Final Prospectus Pcor

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

2

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 Company’s 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 Issuer’s 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 Issuer’s 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.

3

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 Company’s 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,

4

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.

6

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 Petron‘s Common Equity and Related Stockholder Matters 72 Management, Employees and Structure 73 Certain Relationships and Related Transactions 85 Corporate Governance 86 Management‘s 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

7

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

8

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

9

IOPC International Oil Pollution Compensation

ISO International Organization for Standardization

ISPS International Ships and Ports Facility Security

Issuer Petron Corporation

Joint Issue Managers and Bookrunners

BDO Capital & Investment Corporation, BPI Capital Corporation and 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

Moody‘s Moody‘s 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

10

PMC Petron Marketing Corporation

PNOC Philippine National Oil Company

Preferred Shares or Shares

50 million preferred shares that are being offered by Petron 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 Petron‘s Bataan Oil Refinery

Registrar and Paying Agent

SMC Stock Transfer Service Corporation

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

11

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 Company’s 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, Petron‘s 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 AOC‘s 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 Company‘s (―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 Company‘s 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.

12

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, Petron‘s total market capitalization was P 47.8 billion.

For the nine months ended September 30, 2009, Petron‘s 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, Petron‘s total market capitalization was P 47.8 billion.

Strategies and Plans

Value optimization is the key to the Company‘s sustained growth. Amidst today‘s 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. Petron‘s 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 PetroFCC‘s 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 Petron‘s doors to the blending and marketing of world class fuel additives. As Innospec‘s exclusive blender in Asia-Pacific, Petron provides additives and technical services to Innospec‘s customers in the region. The blending plant in Subic, completed in July 2008, has a capacity of 12,000 metric tons per year.

Petron‘s revenue generating initiatives are complemented by cost efficiency programs to further boost the Company‘s 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

13

areas; (c) upgrade of the Refinery‘s 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 SMC‘s network, products and services, for further enhancement of Petron‘s 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. Philippine’s 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)

14

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 Company‘s 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)

15

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.

Income Statement Data (in P millions)

For the Nine Months ended September 30

(Unaudited)

For the Year ended December 31 (Audited)

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 Data (in P millions)

As of Sept 30 (Unaudited)

As of December 31 (Audited)

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

16

Consolidated Financial Position Data (in P millions)

As of Sept 30 (Unaudited)

As of December 31 (Audited)

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

17

Capitalization

The following table sets forth the Company’s 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 (Unaudited)

for maximum 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

Preferred stock – P 1 par value(1)

100

Authorized – 624,895,503 shares

Additional paid-in capital 9,814 (2)

Other reserves (444) (444)

Retained earnings 27,131 27,131

Equity attributable to equity holders of the parent 36,062 45,976 (2)

Minority Interest 244 244

Total Equity 36,306 46,220 (2)

Total Capitalization 111,577 121,491 (2)

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).

18

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 Shareholder’s 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 Option

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‖).

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

19

Redemption Date plus a spread of 487.5 basis points.

Conditions on Payment of Dividends

The declaration and payment of dividends on each Dividend Payment 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 Company‘s 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 Board‘s 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 Company‘s accumulated, realized profits less accumulated, realized loss.

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

20

Dividend Payment Dates

Subject to limitations described in this Prospectus, 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.

Optional Redemption and Purchase

As and if declared by the Board, the Company may redeem the 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 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 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

21

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 Company‘s 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 Company‘s assets available for distribution to shareholders, together with the holders of any other of the Company‘s 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 Company‘s 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 Company‘s 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 Company‘s winding up, the amount payable with respect to the Preferred Shares and any other of the Company‘s 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 Company‘s 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 Company‘s remaining assets and will not be entitled to any further participation or return of capital in a winding up.

Form, Title and Registration of the Preferred Shares

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.

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

22

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 Shares in the Distribution of Assets in the Event of Dissolution

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.

Selling and Transfer Restrictions

Initial placement of the Preferred Shares and subsequent transfers of 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 to the Preferred Shares

Each Application shall be for a minimum of 500 Shares, and thereafter, 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

23

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

Application Forms may be obtained from an Underwriter or Selling 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 Applicant‘s 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 Applicant‘s SEC certificate of registration, duly certified by the corporate secretary; and

c. a duly notarized corporate secretary‘s certificate setting forth the resolution of the Applicant‘s 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 Preferred Shares

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

Payment shall be in the form of a Metro Manila clearing Cashier’s/Manager’s 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 of Applications

The actual number of Preferred Shares that an Applicant will be allowed to subscribe to is subject to the confirmation of the

24

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 Payments

In the event that the number of Preferred Shares to be allotted to an 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 Trading Date

The Preferred Shares are expected to be listed on the PSE on March 5, 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 Agent

SMC Stock Transfer Service Corporation

25

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 Petron’s Articles of Incorporation and By-laws, copies of which are available at the SEC.

Petron’s 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 Company‘s Board of Directors approved on October 21, 2009, an amendment to the Company‘s 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;

26

No pre-emptive rights to any subsequent issue of the Company‘s 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 Company‘s 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 Company‘s By-laws;

Sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the Company‘s 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)

27

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 Company‘s 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 Board‘s 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 Company‘s accumulated, realized profits less accumulated, realized loss.

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

28

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 Company‘s 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 Company‘s assets available for distribution to shareholders, together with the holders of any other of the Company‘s 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 Company‘s 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 Company‘s 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 Company‘s winding up, the amount payable with respect to the Preferred Shares and any other of the Company‘s 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 Company‘s 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 Company‘s 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.

29

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 Petron‘s 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 Petron‘s stock.

Directors

Unless otherwise provided by law or the Articles, the Company‘s 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 Company‘s Directors.

Petron‘s 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;

30

(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 person‘s 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 Company‘s 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 Company‘s shareholders, the latter may be asked to approve actions requiring shareholder approval under Philippine law.

31

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 Company‘s 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.

32

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 Company’s 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 Company’s 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.

33

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 Arroyo‘s resignation.

The Philippine Presidential, Legislative and local elections are scheduled to be held on May 10, 2010. The 2010 elections will lead to the election of the 15

th President as well as Vice President of

the Philippines. The legislators elected in the 2010 elections will join the senators in the 2007 elections and will comprise the 15

th 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 People‘s 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 Company‘s 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

34

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 government‘s 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 & Poor‘s (―S&P‖) has assigned a ―BB-― (three notches below investment grade) rating and Moody‘s Investors Service (―Moody‘s‖) 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 Company‘s products. There is no assurance that current or future Government administrations will adopt economic policies conducive to sustaining economic growth.

The Company monitors the country‘s 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 Petron‘s 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.

35

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 Company‘s 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 Company‘s 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 Company‘s 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 Company‘s enterprise resource planning system. This allows almost real-time awareness and response to contain losses posed by foreign exchange exposure.

36

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 Company‘s 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 Petron‘s refining facilities since disruptions in the Refinery can have substantial ripple effects throughout the Company‘s 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 Aramco‘s operations could impact on the Company‘s 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 Petron‘s total sales volume is moved through Pandacan. In order to mitigate this risk, the Company‘s 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 Petron‘s year-to-date September 2009 domestic sales volume, the bulk of which was fuel oil. Loss of the Company‘s NAPOCOR volumes could impact the Company‘s 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 Government‘s 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.

37

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,

38

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 Petron‘s 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 Company’s Other Indebtedness

Petron‘s obligations in respect of the Preferred Shares are subordinated to all of the Company‘s 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.

