a result of lower benchmark Dubai and MOPS
prices. Average 2009 Dubai as of September 2009 was US$57.33/bbl, 47% behind same
period 2008 level of US$107.45/bbl.

Cost of goods sold dipped to P = 93.52 billion) behind previous years

= 111.62 billion, 46% (P
P
= 205.14 billion. The crude that formed part of cost for the first three quarters averaging
US$57.97/bbl was substantially lower than the average cost in similar period of 2008 at
US$107.40/bbl.

Refinery operating expenses (which formed part of cost of sales) escalated by 15% (P = 504
= 3.88 billion from prior years P
million) to P = 3.38 billion. This was due mainly to higher
maintenance and repairs (by P = 297 million) representing repairs done on electrical facilities
damaged by the fire incident in November 2008 and the depreciation (by P = 239 million) of
two units (Petro Fluidized Catalytic Cracking and Propylene Recovery) completed in April
2008 as well as the Benzene and Toluene extraction unit which became fully operational in
May 2009.

With the rise in refinery OPEX coupled with lower capacity utilization, cost per liter of crude
= 1.04 as against previous years P
processed significantly went up to at P = 0.59.

= 4.12 billion was slightly higher than last years P

Selling & administrative expenses at P = 4.09 billion
essentially from increases in employee costs as well as purchased services and utilities.

As a percentage of sales, actual rate of 3.3% exceeded prior years 1.9%. Similarly, on a peso per
liter sold basis, actual OPEX of P
= 0.80 surpassed last years P
= 0.66.

Net financing costs & other charges slid by 7% (P= 245 million) to P
= 3.26 billion from the P= 3.51 billion
level in same period of 2008. The upsurge in interest costs were reduced by the minimal net other
charges of P = 125 million from previous years P = 1.09 billion mainly on the appreciation of the
Philippine peso versus the US dollar which resulted in foreign exchange (forex) gains reversing
prior years forex losses from dollar-denominated transactions. Meanwhile, total interest expense
from both short and long-term loans climbed by 24% (2009: P = 3.28 billion vs. 2008: P = 2.65 billion)
emanating mostly from long-term peso borrowing from issuance of the P = 10 billion FXCN in June
2009 and higher short-term borrowing levels vis--vis the previous year (YTD 2009 average: P = 41.4
billion vs. YTD 2008 average: P= 33.90 billion).

Capital Resources and Liquidity

Total assets as of September 30, 2009 reached P

= 117.09 billion, 5% or P5.29 billion higher than the
end-December 2008 level of P
= 111.8 billion.

Cash and cash equivalents went up by 31% or P

= 3.92 billion to P
= 16.75 billion as cash cycle
shortened to 39 days from 58 days in 2008.

88
 = 1.36 billion from last years
Available-for-sale investments (current and non-current) moved up to P
balance of P = 682 million as the Companys local and foreign insurance subsidiaries increased
investments in government securities/corporate bonds.

Receivables-net rose significantly by 55% or P = 9.29 billion from prior years P

= 16.88 billion attributed
mostly to additional filing of claims for VAT from zero-rated sales.

Inventories climbed to P
= 32.61 billion from P
= 30.79 billion as of December 31, 2008 brought about
mainly by higher crude prices (P = 4,554/bbl as of September 30, 2009 vs. P = 3,510/bbl as of
December 31, 2008).

Other current assets dropped by 68% or P = 8.1 billion to P

= 3.88 billion on account mainly of the
reclassification of Input VAT claims to receivables account.

Deferred tax assets had nil balance this period from end-December 2008s P = 885 million due to the
effect of the inventory differential (FIFO vs. MAP) partly offset by the impact of the net operating loss
carryover as well as the payment of the minimum corporate income tax (MCIT) during the third
quarter of 2009.

Other non-current assets were lower at P

= 715 million this year from the P
= 925 million year-end 2008
balance traced to the recognition of the retirement expense this year as well as decreases in
prepayment lease and long-term receivables.

Short-term loans and liabilities for crude oil and petroleum product importations slipped by 11% (P =
6.82 billion) to P
= 56.07 billion due essentially to more stable crude and finished products prices this
year.

Accounts payable and accrued expenses declined to P = 4.04 billion from last years P
= 4.56 billion
traced largely to decrease in retention payable with the completion of major projects at the Refinery
as well as lower accrual of interest expense.

Long-term debt inclusive of current portion escalated by 87% or P

= 8.95 billion to P
= 19.2 billion
traceable to the issuance of the P= 10 billion FXCN in June of this year partly offset by the
amortization of existing loans.

Income tax payable slid to P

= 8 million from P
= 22 million as at December 31, 2008 owing to the lower
tax payable reported by the subsidiaries and the application of creditable withholding taxes against
tax due.

Deferred income tax liabilities rose from end-Decembers P = 8 million to P

= 218 million as of
September 30, 2009 traceable to temporary differences reflected under parent and subsidiaries
accounts.

Other non-current liabilities went up by 7% or P

= 81 million to P 1.25 billion this period from P
= 1.17
billion last year mainly because of the increment in provision for Asset Retirement Obligation and
bond account deposit.

Retained Earnings grew by P

= 3.36 billion from P = 23.78 billion to P
= 27.13 billion essentially due to the
consolidated net income realized in the first nine months of the year.

Other reserves negative balance slid to P = 444 million from P

= 473 million attributed mainly by the
higher translation adjustment for the foreign insurance company.

89
Cash Flow

Operating activities of the Company generated net cash inflows amounting to P

= 5.28 billion driven
mainly by higher cash earnings.

In Million Pesos Sep 30, 2009 Sep 30, 2008 Change

Operating Inflows 5,281 3,906 1,375
Investing Outflows (1,973) (5,844) 3,871
Financing Inflows 622 1,694 (1,072)

Discussion of the companys key performance indicators:

Ratio Sep 30, 2009 Dec 31, 2008

Current Ratio 1.3x 1.1x
Debt to Equity Ratio 2.2x 2.4x
Return on Equity (%) 13.1 (11.1)
Debt Service Coverage 2.8x 1.2x
Tangible Net worth P
= 36.3 billion P
= 32.9 billion

Current Ratio: Total current assets divided by total current liabilities. This ratio is a rough indication
of a company's ability to service its current obligations. Generally, the higher the current ratio is, the
greater the "cushion" between current obligations and a company's ability to pay them.

Debt Equity Ratio: Total liabilities divided by tangible net worth. This ratio expresses the relationship
between capital contributed by creditors and that contributed by owners. It expresses the degree of
protection provided by the owners for the creditors. The higher the ratio, the greater the risk being
assumed by creditors. A lower ratio generally indicates greater long-term financial safety.

Return on Equity: Net income divided by average total stockholders equity. This ratio reveals how
much profit a company earned in comparison to the total amount of shareholders equity found on
the balance sheet. A business that has a high return on equity is more likely to be one that is
capable of generating cash internally. For the most part, the higher a companys return on equity
compared to its industry, the better.

Debt Service Coverage: The sum of free cash flows and available closing cash balance divided by
projected debt service. This ratio shows the cash flow available to pay for debts to the total amount
of debt payments to be made. It also measures the companys ability to settle dividends, interests
and other financing charges.

Tangible Net Worth: Net worth minus intangible assets. This figure gives a more immediately
realizable value of the company.

Known trends, demands, commitments, events or uncertainties that will have a material
impact on the issuers liquidity

Inflation
rd
Inflation remained subdued until the 3 quarter bringing YTD September average at 3.9%, sharply
lower than 9.2% in the same period last year. Significantly lower fuel prices and the easing prices of
food and services coupled by a stable peso contributed to the downtrend in inflation.

90
Gross Domestic Product (GDP)

After a sluggish economic performance during the first quarter, GDP improved in the second
quarter, posting 1.5% growth. Easing contraction of exports and imports, positive investments,
growth in remittances and higher government and personal consumption provided support to the
nd rd
economy in the 2 quarter. In the 3 quarter, positive growth is expected to uphold, though this may
be constrained by the damages brought by the recent typhoons and heavy flooding.

91-Day Treasury-Bill Rate/Philippine Dealing System Treasury Fixing (PDST-F) Rates

YTD September 2009 91-day T-bill rates stood at an average of 4.1%, lower than 2008s 5.2% FY
average. Interest rates in 2009 dropped as liquidity in the financial markets remained sufficient.
Subdued inflation also allowed the Bangko Sentral ng Pilipinas (BSP) to maintain low interest rates.
Since December 2008, BSP has cut its policy rates by a total of 200 basis points.

Relative to 2008 of 5.394%, the three-month PDST-F rates as of September 30, 2009 stood lower at
4.491%. Reflective of the money market activities, this supported that liquidity remained sufficient for
the first three quarters of 2009. Yield curve outlook remained on the downward trend supporting
BSPs stand to maintain interest rates at a low side for the rest of the year. Hence, there is a
pressure for an upward yield curve in anticipation of BSPs tightening measures for 2010.

Peso-Dollar Exchange Rates

Peso as of YTD September 2009 averaged P = 47.9/US$. Although this is a steep fall from last years
nine-month average of P= 43.2/US$, the local currency has proven to be very stable hovering at
around P
= 47-48/US$ in the first three quarters. Growing remittance inflows and higher foreign
investments brought by easing risk aversion contributed to the pesos stability.

Dubai price

After the collapse in oil prices since the second half of 2008, Dubai recovered in 2009 and exceeded
US$70/bbl in August. Coming from 1Q09 average of US$44.31/bbl, Dubai strengthened and
averaged at US$67.8/bbl in the third quarter bringing nine-month average at US$57.1/bbl. Various
stimuli packages and optimism in the global economic recovery supported the rebound of oil prices.

Industry Oil Demand

Data from DOE shows that industry oil demand expanded by 5.2% in the first nine months of the
year compared to the same period last year. From 276.6 thousand barrels per day (MBD) in the
January - September last year, industry demand rose to 291.1 MBD as the current low prices
encouraged higher spending of fuel products.

Tight industry Competition

Despite the weakening oil demand, competition remains stiff with the new players implementing
different marketing strategies and aggressively expanding. As of YTD September they have
collectively cornered around 21.7% of the total oil market. Collectively, the new players are leading
the LPG market segment with 48.1% market share.

Material commitments for capital expenditures

As of October 8, 2009, the 2009 capital program amounts to P = 14.6 billion. Of this amount, P
= 12.9
billion has been funded for refinery projects such as efficiency related projects, power-related
projects and replacement of receiving facilities; P= 1.0 billion for the expansion of the service station
network; P= 0.4 billion for tankage facilities and P
= 0.3 billion for miscellaneous projects (such as
safety, maintenance-related, operating support equipment, etc.). Other projects forming part of the
2009 capital program shall be further evaluated and funding may be requested in the succeeding
quarters.

91
Known trends, events or uncertainties that have had or that are reasonably expected to have
a material favorable or unfavorable impact on net sales/revenues/income from continuing
operations

Illegal trading practices

Cases of smuggling and illegal trading (e.g. bote-bote retailing, illegal refilling) continue to be a
concern. These illegal practices have resulted in unfair competition among players.

Existing or Probable Government Regulation

Dubai MOPS 0.05%S

Modification of Import Duty on Crude Oil & Tariff Rate
($/bbl) Diesel ($/bbl)
Refined Petroleum Products. To cushion 2% > 86.5 > 100.0
impact of rising oil prices in the world market, the 1% > 91.7 > 113.0
Government issued Executive Order No. 691 in
0% > 103.5 > 117.0
January 2008 adjusting import duty rates on
crude oil and refined petroleum products based on the tabulated trigger prices indexed to
international oil prices, Dubai crude and Mean of Platts Singapore (MOPS). The guidelines stressed
that oil companies should reflect reduction in pump prices of diesel fuel to the public transport
sector. Moreover, oil companies are required to submit to DOE monthly reports, which indicate their
actual sales volume along with amount offered to the public.

Biofuels Act of 2006. Aiming to reduce the dependence of transport sector on imported fuel, the
biofuels law signed in January 2007 mandates that ethanol comprise 5% of total gasoline sales by
2009. Oil companies are allowed to blend the different premium gasoline grades with 10% ethanol to
be sold in selected areas to achieve the 5% of total gasoline volume requirement. For diesel
engines, biodiesel blend increased from 1% in 2008 to 2% in February 2009. The Department of
Energy (DOE) is now also considering increasing the current requirement of 2% biodiesel blend to
3%.

To produce compliant fuels, the Company invested in CME (coco methyl ester) injection systems at
the refinery and depots. Prior to the mandatory blending of ethanol into gasoline by 2009, the
Company already started selling ethanol blended gasoline in selected service stations in Metro
Manila in May 2008.

Renewable Energy Act of 2008. The Renewable Energy Act signed in December 2008 aims to
promote development and commercialization of renewable and environment-friendly energy
resources (e.g. biomass, solar, wind) through various tax incentives. Renewable energy developers
will be given 7-year income tax holiday, power generated from these sources will be VAT-exempt,
and facilities to be used or imported will also have tax incentives.

Laws on Oil Pollution. To address issues on marine pollution and oil spillage, use of double-hull
vessels for transporting black products by end-2008 and tentatively by 2010 for transporting white
products was mandated.

Petron has been using double-hull vessels in transporting all black products and some white
products already.

Clean Air Act. Petron invested in a Gasoil Hydrotreater Plant and in an Isomerization Plant to
enable it to produce diesel and gasoline compliant with the standards set by law.

Liquefied Petroleum Gas (LPG) Bill. The LPG Act of 2009 aims to ensure safe practices and
quality standards, and to mitigate unfair competition in the LPG sector. LPG cylinder seal suppliers
must obtain a license and certification of quality, health and safety from the Department of Energy
before they are allowed to operate. LPG cylinder requalifiers, repairers and scrapping centers, will
also have to obtain a license from the Department of Trade and Industry. The Bill also imposes
penalties on underfilling, underdelivering, illegal refilling and storage, sale or distribution of LPG-
filled cylinders without seals, illegal possession of LPG cylinder seal, hoarding, and importation of
used or second-hand LPG cylinders, refusal of inspection, and non-compliance to standards.

92
Significant elements of income or loss that did not arise from the issuers continuing
operations

There are no elements of income or loss that did not arise from the Registrants continuing
operations.

Events that may trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation

These cases are discussed in detail under Legal Proceedings on page 64.
1. Tax Credit Certificates (TCC) Related Cases
2. Pandacan Terminal Operations
3. Oil Spill Incident in Guimaras
4. Bataan Real Property Tax Cases

Executive Order No. 839

On October 2, 2009, President Gloria Macapagal-Arroyo, under Proclamation No. 1898, declared a
state of national calamity in view of the devastations caused by typhoons Ondoy and Pepeng.
Allegedly in line with this proclamation, the President subsequently issued E.O. 839, mandating that
prices of petroleum products being sold in Luzon be kept at October 15, 2009 levels. The oil
companies, including Petron, in compliance with E.O. 839, rolled back prices to October 15, 2009
levels.

Pilipinas Shell filed its Petition on November 9, 2009 seeking prohibition, mandamus and injunction
with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction. On
November 13, 2009, the Regional Trial Court of Makati issued a temporary restraining order for a
period of 20 days and scheduled further hearings for the writ of injunction. On November 16, 2009,
thru E.O. 845, the President lifted the price freeze under E.O. 839 and directed a task force to
implement proposals promised by oil firms, including discounts and staggered-price adjustments.

All material off-balance sheet transactions, arrangements, obligations (including contingent

obligations), and other relationships of the company with unconsolidated entities or persons
created during the reporting period

There are no off-balance sheet transactions, arrangements and obligations with unconsolidated
entities or persons during the reporting period.

For the Year ended December 31, 2008

For convenience, U.S. Dollar information in the following discussion has been translated into
= 47.52 to US$1.00, the Philippine peso - U.S. dollar rate
Philippine pesos at the exchange rate of P
as quoted by the Philippine Dealing System as of December 31, 2008.

Results of Operations

2008 vs. 2007

With a four-month consecutive operating losses starting September, the Company suffered a net
loss of P= 3.92 billion in 2008, a reversal from the P = 6.39 billion net income in 2007. The significant
decline in the Companys bottom line was largely attributed to contraction in margins (Gross Profit
2008 P = 3.37 billion vs. 2007s P
= 15.23 billion) as domestic prices fell at a faster rate than crude costs
starting the third quarter while increased borrowing levels to finance the expensive crude in the first
half of the year led to higher financing costs (by P = 2.37 billion).The global financial crisis also
resulted to rising interest rates for all of the Companys borrowings. This was exacerbated by
weaker US dollar and volatility of international crude and product prices that resulted to exchange
losses and rising hedging costs. However, the tax benefit of P = 1.87 billion due largely on the effect
of the Net Operating Loss Carry-over (NOLCO) partly reduced the loss before income tax of P = 5.79
billion to a negative bottom line of P
= 3.92 billion.

93
Sales volume registered an overall 2.57 million barrels drop from 2007s 52.26 million barrels to
49.69 million barrels (MMB) in 2008. Export sales suffered cut back by 18% (1.86 MMB) while
domestic demand decreased by 2% (0.7 MMB) resulting from record-high fuel prices.

Net Sales surpassed the 2007 level by P = 57.16 billion from P

= 210.52 billion to P
= 267.68 billion this
year due to price hikes during the first half of the year. This was complemented by lighter sales mix
with the commissioning of the Companys PetroFCC and PRU that had enabled the Refinery to
convert a portion of its fuel oil volume to higher valued white products, such as propylene, LPG and
gasoline.

Cost of Goods Sold (CGS) rose to P = 264.31 billion from the year-ago figure of P
= 195.29 billion.
Higher duty paid landed cost (DPLC) per liter of crude this year that formed part of CGS was
pegged at an average of P = 29.72 versus P = 20.28 in 2007. Moreover, as experienced by other
refineries in the region in the aftermath of the steep decline in crude and product prices, the
Company also considered a mark down of its inventory. Crude volatility reached 300% as crude
peaked at US$141/bbl in July and crashed to US$40 in December triggering a continued fall in the
regional prices of petroleum products.

Refinery Operating Expenses that went into CGS escalated by P = 1.06 billion from prior years P
= 3.48
billion to P
= 4.54 billion. Increased expenditures were recorded on depreciation of the new PetroFCC
and PRU; maintenance/re-servicing works related to conversion of the Thermofor Catalytic Cracker
Unit to PetroFCC and deferred turnaround of Atmospheric Pipestill; and, purchased utilities caused
by the transfer of the Gas Oil Hydrotreater power from internal to external source to accommodate
the power requirement of the PetroFCC.

Owing to increased operating expenses (OPEX) and reduced crude run (2008: 113 MBCD vs.
2007: 129 MBCD), cost per liter of crude processed increased by 48% or P
= 0.22 over 2007s P
= 0.47.

Selling and Administrative Expenses were trimmed down by 2% (P = 0.11 billion) from P
= 5.33 billion
the preceding year to P = 5.22 billion this year. Reduced expenditures were noted under business
expenses resulting from decreased sponsorships; employee-related costs; and, materials and
supplies with the deferral of LPG cylinder purchases.

= 0.01 from the previous years level as sales volume declined by 5%

OPEX per liter rose slightly by P
or 2.57 million barrels.

Net Financing Costs and Other Charges (P = 3.94 billion) rose more than seven times the
corresponding period in 2007 (P = 0.56 billion). The Companys higher financing costs were mainly
the outcome of the increase in level of borrowings (due to expensive crude and product imports) and
higher interest rates due to the global financial crisis (2008: P = 36.39 billion at 7.2% vs. P = 21.34
billion at 5.4%). Thus, the P = 4.18 billion interest expense largely on short-term peso loans more than
doubled the previous years P = 1.81 billion total. Meanwhile, the foreign exchange (forex) and
hedging activities on dollar-denominated transactions in 2008 resulted in losses and hedging costs
of P= 1.0 billion, a reversal from the forex and hedging gains of P = 1.2 billion the year before.

Loss per share of P

= 0.42 in 2008 was a turnabout from the earnings per share of P
= 0.68 in 2007.
Consequently, the net loss resulted to negative 1.5% return on net sales.

2007 vs. 2006

The Company performed better in 2007 as it posted a net income of P = 6.40 billion, 6% higher than
the P= 6.02 billion level in 2006. Incremental profit was derived from improved margins (P1.02 billion)
and lower non-operating charges (P1.27 billion) owing to a stronger peso as well as lower financing
costs. However, the improvement in the bottom line was significantly reduced by the sharp increase
in income tax expense (P1.07 billion) as a consequence of the expiration of the income tax holiday
on mixed xylene sales coupled with the escalation in operating expenses (P0.84 billion).

Total volume sold in 2007 stood at 52.3 MMB, slightly higher than 2006s 52.0 MMB level. While
domestic demand increased by 0.8 MMB, this was substantially offset by the decline in export sales
(0.5 MMB).

94
Net Revenues dropped slightly by P 1.21 billion to P= 210.52 billion from P = 211.73 billion in 2006 on
account mainly of decline in selling prices because of the appreciation of the peso and heavier sales
mix (2007 - 35% Black Products vs. 2006 32% Black Products).

Cost of Goods Sold went down (by 1% or P = 2.23 billion) to P

= 195.29 billion from the P
= 197.51 billion
in 2006. The reduced CGS level was brought about largely by lower DPLC per liter of crude that
went into cost (2007 average: P
= 20.05 vs. 2006 average: P = 21.35).

Refinery Operating Expenses (which form part of cost of sales) rose to P = 3.48 billion, from the P
=
= 0.24 billion escalation in expenses from 2006s figure was
3.24 billion level in 2006. The 7% or P
principally due to increased maintenance/repair works and employee costs related to turnaround
and shutdown of various process units as well as the replacement of catalysts for the Continuous
Catalyst Regeneration and Gas Oil Hydro Treater (GOHT) units.

Increased level in OPEX and reduced crude run (2007: 129 MBCD vs. 2006: 135 MBCD) pushed
= 0.47 from 2006s P
cost per liter of crude processed to P = 0.41.

Selling and Administrative Expenses of P

= 5.33 billion showed a 19% (P
= 0.84 billion) increase from
2006s level attributed mostly to higher advertising expenses, employee costs and purchased
services.

The escalation in OPEX negated the effect of the incremental sales volume, resulting in a higher
Peso per Liter Cost at P
= 0.64 than the P
= 0.54 in 2006.

Net Financing Costs and Others Charges stood at P = 0.56 billion, less than a third of the P = 1.83
billion posted in 2006. The stronger peso generated forex gains of P = 0.90 billion, a reversal of the P
=
0.10 billion forex loss in 2006. In addition, interest expense on short-term borrowings was lower,
attributed largely to the drop in average borrowing level and rate (2007: P = 21.34 billion at 5.4% vs.
2006: P = 23.87 at 6.7%).

Earnings per share increased by P

= 0.04 to P
= 0.68 in 2006. Likewise, return on sales went up to 3.0%
from 2006s 2.8%.

2006 vs. 2005

In 2006, the Company posted a net income of P = 6.02 billion, almost at the same level as the P = 6.05
billion in 2005. The flat growth was driven mainly by inventory losses estimated at P= 1.59 billion (net
of tax) brought about by the unprecedented drop in crude prices which started in the third quarter.
Selling prices went down as regional product prices fell, significantly compressing the Companys
margins.

Aggregate sales volume reached 52.2 MMB as exports increased by almost 3.0 MMB from 2005
level to compensate for lower domestic demand (by 2.4 MMB).

Net Revenues of P = 211.72 billion showed an 11% (P = 20.23 billion) improvement from the P
= 191.49
billion sales in 2005. Higher Mean of Platts Singapore (MOPS) prices (2006 average: P = 21.58 per
liter vs. 2005 average: P
= 19.28 per liter) as well as the upward adjustments in domestic pump prices
by an average of P = 2.66 per liter accounted mostly for the increase in revenues. This was
augmented by the 1% (0.5 MMB) incremental sales volume.

Cost of Goods Sold stood at P = 197.51 billion, up 11% (P= 20.30 billion) from the P
= 177.21 billion
reported in 2005. This was traceable primarily to the spike in Freight-On-Board per barrel of crude
that went into cost (2006 average: $62.08 vs. 2005 average: $48.72) partly tempered by the
appreciation of the peso against the dollar (2006 average: P
= 51.30 vs. 2005 average: P
= 55.07).

= 1.71 and gross margin rate of 6.7% were lower than 2005s P
Gross Margin per liter of P = 1.74 and
7.5%, respectively. The recorded increase in pump prices and MOPS prices during the first half of
2006 was significantly reduced by successive rollbacks that started in the third quarter brought
about by the rapid drop in crude prices and corresponding fall in regional product prices. On the
other hand, DPLC of crude remained high with Petron holding an average of 28 days in crude
inventory and 25 days in product inventory.

95
Refinery Operating Expenses (which form part of cost of sales) summed up to P = 3.24 billion, 6%
lower than 2005s level. The reduced OPEX compared to the previous year was attributable largely
to lower maintenance and repairs expenses. In addition, no provision for obsolescence was made
for storehouse materials in 2006.

Peso per Liter Cost of Crude Processed declined to P = 0.39 from P

= 0.42 in 2005 owing to lower
refinery expenses and higher crude run (2006: 141 MBCD vs. 2005: 129 MBCD).

Selling and Administrative Expenses of P = 4.48 billion was slightly lower than last years P = 4.53
= 0.54, slightly better than the previous years P
billion. OPEX per liter sold was at P = 0.55 due mainly
to incremental sales volume.

Net Financing Costs and Other Charges stood at P = 1.83 billion, 13% higher (P
= 0.22 billion) than P
=
1.61 billion posted a year earlier. The incremental cost was driven primarily by the hike in interest
expense resulting from increased short-term borrowing level (2006 average: P = 23.9 billion vs. 2005
average: P = 15.8 billion) due to the spike in crude oil price.

Basic Earnings per Share was at 2005s level of P

= 0.64.

Financial Condition

2008

Petrons consolidated resources as at December 31, 2008 rose to P

= 111.80 billion (by 7% or P
= 7.32
billion) over end-December 2007 balance of P
= 104.47 billion.

Cash and cash equivalents went up by 32% or P

= 3.10 billion to P
= 12.83 billion as cash cycle
shortened to 53 days from 70 days in 2007.

Financial assets at fair value through profit or loss decreased by 30% (P = 0.07 billion) from P
= 0.23
billion to P
= 0.16 billion, brought about by the drop in market values of investments in marketable
equity securities and proprietary membership shares.

= 0.68 billion from last years

Available-for-sale investments (current and noncurrent) rose slightly to P
balance of P= 0.63 billion as the Company increased its investment in government securities.

Receivables-net slid to P
= 16.88 billion from P
= 17.87 billion on account primarily of higher collections
from trade accounts partly offset by the increase in VAT and specific tax claims. The increase in
specific tax claims was driven by the product replenishment scheme implemented by the BIR in
March 2008.

Inventories registered a minimal increment of P= 0.52 billion to settle at P

= 30.79 billion in 2008. The
565 MB build-up in volume of finished products valued at P = 2.00 billion was partly offset by the drop
in product cost (December 2008; P = 19.67 per liter vs. December 2007: P = 22.31 per liter) amounting
to P
= 1.70 billion.

Other current assets showed an increase of 12% (P = 1.31 billion) to P

= 11.98 billion from P
= 10.67
billion traced mainly to the increase in Input VAT and product replenishment claims.

Property, plant and equipment grew by 7% or P = 2.31 billion to P

= 36.43 billion primarily on account of
capital investments in the Refinery, particularly PetroFCC (P = 1.09 billion) and the construction of the
BTX plant (P= 2.51 billion).

Investment properties were higher by P = 0.04 billion compared with prior years P
= 0.21 billion driven
mainly by real estate acquisitions for future service station sites.

= 0.88 billion relative to 2007s P

Deferred tax assets rose significantly to P = 0.001 billion traced largely
to the NOLCO.

Other non-current assets closed at P

= 0.92 billion, posting a 25% (P
= 0.19 billion) increment over the
previous year brought about mainly by increased long-term receivables.

96
Short-term loans and suppliers credit moved up by 35% (P = 16.23 billion) to P
= 62.89 billion due
essentially to higher borrowing level to augment working capital requirements.

Accounts payable and accrued expenses inched up to P = 4.56 billion from last years P
= 4.54 billion
traced largely to liabilities to contractors and suppliers as well as accrual of operating expenses and
interest on loans.

Long-term debt inclusive of current portion decreased by 20% (P

= 2.53 billion) to P
= 10.25 billion
traceable to the settlement of the Norddeutsche Landesbank Girozentrale (NORD) loan in
December amounting to US$45 million.

Income tax payable went down to P

= 0.02 billion (by 96% or P
= 0.50 billion) as a result of the net loss
reported by the parent company.

Deferred income tax liabilities declined by 99% to P = 0.01 billion attributable to the temporary
differences, particularly the recognized NOLCO and Minimum Corporate Income Tax.

Other non-current liabilities went up by 28% (P

= 0.25 billion) mainly because of the increment in
Asset Retirement Obligation.

Retained Earnings slid by P = 4.92 billion to P

= 23.78 billion as a result of the combined effect of the
net loss reported by the parent company and dividends declaration amounting to P = 3.92 billion and
P
= 0.94 billion, respectively.

Other reserves negative balance increased to P

= 0.47 billion influenced mainly by the recognition of
actuarial loss on the Companys pension fund.

2007

Petrons consolidated resources as of December 31, 2007 stood at P

= 104.47 billion, recording a
19% growth from the end-December 2006 level of P
= 87.52 billion.

Financial assets at fair value through profit and loss increased by P = 0.05 billion (27%) to P
= 0.23
billion, brought about by the appreciation of the value of investments in marketable equity securities
and proprietary membership.

Receivables-net rose by P
= 2.24 billion to P
= 17.87 billion on account largely of higher sales posted for
exports.

Inventories climbed to P = 30.27 billion or an increase of P= 3.98 billion, despite the 705 MB drawdown
in inventory valued at P
= 2.75 billion. This was attributed to the spike in crude cost (December 2007:
P
= 30.65 per liter vs. December 2006: P = 19.98 per liter) equivalent to P= 6.35 billion coupled with the
hike in product cost (December 2007: P = 22.31 per liter vs. December 2006: P = 21.74 per liter)
amounting to P = 0.36 billion.

Other current assets escalated by P= 3.62 billion to P

= 10.67 billion attributed mostly to input VAT
payments and prepaid taxes/duties.

Property, plant and equipment of P = 34.13 billion showed a significant increase (P = 8.98 billion) due to
investments in the Philippines first petrochemical feedstock facilities. Capital expenditures for the
refinerys PetroFCC stood at P = 6.19 billion, while P= 1.76 billion was spent for the PRU. Total
investment costs for the two units amounted to P = 8.98 billion and P
= 2.37 billion, respectively.

Investment Properties were lower by P

= 0.02 billion as land acquisitions were offset by land disposals
and depreciation of office units.

Other non-current assets went up to P

= 0.74 billion on account largely of actuarial gain on defined
pension plan.

97
The increase in resources was tempered by the substantial cash outlay on major capital investments
resulting in a lower Cash and Cash Equivalents level at P
= 9.73 billion from end-December 2006 of P
=
11.74 billion.

Short-term Loans and Suppliers Credit were higher by P = 10.98 billion as a consequence of the
spike in crude FOB price per barrel (2007- P
= 3,688 vs. 2006 -P
= 2,963).

Accounts payable and accrued expenses moved up to P = 4.54 billion driven by higher liabilities to
contractors and suppliers as a result of the construction of the PetroFCC and PRU.

Income tax payable rose to P

= 0.52 billion traceable mainly to the expiration of the income tax holiday
on Mixed Xylene in December 2006.

Deferred income tax liabilities went down by P = 0.18 billion to P

= 1.27 billion essentially due to
inventory differential arising from the difference in valuation between Moving Average Price and
First-In, First-Out .

Other non-current liabilities slid to P

= 0.91 billion prompted by the change in discount rate applied on
the Companys Asset Retirement Obligation.

Appropriated Retained Earnings increased to P = 21.17 billion following the approval of the Board to
set aside P
= 4.15 billion of the unrestricted earnings for future capital investments.

Unappropriated Retained Earnings were higher by only P = 1.29 billion as the total comprehensive
income of P= 6.48 billion was significantly offset by the appropriation for capital projects as well as
cash dividends declared for the year 2007.

Other reserves negative balance went down to P= 0.41 billion influenced mainly by the recognition of
actuarial gains on the Companys pension fund.

2006

Petrons consolidated resources as of December 31, 2006 reached P = 87.52 billion, 27% or P
= 18.63
billion higher than end-December 2005 level of P = 68.89 billion. The Companys debt ratio slid to
0.63 from 0.60 of last year on account of newly availed long-term loans. On the other hand, current
ratio improved to 1.5 from the 1.3 of end-December 2005.

Cash and cash equivalents of P = 11.74 billion was almost thrice the P = 3.94 billion level in end-
December 2005. This can be traced to the remaining proceeds from the P = 6.30 billion long term
fixed rate corporate note (FXCN) as well as the P
= 2.00 billion long term loan from the Land Bank of
the Philippines.

Financial assets at fair value through profit and loss rose to P

= 0.18 billion. The P
= 0.06 billion (55%)
increase stemmed from the appreciation of the value of investments in marketable equity securities
and proprietary membership.

Available-for-sale investments (current and noncurrent) increased to P = 0.63 billion from last years
balance of P= 0.59 billion on account of higher interest rate on government securities.

Receivables-net surged to P
= 15.63 billion essentially on account of the P
= 3.31 billion VAT claims
from the Government.

Other current assets went up by P

= 5.75 billion influenced mainly by the input VAT on zero-rated
sales.

Property, plant and equipment was higher by P = 2.58 billion (11%) due primarily to the capital
expenditures related to the Refinerys PetroFCC project.

Depreciation reduced the value of Investment Properties to P

= 0.22 billion from P
= 0.24 billion in end-
2005.

98
Other noncurrent assets declined by P
= 0.64 billion (51%) attributed largely to the adjustment in
pension asset as a result of the drop in discount rate used in determining obligations for the
Companys pension plan.

Short-term loans increased by P

= 6.73 billion (31%) emanating from higher crude oil and finished
product importation costs.

Suppliers credits dropped to P

= 7.54 billion from P
= 7.91 billion as crude prices fell towards the end of
2006.

Accounts payable and accrued expenses settled at P = 3.73 billion, P

= 1.10 billion higher than the
December 31, 2005 balance of P
= 2.63 billion emanating mostly from liabilities to haulers, contractors
and suppliers.

Income tax payable rose to P = 0.45 billion as a result of the increase in tax rate from 32.5% to 35%.
Additionally, the income tax holiday on Mixed Xylene ended on December 5, 2006.

Long-term debt-inclusive of current portion rose by almost P= 5.99 billion. The increase stemmed
from the issuance of the P
= 6.30 billion 5-year FXCN and the P
= 2.00 billion long term loan from Land
Bank of the Philippines partly reduced by payments made on matured loans.

Deferred income tax liabilities dropped by P

= 0.07 billion as a result of the adjustment to consider the
change in tax rate to 30% in 2009.

Other non-current liabilities surged to P

= 1.05 billion as ARO was more than twice the December
2005 level.

Retained earnings-appropriated increased to P = 17.02 billion following the approval of the Board to
set aside P
= 5.37 billion of the unrestricted earnings for future capital investments.

Other reserves resulted in a negative balance of P

= 0.49 billion influenced mainly by the recognition
of actuarial losses on the Companys pension fund.

Cash Flows

2008 vs. 2007

Petron generated an operating cash outflow of P = 3.52 billion, a turnabout from the P
= 5.66 billion
inflows the previous year. The negative cash flow was influenced largely by the sharp decline in
cash earnings coupled with higher borrowing level.

2007 vs. 2006

Net cash inflows from operating activities of P = 5.66 billion registered an 84% (P
= 2.59 billion) growth
from P= 3.08 billion a year earlier. The Company was able to manage its working capital despite
rising crude prices by striking a balance between the increase in inventory and the corresponding
increase in liabilities on importations. The 4% (P = 0.54 billion) incremental cash earnings also
contributed to the improved net operating cash level. Internally generated funds and proceeds from
the club loan were utilized to fund its capital projects.

2006 vs. 2005

Cash flows generated from operating activities in 2006 of P = 3.08 billion was 57% better than P
= 1.96
billion level in 2005 owing largely to better working capital management.

99
Financial Condition

Item 7. Financial Statements 2008 2007 2006

a) Cash and Cash Equivalents
Cash in bank (Peso) 2,386 2,273 1,078
Cash in bank (US$) 392 1,112 735
Cash on hand 4,536 2,862 1,954
Marketable securities 5,513 3,485 7,968
Total 12,827 9,732 11,735
b) Accounts Receivables-Others
Borrow and loan 199 237 82
Others 2,303 1,099 895
Total 2,502 1,336 977
c) Selling and Administrative Expenses
Depreciation and amortization 1,070 978 946
Employee costs 1,375 1,481 1,199
Purchased services and utilities 1,202 994 817
Maintenance and repairs 482 530 473
Advertising 235 495 222
Rent expense 411 395 381
Materials and office supplies 181 188 164
Expenses Related to oil spill incident in
Guimaras - 15 122
Taxes and licenses 136 120 104
Impairment loss on trade and other
receivables/receivables written-off 71 50 -
Others 59 79 54
Total 5,222 5,325 4,482
d) Other Income, Interest Expense and Others
Interest income 354 344 371
Interest expense (4,180) (1,814) (2,684)
Rent income 357 325 345
Derivatives net mark to market (MTM)
gain (loss) 179 (603) (279)
Foreign exchange gain-net (1,707) 2,283 388
Commodity hedging 1,159 (806) (13)
Reversal of allowance for impairment loss
on receivables - - 154
Changes in fair value of financial assets at
FVPL (67) 49 63
Insurance claims 33 16 29
Gain on ARO settlement 8 - 9
Miscellaneous (77) (352) (209)
Total (3,941) (558) (1,826)

100
Top Five (5) Key Performance Indicators

Ratio Dec-08 Dec-07 Dec-06

Current Ratio 1.1x 1.3x 1.5x

Debt Equity Ratio 2.4x 1.8x 1.7x
Return on Equity (%) (11.1) 18.3 20.1
Debt Service Coverage 1.2x 3.2x 3.2x
Tangible Net worth P
= 32.9 billion P
= 37.8 billion P
= 32.3 billion

Current Ratio - Total current assets divided by total current liabilities. This ratio is a rough indication
of a company's ability to service its current obligations. Generally, the higher the current ratio, the
greater is the "cushion" between current obligations and a company's ability to pay them.

