EXECUTIVE SUMMARY

A. Introduction

PNOC Renewables Corporation (PNOC RC)

1. On March 13, 2002, the Philippine National Oil Company (PNOC) Board passed
Resolution No. 1393, approving the recommendation of PNOC Management for the
creation of the PNOC New and Renewable Energy Sources Corporation (PNOC-
NRES Corporation) resulting in the reactivation of the PNOC Dockyard and
Engineering Corporation (PDEC) and the amendment of its corporate purposes to
serve as the corporate vehicle for the creation of PNOC-NRES Corporation.

2. On October 17, 2007, PNOC reactivated the PDEC through its Board Resolution
No. 1706 for the purpose of reorganizing it into PNOC RC. The amended Articles of
Incorporation was approved by the Securities and Exchange Commission on
March 7, 2008.

3. The Corporation’s primary purpose is to promote and undertake research,

development, utilization, manufacture, sale, marketing, distribution and commercial
application of new, renewable, non-conventional and environment-friendly energy
sources and systems including, but not limited to, solar, wind, water, heat, steam,
ocean, tidal, biomass, biogas, chemical, mechanical, electrical, synthetic,
agricultural, and other natural, fossil or non-fossil fuel based, artificial, organic or
otherwise, and of energy systems that use new, renewable and any energy
resources applying new and efficient energy conversion and/or utilization of
technologies for commercial application and promote their efficient utilization.

Objectives and Scope of Audit

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

i
 2. The audit covered the examination on a test basis of the accounts and financial
transactions and operations of PNOC RC for the period January 1 to December 31,
2019 and 2018 in accordance with ISSAIs. The audit also involved performing
procedures to ascertain the propriety of financial transactions and compliance of the
Corporation to prescribed laws, rules and regulations.

B. Financial Highlights (In Million Pesos)

The financial position and results of operations of PNOC RC are summarized as follows:

Financial Position

2019 2018 Decrease

Assets 868.190 947.074 (78.884)
Liabilities 78.157 82.654 (4.497)
Equity 790.033 864.420 (74.387)

Increase
2019 2018 (Decrease)
Total Income 43.175 35.595 7.580
Total Expenses (117.209) (89.161) (28.048)
Loss Before Tax (74.034) (53.566) (20.468)
Income Tax Expense (0.210) (0.192) (0.018)
Loss After Tax (74.244) (53.758) (20.486)
Other Comprehensive Income 0.000 0.000 0.000
Comprehensive Loss (74.244) (53.758) (20.486)
C. Auditor’s Opinion

The Auditor rendered a qualified opinion on the fairness of presentation of the 2019 and
2018 financial statements of PNOC RC as stated in the Independent Auditor’s Report in
Part I of this Report, due to the following:

1. Ten parcels of land property of PNOC RC located in Batangas with an area of

56,385 square meters and book value of P102 million were not supported with
Transfer Certificate of Title, thus, their absolute ownership cannot be ascertained.
Moreover, PNOC RC did not re-measure its Investment Property at current fair value
for 11 years after the last valuation at fair market value in 2008 contrary to Section
55 of Philippine Accounting Standards (PAS) 40 on Investment Property resulting in

ii
 understatement of Investment Property and Net Income estimated at P396.247
million.

2. Restricted Fund - Escrow Account – Development Bank of the Philippines (DBP) is

not accurately stated by P2.405 million due to non-reconciliation of transactions per
Escrow Agent and Accounting Books resulting to unrecorded transactions, contrary
to Section 74 of Presidential Decree No. 1445, paragraphs 20 and 21 of Philippine
Financial Reporting Standards 11, and the Escrow Agreement dated December 19,
2014 entered into with DBP by PNOC RC and National Development Company.

3. The reliability, accuracy and validity of the balances of Accounts Payable and Other
Liabilities of P2.985 million and P33.592 million, respectively, as of December 31,
2019 is doubtful due to the inclusion of accruals for various payees amounting to
P7.398 million that were already paid, unmatched debit entries of P397,009.86 in the
Accounts Payable account, the presence of unmatched debit entries of P2.188
million in the Other Payable account, and non-accrual of expenses amounting
P0.811 million, which are contrary to Section 119 of P.D. No. 1445 and paragraph 13
of PAS 1 on the fair presentation of financial statements.
D. Significant Audit Observations and Recommendations

In addition to the audit observations which were considered in the rendition of a qualified
opinion, presented below is another significant audit observation that was noted in the
review of PNOC RC’s transactions, together with the corresponding audit
recommendations that need immediate action. Details are discussed in Part II of this
Report.

Various material uncertainties related to events or conditions of PNOC RC cast

significant doubt on its ability to continue as a going concern in accordance to Section
A2 of International Standards of Supreme Audit Institutions No. 1570, paragraph 15 of
PAS No. 10, Section 2.1 of Governance Commission for Government Owned and
Controlled Corporations Memorandum Circular No. 2015-03 dated April 8, 2015 and
Subject 4 of PNOC Investment Management Policy Manual effective August 14, 1996.

Recommendations:

a. Make an assessment that will include the determination of :

(1) Whether the events or conditions constitute a material uncertainty;

(2) Whether the use of the going concern assumption is appropriate in the
preparation and presentation of the financial statements; and
(3) The adequacy of related disclosures in the financial statements;

b. Ensure that Management obtain capital infusion to finance and implement the
turnaround strategy options presented; and

c. Submit a detailed report on PNOC RC’s potential sources of replacement/ additional

financing for 2020 and onwards.

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

iii
 There was no Notice of Suspension, Notice of Disallowance and/or Notice of Charge
issued to PNOC RC for the Calendar Year 2019.

F. Statement of Prior Years’ Audit Recommendations

Out of the 42 audit recommendations embodied in the previous years’ Annual Audit
Reports, 27 were fully implemented, 13 were partially implemented and two were not
implemented, with 10 of the partially implemented and not implemented reiterated in
2019 as shown in Part III of this Report.

iv