Petron‘s 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, Petron‘s 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.

39

There are no terms in the Preferred Shares that limit Petron‘s 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 Company‘s 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 Petron’s Other Indebtedness

Petron has and will continue to have a certain amount of outstanding indebtedness. The current terms of Petron‘s 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 Petron‘s 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.

40

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).

41

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 the Company

37.500 75.000

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 Refinery‘s power generation system is being upgraded to a more efficient technology. This will improve the reliability, sourcing flexibility and cost efficiency of the Refinery‘s system to meet its growing steam and power requirements. The power plant will be constructed within the Company‘s 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

Repaid Outstanding

Balance as of 31 December 2009

Interest Rate

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

42

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 Company‘s 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 Company‘s Board of Directors and disclosed to the PSE.

43

Determination of Offer Price

The Offer Price of P100.00 is at a premium to the Preferred Share‘s 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.

44

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

45

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 country‘s 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 bank‘s 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.

46

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

47

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.

48

Dilution

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

49

The Company

History

Petron‘s 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 Esso‘s 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 Mobil‘s 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 Mobil‘s 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 1990‘s 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

50

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 Company‘s framework for sustainable growth is anchored on value optimization.

Petron‘s Vision, Mission and Values Statement, ―To be the leading provider of customer solutions in the energy sector and its derivative businesses‖, reflects the Company‘s 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 Company‘s 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. Petron‘s 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 Chevron‘s retail business and the launch of its second brand Fiesta Gas further increased the Company‘s 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

51

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 Petron‘s 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 PetroFCC‘s 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 Innospec‘s 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 Refinery‘s power generation system is being upgraded to improve reliability, sourcing flexibility and cost efficiency to meet its growing steam and power requirements.

52

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 latter‘s 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 Petron‘s 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 Petron‘s ―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.

53

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 Petron‘s 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

Petron‘s 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 country‘s 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 Petron‘s 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 Company‘s 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 Company‘s permits and licenses are valid and subsisting.

54

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 Aramco‘s 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 industry‘s 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 Company‘s 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 country‘s 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 Petron‘s year-to-date September 2009 domestic sales volume, the bulk of which was fuel oil. The supply for NAPOCOR‘s 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 Petron‘s acquisition of the Chevron LPG retail business, Petron started to offer re-branded LPG as Fiesta Gas.

55

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 Petron‘s 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. Petron‘s 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 Company‘s 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.

56

Petron terminals and depots have oil spill contingency plans (―OSCP‖) which can be executed whenever necessary. The OSCP of Petron‘s 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

57

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 Refinery‘s 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 Company‘s 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 Company‘s 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. DOLE‘s 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 Company‘s 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.

58

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 Company‘s 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 Petron‘s core business that was started in 2005, the promotion of CSR is now incorporated in the Company‘s business planning guidelines. Steps were undertaken to help elevate Petron‘s 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 Company‘s 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 Company‘s 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 Education‘s 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

59

East Asia (PEMSEA). The program aims to protect, preserve, and improve the management of the environmental, natural and cultural features of Bataan‘s 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.

Philippine’s Largest Oil Refining and Marketing Company

The Company‘s 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. Petron‘s 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.

Petron‘s 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. Petron‘s 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 Company‘s 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 Shell‘s 27.9% and Chevron‘s 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, Petron‘s lead over its nearest competitor has remained substantial over the last five years.

60

COMPARATIVE MARKET SHARES (%)

2004 2005 2006 2007 2008

Year-to-date 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.

P billion 2002 2003 2004 2005 2006 2007 2008 As of Sept

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 Company‘s crude costs resulting in negative margins. Financial ratios are within the covenant limits imposed by Petron‘s creditor banks.

2004 2005 2006 2007 2008

As of Sept 2009

Limits

Current Ratio 1.2x 1.3x 1.5x 1.1x 1.1x 1.3x Minimum 1.0x

Debt-Equity Ratio

1.8x

64:36

1.5x

60:40

1.7x

63:37

1.8x

64:36

2.4x

71:29

2.2x

69:31

Maximum 2.5x or 71:29

Debt Service Coverage Ratio

1.6x 1.8x 3.2x 3.2x 1.2x 2.8x Minimum 1.1x

Tangible Net Worth

(In P billion)

22.3 27.6 32.3 37.8 32.9 36.3 Minimum P16 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

61

With this comes the ability to manage change, respond to the environment and provide a platform for sustainable growth. Petron‘s 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 Refinery‘s power generation system is being upgraded to a more efficient technology. This will improve the reliability, sourcing flexibility and cost efficiency of the Refinery‘s system to meet its growing steam and power requirements.

62

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.

Major Terminals Bulk Plants and Sales Offices

Luzon Visayas and Mindanao

Limay, Bataan Aparri, Cagayan Amlan, Negros Oriental

Pandacan, Manila Calapan, Oriental Mindoro Bacolod, Negros Occidental

Mabini, Batangas Navotas, Metro Manila Iloilo City

Mandaue City, Cebu Pasacao, Camarines Sur Isabel, Leyte

Puerto Princesa, Palawan Mactan, Lapu-lapu City

Poro Point, La Union Ormoc, Leyte

Rosario, Cavite Culasi, Roxas City

San Jose, Occidental Mindoro 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 industry‘s 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 Company‘s 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.

63

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.

64

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 Company‘s 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 Company‘s 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 Company‘s motion for reconsideration was denied on November 23, 2006. The Company appealed the Division‘s Decision to the CTA En Banc. On October 30, 2007, the CTA En Banc dismissed the Company‘s 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 Shell‘s use of Tax Credit Certificates for payment of its tax liabilities. On November 7, 2008, the Supreme Court gave due course to the Company‘s appeal and directed the Company to file its Memorandum. After the parties filed their respective memoranda, the case is now submitted for resolution.

65

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 Company‘s 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 Company‘s 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. Petron‘s 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 Company‘s external counsel‘s 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

66

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 Court‘s 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.

67

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 the last barge shipments of oil debris unfortunately sunk en route to the same plant

[1].

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.

68

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

69

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 Company‘s appeal to the LBAA and the posting of the surety bond. Considering the Treasurer‘s 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 RTC‘s 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 RTC‘s issuance of a writ of injunction against the holding of a public auction for alleged delinquency in payment of real property taxes. The Company‘s comment was filed on March 7, 2008.

Last January 17, 2008, the Company appealed from the LBAA‘s 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 Talento‘s 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.

70

Ownership and Capitalization

Ownership Structure

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

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 Ashmore‘s 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.

Public

9.43% 50.10%

SEA Refinery Holdings, B.V.

SEA Refinery Corporation

100%

40.47%

100%

Option to Purchase

71

SMC was originally built around closely-related businesses – beverage, food and packaging. Over the years, SMC has established itself as Southeast Asia‘s 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

6 Ansaldo, Godinez & Co. Inc. FAO Mark V. Pangilinan

Filipino 8,000,000 0.09

7 Ernesto Chua Chiaco &/or Margaret Sy Chua Chiaco

Filipino 7,780,000 0.08

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 Petron‘s initial public offering was undertaken, a special secondary sale of Petron‘s shares was offered to employees. Entitlement of shares at the listing price of P9.00 per share was made equivalent to the employee‘s base pay factored by his/her service years with Petron. Petron‘s 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.