Debt Equity Ratio - Total liabilities divided by tangible net worth. This ratio expresses the
relationship between capital contributed by creditors and that contributed by owners. It expresses
the degree of protection provided by the owners for the creditors. The higher the ratio, the greater
the risk being assumed by creditors. A lower ratio generally indicates greater long-term financial
safety.

Return on Equity - Net income divided by average total stockholders equity. This ratio reveals how
much profit a company earned in comparison to the total amount of shareholder equity found on the
balance sheet. A business that has a high return on equity is more likely to be one that is capable of
generating cash internally. For the most part, the higher a companys return on equity compared to
its industry, the better.
Debt Service Coverage - Free cash flows added to available closing cash balance divided by
projected debt service. This ratio shows the cash flow available to pay for debt to the total amount
of debt payments to be made. It also measures the companys ability to settle dividends, interests
and other financing charges.

Tangible Net Worth - Net worth minus intangible assets. This figure gives a more immediately
realizable value of the company.

Known Trends

Foreign Exchange Rate

Starting the year strong at around P

= 41/US$, the peso weakened and reached P = 48/US$ level in
December 2008. Outflow of investments from the country and decelerating exports contributed to
the peso's depreciating trend as the global economic crunch heightened risk aversion among
investors exacerbated by the lackadaisical demand for the countrys exports. The depreciating peso
makes oil production costs even higher given the elevated crude prices.

Crude Prices

The year 2008 was characterized by the volatility in international crude prices. High oil prices
persisted in the first half of 2008 as demand from China, India and Middle East was sustained.
Weakness of the dollar and the equities market also resulted to shift in investments to the oil market
as it was perceived as a relatively safe haven. Geo-political tensions that caused some supply
disruptions in the oil-producing countries also brought crude prices up. Dubai crude prices
continuously rose in the first half of 2008 reaching a record-high US$141/bbl in July. However, since
August 2008, oil prices started to collapse, sharply falling to US$40/bbl in December 2008 as the
global economic crisis dampened demand for oil. Average price of Dubai crude for 2008 was
US$94/bbl, higher by about US$26/bbl compared to the 2007 average price.

101
Inflation and Interest Rates

Rising commodity prices, especially of food and oil, brought inflation in 2008 to high levels. Local
prices of imported goods were even pushed up by the depreciating peso. The country also
underwent a rice crisis which tightened supply of the basic commodity and brought prices up.
Increase in the price of rice significantly impacts on inflation as it constitutes about 9.4% of
Consumer Price Index (CPI), followed by power (3.8%) and crude oil (2.4%).

From a 21-year low of 2.8% in 2007, inflation peaked at 12.5% in August 2008 from 4.9% in
January. However, starting September when oil and food prices were falling, inflation eased rapidly
registering 8% inflation in December. This brought the 2008 average inflation rate to 9.3%.

Interest rates increased in 2008 as inflation pressures compelled the BSP to hike overnight rates.
Tight liquidity in the global financial markets also spilled over to the local markets causing the rise in
the interest rates of the 91-day Treasury-bills (2008: average 5.161% vs. 2007: average 3.354%)
despite the Governments deferment of issuances and rejections of the high quotations by banks
during various Treasury Bill auctions.

Events that may trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation

These cases are discussed in detail under Legal Proceedings on page 64.
1. Tax Credit Certificates (TCC) Related Cases
2. Pandacan Terminal Operations
3. Oil Spill Incident in Guimaras
4. Bataan Real Property Tax Cases

Material Commitment for Capital Expenditure

The Company funded P 1.24 billion for major projects and P0.7 billion for miscellaneous projects in
2008.

Major capital projects include the following:

Service station projects. P 0.50 billion was allotted for the expansion of the service station network
to augment market share and improvement of supply/distribution facilities.

Refinery Utilities-related investments. P 0.40 billion was used for the repair, upgrading of steam and
power-related facilities at the Refinery.

Ethanol Program. To comply with the mandate of ethanol blend in gasoline, P 0.30 billion was
invested to cover the installation of storage tanks and ethanol blending facilities at depots
nationwide.

Safety Projects. To ensure safety, fire truck at the refinery was replaced amounting to P 0.04 billion.

102
External Audit Fees and Services
For the annual review of the financial statements and other assurance related services, the
Company paid its external auditors the amount of P5.4 million in 2007 and P4.4 million in
2008(exclusive of VAT and out of pocket expenses), broken down as follows:

In Million Pesos 2008 2007

Audit Fee P3.1 P2.9
Other Assurance Related Services P1.3 P2.5

Punongbayan & Araullo undertook the annual review of the Companys financial statements in 2007
and 2008, while Manabat Sanagustin and Isla Lipana conducted the other assurance related
services.

In addition, the fees for 2008 include payment for the review of the Distributed Control System of the
Refinery and Quality Assurance Review of the Internal Audit Activity by Isla Lipana and Manabat
Sanagustin, respectively. During the year, external auditors did not provide consultancy services on
tax or other services other than those mentioned above.

Petron's external auditor is selected through sealed bidding wherein qualified auditing firms are
invited to participate. For the audit of annual financial statements, award is endorsed by the Board
Audit Committee (composed of Chair Reynaldo G. David, Ron W. Haddock, Estelito P. Mendoza
and Angelico T. Salud) to the Board. The Board of Directors, finding the recommendation to be in
order, in turn endorses the appointment or retention of the independent external auditor for
approval/information of the stockholders during its annual meeting. Award of other related audit
services is likewise done through sealed bids and is approved by the Audit Committee as endorsed
by the Company's Internal Audit Department.

103
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

There are no changes in and disagreements with Accountants on Accounting and Financial
Disclosure.

104
Matters Affecting Liquidity and Capital Expenditure

Below are the known trends that could have a material effect on the financial condition or results of
operations of Petron which are discussed in detail under Managements Discussion and Analysis of
Results of Operations and Financial Condition on page 87:
1. inflation
2. Gross Domestic Product
3. 91-Day Treasury Bill Rate / PDST-F Rates
4. Peso-Dollar exchange rates
5. Dubai price
6. industry oil demand
7. tight industry competition and
8. material commitments for capital expenditures.

As regards internal and external sources of liquidity, funding will be sourced from internally
generated cash flows as well as from available credit facilities and borrowings from local and
international banks and other financial institutions. In its February 27, 2009 meeting, the Board
approved an increase of the Companys capital stock from the current P 10 billion to P 25 billion
through the issuance of preferred shares. This was approved by the stockholders during the
meeting held on May 12, 2009.

105
Interest of Named Experts and Counsel
Legal Matters

All legal opinion / matters in connection with the issuance of the Preferred Shares which are subject
of this offer will be passed upon by Picazo Buyco Tan Fider and Santos for the Issue Manager and
Underwriter, and Atty. Joel Angelo C. Cruz for the Company.

Independent Auditors

Punongbayan & Araullo, independent public accountants and a member of Grant Thornton
International, audited Petron Corporations financial statements and schedules for the years ended
31 December 2008 and 2007, included in this prospectus.

Petrons financial statements and schedules for the year ended 31 December 2006 included in this
prospectus were audited by another auditor.

There is no arrangement that experts and independent counsels will receive a direct or indirect
interest in the Issuer or was a promoter, underwriter, voting trustee, director, officer, or employee of
the Issuer.

106
Taxation
The following is a discussion of the material Philippine tax consequences of the acquisition,
ownership and disposition of the Preferred Shares. This general description does not purport to be a
comprehensive description of the Philippine tax aspects of the Preferred Shares and no information
is provided regarding the tax aspects of acquiring, owning, holding or disposing of the Preferred
Shares under applicable tax laws of other applicable jurisdictions and the specific Philippine tax
consequence in light of particular situations of acquiring, owning, holding and disposing of the
Preferred Shares in such other jurisdictions. This discussion is based upon laws, regulations,
rulings, and income tax conventions (treaties) in effect at the date of this Prospectus. The tax
treatment of a holder of Preferred Shares may vary depending upon such holders particular
situation, and certain holders may be subject to special rules not discussed below. This summary
does not purport to address all tax aspects that may be important to a Preferred Shareholder.

PROSPECTIVE PURCHASERS OF THE PREFERRED SHARES ARE URGED TO CONSULT

THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF THE PREFERRED SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS.

As used in this section, the term resident alien refers to an individual whose residence is within the
Philippines and who is not a citizen thereof; a non-resident alien is an individual whose residence
is not within the Philippines and who is not a citizen of the Philippines. A non-resident alien who is
actually within the Philippines for an aggregate period of more than 180 days during any calendar
year is considered a non-resident alien doing business in the Philippines, otherwise, such non-
resident alien who is actually within the Philippines for an aggregate period of 180 days or less
during any calendar year is considered a non-resident alien not doing business in the Philippines.
A resident foreign corporation is a non-Philippine corporation engaged in trade or business within
the Philippines; and a non-resident foreign corporation is a non-Philippine corporation not engaged
in trade or business within the Philippines.

Taxes on Dividends on the Preferred Shares

Individual Philippine citizens and individual aliens who are residents of the Philippines are subject to
a final tax on dividends derived from the Preferred Shares at the rate of 10%, which tax shall be
withheld by the Company.

The dividends derived by domestic corporations (i.e. corporations created or organized in the
Philippines or under its laws) and resident foreign corporations (i.e. foreign corporations engaged in
trade or business within the Philippines) from the Preferred Shares shall not be subject to tax.

Non-resident alien individuals engaged in a trade or business in the Philippines are subject to a final
withholding tax on dividends derived from the Preferred Shares at the rate of 20% subject to
applicable preferential tax rates under tax treaties in force between the Philippines and the country
of domicile of such non-resident alien individual. A non-resident alien individual who comes to the
Philippines and stays for an aggregate period of more than 180 days during any calendar year is
considered engaged in a trade or business in the Philippines. Non-resident alien individuals not
engaged in trade or business in the Philippines are subject to a final withholding tax on dividends
derived from the Preferred Shares at the rate of 25% subject to applicable preferential tax rates
under tax treaties in force between the Philippines and the country of domicile of such non-resident
alien individual.

The term non-resident holder means a holder of the Preferred Shares:

(a) who is an individual who Is neither a citizen nor a resident of the Philippines or an entity
which is a foreign corporation not engaged in trade or business in the Philippines; and

(b) should a tax treaty be applicable, whose ownership of the Shares is not effectively connected
with a fixed base or a permanent establishment in the Philippines.

107
Dividends received from a domestic corporation by a non-resident foreign corporation are generally
subject to final withholding tax at the rate of 30% beginning January 1, 2009 subject to applicable
preferential tax rates under tax treaties in force between the Philippines and the country of domicile
of such non-resident foreign corporation. The 35% or 30% rate for dividends paid to non-resident
foreign corporations may be reduced to a special 15% rate if:

(a) the country in which the non-resident foreign corporation is domiciled imposes no taxes on
foreign sourced dividends; or

(b) the country in which the non-resident foreign corporation is domiciled allows a credit against
the tax due from the non-resident corporation taxes deemed to have been paid in the
Philippines equivalent to 20% (until December 31, 2008) or 15% (beginning January 1,
2009).

Philippine tax authorities have prescribed, through an administrative issuance, procedures for
availment of tax treaty relief. Subject to the approval by Philippine tax authorities of a corporations
application for tax treaty relief, the corporation will withhold at a reduced rate on dividends paid to a
non-resident holder of Preferred Shares or interest paid to a non-resident holder if such non-resident
holder provides the corporation with proof of residence and, if applicable, individual or corporate
status. Proof of residence for an individual consists of a certification from his embassy, consulate or
other proper authority as to his citizenship and residence. Proof of residence and corporate status
for a corporation consists of authenticated copies of its articles of association, or other equivalent
certifications issued by the proper government authority, or any other official document proving
residence. If the regular rate of tax is withheld by the corporation instead of the reduced rates
applicable under a treaty, the non-resident holder of Preferred Shares may file a claim for a refund
from the Philippine taxing authorities. However, because the refund process in the Philippines
requires the filing of an administrative claim and the submission of supporting information, and may
also involve the filing of a judicial appeal, it may be impractical to pursue such a refund.

Taxes on Payments on the Preferred Shares

All payments in respect of the Preferred Shares are to be made free and clear of any deductions or
withholding for or on account of any present or future taxes or duties imposed by or on behalf of the
Philippines, including but not limited to, stamp, issue, registration, documentary, value added or any
similar tax or other taxes and duties, including interest and penalties. If such taxes or duties are
imposed, the Company will pay additional amounts so that holders of Preferred Shares will receive
the full amount of the relevant payment which otherwise would have been due and payable.
However, the Company shall not be liable for:

(a) the final withholding tax applicable on dividends earned on the Preferred Shares

(b) expanded value added tax which may be payable by any Preferred Share holder on any
amount to be received from the Company under the Offer, and

(c) any withholding tax on any amount payable to any Preferred Share holder or any entity
which is a non-resident foreign corporation.

In addition, all sums payable by the Company to tax exempt entities shall be paid in full without
deductions for taxes, duties, assessments or governmental charges.

Taxes on Sale or Other Disposition of the Shares

Sales, exchanges or other dispositions of Preferred Shares which are effected through the PSE by
persons other than a dealer in securities are subject to a stock transaction tax at the rate of 0.5%
based on the gross selling price of the shares. This tax is required to be collected by and paid to the
Government by the selling stockbroker on behalf of his client. The stock transaction tax is classified
as a percentage tax in lieu of a capital gains tax. Notwithstanding its classification as a percentage

108
tax, exemptions from capital gains tax may also apply to the stock transaction tax under the terms of
some tax treaties.

Subject to applicable tax treaty rates, a capital gains tax of 5% on the net capital gains realized
during the taxable year, not in excess of P100,000.00, and 10% on the net capital gains realized
during the taxable year, in excess of P100,000.00, is imposed on sales, exchanges or other
dispositions of shares of stock not traded through a local stock exchange. As a practical matter, in
order for an exemption under a tax treaty to be recognized, an application for tax treaty relief must
be filed and approved by Philippine tax authorities. A non-resident holder must submit proof of
residence as described above.

A certificate from the tax authority of the recipients country is a generally accepted proof of
residence, for both individuals and corporations. Aside from proof of residence, the BIR also
requires the following documents:

(a) special power of attorney duly executed by the recipient in favor of its Philippine
agent/withholding agent to file a claim for tax treaty relief;

(b) certification from the SEC that the recipient company is not registered to engage in business
in the Philippines;

(c) letter providing information on the transaction covered by treaty provisions and requested tax
treatment for such transaction and legal justification;

(d) duly notarized certificate of the Corporate Secretary of the Philippine corporation in respect
of the resolution of its board of directors declaring the dividends; and

(e) duly notarized certification by the Corporate Secretary of the Philippine corporation showing
the number and value of the shares of the applicant and the percentage of the latters
ownership in the Philippine corporation as of the date of the transaction.

Tax Treaties

The following table lists some of the countries with which the Philippines has tax treaties and the tax
rates currently applicable to non-resident holders who are residents of those countries:

Stock transaction tax on Capital Gains Tax due

In percentage
Dividends sale or disposition on disposition of of
(%)
effected through the PSE Shares outside the PSE
(1) (8) (8)
Canada 25 Exempt Exempt
(2) (8) (8)
France 15 Exempt Exempt
(3) (9)
Germany 15 0.5 5/10
(4) (8) (8)
Japan 25 Exempt Exempt
(5) (8) (8)
Singapore 25 Exempt Exempt
(6) (10) (10)
United Kingdom 25 Exempt Exempt
(7) (8)
United States 25 Exempt Exempt

Notes:

(1) 15% if recipient company controls at least 10% of the voting power of the company
paying the dividends.

(2) 10% if the recipient company holds directly at least 15% of the voting shares of the
company paying the dividends.

(3) 10% if the recipient company owns directly at least 25% of the capital of the company
paying the dividends.

109
 (4) 10% if the recipient company holds directly at least 25% of either the voting shares of the
company paying the dividends or of the total shares issued by that company during the
period of 6 months immediately preceding the date of payment of the dividends.

(5) 15% if during the part of the paying companys taxable year which precedes the date of
payment of dividends and during the whole of its prior taxable year at least 15% of the
outstanding shares of the voting stock of the paying company was owned by the recipient
company.

(6) 15% if the recipient company is a company which controls directly or indirectly at least
10% of the voting power of the company paying the dividends.

(7) 20% if during the part of the paying corporations taxable year which precedes the date
of payment of dividends and during the whole of its prior taxable year, at least 10% of the
outstanding shares of the voting stock of the paying corporation were owned by the recipient
corporation. Notwithstanding the rates provided under the RP-US Treaty, residents of the
US may avail of the 15% withholding tax rate under the tax-sparing clause of the Philippine
Tax Code provided certain conditions are met.

(8) Capital gains are taxable only in the country where the seller is a resident, provided the
shares are not those of a corporation, the assets of which consist principally of real property
situated in the Philippines, in which case the sale is subject to Philippine taxes.

(9) Under the RP-Germany Tax Treaty, capital gains from the alienation of shares of a
Philippine corporation may be taxed in the Philippines irrespective of the nature of the
assets of the Philippine corporation. Tax rates are 5% on the net capital gains realized
during the taxable year not in excess of P100,000 and 10% on the net capital gains realized
during the taxable year in excess of P100,000.

(10) Under the RP-UK Tax Treaty, capital gains on the sale of the stock of Philippine
corporations are subject to tax only in the country where the seller is a resident, irrespective
of the nature of the assets of the Philippine corporation.

* The Philippine tax authorities, in a recent ruling, have taken the position that the stock
transaction tax is not identical or substantially similar to the income tax/capital gains tax on a
sale of shares in a domestic corporation, and, hence, not covered by the treaty exemption.

Documentary Stamp Taxes on Preferred Shares

The Philippines imposes a documentary stamp tax on the issuance of the Preferred Shares at the
rate of P1.00 on each P200.00, or fraction thereof, of the par value of the shares.

The Philippines also imposes a documentary stamp tax upon transfers of the Preferred Shares at a
rate of P0.75 on each P200.00, or fractional part thereof, of the par value of the shares. The
documentary stamp tax is imposed on the person making, signing, issuing, accepting or transferring
the document and is thus payable either by the vendor and the purchaser of the Preferred Shares.

However, the sale, barter or exchange of Preferred Shares should they be listed and traded through
the PSE are exempt from documentary stamp tax.

Estate and Gift Taxes

The transfer of the Preferred Shares upon the death of a registered holder to his heirs by way of
succession, whether such an individual was a citizen of the Philippines or an alien, regardless of
residence, will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if the
net estate is over P 200,000.00.

110
Individual registered holders, whether or not citizens or residents of the Philippines, who transfer
shares by way of gift or donation will be liable for Philippine donors tax on such transfers at
progressive rates ranging from 2% to 15% if the total net gifts made during the calendar year exceed
P 100,000.00 provided that the rate of tax with respect to net gifts made to a stranger (one who is
not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the
fourth degree of relationship) is a flat rate of 30%. Corporate registered holders are also liable for
Philippine donors tax on such transfers, but the rate of tax with respect to net gifts made by
corporate registered holders is always at a flat rate of 30%.

Estate and gift taxes will not be collected in respect of intangible personal property (a) if the
deceased at the time of death, or the donor at the time of donation, was a citizen and resident of a
foreign country which at the time of his death or donation did not impose a transfer tax of any
character in respect of intangible personal property of citizens of the Philippines not residing in that
foreign country, or (b) if the laws of the foreign country of which the deceased or the donor was a
citizen and resident at the time of his death or donation allow a similar exemption from transfer or
death taxes of every character or description in respect of intangible personal property owned by
citizens of the Philippines not residing in that foreign country.

Corporate Income Tax

In general, a tax of 35% is imposed upon the taxable net income of a domestic corporation from all
sources (within and outside the Philippines). However, effective January 1, 2009, the corporate
income tax rate was reduced to 30% pursuant to Republic Act 9337. Gross interest income from
Philippine currency bank deposits and yield from deposit substitutes, trust fund and similar
arrangements as well as royalties from sources within the Philippines are however subject to a final
withholding tax of 20% of the gross amount of such income.

111
Industry Overview

Global / Regional Oil Market

After rising by almost a million barrels per day (BPD) in 2007 supported by robust demand in the
US, China and India, world oil demand contracted by about 0.5 million barrels per day in 2008. High
oil prices led to consumers conservation. The deepening financial crisis in the US also further
dampened demand for oil. Demand in the US, the worlds top oil consumer, declined by 1.2 million
barrels per day. While positive growth was still seen in Asia, the Middle East, the former Soviet
Union and Eastern Europe, this was not enough to offset the dip in the US. Compared to 2007,
demand growth softened in Asia in 2008, as the crisis resulted in a slump in exports in the second
half of the year.

The 2008 global economy worsened with GDP of major economies like the US, Japan, Europe
contracting while the rest of the worlds economies slowed down compared to previous years
growth.

Contraction in global oil demand is seen to persist until 2009, mainly in the developed economies.
Analysts forecast a 1.5 to 1.6 million BPD drop in oil demand in 2009. However, improvement in oil
demand may be seen beginning 2010, albeit a weak growth of 0.9 million BPD.

While massive demand downturn in 2009 is seen in the developed economies like the US (-5%),
Japan (-8%) and Europe (-3%), oil demand projections in Asia still present some optimism. China
(2-3%), India (3-4%), and the Middle East (2%) continue to be the growth drivers for 2009. In 2010,
these countries are expected to grow by about 5% while the US, Japan and Europe will experience
a milder contraction of 1%.

Mirroring global trends, Asia Pacifics demand will also be lighter, largely driven by gasoline and
diesel which collectively make up about 40% of regional demand. The transport and agricultural
sectors are expected to sustain diesel demand as there is no immediate substitute for diesel used in
these sectors. Similarly, there is no large scale substitution for gasoline in transport. However, the
increasing utilization of biodiesel and ethanol in gasoline may temper demand growth for these
products.

Meanwhile, fuels used for power generation (mainly fuel oil) tend to be substituted with coal and
natural gas. With increasing support to use cleaner renewable resources, demand for these
products is expected to weaken in the medium term.

China and India account for bulk of refining capacity additions. Indias capacity addition is seen to
further strengthen its net exporter status in the region. On the other hand, Chinas additions will
largely cater to its growing domestic demand.

Global Petrochemical Market

Refining-petrochemical synergies have been a market trend primarily to capture higher value from a
refinerys product streams. To a certain extent, the synergy gives a company flexibility to shift from
maximizing production of gasoline or petrochemicals, depending on market requirements. In
addition, the integration of petrochemical facilities with the refinery provides economies of scale in
the use of common utilities and other overhead costs.

Petrochemical Products

(1) Propylene is the raw material for the production of polypropylene which is used to
manufacture food packaging plastics, car bumpers, computer housings, appliance parts,
and fibers.

(2) Benzene is an aromatics hydrocarbon, used to produce numerous compounds, such as

styrene, phenol, cyclohexane, alkylbenzenes, and chlorobenzenes, which are used to

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 produce plastics, pharmaceuticals, pesticides, and other chemicals. It is also used as a
solvent for paints and natural rubber.

(3) Toluene is used as solvents in paints, inks, adhesives, and cleaning agents, and in chemical
extractions. It is also used in the chemical synthesis of benzene, urethane foams, and other
organic chemicals; in the production of pharmaceuticals, dyes, and cosmetic nail products.

(4) Xylene is used to make polyester fibers, packaging materials, bottles and films.

Petrochemical Outlook

In previous years, the petrochemical market grew faster than the global GDP. However, with the
global economic slowdown, demand for petrochemical products weakened in 2008. High energy
prices had an impact on economic growth and demand for basic petrochemicals. However in 2009,
some optimism is seen with Chinas stimulus package to bolster the oil and petrochemical industry.
The package aims to ensure growth in the domestic oil and petrochemical sector for the next three
years by guaranteeing sufficient supply of petrochemicals, technology and equipment upgrade at the
countrys key refineries and accessibility of credit and financing. Recovery in other regions is also
expected in the succeeding years tracking the improvement in the global economy.

Petrochemical feedstock will continue to fetch a higher price relative to regular refinery products, i.e.
LPG vs. propylene and Xylene, Benzene and Toluene vs. Gasoline,

Philippine Oil Demand

In 2007, domestic oil demand rebounded from a downward trend since 2005 supported by favorable
economic conditions. Increase in government spending for infrastructure projects, recovery in
investments, and sustained private consumption fueled by robust OFW remittances propped up
demand for oil.

However, in 2008, the economic downturn muted domestic demand for oil. Based on DOEs industry
data, demand in 2008 plunged by about 3.3%. High oil prices and a depreciating peso during the
year brought pump prices up leading to lower consumption of oil products. The global recession also
affected the countrys exports and reduced demand in the industrial sector.

Philippine petroleum demand is seen to grow from 1% to 2% over the medium-term, to be driven
largely by transport fuels i.e., diesel, gasoline, jet fuel. Transport fuels, currently about 55% of
domestic demand, are seen to remain dominant in the demand mix supported by sustained
consumer spending, growth in vehicle sales, development in air transport industry with airlines route
expansions and increasing demographic trends (e.g. population growth, increasing urbanization).
The governments pump priming activities through increased infrastructure projects will also spur
growth in oil demand.

On the supply side, finished product imports continue to gain prominence with the entry of a lot of
importers/traders since the oil industry deregulation and Chevrons closure of its refinery in 2003.

Price Outlook

Oil prices were very volatile in 2008. After significantly increasing in the first half of 2008 supported
by sustained demand, geopolitical tensions and shift in investments to oil from the weakening dollar
and equities market, oil prices sharply collapsed in August 2008 as the global economic crisis
dampened demand for oil. Dubai crude, the benchmark for Asia, peaked at US$ 141 a barrel in July
and started to plunge in August falling to about US$ 40 a barrel in December. It averaged US$ 94 a
barrel for 2008, 38% higher than the 2007 average of US$ 68 a barrel. Dubai is slowly recovering.
From US$ 44 a barrel in January 2009, it averaged US$68 a barrel in September. Year to date
September 2009 Dubai average is US$ 57 a barrel.

113
Prices are seen to range between US$ 70-80 a barrel in the medium term. This is the price level that
will justify upstream investments at the same time support demand growth. In the long term, as
demand recovers, prices are expected to increase.

114
Regulatory Framework
The Department of Energy is the lead government agency overseeing the oil sector. However, with
the enactment of the Downstream Oil Industry Deregulation Law in 1998 (R.A. No. 8479), the
regulatory functions of the DOE were significantly reduced. The DOE monitors prices as well as
violations under the law (prohibited acts include cartelization, predatory pricing).

Republic Act No. 8479 deregulating the downstream oil industry effectively removed the rate-setting
function of the then Energy Regulatory Board, leaving price-setting to market forces. DOEs current
function is solely to monitor prices.

On the issue of volume regulation, in the event of supply shortage, the government may, as a
contingency measure, undertake supply rationing. However, in recent years, this measure has not
been invoked.

In addition, President Gloria Macapagal-Arroyo, in October 2002, issued Executive Order No. 134
requiring oil companies to maintain sufficient level of inventory. For refiners like Petron, the minimum
inventory level was set at 30 days. However, the said Order was relaxed in March 2003, by virtue of
Department Circular No. 2003-03-002, which reduced the minimum level to only 15 days.

Importation of both crude and finished products (except for LPG) is levied a 3% import duty.
Financial import barriers are low, given that there is zero tariff differential between crude and
finished products. Physical and logistical barriers are likewise low, as there are now several import
terminals operated/owned by independent storage companies, mainly located in Subic or by
domestic oil companies.

Any capital expenditure requires compliance with the environmental regulations in the medium term.
Republic Act No. 8749, or the Philippine Clean Air Act, mandates the sulfur and benzene content for
gasoline and automotive diesel. Petron is fully compliant with these specifications. In addition, in
May 2005, Petron inaugurated the first and only refinery facility which enables the local production of
Clean Air Act-compliant fuels.

The Department of Trade and Industry (DTI), through the Bureau of Products Standards, on the
other hand ensures that all products comply with the requirements under the Philippine National
Standards (PNS).

The DENR, on the other hand, ensures that all projects comply with environmental laws, specifically,
the Philippine Clean Air Act. The DENR, through the Environmental Management Bureau, is the
agency that issues Environmental Compliance Certificate for all projects deem to have impact on the
environment.

Need of Government Approval for Principal Products or Services

Government approval of Petron products and services is not generally required. Petroleum products
refined at the Petron Bataan Refinery conform to specifications under the PNS. Clearances are
secured from concerned government authorities for importations of restricted goods. Supply of
products or services to government and government agencies undergo bidding process in
accordance with law.

The Downstream Oil Industry Deregulation Act of 1998 (R.A. No. 8479) requires the registration with
the DOE of any fuel additive prior to its use in a product. Product specifications have to comply with
the requirements of the DTI (through the Bureau of Product Standards). Moreover, importations of
petroleum products and additives are reported to the DOE.

In compliance with the Philippine Clean Air Act of 1999 (R.A. No. 8749), Petron produces: (a)
unleaded premium gasoline with an anti-knock index of not less than 87.5 and Reid vapor pressure
of not more than 9 psi; (b) unleaded gasoline with aromatics not exceeding 35% by volume and
benzene not exceeding 2% by volume; (c) automotive diesel containing a concentration of sulfur not
exceeding 0.05% by weight with a cetane number of not less than 50; and (d) industrial diesel
containing a concentration of sulfur not in excess of 0.30%.

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Government regulations still require the following: Fire Safety Inspection Certificates; Certificates of
conformance of facilities to national or accepted international standards on health, safety and
environment; Product Liability Insurance Certificates or Product Certificate of Quality; and the
Environmental and Compliance Certificate issued by the DENR for service stations and for
environmentally-critical projects. These certificates have to be submitted to the DOE for monitoring
(not regulation) purposes. Reports to the DOE are required for the following activities/projects
relating to petroleum products: (a) refining, processing, including recycling and blending; (b)
storing/transshipment; (c) distribution/operation of petroleum carriers; (d) gasoline stations; (e) LPG
Refilling Plant; and (f) bunkering from freeports and special economic zones.

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The Philippine Stock Market

Brief History

The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized
in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was self-
regulating, governed by its respective Board of Governors elected annually by its members.

Several steps initiated by the Government have resulted in the unification of the two bourses into the
Philippine Stock Exchange (PSE). The PSE was incorporated in 1992 by officers of both the
Makati and the Manila Stock Exchanges. In March 1994, the licenses of the two exchanges were
revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City,
these floors are linked by an automated trading system which integrates all bid and ask quotations
from the bourses.

In June 1998, the Philippine SEC granted the Self-Regulatory Organization (SRO) status to the
PSE, allowing it to impose rules as well as implement penalties on erring trading participants and
listed companies. On August 8, 2001, PSE completed its demutualization, converting from a non-
stock member-governed institution into a stock corporation in compliance with the requirements of
the SRC. The PSE has an authorized capital stock of P36.8 million, of which P30.6 million is
subscribed and fully paid-up. Each of the 184 member-brokers was granted 50,000 common shares
of the new PSE at a par value of P1.00 per share. In addition, a trading right evidenced by a
Trading Participant Certificate was immediately conferred on each member broker allowing the use
of the PSEs trading facilities. As a result of the demutualization, the composition of the PSE Board
of Governors was changed, requiring the inclusion of seven brokers and eight non-brokers, one of
whom is the President.

On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of
a series of reforms aimed at strengthening the Philippine securities industry.

Classified into financial, industrial, holding firms, property, services, and mining and oil sectors,
companies are listed either on the PSEs First Board, Second Board or the Small and Medium
Enterprises Board. Each index represents the numerical average of the prices of component stocks.
The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the price
movements of selected stocks listed on the PSE, based on traded prices of stocks from the various
sectors. The PSE shifted from full market capitalization to free float market capitalization effective
April 3, 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX
to PSEi. The PSEi includes 30 selected stocks listed on the PSE.

With the increasing calls for good corporate governance, PSE has adopted an online daily
disclosure system to improve the transparency of listed companies and to protect the investing
public.

The table below sets out movements in the composite index from 1995 up to the end of 2008 and
shows the number of listed companies, market capitalization, and value of shares traded for the
same period:

Year Composite Index Number of Listed Aggregate Market Combined Value

at Closing Companies Capitalization of Turnover
(in P billions) (in P billions)
1995 2,594.2 205 1,545.7 379.0
1996 3,170.6 216 2,121.1 668.9
1997 1,869.2 221 1,261.3 588.0
1998 1,968.8 221 1,373.7 408.7
1999 2,142.9 226 1,938.6 713.9
2000 1,494.5 230 2,577.6 357.6
2001 1,168.1 232 2,142.6 159.5

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 Year Composite Index Number of Listed Aggregate Market Combined Value
at Closing Companies Capitalization of Turnover
(in P billions) (in P billions)
2002 1,018.4 234 2,083.2 159.7
2003 1,442.2 236 2,973.8 145.4
2004 1,822.8 236 4,766.2 206.6
2005 2,096.0 237 5,948.4 383.5
2006 2,982.5 240 7,172.8 572.6
2007 3,621.6 244 7,980.0 1,340.0
2008 1,872.9 248 4,070.0 763.9
Source: Philippine Stock Exchange, Inc.

Trading

The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To
trade, bids or ask prices are posted on the PSEs electronic trading system. A buy (or sell) order that
matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders
received by one broker at the same price are crossed at the PSE at the indicated price. Payment of
purchases of listed securities must be made by the buyer on or before the third trading day (the
settlement date) after the trade.

Trading on the PSE starts at 9:30 a.m. and ends at 12:00 p.m. with a 10-minute extension during
which transactions may be conducted, provided that they are executed at the last traded price and
are only for the purpose of completing unfinished orders. Trading days are Monday to Friday, except
legal holidays and days when the BSP clearing house is closed.

Minimum trading lots range from 10 to 5,000,000 shares depending on the price range and nature of
the security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot
trading.

To maintain stability in the stock market, daily price swings are monitored and regulated. Under
current PSE regulations, when the price of a listed security moves up by 50% or down by 40% in
one day (based on the previous closing price or last posted bid price, whichever is higher), the price
of that security is automatically frozen by the PSE, unless there is an official statement from the
company or a government agency justifying such price fluctuation, in which case the affected
security can still be traded but only at the frozen price. If a company fails to submit such explanation,
a trading halt is imposed by the PSE on the listed security the following day. Resumption of trading
shall be allowed only when the disclosure of the company is disseminated, subject again to the
trading ban.

Settlement

The Securities Clearing Corporation of the Philippines ("SCCP") is a private institution organized
primarily as a clearance and settlement agency for depository eligible trades executed in the PSE.
The PSE holds 100% ownership of SCCP. SCCP received its permanent license to operate on
January 17, 2002. It is responsible for:

(a) synchronizing the settlement of funds and the transfer of securities through Delivery versus
Payment (DVP) clearing and settlement of transactions of Clearing Members, who are also
Trading Participants of the Exchange;

(b) guaranteeing the settlement of trades in the event of a Trading Participants default through
the implementation of its Fails Management System and administration of the Clearing and
Trade Guaranty Fund (CTGF), and;

(c) performance of Risk Management and Monitoring to ensure final and irrevocable
settlement.

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SCCP settles PSE trades on a three-day rolling settlement environment, which means that
settlement of trades takes place three (3) trading days after transaction date (T+3). The deadline
for settlement of trades is 12:00 noon on T+3. Securities sold should be in scripless form and lodged
under the book-entry system of the Philippine Depository & Trust Corporations (PDTC, formerly
the Philippine Central Depository, Inc). Each Trading Participant maintains a Cash Settlement
Account with one of the two existing Settlement Banks of SCCP which are Banco de Oro Unibank,
Inc. and Rizal Commercial Banking Corporation. Payment for securities bought should be in good,
cleared funds and should be final and irrevocable. Settlement is presently on a broker level.

SCCP implemented its new clearing and settlement system called Central Clearing and Central
Settlement (CCCS) on May 29, 2006. CCCS employs multilateral netting whereby the system
automatically offsets buy and sell transactions on a per issue and a per flag basis to arrive at a
net receipt or a net delivery security position for each Clearing Member. All cash debits and credits
are also netted into a single net cash position for each Clearing Member. Novation of the original
PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the
Central Counterparty to each PSE-Eligible trade cleared through it.

Scripless Trading

In 1995, the Philippine Depository & Trust Corporation (formerly the Philippine Central Depository,
Inc.), was organized to establish a central depository in the Philippines and introduce scripless or
book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional
license by the Philippine SEC to act as a central securities depository.

All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The
depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment
(withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate
actions including shareholders meetings, dividend declarations and rights offerings. The PDTC also
provides depository and settlement services for non-PSE trades of listed equity securities. For
transactions on the PSE, the security element of the trade will be settled through the book-entry
system, while the cash element will be settled through the current settlement banks, Rizal
Commercial Banking Corporation and Banco de Oro Unibank, Inc.