72

Market Price of and Dividends on Petron’s Common Equity and Related Stockholder Matters

Market Information

The registrant‘s 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

2nd Quarter 6.00

April 14,15 May 18,19,29

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

Petron‘s dividend policy is to declare as dividends out of the company‘s 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 Company‘s 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.

73

Management, Employees and Structure

As of October 31, 2009, the Company‘s 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

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

PRESIDENT

CHIEF FINANCE OFFICER

GENERAL MANAGER

CONTROLLERS

DEPOT & PLANT OPERATIONS

CORP. TECH‘L SERVICES

GROUP

PETRON FOUNDATION

PUBLIC AFFAIRS

RESEARCH & DEV ‘T

CHAIRMAN & CEO

and

BOARD OF DIRECTORS

BOARD NOMINATION COMMITTEE

BOARD EXECUTIVE

COMMITTEE

BOARD AUDIT

COMMITTEE

GENERAL COUNSEL & CORPORATE

SECRETARY

INTERNAL AUDIT

BOARD

COMPENSATION COMMITTEE

TREASURERS

CORPORATE

PLA NNING

RETAIL MARKETING

COMMERCIAL MARKETING

REFINERY

SUPPLY

HUMAN

RESOURCES

SUBSIDIARIES

PROCUREMENT

74

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, ETPI‘s 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 Baños 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.

75

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.

76

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 Position

Lubin B. Nepomuceno Senior Vice President & General Manager

Emmanuel E. Eraña Senior Vice President & Chief Finance Officer

Jose Jesus G. Laurel Vice President, General Counsel and Corporate Secretary

Ramon V. del Rosario Vice President, Retail Marketing

Miguel V. Angeles Vice President, Commercial Marketing

Ma. Rowena O. Cortez Vice President, Supply

Peter Paul V. Shotwell Vice President, Depot & Plant Operations

Susan Y. Yu Vice President, Procurement

Freddie P. Yumang Vice President, Refinery

Ma. Concepcion F. de Claro Vice President, Corporate Planning

Ma. Cristina M. Menorca Vice President, Controllers

Albertito S. Sarte Vice President, Treasurers

Efren P. Gabrillo Assistant Vice President, Internal Audit

Nathaniel R. Orillos Assistant Vice President, Refinery Production

Wilfredo A. Galoyo Assistant Vice President, Human Resources

77

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 Japan‘s Sakura Bank Business Management.

Emmanuel E. Eraña, 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. Eraña 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 Company‘s 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 degree from the Ateneo de Manila University and an LL.B degree also from the same university (2

nd

Honors/Silver Medal). He is a 6th-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-EDC‘s 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

78

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 Petron‘s 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 EDC‘s Finance Division, Ms. De Claro transferred to PNOC‘s Budget and Control Department, where she was a Supervisor for three

79

years before she was assigned to Petron‘s 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, major in Accounting, magna cum laude, from the University of Sto. Tomas and placed 18

th 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 Petron‘s 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 Management‘s 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

80

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

Petron‘s 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 Director‘s 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. Nepomuceno

Sr. Vice President and General Manager

January 9, 2009 to present

Emmanuel E. Erana

Sr. Vice President and Chief Financial Officer

January 9, 2009 to present

Ramon V. del Rosario

Vice President –

Retail Marketing

September 1, 2009 to present

Miguel V. Angeles Vice President –

Commercial Marketing

September 1, 2009 to present

Freddie P. Yumang Vice President - Refinery

September 1, 2009 to present

81

Peter Paul V. Shotwell

Vice President – Depot

and Plant Operations

September 1, 2009 to present

Rowena O. Cortez Vice President – Supply September 1, 2009 to present

Concepcion F. de Claro

Vice President - Corporate Planning

November 7, 2008 to Present

Jose Jesus G. Laurel

General Counsel and Vice-President for Legal and External Affairs; Corporate Secretary and Compliance Officer

April 1, 2005 to present

Susan Y. Yu Vice President - Procurement

March 1, 2009 to present

Albertito S. Sarte Vice President/Treasurer

September 1, 2009 to present

Ma. Cristina M. Menorca

Vice President/Controller

September 1, 2009 to present

Efren P. Gabrillo Asst. Vice President- Internal Audit

September 1, 2009 to present

Nathaniel R. Orillos Asst. Vice President- Refinery Production

September 1, 2009 to present

Wilfredo A. Galoyo Asst. Vice President- Human Resources

September 1, 2009 to present

Total (Top 5 Executives) 2009 Estimate 2008 2007

41.48 40.63 39.24

6.96 19.05 25.85

48.44 59.68 65.09

Total (All Executives and Directors) 2009 Estimate 2008 2007

50.06 69.52 79.32

8.41 32.73 36.63

58.47 102.25 115.95

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:

82

Title of Class

Name & address of record owner & relationship with issuer

Name of beneficial owner & relationship with record owner

Citizenship No. of shares

held Percent

Common Stock

SEA Refinery Corporation 19F Liberty Center Dela Costa St. Salcedo Village Makati City

Major Stockholder

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

Common Stock

SEA Refinery Holdings B.V. Prins Bernhardplein 200 1097JB Amsterdam The Netherlands

Major Stockholder

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

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

Title of Class Name of Beneficial Owner Citizenship Amount and Nature of Beneficial Ownership

Percent of 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. Eraña 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.

83

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 Company‘s outstanding shares under voting trust agreement.

Investor Relations

In addition to being the Chief Finance Officer of the Company, Mr. Emmanuel E. Eraña is also the Company‘s Corporate Information Officer and the head of the Investor Relations Unit. His contact details are as follows:

Telephone Number (632) 886-3888

Email Address [email protected]

Office Address Petron Megaplaza, 358 Sen. Gil Puyat Avenue, Makati City

See ―Other Executive Officers‖ on page 76 for Mr. Eraña‘s 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:

84

Ramon S. Ang Chairman of the Board and Chief Executive Officer Emmanuel E. Eraña 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 Company‘s 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.

85

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 Petron‘s Refinery (with PNOC as lessor) and Petron is in the process of executing a sublease agreement with NVRC that would ensure Petron‘s 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.

86

Corporate Governance

Petron‘s 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.

87

Management’s 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) of P= 10.4 billion was 23% better than previous year‘s P= 8.48 billion.

As a result, earnings per share grew by 20% to P= 0.36 from previous year‘s P= 0.30. Likewise, return on sales rose to 2.7%, more than double the prior year‘s 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).

88

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= 123.63 billion, 43% (P= 92.8 billion) lower than last year‘s 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= 111.62 billion, 46% (P= 93.52 billion) behind previous year‘s 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 million) to P= 3.88 billion from prior year‘s 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 processed significantly went up to at P= 1.04 as against previous year‘s P= 0.59.

Selling & administrative expenses at P= 4.12 billion was slightly higher than last year‘s 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 year‘s 1.9%. Similarly, on a peso per liter sold basis, actual OPEX of P= 0.80 surpassed last year‘s 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 year‘s 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 year‘s 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-à-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.

89

Available-for-sale investments (current and non-current) moved up to P= 1.36 billion from last year‘s balance of P= 682 million as the Company‘s 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 year‘s 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 2008‘s 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 year‘s 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-December‘s 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.

90

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 company’s 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 company‘s 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 company‘s 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 issuer’s liquidity

Inflation

Inflation remained subdued until the 3rd

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.

91

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 economy in the 2

nd quarter. In the 3

rd 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 2008‘s 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 BSP‘s 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 BSP‘s tightening measures for 2010.