In order to benefit from the book-entry system, securities must be immobilized into the PDTC system
through a process called lodgment. Lodgment is the process by which shareholders transfer legal
title (but not beneficial title) over their shares of stock in favor of PCD Nominee Corporation (PCD
Nominee), a corporation wholly owned by the PDTC whose sole purpose is to act as nominee and
legal title holder of all shares of stock lodged into the PDTC, or to any entity authorized by the
Philippine SEC. Immobilization is the process by which the warrant or share certificates of lodging
holders are canceled by the transfer agent and a new warrant or stock certificate covering all the
warrants or shares lodged is issued in the name of PCD Nominee, or any other entity authorized by
the Philippine SEC, without any jumbo or mother certificate in compliance with the requirements of
Section 43 of the Securities Regulation Code (SRC). This trust arrangement between the
participants and PDTC through PCD Nominee is established by and explained in the PDTC Rules
and Operating Procedures approved by the Philippine SEC. No consideration is paid for the transfer
of legal title to PCD Nominee. Once lodged, transfers of beneficial title of the securities are
accomplished via book-entry settlement.

Under the current PDTC system, only participants (e.g. brokers and custodians) will be recognized
by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial owner of
shares through his participant, will be the beneficial owner to the extent of the number of shares held
by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts on these
shares will have to be coursed through a participant. Ownership and transfers of beneficial interests
in the shares will be reflected, with respect to the participants aggregate holdings, in the PDTC
system, and with respect to each beneficial owners holdings, in the records of the participants.
Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the
lodged shares, they must rely on their participant-brokers and/or participant-custodians.

Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade
through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity

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securities through the PDTC system. All matched transactions in the PSE trading system will be fed
through the Securities Clearing Corporation of the Philippines (SCCP), and into the PDTC system.
Once it is determined on the settlement date (trading date plus three trading days) that there are
adequate securities in the securities settlement account of the participant-seller and adequate
cleared funds in the settlement bank account of the participant-buyer, the PSE trades are
automatically settled in the SCCP Central Clearing and Central Settlement (CCCS) system, in
accordance with the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial
ownership of the securities is transferred from the participant-seller to the participant-buyer without
the physical transfer of stock certificates covering the traded securities.

If a stockholder wishes to withdraw his stockholdings from the PDTC System, the PDTC has a
procedure of upliftment under which PCD Nominee will transfer back to the stockholder the legal title
to the shares lodged by surrendering the PCD Nominee certificate to a transfer agent which then
issues a new stock certificate in the name of the shareholder and a new PCD Nominee certificate for
the balance of the lodged shares. The expenses for upliftment are for the account of the uplifting
shareholder.

The difference between the depositary and the registry would be on the recording of ownership of
the shares in the issuing corporations books. In the depository set-up, shares are simply
immobilized, wherein customers certificates are canceled and a new certificate is issued in the
name of PCD Nominee Corp. Transfers among/between broker and/or custodian accounts, as the
case may be, will only be made within the book-entry system of PDTC. However, as far as the
issuing corporation is concerned, the underlying certificates are in the nominees name. In the
registry set-up, settlement and recording of ownership of traded securities will already be directly
made in the corresponding issuing companys transfer agents books or system. Likewise, recording
will already be at the beneficiary level (whether it be a client or a registered custodian holding
securities for its clients), thereby removing from the broker its current de facto custodianship role.

Amended Rule on Lodgment of Securities

On June 24, 2009, the PSE apprised all listed companies and market participants through
Memorandum No. 2009-0320 that commencing on July 1, 2009, as a condition for the listing and
trading of the securities of an applicant company, the applicant company shall electronically lodge its
registered securities with the PDTC or any other entity duly authorized by the SEC, without any
jumbo or mother certificate in compliance with the requirements of Section 43 of the Securities
Regulation Code. In compliance with the foregoing requirement, actual listing and trading of
securities on the scheduled listing date shall take effect only after submission by the applicant
company of the documentary requirements stated in the amended rule on Lodgment of Securities of
the Exchange.

Pursuant to such amendment, the PDTC issued an implementing procedure in support thereof to
wit:

For new companies to be listed at the PSE as of July 1, 2009, the usual procedure will be observed
but the Transfer Agent on the companies shall no longer issue a certificate to PCD Nominee Corp
but shall issue a Registry Confirmation Advice, which shall be the basis for the PDTC to credit the
holdings of the Depository Participants on listing date.

On the other hand, for existing listed companies, the PDTC shall wait for the advice of the Transfer
Agents that it is ready to accept surrender of PCNC jumbo certificates and upon such advice the
PDTC shall surrender all PCNC jumbo certificates to the Transfer Agents for cancellation. The
Transfer Agents shall issue a Registry Confirmation Advice to PCNC evidencing the total number of
shares registered in the name of PCNC in the Issuers registry as of confirmation date.

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Appendix
A. List of Products

B. Unaudited Consolidated Financial Statements as of September 30, 2009

C. Audited Consolidated Financial Statements for December 31, 2008, 2007 and 2006

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A. List of Products

Fuels

PETRON GASUL is a clean-burning LPG consisting of a mixture of propane and butane gas and used as
fuel for cooking, lighting and industrial applications.

FIESTA GAS is a clean-burning LPG, similar to PETRON GASUL, consisting of a mixture of propane and
butane gas and is used as fuel for cooking and lighting applications

PETRON XTEND is an automotive variant of PETRON GASUL, which is designed as an alternative fuel
for gasoline-fed automotive vehicles.

PETRON BLAZE is an ultra high-performance unleaded gasoline with an octane rating of 96+. It also
contains a special blend of octane booster and multi-functional additive that brings about superior
combustion and performance.

PETRON XCS PLUS WITH VALVEMASTER is a premium unleaded gasoline that contains a lead-
replacement additive for valve seat protection. It has the unique combination of two superior additive
TM
systems, XCS and Valvemaster .

PETRON XTRA UNLEADED is an environment-friendly, premium motor gasoline that contains a high-
performance detergent additive which provides excellent cleaning effect for optimum engine power. It also
contains a unique gas-saving additive that promotes more efficient combustion and lower fuel
consumption.

PETRON E10 PREMIUM is an environment-friendly, premium motor gasoline that exceeds the
requirements of the Philippine Biofuels Law. It contains 10% fuel-grade ethanol and 90% premium
unleaded gasoline. It has an enhanced additive system that allows the removal of existing deposits,
resulting in improved performance and fuel economy.

PETRON REGULAR UNLEADED is a motor fuel with controlled volatility for maximum economy, easy
starting and good acceleration.

PETRON JET A-1 is a kerosene-type aviation fuel used by commercial aircraft with turbo prop and
turbojet engines. It has good combustion characteristics suited for low-temperature operation at high
altitude.

PETRON AVIATION GASOLINE is a low-lead, 103-octane aviation gasoline for aircraft with reciprocating
engines.

PETRON GAAS is a refined water-white kerosene with clean and efficient burning qualities. It is the fuel
for stoves, lamps, kerosene-fueled engines, boilers and furnaces. It is also used as solvent.

PETRON DIESEL MAX (automotive grade) - is a low sulfur, premium product that contains a unique and
robust multifunctional additive that has smoke reducing agent and lubricity additive to protect fuel injection
system. It also has the ability to maintain and improve fuel injection system cleanliness through
unsurpassed detergency characteristics.

PETRON FUEL OIL is a low cost residual fuel used in industrial and marine applications. It is also
commonly known as Bunker Fuel. It is the fuel for boilers, furnaces, kilns, ovens and bunker fired diesel
engines.
INTERMEDIATE FUELS are fuels blended from diesel and bunker fuels classified into different grades as
specified by the universally-adopted System International d' Unites (SI) metric system of measurement.
It is intended for use in international marine vessels that identify their fuel requirements by specific
Intermediate Fuel Grades.

SPECIAL FUEL OIL includes fuels of diesel and bunker fuel oils intended for use in domestic marine
vessels. These fuel products are classified into Special Fuel Oil SFO Grades based on viscosity ranges.
Special Fuel Oil can also be used as Intermediate Fuel Oil as long as it meets the requirements of the
particular Intermediate Fuel Oil Grade specified by the customer.

IF-1 is a special type of bunker fuel with a 1.0% maximum sulfur content. It is the fuel for boilers,
furnaces, kilns, ovens and bunker-fired diesel engines

PETRON INDUSTRIAL DIESEL FUEL is dual-purpose fuel that is recommended as a boiler fuel in
domestic or light industrial installations with pressure jet burners and as a diesel fuel for off-road heavy
equipment.

Automotive Oils and Lubricants

Petron has a full line of automotive oils and lubricants for different types of vehicle engines and road
conditions.

The Company sells mineral-based single grade and multi-grade, as well as synthetic-based, multi-grade
heavy-duty diesel engine oils under the REV-X line of products, which include REV-X HD, REV-X
HAULER, REV-X HAULER, and REV-X ALL TERRAIN.

ULTRON are mineral-based, semi-synthetic and synthetic multi-grade engine oils designed for different
types of gasoline engines from vans, sedans to turbocharged sports cars operating under moderate to
extreme conditions. Brand names include ULTRON EXTRA, ULTRON TOURING, ULTRON RALLYE,
and ULTRON RACE.

PETRON MOTOR OIL is a cost-effective, single-grade oil intended primarily for use in gasoline and diesel
engines of passenger cars running in mild operating conditions recommended only for short oil drain
interval application.

For motorcycles, Petron delivers a full line of superior quality motor oils designed for easy application.
These products are PETRON 2T ENVIRO, 2T PREMIUM, 2T AUTOLUBE, and 2T POWERBURN for
two-stroke motorcycle engines, and PETRON SPRINT 4T ENDURO, EXTRA, RIDER for four-stroke
motorcycle engines.

Petron also has a full line of lube oil products catering to the extreme performance requirements of heavy-
duty engines of tractors, locomotives, and other heavy-duty machinery. These are PETRON HDX,
PETRON XD3, PETRON 2040, PETRON XD 2040, and PETRON RAILROAD EXTRA.

As for transmission fluids, Petron has designed a full range of lubricants for either manual or automatic
transmission. These include PETRON GX, PETRON GEP, PETRON GST, which are designed for
manual transmission, and PETRON ATF PREMIUM, PETRON TF 38, and PETRON TDH 50 for
automatic transmission.

Industrial Oils and Lubricants

For industrial applications, Petron has a wide range of oils and lubricants designed for extreme
temperatures and operating conditions for rock-drilling tools, compressors, turbines, hydraulic systems,
metal-cutting machinery, refrigeration systems and other industrial uses. Some of these brands include
AIRLUBE, GEARFLUID, GEARKOTE, HYDROTUR N, HYDROTUR AW, HYDROTUR AW (GT),
HYDROTUR AWX, HYDROTUR R, HYDROTUR SX, HYDROTUR T, HYDROTUR TEP, HYPEX EP
(ASPHALT-BASED), HYPEX EP (OIL-BASED), SPINOL, MILROL 5K, PETROCYL, PETROCYL S,
PETROKUT, PETROSINE 68, SUNISO, TURNOL, VOLTRAN and ZERFLO 68.

Marine Lubricants

The Company has a wide range of oils designed for lubrication of various types of diesel engines used in
the maritime industry. These products are PETROMAR XC 5540, PETROMAR XC 5040, PETROMAR
XC 4040, PETROMAR DCL 7050, PETROMAR DCL 4000 SERIES, PETROMAR 65, PETROMAR HD
MARINE, PETROMAR XC 1000 SERIES, PETROMAR XC 1500 SERIES, PETROMAR XC 2000
SERIES and PETROMAR XC 3000 SERIES.

Greases

For protection of equipment and to reduce wear and tear of ball bearings, gears and other components of
vehicle and industrial engines, Petron has a line of industrial and multi-purpose grease products such as
MOLYGREASE EP2, MOLYGREASE EP 1P and EP 2P, MOLYGREASE PREMIUM, PETROGREASE
EP, PETROGREASE EP 290 and EP 375, PETROGREASE HT, PETROGREASE MP, PETROGREASE
PREMIUM, and PETROGREASE XX.

Special Products
Petrons specialty products are designed for special applications such as steel case molding, rope
manufacturing, tire manufacturing, formulation of paints, varnishes, lacquers and adhesives, masonry
work, newspaper ink formulation, rustproofing, wire-coating, processing of natural fibers, dust sealing,
cleaning agents and other non-lubricating applications. These include PETRON FARM TRAC OIL,
PETRON MARINE HD OIL, STM, BULLS EYE GUN OIL, STEMOL, ROPGRIZ, RUBBEX 130,
MARINEKOTE, MARINEKOTE SS, PETROKOTE, PETROKOTE 392, PETROTHERM 32, PRINTSOL
600, PROCESS OILS, PRODUCT 50R, ALDRO OIL, AUTOKOTE, CABLEKOTE, CABLELUBE,
DISTILLATE MP, DUST STOP OIL, GREASOLVE, and JUTE BATCHING OIL.

Asphalts
Petron also has several asphalt products used for sealing applications, undercoating, waterproofing,
undercoating, rustproofing, soundproofing, insulation, old asphalt surfacing crack sealing, soil
stabilization, and road pavement. These include ASPHALT JOINT SEALER, ASPHALTSEAL,
PETROMUL CSS-1, PETROPEN, and PETROPEN CB.

Aftermarket Products

In the aftermarket segment, the Company sells products such as brake fluid, coolants, diesel additives,
engine oil and gasoline add-ons, sprayable grease, car shampoo, and multi-purpose sprays. Petron sells
these products under brand the PETROMATE brand name, which include PETROMOTE BRAKE AND
CLUTCH FLUID, PETROMATE SUPER COOLANT, PETROMATE DIESEL POWER BOOSTER,
PETROMATE ENGINE FLUSH, PETROMATE OIL IMPROVER, PETROMATE GREASEAWAY,
PETROMATE GAS SAVER, PETROMATE CLEAN N SHINE, PETROMATE PENETRATING FLUID, and
PETROMATE OIL SAVER.
B. Unaudited Consolidated Financial Statements
as of September 30, 2009
 PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
September 30, 2009
(With Comparative Figures for the year ended December 31, 2008)
(Amounts in Million Pesos)

Sept 30, 2009 Dec 31, 2008

(Unaudited) (Audited)
ASSETS
Current Assets
Cash and cash equivalents P 16,746 P 12,827
Financial assets at fair value through profit or loss 165 161
Available-for-sale investments - 331
Receivables 26,163 16,875
Inventories 32,611 30,792
Other current assets 3,881 11,977
Total Current Assets 79,566 72,963
Noncurrent Assets
Available-for-sale investments 1,359 351
Property, plant and equipment - net 35,218 36,428
Investment properties - net 235 246
Deferred tax assets - net - 885
Other noncurrent assets 715 925
Total Noncurrent Assets 37,527 38,835
TOTAL ASSETS P 117,093 P 111,798

LIABILITIES AND EQUITY

Current Liabilities
Short-term loans P 45,587 P 53,979
Liabilities for crude oil and petroleum product importation 10,480 8,907
Accounts payable and accrued expenses 4,043 4,562
Current portion of long-term debt 1,248 1,263
Income tax payable 8 22
Total Current Liabilities 61,366 68,733
Noncurrent Liabilities
Long-term debt - net of current portion 17,956 8,988
Deferred income tax liabilities - net 218 8
Other noncurrent liabilities 1,247 1,166
Total Noncurrent Liabilities 19,421 10,162
Total Liabilities 80,787 78,895
Equity Attributable to Equity Holders of the Parent
Capital stock 9,375 9,375
Retained earnings
Appropriated 15,492 23,920
Unappropriated 11,639 ( 144 )
Other reserves ( 444 ) ( 473 )
Equity Attributable to Equity Holders of the Parent 36,062 32,678
Minority Interest 244 225
Total Equity 36,306 32,903
TOTAL LIABILITIES AND EQUITY P 117,093 P 111,798

See accompanying Notes to Consolidated Interim Financial Statements.

 PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2009 and 2008
(Amounts in Million Pesos, Except Per Share Amounts)
(UNAUDITED)

2009 2008

SALES P 123,635 P 216,427

COST OF GOODS SOLD ( 111,620 ) ( 205,139 )

GROSS PROFIT 12,015 11,288

SELLING AND ADMINISTRATIVE EXPENSES ( 4,116 ) ( 4,085 )

INTEREST INCOME 147 234

INTEREST EXPENSE ( 3,284 ) ( 2,654 )

OTHERS - Net ( 124 ) ( 1,086 )

INCOME BEFORE TAX 4,638 3,697

TAX EXPENSE ( 1,272 ) ( 913 )

NET INCOME P 3,366 P 2,784

Attributable to:
Equity holders of the parent P 3,347 P 2,779
Minority interest 19 5

P 3,366 P 2,784
EARNINGS PER SHARE ATTRIBUTABLE TO
EQUITY HOLDERS OF THE PARENT
COMPANY - BASIC AND DILUTED P 0.36 P 0.30

See accompanying Notes to Consolidated Interim Financial Statements.

 PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2009 and 2008
(Amounts in Million Pesos)
(UNAUDITED)

2009 2008

NET INCOME FOR THE PERIOD P 3,366 P 2,784

OTHER COMPREHENSIVE INCOME

Unrealized fair value gain (loss) on available-for-sale 24 ( 1)
investments (net of tax effect)

Exchange difference in translating foreign operations 5 4

OTHER COMPREHENSIVE INCOME, NET OF TAX 29 3

TOTAL COMPREHENSIVE INCOME P 3,395 P 2,787

Attributable to:
Equity holders of the parent P 3,376 P 2,782
Minority Interest 19 5

P 3,395 P 2,787

See accompanying Notes to Consolidated Interim Financial Statements.

 PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2009 and 2008
(Amounts in Million Pesos)
(UNAUDITED)

Equity Attributable to Holders of the Parent

Retained Earnings
Capital Appropria- Unappropria- Other Minority Total
Stock ted ted Reserves Total Interest Equity

Balance at January 1, 2009 P 9,375 P 23,920 ( P 144 ) ( P 473 ) P 32,678 P 225 P 32,903
Total comprehensive income - - 3,347 29 3,376 19 3,395
Reversal of appropriation for capital
projects - ( 8,428 ) 8,428 - - - -
Prior period adjustment - - 8 - 8 - 8
Balance at September 30, 2009 P 9,375 P 15,492 P 11,639 ( P 444 ) P 36,062 P 244 P 36,306

Balance at January 1, 2008 P 9,375 P 21,172 P 7,520 ( P 412 ) P 37,655 P 133 P 37,788
Total comprehensive income - - 2,779 3 2,782 5 2,787
Cash dividends - - ( 938 ) - ( 938 ) - ( 938 )
Issuance of shares - - - - - 32 32
Balance at September 30, 2008 P 9,375 P 21,172 P 9,361 ( P 409 ) P 39,499 P 170 P 39,669

See accompanying Notes to Consolidated Interim Financial Statements.

 PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2009 and 2008
(Amounts in Million Pesos)
(UNAUDITED)

2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax P 4,638 P 3,697
Adjustments for:
Depreciation and amortization 2,620 2,366
Interest expense 3,284 2,654
Interest income ( 147 ) ( 234 )
Net unrealized foreign exchange loss (gain) ( 55 ) 239
Others ( 26 ) 54
Operating income before working capital changes 10,314 8,776
Changes in operating assets and liabilities
Decrease (increase) in assets:
Receivables ( 1,100 ) ( 4,333 )
Inventories 513 ( 19,007 )
Other current assets ( 137 ) 814
Increase (decrease) in liabilities:
Liabilities for crude oil and petroleum
product importation 1,707 19,289
Accounts payable and accrued expenses ( 367 ) 1,951
Provisions for doubtful accounts, inventory obsolescence and others ( 2,367 ) 26
Interest paid ( 3,368 ) ( 2,650 )
Income taxes paid ( 72 ) ( 1,205 )
Interest received 158 245
Net cash provided by (used in) operating activities 5,281 3,906

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to:
Property, plant and equipment ( 1,392 ) ( 4,349 )
Decrease (increase) in:
Other receivables ( 134 ) ( 1,134 )
Other noncurrent assets 217 ( 303 )
Reductions from (additions to):
Financial assets at fair value through profit or loss 14 -
Available-for-sale investments ( 678 ) ( 58 )
Net cash provided by (used in) investing activities ( 1,973 ) ( 5,844 )

CASH FLOWS FROM FINANCING ACTIVITIES

Availment of loans 132,665 91,991
Payments of:
Loans ( 132,117 ) ( 89,477 )
Cash dividends ( 4) ( 921 )
Others 78 101
Net cash provided by (used in) financing activities 622 1,694

EFFECT OF EXCHANGE RATE CHANGES ON

CASH AND CASH EQUIVALENTS ( 11 ) 71

NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENTS 3,919 ( 173 )

CASH AND CASH EQUIVALENTS AT

BEGINNING OF PERIOD 12,827 9,732

CASH AND CASH EQUIVALENTS AT

END OF PERIOD P 16,746 P 9,559

See accompanying Notes to Consolidated Interim Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Amounts in Million Pesos, Except Par Value, Share and Per Share Amounts,
Exchange Rates, and Commodity Volumes)
(Amounts Unaudited, Except Comparative Amounts for December 31, 2008
Statement of Financial Position)

1. Corporate Information

Petron Corporation (the Parent Company or Petron) was incorporated under the laws of the
Republic of the Philippines and registered with the Philippine Securities and Exchange
Commission (SEC) on December 15, 1966. Petron is the largest oil refining and marketing
company in the Philippines, supplying more than one-third of the countrys oil requirements.
The Companys vision is to be the leading provider of total customer solutions in the energy
sector and its derivative businesses.

Petron operates a refinery in Limay, Bataan, with a rated capacity of 180,000 barrels a day.
Petrons International Standards Organization (ISO) 14001 - certified refinery processes crude
oil into a full range of petroleum products including liquefied petroleum gas (LPG), gasoline,
diesel, jet fuel, kerosene, industrial fuel oil, solvents, asphalts, mixed xylene and propylene.
From the refinery, Petron moves its products mainly by sea to Petrons 31 depots and
terminals situated all over the country. Through this nationwide network, Petron supplies fuel
oil, diesel, and LPG to various industrial customers. The power sector is Petrons largest
customer. Petron also supplies jet fuel at key airports to international and domestic carriers.

Through more than 1,300 service stations, Petron retails gasoline, diesel, and kerosene to
motorists and public transport operators. Petron also sells its LPG brands Gasul and
Fiesta to households and other consumers through an extensive dealership network.

Petron operates a lube oil blending plant at Pandacan Oil Terminal, where it manufactures
lubes and greases. These are also sold through Petrons service stations and sales centers.

In April 2008, Petron inaugurated its 19,000 barrels per day Petro Fluidized Catalytic Cracking
(PetroFCC) unit which enables Petron to convert fuel oil into more high value products
namely gasoline, diesel and LPG. The PetroFCC also produces the petrochemical feedstock
propylene. The propylene is further purified through the Propylene Recovery Unit so that it
can be used as raw material for everyday products such as home appliances, automobile parts,
etc.

Petron is expanding its non-fuel businesses which include its convenience store brand
Treats. Petron has partnered with major fast-food chains, coffee shops, and other consumer
services to give its customers a one-stop full service experience. Petron is also putting up
additional company-owned and company-operated (COCO) service stations in strategic
locations.

In line with Petrons efforts to increase its presence in the regional market, it exports various
petroleum products to Asia-Pacific countries such as Cambodia, South Korea, China, and
Australia.

Petrons shares of stock or securities are listed for trading at the Philippine Stock Exchange
(PSE). Prior to the entry of Ashmore, the Philippine National Oil Company (PNOC) and the
Aramco Overseas Company B.V. (AOC) each owned a 40% share of equity. The remaining
20% was then held by more than 180,000 stockholders.
 2

On March 13, 2008, AOC, entered into a share purchase agreement with Ashmore Investment
Management Limited and subsequently issued a Transfer Notice to PNOC to signify its intent
to sell its 40% equity stake in Petron. PNOC eventually waived its right of first offer to
purchase AOC's interest in Petron. A total of 990,979,040 common shares were tendered
representing 10.57% of the total outstanding common shares of Petron. Together with the
private sale of AOC's 40% interest in Petron, the Ashmore Group, thru its corporate
nominee SEA Refinery Holdings B.V. (SEA BV), a company incorporated in The
Netherlands, acquired a total of 50.57% of the outstanding common shares in Petron in the
latter part of July 2008. SEA BV is a company owned by funds managed by the Ashmore
Group.

On October 6, 2008, the PNOC informed SEA BV and Petron of its intent to dispose of its
40% stake in Petron. In December 2008, the 40% interest of PNOC in Petron was finally
purchased by SEA Refinery Corporation (SRC), a domestic corporation wholly-owned by
SEA BV. In a related development, SEA BV sold a portion of its interest in Petron, equivalent
to 10.1% of the issued shares, to SRC. Thus, at the turn of the year, the capital structure of
Petron is as follows: SRC 50.1%; SEA BV 40.47%; and the general public 9.43%,
making SEA BVs direct and indirect ownership interest in Petron at 90.57%; hence, SEA BV
is the Companys parent company as of December 31, 2008.

On December 24, 2008, San Miguel Corporation (SMC) and SEA BV entered into an Option
Agreement granting SMC the option to buy the entire ownership interest of SEA BV in its
local subsidiary, SRC. The option may be exercised by SMC within a period of two years
from December 24, 2008. Under the Option Agreement, it was provided that SMC will have
representation in the Petron Board and Management. In the implementation of the Option
Agreement between SMC and SEA BV, SMC representatives were elected to the Petron Board
and appointed as senior officers last January 8 and February 27, 2009.

In the February 27, 2009 Board meeting, the Board approved the amendment of the Articles of
Incorporation to include the generation and sale of electric power in its primary purpose. The
objective is principally to lower the refinery power cost thru self-generation and, in the event
there is excess power, to sell the same to third parties. The Board also approved an increase in
capital stock from the current P10 billion to P25 billion through the issuance of preferred
shares aimed at raising funds for capital expenditures related to expansion programs as well as
to possibly reduce some of the Companys debts. Both items, including a waiver to subscribe
to the preferred shares to be issued as a result of the increase in capital stock, were approved
by the stockholders last May 12, 2009 annual stockholders meeting.

The registered office address of Petron and its Philippine-based subsidiaries (except Petron
Freeport Corporation which has its principal office in the Subic Special Economic Zone) is
Petron MegaPlaza, 358 Sen. Gil Puyat Avenue, Makati City. The registered office of SEA BV
is located at Prins Bernhardplein 200, 1097 JB, Amsterdam, The Netherlands.

The consolidated interim financial statements for the period ended September 30, 2009
including the comparatives for the year ended December 31, 2008 (audited) and September 30,
2008 were presented to the Board of Directors on October 21, 2009.
 3

2. Basis of Preparation

The condensed consolidated interim financial statements have been prepared in accordance
with Philippine Accounting Standard (PAS) 34, Interim Financial Reporting. They do not
include all the information required for full annual financial statements in accordance with
Philippine Financial Reporting Standards (PFRS), and should be read in conjunction with the
audited consolidated financial statements of Petron Corporation and subsidiaries (collectively
referred to as the Company) for the year ended December 31, 2008.

Significant Accounting Policies

The accompanying consolidated interim financial statements of the Company was prepared on
the historical cost basis, except for financial assets at fair value through profit or loss (FVPL),
available-for-sale (AFS) investments and derivative financial instruments, which are at fair
value.

The same accounting policies and methods of computation as mentioned in the most recent
audited financial statements, were followed in the preparation of the consolidated interim
financial statements.

3. Significant Accounting Judgments, Estimates and Assumptions

The preparation of the consolidated interim financial statements in accordance with PFRS
requires the Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, income and expenses and disclosure of contingent assets and contingent
liabilities. Future events may occur which will cause the assumptions used in arriving at the
estimates to change. The effects of any change in estimates are reflected in the consolidated
interim financial statements as they become reasonably determinable.

Judgments and estimates are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under
the circumstances.

4. Segment Information

Management identifies segments based on business and geographical locations. These

operating segments are monitored and strategic decisions are made on the basis of adjusted
segment operating results.

Petrons major sources of revenues are as follows:

a. Sales from petroleum and other related products which include gasoline, diesel, kerosene,
fuel oil, jet fuel and LPG offered to motorists and public transport operators through its
service station network around the country as well as to industrial accounts, international
and domestic carriers;

b. Insurance premiums from the business and operation of all kinds of insurance and
reinsurance, on sea as well as on land, of properties, goods and merchandise, of
transportation or conveyance, against fire, earthquake, marine perils, accidents and all
other forms and lines of insurance authorized by law, except life insurance;
 4

c. Lease of acquired real estate properties for petroleum, refining, storage and distribution
facilities, gasoline service stations and other related structures;

d. Sales on wholesale or retail, and operation of service stations, retail outlets, restaurants,
convenience stores and the like; and,

e. Exports sales of various petroleum and non-fuel products to Asia-Pacific countries such as
Cambodia, South Korea, China, Australia and Indonesia.

The following tables present revenue and income information and certain asset and liability
information regarding the business segments as of September 30, 2009 and December 31,
2008 and for the nine months ended September 30, 2009 and 2008. Segment assets and
liabilities exclude deferred tax assets and deferred tax liabilities.

Petroleum Insurance Leasing Marketing Elimination Total

Period Ended Sept 30, 2009
Revenue
External sales P
=121,239 P
=- P
=- P
= 2,396 P
=- P
=123,635
Inter-segment sales 1,545 110 144 - (1,799) -
Segment results 7,341 92 110 61 295 7,899
Net income 3,146 128 32 61 (1) 3,366

As of Sept 30, 2009

Assets and liabilities
Segment assets 114,077 2,115 2,742 1,140 (2,981) 117,093
Segment liabilities 80,078 456 1,876 455 (2,296) 80,569
Other segment information
Property, plant and
equipment 31,867 - - 658 2,693 35,218
Depreciation and
amortization 2,556 - - 64 - 2,620

Period Ended Sept 30, 2008

Revenue
External sales =
P213,177 =
P- =
P- =
P3,250 =
P- =
P216,427
Inter-segment sales 2,495 107 154 - (2,756) -
Segment results 6,658 92 120 86 247 7,203
Net income 2,507 121 26 70 60 2,784

As of Dec 31, 2008

Assets and liabilities
Segment assets 107,800 2,036 2,619 1,507 (3,049) 110,913
Segment liabilities 78,042 535 1,792 881 (2,363) 78,887
Other segment information
Property, plant and
equipment 33,149 1 - 704 2,574 36,428
Depreciation and
amortization 3,169 - - 74 - 3,243
 5

The following tables present additional information on the petroleum business segment of the
Company as of September 30, 2009 and December 31, 2008 and for the nine months ended
September 30, 2009 and 2008:

Retail Lube Gasul Industrial Others Total

Property, plant and equipment
As of Sept 30, 2009 P
=4,144 P
= 442 P
=253 P
= 76 P
=26,952 P
= 31,867
As of Dec 31, 2008 4,138 489 255 46 28211 33,149

Capital Expenditures
As of Sept 30, 2009 P
= 364 P
=4 P
=62 P
= 24 P
= 5,106 P
=5,560
As of Dec 31, 2008 288 3 58 5 5,722 6,076
Revenue
Period ended Sept 30, 2009 P
=52,611 P
=1,528 P
=8,495 P
=48,028 P
=12,122 P
= 122,784
Period ended Sept 30, 2008 80,284 1,631 11,794 77,255 44,708 215,672

Geographical Segments

The following tables present revenue information regarding the geographical segments of the
Company for the nine months ended September 30, 2009 and 2008:

Petroleum Insurance Leasing Marketing Elimination Total

Period ended Sept 30, 2009
Revenue
Local P
= 114,450 = 54
P P
= 144 P
=2,396 (P
=1,799) P
=115,245
Export/ International 8,334 56 - - - 8,390
Period ended Sept 30, 2008
Revenue
Local =
P182,426 =
P56 =
P154 =
P3,250 (P
=2,756) =
P183,130
Export/ International 33,246 51 - - - 33,297

5. Fuel Supply Contract

The Company entered into various fuel supply contracts with National Power Corporation
(NPC). Under the agreement, Petron supplies the bunker fuel and diesel fuel oil requirements
to NPC, its Independent Power Producers (IPP) and Small Power Utility Groups (SPUG)
power plants/barges. As of September 30, 2009, the following are the fuel supply contracts
granted to Petron:

Bid Date Date of Award Contract Duration DFO IFO DFO IFO
(in KL) (in KL) (in MP) (in MP)
Dec 24, 2008 Jan 12, 2009 Jan to Dec 2009 4,303 19,523 149,159 513,237
Dec 24, 2008 Feb 11, 2009 Jan to Dec 2009 - 202,801 - 5,161,125
Feb 3, 2009 Feb 25, 2009 Feb to Apr 2009 1,787 8,043 45,860 129,773
Feb 3, 2009 Apr 7, 2009 Feb to Apr 2009 53,452 78,625 1,325,700 1,278,025
Apr 28, 2009 Jul 16, 2009 May to Dec 2009 31,746 31,421 687,699 528,129
Apr 28, 2009 Jul 16, 2009 May to Dec 2009 53,371 218,547 1,232,721 3,609,812
Jul 22, 2009 Jul 31 2009 Aug to Dec 2009 690 - 19,458 -

Sales from the fuel supply contract transactions amounted to =

P7,169 and =
P11,812 in September
2009 and 2008, respectively.
 6

6. Inventory Write-down (Reversal)

In determining the net selling price of inventories, management takes into account the most
reliable evidence available at the times the estimates are made. Future realization of the
carrying amounts of inventories of =
P32,611 and =P30,792 as at the end of September 2009 and
December 2008, respectively is affected by price changes in different market segments for
crude and petroleum products. Both aspects are considered key sources of estimation
uncertainty and may cause significant adjustments to the Companys inventories within the
next financial year.

Inventory write-down amounted to =

P735 and =
P2,441 as of September 30, 2009 and
December 31, 2008, respectively.

The movement in the allowance for decline in value of inventories at the beginning and end of
September 30, 2009 and December 31, 2008 is shown below.

Sept 30, 2009 Dec 31, 2008

(Unaudited)
Balance at beginning of the year P
=2,742 =
P301
Additions due to:
Write-down 735 2,432
Obsolescence 9
Reversal of allowance for obsolescence (3,379)
Balance at the end of year P
=98 =
P2,742

Reversal of allowance for inventory write-down, which was due to price changes, was credited
to Cost of Goods Sold.

7. Issuance of Debt Securities

The Company issued =

P10 billion Fixed Rate Corporate Notes on June 5, 2009.

8. Related Party Transactions

Saudi Aramco is the ultimate parent of AOC, the Companys major stockholder until July 29,
2008 while PNOC was also a major stockholder until December 24, 2008. Thus, as of
September 30, 2009, PNOC and Saudi Aramco are no longer considered as related parties of
the Company (see Note 1). For the period ended September 30, 2008, total crude purchases
from Saudi Aramco amounted to = P133,291 while, total sales of goods and services to PNOC
amounted to = P756.5. As of December 31, 2008, total current trade payables to and current
trade receivables from PNOC amounted to =P1 and =
P53, respectively, and total current nontrade
receivables from Saudi Aramco amounted to =
P2.

Petron and Saudi Aramco have a term contract to purchase and supply, respectively, 90% of
Petrons monthly crude oil requirements at Saudi Aramcos standard Far East selling prices.
The contract is for a period of one year from October 28, 2008 to October 27, 2009 with
automatic one-year extensions thereafter unless terminated at the option of either party, within
60 days written notice. Outstanding liabilities of Petron for such purchases are shown as part
of Liabilities for Crude Oil and Petroleum Product Importation account in the consolidated
interim statements of financial position.
 7

Petron has long-term lease agreements with PNOC until August 2018 covering certain lots
where the Companys refinery and other facilities are located. Lease charges on refinery
facilities escalate at 2% a year, subject to increase upon re-appraisal.

9. Earnings per share

Basic earnings per share is computed by dividing net income or loss by the weighted average
number of outstanding shares after giving retroactive effect to any stock split and stock
dividends declared during the year.

Diluted earnings per share is computed by adjusting the weighted average number of ordinary
shares outstanding to assume conversion of dilutive potential shares. As of September 30,
2009 and 2008, the Company does not have dilutive potential shares.

Basic and diluted earnings per share amounts are as follows:

2009 2008
Net income after tax attributable to equity holders of the
parent P
= 3,347 =
P 2,779
Weighted average number of shares 9,375,104,497 9,375,104,497
Basic and diluted earnings per share P
= 0.36 =
P 0.30

10. Dividends

There were no dividends declared in 2009. In May 2008 the Company declared cash dividend
of =
P 0.10 per share amounting to =P 938 payable to all stockholders of record as of June 2,
2008. A total of =P 8 and =
P 921 had been paid out as of September 30, 2009 and 2008,
respectively.

11. Seasonal Fluctuations

There were no seasonal aspects that had a material effect on the financial condition or results
of operations of the Company.