Peso-Dollar Exchange Rates

Peso as of YTD September 2009 averaged P= 47.9/US$. Although this is a steep fall from last year‘s nine-month average of P= 43.2/US$, 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 peso‘s 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.

92

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

Modification of Import Duty on Crude Oil & Refined Petroleum Products. To cushion impact of rising oil prices in the world market, the Government issued Executive Order No. 691 in 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.

Tariff Rate Dubai ($/bbl)

MOPS 0.05%S Diesel ($/bbl)

2% > 86.5 > 100.0

1% > 91.7 > 113.0

0% > 103.5 > 117.0

93

Significant elements of income or loss that did not arise from the issuer’s continuing operations There are no elements of income or loss that did not arise from the Registrant‘s 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

Philippine pesos at the exchange rate of P= 47.52 to US$1.00, the Philippine peso - U.S. dollar rate 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 Company‘s bottom line was largely attributed to contraction in margins (Gross Profit 2008 P= 3.37 billion vs. 2007‘s 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 Company‘s 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.

94

Sales volume registered an overall 2.57 million barrels drop from 2007‘s 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 Company‘s 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 year‘s 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 2007‘s 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.

OPEX per liter rose slightly by P= 0.01 from the previous year‘s level as sales volume declined by 5% 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 Company‘s 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 year‘s 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 2006‘s 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).

95

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= 3.24 billion level in 2006. The 7% or P= 0.24 billion escalation in expenses from 2006‘s figure was 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 cost per liter of crude processed to P= 0.47 from 2006‘s P= 0.41.

Selling and Administrative Expenses of P= 5.33 billion showed a 19% (P= 0.84 billion) increase from 2006‘s 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 2006‘s 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 Company‘s 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).

Gross Margin per liter of P= 1.71 and gross margin rate of 6.7% were lower than 2005‘s 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.

96

Refinery Operating Expenses (which form part of cost of sales) summed up to P= 3.24 billion, 6% lower than 2005‘s 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 year‘s P= 4.53 billion. OPEX per liter sold was at P= 0.54, slightly better than the previous year‘s 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 2005‘s level of P= 0.64.

Financial Condition

2008

Petron‘s 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.

Available-for-sale investments (current and noncurrent) rose slightly to P= 0.68 billion from last year‘s 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 year‘s P= 0.21 billion driven mainly by real estate acquisitions for future service station sites.

Deferred tax assets rose significantly to P= 0.88 billion relative to 2007‘s 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.

97

Short-term loans and supplier‘s 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 year‘s 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 Company‘s pension fund.

2007

Petron‘s 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 refinery‘s 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.

98

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 Supplier‘s 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 Company‘s 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 Company‘s pension fund.

2006

Petron‘s 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 Company‘s 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 year‘s 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 Refinery‘s PetroFCC project.

Depreciation reduced the value of Investment Properties to P= 0.22 billion from P= 0.24 billion in end-2005.

99

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 Company‘s pension plan.

Short-term loans increased by P= 6.73 billion (31%) emanating from higher crude oil and finished product importation costs.

Supplier‘s 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 Company‘s 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.

100

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)

101

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 company‘s 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 company‘s 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 country‘s 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.

102

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 Government‘s 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.

103

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 Company‘s 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.

104

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.

105

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 ―Management‘s 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 Company‘s 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.

106

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 Corporation‘s financial statements and schedules for the years ended 31 December 2008 and 2007, included in this prospectus.

Petron‘s 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.

107

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 holder’s 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.

108

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 corporation‘s 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

109

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 recipient‘s 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 latter‘s 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:

In percentage (%)

Dividends Stock transaction tax on

sale or disposition effected through the PSE

Capital Gains Tax due on disposition of of

Shares outside the PSE

Canada 25(1)

Exempt(8)

Exempt(8)

France 15

(2) Exempt

(8) Exempt

(8)

Germany 15(3)

0.5 5/10(9)

Japan 25

(4) Exempt

(8) Exempt

(8)

Singapore 25(5)

Exempt(8)

Exempt(8)

United Kingdom 25

(6) Exempt

(10) Exempt

(10)

United States 25(7)

Exempt Exempt(8)

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.

110

(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 company‘s 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 corporation‘s 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.

111

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 donor‘s 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 donor‘s 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.

112

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 world‘s 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 world‘s 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 Pacific‘s 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. India‘s capacity addition is seen to further strengthen its net exporter status in the region. On the other hand, China‘s 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 refinery‘s 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

113

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 China‘s 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 country‘s 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 DOE‘s 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 country‘s 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 government‘s 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 Chevron‘s 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.

114

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.

115

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. DOE‘s 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%.

116

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.

117

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 PSE‘s 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 PSE‘s 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

118

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 PSE‘s 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 Participant‘s 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.

119

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 Corporation‘s (―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 participant‘s aggregate holdings, in the PDTC system, and with respect to each beneficial owner‘s 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

120

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 nominee‘s name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing company‘s 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 Issuer‘s registry as of confirmation date.

121

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

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 systems, XCS and Valvemaster

TM.

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

Petron’s 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, BULL’S 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

Sept 30, 2009 Dec 31, 2008

(Unaudited) (Audited)

ASSETS

Current Assets

Cash and cash equivalents 16,746 P 12,827 P

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 117,093 P 111,798 P

LIABILITIES AND EQUITY

Current Liabilities

Short-term loans 45,587 P 53,979 P

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 117,093 P 111,798 P

See accompanying Notes to Consolidated Interim Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES

(With Comparative Figures for the year ended December 31, 2008)

CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(Amounts in Million Pesos)

September 30, 2009

2009 2008

SALES 123,635 P 216,427 P

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 3,366 P 2,784 P

Attributable to:

Equity holders of the parent 3,347 P 2,779 P

Minority interest 19 5

3,366 P 2,784 P

EARNINGS PER SHARE ATTRIBUTABLE TO

EQUITY HOLDERS OF THE PARENT

COMPANY - BASIC AND DILUTED 0.36 P 0.30 P

See accompanying Notes to Consolidated Interim Financial Statements.

(Amounts in Million Pesos, Except Per Share Amounts)

(UNAUDITED)

PETRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF INCOME

For the Nine Months Ended September 30, 2009 and 2008

2009 2008

NET INCOME FOR THE PERIOD 3,366 P 2,784 P

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 3,395 P 2,787 P

Attributable to:

Equity holders of the parent 3,376 P 2,782 P

Minority Interest 19 5

3,395 P 2,787 P

See accompanying Notes to Consolidated Interim Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Million Pesos)

(UNAUDITED)

For the Nine Months Ended September 30, 2009 and 2008

Capital Appropria- Unappropria- Other Minority Total

Stock ted ted Reserves Total Interest Equity

Balance at January 1, 2009 9,375 P 23,920 P 144 )( P 473 )( P 32,678 P 225 P 32,903 P

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 9,375 P 15,492 P 11,639 P 444 )( P 36,062 P 244 P 36,306 P

Balance at January 1, 2008 9,375 P 21,172 P 7,520 P 412 )( P 37,655 P 133 P 37,788 P

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 9,375 P 21,172 P 9,361 P 409 )( P 39,499 P 170 P 39,669 P

See accompanying Notes to Consolidated Interim Financial Statements.

PETRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(Amounts in Million Pesos)

Retained Earnings

For the Nine Months Ended September 30, 2009 and 2008

Equity Attributable to Holders of the Parent

(UNAUDITED)

2009 2008

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax 4,638 P 3,697 P

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 16,746 P 9,559 P

See accompanying Notes to Consolidated Interim Financial Statements.

(UNAUDITED)

PETRON CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(Amounts in Million Pesos)

For the Nine Months Ended September 30, 2009 and 2008

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 country’s oil requirements.

The Company’s 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.

Petron’s 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 Petron’s 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 Petron’s 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 Petron’s 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 Petron’s 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.

Petron’s 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 BV’s direct and indirect ownership interest in Petron at 90.57%; hence, SEA BV

is the Company’s 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 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 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.

Petron’s 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 P=213,177 P=- P=- P=3,250 P=- P=216,427

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 P=54 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 P=182,426 P=56 P=154 P=3,250 (P=2,756) P=183,130

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

(in KL)

IFO

(in KL)

DFO

(in MP)

IFO

(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 P=7,169 and P=11,812 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 P=32,611 and P=30,792 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 Company’s inventories within the

next financial year.

Inventory write-down amounted to P=735 and P=2,441 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

(Unaudited)

Dec 31, 2008

Balance at beginning of the year P=2,742 P=301

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 P=2,742

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 P=10 billion Fixed Rate Corporate Notes on June 5, 2009.

8. Related Party Transactions

Saudi Aramco is the ultimate parent of AOC, the Company’s 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 P=133,291 while, total sales of goods and services to PNOC

amounted to P=756.5. As of December 31, 2008, total current trade payables to and current

trade receivables from PNOC amounted to P=1 and P=53, respectively, and total current nontrade

receivables from Saudi Aramco amounted to P=2.

Petron and Saudi Aramco have a term contract to purchase and supply, respectively, 90% of

Petron’s monthly crude oil requirements at Saudi Aramco’s 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 Company’s 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 Company’s

acceptance and use of Tax Credit Certificates (TCCs) worth P=659 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 P=284 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 Company’s petition and ordered it to pay the BIR P=580

representing deficiency excise taxes for 1995 to 1997 plus 20% interest per annum from

December 4, 1999. The Company’s motion for reconsideration was denied on November 23,

2006. The Company appealed the Division’s Decision to the CTA En Banc. On October 30,

2007, the CTA En Banc dismissed the Company’s 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 Shell’s use

of Tax Credit Certificates for payment of its tax liabilities. On November 7, 2008, the Supreme

Court gave due course to the Company’s 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 P=254 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 representing the Company’s 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

Company’s 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. Petron’s 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.

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 Company’s external

counsel’s 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 Court’s 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 P=91, 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. Cruz’s counter-affidavit on August 4, 2009. On the basis of the statement in Atty. Cruz’s

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 P=2,168 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 Company’s appeal to the LBAA and the posting of the surety bond.

Considering the Treasurer’s 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 RTC’s 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 RTC’s issuance of a writ of injunction against the holding

of a public auction for alleged delinquency in payment of real property taxes. The Company’s

comment was filed on March 7, 2008.

Last January 17, 2008, the Company appealed from the LBAA’s 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 Treasurer’s 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 defendant’s

Motion to Dismiss. All pending incidents are now deemed submitted for resolution.

14

13. Financial Risk Management Objectives and Policies

Foreign Exchange Risk

The Company’s functional currency is the Philippine peso, which is the denomination of the

bulk of the Company’s revenues. The Company’s 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 Company’s 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 P=47.39, P=47.05 and P=47.52, respectively.

The succeeding table shows the effect of the percentage changes in the Philippine peso to US

dollar exchange rate on the Company’s 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 Company’s 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 Company’s 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 Company’s

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 Company’s 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 Company’s 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 P=6,018 P=8,291

Receivables 26,163 23,349 16,875

Total P=40,136 P=29,367 P=25,166

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 Division’s 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 Company’s 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

customer’s 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 Company’s range of sources of financing.

Commodity Price Risk

To minimize the Company’s 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 Company’s management.

Other Market Price Risk

The Company’s 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 P=9,732 P=11,735 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 P=104,474 P=87,516

LIABILITIES AND EQUITY

Current Liabilities Short-term loans 12 P=53,979 P=33,784 P=28,135 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 P=104,474 P=87,516

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 P=210,520 P=211,726

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) P=6,395 P=6,018

Attributable to: Equity holders of the parent 27 (P=3,978) P=6,377 P=6,011 Minority interest 58 18 7

(P=3,920) P=6,395 P=6,018

EARNINGS (LOSS) PER SHARE

ATTRIBUTABLE TO EQUITY

HOLDERS OF THE PARENT

COMPANY - BASIC AND DILUTED 27 (P=0.42) P=0.68 P=0.64

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) P=6,395 P=6,018

OTHER COMPREHENSIVE INCOME (LOSS) Actuarial gain (loss) on defined pension plan

[net of tax effects of (P=28), P=38 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 P=8 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) P=6,473 P=5,400

Attributable to: Equity holders of the parent (P=4,039) P=6,455 P=5,393 Minority interest 58 18 7

(P=3,981) P=6,473 P=5,400

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

Notes

Capital

Stock Appropria-

ted

Unappropria-

ted

Other

Reserves Total

Minority

Interest

Total

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 - P=0.10 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 P=9,375 P=17,021 P=6,232 (P=490) P=32,138 P=115 P=32,253 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 - P=0.10 per share 16 – – (938) – (938) – (938)

Balance at December 31, 2007 P=9,375 P=21,172 P=7,520 (P=412) P=37,655 P=133 P=37,788

Balance at January 1, 2006 16 P=9,375 P=11,652 P=6,352 P=128 P=27,507 P=108 P=27,615 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 P=94) 25 – – 176 – 176 – 176

Appropriation for capital projects 16 – 5,369 (5,369) – – – –

Cash dividends - P=0.10 per share 16 – – (938) – (938) – (938)

Balance at December 31, 2006 P=9,375 P=17,021 P=6,232 (P=490) P=32,138 P=115 P=32,253

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) P=9,350 P=7,904

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 P=9,732 P=11,735

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 country’s oil requirements. The Company’s 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. Petron’s 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 Petron’s 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 Petron’s 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 Petron’s 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 Petron’s 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 -

Petron’s 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 BV’s direct and indirect ownership interest in Petron at 90.57%; hence, SEA BV is the Company’s 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’s 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 P=10,000 to P=25,000 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 will be submitted for stockholder’s 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 Company’s 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 entity’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s ownership interest in subsidiaries.

Management does not expect the amendment to the standard to have a material effect on the Company’s 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 Company’s 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:

Subsidiaries Percentage

of Ownership Country of

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. NVRC’s primary purpose is to acquire real estate and derive income from its sale or lease. As of December 31, 2008, Petron’s original ownership interest of 79.95% in NVRC became 40% due to NVRC’s 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 Company’s 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 Company’s share of net assets of the joint venture, less any impairment in value. The consolidated statement of income reflects the Company’s 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 Company’s 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 arm’s 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 arm’s-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 Company’s investments in marketable equity securities and proprietary membership shares and derivative assets (see Note 31). The Company’s 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 Company’s 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 Petrogen’s investments in government securities and Ovincor’s 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 Company’s 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 asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s 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 Company’s 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 asset’s carrying amount is written down immediately to its recoverable amount if the asset’s 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 creator’s 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 arm’s-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 Company’s 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-member’s contribution. However, the Company’s 50% share applies only to a maximum of 10% of the employee-member’s 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 Company’s share, including earnings, will be paid in the event of the employee’s (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 P=200 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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

Company’s recorded selling and administrative expenses and decrease current assets.