12. Commitments and Contingencies

Unused Letters of Credit

Petron has unused letters of credit totaling approximately =

P 39.9 as of September 30, 2009 and
=
P 69.5 as of December 31, 2008.
 8

TCC-Related Matters

In 1998, the Company contested before the Court of Tax Appeals (CTA) the collection by the
Bureau of Internal Revenue (BIR) of deficiency excise taxes arising from the Companys
acceptance and use of Tax Credit Certificates (TCCs) worth = P659 from 1993 to 1997. In July
1999, the CTA ruled that, as a fuel supplier of BOI-registered companies, the Company was a
qualified transferee for the TCCs. The CTA ruled that the collection by the BIR of the alleged
deficiency excise taxes was contrary to law. The BIR appealed the ruling to the Court of
Appeals where the case is still pending. The Court of Appeals issued a resolution suspending
decision on the case until the termination of the Department of Finance (DOF) investigation on
the TCCs assigned to Petron. Petron filed a motion for reconsideration which remains
unresolved as of this date. Petron filed a Motion for Re-raffle requesting the re-raffle of the
case and its immediate resolution.

In November 1999, BIR issued an assessment against the Company for deficiency excise taxes
of =
P284 plus interest and charges for the years 1995 to 1997, as a result of the cancellation by
the DOF Center ExCom of Tax Debit Memos (TDMs), the related TCCs and their
assignments. The Company contested on the grounds that the assessment has no factual and
legal bases and that the cancellation of the TDMs was void. The Company elevated this
protest to the CTA on July 10, 2000. On August 23, 2006, the Second Division of the CTA
rendered its Decision denying the Companys petition and ordered it to pay the BIR = P580
representing deficiency excise taxes for 1995 to 1997 plus 20% interest per annum from
December 4, 1999. The Companys motion for reconsideration was denied on November 23,
2006. The Company appealed the Divisions Decision to the CTA En Banc. On October 30,
2007, the CTA En Banc dismissed the Companys appeal, with two of four justices dissenting.
The Company filed its appeal on November 21, 2007 with the Supreme Court. On December
21, 2007, in the substantially identical case of Pilipinas Shell, the Supreme Court decided to
nullify the assessment of the deficiency excise taxes and declared as valid Pilipinas Shells use
of Tax Credit Certificates for payment of its tax liabilities. On November 7, 2008, the Supreme
Court gave due course to the Companys appeal and directed the Company to file its
Memorandum. After the parties filed their respective memoranda, the case is now submitted
for resolution.

In May 2002, the BIR issued a collection letter for deficiency taxes of =
P254 plus interest and
charges for the years 1995 to 1998, as a result of the cancellation of TCCs and TDMs by the
DOF Center ExCom. The Company protested this assessment on the same legal grounds used
against the tax assessment issued by the BIR in 1999. The Company elevated the protest to
the CTA. The Second Division of the CTA promulgated a decision on May 4, 2007 denying
our Petition for Review for lack of merit. The Company was ordered to pay the respondent the
reduced amount of = P601 representing the Companys deficiency excise taxes for the taxable
years 1995 to 1998. In addition, the Company was ordered to pay the BIR 25% late payment
surcharge and 20% delinquency interest per annum computed from June 27, 2002. The
Companys Motion for Reconsideration was denied on August 14, 2007. The Company
appealed to the CTA En Banc. On December 3, 2008, the CTA En Banc promulgated a
decision reversing the unfavorable decision of the CTA 2nd Division. The CIR filed a
Petition for Review with the Supreme Court. The Supreme Court directed Petron to file
comment on the petition in the Resolution dated February 4, 2009. Petrons Comment was
filed on April 20, 2009.

It should be noted that there are duplications in the TCCs subject of the three assessments.
Excluding these duplications, the basic tax involved in all three assessments represented by the
face value of the related TCCs is =
P910.7.
 9

The Company does not believe these tax assessments and legal claims will have an adverse
effect on its consolidated financial position and results of operations. The Companys external
counsels analysis of potential results of these cases was subsequently supported by the
Decision of the Supreme Court in the case of Pilipinas Shell and in the Decision of the CTA
En Banc on December 3, 2008.

Pandacan Terminal Operations

The City Council of Manila, citing concerns of safety, security and health, passed City
Ordinance No. 8027 reclassifying the areas occupied by the Oil Terminals of Petron, Shell and
Chevron from Industrial to Commercial, making the operation of the Terminals therein
unlawful. Simultaneous with efforts to address the concerns of the City Council with the
implementation of a scale down program to reduce tankage capacities and joint operation of
facilities with Shell and Chevron, the Company filed a petition to annul city Ordinance No.
8027 and enjoin the City Council of Manila, as well as Mayor Joselito Atienza from
implementing the same.

A status quo order is in effect and the case is under mediation proceedings. Recently, the City
of Manila approved the Comprehensive Land Use Plan and Zoning Ordinance (CLUPZO)
(Ordinance No. 8119) that allows The Company a seven-year grace period. The passage of
Ordinance No. 8119 was thought to effectively repeal Manila Ordinance No. 8027. However,
on March 7, 2007, the Supreme Court rendered a Decision in the case of Social Justice Society
(SJS) vs. Atienza, directing the Mayor of Manila to immediately enforce Ordinance No.
8027.

On March 12, 2007, the Company, together with Shell and Chevron, filed an Urgent Motion
for Leave to Intervene and Urgent Motion to Admit Motion for Reconsideration of the
decision dated March 7, 2007, citing that the Supreme Court failed to consider supervising
events, notably (i) the passage of Ordinance No. 8119 which supersedes Ordinance No. 8027,
as well as (ii) the writs of injunction from the RTC presenting the implementation of
Ordinance No. 8027, the Supreme Courts decision and the enforcement of Ordinance No.
8027 improper. Further, The Company, Shell, and Chevron noted the ill-effects of the sudden
closure of the Pandacan Terminals on the entire country.

As a result of the passage of Ordinance No. 8119, on April 23, 2007, upon motion of the
Company, Mayor of Manila and the City Council, on the ground that the issues raised in said
case has become academic, the RTC dismissed the case filed by the Company questioning
Ordinance No. 8027.

On February 13, 2008, the Supreme Court allowed the oil companies intervention but denied
their motion for reconsideration, declaring Manila City Ordinance No. 8027 valid and
applicable to the Oil Terminals. The Court dissolved all existing injunctions against the
implementation of the ordinance and directed the oil companies to submit their relocation
plans to the Regional Trial Court within 90 days to determine, among others, the
reasonableness of the time frame for relocation. On February 28, 2008, the Company, jointly
with Chevron and Shell, filed its motion for reconsideration of the Resolution. On May 13,
2008, the three oil companies submitted their Comprehensive Relocation Plans in compliance
with the February 13 Resolution of the Supreme Court.

SJS, Vladimir Cabigao and Bonifacio Tumbokon filed before the Supreme Court a Motion to
stop the City Council of Manila from further hearing the amending ordinance to Ordinance
No. 8027. Petitioners alleged that the proposed amendment is "a brazen and malicious attempt
by the City of Manila to thwart the Supreme Court's 7 March 2007 decision and 13 February
2008 resolution on the case". The SC 7 March 2007 decision ordered the oil companies
Petron, Shell and Chevron to move out of the Pandacan oil depot. Up to now, the Supreme
Court has not issued any TRO or Order granting the motion filed by the petitioners.
 10

On March 5, 2009, Manila Councilor Arlene W. Koa filed a draft resolution entitled "An
Ordinance Amending Ordinance No. 8119 Otherwise Known As "The Manila Comprehensive
Land Use Plan And Zoning Ordinance of 2006 By Creating A Medium Industrial Zone (I-2)
And Heavy Industrial Zone (I-3) And Providing For Its Enforcement". Section 5 thereof lists
"petroleum refineries and oil depots" under highly pollutive/extremely hazardous industries
while Section 2 provides that "The land use where the existing industries are located, the
operation of which are permitted under Section 1 hereof, are hereby classified as Industrial
Use". On March 13, 2009, the Committee on Laws of the City Council of Manila heard the
merits of the proposed ordinance. On May 28, 2009, Mayor Alfredo Lim of Manila approved
and signed proposed Ordinance 7177 (which became Ordinance No. 8187) repealing
Ordinance No. 8027 and 8119 and allowing the continued stay of the oil depots at Pandacan.

On June 1, 2009, SJS officers filed a petition for prohibition against Mayor Lim before the
Supreme Court, seeking the nullification of Ordinance 8187. On June 5, 2009, former Manila
Mayor Lito Atienza filed his own petition with the Supreme Court seeking to stop the
implementation of Ordinance 8187. The Court has ordered the City to file its comment but the
Court did not issue a temporary restraining order. The City filed its Comment on August 13,
2009.

Executive Order No. 839

On October 2, 2009, President Gloria Macapagal-Arroyo, under Proclamation No. 1898,

declared a state of national calamity in view of the devastations caused by typhoons Ondoy
and Pepeng. Allegedly in line with this proclamation, the President subsequently issued
E.O. 839, mandating that prices of petroleum products being sold in Luzon be kept at October
15, 2009 levels. The oil companies, including Petron, in compliance with E.O. 839, rolled
back prices to October 15, 2009 levels.

Pilipinas Shell filed its Petition on November 9, 2009 seeking prohibition, mandamus and
injunction with prayer for the issuance of a temporary restraining order and/or writ of
preliminary injunction. On November 13, 2009, the Regional Trial Court of Makati issued a
temporary restraining order for a period of 20 days and scheduled further hearings for the writ
of injunction. On November 16, 2009, thru E.O. 845, the President lifted the price freeze under
E.O. 839 and directed a task force to implement proposals promised by oil firms, including
discounts and staggered-price adjustments.

Oil Spill Incident in Guimaras

M/T Solar I sunk in rough seas in the afternoon of August 11, 2006 en route to Zamboanga,
loaded with about 2 million liters of industrial fuel oil. It now lies about 640 meters beneath
the sea, at approximately 13 nautical miles southwest of Guimaras.

The Company immediately dispatched its oil spill gear, equipment and oil spill teams upon
receiving information of the incident. An aerial and surface assessment was conducted to
determine the extent of the spill.

Inspection by the Survey Ship Shinsei Maru, using a remote-operated vehicle (ROV), found
the vessel upright with minimal traces of leakage. All cargo compartment valves were
tightened by the ROV to ensure against further leakage. The Shinsei Maru was contracted by
the Protection and Indemnity (P & I) Club and the International Oil Pollution Compensation
(IOPC) from Fukada Salvage & Marine Works Co. Ltd.
 11

On separate investigations by the Special Task Force on Guimaras by the Department of

Justice and the Special Board of Marine Inquiry (SBMI), both found the owners of M/T Solar
I, Sunshine Marine Development Corporation (SMDC) liable. The DOJ found no criminal
liability on the part of The Company. However, the SBMI found the Company to have
overloaded the vessel. The Company has appealed the findings of the SBMI to the Department
of Transportation and Communication (DOTC).

The Company implemented a Cash for Work program involving residents of the affected
areas in the clean-up operations, providing them with a daily allowance. The Company also
mobilized its employees to assist in the operations. By the middle of November 2006, The
Company had cleaned up all affected shorelines and was affirmed by the inspections made by
Taskforce Solar 1 Oil Spill (SOS), a multi-agency group composed of officials from the Local
Government Units, Departments of Health, Environment and Natural Resources, Social
Welfare and Development, and the Philippine Coast Guard.

The Company collected a total 6,000 metric tons of debris which were brought to the Holcim
Cement facility in Lugait, Misamis Oriental for processing/treatment of waste. On November
20, 2006, one of the last barge shipments of oil debris unfortunately sunk en route to the same
plant.

The Company is working closely with the provincial government, Department of Welfare and
Social Development (DSWD), Department of Agriculture (DA), Technical Education and
Skills Development Authority (TESDA), the Philippine Business for Social Progress (PBSP),
in developing livelihood programs for the local community. Last November 27, 2006, the
Company held a scientific conference in cooperation with the University of the Philippines -
Visayas, the National Disaster Coordinating Council (NDCC), the World Wildlife Fund
(WWF) and the Guimaras Provincial Government with the objective of developing an
integrated assessment and protocol for the rehabilitation of the province. On top of providing
alternative livelihood for affected Guimarasnons, the Company has established programs and
facilities aimed at helping improve basic education in the province. Among the interventions
along this line were the construction of the Petron School in Nueva Valencia and the
establishment of the Petron Library Hub in Jordan, both of which were inaugurated on June
15, 2007. To complement these educational facilities, the Company has put in place internet
connectivity in all the public high schools and Department of Education facilities in Guimaras.

The Company also established a mari-culture park at the Southeast Asian Fisheries
Development Center (SEAFDEC) area in the town of Nueva Valencia in August 2007.
Several representatives from nearby barangays received hands-on training including the
construction of fish cages, stocking of fingerlings, feeding, maintenance work on the fish
cages, harvesting and packaging for shipment to ensure that the program is sustainable.

With regard to the retrieval of the remaining oil still trapped in M/T Solar I, the P & I
contracted a sub-sea systems technology provider (Sonsub) to recover the oil from the sunken
vessel. The recovery vessel AME Allied Shield arrived at Bacolod Real Estate Development
Corporation (BREDCO) Pier in Bacolod City last March 10, 2007. After unloading the ISO-
certified tanks and hoses, the vessel proceeded to site on March 11, 2007. Oil recovery
operation was technically completed on April 1, 2007. A total of 9,000 liters of oil was
recovered.

Representatives from the IOPC met with the claimants from various affected areas of
Guimaras to give an orientation on the requirements of the claim as well as the documents
required to be submitted in support of the claim. The Company has filed a total of = P 220
against the IOPC as of September 2008. Of this amount, a total of =
P 129 had been paid to the
Company. Out of the total outstanding claims from IOPC of = P91, the Company collected
=
P 14 on July 27, 2009 as final settlement.
 12

On June 17, 2009, a certain Emily Dalida, whose child Remelo M. Dalida died on August 16,
2006 at Brgy. Cabalagnan, Nueva Valencia, Guimaras, and Marcelino Gacho who was
hospitalized for seventeen (17) days due to parapneumonic effusion, filed formal complaints
for Homicide for the death of Remelo Dalida and for Less Serious Physical Injuries suffered
by Gacho allegedly due to exposure to the oil spill along the shores of Cabalagnan against the
respondents Sunshine Maritime Development Corp., Petron and Capt. Norberto Aguro, Master
of M/T Solar I. Petron received a copy of the Subpoena on July 10, 2009. Petron submitted
Atty. Cruzs counter-affidavit on August 4, 2009. On the basis of the statement in Atty. Cruzs
counter-affidavit, Dalida and Gacho amended their complaint, changing the offense alleged to
violations of Sec 28, par. 5 in relation to Sec 4 of the Phil. Clean Water Act of 2004, and
dropping current Petron President Eric O. Recto, the Vice President and Board of Directors as
respondents.

On August 4, 2009, the Provincial Prosecutor served a subpoena with a complaint-affidavit

from Oliver Chavez, supposedly the Municipal Agriculturist of Nueva Valencia who claims to
be suffering from PTB due to his exposure to and close contact with waters along the shoreline
and mangroves affected by the oil spill. The respondents are being charged of Violation of the
Philippine Clean Water Act of 2004 (RA 9275). On or about August 24, 2009, Chavez filed a
Manifestation and Motion to Amend Complaint, changing the offense alleged to violations of
Sec 28, par. 5 in relation to Sec 4 of the Phil. Clean Water Act of 2004, and dropping current
Petron President Eric O. Recto as respondent.

The Provincial Prosecutor issued a Subpoena in both cases directing Petron to file their
Counter-Affidavit and other controvertible evidence. Petron filed a Manifestation and Motion
for Extension of Time to file additional Counter-affidavits.

Bataan Real Property Tax Cases

On August 21, 2007, Bataan Provincial Treasurer issued a Final Notice of Delinquent Real
Property Tax requiring the Company to settle the amount of =
P2,168 allegedly in delinquent
real property taxes as of September 30, 2007.

The Company had previously contested the assessments subject of the Notice of Delinquent
Real Property Taxes, appealed the same to the Local Board of Assessment Appeals (LBAA),
and posted the necessary surety bonds to stop collection of the assessed amount. The
Company contested the first assessment covering the Isomerization and Gas Oil Hydrotreater
(GOHT3) Facilities of the Company which enjoy, among others, a 5-year real property tax
exemption under the Oil Deregulation Law (RA 8479) per Board of Investments (BOI)
Certificates of Registration. The second assessment is based on alleged non-declaration by
the Company of machineries and equipment in its Bataan refinery for real property tax
purposes and/or paid the proper taxes thereon since 1994. The Company questioned this
second assessment on the ground among others that: there was no non-declaration; back taxes
can be assessed only for a maximum of 10 years, even assuming fraud; erroneous valuations
were used; some adjustments like asset retirement and non-use were not considered; some
assets were taken up twice in the assessments; and some assets enjoyed real property tax
exemptions.

Notwithstanding the appeal to the LBAA and the posting of the surety bond, the Provincial
Treasurer proceeded with the publication of the Public Auction of the assets of The Company,
which she set for October 17, 2007.
 13

The Company exerted all efforts to explain to the Treasurer that the scheduled auction sale was
illegal considering the Companys appeal to the LBAA and the posting of the surety bond.
Considering the Treasurers refusal to cancel the auction sale, the Company filed a complaint
for injunction on October 8, 2007 before the Regional Trial Court to stop the auction sale. A
writ of injunction stopping the holding of the public auction until the case is finally decided
was issued by the RTC on November 5, 2007.

A motion to dismiss filed by the Provincial Treasurer on the ground of forum-shopping was
denied by the RTC. However, a similar motion based on the same ground of forum shopping
was filed before the LBAA by the respondents and the motion was granted by the LBAA on
December 10, 2007.

On January 4, 2008, the respondents appealed the RTCs grant of a writ of injunction to the
Supreme Court. On February 28, 2008, our counsel was served notice of the Resolution of the
Supreme Court directing the Company to file its Comment on the petition of the Provincial
Treasurer of Bataan questioning the RTCs issuance of a writ of injunction against the holding
of a public auction for alleged delinquency in payment of real property taxes. The Companys
comment was filed on March 7, 2008.

Last January 17, 2008, the Company appealed from the LBAAs dismissal of its appeal by
filing a Notice of Appeal with the CBAA.

On June 27, 2008, the Supreme Court dismissed the petition filed by the Treasurer on the
Order granting the writ of injunction. All five Justices concurred that the Treasurers appeal
was procedurally defective and/or was filed out of time. The Court also faulted the petitioner
for disregarding the hierarchy of courts when it went straight to the Supreme Court without
going thru the Court of Appeals. More importantly, the Court ruled that the issues raised by
the Company against the assessment should be resolved before any auction sale is conducted;
that the auction sale will have serious repercussions on the operations of the Company; and
that a surety bond may be filed in lieu of payment of the taxes under protest to stop collection.
The Provincial Treasurer filed its Motion for Reconsideration of the Decision. The League of
Provinces of the Philippines (LPP) also filed its Motion for Reconsideration-in-Intervention
dated August 20, 2008.

On September 8, 2008, the Supreme Court issued a Resolution denying with finality the
Motion for Reconsiderations of both the Provincial Treasurer and the LPP as well as the
Motion to Intervene filed by the LPP. The Supreme Court issued a Resolution dated December
15 denying for lack of merit of the Treasurer's motion for leave to file a second motion for
reconsideration of the Decision dated June 27, 2008 which dismissed the petition for certiorari,
considering that a second motion for reconsideration is a prohibited pleading under Rules of
Civil Procedure. The second motion for reconsideration is noted without action in view of the
denial of the motion for leave. The Court ordered that the Entry of Judgment be made.

We received an Order dated August 14, 2009 requiring our counsel and the counsel for the
municipality of Limay to manifest in writing if the pending incidents may now be deemed
submitted for resolution.

On August 24, 2009 we filed a Manifestation and Motion in reference to the defendants
Motion to Dismiss. All pending incidents are now deemed submitted for resolution.
 14

13. Financial Risk Management Objectives and Policies

Foreign Exchange Risk

The Companys functional currency is the Philippine peso, which is the denomination of the
bulk of the Companys revenues. The Companys exposures to foreign exchange risk arise
mainly from US dollar-denominated sales as well as purchases principally of crude oil and
petroleum products. As a result of this, the Company maintains a level of US dollar-
denominated assets and liabilities during the period. Foreign exchange risk occurs due to
differences in the levels of US dollar-denominated assets and liabilities.

The Company maintains a policy of hedging foreign exchange risk by purchasing currency
forwards or by substituting U.S. dollar-denominated liabilities with peso-based debt. The
natural hedge provided by US dollar-denominated assets is also factored in hedging decisions.
As a matter of policy, currency hedging is limited to the extent of 100% of the underlying
exposure.

The Company is allowed to engage in active risk management strategies for a portion of its
foreign exchange risk exposure. Loss limits are in place, monitored daily and regularly
reviewed by management.

The following is the summation of the Companys foreign currency-denominated financial

assets and liabilities as of September 30, 2009, September 30, 2008 and December 31, 2008:

Sept 30, 2009 Sept 30, 2008 Dec. 31, 2008

In USD In USD In USD
Financial assets 178 197 107
Financial liabilities (219) (510) (167)
Net foreign exposure (41) (313) (60)

The exchange rates used to restate the US dollar-denominated financial assets and liabilities
stated above are =
P47.39, =
P47.05 and =
P47.52, respectively.

The succeeding table shows the effect of the percentage changes in the Philippine peso to US
dollar exchange rate on the Companys income before tax. These percentages have been
determined based on the market volatility in exchange rates in the previous nine months for the
periods ended September 30, 2009, September 30, 2008, and for full year 2008. The
sensitivity analysis is based on the Companys foreign currency financial instruments held at
each statement of financial position date, with effect estimated from beginning of the
respective periods.

Had the Philippine peso strengthened or weakened against the US dollar, then these would
have the following impact:

(Amounts in millions) Sept 30, 2009 Sept 30, 2008 Dec. 31, 2008
Increase/Decrease in exchange rates 11.05% 13.45% 18.36%
Increase/Decrease in pre-tax income P215 P1,980 P523
 15

Interest Rate Risk

The Companys exposure to interest rate risk is mainly related to its cash and cash equivalents
and debt instruments. Currently, the Company has achieved a balanced mix of cash balances
with various deposit rates and fixed and floating rates on its various debts.

Future hedging decisions for floating deposit/interest rates will continue to be guided by an
assessment of the overall deposit and interest rate risk profiles of the Parent Company
considering the net effect of possible deposit and interest rate movements.

The succeeding table illustrates the sensitivity of income before tax for the periods, given
increases/decreases in deposit rates and interest rates for Philippine peso loans and US dollar
loans, all of which at 95% level of confidence, with effect from the beginning of the said
periods. These changes are considered to be reasonably possible given the observation of
prevailing market conditions in those periods. The calculations are based on the Companys
financial instruments held at each of those statements of financial position dates. All other
variables are held constant.

Effect of change in rates on Philippine peso and US dollar-denominated loans and cash
balances with floating interest/deposit rates:

Sept 30, 2009 Sept 30, 2008 Dec 31, 2008

PHP USD PHP USD PHP USD
Increase/decrease interest rates
for deposits 37.27% 10.27% 80.13% 99.64% 70.47% 22.14%
Increase/decrease interest rates
for short term loans 26.46% 5.23% 57.94% 79.41% 41.36% 30.79%
Increase/decrease interest rates
for long term loans 31.64% - 70.28% 62.90% 52.93% 49.67%
Increase/decrease in
pretax income P558 (P4) P1,370 (P56) P1,782 (P26)

The following table sets out the carrying amount of the Companys financial instruments
exposed to interest rate risk:

Sept 30, 2009 Sept 30, 2008 Dec 31, 2008

Cash in bank and cash equivalents P13,973 P6,018 P8,291
Short-term loans 45,587 37,032 53,979
Long-term loans 1,500 4,117 2,000

Sensitivity to interest rates varies during the year considering the volume of cash and loan
transactions. The analysis above is considered to be a representative of the Companys interest
rate risk.

Credit Risk

In effectively managing credit risk, the Company regulates and extends credit only to qualified
and credit-worthy customers and counterparties, consistent with established Company credit
policies, guidelines and credit verification procedures. Requests for credit facilities from trade
customers undergo stages of review by Marketing and Controllers Divisions. Approvals,
which are based on amounts of credit lines requested, are vested among line managers and top
management that include the President and the Chairman.
 16

Generally, the maximum credit risk exposure of financial assets is the total carrying amount of
the financial assets as shown on the face of the consolidated statement of financial position or
in the notes to the consolidated interim financial statements, as summarized below.

Sept 30, 2009 Sept 30, 2008 Dec 31, 2008

Cash in bank and cash equivalents P
=13,973 =
P6,018 =
P8,291
Receivables 26,163 23,349 16,875
Total P
=40,136 =
P29,367 =
P25,166

The credit risk for cash and cash equivalents and derivative financial instruments is considered
negligible, since the counterparties are reputable entities with high quality external credit
ratings. The credit quality of this other financial assets is therefore considered to be high grade.

In monitoring trade receivables and credit lines, the Company maintains up-to-date records
where daily sales and collection transactions of all customers are recorded in real-time and
month-end statements of accounts are forwarded to customers as collection medium.
Controllers Divisions Credit Department regularly reports to management trade receivables
balances (monthly) and credit utilization efficiency (semi-annually).

Collaterals. To the extent practicable, the Company also requires collateral as security for a
credit facility to mitigate credit risk in trade receivables. Among the collaterals held are real
estate mortgages, bank guarantees, letters of credit and cash bonds. These securities may only
be called on or applied upon default of customers.

Credit Risk Concentration. The Companys exposure to credit risk arises from default of
counterparty. Generally, the maximum credit risk exposure of trade receivable assets is its
carrying amount without considering collaterals or credit enhancements, if any. The Company
has no significant concentration of credit risk since the Company deals with a large number of
homogenous trade customers.

Credit Quality. In monitoring and controlling credit extended to counterparty, the Company
adopts a comprehensive credit rating system based on financial and non-financial assessments
of its customers. Financial factors being considered comprised of the financial standing of the
customer while the non-financial aspects include but are not limited to the assessment of the
customers nature of business, management profile, industry background, payment habit and
both present and potential business dealings with the Company.

Class A High Grade are accounts with strong financial capacity and business performance
and with the lowest default risk.

Class B Moderate Grade refer to accounts of satisfactory financial capability and credit
standing but with some elements of risks where certain measure of control is necessary in
order to mitigate risk of default.

Class C Low Grade are accounts with high probability of delinquency and default.
 17

Liquidity Risk

The Company is exposed to the possibility that adverse changes in the business environment
and/or its operations could result to substantially higher working capital requirements and
consequently, a difficulty in financing additional working capital.

The Company manages liquidity risk by keenly monitoring its cash position as well as
maintaining a pool of credit lines from financial institutions that exceeds projected financing
requirements for working capital. The Company, likewise, regularly evaluates other financing
instruments and arrangements to broaden the Companys range of sources of financing.

Commodity Price Risk

To minimize the Companys risk of potential losses due to volatility of international crude and
product prices, the Company implemented commodity hedging for petroleum products. The
hedging authority approved by the BOD is intended to (a) protect margins of MOPS (Mean of
Platts of Singapore)-based sales and (b) protect product inventories from downward price risk.
Hedging policy (including the use of commodity price swaps, buying of put options, and use
of collars and 3-way options; with collars and 3-way options starting in March 2008)
developed by the Commodity Risk Management Committee is in place. Decisions are guided
by the conditions set and approved by the Companys management.

Other Market Price Risk

The Companys market price risk arises from its investments carried at fair value (FVPL and
AFS financial assets). It manages its risk arising from changes in market price by monitoring
the changes in the market price of the investments.
C. Audited Consolidated Financial Statements
as of December 31, 2008, 2007 and 2006
PETRON CORPORATION AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2008, 2007 and 2006
PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2008 and 2007
(With Comparative Figures for 2006)
(Amounts in Million Pesos)

Notes
2008 2007 2006
ASSETS
Current Assets
Cash and cash equivalents 4 P
=12,827 =
P9,732 =
P11,735
Financial assets at fair value through profit or loss 5 161 229 180
Available-for-sale investments 6 331 164 103
Receivables - net 7 16,875 17,869 15,629
Inventories - net 8 30,792 30,271 26,289
Other current assets 11 11,977 10,672 7,054
Total Current Assets 72,963 68,937 60,990
Noncurrent Assets
Available-for-sale investments 6 351 468 529
Property, plant and equipment - net 9 36,428 34,122 25,153
Investment properties - net 10 246 208 222
Deferred tax assets - net 22 885 1 1
Other noncurrent assets 11 925 738 621
Total Noncurrent Assets 38,835 35,537 26,526
TOTAL ASSETS P
=111,798 =
P104,474 =
P87,516

LIABILITIES AND EQUITY

Current Liabilities
Short-term loans 12 P
=53,979 =
P33,784 =
P28,135
Liabilities for crude oil and petroleum product importation 23 8,907 12,873 7,541
Accounts payable and accrued expenses 13 4,562 4,544 3,731
Income tax payable 22 523 452
Current portion of long-term debt - net 14 1,263 1,604 1,633
Total Current Liabilities 68,733 53,328 41,492
Noncurrent Liabilities
Long-term debt - net of current portion 14 8,988 11,176 11,279
Deferred tax liabilities - net 22 8 1,268 1,443
Other noncurrent liabilities 15 1,166 914 1,049
Total Noncurrent Liabilities 10,162 13,358 13,771
Total Liabilities 78,895 66,686 55,263
Equity Attributable to Equity Holders of the Parent
Capital stock 16 9,375 9,375 9,375
Retained earnings 16 23,776 28,692 23,253
Other reserves (473) (412) (490)
Equity Attributable to Equity Holders of the Parent 32,678 37,655 32,138
Minority Interest 225 133 115
Total Equity 32,903 37,788 32,253
TOTAL LIABILITIES AND EQUITY P
=111,798 =
P104,474 =
P87,516

See accompanying Notes to Consolidated Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2008 and 2007
(With Comparative Figures for the year ended December 31, 2006)
(Amounts in Million Pesos, Except Per Share Amounts)

Notes
2008 2007 2006

SALES 26 P
=267,676 =
P210,520 =
P211,726

COST OF GOODS SOLD 17 264,306 195,287 197,514

GROSS PROFIT 3,370 15,233 14,212

SELLING AND ADMINISTRATIVE

EXPENSES 18 (5,222) (5,325) (4,482)

INTEREST EXPENSE 21 (4,180) (1,814) (2,684)

INTEREST INCOME 21 354 344 371

OTHERS - Net 21 (115) 912 487

INCOME (LOSS) BEFORE TAX (5,793) 9,350 7,904

TAX EXPENSE (BENEFIT) 22/32

Current 240 3,165 1,723
Deferred (2,113) (210) 163
(1,873) 2,955 1,886

NET INCOME (LOSS) (P

=3,920) =
P6,395 =
P6,018

Attributable to:
Equity holders of the parent 27 (P
=3,978) =
P6,377 =
P6,011
Minority interest 58 18 7

(P
=3,920) =
P6,395 =
P6,018
EARNINGS (LOSS) PER SHARE
ATTRIBUTABLE TO EQUITY
HOLDERS OF THE PARENT
COMPANY - BASIC AND DILUTED 27 (P
=0.42) =
P0.68 =
P0.64

See accompanying Notes to Consolidated Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2008 and 2007
(With Comparative Figures for the year ended December 31, 2006)
(Amounts in Million Pesos)

Notes
2008 2007 2006

NET INCOME (LOSS) FOR THE YEAR (P

=3,920) =
P6,395 =
P6,018

OTHER COMPREHENSIVE INCOME (LOSS)

Actuarial gain (loss) on defined pension plan
[net of tax effects of (P
=28), =
P38 and (P=242) in
2008, 2007 and 2006, respectively] 25 (64) 88 (633)
Unrealized fair value gain (loss) on available-for-
sale investments [net of tax effects of (P
=2), (P
=5)
and =P8 in 2008, 2007 and 2006, respectively] 6 (3) (9) 15
Exchange difference in translating foreign
operations 6 (1)

OTHER COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR, NET OF TAX (61) 78 (618)

TOTAL COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR (P
=3,981) =
P6,473 =
P5,400

Attributable to:
Equity holders of the parent (P
=4,039) =
P6,455 =
P5,393
Minority interest 58 18 7

(P
=3,981) =
P6,473 =
P5,400

See accompanying Notes to Consolidated Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended December 31, 2008 and 2007
(With Comparative Figures for the year ended December 31, 2006)
(Amounts in Million Pesos, Except Per Share Amounts)

Equity Attributable to Holders of the Parent

Retained Earnings
Capital Appropria- Unappropria- Other Minority Total
Notes Stock ted ted Reserves Total Interest Equity
Balance at January 1, 2008 16 P
=9,375 P
=21,172 P
=7,520 (P
=412) P
= 37,655 P
=133 P
=37,788
Total comprehensive
income (loss)
for the year (3,978) (61) (4,039) 58 (3,981)
Appropriation for capital
projects 16 2,748 (2,748)
Cash dividends - =P0.10 per
share 16 (938) (938) (938)
Issuance of shares 34 34
Balance at December 31,
2008 P
=9,375 P
=23,920 (P
=144) (P
=473) P
= 32,678 P
=225 P
=32,903
Balance at January 1, 2007 16 =
P9,375 =
P17,021 =
P6,232 (P
=490) =
P32,138 =
P115 =
P32,253
Total comprehensive
income for the year 6,377 78 6,455 18 6,473
Appropriation for capital
projects 16 4,151 (4,151)
Cash dividends - =
P0.10 per
share 16 (938) (938) (938)
Balance at December 31,
2007 =
P9,375 =
P21,172 =
P7,520 (P
=412) =
P37,655 =
P133 =
P37,788
Balance at January 1, 2006 16 =
P9,375 =
P11,652 =
P6,352 =
P128 =
P27,507 =
P108 =
P27,615
Total comprehensive
income (loss)
for the year 6,011 (618) 5,393 7 5,400
Actuarial gains due to
limit on recognized
plan asset (net of tax
effect of =
P94) 25 176 176 176
Appropriation for capital
projects 16 5,369 (5,369)
Cash dividends - =P0.10 per
share 16 (938) (938) (938)
Balance at December 31,
2006 =
P9,375 =
P17,021 =
P6,232 (P
=490) =
P32,138 =
P115 =
P32,253

See accompanying Notes to Consolidated Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008 and 2007
(With Comparative Figures for the year ended December 31, 2006)
(Amounts in Million Pesos)

Notes
2008 2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before tax (P
=5,793) =
P9,350 =
P7,904
Adjustments for:
Depreciation and amortization 20 3,242 2,516 2,482
Interest expense 21 4,180 1,814 2,684
Unrealized foreign exchange gains - net (40) (520) (382)
Interest income 21 (354) (344) (371)
Others (15) (81) (122)
Operating income before working capital changes 1,220 12,735 12,195
Changes in operating assets and liabilities 28 (651) (2,637) (5,635)
Interest paid (3,830) (1,680) (2,383)
Income taxes paid (616) (3,098) (1,454)
Interest received 353 343 352
Net cash provided by (used in) operating activities (3,524) 5,663 3,075
CASH FLOWS FROM INVESTING ACTIVITIES
Disposals of (additions to):
Property, plant and equipment 9 (5,534) (11,471) (5,052)
Investment properties 10 (52)
Decrease (increase) in:
Other receivables (4,522) (956) (2,590)
Other noncurrent assets (278) 5 (61)
Reductions from (additions to):
Financial assets at fair value through profit or loss 1
Available-for-sale investments (49) (9) (24)
Net cash used in investing activities (10,435) (12,431) (7,726)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from availment of loans 142,650 69,625 157,460
Payments of:
Loans (125,045) (63,789) (144,433)
Cash dividends (924) (927) (928)
Increase (decrease) in other noncurrent liabilities 327 (134) 378
Net cash provided by financing activities 17,008 4,775 12,477
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 46 (10) (31)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,095 (2,003) 7,795
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 9,732 11,735 3,940
CASH AND CASH EQUIVALENTS AT
END OF YEAR P
=12,827 =
P9,732 =
P11,735

See accompanying Notes to Consolidated Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(With Comparative Figures for 2006)
(Amounts in Million Pesos, Except Par Value, Share and Per Share Amounts, Exchange
Rates, and Commodity Volumes)

1. Corporate Information

Petron Corporation (the Parent Company or Petron) was incorporated under the laws of the
Republic of the Philippines and registered with the Philippine Securities and Exchange
Commission (SEC) on December 15, 1966. Petron is the largest oil refining and marketing
company in the Philippines, supplying more than one-third of the countrys oil requirements.
The Companys vision is to be the leading provider of total customer solutions in the energy
sector and its derivative businesses.

Petron operates a refinery in Limay, Bataan, with a rated capacity of 180,000 barrels a day.
Petrons International Standards Organization (ISO) 14001 certified refinery processes crude
oil into a full range of petroleum products including liquefied petroleum gas (LPG), gasoline,
diesel, jet fuel, kerosene, industrial fuel oil, solvents, asphalts, mixed xylene and propylene.
From the refinery, Petron moves its products mainly by sea to Petrons 31 depots and
terminals situated all over the country. Through this nationwide network, Petron supplies fuel
oil, diesel, and LPG to various industrial customers. The power sector is Petrons largest
customer. Petron also supplies jet fuel at key airports to international and domestic carriers.

Through its 1,288 service stations, Petron retails gasoline, diesel, and kerosene to motorists
and public transport operators. Petron also sells its LPG brand Gasul to households and
other consumers through an extensive dealership network. To broaden its market base and
further strengthen its leadership in the LPG business, Petron launched a second LPG brand
called Fiesta Gas early in 2008.

Petron operates a lube oil blending plant at Pandacan Oil Terminals, where it manufactures
lubes and greases. These are also sold through Petrons service stations and sales centers.

Petron recently completed the construction of a Fuel Additives Blending facility at the Subic
Bay Freeport. This plant serves the needs of Innospec, a leading global fuel additive company,
in the Asia-Pacific region. At the same time, Petron sources its requirements from this plant.