- 23 -

Impairment losses on trade and other receivables amounted to P=71 and P=50 in 2008 and 2007,

respectively (see Note 18). There was no impairment loss required to be provided in 2006

based on management’s evaluation. Receivables written off amounted to P=7, P=3 and P=4 in

2008, 2007 and 2006, respectively. The carrying value of receivables, amounted to P=16,875,

P=17,869 and P=15,629 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 P=30,792, P=30,271 and

P=26,289 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

Company’s inventories within the next financial year.

Inventory write-down in 2008 to its net realizable value amounted to P=2,441. 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 P=40 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 Company’s 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 arm’s 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 P=219, P=214 and P=202 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 P=36,674, P=34,330 and P=25,375 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 arm’s 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 Company’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Company’s pension obligations. Net pension plan assets amounted to P=299, P=509 and P=434 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 Company’s 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 P=706, P=461 and P=660 as of December 31, 2008, 2007 and 2006, respectively (see Note 15), covers only the Company’s 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 P=3,170, P=1,309 and P=824, 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 P=2,862 P=1,954 Cash in banks 2,778 3,385 1,813 Money market placements 5,513 3,485 7,968

P=12,827 P=9,732 P=11,735

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 P=152 P=131 Proprietary membership shares 73 77 49

P=161 P=229 P=180

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), P=49, and P=63, respectively (see Note 21).

6. AFS Investments

This account consists of investments in government securities of Petrogen and ROP9 bonds of Ovincor.

- 27 -

Petrogen’s 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). Ovincor’s 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 P=164 P=103 Due after one year through five years 351 468 529

P=682 P=632 P=632

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 P=632 P=586 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 P=632 P=632

7. Receivables

2008 2007 2006

Trade P=7,339 P=12,715 P=11,219 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 P=17,869 P=15,629

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. P=6,098 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 Company’s 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 P=684 P=847 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 P=724 P=684

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 P=106 P=13 P=6 P=15 P=140 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 P=290 P=1,481 P=343 P=713 P=2,827

Dec. 31, 2006

Reseller P=24 P=2 P=5 P=17 P=48 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 P=208 P=172 P=189 P=702 P=1,271

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 P=599 P=591

At cost: Petroleum P=– P=12,341 P=13,793 Crude oil and others – 17,331 11,905

– 29,672 25,698

P=30,792 P=30,271 P=26,289

If the Company used the moving-average method (instead of the first-in, first-out method, which is the Company’s policy), the cost of petroleum, crude oil and other products would have increased by P=2,243, P=1,183 and P=355 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 Company’s 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 P=259,391, P=191,613 and P=194,263 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 P=341 P=434 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 P=301 P=341

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.

Buildings

and Related

Facilities

Refinery

and Plant

Equipment

Service

Stations

and Other

Equipment

Computers,

Office and

Motor

Equipment

Land and

Leasehold

Improvements

Construction

in-Progress Total

December 31, 2008

Cost P=14,084 P=31,300 P=4,002 P=2,212 P=4,015 P=6,096 P=61,709 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 P=13,436 P=18,138 P=3,551 P=2,118 P=3,985 P=15,214 P=56,442 Accumulated

depreciation and amortization

(6,445)

(10,300)

(2,802)

(1,640)

(1,133)

–

(22,320)

Net carrying amount P=6,991 P=7,838 P=749 P=478 P=2,852 P=15,214 P=34,122

December 31, 2006 Cost P=13,041 P=18,361 P=3,396 P=2,004 P=3,874 P=4,570 P=45,246 Accumulated

depreciation and amortization (5,829) (9,152) (2,552) (1,507) (1,053) – (20,093)

Net carrying amount P=7,212 P=9,209 P=844 P=497 P=2,821 P=4,570 P=25,153

January 1, 2006

Cost P=8,081 P=22,105 P=3,040 P=1,793 P=3,667 P=1,542 P=40,228 Accumulated

depreciation and amortization

(2,496)

(10,536)

(2,330)

(1,351)

(945)

–

(17,658)

Net carrying amount P=5,585 P=11,569 P=710 P=442 P=2,722 P=1,542 P=22,570

A reconciliation of the carrying amounts at the beginning and end of 2008, 2007 and 2006, of property, plant and equipment, is shown below.

Buildings

and Related

Facilities

Refinery

and Plant

Equipment

Service

Stations

and Other

Equipment

Computers,

Office and

Motor

Equipment

Land and

Leasehold

Improvements

Construction

in-Progress Total

Balance at Jan. 1, 2008, net of accumulated depreciation and amortization

P=6,991

P=7,838

P=749

P=478

P=2,852

P=15,214 P=34,122

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 -

Buildings

and Related

Facilities

Refinery

and Plant

Equipment

Service

Stations

and Other

Equipment

Computers,

Office and

Motor

Equipment

Land and

Leasehold

Improvements

Construction

in-Progress Total

Balance at Jan. 1, 2007, net of accumulated depreciation and amortization P=7,212 P=9,209 P=844 P=497 P=2,821 P=4,570 P=25,153

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 P=6,991 P=7,838 P=749 P=478 P=2,852 P=15,214 P=34,122

Balance at Jan. 1, 2006, net of accumulated depreciation and amortization P=5,585 P=11,569 P=710 P=442 P=2,722 P=1,542 P=22,570

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 P=7,212 P=9,209 P=844 P=497 P=2,821 P=4,570 P=25,153

Interest capitalized in 2008, 2007 and 2006 amounted to P=316, P=893 and P=52, 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 P=48 P=263 P=311 Accumulated depreciation – (103) (103)

Net carrying amount P=48 P=160 P=208

At December 31, 2006 Cost P=48 P=263 P=311 Accumulated depreciation – (89) (89)

Net carrying amount P=48 P=174 P=222

At January 1, 2006 Cost P=48 P=263 P=311 Accumulated depreciation – (76) (76)

Net carrying amount P=48 P=187 P=235

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 P=48 P=174 P=222 Additions 49 – 49 Disposals (49) – (49) Depreciation for the year (see Note 20) – (14) (14)

Net carrying amount, at December 31, 2007 P=48 P=160 P=208

Net carrying amount, at January 1, 2006 P=48 P=187 P=235 Depreciation for the year (see Note 20) – (13) (13)

Net carrying amount, at December 31, 2006 P=48 P=174 P=222

The Company’s 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 P=219, P=214 and P=202 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 P=16, P=15 and P=16 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 P=4,768 P=3,072 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 P=10,672 P=7,054

Noncurrent:

Net pension plan assets (see Note 25) P=299 P=509 P=434 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 P=738 P=621

“Noncurrent Assets – Others” classification include franchise fees amounting to P=9, P=9 and P=6 in 2008, 2007 and 2006, respectively, net of amortization of franchise fees amounting to P=1 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 P=2,372 P=1,298 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 P=4,544 P=3,731

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 P=677 (2008), P=421 (2007) and P=352 (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 P=50 in 2008, P=69 in 2007 and P=70 in 2006) P=10,251 P=10,231 P=8,538

Syndicated dollar bank loans (net of debt issue costs amounting to P=31 and P=58 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 P=19, P=48 and P=41 in 2008, 2007 and 2006, respectively) 1,263 1,604 1,633

P=8,988 P=11,176 P=11,279

Movements of debt issue costs are as follows:

2008 2007 2006

Beginning balance P=100 P=128 P=80 Additions – 17 74 Accretion for the year (see Note 21) (50) (45) (26)

Ending balance P=50 P=100 P=128

- 35 -

The salient terms of the foregoing debts are summarized as follows:

Creditor

Landbank of the

Philippines (Landbank)

BPI Capital Corporation and ING Bank

N.V.