Petron is expanding its non-fuel businesses which include its convenience store brand
Treats. Petron has partnered with major fast-food chains, coffee shops, and other consumer
services to give its customers a one-stop full service experience. Petron is also putting up
additional company-owned and company-operated (COCO) service stations in strategic
locations.

In line with Petrons efforts to increase its presence in the regional market, it exports various
petroleum and non-fuel products to Asia-Pacific countries such as Cambodia, South Korea,
China, Australia and Indonesia.
 -2-

Petrons shares of stock or securities are listed for trading at the Philippine Stock Exchange
(PSE). Prior to the entry of the Ashmore Group in July 2008, the Philippine National Oil
Company (PNOC) and the Aramco Overseas Company B.V. (AOC) each owned a 40% share
in equity of Petron. The remaining 20% was then held by more than 180,000 stockholders.

On March 13, 2008, AOC, entered into a share purchase agreement with Ashmore Investment
Management Limited and subsequently issued a Transfer Notice to PNOC to signify its intent
to sell its 40% equity stake in Petron. PNOC eventually waived its right of first offer to
purchase AOC's interest in Petron. A total of 990,979,040 common shares were tendered
representing 10.57% of the total outstanding common shares of Petron. Together with the
private sale of AOC's 40% interest in Petron, the Ashmore Group, thru its corporate
nominee SEA Refinery Holdings B.V. (SEA BV), a company incorporated in The
Netherlands, acquired 50.57% of the outstanding common shares in Petron in the latter part of
July 2008. SEA BV is a company owned by funds managed by the Ashmore Group.

On October 6, 2008, the PNOC informed SEA BV and Petron of its intent to dispose of its
40% stake in Petron. In December 2008, the 40% interest of PNOC in Petron was finally
purchased by SEA Refinery Corporation (SRC), a domestic corporation wholly-owned by
SEA BV. In a related development, SEA BV sold a portion of its interest in Petron, equivalent
to 10.1% of the issued shares, to SRC. Thus, at the turn of the year, the capital structure of
Petron is as follows: SRC 50.1%; SEA BV 40.47%; and the general public 9.43%,
making SEA BVs direct and indirect ownership interest in Petron at 90.57%; hence, SEA BV
is the Companys parent company as of December 31, 2008.

On December 24, 2008, San Miguel Corporation (SMC) and SEA BV entered into an Option
Agreement granting SMC the option to buy the entire ownership interest of SEA BV in its
local subsidiary, SRC. The option may be exercised by SMC within a period of two years
from December 24, 2008. Under the Option Agreement, it was provided that SMC will have
representation in the Petron Board and Management. In the implementation of the Option
Agreement between SMC and SEA BV, SMC representatives were elected to the Petrons
Board and appointed as senior officers last January 8, 2009.

In its meeting of February 27, 2009, the Petron Board approved the amendment of the Articles
of Incorporation to include the generation and sale of electric power in its Primary Purpose.
The objective is principally to lower the refinery power cost thru self-generation and, in the
event there is excess power, to sell the same to third parties. The Board also approved an
increase of the capital stock from the current = P10,000 to =
P25,000 through the issuance of
preferred shares, raising funds for capital expenditures related to expansion programs, and
possibly, to reduce some of the Companys debts. Both items will be submitted for
stockholders approval on May 12, 2009.

The principal activities of the subsidiaries are described in Note 2 under Basis of
Consolidation.

The registered office address of Petron and its Philippine-based subsidiaries (except Petron
Freeport Corporation which has its principal offices in the Subic Special Economic Zone) is
Petron MegaPlaza, 358 Sen. Gil Puyat Avenue, Makati City. The registered office of SEA BV
is located at Prins Bernhardplein 200, 1097 JB, Amsterdam, The Netherlands.

The accompanying consolidated financial statements for the year ended December 31, 2008
(including comparatives for the years ended December 31, 2007 and 2006) were approved and
authorized for issue by the Board of Directors (BOD) on February 27, 2009.
 -3-

2. Summary of Significant Accounting Policies

Basis of Preparation
The accompanying consolidated financial statements of Petron and subsidiaries (collectively
referred to as the Company) were prepared on historical cost basis, except for financial
assets at fair value through profit or loss (FVPL), available-for-sale (AFS) investments, and
derivative financial instruments, which are measured at fair value. The consolidated financial
statements are presented in Philippine pesos, which is the Companys functional and
presentation currency. All amounts are rounded to the nearest millions (P =000,000), except
when otherwise indicated.

Statement of Compliance
The consolidated financial statements of the Company were prepared in compliance with
Philippine Financial Reporting Standards (PFRS). PFRS are adopted by the Financial
Reporting Standards Council (FRSC) from the pronouncements issued by the International
Accounting Standards Board. The accounting policies have been consistently applied to all
years presented, unless otherwise stated.

Impact of New Amendments and Interpretations to Existing Standards

The following are the amendments, and interpretations to existing standards effective in 2008
that are relevant to the Company:

PAS 39 (Amendment), Financial Instruments: Recognition and Measurement and

PFRS 7 (Amendment), Financial Instruments: Disclosures became effective from
July 1, 2008. These amendments permit an entity to reclassify non-derivative financial
assets (other than those designated at FVPL by the entity upon initial recognition) out of
FVPL category in particular circumstances; and to transfer from the AFS category to the
loans and receivable category those financial assets that would have met the definition of
loans and receivables, provided that the entity has the intention and the ability to hold
those financial assets for the foreseeable future.

The amendments are applicable in a partially retrospective manner up to

July 1, 2008 provided that the reclassification was made on or before November 15, 2008,
the cut-off date set by the FRSC. After the cut-off date, all reclassifications will only take
effect prospectively.

The Company did not exercise the option to reclassify any of its financial assets; hence, it
determined that the adoption of these amendments has no impact on the 2008 consolidated
financial statements.

Philippine Interpretation IFRIC 11, and PFRS 2 Group and Treasury Share
Transactions became effective on January 1, 2008. This interpretation requires
arrangements whereby an employee is granted rights to an entitys equity instruments to
be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or
is required to buy those equity instruments (e.g., treasury shares) from another party, or (b)
the shareholder(s) of the entity provide the equity instruments needed.

This interpretation has no impact on the Company since it does not have share-based
transactions either with employees or third parties.
 -4-

Philippine Interpretation IFRIC 13, Customer Loyalty Programme, became effective on

July 1, 2008. This interpretation requires customer loyalty award credits to be accounted
for as a separate component of the sales transactions in which they are granted and,
therefore, part of the fair value of the consideration received is allocated to the award
credits and deferred over the period that the award credits are fulfilled.

This interpretation has no significant impact on the Company since the amount involved is
not material; hence, no significant changes to disclosures were made in the consolidated
financial statements.

Philippine Interpretation IFRIC 14, PAS 19 The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction became effective on January 1,
2008. This interpretation provides guidance on how to assess the limit on the amounts of
surplus in a defined benefit scheme that can be recognized as an asset under PAS 19,
Employee Benefits. It also explains how pension asset or liability may be affected when
there is a statutory or contractual minimum funding requirement.

The Companys adoption of this interpretation on January 1, 2008 did not have significant
impact on its consolidated financial statements. The Company is in compliance with this
interpretation.

The following are the amended standards and interpretations effective subsequent to 2008 that
have been early adopted by the Company.

PFRS 8, Operating Segments, became effective on January 1, 2009 and will replace PAS
14, Segment Reporting. The standard requires an entity to disclose information about the
nature and financial effects of the types of business activities in which the Company
engages and the economic environment it operates following a management approach to
reporting segment information.

The Company effectively early adopted this standard as the Companys segment reporting
disclosure were significantly in compliance starting 2003 with the required additional
disclosures of this new standard.

PAS 1 (Revised 2007), Presentation of Financial Statements, which became effective on

January 1, 2009 requires an entity to present all items of income and expense recognized
in the period in a single statement of comprehensive income or in two statements: a
separate statement of income and a statement of comprehensive income. The statement of
income shall disclose income and expense recognized in profit and loss in the same way as
the current version of PAS 1. The statement of comprehensive income shall disclose
profit or loss for the period, plus each component of income and expense recognized
outside of profit and loss classified by nature. Changes in equity arising from transactions
with owners are excluded from the statement of comprehensive income (e.g., dividends
and capital increase). An entity would also be required to include in its set of financial
statements a statement showing its financial position (or balance sheet) at the beginning of
the previous period when the entity retrospectively applies an accounting policy or makes
a retrospective restatement.
 -5-

The Company effectively early adopted the amendment to this standard as the Company
has significantly complied with the revisions as prescribed by this amended standard
starting in its 2005 financial statements while changes in the financial statement
nomenclature were made in 2007. The Company elected to present the Statement of
Comprehensive Income in two statements: the Statement of Income and a Statement
of Comprehensive Income. Two comparative periods will be presented for the statement
of financial position when the Company: (i) applies an accounting policy retrospectively,
(ii) makes a retrospective restatement of items in the financial statements, or (iii)
reclassifies items in the financial statements.

PAS 23, Borrowing Costs became effective on January 1, 2009. The standard has been
revised to require capitalization of borrowing costs when such costs relate to a qualifying
asset. A qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.

Adoption of this new standard will have no impact on the consolidated financial
statements as the Companys accounting policy is to capitalize all interest directly related
to qualifying assets.

The following are standards, amendments, interpretations and 2008 annual improvements to
PFRS issued by the FRSC that are not yet effective and have not been adopted early by the
Company. These amendments will become effective in annual periods beginning on or after
January 1, 2009. The Company assess the impact of the amendments to the following
standards to be relevant to the Companys accounting polices.

PFRS 3 (Revised 2008), Business Combinations. The revised standard is applicable for
business combinations occurring in reporting periods beginning on or after July 1, 2009
and will be applied prospectively. The revision introduces changes to the accounting
requirements for business combinations, but still requires use of the purchase method.

This standard will be applied by the Company in 2010; however, management does not
expect material impact unless there will be business combinations at the time of its
adoption.

PAS 27 (Revised 2008), Consolidated and Separate Financial Statements. This standard is
effective July 1, 2009 and introduces changes to the accounting requirements when control
of a subsidiary is lost and for changes in the Parent Companys ownership interest in
subsidiaries.

Management does not expect the amendment to the standard to have a material effect on
the Companys consolidated financial statements.

PAS 1 (Amendment), Presentation of Financial Statements. The amendment clarifies that

financial instruments classified as held for trading in accordance with PAS 39 are not
necessarily required to be presented as current assets or current liabilities. Instead, normal
classification principles under PAS 1 should be applied.

The Company will determine the need to present its financial assets at FVPL following the
normal classification principles under PAS 1; however, management does not expect
material adjustments as a result of the adoption of this amendment in 2009.
 -6-

PAS 19 (Amendment), Employee Benefits. The amendment includes the following:

Clarification that a curtailment is considered to have occurred to the extent that

benefit promises are affected by future salary increases and a reduction in the present
value of the defined benefit obligation results in negative past service cost.

Change in the definition of return on plan assets to require the deduction of plan
administration costs in the calculation of plan assets return only to the extent that
such costs have been excluded from measurement of the defined benefit obligation.

Distinction between short-term and long-term employee benefits will be based on

whether benefits are due to be settled within or after 12 months of employee service
being rendered.

Removal of the reference to recognition in relation to contingent liabilities in order to

be consistent with PAS 37, Provisions, Contingent Liabilities and Contingent Assets,
which requires contingent liabilities to be disclosed and not recognized.

The Company assessed that this amendment to PAS 19 will have no impact on its 2009
consolidated financial statements.
.

PAS 38 (Amendment), Intangible Assets. The amendment clarifies when to recognize a
prepayment asset, including advertising or promotional expenditures. In the case of
supply of goods, the entity recognizes such expenditure as an expense when it has a right
to access the goods. For services, an expense is recognized on receiving the service. Also,
prepayment may only be recognized in the event that payment has been made in advance
of obtaining right of access to goods or receipt of services.

The Company initially determined that adoption of this amendment will not have a
material effect on its 2009 consolidated financial statements.

Minor amendments are made to several other standards; however, those amendments are not
expected to have a material impact on the Companys consolidated financial statements.

Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Parent
Company and its subsidiaries as of December 31 of each year. The financial statements of the
subsidiaries are prepared for the same reporting year as the Parent Company, using consistent
accounting policies.

All significant intra-group balances, transactions, income and expenses and profits and losses
resulting from intra-group transactions are eliminated in full in the consolidation.

Subsidiaries are fully consolidated from the date on which control is transferred to the
Company or Parent Company. Control is achieved where the Company has the power to
govern the financial and operating policies of an entity so as to obtain benefits from its
activities. Consolidation of subsidiaries ceases when control is transferred out of the Parent
Company.
 -7-

There were no subsidiaries acquired or disposed of during the year that may need to be
included or excluded in the consolidated statement of income from the date of acquisition or
up to the date of disposal, as appropriate.

The consolidated subsidiaries include:

Percentage Country of
Subsidiaries of Ownership Incorporation
Overseas Ventures Insurance Corporation (Ovincor) 100.00 Bermuda
Petrogen Insurance Corporation (Petrogen) 100.00 Philippines
Petron Freeport Corporation (PFC) 100.00 Philippines
Petron Marketing Corporation (PMC) 100.00 Philippines
New Ventures Realty Corporation (NVRC)
and Subsidiary 40.00 Philippines

Minority Interests
Minority interests represent the portion of profit or loss and the net assets not held by the
Company and are presented separately in the consolidated statements of income,
comprehensive income, changes in equity and in the equity section of the consolidated
statement of financial position, separate from Equity Attributable to Equity Holders of the
Parent. Acquisitions of minority interests are accounted for using the entity concept method,
where the difference between the consideration and the book value of the share of the net
assets acquired is recognized as an equity transaction.

The primary purpose of PFC and PMC is to, among others, sell on wholesale or retail and
operate service stations, retail outlets, restaurants, convenience stores and the like.

NVRCs primary purpose is to acquire real estate and derive income from its sale or lease. As
of December 31, 2008, Petrons original ownership interest of 79.95% in NVRC became 40%
due to NVRCs increase in authorized capital stock which was subscribed to by the Petron
Corporation Retirement Fund. NVRC remains a subsidiary of Petron since the operating and
financial decisions of NVRC still rest with Petron.

Petrogen and Ovincor are both engaged in the business of non-life insurance and re-insurance.

Interest in a Joint Venture

The Companys 33.33% joint venture interest in Pandacan Depot Services Inc. (PDSI),
included under Other Noncurrent Assets account in the consolidated statement of financial
position, incorporated on September 29, 2004 under the laws of the Republic of the
Philippines, is accounted for under equity method of accounting. The interest in joint venture
is carried in the consolidated statement of financial position at cost plus post-acquisition
changes in the Companys share of net assets of the joint venture, less any impairment in
value. The consolidated statement of income reflects the Companys share in the results of
operations of the joint venture (see Note 21). The Company has no capital commitments in
relation to its interest in this joint venture.

Results of operations as well as financial position balances of PDSI were less than 1% of the
consolidated values and as such are not material; hence, were no longer separately disclosed.
 -8-

Foreign Currency-Denominated Transactions and Translations

Foreign currency transactions are translated into the functional currency of the Company,
using the exchange rate at the date of the transaction. Exchange gains or losses arising from
the settlement of such transactions and from the re-measurement of monetary items at year-end
exchange rates are credited or charged to current operations.

The functional currency of Ovincor, a foreign subsidiary, is the Philippine peso because the
Company assessed that the activities of this subsidiary are carried out as an extension of the
Parent Company.

Segment Reporting
In identifying its operating segments, management generally follows the Companys operating
businesses which are recognized and managed separately according to the nature of the
products marketed and services provided, with each segment representing a strategic business
unit that offers different products and serves different markets.

The measurement policies the Company uses for segment reporting under PFRS 8 are the
same as those used in its consolidated financial statements. There have been no changes from
prior periods in the measurement methods used to determine reported segment profit or loss.
All inter-segment transfers are carried out at arms length prices.

Financial information on business and geographical segments are presented in Note 33.

Financial Instruments
The Company recognizes a financial asset or liability initially at fair value in the consolidated
statement of financial position when it becomes a party to the contractual provisions of the
instrument. Transaction costs are included in the initial measurement of all financial assets
and liabilities, except for financial instruments measured at FVPL.

The fair value of investments that are actively traded in organized financial markets is
determined by reference to quoted market bid prices at the close of business on the statement
of financial position date. For investments where there is no active market, fair value is
determined using valuation techniques. Such techniques include using recent arms-length
market transactions; reference to the current market value of another instrument, which is
substantially the same; discounted cash flow analysis and option pricing models.

Financial instruments are classified as liabilities or equity in accordance with the substance of
the contractual arrangement. Interest, dividends, gains and losses relating to a financial
instrument or a component that is a financial liability, are reported as expense or income.
Distributions to the holders of financial instruments classified as equity are charged directly to
equity, net of any related income tax benefits.

Financial assets and liabilities are further classified into the following categories: financial
assets or liabilities at FVPL, financial liabilities at amortized cost, loans and receivables, held-
to-maturity (HTM) investments and AFS investments. Financial liabilities that do not qualify
as and are not designated at FVPL are subsequently measured at amortized cost using the
effective interest method. The Company determines the classification at initial recognition
and, where allowed and appropriate, re-evaluates this designation at every reporting date.
 -9-

Financial Assets or Liabilities at FVPL. Financial assets or liabilities are classified in this
category if acquired principally for the purpose of selling or repurchasing in the near term or
upon initial recognition, it is designated by management as FVPL. Financial assets or
liabilities at FVPL are designated by management on initial recognition when the following
criteria are met:

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

The assets and liabilities are part of a group of financial assets, financial liabilities or both
which are managed and their performance evaluated on a fair value basis, in accordance
with a documented risk management or investment strategy; or,

The financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.

Financial assets and liabilities at FVPL are recorded in the consolidated statement of financial
position at fair value. Changes in fair value are accounted for in the consolidated statement of
income. Interest earned or incurred is recorded as interest income or expense, respectively.
Dividend income is recorded as other income according to the terms of the contract, or when
the right of the payment has been established.

Derivatives are also categorized as financial assets or liabilities at FVPL, except those
derivatives that may be designated and considered as effective hedging instruments. The
Company did not designate any of its derivative transactions under hedge accounting.

The Company uses commodity price swaps to protect its margin on petroleum products from
potential price volatility of international crude and product prices. It also enters into short-
term forward currency contracts to hedge its currency exposure on crude oil importations. In
addition, the Company has identified and bifurcated embedded foreign currency derivatives
from certain non-financial contracts.

Derivative instruments are initially recognized at fair value on the date in which a derivative
transaction is entered into or bifurcated, and are subsequently re-measured at fair value.
Derivatives are carried in the statement of financial position as assets, presented as part of
Other Current Assets account, when the fair value is positive and as liabilities, presented as
part of Accounts Payable and Accrued Expenses account, when the fair value is negative.
Gains and losses from changes in fair value of these derivatives are recognized under the
caption of mark-to-market gains (losses) included as part of Others Net in the consolidated
statement of income.

The fair values of freestanding and bifurcated forward currency transactions are calculated by
reference to current forward exchange rates for contracts with similar maturity profiles. The
fair values of commodity swaps are determined based on quotes obtained from counterparty
banks.

Classified as financial assets at FVPL are the Companys investments in marketable equity
securities and proprietary membership shares and derivative assets (see Note 31). The
Companys financial liabilities at FVPL as of December 31, 2008, 2007 and 2006 only
pertains to derivative liabilities (see Note 31).
 - 10 -

Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed
or determinable payments and are not quoted in an active market. Financial assets are carried
at cost or amortized cost, using the effective interest method, in the consolidated statement of
financial position. Interest on loans and receivables is included in the Interest Income
account in the consolidated statements of income. The losses arising from impairment of such
financial assets are recognized under Selling and Administrative Expenses in the
consolidated statement of income. Loans and receivables with maturity within 12 months
from the statement of financial position date are classified either as part of current assets.
Otherwise, these are classified as noncurrent assets.

Financial assets classified as loans and receivables in the consolidated statement of financial
position are the Companys cash and cash equivalents and receivables (see Note 31). Cash
equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash with original maturities of three months or less from dates of acquisition and
are subject to an insignificant risk of change in value.

Financial liabilities include short term loans, accounts payable and accrued expenses, long-
term debt, liabilities for crude oil and petroleum product importation, cash bond, cylinder
deposits and other noncurrent liabilities (see Note 31).

Accounts payable are initially recognized at fair value and subsequently measured at
amortized cost less settlement payments. Long-term debts are subsequently measured at
amortized cost using the effective interest method. Amortized cost is calculated by taking into
account any related issue costs, discount or premium.

The carrying amounts of short-term financial assets and liabilities are a reasonable
approximation of its fair value due to their short duration. Long-term financial assets and
liabilities are discounted to their present values, where time value of money is material.

AFS Investments. AFS investments are those which are designated as such or do not qualify to
be classified as financial assets at FVPL, HTM investments or loans and receivables. They are
purchased and held indefinitely, and may be sold in response to liquidity requirements or
changes in market conditions. They may include equity securities, money market papers and
other investment securities.

After initial measurement, AFS investments are subsequently measured at fair value. The
effective yield component of AFS investment securities, as well as the impact of restatement
on foreign currency-denominated AFS investment securities, is reported in the consolidated
statement of income. The unrealized gains and losses arising from the changes in fair value of
AFS investments, net of tax, are excluded from reported earnings and are reported in the
consolidated statements of comprehensive income and in the consolidated statement of
changes in equity under Other Reserves account, until the investment is de-recognized or
until the investment is determined to be impaired at which time the cumulative gains or losses
are reclassified from Other Reserves account to the consolidated statement of income and
presented as a reclassification adjustment within the consolidated statement of comprehensive
income.

Where the Company holds more than one investment in the same security, these are deemed to
be disposed on a first-in, first-out basis. Interest earned and dividends earned on holding AFS
investments are recognized in Other Income account in the consolidated statement of
income when the right of the payment has been established. The losses arising from
impairment of such investments are recognized as impairment losses in the consolidated
statement of income.
 - 11 -

Classified as AFS investments are Petrogens investments in government securities and

Ovincors Republic of the Philippines nine-year bonds (ROP9 Bonds) (see Note 31).

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

Assets under this category are classified as current assets if maturity is within 12 months from
the statement of financial position date and as noncurrent assets if maturity date is more than a
year.

The Company has no HTM investments as of December 31, 2008, 2007 and 2006.

Impairment of Financial Assets

All financial assets except for those at FVPL are subject to review for impairment at least at
each reporting date. Financial assets are impaired when there is an objective evidence that a
financial asset or group of financial asset is impaired. Different criteria to determine
impairment are applied for each category of financial assets as described below.

Loans and Receivables. If there is objective evidence that an impairment loss on loans and
receivables carried at amortized cost has been incurred, the amount of the loss is measured as
the difference between the assets carrying amount and the present value of estimated future
cash flows (excluding future credit losses that have not been incurred) discounted at the
financial assets original effective interest rate (i.e., the effective interest rate computed at
initial recognition). The carrying amount of the asset is reduced either directly or through the
use of an allowance account. The amount of the loss is recognized in the consolidated
statement of income.

The Company first assesses whether objective evidence of impairment exists individually for
financial assets that are individually significant (i.e. when they are past due or when objective
evidence is received that a specific counterparty will default), and individually or collectively
for financial assets that are not individually significant. If it is determined that no objective
evidence of impairment exists for an individually assessed financial asset, whether significant
or not, the asset is included in a group of financial assets with similar credit risk characteristics
and that group of financial assets is collectively assessed for impairment. Assets that are
individually assessed for impairment and for which an impairment loss is or continues to be
recognized are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can
be related objectively to an event occurring after the impairment was recognized, the
previously recognized impairment loss is reversed. Any subsequent reversal of an impairment
loss is recognized in the consolidated statement of income, to the extent that the carrying value
of the asset does not exceed its amortized cost at the reversal date.
 - 12 -

AFS Investments. If an AFS asset is impaired, an amount comprising the difference between
its cost (net of any principal payment and amortization) and its current fair value, less any
impairment loss previously recognized in the consolidated statement of income, is transferred
from equity to the consolidated statement of income and presented as a reclassification
adjustment within the consolidated statement of comprehensive income. Reversals in respect
of equity instruments classified as AFS investments are not recognized in the consolidated
statement of income. Reversals of impairment losses on AFS investments instruments are
reversed through the consolidated statement of income; if the increase in fair value of the
investment can be objectively related to an event occurring after the impairment loss was
recognized in the consolidated statement of income.

De-recognition of Financial Instruments

Financial Assets. A financial asset (or, where applicable a part of a financial asset or part of a
group of similar financial assets) is de-recognized when:

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

The Company retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third party under a pass-
through arrangement; or,

The Company has transferred its rights to receive cash flows from the asset and either (a)
has transferred substantially all the risks and rewards of the assets, or (b) has neither
transferred nor retained substantially all the risks and rewards of the assets, but has
transferred control of the assets.

Where the Company has transferred its rights to receive cash flows from an asset or has
entered into a pass-through arrangement, and has neither transferred nor retained substantially
all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized
to the extent of the Companys continuing involvement in the asset. Continuing involvement
that takes the form of a guarantee over the transferred asset is measured at the lower of original
carrying amount of the asset and the maximum amount of consideration that the Company
could be required to repay.

Financial Liabilities. A financial liability is de-recognized when the obligation under the
liability is discharged, cancelled or has expired. Where an existing financial liability is
replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a
de-recognition of the original liability and the recognition of a new liability, and the difference
in the respective carrying amounts is recognized in the consolidated statement of income.

Offsetting Financial Instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated
statement of financial position if, and only if, there is a currently enforceable legal right to
offset the recognized amounts and there is an intention to settle on a net basis, or to realize the
asset and settle the liability simultaneously.
 - 13 -

Inventories
Inventories are carried at the lower of cost and net realizable value. For petroleum products,
crude oil, and tires, batteries and accessories (TBA), the net realizable value is the estimated
selling price in the ordinary course of business, less the estimated costs to complete and/or
market and distribute. For materials and supplies, net realizable value is the current
replacement cost.

For financial reporting purposes, Petron uses the first-in, first-out method in costing petroleum
products (except lubes and greases, waxes and solvents), crude oil, and other products. Cost is
determined using the moving-average method in costing lubes and greases, waxes and
solvents, TBA, materials and supplies inventories. For income tax reporting purposes, cost of
all inventories is determined using the moving-average method.

For financial reporting purposes, duties and taxes related to the acquisition of inventories are
capitalized as part of inventory cost. For income tax reporting purposes, such duties and taxes
are treated as deductible expenses in the year these charges are incurred.

Property, Plant and Equipment

Property, plant and equipment, except land, are stated at cost less accumulated depreciation,
amortization and any impairment in value. Land owned by NVRC is stated at cost less any
impairment in value.

The initial cost of property, plant and equipment comprises its purchase price, including
import duties and taxes, and any directly attributable costs of bringing the assets to their
working condition and location for their intended use. Cost also includes any related asset
retirement obligation and interest incurred during the construction period on funds borrowed to
finance the construction of the projects. Expenditures incurred after the property, plant and
equipment have been put into operation, such as repairs and maintenance, are normally
charged to income in the year the costs are incurred. In situations where it can be clearly
demonstrated that the expenditures have resulted in an increase in the future economic benefits
expected to be obtained from the use of an item of property, plant and equipment beyond its
originally assessed standard of performance, the expenditures are capitalized as additional
costs of property, plant and equipment. When assets are retired or otherwise disposed of, the
cost and the related accumulated depreciation, amortization and impairment loss, if any, are
removed from the accounts and any resulting gain or loss is credited or charged to current
operations.

When each major inspection is performed, its cost is recognized in the carrying amount of the
property, plant and equipment as a replacement if the recognition criteria are satisfied.

For financial reporting purposes, duties and taxes related to the acquisition of property, plant
and equipment are capitalized. For income tax reporting purposes, such duties and taxes are
treated as deductible expenses in the year these charges are incurred.
 - 14 -

For financial reporting purposes, depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the following assets:

Buildings and related facilities 20 - 25 Years

Refinery and plant equipment 10 - 16 Years
Service stations and other equipment 4 - 10 Years
Computers, office and motor equipment 2-6 Years
Leasehold improvements 10 years or the term of the
lease, whichever is
shorter

The useful lives and depreciation and amortization method are reviewed periodically to ensure
that the periods and method of depreciation and amortization are consistent with the expected
pattern of economic benefits from the items of property, plant and equipment. The residual
value, if any, is also reviewed and adjusted if appropriate, at each statement of financial
position date.

For income tax reporting purposes, depreciation and amortization are computed using the
double-declining balance method.

Construction in-progress represents plant and properties under construction and is stated at
cost. This includes cost of construction, plant and equipment, interest and other direct costs.
Construction in-progress is not depreciated until such time as the relevant assets are completed
and available for operational use.

An assets carrying amount is written down immediately to its recoverable amount if the
assets carrying amount is greater than its estimated recoverable amount.

An item of property, plant and equipment is de-recognized upon disposal or when no future
economic benefits are expected to arise from the continued use of the asset. Any gain or loss
arising from de-recognition of the asset (calculated as the difference between the net disposal
proceeds and carrying amount of the item) is included in the consolidated statement of income
in the year the item is de-recognized.

Investment Properties
Investment properties, except land, are stated at cost less accumulated depreciation and any
impairment in value. Cost includes transaction costs. The carrying amount includes the cost
of replacing part of an existing investment property at the time that cost is incurred if the
recognition criteria are met and excludes the costs of day-to-day servicing of an investment
property. Land is carried at cost less any impairment in value.

Transfers are made to investment property when, and only when, there is a change in use,
evidenced by the end of owner-occupation, commencement of an operating lease to another
party, completion of construction or development or commencement of development with a
view to sale. These transfers are recorded using the carrying amount in use of the investment
property at the date of the change.

Investment properties are de-recognized when either they have been disposed of or when the
investment property is permanently withdrawn from use and no future economic benefit is
expected from its disposal. Any gains or losses on the retirement or disposal of an investment
property are recognized in the consolidated statement of income in the year of retirement or
disposal.
 - 15 -

For financial reporting purposes, depreciation of office units is computed on a straight-line

basis over the estimated useful lives of the assets of 20 years. For income tax reporting
purposes, depreciation is computed using the double-declining balance method.

Intangible Assets
Franchise fees are stated at cost less accumulated amortization and any impairment in value.
These are being amortized on a straight-line basis over 5 to 10 years upon commencement of
commercial operations. Residual values and useful lives are reviewed at each reporting date.
In addition, they are subject to impairment testing as described under Impairment of Non-
financial Assets policy below.

As of December 31, 2008 and 2007, the Company has existing and pending trademark
registrations for its products for a term of 10 to 20 years. It also has copyrights for its 7-kg
LPG container, Gasulito with stylized letter P and two flames, Powerburn 2T, and Petron
New Logo (22 styles). Copyrights endure during the lifetime of the creator and for another 50
years after the creators death.

The amount of intangible assets are included under the caption of Others in the Other
Noncurrent Assets in the consolidated statement of financial position.

Expenses incurred for research and development of internal projects and internally developed
patents and copyrights are expensed as incurred and classified under the caption of Others
under Selling and Administrative Expenses account in the consolidated statement of income
(see Note 18).

Impairment of Non-Financial Assets

The carrying values of long-lived assets are reviewed for impairment when events or changes
in circumstances indicate that the carrying values may not be recoverable. If any such
indication exists and where the carrying values exceed the estimated recoverable amounts, the
assets or cash-generating units are written down to their recoverable amounts. The
recoverable amount of the asset is the greater of net selling price or value in use. The net
selling price is the amount obtainable from the sale of an asset in an arms-length transaction.
In assessing value in use, the estimated future cash flows are discounted to their present value
using a 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 largely
independent cash inflows, the recoverable amount is determined for the smallest cash-
generating unit to which the asset belongs. Impairment losses are recognized in the
consolidated statement of income.

A previously recognized impairment loss is reversed only if there has been a change in the
estimates used to determine the recoverable amount of an asset, however, not to an amount
higher than the carrying amount that would have been determined (net of any depreciation and
amortization) had no impairment loss been recognized for the asset in prior years. A reversal
of an impairment loss is credited to current operations.
 - 16 -

Employee Benefits
The Company has a tax qualified and fully funded defined benefit pension plan covering all
permanent, regular, full-time employees administered by trustee banks. The cost of providing
benefits under the defined benefit plans is determined using the projected unit credit actuarial
valuation method. Actuarial gains and losses are recognized in the statement of
comprehensive income in the period in which they arise. Any actuarial gains and losses and
adjustments arising from the limits on asset ceiling test that have been recognized directly in
the statement of comprehensive income, are taken directly to retained earnings.

The past service cost is recognized as an expense on a straight-line basis over the average
period until the benefits become vested. If the benefits are already vested immediately
following the introduction of, or changes to, a pension plan, past service cost is recognized
immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit
obligation reduced by past service cost not yet recognized and the fair value of plan assets out
of which the obligations are to be settled directly. If such aggregate is negative, the asset is
measured at the lower of such aggregate or the aggregate of cumulative unrecognized net
actuarial losses and past service cost and the present value of any economic benefits available
in the form of refunds from the plan or reductions in the future contributions to the plan.

The Company has a corporate performance incentive program that aims to provide financial
incentives for the employees, contingent on the achievement of the Companys annual
business goals and objectives. The Company recognizes achievement of its business goals
through key performance indicators (KPIs) which are used to evaluate performance of the
organization. The Company recognizes the related expense when the KPIs are met, that is
when the Company is contractually obliged to pay the benefits.

The Company also provides other benefits to its employees as follows:

Savings Plan. The Company established a Savings Plan wherein eligible employees may
apply for membership and have the option to contribute five percent to fifteen percent of the
monthly base pay. The Company, in turn, contributes an amount equivalent to 50% of the
employee-members contribution. However, the Companys 50% share applies only to a
maximum of 10% of the employee-members contribution. The Savings Plan aims to
supplement benefits upon employees retirement and to encourage employee-members to save
a portion of their earnings. The Company accounts for this benefit as a defined contribution
pension plan and recognizes a liability and an expense for this plan as the expenses for its
contribution fall due. The Company has no legal or constructive obligations to pay further
contributions after payment of the equivalent employer-share. The accumulated savings of the
employees plus the Companys share, including earnings, will be paid in the event of the
employees (a) retirement, (b) resignation after completing at least five years of continuous
service, (c) death, or (d) involuntary separation not for cause.

Land/Home Ownership Plan. The Company established the Land/Home Ownership Plan, an
integral part of the Savings Plan, to extend a one-time financial assistance to Savings Plan
members in securing housing loans for residential purposes.
 - 17 -

Cylinder Deposits
The LPG cylinders remain the property of the Company and are loaned to dealers upon
payment by the latter of an equivalent 100% of the acquisition cost of the cylinders.

The Company maintains the balance of cylinder deposits at an amount equivalent to three days
worth of inventory of its biggest dealers, but in no case lower than =
P200 at any given time, to
take care of possible returns by dealers.

At each financial position date, cylinder deposits, shown under Other Noncurrent Liabilities
account in the consolidated statement of financial position, are reduced for estimated non-
returns. The reduction is credited directly to income.

Provisions, Contingent Liabilities and Contingent Assets

Provisions are recognized when the Company has a present obligation (legal or constructive)
as a result of a past event, it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at a credit adjusted pre-tax rate that
reflects current market assessment of the time value of money and, where appropriate, the
risks specific to the liability. Where discounting is used, the increase in the provision due to
the passage of time is recognized as interest expense.

Provisions are measured at the estimated expenditure required to settle the present obligation,
based on the most reliable evidence available at the reporting date, including the risks and
uncertainties associated with the present obligation. Where there are a number of similar
obligations, the likelihood that an outflow will be required in settlement is determined by
considering the class of obligations as a whole.

The Company recognizes provisions arising from legal and/or constructive obligations
associated with the cost of dismantling and removing an item of property, plant and equipment
and restoring the site where it is located, the obligation for which the Company incurs either
when the asset is acquired or as a consequence of having used the asset during a particular year
for purposes other than to produce inventories during that year. Asset retirement obligation is
presented under Other Noncurrent Liabilities (see Note 15).

Any reimbursement that the Company can be virtually certain to collect from a third party with
respect to the obligation will be recognized as a separate asset. However, this asset may not
exceed the amount of the related provision.

All provisions are reviewed at each reporting date and adjusted to reflect the current best
estimate.

In those cases where the possible outflow of economic resources as a result of present
obligations is considered improbable or remote, no contingent liabilities are recognized in the
consolidated statement of financial position.

Possible inflows of economic benefits to the Company that do not yet meet the recognition
criteria of an asset are considered contingent assets which are not recognized in the
consolidated statement of financial position but are disclosed in the notes to consolidated
financial statements when an inflow of economic benefits is probable.
 - 18 -

Revenue
Revenue is recognized to the extent that it is probable that the economic benefits will flow to
the Company and revenue can be reliably measured. The following specific criteria must also
be met before revenue is recognized:

Sale of goods. Revenue is recognized when the significant risks and rewards of ownership of
the goods have passed to the buyer.

Interest income. Revenue is recognized on a time proportion basis that reflects the effective
yield on the assets.

Rental income. Rental income arising from investment properties is accounted for on a
straight-line basis over the lease terms.

Dividend income. Dividend income is recognized at the time the right to receive the payment
is established.