Nordeutsche Landesbank Girozentrale (NORD)

Club Loan (MBTC, Mega ICBC, Maybank and Robinsons)

Citibank

Original Amounts

P=2 billion P=6.3 billion US$100 million P=2 billion P=2 billion

Payment Terms 12 equal quarterly installments starting March 2009 up to November 2011

One time payment in August 2011

Six semi-annual installments starting on the 30th month (June 2004-June 2009). Fully paid on December 12, 2008

13 quarterly installments starting January 2009 up to January 2012

13 quarterly installments starting April 2004 up to April 2007

Interest rates in: 2008 2007 2006

(Variable rates) 4.60% to 6.99% 4.60% to 5.84% 6.10%

(Fixed rates) 8.88% 8.88% 8.88%

(Variable rates) 3.05% to 3.58% 5.26% to 6.52% 5.70% to 6.80%

(Fixed rates) 6.73% 6.73% Not applicable

(Variable rates) Not applicable 5.18% to 7.48% 6.70% to 8.20%

Security None None None None None

Major Covenants (see Note 29)

None Maintenance of certain financial ratios

Maintenance of certain financial ratios

Maintenance of certain financial ratios

Maintenance of certain financial ratios

On January 30, 2007, the Company entered into a Club loan agreement with MBTC and Citibank amounting to P=1,000 each. In December 2007, Citibank assigned P=900 of its interest in the Club loan agreement to the following financial institutions:

Bank Name Amount

MayBank Phils. P=500 Mega International Commercial Bank of China (ICBC) 300 Robinsons Bank 100

Total P=900

In May 2008, Citibank assigned its remaining P=100 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 P=50 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 P=1,078), 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 P=3.3 (see Note 21).

- 36 -

The total interest incurred on these long-term loans amounted to P=964 (2008), P=1,124 (2007) and P=664 (2006), of which amounts, P=201 P=861 and P=44, were capitalized (see Note 9).

15. Other Noncurrent Liabilities

2008 2007 2006

ARO P=706 P=461 P=660 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 P=914 P=1,049

Movements in the ARO are as follows:

2008 2007 2006

Beginning balance P=461 P=660 P=298 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 P=461 P=660

16. Equity

a. Capital Stock for all years presented is as follows:

Number of Shares Amount

Authorized – P=1.00 par value 10,000,000,000 P=10,000

Issued and outstanding (see Note 27) 9,375,104,497 P=9,375

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 P=0.10 per share amounting to P=938 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 P=2,748, P=4,151 and P=5,369 in 2008, 2007 and 2006, respectively. On February 27, 2009, the Company’s 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 P=191,613 P=194,263 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 P=195,287 P=197,514

Distribution or transshipment costs included as part of inventories amounted to P=3,801, P=3,536 and P=3,290 in 2008, 2007 and 2006, respectively.

18. Selling and Administrative Expense

2008 2007 2006

Employee costs (see Note 19) P=1,375 P=1,481 P=1,199 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 P=5,325 P=4,482

Selling and administrative expenses include research and development expenses amounting to P=9, P=11 and P=16 in 2008, 2007 and 2006, respectively.

19. Employee Costs

2008 2007 2006

Salaries, wages and other employee costs (see Note 23) P=1,726 P=1,847 P=1,558

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 P=1,944 P=1,605

- 38 -

The above amounts are distributed as follows:

2008 2007 2006

Cost of goods sold (see Note 17) P=519 P=463 P=406 Selling and administrative expenses

(see Note 18) 1,375 1,481 1,199

P=1,894 P=1,944 P=1,605

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 P=1,538 P=1,536

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 P=2,516 P=2,482

21. Interest Expense, Interest Income and Others

2008 2007 2006

Interest expense: Short-term loans (see Note 12) P=2,614 P=990 P=1,608

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 P=1,814 P=2,684

Interest income: Money market placements

(see Note 4) P=225 P=205 P=192 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 P=344 P=371

- 39 -

2008 2007 2006

Other income (charges): Foreign currency gains (loss) – net (P=1,707) P=2,283 P=388 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) P=912 P=487

Share in the net income (loss) of PDSI amounting to P= 0.41, (P=0.42) and P=0.35 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 P=45 P=42 Regular corporate income tax (RCIT) 65 3,120 1,681 Minimum corporate income tax (MCIT) 123 – –

P=240 P=3,165 P=1,723

Deferred tax expense: Relating to origination and reversal of

temporary differences (P=1,090) (P=170) P=108 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) P=2,955 P=1,886

- 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) P=3,273 P=2,766 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) P=2,955 P=1,886

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 P=164 P=163 P=- (P=1) P=42 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) P=163 (P=30) P=33 (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 P=1 and P=1 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 P=8. 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 P=123. No MCIT was reported in 2007 and 2006 as the RCIT amounts were higher than MCIT in those years. The Company’s 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 P=138,027 P=145,099 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 Petron’s monthly crude oil requirements over a 20-year period at Saudi Aramco’s 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 Company’s 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 Company’s 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 P=251 P=277

Pension costs – defined contribution plan paid 8 7 7

Post-employment benefits – defined benefit plan 70 39 42

P=300 P=297 P=326

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 P=450 P=384 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 P=4,786 P=3,670

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 P=256 P=177 After one year but not more than five

years 277 318 202 After five years 93 114 123

P=617 P=688 P=502

- 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 P=198 P=122 Interest cost on benefit obligation 319 274 256 Expected return on plan assets (392) (421) (374)

Net pension costs P=118 P=51 P=4

Actual return on plan assets P=361 P=330 P=687

Actuarial Gain (Loss) Recognized Directly in Equity

2008 2007 2006

Actuarial gain (loss) for the year (present value of obligation) P=661 P=218 (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) P=126 (P=699)

Net Pension Asset

2008 2007 2006

Fair value of plan assets P=3,832 P=4,360 P=4,217 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 P=509 P=434

Changes in the present value of the defined benefit obligation are as follows:

2008 2007 2006

Opening defined benefit obligation P=3,851 P=3,783 P=2,330 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 P=3,851 P=3,783

- 44 -

Changes in the fair value of plan assets are as follows:

2008 2007 2006

Opening fair value of plan assets P=4,360 P=4,217 P=3,737 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 P=4,360 P=4,217

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 Company’s 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 P=3,851 P=3,783 P=2,330 P=1,709 Fair value of plan assets 3,832 4,360 4,217 3,737 3,382

Surplus P=299 P=509 P=434 P=1,407 P=1,673

Experience adjustments on present value of obligation amounted to (P=240), P=368 and P=151 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 P=0.3, P=1.1 and P=1.1 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 P=15,054, P=12,583 and P=10,727 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 P=149 and P=513, 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 Innospec’s 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 P=7 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) P=6,377 P=6,011

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) P=0.68 P=0.64

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) P=735 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 Company’s capital management policies and programs aim to provide an optimal capital structure that would ensure the Company’s 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 Company’s 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 Company’s capital for the covered reporting periods is summarized in the table below.

2008 2007 2006

Total assets P=111,798 P=104,474 P=87,516 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s

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 Treasurer’s 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 Company’s functional currency is the Philippine peso, which is the denomination of the bulk of the Company’s revenues. The Company’s 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 Company’s 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 P=47.52 (2008), P=41.28 (2007) and P=49.03 (2006).

The succeeding table shows the effects of the percentage changes in the Philippine peso to US dollar exchange rate on the Company’s 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 Company’s 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 P=1,100 P=748 Interest Rate Risk The Company’s 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 Company’s 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

P=1,159

P=5

P=886

P=7

The following table sets out the carrying amount of the Company’s financial instruments exposed to interest rate risk:

2008 2007 2006

Cash in bank and cash equivalents (see Note 4) P=8,291 P=6,870 P=9,781

Short-term loans (see Note 12) P=53,979 P=33,784 P=28,135 Long-term loans (see Note 14) Landbank P=2,000 P=2,000 P=2,000 NORD P=– US$62 US$90 Citibank P=– P=– P=308

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 Company’s 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 P=6,870 P=9,781

Receivables (see Note 7) 16,875 17,869 15,629 Derivative assets (see Note 11) 55 100 58

Total P=25,221 P=24,839 P=25,468

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 Division’s 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 Company’s 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 P=186 P=140 P=9 P=335 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 P=9,301 P=2,827 P=687 P=12,815

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 customer’s 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 Company’s 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) P=384 P=30 P=335 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 P=6,007 P=4,854 P=1,954 P=12,815

- 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 Company’s range of sources of financing.

Below are the contractual maturities of Company’s 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

Within 3

Months

After 3

months but

not more

than 6

months

After 6

months but

not more

than 12

months

After 1 year

but not more

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 P=33,599 P=360 P=– P=– P=33,959 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 P=50,677 P=1,162 P=1,385 P=13,278 P=66,502

- 54 -

2006

Within 3 Months

After 3 months but not more than 6 months

After 6 months but not more than 12

months

After 1 year but not more than 5 years Total

Current financial liabilities:

Short-term loans P=28,115 P=– P=– P=– P=28,115 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 P=39,235 P=771 P=1,326 P=14,355 P=55,687

Commodity Price Risk To minimize the Company’s 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 Company’s management.

Other Market Price Risk The Company’s 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 Company’s 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 Company’s 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 Platt’s Dubai Crude. The swap agreements effectively hedge the Company’s 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 P=12. 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 P=42.5.

� 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 P=554.1 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 P=264.

� Protection Against Rising Prices (BUY). This authority is intended to cushion the effect

on the Company’s 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 P=2.6.

� 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 P=47.28 and P=47.46 per US dollar. The net fair value gain on these outstanding transactions amounted to P=18.60. 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 P=49.70 to US$1.00. The net fair value loss on these currency forward contracts as of December 31, 2006 amounted to P=64. 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 P=5.9 using the year-end closing exchange rate of P=47.52 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 P=98

Fair values at January 1, 2006 P=55 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 Company’s 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 P=9,732 P=9,732 P=11,735 P=11,735 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 P=28,562 P=28,562 P=28,234 P=28,234

- 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 P=33,784 P=33,784 P=28,135 P=28,135 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 P=63,995 P=62,368 P=52,333 P=52,388

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 Petron’s 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 Petron’s 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 contractor’s 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 Petron’s 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 Petron’s application under RA 8479 for new investment at its Bataan Refinery for the PetroFCC (see Note 9). Subject to Petron’s 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 contractor’s tax.

- 61 -

Grease Manufacturing Plant In December 2005, the BOI approved Petron’s application under RA 8479 as an Existing Industry Participant with New Investment in Modernization of the firm’s 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 Petron’s 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 contractor’s tax. Petron has availed of ITH credits amounting to P=171 in 2008, P=163 in 2007 and P=736 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 Company’s 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 P=207,621 P=– P=– P=2,899 P=– P=210,520 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 P=209,395 P=– P=– P=2,331 P=– P=211,726 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 P=3,561, P=2,540 and P=2,057 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 P=87,049 P=1,801 P=11,518 P=71,736 P=37,717 P=209,821 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 P=86,155 P=1,579 P=8,955 P=73,602 P=40,881 P=211,172 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.

Petroleum Insurance Leasing Marketing Elimination/

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 P=177,949 P=84 P=182 P=2,899 (P=2,540) P=178,574 Export/International 31,872 74 – – – 31,946

Year Ended December 31, 2006 Revenue: Local P=176,864 P=63 P=170 P=2,331 (P=2,057) P=177,371 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 P=8,428 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 P=10,000 to P=25,000 through the issuance of preferred shares and change of the Company’s 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 P=70, P=27 and P=257 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 Company’s acceptance and use of Tax Credit Certificates (TCCs) worth P=659 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 P=284 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 Company’s petition and ordered it to pay the BIR P=580 representing deficiency excise taxes for 1995 to 1997 plus 20% interest per annum from December 4, 1999. The Company’s motion for reconsideration was denied on November 23, 2006. The Company appealed the Division’s Decision to the CTA En Banc. On October 30, 2007, the CTA En Banc dismissed the Company’s 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 Shell’s use of Tax Credit Certificates for payment of its tax liabilities. On November 7, 2008, the Supreme Court gave due course to the Company’s appeal and directed the Company to file its Memorandum. In May 2002, the BIR issued a collection letter for deficiency taxes of P=254 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 Company’s Petition for Review for lack of merit. The Company was ordered to pay the respondent the reduced amount of P=601 representing the

- 65 -

Company’s 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 Company’s 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 P=911. 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 Company’s external counsel’s 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 SC’s 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 P=10 (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 P=91.

- 68 -

Total expenses incurred were P=15 in 2007 and P=122 in 2006, net of P=105 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 P=2,168 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 Company’s appeal to the LBAA and the posting of the surety bond. Considering the Treasurer’s 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 RTC’s grant of a writ of injunction to the SC. On February 28, 2008, the Company’s 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 RTC’s issuance of a writ of injunction against the holding of a public auction for alleged delinquency in payment of real property taxes. The Company’s comment was filed on March 7, 2008. On January 17, 2008, the Company appealed from the LBAA’s 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 Treasurer’s 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 & Underwriters

BDO CAPITAL & INVESTMENT CORPORATION 20

th Floor, South Tower, BDO Corporate Center

7899 Makati Avenue, Makati City BPI CAPITAL CORPORATION 8

th Floor, BPI Building

Ayala Avenue corner Paseo de Roxas, Makati City ING BANK N.V., MANILA BRANCH 21

st Floor, Tower One, Ayala Triangle

Ayala Avenue, Makati City RCBC CAPITAL CORPORATION 7

th 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 17

th, 18

th and 19

th Floors, Liberty Center

104 H. V. dela Costa Street, Salcedo Village, Makati City

Receiving Agent BANCO DE ORO UNIBANK, INC. TRUST AND INVESTMENTS GROUP 15

th Floor, South Tower, BDO Corporate Center

7899 Makati Avenue, Makati City

Registrar and Paying Agent

SMC STOCK TRANSFER SERVICE CORPORATION Podium Level, SMC Head Office 40 San Miguel Avenue, Mandaluyong City

Independent Auditors PUNONGBAYAN & ARAULLO 20

th Floor Tower 1, The Enterprise Center

6766 Ayala Avenue, Makati City