Revenue is measured by reference to the fair value of the consideration received or receivable
by the Company for goods supplied and services provided, excluding sales tax [or value-added
tax (VAT)] except where:

the sales tax incurred on a purchase of assets or services is not recoverable from the
taxation authority, in which case the sales tax is recognized as part of the cost of
acquisition of the asset or as part of the expense item as applicable; and,

receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included
as part of Receivables or Accounts Payable and Accrued Expenses account in the
consolidated statement of financial position.

Expense
Cost and expenses are recognized in the consolidated statement of income upon utilization of
the service or at the date they are incurred. Except for borrowing costs attributable to
qualifying assets, all interest expense are reported on an accrual basis.

Borrowing Costs
Borrowing costs are generally expensed as incurred. For financial reporting purposes, interest
on loans used to finance capital projects is capitalized as part of project costs (classified as
Construction in-progress under the Property, Plant and Equipment account in the
consolidated statement of financial position) during construction period. Capitalization of
interest commences when the activities to prepare the asset are in progress and expenditures
and interest are being incurred. Interest costs are capitalized until the assets are substantially
ready for their intended use. If the carrying amount of the asset exceeds its recoverable
amount, an impairment loss is recognized. For income tax reporting purposes, such interest is
treated as deductible expense in the year the interest is incurred.
 - 19 -

Operating Leases
Company as a Lessee. Leases where the lessor retains substantially all the risks and benefits
of ownership of the assets are classified as operating leases. Operating lease payments are
recognized as expense in the consolidated statement of income on a straight-line basis over the
lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

Company as a Lessor. Leases where the Company retains substantially all the risks and
benefits of ownership of the asset are classified as operating leases. Initial direct costs
incurred in negotiating an operating lease are added to the carrying amount of the leased asset
and recognized over the lease terms on the same bases as rental income. Operating lease
payments are recognized as income in the consolidated statement of income on a straight-line
basis over the lease term.

The determination of whether an arrangement is, or contains a lease is based on the substance
of the arrangement at inception date of whether the fulfillment of the arrangement is dependent
on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
A re-assessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the

arrangement;

b. A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified

asset; or,

d. There is a substantial change to the asset.

Where a re-assessment is made, lease accounting shall commence or cease from the date when
the change in circumstance gave rise to the re-assessment for scenarios a, c or d and at the date
of renewal or extension period for scenario b.

Income Taxes
Tax expense recognized in the consolidated statement of income comprises the sum of
deferred tax and current tax not recognized in other comprehensive income or directly in
equity. Changes in deferred tax assets or liabilities are recognized as a component of tax
income or expense in consolidated statement of income, except where they relate to items that
are recognized in other comprehensive income or directly in equity, in which case the related
deferred tax is also recognized in consolidated statement of comprehensive income or
consolidated statement of changes in equity, respectively.

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at
the amount expected to be recovered from or paid to the taxation authorities. The tax rates and
tax laws, used to compute the amount of tax, are those that are enacted or substantively
enacted at the statement of financial position date.
 - 20 -

Deferred Tax. Deferred tax is provided in full, using the balance sheet liability method, on
temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable
temporary differences except where the deferred tax liability arises from the initial recognition
of goodwill or of an asset or liability in a transaction that is not a business combination and, at
the time of the transaction, affects neither the accounting profit nor taxable profit.

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will
be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each statement of financial position
date and reduced to the extent that it is no longer probable that sufficient taxable profit will be
available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax
assets are re-assessed at each statement of financial position date and are recognized to the
extent that it has become probable that future taxable profit will allow the deferred tax asset to
be recovered.

Deferred tax is determined using tax rates (and tax laws) that have been enacted or
substantially enacted at the statement of financial position date and are expected to apply when
the related deferred tax asset is realized or the deferred tax liability is settled.

Deferred tax assets and liabilities are offset only if a legally enforceable right exists to offset
tax assets against tax liabilities and the deferred taxes relate to the same taxable entity and the
same taxation authority.

Equity
Capital stock is determined using the nominal value of shares that have been issued.

Retained earnings, the appropriated portion of which is not available for distribution, include
all current and prior period results as disclosed in the consolidated statement of income.

Other reserves comprise gains and losses due to the revaluation of AFS investments,
translation adjustment in foreign subsidiary (Ovincor) and actuarial gains and losses in defined
benefit pension plan.

Dividend distributions payable to equity shareholders are included under Accounts Payable
and Accrued Expenses account when the dividends have been approved in a general meeting
prior to or on the statement of financial position date.

All transactions with owners of the parent are recorded separately within equity.

Earnings (Loss) Per Share Attributable to the Equity Holders of the Parent
Basic earnings (loss) per share is computed by dividing net income or loss by the weighted
average number of outstanding shares after giving retroactive effect to any stock split and
stock dividends declared during the year.

The Company has no dilutive potential common shares outstanding that would require
disclosure of diluted earnings per share in the consolidated statement of income.
 - 21 -

Subsequent Events
Any post-year-end events that provide additional information about the Companys
consolidated financial position at the statement of financial position date (adjusting event) is
reflected in the consolidated financial statements. Post-year-end events that are not adjusting
events, if any, are disclosed when material in the notes to consolidated financial statements.

3. Significant Accounting Judgments, Estimates and Assumptions

The preparation of the consolidated financial statements in accordance with PFRS requires the
Company to make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses and disclosure of contingent assets and contingent liabilities.
Future events may occur which will cause the assumptions used in arriving at the estimates to
change. The effects of any change in estimates are reflected in the consolidated financial
statements as they become reasonably determinable.

Judgments and estimates are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under
the circumstances.

Judgments
In the process of applying the Companys accounting policies, management has made the
following judgments, apart from those involving estimations, which have the most significant
effect on the amounts recognized in the consolidated financial statements:

Operating Lease Commitments Company as Lessor/Lessee. The Company has entered into
commercial property leases on its investment property portfolio. The Company has
determined that it retains all the significant risks and rewards of ownership of the properties
leased out on operating leases while the significant risks and rewards for properties leased
from third parties are retained by the lessors.

Determining Fair Values of Financial Instruments. Where the fair values of financial assets
and liabilities recorded in the consolidated statement of financial position cannot be derived
from active markets, they are determined using a variety of valuation techniques that include
the use of mathematical models. The Company uses judgments to select from variety of
valuation models and make assumptions regarding considerations of liquidity and model
inputs such as correlation and volatility for longer dated financial instruments. The input to
these models is taken from observable markets where possible, but where this is not feasible, a
degree of judgment is required in establishing fair values.

Distinction between Property, Plant and Equipment and Investment Property. The Company
determines whether a property qualifies as investment property. In making its judgment, the
Company considers whether the property generates cash flows largely independent of the other
assets held by an entity. Owner-occupied properties generate cash flows that are attributable
not only to the property but also to other assets used in the production or supply process.
 - 22 -

Some properties comprise a portion that is held to earn rental or for capital appreciation and
another portion that is held for use in the production and supply of goods and services or for
administrative purposes. If these portions can be sold separately (or leased out separately
under finance lease), the Company accounts for the portions separately. If the portion cannot
be sold separately, the property is accounted for as investment property only if an insignificant
portion is held for use in the production or supply of goods or services or for administrative
purposes. Judgment is applied in determining whether ancillary services are so significant that
a property does not qualify as investment property. The Company considers each property
separately in making its judgment.

Taxes. Significant judgment is required in determining current and deferred income tax expense.
There are many transactions and calculations for which the ultimate tax determination is uncertain
during the ordinary course of business. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes will be due. Where the final tax
outcome of these matters is different from the amounts that were initially recorded, such
differences will impact the current income tax and deferred tax expenses in the year in which such
determination is made.

Beginning July 2008, in the determination of the Companys current taxable income, the
Company has an option to either apply the optional standard deduction (OSD) or continue to
claim itemized standard deduction. The Company, at each taxable year from the effectivity of the
law, may decide which option to apply; once an option to use OSD is made, it shall be irrevocable
for that particular taxable year.

Provisions and Contingencies. Judgement is exercised by management to distinguish between

provisions and contingencies. The Companys policy on recognition and disclosure of provisions
is discussed under Note 2; and the relevant disclosures on commitments are presented in Notes
23, 24 and 26 and on contingencies in Note 35.

Estimations and Assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the
statement of financial position date, that have a significant risk of causing material adjustments to
the carrying amounts of assets and liabilities within the next financial year are discussed below.

Allowance for Impairment of Trade and Other Receivables. Allowance for impairment is
maintained at a level considered adequate to provide for potentially uncollectible receivables.
The level of allowance is based on past collection experience and other factors that may affect
collectibility. An evaluation of receivables, designed to identify potential changes to
allowance, is performed regularly throughout the year. Specifically, in coordination with the
Marketing Division, the Finance Division ascertains customers who are unable to meet their
financial obligations. In these cases, the Companys management uses sound judgment based
on the best available facts and circumstances, included but not limited to, the length of
relationship with the customers and their payment track record. The amount of impairment
loss differ for each year based on available objective evidence for which the Company may
consider that it will not be able to collect some of its accounts. Impaired accounts receivable
are written off when identified to be worthless after exhausting all collection efforts. An
increase in allowance for impairment of trade and other receivables would increase the
Companys recorded selling and administrative expenses and decrease current assets.
 - 23 -

Impairment losses on trade and other receivables amounted to =

P71 and =
P50 in 2008 and 2007,
respectively (see Note 18). There was no impairment loss required to be provided in 2006
based on managements evaluation. Receivables written off amounted to = P7, =
P3 and =P4 in
2008, 2007 and 2006, respectively. The carrying value of receivables, amounted to =P16,875,
=
P17,869 and =P15,629 as of December 31, 2008, 2007 and 2006, respectively (see Note 7).

Net Selling Prices of Inventories. In determining the net selling price of inventories,
management takes into account the most reliable evidence available at the times the estimates
are made. Future realization of the carrying amounts of inventories of =
P30,792, =P30,271 and
=
P26,289 as at the end of 2008, 2007 and 2006, respectively (see Note 8) is affected by price
changes in different market segments for crude and petroleum products. Both aspects are
considered key sources of estimation uncertainty and may cause significant adjustments to the
Companys inventories within the next financial year.

Inventory write-down in 2008 to its net realizable value amounted to =

P2,441. In 2007 and 2006
the net realizable value of inventories is higher than its cost.

Allowance for Inventory Obsolescence. The allowance for inventory obsolescence consists of
collective and specific valuation allowance. A collective valuation allowance is established as a
certain percentage based on the age and movement of stocks. In case there is write-off or disposal
of slow-moving items during the year, a reduction in the allowance for inventory obsolescence is
made. Review of allowance is done every quarter, while a revised set-up or booking is posted at
the end of the year based on evaluations or recommendations of the proponents. The amount and
timing of recorded expenses for any year would therefore differ based on the judgments or
estimates made.

Reduction in the allowance for inventory obsolescence amounted to = P40 and P=93 in 2007 and
2006, respectively (see Note 8). There was no reversal in the allowance made in 2008.

Useful Lives. The useful life of each of the Companys item of property, plant and equipment,
and investment properties is estimated based on the period over which the asset is expected to be
available for use. Such estimation is based on a collective assessment of practices of similar
businesses, internal technical evaluation and experience with similar assets. The estimated useful
life of each asset is reviewed periodically and updated if expectations differ from previous
estimates due to physical wear and tear, technical or commercial obsolescence and legal or other
limits on the use of the asset. It is possible, however, that future results of operations could be
materially affected by changes in the amounts and timing of recorded expenses brought about by
changes in the factors mentioned above. A reduction in the estimated useful life of any item of
property, plant and equipment and investment properties would increase the recorded cost of
goods sold, selling and administrative expenses, and decrease noncurrent assets.

There is no change in estimated useful lives of property, plant and equipment, and investment
properties based on management reviews at the statement of financial position date. The carrying
amounts are analyzed in Notes 9 and 10.

Fair Value of Investment Properties. The fair value of investment property presented for
disclosure purposes is based on market values, being the estimated amount for which the property
can be exchanged between a willing buyer and seller in an arms length transaction, or based on a
most recent sale transaction of a similar property within the same vicinity where the investment
property is located.
 - 24 -

In the absence of current prices in an active market, the valuations are prepared by considering the
aggregate estimated future cash flows expected to be received from leasing out the property. A
yield that reflects the specific risks inherent in the net cash flows is then applied to the net annual
cash flows to arrive at the property valuation.

Estimated fair values of investment property (office units) amounted to = P219, P

=214 and =
P202 as
of December 31, 2008, 2007 and 2006, respectively. Management believes that the fair values of
the parcels of land are higher than their carrying values as of those dates (see Note 10).

Impairment of Non-financial Assets. The Company assesses impairment of non-financial

assets whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The factors that the Company considers important which could
trigger an impairment review include the following:

Significant underperformance relative to expected historical or projected future operating

results;

Significant changes in the manner of use of the acquired assets or the strategy for overall
business; and,

Significant negative industry or economic trends.

The Company recognizes an impairment loss whenever the carrying amount of an asset
exceeds its recoverable value. The recoverable amount is computed using the value in use
approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for
the cash-generating unit to which the asset belongs. Determining the recoverable value of
assets requires the estimation of future cash flows expected to be generated from the continued
use and ultimate disposition of such assets. While it is believed that the assumptions used in
the estimation of fair values reflected in the consolidated financial statements are appropriate
and reasonable, significant changes in these assumptions may materially affect the assessment
of recoverable values and any resulting impairment loss could have a material adverse impact
on the results of operations.

No impairment loss was required to be recognized in 2008, 2007 and 2006. The aggregate
carrying amount of property, plant and equipment, and investment properties amounted to
=
P36,674, =P34,330 and =
P25,375 as of December 31, 2008, 2007 and 2006, respectively
(see Notes 9 and 10).

Fair Value of Financial Instruments. Management uses valuation techniques in measuring fair
value of financial instruments, where active market quotes are not available. In applying the
valuation techniques, management makes maximum use of market inputs, and uses estimates and
assumptions that are, as far as possible, consistent with observable data that market participants
would use in pricing the instrument. Where applicable data is not observable, management uses
its best estimate about assumptions that market participants would make. These estimates may
vary from actual prices that would be achieved in an arms length transaction at statement of
financial position date.

The following methods and assumptions are used to estimate the fair value of each class of
financial instruments and when it is practicable to estimate such value:

Financial Assets at FVPL and AFS Investments. Market values have been used to
determine the fair values of traded government securities and equity shares. Market
value is determined mainly by reference to the stock exchange quoted market bid
prices at the close of business on the statement of financial position date.
 - 25 -

Derivative Assets and Liabilities. The fair values of freestanding and bifurcated
forward currency transactions are calculated by reference to current forward exchange
rates for contracts with similar maturity profiles. Mark-to-market valuation of
commodity hedges is based on the forecasted crude and product prices by KBC
Market Services, an independent consulting group.

Cash Bonds. Fair value is estimated as the present value of all future cash flows
discounted using the market rates for similar types of instruments. Discount rates used
in 2008, 2007 and 2006 are 6.44%, 5.76% and 5.69%, respectively.

Long-term Debt Floating Rate. For variable rate loans that re-price every three
months, the carrying value approximates its fair value because of recent and regular
re-pricing based on current market rates. For variable rate loans that re-price every six
months, the fair value is determined by discounting, the principal amount plus the next
interest payment, using the prevailing market rate for the period up to the next re-
pricing date. Average discount rates used in 2008, 2007 and 2006 are 6.99%, 6.31%
and 5.14%, respectively.

Pension Costs. The determination of the obligation and cost for pension and other retirement
benefits is dependent on the selection of certain assumptions used by actuary in calculating such
amounts. Those assumptions are described in Note 25 and include, among others, discount rate
and rate of compensation increase. In accordance with PAS 19, Employee Benefits, as amended,
the Company recognizes all actuarial gains and losses in the consolidated statement of
comprehensive income, and therefore generally affects the recorded obligation. While it is
believed that the Companys assumptions are reasonable and appropriate, significant differences
in actual experience or significant changes in assumptions may materially affect the Companys
pension obligations.

Net pension plan assets amounted to =

P299, =
P509 and =
P434 as of December 31, 2008, 2007 and
2006, respectively (see Note 11).

Asset Retirement Obligation. The Company has an asset retirement obligation arising from
leased service stations and depots. Determining asset retirement obligation requires estimation
of the costs of dismantling, installations and restoring leased properties to their original
condition. The Company determined the amount of asset retirement obligation, by obtaining
estimates of dismantling costs from the proponent responsible for the operation of the asset,
discounted at the Companys current credit-adjusted risk-free rate ranging from 6.60% to
11.97% depending on the life of the capitalized costs. While it is believed that the
assumptions used in the estimation of such costs are reasonable, significant changes in these
assumptions may materially affect the recorded expense or obligation in future periods.

The Company also has an asset retirement obligation arising from its refinery. However, such
obligation is not expected to be settled for the foreseeable future and therefore a reasonable
estimate of fair value cannot be determined. Thus, the asset retirement obligation amounting to
=
P706, P=461 and P =660 as of December 31, 2008, 2007 and 2006, respectively (see Note 15),
covers only the Companys leased service stations and depots.

Realizable Amount of Deferred Tax Assets. The Company reviews its deferred tax assets at each
financial position date and reduces the carrying amount to the extent that it is no longer probable
that sufficient taxable profit will be available to allow or part of the deferred tax asset to be
utilized.
 - 26 -

As of December 31, 2008, 2007 and 2006, the gross deferred tax assets amounted to =
P3,170,
=
P1,309 and =
P824, respectively (see Note 22).

Contingencies. The Company currently has various tax assessments and legal claims. The
Company develops an estimate of the probable costs for the assessments and resolutions of these
claims in consultation with in-house as well as outside legal counsel handling the prosecution and
defense of these cases and is based upon an analysis of potential results. The Company does not
believe these tax assessments and legal claims will have a material adverse effect on its
consolidated financial position and results of operations.

No provision for probable losses arising from contingencies was required to be recognized in
2008, 2007 and 2006 (see Note 35).

4. Cash and Cash Equivalents

2008 2007 2006

Cash on hand P
=4,536 =
P2,862 =
P1,954
Cash in banks 2,778 3,385 1,813
Money market placements 5,513 3,485 7,968
P
=12,827 =
P9,732 =
P11,735

Cash in banks earn interest at the respective bank deposit rates. Money market placements are
made for varying periods of up to three months depending on the immediate cash requirements
of the Company, and earn interest (see Note 21) at the respective money market placement
rates ranging from 2.5% to 6.8% (2008), 1.5% to 6.0% (2007) and 3.0% to 7.9% (2006).

5. Financial Assets at FVPL

2008 2007 2006

Marketable equity securities P
=88 =
P152 =
P131
Proprietary membership shares 73 77 49
P
=161 =
P229 =
P180

The fair values presented have been determined directly by reference to published prices
quoted in an active market.

Changes in fair value recognized in 2008, 2007 and 2006 amounted to (P

=67), =
P49, and =
P63,
respectively (see Note 21).

6. AFS Investments

This account consists of investments in government securities of Petrogen and ROP9 bonds of
Ovincor.
 - 27 -

Petrogens government securities are deposited with the Insurance Commission (IC) in
accordance with the provisions of the IC, for the benefit and security of its policyholders and
creditors. These investments bear fixed interest rates of 6.8% to 14.6% in 2008, 6.9% to
11.9% in 2007 and 8.5% to 14.6% in 2006, (see Note 21).

Ovincors ROP9 bonds are maintained at the Bank of Bermuda and carried at fair value with
fixed interest rate of 8.375% from July 2005 (purchase date) to March 2009 (maturity date).

Following is the breakdown of investments by contractual maturity dates as of December 31,

2008, 2007 and 2006:

2008 2007 2006

Due in one year or less P
=331 =
P164 =
P103
Due after one year through five years 351 468 529
P
=682 =
P632 =
P632

The movements in the AFS investments as of December 31, 2008, 2007 and 2006 are as
follows:

2008 2007 2006

Balance at the beginning of year P
=632 =
P632 =
P586
Additions 207 138 302
Disposals (163) (103) (260)
Amortization of discount (premium) (3) (28) 33
Fair value gains (losses) net (7) 11 (19)
Foreign currency gains (losses) 16 (18) (10)
Balance at the end of year P
=682 =
P632 =
P632

7. Receivables

2008 2007 2006

Trade P
=7,339 =
P12,715 =
P11,219
Related parties trade (see Note 23) 63 100 71
Allowance for impairment loss on
trade receivables (744) (696) (664)
6,658 12,119 10,626

Related parties non-trade (see Note 23) 2 2 2

Government 7,751 4,440 3,847
Others 2,502 1,336 1,174
Allowance for impairment loss on
non-trade receivables (38) (28) (20)
10,217 5,750 5,003
P
=16,875 =
P17,869 =
P15,629

Trade receivables are noninterest-bearing and are generally on a 45-day term.

Government receivables pertain to tax claims, such as VAT and specific tax claims. = P6,098 of
these receivables is over 30 days but less than one year. The filing and the collection of claims
is a continuous process and is closely monitored.
 - 28 -

Receivables Others significantly consist of receivables relating to creditable withholding tax

certificates on product replenishment and duties.

Credit risk concentration is discussed in Note 30.

All of the Companys trade and other receivables have been reviewed for indicators of
impairment. Certain trade receivables were found to be impaired and impairment losses have
been recorded accordingly.

A reconciliation of the allowance for impairment at the beginning and end of 2008, 2007 and
2006 is shown below.

2008 2007 2006

Balance at beginning of the year P
=724 =
P684 =
P847
Additions (see Note 18) 71 50
Write off (7) (3) (4)
Reversal (see Note 21) (154)
Interest income on accretion (see Note 21) (6) (7) (5)
Balance at the end of year P
=782 =
P724 =
P684

As of December 31, 2008, 2007 and 2006, the age of past due but not impaired trade accounts
receivable (TAR) is as follows (see Note 30):

Past Due But Not Impaired

Within 30 Days 31 to 60 Days 61 to 90 Days Over 90 Days Total
Dec. 31, 2008
Reseller P
=46 P
=3 P
=3 P
= 22 P
=74
Lubes 1 9 7 16 33
Gasul 20 31 70 69 190
Industrial 41 383 115 504 1,043
Others 4 5 32 130 171
Total TAR P
=112 P
=431 P
=227 P
=741 P
=1,511

Dec. 31, 2007

Reseller =
P106 =
P13 =
P6 =
P15 =
P140
Lubes 7 48 10 6 71
Gasul 15 101 52 77 245
Industrial 158 1,314 231 455 2,158
Others 4 5 44 160 213
Total TAR =
P290 =
P1,481 =
P343 =
P713 =
P2,827

Dec. 31, 2006

Reseller =
P24 =
P2 =
P5 =
P17 =
P48
Lubes 1 2 4 112 119
Gasul 30 51 41 133 255
Industrial 149 116 134 218 617
Others 4 1 5 222 232
Total TAR =
P208 =
P172 =
P189 =
P702 =
P1,271

No allowance for impairment is necessary as regard these past due but unimpaired receivables
based on past collection experiences with no significant changes in credit quality. As such,
these amounts are still considered recoverable.
 - 29 -

8. Inventories

2008 2007 2006

At net realizable value:
Petroleum P
=12,672 =
P =
P
Crude oil and others 17,381
TBA products, materials and supplies:
TBA 34 17 36
Materials and supplies 705 582 555
P
=30,792 =
P599 =
P591

At cost:
Petroleum P
= =
P12,341 =
P13,793
Crude oil and others 17,331 11,905
29,672 25,698
P
=30,792 =
P30,271 =
P26,289

If the Company used the moving-average method (instead of the first-in, first-out method,
which is the Companys policy), the cost of petroleum, crude oil and other products would
have increased by =
P2,243, =
P1,183 and = P355 as of December 31, 2008, 2007 and 2006,
respectively.

In 2008, new products of the Company include Petron E10 Premium, pCHEM CA 6100,
pCHEM CI 5140, and pCHEM DS 9100 while product enhancements and research activities
were made on Ultron Race, Ultron Rallye, and Ultron Touring from API SL to API SM.

In 2007, new products include Sprint 4T Enduro, Sprint 4T Rider, Sprint 4T Extra and
Hydrotur SW 68 while product enhancements and research activities were made on the New
Petron XCS and the use of Coco Methyl Ester (CME) in the Companys diesel fuel. Research
and development costs (see Note 18) on these products constituted the expenses incurred for
internal projects in 2008 and 2007.

Inventories (including distribution or transshipment costs) charged to cost of goods sold

amounted to = P259,391, =P191,613 and = P194,263 in 2008, 2007 and 2006, respectively
(see Note 17).

The movement in the allowance for decline in value of inventories at the beginning and end of
2008, 2007 and 2006 is shown below.

2008 2007 2006

Balance at beginning of the year P
=301 =
P341 =
P434
Additions due to:
Write-down 2,432
Obsolescence 9
Reversal of allowance for obsolescence (40) (93)
Balance at the end of year P
=2,742 =
P301 =
P341

Reversals of allowance for inventory obsolescence in 2007 and 2006 were charged as part of
Cost of Goods Sold Others account (see Note 17). These reversals resulted from:
(a) extension of the period of non-movement for lubricants, greases and additives; and,
(b) implementation of the Asset Policy based program for storehouse materials.
 - 30 -

9. Property, Plant and Equipment

The gross carrying amounts and accumulated depreciation and amortization at the beginning
and end of 2008, 2007 and 2006 are shown below.

Service Computers,
Buildings Refinery Stations Office and Land and
and Related and Plant and Other Motor Leasehold Construction
Facilities Equipment Equipment Equipment Improvements in-Progress Total
December 31, 2008
Cost =
P14,084 =
P31,300 =
P4,002 =
P2,212 =
P4,015 =
P6,096 =
P61,709
Accumulated
depreciation and
amortization (7,094) (12,114) (3,102) (1,762) (1,209) (25,281)
Net carrying amount P
=6,990 P
= 19,186 P
= 900 P
= 450 P
=2,806 P
=6,096 P
= 36,428

December 31, 2007

Cost =
P13,436 =
P18,138 =
P3,551 =
P2,118 =
P3,985 =
P15,214 =
P56,442
Accumulated
depreciation and
amortization (6,445) (10,300) (2,802) (1,640) (1,133) (22,320)
Net carrying amount =
P6,991 =
P7,838 =
P749 =
P478 =
P2,852 =
P15,214 =
P34,122

December 31, 2006

Cost =
P13,041 =
P18,361 =
P3,396 =
P2,004 =
P3,874 =
P4,570 =
P45,246
Accumulated
depreciation
and amortization (5,829) (9,152) (2,552) (1,507) (1,053) (20,093)
Net carrying amount =
P7,212 =
P9,209 =
P844 =
P497 =
P2,821 =
P4,570 =
P25,153

January 1, 2006
Cost =
P8,081 =
P22,105 =
P3,040 =
P1,793 =
P3,667 =
P1,542 =
P40,228
Accumulated
depreciation and
amortization (2,496) (10,536) (2,330) (1,351) (945) (17,658)
Net carrying amount =
P5,585 =
P11,569 =
P710 =
P442 =
P2,722 =
P1,542 =
P22,570

A reconciliation of the carrying amounts at the beginning and end of 2008, 2007 and 2006, of
property, plant and equipment, is shown below.

Service Computers,
Buildings Refinery Stations Office and Land and
and Related and Plant and Other Motor Leasehold Construction
Facilities Equipment Equipment Equipment Improvements in-Progress Total
Balance at Jan. 1, 2008,
net of accumulated
depreciation and
amortization =6,991
P = 7,838
P = 749
P = 478
P =2,852
P =15,214
P =
P34,122
Additions 667 13,347 478 166 32 5,383 20,073
Disposals (2) (29) (4) (3) (14,501) (14,539)
Depreciation and
amortization charges
for the year
(see Note 20) (666) (1,970) (323) (191) (78) (3,228)
Balance at Dec. 31, 2008,
net of accumulated
depreciation and
amortization P
=6,990 P
= 19,186 P
= 900 P
= 450 P
=2,806 P
=6,096 P
= 36,428
 - 31 -

Service Computers,
Buildings Refinery Stations Office and Land and
and Related and Plant and Other Motor Leasehold Construction
Facilities Equipment Equipment Equipment Improvements in-Progress Total
Balance at Jan. 1, 2007,
net of accumulated
depreciation and
amortization =
P7,212 =
P9,209 =
P844 =
P497 =
P2,821 =
P4,570 =
P25,153
Additions 432 56 157 166 123 10,644 11,578
Disposals (13) (91) (3) (107)
Depreciation and
amortization charges
for the year
(see Note 20) (640) (1,336) (252) (182) (92) (2,502)
Balance at Dec. 31, 2007,
net of accumulated
depreciation and
amortization =
P6,991 =
P7,838 =
P749 =
P478 =
P2,852 =
P15,214 =
P34,122

Balance at Jan. 1, 2006,

net of accumulated
depreciation and
amortization =
P5,585 =
P11,569 =
P710 =
P442 =
P2,722 =
P1,542 =
P22,570
Additions 2,229 946 368 238 208 3,028 7,017
Disposals (3) (1,937) (20) (5) (1,965)
Depreciation and
amortization charges
for the year
(see Note 20) (599) (1,369) (214) (178) (109) (2,469)
Balance at Dec. 31, 2006,
net of accumulated
depreciation and
amortization =
P7,212 =
P9,209 =
P844 =
P497 =
P2,821 =
P4,570 =
P25,153

Interest capitalized in 2008, 2007 and 2006 amounted to = P316, = P893 and =P52, respectively.
Capitalization rates used for general borrowings (both short- and long-term loans) were 7.20%
in 2008, 5.37% in 2007 and 6.84% in 2006, while capitalization rates used for specific
borrowings were the actual interest rates for those loans.

In July 2007, the Thermofor Catalytic Cracking Unit (TCCU) was decommissioned to pave
way for the Petro Fluidized Bed Catalytic Cracker (PetroFCC). Some of the components of
the TCCU were re-used and made part of the PetroFCC. The PetroFCC, which has a
conversion capacity of 19,000 barrels per day, and the Propylene Recovery Unit (PRU), which
can produce 140,000 metric tons of propylene annually, are the Philippines first
petrochemical feedstock facilities. The units became operational in the first quarter of 2008
(see Note 11).

Major turnaround activities scheduled in January 2009 was implemented in advance in

December 2008 to take advantage of the planned Total Plant Shutdown (TPS) due to poor
refining economics. This facilitated the earlier tie-in of new project and other modification
works in the refinery units. Likewise, the TPS facilitated the earlier implementation of all the
scheduled turnaround maintenance turnaround works and other related maintenance activities.
The TPS lasted until early February 2009.

No impairment loss was required to be recognized in 2008, 2007 and 2006.

 - 32 -

10. Investment Properties

The gross carrying amounts and accumulated depreciation and amortization at the beginning
and end of 2008, 2007 and 2006 are as follows:

Land Office Units Total

At December 31, 2008
Cost P
=100 P
=263 P
=363
Accumulated depreciation (117) (117)
Net carrying amount P
=100 P
=146 P
=246

At December 31, 2007

Cost =
P48 =
P263 =
P311
Accumulated depreciation (103) (103)
Net carrying amount =
P48 =
P160 =
P208

At December 31, 2006

Cost =
P48 =
P263 =
P311
Accumulated depreciation (89) (89)
Net carrying amount =
P48 =
P174 =
P222

At January 1, 2006
Cost =
P48 =
P263 =
P311
Accumulated depreciation (76) (76)
Net carrying amount =
P48 =
P187 =
P235

A reconciliation of the carrying amounts at the beginning and end of 2008, 2007 and 2006
of investment property is shown below.

Land Office Units Total

Net carrying amount, at January 1, 2008 P
=48 P
=160 P
=208
Additions 104 104
Disposals (52) (52)
Depreciation for the year (see Note 20) (14) (14)
Net carrying amount, at December 31, 2008 P
=100 P
=146 P
=246

Net carrying amount, at January 1, 2007 =

P48 =
P174 =
P222
Additions 49 49
Disposals (49) (49)
Depreciation for the year (see Note 20) (14) (14)
Net carrying amount, at December 31, 2007 =
P48 =
P160 =
P208

Net carrying amount, at January 1, 2006 =

P48 =
P187 =
P235
Depreciation for the year (see Note 20) (13) (13)
Net carrying amount, at December 31, 2006 =
P48 =
P174 =
P222

The Companys investment properties consist of office units located in Petron MegaPlaza and
parcels of land in various locations intended for service stations. Estimated fair values for the
office units, based on recent sale of units within the building and/or sale of units in
comparative Grade A buildings, amounted to = P219, =P214 and = P202 in 2008, 2007 and 2006,
respectively.
 - 33 -

The actual fair values of the parcels of land were no longer obtained from independent
appraisers as at the consolidated statement of financial position date as management
determined that the effect of changes in the market prices between the acquisition and
reporting dates was immaterial. As of December 31, 2008, 2007 and 2006, management
believes that the fair values of those parcels of land are higher than their carrying values,
considering recent market transactions and specific conditions related to the parcels of land as
determined by NVRC.

Rental income earned from office units amounted to = P16, =P15 and =
P16 in 2008, 2007 and
2006, respectively, which are recognized as part of Other Income and Charges account (see
Note 21).

There are no other direct selling and administration expenses (i.e., repairs and maintenance)
arising from investment properties that generated income in 2008, 2007 and 2006.

11. Other Assets

2008 2007 2006

Current:
Input VAT P
=10,739 =
P4,768 =
P3,072
Prepaid expenses 824 5,699 3,795
Special-purpose fund 201 34 33
Derivative assets 55 100 58
Others 158 71 96
P
=11,977 =
P10,672 =
P7,054

Noncurrent:
Net pension plan assets (see Note 25) =299
P =
P509 =
P434
Catalyst (see Note 9) 241 11 66
Long-term receivables 202 77 33
Prepaid rent 100 66 15
Others net 83 75 73
P
=925 =
P738 =
P621

Noncurrent Assets Others classification include franchise fees amounting to =

P9, =
P9 and =
P6
in 2008, 2007 and 2006, respectively, net of amortization of franchise fees amounting to =
P1 in
all years presented. Amortization of franchise fee is included as part of Selling and
Administrative Others account in the consolidated statement of income (see Note 18).

12. Short-term Loans

This account pertains to unsecured peso and US dollar-denominated loans obtained from local
and international banks with range of maturities from 30 to 180 days and with interest ranging
from 3% to 9% (see Note 21). These loans are intended to fund the importation of crude oil
and petroleum products (see Note 23), capital expenditures (see Note 9) and working capital
requirements.
 - 34 -

13. Accounts Payable and Accrued Expenses

2008 2007 2006

Accounts payable (see Note 23) P
=1,870 =
P2,372 =
P1,298
Accrued expenses 1,305 1,238 1,390
Specific taxes and other taxes payable 401 443 425
Others (see Note 31) 986 491 618
P
=4,562 =
P4,544 =
P3,731

Accounts payable are liabilities to haulers, contractors and suppliers that are noninterest-
bearing and are normally settled on a 30-day term.

Accrued expenses include accrual of unpaid interest amounting to =

P677 (2008), =
P421 (2007)
and = P352 (2006) (see Note 31) and selling and administrative expenses that are normally
settled within 12 months from the reporting date.

14. Long-term Debt

2008 2007 2006

Unsecured peso loans (net of debt issue cost
amounting to = P50 in 2008, =
P69 in 2007
and =
P70 in 2006) P
=10,251 =
P10,231 =
P8,538
Syndicated dollar bank loans (net of debt
issue costs amounting to =P31 and = P58
in 2007 and 2006, respectively) 2,549 4,374
10,251 12,780 12,912
Less current portion (net of debt issue costs
amounting to =P19, =
P48 and =P41 in
2008, 2007 and 2006, respectively) 1,263 1,604 1,633
P
=8,988 =
P11,176 =
P11,279

Movements of debt issue costs are as follows:

2008 2007 2006

Beginning balance P
=100 =
P128 =
P80
Additions 17 74
Accretion for the year (see Note 21) (50) (45) (26)
Ending balance P
=50 =
P100 =
P128
 - 35 -

The salient terms of the foregoing debts are summarized as follows:

BPI Capital Nordeutsche Club Loan

Landbank of the Corporation Landesbank (MBTC, Mega
Creditor Philippines and ING Bank Girozentrale ICBC, Maybank Citibank
(Landbank) N.V. (NORD) and Robinsons)

Original =
P2 billion =
P6.3 billion US$100 million =
P2 billion =
P2 billion
Amounts

Payment Terms 12 equal One time Six semi-annual 13 quarterly 13 quarterly

quarterly payment in installments installments installments
installments August 2011 starting on the starting January starting April
starting March 30th month (June 2009 up to 2004 up to April
2009 up to 2004-June 2009). January 2012 2007
November 2011 Fully paid on
December 12,
2008
Interest rates in: (Variable rates) (Fixed rates) (Variable rates) (Fixed rates) (Variable rates)
2008 4.60% to 6.99% 8.88% 3.05% to 3.58% 6.73% Not applicable
2007 4.60% to 5.84% 8.88% 5.26% to 6.52% 6.73% 5.18% to 7.48%
2006 6.10% 8.88% 5.70% to 6.80% Not applicable 6.70% to 8.20%
Security None None None None None
Major None Maintenance of Maintenance of Maintenance of Maintenance of
Covenants certain certain certain certain
(see Note 29) financial ratios financial ratios financial ratios financial ratios

On January 30, 2007, the Company entered into a Club loan agreement with MBTC and
Citibank amounting to =P1,000 each. In December 2007, Citibank assigned =
P900 of its interest
in the Club loan agreement to the following financial institutions:

Bank Name Amount

MayBank Phils. =
P500
Mega International Commercial Bank of China (ICBC) 300
Robinsons Bank 100
Total =
P900

In May 2008, Citibank assigned its remaining =

P100 interest to Insular Life Assurance Co. Ltd.

As of December 31, 2008, the Company is in compliance with its loan covenants. Debt
maturities (gross of =
P50 debt issue costs) for the next four years are as follows:

Year Amount
2009 P
=1,282
2010 1,282
2011 7,582
2012 155
P
=10,301

The last installment for the NORD loan amounting to US$23 (approximately = P1,078), which
was originally due on June 2009, was paid on December 12, 2008. No early termination
penalty was imposed by the bank. The related debt issue cost accelerated to the consolidated
statement of income amounted to =
P3.3 (see Note 21).
 - 36 -

The total interest incurred on these long-term loans amounted to =

P964 (2008), = P1,124 (2007)
and =
P664 (2006), of which amounts, = P201 =P861 and =
P44, were capitalized (see Note 9).

15. Other Noncurrent Liabilities

2008 2007 2006
ARO P
=706 =
P461 =
P660
Cylinder deposits (see Note 31) 201 243 206
Cash bonds (see Note 31) 205 173 141
Others (see Note 31) 54 37 42
P
=1,166 =
P914 =
P1,049

Movements in the ARO are as follows:

2008 2007 2006

Beginning balance P
=461 =
P660 =
P298
Additions 71 1 10
Effect of change in discount rate 142 (236) 324
Accretion for the year (see Note 21) 40 36 37
Settlement (see Note 21) (8) (9)
Ending balance P
=706 =
P461 =
P660

16. Equity

a. Capital Stock for all years presented is as follows:

Number of
Shares Amount
Authorized =
P1.00 par value 10,000,000,000 =
P10,000
Issued and outstanding (see Note 27) 9,375,104,497 =
P9,375

The issued and outstanding common shares have been adjusted for the fractional shares
issued in prior years.

b. Retained Earnings

i. Declaration of Cash Dividends

In 2008, 2007 and 2006, the Company declared a cash dividend of = P0.10 per share
amounting to =P938 to all stockholders of record as of June 2, 2008, May 28, 2007 and
June 2, 2006, respectively.

ii. Appropriation for Capital Projects

Additional appropriation for future capital projects and loan obligations amounted to
=
P2,748, =
P4,151 and = P5,369 in 2008, 2007 and 2006, respectively. On February 27,
2009, the Companys BOD approved a resolution to reverse a portion of the
appropriated retained earnings (see Note 34).
 - 37 -

17. Cost of Goods Sold

2008 2007 2006

Inventories (see Notes 8, 23 and 26) P
=259,391 =
P191,613 =
P194,263
Depreciation and amortization
(see Note 20) 2,172 1,538 1,536
Employee costs (see Note 19) 519 463 406
Others net (see Notes 8 and 26) 2,224 1,673 1,309
P
=264,306 =
P195,287 =
P197,514

Distribution or transshipment costs included as part of inventories amounted to =

P3,801, =
P3,536
and =
P3,290 in 2008, 2007 and 2006, respectively.

18. Selling and Administrative Expense

2008 2007 2006

Employee costs (see Note 19) P
=1,375 =
P1,481 =
P1,199
Purchased services and utilities 1,202 994 817
Depreciation and amortization
(see Note 20) 1,070 978 946
Maintenance and repairs 482 530 473
Rent (see Notes 23 and 24) 411 395 381
Advertising 235 495 222
Materials and office supplies 181 188 164
Taxes and licenses 136 120 104
Impairment loss on trade and other
receivables (see Note 7) 71 50
Expenses related to oil spill incident
in Guimaras (see Note 35e) 15 122
Others (see Note 11) 59 79 54
P
=5,222 =
P5,325 =
P4,482

Selling and administrative expenses include research and development expenses amounting to
=
P9, =
P11 and =P16 in 2008, 2007 and 2006, respectively.

19. Employee Costs

2008 2007 2006

Salaries, wages and other employee costs
(see Note 23) P
=1,726 =
P1,847 =
P1,558
Pension costs defined benefit plan
(see Note 25) 118 51 4
Pension costs defined contribution plan 50 46 38
Other long-term employee benefits
interest subsidy 5
P
=1,894 =
P1,944 =
P1,605
 - 38 -

The above amounts are distributed as follows:

2008 2007 2006

Cost of goods sold (see Note 17) P
=519 =
P463 =
P406
Selling and administrative expenses
(see Note 18) 1,375 1,481 1,199
P
=1,894 =
P1,944 =
P1,605

20. Depreciation and Amortization

Depreciation and amortization are distributed as follows:

2008 2007 2006

Cost of goods sold
Property, plant and equipment
(see Notes 9 and 17) P
=2,172 =
P1,538 =
P1,536
Selling and administrative expenses
(see Note 18):
Property, plant and equipment
(see Note 9) 1,056 964 933
Investment properties (see Note 10) 14 14 13
1,070 978 946
P
=3,242 =
P2,516 =
P2,482

21. Interest Expense, Interest Income and Others

2008 2007 2006

Interest expense:
Short-term loans (see Note 12) P
=2,614 =
P990 =
P1,608
Long-term debt (see Note 14) 713 218 594
Bank charges 621 436 414
Accretion on debt issue costs
(see Note 14) 50 45 26
Accretion on ARO (see Note 15) 40 36 37
Product borrowings 21 17 31
Others 121 72 (26)
P
=4,180 =
P1,814 =
P2,684

Interest income:
Money market placements
(see Note 4) P
=225 =
P205 =
P192
Trade receivables (see Note 7) 54 69 92
AFS investments (see Note 6) 42 46 58
Cash in banks (see Note 4) 9 8 12
Product loaning 8 5 9
Others 16 11 8
P
=354 =
P344 =
P371
 - 39 -

2008 2007 2006

Other income (charges):

Foreign currency gains (loss) net (P
=1,707) =
P2,283 =
P388
Commodity hedging gain
(losses) net (see Note 31) 1,159 (806) (13)
Rent (see Notes 10 and 24) 357 325 345
Mark-to-market gain (losses)
(see Note 31) 179 (603) (279)
Changes in fair value of financial
assets at FVPL (see Notes 5
and 22) (67) 49 63
Insurance claims 33 16 29
Gain on settlement of ARO
(see Note 15) 8 9
Reversal of allowance for
impairment loss on receivables
(see Note 7) 154
Miscellaneous (77) (352) (209)
(P
=115) =
P912 =
P487

Share in the net income (loss) of PDSI amounting to = P 0.41, (P

=0.42) and =
P0.35 in 2008, 2007
and 2006, respectively, is classified under Other Income (Charges) Miscellaneous account.

22. Income Taxes

The components of tax expense as reported in the consolidated statement of income are as
follows:

2008 2007 2006

Current tax expense:
Final tax P
=52 =
P45 =
P42
Regular corporate income tax (RCIT) 65 3,120 1,681
Minimum corporate income tax (MCIT) 123
=
P240 =
P3,165 =
P1,723

Deferred tax expense:

Relating to origination and reversal of
temporary differences (P
=1,090) (P
=170) =
P108
Change in tax rate to 30% 213 (40) 55
MCIT (123)
Net operating loss carry-over (NOLCO) (1,113)
(2,113) (210) 163
Income tax expense (benefit) (P
=1,873) =
P2,955 =
P1,886
 - 40 -

A reconciliation of tax on the pretax income computed at the applicable statutory rates to tax
expense reported in the consolidated statement of income is as follows:

2008 2007 2006

Income tax computed at statutory
tax rates of 35% (P
=2,028) =
P3,273 =
P2,766
Additions (reductions) resulting from:
Change in tax rate 400 (39) (55)
Income subject to income tax holiday
(see Note 32) (171) (163) (736)
Nontaxable income (52) (45) (75)
Nondeductible interest expense 34 30 29
Changes in fair value of financial
assets at FVPL (see Note 21) 23 (17) (22)
Nondeductible expense 17 17 16
Interest income subjected to lower
final tax and others (96) (101) (37)
(P
=1,873) =
P2,955 =
P1,886

On October 18, 2005, Republic Act (RA) No. 9337 became effective, which included, among
others, provisions for: (a) the increase in corporate income tax rate from 32% to 35% effective
November 1, 2005 and later on reducing the rate to 30% effective January 1, 2009; and,
(b) the change in non-allowable deduction for interest expense from 38% to 42% effective
November 1, 2005 and 33% beginning January 1, 2009.

Effective July 6, 2008, RA 9504 was approved giving corporate taxpayers an option to claim
itemized deduction or OSD equivalent to 40% of gross sales. For 2008, the Company opted to
continue claiming itemized standard deductions.

The significant components of deferred tax assets and liabilities are as follows:

Consolidated Statements of
Financial Position Income Comprehensive Income
2008 2007 2006 2008 2007 2006 2008 2007 2006
Deferred tax assets:
Rental P
=164 =
P164 =
P163 P
=- (P
=1) =
P42 P
=- =
P- =
P-
Inventory differential 673 414 124 (259) (290) 93 - - -
ARO 116 97 81 (19) (16) 9 - - -
Various allowances, accruals -
and others 981 634 456 (346) (178) 109 - -
NOLCO 1,113 - - (1,113) - - - - -
MCIT 123 - - (123) - - - - -
3,170 1,309 824 (1,860) (485) 253 - - -
Deferred tax liabilities:
Excess of double-declining
over straight-line method of
depreciation and
amortization 1,250 1,195 1,270 55 (75) 3 - - -
Capitalized taxes and duties
on inventories deducted in
advance 347 334 388 13 (54) (23) - - -
Unrealized foreign exchange
gain net 32 320 112 (288) 208 15 - - -
Capitalized interest, duties and
taxes on property, plant and
equipment deducted in
advance and others 572 570 357 2 211 (59) - - -
Net pension plan asset 90 153 130 (35) (15) (26) (28) 38 (242)
Unrealized fair value gains on
AFS investments 2 4 9 - - - (2) (5) 8
2,293 2,576 2,266 (253) 275 (90) (30) 33 (234)
Deferred tax expense (benefit) (P
=2,113) (P
=210) =
P163 (P
=30) =
P33 (P
=234)
Net deferred tax assets (liabilities) P
=877 (P
=1,267) (P
=1,442)
 - 41 -

Net deferred taxes of individual companies are not allowed to be offset againts net deferred tax
liabilities of other companies, or vice versa, for purposes of consolidation. Net deferred tax
assets of the subsidiaries, namely, NVRC and Petrogen, without right of offset presented in the
consolidated statements of financial position amounted to =P1 and =
P1 as of December 31, 2007
and 2006, respectively. As of December 31, 2008, net deferred tax liability of NVRC,
Petrogen and PFC, without right of offset, amounted to =P8.

The Company is subject to the MCIT which is computed at 2% of gross income, as defined
under the tax regulations. MCIT in 2008, included as part of Deferred Tax Assets account
amounted to = P123. No MCIT was reported in 2007 and 2006 as the RCIT amounts were
higher than MCIT in those years. The Companys NOLCO and MCIT can be applied against
taxable income and tax due, respectively, until 2011.

23. Related Party Transactions

The significant transactions and balances with related parties are as follows:

2008 2007 2006

Purchase of Goods and Services
Saudi Aramco P
=173,858 =
P138,027 =
P145,099
PNOC 157 126 147

Current Payables Trade

Saudi Aramco (7,200) (36)
PNOC (1) (1) (33)

Current Receivables Trade

Saudi Aramco
PNOC 53 84 55

Current Receivables Non-Trade

Saudi Aramco 2 2 2
PNOC

Petron and Saudi Aramco have a term contract to purchase and supply, respectively, 90% of
Petrons monthly crude oil requirements over a 20-year period at Saudi Aramcos standard Far
East selling prices. Outstanding liabilities of Petron for such purchases are shown as part of
Liabilities for Crude Oil and Petroleum Product Importation account in the consolidated
statements of financial position.

Petron has long-term lease agreements with PNOC until August 2018 covering certain lots
where the Companys refinery and other facilities are located. Lease charges on refinery
facilities escalate at 2% a year, subject to increase upon re-appraisal (see Note 24).

Saudi Aramco is the ultimate parent of AOC, the Companys major stockholder until July 29,
2008 while PNOC was also a major stockholder until December 24, 2008 (see Note 1).
 - 42 -

Total compensation and benefits of key management personnel included as part of Employee
Costs account consist of the following (see Note 19):

2008 2007 2006

Salaries and other short-term employee
benefits P
=222 =
P251 =
P277
Pension costs defined contribution plan
paid 8 7 7
Post-employment benefits defined
benefit plan 70 39 42
P
=300 =
P297 =
P326

24. Operating Lease Commitments

Company as Lessee
The Company entered into commercial leases on certain parcels of land for its refinery and
certain service stations (see Notes 18 and 23). These leases have an average life between one
to sixteen years with renewal options included in the contracts. There are no restrictions
placed upon the Company by entering into these leases. The lease agreements include upward
escalation adjustment of the annual rental rates.

Future minimum rental payable under the non-cancellable operating lease agreements as of
December 31 follows:

2008 2007 2006

Within one year P
=506 =
P450 =
P384
After one year but not more than five
years 2,189 2,095 1,728
After five years 2,126 2,241 1,558
P
=4,821 =
P4,786 =
P3,670

Company as Lessor
The Company has entered into lease agreements on its investment property portfolio,
consisting of surplus office spaces (see Note 10 and 21). The non-cancellable leases have
remaining terms of between three to fourteen years. All leases include a clause to enable
upward escalation adjustment of the annual rental rates.

Future minimum rental receivable under the non-cancelable operating lease agreements as of
December 31 follows:

2008 2007 2006

Within one year P
=247 =
P256 =
P177
After one year but not more than five
years 277 318 202
After five years 93 114 123
P
=617 =
P688 =
P502
 - 43 -

25. Pension Plan

The succeeding tables summarize the components of net pension costs under a defined benefit
plan recognized in the consolidated statements of income and the funding status and amounts
of pension plan recognized in the consolidated statements of comprehensive income.

Net Pension Costs defined benefit plan (see Note 19)

2008 2007 2006

Current service cost P
=191 =
P198 =
P122
Interest cost on benefit obligation 319 274 256
Expected return on plan assets (392) (421) (374)
Net pension costs P
=118 =
P51 =
P4

Actual return on plan assets P

=361 =
P330 =
P687

Actuarial Gain (Loss) Recognized Directly in Equity

2008 2007 2006

Actuarial gain (loss) for the year
(present value of obligation) P
=661 =
P218 (P
=1,282)
Actuarial gain(loss) for the year
(plan assets) (753) (92) 313
Actuarial gain due to limit
on recognized plan assets 270
Net actuarial gain (loss) recognized (P
=92) =
P126 (P
=699)

Net Pension Asset

2008 2007 2006

Fair value of plan assets P
=3,832 =
P4,360 =
P4,217
Defined benefit obligation 3,533 3,851 3,783
Pension asset 299 509 434
Less unrecognized assets due to limit
Net pension asset recognized
(see Note 11) P
=299 =
P509 =
P434

Changes in the present value of the defined benefit obligation are as follows:

2008 2007 2006

Opening defined benefit obligation P
=3,851 =
P3,783 =
P2,330
Interest cost 319 274 256
Current service cost 191 198 122
Benefits paid (167) (186) (207)
Actuarial loss (gains) on obligation (661) (218) 1,282
Closing defined benefit obligation P
=3,533 =
P3,851 =
P3,783
 - 44 -

Changes in the fair value of plan assets are as follows:

2008 2007 2006

Opening fair value of plan assets P
=4,360 =
P4,217 =
P3,737
Expected return 392 421 374
Benefits paid (167) (186) (207)
Actuarial gain (losses) on plan assets (753) (92) 313
Closing fair value of plan assets P
=3,832 =
P4,360 =
P4,217

The Company will not contribute to its defined benefit pension plan until 2010.

The major categories of plan assets as a percentage of the fair value of total plan assets are as
follows:
2008 2007 2006
Government securities 56% 47% 57%
Stocks 23% 34% 31%
Real estate 13% 6% 7%
Cash 1% 5% 1%
Others 7% 8% 4%
100% 100% 100%

The overall expected rate of return on assets is determined based on the market prices
prevailing on that date, applicable to the period over which the obligation is to be settled.

As of December 31, 2008, 2007 and 2006, the principal assumptions used in determining
obligations for the Companys defined benefit pension plan are shown below.

2008 2007 2006

Discount rate 10% 8% 11%
Expected rate of return on plan assets 6% 9% 10%
Future salary increases 8% 8% 9%

The average attained age, years of service and expected future service years, considered in the
pension cost determination are 41, 15 and 15 years for 2008 and 2007, respectively.

Amounts for the current and previous four periods are as follows:

2008 2007 2006 2005 2004

Defined benefit obligation P
=3,533 =
P3,851 =
P3,783 =
P2,330 =
P1,709
Fair value of plan assets 3,832 4,360 4,217 3,737 3,382
Surplus P
=299 =
P509 =
P434 =
P1,407 =
P1,673

Experience adjustments on present value of obligation amounted to (P

=240), =
P368 and =
P151 in
2008, 2007 and 2006, respectively. There were no experience adjustments on plan assets
reported in 2008, 2007 and 2006.
 - 45 -

26. Significant Agreements

Processing License Agreement. Petron has an agreement with Pennzoil-Quaker State

International Corporation (Pennzoil) for the exclusive right to manufacture, sell, and distribute
in the Philippines certain Pennzoil products until December 31, 2008. The agreement also
includes the license to use certain Pennzoil trademarks in exchange for the payment of royalty
fee based on net sales value. On October 30, 2008, the manufacturing agreement was extended
to June 2009 while the distributorship agreement was extended to September 2009 to allow the
Company to consume the remaining Pennzoil raw materials in its possession.

Royalty expense amounting to =P0.3, =

P1.1 and =
P1.1 in 2008, 2007 and 2006, respectively, are
included as part of Cost of Goods Sold Others account in the consolidated statements of
income (see Note 17).

Fuel Supply Contract with National Power Corporation (NPC). The Company entered into
various fuel supply contracts with NPC. Under the agreement, the Company supplies the
bunker fuel and diesel fuel oil requirements to selected NPC plants and NPC-supplied
Independent Power Producers (IPP) plants.

Sales from the fuel supply contract transactions amounted to =

P15,054, =
P12,583 and =
P10,727 in
2008, 2007 and 2006, respectively.

In the bidding for the Supply & Delivery of Oil-Based Fuel to NPC, IPPs and Small Power
Utilities Group (SPUG) Plants/Barges for the period January to December 2009 that was held
on January 12, 2009, Petron won to supply a total of 4,303 kilo-liters (KL) of diesel fuel and
19,523 KL of bunker fuel worth = P149 and =P513, respectively. All 2008 contracts that were
not fully lifted by December 31, 2008 were extended up to June 30, 2009.

Toll Service Agreement with Innospec Limited. PFC signed an agreement with Innospec
Limited, a leading global fuel additives supplier, in December 2006. Under the agreement,
PFC shall be the exclusive toll blender of Innospecs fuel additives sold in the Asia-Pacific
region consisting of the following countries and territories: Australia, New Zealand, China,
Indonesia, India, Pakistan, South Korea, Taiwan, Japan, Thailand, Vietnam, Malaysia,
Philippines and Singapore.

PFC will provide the tolling services which include storage, blending, filing and logistics
management. In consideration of these services performed by PFC, Innospec will pay PFC a
service fee based on the total volume of products blended at PFC Fuel Additives Blending
facility.

Actual tolling services started in 2008 on which total revenue amounting to =

P7 was recognized
in the consolidated statement of income.
 - 46 -

27. Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share amounts are computed as follows:

2008 2007 2006

Net income (loss) after tax attributable to
equity holders of the parent (P
=3,978) =
P6,377 =
P6,011
Weighted average number of shares
(see Note 16) 9,375,104,497 9,375,104,497 9,375,104,497
Basic and diluted earnings (loss) per share (P
=0.42) =
P0.68 =
P0.64

The Company has no dilutive potential common shares outstanding as of December 31, 2008,
2007 and 2006.

28. Supplemental Disclosure on Cash Flow Information

Changes in operating assets and liabilities:

2008 2007 2006

Decrease (increase) in assets:
Trade receivables P
=5,394 (P
=1,350) =
P735
Inventories (2,962) (3,943) 822
Other current assets (1,342) (3,695) (5,842)
Increase (decrease) in liabilities:
Liabilities for crude oil and
petroleum product importation (3,926) 5,530 (289)
Accounts payable and accrued
expenses (259) 744 (892)
(3,095) (2,714) (5,466)
Addition (reversal) of allowance for
impairment of receivables, inventory
decline and/or obsolescence and
others 2,444 77 (169)
(P
=651) (P
=2,637) (P
=5,635)

29. Capital Management Objectives, Policies and Procedures

The Companys capital management policies and programs aim to provide an optimal capital
structure that would ensure the Companys ability to continue as a going concern, while at the
same time provide adequate returns to the shareholders. As such, it considers the best trade-
off between risks associated with debt financing and the relatively higher cost of equity funds.
Likewise, compliance with the debt to equity ratio covenant of bank loans has to be ensured.
 - 47 -

An enterprise resource planning system is used to monitor and forecast the Companys overall
financial position. The Company regularly updates its near-term and long-term financial
projections to consider the latest available market data in order to preserve the desired capital
structure. The Company may adjust the amount of dividends paid to shareholders, issue new
shares as well as increase or decrease assets and/or liabilities, depending on the prevailing
internal and external business conditions.

The Company monitors capital via the carrying amount of equity as stated in the statement of
financial position. The Companys capital for the covered reporting periods is summarized in
the table below.

2008 2007 2006

Total assets P
=111,798 =
P104,474 =
P87,516
Total liabilities 78,895 66,686 55,263
Total equity 32,903 37,788 32,253
Debt to equity ratio 2.4:1 1.8:1 1.7:1

These ratios are compliant with the existing covenant for bank loans (see Note 14).

30. Financial Risk Management Objectives and Policies

The Companys principal financial instruments include bank loans, cash and cash equivalents,
debt and equity securities, and derivative instruments. The main purpose of bank loans is to
finance working capital relating to the importation of crude and petroleum products, as well as
to partly fund capital expenditures. The Company has other financial assets and liabilities
such as trade receivables and trade payables, which are generated directly from its operations.

It is the Companys policy not to enter into derivative transactions for speculative purposes.
The Company uses hedging instruments to protect its margin on its products from potential
price volatility of crude oil and products. It also enters into short-term forward currency
contracts to hedge its currency exposure on crude oil importations.

The main risks arising from the Companys financial instruments are foreign exchange risk,
interest rate risk, credit risk, liquidity risk and commodity price risk. The BOD regularly
reviews and approves the policies for managing these financial risks. Details of each of these
risks are discussed below, together with the related risk management structure.

In 2007, the Company availed of the transitional relief to apply PFRS 7, Financial
Instruments: Disclosures. In 2008, certain disclosures relating to 2007 and 2006, to comply
with the requirements of PFRS 7, have been improved or expounded unless impracticable.
This is to align all relevant disclosures in all the years presented.

Risk Management Structure

The Company follows an enterprise-wide risk management framework for identifying,
assessing and addressing the risk factors that affect or may affect its businesses.
 - 48 -

The Companys risk management process is a bottom-up approach, with each risk owner
mandated to conduct regular assessment of its risk profile and formulate action plans for
managing identified risks. As the Companys operation is an integrated value chain, risks
emanate from every process, while some could cut across groups. The results of these activities
flow up to the Management Committee and, eventually, the BOD through the Companys
annual business planning process.

Oversight and technical assistance is likewise provided by corporate units and committees with
special duties. These groups and their functions are:

a. The Investment and Risk Management Committee which is composed of the Chairman of
the Board, President, and Vice Presidents of the Company, reviews the adequacy of risk
management policies.

b. The Financial Planning and Corporate Risk Management Unit, which is mandated with the
overall coordination and development of the enterprise-wide risk management process.

c. A cross-functional Commodity Risk Management Committee, which oversees crude oil

and petroleum product hedging transactions. The Secretariat of this committee is the
Commodity Risk Manager, who is responsible for risk management of crude and product
imports, as well as product margins.

d. The Financial Risk Management Unit of the Treasurers Department, which is in charge of
foreign exchange hedging transactions.

e. The Transaction Management Unit of Controllers Department, which provides backroom

support for all hedging transactions.

f. The Corporate Health Safety and Environment Department, which oversees compliance
with the domestic and international standards set for risks related to health, safety and
environment.

g. The Internal Audit Department, which has been tasked with the implementation of a risk-
based auditing.

The BOD also created separate board-level entities with explicit authority and responsibility in
managing and monitoring risks, as follows:

a. The Audit Committee, which ensures the integrity of internal control activities throughout
the Company. It develops, oversees, checks and pre-approves financial management
functions and systems in the areas of credit, market, liquidity, operational, legal and other
risks of the Company, and crisis management. The Internal Audit Department and the
External Auditor directly report to the Audit Committee regarding the direction and effort,
scope and coordination of audit and any related activities.

b. The Compliance Officer, who is a senior officer of the Company that reports to the BOD
through the Audit Committee. He monitors compliance with the provisions and
requirements of the Corporate Governance Manual, determines any possible violations and
recommends corresponding penalties, subject to review and approval of the BOD. The
Compliance Officer identifies and monitors compliance risk. Lastly, the Compliance
Officer represents the Company before the SEC regarding matters involving compliance
with the Code of Corporate Governance.
 - 49 -

Foreign Exchange Risk

The Companys functional currency is the Philippine peso, which is the denomination of the
bulk of the Companys revenues. The Companys exposures to foreign exchange risk arise
mainly from US dollar-denominated sales as well as purchases principally of crude oil and
petroleum products. As a result of this, the Company maintains a level of US dollar-
denominated assets and liabilities during the period. Foreign exchange risk occurs due to
differences in the levels of US dollar-denominated assets and liabilities.

The Company pursues a policy of hedging foreign exchange risk by purchasing currency
forwards or by substituting US dollar-denominated liabilities with peso-based debt. The
natural hedge provided by US dollar-denominated assets is also factored in hedging decisions.
As a matter of policy, currency hedging is limited to the extent of 100% of the underlying
exposure.

The Company is allowed to engage in active risk management strategies for a portion of its
foreign exchange risk exposure. Loss limits are in place, monitored daily and regularly
reviewed by management.

The following is the summation of the Companys foreign currency-denominated financial

assets and liabilities as of December 31, 2008, 2007 and 2006

2008 2007 2006

In USD ($) In USD ($) In USD ($)
Financial assets 107 182 94
Financial liabilities (167) (357) (252)
Net foreign exposure (60) (175) (158)

The exchange rates used to restate the US dollar-denominated financial assets and liabilities
stated above are =
P47.52 (2008), =
P41.28 (2007) and =
P49.03 (2006).

The succeeding table shows the effects of the percentage changes in the Philippine peso to US
dollar exchange rate on the Companys income before tax. These percentages have been
determined based on the market volatility in exchange rates in the previous 12 months for the
years ended December 31, 2008, 2007 and 2006, estimated at 95% level of confidence. The
sensitivity analysis is based on the Companys foreign currency financial instruments held at
each statement of financial position date, with effect estimated from beginning of the year.

Had the Philippine peso strengthened/weakened against the US dollar then these would have
the following impact:

2008 2007 2006

Increase/decrease in exchange rates 18.36% 15.23% 9.65%
Increase/decrease in pretax income P
=523 =
P1,100 =
P748

Interest Rate Risk

The Companys exposure to interest rate risk is mainly related to its cash and cash equivalents
and debt instruments. Currently, the Company has achieved a balanced mix of cash balances
with various deposit rates and fixed and floating rates on its various debts.

Future hedging decisions for floating deposit/interest rates will continue to be guided by an
assessment of the overall deposit and interest rate risk profiles of the Parent Company
considering the net effect of possible deposit and interest rate movements.
 - 50 -

The succeeding table illustrates the sensitivity of income before tax for the year, given the
assumed increases/decreases in deposit rates and interest rates for Philippine peso loans and
US dollar term loans, all of which at 95% level of confidence, with effect from the beginning
of the years 2008, 2007 and 2006. These changes are considered to be reasonably possible
given the observation of prevailing market conditions in those periods. The calculations are
based on the Companys financial instruments held at each of those statements of financial
position dates. All other variables are held constant.

Effects of changes in rates on Philippine peso and US dollar-denominated loans and cash
balances with floating interest/deposit rates:

2008 2007 2006

PHP USD PHP USD PHP USD
Increase/decrease in interest rates
for short-term loans/deposits 39.68% 19.94% 62.61% 32.80% 63.33% 8.90%
Increase/decrease in interest rates
for long-term loans 52.93% 49.67% 71.73% 21.01% 66.42% 6.45%
Increase/decrease in
pretax income P
= 1,782 P
=26 =
P1,159 =
P5 =
P886 =
P7

The following table sets out the carrying amount of the Companys financial instruments
exposed to interest rate risk:

2008 2007 2006

Cash in bank and
cash equivalents (see Note 4) P
=8,291 =
P6,870 =
P9,781
Short-term loans (see Note 12) P
=53,979 =
P33,784 =
P28,135
Long-term loans (see Note 14)
Landbank P
=2,000 =
P2,000 =
P2,000
NORD P
= US$62 US$90
Citibank P
= =
P =
P308

Sensitivity to interest rates varies during the year considering the volume of cash and loan
transactions. The analysis above is considered to be a representative of the Companys interest
rate risk.

Credit Risk
In effectively managing credit risk, the Company regulates and extends credit only to qualified
and credit-worthy customers and counterparties, consistent with established Company credit
policies, guidelines and credit verification procedures. Requests for credit facilities from trade
customers undergo stages of review by Marketing and Finance Divisions. Approvals, which
are based on amounts of credit lines requested, are vested among line managers and top
management that include the President and the Chairman.
 - 51 -

Generally, the maximum credit risk exposure of financial assets is the total carrying amount of
the financial assets as shown on the face of the consolidated statement of financial position or
in the notes to the consolidated financial statements, as summarized below.

2008 2007 2006

Cash in bank and cash
equivalents (see Note 4) P
=8,291 =
P6,870 =
P9,781
Receivables (see Note 7) 16,875 17,869 15,629
Derivative assets (see Note 11) 55 100 58
Total P
=25,221 =
P24,839 =
P25,468

The credit risk for cash and cash equivalents and derivative financial instruments is considered
negligible, since the counterparties are reputable entities with high quality external credit
ratings. The credit quality of this other financial assets is therefore considered to be high grade.

In monitoring trade receivables and credit lines, the Company maintains up-to-date records
where daily sales and collection transactions of all customers are recorded in real-time and
month-end statements of accounts are forwarded to customers as collection medium. Finance
Divisions Credit Department regularly reports to management trade receivables balances
(monthly) and credit utilization efficiency (semi-annually).

Collaterals. To the extent practicable, the Company also requires collateral as security for a
credit facility to mitigate credit risk in trade receivables (see Note 7). Among the collaterals
held are real estate mortgages, bank guarantees, letters of credit and cash bonds valued at
P2,600 and P2,300 as of December 31, 2008 and 2007, respectively. These securities may only
be called on or applied upon default of customers.

Credit Risk Concentration. The Companys exposure to credit risk arises from default of
counterparty. Generally, the maximum credit risk exposure of trade receivable assets is its
carrying amount without considering collaterals or credit enhancements, if any. The Company
has no significant concentration of credit risk since the Company deals with a large number of
homogenous trade customers. The Company does it execute any credit guarantee in favor of
any counterparty.

The credit risk exposure of the Company based on TAR as of December 31, 2008 and 2007
are shown below (see Note 7):

Neither Past Due Past Due but

Nor Impaired Not Impaired Impaired Total
Dec. 31, 2008
Reseller P
=28 P
=74 P
=4 P
=106
Lubes 150 33 17 200
Gasul 363 190 32 585
Industrial 4,531 1,043 605 6,179
Others 101 171 60 332
Total TAR P
=5,173 P
=1,511 P
=718 P
=7,402
 - 52 -

Neither Past Due Past Due but

Nor Impaired Not Impaired Impaired Total
Dec. 31, 2007
Reseller =
P186 =
P140 =
P9 =
P335
Lubes 139 71 16 226
Gasul 448 245 22 715
Industrial 6,001 2,158 579 8,738
Others 2,527 213 61 2,801
Total TAR =
P9,301 =
P2,827 =
P687 =
P12,815

Credit Quality. In monitoring and controlling credit extended to counterparty, the Company
adopts a comprehensive credit rating system based on financial and non-financial assessments
of its customers. Financial factors being considered comprised of the financial standing of the
customer while the non-financial aspects include but are not limited to the assessment of the
customers nature of business, management profile, industry background, payment habit and
both present and potential business dealings with the Company.

Class A High Grade are accounts with strong financial capacity and business performance
and with the lowest default risk.

Class B Moderate Grade refer to accounts of satisfactory financial capability and credit
standing but with some elements of risks where certain measure of control is necessary in
order to mitigate risk of default.

Class C Low Grade are accounts with high probability of delinquency and default.

Below is the credit quality profile of the Companys TAR as of December 31, 2008 and 2007:

Trade Accounts Receivables per Class

Class A Class B Class C Total
Dec. 31, 2008
Reseller (P
=214) P
=319 P
=1 P
=106
Lubes 128 41 31 200
Gasul 171 155 259 585
Industrial 2,593 2,631 955 6,179
Others (126) 315 143 332
Total P
=2,552 P
=3,461 P
=1,389 P
=7,402

Dec. 31, 2007

Reseller (P
=79) =
P384 =
P30 =
P335
Lubes 141 44 41 226
Gasul 211 175 329 715
Industrial 3,429 3,979 1,330 8,738
Others 2,305 272 224 2,801
Total =
P6,007 =
P4,854 =
P1,954 =
P12,815
 - 53 -

Liquidity Risk
The Company is exposed to the possibility that adverse changes in the business environment
and/or its operations could result to substantially higher working capital requirements and
consequently, a difficulty in financing additional working capital.

The Company manages liquidity risk by keenly monitoring its cash position as well as
maintaining a pool of credit lines from financial institutions that exceeds projected financing
requirements for working capital. The Company, likewise, regularly evaluates other financing
instruments and arrangements to broaden the Companys range of sources of financing.

Below are the contractual maturities of Companys financial liabilities as of December 31,
2008, 2007 and 2006. These amounts reflect the gross cash flows that may differ from the
carrying values of the liabilities at the statement of financial position dates.

2008
After 3 After 6
months but months but
not more not more After 1 year
Within 3 than 6 than 12 but not more
Months months months than 5 years Total
Current financial liabilities:
Short-term loans P
= 53,482 P
= 923 P
= P
= P
=54,405
Liabilities for crude oil
and petroleum product
importation 8,907 8,907
Accounts payable and accrued
expenses (see Note 13) 4,147 14 4,161
Current portion of
long-tem debt 525 518 1,022 2,065
Total current financial liabilities 67,061 1,455 1,022 69,538

Noncurrent financial liabilities:

Cash bonds (See Note 15) 205 205
Long-term debt 10,111 10,111
Total noncurrent financial
liabilities 10,316 10,316
Total financial liabilities P
= 67,061 P
= 1,455 P
=1,022 P
= 10,316 P
=79,854

2007
Current financial liabilities:
Short-term loans =
P33,599 =
P360 =
P =
P =
P33,959
Liabilities for crude oil
petroleum product
importation 12,873 12,873
Accounts payable and accrued
expenses (see Note 13) 4,103 4,103
Current portion of
long-tem debt 102 802 1,385 2,289
Total current financial liabilities 50,677 1,162 1,385 53,224

Noncurrent financial liabilities:

Cash bonds (see Note 15) 173 173
Long-term debt 13,105 13,105
Total noncurrent financial
liabilities 13,278 13,278
Total financial liabilities =
P50,677 =
P1,162 =
P1,385 =
P13,278 =
P66,502
 - 54 -

2006
After 3 After 6
months but not months but not After 1 year
Within 3 more than 6 more than 12 but not more
Months months months than 5 years Total

Current financial liabilities:

Short-term loans =
P28,115 =
P =
P =
P =
P28,115
Liabilities for crude oil
petroleum product
importation 7,541 7,541
Accounts payable and accrued
expenses (see Note 13) 3,292 3,292
Current portion of
long-tem debt 287 771 1,326 2,384
Total current financial liabilities 39,235 771 1,326 41,332

Noncurrent financial liabilities:

Cash bonds (see Note 15) 141 141
Long-term debt 14,214 14,214
Total noncurrent financial
liabilities 14,355 14,355
Total financial liabilities =
P39,235 =
P771 =
P1,326 =
P14,355 =
P55,687

Commodity Price Risk

To minimize the Companys risk of potential losses due to volatility of international crude and
product prices, the Company implemented commodity hedging for petroleum products. The
hedging authority approved by the BOD is intended to (a) protect margins of MOPS (Mean of
Platts of Singapore)-based sales and (b) protect product inventories from downward price risk.
Hedging policy (including the use of commodity price swaps, buying of put options, and use
of collars and 3-way options; with collars and 3-way options starting in March 2008)
developed by the Commodity Risk Management Committee is in place. Decisions are guided
by the conditions set and approved by the Companys management.

Other Market Price Risk

The Companys market price risk arises from its investments carried at fair value (FVPL and
AFS financial assets). It manages its risk arising from changes in market price by monitoring
the changes in the market price of the investments.

31. Financial Instruments

Derivative Instruments
The Parent Companys derivative transactions are intended as economic hedge of well-defined
foreign currency and commodity price risks. The Parent Company opted to adopt non-hedge
accounting treatment for all its derivative transactions (including embedded derivatives).

Freestanding Derivatives Commodity Risk Management

In the November 7, 2008 BOD meeting, the following hedge authorities were granted in order
to guard against risks arising from volatility of crude and product prices:

Margin Protection. The Company has authority to hedge the margins of both domestic
sales and exports that are priced based on MOPS. The crack spread, or the difference
between the product and crude prices, are hedged for jet (MOPS Kerosene Dubai) and
fuel oil (MOPS HSFO 180 Dubai), and occasionally gasoil (MOPS Gasoil 0.5%-Dubai),
 - 55 -

through swaps. The cost base of the Companys products is that of the crude oil, most of
which is supplied by Saudi Aramco and is priced based on Dubai/Oman crude price. On
the other hand, the selling price of the products is based on MOPS. Under the crack
spread swap, the Company and its counterparties agree to a monthly exchange of cash
settlements based on a specified reference price, depending on the commodity being
hedged.

For the product portion of the crack spread swap that hedges the price risks on the
products, the Company acts as the floating rate payer and the reference price index is the
monthly MOPS (HSFO 180 CST for IFO, Kerosene for jet oil and Gasoil 0.5% for gasoil).
For the Dubai portion that hedges the price risks on crude oil, the Company acts as the
fixed rate payer and the reference price index is the monthly average for Platts Dubai
Crude. The swap agreements effectively hedge the Companys margin on its products.

The Company is also allowed to hedge full barrel margins, based on its programmed
production. The different main product crack spreads are based on MOPS-Dubai, as
follows:

Product % Product Yield Crack Spread

Gasoline will vary depending on programmed crudes MOPS Mogas 95-Dubai
Jet/Kero will vary depending on programmed crudes MOPS Kerosene-Dubai
Diesel will vary depending on programmed crudes MOPS Gasoil 0.5%S-Dubai
Fuel Oil will vary depending on programmed crudes MOPS HSFO 180-Dubai

In September 2007, Petron concluded with BNP Paribas and Citibank NA Sydney a
Kerosene/Jet A-1 crack swap with an aggregate notional quantity of 50 MB at a fixed
price per barrel of US$20.15 and US$20.00, respectively. In October 2007, another 75
MB of Kerosene/Jet A-1 crack swap was executed with Lehman Brothers, J. Aron, and JP
Morgan at a fixed price per barrel of US$20.26, US$20.30, and US$21.00, respectively.
As of December 31, 2007, the estimated net payout cost for these outstanding
Kerosene/Jet A-1 crack swaps amounted to =
P12.

As of December 31, 2007, there were no outstanding IFO-Dubai crack spread swaps.
Meanwhile, on January 22, 2008, Petron concluded with BNP Paribas a Jet/Dubai crack
swap for the third quarter of 2008 for a volume of 10,000 barrels per month or 30,000
barrels.

In December 2008, IFO-Dubai crack swaps for the first quarter of 2009 with total notional
quantity of 575 MB were concluded from various counterparties namely J. Aron, Standard
Chartered, Morgan Stanley and BP Singapore. Average fixed price per barrel were minus
US$8.81, US$8.87 and US$9.09 for January, February and March 2009 hedges,
respectively. As of December 31, 2008, estimated net payout for these outstanding IFO-
Dubai Crack Swaps totaled =
P42.5.

Inventory Loss Protection (SELL). This is intended to address inventory losses brought
about by abrupt and significant downward price swings. Dubai was used as a proxy hedge
for the products since prices of crude and products generally move in the same direction
and that not all products can be hedged. Petron was the Dubai fixed price seller. This
authority was utilized more during the latter part of 2008 as prices continued to drop.
 - 56 -

Total notional quantity of outstanding Sell swaps were at 3 MMB, 1.45MB pertained to
December 2008 hedges and 1.55MB pertained to January 2009 hedges. Average strike
price was at US$48.63 per barrel and were contracted from BNP Paribas, BP Singapore,
Citibank, J.P Morgan, MERM and Standard Chartered. As of December 31, 2008,
estimated net receipts from these transactions totaled US$11.7 or =
P554.1 translated using
year-end closing rate.

As of December 31, 2007 the Company has outstanding proxy hedge with an aggregate
notional quantity of 650 MB and contracted fixed price per barrel ranging from US$72 to
US$87; the estimated net payout cost amounted to =
P264.

Protection Against Rising Prices (BUY). This authority is intended to cushion the effect
on the Companys working capital and margins if the increase in costs is not fully
recovered through price adjustments. Dubai will be used, with Petron as the fixed price
buyer.

The Board also granted authority to hedge up to a maximum of 100% of crude and product
imports. A yearly limit of US$6 for option premiums was also approved.

The Board likewise created a Board Executive Committee that is authorized to address
urgent issues brought about by market conditions, as well as consider, modify or approve
for immediate implementation guidelines for commodity hedging.

In December 2008, Petron executed 150MB Buy Swap with J.P. Morgan at an average
strike price of US$46.13 per barrel for January 2009 hedges. Estimated net receipts from
these outstanding transactions amounted to =
P2.6.

Foreign Exchange Loss Protection. The Parent Company also enters into deliverable and
non-deliverable short-term currency forward contracts to hedge its foreign currency
exposure on crude oil importations.

As of December 31, 2008, Petron has outstanding currency forwards of US$80.5 at an

average spot rate and forward rate of =
P47.28 and =
P47.46 per US dollar. The net fair value
gain on these outstanding transactions amounted to =P18.60. There were no outstanding
currency forward contracts as of December 31, 2007. On the other hand, as of December
31, 2006, the Company had outstanding currency forward contracts with an aggregate
notional amount of US$109 and weighted average contracted forward rate of = P49.70 to
US$1.00. The net fair value loss on these currency forward contracts as of December 31,
2006 amounted to = P64.

Meanwhile, the 25MB Three Way Option was executed in October 2008 for December
2008 but will be settled in January 2009. Receipt from this transaction amounted to
US$0.125 or = P5.9 using the year-end closing exchange rate of =P47.52 per dollar with the
following strike prices per barrel: sell put of US$53.00, buy put of US$58.00 and sell call
of US$63.00.
 - 57 -

Embedded Derivatives.
Embedded foreign currency derivatives exist in certain U.S. dollar-denominated sales and
purchase contracts for various fuel products of the Parent Company. Under the sales contracts,
the Parent Company agrees to fix the peso equivalent of the invoice amount based on the
average Philippine Dealing System (PDS) rate on the month of delivery. In the purchase
contracts, the peso equivalent is determined using the average PDS rate on the month
preceding the month of delivery.

Fair Value Changes on Derivatives

The net movements in fair value changes of all derivative transactions in 2008, 2007 and 2006
are as follows:

Mark-to-market
Gain (Loss)
Fair values at January 1, 2008 P
=98
Net changes in fair value during the year (see Note 21) 179
Fair value of settled instruments (222)
Balance at December 31, 2008 P
=55

Fair values at January 1, 2007 (P

=6)
Net changes in fair value during the year (see Note 21) (603)
Fair value of settled instruments 707
Balance at December 31, 2007 =
P98

Fair values at January 1, 2006 =

P55
Net changes in fair value during the year (see Note 21) (279)
Fair value of settled instruments 218
Balance at December 31, 2006 (P
=6)

The following table sets forth the carrying values and estimated fair values of the Companys
financial assets and liabilities:

2008 2007 2006

Carrying Value Fair Value Carrying Value Fair Value Carrying Value Fair Value
Financial assets (FA):
Cash and cash equivalents
(see Note 4) P
=12,827 P
= 12,827 =
P9,732 =
P9,732 =
P11,735 =
P11,735
Receivables (see Note 7) 16,875 16,875 17,869 17,869 15,629 15,629
Loans and receivable 29,702 29,702 27,601 27,601 27,364 27,364

AFS investments
(see Note 6) 682 682 632 632 632 632

Financial assets at FVPL

(see Note 5) 161 161 229 229 180 180
Derivative assets
(see Note 11) 55 55 100 100 58 58
FA at FVPL 216 216 329 329 238 238

Total financial assets P

=30,600 P
= 30,600 =
P28,562 =
P28,562 =
P28,234 =
P28,234
 - 58 -

2008 2007 2006

Carrying Value Fair Value Carrying Value Fair Value Carrying Value Fair Value

Financial Liabilities (FL):

Short-term loans
(see Note 12) P
=53,979 P
= 53,979 =
P33,784 =
P33,784 =
P28,135 =
P28,135
Liabilities for crude oil and
petroleum product
importation 8,907 8,907 12,873 12,873 7,541 7,541
Accounts payable and
accrued expenses (see
Note 13) 4,146 4,146 4,103 4,103 3,292 3,292
Cash bonds (see Note 15) 205 192 173 163 141 135
Long-term debt including
current portion
(see Note 14) 10,251 9,075 12,780 11,163 12,912 12,973
Cylinder deposits
(see Note 15) 201 201 243 243 206 206
Other noncurrent liabilities
(see Note 15) 54 54 37 37 42 42
FL at amortized cost 77,743 76,554 63,993 62,366 52,269 52,324

Derivative liabilities
(see Note 13)
FL at FVPL 2 2 64 64

Total financial liabilities P

=77,743 P
= 76,554 =
P63,995 =
P62,368 =
P52,333 =
P52,388

32. Registration with the BOI

Mixed Xylene Plant

Petron is registered with the BOI under the New Omnibus Investments Code of 1987
(Executive Order 226) as a pioneer, new producer status of Mixed Xylene. Under the terms of
its registration, Petron is subject to certain requirements principally that of producing required
metric tons of Mixed Xylene every year.

As a registered enterprise, Petron is entitled to the following benefits on its Mixed Xylene
operations:

a. Income Tax Holiday (ITH) for six years from actual start of Mixed Xylene commercial
operations (December 1999) until 2005. On May 10, 2005, the BOI approved Petrons
application under Certificate of Registration No. DP98-148, for the one year extension of
its ITH incentive. The approved bonus year is for the period December 5, 2005 to
December 4, 2006;

b. Tax credits for taxes on duties on raw materials and supplies used for its export products
and forming parts thereof; and,

c. Simplified custom procedures and others.

 - 59 -

Isomerization and Gas Oil Hydrotreater Units

On January 7, 2004, the BOI approved Petrons application under RA 8479, otherwise known
as the Downstream Oil Industry Deregulation Act (RA 8479), for new investments at its
Bataan Refinery for an Isomerization Unit and a Gas Oil Hydrotreater (Project). The BOI is
extending the following major incentives:

a. ITH for five years without extension or bonus year from January 2005 for the Project and
March 2005 for LVN Isomerization or actual start of commercial operations, whichever is
earlier;

b. Duty of three percent and VAT on imported capital equipment and accompanying spare
parts;

c. Tax credit on domestic capital equipment on locally fabricated capital equipment which is
equivalent to the difference between the tariff rate and the three percent duty imposed on
the imported counterpart;

d. Exemption from taxes and duties on imported spare parts for consigned equipment with
bonded manufacturing warehouse;

e. Exemption from real property tax on production equipment or machinery; and,

f. Exemption from contractors tax.

Mixed Xylene, Benzene, Toluene (BTX) and Propylene Recovery Units

On October 20, 2005, Petron registered with the BOI under the Omnibus Investments Code of
1987 (Executive Order 226) as (1) a non-pioneer, new export producer status of Mixed Xylene;
(2) a pioneer, new export producer status of Benzene and Toluene; and (3) a pioneer, new
domestic producer status of Propylene. Under the terms of its registration, Petron is subject to
certain requirements principally that of exporting at least 70% of the production of the
mentioned petrochemical products every year except for the produced propylene.

As a registered enterprise, Petron is entitled to the following benefits on its production of

petroleum products used as petrochemical feedstock:

a. ITH (1) for four years from May 2008 or actual start of commercial operations, whichever
is earlier, but in no case earlier than the date of registration for Mixed Xylene subject to
base figure of 120,460 metric tons per year representing Petrons highest attained
production volume for the last three (3) years; (2) for six years from May 2008 or actual
start of commercial operations, whichever is earlier, but in no case earlier than the date of
registration for Benzene and Toluene; and (3) for six years from December 2007 or actual
start of commercial operations, whichever is earlier, but in no case earlier than the date of
registration for Propylene;

b. Tax credit equivalent to the national internal revenue taxes and duties paid on raw
materials and supplies and semi-manufactured products used in producing its export
product and forming parts thereof for ten years from start of commercial operations;

c. Simplification of custom procedures;

d. Access to Customs Bonded Manufacturing Warehouse (CBMW) subject to Custom rules

and regulations provided firm exports at least 70% of production output;
 - 60 -

e. Exemption from wharfage dues, any export tax, duty, imposts and fees for a ten year
period from date of registration;

f. Importation of consigned equipment for a period of ten years from the date of registration
subject to the posting of re-export bond;

g. Exemption from taxes and duties on imported spare parts and consumable supplies for
export producers with CBMW exporting at least 70% of production; and,

h. The Company may qualify to import capital equipment, spare parts, and accessories at
zero duty from date of registration up to June 5, 2006 pursuant to Executive Order No.
313 and its Implementing Rules and Regulations.

Fluidized Bed Catalytic Cracker (PetroFCC) Unit

On December 20, 2005, the BOI approved Petrons application under RA 8479 for new
investment at its Bataan Refinery for the PetroFCC (see Note 9). Subject to Petrons
compliance with the terms and conditions of registration, the BOI is extending the following
major incentives:

a. ITH for five years without extension or bonus year from December 2007 or actual start of
commercial operations, whichever is earlier, but in no case earlier than the date of
registration subject to a rate of exemption computed based on the % share of product that
are subject to retooling;

b. Minimum duty of three percent and VAT on imported capital equipment and
accompanying spare parts;

c. Tax credit on domestic capital equipment shall be granted on locally fabricated capital
equipment. This shall be equivalent to the difference between the tariff rate and the three
percent (3%) duty imposed on the imported counterpart

d. Importation of consigned equipment for a period of five years from date of registration
subject to posting of the appropriate re-export bond; provided that such consigned
equipment shall be for the exclusive use of the registered activity;

e. Exemption from taxes and duties on imported spare parts for consigned equipment with
bonded manufacturing warehouse;

f. Exemption from real property tax on production equipment or machinery; and,

g. Exemption from contractors tax.

 - 61 -

Grease Manufacturing Plant

In December 2005, the BOI approved Petrons application under RA 8479 as an Existing
Industry Participant with New Investment in Modernization of the firms Grease
Manufacturing Plant in Pandacan, Manila. The BOI is extending the following major
incentives:

a. ITH for a period of five years without extension or bonus year from March 2006 or actual
start of commercial operations, whichever is earlier, but in no case earlier than the date of
registration subject to base figure of 845 metric tons of grease product representing
Petrons highest attained sales volume prior to rehabilitation;

b. Minimum duty of three percent and VAT on imported capital equipment, machinery and
accompanying spare parts;

c. Tax credit on domestic capital equipment on locally fabricated capital equipment which is
equivalent to the difference between the tariff rate and the three percent duty imposed on
the imported counterpart;

d. Importation of consigned equipment for a period of five years from date of registration
subject to posting of the appropriate re-export bond; provided that such consigned
equipment shall be for the exclusive use of the registered activity;

e. Exemption from taxes and duties on imported spare parts for consigned equipment with
bonded manufacturing warehouse;

f. Exemption from real property tax on production equipment or machinery; and,

g. Exemption from contractors tax.

Petron has availed of ITH credits amounting to = P171 in 2008, =

P163 in 2007 and = P736 in 2006
(see Note 22). Yearly certificates of entitlement have been timely obtained by the Company to
support its ITH credits.

33. Segment Information

Management identifies segments based on business and geographic locations. These operating
segments are monitored and strategic decisions are made on the basis of adjusted segment
operating results.

The Companys major sources of revenues are as follows:

a. Sales from petroleum and other related products which include gasoline, diesel and
kerosene offered to motorists and public transport operators through its service station
network around the country;

b. Insurance premiums from the business and operation of all kinds of insurance and
reinsurance, on sea as well as on land, of properties, goods and merchandise, of
transportation or conveyance, against fire, earthquake, marine perils, accidents and all
other forms and lines of insurance authorized by law, except life insurance;
 - 62 -

c. Lease of acquired real estate properties for petroleum, refining, storage and distribution
facilities, gasoline service stations and other related structures;

d. Sales on wholesale or retail and operation of service stations, retail outlets, restaurants,
convenience stores and the like; and,

e. Export sales of various petroleum and non-fuel products to other Asian countries such as
Cambodia, South Korea, China, Australia, and Indonesia.

The following tables present revenue and income information and certain asset and liability
information regarding the business segments for the years ended December 31, 2008, 2007 and
2006. Segment assets and liabilities exclude deferred tax assets and liabilities.

Petroleum Insurance Leasing Marketing Elimination Total

Year Ended December 31, 2008

Revenue:
External sales P
= 263,393 P
= P
= P
= 4,283 P
= P
= 267,676
Inter-segment sales 3,219 151 191 (3,561)
Segment results (2,562) 124 150 119 317 (1,852)
Net income (loss) (4,347) 155 115 92 65 (3,920)
Assets and liabilities:
Segment assets 107,800 2,036 2,619 1,507 (3,049) 110,913
Segment liabilities 78,042 535 1,792 881 (2,363) 78,887
Other segment information:
Property, plant and equipment 33,149 1 704 2,574 36,428
Depreciation and amortization 3,169 73 3,242

Year Ended December 31, 2007

Revenue:
External sales =
P207,621 =
P =
P =
P2,899 =
P =
P210,520
Inter-segment sales 2,200 158 182 (2,540)
Segment results 9,227 134 161 86 300 9,908
Net income 6,113 177 94 82 (70) 6,396
Assets and liabilities:
Segment assets 102,241 1,512 2,619 1,073 (2,972) 104,473
Segment liabilities 64,962 262 1,942 534 (2,282) 65,418
Other segment information:
Property, plant and equipment 30,912 1 1 597 2,611 34,122
Depreciation and amortization 2,467 49 2,516

Year Ended December 31, 2006

Revenue:
External sales =
P209,395 =
P =
P =
P2,331 =
P =
P211,726
Inter-segment sales 1,777 110 170 (2,057)
Segment results 9,101 85 151 78 315 9,730
Net income 5,944 143 37 75 (181) 6,018
Assets and liabilities:
Segment assets 85,421 1,541 2,507 850 (2,804) 87,515
Segment liabilities 53,268 353 1,924 394 (2,119) 53,820
Other segment information:
Property, plant and equipment 22,193 1 1 467 2,491 25,153
Depreciation and amortization 2,436 41 5 2,482

Intersegment sales transactions amounted to =

P3,561, =
P2,540 and = P2,057 for the year ended
December 31, 2008, 2007 and 2006, respectively, which is less than 2% of the total revenues
for the years presented.
 - 63 -

The following tables present additional information on the petroleum business segment of the
Company for the years ended December 31, 2008, 2007 and 2006:

Reseller Lube Gasul Industrial Others Total

Year Ended December 31, 2008

Revenue P
= 102,980 P
=2,086 P
=14,993 P
= 96,844 P
=49,708 P
= 266,611
Property, plant and equipment 4,138 489 255 46 28,221 33,149
Capital expenditures 288 3 58 5 5,722 6,076

Year Ended December 31, 2007

Revenue =
P87,049 =
P1,801 =
P11,518 =
P71,736 =
P37,717 =
P209,821
Property, plant and equipment 4,347 521 269 49 25,726 30,912
Capital expenditures 349 2 74 2 14,758 15,185

Year Ended December 31, 2006

Revenue =
P86,155 =
P1,579 =
P8,955 =
P73,602 =
P40,881 =
P211,172
Property, plant and equipment 4,236 573 263 55 17,066 22,193
Capital expenditures 250 79 7 4,233 4,569

Geographical Segments
Segment asset by geographical location as well as capital expenditure on property, plant and
equipment and on intangible assets by geographical location are not separately disclosed since
the total segment asset of the segment located outside the country, Ovincor, is less than 1% of
the consolidated assets of all segments as of the years ended 2008, 2007 and 2006.

The following tables present revenue information regarding the geographical segments of the
Company for the years ended December 31, 2008, 2007 and 2006.

Elimination/
Petroleum Insurance Leasing Marketing Others Total

Year Ended December 31, 2008

Revenue:
Local P
= 229,769 P
=94 P
=191 P
=4,283 (P
=3,561) P
= 230,776
Export/International 36,843 57 36,900

Year Ended December 31, 2007

Revenue:
Local =
P177,949 =
P84 =
P182 =
P2,899 (P
=2,540) =
P178,574
Export/International 31,872 74 31,946

Year Ended December 31, 2006

Revenue:
Local =
P176,864 =
P63 =
P170 =
P2,331 (P
=2,057) =
P177,371
Export/International 34,308 47 34,355
 - 64 -

34. Events after the Consolidated Statement of Financial Position Date

In the February 27, 2009 BOD meeting, the Company's BOD approved a resolution to reverse
=
P8,428 from the current balance of appropriated retained earnings (see Note 16).

Also in the same meeting, the BOD resolved to amend the Company's Articles of
Incorporation with regard to the increase in capital stock from =
P10,000 to =
P25,000 through the
issuance of preferred shares and change of the Companys primary purpose to include
generation and sale of electric power (see Note 1).

35. Other Matters

a. Petron has unused letters of credit totaling approximately =

P70, =
P27 and =
P257 as of end of
2008, 2007 and 2006, respectively.

b. Tax Credit Certificate Cases

In 1998, the Company contested before the Court of Tax Appeals (CTA) the collection by
the Bureau of Internal Revenue (BIR) of deficiency excise taxes arising from the
Companys acceptance and use of Tax Credit Certificates (TCCs) worth = P659 from 1993
to 1997. In July 1999, the CTA ruled that, as a fuel supplier of BOI-registered companies,
the Company was a qualified transferee for the TCCs. The CTA ruled that the collection
by the BIR of the alleged deficiency excise taxes was contrary to law. The BIR appealed
the ruling to the Court of Appeals where the case is still pending.

In November 1999, BIR issued an assessment against the Company for deficiency excise
taxes of =P284 plus interest and charges for the years 1995 to 1997, as a result of the
cancellation by the Department of Finance (DOF) Center ExCom of Tax Debit Memos
(TDMs), the related TCCs and their assignments. The Company contested on the grounds
that the assessment has no factual and legal bases and that the cancellation of the TDMs
was void. The Company elevated this protest to the CTA on July 10, 2000. On August
23, 2006, the Second Division of the CTA rendered its Decision denying the Companys
petition and ordered it to pay the BIR = P580 representing deficiency excise taxes for 1995
to 1997 plus 20% interest per annum from December 4, 1999. The Companys motion for
reconsideration was denied on November 23, 2006. The Company appealed the
Divisions Decision to the CTA En Banc. On October 30, 2007, the CTA En Banc
dismissed the Companys appeal, with two of four justices dissenting. The Company filed
its appeal on November 21, 2007 with the Supreme Court. On December 21, 2007, in the
substantially identical case of Pilipinas Shell, the SC decided to nullify the assessment of
the deficiency excise taxes and declared as valid Pilipinas Shells use of Tax Credit
Certificates for payment of its tax liabilities. On November 7, 2008, the Supreme Court
gave due course to the Companys appeal and directed the Company to file its
Memorandum.

In May 2002, the BIR issued a collection letter for deficiency taxes of = P254 plus interest
and charges for the years 1995 to 1998, as a result of the cancellation of TCCs and TDMs
by the DOF Center ExCom. The Company protested this assessment on the same legal
grounds used against the tax assessment issued by the BIR in 1999. The Company
elevated the protest to the CTA. The Second Division of the CTA promulgated a decision
on May 4, 2007 denying the Companys Petition for Review for lack of merit. The
Company was ordered to pay the respondent the reduced amount of = P601 representing the
 - 65 -

Companys deficiency excise taxes for the taxable years 1995 to 1998. In addition, the
Company was ordered to pay the BIR 25% late payment surcharge and 20% delinquency
interest per annum computed from June 27, 2002. The Companys Motion for
Reconsideration was denied on August 14, 2007. The Company appealed to the CTA En
Banc. On December 3, 2008, the CTA En Banc promulgated a decision reversing the
unfavorable decision of the CTA 2nd Division.

It should be noted that there are duplications in the TCCs subject of the three assessments.
Excluding these duplications, the basic tax involved in all three assessments represented
by the face value of the related TCCs is =
P911.

The Company does not believe these tax assessments and legal claims will have an
adverse effect on its consolidated financial position and results of operations. The
Companys external counsels analysis of potential results of these cases was subsequently
supported by the Decision of the SC in the case of Pilipinas Shell and in the Decision of
the CTA En Banc on December 3, 2008.

c. Pandacan Terminal Operations

The City Council of Manila, citing concerns of safety, security and health, passed City
Ordinance No. 8027 reclassifying the areas occupied by the Oil Terminals of Petron, Shell
and Chevron from Industrial to Commercial, making the operation of the Terminals
therein unlawful. Simultaneous with efforts to address the concerns of the City Council
with the implementation of a scale down program to reduce tankage capacities and joint
operation of facilities with Shell and Chevron, the Company filed a petition to annul city
Ordinance No. 8027 and enjoin the City Council of Manila, as well as Mayor Joselito
Atienza from implementing the same.

A status quo order is in effect and the case is under mediation proceedings. Recently, the
City of Manila approved the Comprehensive Land Use Plan and Zoning Ordinance
(CLUPZO) (Ordinance No. 8119) that allows the Company a seven-year grace period.
The passage of Ordinance No. 8119 was thought to effectively repeal Manila Ordinance
No. 8027. However, on March 7, 2007, the SC rendered a Decision in the case of SJS
Society vs. Atienza, directing the Mayor of Manila to immediately enforce Ordinance No.
8027.

On March 12, 2007, the Company, together with Shell and Chevron, filed an Urgent
Motion for Leave to Intervene and Urgent Motion to Admit Motion for Reconsideration of
the decision dated March 7, 2007, citing that the SC failed to consider supervising events,
notably (i) the passage of Ordinance No. 8119 which supersedes Ordinance No. 8027, as
well as (ii) the writs of injunction from the RTC presenting the implementation of
Ordinance No. 8027, rendering the SCs decision and the enforcement of Ordinance No.
8027 improper. Further, the Company, Shell, and Chevron noted the ill-effects of the
sudden closure of the Pandacan Terminals on the entire country.

As a result of the passage of Ordinance No. 8119, on April 23, 2007, upon motion of the
Company, the Mayor of Manila and the City Council, on the ground that the issues raised
in said case became academic, the RTC dismissed the case filed by the Company
questioning Ordinance No. 8027.
 - 66 -

On February 13, 2008, the SC allowed the oil companies intervention but denied their
motion for reconsideration, declaring Manila City Ordinance No. 8027 valid and
applicable to the Oil Terminals. The Court dissolved all existing injunctions against the
implementation of the ordinance and directed the oil companies to submit their relocation
plans to the Regional Trial Court within 90 days to determine, among others, the
reasonableness of the time frame for relocation. On February 28, 2008, the Company,
jointly with Chevron and Shell, filed its motion for reconsideration of the Resolution.
On May 13, 2008, the three oil companies submitted their Comprehensive Relocation
Plans in compliance with the February 13 Resolution of the SC. There have been no
additional updates on this case since May 13, 2008 made known to the Company.

d. Navotas Business Tax Case

In the case of Petron vs. Mayor Tobias Tiangco concerning the imposition of business tax
for the sale of diesel at the Navotas Bulk Plant, the TRO issued by the SC is still in effect
and will prevent the closure of the Bulk Plant until the case is decided by the SC.

On April 16, 2008, the SC has promulgated a Decision in favor of Petron and against the
Municipality of Navotas. The assessment for deficiency taxes amounting to = P10
(business tax on the sale of diesel from 1997 to 2001) was ordered cancelled for being
beyond the authority of the municipality to impose the tax and therefore ruled to be void.
The ruling was based on Sec. 133 (h) of the Local Government Code which precludes
local government units from imposing any kind of taxes, fees or charges on the sale of
petroleum products.

On October 3, 2008, the Company received an Entry of Judgment declaring the Decision
dated April 16, 2008 as final and executory on August 12, 2008. This case is now closed
and terminated.

e. Oil Spill Incident in Guimaras

M/T Solar I sank in rough seas in the afternoon of August 11, 2006 en route to
Zamboanga, loaded with about two million liters of industrial fuel oil. It lies about 640
meters beneath the sea, at approximately 13 nautical miles southwest of Guimaras.

The Company immediately dispatched its oil spill gear, equipment and oil spill teams upon
receiving information of the incident. An aerial and surface assessment was conducted to
determine the extent of the spill.

Inspection by the Survey Ship Shinsei Maru, using a remote-operated vehicle (ROV),
found the vessel upright with minimal traces of leakage. All cargo compartment valves
were tightened by the ROV to ensure against further leakage. The Shinsei Maru was
contracted by the Protection and Indemnity (P & I) Club and the International Oil
Pollution Compensation (IOPC) from Fukada Salvage & Marine Works Co. Ltd.

On separate investigations by the Special Task Force on Guimaras by the Department of

Justice and the Special Board of Marine Inquiry (SBMI), both found the owners of M/T
Solar I, Sunshine Marine Development Corporation (SMDC) liable. The DOJ found no
criminal liability on the part of the Company. However, the SBMI found the Company to
have overloaded the vessel. The Company has appealed the findings of the SBMI to the
Department of Transportation and Communication (DOTC) and is awaiting its resolution.
 - 67 -

The Company implemented a Cash for Work program involving residents of the
affected areas in the clean-up operations, providing them with a daily allowance. The
Company also mobilized its employees to assist in the operations. By the middle of
November 2006, the Company had cleaned up all affected shorelines and was affirmed by
the inspections made by Taskforce Solar 1 Oil Spill (SOS), a multi-agency group
composed of officials from the Local Government Units, Departments of Health,
Environment and Natural Resources, Social Welfare and Development, and the Philippine
Coast Guard.

The Company collected a total 6,000 metric tons of debris which were brought to the
Holcim Cement facility in Lugait, Misamis Oriental for processing/treatment of waste.
On November 20, 2006, one of the last barge shipments of oil debris unfortunately sunk en
route to the same plant.

The Company has been working closely with the provincial government, Department of
Welfare and Social Development (DSWD), Department of Agriculture (DA), Technical
Education and Skills Development Authority (TESDA), the Philippine Business for Social
Progress (PBSP), in developing livelihood programs for the local community.
On November 27, 2006, the Company held a scientific conference in cooperation with the
University of the Philippines Visayas, the National Disaster Coordinating Council
(NDCC), the World Wildlife Fund (WWF) and the Guimaras Provincial Government with
the objective of developing an integrated assessment and protocol for the rehabilitation of
the province. On top of providing alternative livelihood for affected Guimarasnons, the
company has established programs and facilities aimed at helping improve basic education
in the province. Among the interventions along this line were the construction of the
Petron School in Nueva Valencia and the establishment of the Petron Library Hub in
Jordan, both of which were inaugurated on June 15, 2007. To complement these
educational facilities, the Company has put in place internet connectivity in all the public
high schools and Department of Education facilities in Guimaras.

The Company also established a mari-culture park at the Southeast Asian Fisheries
Development Center (SEAFDEC) area in the town of Nueva Valencia in August 2007.
Several representatives from nearby barangays received hands-on training including the
construction of fish cages, stocking of fingerlings, feeding, maintenance work on the fish
cages, harvesting and packaging for shipment to ensure that the program is sustainable.

With regard to the retrieval of the remaining oil still trapped in M/T Solar I, the P & I
contracted a sub-sea systems technology provider (Sonsub) to recover the oil from the
sunken vessel. The recovery vessel AME Allied Shield arrived at Bacolod Real Estate
Development Corporation (BREDCO) Pier in Bacolod City last March 10, 2007. After
unloading the ISO-certified tanks and hoses, the vessel proceeded to site on March 11,
2007. Oil recovery operation was technically completed on April 1, 2007. A total of
9,000 liters of oil was recovered.

Representatives from the IOPC met with the claimants from various affected areas of
Guimaras to give an orientation on the requirements of the claim as well as the documents
required to be submitted in support of the claim. The Company has filed a total of =P 220
against the IOPC as of September 30, 2008. A total of P = 129 has been paid to the
Company. The recent installment was collected last June 13, 2008. As of September 30,
2008, total outstanding claims from IOPC amounted to =P91.
 - 68 -

Total expenses incurred were P

=15 in 2007 and =
P122 in 2006, net of =
P105 reimbursements
in 2006 (see Note 18). As of December 31, 2008, expenses incurred were immaterial.

f. Bataan Real Property Tax Cases

On August 21, 2007, Bataan Provincial Treasurer (Treasurer) issued a Final Notice of
Delinquent Real Property Tax requiring the Company to settle the amount of = P2,168
allegedly in delinquent real property taxes as of September 30, 2007.

The Company had previously contested the assessments subject of the Notice of
Delinquent Real Property Taxes, appealed the same to the Local Board of Assessment
Appeals (LBAA), and posted the necessary surety bonds to stop collection of the assessed
amount. The Company contested the first assessment covering the Isomerization and Gas
Oil Hydrotreater (GOHT3) Facilities of the Company which enjoy, among others, a 5-year
real property tax exemption under the Oil Deregulation Law (RA 8479) per Board of
Investments (BOI) Certificates of Registration. The second assessment is based on alleged
non-declaration by the Company of machineries and equipment in its Bataan refinery for
real property tax purposes and/or paid the proper taxes thereon since 1994. The Company
questioned this second assessment on the ground among others that: there was no non-
declaration; back taxes can be assessed only for a maximum of 10 years, even assuming
fraud; erroneous valuations were used; some adjustments like asset retirement and non-use
were not considered; some assets were taken up twice in the assessments; and some assets
enjoyed real property tax exemptions.

Notwithstanding the appeal to the LBAA and the posting of the surety bond, the Treasurer
proceeded with the publication of the Public Auction of the assets of the Company, which
she set for October 17, 2007.

The Company exerted all efforts to explain to the Treasurer that the scheduled auction sale
was illegal considering the Companys appeal to the LBAA and the posting of the surety
bond. Considering the Treasurers refusal to cancel the auction sale, the Company filed a
complaint for injunction on October 8, 2007 before the Regional Trial Court to stop the
auction sale. A writ of injunction stopping the holding of the public auction until the case
is finally decided was issued by the RTC on November 5, 2007.

A motion to dismiss filed by the Treasurer on the ground of forum-shopping was denied
by the RTC. However, a similar motion based on the same ground of forum shopping was
filed before the LBAA by the respondents and the motion was granted by the LBAA on
December 10, 2007.

On January 4, 2008, the respondents appealed the RTCs grant of a writ of injunction to
the SC. On February 28, 2008, the Companys counsel was served notice of the Resolution
of the SC directing the Company to file its Comment on the petition of the Provincial
Treasurer of Bataan questioning the RTCs issuance of a writ of injunction against the
holding of a public auction for alleged delinquency in payment of real property taxes. The
Companys comment was filed on March 7, 2008.

On January 17, 2008, the Company appealed from the LBAAs dismissal of its appeal by
filing a Notice of Appeal with the CBAA.
 - 69 -

On June 27, 2008, the SC dismissed the petition filed by the Treasurer on the Order
granting the writ of injunction. All five Justices concurred that the Treasurers appeal was
procedurally defective and/or was filed out of time. The Court also faulted the petitioner
for disregarding the hierarchy of courts when it went straight to the SC without going thru
the Court of Appeals. More importantly, the Court ruled that the issues raised by the
Company against the assessment should be resolved before any auction sale is conducted;
that the auction sale will have serious repercussions on the operations of the Company;
and that a surety bond may be filed in lieu of payment of the taxes under protest to stop
collection. The Treasurer filed its Motion for Reconsideration of the Decision. The
League of Provinces of the Philippines (LPP) also filed its Motion for Reconsideration-in-
Intervention dated August 20, 2008.

On September 8, 2008, the SC issued a Resolution denying with finality the Motion for
Reconsiderations of both the Treasurer and the LPP as well as the Motion to Intervene
filed by the LPP. There have been no additional changes made known to the Company
since September 8, 2008.
 Parties to the Offer
Issuer PETRON CORPORATION
Petron MegaPlaza, 358 Sen. Gil J. Puyat Avenue, Makati City

Joint Lead Managers & BDO CAPITAL & INVESTMENT CORPORATION

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Underwriters 20 Floor, South Tower, BDO Corporate Center
7899 Makati Avenue, Makati City

BPI CAPITAL CORPORATION

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8 Floor, BPI Building
Ayala Avenue corner Paseo de Roxas, Makati City

ING BANK N.V., MANILA BRANCH

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21 Floor, Tower One, Ayala Triangle
Ayala Avenue, Makati City

RCBC CAPITAL CORPORATION

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7 Floor Yuchengco Tower, RCBC Plaza
6819 Ayala Avenue, Makati City

UNION BANK OF THE PHILIPPINES

UnionBank Plaza, Meralco corner Onyx Streets
Ortigas Center, Pasig City

Selling Agents THE TRADING PARTICIPANTS OF THE PHILIPPINE STOCK

EXCHANGE, INC.

Legal Counsel PICAZO BUYCO TAN FIDER & SANTOS

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17 , 18 and 19 Floors, Liberty Center
104 H. V. dela Costa Street, Salcedo Village, Makati City

Receiving Agent BANCO DE ORO UNIBANK, INC. TRUST AND INVESTMENTS

GROUP
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15 Floor, South Tower, BDO Corporate Center
7899 Makati Avenue, Makati City

Registrar and Paying SMC STOCK TRANSFER SERVICE CORPORATION

Agent Podium Level, SMC Head Office
40 San Miguel Avenue, Mandaluyong City

Independent Auditors PUNONGBAYAN & ARAULLO

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20 Floor Tower 1, The Enterprise Center
6766 Ayala Avenue, Makati City